-----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, MA69gSeXxCeeiVuTj6dwTHYkuanaa8iDGEc+NJpzNZpoEDrA3g35Le81ZYmLfVCk DoC8rMWcZFGfB2TXsbNXsg== 0000355429-99-000005.txt : 19990329 0000355429-99-000005.hdr.sgml : 19990329 ACCESSION NUMBER: 0000355429-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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-K SEC ACT: SEC FILE NUMBER: 001-12332 FILM NUMBER: 99573217 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-K 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, 1998 Commission File Number 1-12332 PROTECTIVE LIFE CORPORATION (Exact name of Registrant as specified in its charter) 2801 HIGHWAY 280 SOUTH BIRMINGHAM, ALABAMA 35223 (Address of principal executive offices, including zip code) DELAWARE 95-2492236 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Registrant's telephone number, including area code (205) 879-9230 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.50 Par Value Series A Junior Participating Cumulative Preferred Stock, $1.00 Par Value PLC Capital L.L.C. 9% Cumulative Monthly Income Preferred Securities, Series A PLC Capital Trust I 8.25% Trust Originated Preferred Securities FELINE PRIDES Units Guarantees Issued for the Benefit of Holders of: PLC Capital L.L.C. 9% Cumulative Monthly Income Preferred Securities, Series A PLC Capital Trust I 8.25% Trust Originated Preferred Securities (Title of class) Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive proxy statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by nonaffiliates of the Registrant as of March 5, 1999: $2,181,401,938 Number of shares of Common Stock, $0.50 Par Value, outstanding as of March 5, 1999: 64,448,096 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1998 Annual Report To Share Owners (the "1998 Annual Report To Share Owners") are incorporated by reference into Parts I, II, and IV of this Report. Portions of the Registrant's Proxy Statement dated March 26, 1999, 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, 1998 TABLE OF CONTENTS PART I 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 Share-Owner 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 PART I Item 1. Business Protective Life Corporation is a 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 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. Copies of the Company's Proxy Statement and 1998 Annual Report to Share Owners will be furnished to anyone who requests such documents from the Company. Requests for copies should be directed to: Share-Owner Relations, Protective Life Corporation, P. O. Box 2606, Birmingham, Alabama 35202, Telephone (205) 868-3573, FAX (205) 868-3541. Copies may also be requested through the Internet from the Company's Worldwide Web Site (http://www.protective.com). 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). The Company operates seven divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The following table shows the percentages of pretax operating income represented by each of the strategic focuses and the Corporate and Other segment. Retirement Specialty Savings and Corporate Year Ended Life Insurance Investment and December 31 Insurance Products Products Other - ----------------- ------------ ------------- ------------ --------- 1994 53.2% 20.1% 27.3% (0.6)% 1995 53.4 15.9 32.7 (2.0) 1996 50.1 11.0 37.3 1.6 1997 49.8 18.0 23.3 8.9 1998 50.9 20.1 21.7 7.3 Additional information concerning the Company's divisions may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" and Note I to Consolidated Financial Statements in the Company's 1998 Annual Report to Share Owners, which are incorporated herein by reference. In the following paragraphs, the Company reports its divisional sales, new capital invested, members, and annualized premium. These statistics are used by the Company to measure the relative progress of its marketing and acquisition efforts. These statistics were derived from the Company's various sales tracking and administrative systems and were not derived from the Company's financial reporting systems or financial statements. These statistics attempt to measure only one of many factors that may affect future divisional profitability, and therefore are not intended to be predictive of future profitability. LIFE INSURANCE A strategic focus of the Company is to expand its life insurance operations through internal growth and acquisitions. The Individual Life, West Coast and Acquisitions Divisions support this strategy. Individual Life Division The Individual Life Division markets level premium term and term-like insurance, universal life and variable universal life products on a national basis primarily through networks of independent insurance agents. The Division is also developing other distribution channels. These include marketing life insurance products through regional stockbrokers and banks, and through worksite and direct response arrangements. The Division also offers its products on a "private label" basis to other insurance companies and their distribution systems. The Division has experienced increased sales even though the life insurance industry is a mature industry. The Division has two principal agent networks. The first is based on experienced independent personal producing general agents who are recruited by regional sales managers. At December 31, 1998, there were over 55 regional sales managers located throughout the United States. This distribution system generally appeals to agents who prefer to represent one or a few insurers, and who may depend on the regional sales managers or the Company to furnish various support services to the agent. Approximately 47% of the Division's 1998 sales came from this distribution system. The Division also distributes specialty insurance products in the life insurance brokerage market through a wholly-owned subsidiary, Empire General Life Assurance Corporation ("Empire General"), representing approximately 42% of sales. This distribution system generally appeals to agents who prefer to represent many insurers, or who look to Empire General's product offerings to fill a special need. For the entire Division, sales through stockbrokers and banks represented 9% of sales. The following table shows the Individual Life Division's sales measured by new premium. Year Ended December 31 Sales ------------------ -------------------- (dollars in millions) 1994 $30.8 1995 36.3 1996 45.4 1997 48.7 1998 71.2 The Division also includes ProEquities, Inc. ("PES"), an affiliated, full-service, securities broker-dealer. PES recruits members of the Division's field force, financial planners, and others who are licensed to sell securities to affiliate with it. PES makes available variable insurance products, mutual funds, and other investment products to its licensed representatives to offer to their clients and customers. West Coast Division On June 3, 1997, the Company acquired West Coast Life Insurance Company ("West Coast"). Headquartered in San Francisco, West Coast sells universal life and level premium term-like insurance products in the life insurance brokerage market and in the "bank owned life insurance" ("BOLI") market. The West Coast Division primarily utilizes a distribution system comprised of brokerage general agencies ("BGAs") who recruit a network of independent life agents. The BGAs provide varying levels of service to the independent agents based on the size, structure and capabilities of the individual BGA organizations. At December 31, 1998, the Division worked with 80 BGAs located throughout the United States. This distribution system represented approximately 55% of the Division's 1998 sales. The Division also offers corporate owned life insurance products to the BOLI market through an independent marketing organization which specializes in this market. The products are sold to smaller and regional banks, and represent approximately 45% of the Division's sales. The following table shows the West Coast Division's sales measured by new premium including sales prior to the Company's acquisition of West Coast for comparison purposes. Year Ended December 31 Sales --------------------- ------------------- (dollars in millions) 1996 $14.9 1997 29.8 1998 40.6 Acquisitions Division The Company is an active participant in the consolidation of the life insurance industry. The Acquisitions Division focuses on acquiring, converting, and servicing policies acquired from other companies. The Division's primary focus is on life insurance policies sold to individuals. These acquisitions may be accomplished through acquisitions of companies or through the reinsurance of blocks of policies from other insurers. Forty transactions have been closed by the Division since 1970, including 13 since 1989. Blocks of policies acquired through the Division are usually administered as "closed" blocks; i.e., no new policies are being marketed. Therefore, the amount of insurance in force for a particular acquisition is expected to decline with time due to lapses and deaths of the insureds. Most acquisitions closed by the Division do not include the acquisition of an active sales force. In transactions where some marketing capacity was included, the Division generally either ceased future marketing efforts or redirected those efforts to another Division of the Company. However, in the case of the acquisition of West Coast which was closed by the Acquisitions Division, the Company elected to continue the marketing of new policies and to operate and report West Coast as a separate division of the Company. The Division believes that its highly focused and disciplined approach to the acquisition process and its extensive experience in the assimilation, conservation, and servicing of purchased policies give it a significant competitive advantage over many other companies that attempt to make similar acquisitions. The Division expects acquisition opportunities to continue to be available as the life insurance industry continues to consolidate; however, management believes that the Company may face increased competition for future acquisitions. Total revenues and income before income tax from the Acquisitions Division are expected to decline with time unless new acquisitions are made. Therefore, the Division's revenues and earnings may fluctuate from year to year depending upon the level of acquisition activity. The following table shows the number of transactions closed by the Acquisitions Division and the approximate amount of new (statutory) capital invested. Number New Year Ended of Capital December 31 Transactions Invested - ------------------- -------------- ------------------- (dollars in millions) 1994 2 $ 45.6 1995 1 16.6 1996 3 47.1 1997 1 (1) 116.8 (1) 1998 1 77.8 - ----------- (1) West Coast From time to time other of the Company's Divisions have acquired companies and blocks of policies which are included in their respective results. SPECIALTY INSURANCE PRODUCTS A second strategic focus of the Company is to participate in specialized segments of the insurance industry that offer attractive growth opportunities. The Dental and Consumer Benefits and Financial Institutions Divisions support this strategy. Dental and Consumer Benefits Division In 1997, the Division (formerly known as the Group Division) exited from the traditional group major medical business, fulfilling the Division's strategy to focus primarily on dental and related products. Accordingly, the Division was renamed. The Division's primary strategic emphasis is on indemnity and prepaid dental products. The Division was a pioneer in developing indemnity dental products for the voluntary payroll deduction market. In 1995, the Division entered the prepaid dental market when it acquired a company which transacts business under the trade name "DentiCare". The Division's strategy is to promote a "dual choice" option by offering prepaid dental products through the Division's indemnity dental distribution channels. The Division has significantly grown its prepaid dental business through acquisitions. The Division acquired two small prepaid dental plans in 1996, and three small plans in 1997. In September 1998, the Division acquired United Dental Care, Inc. ("United Dental Care"), a leading provider of prepaid dental coverages. With the United Dental Care acquisition, the Division has become the third largest provider of prepaid dental coverages. The Division offers discounted fee-for-service dental programs to individual consumers and groups through its Dental Network Plans where enrolled consumers have access to a contracted network of dental providers who have agreed to a discounted fee schedule. The following table shows the approximate number of Dental and Consumer Benefits Division's members in all of its dental programs and annualized dental premium in-force at December 31. Annualized Dental Members Premium ------------- ------------------- (in millions) (dollars in millions) 1994 0.2 $ 34.2 1995 0.6 74.8 1996 0.8 101.2 1997 1.2 146.1 1998 3.0 339.7 The Division also offers group life and disability coverages, and administers an essentially closed block of individual cancer insurance policies, with a minimal amount of new cancer insurance coverage issued. Financial Institutions Division The Financial Institutions Division specializes in marketing credit life and disability insurance products through banks, consumer finance companies and automobile dealers. The Division is one of the largest independent writers of credit insurance in the United States. The majority of these policies cover consumer loans made by financial institutions located primarily in the southeastern United States and automobile dealers throughout the United States. The demand for credit life and credit health insurance is related to the general level for consumer loans. The Division markets through employee field representatives, independent brokers and wholly-owned subsidiaries. The Company believes it has been a beneficiary of a "flight to quality," as financial institutions and automobile dealers increasingly prefer to do business with insurers having quality products, strong balance sheets and high-quality training and service capabilities. In September 1997, the Division acquired the Western Diversified Group. The Western Diversified Group markets credit insurance and related products through automobile dealers primarily in the midwestern United States. The Western Diversified Group includes a small property and casualty insurer that sells automobile extended service contracts, which the Division has begun to market nationally through its other distribution channels. The Division acquired a closed block of credit policies in 1996 and another in 1997. The following table shows the Financial Institutions Division's sales measured by new premium including sales of Western Diversified since the date of acquisition. Year Ended December 31 Sales --------------------- ------------------- (dollars in millions) 1994 $117.3 1995 136.3 1996 147.2 1997 189.3 1998 273.5 A significant portion of the Division's sales are reinsured with producer-owned reinsurers. RETIREMENT SAVINGS AND INVESTMENT PRODUCTS A third strategic focus of the Company is to offer products that respond to the shift in consumer preference to savings products brought about by demographic trends as "baby-boomers" move into the saving stage of their life cycle. The two Divisions that support this strategy are the Guaranteed Investment Contracts and Investment Products Divisions. Guaranteed Investment Contracts Division The Guaranteed Investment Contracts ("GIC") Division markets GICs to 401(k) and other qualified retirement savings plans. GICs are generally contracts which specify a return on deposits for a specified period and often provide flexibility for withdrawals, in keeping with the benefits provided by the plan. The demand for GICs is related to the relative attractiveness of the "fixed rate" investment option in a 401(k) plan compared to the equity-based investment options available to plan participants. The Division also markets related products, including fixed and floating rate funding agreements offered to the trustees of municipal bond proceeds, bank trust departments and money market funds, and long-term annuity contracts offered to fund certain state obligations. The Division has benefited from the growing acceptance of funding agreements among money managers. The Division's emphasis is on a consistent and disciplined approach to product pricing and asset/liability management, careful underwriting of early withdrawal risks and maintaining low distribution and administration costs. Most GIC contracts and funding agreements written by the Division have maturities of three to five years. The rate of growth in GIC account balances has slowed as the amount of maturing contracts has increased relative to the amount of sales of GIC and related deposits. The following table shows the Guaranteed Investment Contract Division's sales and account balances. Year Ended Account December 31 Sales Balances --------------------- ---------- --------- (dollars in millions) 1994 $806 $2,282 1995 751 2,524 1996 686 2,627 1997 696 2,869 1998 827 2,879 Investment Products Division The Investment Products Division manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Individual Life Division's sales force. The demand for annuity products is related to the general level of interest rates and performance of the equity markets. The Division offers modified guaranteed annuities which guarantee an interest rate for a fixed period. Because contract values are "market-value adjusted" upon surrender prior to maturity, these products afford the Company a measure of protection from changes in interest rates. Since 1994, the Division has offered variable annuities which offer the policyholder the opportunity to invest in various investment accounts. The following table shows the Investment Products Division's sales. Year Ended Fixed Variable Total December 31 Annuities Annuities Annuities - -------------------- --------- ------------ ---------- (dollars in millions) 1994 $280 $171 $451 1995 118 189 307 1996 199 169 368 1997 180 324 504 1998 97 472 569 The following table shows the Investment Products account balances. Year Ended Fixed Variable Total December 31 Annuities Annuities Annuities - ---------------- --------- ---------- ---------- (dollars in millions) 1994 $983 $170 $1,153 1995 996 388 1,384 1996 1,042 625 1,667 1997 1,229 1,057 2,286 1998 1,105 1,555 2,660 Corporate and Other The Company has an additional business segment referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the Divisions described above (including net investment income on capital and interest on substantially all debt). This segment also includes earnings from various investment-related transactions, the Company's 50%-owned joint venture in Hong Kong and the operations of several small subsidiaries. The earnings of this segment may fluctuate from year to year. Investments The types of assets in which the Company may invest are influenced by various 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 overall composition of the investment portfolio by asset type and credit exposure. 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. Due to the potential cash flow volatility of mortgage-backed securities, the Company has focused on sequential, planned amortization class ("PAC") and targeted amortization class ("TAC") securities. These types have less cash flow volatility than other types of mortgage-backed securities. The Company does not invest in the riskiest tranches of mortgage-backed securities. In addition, the Company has entered into hedging transactions to reduce the volatility in market value of its mortgage-backed securities. The table below shows a breakdown of the Company's mortgage-backed securities portfolio by type at December 31, 1998. PACs pay down according to a schedule. TACs pay down in amounts approximating targeted schedule. Sequentials, like PACs and TACs, receive scheduled payments with any "excess" cash flow going to repay the earliest maturing tranches first. All three of these types of structured mortgage-backed securities give the Company some measure of protection against both prepayment and extension risk. Accretion directed securities have a stated maturity but may repay more quickly. Pass through securities receive principal as principal of the underlying mortgages is received. Support tranches are designed to receive cash after the more stable tranches (i.e., PACs, TACs, and sequentials) are satisfied. The CMBS are commercial mortgage-backed securities issued in securitization transactions sponsored by the Company, in which the Company securitized portions of its mortgage loan portfolio. Percentage of Mortgage-Backed Type Securities --------- --------------- PAC 22.6% TAC 10.6 Sequential 36.7 Accretion Directed 8.4 Pass Through 7.9 Support 2.2 CMBS 11.6 ------- 100.0% ======= 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, 1998, approximately 99.6% of bonds were rated by Moody's, S&P, or the NAIC. At December 31, 1998, approximately $6,182.8 million of the Company's $6,431.7 million bond portfolio was invested in U.S. Government or agency-backed securities or investment grade bonds and only approximately $248.9 million of its bond portfolio was rated less than investment grade, of which $83.5 million were securities issued in Company-sponsored commercial mortgage loan securitizations. Risks associated with investments in less than investment grade debt obligations may be significantly higher than risks associated with investments in debt securities rated investment grade. Risk of loss upon default by the borrower is significantly greater with respect to such debt obligations than with other debt securities because these obligations may be unsecured or subordinated to other creditors. Additionally, there is often a thinly traded market for such securities and current market quotations are frequently not available for some of these securities. Issuers of less than investment grade debt obligations usually have higher levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment-grade issuers. The Company also invests 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 1998 was $1.6 million. The average size mortgage loan in the Company's portfolio is approximately $2.0 million. The largest single loan amount is $12.8 million. The following table shows a breakdown of the Company's mortgage loan portfolio by property type at December 31, 1998: Percentage of Mortgage Loans Property Type on Real Estate ---------------- ---------------- Retail 75% Apartments 10 Warehouses 8 Office Building 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, 1998: Percentage of Mortgage Loans Anchor Tenants on Real Estate ----------------- ---------------- Food Lion, Inc. 5% KMart Corporation 3 Winn Dixie Stores, Inc. 3 Wal-Mart Stores, Inc. 2 CVS Corporation 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 $464.4 million of the Company's mortgage loans have this participation feature. Many of the Company's mortgage loans have call or interest rate reset provisions between 3 and 10 years. However, if interest rates were to significantly increase, the Company may be unable to call the loans or increase the interest rates on its existing mortgage loans commensurate with the significantly increased market rates. At December 31, 1998, $11.7 million or 0.7% 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. In 1996, the Company sold approximately $554 million of its mortgage loans in a securitization transaction. In 1997, the Company sold approximately $445 million of its loans in a second securitization transaction, and in 1998 the Company securitized an additional $146 million of its mortgage loans. The securitizations' senior tranches were sold, and the Company retained the junior tranches. 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 a foreclosed property 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 an allowance for uncollectible amounts on investments. This allowance was $24.8 million at December 31, 1998. The following table shows the investment results of the Company for the years 1994 through 1998:
Cash, Accrued Percentage Investment Income, Net Earned on Realized Year Ended and Investments Investment Average of Cash Investment December 31 at December 31 Income and Investments Gains (Losses) - ----------- ----------------- ----------- ----------------- -------------- (dollars in thousands) 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 1997 8,192,538 591,376 7.9 830 1998 8,718,455 636,396 7.5 3,121
For further information regarding the Company's investments, the maturity of and the concentration of risk among the Company's invested assets, derivative financial instruments, and liquidity, see Notes A and B to the Consolidated Financial Statements, and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Company's 1998 Annual Report to Share Owners. Insurance in Force The Company's total consolidated life insurance in force at December 31, 1998 was $110.0 billion. The following table shows sales by face amount and insurance in force for the Company's divisions.
