<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-12332
------------------------
PROTECTIVE LIFE CORPORATION
(Exact name of Registrant as specified in its charter)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices, including zip code)
DELAWARE 95-2492236
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code (205) 879-9230
------------------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.50 PAR VALUE
JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE
PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A
GUARANTY ISSUED FOR THE BENEFIT OF HOLDERS OF
PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A
(Title of class)
Name of each exchange on which registered
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED STOCK, $1.00 PAR VALUE
(Title of class)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in the definitive proxy statement or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
Aggregate market value of voting stock held by nonaffiliates of the Registrant
as of March 8, 1996: $776,470,819
Number of shares of Common Stock, $0.50 Par Value, outstanding as of March 8,
1996: 28,797,189
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1995 Annual Report To Stockholders (the "1995
Annual Report To Stockholders") are incorporated by reference into Parts I,
II, and IV of this Report.
Portions of the Registrant's Proxy Statement dated March 29, 1996, are
incorporated by reference into Part III of this Report.
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<PAGE>
PROTECTIVE LIFE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
Item 1. Business....................................................................................... 3
Item 2. Properties..................................................................................... 19
Item 3. Legal Proceedings.............................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 19
Item 6. Selected Financial Data........................................................................ 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22
Item 8. Financial Statements and Supplementary Data.................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 24
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 24
Item 11. Executive Compensation......................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 27
Item 13. Certain Relationships and Related Transactions................................................. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 27
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
Protective Life Corporation is an insurance holding company, whose
subsidiaries provide financial services through the production, distribution,
and administration of insurance and investment products. Founded in 1907,
Protective Life Insurance Company ("Protective Life") is the Company's principal
operating subsidiary. Unless the context otherwise requires, the "Company"
refers to the consolidated group of Protective Life Corporation and its
subsidiaries. The Company has six operating divisions: Acquisitions, Financial
Institutions, Group, Guaranteed Investment Contracts, Individual Life, and
Investment Products. The Company also has an additional business segment which
is described herein as Corporate and Other.
Additional information concerning the Company's divisions may be found in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- RESULTS OF OPERATIONS" and Note J to Consolidated Financial
Statements in the Company's 1995 Annual Report to Stockholders, which are
incorporated herein by reference.
Copies of the Company's Proxy Statement and 1995 Annual Report to
Stockholders will be furnished to anyone who requests such documents in writing
from the Secretary of the Company, Protective Life Corporation, P. O. Box 2606,
Birmingham, Alabama 35202. The information incorporated herein by reference is
also electronically accessible through the Internet from the "EDGAR Database of
Corporate Information" on the Securities and Exchange Commission's World Wide
Web site (http://www.sec.gov).
Management believes that maintenance of strong claims-paying and financial
strength ratings is necessary for success in many of its markets.
ACQUISITIONS DIVISION
The Company actively seeks to acquire blocks of insurance policies. These
acquisitions may be accomplished through acquisitions of companies or through
the assumption or reinsurance of policies. Most acquisitions do not include the
Company's acquisition of an active sales force, but some do. Blocks of policies
acquired through the Acquisitions Division are usually administered as "closed"
blocks; i.e., no new policies are sold. Therefore, the amount of insurance in
force for a particular acquisition is expected to decline with time due to
lapses and deaths of the insureds.
Thirty-five separate transactions have been entered into since 1970.
Management believes a favorable environment for acquisitions will likely
continue into the immediate future. Insurance companies are facing heightened
regulatory and market pressure to increase statutory capital and thus may seek
to increase capital by selling blocks of policies. Insurance companies also
appear to be selling blocks of policies in conjunction with programs to narrow
strategic focus. In addition, smaller companies may face difficulties in
marketing and thus may seek to be acquired. However, it appears that other
companies are entering this market; therefore, the Company may face increased
competition for future acquisitions.
3
<PAGE>
Several states have enacted statutes that decreased the attractiveness of
assumption reinsurance transactions and increased the attractiveness of
coinsurance transactions. In coinsurance transactions, the seller remains
contingently liable with respect to the coinsured policies should the Company
become unable to fulfill its obligations to the seller under the coinsurance
agreement. This has caused sellers to place more emphasis on the financial
condition and acquisition experience of the purchaser. Management believes this
favorably impacts the Company's competitive position.
Total revenues and income before income tax from the Acquisitions Division
are expected to decline with time unless new acquisitions are made. Therefore,
the Division's revenues and earnings may fluctuate from year to year depending
upon the level of acquisition activity.
In the third quarter of 1993, the Company acquired Wisconsin National Life
Insurance Company and coinsured a small block of universal life policies. In
1994, the Company coinsured a small block of payroll deduction policies in the
second quarter and coinsured a block of 130,000 policies in the fourth quarter.
In the second quarter of 1995, the Company coinsured a block of 28,000 policies.
In March 1996, the Company coinsured a block of 38,000 policies.
FINANCIAL INSTITUTIONS DIVISION
The Financial Institutions Division specializes in marketing insurance
products through commercial banks, savings and loan associations, and mortgage
bankers. The Division markets an array of life and health products, which cover
consumer and mortgage loans made by financial institutions located primarily in
the southeastern United States. The Division also markets life and health
products nationally through the consumer finance industry and through automobile
dealerships. The Division markets through employee field representatives,
independent brokers, and a wholly-owned subsidiary. The Division also offers
certain products through direct mail solicitation to customers of financial
institutions. The demand for credit life and credit health insurance is related
to the general level of loan demand.
In 1992, the Company acquired the credit insurance business of Durham Life
Insurance Company. The acquisition more than doubled the size of the Division
and provided significant market share in the southeastern states not previously
covered by the Company.
The Division has entered into a reinsurance arrangement whereby all of the
Division's new credit insurance sales are being ceded to a reinsurer. In the
second quarter of 1995, the Division also ceded a block of older policies.
Though these reinsurance transactions will reduce the Division's earnings, the
Division's return on investment is expected to improve.
GROUP DIVISION
The Group Division manufactures, distributes, and services group, dental,
cancer, and payroll deduction insurance products. Group accident and health
insurance is generally considered to be cyclical. Profits rise or fall as
competitive forces allow or prevent rate increases to keep pace with changes in
group health medical costs. The Company is placing marketing emphasis on other
health insurance products which have not been as subject to medical cost
inflation as traditional group health products. These products include dental
insurance policies and weekly income (short-term disability) policies which are
distributed nationally through the Division's
4
<PAGE>
existing distribution system, as well as through joint marketing arrangements
with independent marketing organizations, and through reinsurance contracts
with other insurers. These products also include an individual cancer insurance
policy marketed through a nationwide network of agents. It is anticipated that a
significant part of the growth in the Company's health insurance premium income
in the next several years will be from dental products.
In 1993, the Division established a special marketing unit to sell dental
and other products through mail and telephone solicitations. The unit has sales
offices in Arizona, Colorado, Florida, Georgia, Illinois, Kentucky, Michigan,
North Carolina, Ohio, Tennessee, Texas and Wisconsin. On March 20, 1995, the
Company completed its acquisition of National Health Care Systems of Florida,
Inc. ("NHCS"), based in Jacksonville, Florida. NHCS operates prepaid dental
plans (also referred to as dental health maintenance organizations or dental
capitation plans). NHCS, known as "DentiCare", has approximately 308,000 members
as of December 31, 1995, located primarily in Florida, Tennessee, Georgia, and
Alabama. On October 30, 1995, the Company announced it had agreed to acquire an
additional prepaid dental plan and a dental HMO, both of which also operate
under the trade name "Denticare". These plans have approximately 40,000 members
in Oklahoma, Arkansas, and Missouri. This transaction is subject to regulatory
approval and other conditions, and is expected to close in the second quarter of
1996.
The Division offers substantially all forms of group insurance customary in
the industry, making available complete packages of life and accident and health
insurance to employers. The life and accident and health insurance packages
offered by this Division include hospital and medical coverages as well as
dental and disability coverages. To address rising health care costs, the
Division provides cost containment services such as utilization review and
catastrophic case management.
The Division markets its group insurance products primarily in the
southeastern and southwestern United States using the services of brokers who
specialize in group products. Sales offices in Alabama, Florida, Georgia,
Illinois, Missouri, North Carolina, Ohio, Oklahoma, Tennessee, and Texas are
maintained to serve these brokers. Group policies are directed primarily at
employers and associations with between 25 and 1,000 employees. The Division
also markets group insurance to small employers through a marketing organization
affiliated with an insurer, and reinsures the business produced by the marketing
organization. The Division receives a ceding commission from these arrangements.
GUARANTEED INVESTMENT CONTRACTS DIVISION
In 1989, the Company began selling guaranteed investment contracts ("GICs").
The Company's GICs are contracts, issued to a 401(k) or other retirement savings
plan, which guarantee a fixed return on deposits for a specified period and
often provide flexibility for withdrawals, in keeping with the benefits provided
by the plan. The Company also offers related products through this Division,
including fixed rate contracts offered to the trustees of municipal bond
proceeds, floating rate contracts issued to bank trust departments, and
long-term annuity contracts used to fund certain state obligations.
Since 1989, life insurer credit concerns and a demand shift to
non-traditional GIC alternatives have generally caused the GIC market to
contract somewhat, although broadening the Division's product offerings has
allowed it to maintain strong sales.
5
<PAGE>
Most GIC contracts written by the Company have maturities of 3 to 5 years.
Prior to 1993, few GIC contracts were maturing because the contracts were newly
written. Therefore, GIC account balances grew at a significant rate. Beginning
in 1993, GIC contracts began to mature as contemplated when the contracts were
sold. Hence, the rate of growth in GIC deposits has decreased as the amount of
maturing contracts has increased.
INDIVIDUAL LIFE DIVISION
The Individual Life Division primarily utilizes a distribution system based
on experienced independent personal producing general agents who are recruited
by regional sales managers. At December 31, 1995, there were 22 regional sales
managers located throughout the United States. Honors Club members, agents who
produce at least $30 thousand of new premium per year, totalled 258 at December
31, 1995. Honors Club members represent approximately 39% of the Division's new
premium.
In 1993, the Division began distributing insurance products through stock
brokers. The Division also distributes insurance products through the payroll
deduction market and in the life insurance brokerage market. The Division also
offers its products to other insurance companies and their distribution systems
under private label arrangements.
Marketing efforts in the Individual Life Division are directed toward the
Company's various universal life products and products designed to compete in
the term marketplace. Universal life products combine traditional life insurance
protection with the ability to tailor a more flexible payment schedule to the
individual's needs, provide an accumulation of cash values on which income taxes
are deferred, and permit the Company to change interest rates credited on policy
cash values to reflect current market rates. The Company currently emphasizes
back-end loaded universal life policies which reward the continuing policyholder
and which should help maintain the persistency of its universal life business.
The products designed to compete in the term marketplace are term-like policies
with guaranteed level premiums for the first 10, 15, or 20 years which provide a
competitive net cost to the insured.
The Division also includes ProEquities, Inc. ("PES"), an affiliated
securities broker-dealer. Through PES, members of the Company's field force who
are licensed to sell securities can sell stocks, bonds, mutual funds, and
investment products that may be manufactured or issued by companies other than
the Company. Prior to 1995, management responsibility for PES was with the
Investment Products Division, and therefore PES's financial results were
included in the Investment Products Division.
INVESTMENT PRODUCTS DIVISION
The Investment Products Division manufactures, sells, and supports annuity
products. These products are sold through broker-dealers, financial
institutions, and the Individual Life Division. Some of the Division's annuity
products are also sold through PES.
In April 1990, the Company began sales of modified guaranteed annuity
products which guarantee an interest rate for a fixed period. Because contract
values are "market-value adjusted" upon surrender prior to maturity, these
products afford the Company a measure of protection from changes in interest
rates.
6
<PAGE>
In 1992, the Division ceased most new sales of single premium deferred
annuities. In 1994, the Division introduced a variable annuity product to
broaden the Division's product line.
The demand for annuity products is related to the general level of interest
rates and performance of the equity markets.
CORPORATE AND OTHER
The Corporate and Other segment consists of several small insurance lines of
business, net investment income and expenses not attributable to the business
segments described above (including interest on substantially all debt), and the
operations of several small noninsurance subsidiaries. The earnings of this
segment may fluctuate from year to year.
In August 1993, the Company completed the sale of its ownership interest in
Southeast Health Plan, Inc., a Birmingham-based health maintenance organization,
in which the Company had an investment since 1988.
In 1994, the Company entered into a joint venture arrangement with the Lippo
Group to enter the Hong Kong insurance market. The Company and the Lippo Group
jointly own a Hong Kong insurer which commenced business in early 1995.
Management believes that this joint venture will position the Company to market
life insurance in mainland China when that opportunity unfolds. The Company
continues to investigate other possible opportunities in Asia.
INSURANCE IN FORCE
The Company's total consolidated life insurance in force at December 31,
1995 was $61.9 billion. The following table shows sales by face amount and
insurance in force for the Company's business segments.
7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New Business Written
Financial Institutions....... $ 3,563,177 $ 2,524,212 $ 2,776,276 $ 1,149,265 $ 1,057,886
Group........................ 119,357 184,429 252,345 328,258 390,141
Individual Life.............. 7,564,983 6,329,630 4,440,510 4,877,038 4,244,903
-------------- -------------- -------------- -------------- --------------
Total...................... $ 11,247,517 $ 9,038,271 $ 7,469,131 $ 6,354,561 $ 5,692,930
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Business Acquired
Acquisitions................. $ 6,129,159 $ 4,756,371 $ 4,378,812 $ 1,302,330
Financial Institutions....... 1,432,338
-------------- -------------- -------------- -------------- --------------
Total...................... $ 6,129,159 $ 4,756,371 $ 4,378,812 $ 2,734,668 $ 0
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Insurance in Force at End of
Year (1)
Acquisitions................. $ 16,778,359 $ 11,728,569 $ 8,452,114 $ 3,836,066 $ 4,385,948
Financial Institutions....... 6,233,256 4,841,318 4,306,179 3,690,610 2,446,815
Group........................ 6,371,313 7,464,501 6,716,724 6,315,410 7,088,931
Individual Life.............. 32,500,935 25,843,232 22,975,577 20,634,927 16,655,923
-------------- -------------- -------------- -------------- --------------
Total...................... $ 61,883,863 $ 49,877,620 $ 42,450,594 $ 34,477,013 $ 30,577,617
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
- ------------------------
(1) Reinsurance assumed has been included; reinsurance ceded (1995-$17,524,366;
1994-$8,639,272; 1993-$7,484,566; 1992-$6,982,127; 1991-$5,292,080) 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 surrenders and lapses during the year by the mean
of the insurance in force at the beginning and end of the year, adjusted for the
timing of major acquisitions and assumptions was:
<TABLE>
<CAPTION>
RATIO OF
YEAR ENDED VOLUNTARY
DECEMBER 31 TERMINATIONS
-------------------------------------------------- ------------
<S> <C>
1991.............................................. 8.9%
1992.............................................. 9.0
1993.............................................. 8.7
1994.............................................. 7.0
1995.............................................. 6.9
</TABLE>
Net terminations reflect voluntary lapses and cash surrenders, some of which
may be due to the replacement of the Company'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.
8
<PAGE>
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>
1991.......................... $ 1,264,603 $ 115,477 $ 324,662
1992.......................... 1,694,530 299,608 374,451
1993.......................... 2,015,075 468,689 537,053
1994.......................... 2,281,673 661,359 542,766 $ 170,454
1995.......................... 2,451,693 741,849 472,656 392,237
</TABLE>
UNDERWRITING
The underwriting policies of the Company'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.
The Company's insurance subsidiaries require blood samples to be drawn with
individual insurance applications for coverage over $100,000 (ages 16-50) or
$150,000 (age 51 and above). Blood samples are tested for a wide range of
chemical values and are screened for antibodies to the HIV virus. Applications
also contain questions permitted by law regarding the HIV virus which must be
answered by the proposed insureds.
Group insurance underwriting policies are administered by experienced group
underwriters. The underwriting policies are designed for single employer groups.
Initial premium rates are based on prior claim experience and manual premium
rates with relative weights depending on the size of the group and the nature of
the benefits.
INVESTMENTS
The types of assets in which the Company may invest are influenced by state
laws which prescribe qualified investment assets. Within the parameters of these
laws, the Company 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, the Company continually
balances maturity against yield and quality considerations in selecting new
investments.
9
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The Company's asset/liability matching practices involve monitoring of asset
and liability durations for various product lines, cash flow testing under
various interest rate scenarios, and rebalancing of assets and liabilities with
respect to yield, risk, and cash-flow characteristics.
The following table shows the Company's investments at December 31, 1995,
valued on the basis of generally accepted accounting principles.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
ASSET VALUE INVESTMENTS
---------------------- ----------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Fixed maturities:
Bonds:
Mortgage-backed securities............... $2,049,775 34.0%
United States Government and government
agencies and authorities................ 107,577 1.8
States, municipalities, and political
subdivisions............................ 11,590 0.2
Public utilities......................... 327,244 5.4
Convertibles and bonds with warrants
attached................................ 493 --
All other corporate bonds................ 1,168,924 19.4
Bank loan participations................... 220,811 3.7
Redeemable preferred stocks................ 5,594 0.1
----------- -----
Total fixed maturities................. 3,892,008 64.6
----------- -----
Equity securities:
Common stocks -- industrial, miscellaneous,
and all other............................. 28,746 0.5
Nonredeemable preferred stocks............. 9,965 0.2
----------- -----
Total equity securities................ 38,711 0.7
----------- -----
Mortgage loans on real estate................ 1,834,357 30.4
Investment real estate....................... 20,921 0.3
Policy loans................................. 143,372 2.4
Other long-term investments.................. 42,096 0.7
Short-term investments....................... 53,591 0.9
----------- -----
Total investments...................... $6,025,056 100.0%
----------- -----
----------- -----
</TABLE>
A significant portion of the Company's bond portfolio is invested in
mortgage-backed securities. Mortgage-backed securities are constructed from
pools of residential mortgages, and may have cash flow volatility as a result of
changes in the rate at which prepayments of principal occur with respect to the
underlying loans. Prepayments of principal on the underlying residential loans
can be expected to accelerate with decreases in interest rates and diminish with
increases in interest rates.
In management's view, the overall quality of the Company's investment
portfolio continues to be strong. The Company 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, the
Company uses ratings from the Securities Valuation Office of the National
Association of Insurance Commissioners ("NAIC"), or the Company rates the bond
based upon a comparison of the unrated issue to rated issues of the same issuer
or rated issues of
10
<PAGE>
other issuers with similar risk characteristics. At December 31, 1995,
approximately 95% of bonds were rated by Moody's, S&P, or the NAIC.
The following table shows the approximate percentage distribution of the
Company's fixed maturities by rating, utilizing S&P rating categories, at
December 31, 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF
FIXED
TYPE MATURITIES
-------------------------------------------------- -------------
<S> <C>
Bonds
AAA............................................. 56.1%
AA.............................................. 4.5
A............................................... 12.6
BBB............................................. 19.0
BB or Less...................................... 2.0
Bank Loan Participations
Investment Grade................................ 0.4
Non-Investment Grade............................ 5.3
Redeemable Preferred Stock........................ 0.1
-----
Total............................................. 100.0%
-----
-----
</TABLE>
At December 31, 1995, approximately $3,589.9 million of the Company's
$3,665.6 million bond portfolio was invested in U.S. Government or Agency-backed
securities or investment grade corporate bonds and only approximately $75.7
million of its bond portfolio was rated less than investment grade.
Approximately $292.6 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.
The Company also invests in bank loan participations. Generally, such
investments constitute the most senior debt incurred by the borrower in highly
leveraged transactions. They are generally unrated by the credit rating
agencies. Of the $220.8 million of bank loan participations owned by the Company
at December 31, 1995, $206.0 million were classified by the Company as less than
investment grade.
The Company 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. The Company
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.
11
<PAGE>
The following table shows a breakdown of the Company's mortgage loan
portfolio by property type:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
PROPERTY TYPE ON REAL ESTATE
------------------------------------- --------------
<S> <C>
Retail............................... 80.6%
Warehouses........................... 7.3
Office Building...................... 6.2
Apartments........................... 4.0
Mixed-use............................ 1.1
Other................................ 0.8
-----
Total................................ 100.0%
-----
-----
</TABLE>
Credit-anchored strip shopping center loans are generally on strip shopping
centers located in smaller towns and anchored by one or more strong regional or
national retail stores. The anchor tenants enter into long-term leases with the
Company'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 the Company's exposure) in the strip shopping centers at
December 31, 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
ANCHOR TENANTS ON REAL ESTATE
---------------------------------- ---------------
<S> <C>
K-Mart............................ 4%
Food Lion......................... 4
Winn Dixie........................ 4
Wal-Mart.......................... 3
Bi-Lo............................. 3
Revco............................. 2
</TABLE>
The Company's mortgage lending criteria generally require that the
loan-to-value ratio on each mortgage be at or under 75% at the time of
origination, although in certain circumstances the Company will lend on the
basis of an 85% loan-to-value ratio. Projected rental payments from credit
anchors (i.e., excluding rental payments from smaller local tenants) generally
exceed 70% of the property's projected operating expenses and debt service.
