AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1999
REGISTRATION NO. 333-50055
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT
NO. 2
----------------
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
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TENNESSEE 63-0169720 6311
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(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification Number) Classification Code)
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2801 Highway 280 South
Birmingham, Alabama 35223
(205) 879-9230
(Address, including zip code, and telephone number, including area code,
of principal executive office)
----------------
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)
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COPIES TO:
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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
</TABLE>
----------------
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.
================================================================================
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
FORM S-1 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus .................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus ........................................... Summary; Table of Contents
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges ............................ Outside Front Cover Page; Summary
4. Use of Proceeds ......................................... Investments by Protective
5. Determination of Offering Price ......................... Not Applicable
6. Dilution ................................................ Not Applicable
7. Selling Security Holders ................................ Not Applicable
8. Plan of Distribution .................................... Distribution of the Contracts
9. Description of Securities to be Registered .............. Summary; Description of Contract; Appendix A;
Appendix B
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>
PROSAVER(R)
PLATINUM
A MODIFIED GUARANTEED ANNUITY ISSUED BY
PROTECTIVE LIFE INSURANCE
COMPANY
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
TELEPHONE: 1-800-866-3555
This Prospectus describes the ProSaver Platinum Contract, a group and
individual modified guaranteed annuity contract. This Contract is designed for
investors who desire to accumulate capital on a tax deferred basis for
retirement or other long term investment purposes. It may be purchased on a
non-qualified basis or for use with certain qualified retirement plans.
An Annuity Deposit of at least $10,000 is required to purchase a Contract.
Any subsequent Deposit you want to add to your Contract must also be at least
$10,000.
You may allocate each Annuity Deposit to one or more investment periods,
called Guaranteed Periods, from those we offer at the time you make the
deposit. Each allocation to a Guaranteed Period must be at least $10,000. The
amounts you allocate will earn interest for the selected period at the interest
rate we offer at the time of your deposit.
If you surrender your Contract, or any portion of it, before the end of a
Guaranteed Period, we may assess a surrender charge on the amount you
surrender. We may also apply a Market Value Adjustment to the amount you
surrender, which could increase or decrease the value of your Contract. Under
certain conditions, you may withdraw earned interest without a surrender charge
or Market Value Adjustment. Withdrawals of interest will be subject to income
tax and may be subject to a 10% IRS penalty tax if taken before age 59 1/2.
On the Annuity Commencement Date, we will apply your Net Account Value to
the annuity option you have selected, or you may take that amount in one lump
sum payment. The annuity payment options are (1) payments for a fixed period
from five to thirty years, (2) life income with payments guaranteed for ten or
twenty years, or (3) payments of a fixed amount until the amount we hold is
exhausted.
PLEASE READ THIS PROSPECTUS CAREFULLY. INVESTORS SHOULD KEEP A COPY FOR
FUTURE REFERENCE.
THE PROSAVER PLATINUM CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
BY, ANY BANK OR FINANCIAL INSTITUTION. IT IS NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY, AND IT IS SUBJECT TO
INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF INVESTMENT PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999.
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TABLE OF CONTENTS
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PAGE
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SUMMARY ................................................ 3
DESCRIPTION OF THE CONTRACT ............................ 6
The Contract ........................................ 6
Parties to the Contract ............................. 6
Issuing a Contract .................................. 7
Right to Cancel ..................................... 7
Annuity Deposits .................................... 7
Guaranteed Periods and Sub-Accounts ................. 8
Initial Guaranteed Period ........................ 8
Subsequent Guaranteed Periods .................... 8
Surrenders at the End of a Guaranteed Period...... 8
Selecting a Subsequent Guaranteed Period ......... 8
Automatic Subsequent Guaranteed Periods .......... 8
Guaranteed Interest Rates in Subsequent
Guaranteed Periods ............................. 8
Guaranteed Interest Rates ........................... 8
Compounding of Interest .......................... 9
Interest Withdrawals ................................ 9
Account Values ...................................... 10
SURRENDERS ............................................. 10
Surrenders .......................................... 10
Surrenders and Partial Surrenders ................ 10
Taxes May Apply .................................. 10
Delay of Payments ................................ 10
Surrender Value ..................................... 11
Surrender Charges ................................... 11
The Market Value Adjustment ......................... 11
Premium Tax ......................................... 13
DEATH BENEFIT .......................................... 13
Death of an Annuitant ............................... 13
Death of an Owner ................................... 13
Determining the Death Benefit .................... 14
Paying the Death Benefit ......................... 14
ANNUITY BENEFITS ....................................... 14
Annuity Commencement Date ........................... 14
Annuity Options ..................................... 15
Annuity Payments .................................... 15
Death of an Owner or Annuitant After the
Annuity Commencement Date ........................ 16
INVESTMENTS BY PROTECTIVE .............................. 16
OTHER CONTRACT PROVISIONS .............................. 17
Non-Participating ................................... 17
Notice .............................................. 17
Reports ............................................. 17
Transactions and Modifications of the Contract ...... 17
Assignment of a Contract ............................ 17
Facility of Payment ................................. 17
Protection of Proceeds .............................. 17
Error in Age or Gender .............................. 18
DISTRIBUTION OF THE CONTRACTS .......................... 18
FEDERAL TAX MATTERS .................................... 18
Introduction ........................................ 18
The Company's Tax Status ............................ 18
Taxation of Annuities in General .................... 18
Tax Deferral During Accumulation Period .......... 18
Taxation of Interest Withdrawals and Partial
and Full Surrenders ............................ 19
Taxation of Annuity Payments ..................... 20
Taxation of Death Benefit Proceeds ............... 20
Penalty Tax on Premature Distributions ........... 20
Aggregation of Contracts ......................... 21
Loss of Interest Deduction Where Contracts Are
Held by or for the Benefit of Certain
Non-natural Persons .............................. 21
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PAGE
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Qualified Retirement Plans .......................... 21
In General ....................................... 21
Direct Rollover Rules ............................ 23
Federal Income Tax Withholding ...................... 24
PROTECTIVE LIFE INSURANCE COMPANY ...................... 25
Business ............................................ 25
Life Insurance ...................................... 25
Specialty Insurance Products ........................ 27
Retirement Savings and
Investment Products .............................. 28
Selected Financial Data ............................. 30
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ........................... 30
Results of Operations ............................ 30
Premiums and Policy Fees ....................... 31
Net Investment Income .......................... 31
Realized Investment Gains (Losses) ............. 32
Other Income ................................... 32
Income Before Income Tax ....................... 32
Income Tax Expense ............................. 34
Net Income ..................................... 35
Known Trends and
Uncertainties ............................... 35
Recently Issued Accounting
Standards ................................... 37
Liquidity and Capital Resources ........................ 38
Insurance in Force .................................. 43
Underwriting ........................................ 44
Investments ......................................... 45
Indemnity Reinsurance ............................... 47
Policy Liabilities and Accruals ..................... 48
Federal Income Tax Consequences ..................... 48
Competition ......................................... 48
Regulation .......................................... 49
Recent Developments ................................. 50
Employees ........................................... 50
Properties .......................................... 50
DIRECTORS AND EXECUTIVE OFFICERS ....................... 52
EXECUTIVE COMPENSATION ................................. 53
SUMMARY COMPENSATION TABLE ............................. 54
AGGREGATED FY-END OPTION/SAR
VALUES .............................................. 55
OTHER PLANS AND ARRANGEMENTS ........................... 55
EMPLOYMENT CONTINUATION
AGREEMENTS .......................................... 56
Compensation Committee Interlocks and Insider
Participation .................................... 56
Management Ownership of PLC Stock ................... 57
LEGAL PROCEEDINGS ...................................... 58
EXPERTS ................................................ 58
LEGAL MATTERS .......................................... 58
REGISTRATION STATEMENT ................................. 58
APPENDIX A: MATTERS RELATING TO
CONTRACTS OFFERED IN CERTAIN
STATES AFTER SEPTEMBER 10, 1991 AND
PRIOR TO MAY 1, 1996 ................................ A-1
APPENDIX B: MATTERS RELATING TO
CONTRACTS OFFERED IN CERTAIN
STATES PRIOR TO SEPTEMBER 10, 1991 .................. B-1
FINANCIAL STATEMENTS ................................... F-1
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NO ONE IS AUTHORIZED TO MAKE ANY STATEMENT THAT CONTRADICTS THIS
PROSPECTUS. YOU MUST NOT RELY UPON ANY SUCH STATEMENT. THIS PROSPECTUS IS NOT
AN OFFER TO INQUIRE ABOUT, OR PURCHASE THE SECURITIES DESCRIBED IN ANY
JURISDICTION WHERE IT IS UNLAWFUL TO DO SO.
2
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SUMMARY
COMPANY: Protective Life Insurance Company, also referred to as "Protective,"
"we," "us" and "our."
WHAT IS THE PROSAVER PLATINUM
CONTRACT? The ProSaver Platinum Contract is a
modified guaranteed annuity contract
issued by Protective. (See "The
Contract," page 6.)
HOW IS A CONTRACT ISSUED? We will issue the Contract when we
receive and accept your complete
application information and an initial
Annuity Deposit. (See "Issuing a
Contract," page 7.)
WHAT IS AN ANNUITY DEPOSIT? The Annuity Deposit is the premium
payment you send us to purchase or add to
a Contract. You may send us more than one
Annuity Deposit provided each Annuity
Deposit is at least $10,000. We may
refuse to accept an Annuity Deposit and
we may limit the total Annuity Deposits
we will accept. As a general rule, we do
not issue additional contracts when
subsequent Annuity Deposits are
submitted. (See "Annuity Deposits," page
7.)
CAN I CANCEL MY CONTRACT? You may cancel your Contract by returning
it to us with a written cancellation
request within twenty days after you
receive it. When we receive your returned
Contract and cancellation request, we
will treat the Contract as if it had
never been issued and we will refund your
Annuity Deposit. (See "Right to Cancel,"
page 7.)
HOW DO MY ANNUITY DEPOSITS EARN
INTEREST? You allocate each Annuity Deposit
(less applicable premium taxes) to one or
more Guaranteed Periods. Each allocation
to a Guaranteed Period must be at least
$10,000. We establish a Sub-Account for
each Guaranteed Period you select. The
Sub-Account will earn interest at the
Guaranteed Interest Rate for the entire
Guaranteed Period. (See "Guaranteed
Periods and Sub-Accounts," page 8.)
WHAT HAPPENS AT THE END OF A
GUARANTEED PERIOD? At the end of any Guaranteed Period, a
subsequent Guaranteed Period will begin.
Unless you instruct us otherwise, the
subsequent Guaranteed Period will
generally be the same duration as the
expiring Guaranteed Period. If we are not
offering a Guaranteed Period of the same
duration, the subsequent Guaranteed Period
will be the longest one available that is
shorter than the expiring Guaranteed
Period. The subsequent Guaranteed Period
may not, however, extend past the Annuity
Commencement Date. We will pay interest on
your Sub-Account value in the subsequent
Guaranteed Period at our declared
Guaranteed Interest Rate applicable to
that subsequent Guaranteed Period on the
day subsequent Guaranteed Period begins.
(See "Guaranteed Periods and
Sub-Accounts," page 8.)
CAN I TAKE MONEY OUT OF THE CONTRACT? You may request in writing a full or
partial surrender which will be subject
to certain restrictions. The surrender is
subject to a surrender charge and we will
apply a Market Value Adjustment.
Surrenders from a Sub-Account at the end
of its Guaranteed Period will not
3
<PAGE>
incur the surrender charge or the Market
Value Adjustment. Also, once each
contract year you may instruct us to pay
you some or all of the interest credited
to the contract during the prior contract
year. We will not charge a surrender
charge nor apply the Market Value
Adjustment to these interest withdrawals.
Any surrender, including an interest
withdrawal, may have federal (and state)
income tax consequences. In addition,
withdrawals and surrenders from contracts
issued as qualified contracts under the
Internal Revenue Code may not be allowed
in certain circumstances. (See "Interest
Withdrawals," page 9, and "Surrenders,"
page 10.)
HOW IS THE SURRENDER CHARGE
CALCULATED? The surrender charge applies during the
first seven years of each Guaranteed
Period. If the Guaranteed Period is seven
years or less, a surrender charge will
apply for the entire Guaranteed Period.
The surrender charge is a percentage of
the amount surrendered, less any amount
available as an interest withdrawal. The
maximum surrender charge percentage is 6%.
(See "Surrender Charges," page 11.)
WHAT IS A MARKET VALUE ADJUSTMENT? The Market Value Adjustment is an amount
we deduct from or add to Sub-Account
value when you request a surrender before
the end of the Sub-Account's Guaranteed
Period. The Market Value Adjustment
formula in the Contract reflects the
relationship between the Treasury Rate
associated with the Sub-Account from
which the surrender is taken, and the
current Treasury Rate for a Sub-Account
with the same Guaranteed Period. The
Treasury Rate is derived from a published
index that measures fluctuations in
interest rates. (See "Market Value
Adjustment," page 11.)
DOES THE CONTRACT PROVIDE A DEATH
BENEFIT? If you die before the Annuity Commencement
Date, we will pay a death benefit, less
any applicable premium tax, to your
beneficiary. Generally, the death benefit
will be the greater of the Account Value
or the Net Account Value as of the date we
receive the paperwork necessary to process
the death claim but there are other
requirements and conditions. The Internal
Revenue Service imposes restrictions on
distribution of the death benefit. Only
one death benefit is payable under this
Contract, even if the Contract is made to
continue beyond the Owner's death. (See
"Death Benefit," page 13.)
WHAT ANNUITY BENEFIT DOES THE
CONTRACT PROVIDE? On the Annuity Commencement Date we will
pay the Net Account Value in a lump sum or
apply that amount to the annuity option
you select. Annuity options can provide
periodic payments based on the life of one
or two Annuitants, for a fixed amount of
time, or both. As a general rule, the
Annuity Commencement Date cannot extend
beyond an Annuitant's 85th birthday. (See
"Annuity Benefits," page 14.)
4
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WHEN IS PREMIUM TAX DEDUCTED? If your Contract is subject to a premium
tax, we will deduct it, according to
applicable law, from the Annuity Deposits
when we receive them, upon a full or
partial surrender, from the Net Account
Value when we apply it to an annuity
option, or from the Death Benefit before
we pay it. (See "Premium Tax," page 13.)
IS THE CONTRACT AVAILABLE FOR
QUALIFIED RETIREMENT PLANS? The Contract may be issued for use with
retirement plans receiving special
federal income tax treatment under
Sections 401, 403, 408, or 408A of the
Internal Revenue Code such as pension and
profit sharing plans (including H.R. 10
plans), individual retirement accounts,
and individual retirement annuities.
Contracts issued for use with these
qualified retirement plans are referred
to as Qualified Contracts and these types
of plans are referred to as Qualified
Plans. (See "Federal Tax Matters," page
18.)
5
<PAGE>
DESCRIPTION OF THE CONTRACT
CONTRACTS SOLD BEFORE MAY 1, 1996 VARY SIGNIFICANTLY FROM THOSE DESCRIBED
BELOW. THOSE CONTRACTS PROVIDE DIFFERENT RIGHTS AND BENEFITS, AND THE SURRENDER
CHARGE AND MARKET VALUE ADJUSTMENT MAY BE CALCULATED DIFFERENTLY. APPENDIX A
DESCRIBES CONTRACTS OFFERED FROM SEPTEMBER 10, 1991 THROUGH APRIL 30, 1996.
CONTRACTS OFFERED BEFORE SEPTEMBER 10, 1991 AND CERTAIN CONTRACTS OFFERED AFTER
THAT DATE ARE DESCRIBED IN APPENDIX B. YOU MAY ALWAYS CONTACT US IF YOU HAVE
QUESTIONS ABOUT YOUR CONTRACT.
THE CONTRACT
The ProSaver Platinum Contract is a modified guaranteed annuity contract
issued by Protective Life Insurance Company. Generally, this prospectus
describes certificates issued under an allocated group modified guaranteed
annuity contract issued by Protective to the Protective Financial Insurance
Trust. AmSouth Bank, N.A. of Birmingham, Alabama is the Contract Holder, as the
Trustee of the Protective Financial Insurance Trust. Eligible Owners include
account holders of broker-dealers that have entered into a distribution
agreement to offer the Contract. Eligible Owners also include employers and
other entities and organized groups acceptable to us. The certificate we issue
to an Owner summarizes the provisions of the group modified guaranteed annuity
contract. THE PROVISIONS OF THE GROUP MODIFIED GUARANTEED ANNUITY CONTRACT
CONTROL WHETHER OR NOT THEY ARE INCLUDED IN THE CERTIFICATE. WE WILL PROVIDE A
COPY OF THE GROUP MODIFIED GUARANTEED ANNUITY CONTRACT TO AN OWNER UPON
REQUEST.
In states where we do not issue a group contract, we will issue an
individual modified guaranteed annuity contract directly to the Owner. In this
prospectus, we will refer to all these as a "Contract" and use the term "Owner"
to describe the owners of group Contract certificates as well as the owners of
individual Contracts. (See "Parties to the Contract," page 6.)
Contracts are either Qualified or Non-Qualified. Qualified Contracts are
used to fund pension and retirement programs that receive favorable tax
treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code.
These include H.R. 10 (Keogh) Plans, Individual Retirement Accounts or
Annuities (IRAs), Tax-Sheltered Annuity Programs or Annuities (TSAs), or
corporate pension and profit sharing plans. Non-Qualified Contracts may also
enjoy tax favored status. (See, "Federal Tax Matters," page 18.)
PARTIES TO THE CONTRACT
COMPANY: Protective Life Insurance Company, also referred to as
"Protective," "we," "us" and "our."
OWNER: The person or persons who own a group Contract certificate
(sometimes called "Participants" in our contract language and literature) or
who own an individual Contract. An Owner is entitled to exercise all rights and
privileges provided in the Contract, without the consent of a group Contract
Holder. Individuals as well as non-natural persons, such as corporations or
trusts, may own a Contract; two persons may own a Contract together. In this
prospectus, we may refer to Owners as "you" or "your." If an Annuitant is still
alive, the Owner may transfer a Contract to a new Owner by making a written
request to our administrative office.
BENEFICIARY: The person or persons who may receive the benefits of a
Contract upon the death of an Owner. We will treat the surviving Owner of a
jointly owned Contract as the primary Beneficiary. If there is no surviving
Owner, the primary Beneficiary is the person or persons so designated by the
Owner and named in our records. The contingent Beneficiary is the person or
persons designated by the Owner and named in our records to be Beneficiary if
no primary Beneficiary is living. In the case of some Qualified Contracts,
Treasury Department Regulations may restrict who may be designated as a
Beneficiary,
If no Beneficiary designation is in effect or if no Beneficiary is living
at the time of an Owner's death, the Beneficiary will be the estate of the
deceased Owner. If an Owner dies on or after the Annuity Commencement Date, the
Beneficiary will become the new Owner.
Unless designated irrevocably, the Owner may change the Beneficiary by
written notice prior to any Owner's death. If a Beneficiary is designated
irrevocably, that Beneficiary's written consent is required before the Owner
can change the Beneficiary designation or exercise certain other rights. Your
request will be effective on the day you sign it. We will not be liable for any
payments made to a former Beneficiary, however,
6
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unless we have first notified you that we have received your written request
and all necessary written consents at our Administrative Office.
ANNUITANT: The person on whose life annuity income payments may be based.
The Owner is the Annuitant unless the Owner designates another person as the
Annuitant.
The Owner may change the Annuitant by written notice prior to the Annuity
Commencement Date. An Owner cannot use a Guaranteed Period or an Annuity
Commencement Date that extends past an Annuitant's 85th birthday without our
approval. If changing Annuitants, the Owner cannot select an Annuitant whose
85th birthday comes before the end of any Guaranteed Period or the Annuity
Commencement Date without our approval. If any Owner is not a natural person
and changes the Annuitant, the change will be treated as the death of the Owner
and the Death Benefit will be paid to the Beneficiary. (See "Death Benefit,"
page 13.)
PAYEE: The person or persons who, generally at the designation of the
Owner, receive annuity income payments under the Contract.
ISSUING A CONTRACT
You purchase a Contract by completing an application and making an Annuity
Deposit of at least $10,000. After we issue a Contract, you may make additional
Annuity Deposits of at least $10,000 each. Regardless of how many Annuity
Deposits you make, we will generally only issue one Contract. We have the right
to decline any application or any Annuity Deposit. When we sell Contracts to
retirement plans or in connection with retirement plans, those retirement plans
may or may not qualify for special tax treatment under the Internal Revenue
Code.
If we do not receive all of the necessary application information at our
Administrative Office when we receive your Annuity Deposit, we will hold your
Annuity Deposit while we attempt to complete the application. If the necessary
application information is not complete after a reasonable time, we will inform
you of the reason for the delay and we will return your Annuity Deposit unless
you specifically consent to our holding it until the application is complete.
Once we have all of your necessary application information, we will allocate
your Annuity Deposit to the appropriate Guaranteed Periods.
The date we apply your initial Annuity Deposit to the appropriate
Guaranteed Periods is the Effective Date for the Contract. You will begin to
earn interest under the Contract as of this date. The Contract Year is based on
the anniversary of your Effective Date.
RIGHT TO CANCEL
You may cancel your Contract by returning it to us with a written
cancellation request within twenty days after you receive it. You must return
the Contract and cancellation request to our Administrative Office or to the
sales representative who sold it to you. If you return the Contract by mail,
the effective date of the return will be the postmark date on your properly
addressed and postage paid envelope. Upon receiving your returned Contract and
cancellation request, we will treat the Contract as if it had never been issued
and we will refund your Annuity Deposit.
ANNUITY DEPOSITS
The Annuity Deposit is the premium payment you send us to purchase or add
to a Contract. We will only accept Annuity Deposits made prior to the
Annuitant's 85th birthday and we have the right not to accept any Annuity
Deposit if we so choose. The minimum Annuity Deposit is $10,000. We also have
the right to limit the total Annuity Deposits we accept without prior approval.
Currently, this amount is $1,000,000. You can make an Annuity Deposit in the
form a check made out to Protective Life Insurance Company or by any other
method we deem acceptable.
You allocate Annuity Deposits, less any applicable premium tax, to one or
more of the Guaranteed Periods available when you make the Annuity Deposit. You
must allocate at least $10,000 to each Guaranteed Period you choose and you may
not select a Guaranteed Period that extends beyond the Annuity Commencement
Date.
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GUARANTEED PERIODS AND SUB-ACCOUNTS
A Guaranteed Period is the number of years we will credit the Guaranteed
Interest Rate to the Sub-Account. Currently, we offer a variety of Guaranteed
Periods up to 10 years, though all Guaranteed Periods may not be available in
all states.
INITIAL GUARANTEED PERIOD
We will establish a Sub-Account for each Guaranteed Period to which you
allocate an Annuity Deposit. Each Sub-Account earns interest at the Guaranteed
Interest Rate in effect for that Guaranteed Period from the date the Annuity
Deposit is credited to the Sub-Account through the end of the Guaranteed Period
or until the Sub-Account is surrendered, if earlier. The value of the Contract
at any time, sometimes referred to as the Account Value, is the total of the
Sub-Account values under the Contract.
SUBSEQUENT GUARANTEED PERIODS
At the end of a Guaranteed Period, you may select from the following
options:
1. Surrender your ending Sub-Account value without a surrender charge or
Market Value Adjustment;
2. Instruct us to apply the ending Sub-Account value to one or more
subsequent Guaranteed Periods that you select from the Guaranteed Periods
we are then offering; or
3. Do nothing and allow a subsequent Guaranteed Period automatically to
begin.
SURRENDERS AT THE END OF A GUARANTEED PERIOD
To surrender your ending Sub-Account value, you must request the surrender
in writing no later than 10 days after the end of the expiring Guaranteed
Period. If you surrender your ending Sub-Account value under a Non-Qualified
Contract, any surrendered amount may be subject to income taxes, and a 10% IRS
penalty tax may apply if you are not yet 59 1/2 years old.
SELECTING A SUBSEQUENT GUARANTEED PERIOD
To apply the ending Sub-Account value to one or more subsequent Guaranteed
Periods, you must give us written instructions as to the Guaranteed Periods
that you select no later than 10 days after the end of the expiring Guaranteed
Period. You may select a subsequent Guaranteed Period only from the Guaranteed
Periods we are offering at the time you make your selection. Any subsequent
Guaranteed Period may not extend past the Annuity Commencement Date for your
Contract. At least $10,000 must be allocated to any subsequent Guaranteed
Period.
AUTOMATIC SUBSEQUENT GUARANTEED PERIODS
If you do not instruct us otherwise under the first or second options
described above, a subsequent Guaranteed Period automatically begins when the
prior Guaranteed Period ends. Your ending Sub-Account value becomes the
beginning Sub-Account value for the subsequent Guaranteed Period. The
subsequent Guaranteed Period is the longest Guaranteed Period we offer that is
not longer than the Guaranteed Period that just ended, and does not extend past
the Annuity Commencement Date. You must allocate at least $10,000 to any
subsequent Guaranteed Period.