Year Ended December 31 1998 1997 1996 1995 1994 (dollars in thousands) New Business Written Individual Life..................... $ 16,188,344 $10,588,594 $ 9,245,002 $ 7,564,983 $ 6,329,630 West Coast.......................... 5,050,309 1,984,928 Dental and Consumer Benefits........ 113,056 124,230 115,748 119,357 184,429 Financial Institutions.............. 5,257,957 4,183,216 3,956,581 3,563,177 2,524,212 -------------- ------------ ----------- ------------- ------------ Total.......................... $ 26,609,666 $16,880,968 $13,317,331 $ 11,247,517 $ 9,038,271 ============== ============ =========== ============ ============ Business Acquired West Coast.......................... $10,237,731 Acquisitions........................ $ 7,787,284 $ 1,286,673 $ 6,129,159 $ 4,756,371 Financial Institutions.............. 3,364,617 1,607,463 -------------- ---------- ---------- ----------- ------------ Total.......................... $ 7,787,284 $13,602,348 $ 2,894,136 $ 6,129,159 $ 4,756,371 ============== ========== ========== =========== =========== Insurance in Force at End of Year(1) Individual Life..................... $ 50,587,419 $39,715,608 $35,765,841 $32,500,935 $25,843,232 West Coast.......................... 15,498,799 12,004,967 Acquisitions........................ 27,606,592 20,955,836 20,037,857 16,778,359 11,728,569 Dental and Consumer Benefits........ 6,665,815 6,393,076 6,054,947 6,371,313 7,464,501 Financial Institutions.............. 9,632,466 10,183,997 7,468,761 6,233,256 4,841,318 -------------- ----------- ------------ ----------- ----------- Total.......................... $109,991,091 $89,253,484 $69,327,406 $61,883,863 $49,877,620 ============== =========== ============ =========== ===========
(1)Reinsurance assumed has been included; reinsurance ceded (1998-$64,846,246; 1997-$34,139,554; 1996- $18,840,221; 1995-$17,524,366; 1994-$8,639,272) has not been deducted. The ratio of voluntary terminations of individual life insurance to mean individual life insurance in force, which is determined by dividing the amount of insurance terminated due to lapses during the year by the mean of the insurance in force at the beginning and end of the year, adjusted for the timing of major acquisitions and assumptions was: Ratio of Year Ended Voluntary December 31 Terminations 1994........................................ 7.0% 1995........................................ 6.9 1996........................................ 6.4 1997........................................ 6.9 1998........................................ 6.4 Net terminations reflect voluntary lapses, 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 the amount of 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. Most of the variable annuity account balances are reported in the Company's financial statements as liabilities related to separate accounts.
Guaranteed Modified Year Ended Investment Guaranteed Fixed Variable December 31 Contracts Annuities Annuities Annuities -------------- ------------- ----------------- ------------ ------------- (dollars in thousands) 1994 $2,281,673 $661,359 $542,766 $ 170,454 1995 2,451,693 741,849 472,656 392,237 1996 2,474,728 862,747 390,461 624,714 1997 2,684,676 926,071 453,418 1,057,186 1998 2,691,697 818,566 286,413 1,554,969
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 Individual Life Division in 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. Indemnity Reinsurance 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. In many cases the retention is less. At December 31, 1998, the Company had insurance in force of $110.0 billion of which approximately $64.8 billion was ceded to reinsurers. Over the past several years, the Company's reinsurers have reduced the net cost of reinsurance to the Company. Consequently, the Company has increased the amount of reinsurance which it cedes on newly-written individual life insurance policies, and has also ceded a portion of the mortality risk of existing business of the Individual Life, West Coast, and Acquisitions Divisions. Although the Company does not anticipate increases to occur, the reinsurance premium rates in many of the Company's reinsurance agreements are not guaranteed, and could be increased by the reinsurer. 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. 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 a memorandum account designated as "Policyholders' Surplus" to be taxed only when such income was distributed to share owners or when certain limits on accumulated amounts were exceeded. Consistent with current tax law, amounts accumulated in Policyholders' Surplus have been carried forward, although no accumulated income may be added to these accounts. As of December 31, 1998, the aggregate accumulation in the Policyholders' Surplus account was $70.5 million. Under current income tax laws, the Company does not anticipate paying income tax on amounts in the Policyholders' Surplus accounts. Competition Life and health insurance is a mature industry. In recent years, the industry has experienced little growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Insurance is a highly competitive industry, and the Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than the Company, as well as competition from other providers of financial services. The life and health insurance industry is consolidating, with larger, more efficient organizations emerging from consolidation. Also, mutual insurance companies are converting to stock ownership which will give them greater access to capital markets. Management believes that the Company's ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong 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 share owners. The Company cannot predict the form of any future proposals or regulation. A life insurance company's statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners ("NAIC") as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs and more conservative computations of policy liabilities. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Based upon the December 31, 1998 statutory financial reports, 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 1998, 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 Insurance Company ("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 an entity is generally deemed to be the acquisition of control for the purpose of the insurance holding company statute and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. 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 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 1999 is estimated to be $138.9 million. No assurance can be given that more stringent restrictions will not be adopted from time to time by states in which 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. 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. 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 1998 Annual Report to Share Owners. Recent Developments The NAIC has adopted the Codification of Statutory Accounting Principles ("Codification"). The Codification changes current statutory accounting rules in several areas. The Company has not estimated the potential effect the Codification will have on the statutory capital of the Company's insurance subsidiaries. The Codification has been proposed to become effective January 1, 2001. The NAIC is considering a new reserving standard, commonly referred to as "Triple X" (i.e., roman numeral XXX), for universal life and level premium term and term-like insurance products. The Company is currently assessing the impact of Triple X on its products and what changes to the products might be necessary in response to Triple X. The President's Fiscal Year 2000 Budget contains proposals that, if enacted, would adversely affect the life insurance industry. The first proposal would require insurers to include in taxable income over 10 years the balances accumulated in a tax memorandum account designated as Policyholders' Surplus. The Company's accumulation in this account at December 31, 1998 was approximately $70.5 million. A second proposal would require insurers to capitalize higher percentages of acquisition expenses for tax purposes, resulting in the earlier payment of tax. A third proposal would reduce the attractiveness of corporate- owned life insurance (or COLI) products. Life insurance products are often used to fund estate tax obligations. Recently a report issued by the Congressional Joint Economic Committee recommended the elimination of the estate tax. If the estate tax were eliminated, the demand for certain life insurance products would be adversely affected. Some insurers have recently lowered the premium rates for their level premium term and term-like products. The Company's Individual Life and West Coast Divisions are currently developing a response. Those Divisions' results, in part, depend upon their ability to maintain competitive level premium term and term-like products. Employees At December 31, 1998 the Company had approximately 2,500 employees, including approximately 1,350 in Birmingham, Alabama. Most employees are covered by contributory major medical, dental, group life, and long-term disability insurance plans. The cost of these benefits in 1998 amounted to approximately $5.2 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 and makes discretionary profit sharing contributions for employees not otherwise covered by a bonus plan. See Note K to Consolidated Financial Statements. Item 2. Properties The Company's Home Office is located at 2801 Highway 280 South, Birmingham, Alabama. This campus includes the original 142,000 square-foot building which was completed in 1976 and a second contiguous 220,000 square-foot building which was completed in 1985. In addition, parking is provided for approximately 1,000 vehicles. The Company leases administrative space in approximately 16 cities including approximately 114,000 square feet in Birmingham, with most leases being for periods of three to five years. The aggregate monthly rent is approximately $428 thousand. Marketing offices are leased in approximately 35 cities, with most leases being for periods of three to five years. The aggregate monthly rent is approximately $141 thousand. Item 3. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company or any of its subsidiaries is a party or of which any of the Company's properties is the subject. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in the Company's 1998 Annual Report to Share Owners 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 1998 to a vote of security holders of the Company. PART II Item 5. Market for the Registrant's Common Equity and Related Share-Owner 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. Closing prices and dividends have been adjusted for the Company's two-for-one stock split effective April 1, 1998.
Range Dividends ------------------- --------- High Low ------- ------- 1997 First Quarter........................... $22.31 $18.81 $.09 Second Quarter.......................... 25.38 20.31 .10 Third Quarter........................... 26.75 23.81 .10 Fourth Quarter.......................... 32.63 25.06 .10 1998 First Quarter........................... $36.50 $28.94 $.10 Second Quarter.......................... 38.38 31.75 .11 Third Quarter........................... 40.88 30.00 .11 Fourth Quarter.......................... 40.13 28.63 .11
On March 5, 1999, there were approximately 2,100 owners 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 1998 Annual Report to Share Owners. Such subsidiary dividends are restricted by the various insurance laws of the states in which the subsidiaries are incorporated. See Item 1 "Business - Regulation". Item 6. Selected Financial Data
Year Ended December 31 ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ----- (dollars in thousands, except per share amounts) INCOME STATEMENT DATA Premium and policy fee $ 1,122,010 $ 856,549 $ 802,327 $ 765,749 $ 575,347 Reinsurance ceded (459,215) (334,214) (308,174) (333,173) (172,575) ----------- ------------ ------- -------- --------- Net of reinsurance ceded 662,795 522,335 494,153 432,576 402,772 Net investment income................. 636,396 591,376 517,483 475,924 417,825 Realized investment gains(losses)..... 3,121 830 5,510 1,612 6,298 Other income.......................... 64,103 32,784 20,857 11,768 21,553 ----------- ----------- -------- -------- --------- Total revenues.............. 1,366,415 1,147,325 1,038,003 921,880 848,448 Benefits and expenses 1,145,691 967,952 898,262 800,846 742,275 Income tax expense 77,845 60,987 47,512 41,152 33,976 Minority interest 12,098 6,393 3,217 3,217 1,796 ----------- ----------- -------- -------- -------- Net income $ 130,781 $ 111,993 $ 89,012 $ 76,665 $ 70,401 =========== =========== ======== ======== ======== PER SHARE DATA(1) Operating income per share - basic $ 2.04 $ 1.79 $ 1.45 $ 1.34 $ 1.19 Net income per share - basic $ 2.06 $ 1.79 $ 1.47 $ 1.34 $ 1.28 Average shares outstanding - basic 63,521,587 62,429,250 60,570,782 57,320,224 54,952,772 Operating income per share - diluted $ 2.02 $ 1.78 $ 1.44 $ 1.33 $ 1.18 Net income per share - diluted $ 2.04 $ 1.78 $ 1.46 $ 1.33 $ 1.27 Average shares outstanding - diluted 64,087,744 62,849,618 60,969,664 57,705,698 55,459,224 Cash dividends $ .43 $ .39 $ .35 $ .31 $ .275 Share-owners' equity $ 14.65 $ 12.30 $ 9.99 $ 9.15 $ 4.93 Share-owners' equity excluding net unrealized gains and losses on investments $ 13.80 $ 11.30 $ 9.88 $ 8.14 $ 6.89 December 31 ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ---------- --------- ------- (dollars in thousands) BALANCE SHEET DATA Total assets.......................... $ 11,989,495 $10,511,635 $ 8,263,205 $ 7,231,257 $ 6,130,284 Long-term debt........................ $ 152,286 $ 120,000 $ 168,200 $ 115,500 $ 98,000 Total debt............................ $ 172,035 $ 120,000 $ 181,000 $ 115,500 $ 98,000 9% Cumulative Monthly Income Preferred Securities, Series A $ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000 8.25% Trust Originated Preferred Securities $ 75,000 $ 75,000 6.5% FELINE PRIDES $ 115,000 $ 115,000 Share-owners' equity $ 944,194 $ 758,197 $ 615,316 $ 526,557 $ 270,373 Share-owners' equity excluding unrealized gains and losses on investments $ 889,137 $ 696,470 $ 608,628 $ 468,694 $ 377,905
(1) Prior periods have been restated to reflect a two-for-one stock split on June 1, 1995 and April 1, 1998. 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 1998 Annual Report to Share Owners 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 1998 Annual Report to Share Owners, are incorporated herein by reference. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Share Owners of Protective Life Corporation 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 52 of the 1998 Annual Report to Share Owners 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 32 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/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Birmingham, Alabama February 11, 1999 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 Share Owners, April 26, 1999, to be filed with the Securities and Exchange Commission by the Company pursuant to Regulation 14A within 120 days after the end of its 1998 fiscal year. The executive officers of the Company are as follows:
Name Age Position - ------------------------ ----- ------------------------------------ Drayton Nabers, Jr. 58 Chairman of the Board and Chief Executive Officer and Director John D. Johns 47 President, Chief Operating Officer and Director R. Stephen Briggs 49 Executive Vice President Jim E. Massengale 56 Executive Vice President, Acquisitions A. S. Williams III 62 Executive Vice President, Investments and Treasurer Danny L. Bentley 41 Senior Vice President, Dental and Consumer Benefits Richard J. Bielen 38 Senior Vice President, Investments Carolyn King 48 Senior Vice President, Investment Products Deborah J. Long 45 Senior Vice President, Secretary and General Counsel Steven A. Schultz 45 Senior Vice President, Financial Institutions Name Age Position - -------------------- ----- ------------------------------------ Wayne E. Stuenkel 45 Senior Vice President and Chief Actuary Judy Wilson 41 Senior Vice President, Guaranteed Investment Contracts Jerry W. DeFoor 46 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 of the executive officers is related to any director of the Company or to any other executive officer. Mr. Nabers has been Chairman of the Board and Chief Executive Officer and a Director of the Company 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 has served in various capacities with the Company and its subsidiaries since 1979 and has served as a member of the Board since August 1982. 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 a Director of the Company since May 1997. He was Executive Vice President and Chief Financial Officer of the Company 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 also a director of National Bank of Commerce of Birmingham and Alabama National Bancorporation. Mr. Briggs has been Executive Vice President of the Company since October 1993 and has responsibility for the Individual Life Division. From January 1993 to October 1993, he was Senior Vice President, Life Insurance and Investment Products of the Company. Mr. Briggs had been Senior Vice President, Ordinary Marketing of the Company since August 1988. Mr. Briggs has been associated with the Company and its subsidiaries since 1971. Mr. Massengale has been Executive Vice President, Acquisitions of the Company since August 1996 and also has responsibility for the West Coast Division. He was Senior Vice President of the Company from May 1992 to August 1996. Mr. Massengale has been employed by the Company and its subsidiaries since 1983. Mr. Williams has been Executive Vice President, Investments and Treasurer of the Company since August 1996. He was Senior Vice President, Investments and Treasurer of the Company from July 1981 to August 1996. Mr. Williams has been employed by the Company and its subsidiaries since 1964. Mr. Bentley has been Senior Vice President, Dental and Consumer Benefits of the Company since August 1996. From May 1989 to August 1996, he served as Vice President, Group Marketing of Protective Life. Mr. Bentley has been employed by the Company and its subsidiaries since 1980. Mr. Bielen has been Senior Vice President, Investments of the Company 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 of the Company 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. She was Senior Vice President and General Counsel of the Company from February 1994 to November 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 since March 1993. Mr. Schultz served as Vice President, Financial Institutions of the Company from February 1993 to March 1993. Mr. Schultz has been employed by the Company and its subsidiaries since 1989. Mr. Stuenkel has been Senior Vice President and Chief Actuary of the Company since March 1987. Mr. Stuenkel is a Fellow of the Society of Actuaries and has been employed by the Company and its subsidiaries since 1978. Ms. Wilson has been Senior Vice President, Guaranteed Investment Contracts of the Company since January 1, 1995. From July 1991 to December 31, 1994, she served as Vice President, Guaranteed Investment Contracts of Protective Life. Mr. DeFoor has been Vice President and Controller, and Chief Accounting Officer of the Company since April 1989. Mr. DeFoor is a certified public accountant and has been employed by the Company and its subsidiaries since 1982 . 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 file reports with the Securities and Exchange Commission showing changes in their beneficial ownership of the Company's Common Stock. The Company has reviewed copies of these reports and written representations from the individuals required to file reports. Based on this review, we believe that each of the Company's directors and executive officers has complied with the reporting requirements in 1998, except for Mr. Williams who inadvertently filed a late Form 4 reporting two transactions. 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 Share Owners, April 26, 1999, to be filed with the Securities and Exchange Commission by the Company pursuant to Regulation 14A within 120 days after the end of its 1998 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 1998 Annual Report to Share Owners as indicated in the following table are incorporated by reference (see Exhibit 13). Report of Independent Accountants Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996 Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Share-Owners' Equity for the years ended December 31, 1998, 1997, and 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: The Report of Independent Accountants which covers the financial statement schedules appears on page 27 of this report. The following schedules are located in this report on the pages indicated. 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) 1998 Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on November 12, 1998. 3(b) 1998 Amended and Restated By-laws of the Company effective November 2, 1998. 4(a) Reference is made to Exhibit 3(a) above. 4(b) Reference is made to Exhibit 3(b) above. *4(c) Certificate of Formation of PLC Capital L.L.C. filed as Exhibit 4(c) to the Company's Registration Statement on Form S-3 filed March 25, 1994 (No. 33-52831). *4(d) Amended and Restated Limited Liability Company Agreement of PLC Capital L.L.C. filed as Exhibit 4(d) to Amendment No. 2, filed April 15, 1994, to the Company's Registration Statement on Form S-3 (No. 33-52831). *incorporated by reference *4(e) Form of Action establishing series of Preferred Securities (included as Annex A to Exhibit 4(d) to the Company's Registration Statement on Form S-3 (No. 33-52831)). *4(f) Specimen Preferred Security Certificate (included as Annex B to Exhibit 4(d) to the Company's Registration Statement on Form S-3 (No. 33-52831)). *4(g) Form of Guarantee Agreement between the Company and PLC Capital L.L.C. with respect to the Preferred Securities to be issued by PLC Capital L.L.C. filed as Exhibit 4(i) to Amendment No. 2, filed April 15, 1994, to the Company's Registration Statement on Form S-3 (No. 33-52831). *4(h) Rights Agreement, dated as of August 7, 1995, between the Company and The Bank of New York as successor to AmSouth Bank (formerly, AmSouth Bank N.A.), as Rights Agent filed as Exhibit 2 to the Company's Form 8-K Current Report filed August 7, 1995 and filed as Exhibit 1 to the Company's Form 8-A Registration Statement filed August 7, 1995. *4(i) Rights Certificate filed as Exhibit 1 to the Company's Form 8-A filed August 7, 1995. *4(j) Certificate of Trust of PLC Capital Trust I filed as Exhibit 4(a) to the Company's Registration Statement on Form S-3 filed April 11, 1997 (No. 333-25027) *4(k) Declaration of Trust of PLC Capital Trust I filed as Exhibit 4(b) to the Company's Registration Statement on Form S-3 filed April 11, 1997 (No. 333-25027) *4(l) Form of Amended and Restated Declaration of Trust for PLC Capital Trust I filed as Exhibit 4(c) to Amendment No. 1, filed April 21, 1997, to the Company's Registration Statement on Form S-3 (No. 33-25027). *4(m) Form of Preferred Security Certificate for PLC Capital Trust I (included as Exhibit A-1 of Exhibit 4(k)). *4(n) Form of Guarantee with respect to Preferred Securities of PLC Capital Trust I filed as Exhibit 4(i) to the Company's Registration Statement on Form S-3 filed April 11, 1997 (No. 333-25027). *incorporated by reference *4(o) Certificate of Trust of PLC Capital Trust II filed as Exhibit 4(aa) to the Company's Registration Statement on Form S-3 filed July 8, 1997 (No. 333-30905). *4(p) Declaration of Trust of PLC Capital Trust II filed as Exhibit 4(dd) to the Company's Registration Statement on Form S-3 filed July 8, 1997 (No. 333-30905). *4(q) Form of Amended and Restated Declaration of Trust of PLC Capital II filed as Exhibit 4(gg) to the Company's Registration Statement on Form S-3 filed July 8, 1997 (No. 333-30905). *4(r) Form of Preferred Security Certificate for PLC Capital Trust II (included in Exhibit 4(q)). *4(s) Form of Guarantee Agreement with respect to Preferred Securities to be issued by PLC Capital Trust II filed as Exhibit 4(v) to the Company's Registration Statement on Form S-3 filed July 8, 1997 (No. 333-30905). *4(t) Form of Purchase Contract Agreement between the Company and The Bank of New York, as Purchase Contract Agent, filed as Exhibit 4(y) to the Company's Current Report on Form 8-K filed November 20, 1997. *4(u) Form of Pledge Agreement, among the Company, The Bank of New York, as Purchase Contract Agent, and the Chase Manhattan Bank, as Collateral Agent, filed as Exhibit 4(z) to the Company's Current Report on Form 8-K filed November 20, 1997. *10(a)+ The Company's Annual Incentive Plan (effective as of January 1, 1997) filed as Exhibit 10(b) to the Company's Form 10-Q Quarterly Report filed May 14, 1997. *10(b)+ The Company's 1992 Performance Share Plan filed as Exhibit 10(b)(3) to the Company's Form 10-Q Quarterly Report 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. *incorporated by reference +Management contract or compensatory plan or arrangement *10(b)(2)+ The Company's 1997 Long-Term Incentive Plan (formerly, the "1997 Performance Share Plan"), filed as Exhibit 10(a) to the Company's Form 10-Q Quarterly Report filed May 15, 1998. *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 Quarterly Report filed August 14, 1986. *10(d)(1)+ Form of Indemnity Agreement for Officers filed as Exhibit 10(d)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1996. *10(e) Reference is made to Exhibit 4(g) above. *10(f)+ Form of the Company's Employment Continuation Agreement filed as Exhibit 10(a) to the Company's Form 10-Q Quarterly Report filed September 30, 1997. *10(g)+ The Company's Deferred Compensation Plan for Directors Who Are Not Employees of the Company as amended through March 3, 1997, filed as Exhibit 10(e) to the Company's Form 10-Q Quarterly Report filed May 14, 1997. *10(h)+ The Company's Deferred Compensation Plan for Officers as amended through March 3, 1997, filed as Exhibit 10(d) to the Company's Form 10-Q Quarterly Report filed May 14, 1997. *10(i)+ The Company's 1996 Stock Incentive Plan as amended through March 3, 1997, filed as Exhibit 10(c) to the Company's Form 10-Q Quarterly Report filed May 14, 1997. *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 Quarterly Report filed November 13, 1996. 