<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 63-0169720 6355
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification Number) Classification Code)
</TABLE>
2801 Highway 280 South
Birmingham, Alabama 35223
(205) 879-9230
(Address, including zip code, and telephone number, including area code,
of principal executive office)
------------------------
Carolyn King
Senior Vice President, Investment Products Division
Protective Life Insurance Company
P. O. Box 2606
Birmingham, Alabama 35202
(205) 879-9230
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
Stephen E. Roth, Esq. Steve M. Callaway, Esq.
Sutherland, Asbill & Brennan LLP Protective Life Insurance Company
1275 Pennsylvania Avenue, N.W. P. O. Box 2606
Washington, D.C. 20004-2404 Birmingham, Alabama 35202
------------------------
If any of the securities that have been registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. /X/
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
contained herein also relates to Registration Statement Nos. 33-31940, 33-39345,
33-57052 and 333-02249.
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Modified Guaranteed Annuity Contracts
and Participating Interests
Therein............................. * * $250,000,000 $73,750
</TABLE>
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount to be registered and the
proposed maximum offering price per unit are not applicable since these
securities are not issued in predetermined amounts or units.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
FORM S-1 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
<TABLE>
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Capsule Summary of the Contract; Table of
Contents
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Outside Front Cover Page; Capsule Summary
of the Contract; Glossary of Special
Terms
4. Use of Proceeds............................. Investments by Protective
5. Determination of Offering Price............. Not Applicable
6. Dilution.................................... Not Applicable
7. Selling Security Holders.................... Not Applicable
8. Plan of Distribution........................ Distribution of Contracts
9. Description of Securities to be
Registered.................................. Capsule Summary of the Contract;
Description of Contracts, Appendix B;
Appendix C
10. Interests of Named Experts and Counsel...... Not Applicable
11. Information with Respect to the
Registrant.................................. Protective Life Insurance Company;
Executive Officers and Directors;
Executive Compensation; Financial
Statements; Legal Proceedings
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Undertakings
</TABLE>
<PAGE>
P R O S P E C T U S
MODIFIED GUARANTEED ANNUITY CONTRACTS
Issued by
Protective Life Insurance Company
P.O. Box 2606
Birmingham, Alabama 35202
(205) 879-9230
------------------------
This Prospectus describes interests in a Group Modified Guaranteed Annuity
Contract and an Individual Modified Guaranteed Annuity Contract. Both are
designed and offered to provide annuity payments in connection with retirement
programs that may or may not qualify for special income tax treatment under the
Internal Revenue Code. With respect to the Group Contract, eligible individuals
include persons who have established accounts with certain broker-dealers which
have entered into distribution agreements to offer interests in the Group
Modified Guaranteed Annuity Contract, and members of other eligible groups. (See
"Distribution of Contracts"). An Individual Modified Guaranteed Annuity Contract
is offered in certain states.
Participation in a Group Contract will be separately accounted for by the
issuance of a Certificate evidencing your interest under the Group Contract.
Participation in an Individual Contract is evidenced by the issuance of an
Individual Modified Guaranteed Annuity Contract. The Group Contract, Certificate
and Individual Modified Guaranteed Annuity Contract are hereafter referred to
collectively as the "Contract".
An Annuity Deposit of at least $10,000 is required in order to purchase a
Contract. Additional Annuity Deposit(s) can be made to the Contract. Regardless
of the number of Annuity Deposit(s) made, only one Contract will be issued.
Protective Life Insurance Company reserves the right not to accept any deposit
and to limit the total amount of your Annuity Deposit(s).
Each Annuity Deposit (less Premium Taxes, if applicable) will be allocated
at your direction to one or more Sub-Accounts which correspond to the Guaranteed
Periods chosen by you and will accumulate at the Guaranteed Interest Rate or
Rates applicable to such Guaranteed Periods. Several Guaranteed Periods are
currently offered by the Company. PARTIAL AND FULL SURRENDERS MADE PRIOR TO THE
END OF A GUARANTEED PERIOD MAY BE SUBJECT TO A SURRENDER CHARGE, AND WILL BE
SUBJECT TO A MARKET VALUE ADJUSTMENT, WHICH COULD EITHER INCREASE OR DECREASE
YOUR ACCOUNT VALUE.
PLEASE READ THIS PROSPECTUS CAREFULLY. INVESTORS SHOULD KEEP A COPY FOR
FUTURE REFERENCE.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE LOSS OF ANNUITY DEPOSITS
(PRINCIPAL).
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998
<PAGE>
CAPSULE SUMMARY OF THE CONTRACT
This Prospectus describes Group and Individual Modified Guaranteed Annuity
Contracts issued by Protective Life Insurance Company. These Contracts may be
issued to any eligible employer, entity or other organized group acceptable to
us or to an individual in certain states.
The Contract may be issued pursuant to nonqualified retirement plans or
plans qualifying for special tax treatment such as Individual Retirement
Annuities or Accounts, H.R. 10 plans, and Tax-Sheltered Annuities.
You must submit a properly completed application along with an Annuity
Deposit to receive a Contract. Your initial Annuity Deposit must be at least
$10,000 unless approved by the Company. Additional Annuity Deposits may be
accepted. Regardless of the number of Annuity Deposits made, only one Contract
will be issued. We reserve the right not to accept any Annuity Deposit and to
limit the total amount of your Annuity Deposit(s). Each Annuity Deposit will be
allocated to one or more Sub-Accounts which correspond to the Guaranteed Periods
that you specify. The minimum allocation to a Sub-Account is $10,000. You select
Initial Guaranteed Period(s) from among those offered by Protective at the time
an Annuity Deposit is made. A Guaranteed Period is the period of years for which
a rate of interest is guaranteed. During an Initial Guaranteed Period, the
portion of your Annuity Deposit allocated to a Sub-Account and any initial
interest credited thereon will earn interest at the applicable Initial
Guaranteed Interest Rate as established by Protective.
At the end of any Guaranteed Period, a Subsequent Guaranteed Period will
automatically begin. Unless you elect a different duration from among those then
offered by us within twenty days prior to or ten days after the end of a
Guaranteed Period, the corresponding Sub-Account Value will be automatically
transferred to a Subsequent Guaranteed Period of either (i) the same duration as
the Initial Guaranteed Period if then offered by us; or (ii) the shortest
duration then offered by us which is closest to the same duration as the Initial
Guaranteed Period. The Sub-Account Value will earn interest at the Subsequent
Guaranteed Interest Rate. PROTECTIVE'S MANAGEMENT WILL MAKE THE FINAL
DETERMINATION AS TO GUARANTEED RATES TO BE DECLARED. WE CANNOT PREDICT NOR DO WE
GUARANTEE FUTURE GUARANTEED RATES. (See "Establishment of Guaranteed Interest
Rates").
We make no charges to your Annuity Deposit when it is received by us (except
deduction for premium taxes, where applicable). Full and partial surrenders from
each Sub-Account are permitted subject to certain restrictions. A full or
partial surrender made prior to the end of a Guaranteed Period will be subject
to a Market Value Adjustment and may be subject to a Surrender Charge, which
could result in the receipt of less than your Annuity Deposit(s). A Surrender
Charge will apply during each Guaranteed Period. For each Guaranteed Period with
durations longer than seven years, a Surrender Charge will only apply during the
first seven years. The Surrender Charge is equal to a specified Surrender Charge
Percentage (maximum 6%) applied to the amount of each full or partial surrender
requested less any amount available as an Interest Withdrawal. (See "Interest
Withdrawals" and "Surrender Charges").
You may withdraw all or a portion of the interest that has been credited
during the prior Contract Year at any time during the current Contract Year if
you so request in writing. We reserve the right to limit such withdrawals to
once during a Contract Year. No Surrender Charge or Market Value Adjustment will
be imposed on such Interest Withdrawals. Any such withdrawal may, however, be
subject to tax, including the 10% penalty tax under the Internal Revenue Code.
(See "Federal Tax Matters.")
A Market Value Adjustment is applied when you make a full or partial
surrender from a Sub-Account prior to the end of the Sub-Account's Guaranteed
Period. The Market Value Adjustment reflects the relationship between (i) the
Treasury Rate currently established for the same term as the Guaranteed Period
from which the full or partial surrender is being made, and (ii) the Treasury
Rate initially established for the Guaranteed Period from which the full or
partial surrender is being made. The Treasury Rate is the annual effective
interest rate credited to United States Treasury instruments, as published by a
nationally recognized service. It is possible that Treasury Rates may be higher
at the time of surrender than at the time a Sub-Account is established;
therefore the amount you would receive upon a full or partial
<PAGE>
surrender of your Contract may be less than the portion of your Annuity Deposit
allocated to each Sub-Account plus any interest credited thereon. If such
Treasury Rates are lower at the time of surrender than at the time a Sub-Account
is established, the amount you would receive upon a full or partial surrender
may be more than the portion of your Annuity Deposit allocated to each
Sub-Account plus any interest credited thereon. (See "Market Value Adjustment").
Partial or full surrenders are generally taxable, and may also may be
subject to a 10% penalty tax under the Internal Revenue Code (See "Federal Tax
Matters."). We may defer payment of any full or partial surrender for a period
not exceeding 6 months from the date of our receipt of your notice of surrender
or the period permitted by state insurance law, if less.
On the Annuity Commencement Date, Protective will make a lump-sum payment or
start to pay a series of payments based on the Annuity Option selected by you.
Any applicable Surrender Charges and Market Value Adjustment will be deducted
upon the application of your Net Account Value to purchase an Annuity on the
Annuity Commencement Date. To elect an Annuity Option you must notify us of the
Annuity Option you are electing, 30 days prior to the Annuity Commencement Date.
(See "Annuity Benefits").
This Contract provides for a Death Benefit. If any Participant dies before
the Annuity Commencement Date a Death Benefit will be payable to the
Beneficiary. If no Beneficiary designation is in effect or if there is no
designated Beneficiary living, the Death Benefit will be paid to the estate of
the deceased Participant. If any Participant is not an individual, the death or
change of Annuitant will be treated as the death of a Participant.
The Death Benefit will generally equal the greater of: (1) the Account
Value, less applicable Premium Taxes; or (2) the Net Account Value. The Death
Benefit is calculated as of the date due proof of death is received by the
Company. If a claim is received twelve (12) months or more after the date of
death, however, the Death Benefit will equal the Net Account Value. If any
Participant is not a natural person, upon the change of the Annuitant, the Death
Benefit will equal the Net Account Value. Only one Death Benefit is payable
under this Contract. (See "Death Benefit".)
Under any Contract subject to Premium Tax, the Premium Tax will be deducted,
as provided under applicable law, from the Annuity Deposit when received, upon
full or partial surrender, from the amount applied to an Annuity Option, or from
the Death Benefit.
We will furnish you with a report annually showing your Account Value,
Sub-Account Values and interest credited. The report will not include our
financial statements.
You may cancel your Contract within twenty days after receipt by returning
or mailing it to us or the person who sold you the Contract. We will refund your
Annuity Deposit, and the Contract will be as though it had never been issued.
CONTRACTS PURCHASED PRIOR TO MAY 1, 1996, PROVIDE RIGHTS AND BENEFITS, AND
MAY IMPOSE SURRENDER CHARGES AND A MARKET VALUE ADJUSTMENT, THAT DIFFER IN
CERTAIN IMPORTANT RESPECTS FROM THE RIGHTS, BENEFITS, CHARGES, AND MARKET VALUE
ADJUSTMENT DESCRIBED BELOW. A PARTICIPANT SHOULD CONSULT HIS OR HER CONTRACT. IN
ADDITION, IF YOU PURCHASED YOUR CONTRACT PRIOR TO MAY 1, 1996 BUT ON OR AFTER
SEPTEMBER 10, 1991, YOU SHOULD CONSULT APPENDIX B TO THIS PROSPECTUS. IF YOU
PURCHASED YOUR CONTRACT PRIOR TO SEPTEMBER 10, 1991, YOU SHOULD CONSULT APPENDIX
C TO THIS PROSPECTUS. IF YOU HAVE QUESTIONS REGARDING YOUR CONTRACT, CONTACT OUR
ADMINISTRATIVE OFFICE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C> <C> <C> <C>
GLOSSARY OF SPECIAL TERMS..................................................................................... 1
DESCRIPTION OF CONTRACTS...................................................................................... 3
A. General............................................................................................. 3
B. Application Information, Annuity Deposit............................................................ 3
C. Initial and Subsequent Guaranteed Periods........................................................... 4
D. Determination of Guaranteed Interest Rates.......................................................... 6
E. Surrenders.......................................................................................... 7
1. Surrender Charges.................................................................................. 7
2. Market Value Adjustment............................................................................ 8
3. Interest Withdrawals............................................................................... 9
F. Premium Taxes....................................................................................... 9
G. Death Benefit....................................................................................... 9
H. Annuity Benefits.................................................................................... 10
1. Electing the Annuity Commencement Date and Form of Annuity......................................... 10
2. Change of Annuity Commencement Date, Annuity Option, or Annuitant.................................. 10
3. Annuity Options.................................................................................... 11
4. Annuity Payment.................................................................................... 11
5. Death of Annuitant or Participant After Annuity Commencement Date.................................. 11
INVESTMENTS BY PROTECTIVE..................................................................................... 12
OTHER PROVISIONS.............................................................................................. 13
Contract Transactions............................................................................... 13
Amendment of Contracts.............................................................................. 13
Assignment of Contracts............................................................................. 13
DISTRIBUTION OF CONTRACTS..................................................................................... 13
FEDERAL TAX MATTERS........................................................................................... 13
Introduction........................................................................................ 13
The Company's Tax Status............................................................................ 14
Taxation of Annuities in General --................................................................. 14
Tax Deferral During Accumulation Period............................................................ 14
Taxation of Partial and Full Withdrawals........................................................... 14
Taxation of Annuity Payments....................................................................... 15
Taxation of Death Benefit Proceeds................................................................. 15
Penalty Tax on Premature Distributions............................................................. 16
Aggregation of Contracts........................................................................... 16
Loss of Interest Where Contracts Are Held by or for
the Benefit of Certain Non-natural Persons......................................................... 16
Qualified Retirement Plans............................................................................... 16
In General......................................................................................... 16
Individual Retirement Annuities................................................................ 18
Roth IRAs...................................................................................... 18
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-Sharing Plans........... 18
Tax-Sheltered Annuities........................................................................ 18
Direct Rollover Rules.............................................................................. 19
Federal Income Tax Withholding........................................................................... 19
PROTECTIVE LIFE INSURANCE COMPANY............................................................................. 20
A. Business............................................................................................ 20
B. Selected Financial Data............................................................................. 23
C. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 24
Results of Operations.............................................................................. 24
Premiums and Policy Fees....................................................................... 24
Net Investment Income.......................................................................... 25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
---
<S> <C> <C> <C> <C>
Realized Investment Gains (Losses)............................................................. 25
Other Income................................................................................... 26
Income Before Income Tax....................................................................... 27
Income Tax Expense............................................................................. 29
Net Income..................................................................................... 29
Known Trends and Uncertainties................................................................. 29
Recently Issued Accounting Standards............................................................... 31
Liquidity and Capital Resources.................................................................... 32
Impact of Inflation................................................................................ 34
D. Insurance in Force.................................................................................. 35
E. Underwriting........................................................................................ 36
F. Investments......................................................................................... 37
G. Indemnity Reinsurance............................................................................... 40
H. Policy Liabilities and Accruals..................................................................... 40
I. Federal Income Tax Consequences..................................................................... 40
J. Competition......................................................................................... 41
K. Regulation.......................................................................................... 41
L. Recent Developments................................................................................. 43
M. Employees........................................................................................... 43
N. Properties.......................................................................................... 43
DIRECTORS AND EXECUTIVE OFFICERS.............................................................................. 44
EXECUTIVE COMPENSATION........................................................................................ 45
CERTAIN TRANSACTIONS.......................................................................................... 52
LEGAL PROCEEDINGS............................................................................................. 52
EXPERTS....................................................................................................... 52
LEGAL MATTERS................................................................................................. 52
REGISTRATION STATEMENT........................................................................................ 52
APPENDIX A.................................................................................................... A-1
APPENDIX B.................................................................................................... B-1
APPENDIX C.................................................................................................... C-1
FINANCIAL STATEMENTS.......................................................................................... F-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THAT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF AN OFFER TO
ACQUIRE, ANY CONTRACTS OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION.
<PAGE>
GLOSSARY OF SPECIAL TERMS
"We", "us", "our", "Protective", and "Company" refer to Protective Life
Insurance Company. With respect to a Group Modified Guaranteed Annuity Contract,
"you", "your", and "Participant" refer to a person/persons who has/have been
issued a Certificate. With respect to an Individual Modified Guaranteed Annuity
Contract, "you", "your", and "Participant" refer to a person who has been issued
a Contract. The Group Modified Guaranteed Annuity Contract, Certificate, and
Individual Modified Guaranteed Annuity Contract are hereinafter referred to
collectively as "Contract".
DEFINITIONS
ACCOUNT VALUE -- The sum of all Sub-Account Values.
ADMINISTRATIVE OFFICE -- 2801 Highway 280 South, Birmingham, Alabama 35223.
Correspondence by U.S. Mail should be sent to P.O. Box 10648, Birmingham,
Alabama 35202-0648.
ANNUITANT -- Annuity payments may depend upon the continuation of the life
of a person. That person is called an Annuitant. If an Annuitant is not a
Participant and dies prior to the Annuity Commencement Date, the Participant
first named on the application will become the Annuitant, unless the Participant
designates otherwise. The Annuitant is the "Payee" for the purposes of the
Annuity Table.
ANNUITY -- A series of predetermined periodic payments.
ANNUITY COMMENCEMENT DATE -- The date on which annuity payments begin.
ANNUITY DEPOSIT(S) -- Annuity Deposits (less Premium Taxes, if applicable)
made and allocated to the Guaranteed Period(s) you select under the Contract.
Each Annuity Deposit and each allocation to a Guaranteed Period must be at least
$10,000. We reserve the right not to accept any Annuity Deposit and to limit the
amount of your Annuity Deposits. Only one Contract will be issued regardless of
the number of Annuity Deposits you make.
BENEFICIARY -- The person entitled to receive the benefits under the
Contract, if any, upon the death of any Participant.
PRIMARY -- The person named to receive the death benefits upon any
Participant's death. Upon the death of any Participant, the surviving
Participant, if any, will become the Primary Beneficiary.
CONTINGENT -- The person named to receive the death benefits if the
Primary Beneficiary is not living at the time of a Participant's death. If
no Beneficiary designation is in effect or if no Beneficiary is living at
the time of a Participant's death, the estate of the deceased Participant
will be the Beneficiary.
IRREVOCABLE -- An irrevocable Beneficiary is one whose consent is needed
to change the Beneficiary designation, or to exercise certain other rights
under the Contract.
CERTIFICATE -- The individual Certificate issued by the Company to a
Participant or to the Contract Holder for delivery to the Participant together
with any endorsements attached, and the application information. The Certificate
summarizes the provisions of the Contract and evidences that an Annuity Deposit
has been made by or on behalf of a Participant under the Contract.
COMPANY -- Protective Life Insurance Company.
CONTRACT -- The Certificate evidencing an interest in the Group Modified
Guaranteed Annuity Contract as set forth in this Prospectus together with any
endorsements attached, and the application information. Also, any reference in
this Prospectus to Contract includes the underlying Group Modified Guaranteed
Annuity Contract and the Individual Modified Guaranteed Annuity Contract issued
in certain states.
1
<PAGE>
EFFECTIVE DATE -- The date on which we begin crediting interest on your
initial Annuity Deposit. The Effective Date is the date shown on the schedule
page of your Certificate or your Contract. "Certificate Years" or "Contract
Years" are measured from the Effective Date.
GUARANTEED INTEREST RATE -- The effective rate of interest, calculated after
daily compounding of interest has been taken into account, which is established
by the Company for a Guaranteed Period. Guaranteed Interest Rates are designated
as either "Initial" or "Subsequent".
GUARANTEED PERIOD -- The period for which a Guaranteed Interest Rate will be
credited to a Sub-Account. Guaranteed Periods are designated as being either
"Initial" or "Subsequent".
MARKET VALUE ADJUSTMENT -- The adjustment made to a Sub-Account Value when a
full or partial surrender is requested prior to the end of a Guaranteed Period.
NET ACCOUNT VALUE -- The sum of all Net Sub-Account Values.
NET SUB-ACCOUNT VALUE -- The Sub-Account Value after application of the
Market Value Adjustment and deductions for any Surrender Charges and applicable
Premium Taxes.
PARTICIPANT -- The person(s) eligible to participate pursuant to the
eligibility requirements set forth in the Contract and for whom the Company has
received an Annuity Deposit. A participant's age plus the duration of a selected
Guaranteed Period can never exceed 95.
QUALIFIED CONTRACTS -- Contracts issued in connection with retirement plans
that receive favorable tax treatment under Sections 401, 403, 408 or 408A of the
Internal Revenue Code, as amended.
QUALIFIED PLAN -- Retirement plans which receive favorable tax treatment
under sections 401, 403, 408 or 408A of the Internal Revenue Code of 1986, as
amended.
SUB-ACCOUNT -- Annuity Deposits are allocated to one or more Sub-Accounts.
Each Sub-Account will correspond to a specified Guaranteed Period and Guaranteed
Interest Rate.
SUB-ACCOUNT VALUE -- The amount equal to that part of each Annuity Deposit
allocated to a Sub-Account, or any amount transferred to a Sub-Account at the
end of a Guaranteed Period increased by all interest credited and decreased by
amounts due to previous full or partial surrenders (including Surrender Charges,
Market Value Adjustments, and Premium Taxes thereon) and previous interest
withdrawals. The Sub-Account Value of each Sub-Account under this Certificate
must be at least $10,000 at all times.
SURRENDER CHARGE -- A charge imposed when a partial or full surrender is
made prior to the end of a Guaranteed Period.
SURRENDER DATE -- The date Protective receives in Writing at our
Administrative Office a request for a surrender.
SURRENDER VALUE -- The amount available for a full or partial surrender.
WRITING -- A written form satisfactory to the Company and filed at the
Administrative Office of the Company in Birmingham, Alabama. All correspondence
should be sent to P. O. Box 10648, Birmingham, Alabama 35202-0648.
2
<PAGE>
DESCRIPTION OF CONTRACTS
A. GENERAL
The Contract is a group allocated contract pursuant to which specific
accounts are maintained for each Participant. The Contract may be issued to any
employer, entity or other organized group acceptable to Protective. The Contract
may be issued in connection with either Qualified or non-Qualified Plans.
Qualified Plans include "H.R. 10" plans, Individual Retirement Annuities or
Accounts, corporate pension and profit sharing plans, and Tax-Sheltered
Annuities. An Individual Modified Guaranteed Annuity Contract is offered in
certain states.
An eligible member of a group to which a Contract has been issued may become
a Participant by completing application information and forwarding payment of an
Annuity Deposit to us. Protective reserves the right to accept or decline a
request to issue a Contract. The rights and benefits of a Participant under a
Contract are summarized in a Certificate issued to the Participant. Provisions
of the Contract are controlling. All such rights and benefits may be exercised
without the consent of the Contract Holder. However, provisions of any plan in
connection with which the Contract has been issued may restrict a person's
eligibility to participate under the Contract, the minimum or maximum amount of
the Annuity Deposit, and the Participant's ability to exercise the rights and/or
receive the benefits provided under the Contract.
Contracts will be issued to Protective Financial Insurance Trust (AmSouth
Bank, Birmingham, Alabama, Trustee) as Contract Holder for a group comprised of
account holders of broker-dealers, employers, or other entities and organized
groups. Participation under these groups is not permissible in some states. Only
a group contract is offered for sale in the State of California. An Individual
Modified Guaranteed Annuity Contract may be available in certain states where
participation under this group is not permitted.
Each Annuity Deposit(s) (less Premium Taxes, if applicable) will be
allocated at your direction to one or more Sub-Accounts corresponding to the
Guaranteed Periods chosen by you. Each Annuity Deposit will accumulate at a
specified Guaranteed Interest Rate. Your Account Value is the sum of all of your
Sub-Account Values. Each Sub-Account Value is equal to the amount you allocated
to the Sub-Account (either as an Annuity Deposit or as part of a transfer of a
Sub-Account Value at the end of the previous Guaranteed Period), plus the
interest credited thereto at the Guaranteed Interest Rate, as adjusted for any
full or partial surrenders (including Market Value Adjustments, Surrender
Charges, Premium Taxes thereon and previous interest withdrawals). We quote a
Guaranteed Interest Rate for each Guaranteed Period currently being offered by
the Company.
CONTRACTS PURCHASED PRIOR TO MAY 1, 1996, PROVIDE CERTAIN RIGHTS AND
BENEFITS, AND MAY IMPOSE SURRENDER CHARGES AND A MARKET VALUE ADJUSTMENT, THAT
DIFFER IN CERTAIN IMPORTANT RESPECTS FROM THE RIGHTS, BENEFITS, CHARGES, AND
MARKET VALUE ADJUSTMENT DESCRIBED BELOW. A PARTICIPANT SHOULD CONSULT HIS OR HER
CONTRACT. IN ADDITION, IF YOU PURCHASED YOUR CONTRACT PRIOR TO MAY 1, 1996 BUT
ON OR AFTER SEPTEMBER 10, 1991, YOU SHOULD CONSULT APPENDIX B TO THIS
PROSPECTUS. IF YOU PURCHASED YOUR CONTRACT PRIOR TO SEPTEMBER 10, 1991, YOU
SHOULD CONSULT APPENDIX C TO THIS PROSPECTUS. IF YOU HAVE QUESTIONS REGARDING
YOUR CONTRACT, CONTACT OUR ADMINISTRATIVE OFFICE.
B. APPLICATION INFORMATION, ANNUITY DEPOSIT
To apply for a Contract, an Annuity Deposit must accompany properly
completed application information. The minimum Annuity Deposit is $10,000.
Protective retains the right not to accept any Annuity Deposit and to limit the
total amount of Annuity Deposit(s) that can be made, without Administrative
Office approval. This amount currently is $1,000,000.
Each Annuity Deposit (less premium taxes, if applicable) will be allocated
at your direction to one or more Sub-Accounts corresponding to the Guaranteed
Periods you choose. Each Annuity Deposit will accumulate at specified Guaranteed
Interest Rate(s). Your Account Value is the sum of all of your Sub-
3
<PAGE>
Account Values. Each Sub-Account Value is equal to the amount you allocated to
the Sub-Account (either as an Annuity Deposit or as an allocation of Sub-Account
Value at the end of a Guaranteed Period), plus the interest credited thereto at
the Guaranteed Interest Rate, as adjusted for any prior full or partial
surrenders (including Market Value Adjustments, Surrender Charges, premium taxes
thereon and previous interest withdrawals).
You will start earning interest on the day your Contract is issued, which is
also called the Effective Date. Additional Annuity Deposit(s) may be made to the
Contract, subject to our acceptance. Regardless of the number of Annuity
Deposit(s) made, only one Contract will be issued.
C. INITIAL AND SUBSEQUENT GUARANTEED PERIODS
You may select the duration of the Guaranteed Periods for each Annuity
Deposit from among those durations offered by us at the time the Annuity Deposit
is made, provided that no Guaranteed Period may extend beyond the Annuity
Commencement Date. Not all Guaranteed Periods are available in all states. You
may contact our Administrative Office for the Guaranteed Periods currently being
offered. The Guaranteed Period(s) you select for each of your Annuity Deposit(s)
will determine the Initial Guaranteed Interest Rate applicable to each Annuity
Deposit. We will establish a Sub-Account corresponding to each specified
Guaranteed Interest Rate and Guaranteed Period. The minimum allocation to a
Sub-Account is $10,000. The Sub-Account will earn interest at this Initial
Guaranteed Interest Rate which will be an effective rate per year during the
entire Initial Guaranteed Period after taking into account daily compounding of
interest. Initial Annuity Deposits of $100,000 or more are currently credited
with an interest rate in excess of that credited to smaller Initial Annuity
Deposits. In addition, if your account value exceeds $100,000 all subsequent
Annuity Deposits and renewals will be credited with the increased interest rate.
Protective Life reserves the right to change or discontinue crediting the
increased interest rate for future Annuity Deposits at its discretion.
Set forth below is an illustration of how interest will be credited to your
Account Value during each Guaranteed Period. For the purpose of this example, we
have made the assumptions as indicated.
NOTE: THE FOLLOWING EXAMPLE ASSUMES NO SURRENDERS OR WITHDRAWALS OF ANY AMOUNT
AND NO PREMIUM TAX DUE ON ISSUANCE. A MARKET VALUE ADJUSTMENT AND SURRENDER
CHARGE MAY APPLY TO ANY SUCH PARTIAL OR FULL SURRENDER MADE PRIOR TO THE END OF
A GUARANTEED PERIOD (SEE "SURRENDERS"). THE HYPOTHETICAL INTEREST RATES ARE
ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE INTEREST RATES TO BE
DECLARED UNDER THE CONTRACT. ACTUAL INTEREST RATES DECLARED FOR ANY GIVEN
GUARANTEED PERIOD MAY BE MORE OR LESS THAN THOSE SHOWN.
4
<PAGE>
EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
<TABLE>
<S> <C>
Deposit: $100,000.00
Guaranteed Period: 5 years
Guaranteed Interest Rate: 5.0%
</TABLE>
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Beginning of Year 1 Account Value: $ 100,000.00
X (1 + Guaranteed Interest Rate): 1.05
= End of Year 1 Account Value: $ 105,000.00
Beginning of Year 2 Account Value: $ 105,00.00
X (1 + Guaranteed Interest Rate): 1.05
= End of Year 2 Account Value: $ 110,250.00
Beginning of Year 3 Account Value: $ 110,250.00
X (1 + Guaranteed Interest Rate): 1.05
= End of Year 3 Account Value: $ 115,762.50
Beginning of Year 4 Account Value: $ 115,762.50
X (1 + Guaranteed Interest Rate): 1.05
= End of Year 4 Account Value: $ 121,550.62
Beginning of Year 5 Account Value: $ 121,550.62
X (1 + Guaranteed Interest Rate): 1.05
= End of Year 5 Account Value: $ 127,628.16
</TABLE>
Total Interest Credited in Guaranteed Period: $127,628.16 - $100,000.00 =
$27,628.16
Account Value at End of Guaranteed Period: $100,000.00 + $27,628.16 =
$127,628.16
5
<PAGE>
At the end of any Guaranteed Period, a Subsequent Guaranteed Period will
automatically begin. Upon notice to us in Writing, Sub-Account Values can be
transferred from one Sub-Account to a new Sub-Account at the end of a Guaranteed
Period. You may not transfer a Sub-Account Value to any other Sub-Account(s)
prior to the end of the existing Sub-Account's Guaranteed Period. The amount
remaining in the Sub-Account after transfer must be at least $10,000. Unless you
elect a different duration from among those then offered by us within twenty
days prior to or ten days after the end of the Guaranteed Period, your
Sub-Account Values will be automatically transferred to a Subsequent Guaranteed
Period of either (i) the same duration as your previous Guaranteed Period if
then offered by us; or (ii) the shortest duration then offered by us which is
closest to the same duration as your previous Guaranteed Period. If you elect a
different duration, a minimum of $10,000 must be transferred to the Sub-Account
with the different duration, and the amount remaining in the Sub-Account with
the same duration must be at least $10,000, or $0.
In no event may Guaranteed Periods extend beyond the Annuity Commencement
Date then in effect, which cannot extend beyond the Annuitant's 85th birthday
(or a date agreed upon by us). Any request for extension of the maximum Annuity
Commencement Date must be approved by the Administrative Office. For example, if
you are age 62 upon the expiration of an Initial Guaranteed Period for a
Sub-Account, and you have chosen age 65 as the Annuity Commencement Date, we
will automatically provide a three year Subsequent Guaranteed Period for that
Sub-Account to equal the number of years remaining before your Annuity
Commencement Date (unless a shorter Subsequent Guaranteed Period is requested or
is determined in accordance with the guidelines above). Your Sub-Account Value
will then earn interest at the Subsequent Guaranteed Interest Rate which we have
declared for that duration. The Subsequent Guaranteed Interest Rate for the
Subsequent Guaranteed Period automatically applied in these circumstances may be
higher or lower than the Initial Guaranteed Rate for longer durations.
