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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1997 33-31940
33-39345
33-57052
333-02249
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PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
TENNESSEE 63-0169720
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (205) 879-9230
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Aggregate market value of voting stock held by nonaffiliates of the registrant:
None
Number of shares of Common Stock, $1.00 Par Value, outstanding as of March 6,
1998: 5,000,000
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)
(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).
DOCUMENTS INCORPORATED BY REFERENCE
None, except Exhibits
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PART I
ITEM 1. BUSINESS
Protective Life Insurance Company ("Protective"), a stock life insurance
company, was founded in 1907. Protective is a wholly-owned and the principal
operating subsidiary of Protective Life Corporation ("PLC"), an insurance
holding company whose common stock is traded on the New York Stock Exchange
(symbol: PL). Protective provides financial services through the production,
distribution, and administration of a diverse array of insurance and investment
products. Protective operates through seven divisions whose principal product
lines can be grouped into three general categories: life insurance, specialty
insurance products and retirement savings and investment products. Protective
also has an additional business segment which is described herein as Corporate
and Other. Unless the context otherwise requires "Protective" refers to the
consolidated group of Protective Life Insurance Company and its subsidiaries.
Protective offers a competitive selection of individual life insurance,
dental insurance and managed care products, credit life and disability
insurance, guaranteed investment contracts, guaranteed funding agreements, and
fixed and variable annuities. Protective distributes these products through many
channels, primarily independent agents, insurance brokers, stockbrokers,
financial institutions, company sales representatives, and automobile
dealerships. Protective also seeks to acquire blocks of insurance policies from
other insurers.
Over the last twenty-five years PLC has made several acquisitions of
smaller insurance companies or blocks of policies. Many of these transactions
involved Protective. Additionally, PLC has from time to time merged other life
insurance companies it has acquired into Protective. In the second quarter of
1995, Protective coinsured a block of 28,000 policies. In January 1996,
Protective coinsured a block of 38,000 policies. In June 1996 Protective
coinsured a block of 212,000 credit insurance policies. In December 1996
Protective acquired Community National Assurance Company with 16,000 policies
and coinsured a related block of 22,000 policies. In June 1997 Protective
acquired West Coast Life Insurance Company. In September 1997 Protective
acquired the Western Diversified Group. In October 1997 Protective acquired a
closed block of credit insurance policies.
ITEM 2. PROPERTIES
Protective's administrative office building is located at 2801 Highway 280
South, Birmingham, Alabama 35223. 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.
Protective leases administrative space in 7 cities, substantially all
under leases for periods of three to five years. The aggregate monthly rent is
approximately $219 thousand.
Marketing offices are leased in 16 cities, substantially all under leases
for periods of three to five years. The aggregate monthly rent is approximately
$53 thousand.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of Protective, to which Protective
or any of its subsidiaries is a party or of which any of Protective's properties
is subject. For additional information regarding legal proceedings see Note G to
the consolidated financial statements included herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required in accordance with General Instruction I(2)(c).
3
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Protective is a wholly-owned subsidiary of PLC which also owns all of the
preferred stock issued by Protective's subsidiary, American Foundation Life
Insurance Company ("American Foundation"). Therefore, neither Protective's
Common Stock nor American Foundation's Preferred Stock is publicly traded.
At December 31, 1997, $483 million of consolidated stockholder's equity
excluding net unrealized gains and losses represented net assets of Protective
that cannot be transferred to PLC in the form of dividends, loans, or advances.
Also, distributions, including cash dividends to PLC in excess of approximately
$727 million, would be subject to federal income tax at rates then effective.
Insurers are subject to various state statutory and regulatory
restrictions on the insurers' ability to pay dividends. In general, dividends up
to specific 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 PLC by Protective in 1998 is estimated to
be $154 million.
The American Foundation Preferred Stock pays, when and if declared, annual
minimum cumulative dividends of $0.1 million and noncumulative participating
dividends to the extent American Foundation's statutory earnings for the
immediately preceding fiscal year exceed $1 million.
American Foundation paid preferred dividends of $0.1 million each of 1997
and 1996. Protective and American Foundation expect to continue to be able to
pay cash dividends, subject to their earnings and financial condition and other
relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
Not required in accordance with General Instruction I(2)(a).
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS In
accordance with General Instruction I(2)(a), Protective includes the
following analysis with the reduced disclosure format.
REVENUES
The following table sets forth revenues by source for the periods shown:
PERCENTAGE
YEAR ENDED INCREASE/
DECEMBER 31 (DECREASE)
1997 1996
-------- ------
(IN THOUSANDS)
Premiums and policy fees.......................... $ 480,206 $462,050 3.9%
Net investment income............................. 557,488 498,781 11.8%
Realized investment gains (losses)................ 1,824 5,510 (66.9)%
Other income...................................... 6,149 5,010 22.7%
------------ -----------
$1,045,667 $971,351
Premiums and policy fees increased $18.2 million or 3.9% in 1997 over
1996. The coinsurance by the Acquisitions Division of a block of policies and
the acquisition of a small life insurance company in late 1996 resulted in a
$4.4 million increase in premiums and policy fees. Decreases in older acquired
blocks resulted in an $8.3 million
4
decrease in premiums and policy fees. The Individual Life Division's premiums
and policy fees increased $10.8 million. The June 1997 acquisition of West Coast
Life Insurance Company ("West Coast") increased premiums and policy fees $14.1
million. The Dental Division's exit from the group major medical business during
1997 resulted in a $31.1 million decrease in premiums and policy fees. Premiums
and policy fees related to the Dental Division's other businesses increased
$25.7 million. Premiums and policy fees from the Financial Institutions Division
decreased $1.2 million. Decreases of $10.2 million resulted from a reinsurance
arrangement begun in 1995. Decreases of $17.1 million related to the normal
decrease in premium on a closed block of credit insurance policies reinsured in
1996. The recent acquisition of the Western Diversified Group ("Western
Diversified") and coinsurance of an unrelated closed block of credit insurance
policies increased premiums and policy fees $26.1 million. The increase in
premiums and policy fees from the Investment Products Division was $4.2 million.
Net investment income for 1997 was $58.7 million or 11.8% higher than for
the preceding year primarily due to increases in the average amount of invested
assets. Invested assets have increased primarily due to acquisitions and to
receiving annuity and guaranteed investment contract (GIC) deposits. The
coinsurance of a block of policies and the acquisition of a small life insurance
company in late 1996, and the acquisition of West Coast, Western Diversified,
and the block of credit insurance policies in 1997 resulted in an increase in
net investment income of $39.4 million in 1997. The percentage earned on average
cash and investments was 7.6% in 1997 and 7.8% in 1996.
Protective generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. However,
Protective may sell any of its investments to maintain proper matching of assets
and liabilities. Accordingly, Protective 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.
Protective maintains an allowance for uncollectible amounts on
investments. The allowance totaled $23.0 million at December 31, 1997 and $30.9
million at December 31, 1996. Realized investment gains in 1997 of $34.3 million
were largely offset by realized investment losses of $32.5 million, including a
loss of $6.9 million incurred in connection with the sale of $445 million of
mortgage loans in a securitization transaction. Realized investment losses in
1997 were reduced by a $7.9 million reduction to the allowance for uncollectible
amounts on investments.
Other income consists primarily of fees from administrative-services-only
types of group accident and health insurance contracts, and from rental of space
in its administrative building to PLC. Other income increased $1.1 million in
1997 as compared to 1996.
5
INCOME BEFORE INCOME TAX
The following table sets forth operating income or loss and income or loss
before income tax by business segment for the periods shown:
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE
INCOME TAX YEAR ENDED DECEMBER 31
(IN THOUSANDS)
1997 1996
---------- -------
OPERATING INCOME (LOSS) (1)
LIFE INSURANCE
Acquisitions $ 56,672 $ 53,564
Individual Life 22,480 14,774
West Coast 8,202
SPECIALTY INCOME PRODUCTS
Dental 11,767 821
Financial Institutions 13,017 8,966
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GIC 28,117 40,093
Investment Products 8,303 7,852
CORPORATE AND OTHER (259) (2,410)
-------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 148,299 123,660
-----------------------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Individual Life 3,098
GIC (3,180) (7,963)
Investment Products 589 3,858
Unallocated Realized
Investment Gains (Losses) 4,415 6,517
RELATED AMORTIZATION OF DEFERRED
POLICY ACQUISITION COSTS
Individual Life (1,974)
INVESTMENT PRODUCTS (373) (1,887)
-------------------------------------------------------------------------------------
TOTAL NET 1,451 1,649
-----------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX
LIFE INSURANCE
Acquisitions 56,672 53,564
Individual Life 22,480 15,898
West Coast 8,202
SPECIALTY INCOME PRODUCTS
Dental 11,767 821
Financial Institutions 13,017 8,966
RETIREMENT SAVINGS AND
INVESTMENT PRODUCTS
GIC 24,937 32,130
Investment Products 8,519 9,823
Corporate and Other (259) (2,410)
Unallocated Realized
INVESTMENT GAINS (LOSSES) 4,415 6,517
-----------------------------------------------------------------------------------
Total income before
INCOME TAX $149,750 $125,309
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(1) Income before income tax excluding realized investment
gains and losses and related amortization of deferred
policy acquisition costs.
Pretax earnings from the Acquisitions Division increased $3.1 million in
1997 as compared to 1996. Earnings from the Acquisitions Division are normally
expected to decline over time (due to the lapsing of policies resulting from
deaths of insureds or terminations of coverage) unless new acquisitions are
made. The Division's most recent acquisitions resulted in a $1.8 million
increase in pretax earnings. In addition, the Division's mortality experience
was approximately $6.0 million more favorable in 1997 than in 1996.
6
The Individual Life Division's 1997 pretax operating earnings of $22.5
million were $7.7 million above 1996 even though the Division experienced record
high mortality in the second quarter. The increase was primarily due to growth
and improved expense control. There were no realized investment gains, net of
related amortization of deferred policy acquisition costs, associated with this
Division in 1997 and $1.1 million in 1996. As a result, total pretax earnings
were $22.5 million in 1997 and $15.9 million in 1996.