13 Selected portions of the 1998 Annual Report To Share Owners which are incorporated herein by reference. 21 Organization Chart of the Company and Affiliates. *incorporated by reference +Management contract or compensatory plan or arrangement 23 Consent of PricewaterhouseCoopers LLP. 24 Powers of Attorney. 27 Financial Data Schedule. 99 Safe Harbor for Forward-Looking Statements. *incorporated by reference (b) Current Reports on Form 8-K: (1) Form 8-K, dated February 11, 1998 - Item 5 - Item 7 (2) Form 8-K, dated March 11, 1998 - Item 5 - Item 7 (3) Form 8-K, dated April 23, 1998 - Item 5 - Item 7 (4) Form 8-K, dated July 28, 1998 - Item 5 - Item 7 (5) Form 8-K, dated October 27, 1998 - Item 5 - Item 7 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 25, 1999 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 25, 1999 DRAYTON NABERS, JR. Chief Executive Officer (Principal Executive Officer) and Director /s/John D. Johns President and Chief Operating Officer March 25, 1999 JOHN D. JOHNS (Principal Financial Officer) and Director /s/Jerry W. DeFoor Vice President and Controller, March 25, 1999 JERRY W. DEFOOR and Chief Accounting Officer (Principal Accounting Officer) * Chairman Emeritus and March 25, 1999 WILLIAM J. RUSHTON III Director * Director March 25, 1999 WILLIAM J. CABANISS, JR. * Director March 25, 1999 JOHN J. MCMAHON, JR. * Director March 25, 1999 A. W. DAHLBERG * Director March 25, 1999 RONALD L. KUEHN, JR. * Director March 25, 1999 HERBERT A. SKLENAR * Director March 25, 1999 JAMES S. M. FRENCH * Director March 25, 1999 ROBERT A. YELLOWLEES * Director March 25, 1999 ELAINE L. CHAO * Director March 25, 1999 DONALD M. JAMES * Director March 25, 1999 J. GARY COOPER
*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 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME PROTECTIVE LIFE CORPORATION (Parent Company) Years Ended December 31, 1998, 1997, and 1996 (in thousands)
1998 1997 1996 --------- ----------- ----------- REVENUES Dividends from subsidiaries* $77,639 $ 5,317 $ 3,391 Service fees from subsidiaries* 56,683 54,712 40,850 Net investment income 9,295 10,433 2,489 Realized investment gains (losses) 985 (994) Other income (loss) (406) 2,186 (384) --------- ----------- ----------- 144,196 71,654 46,346 EXPENSES Operating and administrative 36,737 36,309 26,901 Interest - subsidiaries* 6,266 6,266 5,904 Interest - others 17,626 13,185 7,859 --------- ----------- ----------- 60,629 55,760 40,664 --------- ----------- ----------- INCOME BEFORE FEDERAL INCOME TAX AND OTHER ITEMS BELOW 83,567 15,894 5,682 INCOME TAX EXPENSE 9,843 2,342 1,630 --------- ----------- ----------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 73,724 13,552 4,052 EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES* 57,057 98,441 84,960 --------- ----------- ----------- NET INCOME $130,781 $111,993 $ 89,012 ========= ========== ===========
*Eliminated in consolidation. See notes to condensed financial statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS PROTECTIVE LIFE CORPORATION (Parent Company) (in thousands) December 31 ------------------------------------- 1998 1997 -------------- ----------- ASSETS Investments: Fixed maturities $ 26,000 $ 26,000 Long-term investments 11,424 47 Short-term investments 7,000 Investment real estate 133 Investments in subsidiaries (equity method)* 1,380,593 1,114,185 ------------- ---------- 1,418,017 1,147,365 Cash 515 305 Receivables from subsidiaries* 22,578 29,920 Property and equipment, net 1,007 Accrued income taxes 8,850 Other 10,590 15,723 ------------ ---------- Total Assets $1,461,557 $1,193,313 LIABILITIES Accrued expenses and other liabilities $ 66,895 $ 48,102 Accrued income taxes 415 Deferred income taxes 16,548 1,102 Debt: Banks 48,500 Senior Notes 75,000 75,000 Medium-Term Notes 44,923 45,000 Subsidiaries* 265,497 265,497 ------------ ---------- Total Liabilities 517,363 435,116 ------------ ---------- SHARE-OWNERS' EQUITY Preferred Stock Junior Participating Cumulative Preferred Stock Common Stock 34,667 33,336 Additional paid-in capital 254,705 167,923 Treasury stock (13,140) (13,455) Unallocated stock in Employee Stock Ownership Plan (4,277) (4,592) Retained earnings (including undistributed income of subsidiaries: 1998 - $680,263; 1997 - $627,706) 617,182 513,258 Accumulated other comprehensive income Net unrealized gains (losses) on investments (all from subsidiaries, net of income tax: 1998 - $29,646; 1997 - $33,238) 55,057 61,727 ------------ ---------- Total Share-Owners' Equity 944,194 758,197 ------------ ---------- $1,461,557 $1,193,313 ============ ==========
*Eliminated in consolidation. See notes to condensed financial statements.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS PROTECTIVE LIFE CORPORATION (Parent Company) Years Ended December 31, 1998, 1997, and 1996 (in thousands) 1998 1997 1996 --------------- ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $130,781 $111,993 $ 89,012 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries* (57,057) (98,441) (84,960) Deferred income taxes 15,446 (5,668) (222) Other (net) (1,324) 3,633 (271) --------------- ------------- -------------- Net cash provided by operating activities 87,846 11,517 3,559 --------------- ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of and/or additional investments in subsidiaries* (115,960) (111,168) (104,872) Principal payments received on loan to subsidiary* 2,000 10,000 Change in fixed maturities and long-term investments (2,242) (2,993) (22,892) Change in short-term investments 7,000 (7,000) --------------- ------------- -------------- Net cash used in investing activities (109,202) (121,161) (117,764) --------------- ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Common Stock 70,546 Borrowings under line of credit arrangements and long-term debt 52,000 275,777 165,934 Principal payments on line of credit arrangements and debt (3,577) (140,900) (100,434) Purchase of Treasury Stock (1,839) Dividends to Share Owners (26,857) (24,113) (20,888) --------------- ------------- -------------- Net cash provided by (used in) financing activities 21,566 108,925 115,158 --------------- ------------- -------------- INCREASE (DECREASE) IN CASH 210 (719) 953 CASH AT BEGINNING OF YEAR 305 1,024 71 --------------- ------------- -------------- CASH AT END OF YEAR $ 515 $ 305 $ 1,024 =============== ============= ==============
*Eliminated in consolidation. See notes to condensed financial statements. 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, 1998, the Company had borrowed $30.0 million under its $70 million revolving line of credit and an additional $18.5 million of bank borrowings. $75.0 million of Senior Notes due 2004, $44.9 million of Medium-Term Notes due 2011, $69.6 million of subordinated debentures due 2024, $77.3 million of subordinated debentures due 2027 and $118.6 million of subordinated debentures due 2003 were outstanding at December 31, 1998. The subordinated debentures were issued to affiliates in connection with the issuance by such affiliates of 9% Cumulative Monthly Income Preferred Securities, Series A; 8.25% Trust Originated Preferred Securities (TOPrS); and 6.5% Trust Originated Preferred Securities (TOPrS) issued as part of the Company's FELINE PRIDES, respectively. NOTE 2 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1998 1997 1996 CASH PAID (RECEIVED) DURING THE YEAR FOR: Interest Paid to Non-Affiliates $ 9,285 $ 8,244 $ 6,809 Interest Paid to Subsidiary* 20,351 10,768 6,266 ---------- ----------- --------- $ 29,636 $ 19,012 $ 13,075 ========== =========== ========= Income Taxes (reduced by amounts received from affiliates under a tax sharing agreement) $ (464) $ (2,026) $ 2,148 ========== =========== ========= NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of Treasury Stock to ESOP $ 205 $ 85 $ 669 ========== =========== ========= Unallocated Stock in ESOP $ 315 $ 333 $ 334 ========== =========== ========= Reissuance of Treasury Stock $ 3,097 $ 1,383 $ 261 ========== =========== ========= Issuance of Common Stock $ 85,126 ==========
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, 1998, the balance of the surplus debentures was $18 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.
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 Net 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, 1998: Individual Life $ 301,941 $1,054,253 $ 355 $ 10,802 $126,166 $ 55,903 West Coast 144,455 1,006,280 0 77,254 22,380 63,492 Acquisitions 255,347 1,383,759 553 233,846 96,735 112,154 Dental 23,836 114,693 5,728 81,572 286,235 15,995 Financial Institutions 39,212 215,451 385,006 105,434 112,272 25,313 Guaranteed Investment Contracts 1,448 172,674 0 2,691,697 0 213,136 Investment Products 75,177 194,726 0 1,233,528 18,809 105,890 Corporate and Other 9 944 39 88 198 44,513 ----------------------------------------------------------------------------------------------------------------- TOTAL $841,425 $4,142,780 $391,681 $4,434,221 $662,795 $636,396 ================================================================================================================= Year Ended December 31, 1997: Individual Life $252,321 $ 920,924 $ 356 $ 16,334 $ 127,480 $ 54,647 West Coast 108,126 739,463 0 95,495 14,122 30,194 Acquisitions 138,052 1,025,340 1,437 311,151 102,635 110,155 Dental 22,459 120,925 6,541 80,564 193,239 24,202 Financial Institutions 52,837 159,422 391,085 6,791 72,263 16,462 Guaranteed Investment Contracts 1,785 180,690 0 2,684,676 0 211,915 Investment Products 56,074 177,150 0 1,184,268 12,367 105,321 Corporate and Other 1,083 380 1,438 183 229 38,480 ----------------------------------------------------------------------------------------------------------------- TOTAL $632,737 $3,324,294 $400,857 $4,379,462 $522,335 $591,376 ================================================================================================================= Year Ended December 31, 1996: Individual Life $220,232 $ 793,370 $ 685 $ 15,577 $116,710 $ 48,478 Acquisitions 156,172 1,117,159 1,087 251,450 106,543 106,015 Dental 27,944 119,010 5,957 83,632 188,633 16,540 Financial Institutions 32,040 119,242 253,153 1,880 73,422 13,941 Guaranteed Investment Contracts 1,164 149,756 0 2,474,728 0 214,369 Investment Products 50,657 149,742 0 1,120,557 8,189 98,767 Corporate and Other 175 170 55 192 656 19,373 ----------------------------------------------------------------------------------------------------------------- TOTAL $488,384 $2,448,449 $260,937 $3,948,016 $494,153 $517,483 ================================================================================================================= SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (con't) PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES (in thousands) COL. A COL. H COL. I COL. J Amortization Benefits of Deferred and Policy Other Settlement Acquisition Operating Segment Expenses Costs Expenses(1) Year Ended December 31, 1998: Individual Life $ 106,306 $ 30,543 $ 48,231 West Coast 54,617 4,924 5,354 Acquisitions 112,051 18,894 28,194 Dental 195,903 10,352 78,809 Financial Institutions 52,629 28,526 55,197 Guaranteed Investment Contracts 178,745 735 2,876 Investment Products 85,045 17,213 19,637 Corporate and Other 469 1 10,440 -------------------------------------------------------------------- TOTAL $785,765 $ 111,188 $ 248,738 ===================================================================== Year Ended December 31, 1997: Individual Life $114,678 $ 27,374 $ 37,921 West Coast 28,304 961 6,849 Acquisitions 116,506 16,606 24,050 Dental 134,384 15,711 52,365 Financial Institutions 27,643 30,812 21,120 Guaranteed Investment Contracts 179,235 618 3,946 Investment Products 82,019 15,110 15,749 Corporate and Other 339 35 15,617 --------------------------------------------------------------------- TOTAL $683,108 $ 107,227 $177,617 ===================================================================== Year Ended December 31, 1996: Individual Life $ 96,404 $ 28,393 $ 40,969 Acquisitions 118,181 17,162 25,186 Dental 143,944 5,326 52,956 Financial Institutions 42,781 24,900 11,660 Guaranteed Investment Contracts 169,927 509 3,851 Investment Products 73,093 14,710 15,323 Corporate and Other 710 30 12,247 --------------------------------------------------------------------- TOTAL $645,040 $ 91,030 $162,192 ===================================================================== (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, 1998: Life insurance in force $ 91,980,657 $ 64,846,246 $ 18,010,434 $ 45,144,845 39.9% ====================================================================================================================== Premiums and policy fees: Life insurance $ 537,000 $ 294,363 $ 87,964 $ 330,601 26.6% Accident/health insurance 456,378 164,852 14,279 305,805 4.7% Property and liability insurance 26,389 0 0 26,389 0.0% - ---------------------------------------------------------------------------------------------------------------------- TOTAL $1,019,767 $ 459,215 $ 102,243 $ 662,795 ====================================================================================================================== Year Ended December 31, 1997: Life insurance in force $ 78,240,282 $ 34,139,554 $ 11,013,202 $ 55,113,930 20.0% ======================================================================================================================= Premiums and policy fees: Life insurance $ 387,108 $ 147,184 $ 74,738 $ 314,662 23.8% Accident/health insurance 378,704 187,539 10,510 201,675 5.3% Property and liability insurance 6,139 176 35 5,998 0.6% - ----------------------------------------------------------------------------------------------------------------------- TOTAL $ 771,951 $ 334,899 $ 85,283 $ 522,335 ======================================================================================================================= 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 =======================================================================================================================
EXHIBITS TO FORM 10-K OF PROTECTIVE LIFE CORPORATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 INDEX TO EXHIBITS 3(a)........................................................... 3(b)........................................................... 13............................................................. 21............................................................. 23............................................................. 24............................................................. 27............................................................. 99............................................................. EX-3.(I) 2 RESOLUTION APPROVING RESTATED CERTIFICATE OF INCORPORATION RESOLVED, That the 1998 Restated Certificate of Incorporation of Protective Life Corporation in the form presented to the Board at this meeting is hereby approved; and FURTHER RESOLVED, That a copy of the 1998 Restated Certificate of Incorporation be filed in the Corporation's minute book for the purpose of identification. RESOLUTION APPROVING RESTATED BYLAWS RESOLVED, That the 1998 Restated Bylaws of Protective Life Corporation in the form presented to the Board at this meeting are hereby approved.; and FURTHER RESOLVED, That a copy of the 1998 Restated Bylaws be filed in the Corporation's minute book for the purpose of identification. EX-3.(II) 3 1998 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. 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 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 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 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 a majority vote of those shares present or represented by proxy and entitled to 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 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. 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. 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 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. 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 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. 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 Bylaws 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 Bylaws. 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 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. 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. 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 Bylaws 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. * * * * * EX-13 4 This report includes "forward looking statements" which express expectations of future events and/or results. All statements based on future expectations rather than on historical facts are forward-looking statements that involve a number of risks and uncertainties, and the Company cannot give assurance that such statements will prove to be correct. Please refer to Known Trends and Uncertainties herein for more information about factors which could affect future results. RESULTS OF OPERATIONS The Company operates seven divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. The Company's Divisions are: Individual Life, West Coast, Acquisitions, Dental and Consumer Benefits (Dental), Financial Institutions, Guaranteed Investment Contracts (GIC), and Investment Products. The Company also has an additional business segment which is Corporate and Other. PREMIUMS AND POLICY FEES The following table sets forth for the periods shown the amount of premiums and policy fees, net of reinsurance (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 1996 $494,153 14.2% 1997 522,335 5.7 1998 662,795 26.9 In 1997, premiums and policy fees increased $28.2 million or 5.7% over 1996. The Individual Life Division's premiums and policy fees increased $10.8 million. The June 1997 acquisition of West Coast Life Insurance Company (West Coast) increased premiums and policy fees $14.1 million. The coinsurance by the Acquisitions Division of a block of policies and the acquisition of a small life insurance company in late 1996 resulted in a $4.4 million increase in premiums and policy fees. Decreases in older acquired blocks resulted in an $8.3 million decrease in premiums and policy fees. The Dental Division's exit from the group major medical business during 1997 resulted in a $31.1 million decrease in premiums and policy fees. Premiums and policy fees related to the Dental Division's other businesses increased $35.7 million. Premiums and policy fees from the Financial Institutions Division decreased $1.2 million. Decreases of $10.2 million resulted from a reinsurance arrangement begun in 1995. Decreases of $17.1 million relate to the normal decrease in premiums on a closed block of credit insurance policies reinsured in 1996. The September 1997 acquisition of the Western Diversified Group (Western Diversified) and coinsurance of an unrelated closed block of credit insurance policies increased premiums and policy fees $26.1 million. The increase in premiums and policy fees from the Investment Products Division was $4.2 million. In 1998, premiums and policy fees increased $140.5 million or 26.9% over 1997. The Individual Life Division's premiums and policy fees decreased $1.3 million due to an increased use of reinsurance by the Division. The full year effect of the June 1997 acquisition of West Coast increased premiums and policy fees $8.3 million. In the Acquisitions Division, decreases in older acquired blocks resulted in a $9.5 million decrease in premiums and policy fees. The coinsurance of a block of policies from Lincoln National Corporation in October 1998 resulted in a $3.6 million increase in premiums and policy fees. The September 1998 acquisition of United Dental Care, Inc. (United Dental Care) resulted in a $53.3 million increase in premiums and policy fees. Premiums and policy fees related to the Dental Division's other businesses increased $39.7 million. The full year effect of the September 1997 acquisition of Western Diversified by the Financial Institutions Division and the coinsured block of credit insurance policies increased premiums and policy fees $49.8 million. The increase in premiums and policy fees from the Investment Products Division was $6.4 million. NET INVESTMENT INCOME The following table sets forth for the periods shown the amount of net investment income, the percentage change from the prior period, and the percentage earned on average cash and investments: NET INVESTMENT INCOME Percentage Earned Year Ended Amount Percentage on Average Cash December 31 (in thousands) Increase and Investments 1996 $517,483 8.7% 8.1% 1997 591,376 14.3 7.9 1998 636,396 7.6 7.5 Net investment income in 1997 was $73.9 million or 14.3% higher than in 1996, and in 1998 was $45.0 million or 7.6% higher than the preceding year, primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to acquisitions and to receiving annuity and GIC deposits. The coinsurance of a block of policies and the acquisition of a small life insurance company in late 1996, and the acquisition of West Coast, Western Diversified, and the block of credit insurance policies in 1997 resulted in an increase in net investment income of $39.4 million in 1997. The full year effect of the 1997 acquisitions resulted in an increase in net investment income of $43.1 million in 1998. The coinsurance of a block of policies from Lincoln National Corporation increased 1998 net investment income $6.0 million. The percentage earned on average cash and investments in 1997 was 7.9%, and in 1998 was 7.5%, each below that of the preceding year due to a general decline in interest rates. REALIZED INVESTMENT GAINS The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. 