-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NS+OWIOqDw0gYTNAXNTk1N9/kw5N95Te7nJRRay/K9qJGU+CiwRXkycwTDiGUnGt YGidYA/OTM802g7cDxNzpA== 0000355429-96-000031.txt : 19961115 0000355429-96-000031.hdr.sgml : 19961115 ACCESSION NUMBER: 0000355429-96-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTIVE LIFE CORP CENTRAL INDEX KEY: 0000355429 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 952492236 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12332 FILM NUMBER: 96660703 BUSINESS ADDRESS: STREET 1: 2801 HGWY 280 S CITY: BIRMINGHAM STATE: AL ZIP: 35223 BUSINESS PHONE: 2058799230 MAIL ADDRESS: STREET 1: PO BOX 2606 CITY: BIRMINGHAM STATE: AL ZIP: 35202 10-Q 1 FORM 10-Q ------------------------------------ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-12332 Protective Life Corporation (Exact name of registrant as specified in its charter) Delaware 95-2492236 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 2801 Highway 280 South Birmingham, Alabama 35223 (Address of principal executive offices and zip code) (205) 879-9230 (Registrant's telephone number, including area code) ------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of Common Stock, $.50 par value, outstanding as of November 8, 1996: 30,803,052 shares. PROTECTIVE LIFE CORPORATION INDEX Part I. Financial Information: Item 1. Financial Statements: Report of Independent Accountants Consolidated Condensed Statements of Income for the Three and Nine Months ended September 30, 1996 and 1995 (unaudited) Consolidated Condensed Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995 Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, 1996 and 1995 (unaudited) Notes to Consolidated Condensed Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K Signature REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders Protective Life Corporation Birmingham, Alabama We have reviewed the accompanying consolidated condensed balance sheet of Protective Life Corporation and subsidiaries as of September 30, 1996, and the related consolidated condensed statements of income for the three-month and nine-month periods ended September 30, 1996 and 1995 and consolidated condensed statements of cash flows for the nine-month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 12, 1996, we expressed an unqualified opinion which contains an explanatory paragraph regarding the changes in accounting for stock-based compensation plans in 1995 and certain investments in debt and equity securities in 1993 on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 1995, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. COOPERS & LYBRAND L.L.P. Birmingham, Alabama October 23, 1996 2
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in thousands except per share amounts) (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------ ---------------------- 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES Premium and policy fees (net of reinsurance ceded: three months: 1996 - $81,453; 1995 - $79,908; nine months: 1996 - $247,988; 1995 - $222,351) $110,310 $101,036 $343,111 $310,502 Net investment income 129,309 123,894 384,149 354,603 Realized investment gains (losses) 861 1,337 5,882 3,401 Other income 13,465 8,924 38,931 22,395 --------- --------- --------- --------- 253,945 235,191 772,073 690,901 --------- --------- --------- --------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: three months: 1996 - $64,420; 1995 - $54,638; nine months: 1996 - $182,201; 1995 - $159,760) 157,931 141,934 466,692 416,081 Amortization of deferred policy acquisition costs 18,822 17,652 70,162 63,218 Other operating expenses (net of reinsurance ceded: three months: 1996 - $24,368; 1995 - $23,173; nine months: 1996 - $67,183; 1995 - $58,645) 45,636 41,901 134,000 120,456 ---------- ---------- --------- --------- 222,389 201,487 670,854 599,755 --------- ---------- --------- --------- INCOME BEFORE INCOME TAX AND MINORITY INTEREST 31,556 33,704 101,219 91,146 Income tax expense 10,730 12,034 34,415 30,990 ---------- ---------- --------- --------- INCOME BEFORE MINORITY INTEREST 20,826 21,670 66,804 60,156 Minority interest in net income of consolidated subsidiaries 804 804 2,413 2,413 ------------ ----------- ----------- ---------- NET INCOME $ 20,022 $ 20,866 $ 64,391 $ 57,743 ========== ========= ========== ========= NET INCOME PER SHARE $ .64 $ .72 $ 2.15 $ 2.03 ============ =========== ============ =========== DIVIDENDS PAID PER SHARE $ .18 $ .16 $ .52 $ .46 ============ =========== ============= =========== Average shares outstanding 31,147,723 28,775,118 29,995,190 28,384,873 See notes to consolidated condensed financial statements
3
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands) SEPTEMBER 30 DECEMBER 31 1996 1995 ------------- ------------ (Unaudited) ASSETS Investments: Fixed maturities $4,507,727 $3,892,008 Equity securities 56,085 38,711 Mortgage loans on real estate 1,515,709 1,834,357 Investment real estate, net 19,352 20,921 Policy loans 165,706 143,372 Other long-term investments 25,712 42,096 Short-term investments 158,463 53,591 ----------- ----------- Total investments 6,448,754 6,025,056 Cash 18,206 11,392 Accrued investment income 69,005 61,007 Accounts and premiums receivable, net 36,463 38,722 Reinsurance receivables 349,806 271,018 Deferred policy acquisition costs 477,344 410,396 Property and equipment, net 37,049 36,578 Other assets 61,856 52,184 Assets held in separate accounts 488,298 324,904 ----------- ----------- TOTAL ASSETS $7,986,781 $7,231,257 ========== ========== LIABILITIES Policy liabilities and accruals $2,589,945 $2,124,486 Guaranteed investment contract deposits 2,514,374 2,451,693 Annuity deposits 1,304,141 1,280,069 Other policyholders' funds 142,368 134,380 Other liabilities 161,275 152,042 Accrued income taxes (4,213) (2,894) Deferred income taxes 24,376 69,520 Debt 139,000 115,500 Liabilities related to separate accounts 488,298 324,904 Minority interest in consolidated subsidiaries 55,000 55,000 ----------- ----------- TOTAL LIABILITIES 7,414,564 6,704,700 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES - NOTE C 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, $0.50 par value Shares authorized: 80,000,000 Issued: 1996 - 33,336,462; 1995 - 31,336,462 16,668 15,668 Additional paid-in capital 166,704 96,371 Net unrealized gains (losses) on investments (net of income tax: 1996 - $(9,328); 1995 - $31,157) (17,323) 57,863 Retained earnings 422,970 373,922 Treasury stock (1996 - 2,533,410 shares; 1995 - 2,561,344 shares) (11,877) (12,008) Unallocated stock in Employee Stock Ownership Plan (1996 - 774,058 shares; 1995 - 793,804 shares) (4,925) (5,259) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 572,217 526,557 ----------- ----------- $7,986,781 $7,231,257 ========== ========== See notes to consolidated condensed financial statements
4
PROTECTIVE LIFE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) NINE MONTHS ENDED SEPTEMBER 30 -------------------- 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 64,391 $ 57,743 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 70,162 63,218 Capitalization of deferred policy acquisition costs (70,124) (61,287) Depreciation expense 5,114 4,277 Deferred income taxes (4,659) (6,966) Accrued income taxes (1,319) 11,088 Interest credited to universal life and investment products 206,763 213,303 Policy fees assessed on universal life and investment products (84,362) (74,772) Change in accrued investment income and other receivables (78,861) (116,181) Change in policy liabilities and other policyholders' funds of traditional life and health products 53,996 131,345 Change in other liabilities 8,619 (5,964) Other (net) (11,792) (1,381) ----------- ----------- Net cash provided by operating activities 157,928 214,423 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments Investments available for sale 494,088 219,760 Other 94,816 49,536 Sale of investments Investments available for sale 769,357 863,479 Other 561,440 4,243 Cost of investments acquired Investments available for sale (2,112,193) (1,322,651) Other (335,397) (243,788) Acquisitions and bulk reinsurance assumptions 172,726 (7,550) Purchase of property and equipment (6,040) (5,283) Sale of property and equipment 455 136 ------------- ------------- Net