For several years the Company has offered a commercial loan product under
which the Company will permit a slightly higher loan-to-value ratio in exchange
for a participating interest in the cash flows from the underlying real estate.
Approximately $361.2 million of the Company's mortgage loans have this
participation feature.
The average size mortgage loan in the Company's portfolio is approximately
$1.6 million. The largest single loan amount is $13.1 million.
Many of the Company's mortgage loans have call or interest rate reset
provisions after five to seven years. However, if interest rates were to
significantly increase, the Company may be unable to increase the interest rates
on its existing mortgage loans commensurate with the significantly increased
market rates, or call the loans.
12
<PAGE>
In order to provide additional liquidity, the Company plans a commercial
mortgage securitization during the first quarter of 1996. Proceeds from the
securitization will be reinvested in publicly-traded investment grade bonds.
At December 31, 1995, $26.1 million or 1.4% of the mortgage loan portfolio
was nonperforming. It is the Company'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
the Company's general policy to initiate foreclosure proceedings unless a
workout arrangement to bring the loan current is in place.
As a general rule, the Company does not invest directly in real estate. The
investment real estate held by the Company consists largely of properties
obtained through foreclosures or the acquisition of other insurance companies.
In the Company'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 the Company to hold and manage the property until the property can be
profitably sold.
The Company has established an allowance for uncollectible amounts on
investments. This allowance was $33.4 million at December 31, 1995.
Combinations of futures contracts and options on treasury notes are
sometimes used as hedges for asset/liability management of certain investments,
primarily mortgage loans on real estate, and liabilities arising from interest
sensitive products such as GICs and annuities. Realized investment gains and
losses on such contracts are deferred and amortized over the life of the hedged
asset. The Company also uses interest rate swap contracts to convert certain
investments from a variable rate of interest to a fixed rate of interest.
For further discussion regarding the Company's investments and the maturity
of and the concentration of risk among the Company's invested assets, see Note C
to the Consolidated Financial Statements.
13
<PAGE>
The following table shows the investment results of the Company for the
years 1991 through 1995:
<TABLE>
<CAPTION>
CASH, ACCRUED PERCENTAGE
INVESTMENT INCOME, NET EARNED ON REALIZED
YEAR ENDED AND INVESTMENTS INVESTMENT AVERAGE OF CASH INVESTMENT
DECEMBER 31 AT DECEMBER 31 INCOME AND INVESTMENTS GAINS (LOSSES)
- -------------------------------- ------------------ ----------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1991............................ $ 2,837,278 $ 233,502 9.4% $ (3,085)
1992............................ 3,653,074 284,069 8.9 (14)
1993............................ 4,845,167 362,130 8.7 5,054
1994............................ 5,362,016 417,825 8.3 6,298
1995............................ 6,097,455 475,924 8.2 1,612
</TABLE>
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" in the Company's 1995 Annual
Report to Stockholders for certain information relating to the Company's
investments and liquidity.
INDEMNITY REINSURANCE
As is customary in the insurance industry, the Company's insurance
subsidiaries cede insurance to other insurance companies. The ceding insurance
company remains contingently liable with respect to ceded insurance should any
reinsurer be unable to meet the obligations assumed by it. The Company sets a
limit on the amount of insurance retained on the life of any one person. In the
individual lines it will not retain more than $500,000, including accidental
death benefits, on any one life. Certain of the term-like plans of the Company
have a retention of $50,000 per life. For group insurance, the maximum amount
retained on any one life is $100,000. At December 31, 1995, the Company had
insurance in force of $61.9 billion of which approximately $17.5 billion was
ceded to reinsurers.
RESERVES
The applicable insurance laws under which the Company's insurance
subsidiaries operate require that each insurance company report policy reserves
as liabilities to meet future obligations on the outstanding policies. These
reserves are the amounts which, with the additional premiums to be
received and interest thereon compounded annually at certain assumed rates, are
calculated in accordance with applicable law to be sufficient to meet the
various policy and contract obligations as they mature. These laws specify that
the reserves shall not be less than reserves calculated using certain named
mortality tables and interest rates.
The reserves carried in the Company'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 reserves other
than those for universal life policies, annuity contracts, and GICs, these
differences arise from the use of mortality and morbidity tables and interest
rate assumptions which are deemed under generally accepted accounting principles
to be more appropriate for financial reporting purposes than those required for
statutory accounting purposes; from the introduction of lapse assumptions into
the reserve calculation; and from the use of the net level premium
14
<PAGE>
reserve method on all business. Policy reserves for universal life policies,
annuity contracts, and GICs are carried in the Company's financial reports
at the account value of the policy or contract.
FEDERAL INCOME TAX CONSEQUENCES
The Company's insurance subsidiaries are taxed by the federal government in
a manner similar to companies in other industries. However, certain restrictions
on consolidating life insurance company income with noninsurance income are
applicable to the Company; thus, the Company is not able to consolidate all of
the operating results of its subsidiaries for federal income tax purposes.
Under pre-1984 tax law, certain income of the Company was not taxed
currently, but was accumulated in the "Policyholders' Surplus Account" for each
insurance company subsidiary 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, 1995, the combined Policyholders'
Surplus Accounts for the life insurance subsidiaries of the Company and the
estimated tax which would become payable on these amounts if distributed to
stockholders were $50.7 million and $17.7 million, respectively. The Company
does not anticipate any of its life insurance subsidiaries exceeding applicable
limits on amounts accumulated in these accounts and, therefore, does not expect
to involuntarily pay tax on the amounts held therein.
COMPETITION
The Company operates in a highly competitive industry. In connection with
the development and sale of its products, the Company encounters significant
competition from other insurance companies, many of which have financial
resources or ratings greater than those of the Company. Certain of the Company's
products compete against other investment alternatives, including bonds, stocks,
and mutual funds.
The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the aging
population has increased the demand for retirement savings products. Management
believes that the Company's ability to compete is dependent upon, among other
things, its ability to attract and retain agents to market its insurance
products, its ability to develop competitive and profitable products, and its
maintenance of a high rating from rating agencies.
Bank products provide competitive alternatives to the Company's GICs and
annuities. Banks may also compete by selling annuity products provided by other
insurance companies. Also, in the future banks and other financial institutions
may be granted approval to underwrite and sell annuities or other insurance
products that compete directly with the Company. Likewise, nontraditional
sources of health care coverages, such as health maintenance organizations and
preferred provider organizations, are developing rapidly in the Company's
operating territory and provide competitive alternatives to the Company's group
health products.
15
<PAGE>
REGULATION
The Company'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, policy forms, and capital adequacy,
and is concerned primarily with the protection of policyholders rather than
stockholders. The Company cannot predict the form of any future proposals or
regulation.
The design and administration of the Company's insurance products, the
conduct of the Company's agents, and the content of advertising and other sales
materials are also regulated by these state agencies. Recently, some regulatory
agencies have enhanced their enforcement efforts resulting in disciplinary
actions being taken against insurers, including the assessment of fines.
A life insurance company's statutory capital is computed according to rules
prescribed by the NAIC as modified by the insurance company's state of domicile.
Statutory accounting rules are different from generally accepted accounting
principles and are intended to reflect a more conservative view. The NAIC's
risk-based capital requirements require insurance companies to calculate and
report information under a risk-based capital formula. These risk-based capital
requirements are intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. Based upon the
December 31, 1995 statutory financial reports, the Company's insurance
subsidiaries are adequately capitalized under the formula.
The Company'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 the Company.
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. The
Company's insurance subsidiaries were assessed immaterial amounts in 1995, which
will be partially offset by credits against future state premium taxes. Although
the Company 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.
In addition, many states, including the states in which the Company'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 Life is
16
<PAGE>
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 a person
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.
The Company's insurance subsidiaries are subject to various state statutory
and regulatory restrictions on the insurance subsidiaries' ability to pay
dividends to Protective Life Corporation. 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 the Company by its insurance subsidiaries in 1996 is
estimated to be $129 million. No assurance can be given that more stringent
restrictions will not be adopted from time to time by states in which the
Company's insurance subsidiaries are domiciled, which restrictions could have
the effect, under certain circumstances, of significantly reducing dividends
or other amounts payable to the Company by such subsidiaries without affirmative
prior approval by state regulatory authorities.
The Company's insurance subsidiaries act as fiduciaries and are subject to
regulation by the Department of Labor ("DOL") when providing a variety of
products and services to employee benefit plans governed by the Employee
Retirement Income Security Act of 1974 ("ERISA"). Severe penalties are imposed
by ERISA on fiduciaries which violate ERISA's prohibited transaction provisions
by breaching their duties to ERISA-covered plans. In a case decided by the
United States Supreme Court in December 1993 (JOHN HANCOCK MUTUAL LIFE INSURANCE
COMPANY V. HARRIS TRUST AND SAVINGS BANK), the Court concluded that an insurance
company general account contract that had been issued to a pension plan should
be divided into its guaranteed and nonguaranteed components and that certain
ERISA fiduciary obligations applied with respect to the assets underlying the
nonguaranteed components. Although the Company's insurance subsidiaries have not
issued contracts identical to the one involved in HARRIS TRUST, some of its
policies relating to ERISA-covered plans may be deemed to have nonguaranteed
components subject to the principles announced by the Court.
The full extent to which HARRIS TRUST makes the fiduciary standards and
prohibited transaction provisions of ERISA applicable to all or part of
insurance company general account assets, however, cannot be determined at this
time. The Supreme Court's opinion did not resolve whether the assets at issue in
the case may be subject to ERISA for some purposes and not others. The life
insurance industry requested that the DOL issue exemptions from the prohibited
transaction provisions of ERISA in view of HARRIS TRUST. In July of 1995, the
DOL published, in final form, a prohibited transaction class exemption (PTE
95-60) which exempts from the prohibited transaction rules, prospectively and
retroactively to January 1, 1975, certain transactions engaged in by insurance
company general accounts in which employer benefit plans have an interest. The
exemption does not cover all such transactions, and the insurance industry is
seeking further relief. Until these and other matters are clarified, the Company
is unable to determine whether the decision will result in any liability and, if
so, its nature and scope.
17
<PAGE>
Existing federal laws and regulations affect the taxation of the Company's
products. Income tax payable by policyholders on investment earnings is deferred
during the accumulation period of certain life insurance and 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. If
these proposals were to be adopted, they could adversely affect the ability of
the Company's life insurance subsidiaries to sell such products and could result
in the surrender of existing contracts and policies. Although it cannot be
predicted whether future legislation will contain provisions that alter the
treatment of these products, such provisions are not part of any tax legislation
currently under active consideration in Congress.
The Federal Government has from time to time advocated changes to the
current health care delivery system which will address both affordability and
availability issues. The ultimate scope and effective date of any health care
reform proposals are unknown at this time and are likely to be modified as they
are considered for enactment by Congress. It is anticipated that these proposals
may adversely affect certain products in the Company's group health insurance
business. In addition to the federal initiatives, a number of states are
considering legislative programs that are intended to affect the accessibility
and affordability of health care. Some states have recently enacted health care
reform legislation. These various state programs (which could be preempted by
any federal program) may also adversely affect the Company's group health
insurance business. However, in light of the small relative proportion of the
Company's earnings attributable to group health insurance, management does not
expect that either the federal or state proposals will have a material adverse
effect on the Company's earnings.
The Federal Government has advocated repeal of the Glass-Steagall Act, 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 the Company.
Additional issues related to regulation of the Company and its insurance
subsidiaries are discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" in the
Company's 1995 Annual Report to Stockholders.
EMPLOYEES
The Company had 1,169 full-time employees, including 983 in the Home Office
in Birmingham, Alabama at December 31, 1995. These employees are covered by
contributory major medical insurance, group life, and long-term disability
insurance plans. The cost of these benefits in 1995 amounted to approximately
$3.4 million for the Company. In addition, substantially all of the employees
are covered by a pension plan. The Company also matches employee contributions
to its 401(k) Plan. See Note K to Consolidated Financial Statements.
18
<PAGE>
ITEM 2. PROPERTIES
The Company's Home Office building is located at 2801 Highway 280 South,
Birmingham, Alabama. This building includes the original 142,000 square-foot
building which was completed in 1976 and a second contiguous 220,000 square-foot
building which was completed in 1985. In addition, parking is provided for
approximately 1,000 vehicles.
The Company leases administrative space in six cities, substantially all
under leases for periods of three to five years. The aggregate monthly rent is
approximately $74 thousand.
Marketing offices are leased in 13 cities, substantially all under leases
for periods of three to five years with only two leases running longer than five
years. The aggregate monthly rent is approximately $30 thousand.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of the Company, to which the Company or
any of its subsidiaries is a party or of which any of the Company's properties
is the subject. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" in the
Company's 1995 Annual Report to Stockholders for certain information relating to
litigation involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1995 to a vote of
security holders of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed and principally traded on the New York
Stock Exchange (NYSE symbol: PL). The following table sets forth the highest and
lowest closing prices of the Company's Common Stock, $0.50 par value, as
reported by the New York Stock Exchange during the periods indicated, along with
the dividends paid per share of Common Stock during the same periods. Prices and
dividends prior to June 1, 1995 have been adjusted for the June 1, 1995
two-for-one stock split.
19
<PAGE>
<TABLE>
<CAPTION>
RANGE
---------------
HIGH LOW DIVIDENDS
------ ------ ---------
<S> <C> <C> <C>
1994
First Quarter......................... $22.88 $20.44 $.13
Second Quarter........................ 23.13 19.13 .14
Third Quarter......................... 22.06 20.00 .14
Fourth Quarter........................ 24.31 19.94 .14
1995
First Quarter......................... $24.25 $21.44 $.14
Second Quarter........................ 27.50 21.63 .16
Third Quarter......................... 29.63 27.38 .16
Fourth Quarter........................ 31.25 26.88 .16
</TABLE>
On February 12, 1996, there were approximately 2,100 holders of record of
Company Common Stock.
The Company (or its predecessor) has paid cash dividends each year since
1926 and each quarter since 1934. The Company expects to continue to pay cash
dividends, subject to the earnings and financial condition of the Company and
other relevant factors. The ability of the Company to pay cash dividends is
dependent in part on cash dividends received by the Company from its life
insurance subsidiaries. See Item 7 -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL
RESOURCES" in the Company's 1995 Annual Report to Stockholders. Such subsidiary
dividends are restricted by the various insurance laws of the states in which
the subsidiaries are incorporated. See Item 1 -- "BUSINESS -- REGULATION".
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees.............. $369,888 $402,772 $370,758 $323,136 $273,975
Net investment income................. 475,924 417,825 362,130 284,069 233,502
Realized investment gains(losses)..... 1,612 6,298 5,054 (14) (3,085)
Other income.......................... 32,663 21,553 21,695 18,835 11,556
------------- ------------- ------------- ------------- -------------
Total revenues.................. $880,087 $848,448 $759,637 $626,026 $515,948
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Benefits and expenses................. $759,053 $742,275 $674,593 $566,079 $464,245
Income tax expense.................... $ 41,152 $ 33,976 $ 28,475 $ 17,384 $ 14,477
Minority interest..................... $ 3,217 $ 1,796 $ 19 $ 90 $ 1,437
Net income............................ $ 76,665 $ 70,401 $ 56,550(1) $ 41,420(2) $ 35,789
PER SHARE DATA (3)
Net income (4)........................ $ 2.68 $ 2.57 $ 2.07(1) $ 1.52(2) $ 1.31
Cash dividends........................ $ 0.62 $ .55 $ .505 $ .45 $ .41
Weighted average number of shares
outstanding.......................... 28,627,345(5) 27,392,936(5) 27,381,578(5) 27,315,986 27,298,062
Stockholders' equity.................. $ 18.30 $ 9.86 $ 13.17 $ 10.28 $ 9.22
Stockholders' equity excluding net
unrealized gains and losses on
investments.......................... $ 16.29 $ 13.78 $ 11.74 $ 10.16 $ 9.08
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets...................................... $7,231,257 $6,130,284 $5,316,005 $4,006,667 $3,120,290
Long-term debt.................................... $ 115,500 $ 98,000 $ 137,598 $ 31,014 $ 23,548
Total debt........................................ $ 115,500 $ 98,000 $ 147,118 $ 88,248 $ 57,579
Monthly Income
Preferred Securities (6)........................ $ 55,000 $ 55,000
Stockholders' equity.............................. $ 526,557 $ 270,373 $ 360,733 $ 281,400 $ 251,745
Stockholders' equity excluding unrealized gains
and losses on investments........................ $ 468,694 $ 377,905 $ 321,449 $ 278,244 $ 247,764
</TABLE>
- ------------------------------
(1) Reduced by $1,261 or $.05 per share representing a one-time adjustment to
income tax expense due to the change in the corporate income tax rate from
34% to 35%.
(2) Reduced by $1,053 or $.04 per share representing the cumulative effect of a
change in accounting principle for the adoption of SFAS No. 106.
(3) Prior periods have been restated to reflect a two-for-one stock split on
June 1, 1995.
(4) Net income per share is computed using the weighted average number of
shares outstanding during each period.
(5) Excludes contingently issuable shares of 225,061, 262,730, and 257,272 at
December 31, 1995, 1994, and 1993, respectively. The dilutive effect of
such shares on earnings per share is less than three percent.
(6) Reported as "minority interest in consolidated subsidiaries" in the
Company's financial statements.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information regarding the Company's financial condition and results of
operations is included under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Company's 1995 Annual
Report to Stockholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data for the Company and its
subsidiaries, which are included under the caption "CONSOLIDATED FINANCIAL
STATEMENTS" in the Company's 1995 Annual Report to Stockholders, are
incorporated herein by reference.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Protective Life Corporation
Birmingham, Alabama
Our report on the consolidated financial statements of Protective Life
Corporation and subsidiaries has been incorporated by reference in this Form
10-K from page 63 of the 1995 Annual Report to Stockholders of Protective Life
Corporation. In connection with our audits of such financial statements, we have
also audited the related financial statement schedules listed in the index on
page 27 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Birmingham, Alabama
February 12, 1996
23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information concerning executive officers of the Company set
forth below, the information called for by this Item 10 is incorporated herein
by reference to the section entitled "ELECTION OF DIRECTORS AND INFORMATION
ABOUT NOMINEES" in the Company's definitive proxy statement for the Annual
Meeting of Stockholders, May 6, 1996, to be filed with the Securities and
Exchange Commission by the Company pursuant to Regulation 14A within 120 days
after the end of its 1995 fiscal year.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --- ------------------------------------------------
<S> <C> <C>
Drayton Nabers, Jr. 55 Chairman of the Board, President and
Chief Executive Officer and a Director
R. Stephen Briggs 46 Executive Vice President
John D. Johns 43 Executive Vice President and Chief Financial
Officer
Ormond L. Bentley 60 Senior Vice President, Group
Carolyn King 45 Senior Vice President, Investment Products
Division
Deborah J. Long 42 Senior Vice President and General Counsel
Jim E. Massengale 53 Senior Vice President
Steven A. Schultz 42 Senior Vice President, Financial Institutions
Wayne E. Stuenkel 42 Senior Vice President and Chief Actuary
A. S. Williams III 59 Senior Vice President, Investments and Treasurer
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --- ------------------------------------------------
<S> <C> <C>
Judy Wilson 37 Senior Vice President, Guaranteed Investment
Contracts
Jerry W. DeFoor 43 Vice President and Controller, and Chief
Accounting Officer
</TABLE>
All executive officers are elected annually and serve at the pleasure of the
Board of Directors. None is related to any director of the Company or to any
other executive officer.
Mr. Nabers has been Chairman of the Board, President and Chief Executive
Officer and a Director since May 1994. From May 1992 to May 1994, he was
President and Chief Executive Officer and a Director. Mr. Nabers was President
and Chief Operating Officer and a Director from August 1982 until May 1992. From
July 1981 to August 1982, he was Senior Vice President of the Company. Since
August 1982, he has also been President of Protective Life and had been its
Senior Vice President from September 1981 to August 1982. From February 1980 to
September 1981, he served as Senior Vice President, Operations of Protective
Life. From 1979 to February 1980, he was Senior Vice President, Operations and
General Counsel of Protective Life. From February 1980 to March 1983, he served
as President of Empire General Life Insurance Company, a subsidiary, and
from March 1983 to December 31, 1984, he was Chairman of the Executive Committee
of Empire General. He is also a director of Energen Corporation, National Bank
of Commerce of Birmingham, and Alabama National Bancorporation.
Mr. Briggs has been Executive Vice President of the Company and of
Protective Life since October 1993. From January 1993 to October 1993, he was
Senior Vice President, Life Insurance and Investment Products of the Company and
of Protective Life. Mr. Briggs had been Senior Vice President, Ordinary
Marketing of the Company since August 1988 and of Protective Life since April
1986. From July 1983 to April 1986, he was President of First Protective
Insurance Group, Inc.
