SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1996 33-31940
33-39345
33-57052
333-02249
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Tennessee 63-0169720
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2801 Highway 280 South
Birmingham, Alabama 35223
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (205)879-9230
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by nonaffiliates of the registrant:
None
Number of shares of Common Stock, $1.00 Par Value, outstanding as of
March 7, 1997: 5,000,000
The registrant meets the conditions set forth in General Instruction I(1)
(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format pursuant to General Instruction I(2).
DOCUMENTS INCORPORATED BY REFERENCE
None, except Exhibits
- ------------------------------------------------------------------------------
<PAGE>
PART I
Item 1. Business
Protective Life Insurance Company ("Protective"), a stock life insurance
company was founded in 1907. Protective is a wholly-owned and the principal
operating subsidiary of Protective Life Corporation ("PLC"), an insurance
holding company whose common stock is traded on the New York Stock Exchange
(symbol: PL). Protective provides financial services through the production,
distribution, and administration of insurance and investment products.
Protective has six operating divisions: Acquisitions, Financial Institutions,
Group, Guaranteed Investment Contracts, Individual Life, and Investment
Products. Protective also has an additional business segment which is described
herein as Corporate and Other. Unless the context otherwise requires
"Protective" refers to the consolidated group of Protective Life Insurance
Company and its subsidiaries.
Protective markets individual life insurance; group life, health, dental,
and cancer insurance; annuities and investment products; credit life and
disability insurance; and guaranteed investment contracts. Its products are
distributed nationally through independent agents and brokers; through
stockbrokers and financial institutions to their customers; through company
sales representatives; and through other insurance companies. Protective also
seeks to acquire blocks of insurance policies from other insurers.
Over the last twenty-five years PLC has made several acquisitions of
smaller insurance companies or blocks of policies. Many of these transactions
involved Protective. Additionally, PLC has from time to time merged other life
insurance companies it has acquired into Protective. In the second quarter of
1995, Protective coinsured a block of 28,000 policies. In January 1996,
Protective coinsured a block of 38,000 policies. In June 1996 Protective
coinsured a block of 212,000 credit life insurance policies. In December 1996
Protective acquired Community National Assurance Company with 16,000 policies
and coinsured a related block of 22,000 policies.
Item 2. Properties
Protective's administrative office building is located at 2801 Highway 280
South, Birmingham, Alabama 35223. This building includes the original 142,000
square-foot building which was completed in 1976 and a second contiguous 220,000
square-foot building which was completed in 1985. In addition, parking is
provided for approximately 1,000 vehicles.
Protective leases administrative space in 4 cities, substantially all
under leases for periods of three to five years. The aggregate monthly rent is
approximately $51 thousand.
Marketing offices are leased in 14 cities, substantially all under leases
for periods of three to five years with five leases running longer than five
years. The aggregate monthly rent is approximately $43 thousand.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of Protective, to which Protective
or any of its subsidiaries is a party or of which any of Protective's properties
is subject. For additional information regarding legal proceedings see Note G to
the consolidated financial statements included herein.
Item 4. Submission of Matters to a Vote of Security Holders
Not required in accordance with General Instruction I(2)(c).
2
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Protective is a wholly-owned subsidiary of PLC which also owns all of the
preferred stock issued by Protective's subsidiary, American Foundation Life
Insurance Company ("American Foundation"). Therefore, neither Protective's
Common Stock nor American Foundation's Preferred Stock is publicly traded.
At December 31, 1996, $413 million of consolidated stockholder's equity
excluding net unrealized gains and losses represented net assets of Protective
that cannot be transferred to PLC in the form of dividends, loans, or advances.
Also, distributions, including cash dividends to PLC in excess of approximately
$439 million, would be subject to Federal income tax at rates then effective.
Protective does not anticipate involuntarily paying tax on such distributions.
In addition, insurers are subject to various state statutory and
regulatory restrictions on the insurers' ability to pay dividends. In general,
dividends up to specific levels are considered ordinary and may be paid thirty
days after written notice to the insurance commissioner of the state of domicile
unless such commissioner objects to the dividend prior to the expiration of such
period. Dividends in larger amounts are considered extraordinary and are subject
to affirmative prior approval by such commissioner. The maximum amount that
would qualify as ordinary dividends to PLC by Protective in 1997 is estimated to
be $117 million.
The American Foundation Preferred Stock pays, when and if declared, annual
minimum cumulative dividends of $0.1 million and noncumulative participating
dividends to the extent American Foundation's statutory earnings for the
immediately preceding fiscal year exceed $1 million.
In 1995, Protective paid common dividends of $5.0 million to PLC. American
Foundation paid preferred dividends of $0.1 million in both 1996 and 1995.
Protective and American Foundation expect to continue to be able to pay cash
dividends, subject to their earnings and financial condition and other relevant
factors.
Item 6. Selected Financial Data
Not required in accordance with General Instruction I(2)(a).
Item 7. Management's Narrative Analysis of the Results of Operations
In accordance with General Instruction I(2)(a), Protective includes the
following analysis with the reduced disclosure format.
Revenues
The following table sets forth revenues by source for the periods shown:
Year Ended Percentage
December 31 Increase
---------------------- ----------
1996 1995
-------- ------
(in thousands)
Premiums and policy fees.................$462,050 $411,682 12.2%
Net investment income.................... 498,781 458,433 8.8%
Realized investment gains (losses)....... 5,510 1,951 182.4%
Other income............................. 5,010 1,355 269.7%
----------- -----------
$971,351 $873,421
Premiums and policy fees increased $50.4 million or 12.2% in 1996 over
1995. The coinsurance by the Acquisitions Division of three blocks of policies
in the first and fourth quarters of 1996 resulted in a $19.2 million
3
<PAGE>
increase in premiums and policy fees. Decreases in older acquired blocks
resulted in an $11.1 million decrease in premiums and policy fees. Premiums and
policy fees from the Financial Institutions Division increased $7.8 million.
This resulted from the coinsurance of a block of policies in the second quarter
of 1996 representing a $32.6 million increase in premiums and policy fees. This
increase was largely offset by decreases resulting from a reinsurance
arrangement begun in 1995. Premiums and policy fees from the Group Division
increased $14.1 million. Premiums and policy fees related to the Group
Division's dental business increased $22.5 million. This increase was partially
offset by a reduction to premiums related to a refund of premiums to certain
cancer insurance policyholders and to decreases in traditional group health
premiums. Increases in premiums and policy fees from the Individual Life and
Investment Product Divisions were $17.7 million and $3.6 million, respectively.
On October 7, 1996, Protective announced that it would make voluntary
refunds to certain of its cancer insurance policyholders and would reduce
premium rates charged to such policyholders until certain conditions are met.
The estimated refunds reduced the Group Division's premiums and policy fees, as
noted above.
Net investment income for 1996 was $40.3 million or 8.8% 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. The
assumption of four blocks of policies during 1996 resulted in an increase in net
investment income of $18.4 million in 1996. The percentage earned on average
cash and investments was 7.8% in 1996 and 7.9% in 1995.
Protective generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. However,
Protective may sell any of its investments to maintain proper matching of assets
and liabilities. Accordingly, Protective has classified its fixed maturities and
certain other securities as "available for sale." The sales of investments that
have occurred generally result from portfolio management decisions to maintain
proper matching of assets and liabilities.
In 1996, realized investment losses on the sale of fixed maturity and
equity securities of $5.4 million were more than offset by realized investment
gains of $10.9 million incurred from sales of mortgage loans and other
investments that occurred to maintain proper matching of assets and liabilities.
Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $30.9 million at December 31, 1996 and $32.7
million at December 31, 1995. Additions and reductions to the allowance are
included in realized investment gains (losses).
Other income consists primarily of fees from administrative-services-only
types of group accident and health insurance contracts, and from rental of space
in its administrative building to PLC. Other income increased $3.7 million in
1996 as compared to 1995.
4
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Income Before Income Tax
The following table sets forth income or loss before income tax by
business segment for the periods shown:
Income (Loss) Before
Income Tax
Year Ended December 31
1996 1995
-------- ------
(in thousands)
Business Segment
Acquisitions...................................$ 53,564 $ 50,376
Financial Institutions......................... 8,966 7,701
Group.......................................... 821 9,107
Guaranteed Investment Contracts................. 32,130 28,979
Individual Life................................. 15,898 16,206
Investment Products............................. 9,823 10,933
Corporate and Other............................. (2,410) (6,490)
Unallocated Realized Investment Gains (Losses).. 6,517 921
--------- ---------
$125,309 $ 117,733
======== ==========
In the 1996 first quarter Protective changed the way it allocates certain
expenses to its operating divisions. Accordingly, prior period division results
have been restated to reflect the change.
Pretax earnings from the Acquisitions Division increased $3.2 million in
1996 as compared to 1995. Earnings from the Acquisitions Division are normally
expected to decline over time (due to the lapsing of policies resulting from
deaths of insureds or terminations of coverage) unless new acquisitions are
made. The Division's most recent acquisitions resulted in a $4.7 million
increase in pretax earnings.
