-----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, NpBSyyTd0B5K974GacHbdBbSrlIyS3urUh1rkts86mAIYlGtW6U/hY8rH5TFFxoE HGbbq1e+4YiRSe5BHbVchg== 0000912057-96-005145.txt : 19960327 0000912057-96-005145.hdr.sgml : 19960327 ACCESSION NUMBER: 0000912057-96-005145 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTIVE LIFE CORP CENTRAL INDEX KEY: 0000355429 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 952492236 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12332 FILM NUMBER: 96538411 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 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-12332 ------------------------ PROTECTIVE LIFE CORPORATION (Exact name of Registrant as specified in its charter) 2801 HIGHWAY 280 SOUTH BIRMINGHAM, ALABAMA 35223 (Address of principal executive offices, including zip code) DELAWARE 95-2492236 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Registrant's telephone number, including area code (205) 879-9230 ------------------------ Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $0.50 PAR VALUE JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A GUARANTY ISSUED FOR THE BENEFIT OF HOLDERS OF PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A (Title of class) Name of each exchange on which registered NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: PREFERRED STOCK, $1.00 PAR VALUE (Title of class) ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive proxy statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / Aggregate market value of voting stock held by nonaffiliates of the Registrant as of March 8, 1996: $776,470,819 Number of shares of Common Stock, $0.50 Par Value, outstanding as of March 8, 1996: 28,797,189 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1995 Annual Report To Stockholders (the "1995 Annual Report To Stockholders") are incorporated by reference into Parts I, II, and IV of this Report. Portions of the Registrant's Proxy Statement dated March 29, 1996, are incorporated by reference into Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROTECTIVE LIFE CORPORATION ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1995 TABLE OF CONTENTS
PAGE ----- PART I Item 1. Business....................................................................................... 3 Item 2. Properties..................................................................................... 19 Item 3. Legal Proceedings.............................................................................. 19 Item 4. Submission of Matters to a Vote of Security Holders............................................ 19 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 19 Item 6. Selected Financial Data........................................................................ 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22 Item 8. Financial Statements and Supplementary Data.................................................... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 24 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 24 Item 11. Executive Compensation......................................................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 27 Item 13. Certain Relationships and Related Transactions................................................. 27 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 27
2 PART I ITEM 1. BUSINESS Protective Life Corporation is an insurance holding company, whose subsidiaries provide financial services through the production, distribution, and administration of insurance and investment products. Founded in 1907, Protective Life Insurance Company ("Protective Life") is the Company's principal operating subsidiary. Unless the context otherwise requires, the "Company" refers to the consolidated group of Protective Life Corporation and its subsidiaries. The Company has six operating divisions: Acquisitions, Financial Institutions, Group, Guaranteed Investment Contracts, Individual Life, and Investment Products. The Company also has an additional business segment which is described herein as Corporate and Other. Additional information concerning the Company's divisions may be found in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- RESULTS OF OPERATIONS" and Note J to Consolidated Financial Statements in the Company's 1995 Annual Report to Stockholders, which are incorporated herein by reference. Copies of the Company's Proxy Statement and 1995 Annual Report to Stockholders will be furnished to anyone who requests such documents in writing from the Secretary of the Company, Protective Life Corporation, P. O. Box 2606, Birmingham, Alabama 35202. The information incorporated herein by reference is also electronically accessible through the Internet from the "EDGAR Database of Corporate Information" on the Securities and Exchange Commission's World Wide Web site (http://www.sec.gov). Management believes that maintenance of strong claims-paying and financial strength ratings is necessary for success in many of its markets. ACQUISITIONS DIVISION The Company actively seeks to acquire blocks of insurance policies. These acquisitions may be accomplished through acquisitions of companies or through the assumption or reinsurance of policies. Most acquisitions do not include the Company's acquisition of an active sales force, but some do. Blocks of policies acquired through the Acquisitions Division are usually administered as "closed" blocks; i.e., no new policies are sold. Therefore, the amount of insurance in force for a particular acquisition is expected to decline with time due to lapses and deaths of the insureds. Thirty-five separate transactions have been entered into since 1970. Management believes a favorable environment for acquisitions will likely continue into the immediate future. Insurance companies are facing heightened regulatory and market pressure to increase statutory capital and thus may seek to increase capital by selling blocks of policies. Insurance companies also appear to be selling blocks of policies in conjunction with programs to narrow strategic focus. In addition, smaller companies may face difficulties in marketing and thus may seek to be acquired. However, it appears that other companies are entering this market; therefore, the Company may face increased competition for future acquisitions. 3 Several states have enacted statutes that decreased the attractiveness of assumption reinsurance transactions and increased the attractiveness of coinsurance transactions. In coinsurance transactions, the seller remains contingently liable with respect to the coinsured policies should the Company become unable to fulfill its obligations to the seller under the coinsurance agreement. This has caused sellers to place more emphasis on the financial condition and acquisition experience of the purchaser. Management believes this favorably impacts the Company's competitive position. Total revenues and income before income tax from the Acquisitions Division are expected to decline with time unless new acquisitions are made. Therefore, the Division's revenues and earnings may fluctuate from year to year depending upon the level of acquisition activity. In the third quarter of 1993, the Company acquired Wisconsin National Life Insurance Company and coinsured a small block of universal life policies. In 1994, the Company coinsured a small block of payroll deduction policies in the second quarter and coinsured a block of 130,000 policies in the fourth quarter. In the second quarter of 1995, the Company coinsured a block of 28,000 policies. In March 1996, the Company coinsured a block of 38,000 policies. FINANCIAL INSTITUTIONS DIVISION The Financial Institutions Division specializes in marketing insurance products through commercial banks, savings and loan associations, and mortgage bankers. The Division markets an array of life and health products, which cover consumer and mortgage loans made by financial institutions located primarily in the southeastern United States. The Division also markets life and health products nationally through the consumer finance industry and through automobile dealerships. The Division markets through employee field representatives, independent brokers, and a wholly-owned subsidiary. The Division also offers certain products through direct mail solicitation to customers of financial institutions. The demand for credit life and credit health insurance is related to the general level of loan demand. In 1992, the Company acquired the credit insurance business of Durham Life Insurance Company. The acquisition more than doubled the size of the Division and provided significant market share in the southeastern states not previously covered by the Company. The Division has entered into a reinsurance arrangement whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. In the second quarter of 1995, the Division also ceded a block of older policies. Though these reinsurance transactions will reduce the Division's earnings, the Division's return on investment is expected to improve. GROUP DIVISION The Group Division manufactures, distributes, and services group, dental, cancer, and payroll deduction insurance products. Group accident and health insurance is generally considered to be cyclical. Profits rise or fall as competitive forces allow or prevent rate increases to keep pace with changes in group health medical costs. The Company is placing marketing emphasis on other health insurance products which have not been as subject to medical cost inflation as traditional group health products. These products include dental insurance policies and weekly income (short-term disability) policies which are distributed nationally through the Division's 4 existing distribution system, as well as through joint marketing arrangements with independent marketing organizations, and through reinsurance contracts with other insurers. These products also include an individual cancer insurance policy marketed through a nationwide network of agents. It is anticipated that a significant part of the growth in the Company's health insurance premium income in the next several years will be from dental products. In 1993, the Division established a special marketing unit to sell dental and other products through mail and telephone solicitations. The unit has sales offices in Arizona, Colorado, Florida, Georgia, Illinois, Kentucky, Michigan, North Carolina, Ohio, Tennessee, Texas and Wisconsin. On March 20, 1995, the Company completed its acquisition of National Health Care Systems of Florida, Inc. ("NHCS"), based in Jacksonville, Florida. NHCS operates prepaid dental plans (also referred to as dental health maintenance organizations or dental capitation plans). NHCS, known as "DentiCare", has approximately 308,000 members as of December 31, 1995, located primarily in Florida, Tennessee, Georgia, and Alabama. On October 30, 1995, the Company announced it had agreed to acquire an additional prepaid dental plan and a dental HMO, both of which also operate under the trade name "Denticare". These plans have approximately 40,000 members in Oklahoma, Arkansas, and Missouri. This transaction is subject to regulatory approval and other conditions, and is expected to close in the second quarter of 1996. The Division offers substantially all forms of group insurance customary in the industry, making available complete packages of life and accident and health insurance to employers. The life and accident and health insurance packages offered by this Division include hospital and medical coverages as well as dental and disability coverages. To address rising health care costs, the Division provides cost containment services such as utilization review and catastrophic case management. The Division markets its group insurance products primarily in the southeastern and southwestern United States using the services of brokers who specialize in group products. Sales offices in Alabama, Florida, Georgia, Illinois, Missouri, North Carolina, Ohio, Oklahoma, Tennessee, and Texas are maintained to serve these brokers. Group policies are directed primarily at employers and associations with between 25 and 1,000 employees. The Division also markets group insurance to small employers through a marketing organization affiliated with an insurer, and reinsures the business produced by the marketing organization. The Division receives a ceding commission from these arrangements. GUARANTEED INVESTMENT CONTRACTS DIVISION In 1989, the Company began selling guaranteed investment contracts ("GICs"). The Company's GICs are contracts, issued to a 401(k) or other retirement savings plan, which guarantee a fixed return on deposits for a specified period and often provide flexibility for withdrawals, in keeping with the benefits provided by the plan. The Company also offers related products through this Division, including fixed rate contracts offered to the trustees of municipal bond proceeds, floating rate contracts issued to bank trust departments, and long-term annuity contracts used to fund certain state obligations. Since 1989, life insurer credit concerns and a demand shift to non-traditional GIC alternatives have generally caused the GIC market to contract somewhat, although broadening the Division's product offerings has allowed it to maintain strong sales. 5 Most GIC contracts written by the Company have maturities of 3 to 5 years. Prior to 1993, few GIC contracts were maturing because the contracts were newly written. Therefore, GIC account balances grew at a significant rate. Beginning in 1993, GIC contracts began to mature as contemplated when the contracts were sold. Hence, the rate of growth in GIC deposits has decreased as the amount of maturing contracts has increased. INDIVIDUAL LIFE DIVISION The Individual Life Division primarily utilizes a distribution system based on experienced independent personal producing general agents who are recruited by regional sales managers. At December 31, 1995, there were 22 regional sales managers located throughout the United States. Honors Club members, agents who produce at least $30 thousand of new premium per year, totalled 258 at December 31, 1995. Honors Club members represent approximately 39% of the Division's new premium. In 1993, the Division began distributing insurance products through stock brokers. The Division also distributes insurance products through the payroll deduction market and in the life insurance brokerage market. The Division also offers its products to other insurance companies and their distribution systems under private label arrangements. Marketing efforts in the Individual Life Division are directed toward the Company's various universal life products and products designed to compete in the term marketplace. Universal life products combine traditional life insurance protection with the ability to tailor a more flexible payment schedule to the individual's needs, provide an accumulation of cash values on which income taxes are deferred, and permit the Company to change interest rates credited on policy cash values to reflect current market rates. The Company currently emphasizes back-end loaded universal life policies which reward the continuing policyholder and which should help maintain the persistency of its universal life business. The products designed to compete in the term marketplace are term-like policies with guaranteed level premiums for the first 10, 15, or 20 years which provide a competitive net cost to the insured. The Division also includes ProEquities, Inc. ("PES"), an affiliated securities broker-dealer. Through PES, members of the Company's field force who are licensed to sell securities can sell stocks, bonds, mutual funds, and investment products that may be manufactured or issued by companies other than the Company. Prior to 1995, management responsibility for PES was with the Investment Products Division, and therefore PES's financial results were included in the Investment Products Division. INVESTMENT PRODUCTS DIVISION The Investment Products Division manufactures, sells, and supports annuity products. These products are sold through broker-dealers, financial institutions, and the Individual Life Division. Some of the Division's annuity products are also sold through PES. In April 1990, the Company began sales of modified guaranteed annuity products which guarantee an interest rate for a fixed period. Because contract values are "market-value adjusted" upon surrender prior to maturity, these products afford the Company a measure of protection from changes in interest rates. 6 In 1992, the Division ceased most new sales of single premium deferred annuities. In 1994, the Division introduced a variable annuity product to broaden the Division's product line. The demand for annuity products is related to the general level of interest rates and performance of the equity markets. CORPORATE AND OTHER The Corporate and Other segment consists of several small insurance lines of business, net investment income and expenses not attributable to the business segments described above (including interest on substantially all debt), and the operations of several small noninsurance subsidiaries. The earnings of this segment may fluctuate from year to year. In August 1993, the Company completed the sale of its ownership interest in Southeast Health Plan, Inc., a Birmingham-based health maintenance organization, in which the Company had an investment since 1988. In 1994, the Company entered into a joint venture arrangement with the Lippo Group to enter the Hong Kong insurance market. The Company and the Lippo Group jointly own a Hong Kong insurer which commenced business in early 1995. Management believes that this joint venture will position the Company to market life insurance in mainland China when that opportunity unfolds. The Company continues to investigate other possible opportunities in Asia. INSURANCE IN FORCE The Company's total consolidated life insurance in force at December 31, 1995 was $61.9 billion. The following table shows sales by face amount and insurance in force for the Company's business segments. 7
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 -------------- -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) New Business Written Financial Institutions....... $ 3,563,177 $ 2,524,212 $ 2,776,276 $ 1,149,265 $ 1,057,886 Group........................ 119,357 184,429 252,345 328,258 390,141 Individual Life.............. 7,564,983 6,329,630 4,440,510 4,877,038 4,244,903 -------------- -------------- -------------- -------------- -------------- Total...................... $ 11,247,517 $ 9,038,271 $ 7,469,131 $ 6,354,561 $ 5,692,930 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Business Acquired Acquisitions................. $ 6,129,159 $ 4,756,371 $ 4,378,812 $ 1,302,330 Financial Institutions....... 1,432,338 -------------- -------------- -------------- -------------- -------------- Total...................... $ 6,129,159 $ 4,756,371 $ 4,378,812 $ 2,734,668 $ 0 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Insurance in Force at End of Year (1) Acquisitions................. $ 16,778,359 $ 11,728,569 $ 8,452,114 $ 3,836,066 $ 4,385,948 Financial Institutions....... 6,233,256 4,841,318 4,306,179 3,690,610 2,446,815 Group........................ 6,371,313 7,464,501 6,716,724 6,315,410 7,088,931 Individual Life.............. 32,500,935 25,843,232 22,975,577 20,634,927 16,655,923 -------------- -------------- -------------- -------------- -------------- Total...................... $ 61,883,863 $ 49,877,620 $ 42,450,594 $ 34,477,013 $ 30,577,617 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
- ------------------------ (1) Reinsurance assumed has been included; reinsurance ceded (1995-$17,524,366; 1994-$8,639,272; 1993-$7,484,566; 1992-$6,982,127; 1991-$5,292,080) has not been deducted. The ratio of voluntary terminations of individual life insurance to mean individual life insurance in force, which is determined by dividing the amount of insurance terminated due to surrenders and lapses during the year by the mean of the insurance in force at the beginning and end of the year, adjusted for the timing of major acquisitions and assumptions was:
RATIO OF YEAR ENDED VOLUNTARY DECEMBER 31 TERMINATIONS -------------------------------------------------- ------------ 1991.............................................. 8.9% 1992.............................................. 9.0 1993.............................................. 8.7 1994.............................................. 7.0 1995.............................................. 6.9
Net terminations reflect voluntary lapses and cash surrenders, some of which may be due to the replacement of the Company's products with competitors' products. Also, a higher percentage of voluntary lapses typically occurs in the first 15 months of a policy, and accordingly, lapses will tend to increase or decrease in proportion to the change in new insurance written during the immediately preceding periods. 8 The amount of investment products in force is measured by account balances. The following table shows guaranteed investment contract and annuity account balances.
GUARANTEED MODIFIED YEAR ENDED INVESTMENT GUARANTEED FIXED VARIABLE DECEMBER 31 CONTRACTS ANNUITIES ANNUITIES ANNUITIES - ------------------------------ ------------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) 1991.......................... $ 1,264,603 $ 115,477 $ 324,662 1992.......................... 1,694,530 299,608 374,451 1993.......................... 2,015,075 468,689 537,053 1994.......................... 2,281,673 661,359 542,766 $ 170,454 1995.......................... 2,451,693 741,849 472,656 392,237
UNDERWRITING The underwriting policies of the Company's insurance subsidiaries are established by management. With respect to individual insurance, the subsidiaries use information from the application and, in some cases, inspection reports, attending physician statements, or medical examinations to determine whether a policy should be issued as applied for, rated, or rejected. Medical examinations of applicants are required for individual life insurance in excess of certain prescribed amounts (which vary based on the type of insurance) and for most individual insurance applied for by applicants over age 50. In the case of "simplified issue" policies, which are issued primarily through the Financial Institutions Division and the payroll deduction market, coverage is rejected if the responses to certain health questions contained in the application indicate adverse health of the applicant. For other than "simplified issue" policies, medical examinations are requested of any applicant, regardless of age and amount of requested coverage, if an examination is deemed necessary to underwrite the risk. Substandard risks may be referred to reinsurers for full or partial reinsurance of the substandard risk. The Company's insurance subsidiaries require blood samples to be drawn with individual insurance applications for coverage over $100,000 (ages 16-50) or $150,000 (age 51 and above). Blood samples are tested for a wide range of chemical values and are screened for antibodies to the HIV virus. Applications also contain questions permitted by law regarding the HIV virus which must be answered by the proposed insureds. Group insurance underwriting policies are administered by experienced group underwriters. The underwriting policies are designed for single employer groups. Initial premium rates are based on prior claim experience and manual premium rates with relative weights depending on the size of the group and the nature of the benefits. INVESTMENTS The types of assets in which the Company may invest are influenced by state laws which prescribe qualified investment assets. Within the parameters of these laws, the Company invests its assets giving consideration to such factors as liquidity needs, investment quality, investment return, matching of assets and liabilities, and the composition of the investment portfolio by asset type and credit exposure. Because liquidity is important, the Company continually balances maturity against yield and quality considerations in selecting new investments. 9 The Company's asset/liability matching practices involve monitoring of asset and liability durations for various product lines, cash flow testing under various interest rate scenarios, and rebalancing of assets and liabilities with respect to yield, risk, and cash-flow characteristics. The following table shows the Company's investments at December 31, 1995, valued on the basis of generally accepted accounting principles.