Mr. Johns has been Executive Vice President and Chief Financial Officer of
the Company and of Protective Life since October 1993. From August 1988 to
October 1993, he served as Vice President and General Counsel of Sonat Inc. He
is a director of National Bank of Commerce of Birmingham, Alabama National
Bancorporation, and Parisian Services, Inc.
Mr. Bentley has been Senior Vice President, Group of the Company since
August 1988 and of Protective Life since December 1978. Mr. Bentley has been
employed by Protective Life since October 1965.
Ms. King has been Senior Vice President, Investment Products Division of the
Company and of Protective Life 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 and of its parent company, Provident Life and Accident
Insurance
25
<PAGE>
Company of America. Since 1975, Ms. King served in a number of capacities
with Provident National Assurance Company.
Ms. Long has been Senior Vice President and General Counsel of the Company
and of Protective Life since February 1994. From August 1993 to January 1994,
Ms. Long served as General Counsel of the Company and from February 1984 to
January 1994 she practiced law with the law firm of Maynard, Cooper & Gale, P.C.
Mr. Massengale has been Senior Vice President of the Company and of
Protective Life since May 1992. From May 1989 to May 1992, he was Senior Vice
President, Operations and Systems of the Company and of Protective Life. From
January 1983 to May 1989, he served as Senior Vice President, Corporate Systems
of the Company and of Protective Life.
Mr. Schultz has been Senior Vice President, Financial Institutions of the
Company and of Protective Life since March 1993. Mr. Schultz served as Vice
President, Financial Institutions of the Company from February 1993 to March
1993 and of Protective Life from February 1989 to March 1993. From June 1977
through January 1989, he was employed by and served in a number of capacities
with The Minnesota Mutual Life Insurance Company, finally serving as Director,
Group Sales.
Mr. Stuenkel has been Senior Vice President and Chief Actuary of the Company
and of Protective Life since March 1987. Mr. Stuenkel is a Fellow of the Society
of Actuaries and has been employed by Protective Life since September 1978.
Mr. Williams has been Senior Vice President, Investments and Treasurer of
the Company since July 1981. Mr. Williams also serves as Senior Vice President,
Investments and Treasurer of Protective Life. Mr. Williams has been employed by
Protective Life since November 1964.
Ms. Wilson has been Senior Vice President, Guaranteed Investment Contracts
of the Company and of Protective Life since January 1, 1995. From July 1991 to
December 31, 1994, she served as Vice President, Guaranteed Investment Contracts
of Protective Life. From October 1989 through July 1991, Ms. Wilson was employed
by an affiliated insurer.
Mr. DeFoor has been Vice President and Controller, and Chief Accounting
Officer of the Company and of Protective Life since April 1989. Mr. DeFoor is a
certified public accountant and has been employed by Protective Life since
August 1982.
Certain of these executive officers also serve as executive officers and/or
directors of various other Company subsidiaries.
Directors and executive officers of the Company are required to report
changes in their beneficial ownership of the Company's Common Stock to the
Securities and Exchange Commission. In 1995, a report concerning a gift of 1,338
shares to charity by Mr. Rushton and a second report concerning the acquisition
of 41.4 shares through the Company's Dividend Reinvestment Plan by Mr. Nabers'
daughters were filed late.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 11 through 13 is incorporated herein by
reference from the Company's definitive proxy statement for the Annual Meeting
of Stockholders, May 6, 1996, to be filed with the Securities and Exchange
Commission by the Company pursuant to Regulation 14A within 120 days after the
end of its 1995 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
The following financial statements set forth in the Company's 1995
Annual Report to Stockholders as indicated in the following table are
incorporated by reference (see Exhibit 13).
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 63
Consolidated Statements of Income for the years ended
December 31, 1995, 1994, and 1993.......................... 43
Consolidated Balance Sheets as of December 31, 1995 and
1994....................................................... 44
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994, and 1993.............. 46
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994, and 1993.......................... 47
Notes to Consolidated Financial Statements.................. 48
</TABLE>
2. Financial Statement Schedules:
The Report of Independent Accountants which covers the financial
statement schedules appears on page 23 of this report. The following
schedules are located in this report on the pages indicated.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II -- Condensed Financial Information of
Registrant................................................. 34
Schedule III -- Supplementary Insurance Information......... 38
Schedule IV -- Reinsurance.................................. 39
</TABLE>
27
<PAGE>
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.
3. Exhibits:
Included as exhibits are the items listed below. The Company will
furnish a copy of any of the exhibits listed upon the payment of
$5.00 per exhibit to cover the cost of the Company in furnishing the
exhibit.
<TABLE>
<CAPTION>
ITEM NUMBER DOCUMENT
- ----------- -----------------------------------------------------------------
<C> <S>
*3(a) 1985 Restated Certificate of Incorporation of the Company filed
as Exhibit 3(a) to the Company's Form 10-K Annual Report for the
year ended December 31, 1993
*3(a)(1) Certificate of Amendment of 1985 Restated Certificate of
Incorporation of the Company filed with the Secretary of State of
Delaware on June 1, 1987 and filed as Exhibit 3(a)(1) to the
Company's Form 10-K Annual Report for the year ended December 31,
1993
*3(a)(2) Certificate of Amendment of 1985 Restated Certificate of
Incorporation of the Company filed with the Secretary of State of
Delaware on May 5, 1994 and filed as Exhibit 3(a)(5) to the
Company's Form 10-Q Quarterly Report for the period ended March
31, 1994
*3(a)(3) Certificate of Designation of Junior Participating Cumulative
Preferred Stock of the Company filed with the Secretary of State
of Delaware on August 9, 1995 and filed as Exhibit A to Exhibit 1
to the Company's Form 8-A Report filed August 7, 1995 and filed
as Exhibit A to Exhibit 2 to the Company's Form 8-K Report filed
August 7, 1995
3(a)(4) Certificate of Decrease of Shares Designated as Junior
Participating Cumulative Preferred Stock of the Company filed
with the Secretary of State of Delaware on August 8, 1995
*3(b) 1995 Amended and Restated By-laws of the Company filed as Exhibit
1 to the Company's Form 8-K Report filed August 7, 1995
*4(a) Reference is made to Exhibits 3(a) through 3(a)(4) above
</TABLE>
- ------------------------
*incorporated by reference
28
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER DOCUMENT
- ----------- -----------------------------------------------------------------
<C> <S>
*4(b) Reference is made to Exhibit 3(b) above
*4(c) Certificate of Formation of PLC Capital L.L.C. ("PLC Capital")
filed as Exhibit 4(c) to the Company's and PLC Capital's
Registration Statement No. 33-52831
*4(d) Amended and Restated Limited Liability Company Agreement of PLC
Capital L.L.C. filed as Exhibit 4(d) to the Company's and PLC
Capital's Registration Statement No. 33-52831
*4(e) Form of Action establishing series of Preferred Securities
(included as Annex A to Exhibit 4(d) to the Company's and PLC
Capital's Registration Statement No. 33-52831)
*4(f) Specimen Preferred Security Certificate (included as Annex B to
Exhibit 4(d) to the Company's and PLC Capital's Registration
Statement No. 33-52831)
*4(g) Rights Agreement, dated as of August 7, 1995, between the Company
and AmSouth Bank of Alabama (formerly, AmSouth Bank N.A.), as
Rights Agent filed as Exhibit 2 to the Company's Form 8-K filed
August 7, 1995 and filed as Exhibit 1 to the Company's Form 8-A
filed August 7, 1995
*10(a) Management Incentive Plan filed as Exhibit 10(a) to the Company's
Form 10-K Annual Report for the year ended December 31, 1984
*10(a)(1) Amendment to the Company's Management Incentive Plan renamed as
the Company's Annual Incentive Plan filed as Exhibit 10(a)(1) to
the Company's Form 10-Q Report filed May 14, 1990
*10(b) The Company's 1992 Performance Share Plan filed as Exhibit
10(b)(3) to the Company's Form 10-Q filed May 15, 1992
10(b)(1) First Amendment to the Company's 1992 Performance Share Plan
*10(c) Excess Benefit Plan amended and restated as of January 1, 1989
filed as Exhibit 10(c)(1) to the Company's Form 10-K Annual
Report for the year ended December 31, 1991
</TABLE>
- ------------------------
*incorporated by reference
29
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER DOCUMENT
- ----------- -----------------------------------------------------------------
<C> <S>
*10(d) Indemnity Agreements filed as Exhibits to the Company's Form 10-Q
Report, filed August 14, 1986
*10(e) Reference is made to Exhibit 4(g) above
*10(f) Form of Severance Compensation Agreement filed as Exhibit 10(i)
to the Company's Form 10-K Annual Report for the year ended
December 31, 1991
*10(f)(1) Form of First Amendment to Severance Compensation Agreement filed
as Exhibit 10(i)(1) to the Company's Form 10-K Annual Report for
the year ended December 31, 1991
*10(g) The Company's Deferred Compensation Plan for Directors Who Are
Not Employees of the Company filed as Exhibit 4 to the Company's
Form S-8 filed August 27, 1993
*10(h) The Company's Deferred Compensation Plan for Officers filed as
Exhibit 4 to the Company's Form S-8 filed January 13, 1994
13 1995 Annual Report To Stockholders
21 Organization Chart of the Company and Affiliates
23 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Form 10-K: Exhibit Item Numbers
10(a), 10(a)(1), 10(b), 10(b)(1), 10(c), 10(f), 10(f)(1), 10(g), and
10(h).
- ------------------------
*incorporated by reference
30
<PAGE>
(b) Reports on Form 8-K:
(1) Form 8-K, dated February 16, 1995
-- Item 5
(2) Form 8-K, dated April 27, 1995
-- Item 5
(3) Form 8-K, dated July 25, 1995
-- Item 5
(4) Form 8-K, dated August 7, 1995
-- Item 5
-- Item 7
(5) Form 8-K, dated October 25, 1995
-- Item 5
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
By: /s/ Drayton Nabers, Jr.
-----------------------------------------
Drayton Nabers, Jr.
Chairman of the Board, President
and Chief Executive Officer
March 22, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ---------------------------------------------- ---------------------------------------------- ------------------
<C> <S> <C>
/s/ Drayton Nabers, Jr. Chairman of the Board, President and Chief
------------------------------------ Executive Officer (Principal Executive March 22, 1996
DRAYTON NABERS, JR. Officer) and Director
/s/ John D. Johns Executive Vice President and Chief Financial
------------------------------------ Officer (Principal Financial Officer) March 22, 1996
JOHN D. JOHNS
/s/ Jerry W. DeFoor Vice President and Controller, and Chief
------------------------------------ Accounting Officer (Principal Accounting March 22, 1996
JERRY W. DEFOOR Officer)
*
------------------------------------ Chairman Emeritus and Director March 22, 1996
WILLIAM J. RUSHTON III
*
------------------------------------ Director March 22, 1996
JOHN W. WOODS
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ---------------------------------------------- ---------------------------------------------- ------------------
<C> <S> <C>
*
------------------------------------ Director March 22, 1996
WILLIAM J. CABANISS, JR.
*
------------------------------------ Director March 22, 1996
H. G. PATTILLO
*
------------------------------------ Director March 22, 1996
JOHN J. MCMAHON, JR.
*
------------------------------------ Director March 22, 1996
A. W. DAHLBERG
*
------------------------------------ Director March 22, 1996
JOHN W. ROUSE, JR.
*
------------------------------------ Director March 22, 1996
ROBERT T. DAVID
*
------------------------------------ Director March 22, 1996
RONALD L. KUEHN, JR.
*
------------------------------------ Director March 22, 1996
HERBERT A. SKLENAR
</TABLE>
- ------------------------
*Drayton Nabers, Jr., by signing his name hereto, does sign this document on
behalf of each of the persons indicated above pursuant to powers of attorney
duly executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ Drayton Nabers, Jr.
-----------------------------------------
DRAYTON NABERS, JR.
Attorney-in-Fact
33
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Dividends from subsidiaries*................................................. $ 13,691 $ 1,885 $ (91)
Service fees from subsidiaries*.............................................. 37,410 28,949 21,143
Investment income............................................................ 3,671 5,339 4,276
Other income/(loss).......................................................... (1,879) 1,582 3,662
--------- --------- ---------
52,893 37,755 28,990
--------- --------- ---------
EXPENSES
Operating and administrative................................................. 28,941 28,499 25,340
Interest -- subsidiaries*.................................................... 4,993 2,491
Interest -- others........................................................... 8,206 6,793 5,300
--------- --------- ---------
42,140 37,783 30,640
--------- --------- ---------
INCOME BEFORE FEDERAL INCOME TAX AND OTHER ITEMS BELOW......................... 10,753 (28) (1,650)
INCOME TAX EXPENSE (BENEFIT)................................................... 3 128 (1,325)
--------- --------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES................... 10,750 (156) (325)
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES*................................ 65,915 70,557 56,875
--------- --------- ---------
NET INCOME..................................................................... $ 76,665 $ 70,401 $ 56,550
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
*Eliminated in consolidation.
See notes to condensed financial statements.
34
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Short-term investments.............................................................. $ $ 1,900
Long-term investments............................................................... 72 77
Investment real estate.............................................................. 133 133
Investments in subsidiaries (equity method)*........................................ 710,212 420,126
----------- -----------
710,417 422,236
Cash.................................................................................. 71 196
Receivables from subsidiaries*........................................................ 35,134 41,188
Other receivables..................................................................... 1,024
Accrued income taxes.................................................................. 4,603 1,884
Other................................................................................. 5,138 4,090
----------- -----------
Total Assets...................................................................... $ 755,363 $ 470,618
----------- -----------
----------- -----------
LIABILITIES
Accrued expenses and other liabilities................................................ $ 37,381 $ 29,581
Deferred income taxes................................................................. 6,305 3,044
Long-term debt:
Subsidiaries*....................................................................... 69,620 69,620
Banks............................................................................... 40,500 23,000
Senior Notes........................................................................ 75,000 75,000
----------- -----------
Total Liabilities................................................................. 228,806 200,245
----------- -----------
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock
Junior Participating Cumulative Preferred Stock
Common Stock.......................................................................... 15,668 15,668
Additional paid-in capital............................................................ 96,371 71,295
Net unrealized gains (losses) on investments (all from subsidiaries, net of income
tax: 1995 -- $31,157; 1994 -- $(57,902))........................................... 57,863 (107,532)
Retained earnings (including undistributed income of subsidiaries: 1995 -- $444,305;
1994 -- $378,390).................................................................... 373,922 314,857
Treasury stock........................................................................ (12,008) (18,323)
Unallocated stock in Employee Stock Ownership Plan.................................... (5,259) (5,592)
----------- -----------
Total Stockholders' Equity........................................................ 526,557 270,373
----------- -----------
$ 755,363 $ 470,618
----------- -----------
----------- -----------
</TABLE>
- ------------------------
*Eliminated in consolidation.
See notes to condensed financial statements.
35
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 76,665 $ 70,401 $ 56,550
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed net income of subsidiaries*.................... (65,915) (70,558) (56,875)
Deferred income taxes.................................................. 3,261 1,227 (2,381)
Gain on sale of subsidiary............................................. (3,522)
Other (net)............................................................ 7,043 6,911 7,725
---------- ------------ ----------
Net cash provided by operating activities................................ 21,054 7,981 1,497
---------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of and/or additional investments in subsidiaries*............... (27,731) (23,071) (41,806)
Loan to subsidiary*...................................................... (20,000)
Principal payments received on loan to subsidiary*....................... 4,750 9,500 11,550
Sale of subsidiary....................................................... 2,091
Change in other long-term investments.................................... 5 (77) 1,041
Change in short-term investments......................................... 1,900 97 (1,147)
---------- ------------ ----------
Net cash used in investing activities (21,076) (13,551) (48,271)
---------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowing under line of credit arrangements and long-term
debt.................................................................... 52,300 87,200 68,300
Principal payments on line of credit arrangements and long-term debt..... (34,800) (136,200) (7,500)
Proceeds from borrowing under long-term debt to subsidiary*.............. 69,620
Purchase of Treasury Stock............................................... (3) (191)
Dividends to stockholders................................................ (17,600) (15,071) (13,827)
---------- ------------ ----------
Net cash provided by (used in) financing activities...................... (103) 5,358 46,973
---------- ------------ ----------
INCREASE (DECREASE) IN CASH................................................ (125) (212) 199
CASH AT BEGINNING OF YEAR.................................................. 196 408 209
---------- ------------ ----------
CASH AT END OF YEAR........................................................ $ 71 $ 196 $ 408
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
- ------------------------
*Eliminated in consolidation.
See notes to condensed financial statements.
36
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The Company publishes consolidated financial statements that are its primary
financial statements. Therefore, these parent company condensed financial
statements are not intended to be the primary financial statements of the
Company, and should be read in conjunction with the consolidated financial
statements and notes thereto of Protective Life Corporation and subsidiaries.
NOTE 1 - DEBT
At December 31, 1995, the Company had borrowed $40.5 million of its $60.0
million revolving line of credit. Borrowings under the revolving line of credit
become due in 1998. In addition, $75.0 million of Senior Notes due 2004 and
$55.0 million of subordinated debentures due 2024 were outstanding at December
31, 1995. The subordinated debentures were issued to PLC Capital L.L.C., an
affiliate, in connection with the issuance of Monthly Income Preferred
Securities by PLC Capital L.L.C.
NOTE 2 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest Paid to Non-Affiliates................................................. $ 6,634 $ 2,783 $ 5,540
Interest Paid to Subsidiary*.................................................... 6,266 3,498
--------- --------- ---------
$ 12,900 $ 6,281 $ 5,540
--------- --------- ---------
--------- --------- ---------
Income Taxes (reduced by amounts received from affiliates under a tax sharing
agreement)..................................................................... $ (538) $ (431) $ (701)
--------- --------- ---------
--------- --------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES
Reissuance of Treasury Stock to ESOP............................................ $ 350 $ 3 $ 3
--------- --------- ---------
--------- --------- ---------
Unallocated Stock in ESOP....................................................... $ 333 $ 264 $ 344
--------- --------- ---------
--------- --------- ---------
Reissuance of Treasury Stock.................................................... $ 31,014 $ 1,050 $ 135
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 3 - SUBSIDIARY SURPLUS DEBENTURES
Protective Life Insurance Company ("Protective Life") has issued surplus
debentures to the Company in order to finance acquisitions and growth. At
December 31, 1995, the balance of the surplus debentures was $34.7 million. The
surplus debentures are included in receivables from subsidiaries. Protective
Life must obtain the approval of the Commissioner of Insurance before it may
repay any portion of the surplus debenture.
NOTE 4 - PURCHASE OF SUBSIDIARY
On March 20, 1995, the Company acquired National Health Care Systems of
Florida, Inc. (also known as "DentiCare"). The purchase price was paid with a
combination of the Company's Common Stock ($30.7 million) and cash ($7.6
million). In connection with the acquisition, the Company reissued 1,316,458
shares of its Common Stock previously held as Treasury Stock.
- ------------------------
*Eliminated in consolidation.