Headquartered in San Francisco, West Coast was acquired by Protective on
June 3, 1997. For the seven months of 1997 that it was a subsidiary of
Protective, the West Coast Division had pretax operating earnings of $8.2
million.
Dental Division 1997 pretax earnings were $11.8 million. Dental earnings
were $6.0 million, an increase of $0.7 million, before expenses of $2.2 million
to develop a new discounted fee-for-service dental program. Pretax earnings
included a one-time release of reserves associated with exiting the group major
medical business of $1.8 million. Lower cancer earnings partially offset
improved results in other lines.
The Financial Institutions Division's 1997 pretax earnings increased $4.1
million to $13.0 million. The Division's results include earnings from recent
acquisitions. At the end of the 1997 third quarter, the Division acquired the
Western Diversified Group and coinsured an unrelated block of policies.
The Guaranteed Investment Contracts (GIC) Division had pretax earnings of
$28.1 million in 1997 and $40.1 million in 1996. Several factors contributed to
the 1997 decline. In December 1996, the Company sold a major portion of its bank
loan participations in a securitization transaction which had the effect of
reducing the Division's earnings and increasing earnings in the Corporate and
Other segment. In order to better match assets to liabilities on a divisional
level, the Company shortened the duration of GIC Division invested assets and
lengthened the duration of the other divisions' invested assets. As a result,
GIC earnings were reduced and earnings of the other divisions were increased.
Realized investment losses associated with this Division in 1997 were $3.2
million as compared to $8.0 million in 1996. As a result, total pretax earnings
were $24.9 million in 1997 and $32.1 million in 1996. The rate of growth in GIC
deposits has decreased as the amount of maturing contracts has increased.
The Investment Products Division's 1997 pretax operating earnings were
$8.3 million, an increase of $0.5 million over 1996. Realized investment gains,
net of related amortization of deferred policy acquisition costs, were $0.2
million in 1997 as compared with $2.0 million in 1996. As a result, total pretax
earnings were $8.5 million in 1997 and $9.8 million in 1996.
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 business segments (including interest on substantially all
debt). Pretax losses for this segment were $2.2 million lower in 1997 as
compared to 1996 primarily due to increased net investment income on capital.
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the
periods shown:
YEAR ENDED EFFECTIVE INCOME
DECEMBER 31 TAX RATES
----------- ---------------
1997........................................... 34.9%
1996........................................... 34.1
Management's current estimate of the effective income tax rate for 1998 is
between 34.0% and 35.0%.
7
NET INCOME
The following table sets forth net income for the periods shown:
NET INCOME
---------------------------
YEAR ENDED PERCENTAGE
DECEMBER 31 AMOUNT INCREASE
(IN THOUSANDS)
1997.................................. $97,448 18.1%
1996.................................. 82,543 6.2
Compared to 1996, net income in 1997 increased 18.1%, reflecting improved
operating earnings in the Acquisitions, Individual Life, West Coast, Dental and
Financial Institutions Divisions, and the Corporate and Other segment, offset by
lower realized investment gains and lower operating earnings in the GIC and
Investment Products Divisions.
RECENTLY ISSUED ACCOUNTING STANDARDS
For additional information regarding recently issued accounting standards
see Note A to the consolidated financial statements included herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
8
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants.........................................
Consolidated Statements of Income for the years ended December 31, 1997,
1996, and 1995.......................................................
Consolidated Balance Sheets as of December 31, 1997 and 1996..............
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1997, 1996, and 1995......................................
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996, and 1995.......................................................
Notes to Consolidated Financial Statements................................
Financial Statement Schedules:
Schedule III-- Supplementary Insurance Information.......................
Schedule IV-- Reinsurance................................................
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder
Protective Life Insurance Company
Birmingham, Alabama
We have audited the consolidated financial statements and the financial
statement schedules of Protective Life Insurance Company and Subsidiaries listed
in the index on page __ of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules 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 Insurance Company and Subsidiaries as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. In addition, 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.
COOPERS & LYBRAND L.L.P.
February 11, 1998
Birmingham, Alabama
10
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1997 1996 1995
-----------------------------------
REVENUES
Premiums and policy fees (net of reinsurance ceded: 1997-$334,899;
1996-$308,174; 1995-$333,173)........................................ $ 480,206 $462,050 $411,682
Net investment income.................................................. 557,488 498,781 458,433
Realized investment gains.............................................. 1,824 5,510 1,951
Other income........................................................... 6,149 5,010 1,355
------------- ----------- ----------
1,045,667 971,351 873,421
---------- --------- --------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded: 1997-$180,605;
1996-$215,424; 1995-$247,224)........................................ 658,872 626,893 553,100
Amortization of deferred policy acquisition costs...................... 107,175 91,001 82,700
Other operating expenses (net of reinsurance ceded: 1997-$90,045;
1996-$81,839; 1995-$84,855).......................................... 129,870 128,148 119,888
----------- --------- --------
895,917 846,042 755,688
----------- --------- --------
INCOME BEFORE INCOME TAX.................................................. 149,750 125,309 117,733
INCOME TAX EXPENSE (BENEFIT)
Current.............................................................. 66,283 44,908 47,009
Deferred............................................................. (13,981) (2,142) (6,972)
------------- --------- ---------
52,302 42,766 40,037
------------ --------- ---------
NET INCOME................................................................ $ 97,448 $ 82,543 $ 77,696
=========== ======== ========
See notes to consolidated financial statements.
11
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
1997 1996
------------ ---------
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1997-$6,221,871; 1996-$4,648,525)...$ 6,348,252 $4,662,997
Equity securities, at market (cost: 1997-$24,983; 1996-$31,669).................. 15,006 35,250
Mortgage loans on real estate.................................................... 1,313,478 1,503,781
Investment real estate, net of accumulated depreciation (1997-$671; 1996-$911)... 13,469 14,172
Policy loans..................................................................... 194,109 166,704
Other long-term investments...................................................... 54,704 29,193
Short-term investments........................................................... 54,337 101,215
-------------- -----------
Total investments 7,993,355 6,513,312
Cash................................................................................. 39,197 114,384
Accrued investment income............................................................ 94,095 70,541
Accounts and premiums receivable, net of allowance for uncollectible
amounts (1997-$5,292; 1996-$2,525)............................................... 42,255 43,469
Reinsurance receivables.............................................................. 591,457 332,614
Deferred policy acquisition costs.................................................... 632,605 488,201
Property and equipment, net.......................................................... 36,407 35,489
Other assets......................................................................... 14,445 14,636
Assets related to separate accounts.................................................. 931,465 550,697
-------------- ------------
$10,375,281 $8,163,343
============== ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims...............................................$ 3,324,294 $2,448,449
Unearned premiums............................................................... 396,696 257,553
-------------- ------------
3,720,990 2,706,002
Guaranteed investment contract deposits.............................................. 2,684,676 2,474,728
Annuity deposits..................................................................... 1,511,553 1,331,067
Other policyholders' funds........................................................... 183,324 142,221
Other liabilities.................................................................... 246,081 117,847
Accrued income taxes................................................................. 941 1,854
Deferred income taxes................................................................ 49,417 37,722
Indebtedness to related parties...................................................... 28,055 25,014
Liabilities related to separate accounts............................................. 931,465 550,697
-------------- ------------
Total liabilities............................................................. 9,356,502 7,387,152
------------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G
STOCKHOLDER'S EQUITY
Preferred Stock, $1.00 par value, shares
authorized and issued: 2,000, liquidation preference $2,000....................... 2 2
Common Stock, $1.00 par value........................................................ 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital........................................................... 327,992 237,992
Note receivable from PLC Employee Stock Ownership Plan............................... (5,378) (5,579)
Retained earnings.................................................................... 629,436 532,088
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 1997-$33,238; 1996-$3,601). 61,727 6,688
-------------- ---------------
Total stockholder's equity.................................................... 1,018,779 776,191
------------ -------------
$10,375,281 $ 8,163,343
============ =============
See notes to consolidated financial statements.
13
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE
RECEIVABLE NET TOTAL
ADDITIONAL FROM UNREALIZED STOCK-
PREFERRED COMMON PAID-IN PLC RETAINED GAINS (LOSSES) HOLDER'S
STOCK STOCK CAPITAL ESOP EARNINGS ON INVESTMENT EQUITY
Balance, December 31, 1994............................ $5,000 $126,494 $(5,936) $377,049 $(107,532) $395,075
--------
Net income for 1995............................... 77,696 77,696
Increase in net unrealized gains on investments
(net of income tax: $89,742)................... 166,663 166,663
Reclassification adjustment for amounts included in
net income (net of income tax: $(683))......... (1,268) (1,268)
---------
Comprehensive income for 1995..................... 243,091
--------
Common dividends ($1.00 per share)................ (5,000) (5,000)
Preferred dividends ($50 per share)............... (100) (100)
Capital contribution from PLC..................... 18,000 18,000
Decrease in note receivable form PLC ESOP......... 171 171
-------------------------------------- -------------- ---------------------
Balance, December 31, 1995............................ 5,000 144,494 (5,765) 449,645 57,863 651,237
-------
Net income for 1996............................... 82,543 82,543
Decrease in net unrealized gains on investments
(net of income tax: $(25,627).................. (47,593) (47,593)
Reclassification adjustment for amounts included in
net income (net of income tax: $(1,928))....... (3,582) (3,582)
--------
Comprehensive income for 1996..................... 31,368
--------
Redemption feature of preferred stock removed-Note I $ 2 1,998 2,000
Preferred dividends ($50 per share)............... (100) (100)
Capital contribution from PLC..................... 91,500 91,500
Decrease in note receivable from PLC ESOP......... 186 186
------------------------------------------ --------------- ----------------
Balance, December 31, 1996............................ 2 5,000 237,992 (5,579) 532,088 6,688 776,191
-------
Net income for 1997............................... 97,448 97,448
Increase in net unrealized
gains on investments (net of income tax-$30,275) 56,225 56,225
Reclassification adjustment for amounts included
in net income (net of income tax: $(638))...... (1,186) (1,186)
--------
Comprehensive income for 1997..................... 152,487
-------
Preferred dividends ($50 per share)............... (100) (100)
Capital contribution from PLC..................... 90,000 90,000
Decrease in note receivable from PLC ESOP......... 201 201
---------------------------------- ---------- ------------- --------------
Balance, December 31, 1997............................ $ 2 $5,000 $327,992 $(5,378)$629,436 $61,727 $1,018,779
===== ====== ======== ======= ======== ======= ==========
See notes to consolidated financial statements.