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 Year Ended Amount December 31 (in thousands) 1996 $5,510 1997 830 1998 3,121 The Company has an allowance for uncollectible amounts on investments. The allowance totaled $23.7 million at December 31, 1997, and $24.8 million at December 31, 1998. Realized investment gains in 1997 of $34.3 million were largely offset by realized investment losses of $33.5 million, including a loss of $6.9 million incurred in connection with the sale of $445 million of mortgage loans in a securitization transaction. Realized investment losses in 1997 were reduced by a $7.9 million reduction to the allowance for uncollectible amounts on investments. Realized investment gains in 1998 of $37.1 million were largely offset by realized investment losses of $34.0 million. Realized investment losses include a $1.1 million net increase to the allowance for uncollectible amounts on investments. OTHER INCOME The following table sets forth other income for the periods shown: OTHER INCOME Year Ended Amount December 31 (in thousands) 1996 $20,857 1997 32,784 1998 64,103 Other income consists primarily of revenues of the Company's broker-dealer subsidiary, fees from variable insurance products, revenues of the Company's wholly owned insurance marketing organizations and small noninsurance subsidiaries, and the results of the Company's 50%-owned joint venture in Hong Kong. In 1997, revenues from the Company's broker-dealer subsidiary increased $5.5 million. Other income from all other sources increased $6.4 million. In 1998, revenues from the Company's broker-dealer increased $13.8 million. The full year effect of the 1997 acquisition of Western Diversified increased other income $12.8 million. Other income from all other sources increased $4.7 million. INCOME BEFORE INCOME TAX The table below sets forth operating income or loss and income or loss before income tax by business segment for the periods shown: Operating Income and Income Before Income Tax Year Ended December 31 (IN THOUSANDS) 1996 1997 1998 OPERATING INCOME (1),(2) Life Insurance Individual Life $ 14,027 $ 20,384 $ 29,230 West Coast 8,202 20,983 Acquisitions 52,670 55,638 51,463 Specialty Insurance Products Dental 5,138 16,259 21,480 Financial Institutions 9,531 14,112 18,738 Retirement Savings and Investment Products GIC 40,082 28,116 30,780 Investment Products 9,624 11,347 12,567 Corporate and Other (2) 2,070 15,022 14,640 ------- ------- ------- Total operating income 133,142 169,080 199,881 ------- ------- ------- REALIZED INVESTMENT GAINS (LOSSES) Individual Life 3,098 GIC (7,963) (3,179) 1,609 Investment Products 3,858 589 1,318 Unallocated Realized Investment Gains 6,517 3,420 194 RELATED AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS Individual Life (1,974) Investment Products (1,887) (373) (890) ------- -------- -------- Total net 1,649 457 2,231 ------- -------- -------- Income Before Income Tax (2) Life Insurance Individual Life 15,151 20,384 29,230 West Coast 8,202 20,983 Acquisitions 52,670 55,638 51,463 Specialty Insurance Products Dental 5,138 16,259 21,480 Financial Institutions 9,531 14,112 18,738 Retirement Savings and Investment Products GIC 32,119 24,937 32,389 Investment Products 11,595 11,563 12,995 Corporate and Other (2) 2,070 15,022 14,640 Unallocated Realized Investment Gains 6,517 3,420 194 ------- -------- -------- Total income before income tax $ 134,791 $ 169,537 $ 202,112 ------- ------- -------- (1)Income before income tax excluding realized investment gains and losses and related amortization of deferred policy acquisition costs.(2)Operating income and income before income tax for the Corporate and Other segment have been reduced by pretax minority interest in income of consolidated subsidiaries of $4,950 in 1996, $9,836 in 1997, and $18,612 in 1998. Such minority interest relates to payments made on the Company's MIPS(SM), TOPrS(SM), and FELINE PRIDES(SM). The Individual Life Division had 1997 pretax operating income of $20.4 million, $6.4 million above 1996, even though the Division experienced record high mortality in the second quarter. The increase was primarily due to growth and improved expense control. The Division's 1998 pretax income was $29.2 million, $8.8 million above 1997. The Division's mortality experience was at expected levels in 1998 and approximately $5.1 million more favorable than 1997. Headquartered in San Francisco, West Coast was acquired by the Company in June 1997. For the seven months of 1997 that it was a subsidiary of the Company, the West Coast Division had pretax income of $8.2 million. The Division's 1998 pretax income was $21.0 million. In the ordinary course of business, the Acquisitions Division regularly considers acquisitions of blocks of policies or smaller insurance companies. Blocks of policies acquired through the Division are usually administered as "closed" blocks; i.e., no new policies are being marketed. Therefore, earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. The Acquisitions Division's 1997 pretax income increased $2.9 million to $55.6 million. The Division's mortality experience was approximately $6.0 million more favorable in 1997 than in 1996. In addition, the Division's newest acquisitions represented a $1.8 million increase in 1997 pretax income. The Acquisitions Division's 1998 pretax income decreased $4.2 million to $51.5 million, compared to 1997. The Division's mortality experience was at expected levels in 1998 compared to being approximately $5.1 million better than expected in 1997. In October 1998, the Division acquired approximately 260,000 policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. The Dental Division's 1997 pretax income was $16.3 million. Dental earnings were $11.1 million, an increase of $1.6 million, before expenses of $2.2 million to develop a discounted fee-for-service dental program. Lower cancer earnings partially offset improved results in other lines. The Division's results included approximately $4.6 million of earnings from the group major medical business which the Division exited. The Division's 1998 pretax income was $21.5 million. Dental earnings were $16.4 million, before a $2.5 million loss relating to its discounted fee-for-service dental program. In September 1998, the Company acquired United Dental Care, a leading provider of prepaid dental coverages. Dental earnings include $5.1 million from United Dental Care. The Financial Institutions Division's 1997 pretax income increased $4.6 million to $14.1 million. The Division's results include earnings from recent acquisitions. At the end of the 1997 third quarter, the Division acquired Western Diversified and coinsured an unrelated block of policies. The Division's 1998 pretax income increased $4.6 million to $18.7 million. Western Diversified and the coinsured block of policies represented $2.8 million of the increase. The GIC Division had pretax operating income of $28.1 million in 1997. Several factors contributed to the 1997 decline from 1996. In December 1996, the Company sold a major portion of its bank loan participations in a securitization transaction which had the effect of reducing the Division's earnings and increasing earnings in the Corporate and Other segment. In order to better match assets to liabilities on a divisional level, the Company shortened the duration of the GIC Division's invested assets and lengthened the duration of the other Divisions' invested assets. As a result, GIC earnings were reduced and earnings of the other Divisions were increased. The Division's 1998 pretax operating income increased to $30.8 million due to increased investment income. Realized investment losses associated with this Division in 1997 were $3.2 million as compared to realized investment gains of $1.6 million in 1998. As a result, total pretax income was $24.9 million in 1997 and $32.4 million in 1998. The Investment Products Division's 1997 pretax operating income was $11.4 million, an increase of $1.7 million. The Division's 1998 pretax operating income was $12.6 million, an increase of $1.2 million. Realized investment gains, net of related amortization of deferred policy acquisition costs, were $0.2 million in 1997 as compared with $0.4 million in 1998. As a result, total pretax income was $11.6 million in 1997 and $13.0 million in 1998. 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, earnings from various investment-related transactions, and the operations of several small subsidiaries. The segment's pretax income increased $12.9 million to $15.0 million in 1997. In 1997, the Company sold its interest in a joint venture resulting in income of $4.1 million. The remaining increase in earnings relates primarily to net investment income on capital, income from the Company's participation commercial mortgage loan program, and income from a securitization transaction. The segment's 1998 pretax earnings were $14.6 million, slightly below last year. 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 1996 34.0% 1997 34.0 1998 35.3 Management's current estimate of the effective income tax rate for 1999 is approximately 36%. The increase in the effective income tax rate primarily relates to non-deductible goodwill associated with the acquisition of United Dental Care. NET INCOME The following table sets forth net income and net income per share for the periods shown: NET INCOME Per Per Year Ended Amount Share- Percentage Share- Percentage December 31 (in thousands) Basic Increase Diluted Increase 1996 $ 89,012 $1.47 9.7% $1.46 9.8% 1997 111,993 1.79 21.8 1.78 21.9 1998 130,781 2.06 15.1 2.04 14.6 Net income per share-basic in 1997 increased 21.8%, reflecting improved operating earnings in the Individual Life, West Coast, Acquisitions, Dental, Financial Institutions, and Investment Products Divisions and the Corporate and Other segment, which were partially offset by lower operating earnings in the GIC Division and lower realized investment gains (net of related amortization of deferred policy acquisition costs). Net income per share-basic in 1998 increased 15.1%, reflecting improved operating earnings in the Individual Life, West Coast, Dental, Financial Institutions, Guaranteed Investment Contracts and Investment Products Divisions, and higher realized investment gains (net of related amortization of deferred policy acquisition costs), which were partially offset by lower operating earnings in the Acquisitions Division and the Corporate and Other segment. KNOWN TRENDS AND UNCERTAINTIES The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of the Company are discussed more fully below. Please also refer to Other Developments herein. o MATURE INDUSTRY/COMPETITION. Life and health insurance is a mature industry. In recent years, the industry has experienced little growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Insurance is a highly competitive industry, and the Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than the Company, as well as competition from other providers of financial services. The life and health insurance industry is consolidating with larger, more efficient organizations emerging from consolidation. Also, mutual insurance companies are converting to stock ownership which will give them greater access to capital markets. Management believes that the Company's ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong financial strength ratings from rating agencies. The Company competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. o 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 retain existing business and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. For the past several years, rating downgrades in the industry have exceeded upgrades. o POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year to year on account of fluctuations in policy claims received by the Company. o LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the Company's insurance subsidiaries allow policyholders and contractholders to withdraw their funds under defined circumstances. The Company's insurance subsidiaries design products and configure investment portfolios to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. Formal asset/liability management programs and procedures are used 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 insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on the Company. o INTEREST RATE FLUCTUATIONS. Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited rates paid on outstanding policies. Both rising and declining interest rates can negatively affect the Company's spread income. For example, certain of the Company's insurance and investment products guarantee a minimum credited rate. While the Company develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that significant changes in interest rates will not materially affect such spreads. Lower interest rates may result in lower sales of the Company's insurance and investment products. o REGULATION AND TAXATION. The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power over all aspects of the insurance business which may include premium rates, marketing practices, advertising, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than share owners. 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 with respect to their ability to sell such products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. The Company cannot predict what future tax initiatives may be proposed which may affect the Company. o LITIGATION. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation or alternatively in arbitration. The outcome of any such litigation or arbitration cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. o Investment Risks. The Company's invested assets are subject to customary risks of credit 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 which the Company has financed. Factors that may affect the overall default rate on, and market value of, the Company's invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual borrowers and tenants. o Continuing Success of Acquisition Strategy. The Company has actively pursued a strategy of acquiring blocks of insurance policies and companies. This acquisition strategy has increased the Company's earnings in part by allowing the Company to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to the Company, or that the Company will realize the anticipated financial results from its acquisitions. o RELIANCE ON THE PERFORMANCE OF OTHERS. The Company's results may be affected by the performance of others because the Company has entered into various ventures involving other parties. Examples include, but are not limited to: many of the Company's products are sold through independent distribution channels; the Investment Products Division's variable annuity deposits are invested in funds managed by unaffiliated investment managers; a portion of the sales in the Individual Life, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations; and the Company has entered the Hong Kong insurance market in a joint venture. o YEAR 2000. Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98." It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather than the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including the Company, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. Due to the fact that the Company does not control all of the factors that could impact its Year 2000 readiness, there can be no assurances that the Company's Year 2000 efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. Should some of the Company's systems not be available due to the Year 2000 problems, in a reasonably likely worst case scenario, the Company may experience significant delays in its ability to perform certain functions, but does not expect to be unable to perform critical functions or to otherwise conduct business. However, other worst case scenarios, depending upon their duration, could have a material adverse effect on the Company and its operations. o REINSURANCE. The Company's insurance subsidiaries cede insurance to other insurance companies. However, the Company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations ceded to it. The cost of reinsurance is, in some cases, reflected in the premium rates charged by the Company. Under certain reinsurance agreements, the reinsurer may increase the rate it charges the Company for the reinsurance, though the Company does not anticipate increases to occur. Therefore, if the cost of reinsurance were to increase with respect to policies where the rates have been guaranteed by the Company, the Company could be adversely affected. 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 The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 will require the Company to report derivative financial instruments on the balance sheet and to carry such derivatives at fair value. The fair values of derivatives increase or decrease as interest rates change. Under SFAS No. 133, changes in fair value are reported as a component of net income or as a change to share-owners' equity, depending upon the nature of the derivative. Although the adoption of SFAS No. 133 will not affect the Company's operations, adoption will introduce volatility into the Company's reported net income and share-owners' equity as interest rates change. SFAS No. 133 is effective January 1, 2000. The FASB has also issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," and the American Institute of Certified Public Accountants has issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of these accounting standards in 1999 is not expected to have a material effect on the Company's financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company's operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments. Since future benefit payments largely represent medium- and long-term obligations reserved using certain assumed interest rates, the Company's investments are predominantly in medium- and long-term, fixed-rate investments such as bonds and mortgage loans. INVESTMENTS 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 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, 1998, the fixed maturity investments (bonds and redeemable preferred stocks) had a market value of $6,437.8 million, which is 1.7% above amortized cost (less allowances for uncollectible amounts on investments) of $6,329.9 million. The Company had $1,622.9 million in mortgage loans at December 31, 1998. While the Company's mortgage loans do not have quoted market values, at December 31, 1998, the Company estimates the market value of its mortgage loans to be $1,774.4 million (using discounted cash flows from the next call date) which is 9.3% above amortized cost. Most of 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 are not expected to adversely affect liquidity. The following table sets forth the estimated market values of the Company's fixed maturity investments and mortgage loans resulting from a hypothetical immediate 1 percentage point increase in interest rates from levels prevailing at December 31, 1998, and the percent change in market value the following estimated market values would represent. ESTIMATED MARKET VALUES RESULTING FROM AN IMMEDIATE 1 PERCENTAGE POINT INCREASE IN INTEREST RATES Amount Percent (in millions) Change Fixed maturities $6,220.8 (3.4)% Mortgage loans 1,703.8 (4.0) Estimated market values were derived from the durations of the Company's fixed maturities and mortgage loans. Duration measures the relationship between changes in market value to changes in interest rates. While these estimated market values generally provide an indication of how sensitive the market values of the Company's fixed maturities and mortgage loans are to changes in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates. For several years the Company has offered a type of commercial mortgage 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. As of December 31, 1998, approximately $464.4 million of the Company's mortgage loans have this participation feature. At December 31, 1998, delinquent mortgage loans and foreclosed properties were 0.1% of invested assets. Bonds rated less than investment grade were 2.1% of invested 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 $24.8 million at December 31, 1998. Policy loans at December 31, 1998, were $232.7 million, a decrease of $5.2 million from December 31, 1997, (after excluding the $43.8 million of policy loans obtained through acquisitions). Policy loan rates are generally in the 4.5% to 8.0% range. Such rates at least equal the assumed interest rates used for future policy benefits. In the ordinary course of its commercial mortgage lending operations, the Company will commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in the Company's financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest. At December 31, 1998, the Company had outstanding mortgage loan commitments of $715.9 million, having an estimated fair value of $752.6 million (using discounted cash flows from the first call date). If interest rates were to, hypothetically, immediately increase 1 percentage point from levels prevailing at December 31, 1998, the estimated fair value would decrease 5.1% to $713.9 million. The estimated fair value was derived from the durations of the Company's outstanding mortgage loan commitments. LIABILITIES Many of the Company's products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Surrender charges for these products generally are sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. GICs and certain annuity contracts have market-value adjustments that protect the Company against investment losses if interest rates are higher at the time of surrender than at the time of issue. At December 31, 1998, the Company had policy liabilities and accruals of $4,534.5 million. The Company's life insurance products have a weighted average minimum credited interest rate of approximately 4.3%. At December 31, 1998, the Company had $2,691.7 million of GIC account balances having an estimated fair value of $2,751.0 million (using discounted cash flows), and $1,519.8 million of annuity account balances having an estimated fair value of $1,513.1 million (using surrender value). The following table sets forth the estimated fair values of the Company's GIC and annuity account balances resulting from a hypothetical immediate 1 percentage point decrease in interest rates from levels prevailing at December 31, 1998, and the percent change in fair value the following estimated fair values would represent. ESTIMATED FAIR VALUES RESULTING FROM AN IMMEDIATE 1 PERCENTAGE POINT DECREASE IN INTEREST RATES Amount Percent (in millions) Change GIC account balances $2,791.7 1.5 % Annuity account balances 1,565.5 3.5 Estimated fair values were derived from the durations of the Company's GIC and annuity account balances. While these estimated fair values generally provide an indication of how sensitive the fair values of the Company's GIC and annuity account balances are to change in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates. DERIVATIVE FINANCIAL INSTRUMENTS The Company does not currently use derivative financial instruments for trading purposes. Combinations of options and futures contracts are sometimes used as hedges against changes in interest rate for certain investments, primarily outstanding mortgage loan commitments, mortgage loans, and mortgage-backed securities, and liabilities arising from interest-sensitive products. At December 31, 1998, options with a notional amount of $975.0 million were in a $0.5 million net unrealized loss position. The Company uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to convert certain investments from a variable rate of interest to a fixed rate of interest and from a fixed rate to a variable rate of interest, and to convert a portion of its Senior Notes, Medium-Term Notes, Monthly Income Preferred Securities, and Trust Originated Preferred Securities from a fixed rate to a variable rate of interest. Swap contracts are also used to alter the effective durations of assets and liabilities. At December 31, 1998, interest rate swap contracts, swaptions, caps and floors with a notional amount of $973.1 million were in a $12.1 million net unrealized gain position, of which a cumulative amount of $3.2 million has been recognized in net income. The following table sets forth the notional amount and net unrealized gains and losses of the Company's derivative financial instruments at December 31, 1998, and the estimated net unrealized gains and losses resulting from a hypothetical immediate plus and minus 1 percentage point change in interest rates from levels prevailing at December 31, 1998.