The Sub-Account Value at the beginning of any Subsequent Guaranteed Period
will be equal to the Sub-Account Value at the end of the previous Guaranteed
Period. This Sub-Account Value will earn interest at the Subsequent Guaranteed
Interest Rate. The minimum reinvestment of any one Sub-Account is $10,000.
At your request within 20 days prior to or ten days after the end of a
Guaranteed Period, we will provide you with the then effective Subsequent
Guaranteed Interest Rate for specified Subsequent Guaranteed Periods. THE ACTUAL
SUBSEQUENT GUARANTEED INTEREST RATE WILL BE DETERMINED AT THE BEGINNING OF THE
SUBSEQUENT GUARANTEED PERIOD THAT YOU SELECT OR THAT IS DETERMINED IN ACCORDANCE
WITH THE GUIDELINES ABOVE.
D. DETERMINATION OF GUARANTEED INTEREST RATES
From time to time, Protective Life Insurance Company, in its sole
discretion, determines the Guaranteed Interest Rate for each Initial and
Subsequent Guaranteed Period. The determination will be reflective of interest
rates available on the types of instruments in which the Company intends to
invest the proceeds attributable to the Contracts. (See "Investments by
Protective"). In addition, we may also consider various other factors in
determining Guaranteed Interest Rates, including regulatory and tax
requirements; sales commissions and administrative expenses incurred by the
Company; general economic trends; and, competitive factors.
Sub-Account Premium of $100,000 or more is currently credited with an
interest rate in excess of that credited to Sub-Account Premium of less than
$100,000. In addition, if your account value exceeds $100,000 all subsequent
Annuity Deposits and renewals will be credited with the increased interest rate.
We reserve the right to change or discontinue offering the increased interest
rate at our discretion. A Guaranteed Interest Rate credited to a Sub-Account
will never be changed prior to the end of the Guaranteed Period. PROTECTIVE LIFE
INSURANCE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO GUARANTEED INTEREST
RATES TO BE DECLARED. WE CANNOT PREDICT NOR DO WE GUARANTEE FUTURE INTEREST
RATES TO BE DECLARED.
6
<PAGE>
E. SURRENDERS
Full surrenders from the Sub-Accounts may be made at any time. Partial
surrenders may only be made if each Sub-Account Value after the partial
surrender is at least $10,000. You must specify the Sub-Accounts from which the
partial surrender is to be made. If a Sub-Account has the same Guaranteed Period
as any other Sub-Account, the partial surrender must come first from the
Sub-Account with the shortest time remaining in the Guaranteed Period.
In the case of certain Qualified Plans, Federal tax law imposes restrictions
on the form and manner in which benefits may be paid. For example, spousal
consent may be needed in certain instances before a distribution may be made.
1. SURRENDER CHARGES
A Surrender Charge, if applicable, will be applied to a full or partial
surrender from a Sub-Account requested prior to the end of a Guaranteed Period.
A Surrender Charge will apply during the first seven years of each Initial and
each Subsequent Guaranteed Period. The Surrender Charge is equal to a specified
Surrender Charge Percentage (set forth below) applied to the amount of each full
or partial surrender requested less any amount available as an Interest
Withdrawal. The Surrender Charge will be deducted from the remaining Sub-Account
Value from which the full or partial surrender is made.
<TABLE>
<CAPTION>
NUMBER OF COMPLETED YEARS SURRENDER CHARGE
IN A GUARANTEED PERIOD PERCENTAGE
- ------------------------------- ---------------------
<S> <C>
0 6%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7+ 0%
</TABLE>
There is no Surrender Charge after the first seven years of each Initial or
Subsequent Guaranteed Periods with a duration greater than seven years. In
addition, for purposes of determining amounts subject to the Surrender Charge,
we will consider surrendered amounts first to be interest withdrawals, to the
extent interest credited to your Sub-Accounts during the prior Contract Year has
not yet been withdrawn. No Surrender Charge (or Market Value Adjustment) is
imposed on these interest withdrawal amounts. (See "Interest Withdrawals").
Surrender Charges and Market Value Adjustments will not apply to full or
partial surrenders made from Sub-Accounts at the end of a Guaranteed Period. The
Surrender Value will equal the Sub-Account Value on this date. A request for a
surrender at the end of a Guaranteed Period must be received by us at our
Administrative Office in Writing within twenty days prior to or ten days after
the end of such Guaranteed Period.
If the date we receive your request for a full or partial surrender is prior
to the end of a Guaranteed Period, the Surrender Value will be calculated as of
the Surrender Date by the Company using the following formula:
SURRENDER VALUE = (A - S - M - P), WHERE:
<TABLE>
<C> <C> <S>
A = the amount of the full or partial surrender;
S = the amount of Surrender Charge;
M = the amount of the Market Value Adjustment; and
P = the amount of applicable Premium Taxes;
</TABLE>
7
<PAGE>
Protective will, upon the date of receipt of your request, inform you of the
amounts available for full or partial surrenders.
Any full or partial surrender may be subject to Federal and state income
tax, including a 10% penalty tax (see "Federal Tax Matters"), and in some cases,
Premium Tax (See "Premium Taxes"). Under certain Qualified Plans, the consent of
your spouse may be required. Under Tax-Sheltered Annuities, withdrawals
attributable to contributions made pursuant to a salary reduction agreement may
be made only in limited circumstances. (See "Federal Tax Matters.")
We may defer payment of any full or partial surrender for a period not
exceeding 6 months from the date of our receipt of your notice of surrender or
the period permitted by state insurance law, if less.
2. MARKET VALUE ADJUSTMENT
The amount payable on a full or partial surrender made prior to the end of
any Guaranteed Period will be adjusted up or down by the application of the
Market Value Adjustment formula. Such a Market Value Adjustment is applied to
the Sub-Account Value. For purposes of determining amounts subject to the Market
Value Adjustment, we will consider surrendered amounts first to be interest
withdrawals, to the extent interest credited to your Sub-Accounts during the
prior Contract Year has not yet been withdrawn. No Market Value Adjustment (or
Surrender Charge) is imposed on these interest withdrawal amounts. (See
"Interest Withdrawals").
In the case of either a full or partial surrender from a Sub-Account, the
Market Value Adjustment reflects the relationship between (i) the Treasury Rate
currently established (at the time of full or partial surrender) for the same
term as the Guaranteed Period from which you request the surrender, and (ii) the
Treasury Rate initially established (at the time the Guaranteed Period was
established) for the Guaranteed Period from which you make a full or partial
surrender. The Treasury Rate is the annual effective interest rate credited to
United States Treasury instruments, as published by a nationally recognized
service. On the fifteenth day and the last day of each month, the Company will
identify a Treasury Rate for each Guaranteed Period. The method used by the
Company to determine the Treasury Rates under this Contract shall be consistent
and is binding upon any Participant, Annuitant and Beneficiary.
The Market Value Adjustment formula includes a set percentage factor (.25%)
designed to compensate Protective Life for certain expenses and losses that
might be incurred as a direct or indirect result or consequence of surrenders.
THE EFFECT OF THE MARKET VALUE ADJUSTMENT WILL BE RELATED TO THE LEVEL OF
TREASURY RATES ESTABLISHED FOR THE GUARANTEED PERIODS. IT IS POSSIBLE,
THEREFORE, THAT, SHOULD TREASURY RATES BE HIGHER (OR UP TO .25% LOWER) WHEN THE
MARKET VALUE ADJUSTMENT IS APPLIED THAN FROM THE TIME YOU ALLOCATED AMOUNTS TO
THE AFFECTED SUB-ACCOUNT, THE EFFECT OF THE MARKET VALUE ADJUSTMENT, COUPLED
WITH THE APPLICATION OF THE SURRENDER CHARGE AND/OR PREMIUM TAXES, COULD RESULT
IN THE AMOUNT YOU RECEIVE BEING LESS THAN THE AMOUNT ALLOCATED. IF TREASURY
RATES ARE MORE THAN .25% LOWER WHEN THE MARKET VALUE ADJUSTMENT IS APPLIED THAN
AT THE TIME YOU ALLOCATED AMOUNTS TO THE AFFECTED SUB-ACCOUNT, THE EFFECT OF THE
MARKET VALUE ADJUSTMENT, COUPLED WITH THE APPLICATION OF THE SURRENDER CHARGE
AND/OR PREMIUM TAXES, COULD RESULT IN THE AMOUNT YOU RECEIVE BEING MORE THAN THE
AMOUNT ALLOCATED. HOWEVER, IN ORDER FOR THERE TO BE A POSITIVE MARKET VALUE
ADJUSTMENT, THE TREASURY RATE MUST HAVE DECREASED SUFFICIENTLY TO OFFSET THE
PERCENTAGE FACTOR (.25%) DESCRIBED ABOVE.
8
<PAGE>
The formula for calculating the Market Value Adjustment is as follows:
MARKET VALUE ADJUSTMENT PERCENTAGE = (C - I + 0.25%) X (N/12) WHERE:
C = the Treasury Rate currently established for the same term as the
Guaranteed Period from which the surrender is being made;
I = the Treasury Rate initially established for the Guaranteed Period from
which the surrender is being made;
N = The number of months remaining in the Guaranteed Period from which the
surrender is being made.
Please refer to Appendix A to this Prospectus, which contains an example of
the application of the Market Value Adjustment Percentage as it is applied to
the amount of each full or partial surrender requested.
3. INTEREST WITHDRAWALS
Once each Contract Year, we will send you all or a portion of the interest
that has been credited to your Sub-Accounts during the prior Contract Year (to
the extent not previously withdrawn or considered part of a surrender) if you so
request in Writing. For most Guaranteed Periods, you may elect to receive
automatic interest withdrawals monthly, quarterly, semi-annually or annually.
Options other than annual may total less than annual withdrawals because of the
interruption of compounding. Upon notice to you we reserve the right to limit
such withdrawals to once per contract year. No Surrender Charge or Market Value
Adjustment will be imposed on withdrawals of such interest. Any such withdrawal
may, however, be subject to tax, including the 10% penalty tax under the
Internal Revenue Code. Withdrawals are permitted from Contracts issued as
Tax-Sheltered Annuities only under limited circumstances. (See "Federal Tax
Matters.")
F. PREMIUM TAXES
Premium Taxes (including related retaliatory taxes, if any) will be
deducted, if applicable. On any Contract subject to Premium Taxes, the tax will
be deducted, as provided under applicable law, either from Annuity Deposit(s)
when received, upon full or partial surrenders, from the amount applied to an
Annuity Option, or from the Death Benefit. Where applicable, the rate of these
taxes currently ranges up to 3.50%.
G. DEATH BENEFIT
If an Annuitant is not a Participant and dies prior to the Annuity
Commencement Date, the Participant first named on the Application will become
the new Annuitant unless the Participant designates otherwise. If any
Participant is not a natural person, the death or change of the Annuitant will
be treated as the death of a Participant.
If any Participant dies while this Contract is in force prior to the Annuity
Commencement Date, a Death Benefit will be payable to the Beneficiary. With
regard to joint Participants, at the first death of a joint Participant prior to
the Annuity Commencement Date, the Beneficiary will be the surviving
Participant, if any. If there is no surviving Participant, the Death Benefit
will be paid to the Beneficiary named by the Participant. If no Beneficiary
designation is in effect or if there is no designated Beneficiary living, the
Death Benefit will be paid to the estate of the deceased Participant. In the
case of certain Contracts issued in connection with Qualified Plans, regulations
promulgated by the Treasury Department prescribe certain limitations on the
designation of a Beneficiary.
The Death Benefit will be determined as of the date due proof of death is
received by the Company. If a claim for the Death Benefit is received at our
Administrative Office before twelve (12) months after the date of death, the
Death Benefit will equal the greater of: (1) the Account Value, less applicable
Premium Taxes; or (2) the Net Account Value. If a claim is received twelve (12)
months or more after the date of
9
<PAGE>
death, the Death Benefit will equal the Net Account Value. If any Participant is
not a natural person, upon the change of the Annuitant, the Death Benefit will
equal the Net Account Value. Only one Death Benefit is payable under this
Contract, even though the Contract may continue beyond a Participant's death.
The Death Benefit may be taken in one sum immediately. In this event, the
Contract will terminate. If the Death Benefit is not taken in one sum
immediately, then the entire interest in the Contract must be distributed under
one of the following options:
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life expectancy of
the Beneficiary, with distributions beginning within one year of the
Owner's death, or
(2) the entire interest must be distributed within 5 years of the
Participant's death.
If the Beneficiary is the deceased Participant's spouse, then the surviving
spouse may elect, in lieu of receiving the Death Benefit, to continue the
Contract and become the new Participant. The surviving spouse may select a new
Beneficiary. Upon this spouse's death, the Death Benefit will become payable to
the new Beneficiary and must then be distributed to the new Beneficiary in one
sum immediately or according to either paragraph (1) or (2) above.
If there is more than one Beneficiary, the foregoing provisions will apply
to each Beneficiary individually.
You may change the Beneficiary at any time, but any such change must be in
Writing. We must also receive any Irrevocable Beneficiary's written consent to
make a change. The request will be effective on the date the request is signed,
but we will not be liable for any payment we make before we receive and
acknowledge the request at our Administrative Office.
H. ANNUITY BENEFITS
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY
Upon purchasing a Contract, you may select an Annuity Commencement Date. The
Annuity Commencement Date you select cannot be earlier than the end of any
Guaranteed Period nor later than the Annuitant's 85th Birthday. Any request for
extension of the maximum Annuity Commencement Date must be approved by our
Administrative Office. If no Annuity Commencement Date is selected, the Annuity
Commencement Date will be the end of the Contract Year immediately prior to the
Annuitant's 85th birthday. Annuity Commencement Dates which occur at advanced
ages, E.G., past age 85, may in some circumstances have adverse income tax
consequences. (See "Federal Tax Matters".) Distributions from Qualified
Contracts may be required before the Annuity Commencement Date.
You may elect to have all, or a portion or your Net Account Value applied to
an Annuity option on the Annuity Commencement Date. In the absence of such
election, the Net Account Value will be applied on the Annuity Commencement Date
under Option 2 -- Life Income Payments for a 10 Year Guaranteed Period.
2. CHANGE OF ANNUITY COMMENCEMENT DATE, ANNUITY OPTION OR ANNUITANT
You may change the Annuity Commencement Date, the Annuity Option, or both,
from time to time. Any such change must be made in Writing and we must receive
it at least 30 days prior to the scheduled Annuity Commencement Date. The
Annuity Commencement Date you select cannot be earlier than the end of any
existing Guaranteed Period nor later than the Annuitant's 85th Birthday. You may
also change the Annuitant prior to the Annuity Commencement Date provided the
change is made in Writing. If any Participant is not a natural person and the
Annuitant is changed, the change will be treated as the death of a Participant
and the death benefit will be paid to the Beneficiary, as described above. If
any Participant is not an individual, the Annuitant may not be changed. The new
Annuitant's 85th birthday may not be before the end of any existing Guaranteed
Period. Once the request is received and acknowledged at our
10
<PAGE>
Administrative Office, any change will relate back to and take effect on the
date the request was signed. If an Annuitant is not an Participant and dies
prior to the Annuity Commencement Date, the Participant first named on the
application will become the Annuitant, unless otherwise designated. The
Annuitant is the "Payee" for purposes of the annuity rates utilized by the
Company.
3. ANNUITY OPTIONS
Any one of the following Annuity Options may be elected. For Qualified
Certificates, certain additional annuity options will be offered and certain
restrictions apply.
OPTION 1 -- PAYMENT FOR A FIXED PERIOD. Equal monthly payments will be made
for any period of not less than 5 nor more than 30 years. The amount of each
payment depends on the total amount applied, the period selected and the monthly
payment rates we are using when the first payment is due.
OPTION 2 -- LIFE INCOME WITH PAYMENTS FOR A GUARANTEED PERIOD. Equal
monthly payments are based on the life of the named Annuitant. Payments will
continue for the lifetime of that person with payments guaranteed for 10 or 20
years. Payments stop at the end of the selected guaranteed period or when the
named person dies, whichever is later.
OPTION 3 -- PAYMENTS OF A FIXED AMOUNT. Equal monthly payments will be for
an agreed fixed amount. The amount of each payment may not be less than $10 for
each $1,000 applied. Interest will be credited each month on the unpaid balance
and added to it. This interest will be at a rate set by us, but not less than an
effective interest rate of 4% per year. Payments continue until the amount we
hold runs out. The last payment will be for the balance only.
MINIMUM AMOUNTS -- We reserve the right to pay the Net Account Value of
this Contract in one lump sum, if less than $5,000. If monthly payments are less
than $100, we may make payments quarterly, semi-annually, or annually, at our
option.
The dollar amount of monthly payments under each available Annuity Option
for each $1,000 applied is calculated in accordance with annuity tables set
forth in the Contract. These tables are based on the 1983 Individual Annuity
Mortality Table A projected 4 years with interest at 4% per annum. One year will
be deducted from the attained age of the Annuitant for every completed three
years beyond the year 1987. If we have available, at the time an Annuity Option
is elected, options or rates on a more favorable basis than those guaranteed,
the higher benefits shall apply.
4. ANNUITY PAYMENT
The first payment under any Annuity Option will be made one month following
the Annuity Commencement Date. Subsequent payments will be made in accordance
with the manner of payment selected.
The Annuity Option elected must result in a payment of an amount at least
equal to the minimum payment amount according to Protective's rules then in
effect. If at any time payments are less than the minimum payment amount, we
have the right to change the frequency to an interval resulting in a payment at
least equal to the minimum. If any amount due is less than the minimum per year,
we may make other arrangements that are equitable to the Annuitant.
This Contract may not be surrendered after the commencement of Annuity
Payments.
5. DEATH OF ANNUITANT OR PARTICIPANT AFTER ANNUITY COMMENCEMENT DATE
If any Participant or Annuitant dies on or after the Annuity Commencement
Date and before all the benefits under the Annuity Option selected have been
paid, any remaining payments will be distributed at least as rapidly as under
the Annuity Option being used as of the date of death.
11
<PAGE>
INVESTMENTS BY PROTECTIVE
Protective's investment philosophy is to maintain a portfolio that is
matched to its liabilities with respect to yield, risk, and cash flow
characteristics. The types of assets in which Protective may invest are governed
by state laws which prescribe qualified investment assets. Within the parameters
of these laws, Protective invests its assets giving consideration to such
factors as liquidity needs, investment quality, investment return, matching of
assets and liabilities, and the composition of the investment portfolio by asset
type and credit exposure. Because liquidity is important, Protective continually
balances maturity against yield and quality considerations in selecting new
investments.
In establishing Guaranteed Interest Rates, Protective intends to take into
account the yields available on the instruments in which it intends to invest
the proceeds from the Contracts. (See "Establishment of Guaranteed Interest
Rates" on page 6.) Protective's investment strategy with respect to the proceeds
attributable to the Contracts will be to primarily invest in investment-grade
debt instruments having durations tending to match the applicable Guaranteed
Periods. It is anticipated that some portion of the portfolio will be invested
in mortgages. Protective may also invest in lower than investment-grade issues,
depending upon relative spreads in the capital markets.
Investment-grade debt instruments in which Protective intends to invest the
proceeds from the Contracts include:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Mortgaged-backed and corporate debt securities which have an investment
grade, at the time of purchase, within the four highest-grades assigned by
Moody's Investors Service, Inc. (Aaa, Aa, A, Baa), Standard & Poor's
Corporation ("S&P") (AAA, AA, A, or BBB) or any other nationally recognized
rating service. Protective considers bonds rated Baa or higher by Moody's or
BBB or higher by S&P to be investment grade. At December 31, 1997, 96.9% of
bonds in which Protective invests were considered investment grade; 32.6% of
these bonds were rated Baa or BBB.
Mortgaged-backed securities are based upon residential mortgages which have
been pooled into securities. Mortgage-backed securities may have greater cash
flow volatility as a result of the pass-through of prepayments of principal on
the underlying loans. Prepayments of principal on the underlying residential
loans can be expected to accelerate with decreases in interest rates and
diminish with increases in interest rates.
Debt obligations which have a Moody's or Standard & Poor's rating below
investment-grade may comprise a portion of the portfolio. Risks associated with
investments in less than investment-grade debt obligations may be significantly
higher than risks associated with investments in debt securities rated
investment-grade. Risk of loss upon default by the borrower is significantly
greater with respect to such debt obligations than with other debt securities
because these obligations may be unsecured or subordinated to other creditors.
Additionally, there is often a thinly traded market for such securities and
current market quotations are frequently not available for some of these
securities. Issuers of less than investment-grade debt obligations usually have
higher levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than
investment-grade issuers. Protective carefully selects, and closely monitors,
such investments. Fixed maturity securities rated BBB may have speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity of the issuer to make principal and
interest payments than is the case with higher rated fixed maturity securities.
Protective's primary mortgage lending emphasis for the past twenty years has
been on strip shopping centers located in smaller towns and anchored by one or
more strong regional or national retail stores. The anchor tenants enter into
long-term noncancelable leases with Protective's borrowers. The centers provide
the basic necessities of life such as food, pharmaceuticals, and clothing, and
are relatively insensitive to changes in economic conditions. Protective also
makes loans on credit-oriented commercial properties. In
12
<PAGE>
the twenty years that Protective has implemented its mortgage loan strategy, it
has had no significant loss of principal on mortgages it has originated.
Protective carefully selects, and closely monitors, such investments.
The federal government or its instrumentalities does not guarantee the
Contracts. Protective backs the guarantees associated with the Contracts.
While the foregoing generally describes our investment strategy with respect
to the proceeds attributable to the Contracts, we are not obligated to invest
the proceeds attributable to the Contracts according to any particular strategy,
except as may be required by the insurance laws of Tennessee and other states.
OTHER PROVISIONS
CONTRACT TRANSACTIONS
Currently, each request for a change or transaction under your Contract
(such as making an additional Annuity Deposit, requesting a surrender or
interest withdrawal, selecting certain Guaranteed Periods, changing the Annuity
Commencement Date, Annuity Option, or Annuitant, or making a death benefit
claim) must be made in Writing on a form acceptable to Protective. The request
must provide all information that is necessary for Protective to make the change
or effect the transaction. For additional information on how to make a change or
effect a transaction, contact Protective at its Administrative Office.
AMENDMENT OF CONTRACTS
We reserve the right to amend the Contract to meet the requirements of
applicable Federal or state laws, regulations or rulings. We will notify you of
any such amendments.
ASSIGNMENT OF CONTRACTS
Your rights, as evidenced by a Contract, may be assigned as permitted by
applicable law. An assignment will not be binding upon us until we receive
notice from you in Writing. We assume no responsibility for the validity or
effect of any assignment. An assignment will have tax consequences. (See
"Federal Tax Matters.") Generally, Qualified Contracts cannot be assigned.
DISTRIBUTION OF CONTRACTS
Investment Distributors, Inc. ("IDI") serves as principal underwriter for
the Contracts. IDI has agreed to use its best efforts to sell the Contracts. IDI
is a wholly-owned subsidiary of Protective Life Corporation ("PLC") and is
registered with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. ("NASD").
IDI has entered into Distribution Agreements with certain broker-dealers
registered under the Securities Exchange Act of 1934. Under the Distribution
Agreements such broker-dealers may offer Contracts to persons who have
established an account with the broker-dealer. In addition, IDI may offer
Contracts to members of certain other eligible groups or certain individuals.
The maximum commission Protective will pay for the sale of a Contract is 7% of
each Annuity Deposit, or of transferred Sub-Account Value at the start of each
Subsequent Guaranteed Period.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
Contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the Contracts is
unclear in certain circumstances, and a qualified tax adviser should always be
consulted
13
<PAGE>
with regard to the application of law to individual circumstances. This
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Contracts. In addition, THE COMPANY MAKES NO GUARANTEE
REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY CONTRACT OR OF
ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Subchapter L of the
Code. The assets underlying the Contracts will be owned by the Company, and the
income derived from such assets will be includible in the Company's income for
federal income tax purposes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code (and except as described below), the
Contracts should be treated as annuities and any increase in a Participant's
Account Value is generally not taxable to the Participant or Annuitant until
received, either in the form of Annuity payments as contemplated by the
Contracts, or in some other form of distribution.
As a general rule, Contracts held by "non-natural persons" such as a
corporation, trust or other similar entity, as opposed to a natural person, are
not treated as annuities for federal tax purposes. The income on such Contracts
(as defined in the tax law) is taxed as ordinary income that is received or
accrued by the Participant during the taxable year. There are several exceptions
to this general rule for Contracts held by non-natural persons. First, Contracts
will generally be treated as held by a natural person if the nominal owner is a
trust or other entity which holds the Contract as an agent for a natural person.
Thus, if a group Contract is held by a trust or other entity as an agent for
Certificate owners who are individuals, those individuals should be treated as
owning an annuity for federal income tax purposes. However, this special
exception will not apply in the case of any employer who is the nominal owner of
a Contract under a non-qualified deferred compensation arrangement for its
employees.
In addition, exceptions to the general rule for non-natural Contract owners
will apply with respect to (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) Contracts issued in connection with
certain Qualified Plans, (3) Contracts purchased by employers upon the
termination of certain Qualified Plans, (4) certain Contracts used in connection
with structured settlement agreements, and (5) Contracts purchased with a single
premium when the annuity starting date is no later than a year from purchase of
the Contract and substantially equal periodic payments are made, not less
frequently than annually, during the annuity period.
If the Contract's Annuity Commencement Date occurs (or is scheduled to
occur) at a time when the Annuitant has reached an advanced age, E.G., past age
85, it is possible that the Contract would not be treated as an annuity for
federal income tax purposes. In that event, the Participant would be taxable
currently on the annual increase in the Account Value.
The remainder of this discussion assumes that the Contract will constitute
an annuity for federal tax purposes.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received generally are
includible in income to the extent the Participant's Account Value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
full withdrawal, amounts received are includible in income to the extent they
exceed the
14
<PAGE>
"investment in the contract." For these purposes the investment in the contract
at any time equals the premiums paid under the Contract (to the extent such
premium payments were neither deductible when made nor excludable from income
as, for example, in the case of certain employer contributions to Qualified
Plans) less any amounts previously received from the Contract which were not
included in income.
Other than in the case of Contracts issued in connection with certain
Qualified Plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the Account Value is
treated as a withdrawal of such amount or portion. The investment in the
contract is increased by the amount includible as income with respect to such
assignment or pledge, though it is not affected by any other aspect of the
assignment or pledge (including its release). If a Participant transfers a
Contract without adequate consideration to a person other than the Participant's
spouse (or to a former spouse incident to divorce), the Participant will be
taxed on the difference between his or her Account Value and the investment in
the contract at the time of transfer. In such case, the transferee's investment
in the contract will be increased to reflect the increase in the transferor's
income.
There is some uncertainty regarding the treatment of the Market Value
Adjustment for purposes of determining the amount includible in income as a
result of any partial withdrawal or transfer without adequate consideration.
Congress has given the Internal Revenue Service ("IRS") regulatory authority to
address this uncertainty. However, as of the date of this Prospectus, the IRS
has not issued any regulations addressing these determinations.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each Annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected value of Annuity payments for the term of the
Contract (determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using
this ratio, Annuity payments will be fully taxable. If Annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the Annuitant in his last taxable year.
There may be special income tax issues present in situations where the
Participant and the Annuitant are not the same person and are not married to one
another. A tax advisor should be consulted in these situations.
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, amounts may be distributed from a
Contract because of the death of a Participant or, in certain circumstances, the
death of the Annuitant. Such Death Benefit proceeds are includible in income as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full withdrawal, as described above, or (2) if distributed under an Annuity
option, they are taxed in the same manner as Annuity payments, as described
above. After the Annuity Commencement Date, where a guaranteed period exists
under an Annuity option and the Annuitant dies before the end of that period,
payments made to the Beneficiary for the remainder of that period are includible
in income as follows: (1) if received in a lump sum, they are includible in
income to the extent that they exceed the unrecovered investment in the Contract
at that time, or (2) if distributed in accordance with the existing Annuity
option selected, they are fully excludable from income until the remaining
investment in the Contract is deemed to be recovered, and all Annuity payments
thereafter are fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Withholding".) In addition, in the case
of such proceeds from certain Qualified
15
<PAGE>
Plans, mandatory withholding requirements may apply, unless a "direct rollover"
of such proceeds is made. (See "Direct Rollover Rules".)
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the taxable amount of any payment from
the Contract unless the payment is: (a) received on or after the Participant
reaches age 59 1/2; (b) attributable to the Participant becoming disabled (as
defined in the tax law); (c) made on or after the death of the Participant or,
if a Participant is not an individual, on or after the death of the primary
annuitant (as defined in the tax law); (d) made as a series of substantially
equal periodic payments (not less frequently than annually) for the life (or
life expectancy) of the Annuitant or the joint lives (or joint life
expectancies) of the Annuitant and a designated beneficiary (as defined in the
tax law); or (e) made under a Contract purchased with a single premium when the
Annuity Commencement Date is no later than a year from purchase of the Contract
and substantially equal periodic payments are made, not less frequently than
annually, during the Annuity period. (Similar rules, described below, generally
apply in the case of Contracts issued in connection with certain Qualified
Plans.)
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an Annuity
payment or a withdrawal from a Contract that is includible in income by
combining some or all of the annuity contracts owned by an individual which are
not issued in connection with a Qualified Plan. For example, if a person
purchases a Contract offered by this Prospectus and also purchases at
approximately the same time an immediate annuity, the IRS may treat the two
contracts as one contract. In addition, if a person purchases two or more
deferred annuity contracts from the same insurance company (or its affiliates)
during any calendar year, all such contracts will be treated as one contract for
purposes of determining whether any payment not received as an annuity
(including withdrawals prior to the Annuity Commencement Date) is includible in
income. The effects of such aggregation are not clear; however, it could affect
the time when income is taxable and the amount which might be subject to the 10%
penalty tax described above.
LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a non-natural taxpayer
(such as a corporation or a trust), or held for the benefit of such an entity,
otherwise deductible interest may no longer be deductible by the entity,
regardless of whether the interest relates to debt used to purchase or carry the
Contract. However, this interest deduction disallowance does not affect
Contracts where the income on such Contracts is treated as ordinary income that
is received or accrued by the Participant during the taxable year. Entities that
are considering purchasing the Contract, or entities that will be beneficiaries
under a Contract, should consult a tax advisor.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types of
retirement plans which receive favorable treatment under the Code. Those who are
considering the purchase of a Contract for use in connection with a Qualified
Plan should consider, in evaluating the suitability of the Contract, that the
Contract requires an Annuity Deposit of at least $10,000. Numerous special tax
rules apply to participants in Qualified Plans and to Contracts used in
connection with Qualified Plans. Therefore, no attempt is made in this
prospectus to provide more than general information about the use of the
Contracts with the various types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of
plan and the terms and conditions of the plan itself. For example, both the
amount of the contribution that may be made, and the
16
<PAGE>
tax deduction or exclusion that the Participant may claim for such contribution,
are limited under Qualified Plans and vary with the type of plan. Also, for full
withdrawals, partial withdrawals, and Annuity payments under Qualified
Contracts, there may be no "investment in the contract" and the total amount
received may be taxable.