14
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
DECEMBER 31
--------------------------------------
1997 1996 1995
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................$ 97,448 $ 82,543 $ 77,696
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs................................... 107,175 91,001 84,501
Capitalization of deferred policy acquisition costs................................. (135,211) (77,078) (89,266)
Depreciation expense................................................................ 5,124 5,333 4,317
Deferred income taxes............................................................... (17,918) (2,442) (6,971)
Accrued income taxes................................................................ (5,558) 893 5,537
Interest credited to universal life and investment products......................... 299,004 280,377 286,710
Policy fees assessed on universal life and investment products...................... (131,582) (116,401) (100,840)
Change in accrued investment income and other receivables........................... (158,798) (70,987) (161,924)
Change in policy liabilities and other policyholder funds of traditional life and
health products 279,522 133,621 201,353
Change in other liabilities......................................................... 65,393 7,209 (3,270)
Other (net)......................................................................... (1,133) (4,281) (6,634)
------------ --------- --------------
Net cash provided by operating activities.................................................. 403,466 329,788 291,209
----------- -------- -------------
CASHFLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of
investments:
Investments available for sale...................................................... 6,462,663 1,327,323 2,014,060
Other............................................................................... 324,242 168,898 78,568
Sale of investments:
Investment available for sale....................................................... 1,108,058 1,569,119 1,523,454
Other............................................................................... 695,270 568,218 141,184
Cost of investments acquired:
Investments available for sale...................................................... (8,428,804) (3,798,631) (3,626,877)
Other............................................................................... (718,335) (400,322) (540,648)
Acquisitions and bulk reinsurance assumptions.......................................... (169,124) 264,126
Purchase of property and equipment..................................................... (6,087) (6,899) (5,629)
Sale of property and equipment......................................................... 2,681 288 286
------------- ----------- --------------
Net cash used in investing activities...................................................... (729,436) (307,880) (415,602)
---------- -------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term debt........................ 1,159,538 941,438 1,162,700
Capital contribution from PLC.......................................................... 90,000 91,500 18,000
Principal payments on line of credit arrangements and long-term debt................... (1,159,538) (941,438) (1,162,700)
Principal payment on surplus note to PLC............................................... (4,693) (10,000) (4,750)
Dividends to stockholder............................................................... (100) (100) (5,100)
Investment product deposits and change in universal life deposits...................... 910,659 949,122 908,063
Investment product withdrawals......................................................... (745,083) (944,244) (785,622)
---------- -------- ------------
Net cash provided by financing activities.................................................. 250,783 86,278 130,591
----------- ---------- ------------
INCREASE(DECREASE) IN CASH................................................................. (75,187) 108,186 6,198
CASH AT BEGINNING OF YEAR.................................................................. 114,384 6,198 0
----------- ---------- --------------
CASH AT END OF YEAR........................................................................$ 39,197 $ 114,384 $ 6,198
============ ========= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt....................................................................$ 4,343 $ 4,633 $ 6,029
Income taxes........................................................................$ 70,133 $ 43,478 $ 41,397
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP...............................................$ 201 $ 186 $ 171
Acquisitions and bulk reinsurance assumptions
Assets acquired..................................................................... $1,114,832 $ 296,935 $ 613
Liabilities assumed................................................................. (902,267) (364,862) (21,800)
----------- --------- -------------
Net.................................................................................$ 212,565 $ (67,927)$ (21,187)
=========== ========= ============
See notes to consolidated financial statements.
15
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Protective Life
Insurance Company and subsidiaries ("Protective") are prepared on the basis of
generally accepted accounting principles. Such accounting principles differ from
statutory reporting practices used by insurance companies in reporting to state
regulatory authorities. (See also Note B.)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make various estimates
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities, as well as the reported amounts of revenues
and expenses.
ENTITIES INCLUDED
The consolidated financial statements include the accounts, after
intercompany eliminations, of Protective Life Insurance Company and its
wholly-owned subsidiaries. Protective is a wholly-owned subsidiary of Protective
Life Corporation ("PLC"), an insurance holding company.
NATURE OF OPERATIONS
Protective produces, distributes, and services a diverse array of life
insurance, specialty insurance and retirement savings and investment products.
Protective markets individual life insurance, dental insurance and managed care
services, credit life and disability insurance, guaranteed investment contracts,
guaranteed funding agreements, and fixed and variable annuities throughout the
United States. Protective also maintains a separate division devoted exclusively
to the acquisition of insurance policies from other companies.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996 Protective adopted Statement of Financial Accounting Standards
("SFAS") No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises
and by Insurance Enterprises for Certain Long-Duration 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." In 1997 Protective adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities;"
SFAS No. 130, "Reporting Comprehensive Income;" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information."
SFAS No. 130 requires the presentation of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Protective has reconfigured the Consolidated
Statements of Stockholder's Equity presented herein in accordance with this
Statement. SFAS No. 131 requires additional disclosures with respect to
Protective's operating segments.
The adoption of these accounting standards did not have a material effect
on Protective's financial statements but has resulted in changed disclosure and
financial statement presentation.
INVESTMENTS
Protective has classified all of its investments in fixed maturities,
equity securities, and short-term investments as "available for sale."
16
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
o Fixed maturities (bonds, bank loan participations, and redeemable
preferred stocks) -- at current market value.
o Equity securities (common and nonredeemable preferred stocks) -- at
current market value.
o Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
o Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate
acquired through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.
o Policy loans -- at unpaid balances.
o Other long-term investments -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.
o Short-term investments -- at cost, which approximates current market
value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $3.1 million in bank
deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses reduced by a related adjustment
to deferred policy acquisition costs, net of income tax reported as a component
of stockholder's equity. The market values of fixed maturities increase or
decrease as interest rates fall or rise. Therefore, although the adoption of
SFAS No. 115 does not affect Protective's operations, its reported stockholder's
equity will fluctuate significantly as interest rates change.
Protective's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
1997 1996
---------------- ---------
Total investments................................$ 7,876,952 $6,495,259
Deferred policy acquisition costs................ 654,043 495,965
All other assets................................. 1,749,321 1,161,830
------------- ----------
$10,280,316 $8,153,054
============= ===========
Deferred income taxes............................$ 16,179 $ 34,121
All other liabilities............................ 9,307,085 7,349,430
------------- -----------
9,323,264 7,383,551
Stockholder's equity............................. 957,052 769,503
-------------- ------------
$10,280,316 $8,153,054
============= ===========
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
17
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
Protective does not use derivative financial instruments for trading
purposes. Combinations of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
guaranteed investment contracts and individual annuities. Realized investment
gains and losses on such contracts are deferred and amortized over the life of
the hedged asset. Net realized gains of $1.5 million and net realized losses of
$0.2 million were deferred in 1997 and 1996 respectively. At December 31, 1997
and 1996, options and open futures contracts with notional amounts of $925.0
million and $805.0 million, respectively, had net unrealized losses of $0.4
million and $1.9 million respectively.
Protective uses interest rate swap contracts to convert certain investments
from a variable to a fixed rate of interest. At December 31, 1997, related open
interest rate swap contracts with a notional amount of $95.3 million were in a
$0.1 million net unrealized loss position. At December 31, 1996, related open
interest rate swap contracts with a notional amount of $150.3 million were in a
$0.7 million net unrealized loss position.
In connection with a commercial mortgage loan securitization, Protective
entered into interest rate swap contracts converting a fixed rate of interest to
a floating rate of interest and converting a floating rate of interest to a
fixed rate of interest with notional amounts at December 31, 1997, of $332.4
million and $200.0 million, respectively. In the aggregate, there were no net
unrealized gains or losses associated with these swap contracts at December 31,
1997.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. Protective primarily uses the
straight-line method of depreciation based upon the estimated useful lives of
the assets. Major repairs or improvements are capitalized and depreciated over
the estimated useful lives of the assets. Other repairs are expensed as
incurred. The cost and related accumulated depreciation of property and
equipment sold or retired are removed from the accounts, and resulting gains or
losses are included in income.
Property and equipment consisted of the following at December 31:
1997 1996
-------------- ---------
Home office building............................. $37,459 $36,586
Other, principally furniture and equipment....... 46,937 35,401
-------- --------
84,396 71,987
Accumulated depreciation......................... 47,989 36,498
-------- --------
$36,407 $35,489
======== ========
SEPARATE ACCOUNTS
Protective operates separate accounts, some in which Protective bears the
investment risk and others in which the investments risk rests with the
contractholder. The assets and liabilities related to separate accounts in which
Protective does not bear the investment risk are valued at market and reported
separately as assets and liabilities related to separate accounts in the
accompanying consolidated financial statements.
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
o Traditional Life and Health Insurance Products-- Traditional life
insurance products consist principally of those products with fixed and
guaranteed premiums and benefits and include whole life insurance policies, term
life insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies. Life insurance and immediate annuity premiums
are recognized as revenue when due. Health insurance premiums are recognized as
revenue over the terms of the policies. Benefits and expenses are associated
with earned premiums so that profits are recognized over the life of the
contracts. This is accomplished by means of the provision for liabilities for
future policy benefits and the amortization of deferred policy acquisition
costs.
18
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Protective'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
Protective and claims incurred but not yet reported. Policy claims
are charged to expense in the period that the claims are incurred.
