SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE
PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A
PLC CAPITAL TRUST I 8.25% TRUST ORIGINATED PREFERRED SECURITIES
FELINE PRIDES UNITS
GUARANTEES ISSUED FOR THE BENEFIT OF HOLDERS OF:
PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A
PLC CAPITAL TRUST I 8.25% TRUST ORIGINATED PREFERRED SECURITIES
(Title of class)
Name of each exchange
ON WHICH REGISTERED
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months 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. [X]
Aggregate market value of voting stock held by nonaffiliates of the Registrant
as of March 6, 1998: $1,973,867,813
Number of shares of Common Stock, $0.50 Par Value, outstanding as of March 6,
1998: 30,879,132
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Annual Report To Stockholders (the "1997
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 27, 1998, are
incorporated by reference into Part III of this Report.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<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 and
Chief Executive Officer
June 19, 1998
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.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
<TABLE>
<CAPTION>
<S> <C> <C>
/S/DRAYTON NABERS, JR. Chairman of the Board and June 19, 1998
DRAYTON NABERS, JR. Chief Executive Officer
(Principal Executive Officer)
and Director
/S/JOHN D. JOHNS President and Chief Operating Officer June 19, 1998
JOHN D. JOHNS (Principal Financial Officer)
and Director
/S/JERRY W. DEFOOR Vice President and Controller, June 19, 1998
JERRY W. DEFOOR and Chief Accounting Officer
(Principal Accounting Officer)
* Chairman Emeritus and June 19, 1998
- ----------------------------
WILLIAM J. RUSHTON III Director
* Director June 19, 1998
- ----------------------------
JOHN W. WOODS
* Director June 19, 1998
- ----------------------------
WILLIAM J. CABANISS, JR.
<PAGE>
* Director June 19, 1998
- ----------------------------
JOHN J. MCMAHON, JR.
* Director June 19, 1998
- ----------------------------
A. W. DAHLBERG
* Director June 19, 1998
- ----------------------------
JOHN W. ROUSE, JR.
* Director June 19, 1998
- ----------------------------
ROBERT T. DAVID
* Director June 19, 1998
- ----------------------------
RONALD L. KUEHN, JR.
* Director June 19, 1998
- ----------------------------
HERBERT A. SKLENAR
* Director June 19, 1998
- ----------------------------
JAMES S. M. FRENCH
* Director June 19, 1998
- ----------------------------
ROBERT A. YELLOWLEES
* Director June 19, 1998
- ----------------------------
ELAINE L. CHAO
* Director June 19, 1998
- ----------------------------
DONALD M. JAMES
</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
<PAGE>
<PAGE>
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company operates seven divisions whose principal strategic focuses can be
grouped into three general categories: life insurance, specialty insurance
products, and retirement savings and investment products. The Company's
divisions are: Acquisitions, Individual Life, West Coast, Dental and Consumer
Benefits ("Dental"), Financial Institutions, Guaranteed Investment Contracts
("GIC"), and Investment Products. The Company also has an additional business
segment which is described herein as Corporate and Other.
The Dental Division (formerly known as the Group Division) recently exited from
the traditional group major medical business, fulfilling the Division's strategy
to focus primarily on dental and related products. Accordingly, the Division was
renamed the Dental and Consumer Benefits Division.
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of premiums and
policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
Year Ended Amount Percentage
December 31 (in thousands) Increase
---------- -------------- ----------
1995 $432,576 7.4%
1996 494,153 14.2
1997 522,335 5.7
Premiums and policy fees increased $61.6 million or 14.2% in 1996 over 1995. The
coinsurance by the Acquisitions Division of three blocks of policies during 1996
resulted in a $19.2 million increase in premiums and policy fees. Decreases in
older acquired blocks resulted in an $11.1 million decrease in premiums and
policy fees. Individual Life premiums and policy fees increased $17.7 million.
Premiums and policy fees from the Dental Division increased $25.3 million.
Premiums and policy fees related to the Dental Division's dental business
increased $33.7 million. This increase was partially offset by a reduction to
premiums related to a refund of premiums to certain cancer insurance
policyholders and to decreases in traditional group health premiums. Premiums
and policy fees from the Financial Institutions Division increased $7.8 million.
This resulted from the coinsurance of a block of policies in 1996 representing a
$32.6 million increase in premiums and policy fees. This increase was largely
offset by decreases resulting from a reinsurance arrangement begun in 1995,
whereby most of the Division's new credit insurance sales are being ceded to a
reinsurer. Premiums and policy fees from the Investment Products Division
increased $3.6 million.
<PAGE>
Premiums and policy fees increased $28.2 million or 5.7% in 1997 over 1996. The
coinsurance by the Acquisitions Division of a block of policies and the
acquisition of a small life insurance company in late 1996 resulted in a $4.4
million increase in premiums and policy fees. Decreases in older acquired blocks
resulted in an $8.3 million decrease in premiums and policy fees. The Individual
Life Division's premiums and policy fees increased $10.8 million. The June 1997
acquisition of West Coast Life Insurance Company ("West Coast") increased
premiums and policy fees $14.1 million. The Dental Division's exit from the
group major medical business during 1997 resulted in a $31.1 million decrease in
premiums and policy fees. Premiums and policy fees related to the Dental
Division's other businesses increased $35.7 million. Premiums and policy fees
from the Financial Institutions Division decreased $1.2 million. Decreases of
$10.2 million resulted from the reinsurance arrangement begun in 1995. Decreases
of $17.1 million relate to the normal decrease in premiums on a closed block of
credit insurance policies reinsured in 1996. The recent acquisition of the
Western Diversified Group ("Western Diversified") and coinsurance of an
unrelated closed block of credit insurance policies increased premiums and
policy fees $26.1 million. The increase in premiums and policy fees from the
Investment Products Division was $4.2 million.
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
Percentage
Earned
Year Ended Amount Percentage on Average Cash
December 31 (in thousands) Increase and Investments
----------- -------------- ---------- -----------------
1995 $475,924 13.9% 8.2 %
1996 517,483 8.7 8.1
1997 591,376 14.3 8.0
Net investment income in 1996 was $41.6 million or 8.7% higher than in 1995, and
in 1997 was $73.9 million or 14.3% higher than the preceding year, primarily due
to increases in the average amount of invested assets. Invested assets have
increased primarily due to acquisitions and to receiving annuity and GIC
deposits. In 1996, the assumption of four blocks of policies during the year
resulted in an increase in net investment income of $18.4 million. The
coinsurance of a block of policies and the acquisition of a small life insurance
company in late 1996, and the acquisition of West Coast, Western Diversified,
and the block
<PAGE>
of credit insurance policies in 1997 resulted in an increase in net investment
income of $39.4 million in 1997.
The percentage earned on average cash and investments in 1996 was 8.1%, and in
1997 was 8.0%, each slightly below that of the preceding year due to a general
decline in interest rates.
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)
Year Ended Amount
December 31 (in thousands)
----------- --------------
1995 $1,612
1996 5,510
1997 830
The Company maintains an allowance for uncollectible amounts on investments. The
allowance totaled $31.6 million at December 31, 1996 and $23.7 million at
December 31, 1997.
Realized investment gains in 1996 of $19.3 million were largely offset by
realized investment losses of $13.8 million. In 1996, the Company sold $554
million of its mortgage loans in a securitization transaction, resulting in a
$6.1 million realized investment gain. Realized investment losses in 1996 were
reduced by a $1.8 million reduction to the allowance for uncollectible amounts
on investments.
Realized investment gains in 1997 of $34.3 million were largely offset by
realized investment losses of $33.5 million, including a loss of $6.9 million
incurred in connection with the sale of $445 million of mortgage loans in a
securitization transaction. Realized investment losses in 1997 were reduced by a
$7.9 million reduction to the allowance for uncollectible amounts on
investments.
<PAGE>
OTHER INCOME
The following table sets forth other income for the periods shown:
OTHER INCOME
Year Ended Amount
December 31 (in thousands)
----------- --------------
1995 $11,768
1996 20,857
1997 32,784
Other income consists primarily of revenues of the Company's broker-dealer
subsidiary, fees from variable insurance products and
administrative-services-only types of group accident and health insurance
contracts, revenues of the Company's wholly owned insurance marketing
organizations and small noninsurance subsidiaries, and the results of the
Company's 50%-owned joint venture in Hong Kong. In 1996, revenues from the
Company's broker-dealer subsidiary increased $4.2 million. Other income from all
other sources increased $4.9 million. In 1997, revenues from the Company's
broker-dealer subsidiary increased $5.5 million. Other income from all other
sources increased $6.4 million.
<PAGE>
INCOME BEFORE INCOME TAX
The following table sets forth operating income or loss and income or loss
before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE
INCOME TAX YEAR ENDED DECEMBER 31
(in thousands)
1995 1996 1997
---- ---- ----
OPERATING INCOME (LOSS) (1),(2)
LIFE INSURANCE
Acquisitions $ 48,490 $ 52,670 $ 55,638
Individual Life 13,490 14,027 20,384
West Coast 8,202
SPECIALTY INSURANCE PRODUCTS
Dental 10,060 5,138 16,259
Financial Institutions 8,375 9,531 14,112
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GIC 31,557 40,082 28,116
Investment Products 6,352 9,624 11,347
Corporate and Other (2) (2,287) 2,070 15,022
--------- -------- --------
Total operating income 116,037 133,142 169,080
--------- -------- --------
REALIZED INVESTMENT GAINS (LOSSES)
Individual Life 3,098
GIC (3,908) (7,963) (3,179)
Investment Products 4,937 3,858 589
Unallocated Realized
Investment Gains (Losses) 583 6,517 3,420
RELATED AMORTIZATION OF DEFERRED
POLICY ACQUISITION COSTS
Individual Life (1,974)
Investment Products (1,565) (1,887) (373)
--------- -------- --------
Total net 47 1,649 457
--------- -------- --------
INCOME (LOSS) BEFORE INCOME TAX(2)
LIFE INSURANCE
Acquisitions 48,490 52,670 55,638
Individual Life 13,490 15,151 20,384
West Coast 8,202
SPECIALTY INSURANCE PRODUCTS
Dental 10,060 5,138 16,259
Financial Institutions 8,375 9,531 14,112
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GIC 27,649 32,119 24,937
Investment Products 9,724 11,595 11,563
Corporate and Other (2) (2,287) 2,070 15,022
Unallocated Realized
Investment Gains (Losses) 583 6,517 3,420
--------- -------- --------
Total income before
income tax $116,084 $134,791 $169,537
========= ======== ========
(1) Income before income tax excluding realized investment gains and losses and
related amortization of deferred acquisition costs.
(2) Operating income and income before income tax for the Corporate and Other
segment have been reduced by pretax minority interest in income of consolidated
subsidiaries of $4,950 in 1995 and 1996, and $9,836 in 1997. Such minority
interest relates to payments made on the Company's MIPS(SM), TOPrS(SM), and
FELINE PRIDES(SM).
<PAGE>
In the ordinary course of business, the Acquisitions Division regularly
considers acquisitions of smaller insurance companies or blocks of policies.