The Financial Institutions Division's 1996 pretax earnings increased $1.3
million compared to 1995. Included in the Division's 1996 results are earnings
from the coinsurance of a block of policies in the second quarter of 1996. A
reinsurance arrangement begun in the first quarter of 1995 reduced the
Division's reported earnings by approximately $3.3 million, which was
contemplated when the arrangement was entered into.
Group 1996 pretax earnings of $0.8 million were $8.3 million lower than
1995. The previously discussed estimate for the refund of cancer premiums and
related expenses resulted in a $6.8 million decrease in the Division's pretax
earnings. Improved dental earnings were offset by lower traditional group health
earnings.
The Guaranteed Investment Contracts ("GIC") Division had pretax operating
earnings of $40.1 million in 1996 and $33.0 million in 1995. The 1996 increase
was due to improved operating spreads and to the growth in GIC deposits.
Realized investment losses associated with this Division in 1996 were $8.0
million as compared to $4.0 million in 1995. As a result, total pretax earnings
were $32.1 million in 1996 and $29.0 million in 1995. The rate of growth in GIC
deposits has decreased as the amount of maturing contracts has increased.
The Individual Life Division had 1996 pretax operating earnings of $14.7
million, $1.4 million below 1995. Realized investment gains, net of related
amortization of deferred policy acquisition costs, associated with this Division
were $1.1 million in 1996. As a result, total pretax earnings were $15.9 million
in 1996 which was $0.3 million lower than 1995 in which there were no realized
investment gains.
The Investment Products Division's 1996 pretax operating earnings were
$7.8 million which was $0.3 million higher than 1995. Earnings increased due to
growth in variable annuity deposits. Realized investment gains, net of related
amortization of deferred policy acquisition costs, were $2.0 million in 1996 as
compared with $3.4 million in 1995. As a result, total pretax earnings were $9.8
million in 1996 and $10.9 million in 1995.
5
<PAGE>
The Corporate and Other segment consists of several small insurance lines
of business, net investment income and other operating expenses not identified
with the preceding business segments (including interest on substantially all
debt). Pretax losses for this segment were $4.1 million lower in 1996 as
compared to 1995 primarily due to increased net investment income on capital.
Income Tax Expense
The following table sets forth the effective income tax rates for the
periods shown:
Year Ended Effective Income
December 31 Tax Rates
----------- ---------------
1996........................................... 34.1%
1995........................................... 34.0
Management's current estimate of the effective income tax rate for 1997 is
34.0%.
Net Income
The following table sets forth net income for the periods shown:
Net Income
Year Ended Percentage
December 31 Amount Increase
(in thousands)
1996.................................. $82,543 6.2%
1995.................................. 77,696 6.8
Compared to 1995, net income in 1996 increased 6.2%, reflecting improved
operating earnings in the Acquisitions, Financial Institutions, GIC and
Investment products, and the Corporate and Other segment, and higher realized
investment gains, offset by lower operating earnings in the Group and Individual
Life Divisions.
Recently Issued Accounting Standards
For additional information regarding recently issued accounting standards
see Note A to the consolidated financial statements included herein.
Item 8. Financial Statements and Supplementary Data
6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants..................................
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994.......................
Consolidated Balance Sheets as of December 31, 1996 and 1995.......
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1996, 1995, and 1994...............................
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994.............................
Notes to Consolidated Financial Statements.........................
Financial Statement Schedules:
Schedule III-- Supplementary Insurance Information................
Schedule IV-- Reinsurance.........................................
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
7
<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 listed
in the index on page 7 of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Protective Life Insurance Company and Subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, 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.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
February 11, 1997
Birmingham, Alabama
8
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Year Ended December 31
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded: 1996-$308,174;
1995-$333,173; 1994-$172,575)........................................$462,050 $411,682 $402,772
Net investment income.................................................. 498,781 458,433 408,933
Realized investment gains (losses)..................................... 5,510 1,951 6,298
Other income........................................................... 5,010 1,355 11,977
---------- --------- ---------
971,351 873,421 829,980
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded: 1996-$215,424;
1995-$247,224; 1994-$112,922)........................................ 626,893 553,100 517,110
Amortization of deferred policy acquisition costs...................... 91,001 82,700 88,089
Other operating expenses (net of reinsurance ceded: 1996-$81,839;
1995-$84,855; 1994-$14,326).......................................... 128,148 119,888 119,203
--------- -------- --------
846,042 755,688 724,402
--------- -------- --------
INCOME BEFORE INCOME TAX................................................. 125,309 117,733 105,578
INCOME TAX EXPENSE (BENEFIT)
Current.............................................................. 44,908 47,009 37,586
Deferred............................................................. (2,142) (6,972) (4,731)
--------- --------- ---------
42,766 40,037 32,855
--------- --------- ---------
NET INCOME............................................................... $ 82,543 $ 77,696 $ 72,723
======== ======== ========
See notes to consolidated financial statements.
9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31
1996 1995
<S> <C> <C>
ASSETS ---------- ----------
Investments:
Fixed maturities, at market (amortized cost: 1996-$4,648,525; 1995-$3,789,926)......... $4,662,997 $3,891,932
Equity securities, at market (cost: 1996-$31,669; 1995-$35,448)........................ 35,250 38,711
Mortgage loans on real estate.......................................................... 1,503,781 1,835,057
Investment real estate, net of accumulated depreciation (1996-$911; 1995-$1,032)....... 14,172 20,788
Policy loans........................................................................... 166,704 143,372
Other long-term investments............................................................ 29,193 43,875
Short-term investments................................................................. 101,215 46,891
--------- ------------
Total investments 6,513,312 6,020,626
Cash....................................................................................... 114,384 6,198
Accrued investment income.................................................................. 70,541 61,004
Accounts and premiums receivable, net of allowance for uncollectible
amounts (1996-$2,525; 1995-$2,342)..................................................... 43,469 35,492
Reinsurance receivables.................................................................... 332,614 271,018
Deferred policy acquisition costs.......................................................... 488,201 410,183
Property and equipment, net................................................................ 35,489 34,211
Receivables from related parties........................................................... 1,961
Other assets............................................................................... 14,636 13,096
Assets related to separate accounts........................................................ 550,697 324,904
----------- ------------
$8,163,343 $7,178,693
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims..................................................... $2,448,449 $1,928,154
Unearned premiums..................................................................... 257,553 193,767
----------- ------------
2,706,002 2,121,921
Guaranteed investment contract deposits.................................................... 2,474,728 2,451,693
Annuity deposits........................................................................... 1,331,067 1,280,069
Other policyholders' funds................................................................. 142,221 134,380
Other liabilities.......................................................................... 117,847 109,538
Accrued income taxes....................................................................... 1,854 838
Deferred income taxes...................................................................... 37,722 67,420
Indebtedness to related parties............................................................ 25,014 34,693
Liabilities related to separate accounts................................................... 550,697 324,904
----------- ---------
Total liabilities................................................................... 7,387,152 6,525,456
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G
REDEEMABLE PREFERRED STOCK, $1.00 par value, at redemption value
Shares authorized and issued: 2,000................................................... 2,000
------------
STOCKHOLDER'S EQUITY
Preferred Stock, $1.00 par value, shares
authorized and issued: 2,000, liquidation preference $2,000............................. 2
Common Stock, $1.00 par value.............................................................. 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital................................................................. 237,992 144,494
Net unrealized gains on investments (net of income tax: 1996-$3,601; 1995-$31,157)......... 6,688 57,863
Retained earnings.......................................................................... 532,088 449,645
Note receivable from PLC Employee Stock Ownership Plan..................................... (5,579) (5,765)
------------ ------------
Total stockholder's equity.......................................................... 776,191 651,237
------------ ------------
$8,163,343 $7,178,693
See notes to consolidated financial statements.
10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands, except per share amounts)
Note
Net Rec.
Additional Unrealized From Total
Preferred Common Paid-In Gains (Losses) Retained PLC Stockholder's
Stock Stock Capital on Investments Earnings ESOP Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993....................... $5,000 $126,494 $39,284 $305,176 $(5,964) $469,990
Net income for 1994.......................... 72,723 72,723
Preferred dividends ($425 per share)......... (850) (850)
Decrease in net unrealized gains on
investments................................. (146,816) (146,816)
Decrease in note receivable from PLC ESOP.... 28 28
----------------------------------------------------------------------------------
Balance, December 31, 1994....................... 5,000 126,494 (107,532) 377,049 (5,936) 395,075
Net income for 1995.......................... 77,696 77,696
Common dividends ($1.00 per share)........... (5,000) (5,000)
Preferred dividends ($50 per share).......... (100) (100)
Increase in net unrealized gains on investments 165,395 165,395
Capital contribution from PLC................ 18,000 18,000
Decrease in note receivable form PLC ESOP.... 171 171
---------------------------------------------------------------------------------
Balance, December 31, 1995...................... 5,000 144,494 57,863 449,645 (5,765) 651,237
Net income for 1996......................... 82,543 82,543
Redemption feature of preferred stock
removed-Note I $ 2 1,998 2,000
Preferred dividends ($50 per share)........ (100) (100)
Decrease in net unrealized gains on
investments.............................. (51,175) (51,175)
Capital contribution from PLC.............. 91,500 91,500
Decrease in note receivable from PLC ESOP.. 186 186
----------------------------------------------------------------------------------
Balance, December 31, 1996 $ 2 $5,000 $237,992 $6,688 $532,088 $(5,579) $776,191
===== ====== ======== ========== ======== ====== ========
See notes to consolidated financial statements.