PERCENT OF TOTAL ASSET VALUE INVESTMENTS ---------------------- ---------------- (DOLLARS IN THOUSANDS) Fixed maturities: Bonds: Mortgage-backed securities............... $2,049,775 34.0% United States Government and government agencies and authorities................ 107,577 1.8 States, municipalities, and political subdivisions............................ 11,590 0.2 Public utilities......................... 327,244 5.4 Convertibles and bonds with warrants attached................................ 493 -- All other corporate bonds................ 1,168,924 19.4 Bank loan participations................... 220,811 3.7 Redeemable preferred stocks................ 5,594 0.1 ----------- ----- Total fixed maturities................. 3,892,008 64.6 ----------- ----- Equity securities: Common stocks -- industrial, miscellaneous, and all other............................. 28,746 0.5 Nonredeemable preferred stocks............. 9,965 0.2 ----------- ----- Total equity securities................ 38,711 0.7 ----------- ----- Mortgage loans on real estate................ 1,834,357 30.4 Investment real estate....................... 20,921 0.3 Policy loans................................. 143,372 2.4 Other long-term investments.................. 42,096 0.7 Short-term investments....................... 53,591 0.9 ----------- ----- Total investments...................... $6,025,056 100.0% ----------- ----- ----------- -----
A significant portion of the Company's bond portfolio is invested in mortgage-backed securities. Mortgage-backed securities are constructed from pools of residential mortgages, and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans. Prepayments of principal on the underlying residential loans can be expected to accelerate with decreases in interest rates and diminish with increases in interest rates. In management's view, the overall quality of the Company's investment portfolio continues to be strong. The Company obtains ratings of its fixed maturities from Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). If a bond is not rated by Moody's or S&P, the Company uses ratings from the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"), or the Company rates the bond based upon a comparison of the unrated issue to rated issues of the same issuer or rated issues of 10 other issuers with similar risk characteristics. At December 31, 1995, approximately 95% of bonds were rated by Moody's, S&P, or the NAIC. The following table shows the approximate percentage distribution of the Company's fixed maturities by rating, utilizing S&P rating categories, at December 31, 1995:
PERCENTAGE OF FIXED TYPE MATURITIES -------------------------------------------------- ------------- Bonds AAA............................................. 56.1% AA.............................................. 4.5 A............................................... 12.6 BBB............................................. 19.0 BB or Less...................................... 2.0 Bank Loan Participations Investment Grade................................ 0.4 Non-Investment Grade............................ 5.3 Redeemable Preferred Stock........................ 0.1 ----- Total............................................. 100.0% ----- -----
At December 31, 1995, approximately $3,589.9 million of the Company's $3,665.6 million bond portfolio was invested in U.S. Government or Agency-backed securities or investment grade corporate bonds and only approximately $75.7 million of its bond portfolio was rated less than investment grade. Approximately $292.6 million of bonds are not publicly traded. Risks associated with investments in less than investment grade debt obligations may be significantly higher than risks associated with investments in debt securities rated investment grade. Risk of loss upon default by the borrower is significantly greater with respect to such debt obligations than with other debt securities because these obligations may be unsecured or subordinated to other creditors. Additionally, there is often a thinly traded market for such securities and current market quotations are frequently not available for some of these securities. Issuers of less than investment grade debt obligations usually have higher levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment-grade issuers. The Company also invests in bank loan participations. Generally, such investments constitute the most senior debt incurred by the borrower in highly leveraged transactions. They are generally unrated by the credit rating agencies. Of the $220.8 million of bank loan participations owned by the Company at December 31, 1995, $206.0 million were classified by the Company as less than investment grade. The Company also invests a significant portion of its portfolio in mortgage loans. Results for these investments have been excellent due to careful management and a focus on a specialized segment of the market. The Company generally does not lend on speculative properties and has specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers. 11 The following table shows a breakdown of the Company's mortgage loan portfolio by property type:
PERCENTAGE OF MORTGAGE LOANS PROPERTY TYPE ON REAL ESTATE ------------------------------------- -------------- Retail............................... 80.6% Warehouses........................... 7.3 Office Building...................... 6.2 Apartments........................... 4.0 Mixed-use............................ 1.1 Other................................ 0.8 ----- Total................................ 100.0% ----- -----
Credit-anchored strip shopping center loans are generally on strip shopping centers located in smaller towns and anchored by one or more strong regional or national retail stores. The anchor tenants enter into long-term leases with the Company's borrowers. These centers provide the basic necessities of life, such as food, pharmaceuticals, and clothing, and have been relatively insensitive to changes in economic conditions. The following are some of the largest anchor tenants (measured by the Company's exposure) in the strip shopping centers at December 31, 1995:
PERCENTAGE OF MORTGAGE LOANS ANCHOR TENANTS ON REAL ESTATE ---------------------------------- --------------- K-Mart............................ 4% Food Lion......................... 4 Winn Dixie........................ 4 Wal-Mart.......................... 3 Bi-Lo............................. 3 Revco............................. 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, although in certain circumstances the Company will lend on the basis of an 85% loan-to-value ratio. Projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) generally exceed 70% of the property's projected operating expenses and debt service. For several years the Company has offered a commercial loan product under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. Approximately $361.2 million of the Company's mortgage loans have this participation feature. The average size mortgage loan in the Company's portfolio is approximately $1.6 million. The largest single loan amount is $13.1 million. Many of the Company's mortgage loans have call or interest rate reset provisions after five to seven years. However, if interest rates were to significantly increase, the Company may be unable to increase the interest rates on its existing mortgage loans commensurate with the significantly increased market rates, or call the loans. 12 In order to provide additional liquidity, the Company plans a commercial mortgage securitization during the first quarter of 1996. Proceeds from the securitization will be reinvested in publicly-traded investment grade bonds. At December 31, 1995, $26.1 million or 1.4% of the mortgage loan portfolio was nonperforming. It is the Company's policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is the Company's general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. As a general rule, the Company does not invest directly in real estate. The investment real estate held by the Company consists largely of properties obtained through foreclosures or the acquisition of other insurance companies. In the Company's experience, the appraised value of foreclosed properties often approximates the mortgage loan balance on the property plus costs of foreclosure. Also, foreclosed properties often generate a positive cash flow enabling the Company to hold and manage the property until the property can be profitably sold. The Company has established an allowance for uncollectible amounts on investments. This allowance was $33.4 million at December 31, 1995. Combinations of futures contracts and options on treasury notes are sometimes used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, and liabilities arising from interest sensitive products such as GICs and annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. The Company also uses interest rate swap contracts to convert certain investments from a variable rate of interest to a fixed rate of interest. For further discussion regarding the Company's investments and the maturity of and the concentration of risk among the Company's invested assets, see Note C to the Consolidated Financial Statements. 13 The following table shows the investment results of the Company for the years 1991 through 1995:
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) 1991............................ $ 2,837,278 $ 233,502 9.4% $ (3,085) 1992............................ 3,653,074 284,069 8.9 (14) 1993............................ 4,845,167 362,130 8.7 5,054 1994............................ 5,362,016 417,825 8.3 6,298 1995............................ 6,097,455 475,924 8.2 1,612
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" in the Company's 1995 Annual Report to Stockholders for certain information relating to the Company's investments and liquidity. INDEMNITY REINSURANCE As is customary in the insurance industry, the Company's insurance subsidiaries cede insurance to other insurance companies. The ceding insurance company remains contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. The Company sets a limit on the amount of insurance retained on the life of any one person. In the individual lines it will not retain more than $500,000, including accidental death benefits, on any one life. Certain of the term-like plans of the Company have a retention of $50,000 per life. For group insurance, the maximum amount retained on any one life is $100,000. At December 31, 1995, the Company had insurance in force of $61.9 billion of which approximately $17.5 billion was ceded to reinsurers. RESERVES The applicable insurance laws under which the Company's insurance subsidiaries operate require that each insurance company report policy reserves as liabilities to meet future obligations on the outstanding policies. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated in accordance with applicable law to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain named mortality tables and interest rates. The reserves carried in the Company's financial reports (presented on the basis of generally accepted accounting principles) differ from those specified by the laws of the various states and carried in the insurance subsidiaries' statutory financial statements (presented on the basis of statutory accounting principles mandated by state insurance regulation). For policy reserves other than those for universal life policies, annuity contracts, and GICs, these differences arise from the use of mortality and morbidity tables and interest rate assumptions which are deemed under generally accepted accounting principles to be more appropriate for financial reporting purposes than those required for statutory accounting purposes; from the introduction of lapse assumptions into the reserve calculation; and from the use of the net level premium 14 reserve method on all business. Policy reserves for universal life policies, annuity contracts, and GICs are carried in the Company's financial reports at the account value of the policy or contract. FEDERAL INCOME TAX CONSEQUENCES The Company's insurance subsidiaries are taxed by the federal government in a manner similar to companies in other industries. However, certain restrictions on consolidating life insurance company income with noninsurance income are applicable to the Company; thus, the Company is not able to consolidate all of the operating results of its subsidiaries for federal income tax purposes. Under pre-1984 tax law, certain income of the Company was not taxed currently, but was accumulated in the "Policyholders' Surplus Account" for each insurance company subsidiary to be taxed only when such income was distributed to the stockholders or when certain limits on accumulated amounts were exceeded. Consistent with current tax law, amounts accumulated in the Policyholders' Surplus Account have been carried forward, although no accumulated income may be added to these accounts. As of December 31, 1995, the combined Policyholders' Surplus Accounts for the life insurance subsidiaries of the Company and the estimated tax which would become payable on these amounts if distributed to stockholders were $50.7 million and $17.7 million, respectively. The Company does not anticipate any of its life insurance subsidiaries exceeding applicable limits on amounts accumulated in these accounts and, therefore, does not expect to involuntarily pay tax on the amounts held therein. COMPETITION The Company operates in a highly competitive industry. In connection with the development and sale of its products, the Company encounters significant competition from other insurance companies, many of which have financial resources or ratings greater than those of the Company. Certain of the Company's products compete against other investment alternatives, including bonds, stocks, and mutual funds. The insurance industry is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Management believes that the Company's ability to compete is dependent upon, among other things, its ability to attract and retain agents to market its insurance products, its ability to develop competitive and profitable products, and its maintenance of a high rating from rating agencies. Bank products provide competitive alternatives to the Company's GICs and annuities. Banks may also compete by selling annuity products provided by other insurance companies. Also, in the future banks and other financial institutions may be granted approval to underwrite and sell annuities or other insurance products that compete directly with the Company. Likewise, nontraditional sources of health care coverages, such as health maintenance organizations and preferred provider organizations, are developing rapidly in the Company's operating territory and provide competitive alternatives to the Company's group health products. 15 REGULATION The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including premium rates, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than stockholders. The Company cannot predict the form of any future proposals or regulation. The design and administration of the Company's insurance products, the conduct of the Company's agents, and the content of advertising and other sales materials are also regulated by these state agencies. Recently, some regulatory agencies have enhanced their enforcement efforts resulting in disciplinary actions being taken against insurers, including the assessment of fines. A life insurance company's statutory capital is computed according to rules prescribed by the NAIC as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These risk-based capital requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Based upon the December 31, 1995 statutory financial reports, the Company's insurance subsidiaries are adequately capitalized under the formula. The Company's insurance subsidiaries are required to file detailed annual reports with the supervisory agencies in each of the jurisdictions in which they do business and their business and accounts are subject to examination by such agencies at any time. Under the rules of the NAIC, insurance companies are examined periodically (generally every three to five years) by one or more of the supervisory agencies on behalf of the states in which they do business. To date, no such insurance department examinations have produced any significant adverse findings regarding any insurance company subsidiary of the Company. Under insurance guaranty fund laws in most states, insurance companies doing business in such a state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. The Company's insurance subsidiaries were assessed immaterial amounts in 1995, which will be partially offset by credits against future state premium taxes. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength. In addition, many states, including the states in which the Company's insurance subsidiaries are domiciled, have enacted legislation or adopted regulations regarding insurance holding company systems. These laws require registration of and periodic reporting by insurance companies domiciled within the jurisdiction which control or are controlled by other corporations or persons so as to constitute an insurance holding company system. These laws also affect the acquisition of control of insurance companies as well as transactions between insurance companies and companies controlling them. Most states, including Tennessee, where Protective Life is 16 domiciled, require administrative approval of the acquisition of control of an insurance company domiciled in the state or the acquisition of control of an insurance holding company whose insurance subsidiary is incorporated in the state. In Tennessee, the acquisition of 10% of the voting securities of a person is generally deemed to be the acquisition of control for the purpose of the insurance holding company statute and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. The Company's insurance subsidiaries are subject to various state statutory and regulatory restrictions on the insurance subsidiaries' ability to pay dividends to Protective Life Corporation. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to the Company by its insurance subsidiaries in 1996 is estimated to be $129 million. No assurance can be given that more stringent restrictions will not be adopted from time to time by states in which the Company's insurance subsidiaries are domiciled, which restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to the Company by such subsidiaries without affirmative prior approval by state regulatory authorities. The Company's insurance subsidiaries act as fiduciaries and are subject to regulation by the Department of Labor ("DOL") when providing a variety of products and services to employee benefit plans governed by the Employee Retirement Income Security Act of 1974 ("ERISA"). Severe penalties are imposed by ERISA on fiduciaries which violate ERISA's prohibited transaction provisions by breaching their duties to ERISA-covered plans. In a case decided by the United States Supreme Court in December 1993 (JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY V. HARRIS TRUST AND SAVINGS BANK), the Court concluded that an insurance company general account contract that had been issued to a pension plan should be divided into its guaranteed and nonguaranteed components and that certain ERISA fiduciary obligations applied with respect to the assets underlying the nonguaranteed components. Although the Company's insurance subsidiaries have not issued contracts identical to the one involved in HARRIS TRUST, some of its policies relating to ERISA-covered plans may be deemed to have nonguaranteed components subject to the principles announced by the Court. The full extent to which HARRIS TRUST makes the fiduciary standards and prohibited transaction provisions of ERISA applicable to all or part of insurance company general account assets, however, cannot be determined at this time. The Supreme Court's opinion did not resolve whether the assets at issue in the case may be subject to ERISA for some purposes and not others. The life insurance industry requested that the DOL issue exemptions from the prohibited transaction provisions of ERISA in view of HARRIS TRUST. In July of 1995, the DOL published, in final form, a prohibited transaction class exemption (PTE 95-60) which exempts from the prohibited transaction rules, prospectively and retroactively to January 1, 1975, certain transactions engaged in by insurance company general accounts in which employer benefit plans have an interest. The exemption does not cover all such transactions, and the insurance industry is seeking further relief. Until these and other matters are clarified, the Company is unable to determine whether the decision will result in any liability and, if so, its nature and scope. 17 Existing federal laws and regulations affect the taxation of the Company's products. Income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. Congress has from time to time considered proposals that, if enacted, would have had an adverse impact on the federal income tax treatment of such products. If these proposals were to be adopted, they could adversely affect the ability of the Company's life insurance subsidiaries to sell such products and could result in the surrender of existing contracts and policies. Although it cannot be predicted whether future legislation will contain provisions that alter the treatment of these products, such provisions are not part of any tax legislation currently under active consideration in Congress. The Federal Government has from time to time advocated changes to the current health care delivery system which will address both affordability and availability issues. The ultimate scope and effective date of any health care reform proposals are unknown at this time and are likely to be modified as they are considered for enactment by Congress. It is anticipated that these proposals may adversely affect certain products in the Company's group health insurance business. In addition to the federal initiatives, a number of states are considering legislative programs that are intended to affect the accessibility and affordability of health care. Some states have recently enacted health care reform legislation. These various state programs (which could be preempted by any federal program) may also adversely affect the Company's group health insurance business. However, in light of the small relative proportion of the Company's earnings attributable to group health insurance, management does not expect that either the federal or state proposals will have a material adverse effect on the Company's earnings. The Federal Government has advocated repeal of the Glass-Steagall Act, which would allow banks to diversify into securities and other businesses, including possibly insurance. The ultimate scope and effective date of any proposals are unknown at this time and are likely to be modified as they are considered for enactment. It is anticipated that these proposals may increase competition and, therefore, may adversely affect the Company. Additional issues related to regulation of the Company and its insurance subsidiaries are discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" in the Company's 1995 Annual Report to Stockholders. EMPLOYEES The Company had 1,169 full-time employees, including 983 in the Home Office in Birmingham, Alabama at December 31, 1995. These employees are covered by contributory major medical insurance, group life, and long-term disability insurance plans. The cost of these benefits in 1995 amounted to approximately $3.4 million for the Company. In addition, substantially all of the employees are covered by a pension plan. The Company also matches employee contributions to its 401(k) Plan. See Note K to Consolidated Financial Statements. 18 ITEM 2. PROPERTIES The Company's Home Office building is located at 2801 Highway 280 South, Birmingham, Alabama. This building includes the original 142,000 square-foot building which was completed in 1976 and a second contiguous 220,000 square-foot building which was completed in 1985. In addition, parking is provided for approximately 1,000 vehicles. The Company leases administrative space in six cities, substantially all under leases for periods of three to five years. The aggregate monthly rent is approximately $74 thousand. Marketing offices are leased in 13 cities, substantially all under leases for periods of three to five years with only two leases running longer than five years. The aggregate monthly rent is approximately $30 thousand. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which the Company or any of its subsidiaries is a party or of which any of the Company's properties is the subject. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" in the Company's 1995 Annual Report to Stockholders for certain information relating to litigation involving the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 1995 to a vote of security holders of the Company. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed and principally traded on the New York Stock Exchange (NYSE symbol: PL). The following table sets forth the highest and lowest closing prices of the Company's Common Stock, $0.50 par value, as reported by the New York Stock Exchange during the periods indicated, along with the dividends paid per share of Common Stock during the same periods. Prices and dividends prior to June 1, 1995 have been adjusted for the June 1, 1995 two-for-one stock split. 19
RANGE --------------- HIGH LOW DIVIDENDS ------ ------ --------- 1994 First Quarter......................... $22.88 $20.44 $.13 Second Quarter........................ 23.13 19.13 .14 Third Quarter......................... 22.06 20.00 .14 Fourth Quarter........................ 24.31 19.94 .14 1995 First Quarter......................... $24.25 $21.44 $.14 Second Quarter........................ 27.50 21.63 .16 Third Quarter......................... 29.63 27.38 .16 Fourth Quarter........................ 31.25 26.88 .16
On February 12, 1996, there were approximately 2,100 holders of record of Company Common Stock. The Company (or its predecessor) has paid cash dividends each year since 1926 and each quarter since 1934. The Company expects to continue to pay cash dividends, subject to the earnings and financial condition of the Company and other relevant factors. The ability of the Company to pay cash dividends is dependent in part on cash dividends received by the Company from its life insurance subsidiaries. See Item 7 -- "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES" in the Company's 1995 Annual Report to Stockholders. Such subsidiary dividends are restricted by the various insurance laws of the states in which the subsidiaries are incorporated. See Item 1 -- "BUSINESS -- REGULATION". 20 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Premiums and policy fees.............. $369,888 $402,772 $370,758 $323,136 $273,975 Net investment income................. 475,924 417,825 362,130 284,069 233,502 Realized investment gains(losses)..... 1,612 6,298 5,054 (14) (3,085) Other income.......................... 32,663 21,553 21,695 18,835 11,556 ------------- ------------- ------------- ------------- ------------- Total revenues.................. $880,087 $848,448 $759,637 $626,026 $515,948 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Benefits and expenses................. $759,053 $742,275 $674,593 $566,079 $464,245 Income tax expense.................... $ 41,152 $ 33,976 $ 28,475 $ 17,384 $ 14,477 Minority interest..................... $ 3,217 $ 1,796 $ 19 $ 90 $ 1,437 Net income............................ $ 76,665 $ 70,401 $ 56,550(1) $ 41,420(2) $ 35,789 PER SHARE DATA (3) Net income (4)........................ $ 2.68 $ 2.57 $ 2.07(1) $ 1.52(2) $ 1.31 Cash dividends........................ $ 0.62 $ .55 $ .505 $ .45 $ .41 Weighted average number of shares outstanding.......................... 28,627,345(5) 27,392,936(5) 27,381,578(5) 27,315,986 27,298,062 Stockholders' equity.................. $ 18.30 $ 9.86 $ 13.17 $ 10.28 $ 9.22 Stockholders' equity excluding net unrealized gains and losses on investments.......................... $ 16.29 $ 13.78 $ 11.74 $ 10.16 $ 9.08
DECEMBER 31 ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA Total assets...................................... $7,231,257 $6,130,284 $5,316,005 $4,006,667 $3,120,290 Long-term debt.................................... $ 115,500 $ 98,000 $ 137,598 $ 31,014 $ 23,548 Total debt........................................ $ 115,500 $ 98,000 $ 147,118 $ 88,248 $ 57,579 Monthly Income Preferred Securities (6)........................ $ 55,000 $ 55,000 Stockholders' equity.............................. $ 526,557 $ 270,373 $ 360,733 $ 281,400 $ 251,745 Stockholders' equity excluding unrealized gains and losses on investments........................ $ 468,694 $ 377,905 $ 321,449 $ 278,244 $ 247,764
- ------------------------------ (1) Reduced by $1,261 or $.05 per share representing a one-time adjustment to income tax expense due to the change in the corporate income tax rate from 34% to 35%. (2) Reduced by $1,053 or $.04 per share representing the cumulative effect of a change in accounting principle for the adoption of SFAS No. 106. (3) Prior periods have been restated to reflect a two-for-one stock split on June 1, 1995. (4) Net income per share is computed using the weighted average number of shares outstanding during each period. (5) Excludes contingently issuable shares of 225,061, 262,730, and 257,272 at December 31, 1995, 1994, and 1993, respectively. The dilutive effect of such shares on earnings per share is less than three percent. (6) Reported as "minority interest in consolidated subsidiaries" in the Company's financial statements. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information regarding the Company's financial condition and results of operations is included under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Company's 1995 Annual Report to Stockholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data for the Company and its subsidiaries, which are included under the caption "CONSOLIDATED FINANCIAL STATEMENTS" in the Company's 1995 Annual Report to Stockholders, are incorporated herein by reference. 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders Protective Life Corporation Birmingham, Alabama Our report on the consolidated financial statements of Protective Life Corporation and subsidiaries has been incorporated by reference in this Form 10-K from page 63 of the 1995 Annual Report to Stockholders of Protective Life Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 27 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND L.L.P. - ---------------------------- Coopers & Lybrand L.L.P. Birmingham, Alabama February 12, 1996 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for the information concerning executive officers of the Company set forth below, the information called for by this Item 10 is incorporated herein by reference to the section entitled "ELECTION OF DIRECTORS AND INFORMATION ABOUT NOMINEES" in the Company's definitive proxy statement for the Annual Meeting of Stockholders, May 6, 1996, to be filed with the Securities and Exchange Commission by the Company pursuant to Regulation 14A within 120 days after the end of its 1995 fiscal year. The executive officers of the Company are as follows:
NAME AGE POSITION - -------------------- --- ------------------------------------------------ Drayton Nabers, Jr. 55 Chairman of the Board, President and Chief Executive Officer and a Director R. Stephen Briggs 46 Executive Vice President John D. Johns 43 Executive Vice President and Chief Financial Officer Ormond L. Bentley 60 Senior Vice President, Group Carolyn King 45 Senior Vice President, Investment Products Division Deborah J. Long 42 Senior Vice President and General Counsel Jim E. Massengale 53 Senior Vice President Steven A. Schultz 42 Senior Vice President, Financial Institutions Wayne E. Stuenkel 42 Senior Vice President and Chief Actuary A. S. Williams III 59 Senior Vice President, Investments and Treasurer
24
NAME AGE POSITION - -------------------- --- ------------------------------------------------ Judy Wilson 37 Senior Vice President, Guaranteed Investment Contracts Jerry W. DeFoor 43 Vice President and Controller, and Chief Accounting Officer
All executive officers are elected annually and serve at the pleasure of the Board of Directors. None is related to any director of the Company or to any other executive officer. Mr. Nabers has been Chairman of the Board, President and Chief Executive Officer and a Director since May 1994. From May 1992 to May 1994, he was President and Chief Executive Officer and a Director. Mr. Nabers was President and Chief Operating Officer and a Director from August 1982 until May 1992. From July 1981 to August 1982, he was Senior Vice President of the Company. Since August 1982, he has also been President of Protective Life and had been its Senior Vice President from September 1981 to August 1982. From February 1980 to September 1981, he served as Senior Vice President, Operations of Protective Life. From 1979 to February 1980, he was Senior Vice President, Operations and General Counsel of Protective Life. From February 1980 to March 1983, he served as President of Empire General Life Insurance Company, a subsidiary, and from March 1983 to December 31, 1984, he was Chairman of the Executive Committee of Empire General. He is also a director of Energen Corporation, National Bank of Commerce of Birmingham, and Alabama National Bancorporation. Mr. Briggs has been Executive Vice President of the Company and of Protective Life since October 1993. From January 1993 to October 1993, he was Senior Vice President, Life Insurance and Investment Products of the Company and of Protective Life. Mr. Briggs had been Senior Vice President, Ordinary Marketing of the Company since August 1988 and of Protective Life since April 1986. From July 1983 to April 1986, he was President of First Protective Insurance Group, Inc. Mr. Johns has been Executive Vice President and Chief Financial Officer of the Company and of Protective Life since October 1993. From August 1988 to October 1993, he served as Vice President and General Counsel of Sonat Inc. He is a director of National Bank of Commerce of Birmingham, Alabama National Bancorporation, and Parisian Services, Inc. Mr. Bentley has been Senior Vice President, Group of the Company since August 1988 and of Protective Life since December 1978. Mr. Bentley has been employed by Protective Life since October 1965. Ms. King has been Senior Vice President, Investment Products Division of the Company and of Protective Life since April 1995. From August 1994 to March 1995, she served as Senior Vice President and Chief Investment Officer of Provident Life and Accident Insurance Company and of its parent company, Provident Life and Accident Insurance Company of America. She served as President of Provident National Assurance Company from November 1987 to March 1995. From November 1986 to August 1994, she served as Vice President of Provident Life and Accident Insurance Company and of its parent company, Provident Life and Accident Insurance 25 Company of America. Since 1975, Ms. King served in a number of capacities with Provident National Assurance Company. Ms. Long has been Senior Vice President and General Counsel of the Company and of Protective Life since February 1994. From August 1993 to January 1994, Ms. Long served as General Counsel of the Company and from February 1984 to January 1994 she practiced law with the law firm of Maynard, Cooper & Gale, P.C. Mr. Massengale has been Senior Vice President of the Company and of Protective Life since May 1992. From May 1989 to May 1992, he was Senior Vice President, Operations and Systems of the Company and of Protective Life. From January 1983 to May 1989, he served as Senior Vice President, Corporate Systems of the Company and of Protective Life. Mr. Schultz has been Senior Vice President, Financial Institutions of the Company and of Protective Life since March 1993. Mr. Schultz served as Vice President, Financial Institutions of the Company from February 1993 to March 1993 and of Protective Life from February 1989 to March 1993. From June 1977 through January 1989, he was employed by and served in a number of capacities with The Minnesota Mutual Life Insurance Company, finally serving as Director, Group Sales. Mr. Stuenkel has been Senior Vice President and Chief Actuary of the Company and of Protective Life since March 1987. Mr. Stuenkel is a Fellow of the Society of Actuaries and has been employed by Protective Life since September 1978. Mr. Williams has been Senior Vice President, Investments and Treasurer of the Company since July 1981. Mr. Williams also serves as Senior Vice President, Investments and Treasurer of Protective Life. Mr. Williams has been employed by Protective Life since November 1964. Ms. Wilson has been Senior Vice President, Guaranteed Investment Contracts of the Company and of Protective Life since January 1, 1995. From July 1991 to December 31, 1994, she served as Vice President, Guaranteed Investment Contracts of Protective Life. From October 1989 through July 1991, Ms. Wilson was employed by an affiliated insurer. Mr. DeFoor has been Vice President and Controller, and Chief Accounting Officer of the Company and of Protective Life since April 1989. Mr. DeFoor is a certified public accountant and has been employed by Protective Life since August 1982. Certain of these executive officers also serve as executive officers and/or directors of various other Company subsidiaries. Directors and executive officers of the Company are required to report changes in their beneficial ownership of the Company's Common Stock to the Securities and Exchange Commission. In 1995, a report concerning a gift of 1,338 shares to charity by Mr. Rushton and a second report concerning the acquisition of 41.4 shares through the Company's Dividend Reinvestment Plan by Mr. Nabers' daughters were filed late. 26 ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Items 11 through 13 is incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders, May 6, 1996, to be filed with the Securities and Exchange Commission by the Company pursuant to Regulation 14A within 120 days after the end of its 1995 fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements: The following financial statements set forth in the Company's 1995 Annual Report to Stockholders as indicated in the following table are incorporated by reference (see Exhibit 13).