Blocks of policies acquired through the Division are usually administered as
"closed" blocks; i.e., no new policies are sold. Therefore, earnings from the
Acquisitions Division are normally expected to decline over time (due to the
lapsing of policies resulting from deaths of insureds or terminations of
coverage) unless new acquisitions are made. The Division's 1996 pretax earnings
increased $4.2 million to $52.7 million. New acquisitions resulted in a $4.7
million increase in 1996 pretax earnings. The Division's 1997 pretax earnings
increased $2.9 million to $55.6 million. The Division's mortality experience was
approximately $6.0 million more favorable in 1997 than in 1996. In addition, the
Division's newest acquisitions represented a $1.8 million increase in 1997
pretax earnings.
The Individual Life Division had 1996 pretax operating earnings of $14.0
million, $0.5 million above 1995. The Division's 1997 pretax operating earnings
were $20.4 million, $6.4 million above 1996, even though the Division
experienced record high mortality in the second quarter. The increase was
primarily due to growth and improved expense control. Realized investment gains,
net of related amortization of deferred policy acquisition costs, associated
with this Division were $1.1 million in 1996 and none in 1997. As a result,
total pretax earnings were $15.1 million in 1996 and $20.4 million in 1997.
Headquartered in San Francisco, West Coast was acquired by the Company on June
3, 1997. For the seven months of 1997 that it was a subsidiary of the Company,
the West Coast Division had pretax operating earnings of $8.2 million.
The Dental Division's 1996 pretax earnings of $5.1 million were lower than 1995.
A refund of cancer premiums and related expenses resulted in a $6.8 million
decrease in the Division's pretax earnings. Dental earnings improved $4.9
million and traditional group health earnings declined by $1.9 million. The
Division's 1997 pretax earnings were $16.3 million. Dental earnings were $11.1
million, an increase of $1.6 million, before expenses of $2.2 million to develop
a new discounted fee-for-service dental program. Pretax earnings included a
one-time release of reserves associated with exiting the group major medical
business of $1.8 million. Lower cancer earnings partially offset improved
results in other lines.
The Financial Institutions Division's pretax earnings increased $1.1 million to
$9.5 million in 1996. Included in the Division's 1996 results are earnings from
the coinsurance of a block of policies in the second quarter of 1996. The
Division's 1997 pretax earnings increased $4.6 million to $14.1 million. The
Division's results include earnings from recent acquisitions. At the end of the
1997 third quarter, the Division acquired the Western Diversified Group and
coinsured an unrelated block of policies.
The GIC Division had pretax operating earnings of $40.1 million in 1996 and
$28.1 million in 1997. The 1996 increase was due to improved operating spreads
and to the growth in GIC deposits. Several factors contributed to the 1997
decline. In December 1996, the Company sold a major portion of its bank loan
participations in a securitization transaction which had the effect of reducing
the Division's earnings and increasing earnings in the Corporate and Other
segment. In order to better match assets to liabilities on a divisional level,
the Company shortened the duration of GIC Division invested assets and
lengthened the duration of the other divisions' invested assets. As a result,
GIC earnings were reduced and earnings of the other divisions were increased.
Realized investment losses associated
<PAGE>
with this Division in 1996 were $8.0 million as compared to $3.2 million in
1997. As a result, total pretax earnings were $32.1 million in 1996 and $24.9
million in 1997. The rate of growth in GIC deposits has decreased as the amount
of maturing contracts has increased.
The Investment Products Division's 1996 pretax operating earnings were $9.6
million which was $3.2 million higher than 1995. Earnings increased primarily
due to growth in variable annuity deposits. The Division's 1997 pretax operating
earnings were $11.4 million, an increase of $1.7 million. Realized investment
gains, net of related amortization of deferred policy acquisition costs, were
$2.0 million in 1996 as compared with $0.2 million in 1997. As a result, total
pretax earnings were $11.6 million in 1996 and 1997.
The Corporate and Other segment consists primarily of net investment income on
capital, interest expense on substantially all debt, the Company's 50%-owned
joint venture in Hong Kong, several small insurance lines of business, and the
operations of several small noninsurance subsidiaries. 1996 pretax operating
earnings for this segment increased $4.3 million to $2.1 million due to improved
operating results from the Company's joint venture in Hong Kong and increased
net investment income on capital. The segment's pretax operating earnings
increased $12.9 million to $15.0 million in 1997. In 1997, the Company sold its
interest in a money management venture resulting in income of $4.1 million. The
remaining increase in earnings relates primarily to increased net investment
income on capital, income from the Company's participation commercial mortgage
loan program, and income from a securitization transaction.
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the periods
shown:
INCOME TAX EXPENSE
Year Ended December 31 Effective Income Tax Rates
---------------------- --------------------------
1995 34%
1996 34
1997 34
Management's current estimate of the effective tax rate for 1998 is between 34%
and 35%.
<PAGE>
NET INCOME
The following table sets forth net income and net income per share for the
periods shown:
<TABLE>
<CAPTION>
NET INCOME
Per Per
Year Ended Amount Share- Percentage Share- Percentage
December 31 (in thousands) Basic Increase Diluted Increase
------------ -------------- ----- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1995 $ 76,665 $2.67 4.3% $2.66 4.7%
1996 89,012 2.94 9.7 2.92 9.8
1997 111,993 3.59 22.1 3.56 21.9
</TABLE>
Net income per share-basic in 1996 increased 9.7%, reflecting improved operating
earnings in the Acquisitions, Financial Institutions, GIC, Individual Life, and
Investment Products Divisions and Corporate and Other segment, and higher
realized investment gains partially offset by lower earnings in the Dental
Division. Net income per share-basic in 1997 increased 22.1%, reflecting
improved operating earnings in the Acquisitions, Individual Life, West Coast,
Dental, Financial Institutions, and Investment Products Divisions and the
Corporate and Other segment, which were partially offset by lower operating
earnings in the GIC Division and lower realized investment gains (net of related
amortization of deferred policy acquisition costs).
KNOWN TRENDS AND UNCERTAINTIES
The operating results of companies in the insurance industry have historically
been subject to significant fluctuations due to competition, economic
conditions, interest rates, investment performance, maintenance of insurance
ratings, and other factors. Certain known trends and uncertainties which may
affect future results of the Company are discussed more fully below.
* MATURE INDUSTRY/COMPETITION. Life and health insurance is a mature industry.
In recent years, the industry has experienced virtually no growth in life
insurance sales, though the aging population has increased the demand for
retirement savings products. Insurance is a highly competitive industry, and the
Company encounters significant competition in all lines of business from other
insurance companies, many of which have greater financial resources than the
Company, as well as competition from other providers of financial services.
The life and health insurance industry is consolidating with larger, more
efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to attract and retain distribution channels to
market its insurance and investment products, its ability to develop competitive
and profitable products, its ability to maintain low unit costs, and its
maintenance of strong claims-paying and financial strength ratings from rating
agencies.
<PAGE>
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
* RATINGS. Ratings are an important factor in the competitive position of
insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company's insurance
subsidiaries. A downgrade in the ratings of the Company's life insurance
subsidiaries could adversely affect its ability to sell its products and its
ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While most of
the considered factors relate to the rated company, some of the factors relate
to general economic conditions and circumstances outside the rated company's
control. For the past several years, rating downgrades in the industry have
exceeded upgrades.
* POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year to
year on account of fluctuations in policy claims received by the Company.
* LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the
Company's insurance subsidiaries allow policyholders and contractholders to
withdraw their funds under defined circumstances. The Company's insurance
subsidiaries design products and configure investment portfolios to provide and
maintain sufficient liquidity to support anticipated withdrawal demands and
contract benefits and maturities. Formal asset/liability management programs and
procedures are used continuously to monitor the relative duration of the
Company's assets and liabilities. While the Company's insurance subsidiaries own
a significant amount of liquid assets, many of their assets are relatively
illiquid. Significant unanticipated withdrawal or surrender activity could,
under some circumstances, compel the Company's insurance subsidiaries to dispose
of illiquid assets on unfavorable terms, which could have a material adverse
effect on the Company.
* INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in interest
rates expose insurance companies to the risk of not earning anticipated spreads
between the interest rate earned on investments and the credited rates paid on
outstanding policies. Both rising and declining interest rates can negatively
affect the Company's spread income. For example, certain of the Company's
insurance and investment products guarantee a minimum credited rate. While the
Company develops and maintains asset/liability management programs and
procedures designed to preserve spread income in rising or falling interest rate
environments, no assurance can be given that sudden and/or significant changes
in interest rates will not materially affect
<PAGE>
such spreads.
Lower interest rates may result in lower sales of the Company's insurance and
investment products.
* 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 over
all aspects of the insurance business including premium rates, marketing
practices, advertising, policy forms, and capital adequacy, and is concerned
primarily with the protection of policyholders rather than stockholders. The
Company cannot predict the form of any future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income tax
payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. Congress is currently reviewing
certain proposals contained in President Clinton's Fiscal Year 1999 Budget
which, if enacted, would adversely impact the tax treatment of variable annuity
and certain other life insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including the Company's subsidiaries, would be adversely
affected with respect to their ability to sell such products, and, depending on
grandfathering provisions, the surrenders of existing annuity contracts and life
insurance policies. 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
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. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. The Company and
its subsidiaries, like other insurers, in the ordinary course of business, are
involved in such litigation. The outcome of any such litigation cannot be
predicted with certainty. In addition, in some class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
* INVESTMENT RISKS. The Company's invested assets are subject to
customary risks of credit defaults and changes in market values.
<PAGE>
The value of the Company's commercial mortgage portfolio depends in part on the
credit worthiness of the tenants occupying the properties which the Company has
financed. Factors that may affect the overall default rate on, and market value
of, the Company's invested assets include interest rate levels, financial market
performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
* CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively pursued a
strategy of acquiring blocks of insurance policies and small insurance
companies. 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.
* RELIANCE ON THE PERFORMANCE OF OTHERS. The Company has entered into various
ventures involving other parties. Examples include, but are not limited to: many
of the Company's products are sold through independent distribution channels;
the Investment Products Division's variable annuity deposits are invested in
funds managed by unaffiliated investment managers; a portion of the sales in the
Individual Life, Dental, and Financial Institutions Divisions comes from
arrangements with unrelated marketing organizations; and the Company has entered
the Hong Kong insurance market in a joint venture. Therefore the Company's
results may be affected by the performance of others.
* YEAR 2000. Older computer hardware and software often denote the year using
two digits rather than four; for example, the year 1997 is denoted as 97. It is
probable that such hardware and software will malfunction when calculations
involving the year 2000 are attempted because the hardware and/or software will
interpret 00 as representing the year 1900 rather than the year 2000. This "Year
2000" problem potentially affects all individuals and companies (including the
Company, and its suppliers, customers, and business partners) who rely upon
computers or devices containing computer chips. While the Company has developed
and implemented programs and procedures designed to correct or replace the
hardware and/or software it relies upon that have a Year 2000 problem, no
assurance can be given that the Year 2000 problem will not affect the Company.
* REINSURANCE. As is customary in the insurance industry, the Company's
insurance subsidiaries cede insurance to other insurance companies. However, the
ceding insurance company remains liable with respect to ceded insurance should
any reinsurer fail to meet the obligations assumed by it.
<PAGE>
Additionally, the Company assumes policies of other insurers. Any regulatory or
other development affecting the ceding insurer could also have an effect on the
Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits." This statement revises the footnote disclosures about
pension and other postretirement benefit
plans and its adoption will have no
effect on the Company's 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. 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.
Many of the Company's products contain surrender charges and other features that
reward persistency and penalize the early withdrawal of funds. Surrender charges
for these products generally are sufficient to cover the Company's unamortized
deferred policy acquisition costs with respect to the policy being surrendered.