11
</TABLE>
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<TABLE>
<CAPTION>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
December 31
1996 1995 1994
<S> <C> <C> <C>
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..............................................................................$ 82,543 $77,696 $72,723
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs.................................... 91,001 84,501 88,089
Capitalization of deferred policy acquisition costs.................................. (77,078) (89,266) (127,566)
Depreciation expense................................................................. 5,333 4,317 4,280
Deferred income taxes................................................................ (2,442) (6,971) (4,731)
Accrued income taxes................................................................. 893 5,537 (12,182)
Interest credited to universal life and investment products.......................... 280,377 286,710 260,081
Policy fees assessed on universal life and investment products.......................(116,401) (100,840) (85,532)
Change in accrued investment income and other receivables............................ (70,987) (161,924) (32,242)
Change in policy liabilities and other policyholder funds of traditional life
and health products 133,621 201,353 61,322
Change in other liabilities........................................................ 7,209 (3,270) 18,564
Other (net)........................................................................ (4,281) (6,634) (1,475)
--------- -------------- -----------
Net cash provided by operating activities................................................. 329,788 291,209 241,331
-------- ------------- -----------
CASHFLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale..................................................... 1,327,323 2,014,060 386,498
Other.............................................................................. 168,898 78,568 153,945
Sale of investments:
Investment available for sale...................................................... 1,569,119 1,523,454 630,095
Other.............................................................................. 568,218 141,184 59,550
Cost of investments acquired:
Investments available for sale.................................................... (3,798,631) (3,626,877) (1,807,658)
Other............................................................................. (400,322) (540,648) (220,839)
Acquisitions and bulk reinsurance assumptions......................................... 264,126 106,435
Purchase of property and equipment................................................... (6,899) (5,629) (4,889)
Sale of property and equipment....................................................... 288 286 470
--------- ---------- ----------
Net cash used in investing activities.................................................... (307,880) (415,602) (696,393)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term debt........................ 941,438 1,162,700 572,586
Capital contribution from PLC.......................................................... 91,500 18,000
Principal payments on line of credit arrangements and long-term debt................... (941,438) (1,162,700) (572,704)
Principal payment on surplus note to PLC............................................... (10,000) (4,750) (9,500)
Dividends to stockholder............................................................... (100) (5,100) (850)
Investment product deposits and change in universal life deposits...................... 949,122 908,063 1,417,980
Investment product withdrawals..........................................................(944,244) (785,622) (976,401)
-------- --------- ----------
Net cash provided by financing activities................................................... 86,278 130,591 431,111
-------- --------- ----------
INCREASE(DECREASE) IN CASH.................................................................. 108,186 6,198 (23,951)
CASH AT BEGINNING OF YEAR................................................................... 6,198 0 23,951
---------- --------- ----------
CASH AT END OF YEAR........................................................................$ 114,384 $ 6,198 $ 0
========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt.....................................................................$ 4,633 $ 6,029 $ 5,029
Income taxes......................................................................... 43,478 $ 41,397 $ 49,765
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP................................................$ 186 $ 171 $ 28
Acquisitions and bulk reinsurance assumptions
Assets acquired......................................................................$296,935 $ 613 $ 117,349
Liabilities assumed..................................................................(364,862) (21,800) (166,595)
--------- ------------- ----------
Net..................................................................................$(67,927) $ (21,187) $ (49,246)
========= ============ ==========
See notes to consolidated financial statements.
12
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<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.)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make various estimates
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities, as well as the reported amounts of revenues
and expenses.
ENTITIES INCLUDED
The consolidated financial statements include the accounts, after
intercompany eliminations, of Protective Life Insurance Company and its
wholly-owned subsidiaries including Wisconsin National Life Insurance Company
("Wisconsin National") and American Foundation Life Insurance Company ("American
Foundation"). Protective is a wholly-owned subsidiary of Protective Life
Corporation ("PLC"), an insurance holding company.
NATURE OF OPERATIONS
Protective markets individual life insurance; group life, health, dental,
and cancer insurance; annuities and investment products; credit life and
disability insurance; and guaranteed investment contracts. Its products are
distributed nationally through independent agents and brokers; through
stockbrokers and financial institutions to their customers; through company
sales representatives; and through other insurance companies. Protective also
seeks to acquire blocks of insurance policies from other insurers.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995 Protective adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures." Under these new standards, a loan is considered impaired,
based on current information and events, if it is probable that Protective will
be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. The adoption of this accounting standard did not have a
material effect on Protective's financial statements.
In 1995 PLC adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which changes the way stock-based compensation expense is
measured and requires additional disclosures relating to PLC's stock-based
compensation plans. The adoption of this accounting standard did not have a
material effect on PLC's or Protective's financial statements.
13
<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)
In 1996 Protective adopted SFAS No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts;" SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;"
and SFAS No. 122, "Accounting for Mortgage Servicing Rights." The adoption of
these accounting standards did not have a material effect on Protective's
financial statements.
INVESTMENTS
Protective has classified all of its investments in fixed maturities, equity
securities, and short-term investments as "available for sale."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
o Fixed maturities (bonds, bank loan participations, and redeemable
preferred stocks) -- at current market value.
o Equity securities (common and nonredeemable preferred stocks) -- at
current market value.
o Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
o Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate
acquired through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.
o Policy loans -- at unpaid balances.
o Other long-term investments -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.
o Short-term investments -- at cost, which approximates current
market value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $3.4 million in bank
deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses reduced by a related adjustment
to deferred policy acquisition costs, net of income tax, reported as a component
of stockholder's equity. The market values of fixed maturities increase or
decrease as interest rates fall or rise. Therefore, although the adoption of
SFAS No. 115 does not affect Protective's operations, its reported stockholder's
equity will fluctuate significantly as interest rates change.
14
<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:
1996 1995
-------------- ---------
Total investments................................ $6,495,259 $5,915,357
Deferred policy acquisition costs................ 495,965 426,432
All other assets................................. 1,161,830 747,884
------------- ---------
$8,153,054 $7,089,673
Deferred income taxes........................... $ 34,121 $ 36,263
All other liabilities........................... 7,349,430 6,458,036
----------- ------------
7,383,551 6,494,299
Redeemable preferred stock...................... 2,000
Stockholder's equity............................ 769,503 593,374
------------ ------------
$8,153,054 $7,089,673
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, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
guaranteed investment contracts and individual annuities. Realized investment
gains and losses on such contracts are deferred and amortized over the life of
the hedged asset. Net realized losses of $0.2 million and $15.2 million were
deferred in 1996 and 1995 respectively. At December 31, 1996 and 1995, options
and open futures contracts with notional amounts of $805.0 million and $25.0
million, respectively, had net unrealized losses of $1.9 million and $0.6
million respectively.
Protective uses interest rate swap contracts to convert certain investments
from a variable to a fixed rate of interest. At December 31, 1996, related open
interest rate swap contracts with a notional amount of $150.3 million were in a
$0.7 million net unrealized loss position. At December 31, 1995, related open
interest rate swap contracts with a notional amount of $170.3 million were in a
$1.3 million net unrealized gain position.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. Protective uses both
accelerated and straight-line methods of depreciation based upon the estimated
useful lives of the assets. Major repairs or improvements are capitalized and
depreciated over the estimated useful lives of the assets. Other repairs are
expensed as incurred. The cost and related accumulated depreciation of property
and equipment sold or retired are removed from the accounts, and resulting gains
or losses are included in income.
15
<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)
Property and equipment consisted of the following at December 31:
1996 1995
----------- ---------
Home office building........................... $36,586 $35,284
Other, principally furniture and equipment..... 35,401 30,356
------- --------
71,987 65,640
Accumulated depreciation....................... 36,498 31,429
-------- --------
$35,489 $34,211
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
o Traditional Life and Health Insurance Products-- Traditional life
insurance products consist principally of those products with fixed and
guaranteed premiums and benefits and include whole life insurance policies,
term life insurance policies, limited-payment life insurance policies, and
certain annuities with life contingencies. Life insurance and immediate
annuity premiums are recognized as revenue when due. Health insurance
premiums are recognized as revenue over the terms of the policies. Benefits
and expenses are associated with earned premiums so that profits are
recognized over the life of the contracts. This is accomplished by means of
the provision for liabilities for future policy benefits and the
amortization of deferred policy acquisition costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions
as to investment yields, mortality, persistency, and other assumptions
based on Protective's experience modified as necessary to reflect
anticipated trends and to include provisions for possible adverse
deviation. Reserve investment yield assumptions are graded and range from
2.5% to 7.0%. The liability for future policy benefits and claims on
traditional life and health insurance products includes estimated unpaid
claims that have been reported to Protective and claims incurred but not
yet reported. Policy claims are charged to expense in the period that the
claims are incurred.
