<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1995
REGISTRATION NO. 33-57052
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
TENNESSEE 63-0169720 6355
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification Number) Classification Code)
</TABLE>
2801 Highway 280 South
Birmingham, Alabama 35223
(205) 879-9230
(Address, including zip code, and telephone number, including area code,
of principal executive office)
------------------------
R. Stephen Briggs
Executive Vice President
Protective Life Insurance Company
P. O. Box 2606
Birmingham, Alabama 35202
(205) 879-9230
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
Stephen E. Roth, Esq. Lizabeth R. Nichols, Esq.
Sutherland, Asbill & Brennan Protective Life Insurance Company
1275 Pennsylvania Avenue, N.W. P. O. Box 2606
Washington, D.C. 20004-2404 Birmingham, Alabama 35202
If any of the securities that have been registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. /X/
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
contained herein also relates to Registration Statement Nos. 33-31940 and
33-39345.
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<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
FORM S-1 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Capsule Summary of the Contract; Table of
Contents
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Outside Front Cover Page; Capsule Summary
of the Contract; Glossary of Special
Terms
4. Use of Proceeds............................. Investments by Protective
5. Determination of Offering Price............. Not Applicable
6. Dilution.................................... Not Applicable
7. Selling Security Holders.................... Not Applicable
8. Plan of Distribution........................ Distribution of Contracts
9. Description of Securities to be
Registered.................................. Capsule Summary of the Contract;
Description of Contracts
10. Interests of Named Experts and Counsel...... Not Applicable
11. Information with Respect to the
Registrant.................................. Protective Life Insurance Company;
Executive Officers and Directors;
Executive Compensation; Financial
Statements; Legal Proceedings
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Undertakings
</TABLE>
<PAGE>
P R O S P E C T U S
PROSAVER-REGISTERED TRADEMARK- MGA
MODIFIED GUARANTEED
ANNUITY CONTRACTS
Protective Life Insurance Company
P.O. Box 2606
Birmingham, Alabama 35202
(205) 879-9230
------------------------
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, 1995
<PAGE>
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.
<PAGE>
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 5). 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C> <C> <C>
GLOSSARY OF SPECIAL TERMS..................................................................................... 1
DESCRIPTION OF CONTRACTS...................................................................................... 3
A. General............................................................................................. 3
B. Application Information, Annuity Deposit............................................................ 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
D. Qualified Retirement Plans............................................................................... 15
1. 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........ 16
2. Direct Rollover Rules.............................................................................. 17
E. Federal Income Tax Withholding........................................................................... 17
</TABLE>
<PAGE>
<TABLE>
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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............................................................................. 24
C. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 25
1. Results of Operations.............................................................................. 25
a. Premiums and Policy Fees....................................................................... 25
b. Net Investment Income.......................................................................... 26
c. Realized Investment Gains (Losses)............................................................. 26
d. Other Income................................................................................... 27
e. Income Before Income Tax....................................................................... 28
f. Income Tax Expense............................................................................. 30
g. Net Income..................................................................................... 30
h. Known Trends and Uncertainties................................................................. 30
i. Recently Issued Accounting Standards........................................................... 33
2. Liquidity and Capital Resources.................................................................... 33
3. Impact of Inflation................................................................................ 36
D. Insurance in Force.................................................................................. 37
E. Underwriting........................................................................................ 38
F. Investments......................................................................................... 38
G. Indemnity Reinsurance............................................................................... 42
H. Reserves............................................................................................ 42
I. Federal Income Tax Consequences..................................................................... 43
J. Competition......................................................................................... 43
K. Regulation.......................................................................................... 44
L. Employees........................................................................................... 45
M. Properties.......................................................................................... 45
N. Recent Developments................................................................................. 46
DIRECTORS AND EXECUTIVE OFFICERS.............................................................................. 47
EXECUTIVE COMPENSATION........................................................................................ 48
LEGAL PROCEEDINGS............................................................................................. 56
EXPERTS....................................................................................................... 56
LEGAL MATTERS................................................................................................. 56
REGISTRATION STATEMENT........................................................................................ 56
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
<PAGE>
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.
2
<PAGE>
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
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.
<TABLE>
<S> <C>
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%
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 SUB-ACCOUNT 2 ACCOUNT VALUE
------------- ------------- -------------
<S> <C> <C> <C>
Beginning Value......................... $ 10,000 $ 10,000 $ 20,000
X(1+Guaranteed Interest Rate)......... 1.050 1.0300
------------- -------------
$ 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
5
<PAGE>
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
6
<PAGE>
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.
7
<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, 1994, 97.5% of
bonds in which Protective invests were considered investment grade; 16.1% 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.
Fixed maturity securities rated BBB may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make
11
<PAGE>
principal and interest payments than is the case with higher rated fixed
maturity securities. 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 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. Generally Qualified Contracts cannot be assigned.
DISTRIBUTION OF CONTRACTS
ProEquities, Inc. (formerly 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").
12
<PAGE>
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 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
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Contract is held by a trust or other entity as an agent for Certificate owners
who are individuals, those 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 (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the Account Value is
treated as a withdrawal of such amount or portion. The investment in the
contract is increased by the amount 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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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
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"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. Section
403(b) Policies contain restrictions on withdrawals of (i) contributions made
pursuant to a salary reduction agreement in years beginning after December 31,
1988, (ii) earnings on those contributions, and (iii) earnings in such years on
amounts held as of the last year beginning before January 1, 1989. These amounts
can be paid only if the employee has reached age 59 1/2 separated from service,
died, become disabled, or in the case of hardship.
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
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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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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. 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. Unless the context otherwise requires, "Protective" refers
to the consolidated group of Protective Life Insurance Company and its
subsidiaries.
Protective markets individual life and health insurance and annuities
nationally through professional, independent general agents. Protective serves
the individual payroll deduction market by offering universal life and
supplemental insurance, and Protective distributes group life, health, and
dental insurance products through full-time field representatives who market to
employers and associations through agents and brokers. Protective markets
annuities and investment products, credit life, and disability products through
broker-dealers and financial institutions to their customers, and Protective
sells guaranteed investment contracts.
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. Most acquisitions do not include
PLC's acquisition of an active sales force, but some do. Blocks of policies
acquired through the Acquisitions Division are usually administered as "closed"
blocks; i.e., no new policies are sold. Therefore, the amount of insurance in
force for a particular acquisition is expected to decline with time due to
lapses and deaths of the insureds. The experience of PLC has been that acquired
or reinsured business can be administered more efficiently by PLC than by
previous management.
PLC made more than twenty separate transactions between 1970 and 1987. Many
of these transactions included Protective. From 1987 through 1989, PLC
encountered more competition concerning acquisitions; however, it did not change
its strategy concerning the margins it sought from acquisitions. Consequently,
no material transactions were entered into from 1987 to 1989.
The environment for acquisitions has become more favorable since 1989 and
management believes that this favorable environment likely will continue into
the immediate future. Insurance companies are facing heightened regulatory and
market pressure to increase statutory capital and thus may seek to increase
capital by selling blocks of policies. Insurance companies also appear to be
selling blocks of policies in conjunction with programs to narrow strategic
focus. In addition, smaller companies may face difficulties in marketing and
thus may seek to be acquired.
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Several states have enacted statutes that decreased the attractiveness of
assumption reinsurance transactions and increased the attractiveness of
coinsurance transactions, which has caused sellers to place more emphasis on the
financial condition and acquisition experience of the purchaser. Management
believes this trend will favorably impact Protective's competitive position.
However, it appears that other companies are entering this market; therefore,
Protective may face increased competition for future acquisitions.
Total revenues and income before income tax from the Acquisitions Division
are expected to decline with time unless new acquisitions are made. Therefore,
the Division's revenues and earnings may fluctuate from year-to-year depending
upon the level of acquisition activity.
In the fourth quarter of 1990, Protective reinsured two separate blocks of
insurance. In the first quarter of 1992, Employers National Life Insurance
Company, a small Texas insurance company, was purchased and merged into
Protective. In the third quarter of 1993, Protective acquired Wisconsin National
Life Insurance Company and coinsured a small block of universal life policies.
In the second quarter of 1994, Protective coinsured a small block of payroll
deduction policies. In the fourth quarter of 1994, Protective acquired through
coinsurance a block of 130,000 policies.
FINANCIAL INSTITUTIONS DIVISION
The Financial Institutions Division specializes in marketing insurance
products through commercial banks, savings and loan associations, and mortgage
bankers. The Division markets an array of life and health products, the majority
of which cover consumer and mortgage loans made by financial institutions
located primarily in the southeastern United States. The Division also markets
life and health products through the consumer finance industry and through
automobile dealerships. The Division markets through employee field
representatives, independent brokers, and an affiliate company. The Division
also offers certain products through direct mail solicitation to customers of
financial institutions. The demand for credit life and credit health insurance
is related to the level of loan demand.
In July 1992, in a major expansion of the Division, Protective acquired the
credit insurance business of Durham Life Insurance Company ("Durham") which more
than doubled the reserves Protective then held for its existing credit insurance
activities. The acquisition provided significant market share in the
southeastern states not previously covered by Protective. The larger size of the
Division has allowed it to achieve economies of scale.
GROUP DIVISION
The Group Division manufactures, distributes, and services group, payroll
deduction, cancer, and dental insurance products. The Division offers
substantially all forms of group insurance customary in the industry, making
available complete packages of life and accident and health insurance to
employers. The life and accident and health insurance packages offered by this
Division include hospital and medical coverages as well as dental and disability
coverages. To address rising health care costs, the Division provides cost
containment services such as utilization review and catastrophic case
management.
The Division markets its group insurance products primarily in the
southeastern and southwestern United States using the services of brokers who
specialize in group products. Sales offices in Alabama, Florida, Georgia,
Illinois, Missouri, North Carolina, Ohio, Oklahoma, Tennessee, and Texas are
maintained to serve these brokers. Group policies are directed primarily at
employers and associations with between 25 and 1,000 employees. The Division
also markets group insurance to small employers through a marketing organization
affiliated with an insurer, and reinsures the business produced by the marketing
organization. The Division receives a ceding commission from these arrangements.
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Group accident and health insurance is generally considered to be cyclical.
Profits rise or fall as competitive forces allow or prevent rate increases to
keep pace with changes in group health medical costs. Protective is placing
marketing emphasis on other health insurance products which have not been as
subject to medical cost inflation as traditional group health products. These
products include dental insurance policies and hospital indemnity policies which
are distributed nationally through the Division's existing distribution system,
as well as through joint marketing arrangements with independent marketing
organizations, and through reinsurance contracts with other insurers. These
products also include an individual cancer insurance policy marketed through a
nationwide network of agents. It is anticipated that a significant part of the
growth in Protective's health insurance premium income in the next several years
will be from products like dental and individual cancer insurance.
In 1993 the Division established a special marketing unit to sell dental
plans through mail and telephone solicitations.
GUARANTEED INVESTMENT CONTRACTS DIVISION
In November 1989, Protective began selling guaranteed investment contracts
("GICs"). Protective's GICs are contracts, generally issued to a 401(k) or other
retirement savings plan, which guarantee a fixed return on deposits 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
which is purchased primarily as a temporary investment vehicle by the trustees
of escrowed municipal bond proceeds. GICs are sold to customers through a
network of specialized GIC managers, consultants, and brokers.
Protective entered the GIC business in 1989 through a joint venture. The
joint venture arrangement was ended in 1991.
Life insurer credit concerns and a demand shift to non-traditional GIC
alternatives have generally caused the GIC market to contract somewhat.
Management believes that maintenance of strong claims-paying and financial
strength ratings is necessary for success in this market.
The Division's total revenues and income before income tax have
significantly increased each year since 1990 as GIC account balances have
increased. The rate of growth in GIC account balances will most likely
significantly decrease as the number of maturing contracts increases.
INDIVIDUAL LIFE DIVISION
Since 1983, the Individual Life Division (formerly, the Agency Division) has
utilized a distribution system based on experienced independent personal
producing general agents who are recruited by regional sales managers. At
December 31, 1994, there were 25 regional sales managers located throughout the
United States. Honors Club members, agents who produce at least $30 thousand of
new premium per year, totalled 253 at December 31, 1994. Honors Club members
represent approximately 46% of the Division's new premium. In 1993, the Division
began distributing insurance products through stock brokers. The Division also
distributes insurance products through the payroll deduction market.
Marketing efforts in the Individual Life Division are directed toward
Protective's various universal life products and products designed to compete in
the term marketplace. Universal life products combine traditional life insurance
protection with the ability to tailor a more flexible payment schedule to the
individual's needs, provide an accumulation of cash values on which income taxes
are deferred, and permit Protective to change interest rates credited on policy
cash values to reflect current market rates. Protective currently emphasizes
back-end loaded universal life policies which reward the continuing policyholder
and
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which should maintain the persistency of its universal life business. The
products designed to compete in the term marketplace are term-like policies with
guaranteed level premiums for the first 10, 15, or 20 years which provide a
competitive net cost to the insured.
The Division is developing new ventures including a special program for
parents and guardians of persons with disabilities, a special product for owners
of privately-held companies, and the sale of policies in the life insurance
brokerage market.
The Division recently changed its name to describe more accurately its
functions of manufacturing, distributing, and servicing Protective's individual
life insurance products.
INVESTMENT PRODUCTS DIVISION
The Investment Products Division manufactures, sells, and supports annuity
products. These products are sold through stock brokers, financial institutions,
and the Individual Life Division.
In April 1990, Protective began sales of modified guaranteed annuity
products ("MGA products") which guarantee a compounded interest rate for a fixed
term. Because contract values are "market-value adjusted" upon surrender prior
to maturity, the MGA products afford Protective a measure of protection from
changes in interest rates.
In late 1992, the Division ceased most new sales of single premium deferred
annuities. In 1994, the Division introduced a variable annuity product to
broaden the Division's product line.
CORPORATE AND OTHER
The Corporate and Other segment consists of several small insurance lines of
business, net investment income and expenses not attributable to the business
segments described above (including interest on substantially all debt). The
earnings of this segment may fluctuate from year to year.
In August 1991, the Company converted preferred stock into 80% of the common
stock of Southeast Health Plan, Inc. ("SEHP"). In January 1993, Protective's
ownership of SEHP was transferred to PLC.
23
<PAGE>
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
--------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees............... $ 402,772 $ 351,423 $ 323,136 $ 273,975 $ 248,448
Net investment income.................. 408,933 354,165 274,991 222,619 132,399
Realized investment gains (losses)..... 6,298 5,054 (154) (3,085) (3,249)
Other income........................... 11,977 4,756 10,675 7,495 5,568
------------ --------------- --------------- ------------ ------------
Total revenues................... $ 829,980 $ 715,398 $ 608,648 $ 501,004 $ 383,166
------------ --------------- --------------- ------------ ------------
------------ --------------- --------------- ------------ ------------
Benefits and expenses.................. $ 724,402 $ 629,286 $ 549,885 $ 456,039 $ 344,295
Income tax expense..................... $ 32,855 $ 29,957(1) $ 17,393 $ 12,024 $ 10,697
Minority interest...................... $ 90 $ 1,437 $ 870
Net income............................. $ 72,723 $ 56,155 $ 40,227(2) $ 31,504 $ 27,304
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets........................... $ 6,110,704 $ 5,307,849 $ 4,000,157 $ 3,120,354 $ 2,326,716
Long-term debt......................... $ 98 $ 2,014 $ 2,048 $ 2,079
Total debt (3)......................... $ 39,443 $ 49,061 $ 43,191 $ 28,022 $ 50,745
Redeemable preferred stock............. $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000
Stockholder's equity................... $ 395,075(4) $ 469,990(4) $ 335,516 $ 298,468 $ 257,136
Stockholder's equity excluding net
unrealized gains and losses on
investments........................... $ 502,607 $ 430,706 $ 332,360 $ 294,487 $ 257,622
<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, 1994 such
indebtedness totaled $39.4 million. See also Note E to the Consolidated
Financial Statements.
(4) Reflects the adoption of SFAS No. 115.
</TABLE>
24
<PAGE>
C.__MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of premiums
and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT PERCENTAGE
DECEMBER 31 ------------- INCREASE
- ------------------------------------------------------------------ (IN -------------
THOUSANDS)
<S> <C> <C>
1992............................................................ $ 323,136 17.9%
1993............................................................ 351,423 8.8
1994............................................................ 402,772 14.6
</TABLE>
Premiums and policy fees increased $28.3 million or 8.8% in 1993 over 1992.
On July 30, 1993, Protective completed its acquisition of Wisconsin National
Life Insurance Company ("Wisconsin National"). The acquisition increased
premiums and policy 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. Increases in premiums and policy fees from
the Financial Institutions, Group, and Individual Life Divisions represent
increases of $30.4 million, $13.0 million, and $14.6 million, respectively.
Effective July 1, 1992, the Financial Institutions Division assumed Durham Life
Insurance Company's ("Durham") credit business. The Durham acquisition
represents $17.8 million of the Financial Institutions Division's $30.4 million
increase. In January 1993 Protective's ownership of Southeast Health Plan, Inc.
("SEHP"), (a Birmingham-based health maintenance organization, in which the
Company had an investment since 1988) was transferred to PLC. The transfer of
SEHP decreased premiums and policy fees $40.5 million in 1993.
