-----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, MjTEhltfrsLH14QdajxDv5zboX88WuZNaHLWniSkSlEaqWltuJBTVNnr0+L2gLGR 5GZ8uCDlzPwudxfh7foZxQ== 0000355429-97-000006.txt : 19970328 0000355429-97-000006.hdr.sgml : 19970328 ACCESSION NUMBER: 0000355429-97-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12332 FILM NUMBER: 97565265 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-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission File Number 1-12332 PROTECTIVE LIFE CORPORATION (Exact name of Registrant as specified in its charter) 2801 HIGHWAY 280 SOUTH BIRMINGHAM, ALABAMA 35223 (Address of principal executive offices, including zip code) DELAWARE 95-2492236 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Registrant's telephone number, including area code (205) 879-9230 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.50 Par Value Junior Participating Cumulative Preferred Stock, $1.00 Par Value PLC Capital L.L.C. 9% Cumulative Monthly Income Preferred Securities, Series A Guarantee Issued for the Benefit of Holders of PLC Capital L.L.C. 9% Cumulative Monthly Income Preferred Securities, Series A (Title of class) Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Preferred Stock, $1.00 Par Value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive proxy statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by nonaffiliates of the Registrant as of March 7, 1997: $1,080,660,330 Number of shares of Common Stock, $0.50 Par Value, outstanding as of March 7, 1997: 30,807,526 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1996 Annual Report To Stockholders (the "1996 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, 1997, are incorporated by reference into Part III of this Report. PROTECTIVE LIFE CORPORATION ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996 TABLE OF CONTENTS PART I Page Item 1. Business............................................ Item 2. Properties.......................................... Item 3. Legal Proceedings................................... Item 4. Submission of Matters to a Vote of Security Holders. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................. Item 6. Selected Financial Data................................... Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... Item 8. Financial Statements and Supplementary Data............... Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... PART III Item 10. Directors and Executive Officers of the Registrant... Item 11. Executive Compensation............................... Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. Item 13. Certain Relationships and Related Transactions....... PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................. 2 PART I Item 1. Business Protective Life Corporation is an insurance holding company, whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. The Company also 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. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries. The Company has six operating divisions: Acquisitions, Financial Institutions, Group, Guaranteed Investment Contracts, Individual Life, and Investment Products. The Company also has an additional business segment which is described herein as Corporate and Other. Additional information concerning the Company's divisions may be found in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSs OF OPERATIONS - RESULTS OF OPERATIONS" and Note J to Consolidated Financial Statements in the Company's 1996 Annual Report to Stockholders, which are incorporated herein by reference. Copies of the Company's Proxy Statement and 1996 Annual Report to Stockholders will be furnished to anyone who requests such documents from the Company. Requests for copies should be directed to: Stockholder Relations, Protective Life Corporation, P. O. Box 2606, Birmingham, Alabama 35202, Telephone (205) 868-3573, FAX (205) 868-3541. The information incorporated herein by reference is also electronically accessible through the Internet from the "EDGAR Database of Corporate Information" on the Securities and Exchange Commission's World Wide Web site (http://www.sec.gov). Acquisitions Division The Company actively seeks to acquire blocks of insurance policies. These acquisitions may be accomplished through acquisitions of companies or through the assumption or reinsurance of policies. Most acquisitions do not include the acquisition of an active sales force, but some do. Blocks of policies acquired through the Acquisitions Division are usually administered as "closed" blocks; i.e., no new policies are sold. Therefore, the amount of insurance in force for a particular acquisition is expected to decline with time due to lapses and deaths of the insureds. The Division focuses solely on acquiring, converting, and servicing business acquired from other companies. Thirty-eight transactions have been entered into since 1970, including 11 since 1989. Generally, the Division focuses on transactions in the $10 million to $50 million range, although the Division does consider larger transactions. Management believes a favorable environment for acquisitions will likely continue into the immediate future. Insurance companies may seek to raise capital by selling blocks of policies or may sell blocks of policies in conjunction with programs to narrow strategic focus. In addition, smaller companies may face difficulties in marketing and thus may seek to be acquired. However, it appears that other companies are entering this market; therefore, the Company may face increased competition for future acquisitions. 3 Several states have enacted statutes that decreased the attractiveness of assumption reinsurance transactions and increased the attractiveness of coinsurance transactions. In coinsurance transactions, the seller remains liable with respect to the coinsured policies should the buyer fail to fulfill its obligations under the coinsurance agreement. This has caused sellers to place more emphasis on the financial condition and acquisition experience of the purchaser. Management believes this favorably impacts the Company's competitive position. Total revenues and income before income tax from the Acquisitions Division are expected to decline with time unless new acquisitions are made. Therefore, the Division's revenues and earnings may fluctuate from year to year depending upon the level of acquisition activity. In 1994, the Division coinsured a small block of payroll deduction policies in the second quarter and coinsured a block of 130,000 policies in the fourth quarter. In the second quarter of 1995, the Division coinsured a block of 28,000 policies. In January 1996, the Division coinsured a block of 38,000 policies. In December 1996, the Division acquired Community National Assurance Company with 16,000 policies and coinsured a related block of 22,000 policies. Financial Institutions Division The Financial Institutions Division specializes in marketing insurance products through commercial banks, savings and loan associations, and mortgage bankers. The Division markets an array of life and health products, which cover consumer and mortgage loans made by financial institutions. The Division also markets life and health products through the consumer finance industry and through automobile dealerships. The Division markets through employee field representatives, independent brokers, and a wholly-owned subsidiary. The Division also offers certain products through direct mail solicitation to customers of financial institutions. In 1992, the Company acquired the credit insurance business of Durham Life Insurance Company which more than doubled the size of the Division. In 1996, the Division coinsured a closed block of credit insurance policies. The demand for credit life and credit health insurance is related to the general level of loan demand. In 1995, the Division entered into a reinsurance arrangement whereby most of the Division's new credit insurance sales are being ceded to a reinsurer. In the second quarter of 1995, the Division also ceded a block of older policies. Though these reinsurance transactions will reduce the Division's earnings, the Division's return on investment is expected to improve. Group Division The Group Division manufactures, distributes, and services group, dental, cancer, and payroll deduction insurance products. The Division is placing marketing emphasis on dental products which are distributed through the Division's existing distribution system, as well as through joint marketing arrangements with independent marketing organizations and reinsurance contracts with other insurers. In addition, the Division has established a special marketing unit to sell dental and other products through mail and telephone solicitations. In 1995, the Company acquired National Health Care Systems of Florida, Inc. ("NHCS" also known as "DentiCare"), based in Jacksonville, Florida. DentiCare operated prepaid dental plans (also referred to as dental health maintenance organizations or dental capitation plans) 4 primarily in Florida, Tennessee, Georgia, and Alabama. In 1996, NHCS acquired an additional prepaid dental plan and a dental health maintenance organization, both of which also operated under the trade name "Denticare," in Oklahoma, Arkansas, and Missouri. DentiCare had approximately 385,000 members at December 31, 1996. In early 1997, NHCS agreed to acquire a dental health maintenance organization with approximately 18,000 members in Wisconsin, and another with approximately 14,000 members in Texas. The Division distributes its dental managed care and insurance products through the same distribution channels. Approximately 83% of the Division's sales and 35% of premiums and policy fees (including premium equivalents) in 1996 came from dental products. It is anticipated that most of the growth in the Division's premiums and policy fee income will be from dental products. The Division offers substantially all forms of group insurance customary in the industry, making available complete packages of life and accident and health insurance to employers. The life and accident and health insurance packages offered by this Division include hospital and medical coverages as well as dental and disability coverages. To address rising health care costs, the Division provides cost containment services such as utilization review and catastrophic case management. The Division markets its group insurance products primarily in the southeastern and southwestern United States using the services of brokers who specialize in group products. Group policies are directed primarily at employers and associations with between 25 and 1,000 employees. The Division also markets group insurance to small employers through a marketing organization affiliated with an insurer, and reinsures the business produced by the marketing organization. The Division receives a ceding commission from these arrangements. The Division also offers an individual cancer insurance policy marketed through a nationwide network of agents. Guaranteed Investment Contracts Division Guaranteed investment contracts ("GICs") are contracts, issued to a 401(k) or other retirement savings plan, which guarantee a fixed return on deposits for a specified period and often provide flexibility for withdrawals, in keeping with the benefits provided by the plan. The Company also offers related products through this Division, including fixed rate contracts offered to the trustees of municipal bond proceeds, floating rate contracts issued to bank trust departments, and long-term annuity contracts used to fund certain state obligations. Life insurer credit concerns and a demand shift to non-traditional GIC alternatives and equity based products have generally caused the GIC market to contract somewhat, although broadening the Division's product offerings has allowed it to maintain strong sales. Most GIC contracts written by the Company have maturities of three to five years. Prior to 1993, few GIC contracts were maturing because the contracts were newly written. Therefore, GIC account balances grew at a significant rate. Beginning in 1993, GIC contracts began to mature as contemplated when the contracts were sold. Hence, the rate of growth in GIC deposits has decreased as the amount of maturing contracts has increased. Individual Life Division The Individual Life Division primarily utilizes a distribution system based on experienced independent personal producing general agents who are recruited by regional sales managers. At 5 December 31, 1996, there were 24 regional sales managers located throughout the United States. Approximately 62% of the Division's 1996 sales came from this distribution system. In addition, the Division distributes insurance products in the life insurance brokerage market, representing approximately 32% of sales. The Division also distributes insurance products through the payroll deduction market and through stockbrokers and banks, and the Division offers its products to other insurance companies and their distribution systems under private label arrangements. Marketing emphasis is placed on the Division's various universal life products and products designed to compete in the term marketplace. The Division emphasizes back-end loaded universal life policies, both variable and fixed, which reward the continuing policyholder and which should help maintain the persistency of its universal life business. The products designed to compete in the term marketplace are term-like policies with guaranteed level premiums for the first 10, 15, or 20 years which provide a competitive net cost to the insured. The Division has experienced increased sales even though the life insurance industry is a mature industry. The Division also includes ProEquities, Inc. ("PES"), an affiliated securities broker-dealer. Through PES, members of the Division's field force who are licensed to sell securities can sell stocks, bonds, mutual funds, and investment products that may be manufactured or issued by companies other than the Company. Investment Products Division The Investment Products Division manufactures, sells, and supports annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Individual Life Division. Some of the Division's annuity products are also sold through PES. Since 1990, the Division has offered modified guaranteed annuity products which guarantee an interest rate for a fixed period. Because contract values are "market-value adjusted" upon surrender prior to maturity, these products afford the Company a measure of protection from changes in interest rates. In 1992, the Division ceased most new sales of single premium deferred annuities. In 1994, the Division introduced a variable annuity product which offers the policyholder the opportunity to invest in mutual funds managed by Goldman Sachs Asset Management and its affiliates. Variable annuity products represented approximately 46% of the Division's 1996 sales. The demand for annuity products is related to the general level of interest rates and performance of the equity markets. Corporate and Other The Corporate and Other segment consists of several small insurance lines of business, net investment income and expenses not attributable to the business segments described above (including net investment income on capital and interest on substantially all debt), and the operations of several small subsidiaries. The earnings of this segment may fluctuate from year to year. 6 In 1994, the Company entered into a joint venture arrangement with the Lippo Group to enter the Hong Kong insurance market. The Company and the Lippo Group jointly own a Hong Kong insurer which commenced business in early 1995. Management believes that this joint venture will position the Company to market life insurance in mainland China when that opportunity unfolds. The Company continues to investigate other possible opportunities in Asia. Insurance in Force The Company's total consolidated life insurance in force at December 31, 1996 was $69.3 billion. The following table shows sales by face amount and insurance in force for the Company's business segments.
Year Ended December 31 1996 1995 1994 1993 1992 ------------- -------------------------------------------------- (dollars in thousands) New Business Written Financial Institutions.............. $ 3,956,581 $ 3,563,177 $ 2,524,212 $ 2,776,276 $ 1,149,265 Group............................... 115,748 119,357 184,429 252,345 328,258 Individual Life..................... 9,245,002 7,564,983 6,329,630 4,440,510 4,877,038 ------------ ------------ ------------- ------------ ------------ Total.......................... $13,317,331 $11,247,517 $ 9,038,271 $ 7,469,131 $ 6,354,561 =========== =========== ============ ============ ============ Business Acquired Acquisitions........................ $ 1,286,673 $ 6,129,159 $ 4,756,371 $ 4,378,812 $ 1,302,330 Financial Institutions.............. 1,607,463 1,432,338 ------------ ------------ ------------ ----------- ------------ Total.......................... $ 2,894,136 $6,129,159 $ 4,756,371 $ 4,378,812 $ 2,734,668 ============ ============ ============ =========== ============ Insurance in Force at End of Year(1) Acquisitions........................ $20,037,857 $16,778,359 $ 11,728,569 $ 8,452,114 $ 3,836,066 Financial Institutions.............. 7,468,761 6,233,256 4,841,318 4,306,179 3,690,610 Group............................... 6,054,947 6,371,313 7,464,501 6,716,724 6,315,410 Individual Life..................... 35,765,841 32,500,935 25,843,232 22,975,577 20,634,927 ----------- ----------- ------------ ----------- ----------- Total.......................... $69,327,406 $61,883,863 $49,877,620 $42,450,594 $34,477,013 =========== =========== =========== =========== ===========
(1) Reinsurance assumed has been included; reinsurance ceded (1996 - $18,840,221; 1995-$17,524,366; 1994- $8,639,272; 1993-$7,484,566; 1992-$6,982,127) has not been deducted. The ratio of voluntary terminations of individual life insurance to mean individual life insurance in force, which is determined by dividing the amount of insurance terminated due to lapses during the year by the mean of the insurance in force at the beginning and end of the year, adjusted for the timing of major acquisitions and assumptions was: Ratio of Year Ended Voluntary December 31 Terminations 1992........................................ 9.0% 1993........................................ 8.7 1994........................................ 7.0 1995........................................ 6.9 1996........................................ 6.4 7 Net terminations reflect voluntary lapses and cash surrenders, some of which may be due to the replacement of the Company's products with competitors' products. Also, a higher percentage of voluntary lapses typically occurs in the first 15 months of a policy, and accordingly, lapses will tend to increase or decrease in proportion to the change in new insurance written during the immediately preceding periods. The amount of investment products in force is measured by account balances. The following table shows guaranteed investment contract and annuity account balances.
Guaranteed Modified Year Ended Investment Guaranteed Fixed Variable December 31 Contracts Annuities Annuities Annuities ----------- ---------- ---------- --------- --------- (dollars in thousands) 1992 $1,694,530 $299,608 $374,451 1993 2,015,075 468,689 537,053 1994 2,281,673 661,359 542,766 $170,454 1995 2,451,693 741,849 472,656 392,237 1996 2,474,728 862,747 390,461 624,714
Underwriting The underwriting policies of the Company's insurance subsidiaries are established by management. With respect to individual insurance, the subsidiaries use information from the application and, in some cases, inspection reports, attending physician statements, or medical examinations to determine whether a policy should be issued as applied for, rated, or rejected. Medical examinations of applicants are required for individual life insurance in excess of certain prescribed amounts (which vary based on the type of insurance) and for most individual insurance applied for by applicants over age 50. In the case of "simplified issue" policies, which are issued primarily through the Financial Institutions Division and the payroll deduction market, coverage is rejected if the responses to certain health questions contained in the application indicate adverse health of the applicant. For other than "simplified issue" policies, medical examinations are requested of any applicant, regardless of age and amount of requested coverage, if an examination is deemed necessary to underwrite the risk. Substandard risks may be referred to reinsurers for full or partial reinsurance of the substandard risk. The Company's insurance subsidiaries require blood samples to be drawn with individual insurance applications for coverage at age 16 and above except in the payroll deduction market where the face amount must be $100,000 or more before blood testing is required. Blood samples are tested for a wide range of chemical values and are screened for antibodies to the HIV virus. Applications also contain questions permitted by law regarding the HIV virus which must be answered by the proposed insureds. Group insurance underwriting policies are administered by experienced group underwriters. The underwriting policies are designed for single employer groups. Initial premium rates are based on prior claim experience and manual premium rates with relative weights depending on the size of the group and the nature of the benefits. 8 Investments The types of assets in which the Company may invest are influenced by state laws which prescribe qualified investment assets. Within the parameters of these laws, the Company invests its assets giving consideration to such factors as liquidity needs, investment quality, investment return, matching of assets and liabilities, and the composition of the investment portfolio by asset type and credit exposure. Because liquidity is important, the Company continually balances maturity, yield, and quality considerations in selecting new investments. The following table shows the Company's investments at December 31, 1996 valued on the basis of generally accepted accounting principles.