In addition, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. For example, the
length of any Guarantee Period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code. Furthermore, failure
to comply with minimum distribution requirements applicable to Qualified Plans
will result in the imposition of an excise tax. This excise tax generally equals
50% of the amount by which a minimum required distribution exceeds the actual
distribution from the Qualified Plan. In the case of Individual Retirement
Accounts or Annuities ("IRAs"), distributions of minimum amounts (as specified
in the tax law) must generally commence by April 1 of the calendar year
following the calendar year in which the Participant attains age 70 1/2. In the
case of certain other Qualified Plans, distributions of such minimum amounts
generally must commence by the later of this date or April 1 of the calendar
year following the calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Contracts. There are exceptions to this penalty tax which vary
depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Participant reaches age 59 1/2, (b) received on or after the
Participant's death or because of the Participant's disability (as defined in
the tax law), or (c) made as a series of substantially equal periodic payments
(not less frequently than annually) for the life (or life expectancy) of the
Participant or for the joint lives (or joint life expectancies) of the
Participant and the Participant's designated Beneficiary (as defined in the tax
law). These exceptions, as well as certain others not described herein,
generally apply to taxable distributions from other Qualified Plans (although,
in the case of plans qualified under sections 401 and 403, exception "c" above
for substantially equal periodic payments applies only if the Participant has
separated from service). In addition, the penalty tax does not apply to certain
distributions from IRAs taken after December 31, 1997 which are used for
qualified first time home purchases or for higher education expenses. Special
conditions must be met for these two exceptions to the penalty tax. Those
wishing to take a distribution from an IRA for these purposes should consult
their tax advisor.
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of the plan. However,
Participants, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions contradict
the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in
connection with which Protective will generally issue a Contract.
17
<PAGE>
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the time
when distributions may commence. Also, subject to the direct rollover and
mandatory withholding requirements (discussed below), distributions from certain
Qualified Plans may be "rolled over" on a tax-deferred basis into an IRA. The
Contract may not, however, be used in connection with an "Education IRA" under
Section 530 of the Code, a "Simplified Employee Pension" under Section 408(k) of
the Code, or as a "SIMPLE IRA" under Section 408(p) of the Code.
ROTH IRAS. Recently enacted Section 408A of the Code permits eligible
individuals to contribute to a type of IRA known as a "Roth IRA." Roth IRAs
differ from other IRAs in several respects. Among the differences is that,
although contributions to a Roth IRA are not deductible, "qualified
distributions" from a Roth IRA will be excludable from income. The eligibility
and mandatory distribution requirements for Roth IRAs also differ from non-Roth
IRAs. Furthermore, a rollover may be made to a Roth IRA only if it is a
"qualified rollover contribution." A "qualified rollover contribution" is a
rollover contribution to a Roth IRA from another Roth IRA or from a non-Roth
IRA, but only if such rollover contribution meets the rollover requirements for
IRAs under section 408(d)(3) of the Code. In the case of a qualified rollover
contribution or a transfer from a non-Roth IRA to a Roth IRA, any portion of the
amount rolled over which would be includible in gross income were it not part of
a qualified rollover contribution or a nontaxable transfer will be includible in
gross income. However, the 10 percent penalty tax on premature distributions
generally will not apply to such amounts.
All or part of amounts in a non-Roth IRA may be converted into a Roth IRA.
Such a conversion can be made without taking an actual distribution from the
IRA. For example, an individual may make a conversion by notifying the IRA
issuer or trustee, whichever is applicable. The conversion of an IRA to a Roth
IRA is a special type of qualified rollover distribution. Hence, the IRA
participant must be eligible to make a qualified rollover distribution in order
to convert an IRA to a Roth IRA. A conversion typically will result in the
inclusion of some or all of the IRA value in gross income, as described above.
Persons with adjusted gross incomes in excess of $100,000 or who are married and
file a separate return are not eligible to make a qualified rollover
contribution or a transfer in a taxable year from a non-Roth IRA to a Roth IRA.
Any "qualified distribution" from a Roth IRA is excludible from gross
income. A "qualified distribution" is a payment or distribution which satisfies
two requirements. First, the payment or distribution must be (a) made after the
Participant attains age 59 1/2, (b) made after the Participant's death, (c)
attributable to the Participant being disabled, or (d) a qualified first-time
homebuyer distribution within the meaning of section 72(t)(2)(F) of the Code.
Second, the payment or distribution must be made in a taxable year that is at
least five years after (a) the first taxable year for which a contribution was
made to any Roth IRA established for the Participant, or (b) in the case of a
payment or distribution properly allocable to a qualified rollover contribution
from a non-Roth IRA (or income allocable thereto), the taxable year in which the
rollover contribution was made. A distribution from a Roth IRA which is not a
qualified distribution is generally taxed in the same manner as a distribution
from non-Roth IRAs. Distributions from a Roth IRA need not commence at age
70 1/2.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. Employers intending to
use the Contract in connection with such plans should seek competent advice.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the
18
<PAGE>
Code to have their employers purchase annuity contracts for them and, subject to
certain limitations, to exclude the amount of purchase payments from gross
income for tax purposes. These annuity contracts are commonly referred to as
"tax-sheltered annuities." Purchasers of the Contracts for such purposes should
seek competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts.
Section 403(b) Policies contain restrictions on withdrawals of (i) contributions
made pursuant to a salary reduction agreement in years beginning after December
31, 1988, (ii) earnings on those contributions, and (iii) earnings after
December 31, 1988 on amounts attributable to salary reduction contributions held
as of December 31, 1988. These amounts can be paid only if the employee has
reached age 59 1/2, separated from service, died, become disabled, or in the
case of hardship. Amounts permitted to be distributed in the event of hardship
shall be limited to actual contributions; earnings thereon shall not be
distributed on account of hardship. (These limitations on withdrawals do not
apply to the extent the Company is directed to transfer some or all of the
Amount Value to the issuer of another tax-sheltered annuity or into a Section
403(b)(7) custodial account.)
DIRECT ROLLOVER RULES
In the case of Contracts used in connection with a pension, profit-sharing,
or annuity plan qualified under Sections 401(a) or 403(a) of the Code, or in the
case of a Section 403(b) Tax-Sheltered annuity, any "eligible rollover
distribution" from the Contract will be subject to direct rollover and mandatory
withholding requirements. An eligible rollover distribution generally is any
taxable distribution from a qualified pension plan under Section 401(a) of the
Code, qualified annuity plan under Section 403(a) of the Code, or Section 403(b)
Tax-Sheltered annuity or custodial account, excluding certain amounts (such as
minimum distributions required under Section 401(a)(9) of the Code and
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more).
Under these requirements, withholding at a rate of 20 percent will be
imposed on any eligible rollover distribution. In addition, the participant in
these qualified retirement plans cannot elect out of withholding with respect to
an eligible rollover distribution. However, this 20 percent withholding will not
apply if, instead of receiving the eligible rollover distribution, the
participant elects to have amounts directly transferred to certain Qualified
Plans (such as to an Individual Retirement Annuity). Prior to receiving an
eligible rollover distribution, you will receive a notice (from the plan
administrator or the Company) explaining generally the direct rollover and
mandatory withholding requirements and how to avoid the 20% withholding by
electing a direct transfer.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances,
Protective may be required to withhold tax. The withholding rates applicable to
the taxable portion of periodic Annuity payments (other than the eligible
rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. The withholding rate applicable to the taxable
portion of non-periodic payments (including withdrawals prior to the Annuity
Commencement Date and conversions of, or rollovers from, non-Roth IRAs to Roth
IRAs) is 10%. Regardless of whether you elect not to have federal income tax
withheld, you are still liable for payment of federal income tax on the taxable
portion of the payment. As described above, the withholding rate applicable to
eligible rollover distributions is 20%.
19
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
A. BUSINESS
Protective Life Insurance Company, 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 under the symbol
"PL". Protective provides financial services through the production,
distribution, and administration of a diverse array of insurance and investment
products. Protective operates through seven divisions whose principal strategic
focuses can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings 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 offers a competitive selection of individual life insurance,
dental insurance and managed care products, credit life and disability
insurance, guaranteed investment contracts, guaranteed funding agreements, and
fixed and variable annuities. Protective distributes these products through many
channels, primarily independent agents, insurance brokers, stockbrokers,
financial institutions, company sales representatives, and automobile
dealerships. Protective also seeks to acquire blocks of insurance policies from
other insurers.
LIFE INSURANCE
A strategic focus of Protective is to expand its life insurance operations
through internal growth and acquisitions. The Acquisitions, Individual Life, and
West Coast Divisions support this strategy.
ACQUISITIONS DIVISION
PLC is an active participant in the consolidation of the life and health
insurance industry. The Acquisitions Division focuses on acquiring, converting,
and servicing business acquired from other companies. These acquisitions may be
accomplished through acquisitions of companies or through the assumption or
reinsurance of life insurance and related policies. Thirty-nine transactions
have been closed by the Division since 1970, including 12 since 1989. Many of
these acquisitions included Protective. Blocks of policies acquired through the
Division are usually administered as "closed" blocks; i.e., no new policies are
sold. Therefore, the amount of insurance in force for a particular acquisition
is expected to decline with time due to lapses and deaths of the insureds.
However, in the case of the most recent acquisition closed by the Division, West
Coast Life Insurance Company ("West Coast") which is discussed below, Protective
has elected to continue the marketing of new policies.
PLC expects acquisition opportunities to continue to be available as the
life and health industry continues to consolidate; however, management believes
that PLC may face increased competition for future acquisitions.
Total revenues and income before income tax from the Acquisitions Division
are expected to decline with time unless new acquisitions are made. Therefore,
the Division's revenues and earnings may fluctuate from year to year depending
upon the level of acquisition activity.
In the second quarter of 1995, the Division coinsured a block of 28,000
policies. In January 1996, the Division coinsured a block of 38,000 policies. In
December 1996, the Division acquired Community National Assurance Company with
16,000 policies and coinsured a related block of 22,000 policies. In June 1997,
Protective acquired West Coast which is discussed below.
From time to time, other Protective Divisions have acquired companies and
blocks of policies which are included in their respective results.
20
<PAGE>
INDIVIDUAL LIFE DIVISION
The Individual Life Division markets universal life, variable universal life
and other life insurance products on a national basis through a network of
independent insurance agents. In addition, the Division has grown sales by
developing niche marketing strategies. The strategies include marketing
specialty products through insurance brokerage channels and traditional life
insurance products through regional stockbrokers and banks. The Division also
offers its products on a "private label" basis to other insurance companies and
their distribution systems. The Division has experienced increased sales even
though the life insurance industry is a mature industry.
The Division primarily utilizes a distribution system based on experienced
independent personal producing general agents who are recruited by regional
sales managers. At December 31, 1997, there were 37 regional sales managers
located throughout the United States. Approximately 51% of the Division's 1997
sales came from this distribution system. In addition, the Division distributes
insurance products in the life insurance brokerage market through a wholly-owned
subsidiary, Empire General Life Assurance Corporation, representing
approximately 39% of sales. The remaining 10% of 1997 sales came from
stockbrokers, banks, and private label arrangements.
WEST COAST DIVISION
On June 3, 1997, Protective acquired West Coast Life Insurance Company.
Headquartered in San Francisco, West Coast sells universal and traditional
ordinary life products in the life insurance brokerage market and in the "bank
owned life insurance" market.
Most acquisitions closed by the Acquisitions Division do not include the
acquisition of an active sales force. In transactions where some marketing
capacity was included, Protective either ceased future marketing efforts or
combined those efforts with another Division. In the West Coast case, the
Company
elected to continue the marketing of new policies, operating the company as a
separate Division.
The West Coast Division primarily utilizes a distribution system comprised
of brokerage general agencies ("BGAs") with a network of independent life
agents. The BGAs provide varying levels of service to the independent agents
based on the size and structure of the individual BGA organizations. At December
31, 1997, the Division had 42 BGAs located throughout the United States.
SPECIALTY INSURANCE PRODUCTS
A second strategic focus of Protective is to participate in specialized
segments of the insurance industry that offer attractive growth opportunities.
The Dental and Consumer Benefits and Financial Institutions Divisions support
this strategy.
DENTAL AND CONSUMER BENEFITS DIVISION
The Division (formerly known as the Group Division) recently exited from the
traditional group major medical business, fulfilling the Division's strategy to
focus primarily on dental and related products. Accordingly, the Division was
renamed the Dental and Consumer Benefits ("Dental") Division.
The Dental Division's primary strategic emphasis is on indemnity and
managed-care dental products. At December 31, 1997, the Division had
approximately 630,000 members in its dental programs.
The Division was a pioneer in developing indemnity dental products for the
voluntary payroll deduction market. The Division has also developed an
innovative system for prospecting and selling dental insurance products by
telephone.
The Division recently launched Dental Network Plans, which offers discounted
fee-for-service dental programs to individual consumers and groups where
enrolled consumers have access to a contracted network of dental providers who
have agreed to a discounted fee schedule.
21
<PAGE>
The Division also markets group life and disability coverages, and
administers an essentially closed block of individual cancer insurance policies.
FINANCIAL INSTITUTIONS DIVISION
The Financial Institutions Division specializes in marketing credit life and
disability insurance products through banks, consumer finance companies and
automobile dealers. The majority of these policies cover consumer loans made by
financial institutions located primarily in the southeastern United States and
automobile dealers throughout the United States. Therefore, the demand for
credit life and credit health insurance is related to the general level of loan
demand. The Division markets through employee field representatives, independent
brokers and wholly-owned subsidiaries. Protective believes it has been a
beneficiary of a "flight to quality," as financial institutions and automobile
dealers increasingly prefer to do business with insurers having quality
products, strong balance sheets and high-quality training and service
capabilities.
On September 30, 1997, the Division acquired the Western Diversified Group.
The Western Diversified Group markets credit insurance and related products
through automobile dealers primarily in the midwestern United States. The
Western Diversified Group includes a small property casualty insurer that sells
automobile extended warranty coverages, which the Division plans to market
nationally through its other distribution channels. In addition, on October 1,
1997, the Division acquired an unrelated closed block of credit policies.
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
A third strategic focus of Protective is to offer products that respond to
the shift in consumer preference to savings products brought about by
demographic trends as "baby-boomers" move into the saving stage of their life
cycle. The two Divisions that support this strategy are the Guaranteed
Investment Contracts and Investment Products Divisions.
GUARANTEED INVESTMENT CONTRACTS DIVISION
Protective entered the Guaranteed Investment Contracts ("GIC") business in
1989. The GIC Division markets GICs to 401(k) and other qualified retirement
savings plans. GICs are generally contracts which specify a return on deposits
for a specified period and often provide flexibility for withdrawals, in keeping
with the benefits provided by the plan. The Division also offers related
products, including guaranteed funding agreements offered to the trustees of
municipal bond proceeds, floating rate contracts offered to bank trust
departments, and long-term annuity contracts offered to fund certain state
obligations. The Division's emphasis is on a consistent and disciplined approach
to product pricing and asset/liability management, careful underwriting of early
withdrawal risks and maintaining low distribution and administration costs.
Most GIC contracts written by Protective have maturities of three to five
years. Prior to 1993, few GIC contracts were maturing because the contracts were
newly written. Therefore, GIC account balances grew at a significant rate.
Beginning in 1993, GIC contracts began to mature as contemplated when the
contracts were sold. Hence, the rate of growth in GIC deposits has decreased as
the amount of maturing contracts has increased.
INVESTMENT PRODUCTS DIVISION
The Investment Products Division manufactures, sells, and supports fixed and
variable annuity products. These products are primarily sold through
stockbrokers, but are also sold through financial institutions and the
Individual Life Division's sales force. The demand for annuity products is
related to the general level of interest rates and performance of the equity
markets.
Since 1990, the Division has offered modified guaranteed annuity products
which guarantee an interest rate for a fixed period. Because contract values are
"market-value adjusted" upon surrender prior
22
<PAGE>
to maturity, these products afford Protective a measure of protection from
changes in interest rates. In 1992, the Division ceased most new sales of single
premium deferred annuities. In 1994, the Division introduced a variable annuity
product which offers the policyholder the opportunity to invest in various
investment accounts.
Variable annuity products represent approximately 49% of the Division's
account balances at December 31, 1997 and 64% of the Division's 1997 sales.
CORPORATE AND OTHER
Protective has an additional business segment herein referred to as
Corporate and Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the Divisions described
above. The earnings of this segment may fluctuate from year to year.
B. SELECTED FINANCIAL DATA
The following Selected Financial Data for Protective and its subsidiaries
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees................ $ 480,206 $ 462,050 $ 411,682 $ 402,772 $ 351,423
Net investment income................... 557,488 498,781 458,433 408,933 354,165
Realized investment gains (losses)...... 1,824 5,510 1,951 6,298 5,054
Other income............................ 6,149 5,010 1,355 11,977 4,756
---------------- --------------- --------------- --------------- ------------
Total revenues...................... $ 1,045,667 $ 971,351 $ 873,421 $ 829,980 $ 715,398
---------------- --------------- --------------- --------------- ------------
---------------- --------------- --------------- --------------- ------------
Benefits and expenses................... $ 895,917 $ 846,042 $ 755,688 $ 724,402 $ 629,286
Income tax expense...................... $ 52,302 $ 42,766 $ 40,037 $ 32,855 $ 29,957(1)
Net income.............................. $ 97,448 $ 82,543 $ 77,696 $ 72,723 $ 56,155
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets............................ $ 10,375,281 $ 8,163,343 $ 7,178,693 $ 6,110,704 $ 5,307,849
Long-term debt.......................... $ 98
Total debt(2)........................... $ 28,055 $ 25,014 $ 34,693 $ 39,443 $ 49,061
Redeemable preferred stock.............. $ 2,000 $ 2,000 $ 2,000
Stockholder's equity.................... $ 1,018,779 $ 776,191 $ 651,237 $ 395,075 $ 469,990
Stockholder's equity excluding net
unrealized gains and losses on
investments........................... $ 957,052 $ 769,503 $ 593,374 $ 502,607 $ 430,706
</TABLE>
- ------------------------
(1) Increased by a one-time adjustment to income tax expense of $1.2 million due
to an increase in the corporate federal income tax rate from 34% to 35%.
(2) Includes indebtedness to related parties. At December 31, 1997 such
indebtedness totaled $28.1 million. See also Note E to the Consolidated
Financial Statements.
23
<PAGE>
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Protective operates seven divisions whose principal strategic focuses can be
grouped into three general categories: life insurance, specialty insurance
products, and retirement savings and investment products. Protective's divisions
are: Acquisitions, Individual Life, West Coast, Dental and Consumer Benefits
("Dental"), Financial Institutions, Guaranteed Investment Contracts ("GIC"), and
Investment Products. Protective also has an additional business segment which is
described herein as Corporate and Other.
The Dental Division (formerly known as the Group Division) recently exited
from the traditional group major medical business, fulfilling the Division's
strategy to focus primarily on dental and related products. Accordingly, the
Division was renamed the Dental and Consumer Benefits Division.
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of premiums
and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
<TABLE>
<CAPTION>
YEAR ENDED PERCENTAGE
DECEMBER 31 AMOUNT INCREASE
- --------------------------------------------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C>
1995....................................... $ 411,682 2.2%
1996....................................... 462,050 12.2
1997....................................... 480,206 3.9
</TABLE>
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 during
1996 resulted in a $19.2 million increase in premiums and policy fees. Decreases
in older acquired blocks resulted in an $11.1 million decrease in premiums and
policy fees. Individual Life premiums and policy fees increased $17.7 million.
Premiums and policy fees from the Dental Division increased $14.1 million.
Premiums and policy fees related to the Dental Division's dental business
increased $22.5 million. This increase was partially offset by a reduction in
premiums related to a refund of premiums to certain cancer insurance
policyholders and to decreases in traditional group health premiums. Premiums
and policy fees from the Financial Institutions Division increased $7.8 million.
This resulted from the coinsurance of a block of policies in 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,
whereby most of the Division's new credit insurance sales are being ceded to a
reinsurer. Premiums and policy fees from the Investment Products Division
increased $3.6 million.
Premiums and policy fees increased $18.2 million or 3.9% in 1997 over 1996.
The coinsurance by the Acquisitions Division of a block of policies and the
acquisition of a small life insurance company in late 1996 resulted in a $4.4
million increase in premiums and policy fees. Decreases in older acquired blocks
resulted in an $8.3 million decrease in premiums and policy fees. The Individual
Life Division's premiums and policy fees increased $10.8 million. The June 1997
acquisition of West Coast Life Insurance Company ("West Coast") increased
premiums and policy fees $14.1 million. The Dental Division's exit from the
group major medical business during 1997 resulted in a $31.1 million decrease in
premiums and policy fees. Premiums and policy fees related to the Dental
Division's other businesses increased $25.7 million. Premiums and policy fees
from the Financial Institutions Division decreased $1.2 million. Decreases of
$10.2 million resulted from the reinsurance arrangement begun in 1995. Decreases
of $17.1 million relate to the normal decrease in premiums on a closed block of
credit insurance policies reinsured in 1996. The recent acquisition of the
Western Diversified Group ("Western Diversified") and coinsurance of an
unrelated closed block of credit insurance policies increased premiums and
policy fees $26.1 million. The increase in premiums and policy fees from the
Investment Products Division was $4.2 million.
24
<PAGE>
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income, the percentage change from the prior period, and the
percentage earned on average cash and investments:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
PERCENTAGE
EARNED ON
AVERAGE CASH
YEAR ENDED PERCENTAGE AND
DECEMBER 31 AMOUNT INCREASE INVESTMENTS
- ------------------------------ --------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
1995........................ $ 458,433 12.1% 7.9%
1996........................ 498,781 8.8 7.8
1997........................ 557,488 11.8 7.6
</TABLE>
Net investment income in 1996 was $40.3 million or 8.8% higher than in 1995,
and in 1997 was $58.7 million or 11.8% higher than the preceding year, primarily
due to increases in the average amount of invested assets. Invested assets have
increased primarily due to acquisitions and to receiving annuity and GIC
deposits. In 1996, the assumption of four blocks of policies during the year
resulted in an increase in net investment income of $18.4 million. The
coinsurance of a block of policies and the acquisition of a small life insurance
company in late 1996, and the acquisition of West Coast, Western Diversified,
and the block of credit insurance policies in 1997 resulted in an increase in
net investment income of $39.4 million in 1997.
The percentage earned on average cash and investments in 1996 was 7.8%, and
in 1997 was 7.6%, each slightly below that of the preceding year due to a
general decline in interest rates.
REALIZED INVESTMENT GAINS (LOSSES)
Protective generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. However,
Protective 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. The following table sets forth
realized investment gains for the periods shown:
REALIZED INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 AMOUNT
- ------------------------------ -----------------
(IN THOUSANDS)
<S> <C>
1995........................ $1,951
1996........................ 5,510
1997........................ 1,824
</TABLE>
Protective maintains an allowance for uncollectible amounts on investments.
The allowance totaled $30.9 million at December 31, 1996 and $23.0 million at
December 31, 1997.
Realized investment gains in 1996 of $10.9 million were largely offset by
realized investment losses of $5.4 million. In 1996, Protective sold $554
million of its mortgage loans in a securitization transaction, resulting in a
$6.1 million realized investment gain. Realized investment losses in 1996 were
reduced by a $1.8 million reduction to the allowance for uncollectible amounts
on investments.
Realized investment gains in 1997 of $34.3 million were largely offset by
realized investment losses of $32.5 million, including a loss of $6.9 million
incurred in connection with the sale of $445 million of mortgage loans in a
securitization transaction. Realized investment losses in 1997 were reduced by a
$7.9 million reduction to the allowance for uncollectible amounts on
investments.
25
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
OTHER INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
- ----------------------------------- -----------------
(IN THOUSANDS)
<S> <C>
1995............................. $1,355
1996............................. 5,010
1997............................. 6,149
</TABLE>
Other income consists primarily of fees, administrative-services-only types
of group accident and health insurance contracts, and from rental of space in
Protective's administrative building to PLC.
26
<PAGE>
INCOME BEFORE INCOME TAX
The following table sets forth operating income or loss and income or loss
before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE
INCOME TAX YEAR ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING INCOME (LOSS)(1)
LIFE INSURANCE
Acquisitions........................................... $ 50,376 $ 53,564 $ 56,672
Individual Life........................................ 16,206 14,774 22,480
West Coast............................................. 8,202
SPECIALTY INCOME PRODUCTS
Dental................................................. 9,107 821 11,767
Financial Instutions................................... 7,701 8,966 13,017
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
GIC.................................................... 32,886 40,093 28,117
Investment Products.................................... 7,561 7,852 8,303
Corporate and Other...................................... (6,490) (2,410) (259)
---------- ---------- ----------
Total operating income................................... 117,347 123,660 148,299
---------- ---------- ----------
REALIZED INVESTMENT GAINS (LOSSES)
Individual Life........................................ 3,098
GIC.................................................... (3,907) (7,963) (3,180)
Investment Products.................................... 4,937 3,858 589
Unallocated Realized Investment Gains (Losses)......... 921 6,517 4,415
RELATED AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS
Individual Life........................................ (1,974)
Investment Products.................................... (1,565) (1,887) (373)
---------- ---------- ----------
Total net................................................ 386 1,649 1,451
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX LIFE INSURANCE
Acquisitions........................................... 50,376 53,564 56,672
Individual Life........................................ 16,206 15,898 22,480
West Coast............................................. 8,202
SPECIALTY INCOME PRODUCTS
Dental................................................. 9,107 821 11,767
Financial Institutions................................. 7,701 8,966 13,017
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
GIC.................................................... 28,979 32,130 24,937
Investment Products.................................... 10,933 9,823 8,519
Corporate and Other...................................... (6,490) (2,410) (259)
Unallocated Realized Investment Gains (Losses)........... 921 6,517 4,415
---------- ---------- ----------
Total income before income tax........................... $ 117,733 $ 125,309 $ 149,750
</TABLE>
- ------------------------
(1) Income before income tax excluding realized investment gains and losses
and related amortization of deferred policy acquisition costs.
In the ordinary course of business, the Acquisitions Division regularly
considers acquisitions of smaller insurance companies or blocks of policies.
Blocks of policies acquired through the Division are usually administered as
"closed" blocks; i.e., no new policies are sold. Therefore, 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 1996 pretax earnings
increased $3.2 million to $53.6 million. New acquisitions resulted in a $4.7
million
27
<PAGE>
increase in 1996 pretax earnings. The Division's 1997 pretax earnings increased
$3.1 million to $56.7 million. The Division's mortality experience was
approximately $6.0 million more favorable in 1997 than in 1996. In addition, the
Division's newest acquisitions represented a $1.8 million increase in 1997
pretax earnings.
The Individual Life Division had 1996 pretax operating earnings of $14.7
million, $1.4 million below 1995. The Division's 1997 pretax operating earnings
were $22.5 million, $7.7 million above 1996, even though the Division
experienced record high mortality in the second quarter. The increase was
primarily due to growth and improved expense control. Realized investment gains,
net of related amortization of deferred policy acquisition costs, associated
with this Division were $1.1 million in 1996 and none in 1997. As a result,
total pretax earnings were $22.5 million in 1996 and $15.9 million in 1997.
Headquartered in San Francisco, West Coast Life Insurance Company was
acquired by Protective on June 3, 1997. For the seven months of 1997 that it was
a subsidiary of Protective, the West Coast Division had pretax operating
earnings of $8.2 million.
The Dental Division's 1996 pretax earnings of $0.8 million were $8.3 million
lower than 1995. A 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 Division's
1997 pretax earnings were $11.8 million. Dental earnings were $6.0 million, an
increase of $0.7 million, before expenses of $2.2 million to develop a new
discounted fee-for-service dental program. Pretax earnings included a one-time
release of reserves associated with exiting the group major medical business of
$1.8 million. Lower cancer earnings partially offset improved results in other
lines.
The Financial Institutions Division's pretax earnings increased $1.3 million
to $9.0 million in 1996. Included in the Division's 1996 results are earnings
from the coinsurance of a block of policies in the second quarter of 1996. The
Division's 1997 pretax earnings increased $4.1 million to $13.0 million. The
Division's results include earnings from recent acquisitions. At the end of the
1997 third quarter, the Division acquired the Western Diversified Group and
coinsured an unrelated block of policies.
The GIC Division's pretax operating earnings increased $7.2 million to $40.1
million in 1996, and declined $12.0 million to $28.1 million in 1997. The 1996
increase was due to improved operating spreads and to the growth in GIC
deposits. Several factors contributed to the 1997 decline. In December 1996,
Protective sold a major portion of its bank loan participations in a
securitization transaction which had the effect of reducing the Division's
earnings and increasing earnings in the Corporate and Other segment. In order to
better match assets to liabilities on a divisional level, Protective shortened
the duration of GIC Division invested assets and lengthened the duration of the
other divisions' invested assets. As a result, GIC earnings were reduced and
earnings of the other divisions were increased. Realized investment losses
associated with this Division in 1996 were $8.0 million as compared to $3.2
million in 1997. As a result, total pretax earnings were $32.1 million in 1996
and $24.9 million in 1997. The rate of growth in GIC deposits has decreased as
the amount of maturing contracts has increased.
The Investment Products Division's 1996 pretax operating earnings were $7.9
million which was $0.3 million higher than 1995. Earnings increased primarily
due to growth in variable annuity deposits. The Division's 1997 pretax operating
earnings were $8.3 million, an increase of $0.5 million over 1996. Realized
investment gains, net of related amortization of deferred policy acquisition
costs, were $2.0 million in 1996 as compared with $0.2 million in 1997. As a
result, total pretax earnings were $9.8 million in 1996 and and $8.5 in 1997.
The Corporate and Other segment consists primarily of net investment income
on capital and other operating expenses not identified with the preceding
operating divisions. Pretax losses for this segment were $4.1 million lower in
1996 as compared to 1995, and $2.2 million lower in 1997 as compared to 1996,
due to higher net investment income on capital.
28
<PAGE>
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the
periods shown:
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
EFFECTIVE
YEAR ENDED INCOME TAX
DECEMBER 31 RATES
- ------------------------------ ------------
<S> <C>
1995........................ 34.0%
1996........................ 34.1
1997........................ 34.9
</TABLE>
Management's current estimate of the effective tax rate for 1998 is between
34% and 35%.
NET INCOME
The following table sets forth net income for the periods shown:
NET INCOME
<TABLE>
<CAPTION>
YEAR ENDED PERCENTAGE
DECEMBER 31 AMOUNT INCREASE
- ------------------------------ ----------------- ----------
(IN THOUSANDS)
<S> <C> <C>
1995........................ $ 77,696 6.8%
1996........................ 82,543 6.2
1997........................ 97,488 18.1
</TABLE>
Compared to 1995, net income in 1996 increased 6.2%, reflecting improved
operating earnings in the Acquisitions, Financial Institutions, GIC, and
Investment Products Divisions and the Corporate and Other segment, and higher
realized investment gains partially offset by lower earnings in the Dental and
Individual Life Divisions. Compared to 1996, net income in 1997 increased 18.1%,
reflecting improved operating earnings in the Acquisitions, Individual Life,
West Coast, Dental, and Financial Institutions Divisions and the Corporate and
Other segment, which were partially offset by lower operating earnings in the
GIC and Investment Products Divisions and lower realized investment gains (net
of related amortization of deferred policy acquisition costs).
KNOWN TRENDS AND UNCERTAINTIES
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of Protective are discussed more fully below.
MATURE INDUSTRY/COMPETITION. Life and health insurance is a mature
industry. In recent years, the industry has experienced virtually no growth in
life insurance sales, though the aging population has increased the demand for
retirement savings products. Insurance is a highly competitive industry, and
Protective encounters significant competition in all lines of business from
other insurance companies, many of which have greater financial resources than
Protective, as well as competition from other providers of financial services.
The life and health insurance industry is consolidating with larger, more
efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that Protective's ability to compete is dependent upon,
among other things, its ability to attract and retain distribution channels to
market its insurance and investment products, its ability to develop competitive
and profitable products, its ability to maintain low unit costs, and its
maintenance of strong claims-paying and financial strength ratings from rating
agencies.
Protective competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
29
<PAGE>
RATINGS. Ratings are an important factor in the competitive position of
insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including Protective and its insurance
subsidiaries. A downgrade in the ratings of Protective or any of its life
insurance subsidiaries could adversely affect their ability to sell products and
its ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While most
of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control. For the past several years, rating downgrades in the industry
have exceeded upgrades.
POLICY CLAIMS FLUCTUATIONS. Protective's results may fluctuate from year to
year on account of fluctuations in policy claims received by Protective.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by
Protective and its insurance subsidiaries allow policyholders and
contractholders to withdraw their funds under defined circumstances. Protective
and its insurance subsidiaries design products and configure investment
portfolios to provide and maintain sufficient liquidity to support anticipated
withdrawal demands and contract benefits and maturities. Formal asset/liability
management programs and procedures are used continuously to monitor the relative
duration of Protective's assets and liabilities. While Protective and its
insurance subsidiaries own a significant amount of liquid assets, many of their
assets are relatively illiquid. Significant unanticipated withdrawal or
surrender activity could, under some circumstances, compel Protective and its'
insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which
could have a material adverse effect on Protective.
INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in interest
rates expose insurance companies to the risk of not earning anticipated spreads
between the interest rate earned on investments and the credited rates paid on
outstanding policies. Both rising and declining interest rates can negatively
affect Protective's spread income. For example, certain of Protective's
insurance and investment products guarantee a minimum credited rate. While
Protective develops and maintains asset/liability management programs and
procedures designed to preserve spread income in rising or falling interest rate
environments, no assurance can be given that sudden and/or significant changes
in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of Protective's insurance and
investment products.
REGULATION AND TAXATION. Protective and its insurance subsidiaries are
subject to government regulation in each of the states in which they conduct
business. Such regulation is vested in state agencies having broad
administrative power over all aspects of the insurance business including
premium rates, marketing practices, advertising, policy forms, and capital
adequacy, and is concerned primarily with the protection of policyholders rather
than stockholders. Protective cannot predict the form of any future regulatory
initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income tax
payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of Protective's products a competitive
advantage over other non-insurance products. Congress is currently reviewing
certain proposals contained in President Clinton's Fiscal Year 1999 Budget
which, if enacted, would adversely impact the tax treatment of variable annuity
and certain other life insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including Protective and its subsidiaries, would be
adversely affected with respect to their ability to sell such products, and
depending on grandfathering provisions, the surrenders of existing annuity
contracts and life insurance policies. Protective cannot predict what future
initiatives the President or Congress may propose which may affect Protective.
LITIGATION. A number of civil jury verdicts have been returned against
insurers in the jurisdictions in which Protective does business involving the
insurers' sales practices, alleged agent misconduct, failure to
30
<PAGE>
properly supervise agents, and other matters. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. Protective and
its subsidiaries, like other insurers, in the ordinary course of business, are
involved in such litigation. The outcome of any such litigation cannot be
predicted with certainty. In addition, in some class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
INVESTMENT RISKS. Protective's invested assets are subject to customary
risks of credit defaults and changes in market values. The value of Protective's
commercial mortgage portfolio depends in part on the credit worthiness of the
tenants occupying the properties which Protective has financed. Factors that may
affect the overall default rate on, and market value of, Protective's invested
assets include interest rate levels, financial market performance, and general
economic conditions, as well as particular circumstances affecting the
businesses of individual borrowers and tenants.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. Protective has actively pursued
a strategy of acquiring blocks of insurance policies and small insurance
companies. This acquisition strategy has increased Protective's earnings in part
by allowing Protective to position itself to realize certain operating
efficiencies associated with economies of scale. There can be no assurance,
however, that suitable acquisitions, presenting opportunities for continued
growth and operating efficiencies, will continue to be available to Protective,
or that Protective will realize the anticipated financial results from its
acquisitions.
RELIANCE ON THE PERFORMANCE OF OTHERS. Protective has entered into various
ventures involving other parties. Examples include, but are not limited to: many
of Protective's products are sold through independent distribution channels; the
Investment Products Division's variable annuity deposits are invested in funds
managed by unaffiliated investment managers; a portion of the sales in the
Individual Life, Dental, and Financial Institutions Divisions comes from
arrangements with unrelated marketing organizations. Therefore Protective's
results may be affected by the performance of others.
YEAR 2000. Older computer hardware and software often denote the year using
two digits rather than four; for example, the year 1997 often is denoted by such
hardware and software as "97." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted because
the hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including Protective, its customers, business
partners, suppliers, banks, custodians and administrators) who rely on computers
or devices containing computer chips.
Protective has developed and is implementing a Year 2000 transition plan
intended to identify and modify or replace primary hardware and/or software
systems on which it relies that have a Year 2000 issue. Protective is also
developing and implementing a plan to identify and modify or replace secondary
hardware and/or software systems on which it relies that have a Year 2000 issue.
Substantial resources are being devoted to this effort; however the costs to
develop and implement these plans are not expected to be material. Protective is
also confirming that its service providers are implementing plans to identify
and modify or replace their systems that have a Year 2000 issue.
Protective currently anticipates that its systems will be able to process
transactions dated beyond 1999 on or before December 31, 1999. There can be no
assurance, however, that Protective's efforts will be successful, that
interaction with other service providers with Year 2000 issues will not impair
Protective's operations, or that the Year 2000 issue will not otherwise
adversely affect Protective.
REINSURANCE. As is customary in the insurance industry, Protective and its
insurance subsidiaries cede insurance to other insurance companies. However, the
ceding insurance company remains liable with respect to ceded insurance should
any reinsurer fail to meet the obligations assumed by it. Additionally,
Protective assumes policies of other insurers. Any regulatory or other
development affecting the ceding insurer could also have an effect on
Protective.
31
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits." This statement revises the footnote disclosures about
pension and other postretirement benefit plans and its adoption will have no
effect on Protective's financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Protective's operations usually produce a positive cash flow. This cash flow
is used to fund an investment portfolio to finance future benefit payments.
Since future benefit payments largely represent medium- and long-term
obligations reserved using certain assumed interest rates, Protective's
investments are predominantly in medium- and long-term, fixed-rate investments
such as bonds and mortgage loans.
Many of Protective's products contain surrender charges and other features
that reward persistency and penalize the early withdrawal of funds. Surrender
charges for these products generally are sufficient to cover Protective's
unamortized deferred policy acquisition costs with respect to the policy being
surrendered. GICs and certain annuity contracts have market-value adjustments
that protect Protective against investment losses if interest rates are higher
at the time of surrender than at the time of issue.
Protective's investments in debt and equity securities are reported at
market value, and investments in mortgage loans are reported at amortized cost.
At December 31, 1997, the fixed maturity investments (bonds and redeemable
preferred stocks) had a market value of $6,348.3 million, which is 2.0% above
amortized cost (less allowances for uncollectible amounts on investments) of
$6,221.9 million. Protective had $1,313.5 million in mortgage loans at December
31, 1997. While Protective's mortgage loans do not have quoted market values, at
December 31, 1997, Protective estimates the market value of its mortgage loans
to be $1,405.5 million (using discounted cash flows from the next call date)
which is 7.0% above amortized cost. Most of Protective's mortgage loans have
significant prepayment penalties. These assets are invested for terms
approximately corresponding to anticipated future benefit payments. Thus, market
fluctuations should not adversely affect liquidity.
For several years Protective has offered a type of commercial loan under
which Protective will permit a slightly higher loan-to-value ratio in exchange
for a participating interest in the cash flows from the underlying real estate.
Approximately $465 million of Protective's mortgage loans have this
participation feature.
At December 31, 1997, delinquent mortgage loans and foreclosed properties
were 0.2% of assets. Bonds rated less than investment grade were 1.9% of assets.
Protective does not expect these investments to adversely affect its liquidity
or ability to maintain proper matching of assets and liabilities. Protective's
allowance for uncollectible amounts on investments was $23.0 million at December
31, 1997.
Policy loans at December 31, 1997, were $194.1 million, a decrease of $4.3
million from December 31, 1996, (after excluding the $31.7 million of policy
loans obtained through acquisitions). Policy loan rates are generally in the
4.5% to 8.0% range. Such rates at least equal the assumed interest rates used
for future policy benefits.
Protective believes its asset/liability management programs and procedures
and certain product features provide significant protection for Protective
against the effects of changes in interest rates. However, approximately
one-fourth of Protective's liabilities relate to products (primarily whole life
insurance) the profitability of which may be affected by changes in interest
rates. The effect of such changes in any one year is not expected to be
material. Additionally, Protective believes its asset/liability management
programs and procedures provide sufficient liquidity to enable it to fulfill its
obligation to pay benefits under its various insurance and deposit contracts.
Protective's asset/liability management programs and procedures involve the
monitoring of asset and liability durations for various product lines; cash flow
testing under various interest rate scenarios; and the continuous rebalancing of
assets and liabilities with respect to yield, risk, and cash flow
characteristics.
32
<PAGE>
It is Protective's general policy to maintain asset and liability durations
within one-half year of one another, although from time to time a broader
interval may be allowed.
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 gains of $1.5 million and net realized losses of
$0.2 million were deferred in 1997 and 1996 respectively. At December 31, 1997
and 1996, options and open futures contracts with notional amounts of $925.0
million and $805.0 million, respectively, had net unrealized losses of $0.4
million and $1.9 million respectively.
Protective has used interest rate swap contracts to convert certain
investments from a variable to a fixed rate of interest. At December 31, 1997,
related open interest rate swap contracts with a notional amount of $95.3
million were in a $0.1 million net unrealized loss position. 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
In connection with a commercial mortgage loan securitization, Protective
entered into interest rate swap contracts converting a fixed rate of interest to
a floating rate of interest and converting a floating rate of interest to a
fixed rate of interest with notional amounts at December 31, 1997, of $332.4
million and $200.0 million, respectively. In the aggregate, there were no net
unrealized gains or losses associated with these swap contracts at December 31,
1997.
GIC withdrawals were approximately $700 million during 1997. Withdrawals
related to GIC contracts are estimated to be approximately $900 million in 1998.
Protective's asset/liability management programs and procedures take into
account GIC withdrawals. Accordingly, Protective does not expect GIC withdrawals
to have an unusual effect on the future operations and liquidity of Protective.
In anticipation of receiving GIC and annuity deposits, Protective and its
life insurance subsidiaries were committed at December 31, 1997, to fund
mortgage loans and to purchase fixed maturity and other long-term investments in
the amount of $400.2 million. Protective held $93.5 million in cash and
short-term investments at December 31, 1997.
While Protective generally anticipates that the cash flow of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, Protective recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then available.
Therefore, Protective has arranged sources of credit to use when needed.
Protective expects that the rate received on its investments will equal or
exceed its borrowing rate. Additionally, Protective may from time to time sell
short-duration GICs to complement its cash management practices.
In 1996, Protective sold approximately $554 million of its commercial
mortgage loans in a securitization transaction. Proceeds from the sale consisted
of cash of approximately $400 million, net of expenses, and securities issued in
the securitization transaction of approximately $161 million. The sale resulted
in a realized gain of approximately $6.1 million. In 1996, Protective also sold
approximately $315 million of its bank loan participations in a securitization
transaction. The sale resulted in a realized gain of approximately $0.5 million.
In a related transaction, PLC purchased $23 million of the securities issued in
the securitization transaction.
In 1997, Protective sold approximately $445 million of its commercial
mortgage loans in a securitization transaction. Proceeds from the sale consisted
of cash of approximately $328 million, net of expenses, and securities issued in
the securitization transaction of approximately $110 million. The Protective is
investigating other securitization opportunities.
At December 31, 1997, Protective had no borrowings outstanding under its
credit arrangements.
As disclosed in the Notes to the Consolidated Financial Statements, at
December 31, 1997, approximately $483 million of consolidated stockholder's
equity, excluding net unrealized investment gains
33
<PAGE>
and losses, represented net assets of Protective that cannot be transferred to
PLC in the form of dividends, loans or advances. In addition, Protective is
subject to various state satutory and regulatory restrictions on its ability to
pay dividends to PLC. Also, distributions, including cash dividends to PLC from
Protective in excess of approximately $727 million, would be subject to federal
income tax at rates then effective.
For the foregoing reasons and due to the expected growth of Protective's
insurance sales, Protective plans to retain substantial portions of the its
earnings primarily to support future growth.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC"), as
modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The NAIC's risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. The achievement of long-term growth will
require growth in the statutory capital of Protective. Protective may secure
additional statutory capital through various sources, which could include
retained statutory earnings or equity contributions by PLC.
Under insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent companies. Protective does not believe
that any such assessments will be materially different from amounts already
reflected in the financial statements.
Protective and its subsidiaries, like other insurers, in the course of
business are involved in litigation. 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, results of operations, or
liquidity of Protective.
IMPACT OF INFLATION
Inflation increases the need for life insurance. Many policyholders who once
had adequate insurance programs may increase their life insurance coverage to
provide the same relative financial benefits and protection. Inflation increases
the cost of health care. The adequacy of premium rates in relation to the level
of health claims is constantly monitored, and where appropriate, premium rates
on such policies are increased as policy benefits increase. Failure to make such
increases commensurate with healthcare cost increases may result in a loss from
health insurance.
The higher interest rates that have traditionally accompanied inflation may
also affect Protective's investment operation. Policy loans increase as policy
loan interest rates become relatively more attractive. As interest rates
increase, disintermediation of GIC and annuity deposits and individual life
policy cash values may increase, the market value of Protective's fixed-rate,
long-term investments may decrease, and Protective may be unable to implement
fully the interest rate reset and call provisions of its mortgage loans. The
difference between the interest rate earned on investments and the interest rate
credited to life insurance and investment products may also be adversely
affected by rising interest rates.
34
<PAGE>
D. INSURANCE IN FORCE
Protective's total consolidated life insurance in force at December 31, 1997
was $89.3 billion. The following table shows sales by face amount and insurance
in force for the Protective's divisions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New Business Written
Individual Life............. $10,588,594 $9,245,002 $7,564,983 $6,329,630 $4,440,510
West Coast.................. 1,984,928
Dental...................... 124,230 115,748 119,357 184,429 252,345
Financial Institutions...... 4,183,216 3,956,581 3,563,177 2,524,212 2,776,276
---------- ---------- ---------- ---------- ----------
Total..................... $16,880,968 $13,317,331 $11,247,517 $9,038,271 $7,469,131
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Business Acquired
Acquisitions................ $1,286,673 $6,129,159 $4,756,371 $4,378,812
West Coast.................. $10,237,731
Financial Institutions...... 3,364,617 1,607,463
---------- ---------- ---------- ---------- ----------
Total..................... $13,602,348 $2,894,136 $6,129,159 $4,756,371 $4,378,812
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Insurance in Force at End of
Year (1)
Acquisitions................ $20,955,836 $20,037,857 $16,778,359 $11,728,569 $8,452,114
Individual Life............. 39,715,608 35,765,841 32,500,935 25,843,232 22,975,577
West Coast.................. 12,004,967
Dental...................... 6,393,076 6,054,947 6,371,313 7,464,501 6,716,724
Financial Institutions...... 10,183,997 7,468,761 6,233,256 4,841,318 4,306,179
---------- ---------- ---------- ---------- ----------
Total..................... $89,253,484 $69,327,406 $61,883,863 $49,877,620 $42,450,594
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Reinsurance assumed has been included; reinsurance ceded (1997-$34,139,554;
1996-$18,840,221; 1995-$17,524,366; 1994-$8,639,272; 1993-$7,484,566) has
not been deducted.
35
<PAGE>
The ratio of voluntary terminations of individual life insurance to mean
individual life insurance in force, which is determined by dividing the amount
of insurance terminated due to lapses during the year by the mean of the
insurance in force at the beginning and end of the year, adjusted for the timing
of major acquisitions and assumptions was:
<TABLE>
<CAPTION>
RATIO OF
YEAR ENDED VOLUNTARY
DECEMBER 31 TERMINATIONS
- ------------------------------ -----------------
<S> <C>
1993........................ 8.7%
1994........................ 7.0
1995........................ 6.9
1996........................ 6.4
1997........................ 6.9
</TABLE>
Net terminations reflect voluntary lapses, some of which may be due to the
replacement of Protective's products with competitors' products. Also, a higher
percentage of voluntary lapses typically occurs in the first 15 months of a
policy, and accordingly, lapses will tend to increase or decrease in proportion
to the change in new insurance written during the immediately preceding periods.
The amount of investment products in force is measured by account balances.
The following table shows guaranteed investment contract and annuity account
balances.
<TABLE>
<CAPTION>
GUARANTEED MODIFIED
YEAR ENDED INVESTMENT GUARANTEED FIXED VARIABLE
DECEMBER 31 CONTRACTS ANNUITIES ANNUITIES ANNUITIES
- -------------------------------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1993.......................... $2,015,075 $ 468,689 $ 537,053
1994.......................... 2,281,673 661,359 542,766 $ 170,454
1995.......................... 2,451,693 741,849 472,656 392,237
1996.......................... 2,474,728 862,747 390,461 624,714
1997.......................... 2,684,676 926,071 453,418 1,057,186
</TABLE>
E. UNDERWRITING
The underwriting policies of Protective's insurance subsidiaries are
established by management. With respect to individual insurance, the
subsidiaries use information from the application and, in some cases, inspection
reports, attending physician statements, or medical examinations to determine
whether a policy should be issued as applied for, rated, or rejected. Medical
examinations of applicants are required for individual life insurance in excess
of certain prescribed amounts (which vary based on the type of insurance) and
for most individual insurance applied for by applicants over age 50. In the case
of "simplified issue" policies, which are issued primarily through the Financial
Institutions Division and the payroll deduction market, coverage is rejected if
the responses to certain health questions contained in the application indicate
adverse health of the applicant. For other than "simplified issue" policies,
medical examinations are requested of any applicant, regardless of age and
amount of requested coverage, if an examination is deemed necessary to
underwrite the risk. Substandard risks may be referred to reinsurers for full or
partial reinsurance of the substandard risk.
Protective's insurance subsidiaries require blood samples to be drawn with
individual insurance applications for coverage at age 16 and above except in the
payroll deduction market where the face amount must be $100,000 or more before
blood testing is required. Blood samples are tested for a wide range of chemical
values and are screened for antibodies to the HIV virus. Applications also
contain questions permitted by law regarding the HIV virus which must be
answered by the proposed insureds.
Group insurance underwriting policies are administered by experienced group
underwriters. The underwriting policies are designed for single employer groups.
Initial premium rates are based on prior claim experience and manual premium
rates with relative weights depending on the size of the group and the nature of
the benefits.
36
<PAGE>
F. INVESTMENTS
The types of assets in which Protective may invest are influenced by state
laws which prescribe qualified investment assets. Within the parameters of these
laws, Protective invests its assets giving consideration to such factors as
liquidity needs, investment quality, investment return, matching of assets and
liabilities, and the composition of the investment portfolio by asset type and
credit exposure.
The following table shows Protective's investments at December 31, 1997
valued on the basis of generally accepted accounting principles.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
ASSET VALUE INVESTMENTS
---------------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities.............................. $3,019,792 37.8%
United States Government and government agencies and
authorities........................................... 161,850 2.0
States, municipalities, and political subdivisions...... 32,153 0.4
Public utilities........................................ 488,920 6.1
Convertibles and bonds with warrants attached........... 526 --
All other corporate bonds............................... 2,639,070 33.0
Redeemable preferred stocks............................... 5,941 0.1
----------- -----
Total fixed maturities.................................. 6,348,252 79.4
----------- -----
Equity securities:
Common stocks -- industrial, miscellaneous, and all other
........................................................ 4,605 0.1
Nonredeemable preferred stocks............................ 10,401 0.1
----------- -----
Total equity securities................................. 15,006 0.2
----------- -----
Mortgage loans on real estate............................... 1,313,478 16.4
Investment real estate...................................... 13,469 0.2
Policy loans................................................ 194,109 2.4
Other long-term investments................................. 54,704 0.7
Short-term investments...................................... 54,337 0.7
----------- -----
Total investments..................................... $7,993,355 100.0%
----------- -----
----------- -----
</TABLE>
A significant portion of Protective's bond portfolio is invested in
mortgage-backed securities. Mortgage-backed securities are constructed from
pools of residential mortgages, and may have cash flow volatility as a result of
changes in the rate at which prepayments of principal occur with respect to the
underlying loans. Prepayments of principal on the underlying residential loans
can be expected to accelerate with decreases in interest rates and diminish with
increases in interest rates. In its mortgage-backed securities portfolio,
Protective has focused on sequential, planned amortization class and targeted
amortization class securities, which tend to be less volatile than other classes
of mortgage-backed securities.
Protective obtains ratings of its fixed maturities from Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). If a bond
is not rated by Moody's or S&P, Protective uses ratings from the Securities
Valuation Office of the National Association of Insurance Commissioners
("NAIC"), or Protective rates the bond based upon a comparison of the unrated
issue to rated issues of the same issuer or rated issues of other issuers with
similar risk characteristics. At December 31, 1997, approximately 99.6% of bonds
were rated by Moody's, S&P, or the NAIC.
37
<PAGE>
The following table shows the approximate percentage distribution of
Protective's fixed maturities by rating, utilizing S&P rating categories, at
December 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
FIXED
TYPE MATURITIES
- ------------------------------ ---------------
<S> <C>
Bonds
AAA......................... 41.1%
AA.......................... 4.8
A........................... 29.1
BBB......................... 21.9
BB or less.................. 3.0
Redeemable Preferred Stock.... 0.1
-----
Total......................... 100.0%
-----
-----
</TABLE>
At December 31, 1997, approximately $6,147.2 million of Protective's
$6,342.3 million bond portfolio was invested in U.S. Government or agency-backed
securities or investment grade corporate bonds and only approximately $195.2
million of its bond portfolio was rated less than investment grade, of which
$89.6 million were securities issued in Protective-sponsored commercial mortgage
loan securitizations. Approximately $693.8 million of bonds are not publicly
traded.
Risks associated with investments in less than investment grade debt
obligations may be significantly higher than risks associated with investments
in debt securities rated investment grade. Risk of loss upon default by the
borrower is significantly greater with respect to such debt obligations than
with other debt securities because these obligations may be unsecured or
subordinated to other creditors. Additionally, there is often a thinly traded
market for such securities and current market quotations are frequently not
available for some of these securities. Issuers of less than investment grade
debt obligations usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment-grade issuers.
Protective also invests a significant portion of its portfolio in mortgage
loans. Results for these investments have been excellent due to careful
management and a focus on a specialized segment of the market. Protective
generally does not lend on speculative properties and has specialized in making
loans on either credit-oriented commercial properties or credit-anchored strip
shopping centers. The average size of loans made during 1997 was $3.0 million.
The average size mortgage loan in Protective's portfolio is approximately $1.6
million. The largest single loan amount is $12.8 million.
The following table shows a breakdown of Protective's mortgage loan
portfolio by property type:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
PROPERTY TYPE ON REAL ESTATE
- ------------------------------ -----------------
<S> <C>
Retail........................ 75%
Office Building............... 7
Warehouses.................... 7
Apartments.................... 9
Other......................... 2
---
Total......................... 100%
---
---
</TABLE>
Retail loans are generally on strip shopping centers located in smaller
towns and anchored by one or more strong regional or national retail stores. The
anchor tenants enter into long-term leases with Protective's borrowers. These
centers provide the basic necessities of life, such as food, pharmaceuticals,
and clothing, and have been relatively insensitive to changes in economic
conditions. The following are
38
<PAGE>
some of the largest anchor tenants (measured by Protective's exposure) in the
strip shopping centers at December 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
ANCHOR TENANTS ON REAL ESTATE
- ------------------------------ -----------------
<S> <C>
Food Lion, Inc................ 5%
K-Mart Corporation............ 3
Winn Dixie Stores, Inc........ 3
Wal-Mart Stores, Inc.......... 2
CVS Corporation............... 2
</TABLE>
Protective's mortgage lending criteria generally require that the
loan-to-value ratio on each mortgage be at or under 75% at the time of
origination. Projected rental payments from credit anchors (i.e., excluding
rental payments from smaller local tenants) generally exceed 70% of the
property's projected operating expenses and debt service.
For several years Protective has offered a commercial loan product under
which Protective will permit a loan-to-value ratio of up to 85% in exchange for
a participating interest in the cash flows from the underlying real estate.
Approximately $465 million of Protective's mortgage loans have this
participation feature.
Many of Protective's mortgage loans have call or interest rate reset
provisions after five to seven years. However, if interest rates were to
significantly increase, Protective may be unable to call the loans or increase
the interest rates on its existing mortgage loans commensurate with the
significantly increased market rates.
At December 31, 1997, $17.7 million or 1.4% of the mortgage loan portfolio
was nonperforming. It is Protective's policy to cease to carry accrued interest
on loans that are over 90 days delinquent. For loans less than 90 days
delinquent, interest is accrued unless it is determined that the accrued
interest is not collectible. If a loan becomes over 90 days delinquent, it is
Protective's general policy to initiate foreclosure proceedings unless a workout
arrangement to bring the loan current is in place.
In 1996, Protective sold approximately $554 million of its commercial
mortgage loans in a securitization transaction. In 1997, Protective sold
approximately $445 million of its loans in a second securitization transaction.
Protective continues to service the securitized mortgage loans.
As a general rule, Protective does not invest directly in real estate. The
investment real estate held by Protective consists largely of properties
obtained through foreclosures or the acquisition of other insurance companies.
In Protective's experience, the appraised value of foreclosed properties often
approximates the mortgage loan balance on the property plus costs of
foreclosure. Also, foreclosed properties often generate a positive cash flow
enabling Protective to hold and manage the property until the property can be
profitably sold.
Protective has established an allowance for uncollectible amounts on
investments. This allowance was $23.0 million at December 31, 1997.
Combinations of futures contracts and options on treasury notes are
sometimes used as hedges for asset/liability management of certain investments,
primarily mortgage loans on real estate, mortgage-backed securities, and
liabilities arising from interest sensitive products such as GICs and annuities.
Realized investment gains and losses on such contracts are deferred and
amortized over the life of the hedged asset. From time to time Protective has
used interest rate swap contracts to convert certain investments from a variable
rate of interest to a fixed rate of interest and vice versa.
For further discussion regarding Protective's investments and the maturity
of and the concentration of risk among Protective's invested assets, see Note C
to the Consolidated Financial Statements.
39
<PAGE>
The following table shows the investment results of Protective for the years
1993 through 1997:
<TABLE>
<CAPTION>
PERCENTAGE
CASH, ACCRUED EARNED ON
INVESTMENT INCOME, NET AVERAGE OF REALIZED
YEAR ENDED AND INVESTMENTS AT INVESTMENT CASH AND INVESTMENT
DECEMBER 31 DECEMBER 31 INCOME INVESTMENTS GAINS (LOSSES)
- ---------------------------------------------------- ------------------ ----------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1993.............................................. $ 4,841,209 $ 354,165 8.4% $ 5,054
1994.............................................. 5,355,988 408,933 8.2 6,298
1995.............................................. 6,087,828 458,433 7.9 1,951
1996.............................................. 6,698,236 498,781 7.8 5,510
1997.............................................. 8,126,647 557,488 7.6 1,824
</TABLE>
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" included herein for certain
information relating to the Protective's investments and liquidity.
G. INDEMNITY REINSURANCE
As is customary in the insurance industry, Protective and its insurance
subsidiaries cede insurance to other insurance companies. The ceding insurance
company remains liable with respect to ceded insurance should any reinsurer fail
to meet the obligations assumed by it. Protective sets a limit on the amount of
insurance retained on the life of any one person. In the individual lines it
will not retain more than $500,000, including accidental death benefits, on any
one life; for group insurance, the maximum amount retained on any one life is
$100,000. In many cases the retention is less. At December 31, 1997, Protective
had insurance in force of $89.3 billion of which approximately $34.1 billion was
ceded to reinsurers.
H. POLICY LIABILITIES AND ACCRUALS
The applicable insurance laws under which Protective's insurance
subsidiaries operate require that each insurance company report policy
liabilities to meet future obligations on the outstanding policies. These
liabilities are the amounts which, with the additional premiums to be received
and interest thereon compounded annually at certain assumed rates, are
calculated in accordance with applicable law to be sufficient to meet the
various policy and contract obligations as they mature. These laws specify that
the liabilities shall not be less than liabilities calculated using certain
named mortality tables and interest rates.
The policy liabilities and accruals carried in Protective's financial
reports (presented on the basis of generally accepted accounting principles)
differ from those specified by the laws of the various states and carried in the
insurance subsidiaries' statutory financial statements (presented on the basis
of statutory accounting principles mandated by state insurance regulation). For
policy liabilities other than those for universal life policies, annuity
contracts, and GICs, these differences arise from the use of mortality and
morbidity tables and interest rate assumptions which are deemed under generally
accepted accounting principles to be more appropriate for financial reporting
purposes than those required for statutory accounting purposes; from the
introduction of lapse assumptions into the calculation; and from the use of the
net level premium method on all business. Policy liabilities for universal life
policies, annuity contracts, and GICs are carried in Protective's financial
reports at the account value of the policy or contract.
I. FEDERAL INCOME TAX CONSEQUENCES
Under pre-1984 tax law, certain income of Protective was not taxed
currently, but was accumulated in the "Policyholders' Surplus Account" to be
taxed only when such income was distributed to the stockholders or when certain
limits on accumulated amounts were exceeded. Consistent with current tax law,
amounts accumulated in the Policyholders' Surplus Account have been carried
forward, although no accumulated income may be added to these accounts. As of
December 31, 1997, the combined Policyholders' Surplus Accounts for Protective
and its life insurance subsidiaries and the estimated tax which would become
payable on these amounts if distributed to stockholders were $73 million and $26
million, respectively. Protective does not anticipate exceeding applicable
limits on amounts accumulated in these accounts and, therefore, does not expect
to involuntarily pay tax on the amounts held therein.
40
<PAGE>
J. COMPETITION
Life and health insurance is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products. Life
and health insurance is a highly competitive industry and Protective's divisions
encounter significant competition in all their respective lines of business from
other insurance companies, many of which have greater financial resources than
Protective, as well as competition from other providers of financial services.
The life and health insurance industry is consolidating, with larger, more
efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that Protective's ability to compete is dependent upon,
among other things, its ability to attract and retain distribution channels to
market its insurance and investment products, its ability to develop competitive
and profitable products, its ability to maintain low unit costs, and its
maintenance of strong claims-paying and financial strength ratings from rating
agencies.
Protective competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
K. REGULATION
Protective's insurance subsidiaries are subject to government regulation in
each of the states in which they conduct business. Such regulation is vested in
state agencies having broad administrative power dealing with all aspects of the
insurance business, including premium rates, marketing practices, advertising,
policy forms, and capital adequacy, and is concerned primarily with the
protection of policyholders rather than stockholders. Protective cannot predict
the form of any future proposals or regulation.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC") as
modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view, for example, requiring immediate
expensing of policy acquisition costs and more conservative computations of
policy liabilities. The NAIC's risk-based capital requirements require insurance
companies to calculate and report information under a risk-based capital
formula. These requirements are intended to allow insurance regulators to
identify inadequately capitalized insurance companies based upon the types and
mixtures of risks inherent in the insurer's operations. The formula includes
components for asset risk, liability risk, interest rate exposure, and other
factors. Based upon the December 31, 1997 statutory financial reports,
Protective's insurance subsidiaries are adequately capitalized under the
formula.
Protective's insurance subsidiaries are required to file detailed annual
reports with the supervisory agencies in each of the jurisdictions in which they
do business and their business and accounts are subject to examination by such
agencies at any time. Under the rules of the NAIC, insurance companies are
examined periodically (generally every three to five years) by one or more of
the supervisory agencies on behalf of the states in which they do business. To
date, no such insurance department examinations have produced any significant
adverse findings regarding any insurance company subsidiary of Protective.
Under insurance guaranty fund laws in most states, insurance companies doing
business in such a state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although Protective cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. Protective's
insurance subsidiaries were assessed immaterial amounts in 1997, which will be
partially offset by credits against future state premium taxes.
In addition, many states, including the states in which Protective's
insurance subsidiaries are domiciled, have enacted legislation or adopted
regulations regarding insurance holding company systems. These laws require
registration of and periodic reporting by insurance companies domiciled within
the jurisdiction which control or are controlled by other corporations or
persons so as to constitute an insurance
41
<PAGE>
holding company system. These laws also affect the acquisition of control of
insurance companies as well as transactions between insurance companies and
companies controlling them. Most states, including Tennessee, where Protective
is domiciled, require administrative approval of the acquisition of control of
an insurance company domiciled in the state or the acquisition of control of an
insurance holding company whose insurance subsidiary is incorporated in the
state. In Tennessee, the acquisition of 10% of the voting securities of an
entity is generally deemed to be the acquisition of control for the purpose of
the insurance holding company statute and requires not only the filing of
detailed information concerning the acquiring parties and the plan of
acquisition, but also administrative approval prior to the acquisition.