cash used in investing activities (360,748) (442,118) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and debt 840,484 1,032,400 Principal payments on line of credit arrangements and debt (816,984) (989,900) Issuance of Common Stock 70,538 Purchase of treasury stock (3) Dividends to stockholders (15,343) (12,995) Investment product deposits and changes in universal life deposits 842,765 734,707 Investment product withdrawals (711,826) (535,234) ----------- ----------- Net cash provided by financing activities 209,634 228,975 ------------ ----------- INCREASE (DECREASE) IN CASH 6,814 1,280 CASH AT BEGINNING OF PERIOD 11,392 4,468 ------------ ------------ CASH AT END OF PERIOD $ 18,206 $ 5,748 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period: Interest on debt $ 9,389 $ 9,740 Income taxes $ 38,971 $ 25,648 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of treasury stock to ESOP $ 669 $ 350 Unallocated stock in ESOP $ 334 $ 333 Reissuance of treasury stock $ 258 $ 362 Acquisitions Assets acquired $ 200,737 $ 10,394 Liabilities assumed (253,480) (25,651) Reissuance of treasury stock (30,681) ------------- ---------- Net $ (52,743) $ (45,938) =========== ========= See notes to consolidated condensed financial statements
5 PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The year-end consolidated condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1995. NOTE B - ISSUANCE OF COMMON STOCK On May 30, 1996, the Company issued 2 million shares of its common stock in a public offering at an issue price of $37.25 per share. Proceeds from the issuance, net of underwriting fees and other expenses, amounted to approximately $70.5 million. NOTE C - COMMITMENTS AND CONTINGENT LIABILITIES The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. These 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. Although the Company has indemnification agreements with certain of its officers providing up to $10 million in indemnification, the officers' agreements do not require the Company 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 any 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. The Company and its subsidiaries, like other life and health insurers, are involved in lawsuits, in which the plaintiff may seek punitive damage awards in addition to compensatory damage awards. In addition, insurers frequently are the target of class-action lawsuits. To date, no lawsuit has resulted in the award of any material amount of damages against the Company. Although the 6 outcome of any litigation cannot be predicted with certainty, the Company believes that no pending or threatened litigation is reasonably likely to have a material adverse effect on the financial position of the Company. NOTE D - BUSINESS SEGMENTS The Company operates predominantly in the life and accident and health insurance industry. The following table sets forth total revenues, income (loss) before income tax and minority interest, and identifiable assets of the Company's business segments. NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------------- 1996 1995 ---- ---- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (dollars in thousands) TOTAL REVENUES: Acquisitions $157,565 20.4% $144,712 21.0% Financial Institutions 69,453 9.0 60,043 8.7 Group 151,767 19.7 134,909 19.5 Guaranteed Investment Contracts 153,720 19.9 150,221 21.7 Individual Life 133,958 17.4 108,553 15.7 Investment Products 85,949 11.1 79,250 11.5 Corporate and Other 13,871 1.8 12,604 1.8 Unallocated Realized Investment Gains (Losses) 5,790 0.7 609 0.1 ---------- ------ ---------- ------ $772,073 100.0% $690,901 100.0% ======== ===== ======== ===== INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST: Acquisitions $ 38,252 37.8% $ 34,481 37.8% Financial Institutions 6,893 6.8 6,036 6.6 Group 2,821 2.8 7,961 8.7 Guaranteed Investment Contracts 22,299 22.0 22,524 24.7 Individual Life 11,502 11.4 12,029 13.2 Investment Products 9,822 9.7 6,343 7.0 Corporate and Other 3,840 3.8 1,163 1.3 Unallocated Realized Investment Gains (Losses) 5,790 5.7 609 0.7 --------- ------ ---------- ------ $101,219 100.0% $ 91,146 100.0% ======== ===== ========= ===== SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- (dollars in thousands) IDENTIFIABLE ASSETS: Acquisitions $1,465,249 18.3% $1,255,542 17.4% Financial Institutions 374,707 4.7 268,782 3.7 Group 281,782 3.5 278,094 3.8 Guaranteed Investment Contracts 2,634,356 33.0 2,537,045 35.1 Individual Life 989,661 12.4 890,198 12.3 Investment Products 1,769,445 22.2 1,580,519 21.9 Corporate and Other 471,581 5.9 421,077 5.8 ----------- ------ ----------- ----- $7,986,781 100.0% $7,231,257 100.0% ========== ===== ========== ===== 7 NOTE E - 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. At September 30, 1996 and for the nine months then ended, the Company's life insurance subsidiaries had stockholder's equity and net income prepared in conformity with statutory reporting practices of $458.9 million and $79.5 million, respectively. NOTE F - INVESTMENTS As prescribed by Statement of Financial Accounting Standards ("SFAS") No. 115, certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of stockholders' equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect the Company's operations, its reported stockholders' equity will fluctuate significantly as interest rates change. The Company's balance sheets at September 30, 1996 and December 31, 1995, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows: SEPTEMBER 30, 1996 DECEMBER 31, 1995 ------------------ ----------------- (IN THOUSANDS) Total investments $6,477,411 $5,919,787 Deferred policy acquisition costs 475,338 426,645 All other assets 1,060,683 795,805 ---------- ----------- $8,013,432 $7,142,237 ========== ========== Deferred income taxes $ 33,704 $ 38,364 All other liabilities 7,390,188 6,635,179 ---------- ---------- 7,423,892 6,673,543 Stockholders' equity 589,540 468,694 ----------- ----------- $8,013,432 $7,142,237 ========== ========== NOTE G - RECENTLY ADOPTED ACCOUNTING STANDARDS At January 1, 1996, the Company adopted 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." The adoption of these accounting standards did not have a material effect on the Company's financial statements. 8 NOTE H - 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. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Protective Life Corporation through its subsidiaries provides financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company ("Protective Life") is the Company's principal operating subsidiary. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries. The Company has six operating divisions: Acquisitions, Financial Institutions, Group, Guaranteed Investment Contracts, Individual Life, and Investment Products. The Company also has an additional business segment which is described herein as Corporate and Other. RESULTS OF OPERATIONS Premiums and Policy Fees The following table sets forth for the periods shown the amount of premiums and policy fees and the percentage change from the prior period: PREMIUMS AND POLICY FEES NINE MONTHS PERCENTAGE ENDED AMOUNT INCREASE/ SEPTEMBER 30 (IN THOUSANDS) (DECREASE) 1995 $310,502 7.3% 1996 343,111 10.5 Premiums and policy fees increased $32.6 million or 10.5% in the first nine months of 1996 over the first nine months of 1995. The coinsurance by the Acquisitions Division of a block of policies in the first quarter of 1996 resulted in a $12.1 million increase in premiums and policy fees. Decreases in older acquired blocks resulted in a $7.7 million decrease in premiums and policy fees. Premium and policy fees from the Financial Institutions Division increased $5.6 million the first nine months of 1996 as compared to the first nine months of 1995. This resulted from the reinsurance of a block of policies in the second quarter of 1996 representing a $26.9 million increase in premiums and policy fees. This increase was largely offset by decreases resulting from a reinsurance arrangement begun in 1995, whereby all of the Division's new credit insurance sales are ceded to a reinsurer. Premium and policy fees from the Group Division increased $6.3 million in the first nine months of 1996 as compared to the same period in 1995. Premium and policy fees related to the Division's dental business increased $14.9 million in the first nine months of 1996 as compared to the same period in 1995. 