GUARANTEED INTEREST RATES IN SUBSEQUENT GUARANTEED PERIODS
Your beginning Sub-Account value for any subsequent Guaranteed Period
earns interest at the rate we have declared that is in effect for the
subsequent Guaranteed Period(s) on the date your subsequent Guaranteed
Period(s) begins. Our Guaranteed Interest Rates for subsequent Guaranteed
Periods may differ from our Guaranteed Interest Rates for initial Guaranteed
Periods of the same duration.
GUARANTEED INTEREST RATES
From time to time and at our sole discretion we set Guaranteed Interest
Rates for each available Guaranteed Period. In determining these Guaranteed
Interest Rates we consider the interest rates available on the types of
instruments in which the Company intends to invest the proceeds attributable to
the Contracts. (See
8
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"Investments by Protective," page 16). In addition, we may also consider
various other factors in determining Guaranteed Interest Rates, including
regulatory and tax requirements; sales commissions and administrative expenses
the Company incurs; general economic trends; and competitive factors.
PROTECTIVE LIFE INSURANCE COMPANY MAKES THE FINAL DETERMINATION AS TO
GUARANTEED INTEREST RATES IT DECLARES. WE CANNOT PREDICT NOR DO WE GUARANTEE
WHAT FUTURE INTEREST RATES WE WILL DECLARE.
Annuity Deposits of $100,000 or more are currently credited with an
interest rate in excess of that credited to an Annuity Deposit of less than
$100,000. In addition, as long as your Account Value exceeds $100,000, all
additional Annuity Deposits and renewals will be credited with the increased
interest rate at our discretion. A Guaranteed Interest Rate credited to a
Sub-Account will reflect the daily compounding of interest and the rate will
not change prior to the end of the Guaranteed Period.
COMPOUNDING OF INTEREST
A Sub-Account will earn interest at the appropriate Guaranteed Interest
Rate which will be the effective interest rate for each year of the Guaranteed
Period. Interest compounds daily in the Sub-Account for the duration of the
Guaranteed Period. Below is an illustration of how interest is credited during
each year of a five-year Guaranteed Period. For the purposes of this example,
we have made assumptions as indicated.
PLEASE NOTE THAT THE FOLLOWING EXAMPLE ASSUMES NO SURRENDERS OR
WITHDRAWALS OF ANY AMOUNT AND NO PREMIUM TAX DUE ON ISSUANCE. A MARKET VALUE
ADJUSTMENT AND SURRENDER CHARGE MAY APPLY TO ANY FULL OR PARTIAL SURRENDER YOU
MAKE PRIOR TO THE END OF A GUARANTEED PERIOD (SEE "SURRENDERS," PAGE 10). THE
HYPOTHETICAL INTEREST RATES ARE FOR PURPOSES OF ILLUSTRATION ONLY AND WE DO NOT
INTEND THEM AS A PREDICTION OF ANY FUTURE INTEREST RATES WE MAY DECLARE UNDER
THE CONTRACT. THE ACTUAL INTEREST RATES WE DECLARE FOR ANY GUARANTEED PERIOD
MAY BE MORE OR LESS THAN WHAT WE HAVE USED IN THIS ILLUSTRATION.
EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
<TABLE>
<S> <C>
Deposit: $100,000
Guaranteed Period: 5 Years
Guaranteed Interest Rate: 5.0%
</TABLE>
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Beginning of Year 1 Account Value: $ 100,000.00
x (1 + Guaranteed Interest Rate): 1.05
= End or Year 1 Account Value: $ 105,000.00
Beginning of Year 2 Account Value: $ 105,000.00
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 2 Account Value: $ 110,250.00
Beginning of Year 3 Account Value: $ 110,250.00
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 3 Account Value: $ 115,762.50
Beginning of Year 4 Account Value: $ 115,762.50
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 4 Account Value: $ 121,550.62
Beginning of Year 5 Account Value: $ 121,550.62
x (1 + Guaranteed Interest Rate): 1.05
= End of Year 5 Account Value: $ 127,628.16
Total Interest Credited in Guaranteed Period: $127,628.16 - $100,000 = $27,628.16
Account Value at End of Guaranteed Period: $100,000 + $27,628.16 = $127,628.16
</TABLE>
INTEREST WITHDRAWALS
Once each Contract year, you may instruct us to send you all or a portion
of the interest credited to your Sub-Accounts during the prior Contract year.
Your instructions must be in writing. Currently, for most Guaranteed Periods,
you may establish automatic interest withdrawals that are paid to you monthly,
quarterly, semi-annually or annually. Interest withdrawals remove money from
your Sub-Account that would otherwise have
9
<PAGE>
been compounding even more interest on a daily basis. Because of this
interruption of interest compounding, the more interest you withdraw, the less
interest your Sub-Account will generate over time. Larger withdrawals reduce
the compounding of interest more than smaller withdrawals; frequent withdrawals
hinder the compounding process more than infrequent withdrawals; and earlier
withdrawals reduce your interest more than later withdrawals would. We reserve
the right to limit automatic interest withdrawals to one per Contract year upon
notice to you.
We will not impose a surrender charge or Market Value Adjustment on
interest withdrawals but interest withdrawals may be subject to federal and
state income tax. In addition, interest withdrawals from Contracts issued as
Tax-Sheltered Annuities are prohibited in certain circumstances. (See Federal
Tax Matters, page 18.)
ACCOUNT VALUES
The value of a Sub-Account at any time is equal to the amounts that were
allocated to that Sub-Account, plus any interest credited to it, minus any
interest withdrawals and surrenders (including any surrender charges, Market
Value Adjustment and premium tax). The sum of the Sub-Account values in your
Contract is called the Account Value and represents the total value of your
Contract.
The Net Sub-Account Value is equal to the Sub-Account value modified by
any Market Value Adjustment, minus surrender charges, and premium tax that
would apply in the case of a full surrender of the Sub-Account. The Net Account
Value, which is the sum of all the Net Sub-Account values under your Contract,
is the amount you would be entitled to receive if you made a full surrender of
your Contract. For this reason, the Net Account Value is sometimes called the
"Surrender Value" of a Contract.
SURRENDERS
SURRENDERS
SURRENDERS AND PARTIAL SURRENDERS
You may surrender your entire Contract at any time. You may surrender part
of the Contract if the value of each remaining Sub-Account is at least $10,000
after the surrender.
Your surrender request must be in writing and, if you request a partial
surrender, you must specify the Sub-Accounts from which the partial surrender
will be taken. If you have more than one Sub-Account with the same Guaranteed
Period, you must take the partial surrender from the Sub-Account with the
shortest time remaining until maturity.
Partial and full surrenders from Contracts issued as Tax-Sheltered
Annuities are prohibited in certain circumstances. (See "Federal Tax Matters,"
page 18.)
TAXES MAY APPLY
Amounts surrendered may be subject to federal and state income taxes. THE
TAXABLE AMOUNT OF A SURRENDER MAY, UNDER CERTAIN CIRCUMSTANCES, BE SUBJECT TO A
10% FEDERAL TAX PENALTY. In the case of Qualified Contracts, federal tax law
imposes restrictions on the form and manner in which benefits may be paid. For
example, surrenders from Qualified Contracts may require your spouse's consent
even if your spouse is not an Owner. (See "Federal Tax Matters," page 18.)
Premium tax may also apply. (See "Premium Tax," page 13.) You should consult
your tax advisor about the effect a surrender from the Contract may have on
your taxes.
DELAY OF PAYMENTS
We may delay payment of a surrender for up to six months from the date we
receive your written request, or for the period permitted by state insurance
law, if less.
10
<PAGE>
SURRENDER VALUE
The surrender value is the amount available to you upon a surrender or
partial surrender. The surrender value is calculated as of the date we receive
your surrender request using the following formula:
Surrender Value = A - S - M - P, where
A = the amount of the surrender or partial surrender you
request;
S = the amount of the surrender charge;
M = the amount of the Market Value Adjustment;
P = the amount of any applicable premium tax.
SURRENDER CHARGES
Surrenders and partial surrenders may be subject to a surrender charge.
Generally, we will assess a surrender charge if you take a surrender during the
first seven years of any Guaranteed Period. We calculate the surrender charge
separately for each Sub-Account. We determine the amount of the surrender
charge for a Sub-Account as follows: first, we subtract any amount available as
an interest withdrawal from the surrender amount you request; then we multiply
the result by the appropriate surrender charge percentage from the table below.
The surrender charge percentage is determined based on the age of the
Sub-Account from which the surrender is taken.
<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 or more 0%
</TABLE>
We will include the surrender charge in the amount we deduct from the
Sub-Account to satisfy your surrender request. The total surrender charge for
your surrender is the sum of the surrender charges for the Sub-Accounts from
which you make your surrender.
We do not apply the surrender charge after the first seven years of any
Guaranteed Period or from any amount available as an interest withdrawal. Also,
we do not apply a surrender charge to surrenders you request at the end of a
Sub-Account's Guaranteed Period if we receive your written surrender request no
later than 10 days after the end of the Guaranteed Period.
THE MARKET VALUE ADJUSTMENT
We will apply a Market Value Adjustment if you request a full or partial
surrender before the end of a Sub-Account's Guaranteed Period. The Market Value
Adjustment reflects the relationship between market interest rates available
when a Sub-Account was established and the interest rates available at the time
of the surrender from that Sub-Account, as measured by an independent index
called the Treasury Rate. The Treasury Rate is the annual effective interest
rate credited to certain United States Treasury instruments and it is published
by Bloomberg L.P., a nationally recognized service. On the fifteenth day and
the last day of each month we will identify a Treasury Rate for each Guaranteed
Period. We will be consistent in the method we use to identify the Treasury
Rate and the determination is binding upon any Owner, Annuitant and
Beneficiary.
The Market Value Adjustment formula contains a 0.25% set percentage factor
that compensates the company for certain expenses and losses that we may incur,
either directly or indirectly, as a result of the surrender. Another factor in
the formula decreases the effect of the Market Value Adjustment as the
Sub-Account matures by taking into consideration the number of months remaining
in the Guaranteed Period from which the surrender is taken.
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<PAGE>
Like the Surrender Charge, the Market Value Adjustment is calculated
separately for each Sub-Account. We determine the amount of the Market Value
Adjustment for each Sub-Account by subtracting any amount available as an
interest withdrawal from the surrender amount requested, and then multiplying
the result by the Market Value Adjustment percentage derived from the formula
below:
Market Value Adjustment Percentage = (C - I + 0.25%) x (N/12), where
C = the current Treasury Rate established for the same term as the
Guaranteed Period from which the surrender is taken;
I = the initial Treasury Rate for the Guaranteed Period from which
the surrender is taken;
N = the number of months remaining in the Guaranteed Period from
which the surrender is taken.
We will include the Market Value Adjustment in the amount we deduct from
the Sub-Account to satisfy your surrender request. The total Market Value
Adjustment for your surrender is the sum of the Market Value Adjustments to the
Sub-Accounts from which the surrender is taken.
The Market Value Adjustment may increase or decrease the Surrender Value.
If the applicable Treasury Rate at the time of the surrender is more than 0.25%
lower than the Treasury Rate associated with the Sub-Account, the Market Value
Adjustment will increase the Surrender Value. Otherwise, the Market Value
Adjustment will decrease the Surrender Value.
We do not apply the Market Value Adjustment to an interest withdrawal.
When calculating the Market Value Adjustment, we consider any amount available
as an interest withdrawal to be surrendered before amounts to which the Market
Value Adjustment applies. If we receive your written surrender request no later
than 10 days after the end of the Guaranteed Period, we also do not apply the
Market Value Adjustment to surrenders requested at the end of a Sub-Account's
Guaranteed Period.
PLEASE NOTE THAT THE FOLLOWING EXAMPLE ASSUMES NO INTEREST WITHDRAWALS, NO
PREMIUM TAX DUE ON ISSUANCE, AND NO SURRENDERS OTHER THAN THOSE SHOWN IN THE
EXAMPLE. THE HYPOTHETICAL INTEREST RATES ARE FOR PURPOSES OF ILLUSTRATION ONLY
AND WE DO NOT INTEND THEM AS A PREDICTION OF ANY FUTURE INTEREST RATES WE MAY
DECLARE UNDER THE CONTRACT. THE ACTUAL INTEREST RATES WE DECLARE FOR ANY
GUARANTEED PERIOD MAY BE MORE OR LESS THAN WHAT WE HAVE USED IN THIS
ILLUSTRATION.
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3
<TABLE>
<CAPTION>
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
Year 3 -
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
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
INITIAL GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- -------------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
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>
PREMIUM TAX
Premium tax (including related retaliatory taxes and fees, if any) will be
deducted when applicable. If your Contract is subject to a premium tax, we will
deduct it according to applicable law from either your Annuity Deposits when
received, upon a full or partial surrender, from the amount applied to an
annuity option, or from the Death Benefit. The current rate of premium tax
ranges up to 3.50%.
DEATH BENEFIT
DEATH OF AN ANNUITANT
If an Annuitant who is not an Owner dies before the Annuity Commencement
Date, the first Owner named on the application will become the new Annuitant
unless the Owner had designated otherwise. IF CHANGING ANNUITANTS, THE OWNER
CANNOT, WITHOUT OUR PRIOR APPROVAL, SELECT AN ANNUITANT WHOSE 85TH BIRTHDAY
COMES BEFORE THE END OF THE GUARANTEED PERIOD OR THE ANNUITY COMMENCEMENT DATE.
If any Owner is not a natural person the death of the Annuitant or a change in
the Annuitant will be treated as the death of an Owner.
DEATH OF AN OWNER
If any Owner dies while the Contract is in force prior to the Annuity
Commencement Date, we will pay a Death Benefit to the Beneficiary. If there are
joint Owners to a Contract and one dies prior to the Annuity
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<PAGE>
Commencement Date, the surviving Owner will be treated as the Beneficiary; if
none of the joint Owners survives prior to the Annuity Commencement Date, we
will pay the Death Benefit to the Beneficiary named by the Owner. If there is
no Beneficiary living or named, we will pay the Death Benefit to the estate of
the deceased Owner.
DETERMINING THE DEATH BENEFIT
We will determine the Death Benefit as of the date we receive due proof of
an Owner's death. If we receive a claim for the Death Benefit in good order and
within 12 months of the date of the Owner's death, the Death Benefit will be
the greater of the Net Account Value or the Account Value less applicable
premium tax. If we receive the claim for the Death Benefit 12 months or more
after the date of death, the Death Benefit will be the Net Account Value. If
any Owner is not a natural person, upon the change of the Annuitant the Death
Benefit will be the Net Account Value.
PAYING THE DEATH BENEFIT
Only one Death Benefit is payable under a Contract, even though the
Contract may, under some circumstances, continue beyond the time of an Owner's
death.
The Death Benefit may be taken in one lump sum immediately, in which event
the Contract will terminate. If the Death Benefit is not taken immediately as a
lump sum, the entire interest in the Contract must be distributed under one of
the following options:
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life
expectancy of the Beneficiary, with distributions beginning within
one year of the Owner's death; or
(2) the entire interest must be distributed within five years of the
Owner's death.
If the Beneficiary is the deceased Owner's spouse, the surviving spouse
may choose, in lieu of taking the Death Benefit, to continue the Contract and
become the new Owner. The surviving spouse may then select a new Beneficiary.
Upon the surviving spouse's death, the Death Benefit will become payable to the
new Beneficiary and must then be distributed to the new Beneficiary under
option 1 or 2, described above.
If there is more than one Beneficiary, these provisions apply to each
Beneficiary individually.
The Death Benefit provisions of this Contract shall be interpreted to
comply with the requirements of ss.72(s) of the Internal Revenue Code. We
reserve the right to endorse this Contract, as necessary, to conform to
regulatory requirements. We will send you a copy of any endorsement containing
such Contract modifications.
ANNUITY BENEFITS
ANNUITY COMMENCEMENT DATE
You may select an Annuity Commencement Date when you purchase a Contract.
The Annuity Commencement Date may not be earlier than the end of any Guaranteed
Period nor later than the Annuitant's 85th birthday. If you do not select one,
the Annuity Commencement Date will be the end of the Contract year immediately
before the Annuitant's 85th birthday.
You may change the Annuity Commencement Date, subject to some general
restrictions:
o You must request the change in writing.
o We must receive the written request at least 30 days before the new
Annuity Commencement Date you requested.
o The new Annuity Commencement Date may not come before the end of any
existing Guaranteed Period.
o Unless we agree prior to the change, the new Annuity Commencement Date
may not be later than the Annuitant's 85th birthday.
14
<PAGE>
Once our Administrative Office notifies you that we have received and
approved your written request for changing the Annuity Commencement Date, the
change will be made effective as of the date you signed the request.
Annuity Commencement Dates which occur after the Annuitant's 85th birthday
may have adverse income tax consequences so you should consult your tax advisor
before requesting an Annuity Commencement Date at these advanced ages. You may
be required to begin distributions from Qualified Contracts before the Annuity
Commencement Date. (See "Federal Tax Matters," page 18.)
ANNUITY OPTIONS
On the Annuity Commencement Date we will apply part or all of the Net
Account Value to the annuity option you have selected. If you have not selected
an annuity option, we will apply your Net Account Value to Option 2 -- Life
Income with Payments for a 10-year Guaranteed Period. You may select from the
following annuity options. For qualified Contracts, additional annuity options
may apply with certain restrictions.
o OPTION 1 -- PAYMENT FOR A FIXED PERIOD.
We will make equal monthly payments for any period not less than five
years nor more than 30 years. The amount of each payment depends upon the
total amount applied, the period selected and the interest rate we are
using when the annuity payments are determined.
o OPTION 2 -- LIFE INCOME WITH PAYMENTS FOR A GUARANTEED PERIOD.
We will make equal monthly payments based on the life of the named
Annuitant or Annuitants. Payments will continue for the lifetime of the
Annuitant or Annuitants with payments guaranteed for either 10 or 20
years. Payments stop at the end of the selected guaranteed period or when
the Annuitant dies, whichever is later.
o OPTION 3 -- PAYMENTS FOR A FIXED AMOUNT.
We will make equal monthly payments for a fixed amount. The amount of
each payment may not be less than $10 for each $1,000 of Net Account Value
applied to the annuity option. Each month we will credit interest on the
unpaid balance and add that interest to it. We will set the interest rate
in our sole discretion, but it will not be less than an annual effective
rate of 4%. Payments will continue until the amount we hold runs out. The
last payment will be for the balance only.
Other annuity options may be available on your Annuity Commencement Date.
ANNUITY PAYMENTS
We will use the Annuitant's age on the Annuity Commencement Date to
determine the amount of the payments under the annuity option you select. We
calculate the amount of each annuity payment using the Annuity Tables published
in the Contract. Those tables are based on the 1983 Individual Annuitant
Mortality Table A projected four years with interest credited at 4% per annum.
One year will be deducted from the attained age of the Annuitant for every
three completed years beyond the year 1987. If, at the time you select an
annuity option, we offer options or rates more favorable that those guaranteed,
the higher benefits will apply.
We will make the first annuity payment one month after the Annuity
Commencement Date. We will make subsequent payments according to the payment
mode you select. We reserve the right to pay the Net Account Value in a lump
sum if it is less than $5,000, and to change the frequency of your annuity
payments if at any time the annuity payment is less than our current minimum
payment amount.
As a condition for making the first annuity payment, we may require proof
of the Annuitant's age and gender. As a condition for continuing to make
annuity payments that are based on the life of an Annuitant, we may also
require proof at any time that an Annuitant is still living. You cannot
surrender this Contract after annuity payments begin.
15
<PAGE>
DEATH OF THE OWNER OR ANNUITANT AFTER THE ANNUITY COMMENCEMENT DATE
If any Owner or Annuitant dies on or after the Annuity Commencement Date
and before all the annuity payments have been made, we will distribute any
remaining payments at least as rapidly as under the annuity option in effect on
the date of death. After the death of an Annuitant, we will make any remaining
payments to the Beneficiary unless you specified otherwise before the Annuitant
died.
INVESTMENTS BY PROTECTIVE
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 "Guaranteed Interest Rates," on page 8.)
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 debt instruments.
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.
Mortgage-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, 1998, 96.5%
of bonds in which Protective invests were considered investment grade;
26.5% of these bonds were rated Baa or BBB.
Mortgage-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
16
<PAGE>
in economic conditions. Protective also makes loans on credit-oriented
commercial properties. In the twenty years that Protective has implemented its
mortgage loan strategy, it has had no significant loss of principal on
mortgages it has originated. Protective carefully selects, and closely
monitors, such investments.
The federal government or its instrumentalities does not guarantee the
Contracts. Protective backs the guarantees associated with the Contracts.
While the foregoing generally describes our investment strategy with
respect to the proceeds attributable to the Contracts, we are not obligated to
invest the proceeds attributable to the Contracts according to any particular
strategy, except as may be required by the insurance laws of Tennessee and
other states.
OTHER CONTRACT PROVISIONS
NON-PARTICIPATING
The Contract does not share in our surplus or profits and does not pay
dividends.
NOTICE
All instructions and requests to change or assign a Contract must be in a
written form acceptable to us and signed by the Owner. The instruction, change
or assignment will relate back to and take effect on the date it was signed,
but we will not be responsible for following any instruction or making any
change or assignment before we receive it and acknowledge it through our
Administrative Office. Send correspondence to: Investment Products Services, P.
O. Box 10648, Birmingham, Alabama 35202-0648.
REPORTS
At least once each year, we will send you a report showing the current
Account Value, Sub-Account values, interest credited and any other information
required by law.
TRANSACTIONS AND MODIFICATION OF THE CONTRACT
Currently, you must make any request for a change or transaction under
your Contract in writing and on a form acceptable to Protective Life. Changes
and transactions under your Contract include actions such as: making additional
Annuity Deposits; requesting surrenders or interest withdrawals; changing the
Annuity Commencement Date; annuity option, or Annuitant; or making a death
benefit claim. No one is authorized to modify or waive any term or provision of
the Contract unless we agree and unless it is signed by our President,
Vice-President or Secretary. We reserve the right to change or modify the
provisions of the Contract to conform to any applicable laws, rules or
regulations issued by a government agency, or to assure the Contract continues
to qualify as an annuity under the Internal Revenue Code. We will send you a
copy of any endorsement that modifies your Contract and will obtain all
necessary approvals including, where required, that of the Owner.
ASSIGNMENT OF A CONTRACT
You have the right to assign a Contract if it is permitted by applicable
law. Generally, you do not have the right to assign a qualified Contract. We do
not assume responsibility for any assignment. Any claim made under an
assignment is subject to proof of the nature and extent of the assignee's
interest before we make a payment. Assignments have federal income tax
consequences. An assignment may result in the Owner recognizing taxable income.
(See, "Federal Tax Matters," page 18.)
FACILITY OF PAYMENT
If the Annuitant or Beneficiary is incapable of giving a valid receipt for
any payment, we may make payment to whomever has assumed his or her care and
principal support. Any such payment shall fully discharge us to the extent of
that payment.
PROTECTION OF PROCEEDS
To the extent permitted by law, no benefits payable under a Contract will
be subject to the claims of creditors of any payee.
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<PAGE>
ERROR IN AGE OR GENDER
When a Contract benefit depends upon any person's age or gender, we may
require proof of such. We may suspend the benefit until we receive that proof.
When we receive satisfactory proof, we will make any payments that were due
during the period of suspension. Where the use of unisex mortality rates is
required, we will not determine or adjust benefits based on gender.
If, after we receive proof of age and gender (where applicable), we
determine that the information you furnished to us was not correct, we will
adjust the benefits under your Contract to that which would have been due based
upon the correct information. If we underpaid a benefit because of the error,
we will make up the underpayment in a lump sum. If the error resulted in an
overpayment, we will deduct the amount of the overpayment from any current or
future payment due under the Contract. We will deduct up to the full amount of
any current or future payment until the overpayment has been fully repaid.
Underpayments and overpayments will bear interest at an annual effective rate
of 3%.
DISTRIBUTION OF THE CONTRACTS
Investment Distributors, Inc., ("IDI") is the principal underwriter for
the Contracts and has agreed to use its best efforts to distribute them. IDI is
registered with the Securities and Exchange Commission as a broker-dealer under
the Securities Exchange Act of 1934. It is a member of the National Association
of Securities Dealers ("NASD"). IDI is a wholly owned subsidiary of Protective
Life Corporation, which is the parent corporation of Protective Life Insurance
Company.
IDI enters into distribution agreements with other broker-dealers
registered under the Securities Exchange Act of 1934. These broker-dealers
offer the Contracts to individuals and groups who have established accounts
with them. IDI may also offer the Contracts to members of certain other
eligible groups or other eligible individuals.
Unless forbidden by law, we pay a commission on each Annuity Deposit and
on the Sub-Account Value transferred to a subsequent Guaranteed Period. The
maximum commission we will pay is 7%.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
Contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the Contracts
is unclear in certain circumstances, and a qualified tax adviser should always
be consulted with regard to the application of law to individual circumstances.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences
associated with the purchase of the Contracts. In addition, THE COMPANY MAKES
NO GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Subchapter L of the
Code. The assets underlying the Contracts will be owned by the Company, and the
income derived from such assets will be includible in the Company's income for
federal income tax purposes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code (and except as described below), the
Contracts should be treated as annuities and any increase in an Owner's Account
Value is generally not taxable to the Owner or Annuitant
18
<PAGE>
until received, either in the form of Annuity payments as contemplated by the
Contracts, or in some other form of distribution.