Protective is subject to various state statutory and regulatory restrictions
on the insurance subsidiaries' ability to pay dividends to PLC. In general,
dividends up to specified levels are considered ordinary and may be paid without
prior approval. Dividends in larger amounts are subject to approval by the
insurance commissioner of the state of domicile. The maximum amount that would
qualify as ordinary dividends to PLC by Protective in 1998 is estimated to be
$154 million. No assurance can be given that more stringent restrictions will
not be adopted from time to time by states in which Protective and its insurance
subsidiaries are domiciled, which restrictions could have the effect, under
certain circumstances, of significantly reducing dividends or other amounts
payable to PLC by Protective without affirmative prior approval by state
regulatory authorities.
Protective acts as a fiduciary and is subject to regulation by the
Department of Labor ("DOL") when providing a variety of products and services to
employee benefit plans governed by the Employee Retirement Income Security Act
of 1974 ("ERISA"). Severe penalties are imposed by ERISA on fiduciaries which
violate ERISA's prohibited transaction provisions by breaching their duties to
ERISA-covered plans. In a case decided by the United States Supreme Court in
December 1993 (JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY V. HARRIS TRUST AND
SAVINGS BANK), the Court concluded that an insurance company general account
contract that had been issued to a pension plan should be divided into its
guaranteed and nonguaranteed components and that certain ERISA fiduciary
obligations applied with respect to the assets underlying the nonguaranteed
components. Although Protective has not issued contracts identical to the one
involved in HARRIS TRUST, some of its policies relating to ERISA-covered plans
may be deemed to have nonguaranteed components subject to the principles
announced by the Court.
The full extent to which HARRIS TRUST makes the fiduciary standards and
prohibited transaction provisions of ERISA applicable to all or part of
insurance company general account assets, however, cannot be determined at this
time. The Supreme Court's opinion did not resolve whether the assets at issue in
the case may be subject to ERISA for some purposes and not others. The life
insurance industry requested that the DOL issue exemptions from the prohibited
transaction provisions of ERISA in view of HARRIS TRUST. In July of 1995, the
DOL published, in final form, a prohibited transaction class exemption (PTE
95-60) which exempts from the prohibited transaction rules, prospectively and
retroactively to January 1, 1975, certain transactions engaged in by insurance
company general accounts in which employee benefit plans have an interest. The
exemption does not cover all such transactions, and the insurance industry is
seeking further relief. Pursuant to the Small Business Job Protection Act signed
into law on August 20, 1996, the DOL has published proposed final regulations
attempting to clarify the HARRIS TRUST decision. Until these and other matters
are clarified, Protective is unable to determine whether the decision will
result in any liability and, if so, its nature and scope.
The Federal Government has from time to time advocated changes to the
current health care delivery system which will address both affordability and
availability issues. In addition to the federal initiatives, a number of states
have adopted legislative programs that are intended to affect the accessibility
and affordability of health care. Some states have enacted health care reform
legislation. However, in light of the small relative proportion of Protective's
earnings attributable to group health insurance, management does not expect that
either the federal or state proposals will have a material adverse effect on
Protective's earnings.
The Federal Government has advocated repeal of the Glass-Steagall Act and
certain other legislative changes, which would allow banks to diversify into
securities and other businesses, including possibly insurance. The ultimate
scope and effective date of any proposals are unknown at this time and are
likely
42
<PAGE>
to be modified as they are considered for enactment. It is anticipated that
these proposals may increase competition and, therefore, may adversely affect
Protective.
Additional issues related to regulation of Protective are discussed in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES" included herein.
L. RECENT DEVELOPMENTS
On April 8, 1998, Protective's Board of Directors declared a dividend on
Protective's common stock amounting to $60 million. The dividend is payable to
Protective's sole stockholder, PLC, and is expected to be paid on or before
April 30, 1998.
M. EMPLOYEES
At December 31, 1997 Protective had approximately 1,200 employees, including
approximately 780 in Birmingham, Alabama. Most employees are covered by
contributory major medical, dental, group life, and long-term disability
insurance plans. The cost of these benefits in 1997 amounted to approximately
$2.7 million to Protective. In addition, substantially all of the employees are
covered by a pension plan. Protective also matches employee contributions to its
401(k) Plan. See Note L to Consolidated Financial Statements.
N. PROPERTIES
Protective's Home Office building is located at 2801 Highway 280 South,
Birmingham, Alabama. This building includes the original 142,000 square-foot
building which was completed in 1976 and a second contiguous 220,000 square-foot
building which was completed in 1985. In addition, parking is provided for
approximately 1,000 vehicles.
Protective leases administrative space in seven cities, substantially all
under leases for periods of three to five years. The aggregate monthly rent is
approximately $219 thousand.
Marketing offices are leased in 16 cities, substantially all under leases
for periods of three to five years. The aggregate monthly rent is approximately
$53 thousand.
43
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Protective are as follows:
<TABLE>
<S> <C> <C>
Drayton Nabers, Jr. 57 Chairman of the Board
John D. Johns 46 President and Chief Financial Officer and a Director
R. Stephen Briggs 48 Executive Vice President and a Director
Deborah J. Long 44 Senior Vice President, General Counsel, Secretary
and a Director
Jim E. Massengale 56 Executive Vice President, Acquisitions and a
Director
Danny L. Bentley 40 Senior Vice President, Group and a Director
Richard J. Bielen 37 Senior Vice President, Investments and a Director
Steven A. Schultz 44 Senior Vice President, Financial Institutions and a
Director
Wayne E. Stuenkel 44 Senior Vice President, Chief Actuary and a Director
A. S. Williams III 61 Executive Vice President, Investments and Treasurer
and a Director
Judy Wilson 40 Senior Vice President, Guaranteed Investment
Contracts
Carolyn King 47 Senior Vice President, Investment Products and a
Director
Jerry W. DeFoor 45 Vice President and Controller, and Chief Accounting
Officer
</TABLE>
All executive officers and directors are elected annually. Executive
officers serve at the pleasure of the Board of Directors and directors are
elected by PLC at the annual meeting of shareholders of Protective. None of the
individuals listed above is related to any director of PLC or Protective or to
any executive officer.
Mr. Nabers has been Chairman of the Board and a Director of Protective Life
since August 1996. Mr. Nabers has been Chairman of the Board and Chief Executive
Officer of PLC and a Director since August 1996. From May 1994 to August 1996,
Mr. Nabers was Chairman of the Board, President and Chief Executive Officer and
a Director of PLC. From May 1992 to May 1994, he was President and Chief
Executive Officer and a Director of PLC. Mr. Nabers was President and Chief
Operating Officer and a Director of PLC from August 1982 until May 1992. He is
also a director of Energen Corporation, National Bank of Commerce of Birmingham,
and Alabama National Bancorporation.
Mr. Johns has been President and Chief Operating Officer of PLC since August
1996 and President of Protective Life since August 1996. He was Executive Vice
President and Chief Financial Officer of PLC and of Protective Life from October
1993 to August 1996. From August 1988 to October 1993, he served as Vice
President and General Counsel of Sonat Inc. He is a director of National Bank of
Commerce of Birmingham and Alabama National Bancorporation.
Mr. Briggs has been Executive Vice President of PLC and Protective since
October 1993. From January 1993 to October 1993 he was Senior Vice President,
Life Insurance and Investment Products of Protective and PLC. Mr. Briggs had
been Senior Vice President, Ordinary Marketing of PLC since August 1988 and of
Protective since April 1986.
Ms. Long has been Senior Vice President, Secretary and General Counsel of
PLC since November 1996 and of Protective since September 1996. Ms. Long was
Senior Vice President and General Counsel of PLC from February 1994 to November
1996 and of Protective from February 1994 to September 1996. From August 1993 to
January 1994, Ms. Long served as General Counsel of PLC and from February 1984
to January 1994 she practiced law with the law firm of Maynard, Cooper & Gale,
P.C.
Mr. Massengale has been Executive Vice President, Acquisitions of Protective
and PLC since August 1996. From May 1992 to August 1996 he served as Senior Vice
President of Protective and PLC. From May
44
<PAGE>
1989 to May 1992 Mr. Massengale was Senior Vice President, Operations and
Systems of Protective and PLC.
Mr. Danny L. Bentley has been Senior Vice President, Group of Protective and
PLC since August 1996. From May 1989 to August 1996, he was Vice President,
Group Marketing of Protective.
Mr. Bielen has been Senior Vice President, Investments of PLC and Protective
since August 1996. From August 1991 to August 1996, he was Vice President,
Investments of Protective.
Mr. Schultz has been Senior Vice President, Financial Institutions of
Protective and PLC since March 1993. Mr. Schultz served as Vice President,
Financial Institutions of Protective from February 1989 to March 1993 and of PLC
from February 1993 to March 1993.
Mr. Stuenkel has been Senior Vice President and Chief Actuary of Protective
and PLC since March 1987. Mr. Stuenkel is a Fellow in the Society of Actuaries.
Mr. Williams has been Executive Vice President, Investments and Treasurer of
Protective and PLC since August 1996. From July 1981 to August 1996 he was
Senior Vice President, Investments and Treasurer of PLC and Protective.
Ms. Wilson has been Senior Vice President, Guaranteed Investment Contracts
of Protective and PLC since January 1995. From July 1991 to December 31, 1994,
she served as Vice President, Guaranteed Investment Contracts of Protective.
Ms. King has been Senior Vice President, Investment Products Division of PLC
and of Protective since April 1995. From August 1994 to March 1995, she served
as Senior Vice President and Chief Investment Officer of Provident Life and
Accident Insurance Company and of its parent company, Provident Life and
Accident Insurance Company of America. She served as President of Provident
National Assurance Company from November 1987 to March 1995. From November 1986
to August 1994, she served as Vice President of Provident Life and Accident
Insurance Company of America.
Mr. DeFoor has been Vice President and Controller, and Chief Accounting
Officer of Protective and PLC since April 1989. Mr. DeFoor is a certified public
accountant.
EXECUTIVE COMPENSATION
Executive officers of Protective also serve as executive officers and/or
directors of one or more affiliate companies of PLC. Compensation allocations
are made as to each individual's time devoted to duties as an executive officer
of Protective and its affiliates. The following table shows the total
compensation paid to the named executive officers of Protective by Protective or
any of its affiliates including PLC. Of the amounts of total compensation shown
in the Summary Compensation Table and other executive compensation information
below, approximately 100% of Mr. Nabers', Mr. Williams', Mr. Bentley's, and Mr.
Briggs' total compensation, and 50% of Mr. Johns' total compensation is
attributable to services performed for or on behalf of Protective. Directors of
Protective who are also employees receive no compensation in addition to their
compensation as employees of Protective.
PLC has established a Deferred Compensation Plan for Officers of PLC (the
"Officers' Plan") whereby eligible officers may voluntarily elect to defer to a
specified date receipt of all or any portion of their Annual Incentive Plan and
Performance Share Plan bonuses. The bonuses so deferred are credited to the
officers in cash or PLC stock equivalents or a combination thereof. The cash
portion earns interest at approximately PLC's short-term borrowing rate. The
stock equivalent portion is credited with dividends in the form of additional
stock equivalents. Deferred bonuses will be distributed in stock or cash as
specified by the officers in accordance with the Officers' Plan unless
distribution is accelerated under certain provisions, including upon a change in
control of PLC.
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ------------------------------
AWARDS PAYOUTS
----------- -----------------
SECURITIES
UNDERLYING
OTHER OPTIONS/ LONG-TERM ALL
ANNUAL SARS INCENTIVE PLAN OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1)(2) BONUS(1)(2)(3) COMPENSATION (#) PAYOUTS(1)(3)(4) COMPENSATION(5)
(A) (B) (C) (D) (E) (G) (H) (I)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DRAYTON NABERS, JR. 1997 $ 552,500 $ 499,500 $ 372 -0- $ 1,551,046(8) $ 4,800
Chairman of the Board and 1996 535,000 691,063(6) 2,970 150,000 807,362 4,500
Chief Executive Officer 1995 499,167 459,000 2,970 -0- 694,733 4,500
----------------------------------------------------------------------------------------------------------------------------------
JOHN D. JOHNS 1997 347,500 280,000 -0- -0- 646,075(8) 4,800
President and Chief
Operating 1996 312,917 306,316(7) -0- 75,000 176,956 4,500
Officer 1995 282,500 200,000 -0- -0- 132,964 4,500
----------------------------------------------------------------------------------------------------------------------------------
R. STEPHEN BRIGGS 1997 295,000 172,400 -0- -0- 646,075(8) 4,800
Executive Vice President 1996 293,333 181,700 -0- 20,000 265,434 4,500
1995 282,500 190,000 1,056 -0- 262,598 4,500
----------------------------------------------------------------------------------------------------------------------------------
JIM E. MASSENGALE 1997 247,500 210,000 1,890 -0- 382,514(8) 4,800
Executive Vice President, 1996 225,417 148,100 756 20,000 248,844 4,500
Acquisitions 1995 203,333 123,000 753 -0- 252,639 4,500
----------------------------------------------------------------------------------------------------------------------------------
A. S. WILLIAMS III 1997 283,333 282,833 5,742 -0- 492,136(8) 4,800
Executive Vice President, 1996 273,333 442,500 5,742 20,000 298,613 4,500
Investments and Treasurer 1995 263,333 240,603 2,970 -0- 299,170 4,500
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
(1) For further information, see the "Compensation and Management Succession
Committee's Report on Executive Compensation."
(2) Includes amounts that the Named Executives may have voluntarily elected to
contribute to the Company's 401(k) and Stock Ownership Plan.
(3) Includes amounts that the Named Executives may have voluntarily deferred
under the Company's Deferred Compensation Plan for Officers.
(4) For further information, see the "Long-Term Incentive Plan -- Awards In Last
Fiscal Year" table.
(5) Matching contributions to the Company's 401(k) and Stock Ownership Plan.
(6) Includes a one-time bonus award of $205,063 in shares of Common Stock.
(7) Includes a one-time bonus award of $53,316 in shares of Common Stock.
(8) 1997 long-term compensation is not yet determinable. The amount shown is the
best estimate available as of the date hereof.
The above table sets forth certain information regarding compensation paid
to the Chief Executive Officer and the four most highly compensated executive
officers of PLC during or with respect to the last three fiscal years.
46
<PAGE>
The following table sets forth the value of the stock appreciation rights
held by the named executives based upon the value of the Common Stock as of
December 31, 1997. No stock appreciation rights were granted to the named
executives during 1997.
AGGREGATED FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
(A) (D) (E)
- --------------------------------------------------------------------------
<S> <C> <C>
Drayton Nabers, Jr. 0/150,000 $0/$3,731,250
- --------------------------------------------------------------------------
John D. Johns 0/ 75,000 0/ 1,865,625
- --------------------------------------------------------------------------
R. Stephen Briggs 0/ 20,000 0/ 497,500
- --------------------------------------------------------------------------
Jim E. Massengale 0/ 20,000 0/ 497,500
- --------------------------------------------------------------------------
A. S. Williams III 0/ 20,000 0/ 497,500
- --------------------------------------------------------------------------
</TABLE>
In 1997, the Compensation and Management Succession Committee awarded
performance shares under the Company's 1997 Performance Share Plan to the Named
Executives as indicated in the table below. These awards are generally payable,
if at all, at the time the results of the comparison group of companies for the
four-year period ending December 31, 2000 are known.
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE-BASED PLANS (IN SHARES)
------------------------------------------
NUMBER OF PERFORMANCE OR
SHARES, OTHER PERIOD
UNITS OR UNTIL
OTHER RIGHTS MATURATION OR
NAME (#)(1) PAYOUT THRESHOLD TARGET MAXIMUM
(A) (B) (C) (D) (E) (F)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Drayton Nabers, Jr. 9,590 shares December 31, 2000 4,795 11,988 16,303
- ---------------------------------------------------------------------------------------------------------------------
John D. Johns 4,600 shares December 31, 2000 2,300 5,750 7,820
- ---------------------------------------------------------------------------------------------------------------------
R. Stephen Briggs 3,410 shares December 31, 2000 1,705 4,263 5,797
- ---------------------------------------------------------------------------------------------------------------------
Jim E. Massengale 2,720 shares December 31, 2000 1,360 3,400 4,624
- ---------------------------------------------------------------------------------------------------------------------
A. S. Williams III 3,180 shares December 31, 2000 1,590 3,975 5,406
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------
(1) In the event of a change in control, payment will be made with respect to
all outstanding awards based upon performance at the target level (which,
for all outstanding awards, is deemed to be at the seventy-fifth percentile)
or, if greater, performance as of the December 31 preceding the change in
control.
With respect to awards made to the Named Executives in 1997, 125% of the
award is earned if either the Company's average return on average equity or
total rate of return for the four-year period ranks at the top 25% of the
comparison group. If the Company ranks at the top 10% of the comparison group,
170% of the award is earned. If the Company ranks at the median of the
comparison group, 50% of the award is earned and if the Company's results are
below the median of the comparison group, no portion of the award is earned. The
Performance Share Plan provides for interpolation between thresholds to
determine the exact percentage to be paid.
47
<PAGE>
PENSION PLAN
PENSION PLAN TABLE
<TABLE>
<CAPTION>
REMUNERATION YEARS OF SERVICE
- ---------- --------------------------------------------------------------------
15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$ 125,000 $27,665 $36,887 $46,109 $55,331 $64,553
150,000 33,665 44,887 56,109 67,331 78,553
175,000* 39,665 52,887 66,109 79,331 92,553
200,000* 45,665 60,887 76,109 91,331 106,553
225,000* 51,665 68,887 86,109 103,331 120,553
250,000* 57,665 76,887 96,109 115,331 134,553*
275,000* 63,665 84,887 106,109 127,331 148,553*
300,000* 69,665 92,887 116,109 139,331* 162,553*
400,000* 93,665 124,887 156,109* 187,331* 218,553*
500,000* 117,665 156,887* 196,109* 235,331* 274,553*
600,000* 141,665* 188,887* 236,109* 283,331* 330,553*
700,000* 165,665* 220,887* 276,109* 331,331* 386,553*
800,000* 189,665* 252,887* 316,109* 379,331* 442,553*
900,000* 213,665* 284,887* 356,109* 427,331* 498,553*
1,000,000* 237,665* 316,887* 396,109* 475,331* 554,553*
1,100,000* 261,665* 348,887* 436,109* 523,331* 610,553*
1,200,000* 285,665* 380,887* 476,109* 571,331* 666,553*
1,300,000* 309,665* 412,887* 516,109* 619,331* 722,553*
</TABLE>
- ------------------------
*Current pension law limits the maximum annual benefit payable at normal
retirement age under a defined benefit plan to $130,000 for 1998 and is subject
to increase in later years. In addition, in 1998, such a plan may not take into
account annual compensation in excess of $160,000, which amount is similarly
subject to increase in later years. The Company's Excess Benefit Plan ("Excess
Benefit Plan"), adopted effective September 1, 1984, and amended and restated
as of January 1, 1989, provides for payment, outside of the Protective Life
Corporation Pension Plan ("Pension Plan"), of the difference between (1) the
fully accrued benefits which would be due under the Pension Plan absent both of
the aforesaid limitations and (2) the amount actually payable under the Pension
Plan as so limited.
The above table illustrates estimated gross annual benefits which would be
payable for life in a straight life annuity commencing at normal retirement age
under the Pension Plan and the Excess Benefit Plan for employees with average
compensation (remuneration under the table above) and years of service. Benefits
in the above table are not reduced by social security or other offset amounts.
Compensation covered by the Pension Plan (for purposes of pension benefits)
excludes commissions and performance share awards and generally corresponds to
that shown under the heading "Annual Compensation" in the Summary Compensation
Table. Compensation is calculated based on the average of the highest level of
compensation paid during a period of 36 consecutive whole months. Only three
Annual Incentive Plan bonuses (whether paid or deferred under a Deferred
Compensation Plan maintained by PLC) may be included in obtaining the average
compensation.
48
<PAGE>
The named executives and their estimated length of service as of December
31, 1997 are provided in the following table.
<TABLE>
<CAPTION>
------------------------------------------------
NAME YEARS OF SERVICE
- ----------------------- -----------------------------
<S> <C>
Drayton Nabers, Jr. 19
John D. Johns 4
R. Stephen Briggs 26
A. S. Williams III 33
Jim E. Massengale 14
- ------------------------------------------------
</TABLE>
EMPLOYMENT CONTINUATION AGREEMENTS
The Board of Directors of PLC has authorized PLC to enter into Employment
Continuation Agreements with each of the named executives which provide for
certain benefits in the event such executive's employment is actually or
constructively (by means of a reduction in duties or compensation) terminated
following certain events constituting a "change in control". Such benefits
include (i) a payment equal to three times the sum of the annual base salary in
effect at the time of the change in control and the average annual incentive
plan bonus for the three years preceding the change in control; (ii)
continuation (for twenty-four months) in PLC's hospital, medical, accident,
disability, and life insurance plans as provided to the executive immediately
prior to the date of his termination of employment; (iii) delivery of an annuity
to equal increased benefits under the Pension Plan and the Excess Benefit Plan
resulting from an additional three years of credited service (subject to the
Pension Plan's maximum on crediting service); and (iv) an additional payment, if
necessary, to reimburse the executive for any additional tax (other than normal
Federal, state and local income taxes) incurred as a result of any benefits
received in connection with the change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation and Management Succession Committee
("Committee") are Messrs. McMahon (Chairman), Woods, Dahlberg, Kuehn, and
Sklenar. No member of the Committee was an officer or employee of PLC or any of
its subsidiaries at any time during 1997. Also, no member of the Committee was
formerly an officer of PLC or any of its subsidiaries.
Mr. Dahlberg is the Chairman of the Board, President and Chief Executive
Officer of The Southern Company. PLC is a 25% member of a limited liability
company which acquired an office building adjacent to PLC's home office from an
affiliate of The Southern Company which continues to lease portions of the
building. During 1997, the limited liability company received $138,410 in lease
payments from affiliates of The Southern Company. This lease expired in 1997.
49
<PAGE>
MANAGEMENT OWNERSHIP OF PLC STOCK
No director or named executive officer of Protective owns any stock of
Protective or of any affiliated corporation except for the shares of PLC common
stock which are shown as owned as of March 1998:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
(1) PERCENT
------------------------- OF
SHARED CLASS
NAME AND BENEFICIAL OWNER SOLE POWER POWER (2) (1)
- ------------------------------------ ----------- --------- --------
<S> <C> <C> <C>
Drayton Nabers, Jr. 140,662(3) 10,815 *
R. Stephen Briggs 72,000(4) 412 *
John D. Johns 20,541(5) 2,100 *
Deborah J. Long 4,864(6) -0- *
Jim E. Massengale 62,726(7) 350 *
Danny L. Bentley 22,239(8) -0- *
Richard J. Bielen 10,951(9) -0- *
Wayne E. Stuenkel 34,321(10) -0- *
A. S. Williams III 50,427(11) -0- *
Steven A. Schultz 16,945(12) -0- *
Judy Wilson 2,572(13) -0- *
Carolyn King 4,123(14) -0- *
Jerry W. DeFoor 15,368(15) -0- *
All directors and executive officers
as a group (13 persons) 457,739(16) 13,677(2) 1.48%
</TABLE>
- ------------------------
* less than one percent
(1) The number of shares reflected are shares which under applicable
regulations of the Securities and Exchange Commission are deemed to be
beneficially owned. Shares deemed to be beneficially owned, under such
regulations, include shares as to which, directly or indirectly, through any
contract, relationship, understanding or otherwise, either voting power or
investment power is held or shared. The total number of shares beneficially
owned is subdivided, where applicable, into two categories: shares as to
which voting/investment power is held solely and shares as to which
voting/investment power is shared. Unless otherwise indicated in the
following notes, if a beneficial owner has sole power, he has sole voting
and investment power, and if a beneficial owner has shared power, he has
shared voting and investment power. The percentage calculation is based on
the aggregate number of shares beneficially owned.
(2) This column may include shares held in the name of a spouse, minor
children, or certain other relatives sharing the same home as the director
or officer, or held by the director or officer, or the spouse of the
director or officer, as a trustee or as a custodian for children, as to all
of which beneficial ownership is disclaimed by the respective directors and
officers except as otherwise noted below.
(3) Includes 6,095 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Nabers has sole voting power. Also, includes
98,664 share equivalents allocated to Mr. Nabers' deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Nabers who
will have sole voting power over the shares at that time. Does not include
150,000 stock appreciation rights awarded under PLC's 1996 Stock Incentive
Plan.
(4) Includes 13,249 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Briggs has sole voting power. Also, includes
34,504 share equivalents allocated to Mr. Briggs' deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Briggs who
will have sole voting power over the shares
50
<PAGE>
at that time. Does not include 20,000 stock appreciation rights awarded
under PLC's 1996 Stock Incentive Plan.
(5) Includes 1,423 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Johns has sole voting power. Also, includes
16,918 share equivalents allocated to Mr. Johns' deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Johns who
will have sole voting power over the shares at that time. Does not include
75,000 stock appreciation rights awarded under PLC's 1996 Stock Incentive
Plan.
(6) Includes 2,532 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Ms. Long has sole voting power. Also includes
1,839 share equivalents allocated to Ms. Long's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Ms. Long who
will have sole voting powers over the shares at that time.
(7) Includes 25,330 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Massengale has sole voting power. Also
includes 22,546 share equivalents allocated to Mr. Massengale's deferred
compensation account pursuant to the terms of PLC's Deferred Compensation
Plan for Officers. Upon distribution, share equivalents will be distributed
in shares of PLC Common Stock. Such shares will be issued directly to Mr.
Massengale who will have sole voting power over the shares at that time.
Does not include 20,000 stock appreciation rights awarded under PLC's 1996
Stock Incentive Plan.
(8) Includes 4,286 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Bentley has sole voting power. Also includes
13,899 share equivalents allocated to Mr. Bentley's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Bentley who
will have sole voting power over the shares at that time.
(9) Includes 4,092 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Bielen has sole voting power. Also, includes
3,121 share equivalents allocated to Mr. Bielen's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Bielen who
will have sole voting power over the shares at that time.
(10) Includes 3,064 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Stuenkel has sole voting power. Also includes
26,489 share equivalents allocated to Mr. Stuenkel's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Stuenkel who
will have sole voting power over the shares at that time.
(11) Includes 12,201 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Williams has sole voting power. Also,
includes 30,744 share equivalents allocated to Mr. Williams' deferred
compensation account pursuant to the terms of PLC's Deferred Compensation
Plan for Officers. Upon distribution, share equivalents will be distributed
in shares of PLC Common Stock. Such shares will be issued directly to Mr.
Williams who will have sole voting power over the shares at that time. Does
not include 20,000 stock appreciation rights awarded under PLC's 1996 Stock
Incentive Plan.
(12) Includes 2,701 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Schultz has sole voting power. Also includes
13,034 share equivalents allocated to Mr. Schultz's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Schultz who
will have sole voting power over the shares at that time.
(13) Includes 2,472 shares held in PLC's 401(k) and Stock Ownership Plan for
which Ms. Wilson has sole voting power.
(14) Includes 441 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Ms. King has sole voting power. Also, includes
3,682 share equivalents allocated to Ms. King's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon
51
<PAGE>
distribution, share equivalents will be distributed in shares of PLC Common
Stock. Such shares will be issued directly to Ms. King who will have sole
voting power over the shares at that time.
(15) Includes 5,224 shares held in PLC's 401(K) and Stock Ownership Plan as of
January 31, 1998 for which Mr. DeFoor has sole voting power. Also, includes
10,144 share equivalents allocated to Mr. DeFoor's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. DeFoor who
will have sole voting power over those shares at that time.
(16) Included are the interests of the persons as of January 31, 1998 in 144,430
shares held in PLC's 401(k) and Stock Ownership Plan, which owned a total of
1,289,516 shares on such date. Each 401(k) and Stock Ownership Plan
participant has sole voting power with respect to the shares held in the
participant's accounts. The 693,346 shares held in PLC's 401(k) Stock
Ownership Plan Trust which have not been allocated to participants will be
voted by the Trustees in accordance with the majority vote of all
participants. Also, includes 286,017 share equivalents allocated to the
deferred compensation accounts of participating directors and executive
officers as a group pursuant to the PLC's Deferred Compensation Plan for
Directors Who Are Not Employees of the PLC and the PLC's Deferred
Compensation Plan for Officers.
CERTAIN TRANSACTIONS
PLC is a 25% member of a limited liability company which acquired an office
building adjacent to PLC's home office from an affiliate of The Southern Company
which continues to lease portions of the building. During 1997, the limited
liability company received $138,410 in lease payments from affiliates of The
Southern Company. Mr. Dahlberg is the Chairman of the Board, President and Chief
Executive Officer of The Southern Company. This lease expired in 1997.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of PLC and Protective, to which PLC or
Protective or any of its subsidiaries is a party or of which any of PLC or
Protective's properties is the subject. For additional information regarding
legal proceedings see Note G to the Consolidated Financial Statements included
herein.
EXPERTS
The consolidated balance sheets of Protective Life Insurance Company and
subsidiaries as of December 31, 1997 and 1996, and the consolidated statements
of income, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997 and the related financial statement schedules
included in this Prospectus, have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in auditing and accounting.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to federal securities laws.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended with respect to the
Contracts. This Prospectus does not contain all information set forth in the
Registration Statement, its amendments and exhibits, to all of which reference
is made for further information concerning Protective and the Contracts.
Statements contained in this Prospectus as to the content of the Contracts and
other legal instruments are summaries. For a complete statement of the terms
thereof, reference is made to the instruments as filed in the Registration
Statement.
52
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is equal to the Market Value Adjustment
Percentage indicated below, applied to the amount of each full or partial
surrender requested. We will consider surrendered amounts to be interest
withdrawals first to the extent interest credited during the prior Contract Year
has not yet been withdrawn from the Contract at the time of the full or partial
surrender. (See "Market Value Adjustment").
MARKET VALUE ADJUSTMENT PERCENTAGE = (C - I + 0.25%) X (N/12), WHERE:
C = the Treasury Rate currently established for the same term as the
Guaranteed Period from which the surrender is being made;
I = the Treasury Rate initially established for the Guaranteed Period from
which the surrender is being made;
N = The number of months remaining in the Guaranteed Period from which the
surrender is being made.
The Treasury Rate is the annual effective interest rate credited to United
States Treasury instruments, as published by a nationally recognized source. On
the fifteenth day and the last day of each month, the Company will identify a
Treasury Rate for each Guaranteed Period. The method used by the Company to
determine the Treasury Rates under this Contract shall be consistent and is
binding upon any Participant, Annuitant and Beneficiary.
A Surrender Charge will apply during the first seven years of each Initial
and each Subsequent Guaranteed Period. The Surrender Charge is equal to a
specified Surrender Charge Percentage (maximum 6%) applied to the amount of each
full or partial surrender requested less any amount available under the Interest
Withdrawals. (See "Surrender Charge").