GICs and certain annuity contracts have market-value adjustments that protect
the Company against investment losses if interest rates are higher at the time
of surrender than at the time of issue.
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, 1997, the fixed maturity investments (bonds and redeemable
preferred stocks) had a market value of $6,374.3 million, which is 2% above
amortized cost (less allowances for uncollectible amounts on investments) of
$6,247.9 million. The Company had $1,312.8 million in mortgage loans at December
31, 1997. While the Company's mortgage loans do not have quoted market values,
at December 31, 1997, the Company estimates the market value of its mortgage
loans to be $1,405.5 million (using discounted cash flows from the next call
date) which is 7.1% above amortized cost. Most of the Company's mortgage loans
have significant prepayment penalties. These assets are invested for terms
approximately corresponding to anticipated future benefit payments. Thus, market
fluctuations should not adversely affect liquidity.
For several years 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
<PAGE>
cash flows from the underlying real estate. Approximately $465 million of the
Company's mortgage loans have this participation feature.
At December 31, 1997, delinquent mortgage loans and foreclosed properties were
0.2% of assets. Bonds rated less than investment grade were 2.1% 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 $23.7 million at December
31, 1997.
Policy loans at December 31, 1997, were $194.1 million, a decrease of $4.3
million from December 31, 1996, (after excluding the $31.7 million of policy
loans obtained through acquisitions). Policy loan rates are generally in the
4.5% to 8.0% range. Such rates at least equal the assumed interest rates used
for future policy benefits.
The Company believes its asset/liability management programs and procedures 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 management programs and
procedures 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 management programs and procedures involve the
monitoring of asset and liability durations for various product lines; cash flow
testing under various interest rate scenarios; and the continuous rebalancing of
assets and liabilities with respect to yield, risk, and cash flow
characteristics. It is the Company's general policy to maintain asset and
liability durations within one-half year of one another, although from time to
time a broader interval may be allowed.
The Company does not use derivative financial instruments for trading purposes.
Combinations of futures contracts, interest rate options, and interest rate
swaps are sometimes used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
GICs and annuities. Realized investment gains and losses of such contracts are
deferred and amortized over the life of the hedged asset. Net realized gains of
$1.5 million were deferred in 1997. At December 31, 1997, options and open
futures contracts with a notional amount of $925.0 million were in a $0.4
million net unrealized loss position.
<PAGE>
The Company has used interest rate swap contracts and options to enter into
interest rate swap contracts (swaptions) to convert certain investments from a
variable rate of interest to a fixed rate of interest and from a fixed rate to a
variable rate of interest, and to convert its Senior Notes, Medium-Term Notes,
Monthly Income Preferred Securities ("MIPSSM"), and Trust Originated Preferred
Securities ("TOPrSSM") from a fixed rate to a variable rate of interest. Amounts
paid or received related to the initiation of interest rate swap contracts and
swaptions are deferred and amortized over the life of the related debt. Amounts
paid and received related to the sale of interest rate swap contracts and
swaptions were $0.5 million and $1.0 million, respectively, in 1997. At December
31, 1997, related open interest rate swap contracts and swaptions with a
notional amount of $385.3 million were in a $3.1 million net unrealized gain
position.
In connection with a commercial mortgage loan securitization, the Company
entered into interest rate swap
contracts converting a fixed rate of interest to a floating rate of interest and
converting a floating rate of interest to a fixed rate of interest with notional
amounts at December 31, 1997, of $332.4 million and $200.0 million,
respectively. In the aggregate, there were no net unrealized gains or losses
associated with these swap contracts at December 31, 1997.
GIC withdrawals were approximately $700 million during 1997. Withdrawals related
to GIC contracts are estimated to be approximately $900 million in 1998. The
Company's asset/liability management programs and procedures take into account
GIC withdrawals. Accordingly, the Company does not expect GIC withdrawals to
have an unusual effect on the future operations and liquidity of the Company.
In anticipation of receiving GIC and annuity deposits, the life insurance
subsidiaries were committed at December 31, 1997, to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $400.2
million. The Company's subsidiaries held $116.3 million in cash and short-term
investments at December 31, 1997. Protective Life Corporation had an additional
$7.3 million in cash and short-term investments available for general corporate
purposes.
While the Company generally anticipates that the cash flow 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 use when
needed. 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.
<PAGE>
During 1996, the Company completed a public offering of two million shares of
its Common Stock. Net proceeds of approximately $70.5 million were primarily
invested in the Company's insurance subsidiaries to support future growth.
Also during 1996, the Company issued $45 million (in four separate offerings) of
Medium-Term Notes. Net proceeds of $43.8 million were used to repay bank
borrowings. The notes bear interest rates ranging from 7.00% to 7.45% and mature
in 2011.
During 1997, a special purpose finance subsidiary of the Company, PLC Capital
Trust I issued $75 million of 8.25% Trust Originated Preferred Securities
("TOPrS"), guaranteed on a subordinated basis by the Company. The TOPrS are
redeemable by PLC Capital Trust I at any time on or after April 29, 2002. Net
proceeds of approximately $72.6 million were used to repay bank borrowings.
Also during 1997, another special purpose finance subsidiary, PLC Capital Trust
II, issued $115 million of FELINE PRIDESSM which are comprised of a stock
purchase contract and a beneficial ownership of 6.5% TOPrS. Under the stock
purchase contract, on February 16, 2001, the holders will purchase shares of the
Company's Common Stock from the Company. The holders may generally settle the
contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS
back to the Company. The shares of Common Stock issuable range from
approximately 1.8 million shares if the price of the Company's Common Stock is
greater than or equal to $65.04 to approximately 2.2 million shares if the stock
price is less than or equal to $53.31. The 6.5% TOPrS are guaranteed on a
subordinated basis by the Company. Net proceeds of approximately $111 million
were invested in the Company's insurance subsidiaries and used to repay bank
borrowings.
In 1996, the Company sold approximately $554 million of its commercial mortgage
loans in a securitization transaction. Proceeds from the sale consisted of cash
of approximately $400 million, net of expenses, and securities issued in the
securitization transaction of approximately $161 million. The sale resulted in a
realized gain of approximately $6.1 million. In 1996, the Company also sold
approximately $315 million of its bank loan participations in a securitization
transaction. The sale resulted in a realized gain of approximately $0.5 million.
In a related transaction, the Company purchased $23 million of the securities
issued in the securitization transaction.
In 1997, the Company sold approximately $445 million of its commercial mortgage
loans in a securitization transaction. Proceeds from the sale consisted of cash
of approximately $328 million, net of expenses, and securities issued in the
securitization transaction of approximately $110 million. The Company is
investigating other securitization opportunities.
At December 31, 1997, Protective Life Corporation had no
<PAGE>
borrowings outstanding under its $70.0 million revolving line of
credit.
Protective Life Corporation's cash flow is dependent on cash dividends and
payments on surplus notes from its subsidiaries, revenues from investment, data
processing, legal and management services rendered to subsidiaries, and
investment income. At December 31, 1997, approximately $154 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 loans, or advances to the parent
company. In addition, the states in which the Company's insurance subsidiaries
are domiciled impose certain restrictions on the insurance subsidiaries' ability
to pay dividends to Protective Life Corporation. Also, distributions, including
cash dividends to Protective Life Corporation from its life insurance
subsidiaries, in excess of approximately $727 million, would be subject to
federal income tax at rates then effective.
Due to the expected growth of the Company's insurance sales, the Company plans
to retain substantial portions of the earnings of its insurance subsidiaries in
those companies primarily to support their future growth. Protective Life
Corporation's cash disbursements have from time to time
exceeded its cash receipts, and these 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 common stock 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 NAIC's risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. The achievement of long-term growth will
require growth in the statutory capital of the Company's insurance subsidiaries.
The subsidiaries may secure additional statutory capital through various
sources, such as retained statutory earnings or equity contributions by the
Company.
Under insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already
<PAGE>
reflected in the financial statements.
The Company and its subsidiaries, like other insurers, in the course of business
are involved in litigation. Although the outcome of any litigation cannot be
predicted with certainty, the Company believes that at the present time there
are no pending or threatened lawsuits that are reasonably likely to have a
material adverse effect on the financial position, results of operations, or
liquidity of the Company.
President Clinton's recent budget proposal contains provisions that would change
the way insurance companies and certain of their products are taxed, which, if
enacted by Congress would negatively affect 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.
IMPACT OF INFLATION
Inflation increases the need for life insurance. Many policyholders who once had
adequate insurance programs may increase their life insurance coverage to
provide the same relative financial benefits and protection. Inflation increases
the cost of health care. The adequacy of premium rates in relation to the level
of health claims is constantly monitored, and where appropriate, premium rates
on such policies are increased as policy benefits increase. Failure to make such
increases commensurate with healthcare cost increases may result in a loss from
health insurance.