Premiums and policy fees increased $51.3 million or 14.6% in 1994 over 1993.
Wisconsin National and the reinsured block of universal life policies
represented $10.5 million of the increase in premiums and policy fees in 1994.
The reinsurance of a block of payroll deduction policies effective April 2, 1994
resulted in a $7.9 million increase. On October 3, 1994 Protective acquired
through coinsurance a block of policies from Reliance Standard Life Insurance
Company ("Reliance Standard"), which added $12.5 million of premiums in 1994.
Decreases in older acquired blocks of policies represented a $3.1 million
decrease in premiums and policy fees. Increases in premiums and policy fees from
the Financial Institutions, Group, and Individual Life Divisions represent
increases of $10.7 million, $5.1 million, and $7.6 million, respectively.
25
<PAGE>
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:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN
YEAR ENDED THOUSANDS) PERCENTAGE PERCENTAGE EARNED ON
DECEMBER 31 INCREASE AVERAGE CASH AND
- ----------------------------------------------- ------------- INVESTMENTS
---------------------
<S> <C> <C> <C>
1992......................................... $ 274,991 23.5% 8.6%
1993......................................... 354,165 28.8 8.4
1994......................................... 408,933 15.5 8.2
</TABLE>
Net investment income for 1993 was $79.2 million or 28.8% higher, and for
1994 was $54.8 million or 15.5% higher, than for the preceding year, primarily
due to increases in the average amount of invested assets. Invested assets have
increased primarily due to receiving annuity and guaranteed investment contract
("GIC") deposits and to acquisitions. Annuity and GIC deposits are not
considered revenues in accordance with generally accepted accounting principles.
These deposits are included in the liability section of the balance sheet. The
Wisconsin National acquisition resulted in an increase in 1993 net investment
income of $14.5 million. Wisconsin National and other recent acquisitions
represented $23.9 million of the increase in net investment income in 1994.
Protective's percentage earned on average cash and investments decreased in
1993 primarily due to the general decline in interest rates, the effect of which
was partially offset by following a "falling interest rate strategy" of using
temporary borrowings to fund investments ahead of receiving GIC and annuity
deposits. The percentage earned on average cash and investments decreased in
1994 primarily due to ending the strategy of funding investments ahead of
receiving deposits due to rising interest rates and an increase in the amount of
investments with short durations in order to bring the durations of assets and
liabilities into balance.
REALIZED INVESTMENT GAINS (LOSSES)
Protective generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. However,
Protective has classified its fixed maturity investments as "available for sale"
because Protective might sell such investments in response to changes in
interest rates, needs for liquidity, and changes in the availability of
alternative investments. 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:
REALIZED INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
AMOUNT
YEAR ENDED -------------
DECEMBER 31 (IN
- ------------------------------------------------------------------------------- THOUSANDS)
<S> <C>
1992......................................................................... $ (154)
1993......................................................................... 5,054
1994......................................................................... 6,298
</TABLE>
26
<PAGE>
Protective maintains an allowance for uncollectible amounts on investments.
The allowance totaled $35.2 million at December 31, 1993 and 1994. Additions to
the allowance are treated as realized investment losses. During 1992, Protective
added $9.7 million to this allowance which offset $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. In 1994,
realized investment gains on the sale of equity securities and other long-term
investments of $14.9 million were partially offset by realized investment losses
of $8.6 million incurred from sales of fixed maturity investments that occurred
to maintain proper matching of assets and liabilities.
Recently, rising interest rates have caused market values to fall below
amortized cost for many of Protective's fixed maturity investments. Therefore,
some realized investment losses may be incurred upon future sales of investments
to maintain proper matching of assets and liabilities. Protective does not
anticipate such realized investment losses will be material.
OTHER INCOME
The following table sets forth other income for the periods shown:
OTHER INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- ------------------------------------------------------------------------------- AMOUNT
-------------
(IN
THOUSANDS)
<S> <C>
1992......................................................................... $ 10,675
1993......................................................................... 4,756
1994......................................................................... 11,977
</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 building to PLC. The transfer of SEHP to PLC
reduced 1993 other income approximately $5.1 million. During 1994, Protective
recognized approximately $8.2 million in settlement of litigation in which
Protective was a plaintiff relating to an acquisition made in 1974. Other income
from recurring sources decreased $0.8 million in 1993 and increased $1.8 million
in 1994.
27
<PAGE>
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX
YEAR ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
BUSINESS SEGMENT 1992 1993 1994
- ------------------------------------------------------------ --------- --------- ----------
<S> <C> <C> <C>
Acquisitions................................................ $ 20,031 $ 29,845 $ 39,176
Financial Institutions...................................... 4,669 7,220 8,176
Group....................................................... 7,762 10,435 11,169
Guaranteed Investment Contracts............................. 18,266 27,218 33,197
Individual Life............................................. 12,976 20,324 17,223
Investment Products......................................... 4,191 3,402 107
Corporate and Other*........................................ (7,543) (14,208) (8,736)
Unallocated Realized Investment Gains (Losses).............. (1,589) 1,876 5,266
--------- --------- ----------
$ 58,763 $ 86,112 $ 105,578
--------- --------- ----------
--------- --------- ----------
<FN>
- ------------------------
* Income before income tax for the Corporate and Other segment has not been
reduced by pretax minority interest of $90 in 1992.
</TABLE>
In 1993, Protective changed the method used to apportion net investment
income among divisions within Protective. Prior to 1993, Protective used an
approximation method to apportion net investment income. Beginning in 1993, net
investment income was apportioned based upon specific portfolios of investments.
This change resulted in increased income attributable to the Acquisitions,
Individual Life, and Investment Products Divisions of $2.6 million, $3.0
million, and $2.0 million, respectively, while decreasing income of the
Corporate and Other segment.
Earnings from the Acquisitions Division are normally expected to decline
over time (due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. In the ordinary
course of business, the Acquisitions Division regularly considers acquisitions
of smaller insurance companies or blocks of policies. The Acquisitions Division
had pretax earnings of $29.8 million for 1993, $9.8 million higher than 1992.
The 1993 acquisition of Wisconsin National and reinsurance of a block of
universal life policies contributed $5.1 million to the Division's 1993
earnings. The Division also experienced improved results in its other blocks of
acquired policies. 1994 pretax earnings from the Acquisitions Division of $39.2
million were $9.3 million higher than 1993. The two acquisitions completed in
1993 added $9.2 million to the Division's 1994 earnings. The acquisition of a
block of policies from Reliance Standard in the 1994 fourth quarter reduced
earnings $1.3 million but should contribute to earnings next year. The remaining
increase was due to improved claims experience in the Division's other blocks of
acquired policies.
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
28
<PAGE>
to premium growth and improved claims ratios in the Division's other lines. The
Division's 1994 pretax earnings of $8.2 million were $1.0 million higher than
1993 primarily due to premium growth and improved claims ratios.
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 higher earnings from cancer
and dental products. 1994 Group pretax earnings of $11.2 million were $0.8
million higher than 1993. Higher traditional group life and health earnings were
complemented by higher earnings from the Division's cancer and dental products.
The Division's results include approximately $3.0 million of expenses to
establish a special marketing unit to sell dental plans through mail and
telephone solicitations.
The Guaranteed Investment Contracts ("GIC") Division had pretax earnings of
$27.2 million in 1993 compared to $18.3 million in 1992. Through 1994 GIC
earnings have significantly increased due to the growth in GIC deposits placed
with Protective. The GIC Division's 1994 pretax earnings were $33.2 million,
$6.0 million above 1993. GIC earnings increased due to the growth in GIC
deposits and $1.8 million higher realized investment gains. GIC deposits totaled
$2.3 billion at December 31, 1994. The rate of growth in GIC deposits will most
likely decrease as the number of maturing contracts increases.
Individual Life 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. The Individual Life Division had 1994 pretax earnings of
$17.2 million, $3.1 million lower than 1993. Mortality experience, while still
favorable, was approximately $2.5 million less favorable than 1993. The Division
also spent approximately $3.0 million during 1994 to develop new ventures
including a special program for parents and guardians of persons with
disabilities; a special product for owners of privately held companies; and the
sale of policies in the life insurance brokerage market.
In 1994, the Individual Life Division reduced the statutory policy
liabilities for certain of its term-like products to be more consistent with
current regulation and industry practice. This change released statutory capital
to invest in an acquisition, which will reduce investment income and thus
reported earnings in this Division next year.
The Investment Products Division's 1993 pretax 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. The Division reported pretax earnings of $0.1 million for
1994. These results are after approximately $2.0 million of additional
amortization of deferred policy acquisition costs related to the compression of
interest spreads caused by rising interest rates on the Division's fixed
annuities, and expenses of approximately $4.5 million related to the development
and introduction of the Division's variable annuity. Realized investment losses
from the sale of investments to maintain proper matching of assets and
liabilities in 1994 were $2.5 million compared to realized investment gains of
$2.9 million last year. Fixed annuity deposits totaled $983 million, and
variable annuity deposits totaled $171 million at December 31, 1994. Variable
annuity deposits of $121 million are reported in the accompanying financial
statements as "liabilities related to separate accounts."
The Corporate and Other segment consists of several small insurance lines of
business, net investment income and other operating expenses not identified with
the preceding operating divisions (including interest on substantially all
debt). Pretax losses of this segment were $6.7 million higher in 1993 as
compared
29
<PAGE>
to 1992 primarily due to the aforementioned reapportionment of net investment
income within the company. The segment's 1994 results include approximately $8.2
million relating to the settlement of litigation relating to an acquisition made
in 1974, which was partially offset by increases in other expenses.
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the
periods shown:
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 EFFECTIVE INCOME TAX RATES
- -------------------------------------------------------------------- ---------------------------
<S> <C>
1992.............................................................. 29.6%
1993.............................................................. 33.4
1994.............................................................. 31.1
</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, excluding the one-time increase, was 33.4%. The
effective income tax rate for 1994 was 31.1%. Management's estimate of the
effective income tax rate for 1995 is 33%.
NET INCOME
The following table sets forth net income for the periods shown:
NET INCOME
<TABLE>
<CAPTION>
YEAR ENDED PERCENTAGE
DECEMBER 31 INCREASE
- ------------------------------------------------------------------ AMOUNT -------------
-------------
(IN
THOUSANDS)
<S> <C> <C>
1992............................................................ $ 40,227 27.7%
1993............................................................ 56,155 39.6
1994............................................................ 72,723 29.5
</TABLE>
Net income in 1993 was 39.6% higher than 1992, reflecting improved earnings
in the Acquisitions, Financial Institutions, Group, GIC, and Individual Life
Divisions, and higher realized investment gains. Net income in 1994 was 29.5%
higher than 1993, reflecting improved earnings in the Acquisitions, Financial
Institutions, Group, and GIC Divisions and Corporate and Other segment, and
higher realized investment gains partially offset by lower earnings in the
Individual Life and Investment Products Division.
KNOWN TRENDS AND UNCERTAINTIES
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future reported results of Protective are discussed more fully
below.
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
30
<PAGE>
alternatives available to its customers. The insurance industry is a mature
industry. In recent years, the industry has experienced no growth in life
insurance sales, though the aging population has increased the demand for
retirement savings products.
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.
Banks, by offering bank investment contracts currently guaranteed by the
FDIC, provide competitive alternatives to Protective's GICs and annuities. Banks
may also compete by selling annuity products provided by other insurance
companies. In addition, in the future banks and other financial institutions may
be granted approval to underwrite and sell annuities or other insurance products
that compete directly with Protective. Likewise, nontraditional sources of
healthcare coverages, such as health maintenance organizations and preferred
provider organizations, provide competitive alternatives to Protective's
traditional group health products.
RATINGS.__Ratings have become an increasingly important factor in
establishing the competitive position of insurance companies. Rating
organizations continue to review the financial performance and condition of
insurers, including Protective. A downgrade in the ratings of Protective could
materially adversely affect its business operations, particularly its ability to
attract annuity and guaranteed investment contract deposits and its ability to
compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While most
of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and other factors outside the rated
company's control. Therefore, ratings downgrades may result for reasons other
than a deterioration in a rated company's financial condition or competitive
position.
POLICY CLAIMS FLUCTUATIONS.__Protective's results may fluctuate from year to
year because of fluctuations in policy claims received by Protective during the
year. Due to the long-term nature of the insurance business, there should be a
review of operating results for a period of several years in order to obtain a
more accurate indication of performance.
INTEREST RATE FLUCTUATIONS.__Protective's investment policy with regard to
fixed maturity investments is generally to buy investment grade securities that
match future cash flow needs and to hold them to maturity.
Rising interest rates could cause disintermediation of GIC and annuity
deposits and individual life policy cash values. In addition, the market value
of Protective's fixed maturity investments would generally 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.
Falling interest rates could cause some of Protective's corporate bonds that
have call features to be called, which could cause Protective to have to
reinvest the proceeds at lower interest rates.
Protective's mortgage loans are entered into, and mortgage-backed securities
are purchased, based on assumptions regarding rates of prepayments. To the
extent that actual prepayments are earlier or later than anticipated due to
falling or rising interest rates, Protective may not receive cash flows when
expected. Most of Protective's mortgage loans, however, have significant
prepayment penalties.
CONTINUING SUCCESS OF ACQUISITION STRATEGY.__Protective has actively pursued
a strategy of acquiring blocks of insurance policies. This acquisition strategy
has increased Protective's earnings in part by allowing
31
<PAGE>
Protective to position itself to realize certain unit cost reductions and
operating efficiencies associated with economies of scale. There can be no
assurance, however, that suitable acquisitions, presenting opportunities for
continued growth and operating efficiencies, will continue to be available to
Protective, or that Protective will realize the anticipated financial results
from its acquisitions.
REGULATION AND TAXATION.__Protective is subject to government regulation in
each of the states in which it conducts business. Such regulation is vested in
state agencies having broad administrative power dealing with all aspects of the
insurance business, including rates, policy forms, and capital adequacy, and is
concerned primarily with the protection of policyholders rather than
stockholders. The design and administration of Protective's insurance products,
the conduct of Protective's agents, and the content of advertising and other
sales materials are also regulated by these agencies. Protective's management
does not believe that the regulatory initiatives currently under consideration
would have a material adverse impact on Protective; however, Protective cannot
predict the form of any future proposals or regulation.
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 or failed insurance companies.
Although Protective cannot predict the amount of any future assessments,
Protective does not believe that any such assessments will be materially
different from amounts already provided for in the financial statements. Most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength.
Under the Internal Revenue Code of 1986, as amended (the "Code"), income tax
payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of Protective's products a competitive
advantage over other retirement products that do not offer this benefit. To the
extent that the Code is revised to reduce the tax-deferred status of life
insurance and annuity products, or to increase the tax-deferred status of
competing products, Protective's competitive position may be adversely affected.
The President and Congress have advocated changes to the current healthcare
delivery system which will address both affordability and availability issues.
The ultimate scope and effective date of any healthcare reform 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 healthcare
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.
Protective cannot predict what future initiatives the President or Congress
may propose which may affect Protective.
RELIANCE UPON THE PERFORMANCE OF OTHERS.__Protective has entered into
various ventures involving other parties. Examples include, but are not limited
to: the Investment Products Division's variable annuity deposits are invested in
funds managed by Goldman, Sachs & Co.; approximately 64% of the Investment
Products Division's fixed annuity sales come from four broker-dealers; and a
portion of the sales in the Financial Institutions and Group Divisions comes
from arrangements with unrelated marketing organizations. Therefore Protective's
results may be affected by the performance of others.
32
<PAGE>
INDEMNITY REINSURANCE.__As is customary in the insurance industry,
Protective cedes insurance to other insurance companies. The ceding insurance
company remains contingently liable with respect to ceded insurance should any
reinsurer be unable to meet the obligations assumed by it. Protective sets a
limit on the amount of insurance retained on the life of any one person. In the
individual lines it will not retain more than $500,000, including accidental
death benefits, on any one life. Certain of the term-like plans of Protective
have a retention of $50,000 per life. For group insurance, the maximum amount
retained on any one life is $100,000. At December 31, 1994, Protective had
insurance in force of $49.9 billion of which approximately $8.6 billion was
ceded to reinsurers.
RECENTLY ISSUED ACCOUNTING STANDARDS
Protective adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," at
December 31, 1993, which requires Protective to carry its investment in fixed
maturities and certain other securities at market value instead of amortized
cost. As prescribed by SFAS No. 115, these investments are recorded at their
market values with the resulting unrealized gains and losses, net of income tax,
reported as a component of stockholders' equity reduced by a related adjustment
to deferred policy acquisition costs. The market values of fixed maturities
increase or decrease as interest rates fall or rise. Therefore, although the
adoption of SFAS No. 115 does not affect Protective's operations, its reported
stockholders' equity will fluctuate significantly as interest rates change.
During 1994, interest rates rose approximately three percentage points. Even
though Protective believes its asset/liability matching practices and certain
product features provide significant protection for Protective against the
effects of changes in interest rates, the new accounting rule required reporting
a $146.8 million decrease in stockholders' equity at December 31, 1994 as
compared to December 31, 1993.