Percent of Total Asset Value Investments (dollars in thousands) Fixed maturities: Bonds: Mortgage-backed securities $2,202,093 33.6% United States Government and government agencies and authorities 347,602 5.3 States, municipalities, and political subdivisions 5,553 0.1 Public utilities 366,560 5.6 Convertibles and bonds with warrants attached 521 All other corporate bonds 1,706,842 26.1 Bank loan participations 49,829 0.8 Redeemable preferred stocks 7,072 0.1 ------------ ------ Total fixed maturities 4,686,072 71.6 ---------- ----- Equity securities: Common stocks - industrial, miscellaneous, and all other 23,053 0.4 Nonredeemable preferred stocks 12,197 0.2 ----------- ----- Total equity securities 35,250 0.6 Mortgage loans on real estate 1,503,080 22.9 Investment real estate 14,305 0.2 Policy loans 166,704 2.5 Other long-term investments 32,506 0.5 Short-term investments 114,258 1.7 ----------- ------ Total investments $6,552,175 100.0% ========== =====
A significant portion of the Company's bond portfolio is invested in mortgage-backed securities. Mortgage-backed securities are constructed from pools of residential mortgages, and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans. Prepayments of principal on the underlying residential loans can be expected to accelerate with decreases in interest rates and diminish with increases in interest rates. In its mortgage-backed securities portfolio, the Company has focused on sequential and planned amortization class securities, which tend to be less volatile than other classes of mortgage-backed securities. 9 The Company obtains ratings of its fixed maturities from Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). If a bond is not rated by Moody's or S&P, the Company uses ratings from the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"), or the Company rates the bond based upon a comparison of the unrated issue to rated issues of the same issuer or rated issues of other issuers with similar risk characteristics. At December 31, 1996, approximately 99% of bonds were rated by Moody's, S&P, or the NAIC. The following table shows the approximate percentage distribution of the Company's fixed maturities by rating, utilizing S&P rating categories, at December 31, 1996: Percentage of Type Fixed Maturities Bonds AAA 48.3% AA 4.4 A 22.6 BBB 21.1 BB or Less 2.5 Bank Loan Participations Investment Grade 0.1 Non-Investment Grade 0.9 Redeemable Preferred Stock 0.1 ------ Total 100.0% At December 31, 1996, approximately $4,511.7 million of the Company's $4,629.2 million bond portfolio was invested in U.S. Government or agency-backed securities or investment grade corporate bonds and only approximately $117.5 million of its bond portfolio was rated less than investment grade. Approximately $521.5 million of bonds are not publicly traded. The Company also invests in bank loan participations. Generally, such investments constitute the most senior debt incurred by the borrower in highly leveraged transactions. They are generally unrated by the credit rating agencies. Of the $49.8 million of bank loan participations owned by the Company at December 31, 1996, $43.6 million were classified by the Company as less than investment grade. Risks associated with investments in less than investment grade debt obligations may be significantly higher than risks associated with investments in debt securities rated investment grade. Risk of loss upon default by the borrower is significantly greater with respect to such debt obligations than with other debt securities because these obligations may be unsecured or subordinated to other creditors. Additionally, there is often a thinly traded market for such securities and current market quotations are frequently not available for some of these securities. Issuers of less than investment grade debt obligations usually have higher levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment-grade issuers. On December 17, 1996, the Company sold approximately $315 million of its bank loan participations in a securitization transaction involving the Company and other unrelated parties. An affiliate of the Company will serve as portfolio manager for the securitization's underlying portfolio of bank loan participations and other assets which total approximately $667 million. 10 The Company also invests a significant portion of its portfolio in mortgage loans. Results for these investments have been excellent due to careful management and a focus on a specialized segment of the market. The Company generally does not lend on speculative properties and has specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers. The average size of loans made during 1996 was $2.9 million. The average size mortgage loan in the Company's portfolio is approximately $1.7 million. The largest single loan amount is $13.6 million. The following table shows a breakdown of the Company's mortgage loan portfolio by property type: Percentage of Mortgage Loans Property Type on Real Estate Retail 78% Office Building 8 Warehouses 7 Apartments 6 Other 1 ---- Total 100% === Retail loans are generally on strip shopping centers located in smaller towns and anchored by one or more strong regional or national retail stores. The anchor tenants enter into long-term leases with the Company's borrowers. These centers provide the basic necessities of life, such as food, pharmaceuticals, and clothing, and have been relatively insensitive to changes in economic conditions. The following are some of the largest anchor tenants (measured by the Company's exposure) in the strip shopping centers at December 31, 1996: Percentage of Mortgage Loans Anchor Tenants on Real Estate Food Lion 4% Wal-Mart 4 K-Mart 4 Winn Dixie 3 Revco 2 Ahold USA 2 The Company's mortgage lending criteria generally require that the loan-to-value ratio on each mortgage be at or under 75% at the time of origination. Projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) generally exceed 70% of the property's projected operating expenses and debt service. For several years the Company has offered a commercial loan product under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. Approximately $498 million of the Company's mortgage loans have this participation feature. 11 Many of the Company's mortgage loans have call or interest rate reset provisions after five to seven years. However, if interest rates were to significantly increase, the Company may be unable to increase the interest rates on its existing mortgage loans commensurate with the significantly increased market rates, or call the loans. At December 31, 1996, $23.7 million or 1.6% of the mortgage loan portfolio was nonperforming. It is the Company's policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is the Company's general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. 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 approximately $400 million, net of expenses, and securities issued in the securitization transaction of approximately $161 million. The Company continues to service the securitized mortgage loans. As a general rule, the Company does not invest directly in real estate. The investment real estate held by the Company consists largely of properties obtained through foreclosures or the acquisition of other insurance companies. In the Company's experience, the appraised value of foreclosed properties often approximates the mortgage loan balance on the property plus costs of foreclosure. Also, foreclosed properties often generate a positive cash flow enabling the Company to hold and manage the property until the property can be profitably sold. The Company has established an allowance for uncollectible amounts on investments. This allowance was $31.6 million at December 31, 1996. Combinations of futures contracts and options on treasury notes are sometimes used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, mortgage-backed securities, and liabilities arising from interest sensitive products such as GICs and annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. The Company also uses interest rate swap contracts to convert certain investments from a variable rate of interest to a fixed rate of interest. For further discussion regarding the Company's investments and the maturity of and the concentration of risk among the Company's invested assets, see Note C to the Consolidated Financial Statements. 12 The following table shows the investment results of the Company for the years 1992 through 1996:
Cash, Accrued Percentage Investment Income, Earned on Realized Year Ended and Investments Net Average of Cash Investment December 31 at December 31 Investment Income and Investments Gains (Losses) - ----------- ----------------- ----------------- --------------- -------------- (dollars in thousands) 1992 $3,653,074 $284,069 8.9% $ (14) 1993 4,845,167 362,130 8.7 5,054 1994 5,362,016 417,825 8.3 6,298 1995 6,097,455 475,924 8.2 1,612 1996 6,743,770 517,483 8.1 5,510
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Company's 1996 Annual Report to Stockholders for certain information relating to the Company's investments and liquidity. Indemnity Reinsurance As is customary in the insurance industry, the Company's insurance subsidiaries cede insurance to other insurance companies. The ceding insurance company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it. The Company sets a limit on the amount of insurance retained on the life of any one person. In the individual lines it will not retain more than $500,000, including accidental death benefits, on any one life. For group insurance, the maximum amount retained on any one life is $100,000. At December 31, 1996, the Company had insurance in force of $69.3 billion of which approximately $18.8 billion was ceded to reinsurers. Policy Liabilities and Accruals The applicable insurance laws under which the Company's insurance subsidiaries operate require that each insurance company report policy liabilities to meet future obligations on the outstanding policies. These liabilities are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated in accordance with applicable law to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the liabilities shall not be less than liabilities calculated using certain named mortality tables and interest rates. The policy liabilities and accruals carried in the Company's financial reports (presented on the basis of generally accepted accounting principles) differ from those specified by the laws of the various states and carried in the insurance subsidiaries' statutory financial statements (presented on the basis of statutory accounting principles mandated by state insurance regulation). For policy liabilities other than those for universal life policies, annuity contracts, and GICs, these differences arise from the use of mortality and morbidity tables and interest rate assumptions which are deemed under generally accepted accounting principles to be more appropriate for financial reporting purposes than those required for statutory accounting purposes; from the introduction of lapse assumptions into the calculation; and from the use of the net level premium method on all business. Policy liabilities for universal life policies, annuity contracts, and GICs are carried in the Company's financial reports at the account value of the policy or contract. 13 Federal Income Tax Consequences The Company's insurance subsidiaries are taxed by the federal government in a manner similar to companies in other industries. However, certain restrictions on consolidating life insurance company income with noninsurance income are applicable to the Company; thus, the Company is not able to consolidate all of the operating results of its subsidiaries for federal income tax purposes. Under pre-1984 tax law, certain income of the Company was not taxed currently, but was accumulated in the "Policyholders' Surplus Account" for each insurance company subsidiary to be taxed only when such income was distributed to the stockholders or when certain limits on accumulated amounts were exceeded. Consistent with current tax law, amounts accumulated in the Policyholders' Surplus Account have been carried forward, although no accumulated income may be added to these accounts. As of December 31, 1996, the combined Policyholders' Surplus Accounts for the life insurance subsidiaries of the Company and the estimated tax which would become payable on these amounts if distributed to stockholders were $50.7 million and $17.7 million, respectively. The Company does not anticipate any of its life insurance subsidiaries exceeding applicable limits on amounts accumulated in these accounts and, therefore, does not expect to involuntarily pay tax on the amounts held therein. Competition Life and health insurance is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Life and health insurance is a highly competitive industry and the Company's divisions encounter significant competition in all their respective 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. 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. The Company competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. Regulation The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including premium rates, 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 proposals or regulation. 14 A life insurance company's statutory capital is computed according to rules prescribed by the NAIC as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs and more conservative computations of policy liabilities. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Based upon the December 31, 1996 statutory financial reports, the Company's insurance subsidiaries are adequately capitalized under the formula. The Company's insurance subsidiaries are required to file detailed annual reports with the supervisory agencies in each of the jurisdictions in which they do business and their business and accounts are subject to examination by such agencies at any time. Under the rules of the NAIC, insurance companies are examined periodically (generally every three to five years) by one or more of the supervisory agencies on behalf of the states in which they do business. To date, no such insurance department examinations have produced any significant adverse findings regarding any insurance company subsidiary of the Company. Under insurance guaranty fund laws in most states, insurance companies doing business in such a state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength. The Company's insurance subsidiaries were assessed immaterial amounts in 1996, which will be partially offset by credits against future state premium taxes. In addition, many states, including the states in which the Company's insurance subsidiaries are domiciled, have enacted legislation or adopted regulations regarding insurance holding company systems. These laws require registration of and periodic reporting by insurance companies domiciled within the jurisdiction which control or are controlled by other corporations or persons so as to constitute an insurance holding company system. These laws also affect the acquisition of control of insurance companies as well as transactions between insurance companies and companies controlling them. Most states, including Tennessee, where Protective Life is domiciled, require administrative approval of the acquisition of control of an insurance company domiciled in the state or the acquisition of control of an insurance holding company whose insurance subsidiary is incorporated in the state. In Tennessee, the acquisition of 10% of the voting securities of a person is generally deemed to be the acquisition of control for the purpose of the insurance holding company statute and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. The Company's insurance subsidiaries are subject to various state statutory and regulatory restrictions on the insurance subsidiaries' ability to pay dividends to Protective Life Corporation. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval. Dividends in larger 15 amounts are subject to approval by the insurance commissioner of the state of domicile. The maximum amount that would qualify as ordinary dividends to the Company by Protective Life in 1997 is estimated to be $98 million. No assurance can be given that more stringent restrictions will not be adopted from time to time by states in which the Company's insurance subsidiaries are domiciled, which restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to the Company by such subsidiaries without affirmative prior approval by state regulatory authorities. The Company's insurance subsidiaries act as fiduciaries and are subject to regulation by the Department of Labor ("DOL") when providing a variety of products and services to employee benefit plans governed by the Employee Retirement Income Security Act of 1974 ("ERISA"). Severe penalties are imposed by ERISA on fiduciaries which violate ERISA's prohibited transaction provisions by breaching their duties to ERISA-covered plans. In a case decided by the United States Supreme Court in December 1993 (John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank), the Court concluded that an insurance company general account contract that had been issued to a pension plan should be divided into its guaranteed and nonguaranteed components and that certain ERISA fiduciary obligations applied with respect to the assets underlying the nonguaranteed components. Although the Company's insurance subsidiaries have not issued contracts identical to the one involved in Harris Trust, some of its policies relating to ERISA-covered plans may be deemed to have nonguaranteed components subject to the principles announced by the Court. The full extent to which Harris Trust makes the fiduciary standards and prohibited transaction provisions of ERISA applicable to all or part of insurance company general account assets, however, cannot be determined at this time. The Supreme Court's opinion did not resolve whether the assets at issue in the case may be subject to ERISA for some purposes and not others. The life insurance industry requested that the DOL issue exemptions from the prohibited transaction provisions of ERISA in view of Harris Trust. In July of 1995, the DOL published, in final form, a prohibited transaction class exemption (PTE 95-60) which exempts from the prohibited transaction rules, prospectively and retroactively to January 1, 1975, certain transactions engaged in by insurance company general accounts in which employee benefit plans have an interest. The exemption does not cover all such transactions, and the insurance industry is seeking further relief. Pursuant to the Small Business Job Protection Act signed into law on August 20, 1996, the DOL is required to publish final regulations clarifying the Harris Trust decision. Until these and other matters are clarified, the Company is unable to determine whether the decision will result in any liability and, if so, its nature and scope. Existing federal laws and regulations affect the taxation of the Company's products. Income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. Congress has from time to time considered proposals that, if enacted, would have had an adverse impact on the federal income tax treatment of such products, or would increase the tax-deferred status of competing products. If these proposals were to be adopted, they could adversely affect the ability of all life insurance companies, including the Company's subsidiaries, to sell such products and could result in the surrender of existing contracts and policies. Although it cannot be predicted whether future legislation will contain provisions that alter the treatment of these products, such provisions are not part of any tax legislation currently under active consideration in Congress. 16 The Federal Government has from time to time advocated changes to the current health care delivery system which will address both affordability and availability issues. In addition to the federal initiatives, a number of states are considering legislative programs that are intended to affect the accessibility and affordability of health care. Some states have enacted health care reform legislation. However, in light of the small relative proportion of the Company's earnings attributable to group health insurance, management does not expect that either the federal or state proposals will have a material adverse effect on the Company's earnings. The Federal Government has advocated repeal of the Glass-Steagall Act and certain other legislative changes, which would allow banks to diversify into securities and other businesses, including possibly insurance. The ultimate scope and effective date of any proposals are unknown at this time and are likely to be modified as they are considered for enactment. It is anticipated that these proposals may increase competition and, therefore, may adversely affect the Company. Additional issues related to regulation of the Company and its insurance subsidiaries are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Company's 1996 Annual Report to Stockholders. Recent Developments The Company expects that its various administrative systems will have the capability to process transactions dated beyond 1999 by the second quarter of 1998. The costs to complete its efforts to modify or replace such systems are not expected to be material. Employees The Company had approximately 1,300 full-time employees, including approximately 1,000 in the Home Office in Birmingham, Alabama at December 31, 1996. These employees are covered by contributory major medical, dental, group life, and long-term disability insurance plans. The cost of these benefits in 1996 amounted to approximately $3.1 million to the Company. In addition, substantially all of the employees are covered by a pension plan. The Company also matches employee contributions to its 401(k) Plan. See Note K to Consolidated Financial Statements. Item 2. Properties The Company's Home Office building is located at 2801 Highway 280 South, Birmingham, Alabama. This building includes the original 142,000 square-foot building which was completed in 1976 and a second contiguous 220,000 square-foot building which was completed in 1985. In addition, parking is provided for approximately 1,000 vehicles. The Company leases administrative space in six cities, substantially all under leases for periods of three to five years. The aggregate monthly rent is approximately $81 thousand. Marketing offices are leased in 20 cities, substantially all under leases for periods of three to five years with five leases running longer than five years. The aggregate monthly rent is approximately $48 thousand. 17 Item 3. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company or any of its subsidiaries is a party or of which any of the Company's properties is the subject. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Company's 1996 Annual Report to Stockholders for certain information relating to litigation involving the Company. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of 1996 to a vote of security holders of the Company. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is listed and principally traded on the New York Stock Exchange (NYSE symbol: PL). The following table sets forth the highest and lowest closing prices of the Company's Common Stock, $0.50 par value, as reported by the New York Stock Exchange during the periods indicated, along with the dividends paid per share of Common Stock during the same periods. Prices and dividends prior to June 1, 1995 have been adjusted for the June 1, 1995 two-for-one stock split. Range Dividends High Low 1995 First Quarter........................... $24.25 $21.44 $.14 Second Quarter.......................... 27.50 21.63 .16 Third Quarter........................... 29.63 27.38 .16 Fourth Quarter.......................... 31.25 26.88 .16 1996 First Quarter........................... $36.50 $30.50 $.16 Second Quarter.......................... 38.38 33.13 .18 Third Quarter........................... 37.75 31.38 .18 Fourth Quarter.......................... 41.63 34.50 .18 On March 7, 1997, there were approximately 2,050 holders of record of Company Common Stock. The Company (or its predecessor) has paid cash dividends each year since 1926 and each quarter since 1934. The Company expects to continue to pay cash dividends, subject to the earnings and financial condition of the Company and other relevant factors. The ability of the Company to pay cash dividends is dependent in part on cash dividends received by the Company from its life insurance subsidiaries. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Company's 1996 Annual Report to Stockholders. Such subsidiary dividends are restricted by the various insurance laws of the states in which the subsidiaries are incorporated. See Item 1 "Business - Regulation". 18 Item 6. Selected Financial Data
Year Ended December 31 1996 1995 1994 1993 1992 (dollars in thousands, except per share amounts) INCOME STATEMENT DATA Premiums and policy fees.............. $ 494,153 $432,576 $402,772 $370,758 $323,136 Net investment income................. 517,483 475,924 417,825 362,130 284,069 Realized investment gains(losses)..... 5,510 1,612 6,298 5,054 (14) Other income.......................... 20,857 11,768 21,553 21,695 18,835 --------------------- --------- --------- --------- Total revenues.............. $ 1,038,003 $921,880 $848,448 $759,637 $626,026 ========= ======== ======== ======== ======== Benefits and expenses................. $ 898,262 $800,846 $742,275 $674,593 $566,079 Income tax expense.................... $ 47,512 $ 41,152 $ 33,976 $ 28,475 $ 17,384 Minority interest .................... $ 3,217 $ 3,217 $ 1,796 $ 19 $ 90 Net income............................ $ 89,012 $ 76,665 $ 70,401 $ 56,550(1) $ 41,420(2) PER SHARE DATA(3) Net income(4)......................... $2.94 $2.68 $2.57 $2.07(1) $1.52(2) Cash dividends........................ $ .70 $ .62 $ .55 $ .505 $ .45 Weighted average number of outstanding...................... 30,285,911(5) 28,627,345(5) 27,392,936(5) 27,381,578(5) 27,315,986 Stockholders' equity.................. $19.98 $18.30 $9.86 $13.17 $10.28 Stockholders' equity excluding net unrealized gains and losses on investments................... $19.76 $16.29 $13.78 $11.74 $10.16 December 31 1996 1995 1994 1993 1992 ------------ ------------- ------------- ------------ --------- (dollars in thousands) BALANCE SHEET DATA Total assets.......................... $ 8,263,205 $ 7,231,257 $6,130,284 $5,316,005 $4,006,667 Long-term debt........................ $ 168,200 $ 115,500 $ 98,000 $ 137,598 $ 31,014 Total debt............................ $ 181,000 $ 115,500 $ 98,000 $ 147,118 $ 88,248 Monthly Income Preferred Securities(6).......... $ 55,000 $ 55,000 $ 55,000 Stockholders' equity.................. $ 615,316 $ 526,557 $ 270,373 $ 360,733 $ 281,400 Stockholders' equity excluding unrealized gains and losses on investments................... $ 608,628 $ 468,694 $ 377,905 $ 321,449 $ 278,244