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 10 group health premiums. Increases in premiums and policy fees from the Individual Life and Investment Product Divisions were $13.1 million and $2.8 million, respectively. On October 7, 1996 the Company announced that it will make voluntary refunds to certain of its cancer insurance policyholders and will reduce premium rates charged to such policyholders until certain conditions are met. The estimated refunds reduced the Group Division's premiums and policy fees, as noted above. Net Investment Income The following table sets forth for the periods shown the amount of net investment income and the percentage change from the prior period: NINE MONTHS NET INVESTMENT INCOME ENDED AMOUNT PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) INCREASE 1995 $354,603 16.4% 1996 384,149 8.3 Net investment income in the first nine months of 1996 was $29.5 million or 8.3% higher than the corresponding period of the preceding year primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to receiving annuity and guaranteed investment contract ("GIC") deposits and to acquisitions. The assumption of a block of policies in the first quarter of 1996 and a block of policies in the second quarter of 1996 resulted in an increase in net investment income of $13.5 million in the first nine months of 1996 as compared to the same period in 1995. Realized Investment Gains 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 approximate 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 have resulted principally from portfolio management decisions to maintain approximate matching of assets and liabilities. The following table sets forth realized investment gains for the periods shown: NINE MONTHS REALIZED ENDED INVESTMENT GAINS SEPTEMBER 30 (IN THOUSANDS) 1995 $3,401 1996 5,882 Realized investment gains for the first nine months of 1996 were $2.5 million higher than the corresponding period of 1995. In the 1996 first quarter, the Company sold $554 million of its 11 commercial mortgage loans in a securitization transaction, resulting in a $6.1 million realized investment gain. Other Income The following table sets forth other income for the periods shown: NINE MONTHS ENDED OTHER INCOME SEPTEMBER 30 (IN THOUSANDS) 1995 $22,395 1996 38,931 Other income consists primarily of revenues of the Company's dental managed care plans and broker-dealer subsidiary, fees from administrative-services-only types of group accident and health insurance contracts, and revenues of the Company's wholly-owned insurance marketing organizations and other small noninsurance subsidiaries. Other income in the first nine months of 1996 was $16.5 million higher than the corresponding period of 1995. On March 20, 1995, the Company completed its acquisition of National Health Care Systems of Florida, Inc. ("NHCS" also known as "DentiCare"), based in Jacksonville, Florida. The acquisition resulted in a $9.0 million increase in other income in the first nine months of 1996. Revenues from the Company's broker-dealer subsidiary increased $3.2 million in the first nine months of 1996 as compared to the same period in 1995. Other income from all other sources increased $4.3 million in the first nine months of 1996 as compared with the first nine months of 1995. Income Before Income Tax and Minority Interest The following table sets forth income or loss before income tax and minority interest by business segment for the periods shown: INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST NINE MONTHS ENDED SEPTEMBER 30 (IN THOUSANDS) BUSINESS SEGMENT 1995 1996 ---------------- ---- ---- Acquisitions $34,481 $ 38,252 Financial Institutions 6,036 6,893 Group 7,961 2,821 Guaranteed Investment Contracts 22,524 22,299 Individual Life 12,029 11,502 Investment Products 6,343 9,822 Corporate and Other 1,163 3,840 Unallocated Realized Investment Gains(Losses) 609 5,790 ------- -------- $91,146 $101,219 ======= ======== Percentage Increase 17.7% 11.1% 12 Pretax earnings from the Acquisitions Division increased $3.8 million in the first nine months of 1996 as compared to the same period of 1995. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. The Division's two most recent acquisitions resulted in a $5.9 million increase in pretax earnings. Older acquired blocks represented a $2.1 million decrease in the first nine months of 1996 as compared to the same period in 1995. Pretax earnings of the Financial Institutions Division were $0.9 million higher in the first nine months of 1996 as compared to the same period in 1995. Included in the Division's 1996 results are earnings of $2.1 million from the coinsurance of a block of policies in the second quarter of 1996. The reinsurance arrangement begun in the first quarter of 1995 to reinsure all of the Division's new credit insurance sales and thereby improve the Division's return on investment, reduced the Division's reported earnings by approximately $3.8 million, which was contemplated when the arrangement was entered into. Group Division pretax earnings were $5.1 million lower in the first nine months of 1996 as compared to the first nine months of 1995. The previously discussed estimate for the refund of cancer premiums and related expenses resulted in a $6.8 million decrease in the Division's pretax earnings. Dental earnings improved $3.5 million and traditional group health earnings declined by $1.8 million. The Guaranteed Investment Contract ("GIC") Division had pretax operating earnings of $30.1 million in the first nine months of 1996 and $23.3 million in the corresponding period of 1995. This increase was due to improved operating spreads and to the growth in GIC deposits placed with the Company. Realized investment losses associated with this Division in the first nine months of 1996 were $7.8 million as compared to $0.8 million in the same period last year. As a result, total pretax earnings were $22.3 million in the first nine months of 1996 compared to $22.5 million for the same period last year. The Individual Life Division had pretax operating earnings of $10.4 million in the first nine months of 1996 as compared to $12.0 million in the same period of 1995. The decrease was primarily due to higher expenses in the first nine months of 1996 as compared to the same period last year. Realized investment gains, net of related amortization of deferred policy acquisition costs, associated with this Division were $1.1 million in 1996. As a result, total pretax earnings were $11.5 million in the first nine months of 1996 which was $0.5 million lower than the first nine months of 1995 in which there were no realized investment gains. Investment Products Division pretax operating earnings were $7.4 million which was $3.2 million higher in the first nine months of 1996 compared to the same period of 1995. Earnings increased due to growth in variable annuity deposits and due to lower expenses. Realized investment gains associated with the Division, net of related amortization of deferred policy acquisition costs, were $2.4 million as compared to $2.1 million last year, resulting in total pretax earnings of $9.8 million in the first nine months of 1996 as compared to $6.3 million in the same period of 1995. 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. Pretax earnings for this segment increased $2.7 million in the first nine months of 1996 as compared to the first nine months of 1995 due to improved operating results from the Company's joint venture in Hong Kong and increased net investment income on capital. 