The higher interest rates that have traditionally accompanied inflation may also
affect 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 life insurance and investment products may also be adversely affected by
rising interest rates.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
<TABLE>
<CAPTION>
(Dollars in thousands except per share amounts) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1997 - $334,899; 1996 - $308,174; 1995 - $333,173) $ 522,335 $ 494,153 $ 432,576
Net investment income 591,376 517,483 475,924
Realized investment gains 830 5,510 1,612
Other income 32,784 20,857 11,768
- ----------------------------------------------------------------------------------------------------------
Total revenues 1,147,325 1,038,003 921,880
- ----------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1997 - $180,605; 1996 - $215,424; 1995 - $247,229) 683,108 645,040 565,027
Amortization of deferred policy acquisition costs 107,227 91,030 82,733
Other operating expenses (net of reinsurance ceded:
1997 - $90,045; 1996 - $81,839; 1995 - $84,855) 177,617 162,192 153,086
- ----------------------------------------------------------------------------------------------------------
Total benefits and expenses 967,952 898,262 800,846
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX 179,373 139,741 121,034
- ----------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE
Current 78,799 47,522 44,862
Deferred (17,812) (10) (3,710)
- ----------------------------------------------------------------------------------------------------------
Total income tax expense 60,987 47,512 41,152
- ----------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 118,386 92,229 79,882
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 6,393 3,217 3,217
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 111,993 $ 89,012 $ 76,665
- ----------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - BASIC $ 3.59 $ 2.94 $ 2.67
NET INCOME PER SHARE - DILUTED $ 3.56 $ 2.92 $ 2.66
- ----------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PAID PER SHARE $ .78 $ .70 $ .62
- ----------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1997 - $6,247,947; 1996 - $4,671,600) $6,374,328 $4,686,072
Equity securities, at market (cost: 1997 - $24,983; 1996 - $31,669) 15,006 35,250
Mortgage loans on real estate 1,312,778 1,503,080
Investment real estate, net of accumulated depreciation (1997 - $671; 1996 - $2,268) 13,602 14,305
Policy loans 194,109 166,704
Other long-term investments 63,511 32,506
Short-term investments 76,086 114,258
- ------------------------------------------------------------------------------------------------------------------------
Total investments 8,049,420 6,552,175
Cash 47,502 121,051
Accrued investment income 95,616 70,544
Accounts and premiums receivable, net of allowance for uncollectible amounts
(1997 - $5,292; 1996 - $2,525) 47,784 47,371
Reinsurance receivables 591,613 332,614
Deferred policy acquisition costs 632,737 488,384
Property and equipment, net 36,957 36,091
Other assets 78,541 64,278
Assets related to separate accounts 931,465 550,697
- ------------------------------------------------------------------------------------------------------------------------
$10,511,635 $8,263,205
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Policy liabilities and accruals
Future policy benefits and claims $3,324,294 $2,448,449
Unearned premiums 400,857 260,937
- ------------------------------------------------------------------------------------------------------------------------
Total policy liabilities and accruals 3,725,151 2,709,386
Guaranteed investment contract deposits 2,684,676 2,474,728
Annuity deposits 1,511,553 1,331,067
Other policyholders' funds 183,233 142,221
Other liabilities 306,241 170,442
Accrued income taxes 4,907 (4,521)
Deferred income taxes 41,212 37,869
Short-term debt 12,800
Long-term debt 120,000 168,200
Liabilities related to separate accounts 931,465 550,697
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,508,438 7,592,889
- ------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES
- - Note G
- ------------------------------------------------------------------------------------------------------------------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES
9% Cumulative Monthly Income Preferred Securities, Series A 55,000 55,000
8.25% Trust Originated Preferred Securities 75,000
6.5% FELINE PRIDES 115,000
- ------------------------------------------------------------------------------------------------------------------------
Total guaranteed preferred beneficial interests 245,000 55,000
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value
Shares authorized: 3,600,000
Issued: none
Junior Participating Cumulative
Preferred Stock, $1 par value
Shares authorized: 400,000
Issued: none
Common Stock, $.50 par value 16,668 16,668
Shares authorized: 80,000,000
Issued: 33,336,462
Additional paid-in capital 167,923 166,713
Treasury stock, at cost (1997 - 2,515,320 shares; 1996 - 2,532,856 shares) (13,455) (11,874)
Unallocated stock in Employee Stock Ownership Plan (1997 - 693,122 shares;
1996 - 743,464 shares) (4,592) (4,925)
Retained earnings 529,926 442,046
Accumulated other comprehensive income
Net unrealized gains on investment (net of income tax: 1997 - $33,238; 1996 - $3,601) 61,727 6,688
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 758,197 615,316
- ------------------------------------------------------------------------------------------------------------------------
$10,511,635 $8,263,205
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Unallocated Net Unrealized Total
(Dollars in thousands Common Paid-In Treasury Stock in Retained Gains (Losses) Stockholders'
except per share amounts) Stock Capital Stock ESOP Earnings on Investments Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $15,668 $71,295 $(18,323) $(5,592) $314,857 $(107,532) $270,373
--------
Net income for 1995 76,665 76,665
Increase in net unrealized
gains on investments
(net of income tax - $89,623) 166,443 166,443
Reclassification adjustment for
amounts included in net income
(net of income tax - $(564)) (1,048) (1,048)
---------
Comprehensive income for 1995 242,060
---------
Cash dividends
($0.62 per share) (17,600) (17,600)
Purchase of treasury stock
(124 shares) (3) (3)
Reissuance of treasury stock
(1,332,566 shares) 24,801 6,243 31,044
Reissuance of treasury stock
to ESOP (16,158 shares) 275 75 (350) 0
Allocation of stock to employee
accounts (66,500 shares) 683 683
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 15,668 96,371 (12,008) (5,259) 373,922 57,863 526,557
---------
Net income for 1996 89,012 89,012
Decrease in net unrealized
gains on investments
(net of income tax - $(25,628)) (47,593) (47,593)
Reclassification adjustment for
amounts included in net income
(net of income tax - $(1,928)) (3,582) (3,582)
---------
Comprehensive income for 1996 37,837
---------
Cash dividends
($0.70 per share) (20,888) (20,888)
Issuance of common stock
(2,000,000 shares) 1,000 69,546 70,546
Reissuance of treasury stock
(8,641 shares) 220 41 261
Reissuance of treasury stock
to ESOP (19,847 shares) 576 93 (669) 0
Allocation of stock to employee
accounts (70,189 shares) 1,003 1,003
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 16,668 166,713 (11,874) (4,925) 442,046 6,688 615,316
---------
Net income for 1997 111,993 111,993
Increase in net unrealized
gains on investments
(net of income tax - $29,927) 55,579 55,579
Reclassification adjustment for
amounts included in net income
(net of income tax - $(290)) (540) (540)
---------
Comprehensive income for 1997 167,032
---------
Cash dividends
($ 0.78 per share) (24,113) (24,113)
Purchase of treasury stock
(37,375 shares) (1,839) (1,839)
Reissuance of treasury stock
(45,859 shares) 1,135 248 1,383
Reissuance of treasury stock
to ESOP (9,052 shares) 75 10 (85) 0
Allocation of stock to employee
accounts (59,394 shares) 418 418
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $16,668 $167,923 $(13,455) $(4,592) $529,926 $61,727 $758,197
- - Note H
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $111,993 $89,012 $76,665
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred policy acquisition costs 107,227 91,030 84,533
Capitalization of deferred policy acquisition costs (135,211) (77,078) (89,267)
Depreciation expense 5,441 7,484 5,524
Deferred income taxes (26,270) 8,458 (5,443)
Accrued income taxes 4,783 (14,603) 3,344
Interest credited to universal life and investment products 299,004 280,377 286,710
Policy fees assessed on universal life and investment products (131,582) (116,401) (100,840)
Change in accrued investment income and other receivables (161,727) (74,116) (160,523)
Change in policy liabilities and other policyholders'
funds of traditional life and health products 279,522 134,441 201,364
Change in other liabilities 72,778 17,301 4,245
Other, net (17,493) (15,699) (4,888)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 408,465 330,206 301,424
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments:
Investments available for sale 6,478,663 1,377,723 2,051,061
Other 324,242 168,898 78,568
Sale of investments:
Investments available for sale 1,110,058 1,591,669 1,533,604
Other 695,270 568,218 141,184
Cost of investments acquired:
Investments available for sale (8,465,132) (3,903,403) (3,667,448)
Other (718,335) (400,322) (540,648)
Acquisitions and bulk reinsurance assumptions (171,560) 264,126 (7,550)
Purchase of property and equipment (6,525) (7,848) (5,919)
Sale of property and equipment 2,681 856 309
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (750,638) (340,083) (416,839)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements
and long-term debt 1,339,438 1,107,372 1,215,000
Principal payments on line of credit arrangements
and long-term debt (1,400,438) (1,042,372) (1,197,500)
Issuance of guaranteed preferred beneficial interests 190,000
Purchase of treasury stock (1,839) (3)
Dividends to stockholders (24,113) (20,888) (17,600)
Issuance of common stock 70,546
Investment product deposits and change in
universal life deposits 910,659 949,122 908,064
Investment product withdrawals (745,083) (944,244) (785,622)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 268,624 119,536 122,339
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (73,549) 109,659 6,924
CASH AT BEGINNING OF YEAR 121,051 11,392 4,468
- ----------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $47,502 $121,051 $11,392
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt $12,588 $11,024 $9,320
Income taxes $71,535 $47,741 $41,532
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Reissuance of treasury stock to ESOP $85 $669 $350
Unallocated stock in ESOP $333 $334 $333
Reissuance of treasury stock $1,383 $261 $363
Acquisitions and bulk reinsurance assumptions:
Assets acquired $1,115,171 $296,935 $10,394
Liabilities assumed (902,357) (364,862) (25,651)
Reissuance of treasury stock (30,681)
- ----------------------------------------------------------------------------------------------------------
Net $212,814 $(67,927) $(45,938)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
ENTITIES INCLUDED
The consolidated financial statements include the accounts, after intercompany
eliminations, of Protective Life Corporation and its wholly owned subsidiaries.
Additionally, the financial statements include the accounts of majority-owned
subsidiaries. The ownership interest of the other stockholders of these
subsidiaries is reported as a liability of the Company and as an adjustment to
income. (See also Note E.)
NATURE OF OPERATIONS
The Company is a holding company that, through its subsidiary insurance
companies, produces, distributes, and services a diverse array of life
insurance, specialty insurance, and retirement savings and investment products.
The Company markets individual life insurance, dental insurance and managed care
services, credit life and disability insurance, guaranteed investment contracts,
guaranteed funding agreements, and fixed and variable annuities throughout the
United States. The Company also maintains a separate division devoted
exclusively to the acquisition of insurance policies from other companies, and
participates in a joint venture which owns a life insurance company in Hong
Kong. Founded in 1907, Protective Life Insurance Company ("Protective Life") is
the Company's principal operating subsidiary.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises
and by Insurance Enterprises for Certain Long-Duration Contracts;" SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage Servicing Rights."
In 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities;" SFAS No. 128,
"Earnings per Share;" SFAS No. 130, "Reporting Comprehensive Income;" and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 128 requires presentation of earnings per share on both a basic
and diluted basis and provides guidance for computing average shares
outstanding. Earnings per share data for all periods presented have been
restated herein in accordance with the Statement. SFAS No. 130 requires the
presentation of comprehensive income and its components in a financial statement
that is displayed with the same prominence as other financial statements. The
Company has reconfigured the Consolidated Statements of Stockholders' Equity
presented herein in accordance with this Statement. SFAS No. 131 requires
additional disclosures with respect to the Company's operating segments.
The adoption of these accounting standards did not have a material effect
on the Company's financial statements.
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.
<PAGE>
- - Short-term investments - at cost, which approximates current market value.
Substantially all short-term investments have maturities of three months
or less at the time of acquisition and include approximately $3.1 million in
bank deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses reduced by a related adjustment
to deferred policy acquisition costs, net of income tax, reported as a component
of 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.
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>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Total investments $ 7,933,017 $ 6,534,122
Deferred policy acquisition costs 654,175 496,148
All other assets 1,829,478 1,222,646
- --------------------------------------------------------------------------------
$ 10,416,670 $ 8,252,916
- --------------------------------------------------------------------------------
Deferred income taxes $ 7,974 $ 34,268
All other liabilities 9,467,226 7,555,020
- --------------------------------------------------------------------------------
9,475,200 7,589,288
- --------------------------------------------------------------------------------
Guaranteed preferred beneficial
interests in Company's subordinated
debentures 245,000 55,000
- --------------------------------------------------------------------------------
Stockholders' equity 696,470 608,628
- --------------------------------------------------------------------------------
$ 10,416,670 $ 8,252,916
- --------------------------------------------------------------------------------
</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, mortgage-backed securities, and
liabilities arising from interest-sensitive products such as guaranteed
investment contracts and annuities. Realized investment gains and losses on such
contracts are deferred and amortized over the life of the hedged asset. Net
realized gains of $1.5 million and net realized losses of $0.2 million were
deferred in 1997 and 1996, respectively. At December 31, 1997 and 1996, options
and open futures contracts with notional amounts of $925.0 million and $805.0
million, respectively, had net unrealized losses of $0.4 million and $1.9
million, respectively.