PAGE ---- Report of Independent Accountants........................... 63 Consolidated Statements of Income for the years ended December 31, 1995, 1994, and 1993.......................... 43 Consolidated Balance Sheets as of December 31, 1995 and 1994....................................................... 44 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994, and 1993.............. 46 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993.......................... 47 Notes to Consolidated Financial Statements.................. 48
2. Financial Statement Schedules: The Report of Independent Accountants which covers the financial statement schedules appears on page 23 of this report. The following schedules are located in this report on the pages indicated.
PAGE ---- Schedule II -- Condensed Financial Information of Registrant................................................. 34 Schedule III -- Supplementary Insurance Information......... 38 Schedule IV -- Reinsurance.................................. 39
27 All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibits: Included as exhibits are the items listed below. The Company will furnish a copy of any of the exhibits listed upon the payment of $5.00 per exhibit to cover the cost of the Company in furnishing the exhibit.
ITEM NUMBER DOCUMENT - ----------- ----------------------------------------------------------------- *3(a) 1985 Restated Certificate of Incorporation of the Company filed as Exhibit 3(a) to the Company's Form 10-K Annual Report for the year ended December 31, 1993 *3(a)(1) Certificate of Amendment of 1985 Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on June 1, 1987 and filed as Exhibit 3(a)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1993 *3(a)(2) Certificate of Amendment of 1985 Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on May 5, 1994 and filed as Exhibit 3(a)(5) to the Company's Form 10-Q Quarterly Report for the period ended March 31, 1994 *3(a)(3) Certificate of Designation of Junior Participating Cumulative Preferred Stock of the Company filed with the Secretary of State of Delaware on August 9, 1995 and filed as Exhibit A to Exhibit 1 to the Company's Form 8-A Report filed August 7, 1995 and filed as Exhibit A to Exhibit 2 to the Company's Form 8-K Report filed August 7, 1995 3(a)(4) Certificate of Decrease of Shares Designated as Junior Participating Cumulative Preferred Stock of the Company filed with the Secretary of State of Delaware on August 8, 1995 *3(b) 1995 Amended and Restated By-laws of the Company filed as Exhibit 1 to the Company's Form 8-K Report filed August 7, 1995 *4(a) Reference is made to Exhibits 3(a) through 3(a)(4) above
- ------------------------ *incorporated by reference 28
ITEM NUMBER DOCUMENT - ----------- ----------------------------------------------------------------- *4(b) Reference is made to Exhibit 3(b) above *4(c) Certificate of Formation of PLC Capital L.L.C. ("PLC Capital") filed as Exhibit 4(c) to the Company's and PLC Capital's Registration Statement No. 33-52831 *4(d) Amended and Restated Limited Liability Company Agreement of PLC Capital L.L.C. filed as Exhibit 4(d) to the Company's and PLC Capital's Registration Statement No. 33-52831 *4(e) Form of Action establishing series of Preferred Securities (included as Annex A to Exhibit 4(d) to the Company's and PLC Capital's Registration Statement No. 33-52831) *4(f) Specimen Preferred Security Certificate (included as Annex B to Exhibit 4(d) to the Company's and PLC Capital's Registration Statement No. 33-52831) *4(g) Rights Agreement, dated as of August 7, 1995, between the Company and AmSouth Bank of Alabama (formerly, AmSouth Bank N.A.), as Rights Agent filed as Exhibit 2 to the Company's Form 8-K filed August 7, 1995 and filed as Exhibit 1 to the Company's Form 8-A filed August 7, 1995 *10(a) Management Incentive Plan filed as Exhibit 10(a) to the Company's Form 10-K Annual Report for the year ended December 31, 1984 *10(a)(1) Amendment to the Company's Management Incentive Plan renamed as the Company's Annual Incentive Plan filed as Exhibit 10(a)(1) to the Company's Form 10-Q Report filed May 14, 1990 *10(b) The Company's 1992 Performance Share Plan filed as Exhibit 10(b)(3) to the Company's Form 10-Q filed May 15, 1992 10(b)(1) First Amendment to the Company's 1992 Performance Share Plan *10(c) Excess Benefit Plan amended and restated as of January 1, 1989 filed as Exhibit 10(c)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1991
- ------------------------ *incorporated by reference 29
ITEM NUMBER DOCUMENT - ----------- ----------------------------------------------------------------- *10(d) Indemnity Agreements filed as Exhibits to the Company's Form 10-Q Report, filed August 14, 1986 *10(e) Reference is made to Exhibit 4(g) above *10(f) Form of Severance Compensation Agreement filed as Exhibit 10(i) to the Company's Form 10-K Annual Report for the year ended December 31, 1991 *10(f)(1) Form of First Amendment to Severance Compensation Agreement filed as Exhibit 10(i)(1) to the Company's Form 10-K Annual Report for the year ended December 31, 1991 *10(g) The Company's Deferred Compensation Plan for Directors Who Are Not Employees of the Company filed as Exhibit 4 to the Company's Form S-8 filed August 27, 1993 *10(h) The Company's Deferred Compensation Plan for Officers filed as Exhibit 4 to the Company's Form S-8 filed January 13, 1994 13 1995 Annual Report To Stockholders 21 Organization Chart of the Company and Affiliates 23 Consent of Coopers & Lybrand L.L.P. 24 Power of Attorney 27 Financial Data Schedule
The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this Form 10-K: Exhibit Item Numbers 10(a), 10(a)(1), 10(b), 10(b)(1), 10(c), 10(f), 10(f)(1), 10(g), and 10(h). - ------------------------ *incorporated by reference 30 (b) Reports on Form 8-K: (1) Form 8-K, dated February 16, 1995 -- Item 5 (2) Form 8-K, dated April 27, 1995 -- Item 5 (3) Form 8-K, dated July 25, 1995 -- Item 5 (4) Form 8-K, dated August 7, 1995 -- Item 5 -- Item 7 (5) Form 8-K, dated October 25, 1995 -- Item 5 31 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROTECTIVE LIFE CORPORATION By: /s/ Drayton Nabers, Jr. ----------------------------------------- Drayton Nabers, Jr. Chairman of the Board, President and Chief Executive Officer March 22, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE - ---------------------------------------------- ---------------------------------------------- ------------------ /s/ Drayton Nabers, Jr. Chairman of the Board, President and Chief ------------------------------------ Executive Officer (Principal Executive March 22, 1996 DRAYTON NABERS, JR. Officer) and Director /s/ John D. Johns Executive Vice President and Chief Financial ------------------------------------ Officer (Principal Financial Officer) March 22, 1996 JOHN D. JOHNS /s/ Jerry W. DeFoor Vice President and Controller, and Chief ------------------------------------ Accounting Officer (Principal Accounting March 22, 1996 JERRY W. DEFOOR Officer) * ------------------------------------ Chairman Emeritus and Director March 22, 1996 WILLIAM J. RUSHTON III * ------------------------------------ Director March 22, 1996 JOHN W. WOODS
32
SIGNATURE CAPACITY IN WHICH SIGNED DATE - ---------------------------------------------- ---------------------------------------------- ------------------ * ------------------------------------ Director March 22, 1996 WILLIAM J. CABANISS, JR. * ------------------------------------ Director March 22, 1996 H. G. PATTILLO * ------------------------------------ Director March 22, 1996 JOHN J. MCMAHON, JR. * ------------------------------------ Director March 22, 1996 A. W. DAHLBERG * ------------------------------------ Director March 22, 1996 JOHN W. ROUSE, JR. * ------------------------------------ Director March 22, 1996 ROBERT T. DAVID * ------------------------------------ Director March 22, 1996 RONALD L. KUEHN, JR. * ------------------------------------ Director March 22, 1996 HERBERT A. SKLENAR
- ------------------------ *Drayton Nabers, Jr., by signing his name hereto, does sign this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission. By: /s/ Drayton Nabers, Jr. ----------------------------------------- DRAYTON NABERS, JR. Attorney-in-Fact 33 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME PROTECTIVE LIFE CORPORATION (PARENT COMPANY) YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993 --------- --------- --------- (IN THOUSANDS) REVENUES Dividends from subsidiaries*................................................. $ 13,691 $ 1,885 $ (91) Service fees from subsidiaries*.............................................. 37,410 28,949 21,143 Investment income............................................................ 3,671 5,339 4,276 Other income/(loss).......................................................... (1,879) 1,582 3,662 --------- --------- --------- 52,893 37,755 28,990 --------- --------- --------- EXPENSES Operating and administrative................................................. 28,941 28,499 25,340 Interest -- subsidiaries*.................................................... 4,993 2,491 Interest -- others........................................................... 8,206 6,793 5,300 --------- --------- --------- 42,140 37,783 30,640 --------- --------- --------- INCOME BEFORE FEDERAL INCOME TAX AND OTHER ITEMS BELOW......................... 10,753 (28) (1,650) INCOME TAX EXPENSE (BENEFIT)................................................... 3 128 (1,325) --------- --------- --------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES................... 10,750 (156) (325) EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES*................................ 65,915 70,557 56,875 --------- --------- --------- NET INCOME..................................................................... $ 76,665 $ 70,401 $ 56,550 --------- --------- --------- --------- --------- ---------
- ------------------------ *Eliminated in consolidation. See notes to condensed financial statements. 34 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
DECEMBER 31 ------------------------ 1995 1994 ----------- ----------- (IN THOUSANDS) ASSETS Investments: Short-term investments.............................................................. $ $ 1,900 Long-term investments............................................................... 72 77 Investment real estate.............................................................. 133 133 Investments in subsidiaries (equity method)*........................................ 710,212 420,126 ----------- ----------- 710,417 422,236 Cash.................................................................................. 71 196 Receivables from subsidiaries*........................................................ 35,134 41,188 Other receivables..................................................................... 1,024 Accrued income taxes.................................................................. 4,603 1,884 Other................................................................................. 5,138 4,090 ----------- ----------- Total Assets...................................................................... $ 755,363 $ 470,618 ----------- ----------- ----------- ----------- LIABILITIES Accrued expenses and other liabilities................................................ $ 37,381 $ 29,581 Deferred income taxes................................................................. 6,305 3,044 Long-term debt: Subsidiaries*....................................................................... 69,620 69,620 Banks............................................................................... 40,500 23,000 Senior Notes........................................................................ 75,000 75,000 ----------- ----------- Total Liabilities................................................................. 228,806 200,245 ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY Preferred Stock Junior Participating Cumulative Preferred Stock Common Stock.......................................................................... 15,668 15,668 Additional paid-in capital............................................................ 96,371 71,295 Net unrealized gains (losses) on investments (all from subsidiaries, net of income tax: 1995 -- $31,157; 1994 -- $(57,902))........................................... 57,863 (107,532) Retained earnings (including undistributed income of subsidiaries: 1995 -- $444,305; 1994 -- $378,390).................................................................... 373,922 314,857 Treasury stock........................................................................ (12,008) (18,323) Unallocated stock in Employee Stock Ownership Plan.................................... (5,259) (5,592) ----------- ----------- Total Stockholders' Equity........................................................ 526,557 270,373 ----------- ----------- $ 755,363 $ 470,618 ----------- ----------- ----------- -----------
- ------------------------ *Eliminated in consolidation. See notes to condensed financial statements. 35 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS PROTECTIVE LIFE CORPORATION (PARENT COMPANY) YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993 ---------- ------------ ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................................... $ 76,665 $ 70,401 $ 56,550 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries*.................... (65,915) (70,558) (56,875) Deferred income taxes.................................................. 3,261 1,227 (2,381) Gain on sale of subsidiary............................................. (3,522) Other (net)............................................................ 7,043 6,911 7,725 ---------- ------------ ---------- Net cash provided by operating activities................................ 21,054 7,981 1,497 ---------- ------------ ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of and/or additional investments in subsidiaries*............... (27,731) (23,071) (41,806) Loan to subsidiary*...................................................... (20,000) Principal payments received on loan to subsidiary*....................... 4,750 9,500 11,550 Sale of subsidiary....................................................... 2,091 Change in other long-term investments.................................... 5 (77) 1,041 Change in short-term investments......................................... 1,900 97 (1,147) ---------- ------------ ---------- Net cash used in investing activities (21,076) (13,551) (48,271) ---------- ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowing under line of credit arrangements and long-term debt.................................................................... 52,300 87,200 68,300 Principal payments on line of credit arrangements and long-term debt..... (34,800) (136,200) (7,500) Proceeds from borrowing under long-term debt to subsidiary*.............. 69,620 Purchase of Treasury Stock............................................... (3) (191) Dividends to stockholders................................................ (17,600) (15,071) (13,827) ---------- ------------ ---------- Net cash provided by (used in) financing activities...................... (103) 5,358 46,973 ---------- ------------ ---------- INCREASE (DECREASE) IN CASH................................................ (125) (212) 199 CASH AT BEGINNING OF YEAR.................................................. 196 408 209 ---------- ------------ ---------- CASH AT END OF YEAR........................................................ $ 71 $ 196 $ 408 ---------- ------------ ---------- ---------- ------------ ----------
- ------------------------ *Eliminated in consolidation. See notes to condensed financial statements. 36 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT PROTECTIVE LIFE CORPORATION (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS The Company publishes consolidated financial statements that are its primary financial statements. Therefore, these parent company condensed financial statements are not intended to be the primary financial statements of the Company, and should be read in conjunction with the consolidated financial statements and notes thereto of Protective Life Corporation and subsidiaries. NOTE 1 - DEBT At December 31, 1995, the Company had borrowed $40.5 million of its $60.0 million revolving line of credit. Borrowings under the revolving line of credit become due in 1998. In addition, $75.0 million of Senior Notes due 2004 and $55.0 million of subordinated debentures due 2024 were outstanding at December 31, 1995. The subordinated debentures were issued to PLC Capital L.L.C., an affiliate, in connection with the issuance of Monthly Income Preferred Securities by PLC Capital L.L.C. NOTE 2 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1995 1994 1993 --------- --------- --------- CASH PAID (RECEIVED) DURING THE YEAR FOR: Interest Paid to Non-Affiliates................................................. $ 6,634 $ 2,783 $ 5,540 Interest Paid to Subsidiary*.................................................... 6,266 3,498 --------- --------- --------- $ 12,900 $ 6,281 $ 5,540 --------- --------- --------- --------- --------- --------- Income Taxes (reduced by amounts received from affiliates under a tax sharing agreement)..................................................................... $ (538) $ (431) $ (701) --------- --------- --------- --------- --------- --------- NONCASH INVESTING AND FINANCING ACTIVITIES Reissuance of Treasury Stock to ESOP............................................ $ 350 $ 3 $ 3 --------- --------- --------- --------- --------- --------- Unallocated Stock in ESOP....................................................... $ 333 $ 264 $ 344 --------- --------- --------- --------- --------- --------- Reissuance of Treasury Stock.................................................... $ 31,014 $ 1,050 $ 135 --------- --------- --------- --------- --------- ---------
NOTE 3 - SUBSIDIARY SURPLUS DEBENTURES Protective Life Insurance Company ("Protective Life") has issued surplus debentures to the Company in order to finance acquisitions and growth. At December 31, 1995, the balance of the surplus debentures was $34.7 million. The surplus debentures are included in receivables from subsidiaries. Protective Life must obtain the approval of the Commissioner of Insurance before it may repay any portion of the surplus debenture. NOTE 4 - PURCHASE OF SUBSIDIARY On March 20, 1995, the Company acquired National Health Care Systems of Florida, Inc. (also known as "DentiCare"). The purchase price was paid with a combination of the Company's Common Stock ($30.7 million) and cash ($7.6 million). In connection with the acquisition, the Company reissued 1,316,458 shares of its Common Stock previously held as Treasury Stock. - ------------------------ *Eliminated in consolidation. 37 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES (in thousands)
COL. A COL. B COL. C COL. D COL. E COL. F COL. G - ------------------------------ ----------- ------------- ----------- ------------- ----------- ----------- GIC AND FUTURE ANNUITY DEFERRED POLICY DEPOSITS AND PREMIUMS POLICY BENEFITS OTHER AND NET REALIZED ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT INVESTMENT SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME(1) GAINS(LOSSES) - ------------------------------ ----------- ------------- ----------- ------------- ----------- ----------- -------------- Year Ended December 31, 1995: Acquisitions.............. $ 123,889 $ 851,994 $ 590 $ 250,550 $ 98,501 $ 95,018 $ 0 Financial Institutions.... 36,283 84,162 189,973 1,495 23,875 9,377 0 Group..................... 24,974 123,279 5,371 85,925 142,483 14,432 0 Guaranteed Investment Contracts................ 993 68,704 0 2,451,693 0 203,376 (3,908) Individual Life........... 186,496 672,569 336 14,709 99,018 40,277 0 Investment Products....... 37,747 127,104 0 1,061,507 4,566 95,706 4,937 Corporate and Other....... 14 342 62 263 1,445 17,738 0 Unallocated Realized Investment Gains (Losses)................. 0 0 0 0 0 0 583 ----------- ------------- ----------- ------------- ----------- ----------- -------------- TOTAL................... $ 410,396 $ 1,928,154 $ 196,332 $ 3,866,142 $ 369,888 $ 475,924 $ 1,612 ----------- ------------- ----------- ------------- ----------- ----------- -------------- ----------- ------------- ----------- ------------- ----------- ----------- -------------- Year Ended December 31, 1994: Acquisitions.............. $ 110,202 $ 856,889 $ 381 $ 266,828 $ 86,376 $ 83,750 $ 532 Financial Institutions.... 68,060 43,198 99,798 2,758 98,027 9,224 0 Group..................... 22,685 116,324 2,905 84,689 131,096 14,381 0 Guaranteed Investment Contracts................ 996 0 0 2,281,674 0 180,591 3,000 Individual Life........... 162,186 571,070 320 13,713 84,925 37,319 0 Investment Products....... 70,298 102,705 0 1,027,527 1,635 80,780 (2,500) Corporate and Other......... 17 4,109 75 263 713 11,780 0 Unallocated Realized Investment Gains (Losses)................. 0 0 0 0 0 0 5,266 ----------- ------------- ----------- ------------- ----------- ----------- -------------- TOTAL................... $ 434,444 $ 1,694,295 $ 103,479 $ 3,677,452 $ 402,772 $ 417,825 $ 6,298 ----------- ------------- ----------- ------------- ----------- ----------- -------------- ----------- ------------- ----------- ------------- ----------- ----------- -------------- Year Ended December 31, 1993: Acquisitions.............. $ 69,942 $ 705,487 $ 501 $ 259,513 $ 58,561 $ 65,290 $ 0 Financial Institutions.... 59,163 39,508 85,042 2,913 87,355 8,956 0 Group..................... 20,520 99,412 2,786 83,522 126,027 14,522 0 Guaranteed Investment Contracts................ 1,464 0 0 2,015,075 0 166,058 1,175 Individual Life........... 129,265 483,604 368 11,762 77,338 34,154 0 Investment Products....... 19,210 52,516 0 789,668 856 66,706 2,003 Corporate and Other....... 20 318 88 339 20,621 6,444 0 Unallocated Realized Investment Gains (Losses)................. 0 0 0 0 0 0 1,876 ----------- ------------- ----------- ------------- ----------- ----------- -------------- TOTAL................... $ 299,584 $ 1,380,845 $ 88,785 $ 3,162,792 $ 370,758 $ 362,130 $ 5,054 ----------- ------------- ----------- ------------- ----------- ----------- -------------- ----------- ------------- ----------- ------------- ----------- ----------- -------------- 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, 1995: Acquisitions.............. $ 100,016 $ 20,601 $ 21,534 Financial Institutions.... (19,574) 28,609 16,301 Group..................... 109,447 3,052 55,384 Guaranteed Investment Contracts................ 165,963 386 2,864 Individual Life........... 80,067 20,403 31,142 Investment Products....... 72,111 11,479 11,995 Corporate and Other....... 1,476 3 25,794 Unallocated Realized Investment Gains (Losses)................. 0 0 0 ----------- ------------ ----------- TOTAL................... $ 509,506 $ 84,533 $ 165,014 ----------- ------------ ----------- ----------- ------------ ----------- Year Ended December 31, 1994: Acquisitions.............. $ 97,649 $ 14,460 $ 19,374 Financial Institutions.... 46,360 36,592 15,873 Group..................... 98,930 2,724 35,574 Guaranteed Investment Contracts................ 147,383 893 5,172 Individual Life........... 67,451 18,771 19,254 Investment Products....... 58,424 14,679 16,201 Corporate and Other......... 913 3 25,595 Unallocated Realized Investment Gains (Losses)................. 0 0 ----------- ------------ ----------- TOTAL................... $ 517,110 $ 88,122 $ 137,043 ----------- ------------ ----------- ----------- ------------ ----------- Year Ended December 31, 1993: Acquisitions.............. $ 73,463 $ 7,832 $ 12,715 Financial Institutions.... 42,840 31,202 15,273 Group..................... 101,266 2,271 29,492 Guaranteed Investment Contracts................ 137,379 1,170 3,279 Individual Life........... 55,973 18,069 17,548 Investment Products....... 49,569 12,822 14,793 Corporate and Other....... 13,394 239 34,004 Unallocated Realized Investment Gains (Losses)................. 0 0 0 ----------- ------------ ----------- TOTAL................... $ 473,884 $ 73,605 $ 127,104 ----------- ------------ ----------- ----------- ------------ -----------
- ------------------------------ (1) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied. 38 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 OF AMOUNT GROSS OTHER FROM OTHER ASSUMED TO AMOUNT COMPANIES COMPANIES NET AMOUNT NET ----------- ----------- ----------- ----------- ------------ Year Ended December 31, 1995: Life insurance in force........... $50,346,719 $17,524,366 $11,537,144 $44,359,497 26.0% ----------- ----------- ----------- ----------- --- ----------- ----------- ----------- ----------- --- Premiums and policy fees: Life insurance.................. $ 287,526 $ 116,091 $ 66,565 $ 238,000 28.0% Accident/health insurance....... 335,387 217,082 13,583 131,888 10.3% ----------- ----------- ----------- ----------- TOTAL......................... $ 622,913 $ 333,173 $ 80,148 $ 369,888 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Year Ended December 31, 1994: Life insurance in force........... $40,909,454 $ 8,639,272 $ 8,968,166 $41,238,348 21.7% ----------- ----------- ----------- ----------- --- ----------- ----------- ----------- ----------- --- Premiums and policy fees: Life insurance.................. $ 256,840 $ 46,029 $ 31,032 $ 241,843 12.8% Accident/health insurance....... 283,883 126,545 3,591 160,929 2.2% ----------- ----------- ----------- ----------- TOTAL......................... $ 540,723 $ 172,574 $ 34,623 $ 402,772 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Year Ended December 31, 1993: Life insurance in force........... $40,149,017 $ 7,484,566 $ 2,301,577 $34,966,028 6.6% ----------- ----------- ----------- ----------- --- ----------- ----------- ----------- ----------- --- Premiums and policy fees: Life insurance.................. $ 230,706 $ 37,995 $ 8,329 $ 201,040 4.1% Accident/health insurance....... 254,672 88,917 3,963 169,718 2.3% ----------- ----------- ----------- ----------- TOTAL......................... $ 485,378 $ 126,912 $ 12,292 $ 370,758 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
39 EXHIBITS TO FORM 10-K OF PROTECTIVE LIFE CORPORATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 INDEX TO EXHIBITS
PAGE ---- 3(a)(4)................................................................ 10(b)(1)................................................................ 13...................................................................... 21...................................................................... 23...................................................................... 24...................................................................... 27......................................................................