Activity in the liability for unpaid claims is summarized as follows:
1997 1996 1995
-------------- -------------- --------
Balance beginning of year................................ $108,159 $ 73,642 $ 79,462
Less reinsurance..................................... 6,423 3,330 5,024
----------- ----------- ---------
Net balance beginning of year............................ 101,736 70,312 74,438
--------- ---------- --------
Incurred related to:
Current year............................................. 258,322 275,524 216,839
Prior year............................................... (14,540) (2,417) (4,038)
---------- ----------- ---------
Total incurred....................................... 243,782 273,107 212,801
--------- -------- ---------
Paid related to:
Current year............................................. 203,381 197,163 164,321
Prior year............................................... 58,104 57,812 48,834
---------- ---------- ---------
Total paid........................................... 261,485 254,975 213,155
--------- --------- --------
Other changes:
Acquisitions and
reserve transfers................................. 3,415 13,292 (3,772)
----------- ---------- ---------
Net balance end of year.................................. 87,448 101,736 70,312
Plus reinsurance..................................... 18,673 6,423 3,330
---------- ----------- ----------
Balance end of year...................................... $106,121 $108,159 $ 73,642
======== ======== ========
o Universal Life and Investment Products-- Universal life and investment
products include universal life insurance, guaranteed investment contracts,
deferred annuities, and annuities without life contingencies. Revenues for
universal life and investment products consist of policy fees that have been
assessed against policy account balances for the costs of insurance, policy
administration, and surrenders. 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 1997.
At December 31, 1997, Protective estimates the fair value of its guaranteed
investment contracts to be $2,687.3 million using discounted cash flows. The
surrender value of Protective's annuities which approximates fair value was
$1,494.6 million.
19
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Policy Acquisition Costs-- Commissions and other costs of acquiring
traditional life and health insurance, universal life insurance, and investment
products that vary with and are primarily related to the production of new
business have been deferred. Traditional life and health insurance acquisition
costs are 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 being
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," Protective 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 forthe
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
Protective's universal life and investment products had been realized.
The cost to acquire blocks of insurance representing the present value of
future profits from such blocks of insurance is also included in deferred policy
acquisition costs. For acquisitions occurring after 1988, Protective 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 $261.9 million and $149.9 million at December 31,
1997 and 1996, respectively. During 1996 $69.2 million of present value of
future profits on acquisitions made during the year was capitalized and $21.8
million was amortized. During 1997 $136.2 million of present value of future
profits on acquisitions made during the year was capitalized, and $24.2 million
was amortized. The unamortized present value of future profits for all
acquisitions was $274.9 million at December 31, 1997 and $167.6 million at
December 31, 1996.
PARTICIPATING POLICIES
Participating business comprises approximately 1% of the individual life
insurance in force and 2% of the individual life insurance premium income.
Policyholder dividends totaled $4.6 million in 1997, $4.1 million in 1996, and
$2.6 million in 1995.
INCOME TAXES
Protective 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.
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
net income, total assets, or stockholder's equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principals ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (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 stockholder's 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.
20
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED)
The reconciliations of net income and stockholder's equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
NET INCOME STOCKHOLDER'S EQUITY
-------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- ---------- ---------- -------
In conformity with statutory reporting
practices:(1)................................... $134,417 $102,337 $115,259 $ 579,111 $ 456,320 $ 324,416
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization.............................. 10,310 (2,830) (765) 632,605 488,201 410,183
Deferred income tax......................... 13,981 2,142 6,972 (49,417) (37,722) (67,420)
Asset Valuation Reserve..................... 67,369 64,233 105,769
Interest Maintenance Reserve................ (1,434) (2,142) (1,235) 9,809 17,682 14,412
Nonadmitted items........................... 30,500 21,610 20,603
Other timing and valuation adjustments...... (54,494) (11,210) (45,028) (215,448) (197,227) (108,495)
Noninsurance affiliates..................... 17,530 11,104 (22) (4) 4 (9)
Consolidation elimination................... (22,862) (16,858) 2,515 (35,746) (36,910) (46,222)
--------- -------- ----------- ------------ ----------- ----------
In conformity with generally accepted
accounting principles........................... $ 97,448 $ 82,543 $ 77,696 $1,018,779 $ 776,191 $ 653,237
========= ======== ========= ========== ========== =========
(1) Consolidated
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
1997 1996 1995
---------- ---------- -------
Fixed maturities.................................... $396,255 $310,353 $272,942
Equity securities................................... 1,186 2,124 1,338
Mortgage loans on real estate....................... 161,604 153,463 162,135
Investment real estate.............................. 2,004 1,875 1,855
Policy loans........................................ 11,370 10,378 8,958
Other, principally short-term investments........... 21,876 51,637 40,348
---------- ---------- ---------
594,295 529,830 487,576
Investment expenses................................. 36,807 31,049 29,143
---------- ---------- ----------
$557,488 $498,781 $458,433
======== ======== ========
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
Fixed maturities.................................... $ (8,355) $ (7,101) $ 6,118
Equity securities................................... 5,975 1,733 44
Mortgage loans and other investments................ 4,204 10,878 (4,211)
---------- --------- ---------
$ 1,824 $ 5,510 $ 1,951
========= ========= =========
Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $23.0 million at December 31, 1997 and $30.9
million at December 31, 1996. Additions and reductions to the allowance are
included in realized investment gains (losses). Without such
additions/reductions, Protective had net realized investment losses of $6.1
million in 1997, net realized investment gains of $3.7 million in 1996, and net
realized investment losses of $0.5 million in 1995.
In 1997, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $21.3 million and
gross losses were $23.5 million. In 1996, gross gains were $6.9 million and
gross losses were $11.8 million. In 1995, gross gains were $18.0 million and
gross losses were $11.8 million.
21
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of Protective's investments
classified as available for sale at December 31 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUES
---- -------------- -------------- ------------- ---------
Fixed maturities:
Bonds:
Mortgage-backed............................. $2,982,266 $ 54,103 $16,577 $3,019,792
United States Government and
authorities............................... 160,484 1,366 0 161,850
States, municipalities, and
political subdivisions.................... 31,621 532 0 32,153
Public utilities............................ 481,679 7,241 0 488,920
Convertibles and bonds with
warrants.................................. 694 0 168 526
All other corporate bonds................... 2,559,186 80,903 1,019 2,639,070
Redeemable preferred stocks...................... 5,941 0 0 5,941
--------------------------- ------------ --------------
6,221,871 144,145 17,764 6,348,252
Equity securities................................... 24,983 300 10,277 15,006
Short-term investments.............................. 54,337 0 0 54,337
--------------------------- ------------ -------------
$6,301,190 $144,445 $28,041 $6,417,595
========== ======== ======= ==========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1996 COST GAINS LOSSES VALUES
---- -------------- -------------- ------------- ---------
Fixed maturities:
Bonds:
Mortgage-backed............................. $2,192,978 $ 29,925 $20,810 $2,202,093
United States Government and
authorities............................... 348,318 661 1,377 347,602
States, municipalities, and
political subdivisions.................... 5,515 47 9 5,553
Public utilities............................ 364,692 2,205 337 366,560
Convertibles and bonds with
warrants.................................. 679 0 158 521
All other corporate bonds................... 1,679,276 33,879 29,388 1,683,767
Bank loan participations......................... 49,829 0 0 49,829
Redeemable preferred stocks...................... 7,238 60 226 7,072
-------------- ------------ ---------- --------------
4,648,525 66,777 52,305 4,662,997
Equity securities................................... 31,669 9,570 5,989 35,250
Short-term investments.............................. 101,215 0 0 101,215
------------ ------------- ------------ ------------
$4,781,409 $ 76,347 $58,294 $4,799,462
========== ======== ======= ==========
22
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown below. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
ESTIMATED
AMORTIZED MARKET
COST VALUES
--------- ----------
1997 Due in one year or less.........................$ 456,248 $ 460,994
Due after one year through five years........... 2,774,769 2,815,553
Due after five years through ten years.......... 2,377,989 2,440,193
Due after ten years............................. 612,865 631,512
------------ ------------
$6,221,871 $6,348,252
============ ===========
ESTIMATED
AMORTIZED MARKET
COST VALUES
--------- ---------
1996
Due in one year or less.......................$ 417,463 $ 420,774
Due after one year through five years.......... 1,547,805 1,546,278
Due after five years through ten years......... 2,090,149 2,095,781
Due after ten years............................. 593,108 600,164
----------- ------------
$4,648,525 $4,662,997
=========== ==========
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
RATING 1997 1996
------ --------------------
AAA................................................. 41.1% 48.3%
AA.................................................. 4.8 4.4
A................................................... 29.1 22.6
BBB
Bonds............................................. 21.9 21.1
Bank loan participations.......................... 0.1
BB or Less
Bonds............................................. 3.0 2.5
Bank loan participations.......................... 0.9
Redeemable preferred stocks......................... 0.1 0.1
------- -------
100.0% 100.0%
===== =====
At December 31, 1997 and 1996, Protective had bonds which were rated less
than investment grade of $195.2 million and $117.5 million, respectively, having
an amortized cost of $193.6 million and $137.0 million, respectively. At
December 31, 1997, approximately $89.6 million of the bonds rates less than
investment grade were securities issued in company-sponsored commercial mortgage
loan securitizations. Additionally, Protective had bank loan participations at
December 31, 1996 which were rated less than investment grade of $43.6 million
having an amortized cost of $43.6 million.
The change in unrealized gains (losses), net of income tax on fixed
maturity and equity securities for the years ended December 31 is summarized as
follows:
1997 1996 1995
----------- ------------- --------
Fixed maturities............................ $72,741 $(56,898) $199,024
Equity securities........................... $(8,813) $ 207 $ 2,740
At December 31, 1997, all of Protective's mortgage loans were commercial
loans of which 75% were retail, 9% were apartments, 7% were office buildings,
and 7% were warehouses. Protective specializes in making mortgage loans on
either credit-oriented or credit-anchored commercial properties, most of which
are strip shopping centers in smaller towns and cities. No single tenant's
leased space represents more than 5% of mortgage loans. Approximately 84% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: Florida, Georgia, Texas, North Carolina,
Alabama, Virginia, South Carolina, Tennessee, Kentucky, California, Maryland,
Mississippi, Ohio, Michigan, and Indiana.