The Company uses interest rate swap contracts to convert certain
investments from a variable to a fixed rate of interest. At December 31, 1997,
related open interest rate swap contracts with a notional amount of $95.3
million were in a $0.1 million net unrealized loss position. At December 31,
1996, related open interest rate swap contracts with a notional amount of $150.3
million were in a $0.7 million net unrealized loss position. The Company also
uses interest rate swap contracts and options to enter into interest rate swaps
(swaptions) to convert its Senior Notes, Medium-Term Notes, Monthly Income
Preferred Securities and Trust Originated Preferred Securities from a fixed rate
to a variable rate of interest. Amounts paid or received related to the
initiation of interest rate swap contracts and swaptions are deferred and
amortized over the life of the related debt. Amounts paid and received related
to the sale of interest rate swap contracts and swaptions were $0.5 million and
$1.0 million, respectively, in 1997. Proceeds from the sale of swaptions
totaling $1.6 million were deferred in 1996. At December 31, 1997, related open
interest rate swap contracts and swaptions with a notional amount of $290.0
million were in a $3.2 million net unrealized gain position. At December 31,
1996, related open interest rate swap contracts and swaptions with a notional
amount of $130.0 million were in a $0.5 million net unrealized gain position.
In connection with a commercial mortgage loan securitization, the Company
entered into interest rate swap contracts converting a fixed rate of interest to
a floating rate of interest and converting a floating rate of interest to a
fixed rate of interest with notional amounts at December 31, 1997, of $332.4
million and $200.0 million, respectively. In the aggregate, there were no net
unrealized gains or losses associated with these swap contracts at December 31,
1997.
CASH
Cash includes all demand deposits reduced by the amount of outstanding checks
and drafts.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. The Company primarily uses the
straight-line method of depreciation based upon the estimated useful lives of
the assets. Major repairs or improvements are capitalized and depreciated over
the estimated useful lives of the assets. Other repairs are expensed as
incurred. The cost and related accumulated depreciation of property and
equipment sold or retired are removed from the accounts, and resulting gains or
losses are included in income.
<PAGE>
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Home Office building $37,459 $36,586
Data processing equipment 25,465 23,649
Other, principally furniture
and equipment 23,039 21,188
- --------------------------------------------------------------------------------
85,963 81,423
- --------------------------------------------------------------------------------
Accumulated depreciation 49,006 45,332
- --------------------------------------------------------------------------------
$36,957 $36,091
- --------------------------------------------------------------------------------
</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-like life
insurance policies, limited payment life insurance policies, and certain
annuities with life contingencies. Life insurance and immediate annuity premiums
are recognized as revenue when due. Health insurance premiums are recognized as
revenue over the terms of the policies. Benefits and expenses are associated
with earned premiums so that profits are recognized over the life of the
contracts. This is accomplished by means of the provision for liabilities for
future policy benefits and the amortization of deferred policy acquisition
costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions as to
investment yields, mortality, persistency, and other assumptions based on 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.
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance beginning of year $108,159 $ 73,642 $ 79,462
Less reinsurance 6,423 3,330 5,024
- --------------------------------------------------------------------------------
Net balance beginning
of year 101,736 70,312 74,438
- --------------------------------------------------------------------------------
Incurred related to:
Current year 258,322 275,524 216,839
Prior year (14,540) (2,417) (4,038)
- --------------------------------------------------------------------------------
Total incurred 243,782 273,107 212,801
- --------------------------------------------------------------------------------
Paid related to:
Current year 203,381 197,163 164,321
Prior year 58,104 57,812 48,834
- --------------------------------------------------------------------------------
Total paid 261,485 254,975 213,155
- --------------------------------------------------------------------------------
Other changes:
Acquisitions and reserve
transfers 3,415 13,292 (3,772)
- --------------------------------------------------------------------------------
Net balance end of year 87,448 101,736 70,312
Plus reinsurance 18,673 6,423 3,330
- --------------------------------------------------------------------------------
Balance end of year $106,121 $108,159 $ 73,642
- --------------------------------------------------------------------------------
</TABLE>
- - Universal Life and Investment Products. Universal life and investment products
include universal life insurance, guaranteed investment contracts, deferred
annuities, and annuities without life contingencies. Revenues for universal life
and investment products consist of policy fees that have been assessed against
policy account balances for the costs of insurance, policy administration, and
surrenders. Benefit reserves for universal life and investment products
represent policy account balances before applicable surrender charges plus
certain deferred policy initiation fees that are recognized in income over the
term of the policies. Policy benefits and claims that are charged to expense
include benefit claims incurred in the period in excess of related policy
account balances and interest credited to policy account balances. Interest
credit rates for universal life and investment products ranged from 3.0% to 9.4%
in 1997.
At December 31, 1997, the Company estimates the market value of its
guaranteed investment contracts to be $2,687.3 million using discounted cash
flows. The surrender value of the Company's annuities which approximates market
value was $1,494.6 million.
- - Policy Acquisition Costs. Commissions and other costs of acquiring traditional
life and health insurance, universal life insurance, and investment products
that vary with and are primarily related to the production of new business have
been deferred. Traditional life and health insurance acquisition costs are 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.
<PAGE>
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.
The cost to acquire blocks of insurance representing the present value of
future profits from such blocks of insurance is also included in deferred policy
acquisition costs. For acquisitions occurring after 1988, the Company amortizes
the present value of future profits over the premium payment period, including
accrued interest at approximately 8%. The unamortized present value of future
profits for such acquisitions was approximately $261.9 million and $149.9
million at December 31, 1997 and 1996, respectively. During 1996, $69.2 million
of present value of future profits on acquisitions made during the year was
capitalized, and $21.8 million was amortized. During 1997, $136.2 million of
present value of future profits on acquisitions made during the year was
capitalized, and $24.2 million was amortized. The unamortized present value of
future profits for all acquisitions was $274.9 million at December 31, 1997, and
$167.6 million at December 31, 1996.
PARTICIPATING POLICIES
Participating business comprises approximately 1% of the individual life
insurance in force and 2% of the individual life insurance premium income.
Policyholder dividends totaled $4.6 million in 1997, $4.1 million in 1996, and
$2.6 million in 1995.
INCOME TAXES
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.
NET INCOME PER SHARE
Net income per share - basic is net income divided by the average number of
shares of Common Stock outstanding including shares that are issuable under
various deferred compensation plans. The average shares outstanding used to
compute net income per share - basic were 31,214,625, 30,285,391, and 28,660,112
in 1997, 1996, and 1995, respectively.
Net income per share - diluted is net income divided by the average number
of shares outstanding including all dilutive potentially issuable shares that
are issuable under various stock-based compensation plans and stock purchase
contracts. The average shares outstanding used to compute net income per share -
diluted were 31,424,809, 30,484,832, and 28,852,849 in 1997, 1996, and 1995,
respectively.
A reconciliation of average shares outstanding for the years ended December
31 is summarized as follows:
Reconciliation of
Average Shares Outstanding
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Issued and outstanding 30,811,846 29,973,015 28,483,236
Issuable under
various deferred
compensation plans 402,779 312,376 176,876
- --------------------------------------------------------------------------------
Basic 31,214,625 30,285,391 28,660,112
Stock appreciation rights 16,776
Issuable under various
other stock-based
compensation plans 193,408 199,441 192,737
FELINE PRIDES stock
purchase contracts 0
- --------------------------------------------------------------------------------
Diluted 31,424,809 30,484,832 28,852,849
- --------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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 recorded at
their market values instead of amortized cost.
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
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory
reporting practices(1) $134,417 $102,337 $115,259 $579,111 $456,320 $324,416
Additions (deductions)
by adjustment:
Deferred policy acquisition
costs, net of amortization 10,310 (2,830) (765) 632,737 488,384 410,396
Deferred income tax 17,812 10 3,711 (41,212) (37,869) (69,520)
Asset Valuation Reserve 67,369 64,233 105,769
Interest Maintenance Reserve (1,434) (2,142) (1,235) 9,809 17,682 14,412
Nonadmitted items 30,500 21,610 20,603
Noninsurance affiliates 17,176 1,328 12,882 626,615 434,237 213,789
Minority interest in
consolidated subsidiaries (6,393) (3,217) (3,217)
Consolidation elimination (982,889) (632,601) (381,988)
Other valuation and timing differences (59,895) (6,474) (49,970) (163,843) (196,680) (111,320)
- ------------------------------------------------------------------------------------------------------------------------
In conformity with generally
accepted accounting principles $111,993 $ 89,012 $ 76,665 $758,197 $615,316 $526,557
- ------------------------------------------------------------------------------------------------------------------------
(1) Consolidated
</TABLE>
NOTE C. INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $402,664 $313,096 $276,847
Equity securities 2,841 2,124 1,338
Mortgage loans on
real estate 161,605 153,463 162,135
Investment real estate 2,057 1,954 1,908
Policy loans 11,370 10,377 8,958
Other, principally
short-term
investments 25,976 50,679 39,223
- --------------------------------------------------------------------------------
606,513 531,693 490,409
Investment expenses 15,137 14,210 14,485
- --------------------------------------------------------------------------------
$591,376 $517,483 $475,924
- --------------------------------------------------------------------------------
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $(8,354) $(7,101) $ 6,075
Equity securities 5,975 1,733 44
Mortgage loans and
other investments 3,209 10,878 (4,507)
- --------------------------------------------------------------------------------
$ 830 $ 5,510 $ 1,612
- --------------------------------------------------------------------------------
</TABLE>
The Company has established an allowance for uncollectible amounts on
investments. The allowance totaled $23.7 million and $31.6 million at December
31, 1997 and 1996, 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 $7.1
million in 1997, net realized investment gains of $3.7 million in 1996, and net
realized investment losses of $0.9 million in 1995.
In 1997, gross gains on the sale of investments available for sale (fixed
maturities, equity securities, and short-term investments) were $21.3 million,
and gross losses were $23.5 million. In 1996, gross gains were $6.9 million, and
gross losses were $11.8 million. In 1995, gross gains were $18.0 million, and
gross losses were $11.8 million.
<PAGE>
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 Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Values
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed
securities $2,982,276 $54,103 $16,589 $3,019,790
United States Govern-
ment and authorities 160,484 1,366 0 161,850
States, municipalities,
and political
subdivisions 31,621 532 0 32,153
Public utilities 481,681 7,241 0 488,922
Convertibles and
bonds with warrants 694 0 168 526
All other corporate
bonds 2,585,250 80,903 1,007 2,665,146
Redeemable preferred
stocks 5,941 0 0 5,941
- --------------------------------------------------------------------------------
6,247,947 144,145 17,764 6,374,328
Equity securities 24,983 300 10,277 15,006
Short-term investments 76,086 0 0 76,086
- --------------------------------------------------------------------------------
$6,349,016 $144,445 $28,041 $6,465,420
- --------------------------------------------------------------------------------
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Values
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed
securities $2,192,978 $29,925 $20,810 $2,202,093
United States Govern-
ment and authorities 348,318 661 1,377 347,602
States, municipalities,
and political
subdivisions 5,515 47 9 5,553
Public utilities 364,692 2,205 337 366,560
Convertibles and
bonds with warrants 679 0 158 521
All other corporate
bonds 1,702,351 33,879 29,388 1,706,842
Bank loan participations 49,829 0 0 49,829
Redeemable preferred
stocks 7,238 60 226 7,072
- --------------------------------------------------------------------------------
4,671,600 66,777 52,305 4,686,072
Equity securities 31,669 9,570 5,989 35,250
Short-term investments 114,258 0 0 114,258
- --------------------------------------------------------------------------------
$4,817,527 $76,347 $58,294 $4,835,580
- --------------------------------------------------------------------------------
</TABLE>
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>
Estimated
Amortized Market
1997 Cost Values
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 456,257 $ 461,000
Due after one year
through five years 2,774,823 2,815,586
Due after five years
through ten years 2,403,990 2,466,223
Due after ten years 612,877 631,519
- --------------------------------------------------------------------------------
$6,247,947 $6,374,328
- --------------------------------------------------------------------------------
<CAPTION>
Estimated
Amortized Market
1996 Cost Values
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 417,472 $ 420,779
Due after one year
through five years 1,547,842 1,546,297
Due after five years
through ten years 2,113,163 2,118,825
Due after ten years 593,123 600,171
- --------------------------------------------------------------------------------
$4,671,600 $4,686,072
- --------------------------------------------------------------------------------
The approximate percentage distribution of the Company's fixed maturity
investments by quality rating at December 31 is as follows:
<CAPTION>
Rating 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
AAA 41.0% 48.3%
AA 4.8 4.4
A 28.9 22.6
BBB
Bonds 21.8 21.1
Bank loan participations 0.1
BB or less
Bonds 3.4 2.5
Bank loan participations 0.9
Redeemable preferred stocks 0.1 0.1
- --------------------------------------------------------------------------------
100.0% 100.0%
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, the Company had bonds which were rated less
than investment grade of $221.2 million and $117.5 million, respectively, having
an amortized cost of $219.6 million and $137.0 million, respectively. At
December 31, 1997, approximately $89.6 million of the bonds rated less than the
investment grade were securities issued in Company-sponsored commercial mortgage
loan securitizations. Additionally, the Company had bank loan participations at
December 31, 1996, which were rated less than investment grade of $43.6 million,
having an amortized cost of $43.6 million.