13 Income Taxes The following table sets forth the effective income tax rates for the periods shown: NINE MONTHS ENDED ESTIMATED EFFECTIVE SEPTEMBER 30 INCOME TAX RATES 1995 33% 1996 34 The effective income tax rate for the full year of 1995 was 34%. Management's estimate of the effective income tax rate for 1996 is also 34%. Net Income The following table sets forth net income and the net income per share for the periods shown, and the percentage change from the prior period: NINE MONTHS NET INCOME ENDED TOTAL PERCENTAGE SEPTEMBER 30 (IN THOUSANDS) PER SHARE INCREASE 1995 $57,743 $2.03 7.4% 1996 64,391 2.15 5.9 Compared to the same period in 1995, net income per share in the first nine months of 1996 increased 5.9%, reflecting improved operating earnings in the Acquisitions, Financial Institutions, Guaranteed Investment Contracts, and Investment Products Divisions, and the Corporate and Other segment, and higher realized investment gains (net of related amortization of deferred policy acquisition costs), which were partially offset by lower operating earnings in the Group and Individual Life Divisions. Recently Issued Accounting Standards In June 1996 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Company anticipates that the impact of adopting this accounting standard will be immaterial to its financial condition. This statement is effective for transactions entered into after January 1, 1997. 14 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 September 30, 1996, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $4,507.7 million, which is 0.7% below amortized cost (less allowances for uncollectible amounts on investments) of $4,541.2 million. The Company had $1,515.7 million in mortgage loans at September 30, 1996. While the Company's mortgage loans do not have quoted market values, at September 30, 1996, the Company estimates the market value of its mortgage loans to be $1,619.8 million (using discounted cash flows from the next call date) which is 6.9% in excess of amortized book value. 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 value fluctuations should not adversely affect liquidity. For several years the Company has offered a commercial loan under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. Approximately $487 million of the Company's mortgage loans have this participation feature. At September 30, 1996, delinquent mortgage loans and foreclosed real estate were 0.4% of assets. Bonds rated less than investment grade were 1.7% of assets. Additionally, the Company had bank loan participations that were less than investment grade representing 2.7% of assets. The Company does not expect these investments to adversely affect its liquidity or ability to hold its other investments to maturity. The Company's allowance for uncollectible amounts on investments was $31.6 million at September 30, 1996. Policy loans at September 30, 1996 were $165.7 million, unchanged from December 31, 1995 (after excluding the $22.3 million of policy loans associated with the coinsurance of a block of policies in the first quarter of 1996). Policy loan rates are generally in the 4.5% to 8.0% range and at least equal the assumed interest rates used for future policy benefits. 15 The Company believes its asset/liability matching practices and certain product features provide significant protection for the Company against the effects of changes in interest rates. However, approximately one-fourth of the Company's liabilities relate to products (primarily whole life insurance) the profitability of which may be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material. Additionally, the Company believes its asset/liability matching practices provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance and deposit contracts. The Company's asset/liability matching practices involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics. It is the Company's policy to generally maintain asset and liability durations within 10% of one another, although from time to time broader duration matching is allowed. The Company does not use derivative financial instruments for trading purposes. Combinations of futures contracts and options on treasury notes are sometimes used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, and liabilities arising from interest-sensitive products such as GICs and annuities. Realized investment gains and losses of such contracts are deferred and amortized over the life of the hedged asset. The Company uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest and from a fixed to a variable rate of interest, and to convert its Senior Notes and Monthly Income Preferred Securities from a fixed rate to a variable rate of interest. At September 30, 1996, related open interest rate swap contracts with a notional amount of $230.3 million were in a $1.3 million net unrealized loss position. Withdrawals related to GICs were approximately $800 million during 1995. Withdrawals related to GICs are estimated to be approximately $700 million in 1996. The Company's asset/liability matching practices take into account maturing contracts. Accordingly, the Company does not expect maturing contracts to have an unusual effect on the future operations and liquidity of the Company. On March 22, 1996, the Company sold approximately $554 million of its commercial mortgage loans in a securitization transaction. Proceeds from the sale consisted of cash of $400 million, net of expenses, and mortgaged-backed securities of approximately $161 million. The transaction resulted in a realized gain of approximately $6.1 million. The cash proceeds were reinvested in fixed maturity and short-term investments. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at September 30, 1996 to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $283.8 million. The Company's subsidiaries held $176.1 million in cash and short-term investments at September 30, 1996. Protective Life Corporation had an additional $0.6 million in cash and short-term investments available for general corporate purposes. While the Company generally anticipates that the cash flows of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may from time to time exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to 16 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. During the third quarter of 1996, the Company issued $20 million (in two separate offerings) of 7.45% Medium-Term Notes due in 2011. Net proceeds of $19.4 million were used to repay bank borrowings. The Company has on file with the Securities and Exchange Commission a shelf registration to issue up to an additional $25 million of debt securities. At September 30, 1996, Protective Life Corporation had borrowed $44.0 million of a $70.0 million revolving line of credit bearing interest rates averaging 5.8%. The Company's bank borrowings have increased $3.5 million, net of repayments, since December 31, 1995. Proceeds were used for general corporate purposes, including the acquisition of a small dental managed care organization, an additional investment in the Hong Kong joint venture, and an investment in an Internet-based insurance distribution system. 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 the subsidiaries, and investment income. At December 31, 1995, approximately $180 million of consolidated stockholders' equity, excluding net unrealized losses on investments, represented net assets of the Company's insurance subsidiaries that cannot be transferred in the form of dividends, loans or advances to the parent company. In addition, the 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 $322 million, would be subject to federal income tax at rates then effective. The Company does not anticipate involuntarily making distributions that would be subject to income tax. Due to the expected growth of the Company's insurance sales, the Company plans to retain substantial portions of the earnings of its life 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. A life insurance company's statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners ("NAIC"), as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The achievement of long-term growth will require growth in the statutory capital of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Company. On May 30, 1996, the Company completed a public offering of 2 million shares of its common stock. Net proceeds of approximately $70.5 million were primarily invested in the Company's insurance company subsidiaries to support future growth. 17 The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formula includes components for asset risk, liability risk, interest rate exposure and other factors. Based upon the September 30, 1996 statutory financial reports of the Company's insurance subsidiaries, the Company's insurance subsidiaries are adequately capitalized under the formula. 