In 1994, Protective adopted SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," which requires
additional disclosures related to derivative financial instruments. Also, in
1994, Protective adopted new disclosure requirements required by Statement of
Position 94-4 of the Accounting Standards Division of the American Institute of
Certified Public Accountants concerning disclosures related to Protective's
liability for unpaid claims. The adoption of these accounting standards had no
effect on Protective's financial statements.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." In October 1994,
the FASB amended SFAS No. 114 with the issuance of SFAS No. 118, "Accounting by
Creditors for Impairment of Loans -- Income Recognition and Disclosures."
Protective anticipates that the impact of adopting SFAS Nos. 114 and 118 on its
financial condition will be immaterial.
LIQUIDITY AND CAPITAL RESOURCES
Protective's operations usually 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 contracts. Since future
benefit payments largely represent long-term obligations reserved using certain
assumed interest rates, Protective's investments are predominantly in medium and
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
33
<PAGE>
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.
In accordance with SFAS No. 115, Protective's investments in debt and equity
securities are reported at market value, and investments in mortgage loans are
reported at amortized cost. At December 31, 1994, the fixed maturity investments
(bonds, bank loan participations, and redeemable preferred stocks) had a market
value of $3,493.6 million, which is 5.5% below amortized cost (less allowances
for uncollectible amounts on investments) of $3,698.4 million. Protective had
$1,488.5 million in mortgage loans at December 31, 1994. While Protective's
mortgage loans do not have quoted market values, at December 31, 1994,
Protective estimates the market value of its mortgage loans to be $1,535.3
million (using discounted cash flows from the next call date) which is 3.2% 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, 1994, problem mortgage loans and foreclosed properties were
$24.0 million or 0.4% of assets. Bonds rated less than investment grade were
$82.5 million or 1.3% of assets. Additionally, Protective had bank loan
participations that were less than investment grade, representing $195.1 million
or 3.2% 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, 1994.
Policy loans at December 31, 1994 were $147.6 million, a decrease of $4.6
million from December 31, 1993 after considering the $11.1 million of policy
loans obtained through acquisitions in 1994. 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 21% 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.
It is Protective's policy to maintain asset and liability durations within
10% of one another. During 1994, interest rates rose approximately three
percentage points. Rising interest rates during 1994 caused the duration of
Protective's assets to increase somewhat above the duration of its liabilities.
As a result, the estimated modified duration of Protective's corporate bonds and
collateralized mortgage obligations has increased from approximately 3.0 years
at the beginning of 1994 to 3.6 years at the end of 1994 while the duration of
its mortgages and liabilities increased only slightly. Protective responded to
the duration mismatch by adjusting the composition of its assets to bring the
durations of assets and liabilities into balance.
Protective does not use derivative financial instruments for trading
purposes.
34
<PAGE>
Combinations of futures contracts and options on treasury notes are
sometimes 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 GICs and annuities. Realized investment
gains and losses of such contracts are deferred and amortized over the life of
the hedged asset. Net realized gains of $7.9 million were deferred in 1994. At
December 31, 1994, open futures contracts with a notional amount of $137.5
million were in a $0.4 million net unrealized loss position.
Protective uses interest rate swap contracts to convert certain investments
from a variable rate of interest to a fixed rate of interest. At December 31,
1994, related open interest rate swap contracts with a notional amount of $230.0
million were in an $8.9 million net unrealized loss position.
Protective entered the GIC market in late 1989. Most GIC contracts written
by Protective have maturities of 3 to 5 years. Prior to 1993, few GIC contracts
were maturing because the contracts were newly written. Beginning in 1993, and
continuing into 1994, GIC contracts began to mature as contemplated when the
contracts were sold. Withdrawals related to GIC contracts were approximately
$700 million during 1994. Withdrawals related to GIC contracts are estimated to
be approximately $600 million in 1995. Protective's asset/liability matching
practices take into account maturing contracts. Accordingly, Protective does not
expect maturing contracts to have an unusual effect on the future operations and
liquidity of Protective.
In anticipation of receiving GIC and annuity deposits, Protective was
committed at December 31, 1994 to fund mortgage loans and to purchase fixed
maturity and other long-term investments in the amount of $231.2 million.
Protective held $54.7 million in short-term investments at December 31, 1994.
While Protective generally anticipates that the cash flows from 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 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, 1994, Protective had no borrowings under its credit
arrangements.
As disclosed in the Notes to the consolidated financial statements, $321
million of consolidated stockholder's equity, excluding net unrealized
investment gains and losses, represented net assets of Protective and its
insurance subsidiaries that cannot be transferred to PLC in the form of
dividends, loans, or advances. In addition, Protective and its insurance
subsidiaries are subject to various state statutory and regulatory restrictions
on their ability to pay dividends. In general, dividends up to specified levels
are considered ordinary and may be paid thirty days after written notice to the
insurance commissioner of the state of domicile unless such commissioner objects
to the dividend prior to the expiration of such period. Dividends in larger
amounts are considered extraordinary and are subject to affirmative prior
approval by such commissioner. The maximum amount that would qualify as ordinary
dividends to PLC by its insurance subsidiaries in 1995 is estimated to be $62
million. Also, distributions, including cash dividends to Protective Life
Corporation from its life insurance subsidiaries, in excess of approximately
$248 million, would be subject to federal income tax at rates then effective.
Protective does not anticipate involuntarily making distributions that would be
subject to tax.
For the foregoing reasons and due to the expected growth of Protective's
insurance sales, Protective will retain substantial portions of its earnings
primarily to support future growth.
35
<PAGE>
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 from
funds generated through debt or equity offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. Based upon
their December 31, 1994 statutory financial reports, Protective and its
insurance subsidiaries are adequately capitalized under the formula.
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which Protective does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgments against the insurer, including material amounts
of punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances. Protective, like other life
and health insurers, from time to time is involved in such litigation. To date,
no such lawsuit has resulted in the award of any significant amount of damages
against Protective. Among the litigation currently pending is a class action
filed in the state of Alabama concerning the sale of credit insurance for which
a proposed settlement agreement has been filed with the supervising court for
approval. Although the outcome of any litigation cannot be predicted with
certainty, Protective believes that such litigation will not have a material
adverse effect on its financial position.
Protective is not aware of any material pending or threatened regulatory
action with respect to Protective or any of its subsidiaries.
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 that 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 individual 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 implement fully the
interest rate reset and 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.
36
<PAGE>
Inflation has 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
healthcare cost increases may result in a loss from health insurance.
Protective does not believe the current rate of inflation will significantly
affect is operations.
D.__INSURANCE IN FORCE
Protective's total consolidated life insurance in force at December 31, 1994
was $49.9 billion. The following table shows sales by face amount and insurance
in force for Protective's business segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New Business Written
Financial Institutions............. $ 2,524,212 $ 2,776,276 $ 1,149,265 $ 1,057,886 $ 1,095,595
Group.............................. 184,429 252,345 328,258 390,141 852,893
Individual Life.................... 6,329,630 4,440,510 4,877,038 4,244,903 3,581,071
------------- ------------- ------------- ------------- -------------
Total............................ $ 9,038,271 $ 7,469,131 $ 6,354,561 $ 5,692,930 $ 5,529,559
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Business Acquired
Acquisitions....................... $ 4,756,371 $ 4,378,812 $ 1,302,330 $ 1,570,401
Financial Institutions............. 1,432,338
------------- ------------- ------------- ------------- -------------
Total............................ $ 4,756,371 $ 4,378,812 $ 2,734,668 $ 0 $ 1,570,401
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Insurance in Force at End of Year(1)
Acquisitions....................... $ 11,728,569 $ 8,452,114 $ 3,836,066 $ 4,385,948 $ 5,290,020
Financial Institutions............. 4,841,318 4,306,179 3,690,610 2,446,815 2,319,150
Group.............................. 7,464,501 6,716,724 6,315,410 7,088,931 6,817,663
Individual Life.................... 25,843,232 22,975,577 20,634,927 16,655,923 13,850,255
------------- ------------- ------------- ------------- -------------
Total............................ $ 49,877,620 $ 42,450,594 $ 34,477,013 $ 30,577,617 $ 28,277,088
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
<FN>
- ------------------------
(1) Reinsurance assumed has been included; reinsurance ceded (1994-$8,639,272;
1993-$7,484,566; 1992-$6,982,127; 1991-$5,292,080; 1990-$3,597,097) has not
been deducted.
</TABLE>
The ratio of voluntary terminations of individual life insurance to mean
individual life insurance in force, which is determined by dividing the amount
of insurance terminated due to surrenders and lapses during the year by the mean
of the insurance in force at the beginning and end of the year, adjusted for the
timing of major acquisitions and assumptions was:
<TABLE>
<CAPTION>
RATIO OF
YEAR ENDED VOLUNTARY
DECEMBER 31 TERMINATIONS
- -------------------------------------------------------------------------------- ---------------
<S> <C>
1990.......................................................................... 11.6%
1991.......................................................................... 8.9
1992.......................................................................... 9.0
1993.......................................................................... 8.7
1994.......................................................................... 7.0
</TABLE>
37
<PAGE>
Net terminations reflect voluntary lapses and cash surrenders, some of which
may be due to the replacement of Protective's products with competitors'
products. Also, a higher percentage of voluntary lapses typically occurs in the
first 15 months of a policy, and accordingly, lapses will tend to increase or
decrease in proportion to the change in new insurance written during the
immediately preceding periods.
The amount of investment products in force is measured by account balances.
The following table shows guaranteed investment contract and annuity account
balances.
<TABLE>
<CAPTION>
GUARANTEED MODIFIED
YEAR ENDED INVESTMENT GUARANTEED FIXED VARIABLE
DECEMBER 31 CONTRACTS ANNUITIES ANNUITIES ANNUITIES
- ------------------------------------------ ------------ ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1990.................................... $ 726,866 $ 37,063 $ 205,032
1991.................................... 1,264,603 115,477 324,662
1992.................................... 1,694,530 299,608 374,451
1993.................................... 2,015,075 468,689 537,053
1994.................................... 2,281,673 661,359 539,756 $ 171,088
</TABLE>
E.__UNDERWRITING
The underwriting policies of Protective are established by management. With
respect to individual insurance, Protective uses information from the
application and, in some cases, inspection reports, attending physician
statements, or medical examinations to determine whether a policy should be
issued as applied for, rated, or rejected. Medical examinations of applicants
are required for individual life insurance in excess of certain prescribed
amounts (which vary based on the type of insurance) and for most ordinary
insurance applied for by applicants over age 50. In the case of "simplified
issue" policies, which are issued primarily through the Financial Institutions
Division and the payroll deduction market, coverage is rejected if the responses
to certain health questions contained in the application indicate adverse health
of the applicant. For other than "simplified issue" policies, medical
examinations are requested of any applicant, regardless of age and amount of
requested coverage, if an examination is deemed necessary to underwrite the
risk. Substandard risks may be referred to reinsurers for full or partial
reinsurance of the substandard risk.
Protective requires blood samples to be drawn with ordinary insurance
applications for coverage over $100,000 (ages 16-50) or $150,000 (age 51 and
above). Blood samples are tested for a wide range of chemical values and are
screened for antibodies to the HIV virus. Applications also contain questions
permitted by law regarding the HIV virus which must be answered by the proposed
insureds.
Group insurance underwriting policies are administered by experienced group
underwriters. The underwriting policies are designed for single employer groups.
Initial premium rates are based on prior claim experience and manual premium
rates with relative weights depending on the size of the group and nature of the
benefits.
F. INVESTMENTS
The types of assets in which Protective may invest are influenced 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.
38
<PAGE>
Protective's asset/liability matching practices involve monitoring of asset
and liability durations for various product lines, cash flow testing under
various interest rate scenarios, and rebalancing of assets and liabilities with
respect to yield, risk, and cash-flow characteristics.
In accordance with generally accepted accounting principles, Protective's
fixed maturities, equity securities, and short-term investments are valued at
market. Mortgage loans, investment real estate, policy loans, and other
long-term investments are valued at amortized cost. The following table shows
Protective's investments at December 31, 1994, valued on the basis of generally
accepted accounting principles.
<TABLE>
<CAPTION>
ASSET VALUE PERCENT OF TOTAL
-------------------- INVESTMENTS
(DOLLARS IN ----------------
THOUSANDS)
<S> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities......................... $ 1,898,321 35.8%
United States Government and government agencies
and authorities................................... 81,881 1.6
States, municipalities, and political
subdivisions...................................... 9,677 0.2
Public utilities................................... 378,120 7.1
Convertibles and bonds with warrants attached...... 385 --
All other corporate bonds.......................... 874,428 16.5
Bank loan participations............................. 244,881 4.6
Redeemable preferred stocks.......................... 5,953 0.1
----------- -----
Total fixed maturities............................. 3,493,646 65.9
----------- -----
Equity securities:
Common stocks -- industrial, miscellaneous, and all
other............................................... 24,797 0.5
Nonredeemable preferred stocks....................... 20,208 0.4
----------- -----
Total equity securities............................ 45,005 0.9
----------- -----
Mortgage loans on real estate.......................... 1,488,495 28.0
Investment real estate................................. 20,170 0.4
Policy loans........................................... 147,608 2.8
Other long-term investments............................ 50,751 1.0
Short-term investments................................. 54,683 1.0
----------- -----
Total investments................................ $ 5,300,358 100.0%
----------- -----
----------- -----
</TABLE>
A significant portion of Protective's bond portfolio is invested in
mortgage-backed securities. Mortgage-backed securities are constructed from
pools of residential mortgages, and may have cash flow volatility as a result of
changes in the rate at which prepayments of principal occur with respect to the
underlying loans. Prepayments of principal on the underlying residential loans
can be expected to accelerate with decreases in interest rates and diminish with
increases in interest rates.
In management's view, the overall quality of Protective's investment
portfolio continues to be strong. Protective obtains ratings of its fixed
maturities from Moody's Investor Service, Inc. ("Moody's") and
39
<PAGE>
Standard & Poor's Corporation ("S&P"). If a bond is not rated by Moody's or S&P,
Protective uses ratings from the Securities Valuation Office of the National
Association of Insurance Commissioners ("NAIC"), or Protective rates the bond
based upon a comparison of the unrated issue to rated issues of the same issuer
or rated issues of other issuers with similar risk characteristics. At December
31, 1994, approximately 98% of bonds were rated by Moody's, S&P, or the NAIC.
The following table shows the approximate percentage distribution of
Protective's fixed maturities by rating category, utilizing S&P's rating
categories, at December 31, 1994:
<TABLE>
<CAPTION>
PERCENTAGE OF
FIXED
TYPE MATURITIES
- -------------------------------------------------------------------------------- --------------
<S> <C>
Bonds
AAA........................................................................... 57.6%
AA............................................................................ 5.5
A............................................................................. 12.5
BBB........................................................................... 14.9
BB or less.................................................................... 2.3
Bank Loan Participations
Investment Grade.............................................................. 1.4
Non-Investment Grade.......................................................... 5.6
Redeemable Preferred Stock...................................................... 0.2
-----
Total........................................................................... 100.0%
-----
-----
</TABLE>
At December 31, 1994, approximately $3,160.3 million of Protective's
$3,242.8 million bond portfolio was invested in U.S. Government-backed
securities or investment grade corporate bonds and only approximately $82.5
million of its bond portfolio was rated less than investment grade.
Approximately $269 million of bonds are not publicly traded.
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 also invests in bank loan participations. Generally, such
investments constitute the most senior debt incurred by the borrower in highly
leveraged transactions. They are generally unrated by the credit rating
agencies. Of the $244.9 million of bank loan participations owned by Protective
at December 31, 1994, $195.1 million were classified by Protective as less than
investment grade.
Protective also invests a significant portion of its portfolio in mortgage
loans. Results for these investments have been excellent due to careful
management and a focus on a specialized segment of the market. Protective
generally does not lend on speculative properties and has specialized in making
loans on either credit-oriented commercial properties, or credit-anchored strip
shopping centers.
40
<PAGE>
The following table shows a breakdown of Protective's mortgage loan
portfolio by property type:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
PROPERTY TYPE ON REAL ESTATE
- ----------------------------------------------------------------------------- -----------------
<S> <C>
Retail....................................................................... 79.2%
Warehouses................................................................... 7.8
Office Building.............................................................. 7.4
Apartments................................................................... 2.7
Mixed-use.................................................................... 1.3
Other........................................................................ 1.6
-----
Total........................................................................ 100.0%
-----
-----
</TABLE>
Credit-anchored strip shopping center loans are generally on strip shopping
centers located in smaller towns and anchored by one or more strong regional or
national retail stores. The anchor tenants enter into long-term leases with
Protective's borrowers. These centers provide the basic necessities of life,
such as food, pharmaceuticals, and clothing, and have been relatively
insensitive to changes in economic conditions. The following are some of the
largest anchor tenants (measured by Protective's exposure) in the strip shopping
centers at December 31, 1994:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
ANCHOR TENANTS ON REAL ESTATE
- ----------------------------------------------------------------------------- ---------------------
<S> <C>
Food Lion.................................................................... 5%
K-Mart....................................................................... 5
Winn Dixie................................................................... 4
Wal-Mart..................................................................... 4
Bi-Lo........................................................................ 3
Kroger....................................................................... 2
</TABLE>
Protective's mortgage lending criteria generally require that the
loan-to-value ratio on each mortgage be at or under 75% at the time of
origination, although in certain circumstances Protective will lend on the basis
of an 85% loan-to-value ratio. Projected rental payments from credit anchors
(i.e., excluding rental payments from smaller local tenants) generally exceed
70% of the property's projected operating expenses and debt service. The average
size mortgage loan in Protective's portfolio is approximately $1.5 million. The
largest single loan amount is $11.9 million.