As a general rule, Contracts held by "non-natural persons" such as a
corporation, trust or other similar entity, as opposed to a natural person, are
not treated as annuities for federal tax purposes. The income on such Contracts
(as defined in the tax law) is taxed as ordinary income that is received or
accrued by the Owner during the taxable year. There are several exceptions to
this general rule for Contracts held by non-natural persons. First, Contracts
will generally 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 Owner would be taxable
currently on the annual increase in the Account Value.
The remainder of this discussion assumes that the Contract will constitute
an annuity for federal tax purposes.
TAXATION OF INTEREST WITHDRAWALS AND PARTIAL AND FULL SURRENDERS
In the case of an interest withdrawal or partial surrender, amounts
received generally are includible in income to the extent the Owner's Account
Value before the withdrawal or partial surrender exceeds his or her "investment
in the contract." In the case of a full surrender, amounts received are
includible in income to the extent they exceed the "investment in the
contract." For these purposes the investment in the contract at any time equals
the premiums paid under the Contract (to the extent such premium payments were
neither deductible when made nor excludable from income as, for example, in the
case of certain contributions to Qualified Contracts) less any amounts
previously received from the Contract which were not included in income.
Other than in the case of Qualified Contracts (which generally cannot be
assigned or pledged), any assignment or pledge (or agreement to assign or
pledge) any portion of the Account Value is treated as a withdrawal of such
amount or portion. The investment in the contract is increased by the amount
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 an Owner transfers a Contract without adequate consideration to a
person other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner will be taxed on the difference between 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 interest withdrawal, partial surrender, or transfer without
adequate consideration. Congress has given the Internal Revenue Service ("IRS")
regulatory authority to address this uncertainty. However, as of the date of
this Prospectus, the IRS has not issued any regulations addressing these
determinations.
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<PAGE>
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each Annuity payment taxable as ordinary income
is equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected value of Annuity payments for the term of the
Contract (determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using
this ratio, Annuity payments will be fully taxable. If Annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the Annuitant in his last taxable year.
There may be special income tax issues present in situations where the
Owner and the Annuitant are not the same person and are not married to one
another. A tax advisor should be consulted in these situations.
EXAMPLE OF DETERMINATION OF EXCLUDABLE AMOUNT
<TABLE>
<S> <C>
Assumptions:
Cost basis (investment) in contract: $70,000
Annuity option selected: 10 year certain period
Payment frequency: monthly, with the initial payment made
immediately upon annuitization
Hypothetical payment: $ 1,000
Calculations:
Total payments = Hypothetical payment multiplied by the
number of payments to be made:
$1,000 x 120 = $120,000
Exclusion ratio = Cost basis divided by the total payments:
$70,000 / $120,000 = 58.33%
Excludable amount = Exclusion ratio multiplied by the
hypothetical payment:
58.33% x $1,000 = $583.33
</TABLE>
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, amounts may be distributed from a
Contract because of the death of an Owner or, in certain circumstances, the
death of the Annuitant. Such Death Benefit proceeds are includible in income as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender, as described above, or (2) if distributed under an Annuity
option, they are taxed in the same manner as Annuity payments, as described
above. After the Annuity Commencement Date, where a guaranteed period exists
under an Annuity option and the Annuitant dies before the end of that period,
payments made to the Beneficiary for the remainder of that period are
includible in income as follows: (1) if received in a lump sum, they are
includible in income to the extent that they exceed the unrecovered investment
in the Contract at that time, or (2) if distributed in accordance with the
existing Annuity option selected, they are fully excludable from income until
the remaining investment in the Contract is deemed to be recovered, and all
Annuity payments thereafter are fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Withholding, page 24.) In addition, in
the case of such proceeds from certain Qualified Contracts, mandatory
withholding requirements may apply, unless a "direct rollover" of such proceeds
is made. (See "Direct Rollover Rules, page 23.)
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
20
<PAGE>
after the Owner reaches age 59 1/2; (b) attributable to the Owner becoming
disabled (as defined in the tax law); (c) made on or after the death of the
Owner or, if a Owner is not an individual, on or after the death of the primary
annuitant (as defined in the tax law); (d) made as a series of substantially
equal periodic payments (not less frequently than annually) for the life (or
life expectancy) of the Owner or the joint lives (or joint life expectancies)
of the Owner and a designated beneficiary (as defined in the tax law); or (e)
made under a Contract purchased with a single premium when the Annuity
Commencement Date is no later than a year from purchase of the Contract and
substantially equal periodic payments are made, not less frequently than
annually, during the Annuity period. (Similar rules, described below, generally
apply in the case of Qualified Contracts.)
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an Annuity
payment or a withdrawal or surrender from a Contract that is 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 interest withdrawals and surrenders 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, a portion of otherwise deductible interest may no longer be deductible
by the entity, regardless of whether the interest relates to debt used to
purchase or carry the Contract. However, this interest deduction disallowance
does not affect Contracts where the income on such Contracts is treated as
ordinary income that is received or accrued by the Owner during the taxable
year. Entities that are considering purchasing the Contract, or entities that
will be beneficiaries under a Contract, should consult a tax advisor.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types
of retirement plans which receive favorable treatment under the Code. Those who
are considering the purchase of a Contract for use in connection with a
Qualified Plan should consider, in evaluating the suitability of the Contract,
that the Contract requires an Annuity 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 tax deduction or exclusion
that the Owner may claim for such contribution, are limited under Qualified
Plans and vary with the type of plan. Also, in the case of interest
withdrawals, full and partial surrenders, and Annuity payments under Qualified
Contracts, there may be no "investment in the contract" and the total amount
received may be taxable.
If a Contract is issued in connection with a Qualified Plan, the Owner and
the Annuitant must be the same person. Additionally, for Contracts issued in
connection with Qualified Plans subject to the Employee Retirement Income
Security Act, the spouse or ex-spouse of the Owner will have rights in the
Contract. In such a case, the Owner may need the consent of the spouse or
ex-spouse to change annuity options, elect an interest withdrawal, or make a
partial or full surrender of the Contract.
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<PAGE>
In addition, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. For example, the
length of any Guarantee Period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code. Furthermore, failure
to comply with minimum distribution requirements applicable to Qualified Plans
will result in the imposition of an excise tax. This excise tax generally
equals 50% of the amount by which a minimum required distribution exceeds the
actual distribution from the Qualified Plan. In the case of Individual
Retirement Accounts or Annuities ("IRAs"), distributions of minimum amounts (as
specified in the tax law) must generally commence by April 1 of the calendar
year following the calendar year in which the Owner attains age 70 1/2. In the
case of certain other Qualified Plans, distributions of such minimum amounts
generally must commence by the later of this date or April 1 of the calendar
year following the calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Contracts. There are exceptions to this penalty tax which
vary depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Owner reaches age 59 1/2, (b) received on or after the Owner's death
or because of the Owner's disability (as defined in the tax law), or (c) made
as a series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the Owner or for the joint lives
(or joint life expectancies) of the Owner and the Owner's designated
Beneficiary (as defined in the tax law). These exceptions, as well as certain
others not described herein, generally apply to taxable distributions from
other Qualified Plans (although, in the case of plans qualified under sections
401 and 403, exception "c" above for substantially equal periodic payments
applies only if the Owner has separated from service). In addition, the penalty
tax does not apply to certain distributions from IRAs taken after December 31,
1997 which are used for qualified first time home purchases or for higher
education expenses. Special conditions must be met for these two exceptions to
the penalty tax. Those wishing to take a distribution from an IRA for these
purposes should consult their tax advisor.
When issued in connection with a Qualified Plan, a Contract will be
amended as generally necessary to conform to the requirements of the plan.
However, Owners, Annuitants, and Beneficiaries are cautioned that the rights of
any person to any benefits under Qualified Plans may be subject to the terms
and conditions of the plans themselves, regardless of the terms and conditions
of the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions
contradict the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in
connection with which Protective will generally issue a Contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA." IRAs are subject to limits on the
amounts that may be contributed, the persons who may be eligible and on the
time when distributions may commence. Also, 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. Section 408A of the Internal Revenue Code permits eligible
individuals to contribute to a type of IRA known as a "Roth IRA." Roth IRAs are
generally subject to the same rules as non-Roth IRAs, but differ 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.
A qualified distributions is a distribution that satisfies two
requirements:
o First, the distribution must be made in a taxable year that is at least
five years after the first taxable year for which a contribution was made
to any Roth IRA established for the Owner.
o Second, the distribution must be either:
1) made after the Owner reaches age 59 1/2;
2) made after the Owner's death;
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3) attributable to the Owner being disabled; or
4) a qualified first-time homebuyer distribution within the meaning of
Section 72(t)(2)(F) of the Internal Revenue Code.
In addition, distributions from Roth IRAs need not commence when the Owner
reaches age 70 1/2. A Roth IRA may accept a "qualified rollover contribution"
from a non-Roth IRA, but a Roth IRA may not accept rollover contributions from
other Qualified Plans. The state tax treatment of a Roth IRA may differ from
federal income tax treatment of a Roth IRA.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. Employers intending to
use the Contract in connection with such plans should seek competent advice.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as
"tax-sheltered annuities." Purchasers of the Contracts for such purposes should
seek competent advice as to eligibility, limitations on permissible amounts of
purchase payments and other tax consequences associated with the Contracts.
Section 403(b) Policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
the employee has reached age 59 1/2, separated from service, died, become
disabled, or in the case of hardship. Amounts permitted to be distributed in
the event of hardship are limited to actual contributions; earnings thereon can
not be distributed on account of hardship. (These limitations on withdrawals do
not apply to the extent the Company is directed to transfer some or all of the
Account Value to the issuer of another tax-sheltered annuity or into a Section
403(b)(7) custodial account.)
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, distributions which are part of a "series
of substantially equal periodic payments" made for life or a specified period
of 10 years or more, or hardship distributions as defined in the tax law).
Under these requirements, withholding at a rate of 20 percent will be
imposed on any eligible rollover distribution. In addition, the Owner in these
qualified retirement plans cannot elect out of withholding with respect to an
eligible rollover distribution. However, this 20 percent withholding will not
apply if, instead of receiving the eligible rollover distribution, the Owner
elects to have amounts directly transferred to certain Qualified Plans (such as
to an Individual Retirement Annuity). Prior to receiving an eligible rollover
distribution, you will receive a notice (from the plan administrator or the
Company) explaining generally the direct rollover and mandatory withholding
requirements and how to avoid the 20% withholding by electing a direct
transfer.
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FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances,
Protective 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%.
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<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
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 insurance and investment products. 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, 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 insurance policies from other insurers.
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.
The following table shows the percentages of pretax operating income
represented by each of the strategic focuses and the Corporate and Other
segment.
<TABLE>
<CAPTION>
RETIREMENT
SPECIALTY SAVINGS AND CORPORATE
YEAR ENDED LIFE INSURANCE INVESTMENT AND
DECEMBER 31 INSURANCE PRODUCTS PRODUCTS OTHER
- ----------------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
1994 ......... 53.1% 17.5% 31.6% (2.1)%
1995 ......... 56.7 14.3 34.5 (5.5)
1996 ......... 55.3 7.9 38.8 (1.9)
1997 ......... 58.9 16.7 24.6 (0.2)
1998 ......... 58.1 15.6 23.1 3.2
</TABLE>
In the following paragraphs, Protective reports its divisional sales, new
capital invested, members, and annualized premium. These statistics are used by
Protective to measure the relative progress of its marketing and acquisition
efforts. These statistics were derived from the Company's various sales
tracking and administrative systems and were not derived from the Company's
financial reporting systems or financial statements. These statistics attempt
to measure only one of many factors that may affect future divisional
profitability, and therefore are not intended to be predictive of future
profitability.
LIFE INSURANCE
A strategic focus of Protective is to expand its life insurance operations
through internal growth and acquisitions. The Individual Life, West Coast, and
Acquisitions Divisions support this strategy.
INDIVIDUAL LIFE DIVISION
The Individual Life Division markets level premium term and term-like
insurance, universal life and variable universal life products on a national
basis through networks of independent insurance agents. The Division is also
developing other distribution channels. These include marketing life insurance
products through regional stockbrokers and banks and through worksite and
direct response arrangements. 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 has two principal agent networks. The first is based on
experienced independent personal producing general agents who are recruited by
regional sales managers. At December 31, 1998, there were over 55 regional
sales managers located throughout the United States. This distribution system
generally appeals to agents who prefer to represent one or a few insurers and
who may depend on the regional sales managers or Protective to furnish various
support services to the agent. Approximately 47% of the Division's 1998 sales
came from this distribution system.
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The Division also distributes specialty insurance products in the life
insurance brokerage market through a wholly-owned subsidiary, Empire General
Life Assurance Corporation, representing approximately 42% of this Division's
sales. This distribution system generally appeals to agents who prefer to
represent many insurers, or who look to Empire General's product offerings to
fill a special need. For the entire Division, sales through stockbrokers and
banks represented 9% of sales.
The following table shows the Individual Life Division's sales measured by
new premium.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 SALES
- ------------------ ----------------------
(DOLLARS IN MILLIONS)
<S> <C>
1994 ........ $ 30.8
1995 ........ 36.3
1996 ........ 45.4
1997 ........ 48.7
1998 ........ 71.2
</TABLE>
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" ("BOLI") market.
The West Coast Division primarily utilizes a distribution system comprised
of brokerage general agencies ("BGAs") who recruit a network of independent
life agents. The BGAs provide varying levels of service to the independent
agents based on the size, structure and capabilities of the individual BGA
organizations. At December 31, 1998, the Division worked with 80 BGAs located
throughout the United States. This distribution system represented
approximately 55% of the Division's 1998 sales.
The Division also offers corporate owned life insurance products to the
BOLI market through an independent marketing organization which specializes in
this market. The products are sold to smaller and regional banks, and represent
approximately 45% of the Division's sales.
The following table shows the West Coast Division's sales measured by new
premium including sales prior to Protective's acquisition of West Coast for
comparison purposes.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 SALES
- ------------------ ----------------------
(DOLLARS IN MILLIONS)
<S> <C>
1996 ......... $ 14.9
1997 ......... 29.8
1998 ......... 40.6
</TABLE>
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. The Division's primary
focus is on life insurance policies sold to individuals. These acquisitions may
be accomplished through acquisitions of companies or through the reinsurance of
blocks of policies from other insurers. Forty transactions have been closed by
the Division since 1970, including 13 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.
Most acquisitions closed by the Division do not include the acquisition of
an active sales force. In transactions where some marketing capacity was
included, the Division generally either ceased future marketing efforts or
redirected those efforts to another Division of Protective. However, in the
case of the acquisition of West Coast which was closed by the Acquisitions
Division, Protective elected to continue the marketing of new policies and to
operate and report West Coast as a separate division of Protective.
26
<PAGE>
The Division believes that its highly focused and disciplined approach to
the acquisition process and its extensive experience in the assimilation,
conservation, and servicing of purchased policies give it a significant
competitive advantage over many other companies that attempt to make similar
acquisitions. The Division expects acquisition opportunities to continue to be
available as the life insurance industry continues to consolidate; however,
management believes that the Company 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.
The following table shows the number of transactions closed by the
Acquisitions Division and the approximate amount of new (statutory) capital
invested.
<TABLE>
<CAPTION>
NUMBER NEW
YEAR ENDED OF CAPITAL
DECEMBER 31 TRANSACTIONS INVESTED
- --------------------- -------------- ----------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
1994 ............ 2 $ 45.6
1995 ............ 1 16.6
1996 ............ 3 47.1
1997 ............ 1(1) 116.8 (1)
1998 ............ 1 77.8
</TABLE>
- ----------
(1) West Coast
From time to time, other Protective Divisions have acquired companies and
blocks of policies which are included in their respective results.
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
In 1997 the Division (formerly known as the Group Division) 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 Division's primary strategic emphasis is on indemnity and
managed-care dental products. At December 31, 1998, the Division had
approximately 690,000 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 offers discounted fee-for-service dental programs to
individual consumers and groups through its Dental Network Plans where enrolled
consumers have access to a contracted network of dental providers who have
agreed to a discounted fee schedule.
27
<PAGE>
The following table shows the approximate number of Dental and Consumer
Benefits Division's members in all of its dental programs and annualized dental
premium in-force at December 31.
<TABLE>
<CAPTION>
ANNUALIZED
DENTAL
MEMBERS PREMIUM
--------------- ----------------------
(IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C>
1994 ......... 0.2 $ 29.9
1995 ......... 0.3 44.1
1996 ......... 0.4 52.3
1997 ......... 0.6 98.3
1998 ......... 0.7 117.8
</TABLE>
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 is one of the largest independent writers of
credit insurance in the United States. The majority of these policies cover
consumer loans made by financial institutions located primarily in the
southeastern United States and automobile dealers throughout the United States.
The demand for credit life and credit health insurance is related to the
general level for consumer loans.
The Division markets through employee field representatives, independent
brokers and wholly-owned subsidiaries. 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.
In September 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 service contracts, which the Division has begun to market
nationally through its other distribution channels. The Division acquired a
closed block of credit policies in 1996 and another in 1997.
The following table shows the Financial Institutions Division's sales
measured by new premium including sales of Western Diversified since the date
of acquisition.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 SALES
- ------------------ ----------------------
(DOLLARS IN MILLIONS)
<S> <C>
1994 ......... $ 117.3
1995 ......... 136.3
1996 ......... 147.2
1997 ......... 189.3
1998 ......... 273.5
</TABLE>
A significant portion of the Division's sales are reinsured with
producer-owned reinsurers.
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
The Guaranteed Investment Contracts ("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
28
<PAGE>
period and often provide flexibility for withdrawals, in keeping with the
benefits provided by the plan. The demand for GICs is related to the relative
attractiveness of the "fixed rate" investment option in a 401(k) plan compared
to the equity-based investment options available to plan participants. The
Division also markets related products, including fixed and floating rate
funding agreements offered to the trustees of municipal bond proceeds, bank
trust departments and money market funds, and long-term annuity contracts
offered to fund certain state obligations. The Division has benefited from the
growing acceptance of funding agreements among money managers. 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 and funding agreements written by Protective have
maturities of three to five years. The rate of growth in GIC account balances
has slowed as the amount of maturing contracts has increased relative to the
amount of sales of GIC and related deposits.
The following table shows the Guaranteed Investment Contract Division's
sales and account balances.
<TABLE>
<CAPTION>
YEAR ENDED ACCOUNT
DECEMBER 31 SALES BALANCES
- ------------------ ------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
1994 ......... $806 $2,282
1995 ......... 751 2,524
1996 ......... 686 2,627
1997 ......... 696 2,869
1998 ......... 827 2,879
</TABLE>
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.
The Division offers modified guaranteed annuities which guarantee an
interest rate for a fixed period. Because contract values are "market-value
adjusted" upon surrender prior to maturity, these products afford Protective a
measure of protection from changes in interest rates. Since 1994, the Division
has offered variable annuities which offer the policyholder the opportunity to
invest in various investment accounts.
The following table shows the Investment Products Division's sales.
<TABLE>
<CAPTION>
YEAR ENDED FIXED VARIABLE TOTAL
DECEMBER 31 ANNUITY ANNUITY ANNUITY
- ------------------ --------- ----------------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
1994 ......... $280 $171 $451
1995 ......... 118 189 307
1996 ......... 199 169 368
1997 ......... 180 324 504
1998 ......... 97 472 569
</TABLE>
The following table shows the Investment Products account balances.
<TABLE>
<CAPTION>
YEAR ENDED FIXED VARIABLE TOTAL
DECEMBER 31 ANNUITY ANNUITY ANNUITY
- ------------------ --------- ----------------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
1994 ......... $ 983 $ 170 $1,153
1995 ......... 996 388 1,384
1996 ......... 1,042 625 1,667
1997 ......... 1,229 1,057 2,286
1998 ......... 1,105 1,555 2,660
</TABLE>
29
<PAGE>
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.
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
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees ............ $ 1,027,340 $ 814,420 $ 770,224 $ 744,855 $ 575,347
Reinsurance ceded ................... (459,215) (334,214) (308,174) (333,173) (172,575)
-------------- ------------- ---------- ---------- ----------
Net of reinsurance ceded ............ 568,125 480,206 462,050 411,682 402,772
Net investment income ............... 603,795 557,488 498,781 458,433 408,933
Realized investment gains ........... 2,136 1,824 5,510 1,951 6,298
Other income ........................ 20,201 6,149 5,010 1,355 11,977
-------------- ------------- ---------- ---------- ----------
Total revenues ................... $ 1,194,257 $ 1,045,667 $ 971,351 $ 873,421 $ 829,980
============== ============= ========== ========== ==========
Benefits and expenses ............... $ 1,013,912 $ 895,917 $ 846,042 $ 755,688 $ 724,402
Income tax expense .................. $ 63,162 $ 52,302 $ 42,766 $ 40,037 $ 32,855
Net income .......................... $ 117,183 $ 97,448 $ 82,543 $ 77,696 $ 72,723
DECEMBER 31
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- ----------- ----------- -----------
BALANCE SHEET DATA
Total assets ........................ $ 11,622,895 $10,375,281 $8,163,343 $7,178,693 $6,110,704
Long-term debt ...................... $ 2,363
Total debt(1) ....................... $ 23,261 $ 28,055 $ 25,014 $ 34,693 $ 39,443
Redeemable preferred stock .......... $ 2,000 $ 2,000
Share-owners equity ................. $ 1,069,371 $ 1,018,779 $ 776,191 $ 651,237 $ 395,075
Share-owners equity excluding net
unrealized gains and losses on
investments ........................ $ 1,014,314 $ 957,052 $ 769,503 $ 593,374 $ 502,607
</TABLE>
- ----------
(1) Includes indebtedness to related parties. At December 31, 1998 such
indebtedness totaled $20.9 million. See also Note E to the Consolidated
Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This report includes "forward looking statements" which express
expectations of future events and/or results. All statements based on future
expectations rather than on historical factors are forward-looking statements
that involve a number of risks and uncertainties, and Protective cannot give
assurance that such statements will prove to be correct. Please refer to Known
Trends and Uncertainties herein for more information about factors which could
affect future results.
RESULTS OF OPERATIONS
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: Individual Life, West Coast, Acquisitions, Dental and Consumer
Benefits ("Dental"),
30
<PAGE>
Financial Institutions, Guaranteed Investment Contracts ("GIC"), and Investment
Products. Protective also has an additional business segment which is Corporate
and Other.
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>
1996 ................................. $462,050 12.2%
1997 ................................. 480,206 3.9
1998 ................................. 568,125 18.3
</TABLE>
Premiums and policy fees, net of reinsurance ("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.
In 1998, premiums and policy fees increased $87.9 million or 18.3% over
1997. The Individual Life Division's premiums and policy fees decreased $1.3
million due to an increased use of reinsurance by the Division. The full year
effect of the June 1997 acquisition of West Coast increased premiums and policy
fees $8.3 million. In the Acquisitions Division, decreases in older acquired
blocks resulted in a $9.5 million decrease in premiums and policy fees. The
coinsurance of a block of policies from Lincoln National Corporation in October
1998 resulted in a $3.6 million increase in premiums and policy fees. Premiums
and policy fees in the Dental Division increased $40.5 million. The full year
effect of the September 1997 acquisition of Western Diversified and a coinsured
block of credit insurance policies by the Financial Institutions Division
increased premiums and policy fees $49.8 million. The increase in premiums and
policy fees from the Investment Products Division was $6.4 million.
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
YEAR ENDED PERCENTAGE ON AVERAGE CASH
DECEMBER 31 AMOUNT INCREASE AND INVESTMENTS
- -------------------- --------------- ------------ ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1996 ......... $498,781 8.8% 7.8%
1997 ......... 557,488 11.8 7.6
1998 ......... 603,795 8.3 7.2
</TABLE>
31
<PAGE>
Net investment income in 1997 was $58.7 million or 11.8% higher than in
1996, and in 1998 was $46.3 million or 8.3% 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. 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
full year effect of the 1997 acquisition of West Coast, Western Diversified,
and the block of credit insurance policies resulted in an increase in net
investment income of $43.1 million in 1998. The coinsurance of a block of
policies from Lincoln National Corporation increased 1998 net investment income
$6.0 million. The percentage earned on average cash and investments was 7.2% in
1998 and 7.6% in 1997.
REALIZED INVESTMENT GAINS
Protective generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. The sales
of investments that have occurred generally result from portfolio management
decisions to maintain proper matching of assets and liabilities. The following
table sets forth realized investment gains for the periods shown:
REALIZED INVESTMENT GAINS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 AMOUNT
- ---------------------------------------------------- ---------------
(IN THOUSANDS)
<S> <C>
1996 ............................................. $5,510
1997 ............................................. 1,824
1998 ............................................. 2,136
</TABLE>
Protective maintains an allowance for uncollectible amounts on
investments. The allowance totaled $23.0 million at December 31, 1997 and $24.1
million at December 31, 1998.