NET UNREALIZED GAIN(LOSS) RESULTING FROM AN IMMEDIATE +/-1 PERCENTAGE AT POINT CHANGE NOTIONAL DECEMBER 31, IN INTEREST RATES AMOUNT 1998 +1% -1% (in millions) Options Puts $975.0 $ (0.5) $ 1.2 $ 0.0 Fixed to floating Swaps 415.3 (4.7) (2.3) (7.5) Swaptions 35.0 0.8 (0.8) (1.0) Caps 95.0 0.1 (0.2) 0.0 Floors 35.0 (0.6) (0.2) (1.4) Floating to fixed Swaps 392.8 16.5 2.9 30.9 -------- ------ ------ ----- $1,948.1 $11.6 $ 0.6 $21.0 -------- ------ ------ -----
Estimated unrealized gains and losses were derived using pricing models specific to derivative financial instruments. While these estimated unrealized gains and losses generally provide an indication of how sensitive the Company's derivative financial instruments are to changes in interest rates, they do not represent management's view of future market changes, and actual market results may differ from these estimates. The Company is exploring other uses of derivative financial instruments. ASSET/LIABILITY MANAGEMENT The Company believes certain product features and its asset/liability management programs and procedures provide significant protection for the Company against the effects of changes in interest rates. 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 duration, yield, risk, and cash flow characteristics. It is the Company's policy to generally maintain asset and liability durations within one-half year of one another, although, from time to time, a broader interval may be allowed. Withdrawals related to GICs were approximately $1.0 billion during 1998. Withdrawals related to GICs are estimated to be approximately $900 million in 1999. The Company's asset/liability management programs and procedures take into account GIC withdrawals. Accordingly, the Company does not expect GIC withdrawals to have an unusual effect on the future operations and liquidity of the Company. The life insurance subsidiaries were committed at December 31, 1998, to fund mortgage loans in the amount of $715.9 million. The Company's subsidiaries held $225.2 million in cash and short-term investments at December 31, 1998. Protective Life Corporation had an additional $0.5 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. The Company has also used securitization transactions to increase its liquidity. In 1997, the Company sold approximately $445 million of its commercial mortgage loans in a securitization transaction. Proceeds from the sale consisted of cash of approximately $328 million, net of expenses, and securities issued in the securitization transaction of approximately $110 million. In 1998, the Company sold approximately $146 million of its commercial mortgage loans in a securitization transaction. Proceeds from the sale consisted of cash of approximately $104 million, net of expenses, and securities issued in the securitization transaction of approximately $42 million. CAPITAL At December 31, 1998, Protective Life Corporation had $30.0 million of borrowings outstanding under its $70.0 million revolving line of credit and an additional $18.5 million of bank borrowings at a weighted interest rate of 5.6%. The increase in borrowing primarily relates to the acquisition of United Dental Care. Protective Life Corporation's cash flow is dependent on cash dividends and payments on surplus notes from its subsidiaries, revenues from investment, data processing, legal and management services rendered to subsidiaries, and investment income. At December 31, 1998, approximately $274.6 million of consolidated share-owners' equity, excluding net unrealized investment gains and losses, represented net assets of the Company's insurance subsidiaries that cannot be transferred to Protective Life Corporation. 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. The Company plans to retain substantial portions of the earnings of its insurance subsidiaries in those companies primarily to support their future growth. Protective Life Corporation's cash disbursements have, from time to time, exceeded its cash receipts, and these shortfalls have been funded through various external financings. Therefore, Protective Life Corporation may, from time to time, require additional external financing. To give the Company flexibility in connection with future acquisitions and other growth opportunities, the Company has registered common stock under the Securities Act of 1933 on a delayed (or shelf) basis. In connection with the acquisition of United Dental Care, the Company issued 2,660,165 shares of Company Common Stock. During 1997, a special purpose finance subsidiary of the Company, PLC Capital Trust I issued $75 million of 8.25% Trust Originated Preferred Securities (TOPrS), guaranteed on a subordinated basis by the Company. The TOPrS are redeemable by PLC Capital Trust I at any time on or after April 29, 2002. Net proceeds of approximately $72.6 million were used to repay bank borrowings. Also during 1997, another special purpose finance subsidiary, PLC Capital Trust II, issued $115 million of FELINE PRIDESSM which are comprised of a stock purchase contract and a beneficial ownership of 6.5% TOPrS. Under the stock purchase contract, on February 16, 2001, the holders will purchase shares of the Company's Common Stock from the Company. The holders may generally settle the contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS back to the Company. The shares of Common Stock issuable range from approximately 3.5 million shares if the price of the Company's Common Stock is greater than or equal to $32.52 to approximately 4.3 million shares if the stock price is less than or equal to $26.66. The 6.5% TOPrS are guaranteed on a subordinated basis by the Company. Net proceeds of approximately $111 million were invested in the Company's insurance subsidiaries and used to repay bank borrowings. A life insurance company's statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or equity contributions by the Company. OTHER DEVELOPMENTS The NAIC has adopted the Codification of Statutory Accounting Principles (Codification). The Codification changes current statutory accounting rules in several areas. The Company has not estimated the potential effect the Codification will have on the statutory capital of the Company's insurance subsidiaries. The Codification has been proposed to become effective January 1, 2001. The NAIC is considering a new reserving standard, commonly referred to as "Triple X" (i.e., roman numeral XXX), for universal life and level premium term-like insurance products. The Company is currently assessing the impact of Triple X on its products and what changes to the products might be necessary in response to Triple X. Under insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe that any such assessments will be materially different from amounts already reflected in the financial statements. 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. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. The President's Fiscal Year 2000 Budget contains proposals that, if enacted, would adversely affect the life insurance industry. The first proposal would require insurers to include in taxable income over 10 years the balances accumulated in a tax memorandum account designated as Policyholders' Surplus. The Company's accumulation in this account at December 31, 1998 was approximately $70.5 million. A second proposal would require insurers to capitalize higher percentages of acquisition expenses for tax purposes, resulting in the earlier payment of tax. A third proposal would reduce the attractiveness of corporate-owned life insurance (or COLI) products. Life insurance products are often used to fund estate tax obligations. Recently a report issued by the Congressional Joint Economic Committee recommended the elimination of the estate tax. If the estate tax were eliminated, the demand for certain life insurance products would be adversely affected. Some insurers have recently lowered the premium rates for their level premium term and term-like products. The Company's Individual Life and West Coast Divisions are currently developing a response. Those Divisions' results, in part, depend upon their ability to maintain competitive level premium term and term-like products. YEAR 2000 DISCLOSURE Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98."It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather than the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including the Company, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. The Company began work on the Year 2000 problem in 1995. At that time, the Company identified and assessed the Company's critical mainframe systems, and prioritized the remediation efforts that were to follow. During 1998 all other hardware and software, including non-information technology (non-IT) related hardware and software, were included in the process. The Company's Year 2000 plan includes all subsidiaries. The Company estimates that Year 2000 remediation is complete for most of its insurance administration and general administration systems. Of the general administration systems that are not yet remediated, the majority are new systems that were implemented during 1998 and are scheduled to be upgraded to the current release of the system during the second quarter of 1999. All remediated systems are currently in production. Personal computer network hardware and software have been reviewed, with upgrades implemented where necessary. A review of personal computer desktop software is in progress, but not complete. All Year 2000 personal computer preparations are expected to be completed by June 30, 1999. With respect to non-IT equipment and processes, the assessment and remediation is progressing on schedule and all known issues are expected to be remediated before December 31, 1999. Two insurance administration systems identified as mission critical are not yet fully remediated. A personal computer database system that processes member information for one subsidiary is currently being remediated. This effort is on schedule and targeted to be complete by June 30, 1999. Also, another personal computer application, which processes policy information for one line of business, is being re-written and is currently in test. This system is targeted to be in production by April 30, 1999. Future date tests are used to verify a system's ability to process transactions dated up to and beyond January 1, 2000. Future date tests are complete or in-progress for the majority of the Company's mission-critical systems. A large portion of the testing is conducted by a contract programming staff dedicated full time to Year 2000 preparations. These resources have been part of the Company's Year 2000 project since 1995. Integrated tests involve multiple system testing and are used to verify the Year 2000 readiness of interfaces and connectivity across multiple systems. The Company is using its mainframe computer to simulate a Year 2000 production environment and to facilitate integrated testing. Integrated testing will continue throughout 1999. Business partners and suppliers that provide products or services critical to the Company's operations are being reviewed and in some cases their Year 2000 preparations are being monitored by the Company. To date, no partners or suppliers have reported that they expect to be unable to continue supplying products and services after January 1, 2000. Initial reviews are targeted to be completed in the first quarter of 1999. Monitoring and testing of critical partners and suppliers will continue throughout 1999. Formal contingency planning will begin in March 1999 and continue throughout the year. These plans will augment the Company's existing disaster recovery plans. The Company cannot specifically identify all of the costs to develop and implement its Year 2000 plan. The cost of new systems to replace non-compliant systems have been capitalized in the ordinary course of business. Other costs have been expensed as incurred. Through December 31, 1998, costs that have been specifically identified as relating to the Year 2000 problem total $3.9 million, with an additional $1.3 million estimated to be required to support continued testing activity. The Company's Year 2000 efforts have not adversely affected its normal procurement and development of information technology. Although the Company believes that a process is in place to successfully address Year 2000 issues, there can be no assurances that the Company's efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. Should some of the Company's systems not be available due to Year 2000 problems, in a reasonably likely worst case scenario, the Company may experience significant delays in its ability to perform certain functions, but does not expect to be unable to perform critical functions or to otherwise conduct business. IMPACT OF INFLATION Inflation increases the need for life insurance. Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefits and protection. The higher interest rates that have traditionally accompanied inflation may also affect 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. In addition, the market value of the Company's fixed-rate, long-term investments may decrease, the Company may be unable to implement fully the interest rate reset and call provisions of its mortgage loans and the Company's ability to make attractive mortgage loans, including participating mortgage loans, may decrease. The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates. Inflation also increases the level of claims of the Company's health insurance products.
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 (Dollars in thousands except per share amounts) 1998 1997 1996 Revenues Premiums and policy fees $1,122,010 $ 856,549 $ 802,327 Reinsurance ceded (459,215) (334,214) (308,174) - ------------------------------------------------------------------------------------------------------------- Net of reinsurance ceded 662,795 522,335 494,153 Net investment income 636,396 591,376 517,483 Realized investment gains 3,121 830 5,510 Other income 64,103 32,784 20,857 - ------------------------------------------------------------------------------------------------------------- Total revenues 1,366,415 1,147,325 1,038,003 - ------------------------------------------------------------------------------------------------------------- Benefits and expenses Benefits and settlement expenses (net of reinsurance ceded: 1998 - $330,494; 1997 - $180,605; 1996 - $215,424) 785,765 683,108 645,040 Amortization of deferred policy acquisition costs 111,188 107,227 91,030 Other operating expenses (net of reinsurance ceded: 1998 - $166,375; 1997 - $90,045; 1996 - $81,839) 248,738 177,617 162,192 - ------------------------------------------------------------------------------------------------------------ Total benefits and expenses 1,145,691 967,952 898,262 - ------------------------------------------------------------------------------------------------------------ Income before income tax 220,724 179,373 139,741 - ------------------------------------------------------------------------------------------------------------ Income tax expense Current 48,807 78,799 47,522 Deferred 29,038 (17,812) (10) - ------------------------------------------------------------------------------------------------------------ Total income tax expense 77,845 60,987 47,512 - ------------------------------------------------------------------------------------------------------------ Income before minority interest 142,879 118,386 92,229 Minority interest in income of consolidated subsidiaries 12,098 6,393 3,217 - ------------------------------------------------------------------------------------------------------------ Net income $ 130,781 $ 111,993 $ 89,012 ============================================================================================================ Net income per share - basic $ 2.06 $ 1.79 $ 1.47 Net income per share - diluted $ 2.04 $ 1.78 $ 1.46 - ------------------------------------------------------------------------------------------------------------ Cash dividends paid per share $ .43 $ .39 $ .35 - ------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS December 31 (Dollars in thousands) 1998 1997 Assets Investments: Fixed maturities, at market (amortized cost: 1998 - $6,329,899; 1997 - $6,2$7,947) $6,437,756 $6,374,328 Equity securities, at market (cost: 1998 - $15,151; 1997 - $24,983) 12,258 15,006 Mortgage loans 1,622,903 1,312,778 Investment real estate, net of accumulated depreciation (1998 - $782; 1997 - $671) 14,868 13,602 Policy loans 232,670 194,109 Other long-term investments 69,906 63,511 Short-term investments 216,249 76,086 - ------------------------------------------------------------------------------------------------------------- Total investments 8,606,610 8,049,420 Cash 9,486 47,502 Accrued investment income 102,359 95,616 Accounts and premiums receivable, net of allowance for uncollectible amounts (1998 - $4,304; 1997 - $5,292) 40,794 47,784 Reinsurance receivables 756,370 591,613 Deferred policy acquisition costs 841,425 632,737 Goodwill, net 202,615 43,428 Property and equipment, net 50,585 36,957 Other assets 76,211 35,113 Assets related to separate accounts Variable annuity 1,285,952 924,406 Variable universal life 13,606 3,634 Other 3,482 3,425 - -------------------------------------------------------------------------------------------------------------- $11,989,495 $10,511,635 ==============================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS December 31 (Dollars in thousands) 1998 1997 Liabilities Policy liabilities and accruals Future policy benefits and claims $ 4,142,780 $ 3,324,294 Unearned premiums 391,681 400,857 Total policy liabilities and accruals 4,534,461 3,725,151 Guaranteed investment contract account balances 2,691,697 2,684,676 Annuity account balances 1,519,820 1,511,553 Other policyholders' funds 222,704 183,233 Other liabilities 327,108 306,241 Accrued income taxes (15,200) 4,907 Deferred income taxes 44,636 41,212 Short-term debt 19,749 Long-term debt 152,286 120,000 Liabilities related to separate accounts Variable annuity 1,285,952 924,406 Variable universal life 13,606 3,634 Other 3,482 3,425 - -------------------------------------------------------------------------------------------------------------- Total liabilities 10,800,301 9,508,438 - -------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities - - Note F - -------------------------------------------------------------------------------------------------------------- Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures 9% Cumulative Monthly Income Preferred Securities, Series A 55,000 55,000 8.25% Trust Originated Preferred Securities 75,000 75,000 6.5% FELINEPRIDES 115,000 115,000 - ------------------------------------------------------------------------------------------------------------- Total guaranteed preferred beneficial interests 245,000 245,000 - ------------------------------------------------------------------------------------------------------------- Share-owners' 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 34,667 33,336 Shares authorized: 1998 - 160,000,000; 1997 - 80,000,000 Issued: 1998 - 69,333,117; 1997 - 66,672,924 Additional paid-in capital 254,705 167,923 Treasury stock, at cost (1998 - 4,898,100 shares; 1997 - 5,030,640 shares) (13,140) (13,455) Unallocated stock in Employee Stock Ownership Plan (1998 - 1,291,194 shares; 1997 - 1,386,244 shares) (4,277) (4,592) Retained earnings 617,182 513,258 Accumulated other comprehensive income Net unrealized gains on investment (net of income tax: 1998 - $29,646; 1997 - $33,238) 55,057 61,727 - -------------------------------------------------------------------------------------------------------------- Total share-owners' equity 944,194 758,197 - -------------------------------------------------------------------------------------------------------------- $11,989,495 $10,511,635 ==============================================================================================================
CONSOLIDATED STATEMENTS OF SHARE-OWNERS' EQUITY Additional Unallocated Net Unrealized Total (Dollars in thousands Common Paid-In Treasury Stock in Retained Gains (Losses) Share-Owners' except per share amounts) Stock Capital Stock ESOP Earnings on Investments Equity - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $ 31,336 $ 96,371 $(12,008) $(5,259) $358,254 $57,863 $526,557 ---------- Net income for 1996 89,012 89,012 Decrease in net unrealized gains on investments (net of income tax - $(25,628) (47,593) (47,593) Reclassification adjustment for amounts included in net income (net of income tax - $(1,928)) (3,582) (3,582) --------- Comprehensive income for 1996 37,837 --------- Cash dividends (20,888) (20,888) Issuance of common stock 2,000 69,546 (1,000) 70,546 Reissuance of treasury stock 220 41 261 Reissuance of treasury stock to ESOP 576 93 (669) 0 Allocation of stock to employee accounts 1,003 1,003 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 33,336 166,713 (11,874) (4,925) 425,378 6,688 615,316 --------- Net income for 1997 111,993 111,993 Increase in net unrealized gains on investments (net of income tax - $29,927) 55,579 55,579 Reclassification adjustment for amounts included in net income (net of income tax - $(290)) (540) (540) --------- Comprehensive income for 1997 167,032 --------- Cash dividends (24,113) (24,113) Purchase of treasury stock (1,839) (1,839) Reissuance of treasury stock 1,135 248 1,383 Reissuance of treasury stock to ESOP 75 10 (85) 0 Allocation of stock to employee accounts 418 418 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 33,336 167,923 (13,455) (4,592) 513,258 61,727 758,197 --------- Net income for 1998 130,781 130,781 Decrease in net unrealized gains on investments (net of income tax - $(2,499)) (4,641) (4,641) Reclassification adjustment for amounts included in net income (net of income tax - $(1,092)) (2,029) (2,029) --------- Comprehensive income for 1998 124,111 --------- Cash dividends (26,857) (26,857) Issuance of common stock 1,331 83,795 85,126 Reissuance of treasury stock 2,797 300 3,097 Reissuance of treasury stock to ESOP 190 15 (205) 0 Allocation of stock to employee accounts 520 520 - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 34,667 $254,705 $(13,140) $(4,277) $617,182 $55,057 $944,194 - - Note G =============================================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 (Dollars in thousands) 1998 1997 1996 ======================================================================================================================= Cash flows from operating activities Net income $ 130,781 $ 111,993 $ 89,012 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs 111,188 107,227 91,030 Capitalization of deferred policy acquisition costs (215,359) (135,211) (77,078) Depreciation expense 7,251 5,441 7,484 Deferred income taxes 5,671 (26,270) 8,458 Accrued income taxes (20,107) 4,783 (14,603) Amortization of goodwill 2,778 1,410 957 Interest credited to universal life and investment products 352,721 299,004 280,377 Policy fees assessed on universal life and investment products (139,689) (131,582) (116,401) Change in accrued investment income and other receivables (152,672) (161,727) (74,116) Change in policy liabilities and other policyholders' funds of traditional life and health products 317,292 279,522 134,441 Change in other liabilities (90) 72,778 17,301 Other, net (24,000) (18,903) (16,656) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 375,765 408,465 330,206 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities Maturities and principal reductions of investments: Investments available for sale 10,663,499 6,478,663 1,377,723 Other 198,559 324,242 168,898 Sale of investments: Investments available for sale 1,082,765 1,110,058 1,591,669 Other 155,906 695,270 568,218 Cost of investments acquired: Investments available for sale (11,854,401) (8,465,132) (3,903,403) Other (662,350) (718,335) (400,322) Acquisitions and bulk reinsurance assumptions (76,896) (171,560) 264,126 Purchase of property and equipment (7,878) (6,525) (7,848) Sale of property and equipment 2,681 856 - ------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (500,796) (750,638) (340,083) - ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities Borrowings under line of credit arrangements and long-term debt 2,029,049 1,339,438 1,107,372 Principal payments on line of credit arrangements and long-term debt (1,977,014) (1,400,438) (1,042,372) Issuance of guaranteed preferred beneficial interests 190,000 Purchase of treasury stock (1,839) Dividends to share owners (26,857) (24,113) (20,888) Issuance of common stock 85,126 70,546 Investment product deposits and change in universal life deposits 1,014,135 910,659 949,122 Investment product withdrawals (1,037,424) (745,083) (944,244) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 87,015 268,624 119,536 - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash (38,016) (73,549) 109,659 Cash at beginning of year 47,502 121,051 11,392 - ------------------------------------------------------------------------------------------------------------------------ Cash at end of year $ 9,486 $ 47,502 $ 121,051 ======================================================================================================================== Supplemental disclosures of cash flow information Cash paid during the year: Interest on debt $ 15,923 $ 12,588 $ 11,024 Income taxes $ 62,588 $ 71,535 $ 47,741 ======================================================================================================================== Supplemental schedule of noncash investing and financing activities Reissuance of treasury stock to ESOP $ 205 $ 85 $ 669 Unallocated stock in ESOP $ 315 $ 333 $ 334 Reissuance of treasury stock $ 3,097 $ 1,383 $ 261 Acquisitions and related reinsurance transactions: Assets acquired $ 446,570 $1,115,171 $ 296,935 Liabilities assumed (380,630) (902,357) (364,862) Issuance of common stock (85,126) Reissuance of treasury stock (3,005) - ------------------------------------------------------------------------------------------------------------------------ Net $ (22,191) $ 212,814 $ (67,927) ========================================================================================================================