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3
<TABLE>
<CAPTION>
INITIAL GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Initially --
Annuity Deposit: $10,000.00 $10,000.00 $10,000.00 $30,000.00
Guaranteed Interest Rate: 4.75% 5.00% 5.25%
Year 1 --
Beginning of Year Account Value: $10,000.00 $10,000.00 $10,000.00 $30,000.00
X (1 + Guaranteed Interest Rate): 1.048 1.050 1.053
= End of Year Account Value: $10,475.00 $10,500.00 $10,525.00 $31,500.00
- Beginning of Year Account Value: $10,000.00 $10,000.00 $10,000.00 $30,000.00
= Interest Earned during Year: $475.00 $500.00 $525.00 $1,500.00
Year 2 --
Beginning of Year Account Value: $10,475.00 $10,500.00 $10,525.00 $31,500.00
X (1 + Guaranteed Interest Rate): 1.048 1.050 1.053
= End of Year Account Value: $10,972.56 $11,025.00 $11,077.56 $33,075.13
- Beginning of Year Account Value: $10,475.00 $10,500.00 $10,525.00 $31,500.00
= Interest Earned during Year: $497.56 $525.00 $552.56 $1,575.12
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
INITIAL GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- --------------------------------------------------------- ------------ ------------ ------------ ------------
Year 3 --
<S> <C> <C> <C> <C>
Beginning of Year Account Value: $10,972.56 $11,025.00 $11,077.56 $33,075.13
X (1 + Guaranteed Interest Rate): 1.048 1.050 1.053
= End of Year Account Value: $11,493.76 $11,576.25 $11,659.13 $34,729.14
- Beginning of Year Account Value: $10,972.56 $11,025.00 $11,077.56 $33,075.13
= Interest Earned during Year: $521.20 $551.25 $581.57 $1,654.02
After Completion of Year 3 --
Account Value: $11,493.76 $11,576.25 $11,659.13 $34,729.14
- Prior Year's Interest: $521.20 $551.25 $581.57 $1,654.02
=Amount Subject to Surrender Charge and Market Value
Adjustment: $10,972.56 $11,025.00 $11,077.56 $33,075.13
Surrender Charge Percentage: 0.00% 3.00% 5.00%
X Subjected Amount: $10,972.56 $11,025.00 $11,077.56 $33,075.13
= Surrender Charge: $0.00 $330.75 $553.88 $884.63
Number of Months Remaining in the Guaranteed Period: 0 24 48
EXAMPLE #1 -- INCREASING INTEREST RATE ENVIRONMENT
Current Guaranteed Interest Rate: 5.75% 6.25% 6.75%
- Initial Guaranteed Interest Rate: 5.00% 5.50% 6.00%
+ 0.25%: 0.25% 0.25% 0.25%
X Number Months Remaining / 12: 0.00 2.00 4.00
= Market Value Adjustment Percentage: 0.00% 2.00% 4.00%
X Subjected Amount: $10,972.56 $11,025.00 $11,077.56 $33,075.13
= Market Value Adjustment: $0.00 $220.50 $443.10 $663.60
Account Value: $11,493.76 $11,576.25 $11,659.13 $34,729.14
- Surrender Charge: $0.00 $330.75 $553.88 $884.63
- Market Value Adjustment: $0.00 $220.50 $443.10 $663.60
= Net Account Value: $11,493.76 $11,025.00 $10,662.15 $33,180.91
EXAMPLE #2 -- DECREASING INTEREST RATE ENVIRONMENT
Current Guarantee Interest Rate: 4.25% 4.75% 5.25%
- Initial Guaranteed Interest Rate: 5.00% 5.50% 6.00%
+ 0.25%: 0.25% 0.25% 0.25%
X Number Months Remaining / 12: 0.00 2.00 4.00
= Market Value Adjustment Percentage: 0.00% -1.00% -2.00%
X Subjected Amount: $10,972.56 $11,025.00 $11,077.56 $33,075.13
= Market Value Adjustment: $0.00 ($110.25) ($221.55) ($331.80)
Account Value: $11,493.76 $11,576.25 $11,659.13 $34,729.14
- Surrender Charge: $0.00 $330.75 $553.88 $884.63
- Market Value Adjustment: $0.00 ($110.25) ($221.55) ($331.80)
= Net Account Value: $11,493.76 $11,355.75 $11,326.81 $34,176.32
</TABLE>
A-2
<PAGE>
APPENDIX B
MATTERS RELATING TO CONTRACTS
OFFERED IN CERTAIN STATES AFTER SEPTEMBER 10, 1991
AND PRIOR TO MAY 1, 1996
THE FOLLOWING SECTIONS DESCRIBE CONTRACTS OFFERED AFTER SEPTEMBER 10, 1991
TO MAY 1, 1996. THE TERMS DEFINED BELOW, AND THE FOLLOWING DESCRIPTIONS OF
CERTAIN PROVISIONS SHOULD BE SUBSTITUTED IN THEIR ENTIRETY FOR THE RELATED TERMS
AND DESCRIPTIONS FOUND ELSEWHERE IN THIS PROSPECTUS. THE PAGE REFERENCES LISTED
BELOW INDICATE WHERE IN THE PROSPECTUS THE SUBSTITUTED TERMS AND DESCRIPTIONS
CAN BE FOUND. REFER TO YOUR CONTRACT FOR COMPLETE DETAILS OF THESE PROVISIONS.
A. CAPSULE SUMMARY OF THE CONTRACT
The paragraphs in the Capsule Summary describing the guaranteed Death
Benefit, Market Value Adjustment, and Surrender Charge should be revised to read
as follows:
A Surrender Charge will apply during the first seven years of each
Initial and each Subsequent Guaranteed Period. For each Initial or
Subsequent Guaranteed Period with durations longer than seven years, a
Surrender Charge will only apply during the first seven years. The
Surrender Charge is equal to six months of interest on the amount
withdrawn from the Sub-Account Value. The Surrender Charge for all full
and partial surrenders made during an Initial or Subsequent Guaranteed
Period shall not exceed, in the aggregate, a total of six months'
interest on the amount of the Annuity Deposit or Sub-Account Value(s)
originally allocated in the case of an Initial Guaranteed Period, or
transferred, in the case of a Subsequent Guaranteed Period from which
the full or partial surrender is made.
A Market Value Adjustment is applied when you request a full or
partial surrender from a Sub-Account prior to the end of the
Sub-Account's Guaranteed Period. The Market Value Adjustment reflects
the relationship between (i) the current Guaranteed Interest Rate that
we are crediting for a Guaranteed Period equal to the time remaining in
the Guaranteed Period at the time you request a full or partial
surrender, and (ii) the then applicable Guaranteed Interest Rate being
applied to the Sub-Account from which you select to make a full or
partial surrender.
This Contract provides for a guaranteed Death Benefit. If any
Participant dies before the Annuity Commencement Date the guaranteed
Death Benefit will be payable to the surviving Participant, if any. If
there is no surviving Participant, the Death Benefit will be paid to the
Beneficiary named by the Participant.
The guaranteed Death Benefit will equal the Account Value.
If applicable, the guaranteed Death Benefit for all Guaranteed
Periods will be totalled to obtain the guaranteed Death Benefit payable.
The Beneficiary will have sixty (60) days from the date of death to
exercise their right to the guaranteed Death Benefit. If this right is
not exercised within the 60-day period, any payments will be treated as
a surrender request, and will be subject to the surrender charge and a
market value adjustment.
B-1
<PAGE>
B. GLOSSARY OF SPECIAL TERMS (PAGE 1)
ANNUITY DEPOSIT(S) -- The Annuity Deposit(s) made will be allocated to each
Guaranteed Period(s) selected under each Contract. Each Annuity Deposit must be
at least $5,000 unless approved by the Company. Additional Annuity Deposits can
be made except in the states of California, Minnesota, South Carolina and
Michigan.
ANNUITANT -- Annuity payments may depend upon the continuation of the life
of a person. That person is called an Annuitant and is named in the Contract.
The Annuitant may be changed prior to the Annuity Commencement Date provided
such change is made in writing on a form acceptable to us.
BENEFICIARY -- PRIMARY -- The person named to receive the Death Benefit
under the Contract upon the death of any Participant. You may change the
Beneficiary at any time by sending a request in Writing to the Administrative
Office. Upon the death of any Participant, the surviving Participant, if any,
will be the Beneficiary.
CONTINGENT -- The person named to receive the Death Benefit if the
Primary Beneficiary is not living at any Participant's death.
IRREVOCABLE -- One whose consent is necessary to change the Beneficiary
or exercise certain other rights.
SUB-ACCOUNT VALUES -- The amount equal to that part of each Annuity Deposit
allocated by a Participant to a Sub-Account(s), or any amount transferred to a
Sub-Account(s) at the end of a Guaranteed Period increased by all interest
credited and decreased by amounts due to previous full or partial surrenders
(including Surrender Charges, Market Value Adjustments, and Premium Taxes
thereon) and previous interest withdrawals.
SURRENDER CHARGE -- A Surrender Charge, if applicable, is deducted from any
Sub-Account Value from which a full or partial surrender is made prior to the
end of an Initial or Subsequent Guaranteed Period. The Surrender Charge is equal
to six months of interest on the amount withdrawn from a Sub-Account Value. The
Surrender Charge for all full and partial surrenders made during an Initial
Guaranteed Period shall not exceed, in the aggregate, a total of six months'
interest on the amount of the Annuity Deposit originally allocated to the
Sub-Account(s) from which the full or partial surrender is made. The Surrender
Charge for all full and partial surrenders made during a Subsequent Guaranteed
Period shall not exceed, in the aggregate, a total of six months' interest on
the amount of the Sub-Account Value(s) originally transferred to a Subsequent
Guaranteed Period from which the full or partial surrender is made.
C. SURRENDER CHARGES (PAGE 7)
A Surrender Charge, if applicable, will be applied to a full or partial
surrender from a Sub-Account requested prior to the end of a Guaranteed Period.
The Surrender Charge is equal to six months of interest on the amount
surrendered from a Sub-Account. The Surrender Charge for all full and partial
surrenders made during an Initial Guaranteed Period shall not exceed, in the
aggregate, a total of six months' interest on the amount of the Annuity
Deposit(s) originally allocated to the Sub-Account from which the full or
partial surrender is made. The Surrender Charge for all full and partial
surrenders made during a Subsequent Guaranteed Period shall not exceed, in the
aggregate, a total of six months' interest on the amount of the Sub-Account
Value originally transferred to a Subsequent Guaranteed Period from which the
full or partial surrender is made. Interest will be computed at the same
interest rate we are crediting the Sub-Account from which the withdrawal is
made. The Surrender Charge will be deducted from the remaining Sub-Account Value
from which the full or partial surrender is made. A Surrender Charge will apply
during the first seven years of all Initial Guaranteed Periods, and during the
first seven years of all Subsequent Guaranteed Periods. There is no Surrender
Charge after the first seven years of each Initial or Subsequent Guaranteed
Periods with a duration greater than seven years. In addition, for purposes of
determining amounts subject to the Surrender Charge, we will consider
surrendered amounts first to be interest withdrawals, to the extent interest
credited to your Sub-Accounts during the prior
B-2
<PAGE>
Contract Year has not yet been withdrawn. No Surrender Charge (or Market Value
Adjustment) is imposed on these interest withdrawal amounts.
Surrender Charges and Market Value Adjustments will not apply to full or
partial surrenders made from Sub-Accounts at the end of an Initial or Subsequent
Guaranteed Period. The Surrender Value will equal the Sub-Account Value on this
date. A request for a surrender at the end of an Initial or Subsequent
Guaranteed Period must be received in a form acceptable to Protective within
twenty days prior to the end of such Initial or Subsequent Guaranteed Period.
If the date we receive your request for a full or partial surrender is prior
to the end of an Initial or Subsequent Guaranteed Period, the Surrender Value
will be calculated as of the Surrender Date by the Company as follows:
[(A X B) - SC] where:
<TABLE>
<C> <C> <S>
A = the Sub-Account Value of the Sub-Account from which a full or
partial surrender is requested
B = the Market Value Adjustment described above
SC = the Surrender Charge plus any unpaid Premium Taxes, if applicable
</TABLE>
Protective will, upon the date of receipt of your request, inform you of the
amounts available for full or partial surrenders.
Any full or partial surrender may be subject to Federal and state income tax
and, in some cases, Premium Tax.
Because the Initial and Subsequent Guaranteed Periods may not extend beyond
the Annuity Commencement Date then in effect, no Surrender Charge or Market
Value Adjustment will be deducted upon the application of your Net Account Value
to purchase an Annuity on the Annuity Commencement Date.
D. MARKET VALUE ADJUSTMENT (PAGE 8)
The amount payable on a full or partial surrender made prior to the end of
any Guaranteed Period may be adjusted up or down by the application of the
Market Value Adjustment formula. Such a Market Value Adjustment is applied to
the Sub-Account Value, before it has been reduced by any Surrender Charge. For
purposes of determining amounts subject to the Market Value Adjustment, we will
consider surrendered amounts first to be interest withdrawals, to the extent
interest credited to your Sub-Accounts during the prior Contract Year has not
yet been withdrawn. No Market Value Adjustment (or Surrender Charge) is imposed
on these interest withdrawal amounts.
The formula which will be used to determine the Market Value Adjustment is:
<TABLE>
<C> <C> <S> <C>
(1+G) N/12
----
(1+C)
</TABLE>
g = The Guaranteed Interest Rate in effect for the current Guaranteed Period
(expressed as a decimal, e.g., 1% = .01).
c = The current Guaranteed Interest Rate that the Company is offering for a
Guaranteed Period of a duration measured in months as represented by N
(expressed as a decimal, e.g., 1% = .01).
N = The number of months from the Surrender Date to the end of the current
Guaranteed Period.
In the case of either a full or partial surrender from a Sub-Account, the
Market Value Adjustment will reflect the relationship between (i) the current
Guaranteed Interest Rate that the Company is crediting for a Guaranteed Period
equal to the time remaining in the Sub-Account's Guaranteed Period at the time
you request the surrender, and (ii) the then applicable Guaranteed Interest Rate
being applied to the Sub-Account from which you select to make a full or partial
surrender.
B-3
<PAGE>
Generally, if your Guaranteed Interest Rate is lower than the applicable
current Guaranteed Interest Rate being credited by Protective for a Guaranteed
Period equal to the time remaining in the Sub-Account's Guaranteed Period, then
the application of the Market Value Adjustment may result in a Surrender Value
that is less than the portion of your Annuity Deposit(s) allocated to a
Sub-Account plus interest credited thereon. Similarly, if your Guaranteed
Interest Rate is higher than the applicable current Guaranteed Interest Rate,
the application of the Market Value Adjustment may result in a Surrender Value
that is greater than the portion of your Annuity Deposit(s) allocated to a
Sub-Account plus interest credited thereon.
Since current Guaranteed Interest Rates are based in part upon the
investment yields then available to Protective, the effect of the Market Value
Adjustment will be related to the levels of such yields. It is possible,
therefore, that, should such yields increase from the time you purchased your
Contract, the effect of the Market Value Adjustment, coupled with the
application of the Surrender Charge and/or Premium Taxes, could result in the
amount you receive upon a full surrender of your Contract being LESS than your
Annuity Deposit(s).
E. DEATH BENEFIT (PAGE 9)
If any Participant dies before the Annuity Commencement Date, a guaranteed
Death Benefit will be payable. With regard to joint Participants, at the first
death of a joint Participant prior to the Annuity Commencement Date, the
Beneficiary will be the surviving Participant, if any. If there is no surviving
Participant, the Death Benefit will be paid to the Beneficiary named by the
Participant. If no Beneficiary designation is in effect or if there is no
designated Beneficiary living, the Death Benefit will be paid to the estate of
the deceased Participant.
If any Participant is not an individual, the death or change of the
Annuitant will be treated as the death of a Participant.
The guaranteed Death Benefit during an Initial or Subsequent Guaranteed
Period will equal the Account Value. The guaranteed Death Benefit is calculated
as of the date of death. If applicable, the guaranteed Death Benefit for all
Guaranteed Periods will be totalled to obtain the guaranteed Death Benefit
payable.
F. WAIVER OF SURRENDER CHARGES
The Company will waive any applicable Surrender Charges in the event you, at
any time after Contract Year 1, (1) enter for a period of at least ninety (90)
days a facility which is licensed by the State and qualifies as a skilled
nursing home facility under Medicare or Medicaid; or (2) you are first diagnosed
as having a terminal illness by a physician that is not related to you or the
Annuitant. The term "terminal illness" is defined in the Contract. Written proof
of a terminal illness satisfactory to Protective must be submitted. Protective
reserves the right to require an examination by a physician of its choice to
verify the terminal illness. A Market Value Adjustment will be imposed if
applicable. The Waiver of Surrender Charges provision is not available in all
states due to applicable insurance laws.
G. ANNUITY BENEFITS (PAGE 10)
OPTION 4 -- The total amount applied may be used to purchase an annuity of
any kind issued by us on the date this option is elected.
The dollar amount of monthly payments under each available Annuity Option
for each $1,000 applied is calculated in accordance with annuity tables set
forth in the Contract. These tables are based on the 1983 Individual Annuity
Mortality Table A projected 4 years with interest at 4% per annum.
H. FEDERAL TAX MATTERS (PAGE 14)
In order to be treated as an annuity contract for federal tax purposes,
section 72(s) of the Code requires that contracts that are held by persons other
than individuals (other than contracts that are issued
B-4
<PAGE>
in connection with certain Qualified Plans) contain certain provisions relating
to distributions upon the death of an annuitant. Certain Contracts do not
contain these provisions. The income under such Contracts is taxable as it
accrues. We issue Forms 1099 in respect of such Contracts.
B-5
<PAGE>
APPENDIX C
MATTERS RELATING TO CONTRACTS
OFFERED IN CERTAIN STATES
PRIOR TO SEPTEMBER 10, 1991
THE FOLLOWING SECTIONS DESCRIBE CONTRACTS WITH A CERTIFICATE DATE PRIOR TO
SEPTEMBER 10, 1991, AND CERTAIN CONTRACTS WITH A CERTIFICATE DATE AFTER THAT
DATE. THESE CONTRACTS CONTAIN PROVISIONS THAT DIFFER FROM THOSE DESCRIBED IN THE
PROSPECTUS. IN PARTICULAR, SURRENDER CHARGE, DEATH BENEFIT, AND CERTAIN ANNUITY
BENEFIT PROVISIONS MAY BE DIFFERENT. REFER TO YOUR CONTRACT FOR COMPLETE DETAILS
OF THESE PROVISIONS. THE TERMS DEFINED BELOW, AND THE FOLLOWING DESCRIPTIONS OF
CERTAIN PROVISIONS SHOULD BE SUBSTITUTED IN THEIR ENTIRETY FOR THE RELATED TERMS
AND DESCRIPTIONS FOUND ELSEWHERE IN THIS PROSPECTUS. THE PAGE REFERENCES LISTED
BELOW INDICATE WHERE IN THE PROSPECTUS THE SUBSTITUTED TERMS AND DESCRIPTIONS
CAN BE FOUND.
A. CAPSULE SUMMARY OF THE CONTRACT
The paragraphs in the Capsule Summary describing the guaranteed Death
Benefit, Market Value Adjustment, and Surrender Charge provided in the Contract
should be revised to read as follows:
A Market Value Adjustment is applied when you request a full or
partial surrender from a Sub-Account prior to the end of the
Sub-Account's Guaranteed Period. The Market Value Adjustment reflects
the relationship between (i) the current Guaranteed Interest Rate that
we are crediting for a Guaranteed Period equal to the time remaining in
the Guaranteed Period at the time you request a full or partial
surrender, and (ii) the then applicable Guaranteed Interest Rate being
applied to the Sub-Account from which you select to make a full or
partial surrender. Since our current guaranteed rates are based in part
upon the investment yields available to Protective, the effect of the
Market Value Adjustment will be related to the levels of such yields.
This Contract provides for a guaranteed Death Benefit. If the
Annuitant or Participant dies before the Annuity Commencement Date, the
guaranteed Death Benefit will be payable to the Beneficiary as
determined under the provisions of the Contract. The guaranteed Death
Benefit is calculated as of the date of death.
The guaranteed Death Benefit will equal the Account Value.
If applicable, the guaranteed Death Benefit for all Guaranteed
Periods will be totalled to obtain the guaranteed Death Benefit payable.
With regard to joint Participants, at the first death of a joint
Participant prior to the Annuity Commencement Date, the Beneficiary will
be the surviving Participant. If the named Beneficiary is the spouse of
the Participant and if the Annuitant is living, the spouse may elect, in
lieu of receiving the guaranteed Death Benefit, to become the
Participant and continue the Contract.
B. GLOSSARY OF SPECIAL TERMS (PAGE 1)
ANNUITANT -- Annuity payments may depend upon the continuation of the life
of a person. That person is called an Annuitant and is named in the Contract.
The Annuitant cannot be changed.
ANNUITY DEPOSIT(S) -- The Annuity Deposit(s) made will be allocated to each
Guaranteed Period(s) selected under each Contract. Each Annuity Deposit must be
at least $5,000 unless approved by the Company.
BENEFICIARY -- PRIMARY -- The person named to receive the Death Benefit
under the Contract upon the death of either the Annuitant or the Participant, as
applicable.
C-1
<PAGE>
CONTINGENT -- The person named to receive the Death Benefit if the
Primary Beneficiary is not living when the Annuitant or Participant dies.
IRREVOCABLE -- One whose consent is necessary to change the Beneficiary
or exercise certain other rights.
SUB-ACCOUNT VALUES -- The amount equal to that part of each Annuity Deposit
allocated by a Participant to a Sub-Account(s), or any amount transferred to a
Sub-Account(s) at the end of a Guaranteed Period increased by all interest
credited and decreased by amounts due to previous full or partial surrenders
(including Surrender Charges, Market Value Adjustments, and Premium Taxes
thereon) and previous interest withdrawals.
SURRENDER CHARGE -- A Surrender Charge, if applicable, is deducted from any
Sub-Account Value from which a full or partial surrender is made prior to the
end of an Initial or Subsequent Guaranteed Period. The Surrender Charge is equal
to six months of interest on the amount withdrawn from a Sub-Account Value. The
Surrender Charge for all full and partial surrenders made during an Initial
Guaranteed Period shall not exceed, in the aggregate, a total of six months'
interest on the amount of the Annuity Deposit originally allocated to the
Sub-Account(s) from which the full or partial surrender is made. The Surrender
Charge for all full and partial surrenders made during a Subsequent Guaranteed
Period shall not exceed, in the aggregate, a total of six months' interest on
the amount of the Sub-Account Value(s) originally transferred to a Subsequent
Guaranteed Period from which the full or partial surrender is made.
C. SURRENDER CHARGES (PAGE 7)
A Surrender Charge, if applicable, will be applied to a full or partial
surrender from a Sub-Account requested prior to the end of a Guaranteed Period.
The Surrender Charge is equal to six months of interest on the amount
surrendered from a Sub-Account. The Surrender Charge for all full and partial
surrenders made during an Initial Guaranteed Period shall not exceed, in the
aggregate, a total of six months' interest on the amount of the Annuity
Deposit(s) originally allocated to the Sub-Account from which the full or
partial surrender is made. The Surrender Charge for all full and partial
surrenders made during a Subsequent Guaranteed Period shall not exceed, in the
aggregate, a total of six months' interest on the amount of the Sub-Account
Value originally transferred to a Subsequent Guaranteed Period from which the
full or partial surrender is made. Interest will be computed at the same
interest rate we are crediting the Sub-Account from which the withdrawal is
made. The Surrender Charge will be deducted from the remaining Sub-Account Value
from which the full or partial surrender is made. A Surrender Charge will apply
during the first seven years of all Initial Guaranteed Periods, and during the
first seven years of all Subsequent Guaranteed Periods. There is no Surrender
Charge after the first seven years of each Initial or Subsequent Guaranteed
Periods with a duration greater than seven years. In addition, for purposes of
determining amounts subject to the Surrender Charge, we will consider
surrendered amounts first to be interest withdrawals, to the extent interest
credited to your Sub-Accounts during the prior Contract Year has not yet been
withdrawn. No Surrender Charge (or Market Value Adjustment) is imposed on these
interest withdrawal amounts.
Surrender Charges and Market Value Adjustments will not apply to full or
partial surrenders made from Sub-Accounts at the end of an Initial or Subsequent
Guaranteed Period. The Surrender Value will equal the Sub-Account Value on this
date. A request for a surrender at the end of an Initial or Subsequent
Guaranteed Period must be received in a form acceptable to Protective within
twenty days prior to the end of such Initial or Subsequent Guaranteed Period.
C-2
<PAGE>
If the date we receive your request for a full or partial surrender is prior
to the end of an Initial or Subsequent Guaranteed Period, the Surrender Value
will be calculated as of the Surrender Date by the Company as follows:
[(A X B) - SC] where:
A = the Sub-Account Value of the Sub-Account from which a full or
partial surrender is requested
B = the Market Value Adjustment described above
SC = the Surrender Charge plus any unpaid Premium Taxes, if applicable
Protective will, upon the date of receipt of your request, inform you of the
amounts available for full or partial surrenders.
Any full or partial surrender may be subject to Federal and state income tax
and, in some cases, Premium Tax.
Because the Initial and Subsequent Guaranteed Periods may not extend beyond
the Annuity Commencement Date then in effect, no Surrender Charge or Market
Value Adjustment will be deducted upon the application of your Net Account Value
to purchase an Annuity on the Annuity Commencement Date.
D. MARKET VALUE ADJUSTMENT (PAGE 8)
The amount payable on a full or partial surrender made prior to the end of
any Guaranteed Period may be adjusted up or down by the application of the
Market Value Adjustment formula. Such a Market Value Adjustment is applied to
the Sub-Account Value, before it has been reduced by any Surrender Charge. For
purposes of determining amounts subject to the Market Value Adjustment, we will
consider surrendered amounts first to be interest withdrawals, to the extent
interest credited to your Sub-Accounts during the prior Contract Year has not
yet been withdrawn. No Market Value Adjustment (or Surrender Charge) is imposed
on these interest withdrawal amounts.
The formula which will be used to determine the Market Value Adjustment is:
(1+G) N/12
----
(1+C)
g = The Guaranteed Interest Rate in effect for the current Guaranteed Period
(expressed as a decimal, e.g., 1% = .01).
c = The current Guaranteed Interest Rate that the Company is offering for a
Guaranteed Period of a duration measured in months as represented by N
(expressed as a decimal, e.g., 1% = .01).
N = The number of months from the Surrender Date to the end of the current
Guaranteed Period.
In the case of either a full or partial surrender from a Sub-Account, the
Market Value Adjustment will reflect the relationship between (i) the current
Guaranteed Interest Rate that the Company is crediting for a Guaranteed Period
equal to the time remaining in the Sub-Account's Guaranteed Period at the time
you request the surrender, and (ii) the then applicable Guaranteed Interest Rate
being applied to the Sub-Account from which you select to make a full or partial
surrender.
Generally, if your Guaranteed Interest Rate is lower than the applicable
current Guaranteed Interest Rate being credited by Protective for a Guaranteed
Period equal to the time remaining in the Sub-Account's Guaranteed Period, then
the application of the Market Value Adjustment may result in a Surrender Value
that is less than the portion of your Annuity Deposit(s) allocated to a
Sub-Account plus interest credited thereon. Similarly, if your Guaranteed
Interest Rate is higher than the applicable current Guaranteed Interest Rate,
the application of the Market Value Adjustment may result in a Surrender Value
that is greater than the portion of your Annuity Deposit(s) allocated to a
Sub-Account plus interest credited thereon.
C-3
<PAGE>
Since current Guaranteed Interest Rates are based in part upon the
investment yields then available to Protective, the effect of the Market Value
Adjustment will be related to the levels of such yields. It is possible,
therefore, that, should such yields increase from the time you purchased your
Contract, the effect of the Market Value Adjustment, coupled with the
application of the Surrender Charge and/or Premium Taxes, could result in the
amount you receive upon a full surrender of your Contract being LESS than your
Annuity Deposit(s).
E. DEATH BENEFIT (PAGE 9)
If an Annuitant or Participant dies before the Annuity Commencement Date, a
guaranteed Death Benefit will be payable to the Beneficiary named by the
Participant or Annuitant as the case may be. With regard to joint Participants,
at the first death of a joint Participant prior to the Annuity Commencement
Date, the Beneficiary will be the surviving Participant.
The guaranteed Death Benefit during an Initial or Subsequent Guaranteed
Period will equal the Account Value. The guaranteed Death Benefit is calculated
as of the date of death. If applicable, the guaranteed Death Benefit for all
Guaranteed Periods will be totalled to obtain the guaranteed Death Benefit
payable.
If the Beneficiary is the surviving spouse of the deceased Participant or
deceased Annuitant, the guaranteed Death Benefit may be taken in one sum
immediately or it may be applied under any of the Annuity Options available
under the Contract. However, if the Beneficiary is the spouse of the deceased
Participant, and if the Annuitant is living, such spouse may elect, in lieu of
receiving the guaranteed Death Benefit, to become the Participant and continue
the Contract.
For any Beneficiary who is not the surviving spouse of the deceased
Participant or deceased Annuitant, the guaranteed Death Benefit may be taken in
one sum immediately or it may be applied under an Annuity Option available under
the Contract which either (i) provides that all amounts will be distributed
within 5 years of the date of death or (ii) provides that amounts will be
payable over the life of the Beneficiary or over a period not extending beyond
the life expectancy of the Beneficiary, and such distribution must commence
within one year of the date of death.
F. WAIVER OF SURRENDER CHARGES
The Company will waive any applicable Surrender Charges in the event you, at
any time after Contract Year 1, (1) enter for a period of at least ninety (90)
days a facility which is licensed by the State and qualifies as a skilled
nursing home facility under Medicare or Medicaid; or (2) you are first diagnosed
as having a terminal illness by a physician that is not related to you or the
Annuitant. The term "terminal illness" is defined in the Contract. Written proof
of a terminal illness satisfactory to Protective must be submitted. Protective
reserves the right to require an examination by a physician of its choice to
verify the terminal illness. A Market Value Adjustment will be imposed if
applicable. The Waiver of Surrender Charges provision is not available in all
states due to applicable insurance laws.
G. ANNUITY BENEFITS (PAGE 10)
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY (PAGE 10)
Upon application for a Contract, you select an Annuity Commencement Date.
The Annuity Commencement Date you choose may never extend beyond the Contract
Year closest to the Annuitant's 85th birthday. Any request for extension of the
maximum Annuity Commencement Date must be approved by the Administrative Office.
You may elect to have all of your Net Account Value or a portion thereof applied
on the Annuity Commencement Date under any of the Annuity Options described
below. In the absence of such election, the Net Account Value will be applied on
the Annuity Commencement Date under Option 2 -- Life Income With Payments for a
10 Year Guaranteed Period.
C-4
<PAGE>
2. CHANGE OF ANNUITY COMMENCEMENT DATE OR ANNUITY OPTION (PAGE 10)
You may change the Annuity Commencement Date from time to time, but any such
change must be made in Writing and received by us within 30 days prior to the
scheduled Annuity Commencement Date. In no event may Initial or Subsequent
Guaranteed Periods extend beyond the Annuity Commencement Date then in effect.
G. ANNUITY OPTIONS (PAGE 11)
OPTION 4 -- The total amount applied may be used to purchase an annuity of
any kind issued by us on the date this option is elected.
The dollar amount of monthly payments under each available Annuity Option
for each $1,000 applied is calculated in accordance with annuity tables set
forth in the Contract. These tables are based on the 1983 Individual Annuity
Mortality Table A projected 4 years with interest at 4% per annum.
H. FEDERAL TAX MATTERS (PAGE 14)
In order to be treated as an annuity contract for federal tax purposes,
section 72(s) of the Code requires that contracts that are held by persons other
than individuals (other than contracts that are issued in connection with
certain Qualified Plans) contain certain provisions relating to distributions
upon the death of an annuitant. Certain Contracts do not contain these
provisions. The income under such Contracts is taxable as it accrues. We issue
Forms 1099 in respect of such Contracts.
C-5
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-2
Consolidated Statements of Income for the years ended December 31, 1997, 1996, and
1995............................................................................... F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996......................... F-4
Consolidated Statements of Stockholder's Equity for the years ended December 31,
1997, 1996, and 1995............................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996,
and 1995........................................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
Financial Statement Schedules:
Schedule III -- Supplementary Insurance Information................................ S-1
Schedule IV -- Reinsurance......................................................... S-2
</TABLE>
All other schedules to the 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.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder
Protective Life Insurance Company
Birmingham, Alabama
We have audited the consolidated financial statements and the financial
statement schedules of Protective Life Insurance Company and Subsidiaries listed
in the index on page F-1 of this Form S-1. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protective Life
Insurance Company and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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.
COOPERS & LYBRAND L.L.P.