37
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES
(in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F COL. G
- ------------------------------ ----------- ------------- ----------- ------------- ----------- -----------
GIC AND
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS AND PREMIUMS
POLICY BENEFITS OTHER AND NET REALIZED
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT INVESTMENT
SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME(1) GAINS(LOSSES)
- ------------------------------ ----------- ------------- ----------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995:
Acquisitions.............. $ 123,889 $ 851,994 $ 590 $ 250,550 $ 98,501 $ 95,018 $ 0
Financial Institutions.... 36,283 84,162 189,973 1,495 23,875 9,377 0
Group..................... 24,974 123,279 5,371 85,925 142,483 14,432 0
Guaranteed Investment
Contracts................ 993 68,704 0 2,451,693 0 203,376 (3,908)
Individual Life........... 186,496 672,569 336 14,709 99,018 40,277 0
Investment Products....... 37,747 127,104 0 1,061,507 4,566 95,706 4,937
Corporate and Other....... 14 342 62 263 1,445 17,738 0
Unallocated Realized
Investment Gains
(Losses)................. 0 0 0 0 0 0 583
----------- ------------- ----------- ------------- ----------- ----------- --------------
TOTAL................... $ 410,396 $ 1,928,154 $ 196,332 $ 3,866,142 $ 369,888 $ 475,924 $ 1,612
----------- ------------- ----------- ------------- ----------- ----------- --------------
----------- ------------- ----------- ------------- ----------- ----------- --------------
Year Ended
December 31, 1994:
Acquisitions.............. $ 110,202 $ 856,889 $ 381 $ 266,828 $ 86,376 $ 83,750 $ 532
Financial Institutions.... 68,060 43,198 99,798 2,758 98,027 9,224 0
Group..................... 22,685 116,324 2,905 84,689 131,096 14,381 0
Guaranteed Investment
Contracts................ 996 0 0 2,281,674 0 180,591 3,000
Individual Life........... 162,186 571,070 320 13,713 84,925 37,319 0
Investment Products....... 70,298 102,705 0 1,027,527 1,635 80,780 (2,500)
Corporate and Other......... 17 4,109 75 263 713 11,780 0
Unallocated Realized
Investment Gains
(Losses)................. 0 0 0 0 0 0 5,266
----------- ------------- ----------- ------------- ----------- ----------- --------------
TOTAL................... $ 434,444 $ 1,694,295 $ 103,479 $ 3,677,452 $ 402,772 $ 417,825 $ 6,298
----------- ------------- ----------- ------------- ----------- ----------- --------------
----------- ------------- ----------- ------------- ----------- ----------- --------------
Year Ended
December 31, 1993:
Acquisitions.............. $ 69,942 $ 705,487 $ 501 $ 259,513 $ 58,561 $ 65,290 $ 0
Financial Institutions.... 59,163 39,508 85,042 2,913 87,355 8,956 0
Group..................... 20,520 99,412 2,786 83,522 126,027 14,522 0
Guaranteed Investment
Contracts................ 1,464 0 0 2,015,075 0 166,058 1,175
Individual Life........... 129,265 483,604 368 11,762 77,338 34,154 0
Investment Products....... 19,210 52,516 0 789,668 856 66,706 2,003
Corporate and Other....... 20 318 88 339 20,621 6,444 0
Unallocated Realized
Investment Gains
(Losses)................. 0 0 0 0 0 0 1,876
----------- ------------- ----------- ------------- ----------- ----------- --------------
TOTAL................... $ 299,584 $ 1,380,845 $ 88,785 $ 3,162,792 $ 370,758 $ 362,130 $ 5,054
----------- ------------- ----------- ------------- ----------- ----------- --------------
----------- ------------- ----------- ------------- ----------- ----------- --------------
<CAPTION>
COL. A COL. H COL. I COL. J
- ------------------------------ ----------- ------------ -----------
AMORTIZATION
BENEFITS OF DEFERRED
AND POLICY OTHER
SETTLEMENT ACQUISITION OPERATING
SEGMENT EXPENSES COSTS EXPENSES(1)
- ------------------------------ ----------- ------------ -----------
<S> <C> <C> <C>
Year Ended
December 31, 1995:
Acquisitions.............. $ 100,016 $ 20,601 $ 21,534
Financial Institutions.... (19,574) 28,609 16,301
Group..................... 109,447 3,052 55,384
Guaranteed Investment
Contracts................ 165,963 386 2,864
Individual Life........... 80,067 20,403 31,142
Investment Products....... 72,111 11,479 11,995
Corporate and Other....... 1,476 3 25,794
Unallocated Realized
Investment Gains
(Losses)................. 0 0 0
----------- ------------ -----------
TOTAL................... $ 509,506 $ 84,533 $ 165,014
----------- ------------ -----------
----------- ------------ -----------
Year Ended
December 31, 1994:
Acquisitions.............. $ 97,649 $ 14,460 $ 19,374
Financial Institutions.... 46,360 36,592 15,873
Group..................... 98,930 2,724 35,574
Guaranteed Investment
Contracts................ 147,383 893 5,172
Individual Life........... 67,451 18,771 19,254
Investment Products....... 58,424 14,679 16,201
Corporate and Other......... 913 3 25,595
Unallocated Realized
Investment Gains
(Losses)................. 0 0
----------- ------------ -----------
TOTAL................... $ 517,110 $ 88,122 $ 137,043
----------- ------------ -----------
----------- ------------ -----------
Year Ended
December 31, 1993:
Acquisitions.............. $ 73,463 $ 7,832 $ 12,715
Financial Institutions.... 42,840 31,202 15,273
Group..................... 101,266 2,271 29,492
Guaranteed Investment
Contracts................ 137,379 1,170 3,279
Individual Life........... 55,973 18,069 17,548
Investment Products....... 49,569 12,822 14,793
Corporate and Other....... 13,394 239 34,004
Unallocated Realized
Investment Gains
(Losses)................. 0 0 0
----------- ------------ -----------
TOTAL................... $ 473,884 $ 73,605 $ 127,104
----------- ------------ -----------
----------- ------------ -----------
</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.
38
<PAGE>
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE CORPORATION 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 ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Life insurance in force........... $50,346,719 $17,524,366 $11,537,144 $44,359,497 26.0%
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
Premiums and policy fees:
Life insurance.................. $ 287,526 $ 116,091 $ 66,565 $ 238,000 28.0%
Accident/health insurance....... 335,387 217,082 13,583 131,888 10.3%
----------- ----------- ----------- -----------
TOTAL......................... $ 622,913 $ 333,173 $ 80,148 $ 369,888
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Year Ended December 31, 1994:
Life insurance in force........... $40,909,454 $ 8,639,272 $ 8,968,166 $41,238,348 21.7%
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
Premiums and policy fees:
Life insurance.................. $ 256,840 $ 46,029 $ 31,032 $ 241,843 12.8%
Accident/health insurance....... 283,883 126,545 3,591 160,929 2.2%
----------- ----------- ----------- -----------
TOTAL......................... $ 540,723 $ 172,574 $ 34,623 $ 402,772
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Year Ended December 31, 1993:
Life insurance in force........... $40,149,017 $ 7,484,566 $ 2,301,577 $34,966,028 6.6%
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
Premiums and policy fees:
Life insurance.................. $ 230,706 $ 37,995 $ 8,329 $ 201,040 4.1%
Accident/health insurance....... 254,672 88,917 3,963 169,718 2.3%
----------- ----------- ----------- -----------
TOTAL......................... $ 485,378 $ 126,912 $ 12,292 $ 370,758
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
39
<PAGE>
EXHIBITS TO FORM 10-K
OF
PROTECTIVE LIFE CORPORATION
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1995
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
3(a)(4)................................................................
10(b)(1)................................................................
13......................................................................
21......................................................................
23......................................................................
24......................................................................
27......................................................................
</TABLE>
<PAGE>
CERTIFICATE OF DECREASE
OF
SHARES DESIGNATED AS
JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK
PAR VALUE $1.00 PER SHARE
OF
PROTECTIVE LIFE CORPORATION
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
We, Drayton Nabers, Jr., President, and John K. Wright, Secretary, of
Protective Life Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), in
accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That the Restated Certificate of Incorporation of said corporation was filed
in the office of the Secretary of State of the State of Delaware on May 7, 1985,
and was amended on June 1, 1987 and May 5, 1994 (as so amended, the "Certificate
of Incorporation"); and a certificate of Designation of Junior Participating
Cumulative Preferred Stock was filed in the office of the Secretary of State of
the State of Delaware on July 14, 1987, and was corrected by a Certificate of
Correction of Certificate of Designation filed in the office of the Secretary of
State of the State of Delaware on July 24, 1987; and
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation, the said Board of Directors on August 7, 1995, by
the affirmative vote of at least a majority of the members of the Board of
Directors, adopted the following
<PAGE>
resolutions to decrease the number of shares designated as Junior Participating
Preferred Stock, par value $1.00 per share, of the Corporation from 150,000
shares to zero shares:
RESOLVED, that, effective on August 18, 1995, the number of shares of
Junior Participating Cumulative Preferred Stock (the "Previous Preferred
Stock"), consisting of 150,000 shares, with a par value of $1.00 per
share having the designation and terms set forth in the Certificate of
Designation of Junior Participating Cumulative Preferred Stock, as filed
with the Secretary of State of the State of Delaware on July 14, 1987,
as corrected by the Certificate of Correction of Certificate of
Designation filed with the Secretary of State of the State of Delaware
on July 24, 1987, is reduced to zero;
RESOLVED, that the 150,000 authorized shares of Previous Preferred
Stock of the Corporation referred to in the foregoing resolution shall
be, as of August 18, 1995, returned to the status of authorized
Preferred Stock not issued or reserved for issuance in any series.
This Certificate of Decrease shall be effective as of August 18, 1995.
IN WITNESS WHEREOF, this Certificate of Decrease is executed on behalf of
the Corporation by its President and attested by its Secretary this 7th day of
August, 1995.
/s/ Drayton Nabers, Jr.
--------------------------------------
Drayton Nabers, Jr.
President
ATTEST:
/s/ John K. Wright
- --------------------------------------
John K. Wright
Secretary
2
<PAGE>
FIRST AMENDMENT TO THE PROTECTIVE LIFE CORPORATION
1992 PERFORMANCE SHARE PLAN
On November 7, 1994, the Protective Life Corporation Board of Directors (the
"Board") ratified and approved the action taken by the Compensation and
Management Succession Committee on August 22, 1994, acting pursuant to the
delegated authority by the Board to amend the Protective Life Corporation 1992
Performance Share Plan as follows:
1. The last sentence of Section 5(c) which read, "However, the Committee
may not provide for payment of greater than 125% of the number of
Performance Shares awarded" was deleted in its entirety.
2. A sentence was added to the end of Section 5(a) which reads, "Moreover,
no Employee may receive in the aggregate more than 187,500 shares of
Common Stock in payment of Awards made under this Plan."
Except as hereby amended, the Protective Life Corporation 1992 Performance
Share Plan shall remain in full force and effect as written.
IN WITNESS WHEREOF, the corporation has caused its corporate seal to be
hereunto affixed and this First Amendment to the Protective Life Corporation
1992 Performance Share Plan to be signed by Drayton Nabers, Jr., as its Chairman
of the Board, President and Chief Executive Officer, and John K. Wright, as its
Secretary, hereby declaring and certifying that this First Amendment to the
Protective Life Corporation 1992 Performance Share Plan was duly adopted by the
Board of Directors at a regular meeting held on the 7th day of November, 1994,
to be effective as of August 22, 1994.
/s/ Drayton Nabers, Jr.
--------------------------------------
Drayton Nabers, Jr.
Chairman of the Board, President
and Chief Executive Officer
ATTEST:
/s/ John K. Wright
- --------------------------------------
John K. Wright
Secretary
(CORPORATE SEAL)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of premiums
and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT PERCENTAGE INCREASE
DECEMBER 31 (IN THOUSANDS) (DECREASE)
- ------------------------- -------------- -------------------
<S> <C> <C>
1993................... $370,758 14.7%
1994................... 402,772 8.6
1995................... 369,888 (8.2)
</TABLE>
Premiums and policy fees increased $32.0 million or 8.6% in 1994 over 1993.
The 1993 acquisition of Wisconsin National Life Insurance Company (Wisconsin
National) and the reinsurance of a block of universal life policies represented
$10.5 million of the increase in premiums and policy fees in 1994. The
reinsurance of a block of payroll deduction policies, effective April 1, 1994,
resulted in a $7.9 million increase. On October 3, 1994, the Company acquired
through coinsurance a block of policies from Reliance Standard Life Insurance
Company (Reliance Standard), which added $12.5 million of premiums in 1994.
Decreases in older acquired blocks of policies represented a $3.1 million
decrease in premiums and policy fees. Increases in premiums and policy fees from
the Financial Institutions, Group, and Individual Life Divisions represent
increases of $10.7 million, $5.1 million, and $7.6 million, respectively. The
1993 sale of the Company's 80% ownership interest in Southeast Health Plan of
Alabama, Inc. (SEHP) decreased 1994 premiums and policy fees by $19.3 million.
Premiums and policy fees decreased $32.9 million or 8.2% in 1995 over 1994.
Premiums and policy fees from the Financial Institutions Division decreased
$74.2 million. This resulted from a reinsurance arrangement begun in the 1995
first quarter whereby all of the Division's new credit insurance sales are being
ceded to a reinsurer. Increases in premiums and policy fees from the Group and
Individual Life Divisions represent increases of $11.4 million and $14.1
million, respectively. Policy fees related to the Company's annuity products
increased $2.9 million in 1995. The 1994 assumptions of two blocks of policies
resulted in a $11.1 million increase in premiums and policy fees in 1995. On
June 15, 1995, the Company coinsured a block of policies which resulted in an
$8.3 million increase in premiums and policy fees. Decreases in older acquired
blocks of policies represented a $7.2 million decrease in premiums and policy
fees.
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income, the percentage change from the prior period, and the
percentage earned on average cash and investments:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
PERCENTAGE
EARNED ON
YEAR ENDED AMOUNT PERCENTAGE AVERAGE CASH
DECEMBER 31 (IN THOUSANDS) INCREASE AND INVESTMENTS
- ------------------------- -------------- ---------- ---------------
<S> <C> <C> <C>
1993................... $362,130 27.5% 8.7%
1994................... 417,825 15.4 8.3
1995................... 475,924 13.9 8.2
</TABLE>
Net investment income in 1994 was $55.7 million or 15.4% higher, and in 1995
was $58.1 million or 13.9% higher than the preceding year, primarily due to
increases in the average amount of invested assets. Invested assets have
increased primarily due to receiving annuity and guaranteed investment contract
(GIC) deposits and to acquisitions. (Annuity and GIC deposits received are not
considered revenues in accordance with generally accepted accounting
principles.) The Wisconsin National and
<PAGE>
other acquisitions represented $23.9 million of the increase in net investment
income in 1994. The assumption of two blocks of policies in 1994 and one block
of policies in the second quarter of 1995 resulted in an increase in net
investment income of $8.9 million in 1995.
The percentage earned on average cash and investments decreased in 1994 to
8.3% primarily due to ending, on account of rising interest rates, the strategy
of funding investments ahead of receiving deposits, and an increase in the
amount of investments with short durations in order to bring the durations of
assets and liabilities into balance. The percentage earned on average cash and
investments in 1995 was 8.2%.
REALIZED INVESTMENT GAINS (LOSSES)
The Company generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. However,
the Company may sell any of its investments to maintain proper matching of
assets and liabilities. Accordingly, the Company has classified its fixed
maturities and certain other securities as "available for sale."
The sales of investments that have occurred generally result from portfolio
management decisions to maintain proper matching of assets and liabilities. The
following table sets forth realized investment gains for the periods shown:
REALIZED INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
DECEMBER 31 (IN THOUSANDS)
- ------------------------- --------------
<S> <C>
1993................... $5,054
1994................... 6,298
1995................... 1,612
</TABLE>
The Company maintains an allowance for uncollectible amounts on investments.
The allowance totaled $35.9 million at December 31, 1994, and $33.4 million at
December 31, 1995. In 1994 realized investment gains of $14.9 million were
partially offset by realized investment losses of $8.6 million. Realized
investment gains in 1995 of $21.6 million were largely offset by realized
investment losses of $20.0 million. Realized investment losses in 1995 were
reduced by a $2.5 million reduction to the allowance for uncollectible amounts
on investments.
OTHER INCOME
The following table sets forth other income for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT
DECEMBER 31 (IN THOUSANDS)
- ------------------------- --------------
<S> <C>
1993................... $21,695
1994................... 21,553
1995................... 32,663
</TABLE>
Other income consists primarily of revenues of the Company's broker-dealer
subsidiary, revenues of the Company's insurance marketing organizations and
other noninsurance subsidiaries, and fees from administrative-services-only
types of group accident and health insurance contracts. The sale of SEHP reduced
other income in 1994 approximately $5.0 million, which was partially offset by a
$4.2 million final payment relating to the sale of SEHP. During 1994 the Company
also received approximately $8.2 million in settlement of litigation in which
the Company was a plaintiff relating to an acquisition made in 1974. Other
income was reduced in 1994 by losses of approximately $3.0 million relating to
the Company's joint venture with the Lippo Group in Hong Kong, which is
accounted for using the equity method. On March 20, 1995, the Company completed
its acquisition of National Health Care Systems of Florida, Inc. (NHCS), based
in Jacksonville, Florida. NHCS operates prepaid dental plans (also referred to
as dental health maintenance organizations or dental capitation plans). NHCS,
known as "DentiCare," had approximately 308,000 members as of December 31, 1995,
located primarily in Florida, Tennessee, Georgia, and Alabama. The acquisition
resulted in a $20.9 million
<PAGE>
increase in other income in 1995. Other income from all other sources decreased
$4.6 million in 1994 and decreased $0.8 million in 1995. The 1994 decrease
primarily related to a decrease in revenues of the Company's broker-dealer
subsidiary.
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
BUSINESS SEGMENT 1993 1994 1995
- --------------------------------------------------------------------------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisitions............................................................... $ 29,845 $ 39,176 $ 51,393
Financial Institutions..................................................... 8,196 9,581 9,197
Group...................................................................... 10,394 11,085 12,379
Guaranteed Investment Contracts............................................ 25,405 30,143 30,255
Individual Life............................................................ 20,064 16,976 15,968
Investment Products........................................................ 2,931 (1,602) 11,392
Corporate and Other*....................................................... (13,667) (4,452) (10,133)
Unallocated Realized Investment Gains (Losses)............................. 1,876 5,266 583
---------- ----------- -----------
$ 85,044 $ 106,173 $ 121,034
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
- ------------------------
*Income before income tax for the Corporate and Other segment has not been
reduced by pretax minority interest of $19 in 1993, $2,764 in 1994, and $4,950
in 1995.
Earnings from the Acquisitions Division are normally expected to decline
over time (due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. In the ordinary
course of business, the Acquisitions Division regularly considers acquisitions
of smaller insurance companies or blocks of policies. 1994 pretax earnings from
the Acquisitions Division of $39.2 million were $9.3 million higher than 1993.
The two acquisitions completed in 1993 added $9.2 million to the Division's 1994
earnings. Expenses associated with a block of policies acquired in the 1994
fourth quarter reduced earnings $1.3 million. The remaining increase was due to
improved claims experience in the Division's other blocks of acquired policies.
1995 pretax earnings from the Acquisitions Division increased $12.2 million to
$51.4 million. The two blocks of policies coinsured during 1994 and the block of
policies coinsured during the second quarter of 1995 represent $11.7 million of
the increase.
The Financial Institutions Division's 1994 pretax earnings of $9.6 million
were $1.4 million higher than 1993 primarily due to premium growth and improved
claims ratios. The Division's 1995 pretax earnings were $0.4 million lower than
1994. The Division has entered into a reinsurance arrangement whereby all of the
Division's new credit insurance sales are being ceded to a reinsurer. In the
1995 second quarter the Division also ceded a block of older policies. Though
the Division's reported earnings were reduced by approximately $2.0 million,
these reinsurance transactions are expected to improve the Division's return on
investment.
Group 1994 pretax earnings of $11.1 million were $0.7 million higher than
1993. Higher traditional group life and health earnings were complemented by
higher earnings from the Division's cancer and dental products. The Division's
1994 results include approximately $3.0 million of expenses to establish a
special marketing unit to sell dental plans through mail and telephone
solicitations. Group 1995 pretax earnings of $12.4 million were $1.3 million
higher than 1994. Total dental earnings were $4.6 million, up $4.5 million. NHCS
(DentiCare) represented $1.9 million of the increase. Lower traditional group
life and health earnings largely offset higher dental earnings.
The Guaranteed Investment Contracts (GIC) Division had pretax operating
earnings of $27.1 million in 1994 and $34.2 million in 1995. Operating earnings
in 1995 were benefited by lower expenses and a favorable interest rate
environment. This increase was also partially due to the growth
<PAGE>
in GIC deposits placed with the Company. At December 31, 1995, GIC deposits
totaled $2.5 billion compared to $2.3 billion one year earlier. Realized
investment gains associated with this Division in 1994 were $3.0 million as
compared to realized investment losses of $3.9 million in 1995. As a result,
total pretax earnings were $30.1 million in 1994 and $30.3 million in 1995. The
rate of growth in GIC deposits has decreased as the amount of maturing contracts
has increased.
The Individual Life Division had 1994 pretax earnings of $17.0 million, $3.1
million lower than 1993. Mortality experience, while still favorable, was
approximately $2.5 million less favorable than 1993. The Division also spent
approximately $3.0 million during 1994 to develop new ventures. Individual Life
1995 pretax earnings of $16.0 million were $1.0 million lower than 1994. At
December 31, 1994, the Company reduced statutory policy liabilities for certain
term-like products to be more consistent with current regulation and industry
practice. This reduced investment income allocated to the Division in 1995 by
approximately $2.6 million when compared to 1994. Additionally, expenses to
develop a new variable universal life product were $1.3 million in 1995. Also
reflected in the Division's operating results for 1995 is a $1.3 million loss
related to the Company's broker-dealer (previously reported within the
Investment Products Division). These decreases were partially offset by
increased earnings from favorable mortality experience and a growing amount of
business in force.
The Investment Products Division reported a pretax operating loss of $0.8
million for 1994. These results are after approximately $2.0 million of
additional amortization of deferred policy acquisition costs related to the
compression of interest spreads during 1994 caused by rising interest rates on
the Division's fixed annuities, and expenses of approximately $4.5 million
related to the development and introduction of the Division's variable annuity.