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements of Protective Life Corporation and subsidiaries (the Company) are prepared on the basis of generally accepted accounting principles. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note J.) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. ENTITIES INCLUDED The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Corporation and its wholly owned subsidiaries. Additionally, the financial statements include the accounts of majority-owned subsidiaries. The ownership interest of the other share owners of these subsidiaries is reported as a liability of the Company and as an adjustment to income. (See also Note D.) NATURE OF OPERATIONS Protective Life Corporation is a holding company whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. The Company markets individual life insurance, indemnity and prepaid dental products, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, and fixed and variable annuities throughout the United States. The Company also maintains a separate division devoted exclusively to the acquisition of insurance policies from other companies, and participates in a joint venture which owns a life insurance company in Hong Kong. Founded in 1907, Protective Life Insurance Company (Protective Life) is the Company's principal operating subsidiary. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. RECENTLY ISSUED ACCOUNTING STANDARDS In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities;" SFAS No. 128,"Earnings per Share;" SFAS No.130, "Reporting Comprehensive Income;" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." The adoption of these accounting standards did not have a material effect on 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: o Fixed maturities (bonds and redeemable preferred stocks) - at current market value. o Equity securities (common and nonredeemable preferred stocks) - at current market value. o Mortgage loans - at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount. o Investment real estate - at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value. o Policy loans - at unpaid balances. o Other long-term investments - at a variety of methods similar to those listed above, as deemed appropriate for the specific investment. o Short-term investments - at cost, which approximates current market value. Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $0.9 million in bank deposits voluntarily restricted as to withdrawal. As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component ofshare-owners' 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 share-owners' 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: 1998 1997 Total investments $ 8,501,646 $ 7,933,017 Deferred policy acquisition costs 857,948 654,175 All other assets 2,545,197 1,829,478 ---------- ---------- $ 11,904,791 $ 10,416,670 ========== ========== Deferred income taxes $ 12,798 $ 7,974 All other liabilities 10,757,856 9,467,226 ---------- ---------- 10,770,654 9,475,200 ---------- ---------- Guaranteed preferred beneficial interests in Company's subordinated debentures 245,000 245,000 ---------- ---------- Share-owners' equity 889,137 696,470 ---------- ---------- $ 11,904,791 $ 10,416,670 ========== ========== 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 currently use derivative financial instruments for trading purposes. Combinations of options and futures contracts are sometimes used as hedges against changes in interest rates for certain investments, primarily outstanding mortgage loan commitments, mortgage loans, and mortgage-backed securities, and liabilities arising from interest-sensitive products. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. No realized investment gains or losses were deferred in 1998. Net realized gains of $1.5 million were deferred in 1997. At December 31, 1998 and 1997, options and open futures contracts with notional amounts of $975.0 million and $925.0 million, respectively, had net unrealized losses of $0.5 million and $0.4 million, respectively. The Company uses interest rate swap contracts, swaptions (options to enter into interest rate swap contracts), caps, and floors to convert certain investments from a variable to a fixed rate of interest and from a fixed rate to a variable rate of interest, and to convert a portion of its Senior Notes, Medium-Term Notes, Monthly Income Preferred Securities, and Trust Originated Preferred Securities from a fixed rate to a variable rate of interest. Swap contracts are also used to alter the effective durations of assets and liabilities. Amounts paid or received related to the initiation of interest rate swap contracts, swaptions, caps, and floors are deferred and amortized over the life of the related financial instrument, and subsequent periodic settlements are recorded in investment income or interest expense. No amounts were paid or received related to the initiation of interest rate swap contracts, swaptions, caps, and floors in 1998. Amounts paid and received were $0.5 million and $1.0 million, respectively, in 1997. Proceeds from the sale of swaptions were $1.6 million in 1996. At December 31, 1998, interest rate swap contracts, swaptions, caps, and floors with a notional amount of $973.1 million were in a $12.1 million net unrealized gain position of which a cumulative amount of $3.2 million has been recognized in net income. At December 31, 1997, contracts with a notional amount of $952.7 million were in a $3.5 million net unrealized gain position. The Company's derivative financial instruments are with highly rated counterparties. CASH Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. DEFERRED POLICY ACQUISITION COSTS Commissions and other costs of acquiring traditional life and health insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are 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 before amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," 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 that assumed. 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. The Company amortizes the present value of future profits over the premium payment period, including accrued interest of up to approximately 8%. The unamortized present value of future profits for all acquisitions was approximately $370.3 million and $274.9 million at December 31, 1998 and 1997, respectively. During 1998, $132.5 million of present value of future profits on acquisitions made during the year was capitalized, and $37.1 million was amortized. During 1997, $136.2 million of present value of future profits on acquisitions made during the year was capitalized, and $28.9 million was amortized. GOODWILL The Company has recorded goodwill in connection with its acquisitions of various small prepaid dental plans and United Dental Care, Inc. Most of the goodwill is being amortized straight-line over 40 years. Goodwill at December 31 is as follows: 1998 1997 Goodwill $ 208,435 $ 46,470 Accumulated amortization 5,820 3,042 -------- ------- $ 202,615 $ 43,428 ======== ======= The Company periodically evaluates the recoverability of its goodwill by comparing expected future cash flows to the amount of unamortized goodwill. In addition, if facts and circumstances were to indicate the unamortized goodwill is impaired, the goodwill would be reduced to an amount representing the present value of applicable estimated future cash flows. PROPERTY AND EQUIPMENT Property and equipment are reported at cost. The Company primarily uses the straight-line method of depreciation based upon the estimated useful lives of the assets. Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income. Property and equipment consisted of the following at December 31: 1998 1997 Home Office building $ 37,959 $ 37,459 Data processing equipment 31,503 25,465 Other, principally furniture and equipment 36,592 23,039 ------- ------- 106,054 85,963 Accumulated depreciation 55,469 49,006 ------- ------- $ 50,585 $ 36,957 ======= ======= 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 AND BENEFITS EXPENSE o Traditional Life and Health Insurance Products. Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits and include whole life insurance policies, term and term-like life insurance policies, limited payment life insurance policies, and certain annuities with life contingencies. Life insurance and immediate annuity premiums are recognized as revenue when due. Health insurance premiums are recognized as revenue over the terms of the policies. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts. This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs. Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on 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:
1998 1997 1996 Balance beginning of year $ 106,121 $ 108,159 $ 73,642 Less reinsurance 18,673 6,423 3,330 Net balance beginning ------- ------- ------ of year 87,448 101,736 70,312 Incurred related to: Current year 317,447 258,322 275,524 Prior year (11,211) (14,540) (2,417) ------- ------- ------- Total incurred 306,236 243,782 273,107 Paid related to: Current year 261,837 203,381 197,163 Prior year 62,679 58,104 57,812 ------- ------- ------- Total paid 324,516 261,485 254,975 Other changes: Acquisitions and reserve transfers 4,779 3,415 13,292 ------ ------- ------- Net balance end of year 73,947 87,448 101,736 Plus reinsurance 20,019 18,673 6,423 ------ ------- ------- Balance end of year $ 93,966 $ 106,121 $ 108,159 ====== ======= =======
o Universal Life and Investment Products.o 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 rates credited to universal life and investment products ranged from 3.4% to 9.4% in 1998. The Company's accounting policies with respect to variable universal life and variable annuities are identical except that policy account balances (excluding account balances that earn a fixed rate) are valued at market and reported as components of assets and liabilities related to separate accounts. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the bases of assets and liabilities determined for financial reporting purposes and the bases determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses. NET INCOME PER SHARE All references to number of shares and per share amounts have been restated to reflect a two-for-one stock split on April 1, 1998. Net income per share - basic is net income divided by the average number of shares of Common Stock outstanding including shares that are issuable under various deferred compensation plans. Net income per share - diluted is adjusted net income divided by the average number of shares outstanding including all diluted potentially issuable shares that are issuable under various stock-based compensation plans and stock purchase contracts. A reconciliation of net income and adjusted net income, and basic and diluted average shares outstanding for the years ended December 31 is summarized as follows:
RECONCILIATION OF NET INCOME AND AVERAGE SHARES OUTSTANDING 1998 1997 1996 Net income $ 130,781 $ 111,993 $ 89,012 Dividends on FELINE PRIDES -- (1) --(1) ----------- ---------- ---------- Adjusted net income $ 130,781 $ 111,993 $ 89,012 Average shares issued and outstanding 62,553,803 61,623,692 59,946,030 Issuable under various deferred compensation plans 967,784 805,558 624,752 ---------- ---------- ---------- Average shares outstanding - basic 63,521,587 62,429,250 60,570,782 Stock appreciation rights 167,981 33,552 Issuable under various other stock-based compensation plans 398,176 386,816 398,882 FELINEPRIDES stock purchase contracts --(1) --(1) ---------- --------- ---------- Average shares outstanding - diluted 64,087,744 62,849,618 60,969,664 ========== ========= ========== (1) Excluded because the effect is anti-dilutive.
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 share-owners' equity. NOTE B. INVESTMENT OPERATIONS Major categories of net investment income for the years ended December 31 are summarized as follows:
1998 1997 1996 Fixed maturities $ 474,200 $ 402,664 $ 313,096 Equity securities 2,832 2,841 2,124 Mortgage loans 158,461 161,605 153,463 Investment real estate 1,274 2,057 1,954 Policy loans 12,345 11,370 10,377 Other, principally short-term investments 15,123 25,976 50,679 -------- ------- -------- 664,235 606,513 531,693 Investment expenses 27,839 15,137 14,210 -------- ------- ------- $ 636,396 $ 591,376 $ 517,483 ======== ======= ======= Realized investment gains (losses) for the years ended December 31 are summarized as follows: 1998 1997 1996 Fixed maturities $ 4,374 $ (8,354) $ (7,101) Equity securities (4,465) 5,975 1,733 Mortgage loans and other investments 3,212 3,209 10,878 ------- ----- ------ $ 3,121 $ 830 $ 5,510 ======= ===== ======
The Company recognizes permanent impairments through changes to an allowance for uncollectible amounts on investments. The allowance totaled $24.8 million and $23.7 million at December 31, 1998 and 1997, 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 $4.2 million in 1998, net realized investment losses of $7.1 million in 1997, and net realized investment gains of $3.7 million in 1996. In 1998, gross gains on the sale of investments available for sale (fixed maturities, equity securities, and short-term investments) were $33.3 million, and gross losses were $32.5 million. In 1997, gross gains were $21.3 million, and gross losses were $23.5 million. In 1996, gross gains were $6.9 million, and gross losses were $11.8 million. The amortized cost and estimated market values of the Company's investments classified as available for sale at December 31 are as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET 1998 COST GAINS LOSSES VALUES Fixed maturities: Bonds: Mortgage-backed securities $ 2,581,561 $ 41,626 $ 33,939 $ 2,589,248 United States Govern- ment and authorities 72,697 2,812 0 75,509 States, municipalities, and political subdivisions 29,521 1,131 0 30,652 Public utilities 533,082 15,066 0 548,148 Convertibles and bonds with warrants 694 0 179 515 All other corporate bonds 3,106,407 104,421 23,189 3,187,639 Redeemable preferred stocks 5,937 108 0 6,045 ------------ ------- ------- ---------- 6,329,899 165,164 57,307 6,437,756 Equity securities 15,151 456 3,349 12,258 Short-term investments 216,249 0 0 216,249 ------------ ------- ------- ---------- $ 6,561,299 $ 165,620 $ 60,656 $ 6,666,263 ============ ======= ======= ========== GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET 1997 COST GAINS LOSSES VALUES Fixed maturities: Bonds: Mortgage-backed securities $ 2,982,276 $ 54,103 $ 16,589 $ 3,019,790 United States Govern- ment and authorities 160,484 1,366 0 161,850 States, municipalities, and political subdivisions 31,621 532 0 32,153 Public utilities 481,681 7,241 0 488,922 Convertibles and bonds with warrants 694 0 168 526 All other corporate bonds 2,585,250 80,903 1,007 2,665,146 Redeemable preferred stocks 5,941 0 0 5,941 --------- ------- ------- ---------- 6,247,947 144,145 17,764 6,374,328 Equity securities 24,983 300 10,277 15,006 Short-term investments 76,086 0 0 76,086 --------- ------- ------- ---------- $ 6,349,016 $ 144,445 $ 28,041 $ 6,465,420 ========= ======= ======= ==========
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 1998 COST VALUES Due in one year or less $ 705,859 $709,686 Due after one year through five years 3,255,973 3,325,078 Due after five years through ten years 1,677,680 1,728,075 Due after ten years 690,387 674,917 ---------- ---------- $ 6,329,899 $6,437,756 ========== ========== ESTIMATED AMORTIZED MARKET 1997 COST VALUES Due in one year or less $ 456,257 $461,000 Due after one year through five years 2,774,823 2,815,586 Due after five years through ten years 2,403,990 2,466,223 Due after ten years 612,877 631,519 --------- ----------- $ 6,247,947 $ 6,374,328 ========= =========== The approximate percentage distribution of the Company's fixed maturity investments by quality rating at December 31 is as follows: RATING 1998 1997 AAA 34.2% 41.0% AA 6.2 4.8 A 29.3 28.9 BBB 26.3 21.8 BB or less 3.9 3.4 Redeemable preferred stocks 0.1 0.1 ----- ----- 100.0% 100.0% ===== ====== At December 31, 1998 and 1997, the Company had bonds which were rated less than investment grade of $248.9 million and $221.2 million, respectively, having an amortized cost of $278.0 million and $219.6 million, respectively. At December 31, 1998, approximately $83.5 million of the bonds rated less than investment grade were securities issued in Company-sponsored commercial mortgage loan securitizations. Approximately $843.9 million of bonds are not publicly traded. The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities for the years ended December 31 is summarized as follows: 1998 1997 1996 Fixed maturities $(12,041) $ 72,741 $ (56,897) Equity securities 4,605 (8,813) 207 At December 31, 1998, all of the Company's mortgage loans were commercial loans of which 75% were retail, 10% were apartments, 8% were warehouses, and 6% were office buildings. The Company specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are strip shopping centers in smaller towns and cities. No single tenant's leased space represents more than 5% of mortgage loans. Approximately 82% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Georgia, Florida, Texas, North Carolina, Tennessee, Virginia, Alabama, South Carolina, Kentucky, Ohio, Maryland, California, Mississippi, and Washington. Many of the mortgage loans have call provisions between 3 and 10 years. Assuming the loans are called at their next call dates, approximately $48.1 million would become due in 1999, $348.9 million in 2000 to 2003, and $209.1 million in 2004 to 2008. At December 31, 1998, the average mortgage loan was $2.0 million, and the weighted average interest rate was 8.3%. The largest single mortgage loan was $12.8 million. At December 31, 1998 and 1997, the Company's problem mortgage loans and foreclosed properties totaled $11.7 million and $17.7 million, respectively. Since the Company's mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on the Company's evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans. Certain investments, principally real estate, with a carrying value of $10.6 million, were non-income producing for the twelve months ended December 31, 1998. Policy loan interest rates generally range from 4.5% to 8.0%. NOTE C. FEDERAL INCOME TAXES The Company's effective income tax rate varied from the maximum federal income tax rate as follows: 1998 1997 1996 Statutory federal income tax rate applied to pretax income 35.0% 35.0% 35.0% Amortization of nondeductible goodwill 0.3 0.3 0.3 State income taxes 0.3 Dividends received deduction and tax-exempt interest (0.1) (0.2) (0.4) Low-income housing credit (0.4) (0.5) (0.6) Tax differences arising from prior acquisitions and other adjustments 0.2 (0.6) (0.3) ----- ----- ----- 35.3% 34.0% 34.0% ===== ===== ===== The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes. Details of the deferred income tax provision for the years ended December 31 are as follows: 1998 1997 1996 Deferred policy acquisition costs $60,855 $ 7,368 $ 15,542 Benefit and other policy liability changes (26,221) (27,480) (16,321) Temporary differences of investment income (3,491) 2,516 2,922 Other items (2,105) (216) (2,153) ------- --------- -------- $29,038 $(17,812) $ (10) ======= ========= ======== The components of the Company's net deferred income tax liability as of December 31 were as follows: 1998 1997 Deferred income tax assets: Policy and policyholder liability reserves $ 195,469 $ 145,880 Other 4,474 2,369 -------- ------- 199,943 148,249 Deferred income tax liabilities: Deferred policy acquisition costs 212,065 151,209 Unrealized gain on investments 32,514 38,252 -------- ------- 244,579 189,461 -------- ------- Net deferred income tax liability $ 44,636 $ 41,212 ======== ======= 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, 1998, was approximately $70.5 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 $769.8 million, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes have not been provided on amounts designated as Policyholders' Surplus. Under current income tax laws, the Company does not anticipate paying income tax on amounts in the Policyholders' Surplus accounts. NOTE D. DEBT AND GUARANTEED PREFERRED BENEFICIAL INTERESTS Short-term and long-term debt at December 31 is summarized as follows: 1998 1997 Short-term debt: Notes payable to banks $ 19,749 -------- ------- Long-term debt: Notes payable to banks $ 30,000 Senior Notes 75,000 $ 75,000 Medium-Term Notes 44,923 45,000 Mortgage note on investment real estate 2,363 ------- ------ $ 152,286 $ 120,000 ======= ====== Under a five-year revolving line of credit arrangement with several banks, the Company can borrow up to $70 million on an unsecured basis. No compensating balances are required to maintain the line of credit. At December 31, 1998, the Company had $30 million outstanding under this credit arrangement at an interest rate of 5.4%. In addition, the Company had borrowed $19.7 million 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. 