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.
Realized investment gains in 1998 of $36.1 million were largely offset by
realized investment losses of $34.0 million. Realized investment losses include
a $1.1 million net increase to the allowance for uncollectible amounts of
investments.
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>
1996 ............................................. $ 5,010
1997 ............................................. 6,149
1998 ............................................. 20,201
</TABLE>
Other income consists primarily of revenues of Protective's noninsurance
subsidiaries rental of space in Protective's administrative building to PLC.
The full year effect of the 1997 acquisition of Western Diversified increased
other income $12.8 million in 1998 as compared to the previous year.
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:
32
<PAGE>
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE
INCOME TAX YEAR ENDED DECEMBER 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING INCOME (LOSS)1
LIFE INSURANCE
Individual Life ........................................ $ 14,774 $ 22,480 $ 30,183
West Coast ............................................. 8,202 20,983
Acquisitions ........................................... 53,564 56,672 52,940
SPECIALTY INSURANCE PRODUCTS
Dental ................................................. 821 11,767 10,206
Financial Instutions ................................... 8,966 13,017 17,650
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
GIC .................................................... 40,093 28,117 30,780
Investment Products .................................... 7,852 8,303 10,639
Corporate and Other ...................................... (2,410) (259) 5,718
-------- -------- --------
Total operating income ................................... 123,660 148,299 179,099
-------- -------- --------
REALIZED INVESTMENT GAINS (LOSSES)
Individual Life ........................................ 3,098
GIC .................................................... (7,963) (3,180) 1,609
Investment Products .................................... 3,858 589 1,318
Unallocated Realized Investment Gains (Losses) ......... 6,517 4,415 (791)
RELATED AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS
Individual Life ........................................ (1,974)
Investment Products .................................... (1,887) (373) (890)
-------- -------- --------
Total net ................................................ 1,649 1,451 1,246
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX LIFE INSURANCE
Individual Life ........................................ 15,898 22,480 30,183
West Coast ............................................. 8,202 20,983
Acquisitions ........................................... 53,564 56,672 52,940
SPECIALTY INSURANCE PRODUCTS
Dental ................................................. 821 11,767 10,206
Financial Institutions ................................. 8,966 13,017 17,650
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
GIC .................................................... 32,130 24,937 32,389
Investment Products .................................... 9,823 8,519 11,067
Corporate and Other ...................................... (2,410) (259) 5,718
Unallocated Realized Investment Gains (Losses) ........... 6,517 4,415 (791)
-------- -------- --------
Total income before income tax ........................... $125,309 $149,750 $180,345
</TABLE>
- ----------
1 Income before income tax excluding realized investment gains and losses and
related amortization of deferred policy acquisition costs.
The Individual Life 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. The Division's 1998 pretax income was $30.2
million, $7.7 million above 1997. The Division's mortality experience was at
expected levels in 1998 and approximately $5.1 million more favorable than
1997.
Headquartered in San Francisco, West Coast Life Insurance Company was
acquired by Protective in June 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 Division's 1998 pretax income was $21.0 million.
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
33
<PAGE>
administered as "closed" blocks; i.e., no new policies are being marketed.
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 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 Division's
1998 pretax income decreased $3.7 million to $52.9 million, compared to 1997.
The Division's mortality experience was at expected levels in 1998 compared to
being approximately $5.1 million better than expected in 1997. In October 1998,
the Division acquired approximately 260,000 policies from Lincoln National
Corporation. The policies represent the payroll deduction business originally
marketed and underwritten by Aetna.
The Dental 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 Dental Division's 1998 pretax
income was $10.2 million compared to $11.8 million in 1997. Dental earnings
were $5.1 million, before a $2.5 million loss relating to its discounted
fee-for-service dental program.
The Financial Institutions 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
Division's 1998 pretax income increased $4.6 million to $17.7 million. Western
Diversified and the coinsured block of policies represented $2.8 million of the
increase.
The GIC Division had pretax operating income of $28.1 million in 1997.
Several factors contributed to the 1997 decline from 1996. 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. The Division's
1998 pretax operating income increased to $30.8 million due to increased
investment income. Realized investment losses associated with this Division in
1997 were $3.2 million as compared to realized investment gains of $1.6 million
in 1998. As a result, total pretax earnings were $24.9 million in 1997 and
$32.4 million in 1998.
The Investment Products Division's 1997 pretax operating earnings were
$8.3 million, an increase of $0.5 million over 1996. The Division's 1998 pretax
operating income was $10.6 million, an increase of $2.3 million. Realized
investment gains, net of related amortization of deferred policy acquisition
costs, were $0.2 million in 1997 as compared with $0.4 million in 1998. As a
result, total pretax earnings were $8.5 million in 1997 and and $11.1 in 1998.
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 income for this segment was $2.2 million
higher in 1997 as compared to 1996, and $6.0 million higher in 1998 as compared
to 1997, due primarily to higher net investment income on capital.
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the
periods shown:
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED EFFECTIVE INCOME
DECEMBER 31 TAX RATES
- ---------------------------------------------------- -----------------
<S> <C>
1996 ............................................. 34.1%
1997 ............................................. 34.9
1998 ............................................. 35.0
</TABLE>
Management's current estimate of the effective tax rate for 1998 is
between 34% and 35%.
34
<PAGE>
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>
1996 ...................................... $ 82,543 6.2%
1997 ...................................... 97,448 18.1
1998 ...................................... 117,183 20.3
</TABLE>
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). Compared to 1997, net
income in 1998 increased 20.3%, reflecting improved operating earnings in the
Individual Life, West Coast, Financial Institutions, GIC, and Investment
Products Divisions, and the Corporate and Other segment, and higher realized
investment gains, offset by lower operating earnings in the Acquisitions and
Dental Divisions.
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 little growth in life
insurance sales, though the aging population has increased the demand for
retirement savings products. Insurance is a highly competitive industry, and
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 financial strength ratings from rating
agencies.
Protective competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
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
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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 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 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 share owners. 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. 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 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 or alternatively in arbitration. The outcome of any
such litigation or arbitration cannot be predicted with certainty. In addition,
in some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments.
INVESTMENT RISKS. 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 financial
condition 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 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.
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RELIANCE ON THE PERFORMANCE OF OTHERS. Protective's results may be
affected by the performance of others because 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.
YEAR 2000. Computer hardware and software often denote the year using two
digits rather than four; for example, the year 1998 often is denoted by such
hardware and software as "98." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted
because the hardware and/or software will interpret "00" as representing the
year 1900 rather than the year 2000. This "Year 2000" issue potentially affects
all individuals and companies (including Protective, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
Protective shares computer hardware and software with its parent,
Protective Life Corporation ("PLC"), and other affiliates of PLC.
Due to the fact that PLC does not control all of the factors that could
impact its Year 2000 readiness, there can be no assurances that PLC's Year 2000
efforts will be successful, that interactions with other service providers with
Year 2000 issues will not impair PLC's operations, or that the Year 2000 issue
will not otherwise adversely affect PLC.
Should some of PLC's systems not be available due to Year 2000 problems,
in a reasonably likely worst case scenario, PLC may experience significant
delays in its ability to perform certain functions, but does not expect an
inability to perform critical functions or to otherwise conduct business.
However, other worst case scenarios, depending upon their duration, could have
a material adverse effect on PLC and Protective and their operations.
REINSURANCE. Protective and its insurance subsidiaries cede insurance to
other insurance companies. However, Protective remains liable with respect to
ceded insurance should any reinsurer fail to meet the obligations assumed by
it. The cost of reinsurance is, in some cases, reflected in the premium rates
charged by Protective. Under certain reinsurance agreements, the reinsurer may
increase the rate it charges Protective for the reinsurance, though Protective
does not anticipate increases to occur. Therefore, if the cost of reinsurance
were to increase with respect to policies where the rates have been guaranteed
by Protective, Protective could be adversely affected.
Additionally, Protective assumes policies of other insurers. Any
regulatory or other adverse development affecting the ceding insurer could also
have an adverse effect on Protective.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will require Protective to
report derivative financial instruments on the balance sheet and to carry such
derivatives at fair value. The fair values of derivatives increase or decrease
as interest rates change. Under SFAS No. 133, changes in fair value are
reported as a component of net income or as a change to share-owner's equity,
depending upon the nature of the derivative. Although the adoption of SFAS No.
133 will not affect Protective's operations, adoption will introduce volatility
into Protective's reported net income and share-owners' equity as interest
rates change. SFAS No. 133 is effective January 1, 2000.
The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," and the American Institute of Certified Public
Accountants has issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The adoption of
these accounting standards in 1999 is not expected to have a material effect on
Protective's financial condition.
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<PAGE>
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.
INVESTMENTS
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."
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, 1998, the fixed maturity investments (bonds and redeemable
preferred stocks) had a market value of $6,400.3 million, which is 1.5% above
amortized cost (less allowances for uncollectible amounts on investments) of
$6,307.3 million. Protective had $1,623.6 million in mortgage loans at December
31, 1998. While Protective's mortgage loans do not have quoted market values,
at December 31, 1998, Protective estimates the market value of its mortgage
loans to be $1,774.4 million (using discounted cash flows from the next call
date) which is 9.3% 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.
The following table sets forth the estimated market values of the
Protective's fixed maturity investments and mortgage loans resulting from a
hypothetical immediate 1 percentage point increase in interest rates from
levels prevailing at December 31, 1998, and the percent change in market value
the following estimated market values would represent.
ESTIMATED MARKET VALUES RESULTING FROM AN
IMMEDIATE 1 PERCENTAGE POINT INCREASE IN INTEREST RATES
<TABLE>
<CAPTION>
AMOUNT PERCENT
(IN MILLIONS) CHANGE
--------------- ------------
<S> <C> <C>
Fixed maturities ................... $ 6,183.3 (3.5)%
Mortgage loans ..................... 1,703.8 (4.0)
</TABLE>
Estimated market values were derived from the durations of Protective's
fixed maturities and mortgage loans. Duration measures the relationship between
changes in market value to changes in interest rates. While these estimated
market values generally provide an indication of how sensitive the market
values of Protective's fixed maturities and mortgage loans are to changes in
interest rates, they do not represent management's view of future market
changes, and actual market results may differ from these estimates.
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.
As of December 31, 1998, approximately $464.4 million of Protective's mortgage
loans have this participation feature.
At December 31, 1998, delinquent mortgage loans and foreclosed properties
were 0.1% 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 $24.1
million at December 31, 1998.
Policy loans at December 31, 1998, were $232.7 million, a decrease of $5.2
million from December 31, 1997, (after excluding the $43.8 million of policy
loans obtained through acquisitions). Policy loan rates are generally in the
4.5% to 8.0% range. Such rates at least equal the assumed interest rates used
for future policy benefits.
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In the ordinary course of its commercial mortgage lending operations,
Protective will commit to provide a mortgage loan before the property to be
mortgaged has been built or acquired. The mortgage loan commitment is a
contractual obligation to fund a mortgage loan when called upon by the
borrower. The commitment is not recognized in Protective's financial statements
until the commitment is actually funded. The mortgage loan commitment contains
terms including the rate of interest. At December 31, 1998, Protective had
outstanding mortgage loan commitments of $715.9 million, having an estimated
fair value of $752.6 million (using discounted cash flows from the first call
date). If interest rates were to, hypothetically, immediately increase 1
percentage point from levels prevailing at December 31, 1998, the estimated
fair value would decrease 5.1% to $713.9 million. The estimated fair value was
derived from the durations of Protective's outstanding mortgage loan
commitments.
LIABILITIES
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.
At December 31, 1998, the Company had policy liabilities and accruals of
$4,529.3 million. The Company's life insurance products have a weighted average
minimum credited interest rate of approximately 4.3%.
At December 31, 1998, Protective had $2,691.7 million of GIC account
balances having an estimated fair value of $2,751.0 million (using discounted
cash flows), and $1,519.8 million of annuity account balances having an
estimated fair value of $1,513.1 million (using surrender value).
The following table sets forth the estimated fair values of Protective's
GIC and annuity account balances resulting from a hypothetical immediate 1
percentage point decrease in interest rates fromlevels prevailing at December
31, 1998, and the percent change in fair value the following estimated fair
values would represent.
ESTIMATED FAIR VALUES RESULTING FROM AN
IMMEDIATE 1 PERCENTAGE POINT DECREASE IN INTEREST RATES
<TABLE>
<CAPTION>
AMOUNT PERCENT
(IN MILLIONS) CHANGE
--------------- --------
<S> <C> <C>
GIC account balances ............. $ 2,791.7 1.5%
Annuity account balances ......... 1,565.5 3.5
</TABLE>
Estimated fair values were derived from the durations of Protective's GIC
and annuity account balances. While these estimated fair values generally
provide an indication of how sensitive the fair values of Protective's GIC and
annuity account balances are to change in interest rates, they do not represent
management's view of future market changes, and actual market results may
differ from these estimates.
DERIVATIVE FINANCIAL INSTRUMENTS
Protective does not currently use derivative financial instruments for
trading purposes. Combinations of options and futures contracts are sometimes
used as hedges against changes in interest rate for certain investments,
primarily outstanding mortgage loan commitments, mortgage loans, and
mortgage-backed securities, and liabilities arising from interest-sensitive
products. At December 31, 1998, options with a notional amount of $975.0
million were in a $0.5 million net unrealized loss position.
Protective uses interest rate swap contracts, swaptions (options to enter
into interest rate swap contracts), caps, and floors to convert certain
investments from a variable rate of interest to a fixed rate of interest and
from a fixed rate to a variable rate of interest. Swap contracts are also used
to alter the effective durations of assets and liabilities. At December 31,
1998, interest rate swap contracts, swaptions, caps and floors with a notional
amount of $55.3 million were in a $0.2 million net unrealized loss position.
The following table sets forth the notional amount and net unrealized
gains and losses of Protective's derivative financial instruments at December
31, 1998, and the estimated net unrealized gains and losses
39
<PAGE>
resulting from a hypothetical immediate plus and minus 1 percentage point
change in interest rates from levels prevailing at December 31, 1998.
<TABLE>
<CAPTION>
NET UNREALIZED GAIN (LOSS)
-------------------------------------
RESULTING FROM AN
IMMEDIATE +/-1
PERCENTAGE
POINT CHANGE
AT IN INTEREST RATES
NOTIONAL DECEMBER 31, ------------------------
AMOUNT 1998 +1% -1%
------------ ------------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Options
Puts $ 975.0 $ (0.5) $ 1.2 $ 0.0
Fixed to floating
Swaps 40.3 0.2 (0.3) 0.3
Floors 15.0 (0.4) (0.1) (0.9)
--------- ------ ------ ------
$ 1,030.3 (0.7) 0.8 (0.6)
--------- ------ ------ ------
</TABLE>
Estimated unrealized gains and losses were derived using pricing models
specific to derivative financial instruments. While these estimated unrealized
gains and losses generally provide an indication of how sensitive Protective's
derivative financial instruments are to changes in interest rates, they do not
represent management's view of future market changes, and actual market results
may differ from these estimates.
Protective is exploring other uses of derivative financial instruments.
ASSET/LIABILITY MANAGEMENT
Protective believes certain product features and its asset/liability
management programs and procedures provide significant protection for
Protective against the effects of changes in interest rates. 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 duration, yield, risk,
and cash flow characteristics. It is Protective's 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.
Withdrawals related to GICs were approximately $1.0 billion during 1998.
Withdrawals related to GIC contracts are estimated to be approximately $900
million in 1999. 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.
Protective and its life insurance subsidiaries were committed at December
31, 1998, to fund mortgage loans and to purchase fixed maturity and other
long-term investments in the amount of $715.9 million. Protective held $159.7
million in cash and short-term investments at December 31, 1998.
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.
Protective has also used securitization transactions to increase its
liquidity. 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.
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In 1998, Protective sold approximately $146 million of its commercial
mortgage loans in a securitization transaction. Proceeds from the sale
consisted of cash of approximately $104 million, net of expenses, and
securities issued in the securitization transaction of approximately $42
million.
CAPITAL
At December 31, 1998, Protective had no borrowings outstanding under its
credit arrangements.
As disclosed in the Notes to the Consolidated Financial Statements, at
December 31, 1998, approximately $608.6 million of consolidated share-owner's
equity, excluding net unrealized investment gains 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 $769 million, would be subject to federal income tax at
rates then effective. 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.
OTHER DEVELOPMENTS
The NAIC has adopted the Codification of Statutory Accounting Principles
(Codification). The Codification changes current statutory accounting rules in
several areas. Protective has not estimated the potential effect the
Codification will have on the statutory capital of the Company's insurance
subsidiaries. The Codification has been proposed to become effective January 1,
2001.
The NAIC is considering a new reserving standard, commonly referred to as
"Triple X" (i.e., roman numeral XXX), for universal life and level premium
term-like insurance products. The Company is currently assessing the impact of
Triple X on its products and what changes to the products might be necessary in
response to Triple X.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. Protective does not
believe that any such assessments will be materially different from amounts
already reflected in the financial statements.
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.
Protective is not aware of any material pending or threatened regulatory
action with respect to Protective or any of its subsidiaries.
The President's Fiscal Year 2000 Budget contains proposals that, if
enacted, would adversely affect the life insurance industry. The first proposal
would require insurers to include in taxable income over 10 years the balances
accumulated in a tax memorandum account designated as Policyholders' Surplus.
Protective's accumulation in this account at December 31, 1998 was
approximately $70.5 million. A second proposal would require insurers to
capitalize higher percentages of acquisition expenses for tax purposes,
resulting in the earlier payment of tax. A third proposal would reduce the
attractiveness of corporate-owned life insurance (or COLI) products.
Life insurance products are often used to fund estate tax obligations.
Recently a report issued by the Congressional Joint Economic Committee
recommended the elimination of the estate tax. If the estate tax were
eliminated, the demand for certain life insurance products would be adversely
affected.
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Some insurers have recently lowered the premium rates for their level
premium term and term-like products. Protective's Individual Life and West
Coast Divisions are currently developing a response. Those Divisions' results,
in part, depend upon their ability to maintain competitive level premium term
and term-like products.
YEAR 2000 DISCLOSURE
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 often is denoted by such hardware
and software as "98". It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including Protective, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
Protective shares computer hardware and software with its parent, PLC. PLC
began work on the Year 2000 problem in 1995. At that time, PLC identified and
assessed PLC's critical mainframe systems, and prioritized the remediation
efforts that were to follow. During 1998 all other hardware and software,
including non-information technology (non-IT) related hardware and software,
were included in the process. PLC's Year 2000 plan includes all subsidiaries.
PLC estimates that Year 2000 remediation is complete for most of its
insurance administration and general administration systems. Of the general
administration systems that are not yet remediated, the majority are new
systems that were implemented during 1998 and are scheduled to be upgraded to
the current release of the system during the second quarter of 1999. All
remediated systems are currently in production. Personal computer network
hardware and software have been reviewed, with upgrades implemented where
necessary. A review of personal computer desktop software is in progress, but
not complete. All Year 2000 personal computer preparations are expected to be
completed by June 30, 1999. With respect to non-IT equipment and processes, the
assessment and remediation is progressing on schedule and all known issues are
expected to be remediated before December 31, 1999.
Two insurance administration systems identified as mission critical are
not yet fully remediated. A personal computer database system that processes
member information for one subsidiary is currently being remediated. This
effort is on schedule and targeted to be complete by June 30, 1999. Also,
another personal computer application, which processes policy information for
one line of business, is being re-written and is currently in test. This system
is targeted to be in production by April 30, 1999.
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of PLC's mission-critical systems. A
large portion of the testing is conducted by a contract programming staff
dedicated full time to Year 2000 preparations. These resources have been part
of PLC's Year 2000 project since 1995.
Integrated test involve multiple system testing and are used to verify the
Year 2000 readiness of interfaces and connectivity across multiple systems. PLC
is using its mainframe computer to simulate a Year 2000 production environment
and to facilitate integrated testing. Integrated testing will continue
throughout 1999.
Business partners and suppliers that provide products or services critical
to PLC's operations are being reviewed and in some cases their Year 2000
preparations are being monitored by the Company. To date, no partners or
suppliers have reported that they expect to be unable to continue supplying
products and services after January 1, 2000. Initial reviews are targeted to be
completed in the first quarter of 1999. Monitoring and testing of critical
partners and suppliers will continue throughout 1999. Formal contingency
planning will begin March 1999 and continue throughout the year. These plans
will augment PLC's existing disaster recovery plans.
PLC cannot specifically identify all of the costs to develop and implement
its Year 2000 plan. The cost of new systems to replace non-compliant systems
have been capitalized in the ordinary course of business. Other cost have been
expensed as incurred. Through December 31, 1998, costs that have been
specifically identified as relating to the Year 2000 problem total $3.9
million, with an additional $1.3 million estimated to
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<PAGE>
be required to support continued testing activity. PLC's Year 2000 efforts have
not adversely affected its normal procurement and development of information
technology.
Although PLC believes that a process is in place to successfully address
Year 2000 issues, there can be no assurances that PLC's efforts will be
successful, that interactions with other service providers with Year 2000
issues will not impair Protective's operations, or that the Year 2000 issue
will not otherwise adversely affect Protective.
Should some of PLC's systems not be available due to Year 2000 problems,
in a reasonably likely worst case scenario, Protective may experience
significant delays in its ability to perform certain functions, but does not
expect to be unable to perform critical functions or to otherwise conduct
business.
IMPACT OF INFLATION
Inflation increases the need for life insurance. Many policyholders who
once had adequate insurance programs may increase their life insurance coverage
to provide the same relative financial benefits and protection.
The higher interest rates that have traditionally accompanied inflation
may also affect 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.
Inflation also increases the level of claims of Protective's health
insurance products.
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
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ----------------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New Business Written
Individual Life ................ $ 16,188,344 $10,588,594 $ 9,245,002 $ 7,564,983 $ 6,329,630
West Coast ..................... 5,050,309 1,984,928
Dental and Consumer
Benefits ..................... 113,056 124,230 115,748 119,357 184,429
Financial Institutions ......... 5,257,957 4,183,216 3,956,581 3,563,177 2,524,212
------------ ----------- ----------- ----------- -----------
Total ........................ $ 26,609,666 $16,880,968 $13,317,331 $11,247,517 $ 9,038,271
============ =========== =========== =========== ===========
Business Acquired
West Coast ..................... $10,237,731
Acquisitions ................... $ 7,787,284 $ 1,286,673 $ 6,129,159 $ 4,756,371
Financial Institutions ......... 3,364,617 1,607,463
----------- -----------
Total ........................ $ 7,787,284 $13,602,348 $ 2,894,136 $ 6,129,159 $ 4,756,371
============ =========== =========== =========== ===========
Insurance in Force at End
of Year (1)
Individual Life ................ $ 50,587,419 $39,715,608 $35,765,841 $32,500,935 $25,843,232
West Coast ..................... 15,498,799 12,004,967
Acquisitions ................... 27,606,592 20,955,836 20,037,857 16,778,359 11,728,569
Dental and Consumer
Benefits ..................... 6,665,815 6,393,076 6,054,947 6,371,313 7,464,501
Financial Institutions ......... 9,632,466 10,183,997 7,468,761 6,233,256 4,841,318
------------ ----------- ----------- ----------- -----------
Total ........................ $109,991,091 $89,253,484 $69,327,406 $61,883,863 $49,877,620
============ =========== =========== =========== ===========
</TABLE>
43
<PAGE>
- ----------
(1) Reinsurance assumed has been included; reinsurance ceded (1998-$64,846,246;
1997-$34,139,554; 1996-$18,840,221; 1995-$17,524,366; 1994-$8,639,272) has
not been deducted.
The ratio of voluntary terminations of individual life insurance to mean
individual life insurance in force, which is determined by dividing the amount
of insurance terminated due to lapses during the year by the mean of the
insurance in force at the beginning and end of the year, adjusted for the
timing of major acquisitions and assumptions was:
<TABLE>
<CAPTION>
RATIO OF
YEAR ENDED VOLUNTARY
DECEMBER 31 TERMINATIONS
- --------------- -------------
<S> <C>
1994 ......... 7.0%
1995 ......... 6.9
1996 ......... 6.4
1997 ......... 6.9
1998 ......... 6.4
</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>
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
1998 ......... 2,691,697 818,566 286,413 1,554,969
</TABLE>
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.
44
<PAGE>
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.
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.
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. Due to the potential cash flow
volatility of mortgage-backed securities, Protective has focused on sequential,
planned amortization class ("PAC") and targeted amortization class ("TAC")
securities. These types have less cash flow volatility than other types of
mortgage-backed securities. Protective does not invest in the riskiest tranches
of mortgage-backed securities. In addition, Protective has entered into hedging
transactions to reduce the volatility in market value of its mortgage-backed
securities.
The table below shows a breakdown of Protective's mortgage-backed
securities portfolio by type at December 31, 1998. PACs pay down according to a
schedule. TACs pay down in amounts approximating targeted schedule.