The Investment Products Division's 1995 pretax operating earnings of $8.0
million were $8.8 million higher than 1994. During 1994 the Division completed
the amortization of the deferred policy acquisition costs related to its book
value annuities. Accordingly, 1995 operating earnings were $7.2 million higher
due to lower amortization. The Division also benefited from a favorable interest
rate environment. Realized investment losses, net of related amortization of
deferred policy acquisition costs, were $0.8 million in 1994 as compared with
realized investment gains, net of amortization, of $3.4 million in 1995. As a
result, total pretax earnings were a loss of $1.6 million in 1994 and a gain of
$11.4 million in 1995. Fixed annuity deposits totaled $996 million, and variable
annuity deposits totaled $392 million at December 31, 1995. Variable annuity
deposits of $322 million are reported in the accompanying financial statements
as "liabilities related to separate accounts."
The Corporate and Other segment consists of several small insurance lines of
business, net investment income and other operating expenses not identified with
the preceding operating divisions (including interest on substantially all
debt), and the operations of several small subsidiaries. 1994 pretax losses of
this segment were $4.5 million. The segment's 1994 results include a $4.2
million final payment relating to the sale of SEHP and approximately $8.2
million received in settlement of litigation relating to an acquisition made in
1974. Increases in expenses of $3.0 million were offset by a decrease in
interest expense of $2.8 million representing the dividends on the Company's
Monthly Income Preferred Securities (MIPS) (the proceeds of which were used to
repay debt), which are reported as "minority interest in net income of
consolidated subsidiaries" rather than expenses of the Corporate and Other
segment. The segment also includes a loss of approximately $3.0 million in 1994
relating to the Company's Hong Kong joint venture. 1995 pretax losses of this
segment were $10.1 million. The segment's 1995 results reflect $2.2 million of
additional MIPS dividends reported as minority interest. The Company's Hong Kong
joint venture reported a loss of approximately $2.1 million in 1995.
<PAGE>
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>
1993.......................................................... 32%
1994.......................................................... 32
1995.......................................................... 34
</TABLE>
In August 1993 the corporate income tax rate was increased from 34% to 35%
which resulted in a one-time increase to income tax expense due to a
recalculation of the Company's deferred income tax liability. The effective
income tax rate for 1993, excluding the one-time increase, and for 1994, was
32%. The estimated income tax rate for 1995 was increased from 33% to 34% during
the 1995 third quarter. Management's current estimate of the effective tax rate
for 1996 is 34%.
NET INCOME
The following table sets forth net income and net income per share for the
periods shown (all references to prior period per share amounts have been
restated to reflect a two-for-one stock split on June 1, 1995):
NET INCOME
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT PERCENTAGE
DECEMBER 31 (IN THOUSANDS) PER SHARE INCREASE
- ----------------------------------- -------------- --------- ----------
<S> <C> <C> <C>
1993............................. $56,550 $2.07 36.3%
1994............................. 70,401 2.57 24.4
1995............................. 76,665 2.68 4.3
</TABLE>
Net income per share in 1994 was 24.4% higher than 1993, reflecting improved
earnings in the Acquisitions, Financial Institutions, Group, and GIC Divisions
and Corporate and Other segment, and higher realized investment gains partially
offset by lower earnings in the Individual Life and Investment Products
Divisions. Net income per share in 1995 increased 4.3%, reflecting improved
operating earnings in the Acquisitions, Group, Guaranteed Investment Contracts,
and Investment Products Divisions, which were partially offset by lower realized
investment gains and lower earnings in the Financial Institutions and Individual
Life Divisions, and the Corporate and Other segment.
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 the Company are discussed more fully below.
COMPETITION. The Company operates in a highly competitive industry. In
connection with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which have
financial resources or ratings greater than those of the Company. Certain of the
Company's products compete against other investment alternatives, including
bonds, stocks, and mutual funds.
The insurance industry is a mature industry. In recent years, the industry
has experienced virtually no growth in life insurance sales, though the aging
population has increased the demand for retirement savings products. Management
believes that the Company's ability to compete is dependent upon, among other
things, its ability to attract and retain agents to market its insurance
products, its ability to develop competitive and profitable products, and its
maintenance of a high rating from rating agencies.
Bank products provide competitive alternatives to the Company's GICs and
annuities. Banks may also compete by selling annuity products provided by other
insurance companies. In addition, in
<PAGE>
the future banks and other financial institutions may be granted approval to
underwrite and sell annuities or other insurance products that compete directly
with the Company. Likewise, nontraditional sources of healthcare coverages, such
as health maintenance organizations and preferred provider organizations,
provide competitive alternatives to the Company's traditional group health
products.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
RATINGS. Ratings have become an increasingly important factor in
establishing the competitive position of insurance companies. Rating
organizations continue to review the financial performance and condition of
insurers, including the Company's insurance subsidiaries. A downgrade in the
ratings of the Company's subsidiaries could materially adversely affect its
business operations, particularly its ability to attract annuity and guaranteed
investment contract deposits and its ability to compete for attractive
acquisition opportunities.
Rating organizations assign ratings based upon several factors. While most
of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control. Therefore, ratings downgrades may result for reasons other
than a deterioration in a rated company's financial condition or competitive
position.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year
to year on account of fluctuations in policy claims received by the Company
during the year. Due to the long-term nature of the insurance business, there
should be a review of operating results for a period of several years in order
to obtain a more accurate indication of performance.
INTEREST RATE FLUCTUATIONS. Rising interest rates could cause market values
to fall below amortized cost for many of the Company's fixed maturity
investments. Therefore, realized investment losses might be incurred upon sales
of investments to maintain proper matching of assets and liabilities. Rising
interest rates could also cause disintermediation of GIC and annuity deposits
and individual life policy cash values. In addition, the Company may be unable
to fully enforce the call provisions of its mortgage loans. The difference
between the interest rate earned on investments and the interest rate credited
to interest-sensitive products may also be adversely affected by rising interest
rates.
Falling interest rates could cause some of the Company's corporate bonds
that have call features to be called, which could cause the Company to have to
reinvest the proceeds at lower interest rates.
The Company's mortgage loans are entered into, and mortgage-backed
securities are purchased, based on assumptions regarding rates of prepayments.
To the extent that actual prepayments are earlier or later than anticipated due
to falling or rising interest rates, the Company may not receive cash flows when
expected. Most of the Company's mortgage loans, however, have significant
prepayment penalties.
INVESTMENT RISKS. The Company 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. However, the Company's actual investment results
may be adversely affected by interest rate fluctuations, financial market and
general economic conditions, and other external factors.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively
pursued a strategy of acquiring blocks of insurance policies. This acquisition
strategy has increased the Company's earnings in part by allowing the Company 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 the Company, or that the Company
will realize the anticipated financial results from its acquisitions.
REGULATION AND TAXATION. The Company'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,
<PAGE>
including premium rates, policy forms, and capital adequacy, and is concerned
primarily with the protection of policyholders rather than stockholders. The
Company cannot predict the form of any future regulatory initiatives.
The design and administration of the Company's insurance products, the
conduct of the Company's agents, and the content of advertising and other sales
materials are also regulated by these agencies. Recently, some regulatory
agencies have enhanced their enforcement efforts resulting in disciplinary
actions being taken against insurers, including the assessment of fines.
Under insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company 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.
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 the Company's products a competitive
advantage over other retirement savings products that do not offer this benefit.
To the extent that the Code is revised to reduce the tax-deferred status of life
insurance and annuity products, or to increase the tax-deferred status of
competing products, the Company's competitive position may be adversely
affected.
The President and Congress have from time to time advocated changes to the
current healthcare delivery system which will address both affordability and
availability issues. The ultimate scope and effective date of any healthcare
reform proposals are unknown at this time. It is anticipated that any such
proposals may adversely affect certain products in the Company's group health
insurance business. In addition to the federal initiatives, a number of states
are considering legislative programs that are intended to affect the
accessibility and affordability of health care. Some states have already enacted
healthcare reform legislation. These various state programs (which could be
preempted by any federal program) may also adversely affect the Company's group
health insurance business. However, in light of the small relative proportion of
the Company's earnings attributable to group health insurance, management does
not expect that either the federal or state proposals will have a material
adverse effect on the Company's earnings.
The Company cannot predict what future initiatives the President or Congress
may propose which may affect the Company.
LITIGATION. A number of civil jury verdicts have been returned against life
and health insurers in the jurisdictions in which the Company does business
involving the insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Some of the lawsuits have resulted
in the award of substantial judgments against the insurer, including material
amounts of punitive damages. In some states, juries have substantial discretion
in awarding punitive damages in these circumstances. The Company and its
subsidiaries, like other life and health insurers, from time to time are
involved in such litigation. Although the outcome of any litigation cannot be
predicted with certainty, to date, no such lawsuit has resulted in the award of
any significant amount of damages against the Company.
RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company has entered into
various ventures involving other parties. Examples include, but are not limited
to: the Investment Products Division's variable annuity deposits are invested in
funds managed by Goldman Sachs Asset Management and its affiliates; a
significant amount of the Investment Products Division's annuity sales comes
from four broker-dealers; a portion of the sales in the Financial Institutions
and Group Divisions comes from arrangements with unrelated marketing
organizations; and the Company has entered the Hong Kong insurance market in a
joint venture with the Lippo Group. Therefore the Company's results may be
affected by the performance of others.
INDEMNITY REINSURANCE. As is customary in the insurance industry, the
Company's insurance subsidiaries cede insurance to other insurance companies.
The ceding insurance company remains contingently liable with respect to ceded
insurance should any reinsurer be unable to meet the
<PAGE>
obligations assumed by it. The Company sets a limit on the amount of insurance
retained on the life of any one person. For example, in the individual lines the
Company will not retain, generally, more than $500,000, including accidental
death benefits, on any one life. For group insurance, the maximum amount
retained on any one life is generally $100,000. At December 31, 1995, the
Company had insurance in force of $61.9 billion of which approximately $17.5
billion was ceded to reinsurers.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." Under these new standards, a loan is considered impaired if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Based on the Company's evaluation of its mortgage loan portfolio, the
Company does not expect any material losses on its mortgage loans, and therefore
no allowance for losses is required under SFAS No. 114 at December 31, 1995.
In 1995 the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which changes the way stock-based compensation expense is
measured and requires additional disclosures relating to the Company's
stock-based compensation plan. The adoption of SFAS No. 123 had no material
effect on the Company's financial statements.
In 1995 the Financial Accounting Standards Board issued: SFAS No. 120,
"Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long-Duration Participating Contracts;" SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage Servicing Rights."
The Company anticipates that the impact of adopting these three accounting
standards will be immaterial to its financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations usually produce a positive cash flow. This cash
flow is used to fund an investment portfolio to finance future benefit payments
including those arising from various types of deposit contracts. Since future
benefit payments largely represent medium- and long-term obligations reserved
using certain assumed interest rates, the Company's investments are
predominantly in medium- and long-term, fixed-rate investments such as bonds and
mortgage loans which provide a sufficient return to cover these obligations.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to cover
the Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered. GICs and certain annuity contracts have market value
adjustments which protect the Company against investment losses if interest
rates are higher at the time of surrender as compared to interest rates at the
time of issue.
In accordance with SFAS No. 115, the Company'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, 1995, the fixed maturity
investments (bonds, bank loan participations, and redeemable preferred stocks)
had a market value of $3,892.0 million, which is 2.5% above amortized cost (less
allowances for uncollectible amounts on investments) of $3,798.9 million. The
Company had $1,834.4 million in mortgage loans at December 31, 1995. While the
Company's mortgage loans do not have quoted market values, at December 31, 1995,
the Company estimates the market value of its mortgage loans to be $2,001.1
million (using discounted cash flows from the next call date) which is 9.1%
above amortized cost. These assets are invested for terms approximately
corresponding to anticipated future benefit payments. Thus, market fluctuations
should not adversely affect liquidity. Most of the Company's mortgage loans have
significant prepayment penalties.
For several years the Company has offered a type of commercial loan under
which the Company will permit a slightly higher loan-to-value ratio in exchange
for a participating interest in the cash flows from the underlying real estate.
Approximately $361 million of the Company's mortgage loans has this
participation feature.
<PAGE>
At December 31, 1995, delinquent mortgage loans and foreclosed properties
were $26.1 million or 0.4% of assets. Bonds rated less than investment grade
were $75.7 million or 1.0% of assets. Additionally, the Company had bank loan
participations that were less than investment grade, representing $206.0 million
or 2.8% of assets. The Company does not expect these investments to adversely
affect its liquidity or ability to maintain proper matching of assets and
liabilities. The Company's allowance for uncollectible amounts on investments
was $33.4 million at December 31, 1995.
Policy loans at December 31, 1995, were $143.4 million, a decrease of $4.2
million from December 31, 1994. Policy loan rates are generally in the 4.5% to
8.0% range. Such rates at least equal the assumed interest rates used for future
policy benefits.
The Company believes its asset/liability matching practices and certain
product features provide significant protection for the Company against the
effects of changes in interest rates. However, approximately one-fourth of the
Company's liabilities relates to products (primarily whole life insurance) the
profitability of which may be affected by changes in interest rates. The effect
of such changes in any one year is not expected to be material. Additionally,
the Company believes its asset/liability matching practices provide sufficient
liquidity to enable it to fulfill its obligation to pay benefits under its
various insurance and deposit contracts.
The Company's asset/liability matching practices involve the monitoring of
asset and liability durations for various product lines; cash flow testing under
various interest rate scenarios; and the continuous rebalancing of assets and
liabilities with respect to yield, risk, and cash flow characteristics. It is
the Company's policy to maintain asset and liability durations within 10% of one
another.
During 1994 interest rates rose approximately three percentage points
causing the duration of the Company's assets to increase somewhat above the
duration of its liabilities. The Company responded to the duration mismatch by
adjusting the composition of its assets to bring the durations of assets and
liabilities into balance. During 1995, interest rates fell approximately 2.5
percentage points. Likewise, the Company adjusted the composition of its assets
to eliminate any significant duration mismatches.
The Company does not use derivative financial instruments for trading
purposes. Combinations of futures contracts and options on treasury notes are
sometimes used as hedges for asset/liability management of certain investments,
primarily mortgage loans on real estate and liabilities arising from
interest-sensitive products such as GICs and annuities. Realized investment
gains and losses of such contracts are deferred and amortized over the life of
the hedged asset. Net realized losses, incurred due to a decline in interest
rates, of $15.2 million were deferred in 1995. At December 31, 1995, open
futures contracts with a notional amount of $25.0 million were in a $0.6 million
net unrealized loss position.
The Company uses interest rate swap contracts to convert certain investments
from a variable rate of interest to a fixed rate of interest. At December 31,
1995, related open interest rate swap contracts with a notional amount of $170.3
million were in an $1.3 million net unrealized loss position. The Company also
uses interest rate swap contracts to convert its Senior Notes and Monthly Income
Preferred Securities from a fixed rate to a variable rate of interest. During
1995, the Company terminated approximately $40.0 million notional amount of
interest rate swap contracts. At December 31, 1995, related open interest rate
swap contracts with a notional amount of $55.0 million were in a $4.4 million
net unrealized gain position.
The Company entered the GIC market in late 1989. Most GIC contracts written
by the Company have maturities of 3 to 5 years. Prior to 1993, few GIC contracts
were maturing because the contracts were newly written. Beginning in 1993, and
continuing into 1994 and 1995, GIC contracts began to mature as contemplated
when the contracts were sold. Withdrawals related to GIC contracts were
approximately $700 million during 1994 and $800 million in 1995. Withdrawals
related to GIC contracts are estimated to be approximately $700 million in 1996.
The Company's asset/liability matching practices take into account maturing
contracts. Accordingly, the Company does not expect maturing GIC contracts to
have an unusual effect on the future operations and liquidity of the Company.
<PAGE>
In anticipation of receiving GIC and annuity deposits, the life insurance
subsidiaries were committed at December 31, 1995, to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $278.5
million. The Company's subsidiaries held $11.3 million in cash and short-term
investments at December 31, 1995. Protective Life Corporation had an additional
$0.1 million in cash and short-term investments available for general corporate
purposes.
In order to provide additional liquidity, the Company plans a commercial
mortgage securitization during the 1996 first quarter. Proceeds from the
securitization of approximately $400 million will be reinvested in publicly
traded investment grade bonds.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then available.
Therefore, the Company has arranged sources of credit for its insurance
subsidiaries to utilize to fund investments in such circumstances. The Company
expects that the rate received on its investments will equal or exceed its
borrowing rate. Additionally, the Company may from time to time sell
short-duration GICs to complement its cash management practices.
In 1994 a special purpose finance subsidiary of the Company, PLC Capital
L.L.C. (PLC Capital), issued $55 million of 9% Cumulative Monthly Income
Preferred Securities, Series A (MIPS), guaranteed by the Company. Net proceeds
were used to repay a term note and other bank borrowings. PLC Capital was formed
solely to issue MIPS and other securities and lend the proceeds thereof to the
Company in exchange for subordinated debentures of the Company. The Company has
the right under the subordinated debentures to extend interest payment periods
up to 60 months, and, as a consequence, monthly dividends on the MIPS may be
deferred (but will continue to accumulate, together with additional dividends on
any accumulated but unpaid dividends at the dividend rate) by PLC Capital during
any such extended interest payment period. The MIPS are redeemable by PLC
Capital at any time on or after June 30, 1999. The MIPS and dividends thereon
are reported in the accompanying financial statements as "minority interest in
consolidated subsidiaries." The Company has entered into related interest rate
swap agreements to effectively convert the MIPS from a fixed dividend rate to
the floating, 30-day London Interbank Offered Rate (LIBOR) plus 60.5 basis
points, approximately 6.3% at December 31, 1995.
In 1994 the Company issued $75 million of 7.95% Senior Notes due July 1,
2004. The notes are not redeemable by the Company prior to maturity. Net
proceeds were used to repay bank borrowings. In 1994 the Company entered into
related interest rate swap agreements to swap $40 million of the notes from a
fixed rate of interest to a floating rate of interest. During 1995 the Company
terminated these agreements and realized a gain of approximately $3.0 million
which is being amortized as a component of interest expense.
At December 31, 1995, Protective Life Corporation had borrowed $40.5 million
of its $60 million revolving line of credit on notes bearing interest rates
averaging 6.2%. The Company's bank borrowings (excluding temporary borrowings of
the Company's insurance subsidiaries) have increased $17.5 million since
December 31, 1994. Proceeds have been primarily used to contribute additional
statutory capital to the Company's insurance subsidiaries, and for general
corporate purposes.
On March 20, 1995, the Company acquired NHCS (DentiCare). In connection with
the acquisition, the Company reissued 1,316,458 (adjusted for the two-for-one
stock split on June 1, 1995) shares of its Common Stock previously held as
Treasury Stock.
Protective Life Corporation's cash flow is dependent on cash dividends from
its subsidiaries, payments on surplus notes, revenues from investment, data
processing, legal, and management services rendered to the subsidiaries, and
investment income. At December 31, 1995, approximately $180 million of
consolidated stockholders' equity, excluding net unrealized investment gains and
losses, represented net assets of the Company's insurance subsidiaries that
cannot be transferred to the Company in the form of dividends, loans, or
advances. In addition, the Company's insurance subsidiaries are subject to
various state statutory and regulatory restrictions on the insurance
subsidiaries' ability to pay dividends to Protective Life Corporation. In
general, dividends up to specified levels are considered ordinary and may be
paid thirty days after written notice to the insurance
<PAGE>
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 the
Company by its insurance subsidiaries in 1996 is estimated to be $129 million.
Also, distributions, including cash dividends to Protective Life Corporation
from its life insurance subsidiaries, in excess of approximately $322 million,
would be subject to federal income tax at rates then effective. The Company does
not anticipate involuntarily making distributions that would be subject to tax.
For the foregoing reasons and due to the expected growth of the Company's
insurance sales, the Company will retain substantial portions of the earnings of
its life insurance subsidiaries in those companies primarily to support their
future growth. Because Protective Life Corporation's cash disbursements have
from time to time exceeded its cash receipts, such shortfalls have been funded
through various external financings. Therefore, Protective Life Corporation may
from time to time require additional external financing.
To give the Company flexibility in connection with future acquisitions and
other growth opportunities, the Company has registered debt securities,
preferred and common stock of Protective Life Corporation, and additional
preferred securities of PLC Capital under the Securities Act of 1933 on a
delayed (or shelf) basis.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners (NAIC), as
modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The achievement of long-term
growth will require growth in the statutory capital of the Company's insurance
subsidiaries. The subsidiaries may secure additional statutory capital through
various sources, such as internally generated statutory earnings or equity
contributions by the Company from funds generated through debt or equity
offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. Based upon
their December 31, 1995, statutory financial reports, the Company's insurance
subsidiaries are adequately capitalized under the formula.