Many of Protective's mortgage loans have call or interest rate reset
provisions after five to seven years. However, if interest rates were to
significantly increase, Protective may be unable to increase the interest rates
on its existing mortgage loans commensurate with the significantly increased
market rates, or call the loans.
At December 31, 1994, $24.0 million or 1.6% of the mortgage loan portfolio
was nonperforming. It is Protective's policy to cease accrued interest on loans
that are over 90 days delinquent. For loans less than 90 days delinquent,
interest is accrued unless it is determined that the accrued interest is not
collectible. If a loan becomes over 90 days delinquent, it is Protective's
general policy to initiate foreclosure proceedings unless a workout arrangement
to bring the loan current is in place.
As a general rule, Protective does not invest directly in real estate. The
investment real estate held by Protective consists largely of properties
obtained through foreclosures or the acquisition of other insurance
41
<PAGE>
companies. At foreclosure, a new appraisal is obtained, and the value of real
estate acquired through foreclosure is valued at the lesser of the mortgage loan
balance plus costs of foreclosure or appraised value. In Protective's
experience, the appraised value of foreclosed properties often equals or exceeds
the mortgage loan balance on the property plus costs of foreclosure. Also,
foreclosed properties often generate a positive cash flow enabling Protective to
hold and manage the property until the property can be profitably sold.
Protective has established an allowance for uncollectible amounts on
investments. This allowance was $35.2 million at December 31, 1994.
A combination of futures contracts and options on treasury notes is
currently being used in connection with a hedging program which is designed to
hedge against rising interest rates for asset/liability management of certain
investments, primarily mortgage loans on real estate, and liabilities arising
from interest sensitive products such as GICs 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 effectively convert certain investments from a variable to a fixed rate of
interest.
For further discussion regarding Protective's investments and the maturity
of and the concentration of risk among Protective's invested assets, see Note C
to the Consolidated Financial Statements.
The following table shows the investment results of Protective for the years
1991 through 1994:
<TABLE>
<CAPTION>
CASH, ACCRUED
INVESTMENT INCOME, PERCENTAGE EARNED REALIZED
YEAR ENDED AND INVESTMENTS AT NET ON AVERAGE OF CASH INVESTMENT
DECEMBER 31 DECEMBER 31 INVESTMENT INCOME AND INVESTMENTS GAINS (LOSSES)
- ----------------------------------------- ------------------ ----------------- ------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1991................................... $ 2,829,353 222,619 8.7% (3,085)
1992................................... 3,650,024 274,991 8.6 (154)
1993................................... 4,841,209 354,165 8.4 5,054
1994................................... 5,355,988 408,933 8.2 6,298
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" included herein for certain
information relating to Protective's investments and liquidity.
G. INDEMNITY REINSURANCE
As is customary in the insurance industry, Protective cedes insurance to
other insurance companies. The ceding insurance company remains contingently
liable with respect to ceded insurance should any reinsurer be unable to meet
the obligations assumed by it. Protective sets a limit on the amount of
insurance retained on the life of any one person. In the individual lines it
will not retain more than $500,000, including accidental death benefits, on any
one life. Certain of the term-like plans of Protective have a retention of
$50,000 per life. For group insurance, the maximum amount retained on any one
life is $100,000. At December 31, 1994, Protective had insurance in force of
$49.9 billion of which approximately $8.6 billion was ceded to reinsurers.
H. RESERVES
The applicable insurance laws under which Protective operates requires that
each insurance company report policy reserves as liabilities to meet future
obligations on the outstanding policies. These reserves are the amounts which,
with the additional premiums to be received and interest thereon compounded
annually
42
<PAGE>
at certain assumed rates, are calculated in accordance with applicable law to be
sufficient to meet the various policy and contract obligations as they mature.
These laws specify that the reserves shall not be less than reserves calculated
using certain named mortality tables and interest rates.
The reserves carried in Protective's financial reports (presented on the
basis of generally accepted accounting principles) differ from those specified
by the laws of the various states and carried in Protective and its insurance
subsidiaries' statutory financial statements (presented on the basis of
statutory accounting principles mandated by state insurance regulation). For
policy reserves other than those for universal life policies, annuity contracts,
and GICs, these differences arise from the use of mortality and morbidity tables
and interest rate assumptions which are deemed under generally accepted
accounting principles to be more appropriate for financial reporting purposes
than those required for statutory accounting purposes; from the introduction of
lapse assumptions into the reserve calculation; and from the use of the net
level premium reserve method on all business. Policy reserves for universal life
policies, annuity contracts, and GICs are carried in Protective's financial
reports at the account value of the policy or contract.
I. FEDERAL INCOME TAX CONSEQUENCES
Under pre-1984 tax law, certain income of Protective was not taxed
currently, but was accumulated in the "Policyholders' Surplus Account" to be
taxed only when such income was distributed to the stockholders or when certain
limits on accumulated amounts were exceeded. Consistent with current tax law,
amounts accumulated in the Policyholders' Surplus Account have been carried
forward, although no accumulated income may be added to these accounts. As of
December 31, 1994, the combined Policyholders' Surplus Accounts for Protective
and its life insurance subsidiaries and the estimated tax which would become
payable on these amounts if distributed to stockholders were $50.7 million and
$17.7 million, respectively. Protective does not anticipate exceeding applicable
limits on amounts accumulated in these accounts and, therefore, does not expect
to involuntarily pay tax on the amounts held therein.
J. 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. Banks may also compete by
selling annuity products provided by other insurance companies. Also, in the
future banks and other financial institutions may be granted approval to
underwrite and sell annuities or other insurance products that compete directly
with Protective.
43
<PAGE>
K. REGULATION
Protective and its insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such regulation
is vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including rates, policy forms and capital
adequacy, and is concerned primarily with the protection of policyholders rather
than stockholders. Protective's management does not believe that the regulatory
initiatives currently under consideration would have a material adverse impact
on Protective or its insurance subsidiaries; however, Protective cannot predict
the form of any future proposals or regulation.
Protective and its insurance subsidiaries are required to file detailed
annual reports with the supervisory agencies in each of the jurisdictions in
which they do business and their business and accounts are subject to
examination by such agencies at any time. Under the rules of the NAIC, insurance
companies are examined periodically (generally every three to five years) by one
or more of the supervisory agencies on behalf of the states in which they do
business. To date, no such insurance department examinations have produced any
significant adverse findings regarding Protective or any of its insurance
subsidiaries.
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 exposure, and other factors. Based upon the
December 31, 1994 statutory financial reports, management believes that
Protective and its insurance subsidiaries are adequately capitalized under the
formula.
Individual state guaranty associations assess insurance companies to pay
benefits to policyholders of insolvent or failed insurance companies. Protective
was assessed immaterial amounts in 1994, which will be partially offset by
credits against future state premium taxes. Protective cannot predict the amount
of any future assessments; however, most insurance guaranty fund laws currently
provide that an assessment may be excused or deferred if it would threaten an
insurer's financial strength.
Protective acts as a fiduciary and is subject to regulation by the
Department of Labor ("DOL") when providing a variety of products and services to
employee benefit plans governed by the Employee Retirement Income Security Act
of 1974 ("ERISA"). Severe penalties are imposed by ERISA on fiduciaries which
violate ERISA's prohibited transaction provisions by breaching their duties to
ERISA covered plans. In a case decided by the United States Supreme Court in
December, 1993 (JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY V. HARRIS TRUST AND
SAVINGS BANK) the Court concluded that an insurance company general account
contract that had been issued to a pension plan should be divided into its
guaranteed and nonguaranteed components and that certain ERISA fiduciary
obligations applied with respect to the assets underlying the nonguaranteed
components. Although Protective has not issued contracts identical to the one
involved in HARRIS TRUST, some of its policies relating to ERISA-covered plans
may be deemed to have nonguaranteed components subject to the principles
announced by the Court.
The full extent to which HARRIS TRUST makes the fiduciary standards and
prohibited transaction provisions of ERISA applicable to all or part of
insurance company general account assets, however, cannot be determined at this
time. The Supreme Court's opinion did not resolve whether the assets at issue in
the case may be subject to ERISA for some purposes and not others. The life
insurance industry is currently
44
<PAGE>
discussing with the DOL the possibility of exemptions from the prohibited
transaction provisions of ERISA in view of HARRIS TRUST. In August of 1994, the
DOL published a notice of a proposed class exemption which, if adopted in final
form, would exempt from the prohibited transaction rules, prospectively and
retroactively to January 1, 1995, certain transactions engaged in by insurance
company general accounts in which employee benefit plans have an interest. The
proposed exemption would not cover all such transactions, and the insurance
industry is seeking further relief. Until these and other matters are clarified,
Protective is unable to determine whether the decision will result in any
liability and, if so, its nature and scope.
Existing federal laws and regulations affect the taxation of life insurance
products and companies or their contractholders or policyowners and the relative
desirability of various personal investment vehicles. Congress has from time to
time considered proposals that, if enacted, would have had an adverse impact on
the federal income tax treatment of certain individual annuity and life
insurance policies offered by Protective. If these proposals were to be adopted,
they would adversely affect the ability of Protective to sell such products and
could result in the surrender of existing contracts and policies. Although it
cannot be predicted whether future legislation will contain provisions that
alter the treatment of these products, such provisions are not part of any tax
legislation currently under active consideration in Congress.
The Federal Government 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 health care reform 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.
Additional issues related to regulation of Protective are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" included herein.
L. EMPLOYEES
Protective had 823 full-time employees, including 721 in the Home Office in
Birmingham, Alabama at December 31, 1994. These employees are covered by
contributory major medical insurance, group life, and long-term disability
insurance plans. The cost of these benefits in 1994 amounted to approximately
$2.6 million for Protective. In addition, substantially all of the employees are
covered by a pension plan. Protective also matches employee contributions to its
401(k) Plan. See Note L to Consolidated Financial Statements.
M.__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.
45
<PAGE>
Protective leases administrative space in 4 cities, substantially all under
leases for periods of three to five years. The aggregate monthly rent is
approximately $61 thousand.
Marketing offices are leased in 15 cities, substantially all under leases
for periods of three to five years with only two leases running longer than five
years. The aggregate monthly rent is approximately $28 thousand.
N. RECENT DEVELOPMENTS
The President and Congress are considering repealing the Glass-Steagall Act,
which would allow banks to diversify into securities and other businesses
including insurance. The ultimate scope and effective date of any proposals are
unknown at this time and are likely to be modified as they are considered for
enactment by Congress. It is anticipated that these proposals may increase
competition and, therefore, may adversely affect Protective.
46
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Protective are as follows:
<TABLE>
<S> <C> <C>
Drayton Nabers, Jr. 54 President and a Director
R. Stephen Briggs 45 Executive Vice President and a Director
John D. Johns 41 Executive Vice President and Chief Financial Officer
and a Director
Ormond L. Bentley 59 Senior Vice President, Group and a Director
Deborah J. Long 40 Senior Vice President and General Counsel
Jim E. Massengale 52 Senior Vice President and a Director
Steven A. Schultz 41 Senior Vice President, Financial Institutions and a
Director
Wayne E. Stuenkel 41 Senior Vice President and Chief Actuary and a
Director
A. S. Williams III 58 Senior Vice President, Investments and Treasurer and
a Director
Judy Wilson 36 Senior Vice President, Guaranteed Investment
Contracts
Jerry W. DeFoor 42 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.
47
<PAGE>
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 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.
Ms. Wilson has been Senior Vice President, Guaranteed Investment Contracts
since January 1995. From October 1989 to January 1995, she was Vice President of
Guaranteed Investment Contracts.
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.
EXECUTIVE COMPENSATION
Executive officers of Protective also serve as executive officers and/or
directors of one or more affiliate companies of PLC. Compensation allocations
are made as to each individual's time devoted to duties as an executive officer
of 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, and Mr.
Briggs' total compensation, and 50% of Mr. Johns' 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. In 1994, Mr. Rushton received $50,000
for his service as PLC's Chairman of the Board through May 1994. Mr. Rushton
also received payment of earned performance share awards that were awarded to
him during his tenure as Chief Executive Officer.
PLC has established a Deferred Compensation Plan for Officers of PLC (the
"Officers' Plan") whereby eligible officers may voluntarily elect to defer to a
specified date receipt of all or any portion of their Annual Incentive Plan and
Performance Share Plan bonuses. The bonuses so deferred are credited to the
officers in cash or PLC stock equivalents or a combination thereof. The cash
portion earns interest at approximately PLC's short-term borrowing rate. The
stock equivalent portion is credited with dividends in the form of additional
stock equivalents. Deferred bonuses will be distributed in stock or cash as
specified by the officers in accordance with the Officers' Plan unless
distribution is accelerated under certain provisions, including upon a change in
control of PLC.
48
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- -------------
LONG-TERM
OTHER INCENTIVE ALL
ANNUAL PLAN OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1)(2) BONUS(1)(2)(3) COMPENSATION PAYOUTS(1)(3)(4) COMPENSATION(3)
(A) (B) (C) (D) (E) (H) (I)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DRAYTON NABERS, JR. 1994 $ 438,550 $ 400,500 $ 1,188 $ 605,979(6) $ 4,500
Chairman of the Board,
President 1993 398,583 365,700 2,238 520,122 6,746
and Chief Executive Officer 1992 339,769 226,800 7,488 77,439 6,546
- ------------------------------------------------------------------------------------------------------------------
JOHN D. JOHNS 1994 268,333 189,000 -0- 84,457(6) 4,500
Executive Vice President and
Chief 1993 60,001 75,020 -0- -0- -0-
Financial Officer since
October 1993
- ------------------------------------------------------------------------------------------------------------------
R. STEPHEN BRIGGS 1994 268,333 153,900 3,168 236,479(6) 4,500
Executive Vice President 1993 222,392 149,100 4,218 204,345 6,746
1992 185,250 71,900 9,468 40,262 6,546
- ------------------------------------------------------------------------------------------------------------------
A. S. WILLIAMS III 1994 252,500 153,000 2,970 255,482(6) 4,500
Senior Vice President,
Investments 1993 227,008 137,800 4,020 217,077 6,746
and Treasurer 1992 208,333 126,000 9,270 39,022 6,546
- ------------------------------------------------------------------------------------------------------------------
ORMOND L. BENTLEY 1994 211,300 107,400 2,970 232,257(6) 4,500
Senior Vice President, Group 1993 200,217 115,800 3,886 193,257 6,746
1992 185,250 89,000 8,395 39,022 6,546
- ------------------------------------------------------------------------------------------------------------------
<FN>
Footnotes:
(1) For further information, see the "Compensation and Management Succession
Committee's Report on Executive Compensation".
(2) Includes amounts that the named executive officer may have voluntarily
elected to contribute to PLC's 401(k) and Stock Ownership Plan.
(3) Includes amounts that the named executive officer may have voluntarily
deferred under PLC's Deferred Compensation Plan for Officers.
(4) For further information, see the "Long-Term Incentive Plan -- Awards In
Last Fiscal Year" table.
(5) Matching contributions to PLC's 401(k) and Stock Ownership Plan.
(6) 1994 long-term compensation is not yet determinable. The amount shown is
the best estimate available as of the date hereof.
</TABLE>
The above table sets forth certain information for the year ended December
31, 1994 relating to the Chief Executive Officer and the four most highly
compensated executive officers of PLC.
49
<PAGE>
PERFORMANCE SHARE PLAN
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) (B) (C) (D) (E) (F)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Drayton Nabers, Jr. 6,650 shares December 31, 1997 3,325 8,313 11,305
- ------------------------------------------------------------------------------------------------------------------
John D. Johns 2,770 shares December 31, 1997 1,385 3,463 4,709
- ------------------------------------------------------------------------------------------------------------------
R. Stephen Briggs 2,770 shares December 31, 1997 1,385 3,463 4,709
- ------------------------------------------------------------------------------------------------------------------
A. S. Williams III 2,110 shares December 31, 1997 1,055 2,638 3,587
- ------------------------------------------------------------------------------------------------------------------
Ormond L. Bentley 1,790 shares December 31, 1997 895 2,238 3,043
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1994, 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.
With respect to 1994 awards, awarded to the named executive officers, 125%
of the award is earned 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, 170% of the award is earned. If PLC ranks
at the median of the comparison group, 50% of the award is earned and if PLC's
results are below the median of the comparison group, no portion of the award is
earned. The Performance Share Plan provides for interpolation between thresholds
to determine the exact percentage to be paid.