16
<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)
Activity in the liability for unpaid claims is summarized as follows:
1996 1995 1994
-------------- ---------- -------------
Balance beginning of year..........$ 73,642 $ 79,462 $ 77,191
Less reinsurance................... 3,330 5,024 3,973
---------- --------- ---------
Net balance beginning of year...... 70,312 74,438 73,218
---------- -------- --------
Incurred related to:
Current year....................... 288,816 217,366 203,453
Prior year......................... (2,417) (8,337) (6,683)
---------- --------- --------
Total incurred.................... 286,399 209,029 196,770
--------- -------- --------
Paid related to:
Current year....................... 197,163 164,321 148,548
Prior year.......................... 57,812 48,834 47,002
---------- --------- ---------
Total paid......................... 254,975 213,155 195,550
--------- -------- --------
Net balance end of year............. 101,736 70,312 74,438
Plus reinsurance.................... 6,423 3,330 5,024
--------- --------- ---------
Balance end of year.................$108,159 $ 73,642 $ 79,462
======= ======== ========
o Universal Life and Investment Products-- Universal life and
investment products include universal life insurance, guaranteed investment
contracts, deferred annuities, and annuities without life contingencies.
Revenues for universal life and investment products consist of policy fees
that have been assessed against policy account balances for the costs of
insurance, policy administration, and surrenders. That is, universal life
and investment product deposits are not considered revenues in accordance
with generally accepted accounting principles. Benefit reserves for
universal life and investment products represent policy account balances
before applicable surrender charges plus certain deferred policy initiation
fees that are recognized in income over the term of the policies. Policy
benefits and claims that are charged to expense include benefit claims
incurred in the period in excess of related policy account balances and
interest credited to policy account balances. Interest credit rates for
universal life and investment products ranged from 3.0% to 9.4% in 1996.
At December 31, 1996, Protective estimates the fair value of its
guaranteed investment contracts to be $2,462.0 million using discounted
cash flows. The surrender value of Protective's annuities which
approximates fair value was $1,322.3 million.
o Policy Acquisition Costs-- Commissions and other costs of acquiring
traditional life and health insurance, universal life insurance, and
investment products that vary with and are primarily related to the
production of new business have been deferred. Traditional life and health
insurance acquisition costs are amortized over the premium-payment period
of the related policies in proportion to the ratio of annual premium income
to total anticipated premium income. Acquisition costs for universal life
and investment products are being amortized over the lives of the policies
in relation to the present value of estimated gross profits from surrender
charges and investment, mortality, and expense margins. Under SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," Protective makes certain assumptions regarding the mortality,
persistency, expenses, and interest rates it expects to experience in
future periods. These assumptions are to be best estimates and are to be
periodically updated whenever actual experience and/or expectations for the
future change from initial assumptions. Additionally, relating to SFAS No.
115, these costs have been adjusted by an amount equal to the amortization
that would have been recorded if unrealized gains or losses on investments
associated with Protective's universal life and investment products had
been realized.
17
<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)
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. 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 $138.2 million and $102.5 million at December 31,
1996 and 1995, respectively. During 1996 $57.6 million of present value of
future profits on acquisitions made during the year was capitalized, and $10.8
million was amortized. The unamortized present value of future profits for all
acquisitions was $155.9 million at December 31, 1996 and $123.9 million at
December 31, 1995.
PARTICIPATING POLICIES
Participating business comprises approximately 1% of the individual life
insurance in force and 2% of the individual life insurance premium income.
Policyholder dividends totaled $4.1 million in 1996 and $2.6 million in 1995 and
1994.
INCOME TAXES
Protective uses the asset and liability method of accounting for income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. Deferred federal income taxes arise from the
recognition of temporary differences between the bases of assets and liabilities
determined for financial reporting purposes and the bases determined for income
tax purposes. Such temporary differences are principally related to the deferral
of policy acquisition costs and the provision for future policy benefits and
expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
net income, total assets, or stockholder's equity.
Note B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principals ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method and are based on realistic
estimates of expected mortality, interest, and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions, (c) deferred
income taxes are provided for temporary differences between financial and
taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance
Reserve are restored to stockholder's equity, (e) furniture and equipment,
agents' debit balances, and prepaid expenses are reported as assets rather than
being charged directly to surplus (referred to as nonadmitted items), (f)
certain items of interest income, principally accrual of mortgage and bond
discounts are amortized differently, and (g) bonds are stated at market instead
of amortized cost.
18
<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
------------------------------------------------------------------------
1996 1995 1994 1996 1995 1994
--------- ---------- ---------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory reporting practices:
Protective Life Insurance Company....................... $ 97,779 $ 105,744 $ 54,812 $454,320 $ 322,416 $304,858
Wisconsin National Life Insurance
Company............................................... 15,011 10,954 10,132 66,577 62,529 57,268
American Foundation Life Insurance
Company............................................... 2,558 3,330 3,072 18,031 18,781 20,327
Capital Investors Life Insurance Company................ 81 182 170 1,458 1,315 1,125
Empire General Life Assurance
Corporation........................................... 905 1,003 690 20,509 20,685 21,270
Protective Life Insurance Corporation of
Alabama............................................... 484 546 69 2,660 2,675 2,133
Protective Life Insurance Company of
Kentucky.............................................. 19 3,030
Community National Assurance Company.................... 5,100
Consolidation elimination............................... (14,500) (6,500) (115,365) (103,985) (100,123)
-------- --------- -------- -------- -------- ---------
102,337 115,259 68,945 456,320 324,416 306,858
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization.......................................... (2,830) (765) 41,718 488,201 410,183 434,200
Policy liabilities and accruals......................... (11,633) (48,330) (34,632) (192,628) (186,512) (140,298)
Deferred income tax..................................... 2,142 6,972 4,731 (37,722) (67,420) 14,667
Asset Valuation Reserve................................. 64,233 105,769 24,925
Interest Maintenance Reserve............................ (2,142) (1,235) (1,716) 17,682 14,412 3,583
Nonadmitted items....................................... 21,610 20,603 21,445
Timing and valuation differences on
mortgage loans on real estate and fixed
maturity investments.................................. 5,913 (619) (961) (1,708) 27,158 6,258
Net unrealized gains and losses on
investments........................................... 4,361 55,765 (106,913)
Realized investment gains (losses)...................... (468) 6,781 (6,664)
Noninsurance affiliates................................. 11,104 (22) 154,143 (9) 0
Consolidation elimination............................... (16,858) 2,515 (4,415) (191,049) (46,222) (162,835)
Other adjustments, net.................................. (5,022) (2,860) 5,717 (7,252) (4,906) (4,815)
-------- --------- ---------- --------- ----------- ----------
In conformity with generally accepted
accounting principles................................... $ 82,543 $ 77,696 $ 72,723 $776,191 $ 653,237 $397,075
======== ========= ======== ======== ========= ========
19
</TABLE>
<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:
1996 1995 1994
-------- --------- -------
Fixed maturities..................... $310,353 $272,942 $237,264
Equity securities................ ... 2,124 1,338 2,435
Mortgage loans on real estate........ 153,463 162,135 141,751
Investment real estate............... 1,875 1,855 1,950
Policy loans...................... . 10,378 8,958 8,397
Other, principally short-term investments 51,637 40,348 35,062
--------- -------- --------
529,830 487,576 426,859
Investment expenses.................. 31,049 29,143 17,926
---------- -------- --------
$498,781 $458,433 $408,933
======== ======== ========
Realized investment gains (losses) for the years ended December 31
are summarized as follows:
Fixed maturities..................... $ (7,101) $ 6,118 $ (8,646)
Equity securities..................... 1,733 44 7,735
Mortgage loans and other investments.. 10,878 (4,211) 7,209
-------- -------- -------
$ 5,510 $ 1,951 $ 6,298
======== ======== ========
Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $30.9 million at December 31, 1996 and $32.7
million at December 31, 1995. Additions and reductions to the allowance are
included in realized investment gains (losses). Without such
additions/reductions, Protective had net realized investment gains of $3.7
million in 1996, net realized investment losses of $0.5 million in 1995, and net
realized investment gains of $6.3 million in 1994.
In 1996, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $6.9 million and
gross losses were $11.8 million. In 1995, gross gains were $18.0 million and
gross losses were $11.8 million. In 1994, gross gains on the sale of fixed
maturities were $15.2 million and gross losses were $16.4 million.