EX-3.(A)(4) 2 EX-3(A)(4) CERTIFICATE OF DECREASE OF SHARES DESIGNATED AS JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK PAR VALUE $1.00 PER SHARE OF PROTECTIVE LIFE CORPORATION PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE We, Drayton Nabers, Jr., President, and John K. Wright, Secretary, of Protective Life Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That the Restated Certificate of Incorporation of said corporation was filed in the office of the Secretary of State of the State of Delaware on May 7, 1985, and was amended on June 1, 1987 and May 5, 1994 (as so amended, the "Certificate of Incorporation"); and a certificate of Designation of Junior Participating Cumulative Preferred Stock was filed in the office of the Secretary of State of the State of Delaware on July 14, 1987, and was corrected by a Certificate of Correction of Certificate of Designation filed in the office of the Secretary of State of the State of Delaware on July 24, 1987; and That pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation, the said Board of Directors on August 7, 1995, by the affirmative vote of at least a majority of the members of the Board of Directors, adopted the following resolutions to decrease the number of shares designated as Junior Participating Preferred Stock, par value $1.00 per share, of the Corporation from 150,000 shares to zero shares: RESOLVED, that, effective on August 18, 1995, the number of shares of Junior Participating Cumulative Preferred Stock (the "Previous Preferred Stock"), consisting of 150,000 shares, with a par value of $1.00 per share having the designation and terms set forth in the Certificate of Designation of Junior Participating Cumulative Preferred Stock, as filed with the Secretary of State of the State of Delaware on July 14, 1987, as corrected by the Certificate of Correction of Certificate of Designation filed with the Secretary of State of the State of Delaware on July 24, 1987, is reduced to zero; RESOLVED, that the 150,000 authorized shares of Previous Preferred Stock of the Corporation referred to in the foregoing resolution shall be, as of August 18, 1995, returned to the status of authorized Preferred Stock not issued or reserved for issuance in any series. This Certificate of Decrease shall be effective as of August 18, 1995. IN WITNESS WHEREOF, this Certificate of Decrease is executed on behalf of the Corporation by its President and attested by its Secretary this 7th day of August, 1995. /s/ Drayton Nabers, Jr. -------------------------------------- Drayton Nabers, Jr. President ATTEST: /s/ John K. Wright - -------------------------------------- John K. Wright Secretary 2 EX-10.(B)(1) 3 EXHIBIT 10(B)(1) FIRST AMENDMENT TO THE PROTECTIVE LIFE CORPORATION 1992 PERFORMANCE SHARE PLAN On November 7, 1994, the Protective Life Corporation Board of Directors (the "Board") ratified and approved the action taken by the Compensation and Management Succession Committee on August 22, 1994, acting pursuant to the delegated authority by the Board to amend the Protective Life Corporation 1992 Performance Share Plan as follows: 1. The last sentence of Section 5(c) which read, "However, the Committee may not provide for payment of greater than 125% of the number of Performance Shares awarded" was deleted in its entirety. 2. A sentence was added to the end of Section 5(a) which reads, "Moreover, no Employee may receive in the aggregate more than 187,500 shares of Common Stock in payment of Awards made under this Plan." Except as hereby amended, the Protective Life Corporation 1992 Performance Share Plan shall remain in full force and effect as written. IN WITNESS WHEREOF, the corporation has caused its corporate seal to be hereunto affixed and this First Amendment to the Protective Life Corporation 1992 Performance Share Plan to be signed by Drayton Nabers, Jr., as its Chairman of the Board, President and Chief Executive Officer, and John K. Wright, as its Secretary, hereby declaring and certifying that this First Amendment to the Protective Life Corporation 1992 Performance Share Plan was duly adopted by the Board of Directors at a regular meeting held on the 7th day of November, 1994, to be effective as of August 22, 1994. /s/ Drayton Nabers, Jr. -------------------------------------- Drayton Nabers, Jr. Chairman of the Board, President and Chief Executive Officer ATTEST: /s/ John K. Wright - -------------------------------------- John K. Wright Secretary (CORPORATE SEAL) EX-13 4 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS PREMIUMS AND POLICY FEES The following table sets forth for the periods shown the amount of premiums and policy fees and the percentage change from the prior period: PREMIUMS AND POLICY FEES
YEAR ENDED AMOUNT PERCENTAGE INCREASE DECEMBER 31 (IN THOUSANDS) (DECREASE) - ------------------------- -------------- ------------------- 1993................... $370,758 14.7% 1994................... 402,772 8.6 1995................... 369,888 (8.2)
Premiums and policy fees increased $32.0 million or 8.6% in 1994 over 1993. The 1993 acquisition of Wisconsin National Life Insurance Company (Wisconsin National) and the reinsurance of a block of universal life policies represented $10.5 million of the increase in premiums and policy fees in 1994. The reinsurance of a block of payroll deduction policies, effective April 1, 1994, resulted in a $7.9 million increase. On October 3, 1994, the Company acquired through coinsurance a block of policies from Reliance Standard Life Insurance Company (Reliance Standard), which added $12.5 million of premiums in 1994. Decreases in older acquired blocks of policies represented a $3.1 million decrease in premiums and policy fees. Increases in premiums and policy fees from the Financial Institutions, Group, and Individual Life Divisions represent increases of $10.7 million, $5.1 million, and $7.6 million, respectively. The 1993 sale of the Company's 80% ownership interest in Southeast Health Plan of Alabama, Inc. (SEHP) decreased 1994 premiums and policy fees by $19.3 million. Premiums and policy fees decreased $32.9 million or 8.2% in 1995 over 1994. Premiums and policy fees from the Financial Institutions Division decreased $74.2 million. This resulted from a reinsurance arrangement begun in the 1995 first quarter whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. Increases in premiums and policy fees from the Group and Individual Life Divisions represent increases of $11.4 million and $14.1 million, respectively. Policy fees related to the Company's annuity products increased $2.9 million in 1995. The 1994 assumptions of two blocks of policies resulted in a $11.1 million increase in premiums and policy fees in 1995. On June 15, 1995, the Company coinsured a block of policies which resulted in an $8.3 million increase in premiums and policy fees. Decreases in older acquired blocks of policies represented a $7.2 million decrease in premiums and policy fees. NET INVESTMENT INCOME The following table sets forth for the periods shown the amount of net investment income, the percentage change from the prior period, and the percentage earned on average cash and investments: NET INVESTMENT INCOME
PERCENTAGE EARNED ON YEAR ENDED AMOUNT PERCENTAGE AVERAGE CASH DECEMBER 31 (IN THOUSANDS) INCREASE AND INVESTMENTS - ------------------------- -------------- ---------- --------------- 1993................... $362,130 27.5% 8.7% 1994................... 417,825 15.4 8.3 1995................... 475,924 13.9 8.2
Net investment income in 1994 was $55.7 million or 15.4% higher, and in 1995 was $58.1 million or 13.9% higher than the preceding year, primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to receiving annuity and guaranteed investment contract (GIC) deposits and to acquisitions. (Annuity and GIC deposits received are not considered revenues in accordance with generally accepted accounting principles.) The Wisconsin National and other acquisitions represented $23.9 million of the increase in net investment income in 1994. The assumption of two blocks of policies in 1994 and one block of policies in the second quarter of 1995 resulted in an increase in net investment income of $8.9 million in 1995. The percentage earned on average cash and investments decreased in 1994 to 8.3% primarily due to ending, on account of rising interest rates, the strategy of funding investments ahead of receiving deposits, and an increase in the amount of investments with short durations in order to bring the durations of assets and liabilities into balance. The percentage earned on average cash and investments in 1995 was 8.2%. REALIZED INVESTMENT GAINS (LOSSES) The Company generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, the Company may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, the Company has classified its fixed maturities and certain other securities as "available for sale." The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities. The following table sets forth realized investment gains for the periods shown: REALIZED INVESTMENT GAINS (LOSSES)
YEAR ENDED AMOUNT DECEMBER 31 (IN THOUSANDS) - ------------------------- -------------- 1993................... $5,054 1994................... 6,298 1995................... 1,612
The Company maintains an allowance for uncollectible amounts on investments. The allowance totaled $35.9 million at December 31, 1994, and $33.4 million at December 31, 1995. In 1994 realized investment gains of $14.9 million were partially offset by realized investment losses of $8.6 million. Realized investment gains in 1995 of $21.6 million were largely offset by realized investment losses of $20.0 million. Realized investment losses in 1995 were reduced by a $2.5 million reduction to the allowance for uncollectible amounts on investments. OTHER INCOME The following table sets forth other income for the periods shown:
YEAR ENDED AMOUNT DECEMBER 31 (IN THOUSANDS) - ------------------------- -------------- 1993................... $21,695 1994................... 21,553 1995................... 32,663
Other income consists primarily of revenues of the Company's broker-dealer subsidiary, revenues of the Company's insurance marketing organizations and other noninsurance subsidiaries, and fees from administrative-services-only types of group accident and health insurance contracts. The sale of SEHP reduced other income in 1994 approximately $5.0 million, which was partially offset by a $4.2 million final payment relating to the sale of SEHP. During 1994 the Company also received approximately $8.2 million in settlement of litigation in which the Company was a plaintiff relating to an acquisition made in 1974. Other income was reduced in 1994 by losses of approximately $3.0 million relating to the Company's joint venture with the Lippo Group in Hong Kong, which is accounted for using the equity method. On March 20, 1995, the Company completed its acquisition of National Health Care Systems of Florida, Inc. (NHCS), based in Jacksonville, Florida. NHCS operates prepaid dental plans (also referred to as dental health maintenance organizations or dental capitation plans). NHCS, known as "DentiCare," had approximately 308,000 members as of December 31, 1995, located primarily in Florida, Tennessee, Georgia, and Alabama. The acquisition resulted in a $20.9 million increase in other income in 1995. Other income from all other sources decreased $4.6 million in 1994 and decreased $0.8 million in 1995. The 1994 decrease primarily related to a decrease in revenues of the Company's broker-dealer subsidiary. INCOME BEFORE INCOME TAX The following table sets forth income or loss before income tax by business segment for the periods shown: INCOME (LOSS) BEFORE INCOME TAX
YEAR ENDED DECEMBER 31 ------------------------------------ BUSINESS SEGMENT 1993 1994 1995 - --------------------------------------------------------------------------- ---------- ----------- ----------- (IN THOUSANDS) Acquisitions............................................................... $ 29,845 $ 39,176 $ 51,393 Financial Institutions..................................................... 8,196 9,581 9,197 Group...................................................................... 10,394 11,085 12,379 Guaranteed Investment Contracts............................................ 25,405 30,143 30,255 Individual Life............................................................ 20,064 16,976 15,968 Investment Products........................................................ 2,931 (1,602) 11,392 Corporate and Other*....................................................... (13,667) (4,452) (10,133) Unallocated Realized Investment Gains (Losses)............................. 1,876 5,266 583 ---------- ----------- ----------- $ 85,044 $ 106,173 $ 121,034 ---------- ----------- ----------- ---------- ----------- -----------
- ------------------------ *Income before income tax for the Corporate and Other segment has not been reduced by pretax minority interest of $19 in 1993, $2,764 in 1994, and $4,950 in 1995. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. In the ordinary course of business, the Acquisitions Division regularly considers acquisitions of smaller insurance companies or blocks of policies. 1994 pretax earnings from the Acquisitions Division of $39.2 million were $9.3 million higher than 1993. The two acquisitions completed in 1993 added $9.2 million to the Division's 1994 earnings. Expenses associated with a block of policies acquired in the 1994 fourth quarter reduced earnings $1.3 million. The remaining increase was due to improved claims experience in the Division's other blocks of acquired policies. 1995 pretax earnings from the Acquisitions Division increased $12.2 million to $51.4 million. The two blocks of policies coinsured during 1994 and the block of policies coinsured during the second quarter of 1995 represent $11.7 million of the increase. The Financial Institutions Division's 1994 pretax earnings of $9.6 million were $1.4 million higher than 1993 primarily due to premium growth and improved claims ratios. The Division's 1995 pretax earnings were $0.4 million lower than 1994. The Division has entered into a reinsurance arrangement whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. In the 1995 second quarter the Division also ceded a block of older policies. Though the Division's reported earnings were reduced by approximately $2.0 million, these reinsurance transactions are expected to improve the Division's return on investment. Group 1994 pretax earnings of $11.1 million were $0.7 million higher than 1993. Higher traditional group life and health earnings were complemented by higher earnings from the Division's cancer and dental products. The Division's 1994 results include approximately $3.0 million of expenses to establish a special marketing unit to sell dental plans through mail and telephone solicitations. Group 1995 pretax earnings of $12.4 million were $1.3 million higher than 1994. Total dental earnings were $4.6 million, up $4.5 million. NHCS (DentiCare) represented $1.9 million of the increase. Lower traditional group life and health earnings largely offset higher dental earnings. The Guaranteed Investment Contracts (GIC) Division had pretax operating earnings of $27.1 million in 1994 and $34.2 million in 1995. Operating earnings in 1995 were benefited by lower expenses and a favorable interest rate environment. This increase was also partially due to the growth in GIC deposits placed with the Company. At December 31, 1995, GIC deposits totaled $2.5 billion compared to $2.3 billion one year earlier. Realized investment gains associated with this Division in 1994 were $3.0 million as compared to realized investment losses of $3.9 million in 1995. As a result, total pretax earnings were $30.1 million in 1994 and $30.3 million in 1995. The rate of growth in GIC deposits has decreased as the amount of maturing contracts has increased. The Individual Life Division had 1994 pretax earnings of $17.0 million, $3.1 million lower than 1993. Mortality experience, while still favorable, was approximately $2.5 million less favorable than 1993. The Division also spent approximately $3.0 million during 1994 to develop new ventures. Individual Life 1995 pretax earnings of $16.0 million were $1.0 million lower than 1994. At December 31, 1994, the Company reduced statutory policy liabilities for certain term-like products to be more consistent with current regulation and industry practice. This reduced investment income allocated to the Division in 1995 by approximately $2.6 million when compared to 1994. Additionally, expenses to develop a new variable universal life product were $1.3 million in 1995. Also reflected in the Division's operating results for 1995 is a $1.3 million loss related to the Company's broker-dealer (previously reported within the Investment Products Division). These decreases were partially offset by increased earnings from favorable mortality experience and a growing amount of business in force. The Investment Products Division reported a pretax operating loss of $0.8 million for 1994. These results are after approximately $2.0 million of additional amortization of deferred policy acquisition costs related to the compression of interest spreads during 1994 caused by rising interest rates on the Division's fixed annuities, and expenses of approximately $4.5 million related to the development and introduction of the Division's variable annuity. The Investment Products Division's 1995 pretax operating earnings of $8.0 million were $8.8 million higher than 1994. During 1994 the Division completed the amortization of the deferred policy acquisition costs related to its book value annuities. Accordingly, 1995 operating earnings were $7.2 million higher due to lower amortization. The Division also benefited from a favorable interest rate environment. Realized investment losses, net of related amortization of deferred policy acquisition costs, were $0.8 million in 1994 as compared with realized investment gains, net of amortization, of $3.4 million in 1995. As a result, total pretax earnings were a loss of $1.6 million in 1994 and a gain of $11.4 million in 1995. Fixed annuity deposits totaled $996 million, and variable annuity deposits totaled $392 million at December 31, 1995. Variable annuity deposits of $322 million are reported in the accompanying financial statements as "liabilities related to separate accounts." The Corporate and Other segment consists of several small insurance lines of business, net investment income and other operating expenses not identified with the preceding operating divisions (including interest on substantially all debt), and the operations of several small subsidiaries. 1994 pretax losses of this segment were $4.5 million. The segment's 1994 results include a $4.2 million final payment relating to the sale of SEHP and approximately $8.2 million received in settlement of litigation relating to an acquisition made in 1974. Increases in expenses of $3.0 million were offset by a decrease in interest expense of $2.8 million representing the dividends on the Company's Monthly Income Preferred Securities (MIPS) (the proceeds of which were used to repay debt), which are reported as "minority interest in net income of consolidated subsidiaries" rather than expenses of the Corporate and Other segment. The segment also includes a loss of approximately $3.0 million in 1994 relating to the Company's Hong Kong joint venture. 1995 pretax losses of this segment were $10.1 million. The segment's 1995 results reflect $2.2 million of additional MIPS dividends reported as minority interest. The Company's Hong Kong joint venture reported a loss of approximately $2.1 million in 1995. INCOME TAX EXPENSE The following table sets forth the effective income tax rates for the periods shown: INCOME TAX EXPENSE
YEAR ENDED EFFECTIVE INCOME DECEMBER 31 TAX RATES - ---------------------------------------------------------------- ------------------- 1993.......................................................... 32% 1994.......................................................... 32 1995.......................................................... 34
In August 1993 the corporate income tax rate was increased from 34% to 35% which resulted in a one-time increase to income tax expense due to a recalculation of the Company's deferred income tax liability. The effective income tax rate for 1993, excluding the one-time increase, and for 1994, was 32%. The estimated income tax rate for 1995 was increased from 33% to 34% during the 1995 third quarter. Management's current estimate of the effective tax rate for 1996 is 34%. NET INCOME The following table sets forth net income and net income per share for the periods shown (all references to prior period per share amounts have been restated to reflect a two-for-one stock split on June 1, 1995): NET INCOME
YEAR ENDED AMOUNT PERCENTAGE DECEMBER 31 (IN THOUSANDS) PER SHARE INCREASE - ----------------------------------- -------------- --------- ---------- 1993............................. $56,550 $2.07 36.3% 1994............................. 70,401 2.57 24.4 1995............................. 76,665 2.68 4.3
Net income per share in 1994 was 24.4% higher than 1993, reflecting improved earnings in the Acquisitions, Financial Institutions, Group, and GIC Divisions and Corporate and Other segment, and higher realized investment gains partially offset by lower earnings in the Individual Life and Investment Products Divisions. Net income per share in 1995 increased 4.3%, reflecting improved operating earnings in the Acquisitions, Group, Guaranteed Investment Contracts, and Investment Products Divisions, which were partially offset by lower realized investment gains and lower earnings in the Financial Institutions and Individual Life Divisions, and the Corporate and Other segment. KNOWN TRENDS AND UNCERTAINTIES The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of the Company are discussed more fully below. COMPETITION. The Company operates in a highly competitive industry. In connection with the development and sale of its products, the Company encounters significant competition from other insurance companies, many of which have financial resources or ratings greater than those of the Company. Certain of the Company's products compete against other investment alternatives, including bonds, stocks, and mutual funds. The insurance industry is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. Management believes that the Company's ability to compete is dependent upon, among other things, its ability to attract and retain agents to market its insurance products, its ability to develop competitive and profitable products, and its maintenance of a high rating from rating agencies. Bank products provide competitive alternatives to the Company's GICs and annuities. Banks may also compete by selling annuity products provided by other insurance companies. In addition, in the future banks and other financial institutions may be granted approval to underwrite and sell annuities or other insurance products that compete directly with the Company. Likewise, nontraditional sources of healthcare coverages, such as health maintenance organizations and preferred provider organizations, provide competitive alternatives to the Company's traditional group health products. The Company competes against other insurance companies and financial institutions in the origination of commercial mortgage loans. RATINGS. Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Rating organizations continue to review the financial performance and condition of insurers, including the Company's insurance subsidiaries. A downgrade in the ratings of the Company's subsidiaries could materially adversely affect its business operations, particularly its ability to attract annuity and guaranteed investment contract deposits and its ability to compete for attractive acquisition opportunities. Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside the rated company's control. Therefore, ratings downgrades may result for reasons other than a deterioration in a rated company's financial condition or competitive position. POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year to year on account of fluctuations in policy claims received by the Company during the year. Due to the long-term nature of the insurance business, there should be a review of operating results for a period of several years in order to obtain a more accurate indication of performance. INTEREST RATE FLUCTUATIONS. Rising interest rates could cause market values to fall below amortized cost for many of the Company's fixed maturity investments. Therefore, realized investment losses might be incurred upon sales of investments to maintain proper matching of assets and liabilities. Rising interest rates could also cause disintermediation of GIC and annuity deposits and individual life policy cash values. In addition, the Company may be unable to fully enforce the call provisions of its mortgage loans. The difference between the interest rate earned on investments and the interest rate credited to interest-sensitive products may also be adversely affected by rising interest rates. Falling interest rates could cause some of the Company's corporate bonds that have call features to be called, which could cause the Company to have to reinvest the proceeds at lower interest rates. The Company's mortgage loans are entered into, and mortgage-backed securities are purchased, based on assumptions regarding rates of prepayments. To the extent that actual prepayments are earlier or later than anticipated due to falling or rising interest rates, the Company may not receive cash flows when expected. Most of the Company's mortgage loans, however, have significant prepayment penalties. INVESTMENT RISKS. The Company invests its assets giving consideration to such factors as liquidity needs, investment quality, investment return, matching of assets and liabilities, and the composition of the investment portfolio by asset type and credit exposure. However, the Company's actual investment results may be adversely affected by interest rate fluctuations, financial market and general economic conditions, and other external factors. CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively pursued a strategy of acquiring blocks of insurance policies. This acquisition strategy has increased the Company's earnings in part by allowing the Company to position itself to realize certain operating efficiencies associated with economies of scale. There can be no assurance, however, that suitable acquisitions, presenting opportunities for continued growth and operating efficiencies, will continue to be available to the Company, or that the Company will realize the anticipated financial results from its acquisitions. REGULATION AND TAXATION. The Company's insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including premium rates, policy forms, and capital adequacy, and is concerned primarily with the protection of policyholders rather than stockholders. The Company cannot predict the form of any future regulatory initiatives. The design and administration of the Company's insurance products, the conduct of the Company's agents, and the content of advertising and other sales materials are also regulated by these agencies. Recently, some regulatory agencies have enhanced their enforcement efforts resulting in disciplinary actions being taken against insurers, including the assessment of fines. Under insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength. Under the Internal Revenue Code of 1986, as amended (the Code), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. This favorable tax treatment may give certain of the Company's products a competitive advantage over other retirement savings products that do not offer this benefit. To the extent that the Code is revised to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products, the Company's competitive position may be adversely affected. The President and Congress have from time to time advocated changes to the current healthcare delivery system which will address both affordability and availability issues. The ultimate scope and effective date of any healthcare reform proposals are unknown at this time. It is anticipated that any such proposals may adversely affect certain products in the Company's group health insurance business. In addition to the federal initiatives, a number of states are considering legislative programs that are intended to affect the accessibility and affordability of health care. Some states have already enacted healthcare reform legislation. These various state programs (which could be preempted by any federal program) may also adversely affect the Company's group health insurance business. However, in light of the small relative proportion of the Company's earnings attributable to group health insurance, management does not expect that either the federal or state proposals will have a material adverse effect on the Company's earnings. The Company cannot predict what future initiatives the President or Congress may propose which may affect the Company. LITIGATION. A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company and its subsidiaries, like other life and health insurers, from time to time are involved in such litigation. Although the outcome of any litigation cannot be predicted with certainty, to date, no such lawsuit has resulted in the award of any significant amount of damages against the Company. RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company has entered into various ventures involving other parties. Examples include, but are not limited to: the Investment Products Division's variable annuity deposits are invested in funds managed by Goldman Sachs Asset Management and its affiliates; a significant amount of the Investment Products Division's annuity sales comes from four broker-dealers; a portion of the sales in the Financial Institutions and Group Divisions comes from arrangements with unrelated marketing organizations; and the Company has entered the Hong Kong insurance market in a joint venture with the Lippo Group. Therefore the Company's results may be affected by the performance of others. INDEMNITY REINSURANCE. As is customary in the insurance industry, the Company's insurance subsidiaries cede insurance to other insurance companies. The ceding insurance company remains contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. The Company sets a limit on the amount of insurance retained on the life of any one person. For example, in the individual lines the Company will not retain, generally, more than $500,000, including accidental death benefits, on any one life. For group insurance, the maximum amount retained on any one life is generally $100,000. At December 31, 1995, the Company had insurance in force of $61.9 billion of which approximately $17.5 billion was ceded to reinsurers. RECENTLY ISSUED ACCOUNTING STANDARDS In 1995 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Under these new standards, a loan is considered impaired if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Based on the Company's evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans, and therefore no allowance for losses is required under SFAS No. 114 at December 31, 1995. In 1995 the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which changes the way stock-based compensation expense is measured and requires additional disclosures relating to the Company's stock-based compensation plan. The adoption of SFAS No. 123 had no material effect on the Company's financial statements. In 1995 the Financial Accounting Standards Board issued: SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts;" SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage Servicing Rights." The Company anticipates that the impact of adopting these three accounting standards will be immaterial to its financial condition. LIQUIDITY AND CAPITAL RESOURCES The Company's operations usually produce a positive cash flow. This cash flow is used to fund an investment portfolio to finance future benefit payments including those arising from various types of deposit contracts. Since future benefit payments largely represent medium- and long-term obligations reserved using certain assumed interest rates, the Company's investments are predominantly in medium- and long-term, fixed-rate investments such as bonds and mortgage loans which provide a sufficient return to cover these obligations. Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds. With respect to such products, surrender charges are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered. GICs and certain annuity contracts have market value adjustments which protect the Company against investment losses if interest rates are higher at the time of surrender as compared to interest rates at the time of issue. In accordance with SFAS No. 115, the Company's investments in debt and equity securities are reported at market value, and investments in mortgage loans are reported at amortized cost. At December 31, 1995, the fixed maturity investments (bonds, bank loan participations, and redeemable preferred stocks) had a market value of $3,892.0 million, which is 2.5% above amortized cost (less allowances for uncollectible amounts on investments) of $3,798.9 million. The Company had $1,834.4 million in mortgage loans at December 31, 1995. While the Company's mortgage loans do not have quoted market values, at December 31, 1995, the Company estimates the market value of its mortgage loans to be $2,001.1 million (using discounted cash flows from the next call date) which is 9.1% above amortized cost. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations should not adversely affect liquidity. Most of the Company's mortgage loans have significant prepayment penalties. For several years the Company has offered a type of commercial loan under which the Company will permit a slightly higher loan-to-value ratio in exchange for a participating interest in the cash flows from the underlying real estate. Approximately $361 million of the Company's mortgage loans has this participation feature. At December 31, 1995, delinquent mortgage loans and foreclosed properties were $26.1 million or 0.4% of assets. Bonds rated less than investment grade were $75.7 million or 1.0% of assets. Additionally, the Company had bank loan participations that were less than investment grade, representing $206.0 million or 2.8% of assets. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. The Company's allowance for uncollectible amounts on investments was $33.4 million at December 31, 1995. Policy loans at December 31, 1995, were $143.4 million, a decrease of $4.2 million from December 31, 1994. Policy loan rates are generally in the 4.5% to 8.0% range. Such rates at least equal the assumed interest rates used for future policy benefits. The Company believes its asset/liability matching practices and certain product features provide significant protection for the Company against the effects of changes in interest rates. However, approximately one-fourth of the Company's liabilities relates to products (primarily whole life insurance) the profitability of which may be affected by changes in interest rates. The effect of such changes in any one year is not expected to be material. Additionally, the Company believes its asset/liability matching practices provide sufficient liquidity to enable it to fulfill its obligation to pay benefits under its various insurance and deposit contracts. The Company's asset/liability matching practices involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, risk, and cash flow characteristics. It is the Company's policy to maintain asset and liability durations within 10% of one another. During 1994 interest rates rose approximately three percentage points causing the duration of the Company's assets to increase somewhat above the duration of its liabilities. The Company responded to the duration mismatch by adjusting the composition of its assets to bring the durations of assets and liabilities into balance. During 1995, interest rates fell approximately 2.5 percentage points. Likewise, the Company adjusted the composition of its assets to eliminate any significant duration mismatches. The Company does not use derivative financial instruments for trading purposes. Combinations of futures contracts and options on treasury notes are sometimes used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate and liabilities arising from interest-sensitive products such as GICs and annuities. Realized investment gains and losses of such contracts are deferred and amortized over the life of the hedged asset. Net realized losses, incurred due to a decline in interest rates, of $15.2 million were deferred in 1995. At December 31, 1995, open futures contracts with a notional amount of $25.0 million were in a $0.6 million net unrealized loss position. The Company uses interest rate swap contracts to convert certain investments from a variable rate of interest to a fixed rate of interest. At December 31, 1995, related open interest rate swap contracts with a notional amount of $170.3 million were in an $1.3 million net unrealized loss position. The Company also uses interest rate swap contracts to convert its Senior Notes and Monthly Income Preferred Securities from a fixed rate to a variable rate of interest. During 1995, the Company terminated approximately $40.0 million notional amount of interest rate swap contracts. At December 31, 1995, related open interest rate swap contracts with a notional amount of $55.0 million were in a $4.4 million net unrealized gain position. The Company entered the GIC market in late 1989. Most GIC contracts written by the Company have maturities of 3 to 5 years. Prior to 1993, few GIC contracts were maturing because the contracts were newly written. Beginning in 1993, and continuing into 1994 and 1995, GIC contracts began to mature as contemplated when the contracts were sold. Withdrawals related to GIC contracts were approximately $700 million during 1994 and $800 million in 1995. Withdrawals related to GIC contracts are estimated to be approximately $700 million in 1996. The Company's asset/liability matching practices take into account maturing contracts. Accordingly, the Company does not expect maturing GIC contracts to have an unusual effect on the future operations and liquidity of the Company. In anticipation of receiving GIC and annuity deposits, the life insurance subsidiaries were committed at December 31, 1995, to fund mortgage loans and to purchase fixed maturity and other long-term investments in the amount of $278.5 million. The Company's subsidiaries held $11.3 million in cash and short-term investments at December 31, 1995. Protective Life Corporation had an additional $0.1 million in cash and short-term investments available for general corporate purposes. In order to provide additional liquidity, the Company plans a commercial mortgage securitization during the 1996 first quarter. Proceeds from the securitization of approximately $400 million will be reinvested in publicly traded investment grade bonds. While the Company generally anticipates that the cash flows of its subsidiaries will be sufficient to meet their investment commitments and operating cash needs, the Company recognizes that investment commitments scheduled to be funded may from time to time exceed the funds then available. Therefore, the Company has arranged sources of credit for its insurance subsidiaries to utilize to fund investments in such circumstances. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Additionally, the Company may from time to time sell short-duration GICs to complement its cash management practices. In 1994 a special purpose finance subsidiary of the Company, PLC Capital L.L.C. (PLC Capital), issued $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A (MIPS), guaranteed by the Company. Net proceeds were used to repay a term note and other bank borrowings. PLC Capital was formed solely to issue MIPS and other securities and lend the proceeds thereof to the Company in exchange for subordinated debentures of the Company. The Company has the right under the subordinated debentures to extend interest payment periods up to 60 months, and, as a consequence, monthly dividends on the MIPS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The MIPS and dividends thereon are reported in the accompanying financial statements as "minority interest in consolidated subsidiaries." The Company has entered into related interest rate swap agreements to effectively convert the MIPS from a fixed dividend rate to the floating, 30-day London Interbank Offered Rate (LIBOR) plus 60.5 basis points, approximately 6.3% at December 31, 1995. In 1994 the Company issued $75 million of 7.95% Senior Notes due July 1, 2004. The notes are not redeemable by the Company prior to maturity. Net proceeds were used to repay bank borrowings. In 1994 the Company entered into related interest rate swap agreements to swap $40 million of the notes from a fixed rate of interest to a floating rate of interest. During 1995 the Company terminated these agreements and realized a gain of approximately $3.0 million which is being amortized as a component of interest expense. At December 31, 1995, Protective Life Corporation had borrowed $40.5 million of its $60 million revolving line of credit on notes bearing interest rates averaging 6.2%. The Company's bank borrowings (excluding temporary borrowings of the Company's insurance subsidiaries) have increased $17.5 million since December 31, 1994. Proceeds have been primarily used to contribute additional statutory capital to the Company's insurance subsidiaries, and for general corporate purposes. On March 20, 1995, the Company acquired NHCS (DentiCare). In connection with the acquisition, the Company reissued 1,316,458 (adjusted for the two-for-one stock split on June 1, 1995) shares of its Common Stock previously held as Treasury Stock. Protective Life Corporation's cash flow is dependent on cash dividends from its subsidiaries, payments on surplus notes, revenues from investment, data processing, legal, and management services rendered to the subsidiaries, and investment income. At December 31, 1995, approximately $180 million of consolidated stockholders' equity, excluding net unrealized investment gains and losses, represented net assets of the Company's insurance subsidiaries that cannot be transferred to the Company in the form of dividends, loans, or advances. In addition, the Company's insurance subsidiaries are subject to various state statutory and regulatory restrictions on the insurance subsidiaries' ability to pay dividends to Protective Life Corporation. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to the Company by its insurance subsidiaries in 1996 is estimated to be $129 million. Also, distributions, including cash dividends to Protective Life Corporation from its life insurance subsidiaries, in excess of approximately $322 million, would be subject to federal income tax at rates then effective. The Company does not anticipate involuntarily making distributions that would be subject to tax. For the foregoing reasons and due to the expected growth of the Company's insurance sales, the Company will retain substantial portions of the earnings of its life insurance subsidiaries in those companies primarily to support their future growth. Because Protective Life Corporation's cash disbursements have from time to time exceeded its cash receipts, such shortfalls have been funded through various external financings. Therefore, Protective Life Corporation may from time to time require additional external financing. To give the Company flexibility in connection with future acquisitions and other growth opportunities, the Company has registered debt securities, preferred and common stock of Protective Life Corporation, and additional preferred securities of PLC Capital under the Securities Act of 1933 on a delayed (or shelf) basis. A life insurance company's statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (NAIC), as modified by the insurance company's state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The achievement of long-term growth will require growth in the statutory capital of the Company's insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Company from funds generated through debt or equity offerings. The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the types and mixtures of risks inherent in the insurer's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Based upon their December 31, 1995, statutory financial reports, the Company's insurance subsidiaries are adequately capitalized under the formula. The Company is not aware of any litigation that will have a material adverse effect on the financial position of the Company. The Company does not believe that the regulatory initiatives currently under consideration by various regulatory agencies will have a material adverse impact on the Company. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. The Company does not believe that any insurance guaranty fund assessments will be materially different from amounts already provided for in the financial statements. As noted above, SFAS No. 115 requires the Company to carry its investment in fixed maturities and certain other securities at market value instead of amortized cost. As prescribed by SFAS No. 115, these investments are recorded at their market values with the resulting unrealized gains and losses, net of income tax, reported as a component of stockholders' equity reduced by a related adjustment to deferred policy acquisition costs. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect the Company's operations, its reported stockholders' equity will fluctuate significantly as interest rates change. During 1994 interest rates rose approximately three percentage points. SFAS No. 115 required the Company to report a $146.8 million decrease in stockholders' equity at December 31, 1994, as compared to December 31, 1993. During 1995 interest rates fell approximately 2.5 percentage points, which required the Company to report a $165.4 million increase in stockholders' equity at December 31, 1995, as compared to December 31, 1994. IMPACT OF INFLATION Inflation increases the need for insurance. Many policyholders who once had adequate insurance programs increase their life insurance coverage to provide the same relative financial benefits and protection. The effect of inflation on medical costs leads to accident and health policies with higher benefits. Thus, inflation has increased the need for life and accident and health products. The higher interest rates that have traditionally accompanied inflation also affect the Company's investment operation. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of GIC and annuity deposits and individual life policy cash values may increase, the market value of the Company's fixed-rate, long-term investments may decrease, and the Company may be unable to implement fully the interest rate reset and call provisions of its mortgage loans. The difference between the interest rate earned on investments and the interest rate credited to interest-sensitive products may also be adversely affected by rising interest rates. Inflation has increased the cost of health care. The adequacy of premium rates in relation to the level of accident and health claims is constantly monitored, and where appropriate, premium rates on such policies are increased as policy benefits increase. Failure to make such increases commensurate with healthcare cost increases may result in a loss from health insurance. The Company does not believe the current rate of inflation will significantly affect its operations. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- REVENUES Premiums and policy fees (net of reinsurance ceded: 1995 -- $333,173; 1994 -- $172,575; 1993 -- $126,912).................... $ 369,888 $ 402,772 $ 370,758 Net investment income...................................................... 475,924 417,825 362,130 Realized investment gains (losses)......................................... 1,612 6,298 5,054 Other income............................................................... 32,663 21,553 21,695 ----------- ----------- ----------- Total revenues......................................................... 880,087 848,448 759,637 ----------- ----------- ----------- ----------- ----------- ----------- BENEFITS AND EXPENSES Benefits and settlement expenses (net of reinsurance ceded: 1995 -- $247,229; 1994 -- $112,922; 1993 -- $84,949)..................... 509,506 517,110 473,884 Amortization of deferred policy acquisition costs.......................... 84,533 88,122 73,605 Other operating expenses (net of reinsurance ceded: 1995 -- $84,855; 1994 -- $14,326; 1993 -- $10,759)....................... 165,014 137,043 127,104 ----------- ----------- ----------- Total benefits and expenses............................................ 759,053 742,275 674,593 ----------- ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAX................................................... 121,034 106,173 85,044 ----------- ----------- ----------- INCOME TAX EXPENSE Current.................................................................... 44,862 37,318 33,748 Deferred................................................................... (3,710) (3,342) (5,273) ----------- ----------- ----------- Total income tax expense............................................... 41,152 33,976 28,475 ----------- ----------- ----------- ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST............................................ 79,882 72,197 56,569 ----------- ----------- ----------- MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES................... 3,217 1,796 19 ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME................................................................. $ 76,665 $ 70,401 $ 56,550 ----------- ----------- ----------- ----------- ----------- ----------- NET INCOME PER SHARE....................................................... $ 2.68 $ 2.57 $ 2.07 ----------- ----------- ----------- ----------- ----------- ----------- CASH DIVIDENDS PAID PER SHARE.............................................. $ .62 $ .55 $ .505 ----------- ----------- ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31 -------------------------- 1995 1994 ------------ ------------ Investments: Fixed maturities, at market (amortized cost: 1995 -- $3,798,944; 1994 -- $3,698,370)........................................................................ $ 3,892,008 $ 3,493,646 Equity securities, at market (cost: 1995 -- $35,448; 1994 -- $45,958)............... 38,711 45,005 Mortgage loans on real estate....................................................... 1,834,357 1,487,795 Investment real estate, net of accumulated depreciation (1995 -- $2,388; 1994 -- $2,052)............................................................................ 20,921 20,303 Policy loans........................................................................ 143,372 147,608 Other long-term investments......................................................... 42,096 48,013 Short-term investments.............................................................. 53,591 59,541 ------------ ------------ Total investments................................................................. 6,025,056 5,301,911 Cash.................................................................................. 11,392 4,468 Accrued investment income............................................................. 61,007 55,637 Accounts and premiums receivable, net of allowance for uncollectible amounts (1995 -- $2,342; 1994 -- $2,464).............................................................. 38,722 30,472 Reinsurance receivables............................................................... 271,018 122,175 Deferred policy acquisition costs..................................................... 410,396 434,444 Property and equipment, net........................................................... 36,578 36,323 Other assets.......................................................................... 52,184 20,709 Assets related to separate accounts................................................... 324,904 124,145 ------------ ------------ Total assets...................................................................... $ 7,231,257 $ 6,130,284 ------------ ------------ ------------ ------------ LIABILITIES Policy liabilities and accruals Future policy benefits and claims..................................................... $ 1,928,154 $ 1,694,295 Unearned premiums..................................................................... 196,332 103,479 ------------ ------------ Total policy liabilities and accruals............................................. 2,124,486 1,797,774 Guaranteed investment contract deposits............................................... 2,451,693 2,281,673 Annuity deposits...................................................................... 1,280,069 1,251,318 Other policyholders' funds............................................................ 134,380 144,461 Other liabilities..................................................................... 152,042 127,873 Accrued income taxes.................................................................. (2,894) (6,238) Deferred income taxes................................................................. 69,520 (14,095) Long-term debt........................................................................ 115,500 98,000 Liabilities related to separate accounts.............................................. 324,904 124,145 Minority interest in consolidated subsidiaries........................................ 55,000 55,000 ------------ ------------ Total liabilities................................................................. 6,704,700 5,859,911 ------------ ------------ ------------ ------------ Commitments and contingent liabilities -- Note G Stockholders' equity Preferred Stock, $1 par value Shares authorized: 1995 -- 3,600,000; 1994 -- 3,850,000 Issued: none Junior Participating Cumulative Preferred Stock, $1 par value Shares authorized: 1995 -- 400,000; 1994 -- 150,000 Issued: none Common Stock, $.50 par value Shares authorized: 80,000,000 Issued: 1995 and 1994 -- 31,336,462........................................................................... 15,668 15,668 Additional paid-in capital............................................................ 96,371 71,295 Net unrealized gains (losses) on investments (net of income tax: 1995 -- $31,157; 1994 -- $(57,902))........................................................................ 57,863 (107,532) Retained earnings..................................................................... 373,922 314,857 Treasury stock, at cost (1995 -- 2,561,344 shares; 1994 -- 3,909,944 shares).......... (12,008) (18,323) Unallocated stock in Employee Stock Ownership Plan (1995 -- 793,804 shares; 1994 -- 844,146 shares)...................................................................... (5,259) (5,592) ------------ ------------ Total stockholders' equity........................................................ 526,557 270,373 ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity........................................ $ 7,231,257 $ 6,130,284 ------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NET UNREALIZED ADDITIONAL GAINS UNALLOCATED TOTAL COMMON PAID-IN (LOSSES) ON RETAINED TREASURY STOCK IN STOCKHOLDERS' STOCK CAPITAL INVESTMENTS EARNINGS STOCK ESOP EQUITY ----------- ----------- ----------- --------- --------- ----------- ------------ Balance, December 31, 1992................ $ 15,668 $ 70,335 $ 3,156 $ 216,804 $ (18,363) $ (6,200) $ 281,400 Net income for 1993..................... 56,550 56,550 Cash dividends ($0.505 per share)....... (13,827) (13,827) Increase in net unrealized gains on investments............................ 36,128 36,128 Reissuance of treasury stock to ESOP (206 shares)........................... 3 (3) 0 Allocation of stock to employee accounts (52,206 shares)........................ 347 347 Reissuance of treasury stock (6,686 shares)................................ 131 4 135 ----------- ----------- ----------- --------- --------- ----------- ------------ Balance, December 31, 1993................ 15,668 70,469 39,284 259,527 (18,359) (5,856) 360,733 Net income for 1994..................... 70,401 70,401 Cash dividends ($0.55 per share)........ (15,071) (15,071) Decrease in net unrealized gains on investments............................ (146,816) (146,816) Purchase of treasury stock (8,412 shares)................................ (191) (191) Reissuance of treasury stock to ESOP (136 shares)........................... 3 (3) 0 Allocation of stock to employee accounts (39,990 shares)........................ 267 267 Reissuance of treasury stock (48,306 shares)................................ 823 227 1,050 ----------- ----------- ----------- --------- --------- ----------- ------------ Balance, December 31, 1994................ 15,668 71,295 (107,532) 314,857 (18,323) (5,592) 270,373 Net income for 1995..................... 76,665 76,665 Cash dividends ($0.62 per share)........ (17,600) (17,600) Increase in net unrealized gains on investments............................ 165,395 165,395 Purchase of treasury stock (124 shares)................................ (3) (3) Reissuance of treasury stock to ESOP (16,158 shares)........................ 275 75 (350) 0 Allocation of stock to employee accounts (66,500 shares)........................ 683 683 Reissuance of treasury stock (1,332,566 shares)................................ 24,801 6,243 31,044 ----------- ----------- ----------- --------- --------- ----------- ------------ Balance, December 31, 1995 -- Note H...... $ 15,668 $ 96,371 $ 57,863 $ 373,922 $ (12,008) $ (5,259) $ 526,557 ----------- ----------- ----------- --------- --------- ----------- ------------ ----------- ----------- ----------- --------- --------- ----------- ------------