50
<PAGE>
PENSION PLAN
PENSION PLAN TABLE
<TABLE>
<CAPTION>
REMUNERATION YEARS OF SERVICE
- ---------- --------------------------------------------------------------------
15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$ 125,000 $28,056 $37,408 $46,760 $56,112 $65,464
150,000 34,056 45,408 56,760 68,112 79,464
175,000* 40,056 53,408 66,760 80,112 93,464
200,000* 46,056 61,408 76,760 92,112 107,464
225,000* 52,056 69,408 86,760 104,112 121,464*
250,000* 58,056 77,408 96,760 116,112 135,464*
275,000* 64,056 85,408 106,760 128,112* 149,464*
300,000* 70,056 93,408 116,760 140,112* 163,464*
400,000* 94,056 125,408* 156,760* 188,112* 219,464*
500,000* 118,056 157,408* 196,760* 236,112* 275,464*
600,000* 142,056* 189,408* 236,760* 284,112* 331,464*
700,000* 166,056* 221,408* 276,760* 332,112* 387,464*
800,000* 190,056* 253,408* 316,760* 380,112* 443,464*
900,000* 214,056* 285,408* 356,760* 428,112* 499,464*
1,000,000* 238,056* 317,408* 396,760* 476,112* 555,464*
<FN>
- ------------------------------
*Current pension law limits the maximum annual benefit payable at normal
retirement age under a defined benefit plan to $120,000 for 1995 and is subject
to increase in later years. In addition, in 1995, 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 Excess Benefit Plan ("Excess Benefit
Plan"), adopted effective September 1, 1984, and amended and restated as of
January 1, 1989, provides for payment, outside of the PLC Pension Plan
("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>
The above table illustrates estimated gross annual benefits which would be
payable for life in a straight life annuity commencing at normal retirement age
under the Pension Plan and the Excess Benefit Plan for employees with average
compensation (remuneration under the table above) and years of service. Benefits
in the above table are not reduced by social security or other offset amounts.
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.
51
<PAGE>
The named executives and their estimated length of service as of December
31, 1994 are provided in the following table.
<TABLE>
<CAPTION>
------------------------------------------------
NAME YEARS OF SERVICE
- ----------------------- -----------------------------
<S> <C>
Drayton Nabers, Jr. 16
John D. Johns 1
R. Stephen Briggs 23
A. S. Williams III 30
Ormond L. Bentley 29
- ------------------------------------------------
</TABLE>
SEVERANCE COMPENSATION AGREEMENTS
PLC has entered into Severance Compensation Agreements with all 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 the 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 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 Common Stock in the transaction effecting the
change in control, and (2) delivery of an annuity to equal increased benefits
under the Pension Plan and the Excess Benefit Plan resulting from an additional
three years of credited service (subject to the Pension Plan's maximum on
crediting service).
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 law limitations). The Severance
Compensation Agreements also provide that if the Performance Share Plan has
terminated before the time of payment of benefits, the amount of benefits under
the Severance Compensation Agreements would be reduced by any payment to the
executive due to the termination of the Performance Share Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation and Management Succession Committee of PLC
("Committee") are Messrs. McMahon (Chairman), Woods, Dahlberg, Kuehn, and
Sklenar. Messrs. McMahon, Woods, Dahlberg, 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 1994. Also, no member of the Committee was
formerly an officer of PLC or any of its subsidiaries.
During 1994, McWane, Inc. and National Bank of Commerce of Birmingham, with
which Committee member Mr. McMahon was affiliated, paid Protective or its
affiliates premiums, fees, or investment product deposits for various types of
insurance in the amounts of $106,023 and $75,585, respectively. Likewise, Sonat
Inc., with which Committee member Mr. Kuehn was affiliated, and Vulcan Materials
Company, with which Committee member Mr. Sklenar was affiliated, paid Protective
premiums, fees, or investment product deposits for various types of insurance in
the amounts of $440,000 and $4,222,189, respectively.
52
<PAGE>
Mr. Rushton, PLC's Chairman Emeritus (formerly, its Chairman of the Board),
serves as a director of AmSouth Bancorporation. Mr. Woods, the Chairman of the
Board and Chief Executive Officer of AmSouth Bancorporation, serves 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 of Alabama serves as Trustee for Protective's
retired lives reserve program. In 1994, Protective and PLC paid $1,367,145 in
credit and mortgage insurance and annuity commissions and $3,539,377 in
interest, mortgage loan service fees, and other charges to AmSouth Bank of
Alabama and other subsidiaries of AmSouth Bancorporation. Additionally, during
1994, AmSouth Bancorporation and certain of its subsidiaries paid Protective
premiums, fees, or investment product deposits for various types of insurance in
the amount of $6,553,930.
Mr. Rushton also serves as a director of The Southern Company. Mr. Dahlberg,
the Chairman of the Board, President and Chief Executive Officer of The Southern
Company, serves on PLC's Committee, and Mr. Addison, formerly, the Chairman of
the Board and Chief Executive Officer of The Southern Company, served on PLC's
Committee through May 1994. During 1994, affiliates of The Southern Company paid
Protective premiums, fees, or investment product deposits for various types of
insurance in the amount of $192,596.
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 1995:
<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 339,136(3) 5,547(4) 2.5%
Drayton Nabers, Jr. 37,332(5) 5,127 *
R. Stephen Briggs 21,724(6) -0- *
John D. Johns 2,448(7) 400 *
Ormond L. Bentley 13,556(8) -0- *
Deborah J. Long 96(9) 1,275 *
Jim E. Massengale 22,316(10) 175 *
Wayne E. Stuenkel 7,114(11) -0- *
A. S. Williams III 20,649(12) -0- *
Steven A. Schultz 3,182(13) -0- *
Judy Wilson 2,040(14) -0- *
All directors and executive officers
as a group (11 persons) 469,593(15) 12,524(2) 3.5%
<FN>
- ------------------------
* 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
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
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 15,125 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 2,769 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Nabers has sole voting power. Also, includes 10,052 share
equivalents allocated to Mr. Nabers' deferred compensation account pursuant
to the terms of the PLC's Deferred Compensation Plan for Officers. Upon
distribution, share equivalents will be distributed in shares of PLC Common
Stock. Such shares will be issued directly to Mr. Nabers who will have sole
voting power over the shares at that time.
(6) Includes 5,698 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Briggs has sole voting power. Also, includes 4,475 share
equivalents allocated to Mr. Briggs' deferred compensation account pursuant
to the terms of the PLC's Deferred Compensation Plan for Officers. Upon
distribution, share equivalents will be distributed in shares of PLC Common
Stock. Such shares will be issued directly to Mr. Briggs who will have sole
voting power over the shares at that time.
(7) Includes 215 shares held in PLC's 401(k) and Stock Ownership Plan for which
Mr. John's has sole voting power. Also, includes 1,133 share equivalents
allocated to Mr. Johns' deferred compensation account pursuant to the terms
of the PLC's Deferred Compensation Plan for Officers. Upon distribution,
share equivalents will be distributed in shares of PLC Common Stock. Such
shares will be issued directly to Mr. Johns who will have sole voting power
over the shares at that time.
(8) Includes 1,410 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Bentley has sole voting power. Also, includes 4,161 share
equivalents allocated to Mr. Bentley's deferred compensation account
pursuant to the terms of the PLC's Deferred Compensation Plan for Officers.
Upon distribution, share equivalents will be distributed in shares of PLC
Common Stock. Such shares will be issued directly to Mr. Bentley who will
have sole voting power over the shares at that time.
(9) Includes 96 shares held in PLC's 401(k) and Stock Ownership Plan for which
Ms. Long has sole voting power.
(10) Includes 946 shares held in PLC's 401(k) and Stock Ownership Plan for which
Mr. Massengale has sole voting power. Also includes 4,341 share equivalents
allocated to Mr. Massengale's deferred compensation account pursuant to the
terms of PLC's Deferred Compensation Plan for Officers. Upon distribution,
share equivalents will be distributed in shares of PLC Common Stock. Such
shares will be issued directly to Mr. Massengale who will have sole voting
power over the shares at that time.
(11) Includes 322 shares held in PLC's 401(k) and Stock Ownership Plan for which
Mr. Stuenkel has sole voting power. Also includes 3,408 share equivalents
allocated to Mr. Stuenkel's deferred compensation account pursuant to the
terms of PLC's Deferred Compensation Plan for Officers. Upon distribution,
share equivalents will be distributed in shares of PLC Common Stock. Such
shares will be issued directly to Mr. Stuenkel who will have sole voting
power over the shares at that time.
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
(12) Includes 5,563 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Williams has sole voting power. Also, includes 4,716 share
equivalents allocated to Mr. Williams' deferred compensation account
pursuant to the terms of the PLC's Deferred Compensation Plan for Officers.
Upon distribution, share equivalents will be distributed in shares of PLC
Common Stock. Such shares will be issued directly to Mr. Williams who will
have sole voting power over the shares at that time.
(13) Includes 1,117 shares held in PLC's 401(k) and Stock Ownership Plan for
which Mr. Schultz has sole voting power. Also includes 1,494 share
equivalents allocated to Mr. Schultz's deferred compensation account
pursuant to the terms of PLC's Deferred Compensation Plan for Officers.
Upon distribution, share equivalents will be distributed in shares of PLC
Common Stock. Such shares will be issued directly to Mr. Schultz who will
have sole voting power over the shares at that time.
(14) Includes 1,040 shares held in PLC's 401(k) and Stock Ownership Plan for
which Ms. Wilson has sole voting power.
(15) Included are the interests of the persons as of December 31, 1994 in 28,210
shares held in PLC's 401(k) and Stock Ownership Plan, which owned a total
of 628,333 shares on such date. Each 401(k) and Stock Ownership Plan
participant has sole voting power with respect to the shares held in the
participant's accounts. The 396,902 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. Also, includes 36,225 share equivalents allocated to the
deferred compensation accounts of participating directors and executive
officers as a group pursuant to the Company's Deferred Compensation Plan
for Directors Who Are Not Employees of the Company and the Company's
Deferred Compensation Plan for Officers.
</TABLE>
CERTAIN TRANSACTIONS
Director Woods is Chairman of the Board and Chief Executive Officer of
AmSouth Bancorporation, a bank holding company which owns all of the stock of
AmSouth Bank of Alabama. In addition to Mr. Woods, four of the directors of PLC,
including Director Rushton, are also directors of such bank and four are
directors of AmSouth Bancorporation. AmSouth Bancorporation and subsidiaries
maintain a group life insurance program with Protective (which through
reinsurance is shared with two other companies). AmSouth Bank of Alabama serves
as Trustee for Protective's retired lives reserve program. In 1994, Protective
and the PLC paid $1,367,145 in credit and mortgage insurance and annuity
commissions and $3,539,377 in interest, mortgage loan service fees, and other
charges to AmSouth Bank of Alabama and other subsidiaries of AmSouth
Bancorporation.
In 1994, PLC received $65,568 from the National Bank of Commerce of
Birmingham ("NBC"), in connection with the provision of a partial guaranty of
mortgage loan participations previously sold to NBC, which has two directors in
common with PLC.
PLC is a 25% member of a limited liability company formed to acquire, for
$7.0 million, an office building adjacent to the PLC's home office from an
affiliate of The Southern Company which will continue to lease portions of the
building. During 1994, the limited liability company received $1,709,376 in
lease payments from affiliates of The Southern Company. The Southern Company has
three directors in common with the PLC. Financing for the purchase of the office
building in the amount of $7.3 million was provided to the limited liability
company by Trust Company Bank which has two directors in common with the PLC.
55
<PAGE>
During 1994, the following corporations with which one or more of PLC's
directors were affiliated paid Protective premiums, fees, or investment product
deposits for various types of insurance as follows:
<TABLE>
<S> <C>
Alabama Power Company................................................... $ 707,864
AmSouth Bancorporation and subsidiaries................................. 6,553,930
Coca-Cola Bottling Company United, Inc.................................. 143,303
McWane, Inc. and affiliates............................................. 106,023
National Bank of Commerce of Birmingham................................. 75,585
Pattillo Construction Company, Inc...................................... 42,255
Sonat Inc. and subsidiaries............................................. 440,000
The Southern Company and affiliates..................................... 192,596
Southern Research Institute............................................. 111,658
SunTrust Banks, Inc. and affiliates..................................... 5,500,000
Union Carbide Corporation............................................... 3,000,000
Vulcan Materials Company................................................ 4,222,189
</TABLE>
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. For additional information regarding
legal proceedings see Note G to the Consolidated Financial Statements included
herein.
EXPERTS
The consolidated balance sheets of Protective Life Insurance Company and
subsidiaries as of December 31, 1994 and 1993 and the consolidated statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1994 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 L.L.P., independent certified public accountants, given on the authority
of that firm as experts in auditing and accounting.
LEGAL MATTERS
Sutherland, Asbill & Brennan 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.
56
<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, 1994, 1993, and
1992................................................................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and 1993......................... F-4
Consolidated Statements of Stockholder's Equity for the years ended December 31,
1994, 1993, and 1992................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993,
and 1992............................................................................ F-6
Notes to Consolidated Financial Statements........................................... F-7
</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-28 and S-1 through S-3, 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, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1993. 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.
/s/ COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
February 13, 1995
F-2
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded: 1994 - $172,575; 1993 -
$126,912; 1992 - $109,355)................................................ $ 402,772 $ 351,423 $ 323,136
Net investment income...................................................... 408,933 354,165 274,991
Realized investment gains (losses)......................................... 6,298 5,054 (154)
Other income............................................................... 11,977 4,756 10,675
---------- ---------- ----------
829,980 715,398 608,648
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded: 1994 -
$112,922; 1993 - $84,949; 1992 - $67,436)................................. 517,110 461,636 409,557
Amortization of deferred policy acquisition costs.......................... 88,089 73,335 48,403
Other operating expenses (net of reinsurance ceded: 1994 - $14,326; 1993 -
$10,759; 1992 - $7,468)................................................... 119,203 94,315 91,925
---------- ---------- ----------
724,402 629,286 549,885
---------- ---------- ----------
INCOME BEFORE INCOME TAX..................................................... 105,578 86,112 58,763
INCOME TAX EXPENSE
Current.................................................................... 37,586 33,039 19,475
Deferred................................................................... (4,731) (3,082) (2,082)
---------- ---------- ----------
32,855 29,957 17,393
---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST.............................................. 72,723 56,155 41,370
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES................. 90
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............ 72,723 56,155 41,280
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF INCOME TAX:
$542)....................................................................... 1,053
---------- ---------- ----------
NET INCOME................................................................... $ 72,723 $ 56,155 $ 40,227
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1994-$3,698,370;
1993-$2,985,670)............................................................. $3,493,646 $3,051,292
Equity securities, at market (cost: 1994-$45,958; 1993-$33,331)............... 45,005 40,596
Mortgage loans on real estate................................................. 1,488,495 1,408,444
Investment real estate, net of accumulated depreciation (1994-$695;
1993-$3,126)................................................................. 20,170 21,928
Policy loans.................................................................. 147,608 141,136
Other long-term investments................................................... 50,751 22,760
Short-term investments........................................................ 54,683 79,772
---------- ----------
Total investments........................................................... 5,300,358 4,765,928
Cash............................................................................ 23,951
Accrued investment income....................................................... 55,630 51,330
Accounts and premiums receivable, net of allowance for uncollectible
amounts (1994-$2,464; 1993-$5,024)............................................. 28,928 20,473
Reinsurance receivables......................................................... 122,175 102,559
Deferred policy acquisition costs............................................... 434,200 299,307
Property and equipment, net..................................................... 33,185 33,046
Receivables from related parties................................................ 281 382
Other assets.................................................................... 11,802 7,473
Assets related to separate accounts............................................. 124,145 3,400
---------- ----------
$6,110,704 $5,307,849
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims............................................. $1,694,295 $1,380,845
Unearned premiums............................................................. 103,479 88,785
---------- ----------
1,797,774 1,469,630
Guaranteed investment contract deposits......................................... 2,281,673 2,015,075
Annuity deposits................................................................ 1,251,318 1,005,742
Other policyholders' funds...................................................... 144,461 141,975
Other liabilities............................................................... 94,181 74,375
Accrued income taxes............................................................ (4,699) 7,483
Deferred income taxes........................................................... (14,667) 69,118
Short-term debt................................................................. -- 20
Long-term debt.................................................................. -- 98
Indebtedness to related parties................................................. 39,443 48,943
Liabilities related to separate accounts........................................ 124,145 3,400
---------- ----------
Total liabilities......................................................... 5,713,629 4,835,859
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G
REDEEMABLE PREFERRED STOCK, $1.00 par value, at redemption value
Shares authorized and issued: 2,000............................................ 2,000 2,000
---------- ----------
STOCKHOLDER'S EQUITY
Common Stock, $1.00 par value................................................... 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital...................................................... 126,494 126,494
Net unrealized gains (losses) on investments (Net of income tax: 1994-$(57,902);
1993-$19,774).................................................................. (107,532) 39,284
Retained earnings............................................................... 377,049 305,176
Note receivable from PLC Employee Stock Ownership Plan.......................... (5,936) (5,964)
---------- ----------
Total stockholder's equity................................................ 395,075 469,990
---------- ----------
$6,110,704 $5,307,849
---------- ----------
---------- ----------
</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, 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................... 5,000 126,494 39,284 305,176 (5,964) 469,990
Net income for 1994........................ 72,723 72,723
Preferred dividends ($425 per share)....... (850) (850)
Decrease in net unrealized gains on
investments............................... (146,816) (146,816)
Decrease in note receivable from PLC
ESOP...................................... 28 28
------ ---------- --------------- -------- ---------- -------------
$5,000 $ 126,494 $ (107,532) $377,049 $ (5,936) $ 395,075
------ ---------- --------------- -------- ---------- -------------
------ ---------- --------------- -------- ---------- -------------
</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
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 72,723 $ 56,155 $ 40,227
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred policy acquisition
costs........................................ 88,089 73,335 48,403
Capitalization of deferred policy acquisition
costs........................................ (127,566) (92,935) (81,160)
Depreciation expense.......................... 4,280 2,660 2,974
Deferred income taxes......................... (4,731) 16,987 (3,280)
Accrued income taxes.......................... (12,182) 5,040 2,368
Interest credited to universal life and
investment products.......................... 260,081 220,772 173,658
Policy fees assessed on universal life and
investment products.......................... (85,532) (67,314) (46,383)
Change in accrued investment income and other
receivables.................................. (32,242) (91,864) (2,135)
Change in policy liabilities and other
policyholder funds of traditional life and
health products.............................. 61,322 47,212 4,307
Change in other liabilities................... 18,564 11,970 6,230
Other (net)................................... (1,475) 10,517 (3,377)
---------- ---------- ----------
Net cash provided by operating activities......... 241,331 192,535 141,832
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of
investments:
Investments available for sale................ 386,498
Other......................................... 153,945 1,319,590 881,795
Sale of investments:
Investment available for sale................. 630,095
Other......................................... 59,550 244,683 338,850
Cost of investments acquired:
Investments available for sale................ (1,807,658)
Other......................................... (220,839) (2,320,628) (1,997,470)
Acquisitions and bulk reinsurance assumptions... 106,435 14,170 23,274
Principal payments on subordinated debenture of
PLC............................................ 3,678
Purchase of property and equipment.............. (4,889) (3,451) (2,679)
Sale of property and equipment.................. 470 1,817 181
---------- ---------- ----------
Net cash used in investing activities............. (696,393) (743,819) (752,371)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowing under line of credit
arrangements and long-term debt................ 572,586 574,423 297,300
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................ (572,704) (577,767) (297,331)
Principal payment on surplus note to PLC........ (9,500) (22,500) (4,500)
Dividends to stockholder........................ (850) (1,500) (3,254)
Investment product deposits and change in
universal life deposits........................ 1,417,980 1,198,263 871,251
Investment product withdrawals.................. (976,401) (683,251) (263,530)
---------- ---------- ----------
Net cash provided by financing activities......... 431,111 563,668 619,636
---------- ---------- ----------
INCREASE(DECREASE) IN CASH........................ (23,951) 12,384 9,097
CASH AT BEGINNING OF YEAR......................... 23,951 11,567 2,470
---------- ---------- ----------
CASH AT END OF YEAR............................... $ 0 $ 23,951 $ 11,567
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on notes and mortgages payable....... $ 5,029 $ 3,803 $ 326
Income taxes.................................. $ 49,765 $ 27,432 $ 17,278
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Minority interest in consolidated subsidiary.... $ (1,311) $ 90
Sale of PLC stock to PLC........................ $ 643
Sale of PLC stock to ESOP....................... $ 16
Reduction of principal on note from ESOP........ $ 28 $ 156 $ 143
Acquisitions and bulk reinsurance assumptions
Assets acquired............................... $ 117,349 $ 423,140 $ 103,557
Liabilities assumed........................... (166,595) (429,580) (130,008)
---------- ---------- ----------
Net........................................... $ (49,246) $ (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.