The Company is not aware of any litigation that will have a material adverse
effect on the financial position of the Company. The Company does not believe
that the regulatory initiatives currently under consideration by various
regulatory agencies will have a material adverse impact on the Company. The
Company is not aware of any material pending or threatened regulatory action
with respect to the Company or any of its subsidiaries. The Company does not
believe that any insurance guaranty fund assessments will be materially
different from amounts already provided for in the financial statements.
As noted above, SFAS No. 115 requires the Company to carry its investment in
fixed maturities and certain other securities at market value instead of
amortized cost. As prescribed by SFAS No. 115, these investments are recorded at
their market values with the resulting unrealized gains and losses, net of
income tax, reported as a component of stockholders' equity reduced by a related
adjustment to deferred policy acquisition costs. The market values of fixed
maturities increase or decrease as interest rates fall or rise. Therefore,
although the adoption of SFAS No. 115 does not affect the Company's operations,
its reported stockholders' equity will fluctuate significantly as interest rates
change.
During 1994 interest rates rose approximately three percentage points. SFAS
No. 115 required the Company to report a $146.8 million decrease in
stockholders' equity at December 31, 1994, as compared to December 31, 1993.
During 1995 interest rates fell approximately 2.5 percentage points, which
required the Company to report a $165.4 million increase in stockholders' equity
at December 31, 1995, as compared to December 31, 1994.
<PAGE>
IMPACT OF INFLATION
Inflation increases the need for insurance. Many policyholders who once had
adequate insurance programs increase their life insurance coverage to provide
the same relative financial benefits and protection. The effect of inflation on
medical costs leads to accident and health policies with higher benefits. Thus,
inflation has increased the need for life and accident and health products.
The higher interest rates that have traditionally accompanied inflation also
affect the Company'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 the Company's fixed-rate, long-term
investments may decrease, and the Company may be unable to implement fully the
interest rate reset and call provisions of its mortgage loans. The difference
between the interest rate earned on investments and the interest rate credited
to interest-sensitive products may also be adversely affected by rising interest
rates.
Inflation has increased the cost of health care. The adequacy of premium
rates in relation to the level of accident and health claims is constantly
monitored, and where appropriate, premium rates on such policies are increased
as policy benefits increase. Failure to make such increases commensurate with
healthcare cost increases may result in a loss from health insurance.
The Company does not believe the current rate of inflation will
significantly affect its operations.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1995 -- $333,173; 1994 -- $172,575; 1993 -- $126,912).................... $ 369,888 $ 402,772 $ 370,758
Net investment income...................................................... 475,924 417,825 362,130
Realized investment gains (losses)......................................... 1,612 6,298 5,054
Other income............................................................... 32,663 21,553 21,695
----------- ----------- -----------
Total revenues......................................................... 880,087 848,448 759,637
----------- ----------- -----------
----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1995 -- $247,229; 1994 -- $112,922; 1993 -- $84,949)..................... 509,506 517,110 473,884
Amortization of deferred policy acquisition costs.......................... 84,533 88,122 73,605
Other operating expenses (net of reinsurance ceded:
1995 -- $84,855; 1994 -- $14,326; 1993 -- $10,759)....................... 165,014 137,043 127,104
----------- ----------- -----------
Total benefits and expenses............................................ 759,053 742,275 674,593
----------- ----------- -----------
----------- ----------- -----------
INCOME BEFORE INCOME TAX................................................... 121,034 106,173 85,044
----------- ----------- -----------
INCOME TAX EXPENSE
Current.................................................................... 44,862 37,318 33,748
Deferred................................................................... (3,710) (3,342) (5,273)
----------- ----------- -----------
Total income tax expense............................................... 41,152 33,976 28,475
----------- ----------- -----------
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST............................................ 79,882 72,197 56,569
----------- ----------- -----------
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES................... 3,217 1,796 19
----------- ----------- -----------
----------- ----------- -----------
NET INCOME................................................................. $ 76,665 $ 70,401 $ 56,550
----------- ----------- -----------
----------- ----------- -----------
NET INCOME PER SHARE....................................................... $ 2.68 $ 2.57 $ 2.07
----------- ----------- -----------
----------- ----------- -----------
CASH DIVIDENDS PAID PER SHARE.............................................. $ .62 $ .55 $ .505
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Investments:
Fixed maturities, at market (amortized cost: 1995 -- $3,798,944; 1994 --
$3,698,370)........................................................................ $ 3,892,008 $ 3,493,646
Equity securities, at market (cost: 1995 -- $35,448; 1994 -- $45,958)............... 38,711 45,005
Mortgage loans on real estate....................................................... 1,834,357 1,487,795
Investment real estate, net of accumulated depreciation (1995 -- $2,388; 1994 --
$2,052)............................................................................ 20,921 20,303
Policy loans........................................................................ 143,372 147,608
Other long-term investments......................................................... 42,096 48,013
Short-term investments.............................................................. 53,591 59,541
------------ ------------
Total investments................................................................. 6,025,056 5,301,911
Cash.................................................................................. 11,392 4,468
Accrued investment income............................................................. 61,007 55,637
Accounts and premiums receivable, net of allowance for uncollectible amounts (1995 --
$2,342; 1994 -- $2,464).............................................................. 38,722 30,472
Reinsurance receivables............................................................... 271,018 122,175
Deferred policy acquisition costs..................................................... 410,396 434,444
Property and equipment, net........................................................... 36,578 36,323
Other assets.......................................................................... 52,184 20,709
Assets related to separate accounts................................................... 324,904 124,145
------------ ------------
Total assets...................................................................... $ 7,231,257 $ 6,130,284
------------ ------------
------------ ------------
LIABILITIES
Policy liabilities and accruals
Future policy benefits and claims..................................................... $ 1,928,154 $ 1,694,295
Unearned premiums..................................................................... 196,332 103,479
------------ ------------
Total policy liabilities and accruals............................................. 2,124,486 1,797,774
Guaranteed investment contract deposits............................................... 2,451,693 2,281,673
Annuity deposits...................................................................... 1,280,069 1,251,318
Other policyholders' funds............................................................ 134,380 144,461
Other liabilities..................................................................... 152,042 127,873
Accrued income taxes.................................................................. (2,894) (6,238)
Deferred income taxes................................................................. 69,520 (14,095)
Long-term debt........................................................................ 115,500 98,000
Liabilities related to separate accounts.............................................. 324,904 124,145
Minority interest in consolidated subsidiaries........................................ 55,000 55,000
------------ ------------
Total liabilities................................................................. 6,704,700 5,859,911
------------ ------------
------------ ------------
Commitments and contingent liabilities -- Note G
Stockholders' equity
Preferred Stock, $1 par value Shares authorized: 1995 -- 3,600,000; 1994 -- 3,850,000
Issued: none
Junior Participating Cumulative Preferred Stock, $1 par value Shares authorized: 1995
-- 400,000; 1994 -- 150,000 Issued: none
Common Stock, $.50 par value Shares authorized: 80,000,000 Issued: 1995 and 1994 --
31,336,462........................................................................... 15,668 15,668
Additional paid-in capital............................................................ 96,371 71,295
Net unrealized gains (losses) on investments (net of income tax: 1995 -- $31,157; 1994
-- $(57,902))........................................................................ 57,863 (107,532)
Retained earnings..................................................................... 373,922 314,857
Treasury stock, at cost (1995 -- 2,561,344 shares; 1994 -- 3,909,944 shares).......... (12,008) (18,323)
Unallocated stock in Employee Stock Ownership Plan (1995 -- 793,804 shares; 1994 --
844,146 shares)...................................................................... (5,259) (5,592)
------------ ------------
Total stockholders' equity........................................................ 526,557 270,373
------------ ------------
------------ ------------
Total liabilities and stockholders' equity........................................ $ 7,231,257 $ 6,130,284
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL GAINS UNALLOCATED TOTAL
COMMON PAID-IN (LOSSES) ON RETAINED TREASURY STOCK IN STOCKHOLDERS'
STOCK CAPITAL INVESTMENTS EARNINGS STOCK ESOP EQUITY
----------- ----------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992................ $ 15,668 $ 70,335 $ 3,156 $ 216,804 $ (18,363) $ (6,200) $ 281,400
Net income for 1993..................... 56,550 56,550
Cash dividends ($0.505 per share)....... (13,827) (13,827)
Increase in net unrealized gains on
investments............................ 36,128 36,128
Reissuance of treasury stock to ESOP
(206 shares)........................... 3 (3) 0
Allocation of stock to employee accounts
(52,206 shares)........................ 347 347
Reissuance of treasury stock (6,686
shares)................................ 131 4 135
----------- ----------- ----------- --------- --------- ----------- ------------
Balance, December 31, 1993................ 15,668 70,469 39,284 259,527 (18,359) (5,856) 360,733
Net income for 1994..................... 70,401 70,401
Cash dividends ($0.55 per share)........ (15,071) (15,071)
Decrease in net unrealized gains on
investments............................ (146,816) (146,816)
Purchase of treasury stock (8,412
shares)................................ (191) (191)
Reissuance of treasury stock to ESOP
(136 shares)........................... 3 (3) 0
Allocation of stock to employee accounts
(39,990 shares)........................ 267 267
Reissuance of treasury stock (48,306
shares)................................ 823 227 1,050
----------- ----------- ----------- --------- --------- ----------- ------------
Balance, December 31, 1994................ 15,668 71,295 (107,532) 314,857 (18,323) (5,592) 270,373
Net income for 1995..................... 76,665 76,665
Cash dividends ($0.62 per share)........ (17,600) (17,600)
Increase in net unrealized gains on
investments............................ 165,395 165,395
Purchase of treasury stock (124
shares)................................ (3) (3)
Reissuance of treasury stock to ESOP
(16,158 shares)........................ 275 75 (350) 0
Allocation of stock to employee accounts
(66,500 shares)........................ 683 683
Reissuance of treasury stock (1,332,566
shares)................................ 24,801 6,243 31,044
----------- ----------- ----------- --------- --------- ----------- ------------
Balance, December 31, 1995 -- Note H...... $ 15,668 $ 96,371 $ 57,863 $ 373,922 $ (12,008) $ (5,259) $ 526,557
----------- ----------- ----------- --------- --------- ----------- ------------
----------- ----------- ----------- --------- --------- ----------- ------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................ $ 76,665 $ 70,401 $ 56,550
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred policy acquisition costs....................... 84,533 88,122 73,605
Capitalization of deferred policy acquisition costs..................... (89,267) (127,566) (104,014)
Depreciation expense.................................................... 5,524 5,601 3,742
Deferred income taxes................................................... (5,443) (4,310) (5,272)
Accrued income taxes.................................................... 3,344 (12,619) 6,230
Interest credited to universal life and investment products............. 286,710 260,081 220,772
Policy fees assessed on universal life and investment products.......... (100,840) (85,532) (67,314)
Change in accrued investment income and other receivables............... (160,523) (28,073) (97,908)
Change in policy liabilities and other policyholders' funds of
traditional life and health products................................... 201,364 61,322 42,901
Change in other liabilities............................................. 4,245 29,949 12,432
Other, net.............................................................. (4,888) (14,461) 14,959
----------- ----------- -----------
Net cash provided by operating activities............................. 301,424 242,915 156,683
----------- ----------- -----------
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments:
Investments available for sale.......................................... 2,051,061 386,498
Other................................................................... 78,568 153,945 1,341,818
Sale of investments:
Investments available for sale.......................................... 1,533,604 630,660
Other................................................................... 141,184 59,550 244,683
Cost of investments acquired:
Investments available for sale.......................................... (3,667,448) (1,807,756)
Other................................................................... (540,648) (220,839) (2,302,196)
Acquisitions and bulk reinsurance assumptions............................. (7,550) 106,435 14,190
Purchase of property and equipment........................................ (5,919) (6,743) (4,682)
Sale of property and equipment............................................ 309 484 3,023
----------- ----------- -----------
Net cash used in investing activities................................. (416,839) (697,766) (703,164)
----------- ----------- -----------
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings under line of credit arrangements and long-term
debt..................................................................... 1,215,000 663,587 719,173
Principal payments on line of credit arrangements and long-term debt...... (1,197,500) (712,704) (661,717)
Proceeds from issuance of Monthly Income Preferred Securities............. 55,000
Purchase of treasury stock................................................ (3) (191)
Dividends to stockholders................................................. (17,600) (15,071) (13,827)
Investment product deposits and change in universal life deposits......... 908,064 1,417,980 1,198,263
Investment product withdrawals............................................ (785,622) (976,401) (683,251)
----------- ----------- -----------
Net cash provided by financing activities............................. 122,339 432,200 558,641
----------- ----------- -----------
----------- ----------- -----------
INCREASE (DECREASE) IN CASH............................................... 6,924 (22,651) 12,160
CASH AT BEGINNING OF YEAR................................................. 4,468 27,119 14,959
----------- ----------- -----------
CASH AT END OF YEAR....................................................... $ 11,392 $ 4,468 $ 27,119
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt........................................................ $ 9,320 $ 7,745 $ 6,426
Income taxes............................................................ $ 41,532 $ 49,935 $ 27,493
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Change in minority interest in consolidated subsidiaries.................. $ (1,311)
Reissuance of treasury stock to ESOP...................................... $ 350 $ 3 $ 3
Unallocated stock in ESOP................................................. $ 333 $ 264 $ 344
Reissuance of treasury stock.............................................. $ 363 $ 1,051 $ 135
Acquisitions and bulk reinsurance assumptions:
Assets acquired......................................................... $ 10,394 $ 117,349 $ 423,167
Liabilities assumed..................................................... (25,651) (166,595) (429,580)
Reissuance of treasury stock............................................ (30,681)
----------- ----------- -----------
Net................................................................... $ (45,938) $ (49,246) $ (6,413)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Protective Life
Corporation and subsidiaries (the Company) 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.
All references to prior period number of shares and per share amounts have
been restated to reflect a two-for-one stock split on June 1, 1995.
ENTITIES INCLUDED
The consolidated financial statements include the accounts, after
intercompany eliminations, of Protective Life Corporation and its wholly owned
subsidiaries. Protective Life Insurance Company (Protective Life) is the
Company's principal operating subsidiary.
Additionally, the financial statements include the accounts of
majority-owned subsidiaries. The ownership interest of the other stockholders of
these subsidiaries is called a minority interest and is reported as a liability
of the Company and as an adjustment to income.
NATURE OF OPERATIONS
The Company markets individual life insurance; group life, health, dental,
and cancer insurance; annuities and investment products; credit life and
disability insurance; and guaranteed investment contracts. Its products are
distributed nationally through independent agents and brokers; through
broker-dealers and financial institutions to their customers; through full-time
sales representatives; and through other insurance companies. The Company also
seeks to acquire blocks of insurance policies from other insurers.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities," at
December 31, 1993, which requires the Company to carry its investment in fixed
maturities and certain other securities at market value instead of amortized
cost.
In 1995 the Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures." Under these new standards, a loan
is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Since the Company'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 the Company's evaluation of its mortgage loan portfolio, the
Company does not expect any material losses on its mortgage loans, and therefore
no allowance for losses is required under SFAS No. 114 at December 31, 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1995 the Company also adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which changes the way stock-based compensation expense is
measured and requires additional disclosures relating to the Company's
stock-based compensation plans. The adoption of this accounting standard did not
have a material effect on the Company's financial statements.
In 1995 the Financial Accounting Standards Board issued: SFAS No. 120,
"Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance
Enterprises for Certain Long-Duration Participating Contracts;" SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage Servicing Rights."
The Company anticipates that the impact of adopting these three accounting
standards will be immaterial to its financial condition.
INVESTMENTS
The Company has classified all of its investments in fixed maturities,
equity securities, and short-term investments as "available for sale."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
FIXED MATURITIES (BONDS, BANK LOAN PARTICIPATIONS, AND REDEEMABLE PREFERRED
STOCKS) -- at current market value.
EQUITY SECURITIES (COMMON AND NONREDEEMABLE PREFERRED STOCKS) -- at current
market value.
MORTGAGE LOANS ON REAL ESTATE -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
INVESTMENT REAL ESTATE -- at cost, less allowances for depreciation computed
on the straight-line method. With respect to real estate acquired through
foreclosure, cost is the lesser of the loan balance plus foreclosure costs or
appraised value.
POLICY LOANS -- at unpaid balances.
OTHER LONG-TERM INVESTMENTS -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.
SHORT-TERM INVESTMENTS -- at cost, which approximates current market value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $5.2 million in bank
deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, 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 stockholders' 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 the Company's operations,
its reported stockholders' equity will fluctuate significantly as interest rates
change.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company'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>
1995 1994
------------- -------------
<S> <C> <C>
Total investments............................................... $ 5,919,787 $ 5,501,064
Deferred policy acquisition costs............................... 426,645 400,724
All other assets................................................ 795,805 393,929
------------- -------------
$ 7,142,237 $ 6,295,717
------------- -------------
Deferred income taxes........................................... $ 38,364 $ 43,806
All other liabilities........................................... 6,635,179 5,874,006
------------- -------------
6,673,543 5,917,812
------------- -------------
Stockholders' equity............................................ 468,694 377,905
------------- -------------
$ 7,142,237 $ 6,295,717
------------- -------------
------------- -------------
</TABLE>
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes. Combinations of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, and liabilities arising
from interest-sensitive products such as guaranteed investment contracts and
individual annuities. Realized investment gains and losses on such contracts are
deferred and amortized over the life of the hedged asset. Net realized losses of
$15.2 million were deferred in 1995 and net realized gains of $7.9 million were
deferred in 1994. At December 31, 1995 and 1994, open futures contracts with
notional amounts of $25.0 million and $137.5 million, respectively, had net
unrealized losses of $0.6 million and $0.4 million, respectively.
The Company uses interest rate swap contracts to convert certain investments
from a variable to a fixed rate of interest. At December 31, 1995, related open
interest rate swap contracts with a notional amount of $170.3 million were in a
$1.3 million net unrealized gain position. At December 31, 1994, related open
interest rate swap contracts with a notional amount of $230.0 million were in an
$8.9 million net unrealized loss position. The Company also uses interest rate
swap contracts to convert its Senior Notes and Monthly Income Preferred
Securities from a fixed rate to a variable rate of interest. At December 31,
1995, related open interest rate swap contracts with a notional amount of $55.0
million were in a $4.4 million net unrealized gain position. At December 31,
1994, related open interest rate swap contracts with a notional amount of $95.0
million were in a $4.8 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. The Company uses both
accelerated and straight-line methods of depreciation based upon the estimated
useful lives of the assets. Major repairs or improvements are capitalized and
depreciated over the estimated useful lives of the assets. Other repairs are
expensed as incurred. The cost and related accumulated depreciation of property
and equipment sold or retired are removed from the accounts, and resulting gains
or losses are included in income.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Home Office building................................................... $ 35,284 $ 35,320
Data processing equipment.............................................. 20,462 17,877
Other, principally furniture and equipment............................. 19,111 16,416
--------- ---------
74,857 69,613
Accumulated depreciation............................................... 38,279 33,290
--------- ---------
$ 36,578 $ 36,323
--------- ---------
--------- ---------
</TABLE>
SEPARATE ACCOUNTS
The Company operates separate accounts, some in which the Company bears the
investment risk and others in which the investment risk rests with the
contractholder. The assets and liabilities related to separate accounts in which
the Company does not bear the investment risk are valued at market and reported
separately as assets and liabilities related to separate accounts in the
accompanying consolidated financial statements.
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
TRADITIONAL LIFE AND HEALTH INSURANCE PRODUCTS -- Traditional life insurance
products consist principally of those products with fixed and guaranteed
premiums and benefits and include whole life insurance policies, term life
insurance policies, limited payment life insurance policies, and certain
annuities with life contingencies. Life insurance and immediate annuity premiums
are recognized as revenue when due. Health insurance premiums are recognized as
revenue over the terms of the policies. Benefits and expenses are associated
with earned premiums so that profits are recognized over the life of the
contracts. This is accomplished by means of the provision for liabilities for
future policy benefits and the amortization of deferred policy acquisition
costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions as to
investment yields, mortality, persistency, and other assumptions based on the
Company'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 the Company and
claims incurred but not yet reported. Policy claims are charged to expense in
the period in which the claims are incurred.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance beginning of year.............................. $ 79,462 $ 77,191 $ 68,203
Less reinsurance..................................... 5,024 3,973 3,809
----------- ----------- -----------
Net balance beginning of year...................... 74,438 73,218 64,394
----------- ----------- -----------
----------- ----------- -----------
Incurred related to:
Current year......................................... 217,366 203,453 $ 194,394
Prior year........................................... (8,337) (6,683) (5,123)
----------- ----------- -----------
Total incurred..................................... 209,029 196,770 189,271
----------- ----------- -----------
----------- ----------- -----------
Paid related to:
Current year......................................... 164,321 148,548 141,361
Prior year........................................... 48,834 47,002 39,086
----------- ----------- -----------
Total paid......................................... 213,155 195,550 180,447
----------- ----------- -----------
----------- ----------- -----------
Net balance end of year................................ 70,312 74,438 73,218
Plus reinsurance..................................... 3,330 5,024 3,973
----------- ----------- -----------
Balance end of year.................................... $ 73,642 $ 79,462 $ 77,191
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
UNIVERSAL LIFE AND INVESTMENT PRODUCTS -- Universal life and investment
products include universal life insurance, guaranteed investment contracts,
deferred annuities, and annuities without life contingencies. Revenues for
universal life and investment products consist of policy fees that have been
assessed against policy account balances for the costs of insurance, policy
administration, and surrenders. That is, universal life and investment product
deposits are not considered revenues in accordance with generally accepted
accounting principles. Benefit reserves for universal life and investment
products represent policy account balances before applicable surrender charges
plus certain deferred policy initiation fees that are recognized in income over
the term of the policies. Policy benefits and claims that are charged to expense
include benefit claims incurred in the period in excess of related policy
account balances and interest credited to policy account balances. Interest
credit rates for universal life and investment products ranged from 3.0% to 9.4%
in 1995.