(1) Reduced by $1,261 or $.05 per share representing a one-time adjustment to income tax expense due to the change in the corporate income tax rate from 34% to 35%. (2) Reduced by $1,053 or $.04 per share representing the cumulative effect of a change in accounting principle for the adoption of SFAS No. 106. (3) Prior periods have been restated to reflect a two-for-one stock split on June 1, 1995. (4) Net income per share is computed using the weighted average number of shares outstanding during each period. (5) Excludes contingently issuable shares of 208,233, 225,061, 262,730, and 257,272 at December 31, 1996, 1995, 1994, and 1993, respectively. The dilutive effect of such shares on earnings per share is less than three percent. (6) Reported as "minority interest in consolidated subsidiaries" in the Company's financial statements. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information regarding the Company's financial condition and results of operations is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1996 Annual Report to Stockholders and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data for the Company and its subsidiaries, which are included under the caption "Consolidated Financial Statements" in the Company's 1996 Annual Report to Stockholders, are incorporated herein by reference. 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders Protective Life Corporation Birmingham, Alabama Our report on the consolidated financial statements of Protective Life Corporation and subsidiaries has been incorporated by reference in this Form 10-K from page 49 of the 1996 Annual Report to Stockholders of Protective Life Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 26 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Birmingham, Alabama February 11, 1997 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant Except for the information concerning executive officers of the Company set forth below, the information called for by this Item 10 is incorporated herein by reference to the section entitled "Election of Directors and Information about Nominees" in the Company's definitive proxy statement for the Annual Meeting of Stockholders, May 5, 1997, to be filed with the Securities and Exchange Commission by the Company pursuant to Regulation 14A within 120 days after the end of its 1996 fiscal year. The executive officers of the Company are as follows: Name Age Position Drayton Nabers, Jr. 56 Chairman of the Board and Chief Executive Officer and a Director John D. Johns 45 President and Chief Operating Officer Ormond L. Bentley 61 Executive Vice President, Group R. Stephen Briggs 47 Executive Vice President Jim E. Massengale 54 Executive Vice President, Acquisitions A. S. Williams III 60 Executive Vice President, Investments and Treasurer Danny L. Bentley 39 Senior Vice President, Group Richard J. Bielen 36 Senior Vice President, Investments Carolyn King 46 Senior Vice President, Investment Products Division Deborah J. Long 43 Senior Vice President, Secretary and General Counsel 22 Name Age Position Steven A. Schultz 43 Senior Vice President, Financial Institutions Wayne E. Stuenkel 43 Senior Vice President and Chief Actuary Judy Wilson 38 Senior Vice President, Guaranteed Investment Contracts Jerry W. DeFoor 44 Vice President and Controller, and Chief Accounting Officer All executive officers are elected annually and serve at the pleasure of the Board of Directors. None is related to any director of the Company or to any other executive officer except for Danny L. Bentley, who is the son of Ormond L. Bentley. Mr. Nabers has been Chairman of the Board and Chief Executive Officer of the Company and a Director since August 1996. Mr. Nabers has been Chairman of the Board and a Director of Protective Life since August 1996. From May 1994 to August 1996, Mr. Nabers was Chairman of the Board, President and Chief Executive Officer and a Director of the Company. From May 1992 to May 1994, he was President and Chief Executive Officer and a Director of the Company. Mr. Nabers was President and Chief Operating Officer and a Director of the Company from August 1982 until May 1992. From July 1981 to August 1982, he was Senior Vice President of the Company. From August 1982 to August 1996, he was President of Protective Life and had been its Senior Vice President from September 1981 to August 1982. From February 1980 to September 1981, he served as Senior Vice President, Operations of Protective Life. From 1979 to February 1980, he was Senior Vice President, Operations and General Counsel of Protective Life. From February 1980 to March 1983, he served as President of Empire General Life Insurance Company, a subsidiary, and from March 1983 to December 31, 1984, he was Chairman of the Executive Committee of Empire General. He is also a director of Energen Corporation, National Bank of Commerce of Birmingham, and Alabama National Bancorporation. Mr. Johns has been President and Chief Operating Officer of the Company since August 1996 and President of Protective Life since August 1996. He was Executive Vice President and Chief Financial Officer of the Company and of Protective Life from October 1993 to August 1996. From August 1988 to October 1993, he served as Vice President and General Counsel of Sonat Inc. He is a director of National Bank of Commerce of Birmingham and Alabama National Bancorporation. Mr. Ormond L. Bentley has been Executive Vice President, Group of the Company and of Protective Life since August 1996. Mr. Bentley was Senior Vice President, Group of the Company from August 1988 to August 1996 and of Protective Life from December 1978 to August 1996. Mr. Bentley has been employed by Protective Life since October 1965. 23 Mr. Briggs has been Executive Vice President of the Company and of Protective Life since October 1993. From January 1993 to October 1993, he was Senior Vice President, Life Insurance and Investment Products of the Company and of Protective Life. Mr. Briggs had been Senior Vice President, Ordinary Marketing of the Company since August 1988 and of Protective Life since April 1986. From July 1983 to April 1986, he was President of First Protective Insurance Group, Inc. Mr. Massengale has been Executive Vice President, Acquisitions of the Company and of Protective Life since August 1996. He was Senior Vice President of the Company and of Protective Life from May 1992 to August 1996. From May 1989 to May 1992, he was Senior Vice President, Operations and Systems of the Company and of Protective Life. From January 1983 to May 1989, he served as Senior Vice President, Corporate Systems of the Company and of Protective Life. Mr. Williams has been Executive Vice President, Investments and Treasurer of the Company and of Protective Life since August 1996. He was Senior Vice President, Investments and Treasurer of the Company and of Protective Life from July 1981 to August 1996. Mr. Williams has been employed by Protective Life since November 1964. Mr. Danny L. Bentley has been Senior Vice President, Group of the Company and of Protective Life since August 1996. From May 1989 to August 1996, he served as Vice President, Group Marketing of Protective Life. Mr. Bielen has been Senior Vice President, Investments of the Company and of Protective Life since August 1996. From August 1991 to August 1996, he served as Vice President, Investments of Protective Life. Ms. King has been Senior Vice President, Investment Products Division of the Company and of Protective Life since April 1995. From August 1994 to March 1995, she served as Senior Vice President and Chief Investment Officer of Provident Life and Accident Insurance Company and of its parent company, Provident Life and Accident Insurance Company of America. She served as President of Provident National Assurance Company from November 1987 to March 1995. From November 1986 to August 1994, she served as Vice President of Provident Life and Accident Insurance Company and of its parent company, Provident Life and Accident Insurance Company of America. Ms. Long has been Senior Vice President, Secretary and General Counsel of the Company since November 1996 and of Protective Life since September 1996. She was Senior Vice President and General Counsel of the Company from February 1994 to November 1996 and of Protective Life from February 1994 to September 1996. From August 1993 to January 1994, Ms. Long served as General Counsel of the Company and from February 1984 to January 1994 she practiced law with the law firm of Maynard, Cooper & Gale, P.C. Mr. Schultz has been Senior Vice President, Financial Institutions of the Company and of Protective Life since March 1993. Mr. Schultz served as Vice President, Financial Institutions of the Company from February 1993 to March 1993 and of Protective Life from February 1989 to March 1993. From June 1977 through January 1989, he was employed by and served in a 24 number of capacities with The Minnesota Mutual Life Insurance Company, finally serving as Director, Group Sales. Mr. Stuenkel has been Senior Vice President and Chief Actuary of the Company and of Protective Life since March 1987. Mr. Stuenkel is a Fellow of the Society of Actuaries and has been employed by Protective Life since September 1978. Ms. Wilson has been Senior Vice President, Guaranteed Investment Contracts of the Company and of Protective Life since January 1, 1995. From July 1991 to December 31, 1994, she served as Vice President, Guaranteed Investment Contracts of Protective Life. From October 1989 through July 1991, Ms. Wilson was employed by an affiliated insurer. Mr. DeFoor has been Vice President and Controller, and Chief Accounting Officer of the Company and of Protective Life since April 1989. Mr. DeFoor is a certified public accountant and has been employed by Protective Life since August 1982. Certain of these executive officers also serve as executive officers and/or directors of various other Company subsidiaries. Section 16(a) Beneficial Ownership Reporting Compliance Directors and executive officers of the Company are required to report changes in their beneficial ownership of the Company's Common Stock to the Securities and Exchange Commission. In 1996, all such reports were filed on a timely basis. Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions The information called for by Items 11 through 13 is incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders, May 5, 1997, to be filed with the Securities and Exchange Commission by the Company pursuant to Regulation 14A within 120 days after the end of its 1996 fiscal year. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. Financial Statements: The following financial statements set forth in the Company's 1996 Annual Report to Stockholders as indicated in the following table are incorporated by reference (see Exhibit 13). 25 Page Report of Independent Accountants....................... Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994............... Consolidated Balance Sheets as of December 31, 1996 and 1995 ........................................ Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994. Notes to Consolidated Financial Statements.............. 2. Financial Statement Schedules: The Report of Independent Accountants which covers the financial statement schedules appears on page 21 of this report. The following schedules are located in this report on the pages indicated. Page Schedule II - Condensed Financial Information of Registrant......................................... Schedule III - Supplementary Insurance Information...... Schedule IV - Reinsurance............................... All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibits: Included as exhibits are the items listed below. The Company will furnish a copy of any of the exhibits listed upon the payment of $5.00 per exhibit to cover the cost of the Company in furnishing the exhibit. Item Number Document *3(a) 1985 Restated Certificate of Incorporation of the Company filed as Exhibit 3(a) to the Company's Form 10-K Annual Report for the year ended December 31, 1993 *3(a)(1) Certificate of Amendment of 1985 Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on June 1, 1987 and filed as Exhibit 3(a)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1993 *incorporated by reference 26 *3(a)(2) Certificate of Amendment of 1985 Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on May 5, 1994 and filed as Exhibit 3(a)(5) to the Company's Form 10-Q Quarterly Report for the period ended March 31, 1994 *3(a)(3) Certificate of Designation of Junior Participating Cumulative Preferred Stock of the Company filed with the Secretary of State of Delaware on August 9, 1995 and filed as Exhibit A to Exhibit 1 to the Company's Form 8-A Report filed August 7, 1995 and filed as Exhibit A to Exhibit 2 to the Company's Form 8-K Report filed August 7, 1995 *3(a)(4) Certificate of Decrease of Shares Designated as Junior Participating Cumulative Preferred Stock of the Company filed with the Secretary of State of Delaware on August 8, 1995 and filed as Exhibit 3(a)(4) to the Company's Form 10-K Annual Report for the year ended December 31, 1995 3(b) 1995 Amended and Restated By-laws of the Company, as amended effective March 1997 *4(a) Reference is made to Exhibits 3(a) through 3(a)(4) above *4(b) Reference is made to Exhibit 3(b) above *4(c) Certificate of Formation of PLC Capital L.L.C. ("PLC Capital") filed as Exhibit 4(c) to the Company's and PLC Capital's Registration Statement No. 33-52831 *4(d) Amended and Restated Limited Liability Company Agreement of PLC Capital L.L.C. filed as Exhibit 4(d) to the Company's and PLC Capital's Registration Statement No. 33-52831 *4(e) Form of Action establishing series of Preferred Securities (included as Annex A to Exhibit 4(d) to the Company's and PLC Capital's Registration Statement No. 33-52831) *4(f) Specimen Preferred Security Certificate (included as Annex B to Exhibit 4(d) to the Company's and PLC Capital's Registration Statement No. 33-52831) *incorporated by reference 27 *4(g) Rights Agreement, dated as of August 7, 1995, between the Company and AmSouth Bank of Alabama (formerly, AmSouth Bank N.A.), as Rights Agent filed as Exhibit 2 to the Company's Form 8-K filed August 7, 1995 and filed as Exhibit 1 to the Company's Form 8-A filed August 7, 1995 *10(a) Management Incentive Plan filed as Exhibit 10(a) to the Company's Form 10-K Annual Report for the year ended December 31, 1984 *10(a)(1) Amendment to the Company's Management Incentive Plan renamed as the Company's Annual Incentive Plan filed as Exhibit 10(a)(1) to the Company's Form 10-Q Report filed May 14, 1990 *10(b) The Company's 1992 Performance Share Plan filed as Exhibit 10(b)(3) to the Company's Form 10-Q filed May 15, 1992 *10(b)(1) First Amendment to the Company's 1992 Performance Share Plan and filed as Exhibit 10(b)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1995 *10(c) Excess Benefit Plan amended and restated as of January 1, 1989 filed as Exhibit 10(c)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1991 *10(d) Form of Indemnity Agreement for Directors filed as Exhibit 19.1 to the Company's Form 10-Q Report filed August 14, 1986 10(d)(1) Form of Indemnity Agreement for Officers *10(e) Reference is made to Exhibit 4(g) above *10(f) Form of Severance Compensation Agreement filed as Exhibit 10(i) to the Company's Form 10-K Annual Report for the year ended December 31, 1991 *10(f)(1) Form of First Amendment to Severance Compensation Agreement filed as Exhibit 10(i)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1991 *10(g) The Company's Deferred Compensation Plan for Directors Who Are Not Employees of the Company filed as Exhibit 4 to the Company's Form S-8 filed August 27, 1993 *incorporated by reference 28 *10(h) The Company's Deferred Compensation Plan for Officers filed as Exhibit 4 to the Company's Form S-8 filed January 13,1994 *10(i) The Company's 1996 Stock Incentive Plan filed as Exhibit 10(1) to the Company's Form 10-Q Report filed November 13, 1996. *10(i)(1) The Company's specimen letter confirming grants under the Company's 1996 Stock Incentive Plan, filed as Exhibit 10(2) to the Company's Form 10-Q Report filed November 13, 1996. 13 1996 Annual Report To Stockholders 21 Organization Chart of the Company and Affiliates 23 Consent of Coopers & Lybrand L.L.P. 24 Power of Attorney 27 Financial Data Schedule 99 Safe Harbor for Forward-Looking Statements The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this Form 10-K: Exhibit Item Numbers 10(a), 10(a)(1), 10(b), 10(b)(1), 10(c), 10(d), 10(d)(1), 10(f), 10(f)(1), 10(g), 10(h), 10(i) and 10(i)(1). (b) Reports on Form 8-K: (1) Form 8-K, dated October 7, 1996 - Item 5 - Item 7 (2) Form 8-K, dated October 24, 1996 - Item 5 - Item 7 (3) Form 8-K, dated November 22, 1996 - Item 7 (4) Form 8-K, dated December 6, 1996 - Item 7 *incorporated by reference 29 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 March 27, 1997 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 /s/Drayton Nabers, Jr. Chairman of the Board and March 27, 1997 Chief Executive Officer - ---------------------- (Principal Executive Officer) DRAYTON NABERS, JR. and Director /s/John D. Johns President and Chief Operating March 27, 1997 - ---------------------- Officer JOHN D. JOHNS (Principal Financial Officer) /s/Jerry W. DeFoor Vice President and Controller, March 27, 1997 - ---------------------- and Chief Accounting Officer (Principal Accounting Officer) JERRY W. DEFOOR * Chairman Emeritus and March 27, 1997 - ---------------------- WILLIAM J. RUSHTON III Director * Director March 27, 1997 - ---------------------- JOHN W. WOODS 30 * Director March 27, 1997 - ---------------------- WILLIAM J. CABANISS, JR. * Director March 27, 1997 - ---------------------- H. G. PATTILLO * Director March 27, 1997 - ---------------------- JOHN J. MCMAHON, JR. * Director March 27, 1997 - ---------------------- A. W. DAHLBERG * Director March 27, 1997 - ---------------------- JOHN W. ROUSE, JR. * Director March 27, 1997 - ---------------------- ROBERT T. DAVID * Director March 27, 1997 - ---------------------- RONALD L. KUEHN, JR. * Director March 27, 1997 - ---------------------- HERBERT A. SKLENAR * Director March 27, 1997 - ---------------------- JAMES S. M. FRENCH * Director March 27, 1997 - ---------------------- ROBERT A. YELLOWLEES *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 31 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME PROTECTIVE LIFE CORPORATION (Parent Company) Years Ended December 31, 1996, 1995, and 1994 (in thousands)
1996 1995 1994 ------- -------- ------ REVENUES Dividends from subsidiaries* $ 3,391 $ 13,691 $ 1,885 Service fees from subsidiaries* 40,850 37,410 28,949 Investment income 2,489 3,671 5,339 Other income (loss) (384) (1,879) 1,582 --------- -------- ------- 46,346 52,893 37,755 -------- -------- -------- EXPENSES Operating and administrative 26,901 28,941 28,499 Interest - subsidiaries* 5,904 4,993 2,491 Interest - others 7,859 8,206 6,793 --------- -------- -------- 40,664 42,140 37,783 -------- -------- -------- INCOME BEFORE FEDERAL INCOME TAX AND OTHER ITEMS BELOW 5,682 10,753 (28) INCOME TAX EXPENSE 1,630 3 128 -------- ---------- --------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 4,052 10,750 (156) EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES* 84,960 65,915 70,557 -------- -------- -------- NET INCOME $ 89,012 $ 76,665 $ 70,401 = ====== = ====== = ======
*Eliminated in consolidation. See notes to condensed financial statements. 32 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS PROTECTIVE LIFE CORPORATION (Parent Company) (in thousands)
December 31 1996 1995 ------------ --------- ASSETS Investments: Fixed maturities $ 23,000 Long-term investments 54 $ 72 Investment real estate 133 133 Investments in subsidiaries (equity method)* 849,204 710,212 --------- -------- 872,391 710,417 Cash 1,024 71 Receivables from subsidiaries* 26,757 35,134 Accrued income taxes 7,636 4,603 Other 7,870 5,138 ---------- ---------- Total Assets $ 915,678 $ 755,363 = ======= = ======= LIABILITIES Accrued expenses and other liabilities $ 43,659 $ 37,381 Deferred income taxes 6,083 6,305 Debt: Subsidiaries* 69,620 69,620 Banks 61,000 40,500 Senior Notes 75,000 75,000 Medium-Term Notes 45,000 --------- --------- Total Liabilities 300,362 228,806 --------- --------- STOCKHOLDERS' EQUITY Preferred Stock Junior Participating Cumulative Preferred Stock Common Stock 16,668 15,668 Additional paid-in capital 166,713 96,371 Net unrealized gains (losses) on investments (all from subsidiaries, net of income tax: 1996 - $3,601; 1995 - $31,157 6,688 57,863 Retained earnings (including undistributed income of subsidiaries: 1996 - $529,265; 1995 - $444,305) 442,046 373,922 Treasury stock (11,874) (12,008) Unallocated stock in Employee Stock Ownership Plan ( 4,925) (5,259) --------- ---------- Total Stockholders' Equity 615,316 526,557 --------- --------- $ 915,678 $ 755,363 = ======= = =======
*Eliminated in consolidation. See notes to condensed financial statements. 33 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS PROTECTIVE LIFE CORPORATION (Parent Company) Years Ended December 31, 1996, 1995, and 1994 (in thousands)
1996 1995 1994 ----------- ---------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 89,012 $ 76,665 $ 70,401 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries* (85,034) (65,915) (70,558) Deferred income taxes (222) 3,261 1,227 Other (net) (1,531) 7,043 6,911 --------- --------- -------- Net cash provided by operating activities 2,225 21,054 7,981 ---------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of and/or additional investments in subsidiaries* (103,538) (27,731) (23,071) Principal payments received on loan to subsidiary* 10,000 4,750 9,500 Change in fixed maturities and long-term investments (22,892) 5 (77) Change in short-term investments 1,900 97 ------------ --------- ----------- Net cash used in investing activities (116,430) (21,076) (13,551) -------- ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Common Stock 70,546 Borrowings under line of credit arrangements and long-term debt 165,934 52,300 87,200 Principal payments on line of credit arrangements and debt (100,434) (34,800) (136,200) Borrowings under long-term debt to subsidiary* 69,620 Purchase of Treasury Stock (3) (191) Dividends to stockholders (20,888) (17,600) (15,071) -------- -------- --------- Net cash provided by (used in) financing activities 115,158 (103) 5,358 -------- ---------- ---------- INCREASE (DECREASE) IN CASH 953 (125) (212) CASH AT BEGINNING OF YEAR 71 196 408 ----------- ----------- ----------- CASH AT END OF YEAR $ 1,024 $ 71 $ 196 = ===== = == = ===
*Eliminated in consolidation. See notes to condensed financial statements. 34 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT PROTECTIVE LIFE CORPORATION (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS The Company publishes consolidated financial statements that are its primary financial statements. Therefore, these parent company condensed financial statements are not intended to be the primary financial statements of the Company, and should be read in conjunction with the consolidated financial statements and notes thereto of Protective Life Corporation and subsidiaries. NOTE 1 - DEBT At December 31, 1996, the Company had borrowed $48.2 million of its $70.0 million revolving line of credit and $12.8 million under a short-term note payable to a bank. Borrowings under the revolving line of credit become due in 1999. In addition, $75.0 million of Senior Notes due 2004, $45.0 million of Medium-Term Notes due 2011, and $55.0 million of subordinated debentures due 2024 were outstanding at December 31, 1996. The subordinated debentures were issued to PLC Capital L.L.C., an affiliate, in connection with the issuance of Monthly Income Preferred Securities by PLC Capital L.L.C. NOTE 2 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 1996 1995 1994 -------- -------- ----- CASH PAID (RECEIVED) DURING THE YEAR FOR: Interest Paid to Non-Affiliates $6,809 $ 6,634 $2,783 Interest Paid to Subsidiary* 6,266 6,266 3,498 -------- -------- ------- $13,075 $ 12,900 $6,281 ======= ======= ====== Income Taxes (reduced by amounts received from affiliates under a tax sharing agreement) $ 2,148 $ (538) $ (431) ======= ======== ======= NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of Treasury Stock to ESOP $ 669 $ 350 $ 3 ======== ======== ======== Unallocated Stock in ESOP $ 334 $ 333 $ 264 ======== ======== ======= Reissuance of Treasury Stock $ 261 $31,044 $1,050 ======== ======= ====== NOTE 3 - SUBSIDIARY SURPLUS DEBENTURES Protective Life Insurance Company ("Protective Life") has issued surplus debentures to the Company in order to finance acquisitions and growth. At December 31, 1996, the balance of the surplus debentures was $24.7 million. The surplus debentures are included in receivables from subsidiaries. Protective Life must obtain the approval of the Tennessee Commissioner of Insurance before it may pay interest or repay principal on the surplus debenture. *Eliminated in consolidation. 35
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES (in thousands) COL. A COL. B COL. C COL. D COL. E COL. F COL. G ------ ------ ------ ------ ------ ------ ------ GIC and Future Annuity Deferred Policy Deposits and Premiums Policy Benefits Other and Net Acquisition and Unearned Policyholders' Policy Investment Segment Costs Claims Premiums Funds Fees Income(1) ------- ----------- -------- -------- -------------- ------------ ------------ Year Ended December 31, 1996: Acquisitions $156,172 $1,117,159 $ 1,087 $ 251,450 $ 106,543 $106,015 Financial Institutions 32,040 119,242 253,153 1,880 73,422 13,941 Group 27,944 119,010 5,957 83,632 188,633 16,540 Guaranteed Investment Contracts 1,164 149,756 0 2,474,728 0 214,369 Individual Life 220,232 793,370 685 15,577 116,710 48,478 Investment Products 50,657 149,742 0 1,120,557 8,189 98,767 Corporate and Other 175 170 55 192 656 19,373 Unallocated Realized Investment Gains (Losses) 0 0 0 0 0 0 -------------------------------------- ------------------------------------------ TOTAL $488,384 $2,448,449 $260,937 $3,948,016 $494,153 $517,483 ======== ========== ======== ========== ======== ======== Year Ended December 31, 1995: Acquisitions $123,889 $ 851,994 $ 590 $ 250,550 $ 98,501 $ 95,018 Financial Institutions 36,283 84,162 189,973 1,495 65,668 9,377 Group 24,974 123,279 5,371 85,925 163,378 14,432 Guaranteed Investment Contracts 993 68,704 0 2,451,693 0 203,376 Individual Life 186,496 672,569 336 14,709 99,018 40,277 Investment Products 37,747 127,104 0 1,061,507 4,566 95,706 Corporate and Other 14 342 62 263 1,445 17,738 Unallocated Realized Investment Gains (Losses) 0 0 0 0 0 0 ----------- ------------- ---------- -------------- ------------ ----------- TOTAL $410,396 $1,928,154 $196,332 $3,866,142 $432,576 $475,924 ======== ========== ======== ========== ======== ======== Year Ended December 31, 1994: Acquisitions $110,202 $ 856,889 $ 381 $ 266,828 $ 86,376 $ 84,350 Financial Institutions 68,060 43,198 99,798 2,758 98,027 9,511 Group 22,685 116,324 2,905 84,689 131,096 14,903 Guaranteed Investment Contracts 996 0 0 2,281,674 0 181,203 Individual Life 162,186 571,070 320 13,713 84,925 38,036 Investment Products 70,298 102,705 0 1,027,527 1,635 81,042 Corporate and Other 17 4,109 75 263 713 8,780 Unallocated Realized Investment Gains (Losses) 0 0 0 0 0 0 ------------------------------------------------------ ------------ ------------ TOTAL $434,444 $1,694,295 $103,479 $3,677,452 $402,772 $417,825 ======== ========== ======== ========== ======== ======== (1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied.
36 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES (in thousands)
COL. A COL. H COL. I COL. J ------ ------ ------ ------ ------ Amortization Benefits of Deferred Realized and Policy Other Investment Settlement Acquisition Operating Segment Gains(Losses) Expenses Costs Expenses (1) ------- ----------- -------- -------- ----------- Year Ended December 31, 1996: Acquisitions $ 0 $ 118,181 $ 17,162 $ 25,186 Financial Institutions 0 42,781 24,900 11,660 Group 0 143,944 5,326 52,956 Guaranteed Investment Contracts (7,963) 169,927 509 3,851 Individual Life 3,098 96,404 28,393 40,969 Investment Products 3,858 73,093 14,710 15,323 Corporate and Other 0 710 30 12,247 Unallocated Realized Investment Gains (Losses) 6,517 0 0 0 -------------------------------------- ----------- TOTAL $5,510 $645,040 $91,030 $162,192 ======== ========== ======== ========== Year Ended December 31, 1995: Acquisitions 0 $100,016 $20,601 $ 24,437 Financial Institutions 0 24,019 26,809 17,123 Group 0 121,375 3,052 45,775 Guaranteed Investment Contracts (3,908) 165,963 386 5,470 Individual Life 0 80,067 20,403 33,620 Investment Products 4,937 72,111 11,479 13,663 Corporate and Other 0 1,476 3 12,998 Unallocated Realized Investment Gains (Losses) 583 0 0 0 --------- --------- -------- --------- TOTAL $ 1,612 $ 565,027 $82,733 $153,086 ======== ========== ======== ========== Year Ended December 31, 1994: Acquisitions $ 532 $ 97,649 $14,460 $ 21,823 Financial Institutions 0 46,360 36,592 16,717 Group 0 98,930 2,724 37,042 Guaranteed Investment Contracts 3,000 147,383 893 6,931 Individual Life 0 67,451 18,771 31,770 Investment Products (2,500) 58,424 14,679 6,801 Corporate and Other 0 913 3 15,959 Unallocated Realized Investment Gains (Losses) 5,266 0 0 0 ------- -------- ------- -------- TOTAL $ 6,298 $517,110 $88,122 $137,043 ======= ======== ======== ======== (1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied.