Protective adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," at December 31, 1993, which requires Protective to carry
its investment in fixed maturities and certain other securities at market value
instead of amortized cost. As prescribed by SFAS No. 115, these investments are
recorded at their market values with the resulting unrealized gains and losses,
net of income tax, reported as a component of stockholder's equity reduced by a
related adjustment to deferred policy acquisition costs. The market values of
fixed maturities increase or decrease as interest rates fall or rise. Therefore,
although the adoption of SFAS No. 115 does not affect Protective's operations,
its reported stockholder's equity will fluctuate significantly as interest rates
change.
In 1994, Protective adopted SFAS No. 119 "Disclosure about Derivative
Financial Instruments and Fair Values of Financial Instruments," which requires
additional disclosures related to derivative financial instruments. Also, in
1994, Protective adopted new disclosure requirements required by Statement of
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)
Position 94-4 of the Accounting Standards Division of the American Institute of
Certified Public Accountants concerning disclosures related to Protective's
liability for unpaid claims. The adoption of these accounting standards had no
effect on Protective's financial statements.
INVESTMENTS
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."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
- Fixed maturities (bonds, bank loan participations, and
redeemable preferred stocks) -- at current market value.
- Equity securities (common and nonredeemable preferred stocks)
-- at current market value.
- Mortgage loans on real estate -- at unpaid balances, adjusted
for loan origination costs, net of fees, and amortization of
premium or discount.
- Investment real estate -- at cost, less allowances for
depreciation computed on the straight-line method. With respect
to real estate acquired through foreclosure, cost is the lesser
of the loan balance plus foreclosure costs or appraised value.
- Policy loans -- at unpaid balances.
- Other long-term investments -- at a variety of methods similar
to those listed above, as deemed appropriate for the specific
investment.
- Short-term investments -- at cost, which approximates current
market value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $9.7 million in bank
deposits voluntarily restricted as to withdrawal.
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)
Protective's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Total investments................................................. $ 5,499,511 $ 4,693,041
Deferred policy acquisition costs................................. 400,480 311,757
All other assets.................................................. 376,146 242,614
------------ ------------
$ 6,276,137 $ 5,247,412
------------ ------------
------------ ------------
Deferred income taxes............................................. $ 43,235 $ 47,965
All other liabilities............................................. 5,728,296 4,766,741
------------ ------------
5,771,531 4,814,706
Redeemable preferred stock........................................ 2,000 2,000
Stockholder's equity.............................................. 502,606 430,706
------------ ------------
$ 6,276,137 $ 5,247,412
------------ ------------
------------ ------------
</TABLE>
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS
Protective does not use derivative financial instruments for trading
purposes.
Combinations of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, and liabilities arising
from interest-sensitive products such as guaranteed investment contracts and
individual annuities. Realized investment gains and losses on such contracts are
deferred and amortized over the life of the hedged asset. Net realized gains of
$7.9 million were deferred in 1994. At December 31, 1994, open futures contracts
with a notional amount of $137.5 million were in a $0.4 million net unrealized
loss position.
Protective uses interest rate swap contracts to convert certain investments
from a variable to a fixed rate of interest. At December 31, 1994, related open
interest rate swap contracts with a notional amount of $230.0 million were in an
$8.9 million net unrealized loss position. At December 31, 1993, related open
interest rate swap contracts with a notional amount of $245.0 million were in a
$9.0 million net unrealized gain position.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. Protective uses both
accelerated and straight-line methods of depreciation based upon the estimated
useful lives of the assets. Major repairs or improvements are
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)
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>
1994 1993
--------- ---------
<S> <C> <C>
Home office building.................................................... $ 35,321 $ 35,284
Other, principally furniture and equipment.............................. 25,687 21,576
--------- ---------
61,008 56,860
Accumulated depreciation................................................ 27,823 23,814
--------- ---------
$ 33,185 $ 33,046
--------- ---------
--------- ---------
</TABLE>
SEPARATE ACCOUNTS
Protective operates separate accounts, some in which Protective bears the
investment risk and others in which the investments risk rests with the
contractholder. The assets and liabilities related to separate accounts in which
Protective does not bear the investment risk are valued at market and reported
separately as assets and liabilities related to separate accounts in the
accompanying consolidated financial statements.
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
- Traditional Life and Health Insurance Products -- Traditional life
insurance products consist principally of those products with fixed and
guaranteed premiums and benefits and include whole life insurance
policies, term life insurance policies, limited-payment life insurance
policies, and certain annuities with life contingencies. Life insurance
and immediate annuity premiums are recognized as revenue when due. Health
insurance premiums are recognized as revenue over the terms of the
policies. Benefits and expenses are associated with earned premiums so
that profits are recognized over the life of the contracts. This is
accomplished by means of the provision for liabilities for future policy
benefits and the amortization of deferred policy acquisition costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions
as to investment yields, mortality, persistency, and other assumptions
based on Protective's experience modified as necessary to reflect
anticipated trends and to include provisions for possible adverse
deviation. Reserve investment yield assumptions are graded and range from
2.5% to 7.0%. The liability for future policy benefits and claims on
traditional life and
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)
health insurance products includes estimated unpaid claims that have been
reported to Protective and claims incurred but not yet reported. Policy
claims are charged to expense in the period that the claims are incurred.
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Balance beginning of year................................ $ 77,191 $ 68,203 $ 49,851
Less reinsurance....................................... 3,973 3,809 3,685
---------- ---------- ----------
Net balance beginning of year............................ 73,218 64,394 46,166
---------- ---------- ----------
Incurred related to:
Current year............................................. 203,453 194,394 178,604
Prior year............................................... (6,683) (5,123) 5,753
---------- ---------- ----------
Total incurred....................................... 196,770 189,271 184,357
---------- ---------- ----------
Paid related to:
Current year............................................. 148,548 141,361 127,859
Prior year............................................... 47,002 39,086 38,270
---------- ---------- ----------
Total paid........................................... 195,550 180,447 166,129
---------- ---------- ----------
Net balance end of year.................................. 74,438 73,218 64,394
Plus reinsurance....................................... 5,024 3,973 3,809
---------- ---------- ----------
Balance end of year...................................... $ 79,462 $ 77,191 $ 68,203
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- 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 1994.
At December 31, 1994, Protective estimates the fair value of its
guaranteed investment contracts to be $2,200 million using discounted cash
flows. The surrender value of Protective's annuities which approximates
fair value was $1,221 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
F-11
<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)
to the production of new business have been deferred. Traditional life and
health insurance acquisition costs are amortized over the premium-payment
period of the related policies in proportion to the ratio of annual
premium income to total anticipated premium income. Acquisition costs for
universal life and investment products are being amortized over the lives
of the policies in relation to the present value of estimated gross
profits from surrender charges and investment, mortality, and expense
margins. Additionally, relating to SFAS No. 115, these costs have been
adjusted by an amount equal to the amortization that would have been
recorded if unrealized gains or losses on investments associated with
Protective's universal life and investment products had been realized.
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, 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 $84.4 million and $39.4 million at December
31, 1994 and 1993, respectively. During 1994 $56.0 million of present
value of future profits on acquisitions made during the year was
capitalized, and $11.0 million was amortized. The unamortized present
value of future profits for all acquisitions was $110.3 million at
December 31, 1994 and $69.9 million at December 31, 1993.
PARTICIPATING POLICIES
Participating business comprises approximately 4% of the individual life
insurance in force and 4% of the individual life insurance premium income.
Policyholder dividends totaled $2.6 million in 1994, 1993, and 1992.
INCOME TAXES
Protective uses the asset and liability method of accounting for income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. Deferred federal income taxes arise from the
recognition of temporary differences between 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.
F-12
<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)
RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
net income, total assets, or stockholder's equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principals ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method and are based on realistic
estimates of expected mortality, interest, and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions, (c) deferred
income taxes are provided for temporary differences between financial and
taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance
Reserve are restored to stockholder's equity, (e) furniture and equipment,
agents' debit balances, and prepaid expenses are reported as assets rather than
being charged directly to surplus (referred to as nonadmitted items), (f)
certain items of interest income, principally accrual of mortgage and bond
discounts are amortized differently, and (g) bonds are stated at market instead
of amortized cost.
F-13
<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
------------------------------- --------------------------------
1994 1993 1992 1994 1993 1992
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory reporting
practices:
Protective Life Insurance Company............ $ 54,812 $ 41,471 $ 25,138 $ 304,858 $ 263,075 $ 206,476
Wisconsin National Life Insurance Company.... 10,132 9,591 57,268 50,885
American Foundation Life Insurance Company... 3,072 1,415 2,155 20,327 18,290 18,394
Capital Investors Life Insurance Company..... 170 207 1,125 824
Empire General Life Assurance Corporation.... 690 408 (201) 21,270 10,588 5,178
National Deposit Life Insurance Company1..... 5,386
Protective Life Insurance Acquisition
Corporation2................................ 22
Protective Life Insurance Corporation of
Alabama..................................... 69 16 2,133 2,064
Consolidation elimination.................... 30 (74) (100,123) (80,651) (21,572)
--------- --------- --------- ---------- --------- ---------
68,945 53,138 32,426 306,858 265,075 208,476
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization................................ 41,718 25,686 33,476 434,200 299,307 274,923
Policy liabilities and accruals.............. (34,632) (15,586) (26,486) (140,298) (69,844) (45,583)
Deferred income tax.......................... 4,731 3,081 2,082 14,667 (69,118) (51,842)
Asset Valuation Reserve...................... 24,925 43,398 25,341
Interest Maintenance Reserve................. (1,716) (1,432) (93) 3,583 10,489 1,634
Nonadmitted items............................ 21,445 7,742 (10,178)
Timing differences on mortgage loans on real
estate and fixed maturity investments....... (961) 1,645 1,296 6,877 7,350 (11,608)
Net unrealized gains and losses on
investments, net of income tax.............. (107,532) 39,284 3,156
Realized investment losses................... (6,664) (7,860) (2,565)
Noninsurance affiliates...................... (12) 934 31 (2,535)
Consolidation elimination.................... (4,415) (2,107) (5,310) (162,835) (65,620) (53,450)
Minority interest in consolidated
subsidiaries................................ (90) (1,311)
Other adjustments, net....................... 5,717 (398) 4,557 (4,815) 1,896 (1,507)
--------- --------- --------- ---------- --------- ---------
In conformity with generally accepted
accounting principles....................... $ 72,723 $ 56,155 $ 40,227 $ 397,075 $ 469,990 $ 335,516
--------- --------- --------- ---------- --------- ---------
--------- --------- --------- ---------- --------- ---------
<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-14
<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 net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities......................................... $ 237,264 $ 211,566 $ 174,051
Equity securities........................................ 2,435 1,519 939
Mortgage loans on real estate............................ 141,751 130,262 108,128
Investment real estate................................... 1,950 2,119 1,848
Policy loans............................................. 8,397 7,558 6,781
Other, principally short-term investments................ 35,062 18,779 3,799
---------- ---------- ----------
426,859 371,803 295,546
Investment expenses...................................... 17,926 17,638 20,555
---------- ---------- ----------
$ 408,933 $ 354,165 $ 274,991
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- ---------- ---------
<S> <C> <C> <C>
Fixed maturities............................................ $ (8,646) $ 10,508 $ 8,163
Equity securities........................................... 7,735 2,230 3,688
Mortgage loans and other investments........................ 7,209 (7,684) (12,005)
--------- ---------- ---------
$ 6,298 $ 5,054 $ (154)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $35.2 million at December 31, 1994 and 1993.
Additions to the allowance are included in realized investment losses. Without
such additions, Protective had realized investment gains of $6.3 million, $13.8
million, and $9.5 million in 1994, 1993, and 1992, respectively.
In 1994, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $15.2 million and
gross losses were $16.4 million. In 1993, gross gains 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.
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 amortized cost and estimated market values of Protective's investments
classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1994 COST GAINS LOSSES VALUES
- ----------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities........... $ 2,002,842 $ 7,538 $ 112,059 $ 1,898,321
United States Government and
authorities......................... 90,468 290 8,877 81,881
States, municipalities, and political
subdivisions........................ 10,902 5 1,230 9,677
Public utilities..................... 414,011 1,091 36,982 378,120
Convertibles and bonds with
warrants............................ 687 0 302 385
All other corporate bonds............ 927,779 3,437 56,788 874,428
Bank loan participations............... 244,881 0 0 244,881
Redeemable preferred stocks............ 6,800 37 884 5,953
------------ ----------- ----------- ------------
3,698,370 12,398 217,122 3,493,646
Equity securities........................ 45,958 3,994 4,947 45,005
Short-term investments................... 54,683 0 0 54,683
------------ ----------- ----------- ------------
$ 3,799,011 $ 16,392 $ 222,069 $ 3,593,334
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<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-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)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown below. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUES
------------ ------------
<S> <C> <C>
1994
- -----------------------------------------------------------------------
Due in one year or less.............................................. $ 577,146 $ 540,223
Due after one year through five years................................ 1,351,435 1,299,248
Due after five years through ten years............................... 994,994 929,764
Due after ten years.................................................. 774,795 724,411
------------ ------------
$ 3,698,370 $ 3,493,646
------------ ------------
------------ ------------
1993
- -----------------------------------------------------------------------
Due in one year or less.............................................. $ 517,179 $ 524,100
Due after one year through five years................................ 1,118,089 1,142,613
Due after five years through ten years............................... 777,058 797,093
Due after ten years.................................................. 573,344 587,486
------------ ------------
$ 2,985,670 $ 3,051,292
------------ ------------
------------ ------------
</TABLE>
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1994 1993
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
AAA......................................................... 57.6% 52.5%
AA.......................................................... 5.5 7.8
A........................................................... 12.5 15.1
BBB
Bonds..................................................... 14.9 16.2
Bank loan participations.................................. 1.4 1.0
BB or Less
Bonds..................................................... 2.3 2.2
Bank loan participations.................................. 5.6 4.0
Redeemable preferred stocks................................. 0.2 1.2
------ ------
100.0% 100.0%
------ ------
------ ------
</TABLE>
At December 31, 1994 and 1993, Protective had bonds which were rated less
than investment grade of $82.5 million and $67.3 million, respectively, having
an amortized cost of $89.4 million and $66.7 million, respectively.