20
<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
1996 Cost Gains Losses Values
---- -------------- -------------- ------------- ---------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed.............................$2,192,978 $ 29,925 $20,810 $2,202,093
United States Government and
authorities............................... 348,318 661 1,377 347,602
States, municipalities, and
political subdivisions.................... 5,515 47 9 5,553
Public utilities............................ 364,692 2,205 337 366,560
Convertibles and bonds with
warrants.................................. 679 0 158 521
All other corporate bonds................... 1,679,276 33,879 29,388 1,683,767
Bank loan participations......................... 49,829 0 0 49,829
Redeemable preferred stocks...................... 7,238 60 226 7,072
---------- --------- ---------- ----------
4,648,525 66,777 52,305 4,662,997
Equity securities................................... 31,669 9,570 5,989 35,250
Short-term investments.............................. 101,215 0 0 101,215
---------- ---------- --------- ----------
$4,781,409 $ 76,347 $ 58,294 $4,799,462
========== ======== ============ ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Values
---- -------------- -------------- ------------- ---------
Fixed maturities:
Bonds:
Mortgage-backed $2,006,858 $ 46,934 $ 4,017 $2,049,775
United States Government and
authorities 105,388 2,290 101 107,577
States, municipalities, and
political subdivisions 10,888 702 0 11,590
Public utilities 322,110 5,904 770 327,244
Convertibles and bonds with
warrants 638 0 145 493
All other corporate bonds 1,117,376 59,045 7,573 1,168,848
Bank loan participations 220,811 0 0 220,811
Redeemable preferred stocks 5,857 61 324 5,594
----------- --------- -------- ---------
3,789,926 114,936 12,930 3,891,932
Equity securities................................... 35,448 6,438 3,175 38,711
Short-term investments.............................. 46,891 0 0 46,891
---------- --------- -------- ---------
$3,872,265 $121,374 $ 16,105 $3,977,534
========== ======== ========= ==========
21
</TABLE>
<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.
Estimated
Amortized Market
Cost Values
1996
Due in one year or less..................... $ 417,463 $ 420,774
Due after one year through five years....... 1,547,805 1,546,278
Due after five years through ten years...... 2,090,149 2,095,781
Due after ten years......................... 593,108 600,164
------------ ------------
$ 4,648,525 $4,662,997
Estimated
Amortized Market
Cost Values
1995
Due in one year or less..................... $ 409,514 $ 411,839
Due after one year through five years....... 1,087,735 1,101,226
Due after five years through ten years...... 1,477,807 1,524,555
Due after ten years......................... 814,870 854,312
------------------------
$3,789,926 $3,891,932
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
Rating 1996 1995
------ -----------------
AAA......................................... 48.3% 56.1%
AA.......................................... 4.4 4.5
A........................................... 22.6 12.6
BBB
Bonds..................................... 21.1 19.0
Bank loan participations.................. 0.1 0.4
BB or Less
Bonds..................................... 2.5 2.0
Bank loan participations.................. 0.9 5.3
Redeemable preferred stocks................. 0.1 0.1
------- -------
100.0% 100.0%
===== =====
At December 31, 1996 and 1995, Protective had bonds which were rated less
than investment grade of $117.5 million and $75.7 million, respectively, having
an amortized cost of $137.0 million and $82.2 million, respectively.
Additionally, Protective had bank loan participations which were rated less than
investment grade of $43.6 million and $206.0 million, respectively, having an
amortized cost of $43.6 million and $206.0 million, respectively.
The change in unrealized gains (losses), net of income tax on fixed
maturity and equity securities for the years ended December 31 is summarized as
follows:
1996 1995 1994
----------- ------------- --------
Fixed maturities......................... $(56,898) $199,024 $(175,723)
Equity securities........................ $ 207 $ 2,740 $ (5,342)
At December 31, 1996, all of Protective's mortgage loans were commercial
loans of which 78% were retail, 8% were office buildings, and 7% were
warehouses. 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 4% of mortgage loans. Approximately 84% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: South Carolina, Florida, Georgia, Tennessee,
Texas, North Carolina, Alabama, Virginia, Mississippi, Kentucky, Ohio, Indiana,
Arizona, and Washington.
22
<PAGE>
Note C -- INVESTMENT OPERATIONS (Continued)
Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $126.7
million would become due in 1997, $761.8 million in 1998 to 2001, and $250.8
million in 2002 to 2006.
At December 31, 1996, the average mortgage loan was $1.7 million, and the
weighted average interest rate was 9.3%. The largest single mortgage loan was
$13.6 million. While Protective's mortgage loans do not have quoted market
values, at December 31,1996 and 1995, Protective estimates the market value of
its mortgage loans to be $1,581.7 million and $2,001.1 million, respectively,
using discounted cash flows from the next call date.
At December 31, 1996 and 1995, Protective's problem mortgage loans and
foreclosed properties totaled $23.7 million and $26.1 million, respectively.
Protective's mortgage loans are collateralized by real estate, any assessment of
impairment is based upon the estimated fair value of the real estate. Based on
Protective's evaluation of its mortgage loan portfolio, Protective does not
expect any material losses on its mortgage loans.
Certain investments, principally real estate, with a carrying value of
$18.8 million were nonincome producing for the twelve months ended December 31,
1996.
Protective believes it is not practicable to determine the fair value of
its policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%. The fair values of Protective's other long-term
investments approximate cost.
Note D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income................. 35.0% 35.0% 35.0%
Dividends received deduction and tax-exempt interest....................... (0.4) (0.5) (0.4)
Low-income housing credit.................................................. (0.6) (0.7) (0.7)
Tax benefits arising from prior acquisitions and other
adjustments............................................................... 0.1 0.2 (2.8)
---- ----- -----
Effective income tax rate.................................................. 34.1% 34.0% 31.1%
==== ==== ====
</TABLE>
The provision for federal income tax differs from amounts currently
payable due to certain items reported for financial statement purposes in
periods which differ from those in which they are reported for income tax
purposes.
Details of the deferred income tax provision for the years ended December
31 are as follows:
1996 1995 1994
---------- ---------- -------
Deferred policy acquisition costs............. $(16,321) $ (11,606) $ 34,561
Benefit and other policy liability changes.... 15,542 52,496 (52,288)
Temporary differences of investment income.... (1,163) (34,175) 15,524
Other items.................................... (200) (13,687) (2,528)
----------- --------- -------
$ (2,142) $ (6,972) $(4,731)
========== ========= =======
23
<PAGE>
Note D -- FEDERAL INCOME TAXES (Continued)
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
1996 1995
Deferred income tax assets
Policy and policyholder liability reserves....... $ 80,151 $ 63,830
Other............................................ 2,503 2,303
----------- ----------
82,654 66,133
Deferred income tax liabilities:
Deferred policy acquisition costs................. 117,696 102,154
Unrealized gain on investments.................... 2,680 31,399
------------ ----------
120,376 133,553
------------ ----------
Net deferred income tax liability $ 37,722 $ 67,420
========= ========
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, 1996 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
$439 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.
Protective's income tax returns are included in the consolidated income
tax returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations.
Note E -- DEBT
At December 31, 1996, 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.
Protective has arranged sources of credit to temporarily fund scheduled
investment commitments. Protective expects that the rate received on its
investments will equal or exceed its borrowing rate. Protective had no such
temporary borrowings outstanding at December 31, 1996 and 1995.
Included in indebtedness to related parties are three surplus debentures
issued by Protective to PLC. At December 31, 1996, the balance of the three
surplus debentures combined was $24.7 million. Future maturities of these
debentures are $4.7 million in 1997 and $20.0 million in 2003.
Interest expense on borrowed money totaled $4.6 million, $6.0 million, and
$5.0 million, in 1996, 1995, and 1994, respectively.
Note F -- ACQUISITIONS
In June 1995 Protective acquired through coinsurance a block of term life
insurance policies. In January 1996 Protective acquired through coinsurance a
block of life insurance policies. In June 1996 Protective acquired through
coinsurance a block of credit life insurance policies. In December 1996
Protective acquired a small life insurance company and acquired through
coinsurance a block of 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.
24
<PAGE>
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. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states, juries have substantial discretion in awarding punitive
damages which creates the potential for unpredictable material adverse judgments
in any given punitive damage suit. Protective and its subsidiaries, like other
life and health insurers, from time to time are involved in such litigation.
Pending litigation includes a class action filed in Jefferson County
(Birmingham), Alabama with respect to cancer premium refunds. Although the
outcome of any litigation cannot be predicted with certainty, Protective
believes that at the present time there are no pending or threatened lawsuits
that are reasonably likely to have a material adverse effect on the financial
position of Protective.
Note H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS
At December 31, 1996, approximately $413 million of consolidated
stockholder's equity excluding net unrealized gains and losses represented net
assets of Protective that cannot be transferred in the form of dividends, loans,
or advances to PLC. In general, dividends up to specified levels are considered
ordinary and may be paid thirty days after written notice to the insurance
commissioner of the state of domicile unless such commissioner objects to the
dividend prior to the expiration of such period. Dividends in larger amounts are
considered extraordinary and are subject to affirmative prior approval by such
commissioner. The maximum amount that would qualify as ordinary dividends to PLC
by Protective in 1997 is estimated to be $117 million.
Note I -- PREFERRED STOCK
PLC owns all of the 2,000 shares of preferred stock issued by Protective's
subsidiary, American Foundation. During 1996, American Foundation's articles of
incorporation were amended such that the preferred stock is redeemable solely at
the discretion of American Foundation. At December 31, 1995 the preferred stock
was reported "Redeemable Preferred Stock", whereas at December 31, 1996 it is
reported as a component of stockholder's equity. The stock pays, when and if
declared, annual minimum cumulative dividends of $50 per share, and
noncumulative participating dividends to the extent American Foundation's
statutory earnings for the immediately preceding fiscal year exceed $1 million.