SCHEDULE IV - REINSURANCE PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES (dollars in thousands)
COL. A COL. B COL. C COL. D COL. E COL. F ------ ------ ------ ------ ------ ------ Percentage Ceded to Assumed from of Amount Gross Other Other Net Assumed to Amount Companies Companies Amount Net Year Ended December 31, 1996: Life insurance in force $53,052,020 $18,840,221 $16,275,386 $50,487,185 32.2% =========== =========== =========== =========== ==== Premiums and policy fees: Life insurance $ 272,331 $ 113,487 $ 129,717 $ 288,561 45.0% Accident/health insurance 370,812 194,687 29,467 205,592 14.3% ------------- ------------- -------------- ------------- TOTAL $ 643,143 $ 308,174 $ 159,184 $ 494,153 ============ ============ ============== ============= Year Ended December 31, 1995: Life insurance in force $50,346,719 $17,524,366 $11,537,144 $44,359,497 26.0% =========== =========== =========== =========== ===== Premiums and policy fees: Life insurance $ 308,422 $ 116,091 $ 66,565 $ 258,896 25.7% Accident/health insurance 377,179 217,082 13,583 173,680 7.8% -------------- ------------- -------------- ------------- TOTAL $ 685,601 $ 333,173 $ 80,148 $ 432,576 ============== ============= ============== ============= Year Ended December 31, 1994: Life insurance in force $40,909,454 $ 8,639,272 $ 8,968,166 $41,238,348 21.7% =========== ============= =========== =========== ===== Premiums and policy fees: Life insurance $ 256,840 $ 46,029 $ 31,032 $ 241,843 12.8% Accident/health insurance 283,884 126,546 3,591 160,929 2.2% -------------- ------------- -------------- ------------- TOTAL $ 540,724 $ 172,575 $ 34,623 $ 402,772 ============== ============= ============== ============
37 EXHIBITS TO FORM 10-K OF PROTECTIVE LIFE CORPORATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 INDEX TO EXHIBITS 3(b)............................................................................ 10(d)(1)........................................................................ 13.............................................................................. 21.............................................................................. 23.............................................................................. 24.............................................................................. 27.............................................................................. 99.............................................................................. EX-3.(II) 2 Exhibit 3(b) 1995 AMENDED AND RESTATED BY-LAWS OF PROTECTIVE LIFE CORPORATION (herein called "the Corporation") ARTICLE I. OFFICES The registered office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle. The principal office of the Corporation shall be located in Jefferson County, Alabama. The Corporation may have such other offices, either within or without the State of Delaware, as the Board of Directors or the Executive Committee may designate or as the business of the Corporation may require from time to time. ARTICLE II. STOCKHOLDERS Section 1. Annual Meeting. The annual meeting of the stockholders for the purpose of electing directors, and for the transaction of such other business as may come before the meeting, shall be held at such date and time during the first five months of the calendar year as shall be specified by resolution of the Board of Directors. Section 2. Special Meetings. Special Meetings of the stockholders may be called in accordance with the provisions of the Certificate of Incorporation of the Corporation. Section 3. Place of Meetings. The place of all meetings shall be the principal office of the Corporation in the State of Alabama unless some other place, either within or without the State of Alabama, is designated by a resolution of the Board of Directors or other person or persons entitled to call such meeting in accordance with the provisions of the Certificate of Incorporation of the Corporation. Section 4. Notice of Meetings. Written or printed notice stating the place, date and hour of the meeting shall be given not less than ten or more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Board of Directors, the Chief Executive Officer or the Secretary to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, addressed to the stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Nothing hereinabove in this Section shall affect the notice requirements of the Certificate of Incorporation. -1- Section 5. Postponement of Meetings. Any previously scheduled annual or special meeting of the stockholders may be postponed by resolution of the Board of Directors upon public announcement made on or prior to the date previously scheduled for such annual or special meeting. Section 6. Business at Annual Meetings. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, the Chief Executive Officer or the Secretary pursuant to Section 4 of this Article, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section, who is entitled to vote on such matter at the meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a stockholder, if such business is related to the election of directors of the Corporation, the procedures in Section 7 of this Article must be complied with. If such business relates to any other matter, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered or mailed to, and received by, the Secretary at the principal executive offices of the Corporation not less than sixty days nor more than ninety days prior to the first anniversary of the preceding year's annual stockholder meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth in writing (i) as to each matter the stockholder proposes to bring before the annual meeting, (A) a brief description of the business desired to be brought before the annual meeting, (B) the reasons for conducting such business at the annual meeting, and (C) any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (ii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made, (A) the name and address of such stockholder and such beneficial owner as they appear on the Corporation's books, and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he should so determine, such presiding officer shall declare to the meeting that any such business not properly brought before the meeting shall not be transacted. For the purposes of this Section and Section 7 of this Article, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the provisions of this -2- Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these By-laws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 7. Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in this Section shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation may be made at any annual meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by a stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section, who is entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section. Any such nomination by a stockholder shall be made pursuant to timely notice thereof given in writing to the Secretary. To be timely, a stockholder's notice must be delivered or mailed to, and received by, the Secretary at the principal executive offices of the Corporation not less than sixty days nor more than ninety days prior to the first anniversary of the preceding year's annual stockholder meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Notwithstanding anything in foregoing sentence to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least seventy days prior to the first anniversary of the preceding year's annual stockholder meeting, a stockholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered or mailed to, and received by, the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. Such stockholder's notice shall set forth in writing (i) as to each person whom the stockholder and the beneficial owner, if any, on whose behalf the nomination is made, proposes to nominate for election or re-election as a director (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the number of shares of stock of the Corporation which are beneficially owned by such person, and (D) any other information relating to such person that is required to be disclosed in connection with the solicitation of proxies for election of directors, or as otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person's written consent to being named in a proxy statement as a nominee and to serving as a director if elected); and (ii) as to such stockholder and such beneficial owner, if any, (A) the name and address of such stockholder and such beneficial owner as they appear on the Corporation's books, and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Nominations of persons for election to the Board of Directors of the Corporation may be made -3- at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors, the Chief Executive Officer or the Secretary or (ii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by a stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section, who is entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice shall be delivered or mailed to, and received by, the Secretary at the principal executive offices of the Corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Notwithstanding anything in these By-laws to the contrary, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section. The presiding officer of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not properly made in accordance with the provisions of this Section, and if he should so determine, such presiding officer shall declare to the meeting that any such nomination not properly made shall be disregarded. In addition to the provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Section 8. Fixing of Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof or entitled to receive payment of any dividend or other distribution or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days prior to any other action. If no record date is fixed the following shall apply: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given. (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of -4- stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 9. Voting Lists. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the Corporation, or to vote in person or proxy at any meeting of stockholders. Section 10. Quorum. A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares entitled to vote are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 11. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting, together with such authorization of the attorney in fact, if any. Section 12. Voting of Shares. Each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of stockholders. Unless otherwise prescribed by statute, the Certificate of Incorporation or these By-laws, all elections shall be had, and all questions decided, by majority vote. Notwithstanding the foregoing, matters which require a higher affirmative vote are specified in the Certificate of Incorporation of the Corporation. Section 13. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the by-laws of such corporation may -5- prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. A stockholder whose shares are pledged shall be entitled to vote such shares unless in the transfer by the pledgor on the books of the Corporation the pledgor has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such shares and vote thereon. Treasury shares and shares belonging to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by this Corporation, shall not be voted, directly or indirectly, at any meeting and shall not be counted in determining the presence of a quorum. Section 14. Voting on Certain Transactions. A merger, consolidation or dissolution of the Corporation or the sale, lease or exchange of all or substantially all of the Corporation's assets shall be subject to the approval of stockholders of the Corporation by the affirmative vote of the holders of a majority of the outstanding shares of the Corporation entitled to vote except as otherwise required by the Certificate of Incorporation of the Corporation. Section 15. Inspectors of Elections. Preceding any meeting of the stockholders, the Chief Executive Officer shall appoint one or more persons to act as Inspectors, and may designate one or more alternate Inspectors to replace any Inspector who fails to act. In the event no Inspector or alternate is able to act, the presiding officer of the meeting shall appoint one or more Inspectors to act at the meeting. Each Inspector, before entering upon the discharge of the duties of the Inspector, shall take and sign an oath faithfully to execute the duties of Inspector with strict impartiality and according to the best of his or her ability. The Inspectors shall: (a) ascertain the number of shares outstanding and the voting power of each (b) determine the shares represented at a meeting and the validity of proxies and ballots; (c) count all votes and ballots; (d) determine and retain with the minutes of the meeting a record of the disposition of any challenges made to any determination by the Inspectors; and (e) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The Inspectors may request other persons or entities to assist in the performance of the duties of the Inspectors. -6- In determining the validity and counting of proxies and ballots, the Inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, ballots and the regular books and records of the Corporation. The Inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the Inspectors consider other reliable information for the limited purpose permitted in this Section, the Inspectors, at the time they make their certification pursuant to clause (e) of this Section, shall specify the precise information considered by them, the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained, and the basis for the Inspectors' belief that such information is accurate and reliable. Section 16. Opening and Closing of Polls. The date and time for the opening and the closing of the polls for each matter upon which stockholders will vote at a meeting of stockholders shall be announced at the meeting by the presiding officer of the meeting. The Inspectors shall be prohibited from accepting any ballots, proxies or votes, nor any revocations thereof or changes thereto, after the closing of the polls, unless the Court of Chancery upon application by a stockholder shall determine otherwise. ARTICLE III. BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors. Section 2. Number, Tenure and Qualifications. So long as the stock of the Corporation is owned by one stockholder, the number of directors shall be three. Effective immediately when there is more than one stockholder, the following provisions shall be effective: The number of directors shall be fixed from time to time by a resolution of a majority of the existing directors of the Corporation. Subject to the provisions of the next paragraph, the number of directors so fixed shall be elected at the annual meeting of stockholders of the Corporation and each director so elected shall serve until the next annual meeting and until his successor shall be elected and shall qualify. No one shall be eligible to serve as a director unless he is the owner of Common Stock of the Corporation standing in his name on the books of the Corporation. Vacancies occurring in the Board of Directors by reason of the death, resignation or removal of any director may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected to serve until the next annual meeting of the stockholders. In the event of any increase in the number of directors, the additional offices so created may be filled by the affirmative vote of a majority of the directors in office at the time such vote is taken. Directors elected to fill such additional offices shall serve until the next annual meeting of stockholders and until their successors shall have been elected and shall qualify. -7- An inside director is one who is or has been in the full-time employment of the Corporation or any of its subsidiaries, and an outside director is any other director. Any outside director, and any inside director who is or has been the Chief Executive Officer of the Corporation, shall be eligible for reelection until he has reached his 70th birthday but not thereafter. No other inside director shall be eligible for reelection after his retirement from full-time employment with the Corporation or any of its subsidiaries. Section 3. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-law immediately after, and at the same place as, the annual meeting of stockholders, for election of officers and the transaction of such other business as may come before the meeting. Other regular meetings of the Board of Directors, of which there shall be at least three each calendar year, shall be held on dates to be fixed by the Board of Directors, and at least two days written notice of the date, time and place of each such meeting shall be given to each director. At all regular and special Board meetings the Chairman of the Board and Chief Executive Officer shall preside and in his absence, the President shall preside or, in absence of the President, the Executive Vice President shall preside. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer, the Executive Committee or any four members of the Board of Directors, and at least two days written notice of the date, time and place of any such special meeting, and of the business to be transacted at, or the purpose of the meeting shall be given to each director. Section 5. Notice. Notice of any regular or special meeting shall be given by written notice delivered personally or mailed to each director at his business or home address, or by facsimile transmission or telegram. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any one or more directors may participate in a meeting of the Board or a Committee thereof by means of conference telephone or similar communications equipment by means of which all persons participating can hear each other and such participation shall constitute presence and attendance at the meeting for all purposes of this Article. Section 6. Quorum. A majority of the whole number of directors constituting the Board shall constitute a quorum for the transaction of business at any meeting of the Board of Directors (but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice) and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by the Certificate of Incorporation or by these By-laws. Notwithstanding the foregoing provisions of this section to the contrary, in the event of an emergency caused by an enemy attack, at each meeting of the Board during such emergency -8- the presence of one-third of the total number of directors, but in any event not less than two directors, shall constitute a quorum and be sufficient for the transaction of business. Section 7. Compensation. Directors, by resolution of the Board of Directors, may be compensated as directors. Such compensation may include: a fixed salary or retainer; a fixed sum for attendance at each meeting of the Board of Directors; expenses for attendance at such meetings; or any combination of the foregoing. Members of special and standing committees of the Board, by resolution of the Board, may be compensated in like manner. No compensation to a director, as a director, shall preclude such director from serving the Corporation in any other capacity and receiving compensation therefor. Section 8. Committees. The Board of Directors, by resolution adopted by a majority of the entire Board, may designate one or more committees, including an Executive Committee, each such committee to consist of three or more directors of the Corporation. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation. Any such committee, to the extent provided in a resolution of the Board of Directors, shall have the power and authority to declare a dividend and to authorize the issuance of stock of the Corporation. The Board of Directors may designate one or more directors of the Corporation as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Vacancies in such committees shall be filled by the Board of Directors; provided, however, that in the absence or disqualification of a member of a committee, the members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Except as otherwise provided in a resolution adopted by the Board of Directors, a majority of all members of a committee shall constitute a quorum for the transaction of business. Section 9. Reliance upon Books, Reports and Records. Each director, each member of a committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the director, committee member or officer believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. -9- ARTICLE IV. OFFICERS Section 1. Officers Chosen by Board. Officers of the Corporation shall be elected by the Board of Directors at its first meeting after the annual meeting of stockholders, and shall consist of a Chairman of the Board, a President, one or more Vice Presidents (one or more of whom may be designated by the Board of Directors as Executive Vice President or Senior Vice President), a Treasurer, a Secretary, and may include a Vice Chairman of the Board of Directors and such other officer as the Board of Directors may prescribe. All such officers shall be elected for a term of one year and until their successors are elected and qualified, but they shall, however, be subject to removal by the Board of Directors at its pleasure. Such officers shall perform such duties and exercise such powers as are conferred by the Board of Directors or as are conferred herein. The Board of Directors may designate one of such elected officers the Chief Executive Officer of the Corporation, and in the absence of such designation, the Chairman of the Board shall be the Chief Executive Officer. The Board of Directors or the Chief Executive Officer, by and with the consent and approval of the Board of Directors or of the Executive Committee, may appoint such other officers and agents as, in its or his discretion, are required for the proper transaction of the Corporation's business. Any two or more offices may be held by the same person. The Board of Directors shall be and is hereby authorized to adopt and amend from time to time By-laws to be effective in the event of an emergency caused by an enemy attack, dealing with or making provisions during such emergency for continuity of management, succession to the authority and duties of officers, vacancies in office, alternative offices or other matters deemed necessary or desirable to enable the Corporation to carry on its business and affairs. Section 2. Removal. The Chief Executive Officer, Chairman of the Board, Vice Chairman of the Board or President may be removed, with or without cause, at any time by action of the Board of Directors. Any other officer elected by the Board of Directors may be removed, with or without cause, at any time, by action of the Board of Directors or the Executive Committee. Any other officer, agent or employee, including any officer, agent or employee appointed by the Board of Directors, may be removed, with or without cause, at any time by the Board of Directors, the Chief Executive Officer, the Executive Committee, or the superior executive officer to whom authority to so remove has been delegated by these By-laws or by the Chief Executive Officer. Section 3. Chairman and Vice Chairman of the Board. The Chairman and Vice Chairman of the Board of Directors, respectively, shall have and may exercise authority to act for the Corporation in all matters to the extent that such authority is delegated to such officer by the Board of Directors or the Executive Committee, and in all other matters to the extent provided by these By-laws. So long as the Chairman of the Board is the Chief Executive Officer, he shall, subject to the control of the Board of Directors, have general management and control of the affairs and business of the Corporation and shall keep the Board of Directors fully informed concerning the affairs and business of the Corporation. The Chief Executive Officer shall perform all other duties commonly incident to his office. The Board of Directors may by resolution -10- designate the officer of the Corporation who, in the event of the death, unavailability or incapacity of the Chief Executive Officer, shall perform the duties of the Chief Executive Officer until the Board of Directors shall designate another person to perform such duties and absent such designation, the chief operating officer shall in such event perform the duties of Chief Executive Officer. Section 4. President. Subject to the control of the Board of Directors and the Chief Executive Officer, the President shall have general management and control of the affairs and business of the Corporation, shall be its chief operating officer, and shall perform all other duties and exercise all other powers commonly incident to his office, or which are or may at any time be authorized or required by law. Section 5. Vice Presidents. Each Vice President shall have powers and perform such duties as shall from time to time be assigned to him by these By-laws or by the Board of Directors and shall have and may exercise such powers as may from time to time be assigned to him by the Chief Executive Officer. Section 6. Other Authority of Officers. The Chairman of the Board of Directors, Vice Chairman of the Board of Directors and the President may sign and execute all authorized bonds, contracts or other obligations in the name of the Corporation, and with the Secretary or an Assistant Secretary, may sign all certificates of shares of the capital stock of the Corporation, and do and perform such other acts and things as may from time to time be assigned to each of them by the Board of Directors. The Chief Executive Officer, the President, the Treasurer or such other officers as are authorized by the Board of Directors may enter into contracts in the name of the corporation or sell and convey any real estate or securities now or hereafter belonging to the Corporation and execute any deeds or written instruments of transfer necessary to convey good title thereto and each of the foregoing officers, or the Secretary or the Treasurer of the Corporation, is authorized and empowered to satisfy and discharge of record any mortgage or deed of trust now or hereafter of record in which the Corporation is a grantee or of which it is the owner, and any such satisfaction and discharge heretofore or hereafter so entered by any such officer shall be valid and in all respects binding on the Corporation. Section 7. Secretary. The Secretary shall attend all meetings of the stockholders, and record all votes and the minutes of all proceedings in a book to be kept for the purpose, and shall perform like duties for the Board and its committees as required. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors. He shall record all transfers of stock, and cancel and preserve all certificates of stock transferred, and shall keep a record, alphabetically arranged, of all persons who are stockholders of the Corporation, showing their places of residence and the number of shares of stock held by them respectively. The Secretary shall also be the transfer agent of the Corporation for the transfer of all certificates of stock ordered by the Board of Directors, and shall affix the seal of the Corporation to all certificates of stock or other instruments requiring the seal. He shall keep such other books and perform such other duties as may be assigned to him from time to time. The Board of Directors may designate a bank or trust company as transfer agent for the Corporation stock, in which case such transfer agent shall perform all duties above set forth relative to transfer of such stock. -11- Section 8. Treasurer. The Treasurer shall have custody of all the funds and securities of the Corporation, and shall perform such duties as may from time to time be assigned to him by the Board of Directors or the Chief Executive Officer. ARTICLE V. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. The Certificates for shares of the capital stock of the Corporation shall be in such form as is prescribed by law and approved by the Board of Directors. Section 2. Lost, Stolen, or Destroyed Certificates. Any person claiming a stock certificate in lieu of one alleged to have been lost, stolen or destroyed shall give the Corporation or its agents an affidavit as to his ownership of the certificate and of the facts which go to prove that it has been lost, stolen or destroyed. If required by the Secretary, he also shall give the Corporation a bond, in such form as may be approved by the Secretary, sufficient to indemnify the Corporation against any claim that may be made against it or on account of the alleged loss, theft or destruction of the certificate or the issuance of a new certificate. Section 3. Transfer of Shares. Shares of the capital stock of the Corporation shall be transferred on the books of the Corporation by the holder thereof in person or by his attorney duly authorized in writing, upon surrender and cancellation of certificates for the number of shares to be transferred, except as provided in the preceding section. Books for the transfer of shares of the capital stock shall be kept by the Corporation or by one or more transfer agents appointed by it. Section 4. Regulations. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. ARTICLE VI. FISCAL YEAR The fiscal year of the Corporation shall begin on the first day of January and end on the 31st day of December in each year. ARTICLE VII. DIVIDENDS The Board of Directors at any regular or special meeting may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation. -12- ARTICLE VIII. SEAL The Board of Directors shall provide a corporate seal which shall have inscribed thereon the name of the Corporation and the state of incorporation and the words, "Corporate Seal". ARTICLE IX. MISCELLANEOUS PROVISIONS Section 1. Informal Action. Nothing contained in these By-laws or in the Certificate of Incorporation of the Corporation shall be deemed to restrict the power of the Board of Directors or members of any of its Committees to take any action required or permitted to be taken by them, without a meeting, in accordance with applicable provisions of law. Section 2. Waivers of Notice. Whenever notice is required to be given under any provision of law or of the Certificate of Incorporation or of these By-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE X. AMENDMENTS The By-laws and any amendments thereof may be altered, amended, changed or repealed, or new By-laws may be adopted, by the Board of Directors (a) at any regular or special meeting by the affirmative vote of all the members of the Board, or (b) at any regular or special meeting of the Board, the notice of which shall have stated the amendment of the By-laws as one of the purposes of the meeting and set forth a summary of the proposed amendment or amendments, by the affirmative vote of a majority of all the members of said Board; but these By-laws and any amendments thereof, including By-laws adopted by the Board of Directors, may be altered, amended, changed or repealed and other By-laws may be enacted by the stockholders at any annual meeting or at any special meeting provided that notice of such proposed alteration, amendment, change, repeal or enactment shall have been given in the notice of the meeting. Provided, however, that nothing herein contained may be construed to conflict with restrictions set forth in the Certificate of Incorporation of the Corporation. * * * * * Exhibit 3(b) AMENDMENT TO THE 1995 AMENDED AND RESTATED BY-LAWS OF PROTECTIVE LIFE CORPORATION (herein called "the Corporation") The By-laws of the Corporation are hereby amended by adding the following after the third paragraph of Article III, Section 2: Any outside director who ceases to hold the same or higher position with the business or professional organization with which such person was associated when first elected a director shall automatically be deemed to have offered his or her resignation as a director of the Corporation, and the Board Structure and Nominating Committee shall make a recommendation to the Board of Directors with respect to such resignation; and, if the deemed offer to resign is accepted by the Board of Directors, such resignation shall be effective as of the next annual meeting of shareholders; provided, however, that with respect to directors who are directors as of March 3, 1997, no such resignation shall be deemed to be tendered until January 1, 1998. IN WITNESS WHEREOF, the Corporation has caused this Amendment to the By-laws to be signed by Drayton Nabers, Jr., as its Chairman of the Board and Chief Executive Officer, and attested by Deborah J. Long, as its Secretary, and has caused its corporate seal to be hereunto affixed, hereby declaring and certifying that this Amendment to the By-laws of the Corporation was duly adopted by the Board of Directors at a regular meeting held on the 3rd day of March, 1997. /s/ Drayton Nabers, Jr. Drayton Nabers, Jr. Chairman of the Board and Chief Executive Officer ATTEST: /s/ Deborah J. Long Deborah J. Long Secretary (CORPORATE SEAL) EX-10 3 Exhibit 10(d)(1) INDEMNITY AGREEMENT FOR OFFICERS This Agreement, effective as of the Effective Date hereinafter defined, is made by and between Protective Life Corporation, a Delaware corporation (hereinafter the "Company") and [INDEMNITEE'S NAME HERE], an officer of Company (hereinafter, together with such person's heirs, personal representatives and estate, the "Indemnitee"). WITNESSETH: THAT WHEREAS, Section 145 of the General Corporation Law of the State of Delaware (hereinafter "Section 145") empowers corporations to indemnify persons serving as a director, officer, employee or agent of the corporation or a person who serves at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, and further specifies that the indemnification set forth in said Section 145 "shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise"; and said Section 145 further empowers a corporation to "purchase and maintain insurance" on behalf of any of such persons "against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under" Section 145; and WHEREAS, Company has initiated a thorough investigation to determine the type of insurance available, the nature and extent of the coverage provided and the cost thereof to Company to insure each of the directors and officers of Company and of corporations affiliated with Company against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any action, suit or proceeding with which such person is threatened or made a party by reason of such status and/or such person's decisions, actions or omissions; however, upon receiving such information, the Board of Directors of Company concluded that at present, due to the high cost and other negative features of the coverage available at the date hereof, it would not be in the best interests of its shareholders for Company to purchase and maintain an adequate amount of such insurance and that, on the contrary, its shareholders' interests would be better served by Company's contracting to indemnify such persons and thereby to effectively self-insure against such potential liabilities in excess of, and in certain instances against liabilities excluded from, the $10,000,000 insurance policy obtained by Company effective May 8, 1989 and any additional acceptable coverage which from time to time hereafter may be placed in force (hereinafter collectively the "Policy") provided that the aggregate liability of Company hereunder (stated as $10,000,000 in Section 9(g) below) shall be reduced by the amounts insured under the Policy as in effect at any given time; and WHEREAS, the Board of Directors on recommendation of Company counsel has concluded that certain Officers (as defined in Section 1 below) of Company, both in their capacities as either executive officers, attorney-officers, or certain other officers of Company as may be designated from 1 time to time by Company's Chief Executive Officer and/or the Board of Directors, and also in their respective capacities as directors, officers, employees or agents of Company's affiliates or of any other corporation, subsidiary, partnership, joint venture, or trust or other enterprise at the request or for the convenience of Company or to represent the interests of Company, as the case may be, should be provided with maximum protection in order to insure that the most capable persons otherwise available will remain in, and in the future be attracted to, such positions and, furthermore, that it is not only fair, reasonable and prudent but necessary for Company to contractually obligate itself to indemnify such past, present and future Officers and their respective estates in a reasonable and adequate manner and that Company assume for itself the responsibility and liability for expenses and damages in connection with claims brought, whether on account of any prior, present or future alleged act, omission, injury, damage, or event; and WHEREAS, Company desires to have Indemnitee serve or continue to serve as an Officer free from undue concern for costs, expenses and damages by reason of Indemnitee's serving in such office or in such capacity or by reason of Indemnitee's decisions or actions or omissions while so serving on behalf of Company or its affiliates, or, at Company's direction or request, on behalf of any other corporation, subsidiary, partnership, joint venture, or trust or other enterprise; and Indemnitee desires to serve or continue to serve in one or more of such capacities, provided Indemnitee is furnished the indemnity provided for hereinafter; NOW, THEREFORE, for and in consideration of the premises and the covenants contained herein, Company and Indemnitee do hereby covenant and agree as follows: 1. Agreement to Serve; Definitions. (a) Indemnitee agrees that Indemnitee will, at the pleasure of the Chief Executive Officer or the Board of Directors of Company, as the case may be, serve or continue to serve as an Officer (as defined herein); provided, however, that nothing herein, express or implied, shall be deemed to be an employment contract nor to grant any rights to Indemnitee for any specific period of continued employment by one or more of Company and its Affiliates. (b) Unless the context otherwise clearly indicates to the contrary, the following terms as used herein shall have the respective meanings set forth below: (i) "Officer" shall refer to: (A) each member of Company's Operations Committee and the principal accounting officer of Company; (B) every officer employed by Company as an attorney in Company's Legal Department; and (C) certain other officers as may be designated from time to time by the Chief Executive Officer and/or the Board of Directors, whether any of said individuals described in (A), (B) or (C) above is serving in the capacity of executive officer of Company, and/or director and/or officer of one or more of Company's Affiliates, and/or serving, at the written request of Company, as a director, officer, employee or agent of any other corporation, subsidiary, partnership, joint venture, or trust or other enterprise for the convenience of Company or to represent the interests of Company, as the case may be. 2 (ii) Except as used in Section 10, "Affiliate" shall mean any corporation which is at least 51% owned by Company or by any corporation at least 51% of which is owned by Company; the term "Company" shall specifically mean and refer to Protective Life Insurance Company prior to its organization with Company in 1981 whereby Company became the parent of Protective Life Insurance Company. (iii) "Person" means any one (or more) individual or natural person or any one (or more) corporation, firm, joint venture, partnership, proprietorship, business venture, government, governmental body, agency or instrumentality, estate, trust, association or other legal entity whatsoever or group of same. (iv) "Non-governmental" shall refer to any Person which is not (A) the government of the United States of America or of any state, district, territory or possession thereof or of any county, parish, city, town, township or municipality within any such state, district, territory or possession, or (B) any agency, tribunal, council, instrumentality or public body established by any Person described in (A). (v) "Effective Date" shall refer to the date that Indemnitee first assumed the duties of an Officer, whether as an executive officer for the Company and/or as director and/or officer of one or more of Company's Affiliates, and/or, at the written request of Company, as a director, officer, employee or agent of any other corporation, subsidiary, partnership, joint venture, or trust or other enterprise for the convenience of Company or to represent the interests of Company, as the case may be. 2. Indemnification. Subject to the provisions of Sections 5, 8 and 9, Company shall indemnify Indemnitee as follows: (a) Company will pay on behalf of Indemnitee, and Indemnitee's executors, administrators and heirs, any amount which Indemnitee is or becomes legally obligated to pay because of any claim or claims from time to time threatened or made against Indemnitee by any Person because of any act or omission or neglect or breach of duty, including any actual or alleged error or misstatement or misleading statement, which Indemnitee commits or suffers while acting in Indemnitee's capacity as, and solely because of Indemnitee's acting as an Officer, provided, however, that prior disclosure by Indemnitee of a relationship with another corporation or organization shall not be deemed to be service at the request of Company. The payments which Company will be obligated to make hereunder shall include, inter alia, damages, charges, judgments, fines, penalties, settlements and costs, cost of investigation and costs of defense of legal or equitable or criminal actions, claims or proceedings and appeals therefrom, and costs of attachment, supersedeas, bail or other bonds. (b) If a claim under this Agreement is not paid by Company, or on its behalf, within sixty (60) days after the later of (i) receipt of written claim by Company or (ii) the date of approval of Indemnitee's coverage hereunder in a specific instance under Section 5, the claimant may at any time 3 thereafter bring suit against Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including reasonable attorney's fees) of prosecuting such claim. (c) In the event of payment under this Agreement, Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents and take all actions reasonably requested by Company to implement such right of subrogation. (d) Indemnitee shall give to Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Indemnitee will further notify and cooperate with Company in the selection of counsel and in the incurrence of costs and expenses in defending or investigating any claim for which indemnification may be sought hereunder. Indemnitee shall give Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 3. Assumption of Liability by Company. If Indemnitee is deceased and is entitled to indemnification under any provision of this Agreement, Company shall indemnify lndemnitee's estate and Indemnitee's spouse, heirs, administrators and executors against, and Company shall and does hereby agree to assume, any and all costs, charges and expenses (including attorneys' fees), penalties and fines actually and reasonably incurred by or for Indemnitee or Indemnitee's estate, in connection with the investigation, defense, settlement or appeal of any such action, suit or proceeding. Further, when requested in writing by the spouse of Indemnitee, and/or the heirs, executors or administrators of Indemnitee's estate, Company shall provide appropriate evidence of Company's agreement set out herein to indemnify Indemnitee against and to assume itself such costs, charges, liabilities and expenses. 4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by Company for some or a portion of the cost, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in the investigation, defense, appeal or settlement of such suit, action or proceeding but not, however, of the total amount thereof, Company shall nevertheless indemnify Indemnitee as to the portion thereof to which Indemnitee is entitled. 5. Determination of Right to Indemnification. Anything contained elsewhere herein to the contrary notwithstanding, any indemnification under Sections 2 through 4 hereinabove, inclusive, shall (unless ordered by a court) not be paid by Company unless a determination is made, as hereinafter provided, that indemnification is proper in the circumstances and not excluded because of the provisions of Section 8 or 9. The determination as to whether or not Indemnitee has met the standard of conduct required to qualify and entitle Indemnitee, partially or fully, to indemnification under the provisions of any provision of Section 2 hereof may be made either by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or if there are no such 4 directors, or if such directors so direct, by independent legal counsel (who may be the outside counsel regularly employed by Company) in a written opinion, or by the stockholders of Company. The fees and expenses of counsel in connection with making said determination contemplated hereunder shall be paid by Company, and, if requested by such counsel, Company shall give such counsel an appropriate written agreement with respect to the payment of their fees and expenses and such other matters as may be reasonably requested by counsel. If the Person (including the Board of Directors, independent legal counsel, the stockholders or a court) making the determination hereunder shall determine that Indemnitee is entitled to indemnification as to some claims, issues or matters involved in the action, suit or proceeding but not as to others, such Person shall reasonably prorate the expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement with respect to which indemnification is sought by Indemnitee among such claims, issues or matters. If, and to the extent that, it is finally determined hereunder that Indemnitee is not entitled to indemnification, then Indemnitee agrees to reimburse Company for all expenses advanced or prepaid hereunder, or the proper proportion thereof. 6. Advance of Costs, Charges and Expenses. If so ordered by the Board of Directors, the costs, charges and expenses incurred by Indemnitee in investigating, defending, or appealing any threatened, pending or completed civil or criminal action, suit or proceeding (administrative or investigative) covered hereunder, shall be paid by Company in advance in order to properly investigate, defend or appeal any such action, suit, or proceeding, and, if so ordered by the Board of Directors of Company, any judgments, fines or amounts paid in settlement shall be paid by Company in advance, all with the understanding and agreement hereby made and entered into by Indemnitee and Company, that in the event it shall ultimately be determined as provided hereunder that Indemnitee was not entitled to be indemnified, or was not entitled to be fully indemnified, that Indemnitee shall repay to Company such amount, or the appropriate portion thereof, so paid or advanced. 7. Other Rights and Remedies. The indemnification and advance payment of expenses as provided by any provision of this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under any provision of law, the Policy (as an Insured thereunder), Company's Certificate of Incorporation, any By-Law, this or other agreement, vote of stockholders or disinterested directors or otherwise, as to action taken while occupying any of the various positions or relationships inherent in Indemnitee's capacity as an Officer, as defined in Section 1 of this Agreement, and shall continue after Indemnitee has ceased to occupy such position or have such relationship and shall inure to the benefit of the heirs, executors and administrators of Indemnitee. 8. Construction. (a) This Agreement shall not be construed so as to give rise to a "contractual liability" which is excluded by the Policy. Each and every term hereof is enforceable by Indemnitee solely as to amounts (i) in excess of the limits of the Policy with respect to costs, charges and expenses (including attorneys' fees), judgments, fines, penalties and amounts paid in settlement 5 for which coverage is in effect under the Policy, and (ii) used under the Policy as a "deductible" amount, and (iii) which none of the Policy and the other liability insurance policies of Company clearly covers for Indemnitee as Insured thereunder; however, in any case in which Company believes the Policy or its other insurance should cover a loss, cost or expense, Company may make a contingent advance of monies pursuant to the terms hereof without admission, waiver or prejudice to its position that the Policy or Company's other insurance covers the loss, cost or expense. In amplification and clarification but not in limitation hereof, it is the intent of Company that this Agreement operate as "excess coverage" above the Policy and other applicable insurance limits up to the limit set forth in Section 9(g) and that it operate as "first dollar" coverage in all matters which are outside the scope of the Policy or within its deductibles and all other insurance maintained by Company from time to time, except as to the exclusions set forth hereinbelow in Section 9. In amplification but not in limitation of the foregoing, there is hereby expressly included "first dollar" coverage with respect to the following matters if considered by the Policy to be exclusions: (1) any act or omission in connection with the acquisition or assumption by Affiliates or Company of the stock, assets and/or business of other corporations by merger, purchase of assets, bulk reinsurance and otherwise; (2) liabilities and expenses based on or arising out of any action, suit or proceeding by a non-governmental Person involving the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. ss.1-61 et seq.; (3) liabilities and expenses based on or arising out of or directly or indirectly involving Indemnitee's position with any other entity if requested in writing by Company to so serve with such other entity; and (4) any act or omission the sole applicable exclusion for which by the Policy is on account of either (i) lack of appropriate notice, (ii) the existence of prior insurance, (iii) the timing of the occurrence and the claim, or (iv) other procedural defenses to coverage by the Policy, except as otherwise provided in Section 9(f) below. (b) If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, all portions of any paragraphs or sections of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph or section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 6 9. Exclusions and Limitations. Notwithstanding anything herein to the contrary: (a) Company shall not be liable to Indemnitee for, nor obligated to furnish advances in connection with, any loss, cost or expense of Indemnitee resulting from Indemnitee's willful, negligent or inadvertent violation of Section 16(b) of the Securities Exchange Act of 1934 or of the Foreign Corrupt Practices Act of 1977. (b) Company shall not be liable to Indemnitee for, and shall not be obligated to furnish any advances except for repayable costs, charges and expenses as hereinabove stated, in connection with, any loss, cost or expense of Indemnitee as the direct result of a final judgment for money damages payable to Company or any Affiliate for or on account of loss, cost or expense directly or indirectly resulting from Indemnitee's negligence or misconduct within the meaning of Section 145(b). (c) Unless otherwise allowed by a court of competent jurisdiction or in a separate action in the Chancery Court of Delaware, Company shall not be liable to Indemnitee for, and Indemnitee undertakes to repay Company for all advances which may have been made of, expenses of investigation, defense or appeal of any matter the judgment of which is excluded under subsection 9(b) next above. (d) Unless otherwise determined by a court of competent jurisdiction or in a separate action in the Chancery Court of Delaware, a settlement of any suit, action or proceeding shall be presumed to be an "expense" in mitigation of the expenses of continued litigation and not the compromise of a judgment on the merits of the action, suit or proceeding. (e) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to Officers of Company pursuant to the foregoing provisions, or otherwise, the Board of Directors has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Company of expenses incurred or paid by an Officer of Company in the wholly or partially successful defense of any action, suit or proceeding) is asserted by Indemnitee in connection with Company securities which have been registered, Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it hereunder is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. In effect, therefore, absent a court decision in the individual case or controlling precedent, the provisions of the Agreement will not apply to liabilities of Indemnitee arising under the Securities Act of 1933 (primarily relating to public distributions of securities) unless and only to the extent that Indemnitee is successful in the defense of the action, suit or proceeding in question. (f) Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee: 7 (i) based upon or attributable to Indemnitee or any member of Indemnitee's immediate family gaining in fact any personal profit or advantage to which Indemnitee was not legally entitled; (ii) based upon or attributable to the dishonesty of Indemnitee seeking payment hereunder; (iii) for bodily injury, sickness, disease or death of any person, or damage to or destruction of any tangible property; including loss of use thereof; (iv) for which indemnification under this Agreement is determined by a final adjudication of a court of competent jurisdiction to be unlawful and violative of public policy; or (v) for any act or omission attributable to Indemnitee in Indemnitee's capacity as a director, officer, agent or employee of any Person which heretofore became or hereafter becomes an Affiliate, if the occurrence of such act or omission was prior to the date such Person actually became or becomes an Affiliate. (g) From and after the date hereof the cumulative total of all amounts paid pursuant to the terms of this Agreement and all similar agreements entered into by Company with officers, reduced by (1) all sums repaid to Company under the repayment provisions of this Agreement and such similar agreements with officers and (2) all sums insured under the Policy for risks covered by this Agreement and such similar agreements with officers, shall never exceed the sum of Ten Million Dollars ($10,000,000). 10. Change of Control. (a) In the event that a Triggering Event, as hereafter defined, should take place, any determination to be made by the Board of Directors, as hereinabove referred to, shall be deemed to refer to action and determinations solely by a Majority of the Continuing Directors. (b) "Triggering Events" are: (i) The coming into being of a Related Person (as defined below); (ii) The approval by the Board of Directors of Company of any agreement, contract, pIan or other arrangement that would, if consummated, result in a Business Combination (as defined below); and (iii) The commencement of a Tender Offer (as defined below). Provided, however, that any event that would otherwise be a Triggering Event shall not be deemed a Triggering Event if a Majority of the Continuing Directors of Company (1) has expressly approved in advance the acquisition of outstanding shares of capital stock of Company entitled to vote generally 8 (the "Voting Stock") that caused the Related Person to become a Related Person, or (2) has approved the Business Combination or recommended acceptance by the shareholders of Company of the Tender Offer. (c) For purposes of this Section 10: (i) The term "Business Combination" shall mean (A) any Reorganization of Company or a Subsidiary (as hereinafter defined) with or into a Related Person, (B) any sale, lease, exchange, transfer or other disposition, including without limitation a pledge, mortgage or any other security device, of all or any Substantial Part (as hereinafter defined) of the assets either of Company or of a Subsidiary, or both, to a Related Person, (C) any Reorganization of a Related Person with or into Company or a Subsidiary, (D) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to Company or a Subsidiary, (E) the issuance of any securities of Company or a Subsidiary to a Related Person except if such issuance were a stock split, stock dividend or other distribution pro rata to all holders of the same class of Voting Stock, (F) any reclassification of securities (including a reverse stock split) or any other recapitalization that would have the effect of increasing the voting power of a Related Person, and (G) any agreement, contract, plan or other arrangement providing for any of the transactions described in this definition of Business Combination. (ii) The term "Related Person" shall mean and include (A) any individual, corporation, partnership or other person or entity which, together with its "Affiliates" and "Associates" (as defined on March 21, 1983 in Rule 12b-2 under the Securities Exchange Act of 1934), "beneficially owns" (as defined on March 21, 1983 in Rule 13d-3 under the Securities Exchange Act of 1934) in the aggregate 15 percent or more of the outstanding Voting Stock of Company, (B) any Affiliate or Associate of any such individual, corporation, partnership or other person or entity, and (C) any assignee, transferee or successor of any of the foregoing. Notwithstanding the foregoing, the term "Related Person" shall not include (1) Company, (2) any Subsidiary (unless the stock thereof not owned by Company is owned by a Related Person as hereinabove defined), (3) any employee benefit plan of Company or any such Subsidiary, (4) any trustee of or fiduciary with respect to any such plan when acting in such capacity, or (5) except as hereinbelow provided, the individuals comprising the Board of Directors of Company, their estates, immediate families, trusts established by them, or trusts in which they have a beneficial interest. Any person or other entity described in (5) above may, nevertheless, be a Related Person involved in a Business Combination, and shall not be counted in determining a Majority of the Continuing Directors, if an Associate or Affiliate of such person or entity which is not excluded by any of (1) through (4), inclusive, is a party to such Business Combination and such person or entity has a 1 percent or greater interest in the equity or profits of such Associate or Affiliate. Any person or entity who at any time is a Related Person continues at all times thereafter to be a Related Person. (iii) Notwithstanding the definition of "beneficially owned" in subsection (ii) above, any Voting Stock of Company that any Related Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by the Related Person. 9 (iv) The term "Substantial Part" shall mean more than 20 percent of the fair market value of the total assets of the corporation in question, as determined in good faith by a Majority of the Continuing Directors, as of the end of its most recent fiscal year ending prior to the time the determination is being made. (v) The term "Subsidiary" means any corporation of which a majority of any class of equity security is owned directly or indirectly by Company. (vi) The term "Continuing Director" shall mean a director of Company at the relevant time who was a member of the Board of Directors of Company immediately prior to the earliest time that (A) any Related Person involved in a Business Combination, or (B) any Related Person who is (1) a Predecessor to such Related Person or (2) an assignor of beneficial ownership in Company to such a Related Person or to its Predecessors, became a Related Person. (vii) The term "Majority" shall mean that number which constitutes a majority of the members of the Board of Directors of Company immediately prior to the earliest time that (A) any Related Person involved in the Business Combination, or (B) any Related Person who is (1) a predecessor to such Related Person or (2) an assignor of beneficial ownership in Company to such a Related Person or to its Predecessors, became a Related person. (viii) The term "Predecessor" shall mean each person or other entity (A) to which the subject Related Person is a successor by merger, consolidation, sale and purchase of substantially all of the assets, or other reorganization or (B) which assigned or transferred beneficial ownership of Voting Stock of Company to the subject Related Person, directly or through successive transactions. (ix) The term "Reorganization" includes a merger, consolidation, plan of exchange, sale of all or substantially all of the assets (including, as pertains to a subsidiary, bulk reinsurance or cession of substantially all of its policies and contracts) or other form of corporate reorganization pursuant to which shares of Voting Stock, or other securities of the subject corporation, are to be converted or exchanged into cash or other property, securities or other consolidation. (x) The term "Tender Offer" shall mean any offer by any individual, corporation, partnership, association, trust, or other organization or entity directed to the shareholders of Company the results of which, if consummated, could by its terms result in the coming into being of a Related Person. (xi) No Associate or Affiliate of any director of Company shall be a Related Person by attribution to such Associate or Affiliate of the Common Stock ownership of such director as of the date such director was elected a member of Company's Board of Directors. 11. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. 10 12. Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 13. Use of Certain Terms. As used in this Agreement, the words "herein", "hereof", and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular paragraph, subparagraph or other subdivision. 14. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 15. Notice to Company. Indemnitee agrees to promptly notify Company in writing upon being served with any citation, complaint, indictment or other document covered hereunder, either civil or criminal. 16. Notices. All notices, requests, demand and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand by Federal Express, Purolator or other commercial courier and receipted for by or on behalf of the party to whom said notice or other communication shall have been directed or if (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: [INDEMNITEE'S NAME HERE] Protective Life Corporation P. O. Box 2606 Birmingham, Alabama 35202 or to such other address as may have been furnished to Company by Indemnitee; (b) If to Company, to: Protective Life Corporation P. O. Box 2606 Birmingham, Alabama 35202 Attn: Drayton Nabers, Jr. Chairman of the Board and Chief Executive Officer or to such other address as may have been furnished to Indemnitee by Company. 