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 reflected in the financial statements. A substantial number of class action and other civil lawsuits have been filed against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial settlements with, or judgments against, the insurers, including material amounts of punitive damages that are disproportionate to the actual 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 damage suit. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. The Company and its subsidiaries, like other life and health insurers, in the course of business are involved in such litigation. Pending litigation includes a class action filed in Jefferson County (Birmingham), Alabama with respect to the previously discussed cancer premium refunds. 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 of 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. 18 PART II Item 6. Exhibits and Reports on Form 8-K (a). Exhibit 10(1) - The Company's 1996 Stock Incentive Plan Exhibit 10(2) - Specimen letter confirming grants under the Company's 1996 Stock Incentive Plan Exhibit 15 - Letter re: unaudited interim financial statements Exhibit 27 - Financial data schedule (b). A report on Form 8-K was filed July 24, 1996, reporting under Item 5 the Company's 1996 second quarter earnings press release. A report on Form 8-K was filed July 31, 1996 filing under Item 7 certain Exhibits related to the Registration Statements on Form S-3 (Registration Nos. 33-55063, 333-03435 and 33-52831) of the Company and PLC Capital L.L.C. A report on Form 8-K was filed September 15, 1996 filing under Item 7 certain Exhibits related to the Registration Statements on Form S-3 (Registration Nos. 33-55063, 333-03435 and 33-52831) of the Company and PLC Capital L.L.C. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTECTIVE LIFE CORPORATION Date: November 12, 1996 /s/ Jerry W. DeFoor -------------------- Jerry W. DeFoor Vice President and Controller, and Chief Accounting Officer (Duly authorized officer) 20 EX-10 2 EXHIBIT 10(1) PROTECTIVE LIFE CORPORATION 1996 STOCK INCENTIVE PLAN SECTION 1 PURPOSE The purpose of the Plan is to foster and promote the long-term financial success of the Company and materially increase stockholder value by (a) motivating superior performance by means of performance-related incentives, (b) encouraging and providing for the acquisition of an ownership interest in the Company by Employees, and (c) enabling the Company to attract and retain the ser vices of an outstanding management team upon whose judgment, interest, and special effort the successful conduct of its operations is largely dependent. SECTION 2 DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Board" means the Board of Directors of the Company. (c) "Cause" means (i) the willful failure by the Participant to perform substantially his duties as an Employee of the Company (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (ii) the Participant's engaging in serious misconduct that is injurious to the Company or any Subsidiary, (iii) the Participant's having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony or (iv) the breach by the Participant of any written covenant or agreement with the Company or any Subsidiary not to disclose any information pertaining to the Company or any Subsidiary or not to compete or interfere with the Company or any Subsidiary. (d) "Change in Control" is (i) as defined in the Company's Rights Agreement, as in effect from time to time, or (ii) the consummation of (A) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Common Stock are converted into cash, securities or other property, other than a merger of the Company in which th holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger as they had in Common Stock immediately prior to the merger, or (B) any sale, lease, exchange 1 or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, including, without limitation, any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all, of the assets of Protective Life Insurance Company. (e) "Change in Control Price" means the highest price per share of Stock offered in conjunction with any transaction resulting in a Change in Control (as determined in good faith by the Committee if any part of the offered price is payable other than in cash). (f) "Code" means the Internal Revenue Code of 1986, as amended. (g) "Committee" means the Compensation and Management Succession Committee of the Board, which shall consist of two or more members, each of whom shall be a "Non-employee Director" within the meaning of Rule 16b-3, as promulgated under the Act. (h) "Company" means Protective Life Corporation, a Delaware corporation, and any successor thereto. (i) "Disability" means total disability as determined in accordance with the terms of the long-term disability plan of the Company or any of its Subsidiaries in which the Participant is eligible to participate. (j) "Employee" means any officer or other key executive and management employee of the Company or any of its Subsidiaries. (k) "Fair Market Value" means, on any date, the average of the average of the highest and lowest sales price for a share of Stock reported for such day on a national exchange or the average of the highest and lowest bid and asked prices for a share of Stock on such date on a nationally recognized system of price quotation. In the event that there are no Stock transactions reported on such exchange or system on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Stock transactions were so reported. (l) "Participant" means any Employee designated by the Committee to participate in the Plan. (m) "Plan" means the Protective Life Corporation 1996 Stock Incentive Plan, as in effect from time to time. (n) "Retirement" means retirement at the age at which the Participant may retire and immediately thereafter commence receipt of any benefits due under the Company's defined benefit pension plan. 2 (o) "Stock" means the common stock of the Company, par value $0.50 per share. (p) "Stock Appreciation Right" shall mean a contractual right granted under Section 6 to receive Stock. (q) "Subsidiary" means any corporation or partnership in which the Company owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation or of the capital interest or profits interest of such partnership. 2.2 Gender and Number. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. SECTION 3 ELIGIBILITY AND PARTICIPATION Participants in the Plan shall be those Employees selected by the Committee to participate in the Plan. SECTION 4 POWERS OF THE COMMITTEE 4.1 Power to Grant. The Committee shall determine the Participants to whom Stock Appreciation Rights shall be granted and the terms and conditions of any and all such Stock Appreciation Rights. The Chairman of the Board may suggest to the Committee the Participants who should receive Stock Appreciation Rights under the Plan. The terms and conditions of each Stock Appreciation Right shall be determined by the Committee at the time of grant, and such terms and conditions shall not be subsequently changed in a manner which would be adverse to participants without the consent of the Participant to whom such Stock Appreciation Right has been granted. The Committee may establish different terms and conditions for different Participants receiving Stock Appreciation Rights and for the same Participant for each Stock Appreciation Right such Participant may receive, whether or not granted at different times. 4.2 Substitute Stock Appreciation Rights. The Committee shall have the right to grant Stock Appreciation Rights in substitution for or upon the cancellation of Stock Appreciation Rights previously granted and such new Stock Appreciation Rights may contain terms more favorable to the recipient than the Stock Appreciation Rights they replace, including, without limitation, a lower exercise price. 