Sequentials, like PACs and TACs, receive scheduled payments with any "excess"
cash flow going to repay the earliest maturing tranches first. All three of
these types of structured mortgage-backed securities give Protective some
measure of protection against both prepayment and extension risk.
Accretion directed securities have a stated maturity but may repay more
quickly. Pass through securities receive principal as principal of the
underlying mortgages is received. Support tranches are designed to receive cash
after the more stable tranches (i.e., PACs, TACs, and sequentials) are
satisfied. The CMBS are commercial mortgage-backed securities issued in
securitization transactions sponsored by Protective, in which Protective
securitized portions of its mortgage loan portfolio.
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE-BACKED
TYPE SECURITIES
- ------------------------------ ----------------
<S> <C>
PAC ........................ 22.6%
TAC ........................ 10.6
Sequential ................. 36.7
Accretion Directed ......... 8.4
Pass Through ............... 7.9
Support .................... 2.2
CMBS ....................... 11.6
-----
100.0%
=====
</TABLE>
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, 1998, approximately 99.6% of
bonds were rated by Moody's, S&P, or the NAIC.
At December 31, 1998, approximately $6,171.3 million of Protective's
$6,394.2 million bond portfolio was invested in U.S. Government or
agency-backed securities or investment grade corporate bonds and only
45
<PAGE>
approximately $222.9 million of its bond portfolio was rated less than
investment grade, of which $83.5 million were securities issued in
Protective-sponsored commercial mortgage loan securitizations. Approximately
$817.9 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 1998 was $1.6 million.
The average size mortgage loan in Protective's portfolio is approximately $2.0
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%
Apartments ............... 10
Warehouses ............... 8
Office Buildings ......... 6
Other .................... 1
--
Total .................... 100%
===
</TABLE>
Retail loans are generally on strip shopping centers located in smaller
towns and anchored by one or more strong regional or national retail stores.
The anchor tenants enter into long-term leases with Protective's borrowers.
These centers provide the basic necessities of life, such as food,
pharmaceuticals, and clothing, and have been relatively insensitive to changes
in economic conditions. The following are some of the largest anchor tenants
(measured by Protective's exposure) in the strip shopping centers at December
31, 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
ANCHOR TENANTS ON REAL ESTATE
- ------------------------------------- ---------------
<S> <C>
Food Lion, Inc. ................. 4%
Winn Dixie Stores, Inc. ......... 3
Wal-Mart Stores, Inc. ........... 2
Kmart Corporation ............... 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 $464.4 million of Protective's mortgage loans have this
participation feature.
Many of Protective's mortgage loans have call or interest rate reset
provisions between 3 and 10 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.
46
<PAGE>
At December 31, 1998, $11.7 million or 0.7% 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
and in 1998 Protective securitized an additional $146 million of its mortgage
loans. The securitizations' senior tranches were sold, and Protective retained
the junior tranches. 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 $24.1 million at December 31, 1998.
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.
The following table shows the investment results of Protective for the
years 1994 through 1998:
<TABLE>
<CAPTION>
PERCENTAGE
CASH, ACCRUED EARNED ON
INVESTMENT INCOME, NET AVERAGE OF REALIZED
YEAR ENDED AND INVESTMENTS AT INVESTMENT CASH AND INVESTMENT
DECEMBER 31 DECEMBER 31 INCOME INVESTMENTS GAINS (LOSSES)
- --------------- -------------------- ------------ ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
1998 ......... 8,613,789 603,795 7.2 2,136
</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.
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,
1998, Protective had insurance in force of $110.0 billion of which
approximately $64.8 billion was ceded to reinsurers.
47
<PAGE>
Over the past several years, Protective's reinsurers have reduced the net
cost of reinsurance to Protective. Consequently, Protective has increased the
amount of reinsurance which it cedes on newly-written individual life insurance
policies, and has also ceded a portion of the mortality risk of existing
business of the Individual Life, West Coast, and Acquisitions Divisions.
Although Protective does not anticipate increases to occur, the reinsurance
premium rates in many of Protective's reinsurance agreements are not
guaranteed, and could be increased by the reinsurer.
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.
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, 1998, the aggregate accumulation in the Policyholders' Surplus
account was $70.5 million. Under current income tax laws, Protective does not
anticipate paying income tax on amounts in the Policyholders' Surplus accounts.
COMPETITION
Life and health insurance is a mature industry. In recent years, the
industry has experienced little growth in life insurance sales, though the
aging population has increased the demand for retirement savings products.
Insurance is a highly competitive industry and 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 financial strength ratings from rating
agencies.
Protective competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
48
<PAGE>
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 share owners. 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, 1998 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 1998,
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 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 1999 is
estimated to be $138.9 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.
Existing federal laws and regulations affect the taxation of Protective's
products. Income tax payable by policyholders on investment earnings is
deferred during the accumulation period of certain life insurance and
49
<PAGE>
annuity products. Congress has from time to time considered proposals that, if
enacted, would have had an adverse impact on the federal income tax treatment
of such products, or would increase the tax-deferred status of competing
products.
The Federal Government has advocated 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 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.
RECENT DEVELOPMENTS
The NAIC has adopted the Codification of Statutory Accounting Principles
("Codification"). The Codification changes current statutory accounting rules
in several areas. Protective has not estimated the potential effect the
Codification will have on the statutory capital of Protective and its insurance
subsidiaries. The Codification has been proposed to become effective January 1,
2001.
The NAIC is considering a new reserving standard, commonly referred to as
"Triple X" (i.e., roman numeral XXX), for universal life and level premium
term-like insurance products. Protective is currently assessing the impact of
Triple X on its products and what changes to the products might be necessary in
response to Triple X.
The President's Fiscal Year 2000 Budget contains proposals that, if
enacted, would adversely affect the life insurance industry. The first proposal
would require insurers to include in taxable income over 10 years the balance
accumulated in a tax memorandum account designated as Policyholders' Surplus.
Protective's accumulation in this account at December 31, 1998 was
approximately $70.5 million. A second proposal would require insurers to
capitalize higher percentages of acquisition expense for tax purposes,
resulting in the earlier payment of tax. A third proposal would reduce the
attractiveness of corporate-owned life insurance (or COLI) products.
Life insurance products are often used to fund estate tax obligations.
Recently a report issued by the Congressional Joint Economic Committee
recommended the elimination of the estate tax. If the estate tax were
eliminated, the demand for certain life insurance products would be adversely
affected.
Some insurers have recently lowered the premium rates for their level
premium term and term-like products. Protective's Individual Life and West
Coast Divisions are currently developing a response. Those Divisions' results,
in part, depend upon their ability to maintain competitive level premium term
and term-like products.
EMPLOYEES
At December 31, 1998 Protective had approximately 1,530 employees,
including approximately 965 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 1998 amounted to approximately
$3.7 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.
PROPERTIES
Protective's Home Office building is located at 2801 Highway 280 South,
Birmingham, Alabama. This campus 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.
50
<PAGE>
Protective leases administrative space in seven cities, including
approximately 114,000 square feet in Birmingham, with most leases being for
periods of three to five years. The aggregate monthly rent is approximately
$325 thousand.
Marketing offices are leased in 16 cities, with most leases being for
periods of three to five years. The aggregate monthly rent is approximately $59
thousand.
51
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Protective are as follows:
<TABLE>
<S> <C> <C>
Drayton Nabers, Jr. 58 Chairman of the Board
John D. Johns 47 President and Chief Financial Officer and a Director
R. Stephen Briggs 49 Executive Vice President and a Director
Deborah J. Long 45 Senior Vice President, General Counsel, Secretary and a Director
Jim E. Massengale 56 Executive Vice President, Acquisitions and a Director
Danny L. Bentley 41 Senior Vice President, Group and a Director
Richard J. Bielen 38 Senior Vice President, Investments and a Director
Steven A. Schultz 45 Senior Vice President, Financial Institutions and a Director
Wayne E. Stuenkel 45 Senior Vice President, Chief Actuary and a Director
A. S. Williams III 62 Executive Vice President, Investments and Treasurer and a Director
Judy Wilson 41 Senior Vice President, Guaranteed Investment Contracts
Carolyn King 48 Senior Vice President, Investment Products and a Director
Jerry W. DeFoor 46 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 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.
52
<PAGE>
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.
53
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
OTHER
SALARY BONUS ANNUAL
NAME AND PRINCIPAL POSITION YEAR (1)(2) (1)(2)(3) COMPENSATION
(A) (B) (C) (D) (E)
- ----------------------------- ------ ----------- ---------------- --------------
<S> <C> <C> <C> <C>
DRAYTON NABERS, JR. 1998 $575,833 $580,000 $ -0-
Chairman of the Board and 1997 552,500 499,500 372
Chief Executive Officer 1996 535,000 691,063(6) 2,970
- ----------------------------- ---- -------- ---------- -------
JOHN D. JOHNS 1998 383,333 312,000 -0-
President and Chief 1997 347,500 280,000 -0-
Operating Officer 1996 312,917 306,316(9) -0-
- ----------------------------- ---- -------- ---------- -------
R. STEPHEN BRIGGS 1998 295,000 206,500 -0-
Executive Vice President 1997 295,000 172,400 -0-
- -----------------------------
1996 293,333 181,700 -0-
---- -------- ---------- -------
JIM E. MASSENGALE 1998 275,000 146,000 1,890
Executive Vice President, 1997 247,500 210,000 1,890
Acquisitions 1996 225,417 148,100 756
- ----------------------------- ---- -------- ---------- -------
A. S. WILLIAMS III 1998 289,167 383,263 5,742
Executive Vice President, 1997 283,333 282,833 5,742
Investments and Treasurer 1996 273,333 442,500 5,742
<CAPTION>
LONG-TERM
COMPENSATION
------------------------------------
AWARDS PAYOUTS
---------------- -------------------
LONG-TERM
SECURITIES INCENTIVE
UNDERLYING PLAN ALL
OPTIONS/ PAYOUTS OTHER
NAME AND PRINCIPAL POSITION SARS (1)(3)(4) COMPENSATION
(A) (#)(G) (H) (5)(I)
- ----------------------------- ---------------- ------------------- -------------
<S> <C> <C> <C>
DRAYTON NABERS, JR. -0- $1,675,044(8) $4,800
Chairman of the Board and -0- 1,551,046 4,800
Chief Executive Officer 300,000(7) 807,362 4,500
- ----------------------------- --------- ------------ ------
JOHN D. JOHNS -0- 661,572(8) 4,800
President and Chief -0- 646,075 4,800
Operating Officer 150,000(7) 176,956 4,500
- ----------------------------- --------- ------------ ------
R. STEPHEN BRIGGS -0- 661,572(8) 4,800
Executive Vice President -0- 646,075 4,800
- -----------------------------
40,000(7) 265,434 4,500
--------- ------------ ------
JIM E. MASSENGALE -0- 394,128(8) 4,800
Executive Vice President, -0- 382,514 4,800
Acquisitions 40,000(7) 248,844 4,500
- ----------------------------- --------- ------------ ------
A. S. WILLIAMS III -0- 516,120(8) 4,800
Executive Vice President, -0- 492,136 4,800
Investments and Treasurer 40,000(7) 298,613 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) SARs have been restated to reflect a two for one stock split on April 1,
1998.
(8) 1998 long-term compensation is not yet determinable. The amount shown
is the best estimate available as of the date hereof.
(9) Includes a one-time bonus award of $53,316 in shares of Common Stock.
The above table sets forth certain information regarding compensation paid
to the Chief Executive Officer and the four most highly compensated executive
officers of PLC during or with respect to the last three fiscal years.
54
<PAGE>
The following table sets forth the value of the stock appreciation rights
held by the Named Executives based upon the value of the Common Stock as of
December 31, 1998. No stock appreciation rights were granted to the Named
Executives during 1998.
AGGREGATED FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY
FY-END (#) OPTIONS/SARS AT
EXERCISABLE/ FY-END ($)
NAME UNEXERCISABLE EXERCISABLE/
(A) (D) UNEXERCISABLE (E)
<S> <C> <C>
Drayton Nabers, Jr. 0/300,000 $0/$6,712,500
John D. Johns 0/150,000 0/3,356,250
R. Stephen Briggs 0/40,000 0/895,000
Jim E. Massengale 0/40,000 0/895,000
A. S. Williams III 0/40,000 0/895,000
</TABLE>
In 1998, the Compensation and Management Succession Committee awarded
performance shares under the Company's 1997 Long-Term Incentive 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, 2001 are known.
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NON-STOCK PRICE-BASED PLANS (IN
SHARES) (2)
PERFORMANCE OR
NUMBER OF OTHER PERIOD UNTIL
SHARES, UNITS OR MATURATION OR
OTHER RIGHTS (#)(1) PAYOUT THRESHOLD TARGET MAXIMUM
NAME (A) (B) (C) (D) (E) (F)
<S> <C> <C> <C> <C> <C>
Drayton Nabers, Jr. 12,380 shares December 31, 2001 6,190 15,475 21,046
John D. Johns 7,420 shares December 31, 2001 3,710 9,275 12,614
R. Stephen Briggs 4,280 shares December 31, 2001 2,140 5,350 7,276
Jim E. Massengale 3,640 shares December 31, 2001 1,820 4,550 6,188
A. S. Williams III 4,140 shares December 31, 2001 2,070 5,175 7,038
</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.
(2) Award is earned based on comparison of the Company's average return on
average equity or total rate of return for a four year period to a peer
group. Below threshold, which is the median of the comparison group, no
portion of award is earned.
OTHER PLANS AND ARRANGEMENTS
RETIREMENT BENEFITS. The table below illustrates the annual pension
benefits payable to executive officers under the Protective Life Corporation
Pension Plan. The table also reflects the Excess Benefit Plan that we have
established to provide retirement benefits over the Internal Revenue Code
limitations. Benefits in the table are not reduced by social security or other
offset amounts. Since the benefits shown in the table reflect a straight life
form of annuity benefit, if the payment is made in the form of a joint and
survivor annuity, the annual amounts of benefit could be substantially below
those illustrated.
55
<PAGE>
PENSION PLAN TABLE
<TABLE>
<CAPTION>
REMUNERATION YEARS OF SERVICE
15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$ 150,000 $ 33,521 $ 44,694 $ 55,868 $ 67,041 $ 78,215
200,000 45,521 60,694 75,868 91,041 106,215
250,000 57,521 76,694 95,868 115,041 134,215
300,000 69,521 92,694 115,868 139,041 162,215
400,000 93,521 124,694 155,868 187,041 218,215
500,000 117,521 156,694 195,868 235,041 274,215
750,000 177,521 236,694 295,868 355,041 414,215
1,000,000 237,521 316,694 395,868 475,041 554,215
1,250,000 297,521 396,694 495,868 595,041 694,215
1,500,000 357,521 476,694 595,868 715,041 834,215
1,750,000 417,521 556,694 695,868 835,041 974,215
2,000,000 477,521 636,694 795,868 955,041 1,114,215
</TABLE>
- ----------
Compensation covered by the Pension Plan (for purposes of pension
benefits) excludes commissions and performance share awards and generally
corresponds to that shown under the heading "Annual Compensation" in the
Summary Compensation Table. Compensation is calculated based on the average of
the highest level of compensation paid during a period of 36 consecutive whole
months. Only three Annual Incentive Plan bonuses (whether paid or deferred) may
be included in obtaining the average compensation.
The Named Executives and their estimated length of service as of December
31, 1998 are provided in the following table.
<TABLE>
<CAPTION>
NAME YEARS OF SERVICE
<S> <C>
Drayton Nabers, Jr. 20
John D. Johns 5
R. Stephen Briggs 7
A. S. Williams III 4
Jim E. Massengale 5
</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), Dahlberg, Kuehn, and Yellowlees.
No member of the Committee was an officer or employee of PLC or any of its
subsidiaries at any time during 1998. Also, no member of the Committee was
formerly an officer of PLC or any of its subsidiaries.
56
<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 1999:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP (1)
--------------------------------------------- PERCENT OF
NAME AND BENEFICIAL OWNER SOLE POWER SHARED POWER (2) CLASS (1)
- -------------------------------------------------- ------------------------ ------------------ -----------
<S> <C> <C> <C>
Drayton Nabers, Jr. 325,486(3) 9,638 *
R. Stephen Briggs 132,511(3) 1,428 *
John D. Johns 61,520(3) 4,200 *
Deborah J. Long 22,561(3) -0- *
Jim E. Massengale 135,819(3) 700 *
Danny L. Bentley 45,835(3) -0- *
Richard J. Bielen 27,085(3) -0- *
Wayne E. Stuenkel 79,404(3) -0- *
A. S. Williams III 103,006(3) -0- *
Steven A. Schultz 42,791(3) -0- *
Judy Wilson 5,504(3) -0- *
Carolyn King 8,693(3) -0- *
Jerry W. DeFoor 31,792(3) -0- *
All directors and executive officers as a
group (13 persons) 1,022,007(3)(4) 15,966(2) 1.61%
</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, arrangement, 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. 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. Unless
otherwise noted below the directors and officers disclaim beneficial
ownership of these shares.
(3) The amounts reported include shares allocated to accounts under the
Company's 401(k) and Stock Ownership Plan as follows: Mr. Nabers, 12,773
shares; Mr. Johns, 3,553 shares; Mr. Briggs, 27,669 shares; Mr.
Massengale, 30,540 shares; Mr. Williams, 25,796 shares; Ms. Long, 1,348
shares; Mr. Bentley, 9,066 shares; Mr. Bielen, 8,990 shares; Mr.Stuenkel,
6,614 shares; Mr Schultz, 5,884 shares; Ms. Wilson, 5,404 shares; Ms.
King, 1,238 shares; Mr. DeFoor, 253 shares; and all directors and
executives officers as a group 150,128.
The amounts reported also include stock equivalents held by certain
officers under the Company's Deferred Compensation Plan for Officers,
entitling each such officer to receive upon distribution a share of Common
Stock or each stock equivalent. The number of stock equivalents included
are as follows: Mr. Nabers, 252,490; Mr. Johns, 53,567; Mr. Briggs, 89,173;
Mr. Massengale, 57,084; Mr. Williams, 62,246; Ms. Long, 16,176; Mr. Bielen,
10,619; Mr. Stuenkel, 63,254; Mr. Schultz, 34,478; Ms. King, 7,455; Mr.
DeFoor, 20,539; Mr. Bentley, 31,715; and all directors and executive
officers as a group 698,796.
The reported amounts do not include stock appreciation rights ("SARs")
awarded under the Company's 1996 Stock Incentive Plan as follows: Mr.
Nabers, 300,000 SARs; Mr. Johns, 150,000 SARs; Mr. Briggs, 40,000 SARs; Mr.
Massengale, 400,000 SARs; Mr. Williams, 40,000 SARs; Mr. Stuenkel, 15,000
SARs and all directors and executive officers as a group, 675,000 SATs.
(4) No officer or director owns any stock of any affiliate of the Company.
57
<PAGE>
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of PLC and Protective, to which
PLC or Protective or any of its subsidiaries is a party or of which any of PLC
or Protective's properties is the subject. 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, 1998 and 1997, and the consolidated statements
of income, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1998 and the related financial statement
schedules included in this Prospectus, have been included herein in reliance on
the report of PricewaterhouseCoopers 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.
58
<PAGE>
APPENDIX A
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
AND BEFORE MAY 1, 1996. 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 DESCRIPTIONS CAN BE FOUND. REFER TO YOUR
CONTRACT FOR COMPLETE DETAILS OF THESE PROVISIONS.
SUMMARY (PAGE 4)
The paragraphs in the Summary describing the guaranteed Death Benefit,
Market Value Adjustment, and Surrender Charge should be revised as follows:
HOW IS THE SURRENDER CHARGE
CALCULATED? The surrender charge applies during the
first seven years of each Guaranteed
Period. If the Guaranteed Period is seven
years or less, a surrender charge will
apply for the entire Guaranteed Period.
The surrender charge is equal to six
months of interest on the amount you
withdraw from a Sub-Account. The total
surrender charges for a Guaranteed Period
will never exceed six months' interest on
the amount of the Annuity Deposit or Sub-
Account value you allocated to the
Guaranteed Period. (See "Surrender
Charges," page 11.)
WHAT IS A MARKET VALUE ADJUSTMENT? The Market Value Adjustment is the amount
we deduct from or add to the Sub-Account
value when you request a surrender before
the end of the Sub-Account's Guaranteed
Period. The Market Value Adjustment
reflects the relationship between 1) the
Guaranteed Interest Rate that we are
currently offering for a Guaranteed
Period equal to the time remaining in
your Guaranteed Period at the time you
request a full or partial surrender, and
2) the Guaranteed Interest Rate being
applied to the Sub-Account from which you
are requesting a full or partial
surrender. (See "Market Value
Adjustment," page 11.)
DOES THE CONTRACT PROVIDE A DEATH
BENEFIT? If any Owner dies while the Contract is in
force and before the Annuity Commencement
Date, we will pay a guaranteed Death
Benefit, less any applicable premium tax,
to any surviving Owner.
If there is no surviving Owner, we will
pay the guaranteed Death Benefit to the
Beneficiary that the Owner has named. The
Beneficiary will have 60 days from the
date of death to exercise this right to
the guaranteed Death Benefit. If the
Beneficiary has not exercised this right
within 60 days, we will treat any
payments as a surrender request subject
to the surrender charge and Market Value
Adjustment.
The guaranteed Death Benefit will be
equal to the Account Value of your
Contract. If applicable, we will total
the Death Benefits for all of your
Guaranteed Periods to determine the
amount of your guaranteed Death Benefit.
(See "Death Benefit," page 13.)
A-1
<PAGE>
PARTIES TO THE CONTRACT (PAGE 6)
BENEFICIARY: The person named under the Contract to receive the Death
Benefit upon the Death of any Owner is the primary Beneficiary. If an Owner
dies, the surviving Owner, if any, will always be the primary Beneficiary,
regardless of whom the Contract may designate. A contingent Beneficiary is the
person named in the Contract to receive the Death Benefit if the primary
Beneficiary is not living at the time of the Owner's death.
If no Beneficiary designation is in effect or if no Beneficiary is living
at the time of an Owner's death, the Beneficiary will be the estate of the
deceased Owner.
Unless designated irrevocably, you may change Beneficiaries at any time by
sending a written request to our Administrative Office. If you have designated
a Beneficiary irrevocably, that Beneficiary's written consent is necessary
before you can change the Beneficiary or exercise certain other rights.
ISSUING A CONTRACT (PAGE 7, FIRST PARAGRAPH)
You purchase a Contract by completing an application and making an Annuity
Deposit of at least $5,000. After we issue the Contract, you may make
additional Annuity Deposits of at least $5,000. We must pre-approve any Annuity
Deposits of less than $5,000. You cannot make additional Annuity Deposits in
the states of California, Minnesota, South Carolina or Michigan. Regardless of
how many Annuity Deposits you make, we will issue only one Contract. We have
the right to decline any Annuity Deposit or any application. When we sell
Contracts to retirement plans or in connection with retirement plans, those
retirement plans may or may not qualify for special tax treatment under the
Internal Revenue Code.
GUARANTEED PERIOD AND SUB-ACCOUNTS
SELECTING A SUBSEQUENT GUARANTEE PERIOD (PAGE 8)
To apply the ending Sub-Account value to one or more subsequent Guaranteed
Periods that you select, you must give us written instructions to this effect
no later than 10 days after the end of the expiring Guaranteed Period. You may
select a subsequent Guaranteed Period only from Guaranteed Periods we are
offering at the time you make your selection. Any subsequent Guaranteed Period
may not extend past the Annuity Commencement Date for your Contract. At least
$5,000 must be allocated to any subsequent Guaranteed Period.
AUTOMATIC SUBSEQUENT GUARANTEED PERIODS (PAGE 8)
If you do not instruct us otherwise under the first or second options
described above, a subsequent Guaranteed Period will automatically begin when
the prior Guaranteed Period ends. Your ending Sub-Account value will become the
beginning Sub-Account value for the subsequent Guaranteed Period. The
Subsequent Guaranteed Period will be the longest Guaranteed Period we offer
that is not longer than the Guaranteed Period that just ended, and does not
extend past the Annuity Commencement Date. You must allocate at least $5,000 to
any subsequent Guaranteed Period.
SURRENDERS
SURRENDERS AND PARTIAL SURRENDERS (PAGE 10, FIRST PARAGRAPH)
You may surrender your entire Contract at any time. You may surrender part
of the Contract if the value of each remaining Sub-Account is at least $5,000
after the surrender.
SURRENDER CHARGES (PAGE 11)
Surrenders and partial surrenders may be subject to a surrender charge.
Generally, we assess a surrender charge if you take a surrender during the
first seven years of any Guarantee Period. The surrender charge is equal to six
months of interest on the amount you surrender from a Sub-Account. The total
surrender charges for a Guaranteed Period will never exceed six months'
interest on the amount of the Annuity Deposit or Sub-Account value you
allocated to the Guaranteed Period. We will compute this interest at the same
rate we are crediting the Sub-Account from which you make a surrender. We will
deduct the surrender charge from the amount you have chosen to surrender.