17. Governing Law. The parties agree that this Agreement shall be construed and enforced in accordance with, and governed by, the laws of the State of Delaware. 11 18. Successors and Assigns. This Agreement shall be binding upon Company and its successors and assigns and shall inure to the benefit of Indemnitee and Indemnitee's spouse, heirs, executors, administrators and estate. IN WITNESS WHEREOF, Company has executed this Agreement by its duly authorized officers, and Indemnitee has executed this Agreement, on this ______ day of _________________, 1996. PROTECTIVE LIFE CORPORATION By: Drayton Nabers, Jr. Its Chairman of the Board and Chief Executive Officer ATTEST: Natalie R. Reid Assistant Secretary (CORPORATE SEAL) Indemnitee: [INDEMNITEE'S NAME HERE] 12 EX-13 4 Exhibit 13 Management's Discussion And Analysis Of Financial Condition And Results Of Operations RESULTS OF OPERATIONS Premiums and Policy Fees The following table sets forth for the periods shown the amount of premiums and policy fees and the percentage change from the prior period: Premiums and Policy Fees Year Ended Amount Percentage December 31 (in thousands) Increase 1994 $402,772 8.6% 1995 432,576 7.4 1996 494,153 14.2 =================================================== Premiums and policy fees increased $29.8 million or 7.4% in 1995 over 1994. The 1994 assumptions of two blocks of policies by the Acquisitions Division resulted in an $11.1 million increase in premiums and policy fees in 1995. On June 15, 1995, the Division coinsured a block of policies which resulted in an $8.3 million increase in premiums and policy fees. Decreases in older acquired blocks of policies represented a $7.2 million decrease in premiums and policy fees. Premiums and policy fees from the Financial Institutions Division decreased $32.4 million. This resulted from a reinsurance arrangement begun in the 1995 first quarter whereby most of the Division's new credit insurance sales are being ceded to a reinsurer. Increases in premiums and policy fees from the Group and Individual Life Divisions represent increases of $32.3 million and $14.1 million, respectively. 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. DentiCare operates prepaid dental plans (also referred to as dental health maintenance organizations or dental capitation plans). The acquisition represented $20.9 million of the increase in Group Division premiums and policy fees. Policy fees from the Investment Products Division increased $2.9 million. 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 in the first and fourth quarters of 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. Premiums and policy fees from the Financial Institutions Division increased $7.8 million. This resulted from the coinsurance of a block of policies in the second quarter of 1996 representing a $32.6 million increase in premiums and policy fees. This increase was largely offset by decreases resulting from the reinsurance arrangement begun in 1995. Premiums and policy fees from the Group Division increased $25.3 million. Premiums and policy fees related to the Group 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. Increases in premiums and policy fees from the Individual Life and Investment Product Divisions were $17.7 million and $3.6 million, respectively. On October 7, 1996, the Company announced that it would make voluntary refunds to certain of its cancer insurance policyholders and would 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, 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 1994 $417,825 15.4% 8.3% 1995 475,924 13.9 8.2 1996 517,483 8.7 8.1 ======================================================= Net investment income in 1995 was $58.1 million or 13.9% higher, and in 1996 was $41.6 million or 8.7% higher than the preceding year, primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to receiving annuity and guaranteed investment contract (GIC) deposits and to acquisitions. The assumption of two blocks of policies in 1994 and one block of policies in the second quarter of 1995 resulted in an increase in net investment income of $8.9 million in 1995. The assumption of four blocks of policies during 1996 resulted in an increase in net investment income of $18.4 million. The percentage earned on average cash and investments in 1995 was 8.2%, and in 1996 was 8.1%, 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) 1994 $6,298 1995 1,612 1996 5,510 =============================== The Company maintains an allowance for uncollectible amounts on investments. The allowance totaled $33.4 million at December 31, 1995 and $31.6 million at December 31, 1996. Realized investment gains in 1995 of $21.6 million were largely offset by realized investment losses of $20.0 million. Realized investment losses in 1995 were reduced by a $2.5 million reduction to the allowance for uncollectible amounts on investments. Realized investment gains in 1996 of $19.3 million were largely offset by realized investment losses of $13.8 million. In the 1996 first quarter, the Company sold $554 million of its commercial 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. Other Income The following table sets forth other income for the periods shown: Other Income Year Ended Amount December 31 (in thousands) 1994 $21,553 1995 11,768 1996 20,857 =============================== 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 insurance marketing organizations and small noninsurance subsidiaries, and the results of the Company's 50%-owned joint venture in Hong Kong. In 1994 the Company received $8.2 million in settlement of litigation. Other income from all other sources decreased $1.6 million in 1995. In 1996, revenues from the Company's broker-dealer subsidiary increased $4.2 million. Other income from all other sources increased $4.9 million. Income Before Income Tax The following table sets forth income or loss before income tax by business segment for the periods shown: Income (Loss) Before Income Tax Year Ended December 31 (in thousands) Business Segment 1994 1995 1996 - -------------------------------------------------------- Acquisitions $ 37,328 $ 48,490 $ 52,670 Financial Institutions 9,024 8,375 9,531 Group 10,139 10,060 5,138 Guaranteed Investment Contracts 29,005 27,649 32,119 Individual Life 13,933 13,490 15,151 Investment Products (705) 9,724 11,595 Corporate and Other* 2,183 2,663 7,020 Unallocated Realized Investment Gains (Losses) 5,266 583 6,517 - -------------------------------------------------------- $106,173 $121,034 $139,741 ======================================================== *Income before income tax for the Corporate and Other segment has not been reduced by pretax minority interest of $2,764 in 1994 and $4,950 in 1995 and 1996. In the 1996 first quarter the Company changed the way it allocates certain expenses to its operating divisions. Accordingly, prior period division results have been restated to reflect the change. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. In the ordinary course of business, the Acquisitions Division regularly considers acquisitions of smaller insurance companies or blocks of policies. 1995 pretax earnings from the Acquisitions Division increased $11.2 million to $48.5 million. The two blocks of policies coinsured during 1994 and the block of policies coinsured during the second quarter of 1995 represent $10.4 million of the increase. The Division's 1996 pretax earnings increased $4.2 million to $52.7 million. The Division's most recent acquisitions resulted in a $4.7 million increase in pretax earnings. The Financial Institutions Division's 1995 pretax earnings of $8.4 million were $0.6 million lower than 1994. In 1995 the Division entered into a reinsurance arrangement whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. The Division also ceded a block of older policies. Though the Division's reported earnings were reduced by approximately $2.0 million, these reinsurance transactions are expected to improve the Division's return on investment. The 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 reinsurance arrangement begun in the first quarter of 1995 reduced the Division's reported earnings by approximately $3.3 million, which was contemplated when the arrangement was entered into. The Group Division's 1995 pretax earnings of $10.1 million were even with 1994. Total dental earnings were $4.6 million, up $4.5 million. DentiCare represented $1.9 million of the increase. Lower traditional group life and health earnings offset higher dental earnings. The Division's 1996 pretax earnings of $5.1 million were lower than 1995. The previously discussed 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 Guaranteed Investment Contracts (GIC) Division had pretax operating earnings of $31.6 million in 1995 and $40.1 million in 1996. Operating earnings in 1995 were benefited by lower expenses and a favorable interest rate environment. This increase was also partially due to the growth in GIC deposits. The 1996 increase was due to improved operating spreads and to the growth in GIC deposits. Realized investment losses associated with this Division in 1995 were $4.0 million as compared to $8.0 million in 1996. As a result, total pretax earnings were $27.6 million in 1995 and $32.1 million in 1996. The rate of growth in GIC deposits has decreased as the amount of maturing contracts has increased. The Individual Life Division had 1995 pretax earnings of $13.5 million, $0.4 million lower than 1994. The Division had 1996 pretax operating earnings of $14.0 million, $0.5 million above 1995. Realized investment gains, net of related amortization of deferred policy acquisition costs, associated with this Division were $1.2 million in 1996. As a result, total pretax earnings were $15.2 million in 1996 which was $1.7 million higher than 1995 in which there were no realized investment gains. The Investment Products Division's 1995 pretax operating earnings of $6.4 million were $6.2 million higher than 1994. During 1994 the Division completed the amortization of the deferred policy acquisition costs related to its book value annuities. Accordingly, 1995 operating earnings were $7.2 million higher due to lower amortization. The Division also benefited from a favorable interest rate environment. The 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. Realized investment gains, net of related amortization of deferred policy acquisition costs, were $3.3 million in 1995 as compared with $2.0 million in 1996. As a result, total pretax earnings were $9.7 million in 1995 and $11.6 million in 1996. 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. 1995 pretax income for this segment was $2.7 million. The segment's 1995 and 1996 results reflect $2.4 million and $2.2 million, respectively, of additional MIPS dividends reported as "minority interest in net income of consolidated subsidiaries" rather than expenses of the Corporate and Other segment. 1996 pretax earnings for this segment increased $4.3 million to $7.0 million due to improved operating results from the Company's joint venture in Hong Kong and increased net investment income on capital. Income Tax Expense The following table sets forth the effective income tax rates for the periods shown: Income Tax Expense Year Ended December 31 Effective Income Tax Rates 1994 32% 1995 34 1996 34 Management's current estimate of the effective tax rate for 1997 is also 34%. Net Income The following table sets forth net income and net income per share for the periods shown (all references to prior period per share amounts have been restated to reflect a two-for-one stock split on June 1, 1995): Net Income Year Ended Amount Per Percentage December 31 (In thousands) Share Increase 1994 $70,401 $2.57 24.4% 1995 76,665 2.68 4.3 1996 89,012 2.94 9.7 ================================================== Net income per share in 1995 increased 4.3%, reflecting improved operating earnings in the Acquisitions, GIC, and Investment Products Divisions and the Corporate and Other segment, which were partially offset by lower realized investment gains and lower earnings in the Financial Institutions, Group, and Individual Life Divisions. Net income per share in 1996 was 9.7% higher than 1995, 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 Group Division. Known Trends and Uncertainties The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of the Company are discussed more fully below. COMPETITION. Life and health insurance is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Life and health insurance is a highly competitive industry and the Company's Divisions encounter significant competition in all their respective 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. 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. 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 life 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. 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 life insurance subsidiaries allow policyholders and contractholders to withdraw their funds under defined circumstances. The Company's life insurance subsidiaries design products and configure investment portfolios so as to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. Asset/liability management programs and procedures are used to monitor the relative duration of the Company's assets and liabilities. While the Company's life 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 life insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on the Company. INTEREST RATE FLUCTIUATIONS. Significant changes in interest rates expose life insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the interest rate credited to its life insurance and investment products. 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 interest 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 significant changes in interest rates will not materially affect such spreads. Lower interest rates may result in lower sales of the Company's life insurance and investment products. INVESTMENT RISKS. The Company's invested assets are subject to inherent risks of defaults and changes in market values. The value of the Company's commercial mortgage portfolio depends in part on the financial condition of the tenants occupying the properties on which the Company has made loans. Factors that may affect the overall default rate on, and market value of, the Company's invested assets include the level of interest rates, performance of the financial markets, 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. This acquisition strategy has increased the Company's earnings in part by allowing the Company to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to the Company, or that the Company will realize the anticipated financial results from its acquisitions. REGULATION AND TAXATION. The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business including premium rates, benefits, marketing practices, advertising, policy forms, underwriting standards, 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. 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. The Company cannot predict what future initiatives the President or Congress may propose which may affect the life and health insurance industry and the Company. LITIGATION. A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. 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 life and health 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 lawsuits involving insurers' sales practices, insurers have made material settlement payments to end litigation. RELIANCE UPON 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 Goldman Sachs Asset Management and its affiliates; a portion of the sales in the Financial Institutions, Group, and Individual Life Divisions comes from arrangements with unrelated marketing organizations; and the Company has entered the Hong Kong insurance market in a joint venture with the Lippo Group. Therefore the Company's results may be affected by the performance of others. 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. Additionally, the Company assumes policies of other insurers. Any regulatory or other adverse development affecting the ceding insurer could also have an adverse effect on the Company. 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." This statement is effective for transactions entered into after January 1, 1997. 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 which reward persistency and penalize the early withdrawal of funds. Surrender charges for these products are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. GICs and certain annuity contracts have market value adjustments 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, 1996, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $4,686.1 million, which is less than 1% below amortized cost (less allowances for uncollectible amounts on investments) of $4,671.6 million. The Company had $1,503.1 million in mortgage loans at December 31, 1996. While the Company's mortgage loans do not have quoted market values, at December 31, 1996, the Company estimates the market value of its mortgage loans to be $1,581.7 million (using discounted cash flows from the next call date) which is 5.2% 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 cash flows from the underlying real estate. Approximately $498 million of the Company's mortgage loans has this participation feature. At December 31, 1996, delinquent mortgage loans and foreclosed properties were 0.3% of assets. Bonds rated less than investment grade were 1.4% of assets. Additionally, the Company had bank loan participations that were less than investment grade, representing 0.5% 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 $31.6 million at December 31, 1996. Policy loans at December 31, 1996, were $166.7 million, a decrease of $0.8 million from December 31, 1995, (after excluding the $24.1 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 10% 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 and options on treasury notes are sometimes used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, mortgage-backed securities, and liabilities arising from interest-sensitive products such as GICs and annuities. Realized investment gains and losses of such contracts are deferred and amortized over the life of the hedged asset. Net realized losses, incurred due to a decline in interest rates, of $0.2 million were deferred in 1996. At December 31, 1996, open futures contracts with a notional amount of $805.0 million were in a $1.9 million net unrealized loss position. The Company may also sometimes use 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, and Monthly Income Preferred Securities from a fixed rate to a variable rate of interest. The proceeds from the sale of swaptions are deferred and amortized over the life of the related debt. Proceeds from the sale of swaptions totaling $1.6 million were deferred in 1996. At December 31, 1996 related open interest rate swap contracts and swaptions with a notional amount of $280.3 million were in a $0.2 million net unrealized loss position. Withdrawals related to GIC contracts were approximately $600 million during 1996. Withdrawals related to GIC contracts are estimated to be approximately $600 million in 1997. 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 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. The cash proceeds were reinvested in fixed maturity and short-term investments. On December 17, 1996, the Company sold approximately $315 million of its bank loan participations in a larger securitization transaction. The sale resulted in a realized gain of approximately $0.5 million. The proceeds were reinvested in fixed maturity and short-term investments. In a related transaction, the Company purchased $23 million of the securities issued in the securitization transaction. The Company is investigating other securitization opportunities. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at December 31, 1996, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $331.5 million. The Company's subsidiaries held $234.3 million in cash and short-term investments at December 31, 1996. Protective Life Corporation had an additional $1.0 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. During 1996, the Company issued $45 million (in four separate offerings) of Medium-Term Notes. Net proceeds of $42.7 million were used to repay bank borrowings. The notes bear interest rates ranging from 7.00% to 7.45% and mature in 2011. At December 31, 1996, Protective Life Corporation had borrowed $48.2 million of its $70.0 million revolving line of credit bearing interest rates averaging 5.9%. The Company's bank borrowings have increased $20.5 million since December 31, 1995. Proceeds have been primarily used to contribute additional statutory capital to the Company's insurance subsidiaries, and 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 life insurance quotation service. 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 investment income. At December 31, 1996, approximately $173 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 $439 million, would be subject to federal income tax at rates then effective. The Company does not anticipate involuntarily making distributions that would be subject to tax. 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 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. On March 20, 1995, in connection with the acquisition of DentiCare, the Company reissued 1,316,458 (adjusted for the two-for-one stock split on June 1, 1995) shares of its Common Stock previously held as Treasury Stock. 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 subsidiaries to support future growth. 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. The Company and its subsidiaries, like other life and health insurers, in the course of business are involved in 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, results of operations, or liquidity of the Company. Rating downgrades have exceeded upgrades for the past several years, and public pronouncements by the rating agencies indicate that this trend is expected to continue for the near future. 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 accident and health claims is constantly monitored, and where appropriate, premium rates on such policies are increased as policy benefits increase. Failure to make such increases commensurate with healthcare cost increases may result in a loss from health insurance. The 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. CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (Dollars in thousands except per share amounts)
1996 1995 1994 ___________________________________________________________________________________________________________________________________ Revenues Premiums and policy fees (net of reinsurance ceded: 1996 - $308,174; 1995 - $333,173; 1994 - $172,575) $ 494,153 $432,576 $402,772 Net investment income 517,483 475,924 417,825 Realized investment gains (losses) 5,510 1,612 6,298 Other income 20,857 11,768 21,553 ____________________________________________________________________________________________________________________________________ Total revenues 1,038,003 921,880 848,448 ____________________________________________________________________________________________________________________________________ Benefits and expenses Benefits and settlement expenses (net of reinsurance ceded: 1996 - $215,424; 1995 - $247,229; 1994 - $112,922) 645,040 565,027 517,110 Amortization of deferred policy acquisition costs 91,030 82,733 88,122 Other operating expenses (net of reinsurance ceded: 1996 - $81,839; 1995 - $84,855; 1994 - $14,326) 162,192 153,086 137,043 ____________________________________________________________________________________________________________________________________ Total benefits and expenses 898,262 800,846 742,275 ____________________________________________________________________________________________________________________________________ Income before income tax 139,741 121,034 106,173 ____________________________________________________________________________________________________________________________________ Income tax expense Current 47,522 44,862 37,318 Deferred (10) (3,710) (3,342) ____________________________________________________________________________________________________________________________________ Total income tax expense 47,512 41,152 33,976 ____________________________________________________________________________________________________________________________________ Income before minority interest 92,229 79,882 72,197 Minority interest in income of consolidated subsidiaries 3,217 3,217 1,796 ____________________________________________________________________________________________________________________________________ Net income $ 89,012 $76,665 $70,401 ==================================================================================================================================== Net income per share $ 2.94 $ 2.68 $ 2.57 ==================================================================================================================================== Cash dividends paid per share $ .70 $ .62 $ .55 ==================================================================================================================================== See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets December 31
(Dollars in thousands) 1996 1995 ____________________________________________________________________________________________________________________________________ Assets Investments: Fixed maturities, at market (amortized cost: 1996 - $4,671,600; 1995 - $3,790,002) $4,686,072 $3,892,008 Equity securities, at market (cost: 1996 - $31,669; 1995 - $35,448) 35,250 38,711 Mortgage loans on real estate 1,503,080 1,834,357 Investment real estate, net of accumulated depreciation (1996 - $2,268; 1995 - $2,388) 14,305 20,921 Policy loans 166,704 143,372 Other long-term investments 32,506 42,096 Short-term investments 114,258 53,591 ____________________________________________________________________________________________________________________________________ Total investments 6,552,175 6,025,056 Cash 121,051 11,392 Accrued investment income 70,544 61,007 Accounts and premiums receivable, net of allowance for uncollectible amounts (1996 - $2,525; 1995 - $2,342) 47,371 38,722 Reinsurance receivables 332,614 271,018 Deferred policy acquisition costs 488,384 410,396 Property and equipment, net 36,091 36,578 Other assets 64,278 52,184 Assets related to separate accounts 550,697 324,904 ____________________________________________________________________________________________________________________________________ Total assets $8,263,205 $7,231,257 ==================================================================================================================================== See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets December 31 (Dollars in thousands) 1996 1995 Liabilities Policy liabilities and accruals Future policy benefits and claims $2,448,449 $1,928,154 Unearned premiums 260,937 196,332 ____________________________________________________________________________________________________________________________________ Total policy liabilities and accruals 2,709,386 2,124,486 Guaranteed investment contract deposits 2,474,728 2,451,693 Annuity deposits 1,331,067 1,280,069 Other policyholders' funds 142,221 134,380 Other liabilities 170,442 152,042 Accrued income taxes (4,521) (2,894) Deferred income taxes 37,869 69,520 Short-term debt 12,800 Long-term debt 168,200 115,500 Liabilities related to separate accounts 550,697 324,904 Minority interest in consolidated subsidiaries 55,000 55,000 ____________________________________________________________________________________________________________________________________ Total liabilities 7,647,889 6,704,700 ____________________________________________________________________________________________________________________________________ Commitments and contingent liabilities - - Note G ____________________________________________________________________________________________________________________________________ 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 15,668 Shares authorized: 80,000,000 Issued: 1996 - 33,336,462; 1995 - 31,336,462 Additional paid-in capital 166,713 96,371 Net unrealized gains (losses) on investment (net of income tax: 1996 - $3,601; 1995 - $31,157) 6,688 57,863 Retained earnings 442,046 373,922 Treasury stock, at cost (1996 - 2,532,856 shares; 1995 - 2,561,344 shares) (11,874) (12,008) Unallocated stock in Employee Stock Ownership Plan (1996 - 743,464 shares; 1995 - 793,804 shares) (4,925) (5,259) ____________________________________________________________________________________________________________________________________ Total stockholders' equity 615,316 526,557 ____________________________________________________________________________________________________________________________________ Total liabilities and stockholders' equity $8,263,205 $7,231,257 ====================================================================================================================================
Consolidated Statements Of Stockholders' Equity Net Unrealized Gains Additional (Losses) Unallocated Total (Dollars in thousands Common Paid-In On Retained Treasury Stock In Stockholders' except per share amounts) Stock Capital Investments Earnings Stock ESOP Equity ____________________________________________________________________________________________________________________________________ Balance, December 31, 1993 $15,668 $70,469 $ 39,284 $259,527 $(18,359) $(5,856) $360,733 Net income for 1994 70,401 70,401 Cash dividends ($0.55 per share) (15,071) (15,071) Decrease in net unrealized gains on investments (146,816) (146,816) Purchase of treasury stock (8,412 shares) (191) (191) Reissuance of treasury stock to ESOP (136 shares) 3 (3) 0 Allocation of stock to employee accounts (39,990 shares) 267 267 Reissuance of treasury stock (48,306 shares) 823 227 1,050 ____________________________________________________________________________________________________________________________________ Balance, December 31, 1994 15,668 71,295 (107,532) 314,857 (18,323) (5,592) 270,373 Net income for 1995 76,665 76,665 Cash dividends ($0.62 per share) (17,600) (17,600) Increase in net unrealized gains on investments 165,395 165,395 Purchase of treasury stock (124 shares) (3) (3) Reissuance of treasury stock to ESOP (16,158 shares) 275 75 (350) 0 Allocation of stock to employee accounts (66,500 shares) 683 683 Reissuance of treasury stock (1,332,566 shares) 24,801 6,243 31,044 ____________________________________________________________________________________________________________________________________ Balance, December 31, 1995 15,668 96,371 57,863 373,922 (12,008) (5,259) 526,557 Net income for 1996 89,012 89,012 Issuance of common stock (2,000,000 shares) 1,000 69,546 70,546 Cash dividends ($0.70 per share) (20,888) (20,888) Decrease in net unrealized gains on investments (51,175) (51,175) 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 Reissuance of treasury stock (8,641 shares) 220 41 261 ____________________________________________________________________________________________________________________________________ Balance, December 31, 1996 - Note H $16,668 $166,713 $ 6,688 $442,046 $(11,874) $(4,925) $615,316 ==================================================================================================================================== See Notes to Consolidated Financial Statements.