See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................................ $ 76,665 $ 70,401 $ 56,550 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred policy acquisition costs....................... 84,533 88,122 73,605 Capitalization of deferred policy acquisition costs..................... (89,267) (127,566) (104,014) Depreciation expense.................................................... 5,524 5,601 3,742 Deferred income taxes................................................... (5,443) (4,310) (5,272) Accrued income taxes.................................................... 3,344 (12,619) 6,230 Interest credited to universal life and investment products............. 286,710 260,081 220,772 Policy fees assessed on universal life and investment products.......... (100,840) (85,532) (67,314) Change in accrued investment income and other receivables............... (160,523) (28,073) (97,908) Change in policy liabilities and other policyholders' funds of traditional life and health products................................... 201,364 61,322 42,901 Change in other liabilities............................................. 4,245 29,949 12,432 Other, net.............................................................. (4,888) (14,461) 14,959 ----------- ----------- ----------- Net cash provided by operating activities............................. 301,424 242,915 156,683 ----------- ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Maturities and principal reductions of investments: Investments available for sale.......................................... 2,051,061 386,498 Other................................................................... 78,568 153,945 1,341,818 Sale of investments: Investments available for sale.......................................... 1,533,604 630,660 Other................................................................... 141,184 59,550 244,683 Cost of investments acquired: Investments available for sale.......................................... (3,667,448) (1,807,756) Other................................................................... (540,648) (220,839) (2,302,196) Acquisitions and bulk reinsurance assumptions............................. (7,550) 106,435 14,190 Purchase of property and equipment........................................ (5,919) (6,743) (4,682) Sale of property and equipment............................................ 309 484 3,023 ----------- ----------- ----------- Net cash used in investing activities................................. (416,839) (697,766) (703,164) ----------- ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings under line of credit arrangements and long-term debt..................................................................... 1,215,000 663,587 719,173 Principal payments on line of credit arrangements and long-term debt...... (1,197,500) (712,704) (661,717) Proceeds from issuance of Monthly Income Preferred Securities............. 55,000 Purchase of treasury stock................................................ (3) (191) Dividends to stockholders................................................. (17,600) (15,071) (13,827) Investment product deposits and change in universal life deposits......... 908,064 1,417,980 1,198,263 Investment product withdrawals............................................ (785,622) (976,401) (683,251) ----------- ----------- ----------- Net cash provided by financing activities............................. 122,339 432,200 558,641 ----------- ----------- ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN CASH............................................... 6,924 (22,651) 12,160 CASH AT BEGINNING OF YEAR................................................. 4,468 27,119 14,959 ----------- ----------- ----------- CASH AT END OF YEAR....................................................... $ 11,392 $ 4,468 $ 27,119 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year: Interest on debt........................................................ $ 9,320 $ 7,745 $ 6,426 Income taxes............................................................ $ 41,532 $ 49,935 $ 27,493 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Change in minority interest in consolidated subsidiaries.................. $ (1,311) Reissuance of treasury stock to ESOP...................................... $ 350 $ 3 $ 3 Unallocated stock in ESOP................................................. $ 333 $ 264 $ 344 Reissuance of treasury stock.............................................. $ 363 $ 1,051 $ 135 Acquisitions and bulk reinsurance assumptions: Assets acquired......................................................... $ 10,394 $ 117,349 $ 423,167 Liabilities assumed..................................................... (25,651) (166,595) (429,580) Reissuance of treasury stock............................................ (30,681) ----------- ----------- ----------- Net................................................................... $ (45,938) $ (49,246) $ (6,413) ----------- ----------- ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements of Protective Life Corporation and subsidiaries (the Company) are prepared on the basis of generally accepted accounting principles. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. (See also Note B.) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make various estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. All references to prior period number of shares and per share amounts have been restated to reflect a two-for-one stock split on June 1, 1995. ENTITIES INCLUDED The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Corporation and its wholly owned subsidiaries. Protective Life Insurance Company (Protective Life) is the Company's principal operating subsidiary. Additionally, the financial statements include the accounts of majority-owned subsidiaries. The ownership interest of the other stockholders of these subsidiaries is called a minority interest and is reported as a liability of the Company and as an adjustment to income. NATURE OF OPERATIONS The Company markets individual life insurance; group life, health, dental, and cancer insurance; annuities and investment products; credit life and disability insurance; and guaranteed investment contracts. Its products are distributed nationally through independent agents and brokers; through broker-dealers and financial institutions to their customers; through full-time sales representatives; and through other insurance companies. The Company also seeks to acquire blocks of insurance policies from other insurers. The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, and other factors. RECENTLY ISSUED ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," at December 31, 1993, which requires the Company to carry its investment in fixed maturities and certain other securities at market value instead of amortized cost. In 1995 the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." Under these new standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Since the Company's mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on the Company's evaluation of its mortgage loan portfolio, the Company does not expect any material losses on its mortgage loans, and therefore no allowance for losses is required under SFAS No. 114 at December 31, 1995. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In 1995 the Company also adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which changes the way stock-based compensation expense is measured and requires additional disclosures relating to the Company's stock-based compensation plans. The adoption of this accounting standard did not have a material effect on the Company's financial statements. In 1995 the Financial Accounting Standards Board issued: SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts;" SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage Servicing Rights." The Company anticipates that the impact of adopting these three accounting standards will be immaterial to its financial condition. INVESTMENTS The Company has classified all of its investments in fixed maturities, equity securities, and short-term investments as "available for sale." Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable: FIXED MATURITIES (BONDS, BANK LOAN PARTICIPATIONS, AND REDEEMABLE PREFERRED STOCKS) -- at current market value. EQUITY SECURITIES (COMMON AND NONREDEEMABLE PREFERRED STOCKS) -- at current market value. MORTGAGE LOANS ON REAL ESTATE -- at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount. INVESTMENT REAL ESTATE -- at cost, less allowances for depreciation computed on the straight-line method. With respect to real estate acquired through foreclosure, cost is the lesser of the loan balance plus foreclosure costs or appraised value. POLICY LOANS -- at unpaid balances. OTHER LONG-TERM INVESTMENTS -- at a variety of methods similar to those listed above, as deemed appropriate for the specific investment. SHORT-TERM INVESTMENTS -- at cost, which approximates current market value. Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $5.2 million in bank deposits voluntarily restricted as to withdrawal. As prescribed by SFAS No. 115, certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of stockholders' equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect the Company's operations, its reported stockholders' equity will fluctuate significantly as interest rates change. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company's balance sheets at December 31, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
1995 1994 ------------- ------------- Total investments............................................... $ 5,919,787 $ 5,501,064 Deferred policy acquisition costs............................... 426,645 400,724 All other assets................................................ 795,805 393,929 ------------- ------------- $ 7,142,237 $ 6,295,717 ------------- ------------- Deferred income taxes........................................... $ 38,364 $ 43,806 All other liabilities........................................... 6,635,179 5,874,006 ------------- ------------- 6,673,543 5,917,812 ------------- ------------- Stockholders' equity............................................ 468,694 377,905 ------------- ------------- $ 7,142,237 $ 6,295,717 ------------- ------------- ------------- -------------
Realized gains and losses on sales of investments are recognized in net income using the specific identification basis. DERIVATIVE FINANCIAL INSTRUMENTS The Company does not use derivative financial instruments for trading purposes. Combinations of futures contracts and options on treasury notes are currently being used as hedges for asset/liability management of certain investments, primarily mortgage loans on real estate, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and individual annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. Net realized losses of $15.2 million were deferred in 1995 and net realized gains of $7.9 million were deferred in 1994. At December 31, 1995 and 1994, open futures contracts with notional amounts of $25.0 million and $137.5 million, respectively, had net unrealized losses of $0.6 million and $0.4 million, respectively. The Company uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. At December 31, 1995, related open interest rate swap contracts with a notional amount of $170.3 million were in a $1.3 million net unrealized gain position. At December 31, 1994, related open interest rate swap contracts with a notional amount of $230.0 million were in an $8.9 million net unrealized loss position. The Company also uses interest rate swap contracts to convert its Senior Notes and Monthly Income Preferred Securities from a fixed rate to a variable rate of interest. At December 31, 1995, related open interest rate swap contracts with a notional amount of $55.0 million were in a $4.4 million net unrealized gain position. At December 31, 1994, related open interest rate swap contracts with a notional amount of $95.0 million were in a $4.8 million net unrealized loss position. CASH Cash includes all demand deposits reduced by the amount of outstanding checks and drafts. PROPERTY AND EQUIPMENT Property and equipment are reported at cost. The Company uses both accelerated and straight-line methods of depreciation based upon the estimated useful lives of the assets. Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and equipment consisted of the following at December 31:
1995 1994 --------- --------- Home Office building................................................... $ 35,284 $ 35,320 Data processing equipment.............................................. 20,462 17,877 Other, principally furniture and equipment............................. 19,111 16,416 --------- --------- 74,857 69,613 Accumulated depreciation............................................... 38,279 33,290 --------- --------- $ 36,578 $ 36,323 --------- --------- --------- ---------
SEPARATE ACCOUNTS The Company operates separate accounts, some in which the Company bears the investment risk and others in which the investment risk rests with the contractholder. The assets and liabilities related to separate accounts in which the Company does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying consolidated financial statements. REVENUES, BENEFITS, CLAIMS, AND EXPENSES TRADITIONAL LIFE AND HEALTH INSURANCE PRODUCTS -- Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits and include whole life insurance policies, term life insurance policies, limited payment life insurance policies, and certain annuities with life contingencies. Life insurance and immediate annuity premiums are recognized as revenue when due. Health insurance premiums are recognized as revenue over the terms of the policies. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contracts. This is accomplished by means of the provision for liabilities for future policy benefits and the amortization of deferred policy acquisition costs. Liabilities for future policy benefits on traditional life insurance products have been computed using a net level method including assumptions as to investment yields, mortality, persistency, and other assumptions based on the Company's experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Reserve investment yield assumptions are graded and range from 2.5% to 7.0%. The liability for future policy benefits and claims on traditional life and health insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Policy claims are charged to expense in the period in which the claims are incurred. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Activity in the liability for unpaid claims is summarized as follows:
1995 1994 1993 ----------- ----------- ----------- Balance beginning of year.............................. $ 79,462 $ 77,191 $ 68,203 Less reinsurance..................................... 5,024 3,973 3,809 ----------- ----------- ----------- Net balance beginning of year...................... 74,438 73,218 64,394 ----------- ----------- ----------- ----------- ----------- ----------- Incurred related to: Current year......................................... 217,366 203,453 $ 194,394 Prior year........................................... (8,337) (6,683) (5,123) ----------- ----------- ----------- Total incurred..................................... 209,029 196,770 189,271 ----------- ----------- ----------- ----------- ----------- ----------- Paid related to: Current year......................................... 164,321 148,548 141,361 Prior year........................................... 48,834 47,002 39,086 ----------- ----------- ----------- Total paid......................................... 213,155 195,550 180,447 ----------- ----------- ----------- ----------- ----------- ----------- Net balance end of year................................ 70,312 74,438 73,218 Plus reinsurance..................................... 3,330 5,024 3,973 ----------- ----------- ----------- Balance end of year.................................... $ 73,642 $ 79,462 $ 77,191 ----------- ----------- ----------- ----------- ----------- -----------
UNIVERSAL LIFE AND INVESTMENT PRODUCTS -- Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Revenues for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. That is, universal life and investment product deposits are not considered revenues in accordance with generally accepted accounting principles. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life and investment products ranged from 3.0% to 9.4% in 1995. At December 31, 1995, the Company estimates the market value of its guaranteed investment contracts to be $2,660.0 million using discounted cash flows. The surrender value of the Company's annuities which approximates market value was $1,296.7 million. POLICY ACQUISITION COSTS -- Commissions and other costs of acquiring traditional life and health insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are being amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to total anticipated premium income. Acquisition costs for universal life and investment products are amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and investment, mortality, and expense margins. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from initial assumptions. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with the Company's universal life and investment products had been realized. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The cost to acquire blocks of insurance representing the present value of future profits from such blocks of insurance is also included in deferred policy acquisition costs, discounted at interest rates averaging 15%. For acquisitions occurring after 1988, the Company amortizes the present value of future profits over the premium payment period, including accrued interest at 8%. The unamortized present value of future profits for such acquisitions was approximately $102.5 million and $84.4 million at December 31, 1995 and 1994, respectively. During 1995 $26.5 million of present value of future profits on acquisitions made during the year was capitalized, and $3.2 million was amortized. The unamortized present value of future profits for all acquisitions was $123.9 million at December 31, 1995, and $110.3 million at December 31, 1994. PARTICIPATING POLICIES Participating business comprises approximately 1% of the individual life insurance in force and 2% of the individual life insurance premium income. Policyholder dividends totaled $2.6 million in 1995, 1994, and 1993. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the bases of assets and liabilities determined for financial reporting purposes and the bases determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses. INCOME PER SHARE OF COMMON STOCK Per share data are based on the weighted average number of shares of Common Stock, including Common Stock equivalents, outstanding which was 28,627,345, 27,392,936, and 27,381,578, in 1995, 1994, and 1993, respectively. RECLASSIFICATIONS Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income, total assets, or stockholders' equity. NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES Financial statements prepared in conformity with generally accepted accounting principles (GAAP) differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The most significant differences are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the approximate life of the policies rather than charged to operations as incurred; (b) benefit liabilities are computed using a net level method and are based on realistic estimates of expected mortality, interest, and withdrawals as adjusted to provide for possible unfavorable deviation from such assumptions; (c) deferred income taxes are provided for temporary differences between financial and taxable earnings; (d) the Asset Valuation Reserve and Interest Maintenance Reserve are restored to stockholders' equity; (e) furniture and equipment, agents' debit balances, and prepaid expenses are reported as assets rather than being charged directly to surplus (referred to as nonadmitted items); (f) certain items of interest income, principally accrual of mortgage and bond discounts, are amortized differently; and (g) bonds are stated at market instead of amortized cost. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED) The reconciliations of net income and stockholders' equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
NET INCOME STOCKHOLDERS' EQUITY ------------------------------- ------------------------------- 1995 1994 1993 1995 1994 1993 --------- --------- --------- --------- --------- --------- In conformity with statutory reporting practices: Protective Life Insurance Company................. $ 105,744 $ 54,812 $ 41,471 $ 322,416 $ 304,858 $ 263,075 American Foundation Life Insurance Company........ 3,330 3,072 1,415 18,781 20,327 18,290 Capital Investors Life Insurance Company.......... 182 170 207 1,315 1,125 824 Empire General Life Assurance Corporation......... 1,003 690 408 20,685 21,270 10,588 Protective Life Insurance Corporation of Alabama.......................................... 546 69 16 2,675 2,133 2,064 Wisconsin National Life Insurance Company......... 10,954 10,132 9,591 62,529 57,268 50,885 Consolidation elimination......................... (6,500) 30 (103,985) (100,123) (80,651) --------- --------- --------- --------- --------- --------- 115,259 68,945 53,138 324,416 306,858 265,075 Additions (deductions) by adjustment: Deferred policy acquisition costs, net of amortization..................................... (765) 41,686 25,392 410,396 434,444 299,584 Policy liabilities and accruals................... (53,272) (34,632) (15,586) (189,319) (140,298) (69,844) Deferred income tax............................... 3,711 3,342 5,273 (69,520) 14,095 (69,269) Asset Valuation Reserve........................... 105,769 24,925 43,398 Interest Maintenance Reserve...................... (1,235) (1,716) (1,432) 14,412 3,583 10,489 Nonadmitted items................................. 20,603 21,445 7,742 Timing and valuation differences on mortgage loans on real estate and fixed maturity investments.... (618) (961) 1,645 25,060 6,877 7,350 Net unrealized gains and losses on investments.... 57,863 (107,532) 39,284 Realized investment gains (losses)................ 6,781 (6,664) (7,860) Noninsurance affiliates........................... 12,882 5,877 (4,081) 213,789 149,750 87,693 Minority interest in consolidated subsidiaries.... (3,218) (1,796) (19) Consolidation elimination......................... (381,988) (436,053) (262,408) Other adjustments, net............................ (2,860) (3,680) 80 (4,924) (7,721) 1,639 --------- --------- --------- --------- --------- --------- In conformity with generally accepted accounting principles......................................... $ 76,665 $ 70,401 $ 56,550 $ 526,557 $ 270,373 $ 360,733 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE C -- INVESTMENT OPERATIONS Major categories of net investment income for the years ended December 31 are summarized as follows:
1995 1994 1993 ----------- ----------- ----------- Fixed maturities....................................... $ 276,847 $ 242,510 $ 212,816 Equity securities...................................... 1,338 2,435 1,519 Mortgage loans on real estate.......................... 162,135 141,751 130,262 Investment real estate................................. 1,908 2,000 2,166 Policy loans........................................... 8,958 8,397 7,558 Other, principally short-term investments.............. 39,223 34,088 17,790 ----------- ----------- ----------- 490,409 431,181 372,111 Investment expenses.................................... 14,485 13,356 9,981 ----------- ----------- ----------- $ 475,924 $ 417,825 $ 362,130 ----------- ----------- ----------- ----------- ----------- -----------
Realized investment gains (losses) for the years ended December 31 are summarized as follows:
1995 1994 1993 --------- --------- --------- Fixed maturities............................................. $ 6,075 $ (8,646) $ 10,508 Equity securities............................................ 44 7,735 2,230 Mortgage loans and other investments......................... (4,506) 7,209 (7,684) --------- --------- --------- $ 1,613 $ 6,298 $ 5,054 --------- --------- --------- --------- --------- ---------
The Company has established an allowance for uncollectible amounts on investments. The allowance totaled $33.4 million and $35.9 million at December 31, 1995 and 1994, respectively. Additions and reductions to the allowance are included in realized investment gains (losses). Without such additions/reductions, the Company had net realized investment losses of $0.9 million in 1995, and net realized investment gains of $6.3 million and $13.8 million in 1994 and 1993, respectively. In 1995 gross gains on the sale of investments available for sale (fixed maturities, equity securities, and short-term investments) were $18.0 million, and gross losses were $11.8 million. In 1994 gross gains were $15.2 million, and gross losses were $16.4 million. In 1993 gross gains on the sale of fixed maturities were $8.3 million, and gross losses were $0.4 million. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE C -- INVESTMENT OPERATIONS (CONTINUED) The amortized cost and estimated market values of the Company's investments classified as available for sale at December 31 are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED 1995 COST GAINS LOSSES MARKET VALUES - ---------------------------------------------------------- ------------- ----------- ----------- ------------- Fixed maturities: Bonds: Mortgage-backed securities............................ $ 2,006,858 $ 46,934 $ 4,017 $ 2,049,775 United States Government and authorities.............. 105,388 2,290 101 107,577 States, municipalities, and political subdivisions.... 10,888 702 0 11,590 Public utilities...................................... 322,110 5,904 770 327,244 Convertibles and bonds with warrants.................. 638 0 145 493 All other corporate bonds............................. 1,126,394 50,103 7,573 1,168,924 Bank loan participations.................................. 220,811 0 0 220,811 Redeemable preferred stocks............................... 5,857 61 324 5,594 ------------- ----------- ----------- ------------- 3,798,944 105,994 12,930 3,892,008 Equity securities......................................... 35,448 6,438 3,175 38,711 Short-term investments.................................... 53,591 0 0 53,591 ------------- ----------- ----------- ------------- $ 3,887,983 $ 112,432 $ 16,105 $ 3,984,310 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED 1994 COST GAINS LOSSES MARKET VALUES - ---------------------------------------------------------- ------------- ----------- ----------- ------------- Fixed maturities: Bonds: Mortgage-backed securities............................ $ 2,002,842 $ 7,538 $ 112,059 $ 1,898,321 United States Government and authorities.............. 90,468 290 8,877 81,881 States, municipalities, and political subdivisions.... 10,902 5 1,230 9,677 Public utilities...................................... 414,011 1,091 36,982 378,120 Convertibles and bonds with warrants.................. 687 0 302 385 All other corporate bonds............................. 927,779 3,437 56,788 874,428 Bank loan participations.................................. 244,881 0 0 244,881 Redeemable preferred stocks............................... 6,800 37 884 5,953 ------------- ----------- ----------- ------------- 3,698,370 12,398 217,122 3,493,646 Equity securities......................................... 45,958 3,994 4,947 45,005 Short-term investments.................................... 59,541 0 0 59,541 ------------- ----------- ----------- ------------- $ 3,803,869 $ 16,392 $ 222,069 $ 3,598,192 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE C -- INVESTMENT OPERATIONS (CONTINUED) The amortized cost and estimated market values of fixed maturities at December 31, by expected maturity, are shown as follows. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment.
AMORTIZED ESTIMATED 1995 COST MARKET VALUES - ---------------------------------------------------------------- ------------- ------------- Due in one year or less......................................... $ 410,489 $ 411,839 Due after one year through five years........................... 1,090,323 1,101,226 Due after five years through ten years.......................... 1,481,324 1,524,631 Due after ten years............................................. 816,808 854,312 ------------- ------------- $ 3,798,944 $ 3,892,008 ------------- ------------- ------------- -------------
AMORTIZED ESTIMATED 1994 COST MARKET VALUES - ---------------------------------------------------------------- ------------- ------------- Due in one year or less......................................... $ 577,146 $ 540,223 Due after one year through five years........................... 1,351,435 1,299,248 Due after five years through ten years.......................... 994,994 929,764 Due after ten years............................................. 774,795 724,411 ------------- ------------- $ 3,698,370 $ 3,493,646 ------------- ------------- ------------- -------------
The approximate percentage distribution of the Company's fixed maturity investments by quality rating at December 31 is as follows:
RATING 1995 1994 - --------------------------------------------------------------------- ----------- ----------- AAA.................................................................. 56.1% 57.6% AA................................................................... 4.5 5.5 A.................................................................... 12.6 12.5 BBB Bonds.............................................................. 19.0 14.9 Bank loan participations........................................... 0.4 1.4 BB or less Bonds.............................................................. 2.0 2.3 Bank loan participations........................................... 5.3 5.6 Redeemable preferred stocks.......................................... 0.1 0.2 ----------- ----------- 100.0% 100.0% ----------- ----------- ----------- -----------
At December 31, 1995 and 1994, the Company had bonds which were rated less than investment grade of $75.7 million and $82.5 million, respectively, having an amortized cost of $82.2 million and $89.4 million, respectively. Additionally, the Company had bank loan participations which were rated less than investment grade of $206.0 million and $195.1 million, respectively, having an amortized cost of $206.0 million and $195.1 million, respectively. The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities for the years ended December 31 is summarized as follows:
1995 1994 1993 ----------- ------------ --------- Fixed maturities......................................... $ 193,562 $ (175,725) $ 1,198 Equity securities........................................ 2,740 (5,342) 1,565
At December 31, 1995, all of the Company's mortgage loans were commercial loans of which 81% were retail, 7% were warehouses, and 6% were office buildings. The Company specializes in making mortgage loans on either credit-oriented or credit-anchored commercial properties, most of which are NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE C -- INVESTMENT OPERATIONS (CONTINUED) strip shopping centers in smaller towns and cities. No single tenant's leased space represents more than 4% of mortgage loans. Approximately 82% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: South Carolina, Georgia, Alabama, Tennessee, Texas, Florida, North Carolina, Virginia, California, Mississippi, Colorado, Ohio, Kentucky, Louisiana, and Indiana. Many of the mortgage loans have call provisions after 5 to 7 years. Assuming the loans are called at their next call dates, approximately $174.3 million would become due in 1996, $497.3 million in 1997 to 2000, and $275.7 million in 2001 to 2005. At December 31, 1995, the average mortgage loan was $1.6 million, and the weighted average interest rate was 9.3%. The largest single mortgage loan was $13.1 million. While the Company's mortgage loans do not have quoted market values, at December 31, 1995 and 1994, the Company estimates the market value of its mortgage loans to be $2,001.1 million and $1,535.3 million, respectively, using discounted cash flows from the next call date. At December 31, 1995 and 1994, the Company's problem mortgage loans and foreclosed properties totaled $26.1 million and $24.0 million, respectively. The Company expects no significant loss of principal. Certain investments, principally real estate, with a carrying value of $9.5 million, were nonincome producing for the twelve months ended December 31, 1995. Mortgage loans to affiliates of both Fletcher Bright and Edens & Avant totaled $95.4 million and $69.1 million, respectively, at December 31, 1995. Most of such loans were not made to, or in reliance on the credit of, Mr. Bright or Edens & Avant. The Company believes it is not practicable to determine the market value of its policy loans since there is no stated maturity, and policy loans are often repaid by reductions to policy benefits. Policy loan interest rates generally range from 4.5% to 8.0%. The market values of the Company's other long-term investments approximate cost. NOTE D -- FEDERAL INCOME TAXES The Company's effective income tax rate varied from the maximum federal income tax rate as follows:
1995 1994 1993 ----------- ----------- ----------- Statutory federal income tax rate applied to pretax income............. 35.0% 35.0% 35.0% Amortization of nondeductible goodwill................................. 0.2 0.1 Dividends received deduction and tax-exempt interest................... (0.6) (0.4) (0.5) Low-income housing credit.............................................. (0.7) (0.7) Tax differences arising from prior acquisitions and other adjustments........................................................... 0.1 (1.9) (2.6) ----- ----- ----- 34.0% 32.0% 32.0% ----- ----- ----- ----- ----- -----
In August 1993 the corporate income tax rate was increased from 34% to 35% which resulted in a one-time increase to income tax expense of $1.3 million or $.09 per share due to a recalculation of the Company's deferred income tax liability. The effective income tax rate for 1993 of 32% excludes the one-time increase. The provision for federal income tax differs from amounts currently payable due to certain items reported for financial statement purposes in periods which differ from those in which they are reported for income tax purposes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE D -- FEDERAL INCOME TAXES (CONTINUED) Details of the deferred income tax provision for the years ended December 31 are as follows:
1995 1994 1993 ---------- ---------- ---------- Deferred policy acquisition costs....................... $ (11,606) $ 34,561 $ 8,861 Benefit and other policy liability changes.............. 52,496 (52,288) (10,416) Temporary differences of investment income.............. (34,174) 15,524 Other items............................................. (10,426) (1,139) (3,718) ---------- ---------- ---------- $ (3,710) $ (3,342) $ (5,273) ---------- ---------- ---------- ---------- ---------- ----------
The components of the Company's net deferred income tax liability as of December 31 were as follows:
1995 1994 ----------- ----------- Deferred income tax assets: Policy and policyholder liability reserves........................ $ 63,830 $ 116,326 Unrealized loss on investments.................................... 23,485 Other............................................................. 203 ----------- ----------- 64,033 139,811 ----------- ----------- ----------- ----------- Deferred income tax liabilities: Deferred policy acquisition costs................................. 102,154 113,760 Unrealized gain on investments.................................... 31,399 Other............................................................. 11,956 ----------- ----------- 133,553 125,716 ----------- ----------- ----------- ----------- Net deferred income tax liability............................... $ 69,520 $ (14,095) ----------- ----------- ----------- -----------
Under pre-1984 life insurance company income tax laws, a portion of the Company's gain from operations which was not subject to current income taxation was accumulated for income tax purposes in a memorandum account designated as Policyholders' Surplus. The aggregate accumulation in this account at December 31, 1995, was approximately $50.7 million. Should the accumulation in the Policyholders' Surplus account of the life insurance subsidiaries exceed certain stated maximums, or should distributions including cash dividends be made to Protective Life Corporation in excess of approximately $322 million, such excess would be subject to federal income taxes at rates then effective. Deferred income taxes have not been provided on amounts designated as Policyholders' Surplus. The Company does not anticipate involuntarily paying income tax on amounts in the Policyholders' Surplus accounts. At December 31, 1995, the Company had an unused capital loss carryforward of $5.9 million which expires in 2000. NOTE E -- DEBT AND PREFERRED SECURITIES Long-term debt at December 31 is summarized as follows:
1995 1994 ----------- --------- Long-term debt: Notes payable to banks............................................. $ 40,500 $ 23,000 7.95% Senior Notes................................................. 75,000 75,000 ----------- --------- $ 115,500 $ 98,000 ----------- --------- ----------- ---------
Under a three-year revolving line of credit arrangement with several banks, the Company can borrow up to $60 million on an unsecured basis. No compensating balances are required to maintain the line of credit. At December 31, 1995, the Company had borrowed $40.5 million under this credit arrangement at an interest rate of 6.2%. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE E -- DEBT AND PREFERRED SECURITIES (CONTINUED) The aforementioned revolving line of credit arrangement contains, among other provisions, requirements for maintaining certain financial ratios and restrictions on indebtedness incurred by the Company and its subsidiaries. Additionally, the Company, on a consolidated basis, cannot incur debt in excess of 50% of its total capital. The Company believes the market value of its bank borrowings approximates book value due to the debt being either short-term or variable rate. On July 1, 1994, the Company issued $75 million of 7.95% Senior Notes due July 1, 2004. The notes are not redeemable by the Company prior to maturity. Net proceeds of $74.4 million were used to repay bank borrowings. In related transactions, in 1994 the Company entered into interest rate swap agreements to swap $40 million of the notes from a fixed rate of interest to a floating rate of interest. During 1995, the Company terminated these agreements and realized a gain of approximately $3.0 million which is being amortized as a component of interest expense. The effective interest rate was 7.4% and 7.3% in 1995 and 1994, respectively. Future maturities of the long-term debt are $40.5 million in 1998 and $75 million in 2004. Interest expense on debt totaled $9.6 million, $7.8 million, and $6.3 million in 1995, 1994, and 1993, respectively. On June 10, 1994, a special purpose finance subsidiary of the Company, PLC Capital L.L.C. (PLC Capital), issued $55 million of 9% Cumulative Monthly Income Preferred Securities, Series A (MIPS), guaranteed by the Company. Net proceeds of approximately $52.3 million were used to repay a term note and other bank borrowings. PLC Capital was formed solely to issue MIPS and other securities and lend the proceeds thereof to the Company in exchange for subordinated debentures of the Company. The Company has the right under the subordinated debentures to extend interest-payment periods up to 60 months, and, as a consequence, monthly dividends on the MIPS may be deferred (but will continue to accumulate, together with additional dividends on any accumulated but unpaid dividends at the dividend rate) by PLC Capital during any such extended interest payment period. The MIPS are redeemable by PLC Capital at any time on or after June 30, 1999. The MIPS and dividends thereon are reported in the accompanying financial statements as "minority interest in consolidated subsidiaries." In related transactions, the Company entered into interest rate swap agreements with two financial institutions which effectively converted the MIPS from a fixed dividend rate to the floating, 30-day LIBOR plus 60.5 basis points, approximately 6.3% and 6.6% at December 31, 1995 and 1994, respectively. Dividends, net of tax, on the MIPS were $3.2 million and $1.8 million in 1995 and 1994, respectively, before consideration of the interest rate swap agreements. On a swap-adjusted basis, dividends were $2.4 million and $1.1 million in 1995 and 1994, respectively. NOTE F -- ACQUISITIONS In April 1994 the Company acquired through coinsurance a block of payroll deduction policies. In October 1994, the Company acquired through coinsurance a block of individual life insurance policies. In June 1995 the Company acquired through coinsurance a block of term life insurance policies. On March 20, 1995, the Company acquired National Health Care Systems of Florida, Inc. (also known as "DentiCare"). The purchase price was $38.3 million and was paid with a combination of the Company's Common Stock ($30.7 million) and cash ($7.6 million). In connection with the acquisition, the Company reissued 1,316,458 shares of its Common Stock previously held as Treasury Stock. The Company recorded $32.4 million of goodwill in connection with this acquisition, which is being amortized using the straight line method over forty years. These transactions have been accounted for as purchases, and the results of the transactions have been included in the accompanying financial statements since the effective dates of the agreements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES The Company is contingently liable to obtain a $20 million letter of credit under indemnity agreements with its directors. Such agreements provide insurance protection in excess of the directors' and officers' liability insurance in force at the time up to $20 million. Should certain events occur constituting a change in control of the Company, the Company must obtain the letter of credit upon which directors may draw for defense or settlement of any claim relating to performance of their duties as directors. The Company has similar agreements with certain of its officers providing up to $10 million in indemnification which are not secured by the obligation to obtain a letter of credit. Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. The Company and its subsidiaries, like other life and health insurers, from time to time are involved in such litigation. To date, no such lawsuit has resulted in the award of any significant amount of damages against the Company. Although the outcome of any litigation cannot be predicted with certainty, the Company is not aware of any litigation that will have a material adverse effect on the financial position of the Company. NOTE H -- STOCKHOLDERS' EQUITY AND RESTRICTIONS On May 1, 1995, the Company's Board of Directors approved a two-for-one split of the Company's Common Stock in the form of a 100% stock dividend on June 1, 1995. Stockholders' equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying from retained earnings to common stock the par value of the additional shares arising from the stock split. In addition, all references to number of shares and per share amounts included herein have been restated to reflect the stock split. The Company has a Rights Agreement that provides rights to holders of the Company's Common Stock to purchase Series A Junior Participating Cumulative Preferred Stock, or in certain circumstances, either Common Stock or common stock of an acquiring company at one half the market price of such Common Stock or common stock, as the case may be. The rights will become exercisable if certain events occur with respect to the Company, including the acquisition by a person or group of 15% or more of the Company's Common Stock. The Company can redeem the rights at $.01 per right in certain circumstances including until ten business days following a public announcement that 15% or more of the Company's Common Stock has been acquired by a person or group. Stockholders have authorized 4,000,000 shares of Preferred Stock, $1.00 par value. Other terms, including preferences, voting, and conversion rights, may be established by the Board of Directors. In connection with the Rights Agreement, 400,000 of these shares have been designated as Series A Junior Participating Cumulative Preferred Stock, $1.00 par value, and were unissued at December 31, 1995. The remaining 3,600,000 shares of Preferred Stock, $1.00 par value, were also unissued at December 31, 1995. The Company has an Employee Stock Ownership Plan (ESOP). In 1990 shares of the Company's Common Stock, which had been held by Protective Life and accounted for as treasury shares, were transferred to the ESOP in exchange for a note. The stock is used to match employee contributions to the Company's 401(k) Plan and to provide other employee benefits. The stock held by the ESOP that has not yet been used is the unallocated stock shown as a reduction to stockholders' equity. The ESOP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE H -- STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED) shares are dividend-paying and therefore are considered outstanding for earnings per share calculations. Dividends on the shares are used to pay the ESOP's note to Protective Life. If certain events associated with a change in control of the Company occur, any unallocated shares held by the ESOP will become allocable to employee 401(k) accounts. The Company may from time to time transfer or buy in the open market additional shares of Common Stock to complete its 401(k) employer match obligation. Accordingly, in 1994, the Company transferred 136 shares of Common Stock to the ESOP and transferred another 16,158 shares during 1995. Since 1973 the Company has had a Performance Share Plan to motivate senior management to focus on the Company's long-range earnings performance. The criterion for payment of performance share awards is based upon a comparison of the Company's average return on average equity over an award period to that of a comparison group of publicly held life insurance companies, multiline insurers, and insurance holding companies. If the Company's results are below the median of the comparison group, no portion of the award is earned. If the Company's results are at or above the 90th percentile, the award maximum is earned. Under the plan approved by stockholders in 1992, up to 1,200,000 shares may be issued in payment of awards. The number of shares granted in 1995, 1994, and 1993 were 85,700, 62,140, and 72,610 shares, respectively, having an approximate market value on the grant date of $1.9 million, $1.4 million, and $1.0 million, respectively. At December 31, 1995, outstanding awards measured at target and maximum payouts were 278,730 and 391,927 shares, respectively. The expense recorded by the Company for the Performance Share Plan was $2.9 million, $3.6 million, and $4.3 million in 1995, 1994, and 1993, respectively. The expense recorded reflects increases in the market value of the Company's Common Stock since the grant date. The Company has established deferred compensation plans for directors and officers. Compensation deferred is credited to the directors and officers in cash or Common Stock equivalents or a combination thereof. The Company may from time to time issue or buy in the open market shares of Common Stock to fulfill its obligation under the plans. At December 31, 1995, the plans had 223,049 shares of Common Stock equivalents credited to directors and officers. At December 31, 1995, approximately $180 million of consolidated stockholders' equity, excluding net unrealized losses on investments, represented net assets of the Company's insurance subsidiaries that cannot be transferred in the form of dividends, loans, or advances to the parent company. In addition, the company's insurance subsidiaries are subject to various state statutory and regulatory restrictions on the insurance subsidiaries' ability to pay dividends to Protective Life Corporation. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to the Company by its insurance subsidiaries in 1996 is estimated to be $129 million. NOTE I -- RELATED PARTY MATTERS Certain corporations with which the Company's directors were affiliated paid the Company premiums and policy fees for various types of group insurance. Such premiums and policy fees amounted to $21.2 million, $21.1 million, and $10.3 million in 1995, 1994, and 1993, respectively. The Company paid commissions, interest, and service fees to these same corporations totaling $5.3 million, $4.9 million, and $6.1 million, in 1995, 1994, and 1993, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE J -- BUSINESS SEGMENTS The Company operates predominantly in the life and accident and health insurance industry. The following table sets forth revenues, income before income tax, and identifiable assets of the Company's business segments. The primary components of revenues are premiums and policy fees, net investment income, and realized investment gains and losses. Premiums and policy fees are attributed directly to each business segment. Net investment income is allocated based on directly related assets required for transacting that segment of business. Realized investment gains (losses) and expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment. Unallocated realized investment gains (losses) are deemed not to be associated with any specific segment. Assets are allocated based on policy liabilities and deferred policy acquisition costs directly attributable to each segment. There are no significant intersegment transactions.