3 4.3 Administration. The Committee shall be responsible for the administration of the Plan. The Committee, by majority action thereof, is authorized to prescribe, amend, and rescind rules and regulations relating to the Plan, to provide for conditions deemed necessary or advisable to protect the interests of the Company, and to make all other determinations necessary or advisable for the administration and interpretation of the Plan in order to carry out its provisions and purposes. Determinations, interpretations, or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final, binding, and conclusive for all purposes and upon all persons. SECTION 5 STOCK SUBJECT TO PLAN 5.1 Number. Subject to the provisions of Section 5.3, the number of shares of Stock subject to Stock Appreciation Rights under the Plan may not exceed 500,000 shares of Stock. The shares to be delivered under the Plan will consist of treasury Stock. 5.2 Canceled, Terminated, or Forfeited Stock Appreciation Rights. Any shares of Stock subject to a Stock Appreciation Right which for any reason is canceled, terminated or otherwise settled without the issuance of any Stock shall again be available under the Plan. 5.3 Adjustment in Capitalization. In the event of any Stock dividend or Stock split, recapitalization (including, without limitation, the payment of an extraordinary dividend), merger, consolidation, combination, spin-off, distribution of assets to stockholders, exchange of shares, or other similar corporate change, the aggregate number of shares of Stock available for Stock Appreciation Rights under Section 5.1 or subject to outstanding Stock Appreciation Rights and the respective base prices and/or performance criteria applicable to outstanding Stock Appreciation Rights may be appropriately adjusted by the Committee, whose determination shall be conclusive. SECTION 6 STOCK APPRECIATION RIGHTS 6.1 Grant of Stock Appreciation Rights. Stock Appreciation Rights may be granted to Participants at such time or times as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Stock Appreciation Rights, if any, to be granted to a Participant. Each Stock Appreciation Right shall be evidenced by a letter to each Participant that shall specify the base price, the duration of the Stock Appreciation Rights, the number of shares of Stock to which the Stock Appreciation Rights pertain, and such other terms and conditions not inconsistent with the Plan as the Committee shall determine. 6.2 Base Price. Unless otherwise determined by the Committee, a Stock Appreciation Right granted pursuant to the Plan shall have a base price which is not less than the Fair Market Value of the Stock on the date the Stock Appreciation Right is granted. 4 6.3 Exercise of Stock Appreciation Rights. A Stock Appreciation Right awarded under the Plan shall entitle a Participant to receive from the Company an amount in Stock equal to the excess of the Fair Market Value of a share of Stock on the date of exercise of the Stock Appreciation Right over the base price thereof. Except as otherwise provided in the Plan and subject to the Committee's right to accelerate the exercisability of such Stock Appreciation Rights in its discretion, the Stock Appreciation Rights shall become exercisable, subject to the restrictions and conditions hereof, on the fifth anniversary of the Grant Date (the "Grant Date"), provided that such Stock Appreciation Rights shall also become exercisable under the circumstances described in Section 7 and/or Section 9.1. Notwithstanding the foregoing, no Stock Appreciation Right shall be exercisable for more than 10 years after the date on which it is granted. 6.4 Payment. The Committee shall establish procedures governing the exercise of Stock Appreciation Rights, which shall require that written notice of exercise be given. The number of shares of Stock payable pursuant to the exercise of Stock Appreciation Rights shall be equal to the (x) the excess of (i) the Fair Market Value of a share of Stock on the date of exercise multiplied by the number of Stock Appreciation Rights exercised over (ii) the sum of the base price for all Stock Appreciation Rights exercised divided by (y) the Fair Market Value of a share of Stock on the date of exercise. As soon as practicable after receipt of a written exercise notice, the Company shall deliver to the Participant a certificate or certificates representing the acquired shares of Stock. In the event that the Committee shall determine that any certificates issued hereunder must bear a legend restricting the transfer of such Stock, such certificates shall have the appropriate legend. 6.5 Limitations on and Deferral of Payment. (a) Deferrals. Notwithstanding anything in the Plan to the contrary, the Committee may defer all or any portion of any distribution of Common Stock to be made hereunder to the extent such distribution, when added to all other payments to be made to a Participant in a calendar year, would not be deductible compensation paid by the Company for federal income tax purposes within the meaning of Section 162 (including Section 162(m)) of the Internal Revenue Code of 1986, as amended (the "Code"). In the event that a distribution or distributions of Stock to a Participant is deferred, the Company will establish for each such Participant a book-entry account (the "Account") representing all such deferred awards. (b) Dividends on Deferred Awards. In the event that dividends are paid by the Company during the deferral period, each Participant's Account shall be credited with the amount of any dividends which would otherwise have been payable to such Participant if the number of shares represented by such Account had been owned directly, and such amount shall be deemed to be reinvested in additional shares of Stock. (c) Payment. The Stock represented by each Participant's Account shall be paid to such Participant (or, in the event of his or her death, to his or her designated beneficiary or, if none, to his or her estate) in a lump sum, or in installments, if necessary to preserve the deductibility of such payment, as of the earliest date that the payment of the Account balance, or portion thereof, when added to all other payments to be made to a Participant in a calendar year, would be deductible by the Company for federal income tax purposes within the meaning of Section 162 (including Section 162(m)) of the Code. 5 SECTION 7 TERMINATION OF EMPLOYMENT 7.1 Termination of Employment Due to Death. Disability or Retirement. Unless otherwise determined by the Committee at the time of grant, in the event a Participant's employment terminates by reason of death, Disability or Retirement, any Stock Appreciation Rights granted to such Participant which are then outstanding (whether or not exercisable prior to the date of such termination) may be exercised by the Participant or the Participant's designated beneficiary, and if none is named, in accordance with Section 11.2, at any time prior to the expiration date of the term of the Stock Appreciation Rights or within three (3) years (or such other period as the Committee shall determine at the time of grant) following the Participant's termination of employment, whichever period is shorter. 7.2 Termination of Employment for Any Other Reason. Unless otherwise determined by the Committee at or after the time of grant, in the event the employment of the Participant shall terminate for any reason other than one described in Section 7.1, any unexercised Stock Appreciation Rights (whether or not exercisable prior to the date of termination) shall terminate and be canceled immediately upon such termination of employment. SECTION 8 FORFEITURE OF STOCK APPRECIATION RIGHTS 8.1 Forfeiture and Pay-Back of SAR Amount. If within one year after the exercise of all or a portion of the Stock Appreciation Rights awarded under this Agreement, the Participant voluntarily terminates his or her employment with the Company and the Participant becomes employed by a competitor of the Company in the financial services industry (which includes, but is not limited to, working in the insurance, mutual fund, broker-dealer, financial institution, or investment company industries), the Participant agrees to pay the Company within 30 days of commencing such employment an amount, in cash or the equivalent value in shares of Stock, equal to the aggregate of all SAR Amounts attributable to Stock Appreciation Rights exercised within the one year period prior to the date of such termination. 