23
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $76.7
million would become due in 1998, $434.4 million in 1999 to 2002, and $129.7
million in 2003 to 2007.
At December 31, 1997, the average mortgage loan was $1.6 million, and the
weighted average interest rate was 8.8%. The largest single mortgage loan was
$12.8 million. While Protective's mortgage loans do not have quoted market
values, at December 31, 1997 and 1996, Protective estimates the market value of
its mortgage loans to be $1,405.5 million and $1,581.7 million, respectively,
using discounted cash flows from the next call date.
At December 31, 1997 and 1996, Protective's problem mortgage loans and
foreclosed properties totaled $17.7 million and $23.7 million, respectively.
Protective'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
Protective's evaluation of its mortgage loan portfolio, Protective does not
expect any material losses on its mortgage loans.
Certain investments, principally real estate, with a carrying value of
$6.7 million were nonincome producing for the twelve months ended December 31,
1997.
Protective believes it is not practicable to determine the fair value of
its policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%. The fair values of Protective's other long-term
investments approximate cost.
NOTE D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
1997 1996 1995
---------- ---------- -------
Statutory federal income tax rate applied to pretax income................. 35.0% 35.0% 35.0%
Dividends received deduction and tax-exempt interest....................... (0.2) (0.4) (0.5)
Low-income housing credit.................................................. (0.6) (0.6) (0.7)
Tax benefits arising from prior acquisitions and other
adjustments............................................................... 0.7 0.1 0.2
----- ----- -----
Effective income tax rate.................................................. 34.9% 34.1% 34.0%
==== ==== ====
The provision for federal income tax differs from amounts currently
payable due to certain items reported for financial statement purposes in
periods which differ from those in which they are reported for income tax
purposes.
Details of the deferred income tax provision for the years ended December
31 are as follows:
1997 1996 1995
----------- ---------- ---------
Deferred policy acquisition costs..................................... $ 7,054 $ 15,542 $(11,606)
Benefit and other policy liability changes............................ (23,564) (16,321) 52,496
Temporary differences of investment income............................ 2,516 (1,163) (34,175)
Other items........................................................... 13 (200) (13,687)
------------ ---------- --------
$(13,981) $ (2,142) $ (6,972)
======== ========= =========
24
NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
1997 1996
-------- --------
Deferred income tax assets:
Policy and policyholder liability reserves........... $138,701 $ 80,151
Other................................................ 1,029 2,503
---------- -----------
139,730 82,654
Deferred income tax liabilities:
Deferred policy acquisition costs.................... 150,895 117,696
Unrealized gain on investments....................... 38,252 2,680
---------- -----------
189,147 120,376
---------- -----------
Net deferred income tax liability $ 49,417 $ 37,722
========= =========
Under pre-1984 life insurance company income tax laws, a portion of
Protective's gain from operations which was not subject to current income
taxation was accumulated for income tax purposes in a memorandum account
designated as Policyholders' Surplus. The aggregate accumulation in this account
at December 31, 1997 was approximately $73 million. Should the accumulation in
the Policyholders' Surplus account exceed certain stated maximums, or should
distributions including cash dividends be made to PLC in excess of approximately
$727 million, such excess would be subject to federal income taxes at rates then
effective. Deferred income taxes have not been provided on amounts designated as
Policyholders' Surplus. Protective does not anticipate involuntarily paying
income tax on amounts in the Policyholders' Surplus accounts.
Protective's income tax returns are included in the consolidated income
tax returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations.
NOTE E -- DEBT
At December 31, 1997, PLC had no borrowings outstanding under a term note
that contains, among other provisions, requirements for maintaining certain
financial ratios, and restrictions on indebtedness incurred by PLC's
subsidiaries including Protective. Additionally, PLC, on a consolidated basis,
cannot incur debt in excess of 50% of its total capital.
Protective has arranged sources of credit to temporarily fund scheduled
investment commitments. Protective expects that the rate received on its
investments will equal or exceed its borrowing rate. Protective had no such
temporary borrowings outstanding at December 31, 1997 and 1996.
Included in indebtedness to related parties is a surplus debenture issued
by Protective to PLC. At December 31, 1997, the balance of the surplus debenture
was $20.0 million. The debenture matures in 2003.
Indebtedness to related parties also consists of payables to affiliates
under control of PLC in the amount of $8.1 million at December 31, 1997.
Protective routinely receives from or pays to affiliates under the control of
PLC reimbursements for expenses incurred on one another's behalf. Receivables
and payables among affiliates are generally settled monthly.
Interest expense on borrowed money totaled $4.3 million, $4.6 million, and
$6.0 million, in 1997, 1996, and 1995, respectively.
NOTE F -- RECENT ACQUISITIONS
In January 1996 Protective acquired through coinsurance a block of life
insurance policies. In June 1996 Protective acquired through coinsurance a block
of credit life insurance policies. In December 1996 Protective acquired a small
life insurance company and acquired through coinsurance a block of life
insurance policies.
In June 1997, Protective acquired West Coast Life Insurance Company ("West
Coast"). In September 1997, Protective acquired the Western Diversified Group.
In October 1997, Protective coinsured a block of credit policies.
These transactions have been accounted for as purchases, and the results
of the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
25
NOTE F -- RECENT ACQUISITIONS (CONTINUED)
Summarized below are the consolidated results of operations of 1997 and
1996, on an unaudited pro forma basis, as if the West Coast and Western
Diversified Group acquisitions had occurred as of January 1, 1996. The pro forma
information is based on Protective's consolidated results of operations for 1997
and 1996 and on data provided by the respective companies, after giving effect
to certain pro forma adjustments. The pro forma financial information does not
purport to be indicative of results of operations that would have occurred had
the transaction occurred on the basis assumed above nor are they indicative of
results of the future operations of the combined enterprises.
1997 1996
---------- -------
Total revenues............................... $1,133,962 $1,126,096
Net income................................... $ 100,621 $ 88,774
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES
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. Protective 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 Protective does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In addition, in some class action and other lawsuits involving
insurers' sales practices, insurers have made material settlement payments. In
some states (including Alabama), juries have substantial discretion in awarding
punitive damages which creates the potential for unpredictable material adverse
judgments in any given punitive damage suit. Protective and its subsidiaries,
like other life and health insurers, in the ordinary course of business, are
involved in such litigation. Although the outcome of any litigation cannot be
predicted with certainty, Protective believes that at the present time there are
no pending or threatened lawsuits that are reasonably likely to have a material
adverse effect on the financial position, results of operations, or liquidity of
Protective.
NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS
At December 31, 1997, approximately $483 million of consolidated
stockholder's equity excluding net unrealized gains and losses represented net
assets of Protective that cannot be transferred in the form of dividends, loans,
or advances to PLC. 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 PLC
by Protective in 1998 is estimated to be $154 million.
NOTE I -- PREFERRED STOCK
PLC owns all of the 2,000 shares of preferred stock issued by Protective's
subsidiary, American Foundation. During 1996, American Foundation's articles of
incorporation were amended such that the preferred stock is redeemable solely at
the discretion of American Foundation. The stock pays, when and if declared,
annual minimum cumulative dividends of $50 per share, and noncumulative
participating dividends to the extent American Foundation's statutory earnings
for the immediately preceding fiscal year exceed $1 million. Dividends of $0.1
million were paid to PLC in 1997, 1996, and 1995.
26
NOTE J -- RELATED PARTY MATTERS
On August 6, 1990, PLC announced that its Board of Directors approved the
formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990,
Protective transferred to the ESOP 520,000 shares of PLC's common stock held by
it in exchange for a note. The outstanding balance of the note, $5.4 million at
December 31, 1997, is accounted for as a reduction to stockholder's equity. The
stock will be used to match employee contributions to PLC's existing 401(k)
Plan. The ESOP shares are dividend paying. Dividends on the shares are used to
pay the ESOP's note to Protective.
Protective leases furnished office space and computers to affiliates.
Lease revenues were $3.1 million in 1997, $3.7 million in 1996, and $3.1 million
in 1995. Protective purchases data processing, legal, investment and management
services from affiliates. The costs of such services were $51.6 million, $50.4
million, and $38.1 million, in 1997, 1996, and 1995, respectively. Commissions
paid to affiliated marketing organizations of $5.2 million, $7.4 million, and
$10.9 million, in 1997, 1996, and 1995, respectively, were included in deferred
policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $21.4 million, $31.2 million, and $21.2
million, in 1997, 1996, and 1995, respectively. Protective and/or PLC paid
commissions, interest, and service fees to these same corporations totaling $5.4
million, $5.0 million, and $5.3 million, in 1997, 1996, and 1995, respectively.
For a discussion of indebtedness to related parties, see Note E.
NOTE K -- OPERATING SEGMENTS
Protective operates seven divisions whose principal strategic focuses can
be grouped into three general categories: Life Insurance, Specialty Insurance
Products, and Retirement Savings and Investment Products. Each division has a
senior officer of Protective responsible for its operations. A division is
generally distinguished by products and/or channels of distribution. A brief
description of each division follows.
LIFE INSURANCE
ACQUISITIONS DIVISION. The Acquisitions Division focuses solely on
acquiring, converting, and servicing business acquired from other companies.
These acquisitions may be accomplished through acquisitions of companies or
through the assumption or reinsurance of life insurance and related policies.
INDIVIDUAL LIFE DIVISION. The Individual Life Division markets universal
life and other life insurance products on a national basis through a network of
independent insurance agents. The Division primarily utilizes a distribution
system based on experienced independent producing general agents who are
recruited by regional sales managers. In addition, the Division distributes
insurance products in the life insurance brokerage market.
WEST COAST DIVISION. The West Coast Division sells universal and
traditional ordinary life products in the life insurance brokerage market and in
the "bank owned life insurance" market. The Division primarily utilizes a
distribution system comprised of brokerage general agencies with a network of
independent life agents.