A-2
<PAGE>
We do not apply the surrender charge after the first seven years of a
Guaranteed Period or from any amount available as an interest withdrawal. Also,
we do not apply a surrender charge to surrenders you request at the end of a
Guaranteed Period provided that we receive your written request, in a form we
deem acceptable, within twenty days prior to the end of the Guaranteed Period.
If we receive your request for a surrender prior to the end of a
Guaranteed Period, we will calculate the surrender value, as of the date of the
surrender, as follows:
[(A x B) - SC] where:
A = the Sub-Account value of the Sub-Account from which you request a
surrender
B = the Market Value Adjustment
SC = the surrender charge plus any premium taxes, if applicable
On the date we receive your request, we will inform you of the amounts
available for you to surrender. Any surrender may be subject to federal and
state income tax and, in some cases, premium taxes.
Because a Guaranteed Period cannot extend past the Annuity Commencement
Date, we will not deduct a surrender charge or Market Value Adjustment if you
use your Net Account value to purchase an Annuity on the Annuity Commencement
Date.
WAIVER OF SURRENDER CHARGES (PAGE 11)
We will waive any applicable surrender charge if you meet any of the
following conditions after the first year of the Contract:
1) You enter, for a period of at least 90 days, a facility that is licensed
by the state and qualifies as a skilled nursing home facility under
Medicare or Medicaid.
2) A physician who is not related to you or the Annuitant diagnoses you as
having a terminal illness as the term is defined in your Contract. You
must submit to us written proof of this illness that we deem satisfactory
and we reserve the right to require an examination by a physician of our
choice to confirm your terminal illness.
If we waive your surrender charge, we will still impose a Market Value
Adjustment where applicable. Our waiver of surrender charges is not available
in all states due to applicable insurance laws.
MARKET VALUE ADJUSTMENT (PAGE 11)
We will apply a Market Value Adjustment if your request a surrender before
the end of a Sub-Account's Guaranteed Period. The Market Value Adjustment may
increase or decrease the amount you receive from a surrender. Like the
surrender charge, we calculate the Market Value Adjustment separately for each
Sub-Account. The Market Value Adjustment is applied to the surrendered
Sub-Account value, less any amount available as an interest withdrawal from
interest earned during the prior Contract year, before we deduct any surrender
charge. We will include the Market Value Adjustment in the amount we deduct
from your Sub-Account to satisfy your surrender request. The formula we use to
determine the Market Value Adjustment is:
(1+g / 1+c) x (N/12) where:
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 we offer for a Guaranteed Period
that has a duration equal to the number of months left before the end of
the Guaranteed Period from which you are making the surrender.
N = The number of months remaining in your Guaranteed Period as of the
date you request a surrender.
The Market Value Adjustment reflects the relationship between 1) the
current Guaranteed Interest Rate we offer for a Guaranteed Period equal in
duration to the amount of time left in the surrendered Guaranteed Period, and
2) the Guaranteed Interest Rate we are applying to the Guaranteed Period from
which you are making a surrender.
A-3
<PAGE>
Generally, if your Guaranteed Interest Rate is lower than the one we offer
for Guaranteed Period equal to the time remaining in your Guaranteed Period,
the Market Value Adjustment may produce a surrender value that is less than the
sum of the portion of your Annuity Deposit being surrendered plus the interest
it has earned. Similarly, if your Guaranteed Interest Rate is higher than the
applicable current Guaranteed Interest Rate, the Market Value Adjustment may
increase your surrender value beyond the sum of the portion of your Annuity
Deposit being surrendered plus the interest it has earned.
Because we base current Guaranteed Interest Rates in part upon the
investment yields that are available to us, the effect of the Market Value
Adjustment will be related to those yields. Therefore, if these yields increase
from the time, you purchase your Contract, it is possible that the Market Value
Adjustment, coupled with the surrender charge and any premium tax, could
produce a full surrender value for your Contract that is less than the total of
your Annuity Deposits.
DETERMINING THE DEATH BENEFIT (PAGE 14)
We will calculate the guaranteed Death Benefit as of the date of an
Owner's death. The guaranteed Death Benefit will be equal to the Account Value
less applicable premium taxes.
ANNUITY OPTIONS (PAGE 15)
On the Annuity Commencement Date we will apply part or all of the Net
Account Value to the annuity option you have selected. If you have not selected
an annuity option, we will apply your Net Account Value to Option 2 - Life
Income with Payments for a 10-Year Guaranteed Period. You may select from the
following annuity options. For Qualified Contracts, annuity options may apply
with certain restrictions.
o OPTION 1 - PAYMENT FOR A FIXED PERIOD
We will make equal monthly payments for any period not less than five
years and not more than 30 years. The amount of each payment depends upon
the total amount applied, the period selected and the interest rate we are
using when the annuity payments are determined.
o OPTION 2 - LIFE INCOME WITH PAYMENTS FOR A GUARANTEED PERIOD
We will make equal monthly payments based on the life of the named
Annuitant or Annuitants. Payments will continue for the lifetime of the
Annuitant or Annuitants with payments guaranteed for either 10 or 20
years. Payments will stop at the end of the selected guaranteed period or
when the Annuitant dies, whichever is later.
o OPTION 3 - PAYMENTS FOR A FIXED AMOUNT
We will make equal monthly payments for a fixed amount. The amount of
each payment may not be less than $10 for each $1,000 of Net Account Value
applied to the annuity option. Each month we will credit interest on the
unpaid balance and add that interest to it. We will set the interest rate
in our sole discretion, but it will not be less than an annual effective
interest rate of 4%. Payments will continue until the amount we hold runs
out. The last payment will be for the balance only.
o OPTION 4 - PURCHASE OF OTHER ANNUITIES
The total amount you apply is used to purchase any kind of annuity we
issue on the date this option is selected.
The dollar amount of monthly payments for every $1,000 you apply to each
available annuity option is calculated in accordance with annuity tables set
forth in the Contract. We base these tables on the 1983 Individual Annuity
Mortality Table A projected four years with interest at 4% per year.
TAXATION OF ANNUITIES IN GENERAL
LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD FOR THE BENEFIT OF CERTAIN
NON-NATURAL PERSONS (PAGE 21)
In order to that they may be treated as annuity contracts for federal tax
purposes, section 72(s) of the Internal Revenue Code requires that Contracts
held by persons other than individuals (other than Contracts 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 Form 1099s with respect to such Contracts.
A-4
<PAGE>
APPENDIX B
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. THE CONTRACTS CONTAIN PROVISIONS THAT DIFFER FROM THOSE DESCRIBED IN THIS
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 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 DESCRIPTIONS CAN BE FOUND.
SUMMARY (PAGE 4)
The paragraphs in the Summary describing the guaranteed Death Benefit,
Market Value Adjustment, and Surrender Charge should be revised as follows:
HOW IS THE SURRENDER CHARGE
CALCULATED? The surrender charge applies during the
first seven years of each Guaranteed
Period. If the Guaranteed Period is seven
years or less, a surrender charge will
apply for the entire Guaranteed Period.
The surrender charge is equal to six
months of interest on the amount you
withdraw from a Sub-Account. The total
surrender charges for a Guaranteed Period
will never exceed six months' interest on
the amount of the Annuity Deposit or Sub-
Account value you allocated to the
Guaranteed Period. (See "Surrender
Charge," page 11.)
WHAT IS A MARKET VALUE ADJUSTMENT? The Market Value Adjustment is the amount
we deduct from or add to the Sub-Account
value when you request a surrender before
the end of the Sub-Account's Guaranteed
Period. The Market Value Adjustment
reflects the relationship between 1) the
Guaranteed Interest Rate that we are
currently offering for a Guaranteed
Period equal to the time remaining in
your Guaranteed Period at the time you
request a full or partial surrender, and
2) the Guaranteed Interest Rate being
applied to the Sub-Account from which you
are requesting a full or partial
surrender. (See, "Market Value
Adjustment," page 11.)
DOES THE CONTRACT PROVIDE A DEATH
BENEFIT? If any Owner dies while the Contract is in
force and before the Annuity Commencement
Date, we will pay a guaranteed Death
Benefit, less any applicable premium tax,
to any surviving Owner. If there is no
surviving Owner, we will pay the
guaranteed Death Benefit to the
Beneficiary as determined under the
provisions of the Contract. If the named
Beneficiary under the Contract is the
spouse of the Owner and the Annuitant is
living, the spouse may elect, in lieu of a
Death Benefit, to become the Owner and
continue the Contract.
The guaranteed Death Benefit will be
equal to the Account Value of your
Contract. If applicable, we will total
the Death Benefits for all of your
Guaranteed Periods to determine the
amount of your guaranteed Death Benefit.
(See "Death Benefit," page 13.)
B-1
<PAGE>
PARTIES TO THE CONTRACT (PAGE 6)
BENEFICIARY: The person named under the Contract to receive the Death
Benefit upon the Death of any Owner or Annuitant, as applicable, is the primary
Beneficiary. If an Owner dies, the surviving Owner, if any, will always be the
primary Beneficiary, regardless of whom the Contract may designate. A
contingent Beneficiary is the person named in the Contract to receive the Death
Benefit if the primary Beneficiary is not living at the time of the Owner's
death.
If no Beneficiary designation is in effect or if no Beneficiary is living
at the time of an Owner's death, the Beneficiary will be the estate of the
deceased Owner.
Unless designated irrevocably, you may change Beneficiaries at any time by
sending a written request to our Administrative Office. If you have designated
a Beneficiary irrevocably, that Beneficiary's written consent is necessary
before you can change the Beneficiary or exercise certain other rights.
ISSUING A CONTRACT (PAGE 7, FIRST PARAGRAPH)
You purchase a Contract by completing an application and making an Annuity
Deposit of at least $5,000. After we issue the Contract, you may make
additional Annuity Deposits of at least $5,000. We must pre-approve any Annuity
Deposits of less than $5,000. Regardless of how many Annuity Deposits you make,
we will issue only one Contract. We have the right to decline any Annuity
Deposit or any application. When we sell Contracts to retirement plans or in
connection with retirement plans, those retirement plans may or may not qualify
for special tax treatment under the Internal Revenue Code.
GUARANTEED PERIODS AND SUB-ACCOUNTS
SELECTING A SUBSEQUENT GUARANTEE PERIOD (PAGE 8)
To apply the ending Sub-Account value to one or more subsequent Guaranteed
Periods that you select, you must give us written instructions to this effect
no later than 10 days after the end of the expiring Guaranteed Period. You may
select a subsequent Guaranteed Period only from Guaranteed Periods we are
offering at the time you make your selection. Any subsequent Guaranteed Period
may not extend past the Annuity Commencement Date for your Contract. At least
$5,000 must be allocated to any subsequent Guaranteed Period.
AUTOMATIC SUBSEQUENT GUARANTEED PERIODS (PAGE 8)
If you do not instruct us otherwise under the first or second options
described above, a subsequent Guaranteed Period will automatically begin when
the prior Guaranteed Period ends. Your ending Sub-Account value will become the
beginning Sub-Account value for the subsequent Guaranteed Period. The
Subsequent Guaranteed Period will be the longest Guaranteed Period we offer
that is not longer than the Guaranteed Period that just ended, and does not
extend past the Annuity Commencement Date. You must allocate at least $5,000 to
any subsequent Guaranteed Period.
SURRENDERS
SURRENDERS AND PARTIAL SURRENDERS (PAGE 10, FIRST PARAGRAPH)
You may surrender your entire Contract at any time. You may surrender part
of the Contract if the value of each remaining Sub-Account is at least $5,000
after the surrender.
SURRENDER CHARGES (PAGE 11)
Surrenders and partial surrenders may be subject to a surrender charge.
Generally, we assess a surrender charge if you take a surrender during the
first seven years of any Guarantee Period. The surrender charge is equal to six
months of interest on the amount you surrender from a Sub-Account. The total
surrender charges for a Guaranteed Period will never exceed six months'
interest on the amount of the Annuity Deposit or Sub-Account value you
allocated to the Guaranteed Period. We will compute this interest at the same
rate we are crediting the Sub-Account from which you make a surrender. We will
deduct the surrender charge from the amount you have chosen to surrender.
We do not apply the surrender charge after the first seven years of a
Guaranteed Period or from any amount available as an interest withdrawal. Also,
we do not apply a surrender charge to surrenders you
B-2
<PAGE>
request at the end of a Guaranteed Period provided that we receive your written
request, in a form we deem acceptable, within twenty days prior to the end of
the Guaranteed Period.
If we receive your request for a surrender prior to the end of a
Guaranteed Period, we will calculate the surrender value, as of the date of the
surrender, as follows:
[(A x B) - SC] where:
A = the Sub-Account value of the Sub-Account from which you request a
surrender
B = the Market Value Adjustment
SC = the surrender charge plus any premium tax, if applicable
On the date we receive your request, we will inform you of the amounts
available for you to surrender. Any surrender may be subject to federal and
state income tax and, in some cases, premium taxes.
Because a Guaranteed Period cannot extend past the Annuity Commencement
Date, we will not deduct a surrender charge or Market Value Adjustment if you
use your Net Account value to purchase an Annuity on the Annuity Commencement
Date.
WAIVER OF SURRENDER CHARGES (PAGE 11)
We will waive any applicable surrender charge if you meet any of the
following conditions after the first year of the Contract:
3) You enter, for a period of at least 90 days, a facility that is licensed
by the state and qualifies as a skilled nursing home facility under
Medicare or Medicaid.
4) A physician who is not related to you or the Annuitant diagnoses you as
having a terminal illness as the term is defined in your Contract. You
must submit to us written proof of this illness that we deem satisfactory
and we reserve the right to require an examination by a physician of our
choice to confirm your terminal illness.
If we waive your surrender charge, we will still impose a Market Value
Adjustment where applicable. Our waiver of surrender charges is not available
in all states due to applicable insurance laws.
MARKET VALUE ADJUSTMENT (PAGE 11)
We will apply a Market Value Adjustment if your request a surrender before
the end of a Sub-Account's Guaranteed Period. The Market Value Adjustment may
increase or decrease the amount you receive from a surrender. Like the
surrender charge, we calculate the Market Value Adjustment separately for each
Sub-Account. The Market Value Adjustment is applied to the surrendered
Sub-Account value, less any amount available as an interest withdrawal from
interest earned during the prior Contract year, before we deduct any surrender
charge. We will include the Market Value Adjustment in the amount we deduct
from your Sub-Account to satisfy your surrender request. The formula we use to
determine the Market Value Adjustment is:
(1+g / 1+c) x (N/12) where:
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 we offer for a Guaranteed Period
that has a duration equal to the number of months left before the end of
the Guaranteed Period from which you are making the surrender.
N = The number of months remaining in your Guaranteed Period as of the date
you request a surrender.
The Market Value Adjustment reflects the relationship between 1) the
current Guaranteed Interest Rate we offer for a Guaranteed Period equal in
duration to the amount of time left in the surrendered Guaranteed Period, and
2) the Guaranteed Interest Rate we are applying to the Guaranteed Period from
which you are making a surrender.
Generally, if your Guaranteed Interest Rate is lower than the one we offer
for Guaranteed Period equal to the time remaining in your Guaranteed Period,
the Market Value Adjustment may produce a surrender value
B-3
<PAGE>
that is less than the sum of the portion of your Annuity Deposit being
surrendered plus the interest it has earned. Similarly, if your Guaranteed
Interest Rate is higher than the applicable current Guaranteed Interest Rate,
the Market Value Adjustment may increase your surrender value beyond the sum of
the portion of your Annuity Deposit being surrendered plus the interest it has
earned.
Because we base current Guaranteed Interest Rates in part upon the
investment yields that are available to us, the effect of the Market Value
Adjustment will be related to those yields. Therefore, if these yields increase
from the time, you purchase your Contract, it is possible that the Market Value
Adjustment, coupled with the surrender charge and any premium tax, could
produce a full surrender value for your Contract that is less than the total of
your Annuity Deposits.
DEATH OF AN ANNUITANT (PAGE 13)
If an Annuitant dies while the Contract is in force, either before or
after the Annuity Commencement Date, the Beneficiary will be the person
designated as such under the Contract. If you have not designated a Beneficiary
or the Beneficiary is no longer living, the surviving Owner will be the
Beneficiary. If neither the Owner nor the Beneficiary have survived the
Annuitant, the Beneficiary will be the Annuitant's estate. YOU CANNOT CHANGE
ANNUITANTS UNDER THIS CONTRACT.
DEATH OF AN OWNER (PAGE 13)
Upon the death of a joint Owner prior to the Annuity Commencement Date,
the surviving Owner will become the Beneficiary. If the sole Owner of a
Contract dies while the Contract is in force and before the Annuity
Commencement Date, the Beneficiary will be the person designated as such under
the Contract. If the Beneficiary is the spouse of the deceased Owner and the
Annuitant is still living, the spouse may elect to become the Owner in lieu of
receiving a guaranteed Death Benefit. If you have not designated a Beneficiary
or the Beneficiary is no longer living, the estate of the Owner will be the
Beneficiary.
DETERMINING THE DEATH BENEFIT (PAGE 14)
If an Annuitant or Owner dies before the Annuity Commencement Date, we
will pay a guaranteed Death Benefit to the Beneficiary. We will calculate the
guaranteed Death Benefit as of the date of an Annuitant's or Owner's death. We
will calculate the guaranteed Death Benefit as follows:
5) If the deceased had not yet reached age 85, the guaranteed Death Benefit
will be the greater of:
o the Net Account Value, or
o the original Annuity Deposit, less interest withdrawals and surrenders
(including surrender charges, Market Value Adjustments, and premium
tax), credited with interest at 5% compounded annually.
6) If the deceased reached age 85, the guaranteed Death Benefit will be
equal to the total of the Sub-Account values multiplied by their
respective Market Value Adjustments.
PAYING THE DEATH BENEFIT (PAGE 14)
We will only pay one guaranteed Death Benefit under a Contract, even
though the Contract may, under some circumstances, continue after an Owner or
Annuitant's death. We will calculate the guaranteed Death Benefit as of the
date of the death that triggers its payment.
We will pay the guaranteed Death Benefit in a lump sum, in which event the
Contract will terminate, or under any of the annuity options available under
the Contract provided that:
o in the event of the Owner's death, any chosen annuity option must provide
that the guaranteed Death Benefit will be distributed within five years of
the date of the Owner's death; or
o if the chosen annuity option provides for the guaranteed Death Benefit to
be paid over a period that does not extend beyond the Beneficiary's life
or life expectancy, the distribution must commence within one year of the
Owner's death.
In addition to these options, if the Beneficiary is the spouse of the
deceased Owner and the Annuitant is living, the spouse may elect to become the
Owner in lieu of receiving a guaranteed Death Benefit.
B-4
<PAGE>
ANNUITY COMMENCEMENT DATE (PAGE 14)
You may select an Annuity Commencement Date when you purchase a Contract.
The Annuity Commencement Date may not be earlier than the end of a Guaranteed
Period nor later than the end of the Contract year immediately before the
Annuitant's 85th birthday. Our Administrative Office must approve any request
for an extension of the Annuity Commencement Date beyond this maximum.
You may change the Annuity Commencement Date subject to the following
restrictions:
o You must request the change in writing.
o We must receive your written request at least 30 days before the new
Annuity Commencement Date you have requested.
o The new Annuity Commencement Date may not come before the end of any
existing Guaranteed Period.
o Unless we agree prior to the change, the new Annuity Commencement Date
may not be later than the Annuitant's 85th birthday.
Annuity Commencement Dates which occur after the Annuitant's 85th birthday
may have adverse tax consequences so you should consult your tax advisor before
requesting an Annuity Commencement Date at these advanced ages. You may be
required to begin distributions from Qualified Contracts before the Annuity
Commencement Date. (See "Federal Tax Matters," page 18.)
Once our Administrative Office notifies you that we have received and
approved your written request for changing the Annuity Commencement Date, the
change will be made effective as of the date you signed the request.
ANNUITY OPTIONS (PAGE 15)
On the Annuity Commencement Date we will apply part or all of the Net
Account Value to the annuity option you have selected. If you have not selected
an annuity option, we will apply your Net Account Value to Option 2 - Life
Income with Payments for a 10-Year Guaranteed Period. You may select from the
following annuity options. For Qualified Contracts, annuity options may apply
with certain restrictions.
o OPTION 1 - PAYMENT FOR A FIXED PERIOD
We will make equal monthly payments for any period not less than five
years and not more than 30 years. The amount of each payment depends upon
the total amount applied, the period selected and the interest rate we are
using when the annuity payments are determined.
o OPTION 2 - LIFE INCOME WITH PAYMENTS FOR A GUARANTEED PERIOD
We will make equal monthly payments based on the life of the named
Annuitant. Payments will continue for the lifetime of the Annuitant with
payments guaranteed for either 10 or 20 years. Payments will stop at the
end of the selected guaranteed period or when the Annuitant dies,
whichever is later.
o OPTION 3 - PAYMENTS FOR A FIXED AMOUNT
We will make equal monthly payments for a fixed amount. The amount of
each payment may not be less than $10 for each $1,000 of Net Account Value
applied to the annuity option. Each month we will credit interest on the
unpaid balance and add that interest to it. We will set the interest rate
in our sole discretion, but it will not be less than an annual effective
interest rate of 4%. Payments will continue until the amount we hold runs
out. The last payment will be for the balance only.
o OPTION 4 - PURCHASE OF OTHER ANNUITIES
The total amount you apply is used to purchase any kind of annuity we
issue on the date this option is selected.
B-5
<PAGE>
The dollar amount of monthly payments for every $1,000 you apply to each
available annuity option is calculated in accordance with annuity tables set
forth in the Contract. We base these tables on the 1983 Individual Annuity
Mortality Table A projected four years with interest at 4% per year.
TAXATION OF ANNUITIES IN GENERAL
LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD FOR THE BENEFIT OF CERTAIN
NON-NATURAL PERSONS (PAGE 21)
In order to that they may be treated as annuity contracts for federal tax
purposes, section 72(s) of the Internal Revenue Code requires that Contracts
held by persons other than individuals (other than Contracts 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 Form 1099s with respect to such Contracts.
B-6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants ........................................................ F-2
Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 .. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............................. F-4
Consolidated Statements of Share-Owner's Equity for the years ended December 31, 1998,
1997, and 1996 .......................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and F-7
1996
Notes to Consolidated Financial Statements ............................................... F-9
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 Share Owner
Protective Life Insurance Company
Birmingham, Alabama
In our opinion, the consolidated financial statements and the financial
statement schedules listed in the index on page F-1 of this Form S-1 present
fairly, in all material respects, the consolidated financial position of
Protective Life Insurance Company and Subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 11, 1999
Birmingham, Alabama
F-2
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees .................................. $1,027,340 $ 814,420 $ 770,224
Reinsurance ceded ......................................... (459,215) (334,214) (308,174)
---------- ---------- ----------
Net of reinsurance ceded ................................. 568,125 480,206 462,050
Net investment income ..................................... 603,795 557,488 498,781
Realized investment gains ................................. 2,136 1,824 5,510
Other income .............................................. 20,201 6,149 5,010
---------- ---------- ----------
1,194,257 1,045,667 971,351
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1998-$330,494; 1997-$180,605; 1996-$215,424) ............. 730,496 658,872 626,893
Amortization of deferred policy acquisition costs ......... 111,188 107,175 91,001
Other operating expenses (net of reinsurance ceded:
1998-$166,375; 1997-$90,045; 1996-$81,839) ............... 172,228 129,870 128,148
---------- ---------- ----------
1,013,912 895,917 846,042
---------- ---------- ----------
INCOME BEFORE INCOME TAX .................................... 180,345 149,750 125,309
INCOME TAX EXPENSE (BENEFIT)
Current ................................................... 48,237 66,283 44,908
Deferred .................................................. 14,925 (13,981) (2,142)
---------- ---------- ----------
63,162 52,302 42,766
---------- ---------- ----------
NET INCOME .................................................. $ 117,183 $ 97,448 $ 82,543
========== ========== ==========
</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
-------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1998-$6,307,274;
1997-$6,221,871) ............................................................ $ 6,400,262 $ 6,348,252
Equity securities, at market (cost: 1998-$15,151; 1997-$24,983) .............. 12,258 15,006
Mortgage loans on real estate ................................................ 1,623,603 1,313,478
Investment real estate, net of accumulated depreciation (1998-$782;
1997-$671) .................................................................. 14,868 13,469
Policy loans ................................................................. 232,670 194,109
Other long-term investments .................................................. 70,078 54,704
Short-term investments ....................................................... 159,655 54,337
----------- -----------
Total investments ........................................................... 8,513,394 7,993,355
Cash ........................................................................... 39,197
Accrued investment income ...................................................... 100,395 94,095
Accounts and premiums receivable, net of allowance for uncollectible amounts
(1998-$4,304; 1997-$5,292) ................................................... 31,265 42,255
Reinsurance receivables ........................................................ 756,370 591,457
Deferred policy acquisition costs .............................................. 841,425 632,605
Property and equipment, net .................................................... 42,374 36,407
Other assets ................................................................... 34,632 14,445
Assets related to separate accounts
Variable Annuity ............................................................. 1,285,952 924,406
Variable Universal Life ...................................................... 13,606 3,634
Other ........................................................................ 3,482 3,425
----------- -----------
$11,622,895 $10,375,281
=========== ===========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims ............................................ $ 4,140,003 $ 3,324,294
Unearned premiums ............................................................ 389,294 396,696
----------- -----------
4,529,297 3,720,990
Guaranteed investment contract deposits ........................................ 2,691,697 2,684,676
Annuity deposits ............................................................... 1,519,820 1,511,553
Other policyholders' funds ..................................................... 219,356 183,324
Other liabilities .............................................................. 226,310 246,081
Accrued income taxes ........................................................... (10,992) 941
Deferred income taxes .......................................................... 51,735 49,417
Note payable ................................................................... 2,363
Indebtedness to related parties ................................................ 20,898 28,055
Liabilities related to separate accounts
Variable Annuity ............................................................. 1,285,952 924,406
Variable Universal Life ...................................................... 13,606 3,634
Other ........................................................................ 3,482 3,425
----------- -----------
Total liabilities ........................................................... 10,553,524 9,356,502
----------- -----------
</TABLE>
F-4
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
COMMITMENTS AND CONTINGENT LIABILITIES--NOTE G
SHARE-OWNER'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 ............................................ 327,992 327,992
Note receivable from PLC Employee Stock Ownership Plan ................ (5,199) (5,378)
Retained earnings ..................................................... 686,519 629,436
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 1998-$29,646;
1997-$33,238)....................................................... 55,057 61,727
------- -------
Total share-owner's equity ......................................... 1,069,371 1,018,779
--------- ---------
$11,622,895 $10,375,281
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHARE-OWNER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- -------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 ................... $5,000 $144,494
Net income for 1996 .........................