8.2 Forfeiture of Stock Appreciation Rights. If, after the Participant's termination of employment, the Committee determines that, either during or after the Participant's employment by the Company or one of its Subsidiaries, the Participant engaged in conduct that (i) would have permitted the Company or any of its Subsidiaries to terminate the Participant's employment for Cause had he or she still been employed or (ii) otherwise results in damage to the business or reputation of the Company or any of its Subsidiaries, all of the Stock Appreciation Rights that are still outstanding at the time of such determination shall immediately terminate and be canceled immediately upon such determination by the Committee. Upon such a determination by the Committee, the Company may disregard any attempted exercise of the Stock Appreciation Rights by notice delivered prior to such 6 determination, if, at such time, the Company had not completed the steps necessary to effect such exercise. SECTION 9 CHANGE IN CONTROL 9.1 Accelerated Vesting and Payment. Subject to the provisions of Section 9.2 below, in the event of a Change in Control, each Stock Appreciation Right (regardless of whether such SARs are at such time otherwise exercisable) shall be canceled in exchange for a payment in cash of an amount equal to the excess, if any, of the Change in Control Price over the base price for such Stock Appreciation Right. 9.2 Alternative Awards. Notwithstanding Section 9.1, no cancellation, acceleration of exercisability or vesting or cash settlement or other payment shall occur with respect to any Stock Appreciation Rights if the Committee reasonably determines in good faith prior to the occurrence of a Change in Control that such Stock Appreciation Rights shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an "Alternative Award"), by a Participant's employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Award must: (i) be based on stock which is traded on an established securities market, or which will be so traded within 60 days of the Change in Control; (ii) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under such Award, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; (iii) have substantially equivalent economic value to such Award (determined at the time of the Change in Control); (iv) have terms and conditions which provide that in the event that the Participant's employment is involuntarily terminated or constructively terminated, any conditions on a Participant's rights under, or any restrictions on transfer or exercisability applicable to, each such Alternative Award shall be waived or shall lapse, as the case may be. For this purpose, a constructive termination shall mean a termination by a Participant following a material reduction in the Participant's compensation or a material reduction in the Participant's responsibilities, in each case without the Participant's written consent. 9.3 Stock Appreciation Rights Granted Within Six Months of the Change of Control. If any Stock Appreciation Rights granted within six months of the date on which a Change in Control occurs (i) is held by a person subject to the reporting requirements of Section 16(a) of the Act and (ii) is to be cashed out pursuant to Section 9.1, such cash out shall not occur until the later of (i) the 7 date which is six months and one day after the date the Stock Appreciation Right was granted or (ii) the first date on which, in the opinion of the Company's counsel, such cash out could occur without such reporting person being potentially subject to liability under Section 16(b) of the Act by reason of such cash out. SECTION 10 AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN The Board may at any time terminate or suspend the Plan, and from time to time either the Board or the Committee may amend or modify the Plan. No amendment, modification, or termination of the Plan shall in any manner adversely affect any Stock Appreciation Right theretofore granted under the Plan, without the consent of the Participant. SECTION 11 MISCELLANEOUS PROVISIONS 11.1 Nontransferability of Stock Appreciation Rights. No Stock Appreciation Right granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. All rights with respect to Stock Appreciation Rights granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. 11.2 Beneficiary Designation. Benefits remaining unpaid at the Participant's death shall be paid to or exercised by the Participant's surviving spouse, if any, or otherwise to or by the Participant's estate. If the Participant desires to name another beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid or by whom any right under the Plan is to be exercised in case of the Participant's death, the Participant may do so by filing a form prescribed by the Committee. Such designation will be effective only when filed by the Participant, in writing with the Chief Accounting Officer of the Company, during the Participant's lifetime. Such designation will revoke all prior designations made by the Participant. 11.3 No Guarantee of Employment or Participation. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary or affiliate. No Employee shall have a right to be selected as a Participant, or, having been so selected, to receive any future Stock Appreciation Rights. 11.4 Tax Withholding. The Company shall have the power to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local withholding tax requirements on any Stock Appreciation Rights under the Plan, and the Company may defer issuance of Stock until such requirements are satisfied. 8 11.5 No Limitation on Compensation. Nothing in the Plan shall be construed to limit the right of the Company to establish other plans or to pay compensation to its employees in cash or property, in a manner which is not expressly authorized under the Plan. 11.6 Requirements of Law. The granting of Stock Appreciation Rights and the issuance of shares of Stock shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 11.7 Term of Plan. The Plan shall be effective on August 15, 1996. The Plan shall continue in effect, unless sooner terminated pursuant to Section 9, until the tenth anniversary of the Grant Date. 11.8 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. 11.9 No Impact on Benefits. Stock Appreciation Rights granted under the Plan are not compensation for purposes of calculating an Employee's rights under any employee benefit plan. 11.10 No Voting Rights. The Participant shall have no right, in respect of Stock Appreciation Rights granted, to vote on any matter submitted to the Company's stockholders until such time as shares of Stock issuable upon exercise of such Stock Appreciation Rights have been so issued. 9 EX-10 3 Exhibit 10(2) October 23, 1996 HAND DELIVERY Re: Stock Appreciation Rights name The Company hereby confirms the grant to you, effective as of August 15, 1996 (the "Grant Date"), of stock appreciation rights (the "SARs") with respect to ______ shares of the Company's Common Stock ("Common Stock") at a base price of $34.875 per share (the "Base Price") under the Protective Life Corporation 1996 Stock Incentive Plan (the "Plan"). The Stock Appreciation Rights are subject to certain restrictions and conditions as set forth in the Plan and as imposed by the Compensation and Management Succession Committee (the "Committee"). The following are highlights of certain conditions of the Plan. For complete details, you should consult the attached copy of the Plan. 1. Exercisability. Except as otherwise provided in the Plan, the SARs shall become exercisable, subject to the provisions of the Plan, on the fifth anniversary of the Grant Date. The SARs shall also become exercisable upon a change of control as set forth in Section 9 of the Plan. Unless an earlier termination is specified in Section 7 of the Plan, the SARs shall terminate on the tenth anniversary of the Grant Date (the "Normal Expiration Date"). 