At December 31, 1995, the Company estimates the market value of its
guaranteed investment contracts to be $2,660.0 million using discounted cash
flows. The surrender value of the Company's annuities which approximates market
value was $1,296.7 million.
POLICY ACQUISITION COSTS -- Commissions and other costs of acquiring
traditional life and health insurance, universal life insurance, and investment
products that vary with and are primarily related to the production of new
business have been deferred. Traditional life and health insurance acquisition
costs are being 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 amortized over the lives of the policies in relation to the present
value of estimated gross profits from surrender charges and investment,
mortality, and expense margins. Under SFAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments," the Company makes certain assumptions
regarding the mortality, persistency, expenses, and interest rates it expects to
experience in future periods. These assumptions are to be best estimates and are
to be periodically updated whenever actual experience and/or expectations for
the future change from initial assumptions. Additionally, relating to SFAS No.
115, these costs have been adjusted by an amount equal to the amortization that
would have been recorded if unrealized gains or losses on investments associated
with the Company's universal life and investment products had been realized.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost to acquire blocks of insurance representing the present value of
future profits from such blocks of insurance is also included in deferred policy
acquisition costs, discounted at interest rates averaging 15%. For acquisitions
occurring after 1988, the Company amortizes the present value of future profits
over the premium payment period, including accrued interest at 8%. The
unamortized present value of future profits for such acquisitions was
approximately $102.5 million and $84.4 million at December 31, 1995 and 1994,
respectively. During 1995 $26.5 million of present value of future profits on
acquisitions made during the year was capitalized, and $3.2 million was
amortized.
The unamortized present value of future profits for all acquisitions was
$123.9 million at December 31, 1995, and $110.3 million at December 31, 1994.
PARTICIPATING POLICIES
Participating business comprises approximately 1% of the individual life
insurance in force and 2% of the individual life insurance premium income.
Policyholder dividends totaled $2.6 million in 1995, 1994, and 1993.
INCOME TAXES
The Company 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.
INCOME PER SHARE OF COMMON STOCK
Per share data are based on the weighted average number of shares of Common
Stock, including Common Stock equivalents, outstanding which was 28,627,345,
27,392,936, and 27,381,578, in 1995, 1994, and 1993, respectively.
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
previously reported net income, total assets, or stockholders' equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles (GAAP) differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are as follows: (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 stockholders' 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED)
The reconciliations of net income and stockholders' equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
<TABLE>
<CAPTION>
NET INCOME STOCKHOLDERS' EQUITY
------------------------------- -------------------------------
1995 1994 1993 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory reporting practices:
Protective Life Insurance Company................. $ 105,744 $ 54,812 $ 41,471 $ 322,416 $ 304,858 $ 263,075
American Foundation Life Insurance Company........ 3,330 3,072 1,415 18,781 20,327 18,290
Capital Investors Life Insurance Company.......... 182 170 207 1,315 1,125 824
Empire General Life Assurance Corporation......... 1,003 690 408 20,685 21,270 10,588
Protective Life Insurance Corporation of
Alabama.......................................... 546 69 16 2,675 2,133 2,064
Wisconsin National Life Insurance Company......... 10,954 10,132 9,591 62,529 57,268 50,885
Consolidation elimination......................... (6,500) 30 (103,985) (100,123) (80,651)
--------- --------- --------- --------- --------- ---------
115,259 68,945 53,138 324,416 306,858 265,075
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization..................................... (765) 41,686 25,392 410,396 434,444 299,584
Policy liabilities and accruals................... (53,272) (34,632) (15,586) (189,319) (140,298) (69,844)
Deferred income tax............................... 3,711 3,342 5,273 (69,520) 14,095 (69,269)
Asset Valuation Reserve........................... 105,769 24,925 43,398
Interest Maintenance Reserve...................... (1,235) (1,716) (1,432) 14,412 3,583 10,489
Nonadmitted items................................. 20,603 21,445 7,742
Timing and valuation differences on mortgage loans
on real estate and fixed maturity investments.... (618) (961) 1,645 25,060 6,877 7,350
Net unrealized gains and losses on investments.... 57,863 (107,532) 39,284
Realized investment gains (losses)................ 6,781 (6,664) (7,860)
Noninsurance affiliates........................... 12,882 5,877 (4,081) 213,789 149,750 87,693
Minority interest in consolidated subsidiaries.... (3,218) (1,796) (19)
Consolidation elimination......................... (381,988) (436,053) (262,408)
Other adjustments, net............................ (2,860) (3,680) 80 (4,924) (7,721) 1,639
--------- --------- --------- --------- --------- ---------
In conformity with generally accepted accounting
principles......................................... $ 76,665 $ 70,401 $ 56,550 $ 526,557 $ 270,373 $ 360,733
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities....................................... $ 276,847 $ 242,510 $ 212,816
Equity securities...................................... 1,338 2,435 1,519
Mortgage loans on real estate.......................... 162,135 141,751 130,262
Investment real estate................................. 1,908 2,000 2,166
Policy loans........................................... 8,958 8,397 7,558
Other, principally short-term investments.............. 39,223 34,088 17,790
----------- ----------- -----------
490,409 431,181 372,111
Investment expenses.................................... 14,485 13,356 9,981
----------- ----------- -----------
$ 475,924 $ 417,825 $ 362,130
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities............................................. $ 6,075 $ (8,646) $ 10,508
Equity securities............................................ 44 7,735 2,230
Mortgage loans and other investments......................... (4,506) 7,209 (7,684)
--------- --------- ---------
$ 1,613 $ 6,298 $ 5,054
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company has established an allowance for uncollectible amounts on
investments. The allowance totaled $33.4 million and $35.9 million at December
31, 1995 and 1994, respectively. Additions and reductions to the allowance are
included in realized investment gains (losses). Without such
additions/reductions, the Company had net realized investment losses of $0.9
million in 1995, and net realized investment gains of $6.3 million and $13.8
million in 1994 and 1993, respectively.
In 1995 gross gains on the sale of investments available for sale (fixed
maturities, equity securities, and short-term investments) were $18.0 million,
and gross losses were $11.8 million. In 1994 gross gains were $15.2 million, and
gross losses were $16.4 million. In 1993 gross gains on the sale of fixed
maturities were $8.3 million, and gross losses were $0.4 million.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of the Company's investments
classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
1995 COST GAINS LOSSES MARKET VALUES
- ---------------------------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities............................ $ 2,006,858 $ 46,934 $ 4,017 $ 2,049,775
United States Government and authorities.............. 105,388 2,290 101 107,577
States, municipalities, and political subdivisions.... 10,888 702 0 11,590
Public utilities...................................... 322,110 5,904 770 327,244
Convertibles and bonds with warrants.................. 638 0 145 493
All other corporate bonds............................. 1,126,394 50,103 7,573 1,168,924
Bank loan participations.................................. 220,811 0 0 220,811
Redeemable preferred stocks............................... 5,857 61 324 5,594
------------- ----------- ----------- -------------
3,798,944 105,994 12,930 3,892,008
Equity securities......................................... 35,448 6,438 3,175 38,711
Short-term investments.................................... 53,591 0 0 53,591
------------- ----------- ----------- -------------
$ 3,887,983 $ 112,432 $ 16,105 $ 3,984,310
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
1994 COST GAINS LOSSES MARKET VALUES
- ---------------------------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities............................ $ 2,002,842 $ 7,538 $ 112,059 $ 1,898,321
United States Government and authorities.............. 90,468 290 8,877 81,881
States, municipalities, and political subdivisions.... 10,902 5 1,230 9,677
Public utilities...................................... 414,011 1,091 36,982 378,120
Convertibles and bonds with warrants.................. 687 0 302 385
All other corporate bonds............................. 927,779 3,437 56,788 874,428
Bank loan participations.................................. 244,881 0 0 244,881
Redeemable preferred stocks............................... 6,800 37 884 5,953
------------- ----------- ----------- -------------
3,698,370 12,398 217,122 3,493,646
Equity securities......................................... 45,958 3,994 4,947 45,005
Short-term investments.................................... 59,541 0 0 59,541
------------- ----------- ----------- -------------
$ 3,803,869 $ 16,392 $ 222,069 $ 3,598,192
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown as follows. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
1995 COST MARKET VALUES
- ---------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less......................................... $ 410,489 $ 411,839
Due after one year through five years........................... 1,090,323 1,101,226
Due after five years through ten years.......................... 1,481,324 1,524,631
Due after ten years............................................. 816,808 854,312
------------- -------------
$ 3,798,944 $ 3,892,008
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
1994 COST MARKET VALUES
- ---------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less......................................... $ 577,146 $ 540,223
Due after one year through five years........................... 1,351,435 1,299,248
Due after five years through ten years.......................... 994,994 929,764
Due after ten years............................................. 774,795 724,411
------------- -------------
$ 3,698,370 $ 3,493,646
------------- -------------
------------- -------------
</TABLE>
The approximate percentage distribution of the Company's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1995 1994
- --------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
AAA.................................................................. 56.1% 57.6%
AA................................................................... 4.5 5.5
A.................................................................... 12.6 12.5
BBB
Bonds.............................................................. 19.0 14.9
Bank loan participations........................................... 0.4 1.4
BB or less
Bonds.............................................................. 2.0 2.3
Bank loan participations........................................... 5.3 5.6
Redeemable preferred stocks.......................................... 0.1 0.2
----------- -----------
100.0% 100.0%
----------- -----------
----------- -----------
</TABLE>
At December 31, 1995 and 1994, the Company had bonds which were rated less
than investment grade of $75.7 million and $82.5 million, respectively, having
an amortized cost of $82.2 million and $89.4 million, respectively.
Additionally, the Company had bank loan participations which were rated less
than investment grade of $206.0 million and $195.1 million, respectively, having
an amortized cost of $206.0 million and $195.1 million, respectively.
The change in unrealized gains (losses), net of income tax, on fixed
maturity and equity securities for the years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ---------
<S> <C> <C> <C>
Fixed maturities......................................... $ 193,562 $ (175,725) $ 1,198
Equity securities........................................ 2,740 (5,342) 1,565
</TABLE>
At December 31, 1995, all of the Company's mortgage loans were commercial
loans of which 81% were retail, 7% were warehouses, and 6% were office
buildings. The Company specializes in making mortgage loans on either
credit-oriented or credit-anchored commercial properties, most of which are
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
strip shopping centers in smaller towns and cities. No single tenant's leased
space represents more than 4% of mortgage loans. Approximately 82% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: South Carolina, Georgia, Alabama, Tennessee,
Texas, Florida, North Carolina, Virginia, California, Mississippi, Colorado,
Ohio, Kentucky, Louisiana, and Indiana.
Many of the mortgage loans have call provisions after 5 to 7 years. Assuming
the loans are called at their next call dates, approximately $174.3 million
would become due in 1996, $497.3 million in 1997 to 2000, and $275.7 million in
2001 to 2005.
At December 31, 1995, the average mortgage loan was $1.6 million, and the
weighted average interest rate was 9.3%. The largest single mortgage loan was
$13.1 million. While the Company's mortgage loans do not have quoted market
values, at December 31, 1995 and 1994, the Company estimates the market value of
its mortgage loans to be $2,001.1 million and $1,535.3 million, respectively,
using discounted cash flows from the next call date.
At December 31, 1995 and 1994, the Company's problem mortgage loans and
foreclosed properties totaled $26.1 million and $24.0 million, respectively. The
Company expects no significant loss of principal.
Certain investments, principally real estate, with a carrying value of $9.5
million, were nonincome producing for the twelve months ended December 31, 1995.
Mortgage loans to affiliates of both Fletcher Bright and Edens & Avant
totaled $95.4 million and $69.1 million, respectively, at December 31, 1995.
Most of such loans were not made to, or in reliance on the credit of, Mr. Bright
or Edens & Avant.
The Company believes it is not practicable to determine the market value of
its policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%. The market values of the Company's other long-term
investments approximate cost.
NOTE D -- FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income............. 35.0% 35.0% 35.0%
Amortization of nondeductible goodwill................................. 0.2 0.1
Dividends received deduction and tax-exempt interest................... (0.6) (0.4) (0.5)
Low-income housing credit.............................................. (0.7) (0.7)
Tax differences arising from prior acquisitions and other
adjustments........................................................... 0.1 (1.9) (2.6)
----- ----- -----
34.0% 32.0% 32.0%
----- ----- -----
----- ----- -----
</TABLE>
In August 1993 the corporate income tax rate was increased from 34% to 35%
which resulted in a one-time increase to income tax expense of $1.3 million or
$.09 per share due to a recalculation of the Company's deferred income tax
liability. The effective income tax rate for 1993 of 32% excludes the one-time
increase.
The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for income tax purposes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
Details of the deferred income tax provision for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Deferred policy acquisition costs....................... $ (11,606) $ 34,561 $ 8,861
Benefit and other policy liability changes.............. 52,496 (52,288) (10,416)
Temporary differences of investment income.............. (34,174) 15,524
Other items............................................. (10,426) (1,139) (3,718)
---------- ---------- ----------
$ (3,710) $ (3,342) $ (5,273)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the Company's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder liability reserves........................ $ 63,830 $ 116,326
Unrealized loss on investments.................................... 23,485
Other............................................................. 203
----------- -----------
64,033 139,811
----------- -----------
----------- -----------
Deferred income tax liabilities:
Deferred policy acquisition costs................................. 102,154 113,760
Unrealized gain on investments.................................... 31,399
Other............................................................. 11,956
----------- -----------
133,553 125,716
----------- -----------
----------- -----------
Net deferred income tax liability............................... $ 69,520 $ (14,095)
----------- -----------
----------- -----------
</TABLE>
Under pre-1984 life insurance company income tax laws, a portion of the
Company'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, 1995, was approximately $50.7 million. Should the accumulation in the
Policyholders' Surplus account of the life insurance subsidiaries exceed certain
stated maximums, or should distributions including cash dividends be made to
Protective Life Corporation in excess of approximately $322 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. The Company does not anticipate involuntarily paying income tax on
amounts in the Policyholders' Surplus accounts.
At December 31, 1995, the Company had an unused capital loss carryforward of
$5.9 million which expires in 2000.
NOTE E -- DEBT AND PREFERRED SECURITIES
Long-term debt at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
Long-term debt:
Notes payable to banks............................................. $ 40,500 $ 23,000
7.95% Senior Notes................................................. 75,000 75,000
----------- ---------
$ 115,500 $ 98,000
----------- ---------
----------- ---------
</TABLE>
Under a three-year revolving line of credit arrangement with several banks,
the Company can borrow up to $60 million on an unsecured basis. No compensating
balances are required to maintain the line of credit. At December 31, 1995, the
Company had borrowed $40.5 million under this credit arrangement at an interest
rate of 6.2%.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE E -- DEBT AND PREFERRED SECURITIES (CONTINUED)
The aforementioned revolving line of credit arrangement contains, among
other provisions, requirements for maintaining certain financial ratios and
restrictions on indebtedness incurred by the Company and its subsidiaries.
Additionally, the Company, on a consolidated basis, cannot incur debt in excess
of 50% of its total capital.
The Company believes the market value of its bank borrowings approximates
book value due to the debt being either short-term or variable rate.
On July 1, 1994, the Company issued $75 million of 7.95% Senior Notes due
July 1, 2004. The notes are not redeemable by the Company prior to maturity. Net
proceeds of $74.4 million were used to repay bank borrowings. In related
transactions, in 1994 the Company entered into interest rate swap agreements to
swap $40 million of the notes from a fixed rate of interest to a floating rate
of interest. During 1995, the Company terminated these agreements and realized a
gain of approximately $3.0 million which is being amortized as a component of
interest expense. The effective interest rate was 7.4% and 7.3% in 1995 and
1994, respectively.
Future maturities of the long-term debt are $40.5 million in 1998 and $75
million in 2004.
Interest expense on debt totaled $9.6 million, $7.8 million, and $6.3
million in 1995, 1994, and 1993, respectively.
On June 10, 1994, a special purpose finance subsidiary of the Company, PLC
Capital L.L.C. (PLC Capital), issued $55 million of 9% Cumulative Monthly Income
Preferred Securities, Series A (MIPS), guaranteed by the Company. Net proceeds
of approximately $52.3 million were used to repay a term note and other bank
borrowings. PLC Capital was formed solely to issue MIPS and other securities and
lend the proceeds thereof to the Company in exchange for subordinated debentures
of the Company. The Company has the right under the subordinated debentures to
extend interest-payment periods up to 60 months, and, as a consequence, monthly
dividends on the MIPS may be deferred (but will continue to accumulate, together
with additional dividends on any accumulated but unpaid dividends at the
dividend rate) by PLC Capital during any such extended interest payment period.
The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999.
The MIPS and dividends thereon are reported in the accompanying financial
statements as "minority interest in consolidated subsidiaries." In related
transactions, the Company entered into interest rate swap agreements with two
financial institutions which effectively converted the MIPS from a fixed
dividend rate to the floating, 30-day LIBOR plus 60.5 basis points,
approximately 6.3% and 6.6% at December 31, 1995 and 1994, respectively.
Dividends, net of tax, on the MIPS were $3.2 million and $1.8 million in
1995 and 1994, respectively, before consideration of the interest rate swap
agreements. On a swap-adjusted basis, dividends were $2.4 million and $1.1
million in 1995 and 1994, respectively.
NOTE F -- ACQUISITIONS
In April 1994 the Company acquired through coinsurance a block of payroll
deduction policies. In October 1994, the Company acquired through coinsurance a
block of individual life insurance policies. In June 1995 the Company acquired
through coinsurance a block of term life insurance policies.
On March 20, 1995, the Company acquired National Health Care Systems of
Florida, Inc. (also known as "DentiCare"). The purchase price was $38.3 million
and was paid with a combination of the Company's Common Stock ($30.7 million)
and cash ($7.6 million). In connection with the acquisition, the Company
reissued 1,316,458 shares of its Common Stock previously held as Treasury Stock.
The Company recorded $32.4 million of goodwill in connection with this
acquisition, which is being amortized using the straight line method over forty
years.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES
The Company is contingently liable to obtain a $20 million letter of credit
under indemnity agreements with its directors. Such agreements provide insurance
protection in excess of the directors' and officers' liability insurance in
force at the time up to $20 million. Should certain events occur constituting a
change in control of the Company, the Company must obtain the letter of credit
upon which directors may draw for defense or settlement of any claim relating to
performance of their duties as directors. The Company has similar agreements
with certain of its officers providing up to $10 million in indemnification
which are not secured by the obligation to obtain a letter of credit.
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. The Company does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Some of the lawsuits have resulted in the
award of substantial judgments against the insurer, including material amounts
of punitive damages. In some states, juries have substantial discretion in
awarding punitive damages in these circumstances. The Company and its
subsidiaries, like other life and health insurers, from time to time are
involved in such litigation. To date, no such lawsuit has resulted in the award
of any significant amount of damages against the Company. Although the outcome
of any litigation cannot be predicted with certainty, the Company is not aware
of any litigation that will have a material adverse effect on the financial
position of the Company.
NOTE H -- STOCKHOLDERS' EQUITY AND RESTRICTIONS
On May 1, 1995, the Company's Board of Directors approved a two-for-one
split of the Company's Common Stock in the form of a 100% stock dividend on June
1, 1995. Stockholders' equity has been restated to give retroactive recognition
to the stock split for all periods presented by reclassifying from retained
earnings to common stock the par value of the additional shares arising from the
stock split. In addition, all references to number of shares and per share
amounts included herein have been restated to reflect the stock split.
The Company has a Rights Agreement that provides rights to holders of the
Company's Common Stock to purchase Series A Junior Participating Cumulative
Preferred Stock, or in certain circumstances, either Common Stock or common
stock of an acquiring company at one half the market price of such Common Stock
or common stock, as the case may be. The rights will become exercisable if
certain events occur with respect to the Company, including the acquisition by a
person or group of 15% or more of the Company's Common Stock. The Company can
redeem the rights at $.01 per right in certain circumstances including until ten
business days following a public announcement that 15% or more of the Company's
Common Stock has been acquired by a person or group.