Decrease in net unrealized gains on
investments (net of income tax:
$(25,627)) ................................
Reclassification adjustment for amounts
included in net income (net of income
tax: $(1,928)) ............................
Comprehensive income for 1996 ...............
Redemption feature of preferred stock
removed-Note I ............................ $ 2 1,998
Preferred dividends ($50 per share) .........
Capital contribution from PLC ............... 91,500
Decrease in note receivable from PLC
ESOP ......................................
Balance, December 31, 1996 ................... 2 5,000 237,992
--- ------ --------
Net income for 1997 .........................
Increase in net unrealized gains on
investments (net of income
tax-$30,275) ..............................
Reclassification adjustment for amounts
included in net income (net of income
tax: $(638)) ..............................
Comprehensive income for 1997 ...............
Preferred dividends ($50 per share) .........
Capital contribution from PLC ............... 90,000
Decrease in note receivable from PLC
ESOP ......................................
Balance, December 31, 1997 ................... 2 5,000 327,992
--- ------ --------
Net income for 1998 .........................
Decrease in net unrealized gains on
investments (net of income
tax-($2,844)) .............................
Reclassification adjustment for amounts
included in net income (net of income
tax: $(747)) ..............................
Comprehensive income for 1998 ...............
Common dividends ($12 per share) ............
Preferred dividends ($50 per share) .........
Decrease in note receivable from PLC
ESOP ......................................
--- ------ --------
Balance, December 31, 1998 ................... $ 2 $5,000 $327,992
=== ====== ========
<CAPTION>
NOTE
RECEIVABLE NET
FROM UNREALIZED TOTAL
PLC RETAINED GAINS (LOSSES) SHARE-OWNER'S
ESOP EARNINGS ON INVESTMENTS EQUITY
------------ ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ................... $ (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 ............................ 2,000
Preferred dividends ($50 per share) ......... (100) (100)
Capital contribution from PLC ............... 91,500
Decrease in note receivable from PLC
ESOP ...................................... 186 186
-------- --------- --------- ----------
Balance, December 31, 1996 ................... (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
Decrease in note receivable from PLC
ESOP ...................................... 201 201
-------- --------- --------- ----------
Balance, December 31, 1997 ................... (5,378) 629,436 61,727 1,018,779
Net income for 1998 ......................... 117,183 117,183
Decrease in net unrealized gains on
investments (net of income
tax-($2,844)) ............................. (5,281) (5,281)
Reclassification adjustment for amounts
included in net income (net of income
tax: $(747)) .............................. (1,389) (1,389)
----------
Comprehensive income for 1998 ............... 110,513
----------
Common dividends ($12 per share) ............ (60,000) (60,000)
Preferred dividends ($50 per share) ......... (100) (100)
Decrease in note receivable from PLC
ESOP ...................................... 179 179
-------- --------- --------- ----------
Balance, December 31, 1998 ................... $ (5,199) $ 686,519 $ 55,057 $1,069,371
======== ========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 117,183 $ 97,448 $ 82,543
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs ................... 111,188 107,175 91,001
Capitalization of deferred policy acquisition costs ................. (192,838) (135,211) (77,078)
Depreciation expense ................................................ 7,110 5,124 5,333
Deferred income taxes ............................................... 14,925 (17,918) (2,442)
Accrued income taxes ................................................ (11,933) (5,558) 893
Interest credited to universal life and investment products ......... 352,721 299,004 280,377
Policy fees assessed on universal life and investment products (139,689) (131,582) (116,401)
Change in accrued investment income and other receivables ........... (159,362) (158,798) (70,987)
Change in policy liabilities and other policyholder funds of
traditional life and health products .............................. 322,464 279,522 133,621
Change in other liabilities ......................................... (19,771) 65,393 7,209
Other (net) ......................................................... (22,634) (1,133) (4,281)
------------- ------------ ------------
Net cash provided by operating activities ............................ 379,364 403,466 329,788
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale .................................... 10,445,407 6,462,663 1,327,323
Other ............................................................. 198,559 324,242 168,898
Sale of investments:
Investment available for sale ..................................... 1,080,265 1,108,058 1,569,119
Other ............................................................. 155,906 695,270 568,218
Cost of investments acquired:
Investments available for sale .................................... (11,507,234) (8,428,804) (3,798,631)
Other ............................................................. (662,350) (718,335) (400,322)
Acquisitions and bulk reinsurance assumptions ....................... (169,124) 264,126
Purchase of property and equipment .................................. (13,077) (6,087) (6,899)
Sale of property and equipment ...................................... 2,681 288
------------- ------------ ------------
Net cash used in investing activities ................................ (302,524) (729,436) (307,880)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term
debt .............................................................. 1,975,800 1,159,538 941,438
Capital contribution from PLC ....................................... 90,000 91,500
Principal payments on line of credit arrangements and
long-term debt .................................................... (1,973,437) (1,159,538) (941,438)
Principal payment on surplus note to PLC ............................ (2,000) (4,693) (10,000)
Dividends to share-owner ............................................ (60,100) (100) (100)
Investment product deposits and change in universal life
deposits .......................................................... 981,124 910,659 949,122
Investment product withdrawals ...................................... (1,037,424) (745,083) (944,244)
------------- ------------ ------------
Net cash provided by (used in) financing activities .................. (116,037) 250,783 86,278
------------- ------------ ------------
INCREASE (DECREASE) IN CASH .......................................... (39,197) (75,187) 108,186
CASH AT BEGINNING OF YEAR ............................................ 39,197 114,384 6,198
------------- ------------ ------------
CASH AT END OF YEAR .................................................. $ 0 $ 39,197 $ 114,384
============= ============ ============
</TABLE>
F-7
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1998 1997 1996
--------------- ------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year:
Interest on debt ............................... $ 8,338 $ 4,343 $ 4,633
Income taxes ................................... $ 57,429 $ 70,133 $ 43,478
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP ......... $ 179 $ 201 $ 186
Acquisitions and bulk reinsurance assumptions
Assets acquired ................................ $ 247,894 $1,114,832 $ 296,935
Liabilities assumed ............................ (380,405) (902,267) (364,862)
----------- ---------- ----------
Net ............................................ $ (132,511) $ 212,565 $ (67,927)
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-8
<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 provides financial services through the production,
distribution, and administration of insurance 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 1997 Protective adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities;" SFAS No. 130, "Reporting Comprehensive
Income;" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
In 1998 PLC adopted SFAS No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits."
The adoption of these accounting standards did not have a material effect
on PLC's or Protective's financial statements.
INVESTMENTS
Protective has classified all of its investments in fixed maturities,
equity securities, and short-term investments as "available for sale."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
o Fixed maturities (bonds, bank loan participations, and redeemable
preferred stocks) -- at current market value.
o Equity securities (common and nonredeemable preferred stocks) -- at
current market value.
F-9
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
o Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
o Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate acquired
through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.
o Policy loans -- at unpaid balances.
o Other long-term investments -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.
o Short-term investments -- at cost, which approximates current market
value.
Substantially all short-term investments have maturities of three months
or less at the time of acquisition and include approximately $0.9 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 share-owner'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 share-owner'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>
1998 1997
-------------- --------------
<S> <C> <C>
Total investments .......................... $ 8,412,167 $ 7,876,952
Deferred policy acquisition costs .......... 857,949 654,043
All other assets ........................... 2,268,076 1,749,321
----------- -----------
$11,538,192 $10,280,316
=========== ===========
Deferred income taxes ...................... $ 22,089 $ 16,179
All other liabilities ...................... 10,501,789 9,307,085
----------- -----------
10,523,878 9,323,264
Share-owner's equity ....................... 1,014,314 957,052
----------- -----------
$11,538,192 $10,280,316
=========== ===========
</TABLE>
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS
Protective does not use derivative financial instruments for trading
purposes. Combinations of swaps, 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. No realized investment gains or losses were deferred in 1998.
Net realized gains of $1.5 million were deferred in 1997. At December 31, 1998
and 1997, options and open futures contracts with notional amounts of $975.0
million and $925.0 million, respectively, had net unrealized losses of $0.5
million and $0.4 million respectively.
F-10
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Protective uses interest rate swap contracts to convert certain
investments and liabilities from a variable to a fixed rate of interest and
from a fixed rate to variable rate of interest. At December 31, 1998, related
open interest rate swap contracts with a notional amount of $55.3 million were
in a $0.2 million net unrealized loss position. 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.
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.
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Home office building ................................ $37,959 $37,459
Other, principally furniture and equipment .......... 58,958 46,937
------- -------
96,917 84,396
Accumulated depreciation ............................ 54,543 47,989
------- -------
$42,374 $36,407
======= =======
</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 AND BENEFITS EXPENSE
o Traditional Life and Health Insurance Products -- Traditional life
insurance products consist principally of those products with fixed and
guaranteed premiums and benefits and include whole life insurance
policies, term and term-like life insurance policies, limited-payment life
insurance policies, and certain annuities with life contingencies. Life
insurance and immediate annuity premiums are recognized as revenue when
due. Health insurance premiums are recognized as revenue over the terms of
the policies. Benefits and expenses are associated with earned premiums so
that profits are recognized over the life of the contracts. This is
accomplished by means of the provision for liabilities for future policy
benefits and the amortization of deferred policy acquisition costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions
as to investment yields, mortality, persistency, and other assumptions
based on 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-11
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance beginning of year ..................... $ 106,121 $ 108,159 $ 73,642
Less reinsurance ............................ 18,673 6,423 3,330
--------- --------- --------
Net balance beginning of year ................. 87,448 101,736 70,312
--------- --------- --------
Incurred related to:
Current year .................................. 288,015 258,322 275,524
Prior year .................................... (10,198) (14,540) (2,417)
--------- --------- --------
Total incurred .............................. 277,817 243,782 273,107
--------- --------- --------
Paid related to:
Current year .................................. 236,001 203,381 197,163
Prior year .................................... 58,951 58,104 57,812
--------- --------- --------
Total paid .................................. 294,952 261,485 254,975
--------- --------- --------
Other changes:
Acquisitions and reserve transfers .......... 0 3,415 13,292
--------- --------- --------
Net balance end of year ....................... 70,313 87,448 101,736
Plus reinsurance ............................ 20,019 18,673 6,423
--------- --------- --------
Balance end of year ........................... $ 90,332 $ 106,121 $108,159
========= ========= ========
</TABLE>
o Universal Life and Investment Products -- Universal life and investment
products include universal life insurance, guaranteed investment
contracts, deferred annuities, and annuities without life contingencies.
Revenues for universal life and investment products consist of policy fees
that have been assessed against policy account balances for the costs of
insurance, policy administration, and surrenders. That is, universal life
and investment product deposits are not considered revenues in accordance
with generally accepted accounting principles. Benefit reserves for
universal life and investment products represent policy account balances
before applicable surrender charges plus certain deferred policy
initiation fees that are recognized in income over the term of the
policies. Policy benefits and claims that are charged to expense include
benefit claims incurred in the period in excess of related policy account
balances and interest credited to policy account balances. Interest credit
rates for universal life and investment products ranged from 3.4% to 9.4%
in 1998.
Protective's accounting policies with respect to variable universal life
and variable annuities are identical except that policy account balances
(excluding account balances that earn a fixed rate) are valued at market
and reported as components of assets and liabilities related to separate
accounts.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life and health
insurance, universal life insurance, and investment products that vary with and
are primarily related to the production of new business have been deferred.
Traditional life and health insurance acquisition costs are 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
before amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," 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 that assumed. Additionally, relating to SFAS No.
115, these costs have been adjusted by an
F-12
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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. Protective amortizes the present value of future
profits over the premium payment period including accrued interest of up to
approximately 8%. The unamortized present value of future profits for all
acquisitions was approximately $370.3 million and $274.9 million at December
31, 1998 and 1997, respectively. During 1998 $132.5 million of present value of
future profits on acquisitions made during the year was capitalized and $37.1
million was amortized. During 1997 $136.2 million of present value of future
profits on acquisitions made during the year was capitalized, and $28.9 million
was amortized.
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 share-owner's equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principals ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method and are based on realistic
estimates of expected mortality, interest, and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions, (c) deferred
income taxes are provided for temporary differences between financial and
taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance
Reserve are restored to stock-owner's equity, (e) furniture and equipment,
agents' debit balances, and prepaid expenses are reported as assets rather than
being charged directly to surplus (referred to as nonadmitted items), (f)
certain items of interest income, principally accrual of mortgage and bond
discounts are amortized differently, and (g) bonds are stated at market instead
of amortized cost.
F-13
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES -- (CONTINUED)
The reconciliations of net income and share-owner'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 SHARE-OWNER'S EQUITY
--------------------------------------- -----------------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory
reporting practices:(1) ........... $ 147,077 $ 134,417 $ 102,337 $ 531,956 $ 579,111 $ 456,320
Additions (deductions) by
adjustment:
Deferred policy acquisition
costs, net of amortization ..... 68,155 10,310 (2,830) 841,425 632,605 488,201
Deferred income tax ............. (14,925) 13,981 2,142 (51,735) (49,417) (37,722)
Asset Valuation Reserve ......... 66,922 67,369 64,233
Interest Maintenance
Reserve ........................ (1,355) (1,434) (2,142) 15,507 9,809 17,682
Nonadmitted items ............... 42,835 30,500 21,610
Other timing and valuation
adjustments .................... (76,214) (54,494) (11,210) (282,480) (215,448) (197,227)
Noninsurance affiliates ......... 18,171 17,530 11,104 (4) 4
Consolidation elimination ....... (23,726) (22,862) (16,858) (95,059) (35,746) (36,910)
--------- --------- --------- ---------- ----------- ----------
In conformity with generally
accepted accounting principles $ 117,183 $ 97,448 $ 82,543 $1,069,371 $1,018,779 $ 776,191
========= ========= ========= ========== =========== ==========
</TABLE>
(1) Consolidated
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities ................................... $463,416 $396,255 $310,353
Equity securities .................................. 905 1,186 2,124
Mortgage loans on real estate ...................... 158,461 161,604 153,463
Investment real estate ............................. 1,224 2,004 1,875
Policy loans ....................................... 12,346 11,370 10,378
Other, principally short-term investments .......... 16,536 21,876 51,637
-------- -------- --------
652,888 594,295 529,830
Investment expenses ................................ 49,093 36,807 31,049
-------- -------- --------
$603,795 $557,488 $498,781
======== ======== ========
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<S> <C> <C> <C>
Fixed maturities ............................. $ 4,374 $ (8,355) $ (7,101)
Equity securities ............................ (4,465) 5,975 1,733
Mortgage loans and other investments ......... 2,227 4,204 10,878
-------- --------- ---------
$ 2,136 $ 1,824 $ 5,510
======== ========= =========
</TABLE>
Protective recognizes permanent impairments through changes to an
allowance for uncollectible amounts on investments. The allowance totaled $24.1
million at December 31, 1998 and $23.0 million at December 31, 1997. Additions
and reductions to the allowance are included in realized investment gains
(losses). Without
F-14
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS -- (CONTINUED)
such additions/reductions, Protective had net realized investment gains of $3.2
million in 1998, net realized investment losses of $6.1 million in 1997, and
net realized investment gains of $3.7 million in 1996.
In 1998, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $32.3 million
and gross losses were $32.5 million. In 1997, gross gains 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.
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
1998 COST GAINS LOSSES VALUES
- ----------------------------------------------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed .................................. $2,581,561 $ 41,626 $33,939 $2,589,248
United States Government and authorities ......... 72,697 2,812 75,509
States, municipalities, and political
subdivisions .................................... 29,521 1,131 30,652
Public utilities ................................. 533,082 15,066 548,148
Convertibles and bonds with warrants ............. 694 179 515
All other corporate bonds ........................ 3,083,782 98,992 32,629 3,150,145
Redeemable preferred stocks ........................ 5,937 108 6,045
---------- -------- ------- ----------
6,307,274 159,735 66,747 6,400,262
Equity securities ................................... 15,151 456 3,349 12,258
Short-term investments .............................. 159,655 159,655
---------- -------- ------- ----------
$6,482,080 $160,191 $70,096 $6,572,175
========== ======== ======= ==========
</TABLE>
<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>
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.
F-15
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST Values
------------- ------------
<S> <C> <C>
1998
- -----------
Due in one year or less ........................ $ 705,859 $ 709,686
Due after one year through five years .......... 3,255,973 3,325,078
Due after five years through ten years ......... 1,655,055 1,690,581
Due after ten years ............................ 690,387 674,917
---------- ----------
$6,307,274 $6,400,262
========== ==========
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUES
------------- ------------
<S> <C> <C>
1997
- -----------
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>
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1998 1997
- ---------------------------------------------- ---------- ----------
<S> <C> <C>
AAA .................................. 34.3% 41.1%
AA ................................... 6.2 4.8
A .................................... 29.4 29.1
BBB .................................. 26.5 21.9
BB or less ........................... 3.5 3.0
Redeemable preferred stocks .......... 0.1 0.1
----- -----
100.0% 100.0%
===== =====
</TABLE>
At December 31, 1998 and 1997, Protective had bonds which were rated less
than investment grade of $222.9 million and $195.2 million, respectively,
having an amortized cost of $252.0 million and $193.6 million, respectively. At
December 31, 1998, approximately $83.5 million of the bonds rates less than
investment grade were securities issued in company-sponsored commercial
mortgage loan securitizations. Approximately $817.9 million of bonds are not
publically traded.
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>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Fixed maturities ........... $ (21,705) $ 72,741 $ (56,898)
Equity securities .......... $ 4,605 $ (8,813) $ 207
</TABLE>
At December 31, 1998, all of Protective's mortgage loans were commercial
loans of which 75% were retail, 10% were apartments, 8% were warehouses, and 6%
were office buildings. Protective specializes in making mortgage loans on
either credit-oriented or credit-anchored commercial properties, most of which
are strip shopping centers in smaller towns and cities. No single tenant's
leased space represents more than 5% of mortgage loans. Approximately 82% of
the mortgage loans are on properties located in the following states
F-16
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS -- (CONTINUED)
listed in decreasing order of significance: Georgia, Florida, Texas, North
Carolina, Tennessee, Virginia, Alabama, South Carolina, Kentucky, Ohio,
Maryland, California, Mississippi, and Washington.
Many of the mortgage loans have call provisions after three to ten years.
Assuming the loans are called at their next call dates, approximately $48.1
million would become due in 1999, $348.9 million in 2000 to 2003, and $209.1
million in 2004 to 2008.
At December 31, 1998, the average mortgage loan was approximately $2.0
million, and the weighted average interest rate was 8.3%. The largest single
mortgage loan was $12.8 million.
At December 31, 1998 and 1997, Protective's problem mortgage loans and
foreclosed properties totaled $11.7 million and $17.7 million, respectively.
Since 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
$10.6 million were nonincome producing for the twelve months ended December 31,
1998.
Policy loan interest rates generally range from 4.5% to 8.0%.
NOTE D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income .............. 35.0% 35.0% 35.0%
Dividends received deduction and tax-exempt interest .................... (0.1) (0.2) (0.4)
Low-income housing credit ............................................... (0.5) (0.6) (0.6)
Tax benefits arising from prior acquisitions and other adjustments ...... 0.1 0.7 0.1
State income taxes ...................................................... 0.5
---- ---- ----
Effective income tax rate ............................................... 35.0% 34.9% 34.1%
==== ==== ====
</TABLE>
The provision for federal income tax differs from amounts currently
payable due to certain items reported for financial statement purposes in
periods which differ from those in which they are reported for income tax
purposes.
Details of the deferred income tax provision for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Deferred policy acquisition costs ................... $ 60,746 $ 7,054 $ 15,542
Benefit and other policy liability changes .......... (41,268) (23,564) (16,321)
Temporary differences of investment income .......... (3,491) 2,516 (1,163)
Other items ......................................... (1,062) 13 (200)
--------- --------- ---------
$ 14,925 $ (13,981) $ (2,142)
========= ========= =========
</TABLE>
F-17
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- FEDERAL INCOME TAXES -- (CONTINUED)
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder liability reserves ......... $190,328 $138,701
Other .............................................. 2,091 1,029
-------- --------
192,419 139,730
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs .................. 211,641 150,895
Unrealized gain on investments ..................... 32,513 38,252
-------- --------
244,154 189,147
-------- --------
Net deferred income tax liability .................. $ 51,735 $ 49,417
======== ========
</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, 1998 was approximately $70.5 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 $769 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. Under current income
tax laws, 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, 1998, PLC had borrowed $18.5 million at a rate of 5.8%.
PLC had also borrowed $30.0 million at a rate of 5.4% 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, 1998 and 1997. Also,
Protective has a mortgage note on investment real estate amounting to
approximately $2.4 million that matures in 2003.
Included in indebtedness to related parties is a surplus debenture issued
by Protective to PLC. At December 31, 1998, the balance of the surplus
debenture was $18.0 million. The debenture matures in 2003.
Indebtedness to related parties also consists of payables to affiliates
under control of PLC in the amount of $2.9 million at December 31, 1998.
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 $8.3 million, $4.3 million, and
$4.6 million, in 1998, 1997, and 1996, respectively.
F-18
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- RECENT ACQUISITIONS
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.
In October 1998 Protective coinsured a block of life insurance policies
from Lincoln National Corporation. The policies represent the payroll deduction
business originally marketed and underwritten by Aetna.
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.
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 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 insurers, in
the ordinary course of business, are involved in such litigation or
alternatively in arbitration. Although the outcome of any litigation or
arbitration cannot be predicted with certainty, 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 -- SHARE-OWNER'S EQUITY AND RESTRICTIONS
At December 31, 1998, approximately $608.6 million of consolidated
share-owner'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 1999 is estimated to be $138.9
million. Dividends of $60.0 million were paid to PLC in 1998.
NOTE I -- PREFERRED STOCK
PLC owns all of the 2,000 shares of preferred stock issued by Protective's
subsidiary, Protective Life and Annuity Insurance Company ("PL&A"). During
1996, PL&A's articles of incorporation were amended such that the preferred
stock is redeemable solely at the discretion of PL&A. Prior to November 1998,
the stock paid, when and if declared, annual minimum cumulative dividends of
$50 per share, and noncumulative participating dividends to the extent PL&A's
statutory earnings for the immediately preceding fiscal year exceeded $1
million. Dividends of $0.1 million were paid to PLC in 1998, 1997, and 1996.
Effective November 3, 1998, PL&A's articles of incorporation were amended such
that the provision for an annual minimum cumulative dividend was removed.
F-19
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, $5.2 million at
December 31, 1998, is accounted for as a reduction to share-owner'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 $3.0 million in 1998, $3.1 million in 1997, and $3.7
million in 1996. Protective purchases data processing, legal, investment and
management services from affiliates. The costs of such services were $56.2
million, $51.6 million, and $50.4 million in 1998, 1997, and 1996,
respectively. Commissions paid to affiliated marketing organizations of $8.4
million, $5.2 million, and $7.4 million in 1998, 1997, and 1996, respectively,
were included in deferred policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums, policy fees, or deposits for various types of insurance
and investment products. Such premiums, policy fees, and deposits amounted to
$28.6 million, $21.4 million and $31.2 million in 1998, 1997, and 1996,
respectively. Protective and/or PLC paid commissions, interest on debt and
investment products, and fees to these same corporations totaling $7.3 million,
$5.4 million and $5.0 million in 1998, 1997, and 1996, 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
INDIVIDUAL LIFE DIVISION. The Individual Life Division markets universal
life, variable universal life, and level premium term and term-like insurance
products on a national basis through a network of independent insurance agents.