Dividends of $0.1 million, $0.1 million, and $0.9 million were paid to PLC in
1996, 1995, and 1994, respectively.
Note J -- RELATED PARTY MATTERS
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amount of $2.0 million at December 31, 1995.
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, $5.6 million at
December 31, 1996, 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.
25
<PAGE>
Note J -- RELATED PARTY MATTERS (continued)
Protective leases furnished office space and computers to affiliates.
Lease revenues were $3.7 million in 1996, $3.1 million in 1995, and $2.8 million
in 1994. Protective purchases data processing, legal, investment and management
services from affiliates. The costs of such services were $50.4 million, $38.1
million, and $29.8 million in 1996, 1995, and 1994, respectively. Commissions
paid to affiliated marketing organizations of $7.4 million, $10.9 million, and
$10.1 million in 1996, 1995, and 1994, respectively, were included in deferred
policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $31.2 million, $21.2 million, and $21.1
million in 1996, 1995, and 1994, respectively. Protective and/or PLC paid
commissions, interest, and service fees to these same corporations totaling $5.0
million, $5.3 million, and $4.9 million, in 1996, 1995, and 1994, 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. In the 1996 first quarter, Protective changed the way it allocates
certain expenses to its business segments. Accordingly, prior period segment
results have been restated to reflect the change.
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.
1996 1995 1994
---------- ---------- -------
TOTAL REVENUES
Acquisitions.................................$213,199 $ 193,544 $171,259
Financial Institutions....................... 87,320 72,758 107,481
Group........................................ 174,971 159,263 148,835
Guaranteed Investment Contracts.............. 206,407 199,468 184,212
Individual Life.............................. 169,306 139,424 122,915
Investment Products.......................... 110,821 104,984 80,076
Corporate and Other.......................... 2,810 3,059 9,936
Unallocated Realized Investment Gains (Losses) 6,517 921 5,266
---------- ------- --------
$971,351 $ 873,421 $ 829,980
======== ========= =========
Acquisitions................................. 21.9% 22.2% 20.7%
Financial Institutions....................... 9.0 8.3 12.9
Group........................................ 18.0 18.2 17.9
Guaranteed Investment Contracts.............. 21.3 22.8 22.3
Individual Life.............................. 17.4 16.0 14.7
Investment Products.......................... 11.4 12.0 9.7
Corporate and Other.......................... 0.3 0.4 1.2
Unallocated Realized Investment Gains (Losses) 0.7 0.1 0.6
----------- ------------ --------
100.0% 100.0% 100.0%
========= ========== =======
26
<PAGE>
Note K - BUSINESS SEGMENTS (Continued)
1996 1995 1994
----------- ---------- -------
INCOME BEFORE INCOME TAX
Acquisitions..................................$53,564 $ 50,376 $ 37,719
Financial Institutions......................... 8,966 7,701 7,544
Group.......................................... 821 9,107 10,122
Guaranteed Investment Contracts................32,130 28,979 31,933
Individual Life................................15,898 16,206 15,957
Investment Products........................... 9,823 10,933 (796)
Corporate and Other............................(2,410) (6,490) (2,167)
Unallocated Realized Investment Gains (Losses). 6,517 921 5,266
----------- ----------- ---------
$ 125,309 $117,733 $105,578
========== ======== ========
Acquisitions.............................. 42.7% 42.8% 35.7%
Financial Institutions..................... 7.2 6.5 7.1
Group...................................... 0.7 7.7 9.6
Guaranteed Investment Contracts............ 25.6 24.6 30.2
Individual Life............................ 12.7 13.8 15.1
Investment Products........................ 7.8 9.3 (0.7)
Corporate and Other........................ (1.9) (5.5) (2.0)
Unallocated Realized Investment Gains (Losses) 5.2 0.8 5.0
----------- --------- ---------
100.0% 100.0% 100.0%
============= ========= =========
IDENTIFIABLE ASSETS
Acquisitions.............................. $1,579,253 $1,255,542 $1,204,883
Financial Institutions.................... 344,866 265,132 211,652
Group..................................... 233,640 240,222 215,904
Guaranteed Investment Contracts........... 2,608,037 2,536,939 2,211,079
Individual Life........................... 1,034,960 887,927 752,168
Investment Products....................... 1,871,887 1,578,789 1,284,186
Corporate and Other....................... 490,700 414,142 230,832
------------ ------------ ------------
$8,163,343 $7,178,693 $6,110,704
========== ========== ==========
Acquisitions.............................. 19.3% 17.5% 19.7%
Financial Institutions.................... 4.2 3.7 3.5
Group..................................... 2.9 3.3 3.5
Guaranteed Investment Contracts........... 32.0 35.3 36.2
Individual Life........................... 12.7 12.4 12.3
Investment Products....................... 22.9 22.0 21.0
Corporate and Other....................... 6.0 5.8 3.8
---------- ---------- --------
100.0% 100.0% 100.0%
=========== ========== ==========
Note L -- EMPLOYEE BENEFIT PLANS
PLC has a defined benefit pension plan covering substantially all of its
employees. The plan is not separable by affiliates participating in the plan.
However, approximately 80% of the participants in the plan are employees of
Protective. The benefits are based on years of service and the employee's
highest thirty-six consecutive months of compensation. PLC's funding policy is
to contribute amounts to the plan sufficient to meet the minimum finding
requirements of ERISA plus such additional amounts as PLC may determine to be
appropriate from time to time. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future.
27
<PAGE>
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 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $14,720 in 1996
and $16,676 in 1995.................................................................. $15,475 $17,415
------- -------
Projected benefit obligation for service rendered to date.............................. $25,196 $24,877
Plan assets at fair value (group annuity contract with Protective)..................... 19,779 18,254
-------- --------
Plan assets less than the projected benefit obligation................................. (5,417) (6,623)
Unrecognized net loss from past experience different from that assumed................. 3,559 4,882
Unrecognized prior service cost........................................................ 705 805
Unrecognized net transition asset...................................................... (67) (84)
---------- ----------
Net pension liability recognized in balance sheet...................................... $ (1,220) $(1,020)
======== =======
</TABLE>
Net pension cost includes the following components for the years ended December
31:
1996 1995 1994
-------- -------- -------
Service cost-- benefits earned during the year......$1,908 $ 1,540 $ 1,433
Interest cost on projected benefit obligation....... 1,793 1,636 1,520
Actual return on plan assets........................(1,674) (1,358) (1,333)
Net amortization and deferral....................... 374 114 210
--------- ---------- -------
Net pension cost...................................$ 2,401 $ 1,932 $ 1,830
======= ======= =======
Protective's share of the net pension cost was $1.5 million, $1.2 million,
and $1.2 million, in 1996, 1995, and 1994, respectively.
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
1996 1995 1994
--------- ---------- -------
Weighted average discount rate................. 7.75% 7.25% 8.00%
Rates of increase in compensation level........ 5.75% 5.25% 6.00%
Expected long-term rate of return on assets.... 8.50% 8.50% 8.50%
Assets of the pension plan are included in the general assets of Protective.
Upon retirement, the amount of pension plan assets vested in the retiree is used
to purchase a single premium annuity from Protective in the retiree's name.
Therefore, amounts presented above as plan assets exclude assets relating to
retirees.
PLC also sponsors an unfunded Excess Benefits Plan, which is a nonqualified
plan that provides defined pension benefits in excess of limits imposed by
federal income tax law. At December 31, 1996 and 1995, the projected benefit
obligation of this plan totaled $7.2 million and $5.7 million, respectively.
In addition to pension benefits, PLC provides limited healthcare benefits to
eligible retired employees until age 65. The postretirement benefit is provided
by an unfunded plan. At December 31, 1996 and 1995, the liability for such
benefits totaled $1.4 million and $1.5 million, respectively. The expense
recorded by PLC was $0.1 million in 1996 and $0.2 million in 1995 and 1994.
PLC's obligation is not materially affected by a 1% change in the healthcare
cost trend assumptions used in the calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of
life insurance policies upon retirement equal to the employees' annual
compensation. This plan is partially funded at a maximum of $50,000 face amount
of insurance.
PLC sponsors a defined contribution plan which covers substantially all
employees. Employee contributions are made on a before-tax basis as provided by
Section 401(k) of the Internal Revenue Code. In 1990, PLC established an
Employee Stock Ownership Plan to match employee contributions to PLC's 401(k)
Plan. In 1994, a stock bonus was added to the 401(k) Plan for employees who are
not otherwise under a bonus 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, 1996, PLC had committed 52,388 shares to be
released to fund employee benefits. The expense recorded by PLC for these
employee benefits was $1.0 million, $0.7 million and $0.6 million in 1996, 1995,
and 1994, respectively.
28
<PAGE>
Note M -- STOCK BASED COMPENSATION
Certain Protective employees participate in PLC's Performance Share Plan and
receive stock appreciation rights (SARs) from PLC.