February 11, 1998
Birmingham, Alabama
F-2
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded: 1997-
$334,899; 1996-$308,174; 1995-$333,173)................. $ 480,206 $ 462,050 $ 411,682
Net investment income..................................... 557,488 498,781 458,433
Realized investment gains................................. 1,824 5,510 1,951
Other income.............................................. 6,149 5,010 1,355
--------- --------- ---------
1,045,667 971,351 873,421
--------- --------- ---------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance
ceded: 1997-$180,605; 1996-$215,424; 1995-$247,224)..... 658,872 626,893 553,100
Amortization of deferred policy acquisition costs......... 107,175 91,001 82,700
Other operating expenses (net of reinsurance ceded: 1997-
$90,045; 1996-$81,839; 1995-$84,855).................... 129,870 128,148 119,888
--------- --------- ---------
895,917 846,042 755,688
--------- --------- ---------
INCOME BEFORE INCOME TAX.................................... 149,750 125,309 117,733
INCOME TAX EXPENSE (BENEFIT)
Current................................................... 66,283 44,908 47,009
Deferred.................................................. (13,981) (2,142) (6,972)
--------- --------- ---------
52,302 42,766 40,037
--------- --------- ---------
NET INCOME.................................................. $ 97,448 $ 82,543 $ 77,696
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1997-$6,221,871; 1996-$4,648,525)......... $6,348,252 $4,662,997
Equity securities, at market (cost: 1997-$24,983; 1996-$31,669)........................ 15,006 35,250
Mortgage loans on real estate.......................................................... 1,313,478 1,503,781
Investment real estate, net of accumulated depreciation (1997-$671; 1996-$911)......... 13,469 14,172
Policy loans........................................................................... 194,109 166,704
Other long-term investments............................................................ 54,704 29,193
Short-term investments................................................................. 54,337 101,215
---------- ---------
Total investments.................................................................... 7,993,355 6,513,312
Cash..................................................................................... 39,197 114,384
Accrued investment income................................................................ 94,095 70,541
Accounts and premiums receivable, net of allowance for uncollectible amounts
(1997-$5,292; 1996-$2,525)............................................................. 42,255 43,469
Reinsurance receivables.................................................................. 591,457 332,614
Deferred policy acquisition costs........................................................ 632,605 488,201
Property and equipment, net.............................................................. 36,407 35,489
Other assets............................................................................. 14,445 14,636
Assets related to separate accounts...................................................... 931,465 550,697
---------- ---------
$10,375,281 $8,163,343
---------- ---------
---------- ---------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims...................................................... $3,324,294 $2,448,449
Unearned premiums...................................................................... 396,696 257,553
---------- ---------
3,720,990 2,706,002
Guaranteed investment contract deposits.................................................. 2,684,676 2,474,728
Annuity deposits......................................................................... 1,511,553 1,331,067
Other policyholders' funds............................................................... 183,324 142,221
Other liabilities........................................................................ 246,081 117,847
Accrued income taxes..................................................................... 941 1,854
Deferred income taxes.................................................................... 49,417 37,722
Indebtedness to related parties.......................................................... 28,055 25,014
Liabilities related to separate accounts................................................. 931,465 550,697
---------- ---------
Total liabilities.................................................................... 9,356,502 7,387,152
---------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G
STOCKHOLDER'S EQUITY
Preferred Stock, $1.00 par value, shares authorized and issued: 2,000, liquidation
preference $2,000...................................................................... 2 2
Common Stock, $1.00 par value............................................................ 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital............................................................... 327,992 237,992
Note receivable from PLC Employee Stock Ownership Plan................................... (5,378) (5,579)
Retained earnings........................................................................ 629,436 532,088
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 1997-$33,238; 1996-$3,601)..... 61,727 6,688
---------- ---------
Total stockholder's equity........................................................... 1,018,779 776,191
---------- ---------
$10,375,281 $8,163,343
---------- ---------
---------- ---------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE
ADDITIONAL RECEIVABLE NET UNREALIZED TOTAL
PREFERRED COMMON PAID-IN FROM PLC RETAINED GAINS (LOSSES) STOCKHOLDER'S
STOCK STOCK CAPITAL ESOP EARNINGS ON INVESTMENTS EQUITY
--------- ------ ---------- ---------- --------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994................... $5,000 $126,494 $(5,936) $377,049 $(107,532) $ 395,075
-------------
Net income for 1995........................ 77,696 77,696
Increase in net unrealized gains on
investments (net of income tax:
$89,742)................................. 166,663 166,663
Reclassification adjustment for amounts
included in net income (net of income
tax: $(683))............................. (1,268) (1,268)
-------------
Comprehensive income for 1995.............. 243,091
-------------
Common dividends ($1.00 per share)......... (5,000) (5,000)
Preferred dividends ($50 per share)........ (100) (100)
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 (5,765) 449,645 57,863 651,237
-------------
Net income for 1996........................ 82,543 82,543
Decrease in net unrealized gains on
investments (net of income tax:
$(25,627)................................ (47,593) (47,593)
Reclassification adjustment for amounts
included in net income (net of income
tax: $(1,928))........................... (3,582) (3,582)
-------------
Comprehensive income for 1996.............. 31,368
-------------
Redemption feature of preferred stock
removed-Note I........................... $2 1,998 2,000
Preferred dividends ($50 per share)........ (100) (100)
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 (5,579) 532,088 6,688 776,191
-------------
Net income for 1997........................ 97,448 97,448
Increase in net unrealized gains on
investments (net of income tax-
$30,275)................................. 56,225 56,225
Reclassification adjustment for amounts
included in net income (net of income
tax: $(638))............................. (1,186) (1,186)
-------------
Comprehensive income for 1997.............. 152,487
-------------
Preferred dividends ($50 per share)........ (100) (100)
Capital contribution from PLC.............. 90,000 90,000
Decrease in note receivable from PLC
ESOP..................................... 201 201
--
------ ---------- ---------- --------- -------------- -------------
Balance, December 31, 1997................... $2 $5,000 $327,992 $(5,378) $629,436 $ 61,727 $1,018,779
--
--
------ ---------- ---------- --------- -------------- -------------
------ ---------- ---------- --------- -------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 97,448 $ 82,543 $ 77,696
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs............ 107,175 91,001 84,501
Capitalization of deferred policy acquisition costs.......... (135,211) (77,078) (89,266)
Depreciation expense......................................... 5,124 5,333 4,317
Deferred income taxes........................................ (17,918) (2,442) (6,971)
Accrued income taxes......................................... (5,558) 893 5,537
Interest credited to universal life and investment
products................................................... 299,004 280,377 286,710
Policy fees assessed on universal life and investment
products................................................... (131,582) (116,401) (100,840)
Change in accrued investment income and other receivables.... (158,798) (70,987) (161,924)
Change in policy liabilities and other policyholder funds of
traditional life and health products....................... 279,522 133,621 201,353
Change in other liabilities.................................. 65,393 7,209 (3,270)
Other (net).................................................. (1,133) (4,281) (6,634)
---------- ---------- ----------
Net cash provided by operating activities........................ 403,466 329,788 291,209
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale............................... 6,462,663 1,327,323 2,014,060
Other........................................................ 324,242 168,898 78,568
Sale of investments:
Investment available for sale................................ 1,108,058 1,569,119 1,523,454
Other........................................................ 695,270 568,218 141,184
Cost of investments acquired:
Investments available for sale............................... (8,428,804) (3,798,631) (3,626,877)
Other........................................................ (718,335) (400,322) (540,648)
Acquisitions and bulk reinsurance assumptions.................. (169,124) 264,126
Purchase of property and equipment............................. (6,087) (6,899) (5,629)
Sale of property and equipment................................. 2,681 288 286
---------- ---------- ----------
Net cash used in investing activities............................ (729,436) (307,880) (415,602)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term
debt......................................................... 1,159,538 941,438 1,162,700
Capital contribution from PLC.................................. 90,000 91,500 18,000
Principal payments on line of credit arrangements and long-term
debt......................................................... (1,159,538) (941,438) (1,162,700)
Principal payment on surplus note to PLC....................... (4,693) (10,000) (4,750)
Dividends to stockholder....................................... (100) (100) (5,100)
Investment product deposits and change in universal life
deposits..................................................... 910,659 949,122 908,063
Investment product withdrawals................................. (745,083) (944,244) (785,622)
---------- ---------- ----------
Net cash provided by financing activities........................ 250,783 86,278 130,591
---------- ---------- ----------
INCREASE (DECREASE) IN CASH...................................... (75,187) 108,186 6,198
CASH AT BEGINNING OF YEAR........................................ 114,384 6,198 0
---------- ---------- ----------
CASH AT END OF YEAR.............................................. $ 39,197 $ 114,384 $ 6,198
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt............................................. $ 4,343 $ 4,633 $ 6,029
Income taxes................................................. $ 70,133 $ 43,478 $ 41,397
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Reduction of principal on note from ESOP....................... $ 201 $ 186 $ 171
Acquisitions and bulk reinsurance assumptions
Assets acquired.............................................. $1,114,832 $ 296,935 $ 613
Liabilities assumed.......................................... (902,267) (364,862) (21,800)
---------- ---------- ----------
Net.......................................................... $ 212,565 $ (67,927) $ (21,187)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Protective Life
Insurance Company and subsidiaries ("Protective") are prepared on the basis of
generally accepted accounting principles. Such accounting principles differ from
statutory reporting practices used by insurance companies in reporting to state
regulatory authorities. (See also Note B.)
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. Protective is a wholly-owned subsidiary of Protective
Life Corporation ("PLC"), an insurance holding company.
NATURE OF OPERATIONS
Protective produces, distributes, and services a diverse array of life
insurance, specialty insurance and retirement savings and investment products.
Protective markets individual life insurance, dental insurance and managed care
services, credit life and disability insurance, guaranteed investment contracts,
guaranteed funding agreements, and fixed and variable annuities throughout the
United States. Protective also maintains a separate division devoted exclusively
to the acquisition of insurance policies from other companies.
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 1996 Protective adopted Statement of Financial Accounting Standards
("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." In 1997 Protective adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities;"
SFAS No. 130, "Reporting Comprehensive Income;" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
SFAS No. 130 requires the presentation of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Protective has reconfigured the Consolidated
Statements of Stockholder's Equity presented herein in accordance with this
Statement. SFAS No. 131 requires additional disclosures with respect to
Protective's operating segments.
The adoption of these accounting standards did not have a material effect on
Protective's financial statements but has resulted in changed disclosure and
financial statement presentation.
F-7
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Protective has classified all of its investments in fixed maturities, equity
securities, and short-term investments as "available for sale."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
- Fixed maturities (bonds, bank loan participations, and redeemable
preferred stocks) -- at current market value.
- Equity securities (common and nonredeemable preferred stocks) -- at
current market value.
- Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
- Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate acquired
through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.
- Policy loans -- at unpaid balances.
- Other long-term investments -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.
- Short-term investments -- at cost, which approximates current market
value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $3.1 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.
Protective's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Total investments................................................ $ 7,876,952 $ 6,495,259
Deferred policy acquisition costs................................ 654,043 495,965
All other assets................................................. 1,749,321 1,161,830
------------- ------------
$ 10,280,316 $ 8,153,054
------------- ------------
------------- ------------
Deferred income taxes............................................ $ 16,179 $ 34,121
All other liabilities............................................ 9,307,085 7,349,430
------------- ------------
9,323,264 7,383,551
Stockholder's equity............................................. 957,052 769,503
------------- ------------
$ 10,280,316 $ 8,153,054
------------- ------------
------------- ------------
</TABLE>
F-8
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 gains of $1.5 million and net realized losses of
$0.2 million were deferred in 1997 and 1996 respectively. At December 31, 1997
and 1996, options and open futures contracts with notional amounts of $925.0
million and $805.0 million, respectively, had net unrealized losses of $0.4
million and $1.9 million respectively.
Protective uses interest rate swap contracts to convert certain investments
from a variable to a fixed rate of interest. At December 31, 1997, related open
interest rate swap contracts with a notional amount of $95.3 million were in a
$0.1 million net unrealized loss position. 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.
In connection with a commercial mortgage loan securitization, Protective
entered into interest rate swap contracts converting a fixed rate of interest to
a floating rate of interest and converting a floating rate of interest to a
fixed rate of interest with notional amounts at December 31, 1997, of $332.4
million and $200.0 million, respectively. In the aggregate, there were no net
unrealized gains or losses associated with these swap contracts at December 31,
1997.
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 primarily uses the
straight-line method 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.
F-9
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Home office building.................................................... $ 37,459 $ 36,586
Other, principally furniture and equipment.............................. 46,937 35,401
--------- ---------
84,396 71,987
Accumulated depreciation................................................ 47,989 36,498
--------- ---------
$ 36,407 $ 35,489
--------- ---------
--------- ---------
</TABLE>
SEPARATE ACCOUNTS
Protective operates separate accounts, some in which Protective bears the
investment risk and others in which the investments risk rests with the
contractholder. The assets and liabilities related to separate accounts in which
Protective does not bear the investment risk are valued at market and reported
separately as assets and liabilities related to separate accounts in the
accompanying consolidated financial statements.
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
Traditional Life and Health Insurance Products -- Traditional life insurance
products consist principally of those products with fixed and guaranteed
premiums and benefits and include whole life insurance policies, term life
insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies. Life insurance and immediate annuity premiums
are recognized as revenue when due. Health insurance premiums are recognized as
revenue over the terms of the policies. Benefits and expenses are associated
with earned premiums so that profits are recognized over the life of the
contracts. This is accomplished by means of the provision for liabilities for
future policy benefits and the amortization of deferred policy acquisition
costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions as to
investment yields, mortality, persistency, and other assumptions based on
Protective's experience modified as necessary to reflect anticipated trends and
to include provisions for possible adverse deviation. Reserve investment yield
assumptions are graded and range from 2.5% to 7.0%. The liability for future
policy benefits and claims on traditional life and health insurance products
includes estimated unpaid claims that have been reported to Protective and
claims incurred but not yet reported. Policy claims are charged to expense in
the period that the claims are incurred.
F-10
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance beginning of year................................ $ 108,159 $ 73,642 $ 79,462
Less reinsurance....................................... 6,423 3,330 5,024
---------- ---------- ----------
Net balance beginning of year............................ 101,736 70,312 74,438
---------- ---------- ----------
Incurred related to:
Current year............................................. 258,322 275,524 216,839
Prior year............................................... (14,540) (2,417) (4,038)
---------- ---------- ----------
Total incurred......................................... 243,782 273,107 212,801
---------- ---------- ----------
Paid related to:
Current year............................................. 203,381 197,163 164,321
Prior year............................................... 58,104 57,812 48,834
---------- ---------- ----------
Total paid............................................. 261,485 254,975 213,155
---------- ---------- ----------
Other changes:
Acquisitions and reserve transfers..................... 3,415 13,292 (3,772)
---------- ---------- ----------
Net balance end of year.................................. 87,448 101,736 70,312
Plus reinsurance....................................... 18,673 6,423 3,330
---------- ---------- ----------
Balance end of year...................................... $ 106,121 $ 108,159 $ 73,642
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- Universal Life and Investment Products -- Universal life and investment
products include universal life insurance, guaranteed investment
contracts, deferred annuities, and annuities without life contingencies.
Revenues for universal life and investment products consist of policy fees
that have been assessed against policy account balances for the costs of
insurance, policy administration, and surrenders. That is, universal life
and investment product deposits are not considered revenues in accordance
with generally accepted accounting principles. Benefit reserves for
universal life and investment products represent policy account balances
before applicable surrender charges plus certain deferred policy
initiation fees that are recognized in income over the term of the
policies. Policy benefits and claims that are charged to expense include
benefit claims incurred in the period in excess of related policy account
balances and interest credited to policy account balances. Interest credit
rates for universal life and investment products ranged from 3.0% to 9.4%
in 1997.
At December 31, 1997, Protective estimates the fair value of its
guaranteed investment contracts to be $2,687.3 million using discounted
cash flows. The surrender value of Protective's annuities which
approximates fair value was $1,494.6 million.
- Policy Acquisition Costs -- Commissions and other costs of acquiring
traditional life and health insurance, universal life insurance, and
investment products that vary with and are primarily related to the
production of new business have been deferred. Traditional life and health
insurance acquisition costs are amortized over the premium-payment period
of the related policies in proportion to the ratio of annual premium
income to total anticipated premium income. Acquisition costs for
universal life and investment products are being amortized over the lives
of the policies in relation to the present value of estimated gross
profits from surrender charges and
F-11
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $261.9 million and $149.9 million at December 31,
1997 and 1996, respectively. During 1996 $69.2 million of present value of
future profits on acquisitions made during the year was capitalized and $21.8
million was amortized. During 1997 $136.2 million of present value of future
profits on acquisitions made during the year was capitalized, and $24.2 million
was amortized. The unamortized present value of future profits for all
acquisitions was $274.9 million at December 31, 1997 and $167.6 million at
December 31, 1996.
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 $4.6 million in 1997, $4.1 million in 1996, and
$2.6 million in 1995.
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
F-12
<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)
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.
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
------------------------------- -------------------------------
1997 1996 1995 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory
reporting practices: (1)........... $ 134,417 $ 102,337 $ 115,259 $ 579,111 $ 456,320 $ 324,416
Additions (deductions) by adjustment:
Deferred policy acquisition costs,
net of amortization.............. 10,310 (2,830) (765) 632,605 488,201 410,183
Deferred income tax................ 13,981 2,142 6,972 (49,417) (37,722) (67,420)
Asset Valuation Reserve............ 67,369 64,233 105,769
Interest Maintenance Reserve....... (1,434) (2,142) (1,235) 9,809 17,682 14,412
Nonadmitted items.................. 30,500 21,610 20,603
Other timing and valuation
adjustments...................... (54,494) (11,210) (45,028) (215,448) (197,227) (108,495)
Noninsurance affiliates............ 17,530 11,104 (22) (4) 4 (9)
Consolidation elimination.......... (22,862) (16,858) 2,515 (35,746) (36,910) (46,222)
--------- --------- --------- --------- --------- ---------
In conformity with generally accepted
accounting principles.............. $ 97,448 $ 82,543 $ 77,696 $1,018,779 $ 776,191 $ 653,237
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Consolidated
F-13
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities......................................... $ 396,255 $ 310,353 $ 272,942
Equity securities........................................ 1,186 2,124 1,338
Mortgage loans on real estate............................ 161,604 153,463 162,135
Investment real estate................................... 2,004 1,875 1,855
Policy loans............................................. 11,370 10,378 8,958
Other, principally short-term investments................ 21,876 51,637 40,348
---------- ---------- ----------
594,295 529,830 487,576
Investment expenses...................................... 36,807 31,049 29,143
---------- ---------- ----------
$ 557,488 $ 498,781 $ 458,433
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<S> <C> <C> <C>
Fixed maturities.............................. $ (8,355) $ (7,101) $ 6,118
Equity securities............................. 5,975 1,733 44
Mortgage loans and other investments.......... 4,204 10,878 (4,211)
--------- --------- ---------
$ 1,824 $ 5,510 $ 1,951
--------- --------- ---------
--------- --------- ---------
</TABLE>
Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $23.0 million at December 31, 1997 and $30.9
million at December 31, 1996. Additions and reductions to the allowance are
included in realized investment gains (losses). Without such additions/
reductions, Protective had net realized investment losses of $6.1 million in
1997, net realized investment gains of $3.7 million in 1996, and net realized
investment losses of $0.5 million in 1995.
In 1997, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $21.3 million and
gross losses were $23.5 million. In 1996, gross gains 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.
F-14
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of Protective's investments
classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUES
- ------------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed.......................................... $ 2,982,266 $ 54,103 $ 16,577 $ 3,019,792
United States Government and authorities................. 160,484 1,366 0 161,850
States, municipalities, and political subdivisions....... 31,621 532 0 32,153
Public utilities......................................... 481,679 7,241 0 488,920
Convertibles and bonds with warrants..................... 694 0 168 526
All other corporate bonds................................ 2,559,186 80,903 1,019 2,639,070
Redeemable preferred stocks................................ 5,941 0 0 5,941
------------ ----------- ----------- ------------
6,221,871 144,145 17,764 6,348,252
Equity securities............................................ 24,983 300 10,277 15,006
Short-term investments....................................... 54,337 0 0 54,337
------------ ----------- ----------- ------------
$ 6,301,190 $ 144,445 $ 28,041 $ 6,417,595
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<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
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
F-15
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown below. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1997 COST VALUES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Due in one year or less........................................... $ 456,248 $ 460,994
Due after one year through five years............................. 2,774,769 2,815,553
Due after five years through ten years............................ 2,377,989 2,440,193
Due after ten years............................................... 612,865 631,512
------------ ------------
$ 6,221,871 $ 6,348,252
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1996 COST VALUES
- ------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1997 1996
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
AAA........................................................................ 41.1% 48.3%
AA......................................................................... 4.8 4.4
A.......................................................................... 29.1 22.6
BBB
Bonds.................................................................... 21.9 21.1
Bank loan participations................................................. 0.1
BB or Less
Bonds.................................................................... 3.0 2.5
Bank loan participations................................................. 0.9
Redeemable preferred stocks................................................ 0.1 0.1
--------- ---------
100.0% 100.0%
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997 and 1996, Protective had bonds which were rated less than
investment grade of $195.2 million and $117.5 million, respectively, having an
amortized cost of $193.6 million and $137.0 million, respectively. At December
31, 1997, approximately $89.6 million of the bonds rates less than investment
grade were securities issued in company-sponsored commercial mortgage loan
securitizations. Additionally, Protective had bank loan participations at
December 31, 1996 which were rated less than investment grade of $43.6 million
having an amortized cost of $43.6 million.
F-16
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The change in unrealized gains (losses), net of income tax on fixed maturity
and equity securities for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Fixed maturities......................................... $ 72,741 $ (56,898) $ 199,024
Equity securities........................................ $ (8,813) $ 207 $ 2,740
</TABLE>
At December 31, 1997, all of Protective's mortgage loans were commercial
loans of which 75% were retail, 9% were apartments, 7% 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 5% of mortgage loans. Approximately 84% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: Florida, Georgia, Texas, North Carolina,
Alabama, Virginia, South Carolina, Tennessee, Kentucky, California, Maryland,
Mississippi, Ohio, Michigan, and Indiana.
Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $76.7
million would become due in 1998, $434.4 million in 1999 to 2002, and $129.7
million in 2003 to 2007.
At December 31, 1997, the average mortgage loan was $1.6 million, and the
weighted average interest rate was 8.8%. The largest single mortgage loan was
$12.8 million. While Protective's mortgage loans do not have quoted market
values, at December 31, 1997 and 1996, Protective estimates the market value of
its mortgage loans to be $1,405.5 million and $1,581.7 million, respectively,
using discounted cash flows from the next call date.
At December 31, 1997 and 1996, Protective's problem mortgage loans and
foreclosed properties totaled $17.7 million and $23.7 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 $6.7
million were nonincome producing for the twelve months ended December 31, 1997.
Protective believes it is not practicable to determine the fair value of its
policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%. The fair values of Protective's other long-term
investments approximate cost.
F-17
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<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............................... (0.2) (0.4) (0.5)
Low-income housing credit.......................................................... (0.6) (0.6) (0.7)
Tax benefits arising from prior acquisitions and other adjustments................. 0.7 0.1 0.2
--- --- ---
Effective income tax rate.......................................................... 34.9% 34.1% 34.0%
--- --- ---
--- --- ---
</TABLE>
The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Deferred policy acquisition costs............................................. $ 7,054 $ 15,542 $ (11,606)
Benefit and other policy liability changes.................................... (23,564) (16,321) 52,496
Temporary differences of investment income.................................... 2,516 (1,163) (34,175)
Other items................................................................... 13 (200) (13,687)
---------- ---------- ----------
$ (13,981) $ (2,142) $ (6,972)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder liability reserves.............................................. $ 138,701 $ 80,151
Other................................................................................... 1,029 2,503
---------- ----------
139,730 82,654
---------- ----------
---------- ----------
Deferred income tax liabilities:
Deferred policy acquisition costs....................................................... 150,895 117,696
Unrealized gain on investments.......................................................... 38,252 2,680
---------- ----------
189,147 120,376
---------- ----------
Net deferred income tax liability....................................................... $ 49,417 $ 37,722
---------- ----------
---------- ----------
</TABLE>
Under pre-1984 life insurance company income tax laws, a portion of
Protective's gain from operations which was not subject to current income
taxation was accumulated for income tax purposes in a memorandum account
designated as Policyholders' Surplus. The aggregate accumulation in this account
at December 31, 1997 was approximately $73 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
$727 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.
F-18
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
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, 1997, PLC had no borrowings outstanding 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, 1997 and 1996.
Included in indebtedness to related parties is a surplus debenture issued by
Protective to PLC. At December 31, 1997, the balance of the surplus debenture
was $20.0 million. The debenture matures in 2003.
Indebtedness to related parties also consists of payables to affiliates
under control of PLC in the amount of $8.1 million at December 31, 1997.
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.
Interest expense on borrowed money totaled $4.3 million, $4.6 million, and
$6.0 million, in 1997, 1996, and 1995, respectively.
NOTE F -- RECENT ACQUISITIONS
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.
In June 1997, Protective acquired West Coast Life Insurance Company ("West
Coast"). In September 1997, Protective acquired the Western Diversified Group.
In October 1997, Protective coinsured a block of credit policies.
These transactions have been accounted for as purchases, and the results of
the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
Summarized below are the consolidated results of operations of 1997 and
1996, on an unaudited pro forma basis, as if the West Coast and Western
Diversified Group acquisitions had occurred as of January 1, 1996. The pro forma
information is based on Protective's consolidated results of operations for 1997
and 1996 and on data provided by the respective companies, after giving effect
to certain pro forma adjustments. The pro forma financial information does not
purport to be indicative of results of operations that
F-19
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE F -- RECENT ACQUISITIONS (CONTINUED)
would have occurred had the transaction occurred on the basis assumed above nor
are they indicative of results of the future operations of the combined
enterprises.
<TABLE>
<S> <C> <C>
1997 1996
------------ ------------
Total revenues...................................................................... $ 1,133,962 $ 1,126,096
Net income.......................................................................... $ 100,621 $ 88,774
</TABLE>
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Protective does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which Protective does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In addition, in some class action and other lawsuits involving
insurers' sales practices, insurers have made material settlement payments. In
some states (including Alabama), juries have substantial discretion in awarding
punitive damages which creates the potential for unpredictable material adverse
judgments in any given punitive damage suit. Protective and its subsidiaries,
like other life and health insurers, in the ordinary course of business, are
involved in such litigation. 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, results of operations, or liquidity of
Protective.
NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS
At December 31, 1997, approximately $483 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 1998 is estimated to be $154 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. The stock pays, when and if declared,
annual minimum cumulative dividends of $50 per share, and noncumulative
participating
F-20
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE I -- PREFERRED STOCK (CONTINUED)
dividends to the extent American Foundation's statutory earnings for the
immediately preceding fiscal year exceed $1 million. Dividends of $0.1 million
were paid to PLC in 1997, 1996, and 1995.
NOTE J -- RELATED PARTY MATTERS
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, $5.4 million at
December 31, 1997, is accounted for as a reduction to stockholder's equity. The
stock will be used to match employee contributions to PLC's existing 401(k)
Plan. The ESOP shares are dividend paying. Dividends on the shares are used to
pay the ESOP's note to Protective.
Protective leases furnished office space and computers to affiliates. Lease
revenues were $3.1 million in 1997, $3.7 million in 1996, and $3.1 million in
1995. Protective purchases data processing, legal, investment and management
services from affiliates. The costs of such services were $51.6 million, $50.4
million, and $38.1 million, in 1997, 1996, and 1995, respectively. Commissions
paid to affiliated marketing organizations of $5.2 million, $7.4 million, and
$10.9 million, in 1997, 1996, and 1995, respectively, were included in deferred
policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $21.4 million, $31.2 million, and $21.2
million, in 1997, 1996, and 1995, respectively. Protective and/or PLC paid
commissions, interest, and service fees to these same corporations totaling $5.4
million, $5.0 million, and $5.3 million, in 1997, 1996, and 1995, respectively.
For a discussion of indebtedness to related parties, see Note E.
NOTE K -- OPERATING SEGMENTS
Protective operates seven divisions whose principal strategic focuses can be
grouped into three general categories: Life Insurance, Specialty Insurance
Products, and Retirement Savings and Investment Products. Each division has a
senior officer of Protective responsible for its operations. A division is
generally distinguished by products and/or channels of distribution. A brief
description of each division follows.
LIFE INSURANCE
ACQUISITIONS DIVISION. The Acquisitions Division focuses solely on
acquiring, converting, and servicing business acquired from other companies.
These acquisitions may be accomplished through acquisitions of companies or
through the assumption or reinsurance of life insurance and related policies.
INDIVIDUAL LIFE DIVISION. The Individual Life Division markets universal
life and other life insurance products on a national basis through a network of
independent insurance agents. The Division primarily utilizes a distribution
system based on experienced independent producing general agents who are
recruited by regional sales managers. In addition, the Division distributes
insurance products in the life insurance brokerage market.
WEST COAST DIVISION. The West Coast Division sells universal and
traditional ordinary life products in the life insurance brokerage market and in
the "bank owned life insurance" market. The Division primarily
F-21
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
utilizes a distribution system comprised of brokerage general agencies with a
network of independent life agents.
SPECIALTY INSURANCE PRODUCTS
DENTAL AND CONSUMER BENEFITS DIVISION. The Division (formerly known as the
Group Division) recently exited from the traditional group major medical
business, fulfilling the Division's strategy to focus primarily on dental and
related products. Accordingly, the Division was renamed the Dental and Consumer
Benefits Division. The Division's primary focus is on indemnity dental products.
The Division also markets group life and disability coverages, and administers
an essentially closed block of individual cancer insurance policies.
FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, consumer finance companies and automobile dealers. The Division markets
through employee field representatives, independent brokers, and an affiliate.
The Division also includes a small property casualty insurer that sells
automobile extended warranty coverages.
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
GUARANTEED INVESTMENT CONTRACTS DIVISION. The Guaranteed Investment
Contracts ("GIC") Division markets GICs to 401(k) and other qualified retirement
savings plans. The Division also offers related products, including guaranteed
funding agreements offered to the trustees of municipal bond proceeds, floating
rate contracts offered to trust departments, and long-term annuity contracts
offered to fund certain state obligations.
INVESTMENT PRODUCTS DIVISION. The Investment Products Division
manufactures, sells, and supports fixed and variable annuity products. These
products are primarily sold through stockbrokers, but are also sold through
financial institutions and the Individual Life Division's agency sales force.
CORPORATE AND OTHER
Protective has an additional business segment herein referred to as
Corporate and Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the Divisions above
(including net investment income on capital and interest on substantially all
debt).
Protective uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax. Premiums and policy fees, other income, benefits and settlement expenses,
and amortization of deferred policy acquisition costs are attributed directly to
each operating segment. Net investment income is allocated based on directly
related assets required for transacting the business of that segment. Realized
investment gains (losses) and other operating expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
Operating segment income and assets for the years ended December 31 are as
follows:
F-22
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
(This page has been left blank intentionally.)
F-23
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
LIFE INSURANCE
-----------------------------------------
INDIVIDUAL
OPERATING SEGMENT INCOME ACQUISITIONS LIFE WEST COAST
- ------------------------- ------------- ----------- -----------
<S> <C> <C> <C>
1997
Premiums and policy
fees................... $ 102,635 $ 127,480 $ 14,122
Net investment income.... 110,155 54,593 30,194
Realized investment gains
(losses)...............
Other income............. 10 617
------------- ----------- -----------
Total revenues....... 212,800 182,690 44,316
------------- ----------- -----------
Benefits and settlement
expenses............... 116,506 114,678 28,304
Amortization of deferred
policy acquisition
costs.................. 16,606 27,354 961
Other operating
expenses............... 23,016 18,178 6,849
------------- ----------- -----------
Total benefits and
expenses............ 156,128 160,210 36,114
------------- ----------- -----------
Income before income
tax.................... 56,672 22,480 8,202
Income tax expense.......
------------- ----------- -----------
Net income...............
------------- ----------- -----------
1996
Premiums and policy
fees................... $ 106,543 $ 116,710
Net investment income.... 106,015 48,442
Realized investment gains
(losses)............... 3,098
Other income............. 641 1,056
------------- ----------- -----------
Total revenues....... 213,199 169,306
------------- ----------- -----------
Benefits and settlement
expenses............... 118,181 96,404
Amortization of deferred
policy acquisition
costs.................. 17,162 28,393
Other operating
expenses............... 24,292 28,611
------------- ----------- -----------
Total benefits and
expenses............ 159,635 153,408
------------- ----------- -----------
Income before income
tax.................... 53,564 15,898
Income tax expense.......