Additionally, Protective had bank loan participations which were rated less than
investment grade of $195.1 million and $121.7 million, respectively, having an
amortized cost of $195.1 million and $121.7 million, respectively.
F-17
<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 change in unrealized gains (losses), net of income tax, on fixed
maturity and equity securities for the years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- ---------
<S> <C> <C> <C>
Fixed maturities.............................................. $ (175,723) $ 1,198 $ 76
Equity securities............................................. $ (5,342) $ 1,565 $ (825)
</TABLE>
At December 31, 1994, all of Protective's mortgage loans were commercial
loans of which 79% were retail, 8% were warehouses, and 7% were office
buildings. Protective specializes in making mortgage loans on either
credit-oriented or credit-anchored commercial properties, most of which are
strip shopping centers in smaller towns and cities. No single tenant's leased
space represents more than 5% of mortgage loans. Approximately 84% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: Alabama, South Carolina, Tennessee, Texas,
Georgia, North Carolina, Florida, Mississippi, Virginia, California, Colorado,
Louisiana, Illinois, Ohio, Kentucky, and Indiana.
Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $107.9
million would become due in 1995, $478.0 million in 1996 to 1999, and $233.9
million in 2000 to 2004.
At December 31, 1994, the average mortgage loan was $1.5 million, and the
weighted average interest rate was 9.6%. The largest single mortgage loan was
$11.9 million. While Protective's mortgage loans do not have quoted market
values, at December 31, 1994 and 1993, Protective estimates the market value of
its mortgage loans to be $1,535.3 million and $1,524.2 million, respectively,
using discounted cash flows from the next call date.
At December 31, 1994 and 1993, Protective's problem mortgage loans and
foreclosed properties totaled $24.0 million and $27.1 million, respectively.
Protective expects no significant loss of principal.
Certain investments, principally real estate, with a carrying value of $6.7
million were nonincome producing for the twelve months ended December 31, 1994.
Mortgage loans to Fletcher Bright and Edens & Avant, totaling $99.4 million
and $65.6 million, respectively, exceeded ten percent of stockholder's equity at
December 31, 1994.
Mortgage-backed securities consist primarily of sequential and planned
amortization class (PAC) securities. Mortgage-backed securities issued by
Independent National Mortgage Corporation totaling $54.9 million exceeded ten
percent of stockholder's equity at December 31, 1994.
Protective believes it is not practicable to determine the fair value of its
policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%. The fair values of Protective's other long-term
investments approximate cost.
F-18
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax
income..................................................... 35.0% 35.0% 34.0%
Amortization of nondeductible goodwill...................... 0.4
Dividends received deduction and tax-exempt interest........ (0.4) (0.5) (1.0)
Low-income housing credit................................... (0.7)
Tax benefits arising from prior acquisitions and other
adjustments................................................ (2.8) (1.1) (3.8)
------ ------ ------
Effective income tax rate................................... 31.1% 33.4% 29.6%
------ ------ ------
------ ------ ------
</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.
Details of the deferred income tax provision for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Deferred policy acquisition costs........................... $ 34,561 $ 8,861 $ 7,351
Benefit and other policy liability changes.................. (52,288) (10,416) (9,005)
Temporary differences of investment income.................. 15,524 336
Other items................................................. (2,528) (1,527) (764)
---------- ---------- ---------
$ (4,731) $ (3,082) $ (2,082)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-19
<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)
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder liability reserves........................... $ 116,326 $ 25,123
Unrealized loss on investments....................................... 23,485
Other................................................................ 4,484
---------- ---------
139,811 29,607
---------- ---------
Deferred income tax liabilities:
Deferred policy acquisition costs.................................... 113,760 79,199
Unrealized gain on investments....................................... 19,526
Other................................................................ 11,384
---------- ---------
125,144 98,725
---------- ---------
Net deferred income tax liability.................................... $ (14,667) $ 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, 1994 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
$248 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, 1994 Protective has no material 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.
NOTE E -- DEBT
Short-term and long-term debt at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
--------- -----
<S> <C> <C>
Short-term debt:
Current portion of mortgage and other notes payable.................................... None $ 20
--------- ---
--------- ---
Long-term debt:
Mortgage and other notes payable less current portion.................................. None $ 98
--------- ---
--------- ---
</TABLE>
At December 31, 1994, PLC had borrowed under a term note that contains,
among other provisions, requirements for maintaining certain financial ratios,
and restrictions on indebtedness incurred by PLC's subsidiaries including
Protective. Additionally, PLC, on a consolidated basis, cannot incur debt in
excess of 50% of its total capital.
F-20
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE E -- DEBT (CONTINUED)
Included in indebtedness to related parties are three surplus debentures
issued by Protective to PLC. At December 31, 1994, the balance of the three
surplus debentures combined was $39.4 million.
Interest expense totaled $5.0 million, $5.0 million, and $3.3 million, in
1994, 1993, and 1992, respectively.
NOTE F -- ACQUISITIONS
In July 1993, Protective acquired Wisconsin National Life Insurance Company
("Wisconsin National"). Also in 1993, Protective acquired through reinsurance a
block of universal life policies.
In April 1994, Protective acquired through reinsurance a block of payroll
deduction policies. In October 1994, Protective acquired through reinsurance a
block of individual life insurance policies.
These transactions have been accounted for as purchases, and the results of
the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
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>
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Protective does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which Protective does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgments against the insurer, including material amounts
of punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances. Protective and its
subsidiaries, like other life and health insurers, from time to time are
involved in such litigation. To date, no such lawsuit has resulted in the award
of any significant amount of damages against Protective. Among the litigation
F-21
<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 (CONTINUED)
currently pending is a class action filed in the state of Alabama concerning the
sale of credit insurance for which a proposed settlement agreement has been
filed with the supervising court for approval. Although the outcome of any
litigation cannot be predicted with certainty, Protective believes that such
litigation will not have a material adverse effect on the financial position of
Protective.
NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS
At December 31, 1994, approximately $321 million of consolidated
stockholder's equity excluding net unrealized gains and losses represented net
assets of Protective that cannot be transferred in the form of dividends, loans,
or advances to PLC. 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 $0.9 million, $1.5 million, and $1.4
million were paid to PLC in 1994, 1993, and 1992, respectively.
NOTE J -- RELATED PARTY MATTERS
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amounts of $0.3 million and $0.4 million at December
31, 1994 and 1993, respectively. Protective routinely receives from or pays to
affiliates under the control of PLC reimbursements for expenses incurred on one
another's behalf. Receivables and payables among affiliates are generally
settled monthly.
On August 6, 1990, PLC announced that its Board of Directors approved the
formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990,
Protective transferred to the ESOP 520,000 shares of PLC's common stock held by
it in exchange for a note. The outstanding balance of the note, $5.9 million at
December 31, 1994, 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 1994, $2.8 million in 1993, and $2.6 million in
1992. Protective purchases data processing, legal, investment and management
services from affiliates. The costs of such services were $29.8 million, $20.4
million, and $27.5 million in 1994, 1993, and 1992, respectively. Commissions
paid to affiliated marketing organizations of $10.1 million, $5.8 million, and
$4.8 million in 1994, 1993, and 1992, respectively, were included in deferred
policy acquisition costs.
F-22
<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)
Certain corporations with which PLC's directors were affiliated paid
Protective premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $21.1 million, $10.3 million, and $10.9
million in 1994, 1993, and 1992, 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-23
<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>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
TOTAL REVENUES
Acquisitions.................................................. $ 170,659 $ 123,855 $ 93,634
Financial Institutions........................................ 107,194 96,443 63,041
Group......................................................... 148,313 143,423 129,778
Guaranteed Investment Contracts............................... 183,591 167,233 138,617
Individual Life............................................... 122,248 111,497 90,516
Investment Products........................................... 79,773 69,550 47,678
Corporate and Other........................................... 12,936 1,521 46,973
Unallocated Realized Investment Gains (Losses)................ 5,266 1,876 (1,589)
------------ ------------ ------------
$ 829,980 $ 715,398 $ 608,648
------------ ------------ ------------
------------ ------------ ------------
Acquisitions.................................................. 20.6% 17.3% 15.4%
Financial Institutions........................................ 12.9 13.5 10.4
Group......................................................... 17.9 20.0 21.3
Guaranteed Investment Contracts............................... 22.1 23.4 22.8
Individual Life............................................... 14.7 15.6 14.9
Investment Products........................................... 9.6 9.7 7.8
Corporate and Other........................................... 1.6 0.2 7.7
Unallocated Realized Investment Gains (Losses)................ 0.6 0.3 (0.3)
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------
INCOME BEFORE INCOME TAX
Acquisitions.................................................. $ 39,176 $ 29,845 $ 20,031
Financial Institutions........................................ 8,176 7,220 4,669
Group......................................................... 11,169 10,435 7,762
Guaranteed Investment Contracts............................... 33,197 27,218 18,266
Individual Life............................................... 17,223 20,324 12,976
Investment Products........................................... 107 3,402 4,191
Corporate and Other*.......................................... (8,736) (14,208) (7,543)
Unallocated Realized Investment Gains (Losses)................ 5,266 1,876 (1,589)
------------ ------------ ------------
$ 105,578 $ 86,112 $ 58,763
------------ ------------ ------------
------------ ------------ ------------
Acquisitions.................................................. 37.1% 34.6% 34.1%
Financial Institutions........................................ 7.7 8.4 7.9
Group......................................................... 10.6 12.1 13.2
Guaranteed Investment Contracts............................... 31.5 31.6 31.1
Individual Life............................................... 16.3 23.6 22.1
Investment Products........................................... 0.1 4.0 7.1
Corporate and Other........................................... (8.3) (16.5) (12.8)
Unallocated Realized Investment Gains (Losses)................ 5.0 2.2 (2.7)
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-24
<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>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Acquisitions.................................................. $ 1,282,478 $ 1,145,357 $ 599,022
Financial Institutions........................................ 211,652 189,943 145,014
Group......................................................... 215,904 208,790 161,445
Guaranteed Investment Contracts............................... 2,211,079 2,041,463 1,696,786
Individual Life............................................... 752,168 641,992 507,449
Investment Products........................................... 1,160,041 876,691 683,450
Corporate and Other........................................... 277,382 203,613 206,991
------------ ------------ ------------
$ 6,110,704 $ 5,307,849 $ 4,000,157
------------ ------------ ------------
------------ ------------ ------------
Acquisitions.................................................. 21.0% 21.6% 15.0%
Financial Institutions........................................ 3.5 3.6 3.6
Group......................................................... 3.5 3.9 4.0
Guaranteed Investment Contracts............................... 36.2 38.5 42.4
Individual Life............................................... 12.3 12.1 12.7
Investment Products........................................... 19.0 16.5 17.1
Corporate and Other........................................... 4.5 3.8 5.2
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------
<FN>
- ------------------------
* Income before income tax for the Corporate and Other segment has not been
reduced by pretax minority interest of $90 in 1992.
</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 80% of the participants in the plan are employees of
Protective. The benefits are based on years of service and the employee's
highest thirty-six consecutive months of compensation. PLC's funding policy is
to contribute amounts to the plan sufficient to meet the minimum funding
requirements of ERISA plus such additional amounts as PLC may determine to be
appropriate from time to time. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future.
F-25
<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>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $11,992 in 1994 and
$12,406 in 1993.................................................................. $ 12,348 $ 12,692
--------- ---------
Projected benefit obligation for service rendered to date......................... $ 20,302 $ 20,480
Plan assets at fair value (group annuity contract with Protective)................ 15,679 15,217
--------- ---------
Plan assets less than the projected benefit obligation............................ (4,623) (5,263)
Unrecognized net loss from past experience different from that assumed............ 2,400 2,244
Unrecognized prior service cost................................................... 905 2,069
Unrecognized net transition asset................................................. (101) (118)
--------- ---------
Net pension liability recognized in balance sheet................................. $ (1,419) $ (1,068)
--------- ---------
--------- ---------
</TABLE>
Net pension cost includes the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............... $ 1,433 $ 1,191 $ 970
Interest cost on projected benefit obligation................. 1,520 1,396 1,257
Actual return on plan assets.................................. (1,333) (1,270) (1,172)
Net amortization and deferral................................. 210 704 130
--------- --------- ---------
Net pension cost.............................................. $ 1,830 $ 2,021 $ 1,185
--------- --------- ---------
--------- --------- ---------
</TABLE>
Protective's share of the net pension cost was $1.2 million, $1.5 million,
and $0.8 million, in 1994, 1993, and 1992, respectively.
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate....................................... 8.0% 7.5% 8.0%
Rates of increase in compensation level.............................. 6.0% 5.5% 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 income tax law. At December 31, 1994, the projected benefit obligation
of this plan totaled $4.7 million.
F-26
<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. 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, 1994,
the liability for such benefits totaled $1.6 million. The expense recorded by
Protective was $0.2 million in 1994, 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 $50,000 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. In 1994, a stock bonus was added to the 401(k) Plan for
employees who are not otherwise under a bonus plan. Expense related to the ESOP
consists of the cost of the shares allocated to participating employees plus the
interest expense on the ESOP's note payable to Protective less dividends on
shares held by the ESOP. At December 31, 1994, PLC had committed 33,250 shares
to be released to fund employee benefits. The expense recorded by PLC for this
employee benefit was $0.6 million, $0.2 million and $0.4 million in 1994, 1993,
and 1992, 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 $500,000 individual life insurance on a single risk.
Protective has reinsured approximately $8.6 billion, $7.5 billion, and $7.0
billion in face amount of life insurance risks with other insurers representing
$46.0 million, $37.9 million, and $34.8 million of premium income for 1994,
1993, and 1992, respectively. Protective has also reinsured accident and health
risks representing $126.5 million, $88.9 million, and $74.6 million of premium
income for 1994, 1993, and 1992, respectively. In 1994 and 1993, policy and
claim reserves relating to insurance ceded of $120.0 million and $97.8 million
respectively are included in reinsurance receivables. Should any of the
reinsurers be unable to meet its obligation at the time of the claim, obligation
to pay such claim would remain with Protective. At December 31, 1994 and 1993,
Protective had paid $5.4 million and $4.8 million, respectively, of ceded
benefits which are recoverable from reinsurers.
F-27
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE N -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of Protective's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUES AMOUNT VALUES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities....................................... $ 3,493,646 $ 3,493,646 $ 3,051,292 $ 3,051,292
Equity securities...................................... 45,005 45,005 40,596 40,596
Mortgage loans on real estate.......................... 1,488,495 1,535,300 1,408,444 1,524,200
Short-term investments................................. 54,683 54,683 79,772 79,772
Cash..................................................... 23,951 23,951
Other (see Note A):
Futures contracts........................................ (416)
Interest rate swaps...................................... (8,952) 9,038
</TABLE>
F-28
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses of the issuance and distribution of the Contracts, other than
any underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fees........... $ 125,000
Printing and engraving......................................... 69,000
Accounting fees and expenses................................... 45,000*
Legal fees and expenses........................................ 27,959
Miscellaneous.................................................. 0
---------
TOTAL EXPENSES........................................... $ 266,959*
---------
---------
<FN>
*Estimated.
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 6.5 of Article VI of the Certificate of Incorporation of PLC
provides, in substance, that any of PLC's directors and officers and certain
directors and officers of Protective, who is a party or is threatened to be made
a party to any action, suit or proceeding, other than an action by or in the
right of PLC, by reason of the fact that he is or was an officer or director,
shall be indemnified by PLC against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of PLC and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. If the action or
suit is or was by or in the right of PLC to procure a judgment in its favor,
such person shall be indemnified by PLC against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to PLC unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper. To the extent that any officer or director has been successful on
the merits or otherwise in defense of any such action, suit or proceeding, or in
defense of any issue or matter therein, he shall be indemnified by PLC against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith without the necessity of any action being taken by PLC
other than the determination, in good faith, that such defense has been
successful. In all other cases, unless ordered by a court, indemnification shall
be made by PLC only as authorized in the specific case upon a determination that
indemnification of the officer or director is proper in the circumstances
because he has met the applicable standard of conduct. Such determination shall
be made (a) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion or (c) by the holders of a majority of the shares of capital stock of
PLC entitled to vote thereon. By means of a by-law, Protective offers its
directors and certain executive officers similar indemnification.