Consolidated Statements Of Cash Flows Year Ended December 31 (Dollars in thousands) 1996 1995 1994 ____________________________________________________________________________________________________________________________________ Cash flows from operating activities Net income $ 89,012 $ 76,665 $ 70,401 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 91,030 84,533 88,122 Capitalization of deferred policy acquisition costs (77,078) (89,267) (127,566) Depreciation expense 7,484 5,524 5,601 Deferred income taxes 8,458 (5,443) (4,310) Accrued income taxes (14,603) 3,344 (12,619) Interest credited to universal life and investment products 280,377 286,710 260,081 Policy fees assessed on universal life and investment products (116,401) (100,840) (85,532) Change in accrued investment income and other receivables (74,116) (160,523) (28,073) Change in policy liabilities and other policyholders' funds of traditional life and health products 134,441 201,364 61,322 Change in other liabilities 17,301 4,245 29,949 Other, net (15,699) (4,888) (14,461) ____________________________________________________________________________________________________________________________________ Net cash provided by operating activities 330,206 301,424 242,915 ____________________________________________________________________________________________________________________________________ Cash flows from investing activities Maturities and principal reductions of investments: Investments available for sale 1,377,723 2,051,061 386,498 Other 168,898 78,568 153,945 Sale of investments: Investments available for sale 1,591,669 1,533,604 630,660 Other 568,218 141,184 59,550 Cost of investments acquired: Investments available for sale (3,903,403) (3,667,448) (1,807,756) Other (400,322) (540,648) (220,839) Acquisitions and bulk reinsurance assumptions 264,126 (7,550) 106,435 Purchase of property and equipment (7,848) (5,919) (6,743) Sale of property and equipment 856 309 484 ____________________________________________________________________________________________________________________________________ Net cash used in investing activities (340,083) (416,839) (697,766) ____________________________________________________________________________________________________________________________________ Cash flows from financing activities Borrowings under line of credit arrangements and long-term debt 1,107,372 1,215,000 663,587 Principal payments on line of credit arrangements and long-term debt (1,042,372) (1,197,500) (712,704) Issuance of Monthly Income Preferred Securities 55,000 Purchase of treasury stock (3) (191) Dividends to stockholders (20,888) (17,600) (15,071) Issuance of common stock 70,546 Investment product deposits and change in universal life deposits 949,122 908,064 1,417,980 Investment product withdrawals (944,244) (785,622) (976,401) ____________________________________________________________________________________________________________________________________ Net cash provided by financing activities 119,536 122,339 432,200 ____________________________________________________________________________________________________________________________________ Increase (decrease) in cash 109,659 6,924 (22,651) Cash at beginning of year 11,392 4,468 27,119 ____________________________________________________________________________________________________________________________________ Cash at end of year $ 121,051 $ 11,392 $ 4,468 ____________________________________________________________________________________________________________________________________ Supplemental disclosures of cash flow information Cash paid during the year: Interest on debt $ 11,024 $ 9,320 $ 7,745 Income taxes $ 47,741 $ 41,532 $ 49,935 ____________________________________________________________________________________________________________________________________ Supplemental schedule of noncash investing and financing activities Reissuance of treasury stock to ESOP $ 669 $ 350 $ 3 Unallocated stock in ESOP $ 334 $ 333 $ 264 Reissuance of treasury stock $ 261 $ 363 $ 1,050 Acquisitions and bulk reinsurance assumptions: Assets acquired $ 296,935 $ 10,394 $ 117,349 Liabilities assumed (364,862) (25,651) (166,595) Reissuance of treasury stock (30,681) ____________________________________________________________________________________________________________________________________ Net $(67,927) $ (45,938) $(49,246) ==================================================================================================================================== See Notes to Consolidated Financial Statements.
Notes To Consolidated Financial Statements (All dollar amounts in tables in thousands, except per share amounts) NOTE A. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of Protective Life Corporation and subsidiaries (the Company) are prepared on the basis of generally accepted accounting principles. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note B.) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. All references to prior period number of shares and per share amounts have been restated to reflect a two-for-one stock split on June 1, 1995. Entities Included The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Corporation and its wholly owned subsidiaries. Protective Life Insurance Company (Protective Life) is the Company's principal operating subsidiary. Additionally, the financial statements include the accounts of majority-owned subsidiaries. The ownership interest of the other stockholders of these subsidiaries is called a minority interest and is reported as a liability of the Company and as an adjustment to income. Nature of Operations The Company markets individual life insurance; group life, health, dental, and cancer insurance; annuities and investment products; credit life and disability insurance; and guaranteed investment contracts. Its products are distributed nationally through independent agents and brokers; through stockbrokers and financial institutions to their customers; through Company sales representatives; and through other insurance companies. The Company also seeks to acquire blocks of insurance policies from other insurers. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Recently Issued Accounting Standards In 1995 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." Under these new standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. The adoption of this accounting standard did not have a material effect on the Company's financial statements. In 1995 the Company also adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which changes the way stock-based compensation expense is measured and requires additional disclosures relating to the Company's stock-based compensation plans. The adoption of this accounting standard did not have a material effect on the Company's financial statements. In 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. Investments The Company has classified all of its investments in fixed maturities, equity securities, and short-term investments as "available for sale." Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable: FIXED MATURITIES (bonds, bank loan participations, and redeemable preferred stocks) - at current market value. EQUITY SECURITIES (common and nonredeemable preferred stocks) - at current market value. MORTGAGE LOANS ON REAL ESTATE - at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount. INVESTMENT REAL ESTATE - at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value. POLICY LOANS - at unpaid balances. OTHER LONG-TERM INVESTMENTS - at a variety of methods similar to those listed above, as deemed appropriate for the specific investment. SHORT-TERM INVESTMENTS - at cost, which approximates current market value. Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $3.4 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: 1996 1995 ---- ---- Total investments $6,534,122 $5,919,787 Deferred policy acquisition costs 496,148 426,645 All other assets 1,222,646 795,805 --------- ------- $8,252,916 $7,142,237 ========== ========== Deferred income taxes $ 34,268 $ 38,364 All other liabilities 7,610,020 6,635,179 --------- --------- 7,644,288 6,673,543 --------- --------- Stockholders' equity 608,628 468,694 ------- ------- $8,252,916 $7,142,237 ========== ========== 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 losses of $0.2 million and $15.2 million were deferred in 1996 and 1995, respectively. At December 31, 1996 and 1995, options and open futures contracts with notional amounts of $805.0 million and $25.0 million, respectively, had net unrealized losses of $1.9 million and $0.6 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, 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. At December 31, 1995, related open interest rate swap contracts with a notional amount of $170.3 million were in a $1.3 million net unrealized gain position. 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 and Monthly Income Preferred Securities from a fixed rate to a variable rate of interest. The proceeds from the sale of swaptions are deferred and amortized over the life of the related debt. Proceeds from the sale of swaptions totaling $1.6 million were deferred in 1996. 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. At December 31, 1995, related open interest rate swap contracts with a notional amount of $55.0 million were in a $4.4 million net unrealized gain position. Cash Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. Property and Equipment Property and equipment are reported at cost. The Company uses both accelerated and straight-line methods of depreciation based upon the estimated useful lives of the assets. Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income. Property and equipment consisted of the following at December 31: 1996 1995 ==== ==== Home Office building $36,586 $35,284 Data processing equipment 23,649 20,462 Other, principally furniture and equipment 21,188 19,111 ------ ------ 81,423 74,857 Accumulated depreciation 45,332 38,279 ------ ------ $36,091 $36,578 ======= ======= 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 o Traditional Life and Health Insurance Products. Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits and include whole life insurance policies, term 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: 1996 1995 1994 ==== ==== ==== Balance beginning of year $ 73,642 $ 79,462 $ 77,191 Less reinsurance 3,330 5,024 3,973 ----- ----- ----- Net balance beginning of year 70,312 74,438 73,218 ------ ------ ------ Incurred related to: Current year 288,816 217,366 203,453 Prior year (2,417) (8,337) (6,683) ------- ------- ------- Total incurred 286,399 209,029 196,770 ------- ------- ------- Paid related to: Current year 197,163 164,321 148,548 Prior year 57,812 48,834 47,002 ------- ------ ------ Total paid 254,975 213,155 195,550 ------- ------- ------- Net balance end of year 101,736 70,312 74,438 Plus reinsurance 6,423 3,330 5,024 ----- ----- ----- Balance end of year $108,159 $ 73,642 $ 79,462 ======== ========= ========= o Universal Life and Investment Products. Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Revenues for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. 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 1996. At December 31, 1996, the Company estimates the market value of its guaranteed investment contracts to be $2,462.0 million using discounted cash flows. The surrender value of the Company's annuities which approximates market value was $1,322.3 million. o Policy Acquisition Costs. Commissions and other costs of acquiring traditional life and health insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are being amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to total anticipated premium income. Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and investment, mortality, and expense margins. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from initial assumptions. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with the Company's universal life and investment products had been realized. 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 $138.2 million and $102.5 million at December 31, 1996 and 1995, respectively. During 1996 $57.6 million of present value of future profits on acquisitions made during the year was capitalized, and $10.8 million was amortized. The unamortized present value of future profits for all acquisitions was $155.9 million at December 31, 1996, and $123.9 million at December 31, 1995. 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 $4.1 million in 1996 and $2.6 million in 1995 and 1994. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the bases of assets and liabilities determined for financial reporting purposes and the bases determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses. Income Per Share Of Common Stock Per share data are based on the weighted average number of shares of Common Stock, including Common Stock equivalents, outstanding which was 30,285,911, 28,627,345, and 27,392,936, in 1996, 1995, and 1994, respectively. Reclassifications Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or stockholders' equity. NOTE B. RECONCILIATION WITH STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles (GAAP) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred; (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions; (c) deferred income taxes are provided for temporary differences between financial and taxable earnings; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to stockholders' equity; (e) furniture and equipment, agents' debit balances, and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted items); (f) certain items of interest income, principally accrual of mortgage and bond discounts, are amortized differently; and (g) bonds are stated at market instead of amortized cost. 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:
Net Income Stockholders' Equity 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- In conformity with statutory reporting practices: Protective Life Insurance Company $ 97,779 $105,744 $ 54,812 $ 454,320 $ 322,416 $ 304,858 American Foundation Life Insurance Company 2,558 3,330 3,072 18,031 18,781 20,327 Capital Investors Life Insurance Company 81 182 170 1,458 1,315 1,125 Empire General Life Assurance Corporation 905 1,003 690 20,509 20,685 21,270 Protective Life Insurance Corporation of Alabama 484 546 69 2,660 2,675 2,133 Wisconsin National Life Insurance Company 15,011 10,954 10,132 66,577 62,529 57,268 Protective Life Insurance Company of Kentucky 19 3,030 Community National Assurance Company 5,100 Consolidation elimination (14,500) (6,500) (115,365) (103,985) (100,123) -------- -------- ------- --------- --------- --------- 102,337 115,259 68,945 456,320 324,416 306,858 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization (2,830) (765) 41,686 488,384 410,396 434,444 Policy liabilities and accruals (6,895) (53,272) (34,632) (192,351) (189,319) (140,298) Deferred income tax 10 3,711 3,342 (37,869) (69,520) 14,095 Asset Valuation Reserve 64,233 105,769 24,925 Interest Maintenance Reserve (2,142) (1,235) (1,716) 17,682 14,412 3,583 Nonadmitted items 21,610 20,603 21,445 Timing and valuation differences on mortgage loans on real estate and fixed maturity investments 5,913 (618) (961) (1,708) 27,158 6,258 Net unrealized gains and losses on investments 4,361 55,765 (106,913) Realized investment gains (losses) (468) 6,781 (6,664) Noninsurance affiliates 1,328 12,882 5,877 434,237 213,789 149,750 Minority interest in consolidated subsidiaries (3,217) (3,217) (1,796) Consolidation elimination (632,601) (381,988) (436,053) Other adjustments, net (5,024) (2,861) (3,680) (6,982) (4,924) (7,721) ------- ------- ------- ------- ------- ------- In conformity with generally accepted accounting principles $ 89,012 $ 76,665 $ 70,401 $ 615,316 $ 526,557 $ 270,373 ========= ========= ======== ========= ========= =========
NOTE C. INVESTMENT OPERATIONS Major categories of net investment income for the years ended December 31 are summarized as follows:
1996 1995 1994 ---- ---- ---- Fixed maturities $313,096 $276,847 $242,510 Equity securities 2,124 1,338 2,435 Mortgage loans on real estate 153,463 162,135 141,751 Investment real estate 1,954 1,908 2,000 Policy loans 10,377 8,958 8,397 Other, principally short-term investments 50,679 39,223 34,088 ------ ------ ------ 531,693 490,409 431,181 Investment expenses 14,210 14,485 13,356 ------ ------ ------ $517,483 $475,924 $417,825 ========= ======== ========= Realized investment gains (losses) for the years ended December 31 are summarized as follows: 1996 1995 1994 ---- ---- ---- Fixed maturities $(7,101) $ 6,075 $(8,646) Equity securities 1,733 44 7,735 Mortgage loans and other investments 10,878 (4,507) 7,209 ------- -------- ----- $ 5,510 $ 1,612 $ 6,298 ======= ======= =======
The Company has established an allowance for uncollectible amounts on investments. The allowance totaled $31.6 million and $33.4 million at December 31, 1996 and 1995, respectively. Additions and reductions to the allowance are included in realized investment gains (losses). Without such additions/reductions, the Company had net realized investment gains of $3.7 million in 1996, net realized investment losses of $0.9 million in 1995, and net realized investment gains of $6.3 million in 1994. In 1996 gross gains on the sale of investments available for sale (fixed maturities, equity securities, and short-term investments) 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. In 1994 gross gains were $15.2 million, and gross losses were $16.4 million. The amortized cost and estimated market values of the Company's investments classified as available for sale at December 31 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Values 1996 Fixed maturities: Bonds: Mortgage-backed securities $2,192,978 $29,925 $20,810 $2,202,093 United States Government and authorities 348,318 661 1,377 347,602 States, municipalities, and political subdivisions 5,515 47 9 5,553 Public utilities 364,692 2,205 337 366,560 Convertibles and bonds with warrants 679 0 158 521 All other corporate bonds 1,702,351 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 ========== ======= ======= ========== Gross Gross Estimated Amortized Unrealized Unrealized Market 1995 Cost Gains Losses Values Fixed maturities: Bonds: Mortgage-backed securities $2,006,858 $ 46,934 $ 4,017 $2,049,775 United States Government and authorities 105,388 2,290 101 107,577 States, municipalities, and political subdivisions 10,888 702 0 11,590 Public utilities 322,110 5,904 770 327,244 Convertibles and bonds with warrants 638 0 145 493 All other corporate bonds 1,117,452 59,045 7,573 1,168,924 Bank loan participations 220,811 0 0 220,811 Redeemable preferred stocks 5,857 61 324 5,594 ---------- -------- --------- ---------- 3,790,002 114,936 12,930 3,892,008 Equity securities 35,448 6,438 3,175 38,711 Short-term investments 53,591 0 0 53,591 ---------- -------- --------- ---------- $3,879,041 $121,374 $ 16,105 $3,984,310 ========== ======== ========= ==========
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. Estimated Amortized Market 1996 Cost Values 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 ========== ========== Estimated Amortized Market 1995 Cost Values Due in one year or less $ 409,523 $ 411,839 Due after one year through five years 1,087,757 1,101,226 Due after five years through ten years 1,477,837 1,524,631 Due after ten years 814,885 854,312 ---------- ---------- $3,790,002 $3,892,008 ========== ========== The approximate percentage distribution of the Company's fixed maturity investments by quality rating at December 31 is as follows: Rating 1996 1995 ------ ---- ---- AAA 48.3% 56.1% AA 4.4 4.5 A 22.6 12.6 BBB Bonds 21.1 19.0 Bank loan participations 0.1 0.4 BB or less Bonds 2.5 2.0 Bank loan participations 0.9 5.3 Redeemable preferred stocks 0.1 0.1 --- --- 100.0% 100.0% At December 31, 1996 and 1995, the Company had bonds which were rated less than investment grade of $117.5 million and $75.7 million, respectively, having an amortized cost of $137.0 million and $82.2 million, respectively. Additionally, the Company had bank loan participations which were rated less than investment grade of $43.6 million and $206.0 million, respectively, having an amortized cost of $43.6 million and $206.0 million, respectively. The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities for the years ended December 31 is summarized as follows: 1996 1995 1994 ---- ---- ---- Fixed maturities $(56,897) $199,395 $(175,725) Equity securities 207 2,740 (5,342) ===== ===== ======= At December 31, 1996, all of the Company's mortgage loans were commercial loans of which 78% were retail, 8% 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 4% of mortgage loans. Approximately 84% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: South Carolina, Florida, Georgia, Tennessee, Texas, North Carolina, Alabama, Virginia, Mississippi, Kentucky, Ohio, California, Indiana, Arizona, and Washington. Many of the mortgage loans have call provisions after 5 to 7 years. Assuming the loans are called at their next call dates, approximately $126.7 million would become due in 1997, $761.8 million in 1998 to 2001, and $250.8 million in 2002 to 2006. At December 31, 1996, the average mortgage loan was $1.7 million, and the weighted average interest rate was 9.3%. The largest single mortgage loan was $13.6 million. While the Company's mortgage loans do not have quoted market values, at December 31, 1996 and 1995, the Company estimates the market value of its mortgage loans to be $1,581.7 million and $2,001.1 million, respectively, using discounted cash flows from the next call date. At December 31, 1996 and 1995, the Company's problem mortgage loans and foreclosed properties totaled $23.7 million and $26.1 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 $18.8 million, were nonincome producing for the twelve months ended December 31, 1996. 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:
1996 1995 1994 ---- ---- ---- Statutory federal income tax rate applied to pretax income 35.0% 35.0% 35.0% Amortization of nondeductible goodwill 0.3 0.2 Dividends received deduction and tax-exempt interest (0.4) (0.6) (0.4) Low-income housing credit (0.6) (0.7) (0.7) Tax differences arising from prior acquisitions and other adjustments (0.3) 0.1 (1.9) ----- --- ----- 34.0% 34.0% 32.0% ===== ===== =====
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:
1996 1995 1994 ---- ---- ---- Deferred policy acquisition costs $15,542 $(11,606) $34,561 Benefit and other policy liability changes (16,321) 52,496 (52,288) Temporary differences of investment income 2,922 (34,174) 15,524 Other items (2,153) (10,426) (1,139) ----------- ---------- -------- $ (10) $ (3,710) $(3,342) =========== ========== ========