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:
<PAGE>
1997 1996 1995
- --------------------------------------------------------------------------------
Fixed maturities $72,741 $(56,897) $199,395
Equity securities (8,813) 207 2,740
- --------------------------------------------------------------------------------
At December 31, 1997, all of the Company's mortgage loans were commercial
loans of which 75% were retail, 9% were apartments, 7% were office buildings,
and 7% were warehouses. The Company specializes in making mortgage loans on
either credit-oriented or credit-anchored commercial properties, most of which
are strip shopping centers in smaller towns and cities. No single tenant's
leased space represents more than 5% of mortgage loans. Approximately 84% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: Florida, Georgia, Texas, North Carolina,
Alabama, Virginia, South Carolina, Tennessee, Kentucky, California, Maryland,
Mississippi, Ohio, Michigan, and Indiana.
Many of the mortgage loans have call provisions after 5 to 7 years.
Assuming the loans are called at their next call dates, approximately $76.7
million would become due in 1998, $434.4 million in 1999 to 2002, and $129.7
million in 2003 to 2007.
At December 31, 1997, the average mortgage loan was $1.6 million, and the
weighted average interest rate was 8.8%. The largest single mortgage loan was
$12.8 million. While the Company's mortgage loans do not have quoted market
values, at December 31, 1997 and 1996, the Company estimates the market value of
its mortgage loans to be $1,405.5 million and $1,581.7 million, respectively,
using discounted cash flows from the next call date.
At December 31, 1997 and 1996, the Company's problem mortgage loans and
foreclosed properties totaled $17.7 million and $23.7 million, respectively.
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.
Certain investments, principally real estate, with a carrying value of $6.7
million, were nonincome producing for the twelve months ended December 31, 1997.
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>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate applied to
pretax income 35.0% 35.0% 35.0%
Amortization of
nondeductible
goodwill 0.3 0.3 0.2
Dividends received
deduction and
tax-exempt
interest (0.2) (0.4) (0.6)
Low-income housing
credit (0.5) (0.6) (0.7)
Tax differences arising
from prior acquisitions
and other adjustments (0.6) (0.3) 0.1
- --------------------------------------------------------------------------------
34.0% 34.0% 34.0%
- --------------------------------------------------------------------------------
The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December
31 are as follows:
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred policy
acquisition costs $ 7,368 $15,542 $(11,606)
Benefit and other
policy liability
changes (27,480) (16,321) 52,496
Temporary
differences of
investment income 2,516 2,922 (34,174)
Other items (216) (2,153) (10,426)
- --------------------------------------------------------------------------------
$(17,812) $ (10) $ (3,710)
- --------------------------------------------------------------------------------
The components of the Company's net deferred income tax liability as of
December 31 were as follows:
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder
liability reserves $145,880 $ 80,151
Other 2,369 2,356
- --------------------------------------------------------------------------------
148,249 82,507
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 151,209 117,696
Unrealized gain on investments 38,252 2,680
- --------------------------------------------------------------------------------
189,461 120,376
- --------------------------------------------------------------------------------
Net deferred income tax liability $ 41,212 $ 37,869
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
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, 1997, was approximately $73 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 $727 million, such excess
would be subject to federal income taxes at rates then effective. Deferred
income taxes have not been provided on amounts designated as Policyholders'
Surplus. The Company does not anticipate involuntarily paying income tax on
amounts in the Policyholders' Surplus accounts.
NOTE E. DEBT AND GUARANTEED PREFERRED BENEFICIAL INTERESTS
Short-term and long-term debt at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt:
Note payable to bank $ 12,800
- --------------------------------------------------------------------------------
$ 12,800
- --------------------------------------------------------------------------------
Long-term debt:
Notes payable to banks $ 48,200
Senior Notes $ 75,000 75,000
Medium-Term Notes 45,000 45,000
- --------------------------------------------------------------------------------
$ 120,000 $ 168,200
- --------------------------------------------------------------------------------
</TABLE>
Under a five-year revolving line of credit arrangement with several banks,
the Company can borrow up to $70 million on an unsecured basis. No compensating
balances are required to maintain the line of credit. At December 31, 1997, the
Company had no borrowings outstanding under this credit arrangement.
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 debt approximates book value
due to the debt being either short-term or having a variable rate of interest
after taking into account the effects of interest rate swaps.
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. During
1996, the Company issued $45 million of Medium-Term Notes with interest rates
ranging from 7.00% to 7.45%. These notes are due in 2011, and $35 million of the
notes are redeemable by the Company after five years.
As discussed in Note A, the Company uses interest rate swaps and swaptions
to convert its Senior Notes and Medium-Term Notes from a fixed interest rate to
a floating interest rate. The effective interest rate for the Senior Notes was
7.1% and 7.3% in 1997 and 1996, respectively. The effective interest rate for
the Medium-Term Notes was 6.5% in 1997 and 7.3% in 1996.
Future maturities of the long-term debt are $75 million in 2004 and $45
million in 2011.
Interest expense on debt totaled $10.8 million, $10.1 million, and $9.6
million in 1997, 1996, and 1995, respectively.
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 ("MIPSSM"). On April 29, 1997, another special
purpose finance subsidiary, PLC Capital Trust I issued $75 million of 8.25%
Trust Originated Preferred Securities ("TOPrSSM"). The MIPS and 8.25% TOPrS are
guaranteed on a subordinated basis by the Company. This guarantee, considered
together with the other obligations of the Company with respect to the MIPS and
8.25% TOPrS, constitutes a full and unconditional guarantee by the Company of
PLC Capital and PLC Capital Trust I's obligations with respect to the MIPS and
8.25% TOPrS.
PLC Capital and PLC Capital Trust I were formed solely to issue securities
and use the proceeds thereof to purchase subordinated debentures of the Company.
The sole assets of PLC Capital are $69.6 million of Protective Life Corporation
9% Subordinated Debentures due 2024, Series A. The sole assets of PLC Capital
Trust I are $77.3 million of Protective Life Corporation 8.25% Subordinated
Debentures due 2027, Series B. The Company has the right under the subordinated
debentures to extend interest payment periods up to five consecutive years, and,
as a consequence, dividends on the MIPS and 8.25% TOPrS 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 and PLC
Capital Trust I, respectively, during any such extended interest payment period.
The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999.
The 8.25% TOPrS are redeemable by PLC Capital Trust I at any time on or after
April 29, 2002.
On November 20, 1997, another special purpose finance subsidiary, PLC
Capital Trust II, issued $115 million of FELINE PRIDESSM which are comprised of
a stock purchase contract and a beneficial ownership of 6.5% TOPrS. The sole
assets of PLC Capital Trust II is $118.6 million of Protective Life Corporation
6.5% Subordinated Debentures due 2003,
<PAGE>
Series C. Under the stock purchase contract, on February 16, 2001, the holders
will purchase shares of the Company's Common Stock from the Company. The holders
may generally settle the contract in cash or by exercising their right to put,
in effect, the 6.5% TOPrS back to the Company. The shares of Common Stock
issuable range from approximately 1.8 million shares if the price of the
Company's Common Stock is greater than or equal to $65.04 to approximately 2.2
million shares if the stock price is less than or equal to $53.31. The 6.5%
TOPrS are guaranteed on a subordinated basis by the Company. Dividends on the
6.5% TOPrS may be deferred until maturity. The dividend rate on the 6.5% TOPrS
which remain outstanding after February 16, 2001, will be reset by a formula
specified in the agreement.
In related transactions, the Company entered into interest rate swap
agreements which effectively converted a portion of the MIPS and TOPrS from a
fixed dividend rate to a floating rate.
During 1997, the effective dividend rates on the MIPS and 8.25% TOPrS were
approximately 6.4% and 6.8%, respectively. During 1996, the effective rate on
the MIPS was approximately 6.2%.
Dividends, net of tax, on the MIPS, TOPrS, and FELINE PRIDES totaled $6.4
million in 1997, and $3.2 million in 1996 and 1995 before consideration of the
interest rate swap agreements. On a swap-adjusted basis, dividends were $5.0
million, $2.2 million, and $2.4 million in 1997, 1996, and 1995, respectively.
The MIPS, 8.25% TOPrS, and FELINE PRIDES are reported in the accompanying
balance sheets as "guaranteed preferred beneficial interests in Company's
subordinated debentures," and the related dividends are reported in the
accompanying statements of income as "minority interest in net income of
consolidated subsidiaries." The market values of the MIPS, TOPrS, and FELINE
PRIDES (See Note M) are estimated using quoted market prices.
NOTE F. RECENT ACQUISITIONS
In March 1995, the Company acquired National Health Care Systems of Florida,
Inc. (also known as "DentiCare"). In connection with the acquisition, the
Company reissued 1,316,458 shares of its Common Stock previously held as
Treasury Stock. In June 1995, the Company acquired through coinsurance a block
of term-like life insurance policies.
In January 1996, the Company acquired through coinsurance a block of life
insurance policies. In March 1996, the Company acquired a small dental managed
care company. In June 1996, the Company acquired through coinsurance a block of
credit life insurance policies. In December 1996, the Company acquired a small
life insurance company and acquired through coinsurance a related block of life
insurance policies.
In January 1997, the Company acquired a small dental managed care company.
A second small dental managed care company was acquired in February 1997, and a
third in August 1997. In June 1997, the Company acquired West Coast Life
Insurance Company ("West Coast"). In September 1997, the Company acquired the
Western Diversified Group. In October 1997, the Company coinsured a block of
credit policies.
These transactions have been accounted for as purchases, and the results of
the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
Summarized below are the consolidated results of operations of 1997 and
1996, on an unaudited pro forma basis, as if the West Coast and Western
Diversified Group acquisitions had occurred as of January 1, 1996. The pro forma
information is based on the Company's consolidated results of operations for
1997 and 1996 and on data provided by the respective companies, after giving
effect to certain pro forma adjustments. The pro forma financial information
does not purport to be indicative of results of operations that would have
occurred had the transaction occurred on the basis assumed above nor are they
indicative of results of the future operations of the combined enterprises.