SPECIALTY INSURANCE PRODUCTS
DENTAL AND CONSUMER BENEFITS DIVISION. The Division (formerly known as the
Group Division) recently exited from the traditional group major medical
business, fulfilling the Division's strategy to focus primarily on dental and
related products. Accordingly, the Division was renamed the Dental and Consumer
Benefits Division. The Division's primary focus is on indemnity dental products.
The Division also markets group life and disability coverages, and administers
an essentially closed block of individual cancer insurance policies.
FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, consumer finance companies and automobile dealers. The Division markets
through employee field representatives, independent brokers, and an affiliate.
The Division also includes a small property casualty insurer that sells
automobile extended warranty coverages.
27
NOTE K -- OPERATING SEGMENTS (CONTINUED)
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
GUARANTEED INVESTMENT CONTRACTS DIVISION. The Guaranteed Investment
Contracts ("GIC") Division markets GICs to 401(k) and other qualified retirement
savings plans. The Division also offers related products, including guaranteed
funding agreements offered to the trustees of municipal bond proceeds, floating
rate contracts offered to trust departments, and long-term annuity contracts
offered to fund certain state obligations.
INVESTMENT PRODUCTS DIVISION. The Investment Products Division
manufactures, sells, and supports fixed and variable annuity products. These
products are primarily sold through stockbrokers, but are also sold through
financial institutions and the Individual Life Division's agency sales force.
CORPORATE AND OTHER
Protective has an additional business segment herein referred to as
Corporate and Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the Divisions above
(including net investment income on capital and interest on substantially all
debt).
Protective uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax. Premiums and policy fees, other income, benefits and settlement expenses,
and amortization of deferred policy acquisition costs are attributed directly to
each operating segment. Net investment income is allocated based on directly
related assets required for transacting the business of that segment. Realized
investment gains (losses) and other operating expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
Operating segment income and assets for the years ended December 31 are as
follows:
28
LIFE INSURANCE
INDIVIDUAL
OPERATING SEGMENT INCOME ACQUISITIONS LIFE WEST COAST
- -------------------------------------------------------------------------------------------------------------------
1997
Premiums and policy fees $ 102,635 $ 127,480 $ 14,122
Net investment income 110,155 54,593 30,194
Realized investment gains (losses)
Other income 10 617
- -------------------------------------------------------------------------------------------------------------------
Total revenues 212,800 182,690 44,316
- -------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 116,506 114,678 28,304
Amortization of deferred policy acquisition costs 16,606 27,354 961
Other operating expenses 23,016 18,178 6,849
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 156,128 160,210 36,114
- -------------------------------------------------------------------------------------------------------------------
Income before income tax 56,672 22,480 8,202
Income tax expense
- -------------------------------------------------------------------------------------------------------------------
Net income
===================================================================================================================
1996
Premiums and policy fees $ 106,543 $ 116,710
Net investment income 106,015 48,442
Realized investment gains (losses) 3,098
Other income 641 1,056
- -------------------------------------------------------------------------------------------------------------------
Total revenues 213,199 169,306
- -------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 118,181 96,404
Amortization of deferred policy acquisition costs 17,162 28,393
Other operating expenses 24,292 28,611
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 159,635 153,408
- -------------------------------------------------------------------------------------------------------------------
Income before income tax 53,564 15,898
Income tax expense
- -------------------------------------------------------------------------------------------------------------------
Net income
===================================================================================================================
1995
Premiums and policy fees $ 98,501 $ 99,018
Net investment income 95,018 40,237
Realized investment gains (losses)
Other income 25 169
- -------------------------------------------------------------------------------------------------------------------
Total revenues 193,544 139,424
- -------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 100,016 80,067
Amortization of deferred policy acquisition costs 20,601 20,403
Other operating expenses 22,551 22,748
- -------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 143,168 123,218
- -------------------------------------------------------------------------------------------------------------------
Income before income tax 50,376 16,206
Income tax expense
- -------------------------------------------------------------------------------------------------------------------
Net income
===================================================================================================================
OPERATING SEGMENT ASSETS
1997
Investments and other assets $1,401,294 $ 960,316 $910,030
Deferred policy acquisition costs 138,052 252,321 108,126
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,539,346 $1,212,637 $1,018,156
===================================================================================================================
1996
Investments and other assets $1,423,081 $ 814,728
Deferred policy acquisition costs 156,172 220,232
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,579,253 $1,034,960
===================================================================================================================
1995
Investments and other assets $1,131,653 $ 701,431
Deferred policy acquisition costs 123,889 186,496
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,255,542 $ 887,927
===================================================================================================================
(1) Adjustments represent the inclusion of unallocated realized investment gains
(losses) and the recognition of income tax expense. There are no asset
adjustments.
29
RETIREMENT SAVINGS AND
SPECIALTY INSURANCE PRODUCTS INVESTMENT PRODUCTS
DENTAL AND GUARANTEED CORPORATE
CONSUMER FINANCIAL INVESTMENT INVESTMENT AND TOTAL
BENEFITS INSTITUTIONS CONTRACTS PRODUCTS OTHER ADJUSTMENTS(1) CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
$151,110 $ 72,263 $ 12,367 $ 229 $ 480,206
23,810 16,341 $ 211,915 105,196 5,284 557,488
(3,180) 589 $ 4,415 1,824
1,278 3,033 (192) 1,403 6,149
- ------------------------------------------------------------------------------------------------------------------------
176,198 91,637 208,735 117,960 6,916 1,045,667
- ------------------------------------------------------------------------------------------------------------------------
110,148 27,643 179,235 82,019 339 658,872
15,711 30,812 618 15,110 3 107,175
38,572 20,165 3,945 12,312 6,833 129,870
- ------------------------------------------------------------------------------------------------------------------------
164,431 78,620 183,798 109,441 7,175 895,917
- ------------------------------------------------------------------------------------------------------------------------
11,767 13,017 24,937 8,519 (259) 149,750
- ------------------------------------------------------------------------------------------------------------------------
52,302 52,302
$ 97,448
========================================================================================================================
$156,530 $ 73,422 $ 8,189 $ 656 $ 462,050
16,249 13,898 $ 214,369 98,719 1,089 498,781
(7,963) 3,858 $ 6,517 5,510
2,193 56 1,064 5,010
- ------------------------------------------------------------------------------------------------------------------------
174,972 87,320 206,406 110,822 2,809 971,351
- ------------------------------------------------------------------------------------------------------------------------
125,797 42,781 169,927 73,093 710 626,893
5,326 24,900 509 14,710 1 91,001
43,028 10,673 3,840 13,196 4,508 128,148
- ------------------------------------------------------------------------------------------------------------------------
174,151 78,354 174,276 100,999 5,219 846,042
- ------------------------------------------------------------------------------------------------------------------------
821 8,966 32,130 9,823 (2,410) 125,309
42,766 42,766
- ------------------------------------------------------------------------------------------------------------------------
$ 82,543
========================================================================================================================
$142,483 $ 65,669 $ 4,566 $ 1,445 $ 411,682
14,329 9,276 $ 203,376 95,661 536 458,433
(3,908) 4,938 $ 921 1,951
2,451 (2,187) (181) 1,078 1,355
- ------------------------------------------------------------------------------------------------------------------------
159,263 72,758 199,468 104,984 3,059 873,421
- ------------------------------------------------------------------------------------------------------------------------
109,447 24,020 165,963 72,111 1,476 553,100
3,052 26,809 386 11,446 3 82,700
37,657 14,228 4,140 10,494 8,070 119,888
- ------------------------------------------------------------------------------------------------------------------------
150,156 65,057 170,489 94,051 9,549 755,688
- ------------------------------------------------------------------------------------------------------------------------
9,107 7,701 28,979 10,933 (6,490) 117,733
40,037 40,037
- ------------------------------------------------------------------------------------------------------------------------
$ 77,696
========================================================================================================================
$208,071 $536,058 $2,887,732 $2,313,279 $525,896 $ 9,742,676
22,459 52,836 1,785 56,074 952 632,605
- ------------------------------------------------------------------------------------------------------------------------
$230,530 $588,894 $2,889,517 $2,369,353 $526,848 $10,375,281
========================================================================================================================
$205,696 $312,826 $2,606,873 $1,821,250 $490,688 $ 7,675,142
27,944 32,040 1,164 50,637 12 488,201
- ------------------------------------------------------------------------------------------------------------------------
$233,640 $344,866 $2,608,037 $1,871,887 $490,700 $ 8,163,343
========================================================================================================================
$215,248 $228,849 $2,535,946 $1,541,255 $414,128 $ 6,768,510
24,974 36,283 993 37,534 14 410,183
- ------------------------------------------------------------------------------------------------------------------------
$240,222 $265,132 $2,536,939 $1,578,789 $414,142 $ 7,178,693
========================================================================================================================
30
NOTE L -- EMPLOYEE BENEFIT PLANS
PLC has a defined benefit pension plan covering substantially all of its
employees. The plan is not separable by affiliates participating in the plan.
However, approximately 81% of the participants in the plan are employees of
Protective. The benefits are based on years of service and the employee's
highest thirty-six consecutive months of compensation. PLC's funding policy is
to contribute amounts to the plan sufficient to meet the minimum finding
requirements of ERISA plus such additional amounts as PLC may determine to be
appropriate from time to time. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future.
The actuarial present value of benefit obligations and the funded status of
the plan taken as a whole at December 31 are as follows:
1997 1996
------- -------
Accumulated benefit obligation, including vested benefits of $18,216 in 1997
and $14,720 in 1996.................................................................. $ 19,351 $15,475
-------- -------
Projected benefit obligation for service rendered to date.............................. $ 30,612 $25,196
Plan assets at fair value (group annuity contract with Protective)..................... 21,763 19,779
--------- --------
Plan assets less than the projected benefit obligation................................. (8,849) (5,417)
Unrecognized net loss from past experience different from that assumed................. 6,997 3,559
Unrecognized prior service cost........................................................ 605 705
Unrecognized net transition asset...................................................... (51) (67)
------------ --------
Net pension liability recognized in balance sheet...................................... $ (1,298) $(1,220)
========= =========
Net pension cost includes the following components for the years ended December
31:
1997 1996 1995
---------- ----------- -------
Service cost-- benefits earned during the year............................ $ 2,112 $ 1,908 $ 1,540
Interest cost on projected benefit obligation............................. 2,036 1,793 1,636
Actual return on plan assets.............................................. (1,624) (1,674) (1,358)
Net amortization and deferral............................................. 66 374 114
---------- --------- ---------
Net pension cost.......................................................... $ 2,590 $ 2,401 $ 1,932
======= ======= =======
Protective's share of the net pension cost was $1.8 million, $1.5 million,
and $1.2 million, in 1997, 1996, and 1995, respectively.