1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) TOTAL REVENUES Acquisitions................................. $ 193,544 $ 170,659 $ 123,855 Financial Institutions....................... 34,533 108,406 97,511 Group........................................ 180,262 148,313 143,423 Guaranteed Investment Contracts.............. 199,468 183,591 167,233 Individual Life.............................. 147,580 122,452 111,654 Investment Products.......................... 106,977 87,702 80,115 Corporate and Other.......................... 17,140 22,059 33,970 Unallocated Realized Investment Gains (Losses).................................... 583 5,266 1,876 ---------- ---------- ---------- $ 880,087 $ 848,448 $ 759,637 ---------- ---------- ---------- ---------- ---------- ---------- Acquisitions................................. 22.0% 20.1% 16.3% Financial Institutions....................... 3.9 12.8 12.9 Group........................................ 20.5 17.5 18.9 Guaranteed Investment Contracts.............. 22.7 21.6 22.0 Individual Life.............................. 16.8 14.5 14.7 Investment Products.......................... 12.1 10.3 10.6 Corporate and Other.......................... 1.9 2.6 4.4 Unallocated Realized Investment Gains (Losses).................................... 0.1 0.6 0.2 ---------- ---------- ---------- 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ----------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE J -- BUSINESS SEGMENTS (CONTINUED)
1995 1994 1993 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) INCOME BEFORE INCOME TAX Acquisitions................................. $ 51,393 $ 39,176 $ 29,845 Financial Institutions....................... 9,197 9,581 8,196 Group........................................ 12,379 11,085 10,394 Guaranteed Investment Contracts.............. 30,255 30,143 25,405 Individual Life.............................. 15,968 16,976 20,064 Investment Products.......................... 11,392 (1,602) 2,931 Corporate and Other*......................... (10,133) (4,452) (13,667) Unallocated Realized Investment Gains (Losses).................................... 583 5,266 1,876 ---------- ---------- ---------- $ 121,034 $ 106,173 $ 85,044 ---------- ---------- ---------- ---------- ---------- ---------- Acquisitions................................. 42.5% 36.9% 35.1% Financial Institutions....................... 7.6 9.0 9.6 Group........................................ 10.2 10.4 12.2 Guaranteed Investment Contracts.............. 25.0 28.4 29.9 Individual Life.............................. 13.2 16.0 23.6 Investment Products.......................... 9.4 (1.5) 3.5 Corporate and Other.......................... (8.4) (4.2) (16.1) Unallocated Realized Investment Gains (Losses).................................... 0.5 5.0 2.2 ---------- ---------- ---------- 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- IDENTIFIABLE ASSETS Acquisitions................................. $1,255,542 $1,204,883 $1,076,182 Financial Institutions....................... 268,782 215,878 192,486 Group........................................ 278,094 215,997 208,968 Guaranteed Investment Contracts.............. 2,537,045 2,211,181 2,041,564 Individual Life.............................. 890,198 731,026 642,325 Investment Products.......................... 1,580,519 1,286,744 879,365 Corporate and Other.......................... 421,077 264,575 275,115 ---------- ---------- ---------- $7,231,257 $6,130,284 $5,316,005 ---------- ---------- ---------- ---------- ---------- ---------- Acquisitions................................. 17.4% 19.7% 20.2% Financial Institutions....................... 3.7 3.5 3.6 Group........................................ 3.8 3.5 3.9 Guaranteed Investment Contracts.............. 35.1 36.1 38.4 Individual Life.............................. 12.3 11.9 12.1 Investment Products.......................... 21.9 21.0 16.6 Corporate and Other.......................... 5.8 4.3 5.2 ---------- ---------- ---------- 100.0% 100.0% 100.0% ---------- ---------- ---------- ---------- ---------- ---------- - ------------------------ *Income before income tax for the Corporate and Other segment has not been reduced by pretax minority interest of $4,950 in 1995, $2,764 in 1994, and $19 in 1993.
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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE K -- EMPLOYEE BENEFIT PLANS (CONTINUED) The actuarial present value of benefit obligations and the funded status of the plan at December 31 are as follows:
1995 1994 --------- --------- Accumulated benefit obligation, including vested benefits of $16,676 in 1995 and $11,992 in 1994................................................................. $ 17,415 $ 12,348 --------- --------- --------- --------- Projected benefit obligation for service rendered to date........................ $ 24,877 $ 20,302 Plan assets at fair value (group annuity contract with Protective Life).......... 18,254 15,679 --------- --------- Plan assets less than the projected benefit obligation........................... (6,623) (4,623) Unrecognized net loss from past experience different from that assumed........... 4,882 2,400 Unrecognized prior service cost.................................................. 805 905 Unrecognized net transition asset................................................ (84) (101) --------- --------- Net pension liability recognized in balance sheet................................ $ (1,020) $ (1,419) --------- --------- --------- ---------
Net pension cost includes the following components for the years ended December 31:
1995 1994 1993 --------- --------- --------- Service cost -- benefits earned during the year........................ $ 1,540 $ 1,433 $ 1,191 Interest cost on projected benefit obligation.......................... 1,636 1,520 1,396 Actual return on plan assets........................................... (1,358) (1,333) (1,270) Net amortization and deferral.......................................... 114 210 704 --------- --------- --------- Net pension cost....................................................... $ 1,932 $ 1,830 $ 2,021 --------- --------- --------- --------- --------- ---------
Assumptions used to determine the benefit obligations as of December 31 were as follows:
1995 1994 1993 ----------- ----------- ----------- Weighted average discount rate............................................. 7.25% 8.00% 7.50% Rates of increase in compensation level.................................... 5.25% 6.00% 5.50% Expected long-term rate of return on assets................................ 8.50% 8.50% 8.50%
Assets of the pension plan are included in the general assets of Protective Life. Upon retirement, the amount of pension plan assets vested in the retiree are used to purchase a single premium annuity from Protective Life in the retiree's name. Therefore, amounts presented above as plan assets exclude assets relating to retirees. The Company also sponsors an unfunded Excess Benefits Plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed by federal tax law. At December 31, 1995, the projected benefit obligation of this plan totaled $5.7 million. In addition to pension benefits, the Company provides limited healthcare benefits to eligible retired employees until age 65. The postretirement benefit is provided by an unfunded plan. At December 31, 1995, the liability for such benefits totaled $1.5 million. The expense recorded by the Company was $0.2 million in 1995, 1994, and 1993. The Company's obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation. Life insurance benefits for retirees are provided through the purchase of life insurance policies upon retirement equal to the employees' annual compensation. This plan is partially funded at a maximum of $50,000 face amount of insurance. The Company sponsors a defined contribution retirement plan which covers substantially all employees. Employee contributions are made on a before-tax basis as provided by Section 401(k) of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE K -- EMPLOYEE BENEFIT PLANS (CONTINUED) Internal Revenue Code. In 1990 the Company established an Employee Stock Ownership Plan (ESOP) to match voluntary employee contributions to the Company's 401(k) Plan. In 1994 a stock bonus was added to the 401(k) Plan for employees who are not otherwise under a bonus plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP's note payable to the Company less dividends on shares held by the ESOP. All shares held by the ESOP are treated as outstanding for purposes of computing the Company's earnings per share. At December 31, 1995, the Company had committed 70,088 shares to be released to fund employee benefits. The expense recorded by the Company for these employee benefits was $0.7 million, $0.6 million, and $0.3 million in 1995, 1994, and 1993, respectively. NOTE L -- REINSURANCE The Company assumes risks from, and reinsures certain parts of its risks with other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Yearly renewable term and coinsurance agreements are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. Modified coinsurance is accounted for similarly to coinsurance except that the liability for future policy benefits is held by the original company, and settlements are made on a net basis between the companies. While the amount retained on an individual life will vary based upon age and mortality prospects of the risk, the Company generally will not carry more than $500,000 individual life insurance on a single risk. The Company has reinsured approximately $17.5 billion, $8.6 billion, and $7.5 billion in face amount of life insurance risks with other insurers representing $116.1 million, $46.0 million, and $37.9 million of premium income for 1995, 1994, and 1993, respectively. The Company has also reinsured accident and health risks representing $217.1 million, $126.5 million, and $88.9 million of premium income for 1995, 1994, and 1993, respectively. In 1995 and 1994, policy and claim reserves relating to insurance ceded of $232.3 million and $120.0 million, respectively, are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with the Company. At December 31, 1995 and 1994, the Company had paid $4.1 million and $5.4 million, respectively, of ceded benefits which are recoverable from reinsurers. During 1995 the Company entered into a reinsurance agreement whereby all of the Company's new credit insurance sales are being ceded to a reinsurer. Included in the preceding paragraph are credit life and credit accident and health insurance premiums of $68.2 million and $57.6 million, respectively, and reserves totaling $100.8 million which were ceded during 1995. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE M -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and estimated market values of the Company's financial instruments at December 31 are as follows:
1995 1994 ---------------------------- ---------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNTS MARKET VALUES AMOUNTS MARKET VALUES ------------- ------------- ------------- ------------- Assets (see Notes A and C): Investments: Fixed maturities................................... $ 3,892,008 $ 3,892,008 $ 3,493,646 $ 3,493,646 Equity securities.................................. 38,711 38,711 45,005 45,005 Mortgage loans on real estate...................... 1,834,357 2,001,081 1,487,795 1,535,300 Short-term investments............................. 53,591 53,591 59,541 59,541 Cash................................................. 11,392 11,392 4,468 4,468 Liabilities (see Notes A and E): Debt: Notes payable to banks............................. 40,500 40,500 23,000 23,000 Senior Notes....................................... 75,000 75,000 75,000 75,000 Monthly Income Preferred Securities.................. 55,000 58,300 55,000 54,700 Other (see Note A): Futures contracts.................................. (633) (416) Interest rate swaps................................ 5,658 (13,715)
NOTE N -- CONSOLIDATED QUARTERLY RESULTS -- UNAUDITED Protective Life Corporation's unaudited consolidated quarterly operating data for the years ended December 31, 1995 and 1994, are presented below. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of quarterly results have been reflected in the data which follow. It is also management's opinion, however, that quarterly operating data for insurance enterprises are not indicative of results to be achieved in succeeding quarters or years. In order to obtain a more accurate indication of performance, there should be a review of operating results, changes in stockholders' equity, and cash flows for a period of several years. Fluctuation in short-term performance may be due to the long-term nature of the insurance business, seasonal patterns in premium production and policy claims, as well as to the varying yields obtained on invested assets. The data below should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein.
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------ -------------- -------------- -------------- -------------- Premiums and policy fees........................ $ 90,562 $ 93,685 $ 93,213 $ 92,428 Net investment income........................... 112,663 118,046 123,894 121,321 Realized investment gains (losses).............. 2,619 (555) 1,337 (1,789) Other income.................................... 4,533 8,938 8,924 10,268 -------------- -------------- -------------- -------------- Total revenues................................ 210,377 220,114 227,368 222,228 Benefits and expenses........................... 180,805 192,244 193,664 192,340 -------------- -------------- -------------- -------------- Income before income tax........................ 29,572 27,870 33,704 29,888 Income tax expense.............................. 9,759 9,197 12,034 10,162 Minority interest............................... 804 804 804 805 -------------- -------------- -------------- -------------- Net income...................................... $ 19,009 $ 17,869 $ 20,866 $ 18,921 -------------- -------------- -------------- -------------- Net income per share............................ $ .69 $ .62 $ .72 $ .65 -------------- -------------- -------------- -------------- Average shares outstanding...................... 27,599,922 28,766,664 28,775,118 28,934,174 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE N -- CONSOLIDATED QUARTERLY RESULTS -- UNAUDITED (CONTINUED)
FIRST SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------ -------------- -------------- -------------- -------------- Premiums and policy fees........................ $ 89,437 $ 98,049 $ 101,876 $ 113,410 Net investment income........................... 100,248 98,637 105,762 113,178 Realized investment gains (losses).............. 2,297 (564) 3,122 1,443 Other income.................................... 3,562 7,647 2,185 8,159 -------------- -------------- -------------- -------------- Total revenues................................ 195,544 203,769 212,945 236,190 Benefits and expenses........................... 171,165 179,316 184,311 207,483 -------------- -------------- -------------- -------------- Income before income tax........................ 24,379 24,453 28,634 28,707 Income tax expense.............................. 7,801 7,825 9,163 9,187 Minority interest............................... 188 804 804 -------------- -------------- -------------- -------------- Net income...................................... $ 16,578 $ 16,440 $ 18,667 $ 18,716 -------------- -------------- -------------- -------------- Net income per share............................ $ .61 $ .60 $ .68 $ .68 -------------- -------------- -------------- -------------- Average shares outstanding...................... 27,389,792 27,399,262 27,402,166 27,425,584 -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders of Protective Life Corporation Birmingham, Alabama We have audited the accompanying consolidated balance sheets of Protective Life Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Protective Life Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note A to the Consolidated Financial Statements, the Company changed its method of accounting for stock-based employee compensation plans in 1995. Also, as discussed in Note A, the Company changed its method of accounting for certain investments in debt and equity securities in 1993. Coopers & Lybrand L.L.P. Birmingham, Alabama February 12, 1996 EX-21 5 EXHIBIT 21 EXHIBIT 21 TO FORM 10-K OF PROTECTIVE LIFE CORPORATION FOR FISCAL YEAR ENDED DECEMBER 31, 1995 The following wholly-owned subsidiary of Protective Life Corporation is organized under the laws of the State of Tennessee and does business under its corporate name: Protective Life Insurance Company The following wholly-owned subsidiary of Protective Life Insurance Company is incorporated under the laws of the State of Alabama and does business under its corporate name: American Foundation Life Insurance Company The following wholly-owned subsidiary of Protective Life Insurance Company is incorporated under the laws of the State of Wisconsin and does business under its corporate name: Wisconsin National Life Insurance Company EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Protective Life Corporation on Form S-3 (File No. 33-52831) and Form S-8 (File Nos. 33-51887 and 33-68036) of our report, which includes an explanatory paragraph with respect to changes in the Company's methods of accounting for stock-based employee compensation plans in 1995 and certain investments in debt and equity securities in 1993, dated February 12, 1996, on our audits of the consolidated financial statements and financial statement schedules of Protective Life Corporation as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994, and 1993, which report is included or incorporated by reference in this Annual Report on Form 10-K. COOPERS & LYBRAND March 22, 1996 EX-24 7 EXHIBIT 24 EXHIBIT 24 DIRECTORS' POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned Directors of Protective Life Corporation, a Delaware corporation, ('Company') by his execution hereof or upon an identical counterpart hereof, does hereby constitute and appoint Drayton Nabers, Jr., John D. Johns, Deborah J. Long, or Jerry W. DeFoor, and each or any of them, his true and lawful attorneys-in-fact and agents, for him and in his name, place and stead, to execute and sign the 1995 Annual Report on Form 10-K to be filed by the Company with the Securities and Exchange Commission, pursuant to the provisions of the Securities Exchange Act of 1934 and, further, to execute and sign any and all amendments to such Annual Report, and to file same, with all exhibits and schedules thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all the acts of said attorneys-in-fact and agents or any of them which they may lawfully do in the premises or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and seal this 4th day of March, 1996. WITNESS TO ALL SIGNATURES: /s/ William J. Rushton III -------------------------------------- William J. Rushton III /s/ John K. Wright /s/ John W. Woods - -------------------------------------- -------------------------------------- John K. Wright John W. Woods /s/ William J. Cabaniss, Jr. -------------------------------------- William J. Cabaniss, Jr. /s/ H. G. Pattillo -------------------------------------- H. G. Pattillo /s/ Drayton Nabers, Jr. -------------------------------------- Drayton Nabers, Jr. /s/ John J. McMahon, Jr. -------------------------------------- John J. McMahon, Jr. /s/ A. W. Dahlberg -------------------------------------- A. W. Dahlberg /s/ John W. Rouse, Jr. -------------------------------------- John W. Rouse, Jr. /s/ Robert T. David -------------------------------------- Robert T. David /s/ Ronald L. Kuehn, Jr. -------------------------------------- Ronald L. Kuehn, Jr. /s/ Herbert A. Sklenar -------------------------------------- Herbert A. Sklenar EX-27 8 FDS
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF PROTECTIVE LIFE CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 3,892,008 0 0 38,711 1,834,357 20,921 6,025,056 11,392 271,018 410,396 7,231,257 1,928,154 196,332 0 134,380 115,500 0 0 15,668 510,889 7,231,257 369,888 475,924 1,612 32,663 509,506 84,533 165,014 121,034 41,152 76,665 0 0 0 76,665 2.68 2.68 0 0 0 0 0 0 0 Net of minority interest in consolidated subsidiaries of $3,217.
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