Since 1973 PLC has had a Performance Share Plan to motivate senior
management to focus on PLC's long-range earnings performance. The criterion for
payment of performance share awards is based upon a comparison of PLC's average
return on average equity over a four year award period (earlier upon the death,
disability or retirement of the executive, or in certain circumstances, of a
change in control of PLC) to that of a comparison group of publicly held life
insurance companies, multiline insurers, and insurance holding companies. If
PLC's results are below the median of the comparison group, no portion of the
award is earned. If PLC's results are at or above the 90th percentile, the award
maximum is earned. Under the plan approved by stockholders in 1992, up to
1,200,000 shares may be issued in payment of awards. The number of shares
granted in 1996, 1995, and 1994 were 52,290, 72,610, and 62,140 shares,
respectively, having an approximate market value on the grant date of $1.8
million, $1.6 million, and $1.4 million, respectively. At December 31, 1996,
outstanding awards measured at target and maximum payouts were 279,648 and
375,470 shares, respectively. The expense recorded by PLC for the Performance
Share Plan was $3.0 million, $2.9 million, and $3.6 million in 1996, 1995, and
1994, respectively.
During 1996, stock appreciation rights (SARs) were granted to certain
executives of PLC to provide long-term incentive compensation based on the
performance of PLC's Common Stock. Under this arrangement PLC will pay (in
shares of PLC Common Stock) an amount equal to the difference between the
specified base price of PLC's Common Stock and the market value at the exercise
date. The SARs are exercisable after five years (earlier upon the death,
disability or retirement of the executive, or in certain circumstances, of a
change in control of PLC) and expire in 2006 or upon termination of employment.
The number of SARs granted during 1996 and outstanding at December 31, 1996 was
337,500. The SARs have a base price of $34.875 per share of PLC Common Stock
(the market price on the grant date was $35.00 per share). The estimated fair
value of the SARs on the grant date was $3.0 million. This estimate was derived
using the Roll-Geske variation of the Black-Sholes option pricing model.
Assumptions used in the pricing model are as follows: expected volatility rate
of 15% (approximately equal to that of the S & P Life Insurance Index), a risk
free interest rate of 6.35%, a dividend yield rate of 1.97%, and an expected
exercise date of August 15, 2002. The expense recorded by PLC for the SARs was
$0.2 million in 1996.
Note N -- REINSURANCE
Protective assumes risks from and reinsures certain parts of its risks with
other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies. While the amount retained on an individual life
will vary based upon age and mortality prospects of the risk Protective,
generally, will not carry more than $500,000 individual life insurance on a
single risk.
Protective has reinsured approximately $18.8 billion, $17.5 billion, and
$8.6 billion, in face amount of life insurance risks with other insurers
representing $113.5 million, $116.1 million, and $46.0 million of premium income
for 1996,1995, and 1994, respectively. Protective has also reinsured accident
and health risks representing $194.7 million, $217.1 million, and $126.5
million, of premium income for 1996, 1995, and 1994, respectively. In 1996 and
1995, policy and claim reserves relating to insurance ceded of $325.9 million
and $266.9 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, 1996
and 1995, Protective had paid $6.7 million and $4.1 million, respectively, of
ceded benefits which are recoverable from reinsurers.
During 1995 Protective entered into a reinsurance agreement whereby all of
Protective's new credit insurance sales are being ceded to a reinsurer. Included
in the preceding paragraph are credit life and credit accident and health
insurance premiums of $47.7 million and $55.3 million respectively, and reserves
totaling $135.8 million which were ceded during 1996. Also included are credit
life and credit accident and health insurance premiums of $68.2 million and
$57.6 million, respectively, and reserves totaling $100.8 million which were
ceded during 1995.
29
<PAGE>
Note O -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of Protective's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------
Estimated Estimated
Carrying Market Carrying Market
Amount Values Amount Values
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities..................... $4,662,997 $4,662,997 $3,891,932 $3,891,932
Equity securities.................... 35,250 35,250 38,711 38,711
Mortgage loans on real estate........ 1,503,781 1,581,694 1,835,057 2,001,100
Short-term investments............... 101,215 101,215 46,891 46,891
Cash...................................... 114,384 114,384 6,198 6,198
Other (see Note A):
Futures contracts.................... (1,708) (633)
Interest rate swaps.................. (679) 1,299
30
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J
- -----------------------------------------------------------------------------------------------------------------------------------
GIC and
Future Annuity Amort.of
Deferred Policy Deposits Premiums Realized Benefits Deferred Other
Policy Benefits and Other and Net Investment and Policy Operating
Acq. and Unearned Policy- Policy Investment Gains Settlement Acq. Expenses
Segment Costs Costs Premiums holders'Funds Fees Income (1) (Losses) Expenses Costs Exp. (1)
------- -------------------------- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31,1996:
Acquisitions....... $156,172 $1,117,159 $ 1,087 $251,450 $106,543 $106,015 $ 0 $118,181 $17,162 $24,292
Financial Institutions 32,040 119,242 253,154 1,880 73,422 13,898 0 42,781 24,900 10,673
Group ............. 27,944 119,010 2,572 83,632 156,530 16,249 0 125,797 5,326 43,027
Guaranteed Investment 1,164 149,755 0 2,474,728 0 214,369 (7,963) 169,927 509 3,840
Contracts........
Individual Life.... 220,232 793,370 685 15,577 116,710 48,442 3,098 96,404 28,393 28,611
Investment Products 50,637 149,743 0 1,120,557 8,189 98,719 3,858 73,093 14,710 13,197
Corporate and Other 12 170 55 192 656 1,089 0 710 1 4,508
Unallocated Realized
Investment Gains
(Losses)........ 0 0 0 0 0 0 6,517 0 0 0
---------------------------------------------------------------------------------------------------------------
TOTAL......... $488,201 $2,448,449 $257,553 $3,948,016 $462,050 $498,781 $5,510 $626,893 $91,001 $128,148
======== =========== ========= ========== ======== ======== ====== ======== ======= ========
Year Ended
December 31,1995:
Acquisitions....... $123,889 $ 851,994 $ 590 $ 250,550 $ 98,501 $ 95,018$ 0 $100,016 $20,601 $ 22,551
Financial Institutions 36,283 84,162 189,973 1,495 65,669 9,276 0 24,020 26,809 14,229
Group ............. 24,974 123,279 2,806 85,925 142,483 14,329 0 109,447 3,052 37,657
Guaranteed Investment
Contracts........ 993 68,704 0 2,451,693 0 203,376 (3,908) 165,963 386 4,140
Individual Life.... 186,496 672,569 336 14,709 99,018 40,237 0 80,067 20,403 22,748
Investment Products 37,534 127,104 0 1,061,507 4,566 95,661 4,938 72,111 11,446 10,494
Corporate and Other 14 342 62 263 1,445 536 0 1,476 3 8,069
Unallocated Realized
Investment Gains
(Losses)........ 0 0 0 0 0 0 921 0 0 0
--------------------------------------------------------------------------------------------------------------
TOTAL......... $410,183 $1,928,154 $193,767 $3,866,142 $411,682 $458,433 $1,951 $553,100 $82,700 $119,888
=========== ========== ======== ========== ======== ======== ====== ======== ======= ========
Year Ended
December 31,1994:
Acquisitions....... $110,203 $ 856,889 $ 381 $ 266,828 $ 86,376 $ 84,350 $ 532 $ 97,649 $ 14,460 $ 21,431
Financial Institutions 68,060 43,198 99,798 2,758 98,027 9,451 46,360 36,592 16,984
Group ............. 22,685 116,324 2,905 84,689 131,096 14,903 98,930 2,724 37,059
Guaranteed Investment
Contracts........ 996 0 0 2,281,674 0 181,212 3,000 147,383 892 4,004
Individual Life.... 162,186 571,070 320 13,713 84,925 37,986 67,451 18,771 20,736
Investment Products 70,053 102,705 0 1,027,527 1,635 81,062 (2,500) 58,424 14,647 7,801
Corporate and Other 17 4,109 75 263 713 (31) 913 3 11,188
Unallocated Realized
Investment Gains
(Losses)......... 0 0 0 0 0 0 5,266 0 0 0
--------------------------------------------------------------------------------------------------------------
TOTAL.......... $434,200 $1,694,295 $103,479 $3,677,452 $402,772 $408,933 $6,298 $517,110 $88,089 $119,203
=========== ========== ======== ========== ======== ======== ====== ======== ======= ========
(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>
31
<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 31,1996:
Life insurance in force........................... $53,052,020 $18,840,221 $16,275,386 $50,487,185 32.2%
=========== =========== =========== =========== ====
Premiums and policy fees:
Life insurance.................................... $ 272,331 $ 113,487 $ 129,717 $ 288,561 45.0%
Accident and health insurance..................... 338,709 194,687 29,467 173,489 17.0%
------------- -------------- -------------- -------------
TOTAL......................................... $ 611,040 $ 308,174 $ 159,184 $ 462,050
============= ============= ============= =============
Year Ended December 31,1995:
Life insurance in force........................... $50,346,719 $17,524,366 $11,537,144 $ 44,359,497 26.0%
=========== =========== =========== ============ ====
Premiums and policy fees:
Life insurance.................................... $ 308,422 $ 116,091 $ 66,565 $ 258,896 25.7%
Accident/health insurance......................... 356,285 217,082 13,583 152,786 8.9%
-------------- -------------- -------------- --------------
TOTAL......................................... $ 664,707 $ 333,173 $ 80,148 $ 411,682
============= ============= ============= =============
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......................... 283,884 126,546 3,591 160,929 2.2%
-------------- ------------ -------------- -------------
TOTAL.......................................... $ 540,724 $ 172,575 $ 34,623 $ 402,772
============= =========== ============ =============
</TABLE>
32
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
Item 10. Directors and Executive Officers of the Registrant Not required in
accordance with General Instruction I(2)(c).