Stockholders have authorized 4,000,000 shares of Preferred Stock, $1.00 par
value. Other terms, including preferences, voting, and conversion rights, may be
established by the Board of Directors. In connection with the Rights Agreement,
400,000 of these shares have been designated as Series A Junior Participating
Cumulative Preferred Stock, $1.00 par value, and were unissued at December 31,
1995. The remaining 3,600,000 shares of Preferred Stock, $1.00 par value, were
also unissued at December 31, 1995.
The Company has an Employee Stock Ownership Plan (ESOP). In 1990 shares of
the Company's Common Stock, which had been held by Protective Life and accounted
for as treasury shares, were transferred to the ESOP in exchange for a note. The
stock is used to match employee contributions to the Company's 401(k) Plan and
to provide other employee benefits. The stock held by the ESOP that has not yet
been used is the unallocated stock shown as a reduction to stockholders' equity.
The ESOP
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE H -- STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED)
shares are dividend-paying and therefore are considered outstanding for earnings
per share calculations. Dividends on the shares are used to pay the ESOP's note
to Protective Life. If certain events associated with a change in control of the
Company occur, any unallocated shares held by the ESOP will become allocable to
employee 401(k) accounts.
The Company may from time to time transfer or buy in the open market
additional shares of Common Stock to complete its 401(k) employer match
obligation. Accordingly, in 1994, the Company transferred 136 shares of Common
Stock to the ESOP and transferred another 16,158 shares during 1995.
Since 1973 the Company has had a Performance Share Plan to motivate senior
management to focus on the Company's long-range earnings performance. The
criterion for payment of performance share awards is based upon a comparison of
the Company's average return on average equity over an award period to that of a
comparison group of publicly held life insurance companies, multiline insurers,
and insurance holding companies. If the Company's results are below the median
of the comparison group, no portion of the award is earned. If the Company's
results are at or above the 90th percentile, the award maximum is earned. Under
the plan approved by stockholders in 1992, up to 1,200,000 shares may be issued
in payment of awards. The number of shares granted in 1995, 1994, and 1993 were
85,700, 62,140, and 72,610 shares, respectively, having an approximate market
value on the grant date of $1.9 million, $1.4 million, and $1.0 million,
respectively. At December 31, 1995, outstanding awards measured at target and
maximum payouts were 278,730 and 391,927 shares, respectively. The expense
recorded by the Company for the Performance Share Plan was $2.9 million, $3.6
million, and $4.3 million in 1995, 1994, and 1993, respectively. The expense
recorded reflects increases in the market value of the Company's Common Stock
since the grant date.
The Company has established deferred compensation plans for directors and
officers. Compensation deferred is credited to the directors and officers in
cash or Common Stock equivalents or a combination thereof. The Company may from
time to time issue or buy in the open market shares of Common Stock to fulfill
its obligation under the plans. At December 31, 1995, the plans had 223,049
shares of Common Stock equivalents credited to directors and officers.
At December 31, 1995, approximately $180 million of consolidated
stockholders' equity, excluding net unrealized losses on investments,
represented net assets of the Company's insurance subsidiaries that cannot be
transferred in the form of dividends, loans, or advances to the parent company.
In addition, the company's insurance subsidiaries are subject to various state
statutory and regulatory restrictions on the insurance subsidiaries' ability to
pay dividends to Protective Life Corporation. 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 the Company by its insurance subsidiaries
in 1996 is estimated to be $129 million.
NOTE I -- RELATED PARTY MATTERS
Certain corporations with which the Company's directors were affiliated paid
the Company premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $21.2 million, $21.1 million, and $10.3
million in 1995, 1994, and 1993, respectively. The Company paid commissions,
interest, and service fees to these same corporations totaling $5.3 million,
$4.9 million, and $6.1 million, in 1995, 1994, and 1993, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE J -- BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health
insurance industry. The following table sets forth revenues, income before
income tax, and identifiable assets of the Company's business segments. The
primary components of revenues are premiums and policy fees, net investment
income, and realized investment gains and losses. Premiums and policy fees are
attributed directly to each business segment. Net investment income is allocated
based on directly related assets required for transacting that segment of
business.
Realized investment gains (losses) and expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
TOTAL REVENUES
Acquisitions................................. $ 193,544 $ 170,659 $ 123,855
Financial Institutions....................... 34,533 108,406 97,511
Group........................................ 180,262 148,313 143,423
Guaranteed Investment Contracts.............. 199,468 183,591 167,233
Individual Life.............................. 147,580 122,452 111,654
Investment Products.......................... 106,977 87,702 80,115
Corporate and Other.......................... 17,140 22,059 33,970
Unallocated Realized Investment Gains
(Losses).................................... 583 5,266 1,876
---------- ---------- ----------
$ 880,087 $ 848,448 $ 759,637
---------- ---------- ----------
---------- ---------- ----------
Acquisitions................................. 22.0% 20.1% 16.3%
Financial Institutions....................... 3.9 12.8 12.9
Group........................................ 20.5 17.5 18.9
Guaranteed Investment Contracts.............. 22.7 21.6 22.0
Individual Life.............................. 16.8 14.5 14.7
Investment Products.......................... 12.1 10.3 10.6
Corporate and Other.......................... 1.9 2.6 4.4
Unallocated Realized Investment Gains
(Losses).................................... 0.1 0.6 0.2
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE J -- BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INCOME BEFORE INCOME TAX
Acquisitions................................. $ 51,393 $ 39,176 $ 29,845
Financial Institutions....................... 9,197 9,581 8,196
Group........................................ 12,379 11,085 10,394
Guaranteed Investment Contracts.............. 30,255 30,143 25,405
Individual Life.............................. 15,968 16,976 20,064
Investment Products.......................... 11,392 (1,602) 2,931
Corporate and Other*......................... (10,133) (4,452) (13,667)
Unallocated Realized Investment Gains
(Losses).................................... 583 5,266 1,876
---------- ---------- ----------
$ 121,034 $ 106,173 $ 85,044
---------- ---------- ----------
---------- ---------- ----------
Acquisitions................................. 42.5% 36.9% 35.1%
Financial Institutions....................... 7.6 9.0 9.6
Group........................................ 10.2 10.4 12.2
Guaranteed Investment Contracts.............. 25.0 28.4 29.9
Individual Life.............................. 13.2 16.0 23.6
Investment Products.......................... 9.4 (1.5) 3.5
Corporate and Other.......................... (8.4) (4.2) (16.1)
Unallocated Realized Investment Gains
(Losses).................................... 0.5 5.0 2.2
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS
Acquisitions................................. $1,255,542 $1,204,883 $1,076,182
Financial Institutions....................... 268,782 215,878 192,486
Group........................................ 278,094 215,997 208,968
Guaranteed Investment Contracts.............. 2,537,045 2,211,181 2,041,564
Individual Life.............................. 890,198 731,026 642,325
Investment Products.......................... 1,580,519 1,286,744 879,365
Corporate and Other.......................... 421,077 264,575 275,115
---------- ---------- ----------
$7,231,257 $6,130,284 $5,316,005
---------- ---------- ----------
---------- ---------- ----------
Acquisitions................................. 17.4% 19.7% 20.2%
Financial Institutions....................... 3.7 3.5 3.6
Group........................................ 3.8 3.5 3.9
Guaranteed Investment Contracts.............. 35.1 36.1 38.4
Individual Life.............................. 12.3 11.9 12.1
Investment Products.......................... 21.9 21.0 16.6
Corporate and Other.......................... 5.8 4.3 5.2
---------- ---------- ----------
100.0% 100.0% 100.0%
---------- ---------- ----------
---------- ---------- ----------
<FN>
- ------------------------
*Income before income tax for the Corporate and Other segment has not been
reduced by pretax minority interest of $4,950 in 1995, $2,764 in 1994, and $19
in 1993.
</TABLE>
NOTE K -- EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all of
its employees. The benefits are based on years of service and the employee's
highest thirty-six consecutive months of compensation. The Company's funding
policy is to contribute amounts to the plan sufficient to meet the minimum
funding requirements of ERISA plus such additional amounts as the Company 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE K -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The actuarial present value of benefit obligations and the funded status of
the plan at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $16,676 in 1995 and
$11,992 in 1994................................................................. $ 17,415 $ 12,348
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date........................ $ 24,877 $ 20,302
Plan assets at fair value (group annuity contract with Protective Life).......... 18,254 15,679
--------- ---------
Plan assets less than the projected benefit obligation........................... (6,623) (4,623)
Unrecognized net loss from past experience different from that assumed........... 4,882 2,400
Unrecognized prior service cost.................................................. 805 905
Unrecognized net transition asset................................................ (84) (101)
--------- ---------
Net pension liability recognized in balance sheet................................ $ (1,020) $ (1,419)
--------- ---------
--------- ---------
</TABLE>
Net pension cost includes the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year........................ $ 1,540 $ 1,433 $ 1,191
Interest cost on projected benefit obligation.......................... 1,636 1,520 1,396
Actual return on plan assets........................................... (1,358) (1,333) (1,270)
Net amortization and deferral.......................................... 114 210 704
--------- --------- ---------
Net pension cost....................................................... $ 1,932 $ 1,830 $ 2,021
--------- --------- ---------
--------- --------- ---------
</TABLE>
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average discount rate............................................. 7.25% 8.00% 7.50%
Rates of increase in compensation level.................................... 5.25% 6.00% 5.50%
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
Life. Upon retirement, the amount of pension plan assets vested in the retiree
are used to purchase a single premium annuity from Protective Life in the
retiree's name. Therefore, amounts presented above as plan assets exclude assets
relating to retirees.
The Company also sponsors an unfunded Excess Benefits Plan, which is a
nonqualified plan that provides defined pension benefits in excess of limits
imposed by federal tax law. At December 31, 1995, the projected benefit
obligation of this plan totaled $5.7 million.
In addition to pension benefits, the Company provides limited healthcare
benefits to eligible retired employees until age 65. The postretirement benefit
is provided by an unfunded plan. At December 31, 1995, the liability for such
benefits totaled $1.5 million. The expense recorded by the Company was $0.2
million in 1995, 1994, and 1993. The Company's obligation is not materially
affected by a 1% change in the healthcare cost trend assumptions used in the
calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of
life insurance policies upon retirement equal to the employees' annual
compensation. This plan is partially funded at a maximum of $50,000 face amount
of insurance.
The Company sponsors a defined contribution retirement plan which covers
substantially all employees. Employee contributions are made on a before-tax
basis as provided by Section 401(k) of the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE K -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Internal Revenue Code. In 1990 the Company established an Employee Stock
Ownership Plan (ESOP) to match voluntary employee contributions to the Company'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 the Company less dividends on shares held
by the ESOP. All shares held by the ESOP are treated as outstanding for purposes
of computing the Company's earnings per share. At December 31, 1995, the Company
had committed 70,088 shares to be released to fund employee benefits. The
expense recorded by the Company for these employee benefits was $0.7 million,
$0.6 million, and $0.3 million in 1995, 1994, and 1993, respectively.
NOTE L -- REINSURANCE
The Company assumes risks from, and reinsures certain parts of its risks
with other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies. While the amount retained on an individual life
will vary based upon age and mortality prospects of the risk, the Company
generally will not carry more than $500,000 individual life insurance on a
single risk.
The Company has reinsured approximately $17.5 billion, $8.6 billion, and
$7.5 billion in face amount of life insurance risks with other insurers
representing $116.1 million, $46.0 million, and $37.9 million of premium income
for 1995, 1994, and 1993, respectively. The Company has also reinsured accident
and health risks representing $217.1 million, $126.5 million, and $88.9 million
of premium income for 1995, 1994, and 1993, respectively. In 1995 and 1994,
policy and claim reserves relating to insurance ceded of $232.3 million and
$120.0 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 the Company. At December 31, 1995
and 1994, the Company had paid $4.1 million and $5.4 million, respectively, of
ceded benefits which are recoverable from reinsurers.
During 1995 the Company entered into a reinsurance agreement whereby all of
the Company's new credit insurance sales are being ceded to a reinsurer.
Included in the preceding paragraph are credit life and credit accident and
health insurance premiums of $68.2 million and $57.6 million, respectively, and
reserves totaling $100.8 million which were ceded during 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE M -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated market values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNTS MARKET VALUES AMOUNTS MARKET VALUES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities................................... $ 3,892,008 $ 3,892,008 $ 3,493,646 $ 3,493,646
Equity securities.................................. 38,711 38,711 45,005 45,005
Mortgage loans on real estate...................... 1,834,357 2,001,081 1,487,795 1,535,300
Short-term investments............................. 53,591 53,591 59,541 59,541
Cash................................................. 11,392 11,392 4,468 4,468
Liabilities (see Notes A and E):
Debt:
Notes payable to banks............................. 40,500 40,500 23,000 23,000
Senior Notes....................................... 75,000 75,000 75,000 75,000
Monthly Income Preferred Securities.................. 55,000 58,300 55,000 54,700
Other (see Note A):
Futures contracts.................................. (633) (416)
Interest rate swaps................................ 5,658 (13,715)
</TABLE>
NOTE N -- CONSOLIDATED QUARTERLY RESULTS -- UNAUDITED
Protective Life Corporation's unaudited consolidated quarterly operating
data for the years ended December 31, 1995 and 1994, are presented below. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of quarterly results have been reflected in
the data which follow. It is also management's opinion, however, that quarterly
operating data for insurance enterprises are not indicative of results to be
achieved in succeeding quarters or years. In order to obtain a more accurate
indication of performance, there should be a review of operating results,
changes in stockholders' equity, and cash flows for a period of several years.
Fluctuation in short-term performance may be due to the long-term nature of the
insurance business, seasonal patterns in premium production and policy claims,
as well as to the varying yields obtained on invested assets. The data below
should be read in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Premiums and policy fees........................ $ 90,562 $ 93,685 $ 93,213 $ 92,428
Net investment income........................... 112,663 118,046 123,894 121,321
Realized investment gains (losses).............. 2,619 (555) 1,337 (1,789)
Other income.................................... 4,533 8,938 8,924 10,268
-------------- -------------- -------------- --------------
Total revenues................................ 210,377 220,114 227,368 222,228
Benefits and expenses........................... 180,805 192,244 193,664 192,340
-------------- -------------- -------------- --------------
Income before income tax........................ 29,572 27,870 33,704 29,888
Income tax expense.............................. 9,759 9,197 12,034 10,162
Minority interest............................... 804 804 804 805
-------------- -------------- -------------- --------------
Net income...................................... $ 19,009 $ 17,869 $ 20,866 $ 18,921
-------------- -------------- -------------- --------------
Net income per share............................ $ .69 $ .62 $ .72 $ .65
-------------- -------------- -------------- --------------
Average shares outstanding...................... 27,599,922 28,766,664 28,775,118 28,934,174
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE N -- CONSOLIDATED QUARTERLY RESULTS -- UNAUDITED (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Premiums and policy fees........................ $ 89,437 $ 98,049 $ 101,876 $ 113,410
Net investment income........................... 100,248 98,637 105,762 113,178
Realized investment gains (losses).............. 2,297 (564) 3,122 1,443
Other income.................................... 3,562 7,647 2,185 8,159
-------------- -------------- -------------- --------------
Total revenues................................ 195,544 203,769 212,945 236,190
Benefits and expenses........................... 171,165 179,316 184,311 207,483
-------------- -------------- -------------- --------------
Income before income tax........................ 24,379 24,453 28,634 28,707
Income tax expense.............................. 7,801 7,825 9,163 9,187
Minority interest............................... 188 804 804
-------------- -------------- -------------- --------------
Net income...................................... $ 16,578 $ 16,440 $ 18,667 $ 18,716
-------------- -------------- -------------- --------------
Net income per share............................ $ .61 $ .60 $ .68 $ .68
-------------- -------------- -------------- --------------
Average shares outstanding...................... 27,389,792 27,399,262 27,402,166 27,425,584
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders of
Protective Life Corporation Birmingham, Alabama
We have audited the accompanying consolidated balance sheets of Protective
Life Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protective Life
Corporation and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note A to the Consolidated Financial Statements, the Company
changed its method of accounting for stock-based employee compensation plans in
1995. Also, as discussed in Note A, the Company changed its method of accounting
for certain investments in debt and equity securities in 1993.
Coopers & Lybrand L.L.P.
Birmingham, Alabama
February 12, 1996
<PAGE>
EXHIBIT 21
TO
FORM 10-K
OF
PROTECTIVE LIFE CORPORATION
FOR
FISCAL YEAR
ENDED DECEMBER 31, 1995
The following wholly-owned subsidiary of Protective Life Corporation
is organized under the laws of the State of Tennessee and does business under
its corporate name:
Protective Life Insurance Company
The following wholly-owned subsidiary of Protective Life Insurance Company
is incorporated under the laws of the State of Alabama and does business under
its corporate name:
American Foundation Life Insurance Company
The following wholly-owned subsidiary of Protective Life Insurance Company
is incorporated under the laws of the State of Wisconsin and does business under
its corporate name:
Wisconsin National Life Insurance Company
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Protective Life Corporation on Form S-3 (File No. 33-52831) and Form S-8
(File Nos. 33-51887 and 33-68036) of our report, which includes an
explanatory paragraph with respect to changes in the Company's methods of
accounting for stock-based employee compensation plans in 1995 and certain
investments in debt and equity securities in 1993, dated February 12, 1996,
on our audits of the consolidated financial statements and financial
statement schedules of Protective Life Corporation as of December 31, 1995
and 1994 and for the years ended December 31, 1995, 1994, and 1993, which
report is included or incorporated by reference in this Annual Report on Form
10-K.
COOPERS & LYBRAND
March 22, 1996
<PAGE>
EXHIBIT 24
DIRECTORS' POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned Directors of
Protective Life Corporation, a Delaware corporation, ('Company') by his
execution hereof or upon an identical counterpart hereof, does hereby constitute
and appoint Drayton Nabers, Jr., John D. Johns, Deborah J. Long, or Jerry W.
DeFoor, and each or any of them, his true and lawful attorneys-in-fact and
agents, for him and in his name, place and stead, to execute and sign the 1995
Annual Report on Form 10-K to be filed by the Company with the Securities and
Exchange Commission, pursuant to the provisions of the Securities Exchange Act
of 1934 and, further, to execute and sign any and all amendments to such Annual
Report, and to file same, with all exhibits and schedules thereto and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all the acts of said attorneys-in-fact and agents or any of them
which they may lawfully do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and
seal this 4th day of March, 1996.
WITNESS TO ALL SIGNATURES: /s/ William J. Rushton III
--------------------------------------
William J. Rushton III
/s/ John K. Wright /s/ John W. Woods
- -------------------------------------- --------------------------------------
John K. Wright John W. Woods
/s/ William J. Cabaniss, Jr.
--------------------------------------
William J. Cabaniss, Jr.
/s/ H. G. Pattillo
--------------------------------------
H. G. Pattillo
/s/ Drayton Nabers, Jr.
--------------------------------------
Drayton Nabers, Jr.
/s/ John J. McMahon, Jr.
--------------------------------------
John J. McMahon, Jr.
/s/ A. W. Dahlberg
--------------------------------------
A. W. Dahlberg
/s/ John W. Rouse, Jr.
--------------------------------------
John W. Rouse, Jr.
/s/ Robert T. David
--------------------------------------
Robert T. David
/s/ Ronald L. Kuehn, Jr.
--------------------------------------
Ronald L. Kuehn, Jr.
/s/ Herbert A. Sklenar
--------------------------------------
Herbert A. Sklenar
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PROTECTIVE LIFE CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 3,892,008
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 38,711
<MORTGAGE> 1,834,357
<REAL-ESTATE> 20,921
<TOTAL-INVEST> 6,025,056
<CASH> 11,392
<RECOVER-REINSURE> 271,018
<DEFERRED-ACQUISITION> 410,396
<TOTAL-ASSETS> 7,231,257
<POLICY-LOSSES> 1,928,154
<UNEARNED-PREMIUMS> 196,332
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 134,380
<NOTES-PAYABLE> 115,500
0
0
<COMMON> 15,668
<OTHER-SE> 510,889
<TOTAL-LIABILITY-AND-EQUITY> 7,231,257
369,888
<INVESTMENT-INCOME> 475,924
<INVESTMENT-GAINS> 1,612
<OTHER-INCOME> 32,663
<BENEFITS> 509,506
<UNDERWRITING-AMORTIZATION> 84,533
<UNDERWRITING-OTHER> 165,014
<INCOME-PRETAX> 121,034
<INCOME-TAX> 41,152
<INCOME-CONTINUING> 76,665<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,665
<EPS-PRIMARY> 2.68
<EPS-DILUTED> 2.68
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Net of minority interest in consolidated subsidiaries of $3,217.
</FN>
</TABLE>