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
(unaudited)
Total revenues $1,235,620 $1,192,748
Net income $ 115,166 $ 95,243
Net income per share - basic $ 3.69 $ 3.14
Net income per share - diluted $ 3.66 $ 3.12
- --------------------------------------------------------------------------------
</TABLE>
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 insurers in the
jurisdictions in which the Company does
<PAGE>
business involving the insurers' sales practices, alleged agent misconduct,
failure to properly supervise agents, and other matters. Increasingly these
lawsuits have resulted in the award of substantial judgments against the insurer
that are disproportionate to the actual damages, including material amounts of
punitive damages. In addition, in some class action and other lawsuits involving
insurers' sales practices, insurers have made material settlement payments. In
some states (including Alabama), juries have substantial discretion in awarding
punitive damages which creates the potential for unpredictable material adverse
judgments in any given punitive damage suit. The Company and its subsidiaries,
like other insurers, in the ordinary course of business, are involved in such
litigation. Although the outcome of any such litigation cannot be predicted with
certainty, the Company believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse effect
on the financial position, results of operations, or liquidity of the Company.
NOTE H. STOCKHOLDERS' EQUITY AND RESTRICTIONS
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
redemption 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,
1997. The remaining 3,600,000 shares of Preferred Stock, $1.00 par value, were
also unissued at December 31, 1997.
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 shares are dividend-paying and 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 1996, the Company transferred 19,847 shares of
Common Stock to the ESOP and transferred another 9,052 shares during 1997.
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 and total rate of return over a
four year award period (earlier upon the death, disability or retirement of the
executive, or in certain circumstances, of a change in control of the Company)
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 plans approved by stockholders in 1992 and 1997, up to
3,200,000 shares may be issued in payment of awards. The number of shares
granted in 1997, 1996, and 1995 was 49,390, 52,290, and 72,610, respectively,
having an approximate market value on the grant date of $2.0 million, $1.8
million, and $1.6 million, respectively. At December 31, 1997, outstanding
awards measured at target and maximum payouts were 261,318 and 353,385 shares,
respectively. The expense recorded by the Company for the Performance Share Plan
was $2.7 million, $3.0 million, and $2.9 million in 1997, 1996, and 1995,
respectively.
During 1996, stock appreciation rights ("SARs") were granted to certain
executives of the Company to provide long-term incentive compensation based on
the performance of the Company's Common Stock. Under this arrangement the
Company will pay (in shares of Company Common Stock) an amount equal to the
difference between the specified base price of the Company's Common Stock and
the market value at the exercise date. The SARs are exercisable after five years
(earlier upon the death, disability or retirement of the executive, or in
certain circumstances, of a change in control of the Company) and expire in 2006
or upon termination of employment. The number of SARs granted during 1996 and
outstanding at December 31, 1997 was 337,500. The SARs have a base price of
$34.875 per share of Company Common Stock (the market price on the grant date
was $35.00 per
<PAGE>
share). The estimated fair value of the SARs on the grant date was $3.0 million.
This estimate was derived using the Roll-Geske variation of the Black-Sholes
option pricing model. Assumptions used in the pricing model are as follows:
expected volatility rate of 15% (approximately equal to that of the S & P Life
Insurance Index), a risk free interest rate of 6.35%, a dividend yield rate of
1.97%, and an expected exercise date of August 15, 2002. The expense recorded by
the Company for the SARs was $0.6 million in 1997 and $0.2 million in 1996.
The Company has established deferred compensation plans for directors,
officers and others. Compensation deferred is credited to the participants 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, 1997, the plans had 421,301
shares of Common Stock equivalents credited to participants.
At December 31, 1997, approximately $154 million of consolidated
stockholders' equity, excluding net unrealized gains 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 1998 is estimated to
be $154 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 $21.4 million, $31.2 million, and $21.2
million in 1997, 1996, and 1995, respectively. The Company paid commissions,
interest, and service fees to these same corporations totaling $5.4 million,
$5.0 million, and $5.3 million in 1997, 1996, and 1995, respectively.
NOTE J. OPERATING SEGMENTS
The Company operates several divisions whose principal strategic focuses can be
grouped into three general categories: Life Insurance, Specialty Insurance
Products, and Retirement Savings and Investment Products. Each division has a
senior officer of the Company responsible for its operations. A division is
generally distinguished by products and/or channels of distribution. A brief
description of each division follows.
LIFE INSURANCE
- - ACQUISITIONS DIVISION. The Acquisitions Division focuses on acquiring,
converting, and servicing business acquired from other companies. These
acquisitions may be accomplished through acquisitions of companies or through
the assumption or reinsurance of life insurance and related policies.
- - INDIVIDUAL LIFE DIVISION. The Individual Life Division markets universal life
and other life insurance products on a national basis through a network of
independent insurance agents. The Division primarily utilizes a distribution
system based on experienced independent producing general agents who are
recruited by regional sales managers. In addition, the Division distributes
insurance products in the life insurance brokerage market.
- - WEST COAST DIVISION. The West Coast Division sells universal and traditional
ordinary life products in the life insurance brokerage market and in the "bank
owned life insurance" market. The Division primarily utilizes a distribution
system comprised of brokerage general agencies with a network of independent
life agents.
SPECIALTY INSURANCE PRODUCTS
- - DENTAL AND CONSUMER BENEFITS DIVISION. The Division (formerly known as the
Group Division) recently exited from the traditional group major medical
business, fulfilling the Division's strategy to focus primarily on dental and
related products. Accordingly, the Division was renamed the Dental and Consumer
Benefits Division. The Division's primary focus is on indemnity and managed-care
dental products. The Division also markets group life and disability coverages,
and administers an essentially closed block of individual cancer insurance
policies.
- - FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, savings and loan associations, mortgage bankers, and automobile dealers.
The Division markets through employee field representatives, independent
brokers, and a wholly owned subsidiary. The Division also includes a small
property casualty insurer that sells automobile extended warranty coverages.
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
- - GUARANTEED INVESTMENT CONTRACTS DIVISION. The Guaranteed Investment Contracts
("GIC") Division markets GICs to 401(k) and other qualified retirement savings
plans. The
<PAGE>
Division also offers related products, including guaranteed funding agreements
offered to the trustees of municipal bond proceeds, floating rate contracts
offered to trust departments, and long-term annuity contracts offered to fund
certain state obligations.
- - INVESTMENT PRODUCTS DIVISION. The Investment Products Division manufactures,
sells, and supports fixed and variable annuity products. These products are
primarily sold through stockbrokers, but are also sold through financial
institutions and the Individual Life Division's sales force.
CORPORATE AND OTHER
The Company has an additional business segment herein referred to as Corporate
and Other. The Corporate and Other segment primarily consists of net investment
income and expenses not attributable to the Divisions above (including net
investment income on capital and interest on substantially all debt). This
segment also includes earnings from various investment-related transactions and
the operations of several small subsidiaries. The segment also includes the
Company's interest in a joint venture which owns a life insurance company in
Hong Kong.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax, adjusted to exclude any pretax minority interest in income of consolidated
subsidiaries. Premiums and policy fees, other income, benefits and settlement
expenses, and amortization of deferred policy acquisition costs are attributed
directly to each operating segment. Net investment income is allocated based on
directly related assets required for transacting the business of that segment.
Realized investment gains (losses) and other operating expenses are allocated to
the segments in a manner which most appropriately reflects the operations of
that segment. Unallocated realized investment gains (losses) are deemed not to
be associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
Operating segment income and assets for the years ended December 31 are as
follows:
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT LIFE INSURANCE
Individual
OPERATING SEGMENT INCOME Acquisitions Life West Coast
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Premiums and policy fees $ 102,635 $ 127,480 $14,122
Net investment income 110,155 54,647 30,194
Realized investment gains (losses)
Other income 10 18,230
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 212,800 200,357 44,316
- --------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 116,506 114,678 28,304
Amortization of deferred policy acquisition costs 16,606 27,374 961
Other operating expenses 24,050 37,921 6,849
- --------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 157,162 179,973 36,114
- --------------------------------------------------------------------------------------------------------------------------------
Income before income tax 55,638 20,384 8,202
Income tax expense
Minority interest
- --------------------------------------------------------------------------------------------------------------------------------
Net income
- --------------------------------------------------------------------------------------------------------------------------------
1996
Premiums and policy fees $ 106,543 $ 116,710
Net investment income 106,015 48,478
Realized investment gains (losses) 3,098
Other income 641 12,631
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 213,199 180,917
- --------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 118,181 96,404
Amortization of deferred policy acquisition costs 17,162 28,393
Other operating expenses 25,186 40,969
- --------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 160,529 165,766
- --------------------------------------------------------------------------------------------------------------------------------
Income before income tax 52,670 15,151
Income tax expense
Minority interest
- --------------------------------------------------------------------------------------------------------------------------------
Net income
- --------------------------------------------------------------------------------------------------------------------------------
1995
Premiums and policy fees $ 98,501 $99,018
Net investment income 95,018 40,277
Realized investment gains (losses)
Other income 25 8,285
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 193,544 147,580
- --------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 100,016 80,067
Amortization of deferred policy acquisition costs 20,601 20,403
Other operating expenses 24,437 33,620
- --------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 145,054 134,090
- --------------------------------------------------------------------------------------------------------------------------------
Income before income tax 48,490 13,490
Income tax expense
Minority interest
- --------------------------------------------------------------------------------------------------------------------------------
Net income
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING SEGMENT ASSETS
1997
Investments and other assets $1,401,294 $ 963,661 $ 910,030
Deferred policy acquisition costs 138,052 252,321 108,126
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,539,346 $1,215,982 $1,018,156
- --------------------------------------------------------------------------------------------------------------------------------
1996
Investments and other assets $1,423,081 $ 817,154
Deferred policy acquisition costs 156,172 220,232
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,579,253 $1,037,386
- --------------------------------------------------------------------------------------------------------------------------------
1995
Investments and other assets $1,131,653 $ 703,702
Deferred policy acquisition costs 123,889 186,496
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,255,542 $ 890,198
- --------------------------------------------------------------------------------------------------------------------------------
(1) Adjustments represent the inclusion of unallocated realized investment gains (losses), the reclassification and tax effecting of
pretax minority interest in the Corporate and Other segment, and the recognition of income tax expense. There are no asset
adjustments.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPECIALTY INSURANCE RETIREMENT SAVINGS AND
PRODUCTS INVESTMENT PRODUCTS
Dental and Guaranteed Corporate
Consumer Financial Investment Investment and Total
Benefits Institutions Contracts Products Other Adjustments(1) Consolidated
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$193,239 $ 72,263 $ 12,367 $ 229 $ 522,335
24,202 16,462 $ 211,915 105,321 38,480 591,376
(3,179) 589 $ 3,420 830
1,278 4,962 6,164 2,140 32,784
- --------------------------------------------------------------------------------------------------------------------------------
218,719 93,687 208,736 124,441 40,849 1,147,325
- --------------------------------------------------------------------------------------------------------------------------------
134,384 27,643 179,235 82,019 339 683,108
15,711 30,812 618 15,110 35 107,227
52,365 21,120 3,946 15,749 25,453 (9,836) 177,617
- --------------------------------------------------------------------------------------------------------------------------------
202,460 79,575 183,799 112,878 25,827 967,952
- --------------------------------------------------------------------------------------------------------------------------------
16,259 14,112 24,937 11,563 15,022 179,373
60,987 60,987
6,393 6,393
- --------------------------------------------------------------------------------------------------------------------------------
$ 111,993
- --------------------------------------------------------------------------------------------------------------------------------
$188,633 $ 73,422 $ 8,189 $ 656 $ 494,153
16,540 13,941 $ 214,369 98,767 19,373 517,483
(7,963) 3,858 $ 6,517 5,510
2,191 1,509 3,907 (22) 20,857
- -------------------------------------------------------------------------------------------------------------------------------
207,364 88,872 206,406 114,721 20,007 1,038,003
- -------------------------------------------------------------------------------------------------------------------------------
143,944 42,781 169,927 73,093 710 645,040
5,326 24,900 509 14,710 30 91,030
52,956 11,660 3,851 15,323 17,197 (4,950) 162,192
- -------------------------------------------------------------------------------------------------------------------------------
202,226 79,341 174,287 103,126 17,937 898,262
- -------------------------------------------------------------------------------------------------------------------------------
5,138 9,531 32,119 11,595 2,070 139,741
47,512 47,512
3,217 3,217
- -------------------------------------------------------------------------------------------------------------------------------
$ 89,012
- -------------------------------------------------------------------------------------------------------------------------------
$163,378 $ 65,668 $ 4,566 $ 1,445 $ 432,576
14,432 9,377 $ 203,376 95,706 17,738 475,924
(3,908) 4,937 $ 583 1,612
2,452 1,281 1,768 (2,043) 11,768
- -------------------------------------------------------------------------------------------------------------------------------
180,262 76,326 199,468 106,977 17,140 921,880
- -------------------------------------------------------------------------------------------------------------------------------
121,375 24,019 165,963 72,111 1,476 565,027
3,052 26,809 386 11,479 3 82,733
45,775 17,123 5,470 13,663 17,948 (4,950) 153,086
- -------------------------------------------------------------------------------------------------------------------------------
170,202 67,951 171,819 97,253 19,427 800,846
- -------------------------------------------------------------------------------------------------------------------------------
10,060 8,375 27,649 9,724 (2,287) 121,034
41,152 41,152
3,217 3,217
- -------------------------------------------------------------------------------------------------------------------------------
$ 76,665
- -------------------------------------------------------------------------------------------------------------------------------
$264,083 $544,085 $2,887,732 $2,316,495 $591,518 $ 9,878,898
22,459 52,837 1,785 56,074 1,083 632,737
- -------------------------------------------------------------------------------------------------------------------------------
$286,542 $596,922 $2,889,517 $2,372,569 $592,601 $10,511,635
- -------------------------------------------------------------------------------------------------------------------------------
$250,982 $319,981 $2,606,985 $1,822,462 $534,176 $ 7,774,821
27,944 32,040 1,164 50,657 175 488,384
- -------------------------------------------------------------------------------------------------------------------------------
$278,926 $352,021 $2,608,149 $1,873,119 $534,351 $ 8,263,205
- -------------------------------------------------------------------------------------------------------------------------------
$253,120 $232,499 $2,536,052 $1,542,772 $421,063 $ 6,820,861
24,974 36,283 993 37,747 14 410,396
- -------------------------------------------------------------------------------------------------------------------------------
$278,094 $268,782 $2,537,045 $1,580,519 $421,077 $ 7,231,257
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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.