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 approximately $35 million of the notes are redeemable by the Company after five years. Limited amounts of the Medium-Term Notes may be redeemed upon the death of the beneficial owner of the notes. As discussed in Note A, the Company uses derivative financial instruments to convert a portion of 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 7.1% in 1998 and 1997, respectively. The effective interest rate for the Medium-Term Notes was 6.4% in 1998 and 6.5% in 1997. Future maturities of the long-term debt are $32.4 million in 2003, $75.0 million in 2004, and $44.9 million in 2011. Interest expense on all debt totaled $13.5 million, $10.8 million, and $10.1 million in 1998, 1997, and 1996, respectively. In 1994, a special purpose finance subsidiary of the Company, PLC Capital L.L.C. (PLC Capital), issued $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A (MIPSSM). On April 29, 1997, another special purpose finance subsidiary, PLC Capital Trust I issued $75 million of 8.25% Trust Originated Preferred Securities (TOPrSSM). The MIPS and 8.25% TOPrS are guaranteed on a subordinated basis by the Company. This guarantee, considered together with the other obligations of the Company with respect to the MIPS and 8.25% TOPrS, constitutes a full and unconditional guarantee by the Company of PLC Capital and PLC Capital Trust I's obligations with respect to the MIPS and 8.25% TOPrS. PLC Capital and PLC Capital Trust I were formed solely to issue securities and use the proceeds thereof to purchase subordinated debentures of the Company. The sole assets of PLC Capital are $69.6 million of Protective Life Corporation 9% Subordinated Debentures due 2024, Series A. The sole assets of PLC Capital Trust I are $77.3 million of Protective Life Corporation 8.25% Subordinated Debentures due 2027, Series B. The Company has the right under the subordinated debentures to extend interest payment periods up to five consecutive years, and, as a consequence, dividends on the MIPS and 8.25% TOPrS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital and PLC Capital Trust I, respectively, during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The 8.25% TOPrS are redeemable by PLC Capital Trust I at any time on or after April 29, 2002. On November 20, 1997, another special purpose finance subsidiary, PLC Capital Trust II, issued $115 million of FELINE PRIDESSM which are comprised of a stock purchase contract and a beneficial ownership of 6.5% TOPrS. The sole assets of PLC Capital Trust II are $118.6 million of Protective Life Corporation 6.5% Subordinated Debentures due 2003, Series C. Under the stock purchase contract, on February 16, 2001, the holders will purchase shares of the Company's Common Stock from the Company. The holders may generally settle the contract in cash or by exercising their right to put, in effect, the 6.5% TOPrS back to the Company. The shares of Common Stock issuable range from approximately 3.5 million shares if the price of the Company's Common Stock is greater than or equal to $32.52 to approximately 4.3 million shares if the stock price is less than or equal to $26.66. The 6.5% TOPrS are guaranteed on a subordinated basis by the Company. Dividends on the 6.5% TOPrS may be deferred until maturity. The dividend rate on the 6.5% TOPrS which remain outstanding after February 16, 2001, will be reset by a formula specified in the agreement. In related transactions, the Company entered into interest rate swap agreements which effectively converted a portion of the MIPS and TOPrS from a fixed dividend rate to a floating rate. During 1998, the effective dividend rates on the MIPS and 8.25% TOPrS were approximately 6.4% and 6.6%, respectively. During 1997, the effective dividend rates on the MIPS and 8.25% TOPrS were approximately 6.4% and 6.8%, respectively. Dividends, net of tax, on the MIPS, TOPrS, and FELINEPRIDES totaled $12.1 million in 1998, $6.4 million in 1997, and $3.2 million in 1996 before consideration of the interest rate swap agreements. On a swap-adjusted basis, dividends were $10.9 million, $5.0 million, and $2.2 million in 1998, 1997, and 1996, respectively. The MIPS, 8.25% TOPrS, and FELINE PRIDES are reported in the accompanying balance sheets as "guaranteed preferred beneficial interests in Company's subordinated debentures," and the related dividends are reported in the accompanying statements of income as "minority interest in net income of consolidated subsidiaries." NOTE E. RECENT ACQUISITIONS In January 1997, the Company acquired a small prepaid dental plan. A second small prepaid dental plan was acquired in February 1997, and a third in August 1997. In June 1997, the Company acquired West Coast Life Insurance Company (West Coast). In September 1997, the Company acquired the Western Diversified Group. In October 1997, the Company coinsured a block of credit policies. In September 1998, the Company acquired United Dental Care, Inc. (United Dental Care), a leading provider of prepaid dental coverages. In October 1998 the Company coinsured a block of life insurance policies from Lincoln National Corporation. The policies represent the payroll deduction business originally marketed and underwritten by Aetna. These transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since their respective effective dates. Summarized below are the consolidated results of operations for 1998 and 1997, on an unaudited pro forma basis, as if the West Coast, Western Diversified Group, and United Dental Care acquisitions had occurred as of January 1, 1997. The pro forma information is based on the Company's consolidated results of operations for 1998 and 1997 and on data provided by the respective companies, after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises. 1998 1997 (unaudited) Total revenues $ 1,459,552 $ 1,417,655 Net income $ 124,855 $ 117,087 Net income per share - basic $ 1.91 $ 1.80 Net income per share - diluted $ 1.89 $ 1.79 NOTE F. COMMITMENTS AND CONTINGENT LIABILITIES The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors' and officers' liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification which are not secured by the obligation to obtain a letter of credit. Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damage suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation or alternatively in arbitration. Although the outcome of any such litigation or arbitration 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 G. SHARE-OWNERS' EQUITY AND RESTRICTIONS 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 April 1, 1998. Share-owners' 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 have been restated to reflect the stock split. Activity in the Company's issued and outstanding common stock is summarized as follows:
Issued Treasury Outstanding Shares Shares Shares Balance, December 31, 1995 62,672,924 5,122,688 57,550,236 Issuance of common stock 4,000,000 4,000,000 Reissuance of treasury stock (56,976) 56,976 ---------- --------- ---------- Balance, December 31, 1996 66,672,924 5,065,712 61,607,212 Purchase of treasury stock 74,750 (74,750) Reissuance of treasury stock (109,822) 109,822 ---------- --------- ---------- Balance, December 31, 1997 66,672,924 5,030,640 61,642,284 Issuance of common stock 2,660,193 28 2,660,165 Reissuance of treasury stock (132,568) 132,568 ---------- --------- ---------- Balance, December 31, 1998 69,333,117 4,898,100 64,435,017 ========== ========= ==========
The Company has a Rights Agreement that provides rights to owners of the Company's Common Stock to purchase Series A Junior Participating Cumulative Preferred Stock, or in certain circumstances, either Common Stock or common stock of an acquiring company at one half the market price of such Common Stock or common stock, as the case may be. The rights will become exercisable if certain events occur with respect to the Company, including the acquisition by a person or group of 15% or more of the Company's Common Stock. The Company can redeem the rights at $.01 per right in certain circumstances, including redemption until ten business days following a public announcement that 15% or more of the Company's Common Stock has been acquired by a person or group. Share owners 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, 1998. The remaining 3,600,000 shares of Preferred Stock, $1.00 par value, were also unissued at December 31, 1998. The Company has an Employee Stock Ownership Plan (ESOP). The stock is used to match employee contributions to the Company's 401(k) and Stock Ownership Plan (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 share-owners' equity. The ESOP shares are dividend-paying and are considered outstanding for earnings per share calculations. Dividends on the shares are used to pay the ESOP's note to Protective Life. If certain events associated with a change in control of the Company occur, any unallocated shares held by the ESOP will become allocable to employee 401(k) accounts. The Company may, from time to time, reissue treasury shares or buy in the open market additional shares of Common Stock to complete its 401(k) employer match obligation. Accordingly, in 1997, the Company reissued from treasury 18,104 shares of Common Stock to the 401(k) Plan and reissued from treasury another 6,442 shares during 1998. Since 1973, the Company has had a Long-Term Incentive Plan (previously known as the Performance Share Plan) to motivate senior management to focus on the Company's long-range earnings performance through the awarding of performance shares. The criterion for payment of performance share awards is based upon a comparison of the Company's average return on average equity and total rate of return over a four year award period (earlier upon the death, disability or retirement of the executive, or in certain circumstances, of a change in control of the Company) to that of a comparison group of publicly held life and multiline insurance companies. If the Company's results are below the median of the comparison group, no portion of the award is earned. If the Company's results are at or above the 90th percentile, the award maximum is earned. Under plans approved by share owners in 1992 and 1997, up to 6,400,000 shares may be issued in payment of awards. The number of shares granted in 1998, 1997, and 1996 was 71,340, 98,780, and 104,580, respectively, having an approximate market value on the grant date of $2.3 million, $2.0 million, and $1.8 million, respectively. At December 31, 1998, outstanding awards measured at target and maximum payouts were 474,695 and 638,090 shares, respectively. The expense recorded by the Company for the Long-Term Incentive Plan was $2.7 million, $2.7 million, and $3.0 million in 1998, 1997, and 1996, respectively. During 1996, stock appreciation rights (SARs) were granted to certain executives of 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, 1998 was 675,000. The SARs have a base price of $17.4375 per share of Company Common Stock (the market price on the grant date was $17.50 per share). The estimated fair value of the SARs on the grant date was $3.0 million. This estimate was derived using the Roll-Geske variation of the Black-Sholes option pricing model. Assumptions used in the pricing model are as follows: expected volatility rate of 15% (approximately equal to that of the S & P Life Insurance Index), a risk free interest rate of 6.35%, a dividend yield rate of 1.97%, and an expected exercise date of August 15, 2002. The expense recorded by the Company for the SARs was $0.6 million in 1998 and 1997. The Company has established deferred compensation plans for directors, officers and others. Compensation deferred is credited to the participants in cash or Common Stock equivalents or a combination thereof. The Company may, from time to time, reissue treasury shares or buy in the open market shares of Common Stock to fulfill its obligation under the plans. At December 31, 1998, the plans had 1,041,996 shares of Common Stock equivalents credited to participants. At December 31, 1998, approximately $274.6 million of consolidated share-owners' equity, excluding net unrealized gains on investments, represented net assets of the Company's insurance subsidiaries that cannot be transferred to Protective Life Corporation. 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 1999 is estimated to be $138.9 million. NOTE H. RELATED PARTY MATTERS Certain corporations with which the Company's directors were affiliated paid the Company premiums and policy fees or deposits for various types of insurance and investment products. Such premiums, policy fees, and deposits amounted to $28.6 million, $21.4 million, and $31.2 million in 1998, 1997, and 1996, respectively. The Company paid commissions, interest on debt and investment products, and fees to these same corporations totaling $7.3 million, $5.4 million, and $5.0 million in 1998, 1997, and 1996, respectively. In addition, the Company has entered into a swap contract with one such corporation having a notional amount of $392.8 million which to the Company was in a $16.5 million unrealized gain position at December 31, 1998. NOTE I. OPERATING SEGMENTS The Company operates several divisions whose principal strategic focuses can be grouped into three general categories: life insurance, specialty insurance products, and retirement savings and investment products. Each division has a senior officer of the Company responsible for its operations. A division is generally distinguished by products and/or channels of distribution. A brief description of each division follows. LIFE INSURANCE o INDIVIDUAL LIFE DIVISION. The Individual Life Division markets universal life, variable universal life, and level premium term and term-like insurance products on a national basis primarily through networks of independent insurance agents. o WEST COAST DIVISION. The West Coast Division sells universal life and level premium term-like insurance products in the life insurance brokerage market and in the "bank owned life insurance" market. o ACQUISITIONS DIVISION. The Acquisitions Division focuses on acquiring, converting, and servicing policies acquired from other companies. The Division's primary focus is on life insurance policies sold to individuals. SPECIALTY INSURANCE PRODUCTS o DENTAL AND CONSUMER BENEFITS DIVISION. The Division's primary focus is on indemnity and prepaid dental products. In 1997, the Division exited from the traditional major medical business, fulfilling the Division's strategy to focus primarily on dental and related products. o FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division specializes in marketing credit life and disability insurance products through banks, consumer finance companies, and automobile dealers. The Division also includes a small property casualty insurer that sells automobile service contracts. RETIREMENT SAVINGS AND INVESTMENT PRODUCTS o GUARANTEED INVESTMENT CONTRACTS DIVISION. The Guaranteed Investment Contracts (GIC) Division markets GICs to 401(k) and other qualified retirement savings plans. The Division also offers related products, including fixed and floating rate funding agreements offered to the trustees of municipal bond proceeds, bank trust departments and money market funds, and long-term annuity contracts offered to fund certain state obligations. o INVESTMENT PRODUCTS DIVISION. The Investment Products Division manufactures, sells, and supports fixed and variable annuity products. These products are primarily sold through stockbrokers, but are also sold through financial institutions and the Individual Life Division's sales force. CORPORATE AND OTHER The Company has an additional business segment herein referred to as Corporate and Other. The Corporate and Other segment primarily consists of net investment income and expenses not attributable to the Divisions above (including net investment income on capital and interest on substantially all debt). This segment also includes earnings from various investment-related transactions, the Company's 50%-owned joint venture in Hong Kong, and the operations of several small subsidiaries. The Company uses the same accounting policies and procedures to measure operating segment income and assets as it uses to measure its consolidated net income and assets. Operating segment income is generally income before income tax, adjusted to exclude any pretax minority interest in income of consolidated subsidiaries. Premiums and policy fees, other income, benefits and settlement expenses, and amortization of deferred policy acquisition costs are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment. Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment. There are no significant intersegment transactions. Operating segment income and assets for the years ended December 31 are as follows:
OPERATING SEGMENT LIFE INSURANCE INDIVIDUAL OPERATING SEGMENT INCOME LIFE WEST COAST ACQUISITIONS 1998 Premiums and policy fees......................................$ 228,699 $ 75,757 $125,329 Reinsurance ceded............................................. (102,533) (53,377) (28,594) -------- ------- -------- Net of reinsurance ceded................................... 126,166 22,380 96,735 Net investment income......................................... 55,903 63,492 112,154 Realized investment gains (losses)............................ Other income.................................................. 32,241 6 1,713 -------- ------- -------- Total revenues............................................. 214,310 85,878 210,602 -------- ------- -------- Benefits and settlement expenses.............................. 106,306 54,617 112,051 Amortization of deferred policy acquisition costs............. 30,543 4,924 18,894 Other operating expenses...................................... 48,231 5,354 28,194 -------- ------- -------- Total benefits and expenses................................ 185,080 64,895 159,139 -------- ------- -------- Income before income tax...................................... 29,230 20,983 51,463 Income tax expense Minority interest -------- ------- -------- Net income ======== ======= ======== 1997 Premiums and policy fees......................................$ 182,746 $ 41,290 $ 120,504 Reinsurance ceded............................................. (55,266) (27,168) (17,869) -------- ------- -------- Net of reinsurance ceded................................... 127,480 14,122 102,635 Net investment income......................................... 54,647 30,194 110,155 Realized investment gains (losses)............................ Other income.................................................. 18,230 10 -------- ------- -------- Total revenues............................................. 200,357 44,316 212,800 -------- ------- -------- Benefits and settlement expenses.............................. 114,678 28,304 116,506 Amortization of deferred policy acquisition costs............. 27,374 961 16,606 Other operating expenses...................................... 37,921 6,849 24,050 -------- ------- -------- Total benefits and expenses................................ 179,973 36,114 157,162 Income before income tax...................................... 20,384 8,202 55,638 Income tax expense Minority interest -------- ------- -------- Net income ======== ======= ======== 1996 Premiums and policy fees......................................$ 154,295 $ 125,798 Reinsurance ceded............................................. (37,585) (19,255) -------- ------- -------- Net of reinsurance ceded................................... 116,710 106,543 Net investment income......................................... 48,478 106,015 Realized investment gains (losses)............................ 3,098 Other income.................................................. 12,631 641 -------- ------- -------- Total revenues............................................. 180,917 213,199 -------- ------- -------- Benefits and settlement expenses.............................. 96,404 118,181 Amortization of deferred policy acquisition costs............. 28,393 17,162 Other operating expenses...................................... 40,969 25,186 -------- ------- -------- Total benefits and expenses................................ 165,766 160,529 Income before income tax...................................... 15,151 52,670 Income tax expense Minority interest -------- ------- -------- Net income ======== ======= ======== Operating Segment Assets 1998 Investments and other assets..................................$ 1,083,388 $ 1,149,642 $ 1,600,123 Deferred policy acquisition costs and goodwill................ 301,941 144,455 255,347 -------- ------- -------- Total assets..................................................$ 1,385,329 $ 1,294,097 $ 1,855,470 ======== ======= ======== 1997 Investments and other assets..................................$ 963,661 $ 910,030 $ 1,401,294 Deferred policy acquisition costs and goodwill................ 252,321 108,126 138,052 -------- ------- -------- Total assets..................................................$ 1,215,982 $ 1,018,156 $ 1,539,346 ======== ======= ======== 1996 Investments and other assets..................................$ 817,154 $ 1,423,081 Deferred policy acquisition costs and goodwill................ 220,232 156,172 -------- ------- -------- Total assets..................................................$ 1,037,386 $ 1,579,253 ======== ======= ======== (1) Adjustments represent the inclusion of unallocated realized investment gains (losses), the reclassification and tax effecting of pretax minority interest in the Corporate and Other segment, and the recognition of income tax expense. There are no asset adjustments. Specialty Insurance Retirement Savings and Products Investment Products Dental and Guaranteed Corporate Consumer Financial Investment Investment and Total Benefits Institutions Contracts Products Other Adjustments(1) Consolidated $ 371,988 $ 301,230 $ 18,809 $ 198 $ 1,122,010 (85,753) (188,958) (459,215) ------- -------- ------- ------- ------ ------- ----------- 286,235 112,272 18,809 198 662,795 15,995 25,313 $ 213,136 105,890 44,513 636,396 1,609 1,318 $ 194 3,121 4,314 17,505 8,873 (549) 64,103 ------- -------- ------- ------- ------ ------- ----------- 306,544 155,090 214,745 134,890 44,162 1,366,415 ------- -------- ------- ------- ------ ------- ----------- 195,903 52,629 178,745 85,045 469 785,765 10,352 28,526 735 17,213 1 111,188 78,809 55,197 2,876 19,637 29,052 (18,612) 248,738 ------- -------- ------- ------- ------ ------- ----------- 285,064 136,352 182,356 121,895 29,522 1,145,691 ------- -------- ------- ------- ------ ------- ----------- 21,480 18,738 32,389 12,995 14,640 220,724 77,845 77,845 12,098 12,098 ------- -------- ------- ------- ------ ------- ----------- $ 130,781 ======= ======== ======= ======= ====== ======= ========= $ 302,719 $ 196,694 $ 12,367 $ 229 $ 856,549 (109,480) (124,431) (334,214) ------- -------- ------- ------- ------ ------- ----------- 193,239 72,263 12,367 229 522,335 24,202 16,462 $ 211,915 105,321 38,480 591,376 (3,179) 589 $ 3,420 830 1,278 4,962 6,164 2,140 32,784 ------- -------- ------- ------- ------ ------- ----------- 218,719 93,687 208,736 124,441 40,849 1,147,325 ------- -------- ------- ------- ------ ------- ----------- 134,384 27,643 179,235 82,019 339 683,108 15,711 30,812 618 15,110 35 107,227 52,365 21,120 3,946 15,749 25,453 (9,836) 177,617 ------- -------- ------- ------- ------ ------- ----------- 202,460 79,575 183,799 112,878 25,827 967,952 ------- -------- ------- ------- ------ ------- ----------- 16,259 14,112 24,937 11,563 15,022 179,373 60,987 60,987 6,393 6,393 ------- -------- ------- ------- ------ ------- ----------- $ 111,993 ======= ======== ======= ======= ====== ======= ========= $ 320,153 $ 193,236 $ 8,189 $ 656 $ 802,327 (131,520) (119,814) (308,174) ------- -------- ------- ------- ------ ------- ----------- 188,633 73,422 8,189 656 494,153 16,540 13,941 $ 214,369 98,767 19,373 517,483 (7,963) 3,858 $ 6,517 5,510 2,191 1,509 3,907 (22) 20,857 ------- -------- ------- ------- ------ ------- ----------- 207,364 88,872 206,406 114,721 20,007 1,038,003 ------- -------- ------- ------- ------ ------- ----------- 143,944 42,781 169,927 73,093 710 645,040 5,326 24,900 509 14,710 30 91,030 52,956 11,660 3,851 15,323 17,197 (4,950) 162,192 ------- -------- ------- ------- ------ ------- ----------- 202,226 79,341 174,287 103,126 17,937 898,262 ------- -------- ------- ------- ------ ------- ----------- 5,138 9,531 32,119 11,595 2,070 139,741 47,512 47,512 3,217 3,217 ------- -------- ------- ------- ------ ------- ----------- $ 89,012 ======= ======== ======= ======= ====== ======= ========= $ 272,586 $ 655,684 $ 2,869,304 $ 2,545,364 $ 769,364 $ 10,945,455 223,953 41,710 1,448 75,177 9 1,044,040 ------- -------- ------- ------- ------ ------- ----------- $ 496,539 $ 697,394 $ 2,870,752 $ 2,620,541 $ 769,373 $ 11,989,495 ======= ======== ======= ======= ====== ======= ========= $ 220,655 $ 544,085 $ 2,887,732 $ 2,316,495 $ 591,518 $ 9,835,470 65,887 52,837 1,785 56,074 1,083 676,165 ------- -------- ------- ------- ------ ------- ----------- $ 286,542 $ 596,922 $ 2,889,517 $ 2,372,569 $ 592,601 $ 10,511,635 ======= ======== ======= ======= ====== ======= ========= $ 216,004 $ 319,981 $ 2,606,985 $ 1,822,462 $ 534,176 $ 7,739,843 62,922 32,040 1,164 50,657 175 523,362 ------- -------- ------- ------- ------ ------- ----------- $ 278,926 $ 352,021 $ 2,608,149 $ 1,873,119 $ 534,351 $ 8,263,205 ======= ======== ======= ======= ====== ======= =========