Item 11. Executive Compensation
Not required in accordance with General Instruction I(2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not required in accordance with General Instruction I(2)(c).
Item 13. Certain Relationships and Related Transactions
Not required in accordance with General Instruction I(2)(c).
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 36 of this Form
10-K are filed herewith or are incorporated herein by reference.
No management contract or compensatory plan or arrangement is
required to be filed as an exhibit to this form. The Registrant
will furnish a copy of any of the exhibits listed upon the
payment of $5.00 per exhibit to cover the cost of the Registrant
in furnishing the exhibit.
(b) Reports on Form 8-K:
None
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama on March 27, 1997.
PROTECTIVE LIFE INSURANCE COMPANY
By: /s/ DRAYTON NABERS, JR.
President
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated:
Signature Title Date
(i) Principal Executive Officer
/s/ DRAYTON NABERS, JR. Chairman of the Board March 27, 1997
-----------------------------
Drayton Nabers, Jr.
(ii) Principal Financial Officer
/s/ JOHN D. JOHNS President March 27, 1997
-----------------------------
John D. Johns
(iii) Principal Accounting Officer
/s/ JERRY W. DEFOOR Vice President and
Controller, and Chief March 27, 1997
---------------------------- Accounting Officer
Jerry W. DeFoor
(iv) Board of Directors:
/s/ DRAYTON NABERS, JR. Director March 27, 1997
-----------------------------
Drayton Nabers, Jr.
/s/ JOHN D. JOHNS Director March 27, 1997
-----------------------------
John D. Johns
* Director March 27, 1997
-----------------------------
Danny L. Bentley
* Director March 27, 1997
-----------------------------
Ormond L. Bentley
* Director March 27, 1997
-----------------------------
Richard J. Bielen
* Director March 27, 1997
-----------------------------
R. Stephen Briggs
* Director March 27, 1997
-----------------------------
Carolyn King
* Director March 27, 1997
-----------------------------
Deborah J. Long
* Director March 27, 1997
-----------------------------
Jim E. Massengale
34
<PAGE>
Signature Title Date
* Director March 27, 1997
---------------------------
Steven A. Schultz
* Director March 27, 1997
---------------------------
Wayne E. Stuenkel
* Director March 27, 1997
----------------------------
A. S. Williams III
*By: /s/ JERRY W. DEFOOR
Jerry W. DeFoor
Attorney-in-fact
35
<PAGE>
EXHIBIT INDEX
Item
Number Document
**** 2 -- Stock Purchase Agreement
* 3(a) -- Articles of Incorporation
* 3(b) -- By-laws
** 4(a) -- Group Modified Guaranteed Annuity Contract
*** 4(b) -- Individual Certificate
** 4(h) -- Tax-Sheltered Annuity Endorsement
** 4(i) -- Qualified Retirement Plan Endorsement
** 4(j) -- Individual Retirement Annuity Endorsement
** 4(l) -- Section 457 Deferred Compensation Plan
Endorsement
* 4(m) -- Qualified Plan Endorsement
** 4(n) -- Application for Individual Certificate
** 4(o) -- Adoption Agreement for Participation in Group
Modified Guaranteed Annuity
*** 4(p) -- Individual Modified Guaranteed Annuity Contract
** 4(q) -- Application for Individual Modified Guaranteed
Annuity Contract
** 4(r) -- Tax-Sheltered Annuity Endorsement
** 4(s) -- Individual Retirement Annuity Endorsement
** 4(t) -- Section 457 Deferred Compensation Plan
Endorsement
** 4(v) -- Qualified Retirement Plan Endorsement
**** 4(w) -- Endorsement -- Group Policy
**** 4(x) -- Endorsement -- Certificate
**** 4(y) -- Endorsement -- Individual Contract
**** 4(z) -- Endorsement (Annuity Deposits) -- Group Policy
**** 4(aa) -- Endorsement (Annuity Deposits) -- Certificate
**** 4(bb) -- Endorsement (Annuity Deposits) -- Individual
Contracts
***** 4(cc) -- Endorsement -- Individual
***** 4(dd) -- Endorsement -- Group Contract/Certificate
****** 4(ee) -- Endorsement (96) -- Individual
****** 4(ff) -- Endorsement (96) -- Group Contract
****** 4(gg) -- Endorsement (96) -- Group Certificate
****** 4(hh) -- Individual Modified Guaranteed Annuity
Contract (96)
* 10(a) -- Bond Purchase Agreement
* 10(b) -- Escrow Agreement
24 -- Power of Attorney
27 -- Financial Data Schedule
* Previously filed or incorporated by reference in Form S-1
Registration Statement, Registration No. 33-31940.
** Previously filed or incorporated by reference in Amendment No. 1
to Form S-1 Registration Statement, Registration No. 33-31940.
*** Previously filed or incorporated by reference from Amendment No.2
to Form S-1 Registration Statement, Registration No. 33-31940.
**** Previously filed or incorporated by reference from Amendment No.2
to Form S-1 Registration Statement, Registration No. 33-57052.
***** Previously filed or incorporated by reference from Amendment No.3
to Form S-1 Registration Statement, Registration No. 33-57052.
****** Previously filed or incorporated by reference from S-1
Registration Statement, Registration No. 333-02249.
36
<PAGE>
DIRECTORS' POWER OF ATTORNEY
KNOW BY ALL MEN PRESENTS, that each of the undersigned Directors of
Protective Life Insurance Company, a Tennessee corporation, ("Company") by his
execution hereof or upon and identical conunterpart hereof, does hereby
constitute and appoint John D. Johns, Deborah J. Long, Maria Gutierrez Matthews,
or Jerry W. DeFoor, to execute and sign the 1996 Annual Report on Form 10-K
to be filed by the Company with the Securities and Exchange Act of 1934 and,
further to execute and sign any and all amendments to such Annual Report, and
to file same, with all exhibits and schedules thereto and all other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all the acts of said attorneys-in-fact and agents or any of them which they may
lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and
seal this 10th day of March, 1997.
WITNESS TO ALL SIGNATURES:
/s/ Jerry W. DeFoor /s/ DRAYTON NABERS, JR.
- --------------------- -----------------------
Jerry W, DeFoor Drayton Nabers, Jr.
/s/ JOHN D. JOHNS
-----------------------
John D. Johns
/s/ ORMOND L. BENTLEY
-----------------------
Ormond L. Bentley
/s/ R. STEPHEN BRIGGS
-----------------------
R. Stephen Briggs
/s/ JIM E. MASSENGALE
-----------------------
Jim E. Massengale
/s/ A.S. WILLIAMS III
-----------------------
A.S. Williams III
/s/ CAROLYN KING
-----------------------
Carolyn King
/s/ DEBORAH J. LONG
-----------------------
Deborah J. Long
/s/ STEVEN A. SCHULTZ
-----------------------
Steven A. Schultz
/s/ WAYNE E. STUENKEL
-----------------------
Wayne E. Stuenkel
/s/ DANNY L BENTLEY
-----------------------
Danny L. Bentley
/s/ RICHARD J. BIELEN
-----------------------
Richard J. Bielen
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life Insurance Company and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 4,662,997
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 35,250
<MORTGAGE> 1,503,781
<REAL-ESTATE> 14,172
<TOTAL-INVEST> 6,513,312
<CASH> 114,384
<RECOVER-REINSURE> 332,614
<DEFERRED-ACQUISITION> 488,201
<TOTAL-ASSETS> 8,163,343
<POLICY-LOSSES> 2,448,449
<UNEARNED-PREMIUMS> 257,553
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 142,221
<NOTES-PAYABLE> 0
0
2
<COMMON> 5,000
<OTHER-SE> 771,189
<TOTAL-LIABILITY-AND-EQUITY> 8,163,343
462,050
<INVESTMENT-INCOME> 498,781
<INVESTMENT-GAINS> 5,510
<OTHER-INCOME> 5,010
<BENEFITS> 626,893
<UNDERWRITING-AMORTIZATION> 91,001
<UNDERWRITING-OTHER> 128,148
<INCOME-PRETAX> 125,309
<INCOME-TAX> 42,766
<INCOME-CONTINUING> 82,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,543
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Protective Life Insurance Company is a wholly-owned subsidiary of Protective
Life Corporation (NYSE:PL)and is not requires to present EPS information.
</FN>
</TABLE>