2. Method of Exercise and Form of Payment. You may exercise any portion of the SARs that has become exercisable by written notice of exercise to the Chief Accounting Officer of the Company. As soon as practicable after receipt of a written exercise notice of any exercisable SARs, the Company shall deliver to you a certificate or certificates representing the shares of Common Stock acquired upon the exercise thereof. The number of shares of Common Stock to be distributed shall be as set forth in Section 6.4 of the Plan. 3. Limitations on and Deferral of Payment. (a) The Committee may defer all or any portion of any distribution of Common Stock to be made under the Plan to the extent such distribution, when added to all other payments to be made to a Participant in a calendar year, would not be deductible compensation paid by the Company for federal income tax purposes within the meaning of Sec tion 162 (including Section 162(m)) of the Internal Revenue Code of 1986, as amended (the "Code"). In the event that a distribution or distributions of Common Stock to a Participant is deferred, the Company will establish for each Participant a book-entry account (the "Account") representing all such deferred awards. 1 (b) Dividends on Deferred Awards. In the event that dividends are paid by the Company during the deferral period, each Participant's Account shall be credited with the amount of any dividends which would otherwise have been payable to such Participant if the number of shares represented by such Account had been owned directly, and such amount shall be deemed to be reinvested in additional shares of Stock. 4. Termination of Employment. (a) Death, Disability or Retirement. In the event your employment with the Company terminates due to death, disability or retirement, then 100% of the SARs shall be exercisable as of the date of such termination, and such SARs may be exercised by you or your beneficiary as designated in accordance with Section 11.2 of the Plan, at any time on or before the earlier to occur of (i) the Normal Expiration Date or (ii) the day before the third anniversary of your termination of employment. (b) Other Termination. In the event your employment with the Company terminates for any reason other than your death, disability or retirement, then all unexercised SARs (whether or not then exercisable) shall terminate and be canceled immediately upon such termination of employment. 5. Forfeiture and Pay-Back of SAR Amount. (a) If within one year after the exercise of all or a portion of the SARs awarded under the Plan, you voluntarily terminate your employment with the Company and you become employed by a competitor of the Company in the financial services industry (which includes, but is not limited to, working in the insurance, mutual fund, broker-dealer, financial institution or investment company industries), you agree to pay the Company within 30 days of commencing such employment an amount, in cash or the equivalent value in shares of Common Stock, equal to the aggregate of all SAR amounts attributable to SARs exercised within the one year period prior to the date of such termination. (b) If, after your termination of employment, the Committee determines that, either during or after your employment by the Company or one of its Subsidiaries, you engaged in conduct that (i) would have permitted the Company or any of its Subsidiaries to terminate your employment for Cause had you still been employed or (ii) otherwise results in damage to the business or reputation of the Company or any of its Subsidiaries, all of the SARs that are still outstanding at the time of such determination shall immediately terminate and be canceled immediately upon such determination by the Committee. Upon such a determination by the Committee, the Company may disregard any attempted exercise of the SARs by notice delivered prior to such determination, if, at such time, the Company had not completed the steps necessary to effect such exercise. 6. Nontransferability of Awards. No SARs may be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. 7. Beneficiary Designation. Benefits remaining unpaid at your death shall be paid to or exercised by your surviving spouse, if any, or otherwise to your estate. If you desire to name another beneficiary, you may name any beneficiary or beneficiaries (who may be named contingently or successively) by whom any right under the Plan is to be exercised in case of your death by submitting a form reasonably acceptable to the Company. This designation will be effective only when filed in writing, with the Chief Accounting Officer of the Company, during your lifetime. Such designation will revoke all prior designations. 2 8. Tax Withholding. Whenever Common Stock is to be issued pursuant to the exercise of a SAR, the Company shall have the power to withhold, or require you to remit, an amount sufficient to satisfy Federal, state, and local withholding tax requirements relating to such transaction, and the Company may defer the issuance of Common Stock until such requirements are satisfied. The Committee may permit you to elect, subject to such conditions as the Committee shall impose, to have shares of Common Stock otherwise issuable upon the exercise of a SAR withheld to satisfy all or part of your estimated total Federal, state, and local tax obligation associated with the transaction. 9. Accelerated Vesting and Payment. Unless the Committee shall otherwise determine in the manner set forth in Section 9.2 of the Plan, in the event of a Change in Control, each Stock Appreciation Right (regardless of whether such SARs are at such time otherwise exercisable) shall be canceled in exchange for a payment in cash of an amount equal to the excess, if any, of the Change in Control Price over the Base Price for such Stock Appreciation Right. 10. No Guarantee of Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate your employment at any time, or confer upon you any right to continue in the employ of the Company or any Subsidiary. 11. Amendments. The Committee shall have the right, in its sole discretion, to amend the Plan, from time to time, provided that no such amendment shall impair your rights under the Plan without your consent. Subject to the preceding sentence, any alteration or amendment of the Plan by the Committee shall, upon adoption thereof by the Committee, become and be binding and conclusive on all persons affected thereby without requirement for consent or other action with respect thereto by any such person. The Company shall give written notice to you of any such alteration or amendment of the Plan as promptly as practicable after the adoption thereof. The Plan may also be amended in a written document signed by both you and the Company. 12. Interpretation; Construction. Any determination or interpretation by the Committee under or pursuant to the Plan shall be final and conclusive on all persons affected hereby Please sign below indicating that you have received this letter and a copy of the Plan. Upon signing, please send a signed copy of this memo to Jerry DeFoor. COMPENSATION AND MANAGEMENT SUCCESSION COMMITTEE John J. McMahon, Jr., Chairman By signing below, I hereby acknowledge that I have reviewed the Company's 1996 Stock Incentive Plan. I understand that the terms of such Plan reflect the terms and conditions under which the award was granted. Further, I understand and agree to be bound by all of the Plan's terms, including Section 8 concerning the Forfeiture and Pay-Back of SARs. By: Signature: 3 EX-15 4 Exhibit 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Protective Life Corporation We are aware that our report dated October 23, 1996, on our review of interim consolidated financial information of Protective Life Corporation and subsidiaries for the period ended September 30, 1996, and included in the Company's quarterly report on Form 10-Q for the quarter then ended, is incorporated by reference in the Company's registration statements on Form S-8 and Form S-3. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. COOPERS & LYBRAND L.L.P. Birmingham, Alabama November 12, 1996 EX-27 5
7 This schedule contains summary financial information extracted from the consolidated financial statements of Protective Life Corporation and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 4,507,727 0 0 56,085 1,515,709 19,352 6,448,754 18,206 349,806 477,344 7,986,781 2,309,157 280,788 0 142,368 139,000 0 0 16,668 555,549 7,986,781 343,111 384,149 5,882 38,931 466,692 70,162 134,000 101,219 34,415 64,391 0 0 0 64,391 2.15 2.15 0 0 0 0 0 0 0 Reflects two for one stock split effective June 1, 1995. Net of minority interest in income of consolidated subsidiaries of $2,413.
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