------------- ----------- -----------
Net income...............
------------- ----------- -----------
1995
Premiums and policy
fees................... $ 98,501 $ 99,018
Net investment income.... 95,018 40,237
Realized investment gains
(losses)...............
Other income............. 25 169
------------- ----------- -----------
Total revenues....... 193,544 139,424
------------- ----------- -----------
Benefits and settlement
expenses............... 100,016 80,067
Amortization of deferred
policy acquisition
costs.................. 20,601 20,403
Other operating
expenses............... 22,551 22,748
------------- ----------- -----------
Total benefits and
expenses............ 143,168 123,218
------------- ----------- -----------
Income before income
tax.................... 50,376 16,206
Income tax expense.......
------------- ----------- -----------
Net income...............
------------- ----------- -----------
OPERATING SEGMENT ASSETS
- -------------------------
1997
Investments and other
assets................. $1,401,294 $ 960,316 $ 910,030
Deferred policy
acquisition costs...... 138,052 252,321 108,126
------------- ----------- -----------
Total assets............. $1,539,346 $ 1,212,637 $1,018,156
------------- ----------- -----------
1996
Investments and other
assets................. $1,423,081 $ 814,728
Deferred policy
acquisition costs...... 156,172 220,232
------------- ----------- -----------
Total assets............. $1,579,253 $ 1,034,960
------------- ----------- -----------
1995
Investments and other
assets................. $1,131,653 $ 701,431
Deferred policy
acquisition costs...... 123,889 186,496
------------- ----------- -----------
Total assets............. $1,255,542 $ 887,927
------------- ----------- -----------
</TABLE>
- ----------------------------------
(1) Adjustments represent the inclusion of unallocated realized investment
gains (losses) and the recognition of income tax expense. There are no
asset adjustments.
F-24
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
SPECIALTY INSURANCE RETIREMENT SAVINGS AND
PRODUCTS INVESTMENT PRODUCTS
--------------------------- ---------------------------
DENTAL AND GUARANTEED CORPORATE
CONSUMER FINANCIAL INVESTMENT INVESTMENT AND TOTAL
BENEFITS INSTITUTIONS CONTRACTS PRODUCTS OTHER ADJUSTMENTS(1) CONSOLIDATED
----------- ------------- ------------ ------------ ---------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Premiums and policy
fees................... $151,110 $ 72,263 $ 12,367 $ 229 $ 480,206
Net investment income.... 23,810 16,341 $ 211,915 105,196 5,284 557,488
Realized investment gains
(losses)............... (3,180) 589 $4,415 1,824
Other income............. 1,278 3,033 (192) 1,403 6,149
----------- ------------- ------------ ------------ ---------- ------ -------------
Total revenues....... 176,198 91,637 208,735 117,960 6,916 1,045,667
----------- ------------- ------------ ------------ ---------- ------ -------------
Benefits and settlement
expenses............... 110,148 27,643 179,235 82,019 339 658,872
Amortization of deferred
policy acquisition
costs.................. 15,711 30,812 618 15,110 3 107,175
Other operating
expenses............... 38,572 20,165 3,945 12,312 6,833 129,870
----------- ------------- ------------ ------------ ---------- ------ -------------
Total benefits and
expenses............ 164,431 78,620 183,798 109,441 7,175 895,917
----------- ------------- ------------ ------------ ---------- ------ -------------
Income before income
tax.................... 11,767 13,017 24,937 8,519 (259) 149,750
Income tax expense....... 52,302 52,302
----------- ------------- ------------ ------------ ---------- ------ -------------
Net income............... $ 97,448
----------- ------------- ------------ ------------ ---------- ------ -------------
1996
Premiums and policy
fees................... $156,530 $ 73,422 $ 8,189 $ 656 $ 462,050
Net investment income.... 16,249 13,898 $ 214,369 98,719 1,089 498,781
Realized investment gains
(losses)............... (7,963) 3,858 $6,517 5,510
Other income............. 2,193 56 1,064 5,010
----------- ------------- ------------ ------------ ---------- ------ -------------
Total revenues....... 174,972 87,320 206,406 110,822 2,809 971,351
----------- ------------- ------------ ------------ ---------- ------ -------------
Benefits and settlement
expenses............... 125,797 42,781 169,927 73,093 710 626,893
Amortization of deferred
policy acquisition
costs.................. 5,326 24,900 509 14,710 1 91,001
Other operating
expenses............... 43,028 10,673 3,840 13,196 4,508 128,148
----------- ------------- ------------ ------------ ---------- ------ -------------
Total benefits and
expenses............ 174,151 78,354 174,276 100,999 5,219 846,042
----------- ------------- ------------ ------------ ---------- ------ -------------
Income before income
tax.................... 821 8,966 32,130 9,823 (2,410) 125,309
Income tax expense....... 42,766 42,766
----------- ------------- ------------ ------------ ---------- ------ -------------
Net income............... $ 82,543
----------- ------------- ------------ ------------ ---------- ------ -------------
1995
Premiums and policy
fees................... $142,483 $ 65,669 $ 4,566 $ 1,445 $ 411,682
Net investment income.... 14,329 9,276 $ 203,376 95,661 536 458,433
Realized investment gains
(losses)............... (3,908) 4,938 $ 921 1,951
Other income............. 2,451 (2,187) (181) 1,078 1,355
----------- ------------- ------------ ------------ ---------- ------ -------------
Total revenues....... 159,263 72,758 199,468 104,984 3,059 873,421
----------- ------------- ------------ ------------ ---------- ------ -------------
Benefits and settlement
expenses............... 109,447 24,020 165,963 72,111 1,476 553,100
Amortization of deferred
policy acquisition
costs.................. 3,052 26,809 386 11,446 3 82,700
Other operating
expenses............... 37,657 14,228 4,140 10,494 8,070 119,888
----------- ------------- ------------ ------------ ---------- ------ -------------
Total benefits and
expenses............ 150,156 65,057 170,489 94,051 9,549 755,688
----------- ------------- ------------ ------------ ---------- ------ -------------
Income before income
tax.................... 9,107 7,701 28,979 10,933 (6,490) 117,733
Income tax expense....... 40,037 40,037
----------- ------------- ------------ ------------ ---------- ------ -------------
Net income............... $ 77,696
----------- ------------- ------------ ------------ ---------- ------ -------------
OPERATING SEGMENT ASSETS
- -------------------------
1997
Investments and other
assets................. $208,071 $536,058 $2,887,732 $2,313,279 $525,896 $ 9,742,676
Deferred policy
acquisition costs...... 22,459 52,836 1,785 56,074 952 632,605
----------- ------------- ------------ ------------ ---------- ------ -------------
Total assets............. $230,530 $588,894 $2,889,517 $2,369,353 $526,848 $10,375,281
----------- ------------- ------------ ------------ ---------- ------ -------------
1996
Investments and other
assets................. $205,696 $312,826 $2,606,873 $1,821,250 $490,688 $ 7,675,142
Deferred policy
acquisition costs...... 27,944 32,040 1,164 50,637 12 488,201
----------- ------------- ------------ ------------ ---------- ------ -------------
Total assets............. $233,640 $344,866 $2,608,037 $1,871,887 $490,700 $ 8,163,343
----------- ------------- ------------ ------------ ---------- ------ -------------
1995
Investments and other
assets................. $215,248 $228,849 $2,535,946 $1,541,255 $414,128 $ 6,768,510
Deferred policy
acquisition costs...... 24,974 36,283 993 37,534 14 410,183
----------- ------------- ------------ ------------ ---------- ------ -------------
Total assets............. $240,222 $265,132 $2,536,939 $1,578,789 $414,142 $ 7,178,693
</TABLE>
F-25
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
----------- ------------- ------------ ------------ ---------- ------ -------------
</TABLE>
- ----------------------------------
F-26
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE L -- EMPLOYEE BENEFIT PLANS
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 81% 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.
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>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $18,216 in 1997 and $14,720 in
1996...................................................................................... $ 19,351 $ 15,475
--------- ---------
Projected benefit obligation for service rendered to date................................... $ 30,612 $ 25,196
Plan assets at fair value (group annuity contract with Protective).......................... 21,763 19,779
--------- ---------
Plan assets less than the projected benefit obligation...................................... (8,849) (5,417)
Unrecognized net loss from past experience different from that assumed...................... 6,997 3,559
Unrecognized prior service cost............................................................. 605 705
Unrecognized net transition asset........................................................... (51) (67)
--------- ---------
Net pension liability recognized in balance sheet........................................... $ (1,298) $ (1,220)
--------- ---------
--------- ---------
</TABLE>
Net pension cost includes the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year................................... $ 2,112 $ 1,908 $ 1,540
Interest cost on projected benefit obligation..................................... 2,036 1,793 1,636
Actual return on plan assets...................................................... (1,624) (1,674) (1,358)
Net amortization and deferral..................................................... 66 374 114
--------- --------- ---------
Net pension cost.................................................................. $ 2,590 $ 2,401 $ 1,932
--------- --------- ---------
--------- --------- ---------
</TABLE>
Protective's share of the net pension cost was $1.8 million, $1.5 million,
and $1.2 million, in 1997, 1996, and 1995, respectively.
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average discount rate........................................................ 7.25% 7.75% 7.25%
Rates of increase in compensation level............................................... 5.25% 5.75% 5.25%
Expected long-term rate of return on assets........................................... 8.50% 8.50% 8.50%
</TABLE>
Assets of the pension plan are included in the general assets of Protective.
Upon retirement, the amount of pension plan assets vested in the retiree is used
to purchase a single premium annuity from
F-26
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
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, 1997 and 1996, the projected benefit
obligation of this plan totaled $10.0 million and $7.2 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, 1997 and 1996, the liability for such
benefits totaled $1.3 million and $1.4 million, respectively. The expense
recorded by PLC was $0.1 million in 1997 and 1996 and $0.2 million in 1995.
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, 1997, PLC had committed 47,523 shares to be
released to fund employee benefits. The expense recorded by PLC for these
employee benefits was less than $0.1 million, $1.0 million, and $0.7 million, in
1997, 1996, and 1995, respectively.
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
3,200,000 shares may be issued in payment of awards. The number of shares
granted in 1997, 1996, and 1995 were 49,390, 52,290, and 72,610 shares,
respectively, having an approximate market value on the grant date of $2.0
million, $1.8 million, and $1.6 million, respectively. At December 31, 1997,
outstanding awards measured at target and maximum payouts were 261,318 and
353,385 shares, respectively. The expense recorded by PLC for the Performance
Share Plan was $2.7 million, $3.0 million, and $2.9 million in 1997, 1996, and
1995, 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
F-27
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE M -- STOCK BASED COMPENSATION (CONTINUED)
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, 1997 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 $0.6 million in 1997 and $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. In many cases, the retention is less.
Protective has reinsured approximately $34.1 billion, $18.8 billion, and
$17.5 billion in face amount of life insurance risks with other insurers
representing $147.2 million, $113.5 million, and $116.1 million of premium
income for 1997, 1996, and 1995, respectively. Protective has also reinsured
accident and health risks representing $187.7 million, $194.7 million, and
$217.1 million of premium income for 1997, 1996, and 1995, respectively. In 1997
and 1996, policy and claim reserves relating to insurance ceded of $485.8
million and $325.9 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, 1997 and 1996, Protective had paid $25.6 million and $6.7 million,
respectively, of ceded benefits which are recoverable from reinsurers. In
addition, at December 31, 1997, Protective had receivables of $80.3 million
related to insurance assumed.
A substantial portion of Protective's new credit insurance sales are being
reinsured. Included in the preceding paragraph are credit life and credit
accident and health insurance premiums of $96.7 million, $103.0 million, and
$125.8 million for 1997, 1996 and 1995, respectively, and reserves which were
ceded of $238.8 million and $135.8 million during 1997 and 1996, respectively.
F-28
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
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>
1997 1996
----------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT MARKET VALUES AMOUNT MARKET VALUES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities...................... $ 6,348,252 $ 6,348,252 $ 4,662,997 $ 4,662,997
Equity securities..................... 15,006 15,006 35,250 35,250
Mortgage loans on real estate......... 1,313,478 1,405,474 1,503,781 1,581,694
Short-term investments................ 54,337 54,337 101,215 101,215
Cash.................................... 39,197 39,197 114,384 114,384
Liabilities (see Notes A and E):
Guaranteed investment contract
deposits............................ 2,684,676 2,687,331 2,474,728 2,462,036
Annuity deposits...................... 1,511,553 1,494,600 1,331,067 1,322,304
Other (see Note A):
Futures contracts..................... (1,708)
Interest rate swaps................... (145) (679)
Options............................... 234
</TABLE>
F-29
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses of the issuance and distribution of the Contracts, other than
any underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fees............. $ 68,965.52
Printing and engraving........................................... 70,000
Accounting fees and expenses..................................... 20,000
Legal fees and expenses.......................................... 20,000
Miscellaneous.................................................... 0
------------
TOTAL EXPENSES............................................. $ 68,965.52
------------
------------
</TABLE>
- ------------------------
*Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 6.5 of Article VI of the Certificate of Incorporation of PLC
provides, in substance, that any of PLC's directors and officers and certain
directors and officers of Protective, who is a party or is threatened to be made
a party to any action, suit or proceeding, other than an action by or in the
right of PLC, by reason of the fact that he is or was an officer or director,
shall be indemnified by PLC against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of PLC and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. If the action or
suit is or was by or in the right of PLC to procure a judgment in its favor,
such person shall be indemnified by PLC against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to PLC unless and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper. To the extent that any officer or director has been successful on
the merits or otherwise in defense of any such action, suit or proceeding, or in
defense of any issue or matter therein, he shall be indemnified by PLC against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith without the necessity of any action being taken by PLC
other than the determination, in good faith, that such defense has been
successful. In all other cases, unless ordered by a court, indemnification shall
be made by PLC only as authorized in the specific case upon a determination that
indemnification of the officer or director is proper in the circumstances
because he has met the applicable standard of conduct. Such determination shall
be made (a) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion or (c) by the holders of a majority of the shares of capital stock of
PLC entitled to vote thereon. By means of a by-law, Protective offers its
directors and certain executive officers similar indemnification.
In addition, the executive officers and directors are insured by PLC's
Directors' and Officers' Liability Insurance Policy including Company
Reimbursement and are indemnified by a written contract with PLC which
supplements such coverage.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------------ -------------------------------------------------------------------------------- ----------------
<C> <C> <C> <S> <C>
* 1(a) -- Underwriting Agreement
***** 1(b) -- Form of Distribution Agreement
**** 2 -- Stock Purchase Agreement
* 3(a) -- Articles of Incorporation
* 3(b) -- By-laws
** 4(a) -- Group Modified Guaranteed Annuity Contract
*** 4(b) -- Individual Certificate
** 4(h) -- Tax-Sheltered Annuity Endorsement
** 4(i) -- Qualified Retirement Plan Endorsement
** 4(j) -- Individual Retirement Annuity Endorsement
** 4(l) -- Section 457 Deferred Compensation Plan Endorsement
* 4(m) -- Qualified Plan Endorsement
** 4(n) -- Application for Individual Certificate
** 4(o) -- Adoption Agreement for Participation in Group Modified Guaranteed Annuity
*** 4(p) -- Individual Modified Guaranteed Annuity Contract
** 4(q) -- Application for Individual Modified Guaranteed Annuity Contract
** 4(r) -- Tax-Sheltered Annuity Endorsement
** 4(s) -- Individual Retirement Annuity Endorsement
** 4(t) -- Section 457 Deferred Compensation Plan Endorsement
** 4(v) -- Qualified Retirement Plan Endorsement
**** 4(w) -- Endorsement -- Group Policy
**** 4(x) -- Endorsement -- Certificate
**** 4(y) -- Endorsement -- Individual Contract
**** 4(z) -- Endorsement (Annuity Deposits) -- Group Policy
**** 4(aa) -- Endorsement (Annuity Deposits) -- Certificate
**** 4(bb) -- Endorsement (Annuity Deposits) -- Individual Contract
** 4(cc) -- Endorsement -- Individual
** 4(dd) -- Endorsement -- Group Contract/Certificate
***** 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)
4(ii) -- Settlement Endorsement
* 5 -- Opinion re legality
* 10(a) -- Bond Purchase Agreement
* 10(b) -- Escrow Agreement
24(a) -- Consent of Coopers & Lybrand L.L.P.
24(b) -- Consent of Sutherland, Asbill & Brennan, L.L.P.
25 -- Power of Attorney
</TABLE>
- ------------------------
*Previously filed in Form S-1 Registration Statement, Registration No.
33-31940.
**Previously filed in Amendment No. 1 to Form S-1 Registration Statement,
Registration No. 33-31940.
***Previously filed in Amendment No. 2 to Form S-1 Registration Statement,
Registration No. 33-31940.
****Previously filed in Amendment No. 2 to Form S-1 Registration Statement,
Registration No. 33-57052.
*****Previously filed in Form S-1 Registration Statement, Registration No.
333-02249.
II-2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL
STATEMENTS
SCHEDULES FILED WITH THIS AMENDMENT
- ------------ -----------------------------------------------------------
<S> <C> <C>
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
</TABLE>
Schedules other than those referred to above are not required or are
inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement,
including (but not limited to) any addition or deletion of a managing
underwriter;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officers or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Birmingham,
State of Alabama on April 13, 1998.
<TABLE>
<S> <C> <C>
PROTECTIVE LIFE INSURANCE COMPANY
By: /s/ JOHN D. JOHNS
-----------------------------------------
John D. Johns
President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form S-1 has been signed by the following persons in the capacities
and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- ---------------------------------------------- ----------------
<S> <C> <C> <C>
(i) Principal Executive Officer
* Chairman of the Board April 13, 1998
-------------------------------
Drayton Nabers, Jr.
(ii) Principal Financial Officer
/s/ JOHN D. JOHNS President and April 13, 1998
------------------------------- Chief Financial Officer
John D. Johns
(iii) Principal Accounting Officer
/s/ JERRY W. DEFOOR Vice President and Controller, April 13, 1998
------------------------------- and Chief Accounting Officer
Jerry W. DeFoor
(iv) Board of Directors:
* Director April 13, 1998
-------------------------------
Drayton Nabers, Jr.
/s/ JOHN D. JOHNS Director April 13, 1998
-------------------------------
John D. Johns
* Director April 13, 1998
-------------------------------
R. Stephen Briggs
* Director April 13, 1998
-------------------------------
Jim E. Massengale
* Director April 13, 1998
-------------------------------
Wayne E. Stuenkel
* Director April 13, 1998
-------------------------------
A. S. Williams III
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- ---------------------------------------------- ----------------
<S> <C> <C> <C>
* Director April 13, 1998
-------------------------------
Deborah J. Long
* Director April 13, 1998
-------------------------------
Carolyn King
* Director April 13, 1998
-------------------------------
Richard J. Bielen
* Director April 13, 1998
-------------------------------
Danny L. Bentley
*By: /s/ STEVE M. CALLAWAY April 13, 1998
-------------------------------
Steve M. Callaway
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------------------------------------------------------------
GIC AND
ANNUITY
DEFERRED FUTURE DEPOSITS AND PREMIUMS
POLICY POLICY OTHER AND
ACQUISITION BENEFITS UNEARNED POLICYHOLDERS' POLICY
SEGMENT COSTS AND COSTS PREMIUMS FUNDS FEES
- --------------------------------------------- ----------- ---------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Life Insurance
Acquisitions............................... $138,052 $1,025,340 $ 1,437 $ 311,150 $102,635
Individual Life............................ 252,321 920,924 356 16,334 127,480
West Coast................................. 108,126 739,463 0 95,495 14,122
Specialty Insurance Products
Dental and Consumer Benefits............... 22,459 120,925 2,536 80,654 151,110
Financial Institutions..................... 52,836 159,422 391,085 6,791 72,263
Retirement Savings and Investment Products
Guaranteed Investment Contracts............ 1,785 180,690 0 2,684,676 0
Investment Products........................ 56,074 177,150 0 1,184,268 12,367
Corporate and Other.......................... 952 380 1,282 185 229
Unallocated Realized Investment Gains
(Losses)................................... 0 0 0 0 0
----------- ---------- -------- -------------- --------
TOTAL.................................... $632,605 $3,324,294 $396,696 $4,379,553 $480,206
----------- ---------- -------- -------------- --------
----------- ---------- -------- -------------- --------
Year Ended December 31, 1996:
Life Insurance
Acquisitions............................... $156,172 $1,117,159 $ 1,087 $ 251,450 $106,543
Individual Life............................ 220,232 793,370 685 15,577 116,710
Specialty Insurance Products
Dental and Consumer Benefits............... 27,944 119,010 2,572 83,632 156,530
Financial Institutions..................... 32,040 119,242 253,154 1,880 73,422
Retirement Savings and Investment Products
Guaranteed Investment Contracts............ 1,164 149,755 0 2,474,728 0
Investment Products........................ 50,637 149,743 0 1,120,557 8,189
Corporate and Other.......................... 12 170 55 192 656
Unallocated Realized Investment Gains
(Losses)................................... 0 0 0 0 0
----------- ---------- -------- -------------- --------
TOTAL.................................... $488,201 $2,448,449 $257,553 $3,948,016 $462,050
----------- ---------- -------- -------------- --------
----------- ---------- -------- -------------- --------
Year Ended December 31, 1995:
Life Insurance
Acquisitions............................... $123,889 $ 851,994 $ 590 $ 250,550 $98,501
Individual Life............................ 186,496 672,569 336 14,709 99,018
Specialty Insurance Products
Dental and Consumer Benefits............... 24,974 123,279 2,806 85,925 142,483
Financial Institutions..................... 36,283 84,162 189,973 1,495 65,669
Retirement Savings and Investment Products
Guaranteed Investment Contracts............ 993 68,704 0 2,451,693 0
Investment Products........................ 37,534 127,104 0 1,061,507 4,566
Corporate and Other.......................... 14 342 62 263 1,445
Unallocated Realized Investment Gains
(Losses)................................... 0 0 0 0 0
----------- ---------- -------- -------------- --------
TOTAL.................................... $410,183 $1,928,154 $193,767 $3,866,142 $411,682
----------- ---------- -------- -------------- --------
----------- ---------- -------- -------------- --------
<CAPTION>
- ---------------------------------------------
COL. A COL. G COL. H COL. I COL. J
- ---------------------------------------------
AMORTIZATION
REALIZED BENEFITS OF DEFERRED
NET INVESTMENT AND POLICY OTHER
INVESTMENT GAINS SETTLEMENT ACQUISITION OPERATING
SEGMENT INCOME (1) (LOSSES) EXPENSES COSTS EXPENSES (1)
- --------------------------------------------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Life Insurance
Acquisitions............................... $110,155 $ 0 $116,506 $ 16,606 $ 23,016
Individual Life............................ 54,593 0 114,678 27,354 18,178
West Coast................................. 30,194 0 28,304 961 6,849
Specialty Insurance Products
Dental and Consumer Benefits............... 23,810 0 110,148 15,711 38,572
Financial Institutions..................... 16,341 0 27,643 30,812 20,165
Retirement Savings and Investment Products
Guaranteed Investment Contracts............ 211,915 (3,180) 179,235 618 3,945
Investment Products........................ 105,196 589 82,019 15,110 12,312
Corporate and Other.......................... 5,284 0 339 3 6,833
Unallocated Realized Investment Gains
(Losses)................................... 0 4,415 0 0 0
---------- ---------- ---------- ----------- ------------
TOTAL.................................... $557,488 $ 1,824 $658,872 $107,175 $129,870
---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ----------- ------------
Year Ended December 31, 1996:
Life Insurance
Acquisitions............................... $106,015 $ 0 $118,181 $ 17,162 $ 24,292
Individual Life............................ 48,442 3,098 96,404 28,393 28,611
Specialty Insurance Products
Dental and Consumer Benefits............... 16,249 0 125,797 5,326 43,027
Financial Institutions..................... 13,898 0 42,781 24,900 10,673
Retirement Savings and Investment Products
Guaranteed Investment Contracts............ 214,369 (7,963) 169,927 509 3,840
Investment Products........................ 98,719 3,858 73,093 14,710 13,197
Corporate and Other.......................... 1,089 0 710 1 4,508
Unallocated Realized Investment Gains
(Losses)................................... 0 6,517 0 0 0
---------- ---------- ---------- ----------- ------------
TOTAL.................................... $498,781 $ 5,510 $626,893 $ 91,001 $128,148
---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ----------- ------------
Year Ended December 31, 1995:
Life Insurance
Acquisitions............................... $ 95,018 $ 0 $100,016 $ 20,601 $ 22,551
Individual Life............................ 40,237 0 80,067 20,403 22,748
Specialty Insurance Products
Dental and Consumer Benefits............... 14,329 0 109,447 3,052 37,657
Financial Institutions..................... 9,276 0 24,020 26,809 14,229
Retirement Savings and Investment Products
Guaranteed Investment Contracts............ 203,376 (3,908) 165,963 386 4,140
Investment Products........................ 95,661 4,938 72,111 11,446 10,494
Corporate and Other.......................... 536 0 1,476 3 8,069
Unallocated Realized Investment Gains
(Losses)................................... 0 921 0 0 0
---------- ---------- ---------- ----------- ------------
TOTAL.................................... $458,433 $ 1,951 $553,100 $ 82,700 $119,888
---------- ---------- ---------- ----------- ------------
---------- ---------- ---------- ----------- ------------
</TABLE>
- ------------------------
(1) Allocations of Net Investment Income and Other Operating Expenses are based
on a number of assumptions and estimates and results would change if
different methods were applied.
S-1
<PAGE>
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE 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, 1997:
Life insurance in force.................... $ 78,240,282 $ 34,139,554 $ 11,013,202 $ 55,113,930 20.0%
------------- ------------- ------------- ------------- ---
------------- ------------- ------------- ------------- ---
Premiums and policy fees:
Life insurance............................. $ 387,108 $ 147,184 $ 74,738 $ 314,662 23.8%
Accident and health insurance.............. 336,575 187,539 10,510 159,546 6.7%
Property and liability insurance........... 6,139 176 35 5,998 0.6%
------------- ------------- ------------- -------------
TOTAL...................................... $ 729,822 $ 334,899 $ 85,283 $ 480,206
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
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 and health insurance.............. 356,285 217,082 13,583 152,786 8.9%
------------- ------------- ------------- -------------
TOTAL...................................... $ 664,707 $ 333,173 $ 80,148 $ 411,682
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
NUMBER DESCRIPTION WHERE EXHIBIT LOCATED
- ------ ------------------------------------------------------- ---------------------
<C> <C><S> <C>
1(a) -- Underwriting Agreement *
1(b) -- Form of Distribution Agreement *****
2 -- Stock Purchase Agreement ****
3(a) -- Articles of Incorporation *
3(b) -- By-laws *
4(a) -- Group Modified Guaranteed Annuity Contract **
4(b) -- Individual Certificate ***
4(h) -- Tax-Sheltered Annuity Endorsement **
4(i) -- Qualified Retirement Plan Endorsement **
4(j) -- Individual Retirement Annuity Endorsement **
4(l) -- Section 457 Deferred Compensation Plan Endorsement **
4(m) -- Qualified Plan Endorsement *
4(n) -- Application for Individual Certificate **
4(o) -- Adoption Agreement for Participation in Group Modified **
Guaranteed Annuity
4(p) -- Individual Modified Guaranteed Annuity Contract ***
4(q) -- Application for Individual Modified Guaranteed Annuity **
Contract
4(r) -- Tax-Sheltered Annuity Endorsement **
4(s) -- Individual Retirement Annuity Endorsement **
4(t) -- Section 457 Deferred Compensation Plan Endorsement **
4(v) -- Qualified Retirement Plan Endorsement **
4(w) -- Endorsement -- Group Policy ****
4(x) -- Endorsement -- Certificate ****
4(y) -- Endorsement -- Individual Contract ****
4(z) -- Endorsement (Annuity Deposits) -- Group Policy ****
4(aa) -- Endorsement (Annuity Deposits) -- Certificate ****
4(bb) -- Endorsement (Annuity Deposits) -- Individual Contract ****
4(cc) -- Endorsement -- Individual **
4(dd) -- Endorsement -- Group Contract/Certificate **
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) *****
4(ii) -- Settlement Endorsement ******
5 -- Opinion re legality *
10(a) -- Bond Purchase Agreement *
10(b) -- Escrow Agreement *
24(a) -- Consent of Coopers & Lybrand L.L.P.
24(b) -- Consent of Sutherland, Asbill & Brennan, L.L.P.
25 -- Power of Attorney
</TABLE>
- ------------------------
*Previously filed in Form S-1 Registration Statement, Registration
No. 33-31940.
**Previously filed in Amendment No. 1 to Form S-1 Registration Statement,
Registration
No. 33-31940.
***Previously filed in Amendment No. 2 to Form S-1 Registration Statement,
Registration
No. 33-31940.
****Previously filed in Amendment No. 2 to Form S-1 Registration Statement,
Registration
No. 33-57052.
*****Previously filed in Form S-1 Registration Statement, Registration No.
333-02249.
******Previously filed in Amendment No. 1 to Registration Statement,
Registration No. 333-02249.
<PAGE>
EXHIBIT 24(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 11, 1998, on our audits of the consolidated financial
statements and financial statement schedules of Protective Life Insurance
Company and subsidiaries. We also consent to the reference to our firm under the
caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
- --------------------------------------
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
April 13, 1998
<PAGE>
EXHIBIT 24(B)
CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading "Legal Matters" in
the prospectus included in the Registration Statement on Form S-1 for certain
modified guaranteed annuity contracts issued by Protective Life Insurance
Company. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
/s/ SUTHERLAND, ASBILL & BRENNAN LLP
--------------------------------------------
SUTHERLAND, ASBILL & BRENNAN LLP
WASHINGTON, D.C.
APRIL 11, 1998
<PAGE>
EXHIBIT 25
DIRECTORS'
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors of
Protective Life Insurance Company, a Tennessee corporation, ("Company") by his
execution hereof or upon an identical counterpart hereof, does hereby constitute
and appoint John D. Johns, Steve M. Callaway or Jerry W. DeFoor, and each or any
of them, his true and lawful attorney-in-fact and agent, for him and in his
name, place and stead, to execute and sign all post-effective amendments to the
Registration Statement on Form S-1 to be filed by the Company with respect to
insurance products with the Securities and Exchange Commission, pursuant to the
provisions of the Securities Exchange Act of 1933 and the Investment Company Act
of 1940 and, further, to file same, with all exhibits and schedules thereto and
all other documents in connection therewith, with the Securities and Exchange
Commission and with such state securities as may be appropriate, granting unto
said attorney-in-fact and agent, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes of the
undersigned might or could do in person, hereby ratifying and confirming all the
acts of said attorney-in-fact and agent or any of them which they may lawfully
do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and
seal this 13th day of April, 1998.
WITNESS TO ALL SIGNATURES:
<TABLE>
<S> <C>
/s/ DEBORAH J. LONG
- -------------------------------------------
Deborah J. Long
/s/ DRAYTON NABERS, JR. /s/ DANNY L. BENTLEY
- ------------------------------------------- -------------------------------------------
Drayton Nabers, Jr. Danny L. Bentley
/s/ JOHN D. JOHNS /s/ RICHARD J. BIELEN
- ------------------------------------------- -------------------------------------------
John D. Johns Richard J. Bielen
/s/ R. STEPHEN BRIGGS /s/ CAROLYN KING
- ------------------------------------------- -------------------------------------------
R. Stephen Briggs Carolyn King
/s/ STEVEN A. SCHULTZ /s/ JIM E. MASSENGALE
- ------------------------------------------- -------------------------------------------
Steven A. Schultz Jim E. Massengale
/s/ A. S. WILLIAMS, III /s/ WAYNE E. STUENKEL
- ------------------------------------------- -------------------------------------------
A. S. Williams, III Wayne E. Stuenkel
</TABLE>