WEST COAST DIVISION. The West Coast Division sells universal life and
level premium term-like insurance products in the life insurance brokerage
market and in the "bank owned life insurance" market.
ACQUISITIONS DIVISION. The Acquisitions Division focuses solely on
acquiring, converting, and servicing policies acquired from other companies.
These acquisitions may be accomplished through acquisitions of companies or
through the assumption or reinsurance of life insurance and related policies.
SPECIALTY INSURANCE PRODUCTS
DENTAL AND CONSUMER BENEFITS DIVISION. The Division's primary focus is on
indemnity and prepaid dental products. In 1997, the Division exited from the
traditional group major medical business, fulfilling the Division's strategy to
focus primarily on dental and related products.
FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, consumer finance companies and automobile dealers. The Division also
includes a small property casualty insurer that sells automobile service
contracts.
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,
F-20
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- OPERATING SEGMENTS -- (CONTINUED)
including fixed and floating rate funding agreements offered to the trustees of
municipal bond proceeds, bank trust departments, and money market funds, 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 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.
F-21
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- OPERATING SEGMENTS -- (CONTINUED)
Operating segment income and assets for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
LIFE INSURANCE
----------------------------------------------
INDIVIDUAL
OPERATING SEGMENT INCOME LIFE WEST COAST ACQUISITIONS
- ----------------------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
1998
Premiums and policy fees .................................. $ 228,701 $ 75,757 $ 125,329
Reinsurance ceded ......................................... (102,533) (53,377) (28,594)
---------- ---------- ----------
Net of reinsurance ceded ................................. 126,168 22,380 96,735
Net investment income ..................................... 55,779 63,492 112,154
Realized investment gains (losses) ........................
Other income .............................................. 70 6 1,713
---------- ---------- ----------
Total revenues ........................................... 182,017 85,878 210,602
---------- ---------- ----------
Benefits and settlement expenses .......................... 106,308 54.617 112,051
Amortization of deferred policy acquisition costs ......... 30,543 4,924 18,894
Other operating expenses .................................. 14,983 5,354 26,717
---------- ----------- ----------
Total benefits and expenses ............................... 151,834 64,895 157,662
---------- ----------- ----------
Income before income tax .................................. 30,183 20,983 52,940
Income tax expense ........................................
Net income ................................................
1997
Premiums and policy fees .................................. $ 182,746 $ 41,290 $ 120,504
Reinsurance ceded ......................................... (55,266) (27,168) (17,869)
---------- ----------- ----------
Net of reinsurance ceded ................................ 127,480 14,122 102,635
Net investment income ..................................... 54,593 30,194 110,155
Realized investment gains (losses) ........................
Other income .............................................. 617 10
---------- ----------
Total revenues ............................................ 182,690 44,316 212,800
---------- ----------- ----------
Benefits and settlement expenses .......................... 114,678 28,304 116,506
Amortization of deferred policy acquisition costs ......... 27,354 961 16,606
Other operating expenses .................................. 18,178 6,849 23,016
---------- ----------- ----------
Total benefits and expenses ............................... 160,210 36,114 156,128
---------- ----------- ----------
Income before income tax .................................. 22,480 8,202 56,672
Income tax expense ........................................
Net income ................................................
1996
Premiums and policy fees .................................. $ 154,295 $ 125,798
Reinsurance ceded ......................................... (37,585) (19,255)
---------- ----------
Net of reinsurance ceded ................................. 116,710 106,543
Net investment income ..................................... 48,442 106,015
Realized investment gains (losses) ........................ 3,098
Other income .............................................. 1,056 641
---------- ----------
Total revenues ............................................ 169,306 213,199
---------- ----------
Benefits and settlement expenses .......................... 96,404 118,181
Amortization of deferred policy acquisition costs ......... 28,393 17,162
Other operating expenses .................................. 28,611 24,292
---------- ----------
Total benefits and expenses ............................... 153,408 159,635
---------- ----------
Income before income tax .................................. 15,898 53,564
Income tax expense ........................................
Net income ................................................
OPERATING SEGMENT ASSETS
- -----------------------------------------------------------
1998
Investments and other assets .............................. $1,076,202 $1,149,642 $1,600,123
Deferred policy acquisition costs ......................... 301,941 144,455 255,347
---------- ----------- ----------
Total assets .............................................. $1,378,143 $1,294,097 $1,855,470
---------- ----------- ----------
1997
Investments and other assets .............................. $ 960,316 $ 910,030 $1,401,294
Deferred policy acquisition costs ......................... 252,321 108,126 138,052
---------- ----------- ----------
Total assets .............................................. $1,212,637 $1,018,156 $1,539,346
---------- ----------- ----------
1996
Investments and other assets .............................. $ 814,728 $1,423,081
Deferred policy acquisition costs ......................... 220,232 156,172
---------- ----------- ----------
Total assets .............................................. $1,034,960 $1,579,253
---------- ----------- ----------
</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-22
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- OPERATING SEGMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
RETIREMENT SAVINGS AND
SPECIALTY INSURANCE 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>
$ 277,316 $ 301,230 $ 18,809 $ 198 $ 1,027,340
(85,753) (188,958) (459,215)
---------- ---------- -----------
191,563 112,272 18,809 198 568,125
15,245 25,068 $ 213,136 105,827 13,094 603,795
1,609 1,318 $ (791) 2,136
4,295 10,302 1,799 2,016 20,201
---------- ---------- ---------- -------- -----------
211,103 147,642 214,745 127,753 15,308 1,194,257
---------- ---------- ---------- ---------- -------- -----------
140,632 52,629 178,745 85,045 469 730,496
10,352 28,526 735 17,213 1 111,188
49,913 48,837 2,876 14,428 9,120 172,228
---------- ---------- ---------- ---------- -------- -----------
200,897 129,992 182,356 116,686 9,590 1,013,912
---------- ---------- ---------- ---------- -------- -----------
10,206 17,650 32,389 11,067 5,718 180,345
63,162 63,162
------- -----------
$ 117,183
-----------
$ 260,590 $ 196,694 $ 12,367 $ 229 $ 814,420
(109,480) (124,431) (334,214)
---------- ---------- -----------
151,110 72,263 12,367 229 480,206
23,810 16,341 $ 211,915 105,196 5,284 557,488
(3,180) 589 $ 4,415 1,824
1,278 3,033 (192) 1,403 6,149
---------- ---------- ---------- -------- -----------
176,198 91,637 208,735 117,960 6,916 1,045,667
---------- ---------- ---------- ---------- -------- -----------
110,148 27,643 179,235 82,019 339 658,872
15,711 30,812 618 15,110 3 107,175
38,572 20,165 3,945 12,312 6,833 129,870
---------- ---------- ---------- ---------- -------- -----------
164,431 78,620 183,798 109,441 7,175 895,917
---------- ---------- ---------- ---------- -------- -----------
11,767 13,017 24,937 8,519 (259) 149,750
52,302 52,302
------- -----------
$ 97,448
-----------
$ 288,050 $ 193,236 $ 8,189 $ 656 $ 770,224
(131,520) (119,814) (308,174)
---------- ---------- -----------
156,530 73,422 8,189 656 462,050
16,249 13,898 $ 214,369 98,719 1,089 498,781
(7,963) 3,858 $ 6,517 5,510
2,193 56 1,064 5,010
---------- ---------- -------- -----------
174,972 87,320 206,406 110,822 2,809 971,351
---------- ---------- ---------- ---------- -------- -----------
125,797 42,781 169,927 73,093 710 626,893
5,326 24,900 509 14,710 1 91,001
43,028 10,673 3,840 13,196 4,508 128,148
---------- ---------- ---------- ---------- -------- -----------
174,151 78,354 174,276 100,999 5,219 846,042
---------- ---------- ---------- ---------- -------- -----------
821 8,966 32,130 9,823 (2,410) 125,309
42,766 42,766
------- -----------
$ 82,543
-----------
$ 197,337 $ 645,909 $2,869,304 $2,542,536 $700,417 $10,781,470
23,836 39,212 1,448 75,177 9 841,425
---------- ---------- ---------- ---------- -------- -----------
$ 221,173 $ 685,121 $2,870,752 $2,617,713 $700,426 $11,622,895
---------- ---------- ---------- ---------- -------- -----------
$ 208,071 $ 536,058 $2,887,732 $2,313,279 $525,896 $ 9,742,676
22,459 52,836 1,785 56,074 952 632,605
---------- ---------- ---------- ---------- -------- -----------
$ 230,530 $ 588,894 $2,889,517 $2,369,353 $526,848 $10,375,281
---------- ---------- ---------- ---------- -------- -----------
$ 205,696 $ 312,826 $2,606,873 $1,821,250 $490,688 $ 7,675,142
27,944 32,040 1,164 50,637 12 488,201
---------- ---------- ---------- ---------- -------- -----------
$ 233,640 $ 344,866 $2,608,037 $1,871,887 $490,700 $ 8,163,343
---------- ---------- ---------- ---------- -------- -----------
</TABLE>
F-23
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
------------- ------------
<S> <C> <C>
Projected benefit obligation, beginning of the year ............................. $ 30,612 $ 25,196
Service cost -- benefits earned during the year ................................. 2,585 2,112
Interest cost -- on projected benefit obligation ................................ 2,203 2,036
Actuarial gain .................................................................. 2,115 3,421
Plan amendment .................................................................. 160
Benefits paid ................................................................... (1,128) (2,153)
--------- --------
Projected benefit obligation, end of the year ................................... 36,547 30,612
--------- --------
Fair value of plan assets beginning of the year ................................. 21,763 19,779
Actual return on plan assets .................................................... 1,689 1,625
Employer contribution ........................................................... 2,823 2,512
Benefits paid ................................................................... (1,128) (2,153)
--------- --------
Fair value of plan assets end of the year ....................................... 25,147 21,763
--------- --------
Plan assets less than the projected benefit obligation .......................... (11,400) (8,849)
Unrecognized net actuarial loss from past experience different from that assumed 9,069 6,997
Unrecognized prior service cost ................................................. 652 605
Unrecognized net transition asset ............................................... (34) (51)
--------- --------
Net pension liability recognized in balance sheet ............................... $ (1,713) $ (1,298)
========= ========
</TABLE>
Net pension cost of the defined benefit pension plan includes the
following components for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service cost ................................ $ 2,585 $ 2,112 $ 1,908
Interest cost ............................... 2,203 2,036 1,793
Expected return on plan assets .............. (1,950) (1,793) (1,593)
Amortization of prior service cost .......... 112 100 100
Amortization of transition asset ............ (17) (17) (17)
Recognized net actuarial loss ............... 305 152 210
-------- -------- --------
Net pension cost ............................ $ 3,238 $ 2,590 $ 2,401
======== ======== ========
</TABLE>
Protective's share of the net pension cost was $2.6 million, $1.8 million,
and $1.5 million, in 1998, 1997, and 1996, respectively.
Assumptions used to determine the benefit obligations as of December 31
were as follows:
F-24
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average discount rate ....................... 6.75% 7.25% 7.75%
Rates of increase in compensation level .............. 4.75% 5.25% 5.75%
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 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, 1998 and 1997, the projected
benefit obligation of this plan totaled $11.7 million and $10.0 million,
respectively, of which $7.8 million and $6.6 million, respectively, have been
recognized in PLC's financial statements.
Net pension cost of the excess benefits plan includes the following
components for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost ................................ $ 611 $ 544 $ 424
Interest cost ............................... 722 651 505
Plan amendment .............................. 351
Amortization of prior service cost .......... 112 112 112
Amortization of transition asset ............ 37 37 37
Recognized net actuarial loss ............... 173 180 155
------ ------ ------
Net pension cost ............................ $1,655 $1,875 $1,233
====== ====== ======
</TABLE>
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, 1998 and 1997, the liability for
such benefits totaled $1.2 million and $1.3 million, respectively. The expense
recorded by PLC was $0.1 million in 1998, 1997 and 1996. 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 up to a maximum of $75,000. 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 ("ESOP") to match voluntary 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, 1998, PLC
had committed up to 101,124 shares to be released to fund employee benefits.
The expense recorded by PLC for these employee benefits was less than $0.1
million in 1998 and 1997, and $1.0 million in 1996.
NOTE M -- STOCK BASED COMPENSATION
Certain Protective employees participate in PLC's Long-Term Incentive Plan
(previously known as the Performance Share Plan) and receive stock appreciation
rights (SARs) from PLC.
F-25
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- STOCK BASED COMPENSATION -- (CONTINUED)
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 or total return 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
share-owners in 1992 and 1997, up to 6,400,000 shares may be issued in payment
of awards. The number of shares granted in 1998, 1997, and 1996 were 71,340,
98,780 and 104,580 shares, respectively, having an approximate market value on
the grant date of $2.3 million, $2.0 million, and $1.8 million, respectively.
At December 31, 1998, outstanding awards measured at target and maximum payouts
were 474,695 and 638,090 shares, respectively. The expense recorded by PLC for
the Performance Share Plan was $2.7 million, $2.7 million, and $3.0 million in
1998, 1997, and 1996, respectively.
During 1996, stock appreciation rights (SARs) were granted to certain
executives of PLC to provide long-term incentive compensation based on the
performance of PLC's Common Stock. Under this arrangement PLC will pay (in
shares of PLC Common Stock) an amount equal to the difference between the
specified base price of PLC's Common Stock and the market value at the exercise
date. The SARs are exercisable after five years (earlier upon the death,
disability or retirement of the executive, or in certain circumstances, of a
change in control of PLC) and expire in 2006 or upon termination of employment.
The number of SARs granted during 1996 and outstanding at December 31, 1998 was
675,000. The SARs have a base price of $17.4375 per share of PLC Common Stock
(the market price on the grant date was $17.50 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 1998 and 1997.
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.
Protective has reinsured approximately $64.8 billion, $34.1 billion, and
$18.8 billion in face amount of life insurance risks with other insurers
representing $294.4 million, $147.2 million, and $113.5 million of premium
income for 1998, 1997, and 1996, respectively. Protective has also reinsured
accident and health risks representing $164.8 million, $187.7 million, and
$194.7 million of premium income for 1998, 1997, and 1996, respectively. In
1998 and 1997, policy and claim reserves relating to insurance ceded of $658.7
million and $485.8 million respectively are included in reinsurance
receivables. Should any of the reinsurers be unable to meet its obligation at
the time of the claim, obligation to pay such claim would remain with
Protective. At December 31, 1998 and 1997, Protective had paid $22.8 million
and $25.6 million, respectively, of ceded benefits which are recoverable from
reinsurers. In addition, at December 31, 1998, Protective had receivables of
$75.0 million related to insurance assumed.
A substantial portion of Protective's new life insurance and credit
insurance sales are being reinsured.
F-26
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
----------------------------- -----------------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUES AMOUNT VALUES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities ................................ $6,400,262 $6,400,262 $6,348,252 $6,348,252
Equity securities ............................... 12,258 12,258 15,006 15,006
Mortgage loans on real estate ................... 1,623,603 1,774,379 1,313,478 1,405,474
Short-term investments .......................... 159,655 159,655 54,337 54,337
Cash ............................................. 39,197 39,197
Liabilities (see Notes A and E):
Guaranteed investment contract deposits ......... 2,691,697 2,751,007 2,684,676 2,687,331
Annuity deposits ................................ 1,519,820 1,513,148 1,511,553 1,494,600
Notes payable ................................... 2,363 2,363
Other (see Note A):
Derivative Financial Instruments ................ (734) (545)
</TABLE>
Except as noted below, fair values were estimated using quoted market
prices. Protective estimates the fair value of its mortgage loans using
discounted cash flows from the next call date. Protective believes the fair
value of its short-term investments and notes payable approximate book value
due to either being short-term or having a variable rate of interest.
Protective estimates the fair value of its guaranteed investment contracts and
annuities using discounted cash flows and surrender values, respectively.
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.
F-27
<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
- --------------------------------- ------------- ------------- ---------- ----------------
GIC AND
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS
POLICY BENEFITS AND OTHER
ACQUISITION AND UNEARNED POLICYHOLDERS'
SEGMENT COSTS CLAIMS PREMIUMS FUNDS
- --------------------------------- ------------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Year Ended
December 31, 1998:
Life Insurance
Individual Life ................ $301,941 $1,054,253 $ 355 $ 10,802
West Coast ..................... 144,455 1,006,280 0 77,254
Acquisitions ................... 255,347 1,383,759 553 233,846
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 23,836 111,916 3,341 78,224
Financial Institutions ......... 39,212 215,451 385,006 105,434
Retirement Savings and
Investment Products ............
Guaranteed Investment
Contracts ..................... 1,448 172,674 0 2,691,697
Investment Products ............ 75,177 194,726 0 1,233,528
Corporate and Other ............. 9 944 39 88
-------- ---------- -------- ----------
TOTAL ......................... $841,425 $4,140,003 $389,294 $4,430,873
======== ========== ======== ==========
Year Ended
December 31, 1997:
Life Insurance
Individual Life ................ $252,321 $ 920,924 $ 356 $ 16,334
West Coast ..................... 108,126 739,463 0 95,495
Acquisitions ................... 138,052 1,025,340 1,437 311,150
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 22,459 120,925 2,536 80,654
Financial Institutions ......... 52,836 159,422 391,085 6,791
Retirement Savings and
Investment Products ............
Guaranteed Investment
Contracts ..................... 1,785 180,690 0 2,684,676
Investment Products ............ 56,074 177,150 0 1,184,268
Corporate and Other ............. 952 380 1,282 185
-------- ---------- -------- ----------
TOTAL ......................... $632,605 $3,324,294 $396,696 $4,379,553
======== ========== ======== ==========
Year Ended December 31,
1996:
Life Insurance ..................
Individual Life ................ $220,232 $ 793,370 $ 685 $ 15,577
Acquisitions ................... 156,172 1,117,159 1,087 251,450
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 27,944 119,010 2,572 83,632
Financial Institutions ......... 32,040 119,242 253,154 1,880
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts ..................... 1,164 149,755 0 2,474,728
Investment Products ............ 50,637 149,743 0 1,120,557
Corporate and Other ............. 12 170 55 192
-------- ---------- -------- ----------
TOTAL ......................... $488,201 $2,448,449 $257,553 $3,948,016
======== ========== ======== ==========
<CAPTION>
COL. A COL. F COL. G COL. H COL. I COL. J
- --------------------------------- ---------- ------------ ------------ ------------- -------------
AMORTIZATION
PREMIUMS BENEFITS OF DEFERRED
AND NET AND POLICY OTHER
POLICY INVESTMENT SETTLEMENT ACQUISITION OPERATING
SEGMENT FEES INCOME (1) EXPENSES COSTS EXPENSES (1)
- --------------------------------- ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended
December 31, 1998:
Life Insurance
Individual Life ................ $126,168 $ 55,779 $106,308 $ 30,543 $ 14,983
West Coast ..................... 22,380 63,492 54,617 4,924 5,354
Acquisitions ................... 96,735 112,154 112,051 18,894 26,717
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 191,563 15,245 140,632 10,352 49,913
Financial Institutions ......... 112,272 25,068 52,629 28,526 48,837
Retirement Savings and
Investment Products ............
Guaranteed Investment
Contracts ..................... 213,136 178,745 735 2,876
Investment Products ............ 18,809 105,827 85,045 17,213 14,428
Corporate and Other ............. 198 13,094 469 1 9,120
-------- -------- -------- -------- --------
TOTAL ......................... $568,125 $603,795 $730,496 $111,188 $172,228
======== ======== ======== ======== ========
Year Ended
December 31, 1997:
Life Insurance
Individual Life ................ $127,480 $ 54,593 $114,678 $ 27,354 $ 18,178
West Coast ..................... 14,122 30,194 28,304 961 6,849
Acquisitions ................... 102,635 110,155 116,506 16,606 23,016
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 151,110 23,810 110,148 15,711 38,572
Financial Institutions ......... 72,263 16,341 27,643 30,812 20,165
Retirement Savings and
Investment Products ............
Guaranteed Investment
Contracts ..................... 0 211,915 179,235 618 3,945
Investment Products ............ 12,367 105,196 82,019 15,110 12,312
Corporate and Other ............. 229 5,284 339 3 6,833
-------- -------- -------- -------- --------
TOTAL ......................... $480,206 $557,488 $658,872 $107,175 $129,870
======== ======== ======== ======== ========
Year Ended December 31,
1996:
Life Insurance ..................
Individual Life ................ $116,710 $ 48,442 $ 96,404 $ 28,393 $ 28,611
Acquisitions ................... 106,543 106,015 118,181 17,162 24,292
Specialty Insurance Products
Dental and Consumer
Benefits ...................... 156,530 16,249 125,797 5,326 43,027
Financial Institutions ......... 73,422 13,898 42,781 24,900 10,673
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts ..................... 0 214,369 169,927 509 3,840
Investment Products ............ 8,189 98,719 73,093 14,710 13,197
Corporate and Other ............. 656 1,089 710 1 4,508
-------- -------- -------- -------- --------
TOTAL ......................... $462,050 $498,781 $626,893 $ 91,001 $128,148
======== ======== ======== ======== ========
</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, 1998:
Life insurance in force .................. $91,980,657 $64,846,246 $18,010,434 $45,144,845 39.9%
=========== =========== =========== =========== ====
Premiums and policy fees:
Life insurance ........................... $ 537,002 $ 294,363 $ 87,964 $ 330,603 26.6%
Accident and health insurance ............ 361,705 164,852 14,279 211,132 6.8%
Property and liability insurance ......... 26,389 26,289 0.0%
----------- ----------- ----
TOTAL ................................... $ 925,096 $ 459,215 $ 102,243 $ 568,124
=========== =========== =========== ===========
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
=========== =========== =========== ===========
</TABLE>
S-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses of the issuance and distribution of the Contracts, other than
any underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fees ......... $ 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
- ----------------------- ------------------------------------------------------- -----------------
<S> <C> <C> <C> <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
23(a) -- Consent of PricewaterhouseCoopers L.L.P.
23(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 Form S-1 Registration Statement, Registration No.
333-50055.
+ Previously filed in Post-Effective Amendment No. 1 to Form S-1
Registration Statement, Registration No. 333-50055 dated February 16,
1999.
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 19, 1999.
PROTECTIVE LIFE INSURANCE COMPANY
By: /S/ JOHN D. JOHNS
----------------------------------
John D. Johns
President
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
/S/ DRAYTON NABERS, JR. Chairman of the Board April 19, 1999
-------------------------------
Drayton Nabers, Jr.
(ii) Principal Financial Officer
/S/ JOHN D. JOHNS President and Chief Financial Officer April 19, 1999
-------------------------------
John D. Johns
(iii) Principal Accounting Officer
/S/ JERRY W. DEFOOR Vice President and Controller, and April 19, 1999
-------------------------------
Jerry W. DeFoor Chief Accounting Officer
(iv) Board of Directors:
/S/ DRAYTON NABERS, JR. Director April 19, 1999
-------------------------------
Drayton Nabers, Jr.
/S/ JOHN D. JOHNS Director April 19, 1999
-------------------------------
John D. Johns
* Director April 19, 1999
-------------------------------
R. Stephen Briggs
* Director April 19, 1999
-------------------------------
Jim E. Massengale
* Director April 19, 1999
-------------------------------
Wayne E. Stuenkel
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------ ---------- ---------------
<S> <C> <C> <C>
* Director April 19, 1999
-------------------------------
A. S. Williams III
* Director April 19, 1999
-------------------------------
Deborah J. Long
* Director April 19, 1999
-------------------------------
Carolyn King
* Director April 19, 1999
-------------------------------
Richard J. Bielen
* Director April 19, 1999
-------------------------------
Danny L. Bentley
*By: /S/ STEVE M. CALLAWAY April 19, 1999
---------------------------
Steve M. Callaway
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE IN SEQUENTIAL
NUMBERING SYSTEM
NUMBER DESCRIPTION WHERE EXHIBIT LOCATED
- ------------- ------------------------------------------------- ----------------------
<S> <C> <C> <C>
23(a) -- Consent of PricewaterhouseCoopers L.L.P.
23(b) -- Consent of Sutherland, Asbill & Brennan, L.L.P.
</TABLE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated February 11, 1999, on our audits of the 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/ PRICEWATERHOUSECOOPERS L.L.P.
PRICEWATERHOUSECOOPERS L.L.P.
Birmingham, Alabama
April 15, 1999
EXHIBIT 23(B)
CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading "Legal Matters"
in the prospectus included in the Registration Statement on Form S-1 (File No.
333-50055) for certain modified guaranteed annuity contracts issued by
Protective Life Insurance Company. In giving this consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933.
/s/ SUTHERLAND, ASBILL & BRENNAN LLP
------------------------------------
SUTHERLAND, ASBILL & BRENNAN LLP
WASHINGTON, D.C.
APRIL 15, 1999