The actuarial present value of benefit obligations and the funded status of
the plan at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation,
including vested benefits of
$18,216 in 1997 and $14,720
in 1996 $19,351 $15,475
- --------------------------------------------------------------------------------
Projected benefit obligation
for service rendered to date $30,612 $25,196
Plan assets at fair value
(group annuity contract
with Protective Life) 21,763 19,779
- --------------------------------------------------------------------------------
Plan assets less than the
projected benefit obligation (8,849) (5,417)
Unrecognized net loss from
past experience different
from that assumed 6,997 3,559
Unrecognized prior service cost 605 705
Unrecognized net transition asset (51) (67)
- --------------------------------------------------------------------------------
Net pension liability recognized
in balance sheet $(1,298) $(1,220)
- --------------------------------------------------------------------------------
Net pension cost includes the following components for the years ended
December 31:
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost -
benefits earned
during the year $2,112 $1,908 $1,540
Interest cost on
projected benefit
obligation 2,036 1,793 1,636
Actual return on
plan assets (1,624) (1,674) (1,358)
Net amortization
and deferral 66 374 114
- --------------------------------------------------------------------------------
Net pension cost $2,590 $2,401 $1,932
- --------------------------------------------------------------------------------
Assumptions used to determine the benefit obligations as of December 31
were as follows:
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average
discount rate 7.25% 7.75% 7.25%
Rates of increase
in compensation
level 5.25% 5.75% 5.25%
Expected long-term
rate of return on
assets 8.50% 8.50% 8.50%
- --------------------------------------------------------------------------------
</TABLE>
Assets of the pension plan are included in the general assets of Protective
Life Insurance Company ("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, 1997 and 1996, the projected benefit
obligation of this plan totaled $10.0 million and $7.2 million, respectively.
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, 1997 and 1996, the liability
for such benefits totaled $1.3 million and $1.4 million, respectively. The
expense recorded by the Company was $0.1 million in 1997 and 1996, and $0.2
million in 1995. 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 Internal Revenue Code. The Company
has 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 basic
and diluted earnings per share. At December 31, 1997, the Company had committed
47,523 shares to be released to fund employee benefits. The
<PAGE>
expense recorded by the Company for these employee benefits was less than $0.1
million, $1.0 million, and $0.7 million in 1997, 1996, and 1995, 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. In many cases, the retention is less.
The Company has reinsured approximately $34.1 billion, $18.8 billion, and
$17.5 billion in face amount of life insurance risks with other insurers
representing $147.2 million, $113.5 million, and $116.1 million of premium
income for 1997, 1996, and 1995, respectively. The Company has also reinsured
accident and health risks representing $187.7 million, $194.7 million, and
$217.1 million of premium income for 1997, 1996, and 1995, respectively. In 1997
and 1996, policy and claim reserves relating to insurance ceded of $485.8
million and $325.9 million, respectively, are included in reinsurance
receivables. Should any of the reinsurers be unable to meet its obligation at
the time of the claim, obligation to pay such claim would remain with the
Company. At December 31, 1997 and 1996, the Company had paid $25.6 million and
$6.7 million, respectively, of ceded benefits which are recoverable from
reinsurers. In addition, at December 31, 1997, the Company had receivables of
$80.3 million related to insurance assumed.
A substantial portion of the Company's new credit insurance sales are being
reinsured. Included in the preceding paragraph are credit life and credit
accident and health insurance premiums of $96.7 million, $103.0 million, and
$125.8 million for 1997, 1996, and 1995, respectively, and reserves which were
ceded of $238.8 million and $135.8 million during 1997 and 1996, respectively.
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>
1997 1996
Estimated Estimated
Carrying Market Carrying Market
Amounts Values Amounts Values
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities $6,374,328 $6,374,328 $4,686,072 $4,686,072
Equity securities 15,006 15,006 35,250 35,250
Mortgage loans
on real estate 1,312,778 1,405,474 1,503,080 1,581,694
Short-term
investments 76,086 76,086 114,258 114,258
Cash 47,502 47,502 121,051 121,051
Liabilities
(see Notes A and E):
Guaranteed investment
contract deposits 2,684,676 2,687,331 2,474,728 2,462,036
Annuity deposits 1,511,553 1,494,600 1,331,067 1,322,304
Debt:
Notes payable to banks 61,000 61,000
Senior Notes 75,000 75,000 75,000 75,000
Medium-Term Notes 45,000 45,000 45,000 45,000
Monthly Income
Preferred Securities 55,000 57,613 55,000 57,200
Trust Originated
Preferred Securities 75,000 77,438
FELINE PRIDES 115,000 126,500
Other (see Note A):
Futures contracts (1,708)
Interest rate swaps 3,100 (333)
Options 234 (54)
- --------------------------------------------------------------------------------
</TABLE>
NOTE N. SUBSEQUENT EVENT
On March 2, 1998, the Company's Board of Directors approved a two-for-one split
of the Company's Common Stock in the form of a stock dividend to be distributed
April 1, 1998, to the stockholders of record at the close of business on March
13, 1998.
NOTE O. CONSOLIDATED QUARTERLY RESULTS - UNAUDITED
Protective Life Corporation's unaudited consolidated quarterly operating data
for the years ended December 31, 1997 and 1996, 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
quarters.
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and policy fees $129,578 $117,993 $116,246 $158,518
Net investment income 130,330 137,475 158,196 165,375
Realized investment gains (losses) (418) 1,143 61 44
Other income 4,762 8,906 8,222 10,894
- --------------------------------------------------------------------------------------------------------------------
Total revenues 264,252 265,517 282,725 334,831
Benefits and expenses 225,484 221,536 233,871 287,061
- --------------------------------------------------------------------------------------------------------------------
Income before income tax 38,768 43,981 48,854 47,770
Income tax expense 13,181 14,954 16,610 16,242
Minority interest 804 1,497 1,810 2,282
- --------------------------------------------------------------------------------------------------------------------
Net income $ 24,783 $ 27,530 $ 30,434 $ 29,246
- --------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ .80 $ .88 $ .97 $ .94
Average shares outstanding - basic 31,158,733 31,231,096 31,231,938 31,235,697
- --------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ .79 $ .88 $ .96 $ .93
Average shares outstanding - diluted 31,334,632 31,421,738 31,452,488 31,488,383
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and policy fees $115,586 $132,251 $118,696 $127,620
Net investment income 124,280 130,560 129,309 133,334
Realized investment gains (losses) 4,421 600 861 (372)
Other income 5,458 4,972 5,079 5,348
- --------------------------------------------------------------------------------------------------------------------
Total revenues 249,745 268,383 253,945 265,930
Benefits and expenses 216,605 231,860 222,389 227,408
- --------------------------------------------------------------------------------------------------------------------
Income before income tax 33,140 36,523 31,556 38,522
Income tax expense 11,268 12,417 10,730 13,097
Minority interest 804 805 804 804
- --------------------------------------------------------------------------------------------------------------------
Net income $ 21,068 $ 23,301 $ 20,022 $ 24,621
- --------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ .73 $ .78 $ .64 $ .79
Average shares outstanding - basic 29,020,360 29,804,822 31,147,562 31,149,846
- --------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ .72 $ .78 $ .63 $ .79
Average shares outstanding - diluted 29,186,934 29,995,567 31,357,446 31,379,955
- --------------------------------------------------------------------------------------------------------------------
</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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Birmingham, Alabama
February 11, 1998, except for Note N,
as to which the date is March 2, 1998.
Exhibit 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statements of
Protective Life Corporation on Form S-3 (File Nos. 333-30905, 333-39103 and
33-59769) and Form S-8 (File Nos. 33-51887 and 33-68036) of our report, dated
February 11, 1998, except for Note N, as to which the date is March 2, 1998,on
our audits of the consolidated financial statements and financial statement
schedules of Protective Life Corporation as of December 31, 1997 and 1996 and
for the years ended December 31, 1997, 1996, and 1995, which report is included
or incorporated by reference in this Annual Report on Form 10-K/A.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
June 19, 1998