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
1997 1996 1995
---------- ---------- -------
Weighted average discount rate................................. 7.25% 7.75% 7.25%
Rates of increase in compensation level........................ 5.25% 5.75% 5.25%
Expected long-term rate of return on assets.................... 8.50% 8.50% 8.50%
Assets of the pension plan are included in the general assets of Protective.
Upon retirement, the amount of pension plan assets vested in the retiree is used
to purchase a single premium annuity from Protective in the retiree's name.
Therefore, amounts presented above as plan assets exclude assets relating to
retirees.
PLC also sponsors an unfunded Excess Benefits Plan, which is a nonqualified
plan that provides defined pension benefits in excess of limits imposed by
federal income tax law. At December 31, 1997 and 1996, the projected benefit
obligation of this plan totaled $10.0 million and $7.2 million, respectively.
In addition to pension benefits, PLC provides limited healthcare benefits to
eligible retired employees until age 65. The postretirement benefit is provided
by an unfunded plan. At December 31, 1997 and 1996, the liability for such
benefits totaled $1.3 million and $1.4 million, respectively. The expense
recorded by PLC was $0.1 million in 1997 and 1996 and $0.2 million in 1995.
PLC's obligation is not materially affected by a 1% change in the healthcare
cost trend assumptions used in the calculation of the obligation.
31
NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
PLC sponsors a defined contribution plan which covers substantially all
employees. Employee contributions are made on a before-tax basis as provided by
Section 401(k) of the Internal Revenue Code. In 1990, PLC established an
Employee Stock Ownership Plan to match employee contributions to PLC'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 Protective less dividends on shares held
by the ESOP. At December 31, 1997, PLC had committed 47,523 shares to be
released to fund employee benefits. The expense recorded by PLC for these
employee benefits was less than $0.1 million, $1.0 million, and $0.7 million, in
1997, 1996, and 1995, respectively.
NOTE M -- STOCK BASED COMPENSATION
Certain Protective employees participate in PLC's Performance Share Plan and
receive stock appreciation rights (SARs) from PLC.
Since 1973 PLC has had a Performance Share Plan to motivate senior
management to focus on PLC's long-range earnings performance. The criterion for
payment of performance share awards is based upon a comparison of PLC's average
return on average equity over a four year award period (earlier upon the death,
disability or retirement of the executive, or in certain circumstances, of a
change in control of PLC) to that of a comparison group of publicly held life
insurance companies, multiline insurers, and insurance holding companies. If
PLC's results are below the median of the comparison group, no portion of the
award is earned. If PLC's results are at or above the 90th percentile, the award
maximum is earned. Under the plan approved by stockholders in 1992, up to
3,200,000 shares may be issued in payment of awards. The number of shares
granted in 1997, 1996, and 1995 were 49,390, 52,290, and 72,610 shares,
respectively, having an approximate market value on the grant date of $2.0
million, $1.8 million, and $1.6 million, respectively. At December 31, 1997,
outstanding awards measured at target and maximum payouts were 261,318 and
353,385 shares, respectively. The expense recorded by PLC for the Performance
Share Plan was $2.7 million, $3.0 million, and $2.9 million in 1997, 1996, and
1995, respectively.
During 1996, stock appreciation rights (SARs) were granted to certain
executives of PLC to provide long-term incentive compensation based on the
performance of PLC's Common Stock. Under this arrangement PLC will pay (in
shares of PLC Common Stock) an amount equal to the difference between the
specified base price of PLC's Common Stock and the market value at the exercise
date. The SARs are exercisable after five years (earlier upon the death,
disability or retirement of the executive, or in certain circumstances, of a
change in control of PLC) and expire in 2006 or upon termination of employment.
The number of SARs granted during 1996 and outstanding at December 31, 1997 was
337,500. The SARs have a base price of $34.875 per share of PLC Common Stock
(the market price on the grant date was $35.00 per share). The estimated fair
value of the SARs on the grant date was $3.0 million. This estimate was derived
using the Roll-Geske variation of the Black-Sholes option pricing model.
Assumptions used in the pricing model are as follows: expected volatility rate
of 15% (approximately equal to that of the S & P Life Insurance Index), a risk
free interest rate of 6.35%, a dividend yield rate of 1.97%, and an expected
exercise date of August 15, 2002. The expense recorded by PLC for the SARs was
$0.6 million in 1997 and $0.2 million in 1996.
NOTE N -- REINSURANCE
Protective 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 Protective,
generally, will not carry more than $500,000 individual life insurance on a
single risk. In many cases, the retention is less.
32
NOTE N -- REINSURANCE (CONTINUED)
Protective has reinsured approximately $34.1 billion, $18.8 billion, and
$17.5 billion in face amount of life insurance risks with other insurers
representing $147.2 million, $113.5 million, and $116.1 million of premium
income for 1997,1996, and 1995, respectively. Protective has also reinsured
accident and health risks representing $187.7 million, $194.7 million, and
$217.1 million of premium income for 1997, 1996, and 1995, respectively. In 1997
and 1996, policy and claim reserves relating to insurance ceded of $485.8
million and $325.9 million respectively are included in reinsurance receivables.
Should any of the reinsurers be unable to meet its obligation at the time of the
claim, obligation to pay such claim would remain with Protective. At December
31, 1997 and 1996, Protective had paid $25.6 million and $6.7 million,
respectively, of ceded benefits which are recoverable from reinsurers. In
addition, at December 31, 1997, Protective had receivables of $80.3 million
related to insurance assumed.
A substantial portion of Protective's new credit insurance sales are being
reinsured. Included in the preceding paragraph are credit life and credit
accident and health insurance premiums of $96.7 million, $103.0 million, and
$125.8 million for 1997, 1996 and 1995, respectively, and reserves which were
ceded of $238.8 million and $135.8 million during 1997 and 1996, respectively.
NOTE O -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of Protective's financial
instruments at December 31 are as follows:
1997 1996
--------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUES AMOUNT VALUES
--------- ---------- --------- ---------
Assets (see Notes A and C):
Investments:
Fixed maturities..................... $6,348,252 $6,348,252 $4,662,997 $4,662,997
Equity securities.................... 15,006 15,006 35,250 35,250
Mortgage loans on real estate........ 1,313,478 1,405,474 1,503,781 1,581,694
Short-term investments............... 54,337 54,337 101,215 101,215
Cash...................................... 39,197 39,197 114,384 114,384
Liabilities (see Notes A and E):
Guaranteed investment contract deposits 2,684,676 2,687,331 2,474,728 2,462,036
Annuity deposits..................... 1,511,553 1,494,600 1,331,067 1,322,304
Other (see Note A):
Futures contracts.................... (1,708)
Interest rate swaps.................. (145) (679)
Options.............................. 234
33
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H
- --------------------------------------------------------------------------------------------------------------------------------
GIC AND
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS PREMIUMS REALIZED BENEFITS
POLICY BENEFITS AND OTHER AND NET INVESTMENT AND
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT GAINS SETTLEMENT
SEGMENT COSTS COSTS PREMIUMS FUNDS FEES INCOME (1) (LOSSES) EXPENSES
------- -------------------------- -------------------------------------------------------------------------------------
Year Ended
December 31,1997:
Life Insurance
Acquisitions...... $138,052 $1,025,340 $1,437 $311,150 $102,635 $110,155 $0 $116,506
Individual Life... 252,321 920,924 356 16,334 127,480 54,593 0 114,678
West Coast........ 108,126 739,463 0 95,495 14,122 30,194 0 28,304
Specialty Insurance Products
Dental and Consumer
Benefits....... 22,459 120,925 2,536 80,654 151,110 23,810 0 110,148
Financial Institutions 52,836 159,422 391,085 6,791 72,263 16,341 0 27,643
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts....... 1,785 180,690 0 2,684,676 0 211,915 (3,180) 179,235
Investment Products 56,074 177,150 0 1,184,268 12,367 105,196 589 82,019
Corporate and Other.. 952 380 1,282 185 229 5,284 0 339
Unallocated Realized
Investment Gains
(Losses)....... 0 0 0 0 0 0 4,415 0
--------------------------------------------------------------------------------------------------------
TOTAL........ $632,605 $3,324,294 $396,696 $4,379,553 $480,206 $557,488 $1,824 $658,872
========================================================================================================
Year Ended
December 31,1996:
Life Insurance
Acquisitions...... $156,172 $1,117,159 $ 1,087 $ 251,450 $106,543 $106,015 $ 0 $118,181
Individual Life... 220,232 793,370 685 15,577 116,710 48,442 3,098 96,404
Specialty Insurance Products
Dental and Consumer
Benefits........ 27,944 119,010 2,572 83,632 156,530 16,249 0 125,797
Financial Institutions 32,040 119,242 253,154 1,880 73,422 13,898 0 42,781
Retirement Savings and
Investment Products
Guaranteed Investment 1,164 149,755 0 2,474,728 0 214,369 (7,963) 169,927
Contracts.......