The components of the Company's net deferred income tax liability as of December 31 were as follows: 1996 1995 ---- ---- Deferred income tax assets: Policy and policyholder liability reserves $ 80,151 $ 63,830 Other 2,356 203 -------- -------- 82,507 64,033 -------- -------- Deferred income tax liabilities: Deferred policy acquisition costs 117,696 102,154 Unrealized gain on investments 2,680 31,399 -------- -------- 120,376 133,553 -------- -------- Net deferred income tax liability $ 37,869 $ 69,520 ======== ========= 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, 1996, was approximately $50.7 million. Should the accumulation in the Policyholders' Surplus account of the life insurance subsidiaries exceed certain stated maximums, or should distributions including cash dividends be made to Protective Life Corporation in excess of approximately $439 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 PREFERRED SECURITIES Short-term and long-term debt at December 31 is summarized as follows: 1996 1995 ---- ---- Short-term debt: Note payable to bank $ 12,800 $ 12,800 ======= ======= Long-term debt: Notes payable to banks $ 48,200 $ 40,500 Senior Notes 75,000 75,000 Medium-Term Notes 45,000 ------- ------- $168,200 $115,500 ======= ======= Under a three-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, 1996, the Company had borrowed $48.2 million under this credit arrangement at an interest rate of 5.9%. Additionally, the Company had a $12.8 million short-term note payable to a bank at an interest rate of 5.8%. The aforementioned revolving line of credit arrangement contains, among other provisions, requirements for maintaining certain financial ratios and restrictions on indebtedness incurred by the Company and its subsidiaries. Additionally, the Company, on a consolidated basis, cannot incur debt in excess of 50% of its total capital. The Company believes the market value of its bank borrowings approximates book value due to the debt being either short-term or variable rate. 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 7.3% and 7.4% in 1996 and 1995, respectively. The effective interest rate for the Medium-Term Notes was 7.3% in 1996. Future maturities of the long-term debt are $48.2 million in 1999, $75 million in 2004, and $45 million in 2011. Interest expense on debt totaled $10.1 million, $9.6 million, and $7.8 million in 1996, 1995, and 1994, 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 (MIPS), guaranteed by the Company. PLCCapital was formed solely to issue MIPS and other securities and lend the proceeds thereof to the Company in exchange for subordinated debentures of the Company. The Company has the right under the subordinated debentures to extend interest-payment periods up to 60 months, and, as a consequence, monthly dividends on the MIPS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The MIPS and dividends thereon are reported in the accompanying financial statements as "minority interest in consolidated subsidiaries." In related transactions, the Company entered into interest rate swap agreements which effectively converted the MIPS from a fixed dividend rate to the floating, 30-day LIBOR plus 60.5 basis points, approximately 6.2% and 6.3% at December 31, 1996 and 1995, respectively. Dividends, net of tax, on the MIPS were $3.2 million in 1996 and 1995 and $1.8 million in 1994 before consideration of the interest rate swap agreements. On a swap-adjusted basis, dividends were $2.2 million, $2.4 million, and $1.1 million in 1996, 1995, and 1994, respectively. NOTE F. ACQUISITIONS On March 20, 1995, the Company acquired National Health Care Systems of Florida, Inc. (also known as "DentiCare"). The purchase price was $38.3 million and was paid with a combination of the Company's Common Stock ($30.7 million) and cash ($7.6 million). In connection with the acquisition, the Company reissued 1,316,458 shares of its Common Stock previously held as Treasury Stock. The Company recorded $32.4 million of goodwill in connection with this acquisition, which is being amortized using the straight line method over forty years. In June 1995 the Company acquired through coinsurance a block of term 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 block of life insurance 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. NOTE G. COMMITMENTS AND CONTINGENT LIABILITIES The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors' and officers' liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification which are not secured by the obligation to obtain a letter of credit. Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. 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, 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 life and health insurers, from time to time are involved in such litigation. Pending litigation includes a class action filed in Jefferson County (Birmingham), Alabama with respect to 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, results of operations, or liquidity of the Company. NOTE H. STOCKHOLDERS' EQUITY AND RESTRICTIONS On May 1, 1995, the Company's Board of Directors approved a two-for-one split of the Company's Common Stock in the form of a 100% stock dividend on June 1, 1995. Stockholders' equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying from retained earnings to common stock the par value of the additional shares arising from the stock split. In addition, all references to number of shares and per share amounts included herein have been restated to reflect the stock split. The Company has a Rights Agreement that provides rights to holders of the Company's Common Stock to purchase Series A Junior Participating Cumulative Preferred Stock, or in certain circumstances, either Common Stock or common stock of an acquiring company at one half the market price of such Common Stock or common stock, as the case may be. The rights will become exercisable if certain events occur with respect to the Company, including the acquisition by a person or group of 15% or more of the Company's Common Stock. The Company can redeem the rights at $.01 per right in certain circumstances including until ten business days following a public announcement that 15% or more of the Company's Common Stock has been acquired by a person or group. Stockholders have authorized 4,000,000 shares of Preferred Stock, $1.00 par value. Other terms, including preferences, voting, and conversion rights, may be established by the Board of Directors. In connection with the Rights Agreement, 400,000 of these shares have been designated as Series A Junior Participating Cumulative Preferred Stock, $1.00 par value, and were unissued at December 31, 1996. The remaining 3,600,000 shares of Preferred Stock, $1.00 par value, were also unissued at December 31, 1996. 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 therefore are considered outstanding for earnings per share calculations. Dividends on the shares are used to pay the ESOP's note to Protective Life. If certain events associated with a change in control of the Company occur, any unallocated shares held by the ESOP will become allocable to employee 401(k) accounts. The Company may from time to time transfer or buy in the open market additional shares of Common Stock to complete its 401(k) employer match obligation. Accordingly, in 1995, the Company transferred 16,158 shares of Common Stock to the ESOP and transferred another 19,847 shares during 1996. Since 1973 the Company has had a Performance Share Plan to motivate senior management to focus on the Company's long-range earnings performance. The criterion for payment of performance share awards is based upon a comparison of the Company's average return on average equity over 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 the plan approved by stockholders in 1992, up to 1,200,000 shares may be issued in payment of awards. The number of shares granted in 1996, 1995, and 1994 were 52,290, 72,610, and 62,140 shares, respectively, having an approximate market value on the grant date of $1.8 million, $1.6 million, and $1.4 million, respectively. At December 31, 1996, outstanding awards measured at target and maximum payouts were 279,648 and 375,470 shares, respectively. The expense recorded by the Company for the Performance Share Plan was $3.0 million, $2.9 million, and $3.6 million in 1996, 1995, and 1994, 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, 1996 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 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 $0.2 million in 1996. The Company has established deferred compensation plans for directors and 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, 1996, the plans had 347,358 shares of Common Stock equivalents credited to participants. At December 31, 1996, approximately $173 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 1997 is estimated to be $117 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 $31.2 million, $21.2 million, and $21.1 million in 1996, 1995, and 1994, respectively. The Company paid commissions, interest, and service fees to these same corporations totaling $5.0 million, $5.3 million, and $4.9 million, in 1996, 1995, and 1994, respectively. NOTE J. BUSINESS SEGMENTS The Company operates predominantly in the life and accident and health insurance industry. The following table sets forth revenues, income before income tax, and identifiable assets of the Company's business segments. The primary components of revenues are premiums and policy fees, net investment income, and realized investment gains and losses. Premiums and policy fees are attributed directly to each business segment. Net investment income is allocated based on directly related assets required for transacting that segment of business. In the 1996 first quarter the Company changed the way it allocates certain expenses to its business segments. Accordingly, prior period segment results have been restated to reflect the change. Realized investment gains (losses) and expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment. Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment. There are no significant intersegment transactions.
(Dollars in thousands) 1996 1995 1994 - ---------------------- ---- ---- ---- Total Revenues Acquisitions $ 213,199 $ 193,544 $ 171,259 Financial Institutions 88,872 76,326 108,693 Group 207,364 180,262 148,835 Guaranteed Investment Contracts 206,406 199,468 184,212 Individual Life 180,917 147,580 131,925 Investment Products 114,721 106,977 79,199 Corporate and Other 20,007 17,140 19,059 Unallocated Realized Investment Gains (Losses) 6,517 583 5,266 ----- --- ----- $1,038,003 $ 921,880 $ 848,448 ========== =========== =========== Acquisitions 20.5% 21.0% 20.2% Financial Institutions 8.6 8.3 12.8 Group 20.0 19.5 17.5 Guaranteed Investment Contracts 20.0 21.6 21.7 Individual Life 17.4 16.0 15.6 Investment Products 11.0 11.6 9.3 Corporate and Other 1.9 1.9 2.3 Unallocated Realized Investment Gains (Losses) 0.6 0.1 0.6 --- --- --- 100.0% 100.0% 100.0% ====== ====== ====== Income Before Income Tax Acquisitions $ 52,670 $ 48,490 $ 37,328 Financial Institutions 9,531 8,375 9,024 Group 5,138 10,060 10,139 Guaranteed Investment Contracts 32,119 27,649 29,005 Individual Life 15,151 13,490 13,933 Investment Products 11,595 9,724 (705) Corporate and Other* 7,020 2,663 2,183 Unallocated Realized Investment Gains (Losses) 6,517 583 5,266 ----- --- ----- $ 139,741 $ 121,034 $ 106,173 =========== =========== =========== Acquisitions 37.7% 40.1% 35.2% Financial Institutions 6.8 6.9 8.5 Group 3.7 8.3 9.5 Guaranteed Investment Contracts 23.0 22.8 27.3 Individual Life 10.8 11.2 13.1 Investment Products 8.3 8.0 (0.7) Corporate and Other 5.0 2.2 2.1 Unallocated Realized Investment Gains (Losses) 4.7 0.5 5.0 --- --- --- 100.0% 100.0% 100.0% ====== ====== ====== Identifiable Assets Acquisitions $1,579,253 $1,255,542 $1,204,883 Financial Institutions 352,021 268,782 215,878 Group 278,926 278,094 215,997 Guaranteed Investment Contracts 2,608,149 2,537,045 2,211,181 Individual Life 1,037,386 890,198 731,026 Investment Products 1,873,119 1,580,519 1,286,744 Corporate and Other 534,351 421,077 264,575 ------- ------- ------- $8,263,205 $7,231,257 $6,130,284 ========== ========== ========== Acquisitions 19.1% 17.4% 19.7% Financial Institutions 4.3 3.7 3.5 Group 3.4 3.8 3.5 Guaranteed Investment Contracts 31.5 35.1 36.1 Individual Life 12.5 12.3 11.9 Investment Products 22.7 21.9 21.0 Corporate and Other 6.5 5.8 4.3 --- --- --- 100.0% 100.0% 100.0% ====== ====== ======
* Income before income tax for the Corporate and Other segment has not been reduced by pretax minority interest of $4,950 in 1996 and 1995, and $2,764 in 1994. 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: 1996 1995 ---- ---- Accumulated benefit obligation, including vested benefits of $14,720 in 1996 and $16,676 in 1995 $15,475 $17,415 ======= ======= Projected benefit obligation for service rendered to date $25,196 $24,877 Plan assets at fair value (group annuity contract with Protective Life) 19,779 18,254 ------ ------ Plan assets less than the projected benefit obligation (5,417) (6,623) Unrecognized net loss from past experience different from that assumed 3,559 4,882 Unrecognized prior service cost 705 805 Unrecognized net transition asset (67) (84) ---- ---- Net pension liability recognized in balance sheet $ (1,220) $ (1,020) ========= ========= Net pension cost includes the following components for the years ended December 31: 1996 1995 1994 ---- ---- ---- Service cost - benefits earned during the year $1,908 $1,540 $1,433 Interest cost on projected benefit obligation 1,793 1,636 1,520 Actual return on plan assets (1,674) (1,358) (1,333) Net amortization and deferral 374 114 210 --- --- --- Net pension cost $2,401 $1,932 $1,830 ====== ====== ====== Assumptions used to determine the benefit obligations as of December 31 were as follows: 1996 1995 1994 ---- ---- ---- Weighted average discount rate 7.75% 7.25% 8.00% Rates of increase in compensation level 5.75% 5.25% 6.00% Expected long-term rate of return on assets 8.50% 8.50% 8.50% ===== ===== ===== Assets of the pension plan are included in the general assets of Protective Life. Upon retirement, the amount of pension plan assets vested in the retiree are used to purchase a single premium annuity from Protective Life in the retiree's name. Therefore, amounts presented above as plan assets exclude assets relating to retirees. The Company also sponsors an unfunded Excess Benefits Plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed by federal tax law. At December 31, 1996 and 1995, the projected benefit obligation of this plan totaled $7.2 million and $5.7 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, 1996 and 1995, the liability for such benefits totaled $1.4 million and $1.5 million, respectively. The expense recorded by the Company was $0.1 million in 1996 and $0.2 million in 1995 and 1994. 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 earnings per share. At December 31, 1996, the Company had committed 52,388 shares to be released to fund employee benefits. The expense recorded by the Company for these employee benefits was $1.0 million, $0.7 million, and $0.6 million in 1996, 1995, and 1994, respectively. NOTE L. REINSURANCE The Company assumes risks from, and reinsures certain parts of its risks with other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Yearly renewable term and coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies. While the amount retained on an individual life will vary based upon age and mortality prospects of the risk, the Company generally will not carry more than $500,000 individual life insurance on a single risk. The Company has reinsured approximately $18.8 billion, $17.5 billion, and $8.6 billion in face amount of life insurance risks with other insurers representing $113.5 million, $116.1 million, and $46.0 million of premium income for 1996, 1995, and 1994, respectively. The Company has also reinsured accident and health risks representing $194.7 million, $217.1 million, and $126.5 million of premium income for 1996, 1995, and 1994, respectively. In 1996 and 1995, policy and claim reserves relating to insurance ceded of $325.9 million and $266.9 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, 1996 and 1995, the Company had paid $6.7 million and $4.1 million, respectively, of ceded benefits which are recoverable from reinsurers. During 1995 the Company entered into a reinsurance agreement whereby all of the Company's new credit insurance sales are being ceded to a reinsurer. Included in the preceding paragraph are credit life and credit accident and health insurance premiums of $47.7 million and $55.3 million, respectively, and reserves of $135.8 million which were ceded during 1996. Also included are credit life and credit accident and health insurance premiums of $68.2 million and $57.6 million, respectively, and reserves totaling $100.8 million which were ceded during 1995. 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:
1996 1995 Estimated Estimated Carrying Market Carrying Market Amounts Values Amounts Values Assets (see Notes A and C): Investments: Fixed maturities $4,686,072 $4,686,072 $3,892,008 $3,892,008 Equity securities 35,250 35,250 38,711 38,711 Mortgage loans on real estate 1,503,080 1,581,694 1,834,357 2,001,081 Short-term investments 114,258 114,258 53,591 53,591 Cash 121,051 121,051 11,392 11,392 Liabilities (see Notes A and E): Debt: Notes payable to banks 61,000 61,000 40,500 40,500 Senior Notes 75,000 75,000 75,000 75,000 Medium-Term Notes 45,000 45,000 Monthly Income Preferred Securities 55,000 57,200 55,000 58,300 Other (see Note A): Futures contracts (1,708) (633) Interest rate swaps (333) 5,658 Options (54)
NOTE N. CONSOLIDATED QUARTERLY RESULTS - UNAUDITED Protective Life Corporation's unaudited consolidated quarterly operating data for the years ended December 31, 1996 and 1995, 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.
First Second Third Fourth 1996 Quarter Quarter Quarter Quarter - ---- ------- ------- ------- ------- 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 $.73 $.78 $.64 $.79 ==== ==== ==== ==== Average shares outstanding 29,020,360 29,805,228 31,147,723 31,151,755 ========== ========== ========== ========== First Second Third Fourth 1995 Quarter Quarter Quarter Quarter - ---- ------- ------- ------- ------- Premiums and policy fees $104,022 $113,610 $107,300 $107,644 Net investment income 112,663 118,046 123,894 121,321 Realized investment gains (losses) 2,619 (555) 1,337 (1,789) Other income 2,525 2,780 2,660 3,803 ----- ----- ----- ----- Total revenues 221,829 233,881 235,191 230,979 Benefits and expenses 192,257 206,011 201,487 201,091 ------- ------- ------- ------- Income before income tax 29,572 27,870 33,704 29,888 Income tax expense 9,759 9,197 12,034 10,162 Minority interest 804 804 804 805 --- --- --- --- Net income $19,009 $17,869 $20,866 $18,921 ======= ======= ======= ======= Net income per share $.69 $.62 $.72 $.65 ==== ==== ==== ==== Average shares outstanding 27,599,922 28,766,664 28,775,118 28,934,174 ========== ========== ========== ==========
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, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note A to the Consolidated Financial Statements, the Company changed its method of accounting for stock-based employee compensation plans in 1995. /s/ Coopers & Lybrand, L.L.P. Coopers & Lybrand, L.L.P. Birmingham, Alabama February 11, 1997 EX-21 5 Exhibit 21 to Form 10-K of Protective Life Corporation for Fiscal Year Ended December 31, 1996 The following wholly-owned subsidiary of Protective Life Corporation is organized under the laws of the State of Tennessee and does business under its corporate name: Protective Life Insurance Company The following wholly-owned subsidiary of Protective Life Insurance Company is incorporated under the laws of the State of Alabama and does business under its corporate name: American Foundation Life Insurance Company The following wholly-owned subsidiary of Protective Life Insurance Company is incorporated under the laws of the State of Wisconsin and does business under its corporate name: Wisconsin National Life Insurance Company 38 EX-23 6 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. 333-03435 and 33-55063) and Form S-8 (File Nos. 33-51887 and 33-68036) of our report, which includes an explanatory paragraph with respect to changes in the Company's method of accounting for stock-based employee compensation plans in 1995, dated February 11, 1997, on our audits of the consolidated financial statements and financial statement schedules of Protective Life Corporation as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995, and 1994, which report is included or incorporated by reference in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. March 27, 1997 EX-24 7 Exhibit 24 DIRECTORS' POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned Directors of Protective Life Corporation, a Delaware corporation, ("Company") by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint Drayton Nabers, Jr., John D. Johns, Deborah J. Long, or Jerry W. DeFoor, and each or any of them, his true and lawful attorneys-in-fact and agents, for him and in his name, place and stead, to execute and sign the 1996 Annual Report on Form 10-K to be filed by the Company with the Securities and Exchange Commission, pursuant to the provisions of the Securities Exchange Act of 1934 and, further, to execute and sign any and all amendments to such Annual Report, and to file same, with all exhibits and schedules thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorneys-in-fact and agents or any of them which they may lawfully do in the premises or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and seal this 3rd day of March, 1997. WITNESS TO ALL SIGNATURES: /s/ William J. Rushton III William J. Rushton III /s/ Deborah J. Long /s/ John W. Woods Deborah J. Long John W. Woods /s/ William J. Cabaniss, Jr. William J. Cabaniss, Jr. /s/ H. G. Pattillo H. G. Pattillo /s/ Drayton Nabers, Jr. Drayton Nabers, Jr. /s/ John J. McMahon, Jr. John J. McMahon, Jr. /s/ A. W. Dahlberg A. W. Dahlberg /s/ John W. Rouse, Jr. John W. Rouse, Jr. /s/ Robert T. David Robert T. David /s/ Ronald L. Kuehn, Jr. Ronald L. Kuehn, Jr. /s/ Herbert A. Sklenar Herbert A. Sklenar /s/ James S. M. French James S. M. French /s/ Robert A. Yellowlees Robert A. Yellowlees EX-27 8 FDS --
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 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,686,072 0 0 35,250 1,503,080 14,305 6,552,175 121,051 332,614 488,384 8,263,205 2,448,449 260,937 0 142,221 181,000 0 0 16,668 598,648 8,263,205 494,153 517,483 5,510 20,857 645,040 91,030 162,192 139,741 47,512 89,012 0 0 0 89,012 2.94 2.94 0 0 0 0 0 0 0 Net of minority interest in income of consolidated subsidiaries of $3,217
EX-99 9 Exhibit 99 to Form 10-K of Protective Life Corporation for Fiscal Year Ended December 31, 1996 Safe Harbor for Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") encourages companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. Forward-looking statements can be identified by use of words such as "expect," "estimate," "project," "budget," "forecast," "anticipate," "plan," and similar expressions. Protective Life Corporation (the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Act. To qualify oral forward-looking statements for protection under the Act, a readily available written document must identify important factors that could cause actual results to differ materially from those in the forward-looking statements. The Company provides the following information to qualify forward-looking statements for the safe harbor protection of the Act. The operating results of companies in the insurance industry have historically been subject to significant fluctuations. Important factors which could affect future results of the Company are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Known Trends and Uncertainties" in the Company's 1996 Annual Report to Stockholders, which is incorporated herein by reference. The trends and uncertainties discussed are: competition, ratings, policy claims fluctuations, liquidity and investment portfolio, interest rate fluctuations, investment risks, continuing success of acquisition strategy, regulation and taxation, litigation, reliance upon the performance of others, and reinsurance. Forward-looking statements express expectations of future events and/or results. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, investors are urged not to place undue reliance on forward-looking statements. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to projections over time. 39 -----END PRIVACY-ENHANCED MESSAGE-----