In addition, the executive officers and directors are insured by PLC's
Directors' and Officers' Liability Insurance Policy including Company
Reimbursement and are indemnified by a written contract with PLC which
supplements such coverage.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- -------------- -------------------------------------------------------------------------------- ----------------
<C> <C> <C> <S> <C>
** 1 -- Underwriting Agreement including form of Distribution Agreement
***** 2 -- Stock Purchase Agreement
* 3(a) -- Articles of Incorporation
* 3(b) -- By-laws
** 4(a) -- Group Modified Guaranteed Annuity Contract
*** 4(b) -- Individual Certificate
** 4(h) -- Tax-Sheltered Annuity Endorsement
** 4(i) -- Qualified Retirement Plan Endorsement
** 4(j) -- Individual Retirement Annuity Endorsement
** 4(l) -- Section 457 Deferred Compensation Plan Endorsement
* 4(m) -- Qualified Plan Endorsement
** 4(n) -- Application for Individual Certificate
** 4(o) -- Adoption Agreement for Participation in Group Modified Guaranteed Annuity
*** 4(p) -- Individual Modified Guaranteed Annuity Contract
** 4(q) -- Application for Individual Modified Guaranteed Annuity Contract
** 4(r) -- Tax-Sheltered Annuity Endorsement
** 4(s) -- Individual Retirement Annuity Endorsement
** 4(t) -- Section 457 Deferred Compensation Plan Endorsement
** 4(v) -- Qualified Retirement Plan Endorsement
***** 4(w) -- Endorsement -- Group Policy
***** 4(x) -- Endorsement -- Certificate
***** 4(y) -- Endorsement -- Individual Contract
***** 4(z) -- Endorsement (Annuity Deposits) -- Group Policy
***** 4(aa) -- Endorsement (Annuity Deposits) -- Certificate
***** 4(bb) -- Endorsement (Annuity Deposits) -- Individual Contract
** 4(cc) -- Endorsement -- Individual
** 4(dd) -- Endorsement -- Group Contract/Certificate
* 5 -- Opinion re legality
* 10(a) -- Bond Purchase Agreement
* 10(b) -- Escrow Agreement
24(a) -- Consent of Coopers & Lybrand L.L.P.
24(b) -- Consent of Sutherland, Asbill & Brennan
**** 25 -- Power of Attorney
<FN>
- ------------------------
* Previously filed or incorporated by reference in Form S-1 Registration
Statement, Registration No. 33-31940.
** Previously filed or incorporated by reference in Amendment No. 1 to Form
S-1 Registration Statement, Registration No. 33-31940.
*** Previously filed or incorporated by reference from Amendment No. 2 to Form
S-1 Registration Statement, Registration No. 33-31940.
**** Previously filed or incorporated by reference from Form S-1 Registration
Statement, Registration No. 33-57052.
***** Previously filed or incorporated by reference from Amendment No. 2 to Form
S-1 Registration Statement, Registration No. 33-57052.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
SCHEDULES FILED WITH THIS AMENDMENT
- ------------ -----------------------------------------------------------
<S> <C> <C>
Schedule I -- Summary of Investments Other Than Instruments in Related
Parties
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
</TABLE>
Schedules other than those referred to above are not required or are
inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement,
including (but not limited to) any addition or deletion of a managing
underwriter;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officers or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 4 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Birmingham, State of Alabama on April 6, 1995.
PROTECTIVE LIFE INSURANCE COMPANY
By: ______/s/ DRAYTON NABERS, JR._____
Drayton Nabers, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, the Post-Effective
Amendment No. 4 to Registration Statement on Form S-1 has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- ------------------------------------------------ ---------------
<S> <C> <C> <C>
(i) Principal Executive Officer
/s/ DRAYTON NABERS, JR. President April 6, 1995
-------------------------------
Drayton Nabers, Jr.
(ii) Principal Financial Officer
/s/ JOHN D. JOHNS Executive Vice President April 6, 1995
------------------------------- and Chief Financial Officer
John D. Johns
(iii) Principal Accounting Officer
/s/ JERRY W. DEFOOR Vice President and Controller, April 6, 1995
------------------------------- and Chief Accounting Officer
Jerry W. DeFoor
(iv) Board of Directors:
/s/ DRAYTON NABERS, JR. Director April 6, 1995
-------------------------------
Drayton Nabers, Jr.
/s/ JOHN D. JOHNS Director April 6, 1995
-------------------------------
John D. Johns
* Director April 6, 1995
-------------------------------
Ormond L. Bentley
* Director April 6, 1995
-------------------------------
R. Stephen Briggs
* Director April 6, 1995
-------------------------------
Jim E. Massengale
* Director April 6, 1995
-------------------------------
Wayne E. Stuenkel
* Director April 6, 1995
-------------------------------
A. S. Williams III
* Director April 6, 1995
-------------------------------
Deborah J. Long
*By: /s/ LIZABETH R. NICHOLS April 6, 1995
-------------------------------
Lizabeth R. Nichols
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D
- -----------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- -------------------------------------------------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities...................................... $ 2,002,842 $ 1,898,321 $ 1,898,321
United States Government and government agencies and
authorities.................................................... 90,468 81,881 81,881
States, municipalities, and political subdivisions.............. 10,902 9,677 9,677
Public utilities................................................ 414,011 378,120 378,120
Convertibles and bonds with warrants attached................... 687 385 385
All other corporate bonds....................................... 927,779 874,428 874,428
Bank loan participations.......................................... 244,881 244,881 244,881
Redeemable preferred stocks....................................... 6,800 5,953 5,953
------------ ------------ ---------------
TOTAL FIXED MATURITIES........................................ 3,698,370 3,493,646 3,493,646
------------ ------------ ---------------
Equity securities:
Common stocks -- Industrial, miscellaneous, and all other......... 22,768 24,797 24,797
Nonredeemable preferred stocks.................................... 23,190 20,208 20,208
------------ ------------ ---------------
TOTAL EQUITY SECURITIES....................................... 45,958 45,005 45,005
------------ ------------ ---------------
Mortgage loans on real estate....................................... 1,488,495 1,488,495
Investment real estate.............................................. 20,170 20,170
Policy loans........................................................ 147,608 147,608
Other long-term investments......................................... 50,751 50,751
Short-term investments.............................................. 54,683 54,683
------------ ---------------
TOTAL INVESTMENTS............................................. $ 5,506,035 $ 5,300,358
------------ ---------------
------------ ---------------
</TABLE>
S-1
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------------------------------------------------------------------------
GIC AND
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS PREMIUMS
POLICY BENEFITS AND OTHER AND
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY
SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES
- ------------------------------------------------------- ----------- ---------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994:
Acquisitions......................................... $110,203 $ 856,889 $ 381 $ 266,828 $86,376
Financial Institutions............................... 68,060 43,198 99,798 2,758 98,027
Group................................................ 22,685 116,324 2,905 84,689 131,096
Guaranteed Investment Contracts...................... 996 0 0 2,281,674 0
Individual Life...................................... 162,186 571,070 320 13,713 84,925
Investment Products.................................. 70,053 102,705 0 1,027,527 1,635
Corporate and Other.................................. 17 4,109 75 263 713
Unallocated Realized Investment Gains (Losses)....... 0 0 0 0 0
----------- ---------- --------- -------------- --------
TOTAL.............................................. $434,200 $1,694,295 $103,479 $3,677,452 $402,772
----------- ---------- --------- -------------- --------
----------- ---------- --------- -------------- --------
Year Ended
December 31, 1993:
Acquisitions......................................... $ 69,942 $ 705,487 $ 501 $ 259,513 $58,562
Financial Institutions............................... 59,163 39,508 85,042 2,913 87,355
Group................................................ 20,520 99,412 2,786 83,522 126,027
Guaranteed Investment Contracts...................... 1,464 0 0 2,015,075 0
Individual Life...................................... 129,265 483,604 368 11,762 77,338
Investment Products.................................. 18,934 52,516 0 789,668 856
Corporate and Other.................................. 19 318 88 339 1,285
Unallocated Realized Investment Gains (Losses)....... 0 0 0 0 0
----------- ---------- --------- -------------- --------
TOTAL.............................................. $299,307 $1,380,845 $ 88,785 $3,162,792 $351,423
----------- ---------- --------- -------------- --------
----------- ---------- --------- -------------- --------
Year Ended
December 31, 1992:
Acquisitions......................................... $ 65,868 $ 428,991 $ 655 $ 80,458 $48,068
Financial Institutions............................... 49,684 20,207 71,878 3,246 56,990
Group................................................ 14,801 66,551 2,422 77,671 112,985
Guaranteed Investment Contracts...................... 2,256 0 0 1,694,530 0
Individual Life...................................... 110,408 382,025 2 8,847 62,776
Investment Products.................................. 30,228 27,051 0 626,171 586
Corporate and Other.................................. 1,678 4,767 220 439 41,731
Unallocated Realized Investment Gains (Losses)....... 0 0 0 0 0
----------- ---------- --------- -------------- --------
TOTAL.............................................. $274,923 $ 929,592 $ 75,177 $2,491,362 $323,136
----------- ---------- --------- -------------- --------
----------- ---------- --------- -------------- --------
<CAPTION>
- ------------------------------------------------------- ------------------------------------------------------------------
COL. A COL. G COL. H COL. I COL. J
- -------------------------------------------------------
------------------------------------------------------------------
AMORTIZATION
REALIZED BENEFITS OF DEFERRED
NET INVESTMENT AND POLICY OTHER
INVESTMENT GAINS SETTLEMENT ACQUISITION OPERATING
SEGMENT INCOME (1) (LOSSES) EXPENSES COSTS EXPENSES (1)
- ------------------------------------------------------- ---------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1994:
Acquisitions......................................... $ 83,750 $ 532 $ 97,649 $14,460 $ 19,374
Financial Institutions............................... 9,164 46,360 36,592 16,065
Group................................................ 14,381 98,930 2,724 35,490
Guaranteed Investment Contracts...................... 180,591 3,000 147,383 892 2,119
Individual Life...................................... 37,319 67,451 18,771 18,803
Investment Products.................................. 80,759 (2,500) 58,424 14,647 6,595
Corporate and Other.................................. 2,969 913 3 20,757
Unallocated Realized Investment Gains (Losses)....... 0 5,266 0 0 0
---------- --------- ---------- ------------ -------------
TOTAL.............................................. $408,933 $6,298 $517,110 $88,089 $119,203
---------- --------- ---------- ------------ -------------
---------- --------- ---------- ------------ -------------
Year Ended
December 31, 1993:
Acquisitions......................................... $ 65,290 $ 73,463 $ 7,831 $ 12,715
Financial Institutions............................... 8,921 42,840 31,202 15,181
Group................................................ 14,522 101,266 2,272 29,450
Guaranteed Investment Contracts...................... 166,058 $1,175 137,380 1,170 1,466
Individual Life...................................... 34,153 55,972 18,069 17,133
Investment Products.................................. 66,691 2,003 49,569 12,788 3,790
Corporate and Other.................................. (1,470) 1,146 3 14,580
Unallocated Realized Investment Gains (Losses)....... 0 1,876 0 0 0
---------- --------- ---------- ------------ -------------
TOTAL.............................................. $354,165 $5,054 $461,636 $73,335 $ 94,315
---------- --------- ---------- ------------ -------------
---------- --------- ---------- ------------ -------------
Year Ended
December 31, 1992:
Acquisitions......................................... $ 45,543 $ 56,901 $ 7,404 $ 9,299
Financial Institutions............................... 6,051 25,342 21,605 11,426
Group................................................ 12,620 93,380 1,664 26,972
Guaranteed Investment Contracts...................... 137,654 $ 962 117,321 1,267 1,763
Individual Life...................................... 27,723 49,755 11,493 16,292
Investment Products.................................. 46,618 473 37,021 4,485 1,980
Corporate and Other.................................. (1,218) 29,837 485 24,193
Unallocated Realized Investment Gains (Losses)....... 0 (1,589) 0 0 0
---------- --------- ---------- ------------ -------------
TOTAL.............................................. $274,991 $ (154) $409,557 $48,403 $ 91,925
---------- --------- ---------- ------------ -------------
---------- --------- ---------- ------------ -------------
<FN>
- ------------------------------
(1) Allocations of Net Investment Income and Other Operating Expenses are based
on a number of assumptions and estimates and results would change if
different methods were applied.
</TABLE>
S-2
<PAGE>
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994:
Life insurance in force.................. $ 40,909,454 $ 8,639,272 $ 8,968,166 $ 41,238,348 21.7%
------------- ------------ ------------ ------------- ---
------------- ------------ ------------ ------------- ---
Premiums and policy fees:
Life insurance......................... $ 256,840 $ 46,029 $ 31,032 $ 241,843 12.8%
Accident/health insurance.............. 283,883 126,545 3,591 160,929 2.2%
------------- ------------ ------------ -------------
TOTAL................................ $ 540,723 $ 172,574 $ 34,623 $ 402,772
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Year Ended December 31, 1993:
Life insurance in force.................. $ 40,149,017 $ 7,484,566 $ 2,301,577 $ 34,966,028 6.6%
------------- ------------ ------------ ------------- ---
------------- ------------ ------------ ------------- ---
Premiums and policy fees:
Life insurance......................... $ 230,706 $ 37,995 $ 8,329 $ 201,040 4.1%
Accident/health insurance.............. 254,672 88,917 3,963 169,718 2.3%
------------- ------------ ------------ -------------
TOTAL................................ $ 485,378 $ 126,912 $ 12,292 $ 370,758
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Year Ended December 31, 1992:
Life insurance in force.................. $ 33,811,280 $ 6,982,127 $ 665,733 $ 27,494,886 2.4%
------------- ------------ ------------ ------------- ---
------------- ------------ ------------ ------------- ---
Premiums and policy fees:
Life insurance......................... $ 180,018 $ 34,824 $ 16,092 $ 161,286 10.0%
Accident/health insurance.............. 228,192 74,531 8,189 161,850 5.1%
------------- ------------ ------------ -------------
TOTAL................................ $ 408,210 $ 109,355 $ 24,281 $ 323,136
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
NUMBER DESCRIPTION WHERE EXHIBIT LOCATED
- -------------- --------------------------------------------------------------------------- ---------------------------
<C> <C> <S> <C>
1 -- Underwriting Agreement including form of Distribution Agreement **
2 -- Stock Purchase Agreement *****
3(a) -- Articles of Incorporation *
3(b) -- By-laws *
4(a) -- Group Modified Guaranteed Annuity Contract **
4(b) -- Individual Certificate ***
4(h) -- Tax-Sheltered Annuity Endorsement **
4(i) -- Qualified Retirement Plan Endorsement **
4(j) -- Individual Retirement Annuity Endorsement **
4(l) -- Section 457 Deferred Compensation Plan Endorsement **
4(m) -- Qualified Plan Endorsement *
4(n) -- Application for Individual Certificate **
4(o) -- Adoption Agreement for Participation in Group Modified Guaranteed Annuity **
4(p) -- Individual Modified Guaranteed Annuity Contract ***
4(q) -- Application for Individual Modified Guaranteed Annuity Contract **
4(r) -- Tax-Sheltered Annuity Endorsement **
4(s) -- Individual Retirement Annuity Endorsement **
4(t) -- Section 457 Deferred Compensation Plan Endorsement **
4(v) -- Qualified Retirement Plan Endorsement **
4(w) -- Endorsement -- Group Policy *****
4(x) -- Endorsement -- Certificate *****
4(y) -- Endorsement -- Individual Contract *****
4(z) -- Endorsement (Annuity Deposits) -- Group Policy *****
4(aa) -- Endorsement (Annuity Deposits) -- Certificate *****
4(bb) -- Endorsement (Annuity Deposits) -- Individual Contract *****
4(cc) -- Endorsement -- Individual **
4(dd) -- Endorsement -- Group Contract/Certificate **
5 -- Opinion re legality *
10(a) -- Bond Purchase Agreement *
10(b) -- Escrow Agreement *
24(a) -- Consent of Coopers & Lybrand L.L.P.
24(b) -- Consent of Sutherland, Asbill & Brennan
25 -- Power of Attorney ****
<FN>
- ------------------------
* Previously filed or incorporated by reference in Form S-1 Registration
Statement, Registration No. 33-31940.
** Previously filed or incorporated by reference in Amendment No. 1 to Form
S-1 Registration Statement, Registration No. 33-31940.
*** Previously filed or incorporated by reference from Amendment No. 2 to Form
S-1 Registration Statement, Registration No. 33-31940.
**** Previously filed or incorporated by reference from Form S-1 Registration
Statement, Registration No. 33-57052.
***** Previously filed or incorporated by reference from Amendment No. 2 to Form
S-1 Registration Statement, Registration No. 33-57052.
</TABLE>
<PAGE>
EXHIBIT 24(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File No.
33-57052) of our report dated February 13, 1995, which includes an explanatory
paragraph with respect to changes in the Company's methods of accounting for
certain investments in debt and equity securities in 1993 and postretirement
benefits other than pensions in 1992, on our audits of the consolidated
financial statements and financial statement schedules of Protective Life
Insurance Company and subsidiaries. We also consent to the reference to our firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
April 6, 1995
<PAGE>
EXHIBIT 24(B)
CONSENT OF SUTHERLAND, ASBILL & BRENNAN
We consent to the reference to our firm under the heading "Legal Matters" in
the prospectus included in Post-Effective Amendment No. 4 to the Registration
Statement on Form S-1 for certain modified guaranteed annuity contracts issued
by Protective Life Insurance Company (File No. 33-57052). In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
/s/ Sutherland, Asbill & Brennan
SUTHERLAND, ASBILL & BRENNAN
Washington, D.C.
April 5, 1995