NOTE J. RECONCILIATION WITH STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles 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 share-owners' 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 assets); (f) certain items of interest income, principally accrual of mortgage and bond discounts, are amortized differently; and (g) bonds are recorded at their market values instead of amortized cost. The reconciliations of net income and share-owners' equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
Net Income Share-Owners' Equity 1998 1997 1996 1998 1997 1996 In conformity with statutory reporting practices (1) $147,077 $134,417 $102,337 $ 531,956 $579,111 $456,320 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization 68,155 10,310 (2,830) 841,425 632,737 488,384 Deferred income tax (29,038) 17,812 10 (44,636) (41,212) (37,869) Asset Valuation Reserve 66,922 67,369 64,233 Interest Maintenance Reserve (1,355) (1,434) (2,142) 15,507 9,809 17,682 Nonadmitted items 42,835 30,500 21,610 Noninsurance affiliates 13,010 17,176 1,328 992,097 626,615 434,237 Minority interest in consolidated subsidiaries (12,098) (6,393) (3,217) Consolidation elimination (1,334,183) (982,889) (632,601) Other valuation and timing differences (54,970) (59,895) (6,474) (167,729) (163,843) (196,680) ---------- ------- -------- ----------- ---------- --------- In conformity with generally accepted accounting principles $130,781 $111,993 $89,012 $ 944,194 $ 758,197 $ 615,316 (1) Consolidated
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: 1998 1997 Projected Benefit obligation, beginning of the year $ 30,612 $ 25,196 Service cost - benefits earned during the year 2,585 2,112 Interest cost - on projected benefit obligation 2,203 2,036 Actuarial gain 2,115 3,421 Plan amendment 160 Benefits paid (1,128) (2,153) --------- ---------- Projected Benefit obligation, end of the year 36,547 30,612 --------- ---------- Fair value of plan assets beginning of the year 21,763 19,779 Actual return on plan assets 1,689 1,625 Employer contribution 2,823 2,512 Benefits paid (1,128) (2,153) --------- ---------- Fair value of plan assets end of the year 25,147 21,763 --------- ---------- Plan assets less than the projected benefit obligation (11,400) (8,849) Unrecognized net actuarial loss from past experience different from that assumed 9,069 6,997 Unrecognized prior service cost 652 605 Unrecognized net transition asset (34) (51) --------- ---------- Net pension liability recognized in balance sheet $ (1,713) $(1,298) ========= ========== Net pension cost of the defined benefit pension plan includes the following components for the years ended December 31: 1998 1997 1996 Service cost $ 2,585 $ 2,112 $ 1,908 Interest cost 2,203 2,036 1,793 Expected return on plan assets (1,950) (1,793) (1,593) Amortization of prior service cost 112 100 100 Amortization of transition asset (17) (17) (17) Recognized net actuarial loss 305 152 210 ------- ------- --------- Net pension cost $ 3,238 $ 2,590 $ 2,401 ======= ======= ========= Assumptions used to determine the benefit obligations as of December 31 were as follows: 1998 1997 1996 Weighted average discount rate 6.75% 7.25% 7.75% Rates of increase in compensation level 4.75% 5.25% 5.75% Expected long-term rate of return on assets 8.50% 8.50% 8.50% Assets of the pension plan are in a group annuity contract with Protective Life and therefore 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, 1998 and 1997, the projected benefit obligation of this plan totaled $11.7 million and $10.0 million, respectively, of which $7.8 million and $6.6 million, respectively, have been recognized in the Company's financial statements. Net pension costs of the excess benefits plan includes the following components for the years ended December 31: 1998 1997 1996 Service cost $ 611 $ 544 $ 424 Interest cost 722 651 505 Plan amendment 351 Amortization of prior service cost 112 112 112 Amortization of transition asset 37 37 37 Recognized net actuarial loss 173 180 155 ------- ------- ------- Net pension cost $ 1,655 $ 1,875 $ 1,233 ======= ======= ======= 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, 1998 and 1997, the liability for such benefits totaled $1.2 million and $1.3 million, respectively. The expense recorded by the Company was $0.1 million in 1998, 1997 and 1996. 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 up to a maximum of $75,000. This plan is partially funded at a maximum of $50,000 face amount of insurance. The Company sponsors a defined contribution retirement plan which covers substantially all employees. Employee contributions are made on a before-tax basis as provided by Section 401(k) of the Internal Revenue Code. The Company has established an Employee Stock Ownership Plan (ESOP)to match voluntary employee contributions to the Company's 401(k) Plan. In 1994, a stock bonus was added to the 401(k) Plan for employees who are not otherwise under a bonus plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP's note payable to the Company less dividends on shares held by the ESOP. All shares held by the ESOP are treated as outstanding for purposes of computing the Company's basic and diluted earnings per share. At December 31, 1998, the Company had committed up to 101,124 shares to be released to fund employee benefits. The expense recorded by the Company for these employee benefits was less than $0.1 million in 1998 and 1997, and $1.0 million in 1996. NOTE L. REINSURANCE The Company assumes risks from, and reinsures certain 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. The Company has reinsured approximately $64.8 billion, $34.1 billion, and $18.8 billion in face amount of life insurance risks with other insurers representing $294.4 million, $1 respectively. The Company has also reinsured accident and health risks representing $164.8 million, $187.7 million, and $194.7 million of premium income for 1998, 1997, and 1996, respectively. In 1998 and 1997, policy and claim reserves relating to insurance ceded of $658.7 million and $485.8 million, respectively, are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with the Company. At December 31, 1998 and 1997, the Company had paid $22.8 million and $25.6 million, respectively, of ceded benefits which are recoverable from reinsurers. In addition, at December 31, 1998, the Company had receivables of $75.0 million related to insurance assumed. A substantial portion of the Company's new life insurance and credit insurance sales are being reinsured. NOTE M. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of the Company's financial instruments at December 31 are as follows:
1998 1997 Estimated Estimated Carrying Fair Carrying Fair Amounts Values Amounts Values Assets (see Notes A and B): Investments: Fixed maturities $ 6,437,756 $ 6,437,756 $ 6,374,328 $ 6,374,328 Equity securities 12,258 12,258 15,006 15,006 Mortgage loans on real estate 1,622,903 1,774,379 1,312,778 1,405,474 Short-term investments 216,249 216,249 76,086 76,086 Cash 9,486 9,486 47,502 47,502 Liabilities (see Notes A and D): Guaranteed investment contract deposits 2,691,697 2,751,007 2,684,676 2,687,331 Annuity deposits 1,519,820 1,513,148 1,511,553 1,494,600 Debt: Notes payable to banks 49,749 49,749 Senior Notes 75,000 79,335 75,000 80,055 Medium-Term Notes 44,923 46,075 45,000 46,467 Monthly Income Preferred Securities 55,000 55,836 55,000 57,613 Trust Originated Preferred Securities 75,000 78,570 75,000 77,438 FELINE PRIDES 115,000 150,075 115,000 126,500 Other (see Note A): Derivative Financial Instruments 11,621 3,107
Except as noted below, fair values were estimated using quoted market prices. The Company estimates the fair value of its mortgage loans using discounted cash flows from the next call date. The Company believes the fair value of its short-term investments and notes payable to banks approximates book value due to being either short-term or having a variable rate of interest. The Company estimates the fair value of its guaranteed investment contracts and annuities using discounted cash flows and surrender values, respectively. The Company believes it is not practicable to determine the fair value of its policy loans since there is no stated maturity, and policy loans are often repaid by reductions to policy benefits. NOTE N. CONSOLIDATED QUARTERLY RESULTS - UNAUDITED Protective Life Corporation's unaudited consolidated quarterly operating data for the years ended December 31, 1998 and 1997, 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 share-owners' equity, and cash flows for a period of several quarters.
FIRST SECOND THIRD FOURTH 1998 QUARTER QUARTER QUARTER QUARTER Premiums and policy fees $ 242,832 $ 258,524 $ 275,411 $ 345,243 Reinsurance ceded (93,647) (103,691) (107,677) (154,200) ----------------------------------------------------------------- Net of reinsurance ceded 149,185 154,833 167,734 191,043 Net investment income 157,649 153,006 164,537 161,204 Realized investment gains (losses) 11 2,023 411 676 Other income 13,515 19,150 15,912 15,526 ----------------------------------------------------------------- Total revenues 320,360 329,012 348,594 368,449 Benefits and expenses 270,334 273,524 292,391 309,442 ----------------------------------------------------------------- Income before income tax 50,026 55,488 56,203 59,007 Income tax expense 17,009 19,921 19,671 21,244 Minority interest 3,024 3,025 3,024 3,025 ----------------------------------------------------------------- Net income $ 29,993 $ 32,542 $ 33,508 $ 34,738 ================================================================= Operating income(1) per share - basic $ .48 $ .50 $ .53 $ .53 Net income per share - basic $ .48 $ .52 $ .53 $ .53 Average shares outstanding - basic 62,606,735 62,704,433 63,272,089 65,474,321 ================================================================= Operating income(1) per share - diluted $ .47 $ .50 $ .52 $ .53 Net income per share - diluted $ .47 $ .52 $ .52 $ .53 Average shares outstanding - diluted 63,226,180 63,295,035 63,790,168 66,012,247 ================================================================= FIRST SECOND THIRD FOURTH 1997 QUARTER QUARTER QUARTER QUARTER Premiums and policy fees $ 183,980 $ 189,192 $ 211,367 $ 272,010 Reinsurance ceded (54,402) (71,199) (95,121) (113,492) ----------------------------------------------------------------- Net of reinsurance ceded 129,578 117,993 116,246 158,518 Net investment income 130,330 137,475 158,196 165,375 Realized investment gains (losses) (418) 1,143 61 44 Other income 4,762 8,906 8,222 10,894 ----------------------------------------------------------------- Total revenues 264,252 265,517 282,725 334,831 Benefits and expenses 225,484 221,536 233,871 287,061 ----------------------------------------------------------------- Income before income tax 38,768 43,981 48,854 47,770 Income tax expense 13,181 14,954 16,610 16,242 Minority interest 804 1,497 1,810 2,282 ----------------------------------------------------------------- Net income $ 24,783 $ 27,530 $ 30,434 $ 29,246 ================================================================= Operating income(1) per share - basic $ .41 $ .43 $ .49 $ .46 Net income per share - basic $ .40 $ .44 $ .49 $ .46 Average shares outstanding - basic 62,317,466 62,462,192 62,463,876 62,471,394 ================================================================= Operating income(1) per share - diluted $ .41 $ .42 $ .49 $ .46 Net income per share - diluted $ .40 $ .43 $ .49 $ .46 Average shares outstanding - diluted 62,669,264 62,843,476 62,904,976 62,976,766 ================================================================= (1) Net income excluding realized investment gains and losses and related amortization.
REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHARE OWNERS OF PROTECTIVE LIFE CORPORATION In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, share-owners' equity and of cash flows present fairly, in all material respects, the financial position of Protective Life Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Birmingham, Alabama February 11, 1999 EX-21 5 Exhibit 21 to Form 10-K of Protective Life Corporation for Fiscal Year Ended December 31, 1998 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 Corporation is organized under the laws of the State of Delaware and does business under its corporate name: United Dental Care, Inc. The following wholly-owned subsidiary of Protective Life Insurance Company is incorporated under the laws of the State of California and does business under its corporate name: West Coast Life Insurance Company 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. 333-30905, 333-39103 and 33-59769) and Form S-8 (File Nos. 33-51887 and 33-68036) of our report, dated February 11, 1999, on our audits of the consolidated financial statements and financial statement schedules of Protective Life Corporation and subsidiaries as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997, and 1996, which report is included or incorporated by reference in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Birmingham, Alabama March 25, 1999 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 1998 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 1st day of March, 1999. WITNESS TO ALL SIGNATURES: /S/ WILLIAM J. RUSHTON III William J. Rushton III /S/ DEBORAH J. LONG /S/ WILLIAM J. CABANISS, JR. Deborah J. Long William J. Cabaniss, Jr. /S/ DRAYTON NABERS, JR. Drayton Nabers, Jr. /S/ JOHN J. MCMAHON, JR. John J. McMahon, Jr. /S/ A. W. DAHLBERG A. W. Dahlberg /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 /S/ JOHN D. JOHNS John D. Johns /S/ ELAINE L. CHAO Elaine L. Chao /S/ DONALD M. JAMES Donald M. James /S/ J. GARY COOPER J. Gary Cooper EX-27 8
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 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 6,437,756 0 0 12,258 1,622,903 14,868 8,606,610 9,486 756,370 841,425 11,989,495 4,142,780 391,681 0 222,704 152,286 0 0 34,667 909,527 11,989,495 662,795 636,396 3,121 64,103 785,765 111,188 248,738 220,724 77,845 130,781 0 0 0 130,781 2.06 2.04 0 0 0 0 0 0 0 Net of minority interest in income of subsidiaries of $12,098
EX-99 9 Exhibit 99 to Form 10-K of Protective Life Corporation for Fiscal Year Ended December 31, 1998 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 the 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 due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of the Company are discussed more fully below. MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature industry. In recent years, the industry has experienced little growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Insurance is a highly competitive industry, and the Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources than the Company, as well as competition from other providers of financial services. The life and health insurance industry is consolidating, with larger, more efficient organizations emerging from consolidation. Also, mutual insurance companies are converting to stock ownership which will give them greater access to capital markets. Management believes that the Company's ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of strong 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 retain existing business and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. For the past several years, rating downgrades in the industry have exceeded upgrades. POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year to year on account of fluctuations in policy claims received by the Company LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the Company's insurance subsidiaries allow policyholders and contractholders to withdraw their funds under defined circumstances. The Company's insurance subsidiaries design products and configure investment portfolios to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities. Formal asset/liability management programs and procedures are used 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 insurance subsidiaries to dispose of illiquid assets on unfavorable terms, which could have a material adverse effect on the Company. INTEREST RATE FLUCTUATIONS. Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited rates paid on outstanding policies. Both rising and declining interest rates can negatively affect the Company's spread income. For example, certain of the Company's insurance and investment products guarantee a minimum credited rate. While the Company develops and maintains asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, no assurance can be given that significant changes in interest rates will not materially affect such spreads. Lower interest rates may result in lower sales of the Company's insurance and investment products. REGULATION AND TAXATION. The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power over all aspects of the insurance business which may include premium rates, marketing practices, advertising, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than Share Owners. 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 with respect to their ability to sell such products, and, depending on grandfathering provisions, the surrenders of existing annuity contracts and life insurance policies. The Company cannot predict what future tax initiatives may be proposed which may affect the Company. LITIGATION. A number of civil jury verdicts have been returned against insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Increasingly these lawsuits have resulted in the award of substantial judgments against the insurer that are disproportionate to the actual damages, including material amounts of punitive damages. In some states (including Alabama), juries have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damages suit. The Company and its subsidiaries, like other insurers, in the ordinary course of business, are involved in such litigation or alternatively in arbitration. The outcome of any such litigation or arbitration cannot be predicted with certainty. In addition, in some class action and other lawsuits involving insurers' sales practices, insurers have made material settlement payments. INVESTMENT RISKS. The Company's invested assets are subject to customary risks of credit 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 which the Company has financed. Factors that may affect the overall default rate on, and market value of, the Company's invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual borrowers and tenants. CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively pursued a strategy of acquiring blocks of insurance policies. This acquisition strategy has increased the Company's earnings in part by allowing the Company to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to the Company, or that the Company will realize the anticipated financial results from its acquisitions. RELIANCE ON THE PERFORMANCE OF OTHERS. The Company's results may be affected by the performance of others because the Company has entered into various ventures involving other parties. Examples include, but are not limited to: many of the Company's products are sold through independent distribution channels; the Investment Products Division's variable annuity deposits are invested in funds managed by unaffiliated investment managers; a portion of the sales in the Individual Life, Dental, and Financial Institutions Divisions comes from arrangements with unrelated marketing organizations; and the Company has entered the Hong Kong insurance market in a joint venture. YEAR 2000. Computer hardware and software often denote the year using two digits rather than four; for example, the year 1998 often is denoted by such hardware and software as "98". It is probable that such hardware and software will malfunction when calculations involving the year 2000 are attempted because the hardware and/or software will interpret "00" as representing the year 1900 rather than the year 2000. This "Year 2000" issue potentially affects all individuals and companies (including the Company, its customers, business partners, suppliers, banks, custodians and administrators). The problem is most prevalent in older mainframe systems, but personal computers and equipment containing computer chips could also be affected. Due to the fact that the Company does not control all of the factors that could impact its Year 2000 readiness, there can be no assurances that the Company's Year 2000 efforts will be successful, that interactions with other service providers with Year 2000 issues will not impair the Company's operations, or that the Year 2000 issue will not otherwise adversely affect the Company. Should some of the Company's systems not be available due to Year 2000 problems, in a reasonable likely worst case scenario, the Company may experience significant delays in its ability to perform certain functions, but does not expect an inability to perform critical functions or to otherwise conduct business. However, other worst case scenarios depending upon their duration, could have a material adverse effect on the Company and its operations. REINSURANCE. The Company's insurance subsidiaries cede insurance to other insurance companies. However, the Company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations ceded to it. The cost of reinsurance is, in some cases, reflected in the premium rates charged by the Company. Under certain reinsurance agreements, the reinsurer may increase the rate it charges the Company for the reinsurance, though the Company does not anticipate increases to occur. Therefore, if the cost of reinsurance were to increase with respect to policies where the rates have been guaranteed by the Company, the Company could be adversely affected. 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. 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. -----END PRIVACY-ENHANCED MESSAGE-----