Investment Products 50,637 149,743 0 1,120,557 8,189 98,719 3,858 73,093
Corporate and Other.. 12 170 55 192 656 1,089 0 710
Unallocated Realized
Investment Gains
(Losses)....... 0 0 0 0 0 0 6,517 0
--------------------------------------------------------------------------------------------------
TOTAL........ $488,201 $2,448,449 $257,553 $3,948,016 $462,050 $498,781 $5,510 $626,893
===================================================================================================
Year Ended
December 31,1995:
Life Insurance
Acquisitions...... $123,889 $ 851,994 $ 590 $ 250,550 $ 98,501 $ 95,018 $ 0 $100,016
Individual Life... 186,496 672,569 336 14,709 99,018 40,237 0 80,067
Specialty Insurance Products
Dental and Consumer
Benefits........ 24,974 123,279 2,806 85,925 142,483 14,329 0 109,447
Financial Institutions 36,283 84,162 189,973 1,495 65,669 9,276 0 24,020
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts....... 993 68,704 0 2,451,693 0 203,376 (3,908) 165,963
Investment Products 37,534 127,104 0 1,061,507 4,566 95,661 4,938 72,111
Corporate and Other.. 14 342 62 263 1,445 536 0 1,476
Unallocated Realized
Investment Gains
(Losses)........ 0 0 0 0 0 0 921 0
- -----------------------------------------------------------------------------------------------------------------------
TOTAL......... $410,183 $1,928,154 $193,767 $3,866,142 $411,682 $ 458,433 $1,951 $553,100
===============================================================================================
- -------------------------------------------------------------------------
COL. I COL.J
- -------------------------------------------------------------------------
Amortization Other
of Deferred Operating
Policy Expenses (1)
Acquisition
Costs
----------- -----------
Year Ended
December 31,1997
Life Insurance
Acquisitions..........$ 16,606 $ 23,016
Individual Life....... 27,354 18,178
West Coast............ 961 6,849
Specialty Insurance Products
Dental and Consumer
Benefits............ 15,711 38,572
Financial Institutions 30,812 20,165
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts........... 618 3,945
Investment Products... 15,110 12,312
Corporate and Other..... 3 6,833
Unallocated Realized
Investment Gains
(Losses).............. 0 0
- ----------------------------------------------------
TOTAL..............$107,175 $129,870
====================================================
Year Ended
December 31,1996
Life Insurance
Acquisitions..........$ 17,162 $ 24,292
Individual Life....... 28,393 28,611
Specialty Insurance Products
Dental and Consumer
Benefits............ 5,326 43,027
Financial Institutions 24,900 10,673
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts........... 509 3,840
Investment Products... 14,710 13,197
Corporate and Other..... 1 4,508
Unallocated Realized
Investment Gains
(Losses).............. 0 0
- ----------------------------------------------------
TOTAL..............$ 91,001 $128,148
====================================================
Year Ended
December 31,1995
Life Insurance
Acquisitions..........$ 20,601 $ 22,551
Individual Life....... 20,403 22,748
Specialty Insurance Products
Dental and Consumer
Benefits............ 3,052 37,657
Financial Institutions 26,809 14,229
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts........... 386 4,140
Investment Products... 11,446 10,494
Corporate and Other..... 3 8,069
Unallocated Realized
Investment Gains
(Losses).............. 0 0
- ----------------------------------------------------
TOTAL..............$ 82,700 $119,888
====================================================
(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.
34
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE INSURANCE COMPANY 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 NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
Year Ended December 31,1997:
Life insurance in force........................... $78,240,282 $34,139,554 $11,013,202 $55,113,930 20.0%
=========== =========== =========== =========== ====
Premiums and policy fees:
Life insurance.................................... $ 387,108 $ 147,184 $ 74,738 $ 314,662 23.8%
Accident and health insurance..................... 336,575 187,539 10,510 159,546 6.7%
Property and liability insurance.................. 6,139 176 35 5,998 0.6%
-------------------------------------------------------------------
TOTAL......................................... $ 729,822 $ 334,899 $ 85,283 $ 480,206
============= ============= ============== =============
Year Ended December 31,1996:
Life insurance in force........................... $53,052,020 $18,840,221 $16,275,386 $50,487,185 32.2%
=========== =========== =========== =========== ====
Premiums and policy fees:
Life insurance.................................... $ 272,331 $ 113,487 $ 129,717 $ 288,561 45.0%
Accident and health insurance..................... 338,709 194,687 29,467 173,489 17.0%
------------- -------------- -------------- -------------
TOTAL......................................... $ 611,040 $ 308,174 $ 159,184 $ 462,050
============= ============= ============= =============
Year Ended December 31,1995:
Life insurance in force........................... $50,346,719 $17,524,366 $11,537,144 $ 44,359,497 26.0%
=========== =========== =========== ============ ====
Premiums and policy fees:
Life insurance.................................... $ 308,422 $ 116,091 $ 66,565 $ 258,896 25.7%
Accident and health insurance..................... 356,285 217,082 13,583 152,786 8.9%
-------------- -------------- -------------- --------------
TOTAL......................................... $ 664,707 $ 333,173 $ 80,148 $ 411,682
============= ============= ============= =============
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Not required in
accordance with General Instruction I(2)(c).
ITEM 11. EXECUTIVE COMPENSATION
Not required in accordance with General Instruction I(2)(c).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not required in accordance with General Instruction I(2)(c).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not required in accordance with General Instruction I(2)(c).
PART IV
ITEM14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 37 of this Form
10-K are filed herewith or are incorporated herein by reference.
No management contract or compensatory plan or arrangement is
required to be filed as an exhibit to this form. The Registrant
will furnish a copy of any of the exhibits listed upon the
payment of $5.00 per exhibit to cover the cost of the Registrant
in furnishing the exhibit.
(b) Reports on Form 8-K:
None
36
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama on March 27, 1998.
PROTECTIVE LIFE INSURANCE COMPANY
By: /S/ DRAYTON NABERS, JR.
Chairman of the Board
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
(i) Principal Executive Officer
/S/ DRAYTON NABERS, JR. Chairman of the Board March 27, 1998
---------------------------------------
Drayton Nabers, Jr.
(ii) Principal Financial Officer
/S/ JOHN D. JOHNS President March 27, 1998
------------------------------------------------
John D. Johns
(iii) Principal Accounting Officer
/S/ JERRY W. DEFOOR Vice President and Controller, March 27, 1998
----------------------------------------------
Jerry W. DeFoor and Chief Accounting Officer
(iv) Board of Directors:
/S/ DRAYTON NABERS, JR. Director March 27, 1998
------------------------------------------
Drayton Nabers, Jr.
/S/ JOHN D. JOHNS Director March 27, 1998
------------------------------------------
John D. Johns
* Director March 27, 1998
------------------------------------------
Danny L. Bentley
* Director March 27, 1998
------------------------------------------
Richard J. Bielen
* Director March 27, 1998
------------------------------------------
R. Stephen Briggs
* Director March 27, 1998
------------------------------------------
Carolyn King
* Director March 27, 1998
------------------------------------------
Deborah J. Long
* Director March 27, 1998
------------------------------------------
Jim E. Massengale
37
SIGNATURE TITLE DATE
* Director March 27, 1998
------------------------------------------------------------------
Steven A. Schultz
* Director March 27, 1998
------------------------------------------------------------------
Wayne E. Stuenkel
* Director March 27, 1998
------------------------------------------------------------------
A. S. Williams III
*By: /S/ JERRY W. DEFOOR
Jerry W. DeFoor
ATTORNEY-IN-FACT
38
EXHIBIT INDEX
ITEM
NUMBER DOCUMENT
**** 2 -- Stock Purchase Agreement
* 3(a) -- Articles of Incorporation
* 3(b) -- By-laws
** 4(a) -- Group Modified Guaranteed Annuity Contract
*** 4(b) -- Individual Certificate
** 4(h) -- Tax-Sheltered Annuity Endorsement
** 4(i) -- Qualified Retirement Plan Endorsement
** 4(j) -- Individual Retirement Annuity Endorsement
** 4(l) -- Section 457 Deferred Compensation Plan Endorsement
* 4(m) -- Qualified Plan Endorsement
** 4(n) -- Application for Individual Certificate
** 4(o) -- Adoption Agreement for Participation in Group Modified Guaranteed
Annuity
*** 4(p) -- Individual Modified Guaranteed Annuity Contract
** 4(q) -- Application for Individual Modified Guaranteed Annuity Contract
** 4(r) -- Tax-Sheltered Annuity Endorsement
** 4(s) -- Individual Retirement Annuity Endorsement
** 4(t) -- Section 457 Deferred Compensation Plan Endorsement
** 4(v) -- Qualified Retirement Plan Endorsement
**** 4(w) -- Endorsement -- Group Policy
**** 4(x) -- Endorsement -- Certificate
**** 4(y) -- Endorsement -- Individual Contract
**** 4(z) -- Endorsement (Annuity Deposits) -- Group Policy
**** 4(aa) -- Endorsement (Annuity Deposits) -- Certificate
**** 4(bb) -- Endorsement (Annuity Deposits) -- Individual Contracts
***** 4(cc) -- Endorsement -- Individual
***** 4(dd) -- Endorsement -- Group Contract/Certificate
****** 4(ee) -- Endorsement (96) -- Individual
****** 4(ff) -- Endorsement (96) -- Group Contract
****** 4(gg) -- Endorsement (96) -- Group Certificate
****** 4(hh) -- Individual Modified Guaranteed Annuity Contract (96)
******* 4(ii) -- Settlement Endorsement
* 10(a) -- Bond Purchase Agreement
* 10(b) -- Escrow Agreement
24 -- Power of Attorney
27 -- Financial Data Schedule
* Previously filed or incorporated by reference in Form S-1 Registration Statement, Registration
No. 33-31940.
** Previously filed or incorporated by reference in Amendment No. 1 to Form S-1 Registration
Statement, Registration No. 33-31940.
*** Previously filed or incorporated by reference from Amendment No. 2 to Form S-1 Registration
Statement, Registration No. 33-31940.
**** Previously filed or incorporated by reference from Amendment No. 2 to Form S-1 Registration
Statement, Registration No. 33-57052.
***** Previously filed or incorporated by reference from Amendment No. 3 to Form S-1 Registration
Statement, Registration No. 33-57052.
****** Previously filed or incorporated by reference from S-1
Registration Statement, Registration No. 333-02249.
******* Previously filed or incorporated by reference in Amendment No. 1 to Form S-1 Registration
Statement, Registration No. 333-02249.