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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, 1998 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 5, 1999: 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 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
insurance and investment products. 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, 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 insurance policies from other insurers.
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. The life insurance
category includes the Acquisitions, Individual Life, and West Coast Divisions.
The specialty insurance products category includes the Dental and Consumer
Benefits ("Dental") and Financial Institutions Divisions. The retirement savings
and investment products category includes the Guaranteed Investment Contracts
and Investment Products Divisions. Protective also has an additional business
segment which is described herein as Corporate and Other.
The following table shows the percentages of pretax operating income
represented by each of the strategic focuses and the Corporate and Other
segment.
Retirement
Specialty Savings and Corporate
Year Ended Life Insurance Investment and
Dcember 31 Insurance Products Products Other
---------- --------- --------- ------------ --------
1994 53.1% 17.5% 31.6% (2.1)%
1995 56.7 14.3 34.5 (5.5)
1996 55.3 7.9 38.8 (1.9)
1997 58.9 16.7 24.6 (0.2)
1998 58.1 15.6 23.1 3.2
Additional information concerning Protective's divisions may be found in
"Management's Narrative Analysis of the Results of Operations" and Note K to
Consolidated Financial Statements included herein.
Item 2. Properties
Protective's administrative office building is located at 2801 Highway 280
South, Birmingham, Alabama 35223. This campus includes the original 142,000
square-foot building which was completed in 1976 and a second contiguous 220,000
square-foot building which was completed in 1985. In addition, parking is
provided for approximately 1,000 vehicles.
Protective leases administrative space in 7 cities, including
approximately 114,000 square feet in Birmingham, with most leases being for
periods of three to five years. The aggregate monthly rent is approximately $325
thousand.
Marketing offices are leased in 16 cities, with most leases being for
periods of three to five years. The aggregate monthly rent is approximately $59
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).
PART II
Item 5. Market for the Registrant's Common Stock and Related Share-Owner Matters
Protective is a wholly-owned subsidiary of PLC which also owns all of the
preferred stock issued by Protective's subsidiary, Protective Life and Annuity
Insurance Company ("PL&A"), formerly American Foundation Life Insurance Company.
Therefore, neither Protective's Common Stock nor PL&A's Preferred Stock is
publicly traded.
At December 31, 1998, $608.6 million of consolidated share-owner'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
$769.8 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 1999 is estimated to
be $138.9 million. Protective paid $60 million of ordinary dividends to PLC in
1998.
PL&A paid preferred dividends of $0.1 million in 1998 and 1997. Also in
1998, PL&A declared and paid a common stock dividend of 50,000 shares to
Protective. Protective and PL&A 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:
Year Ended Percentage
December 31 Increase
1998 1997
---- ----
(in thousands)
Premiums and policy fees............... $ 568,125 $ 480,206 18.3%
Net investment income................... 603,795 557,488 8.3%
Realized investment gains............... 2,136 1,824 17.1%
Other income............................ 20,201 6,149 228.5%
--------- ---------
$ 1,194,257 $ 1,045,667
In 1998, premiums and policy fees, net of reinsurance ("premiums and
policy fees") increased $87.9 million or 18.3% over 1997. The Individual Life
Division's premiums and policy fees decreased $1.3 million due to an increased
use of reinsurance by the Division. The full year effect of the June 1997
acquisition of West Coast Life Insurance Company ("West Coast") increased
premiums and policy fees $8.3 million. In the Acquisitions Division, decreases
in older acquired blocks resulted in a $9.5 million decrease in premiums and
policy fees. The coinsurance of a block of policies from Lincoln National
Corporation in October 1998 resulted in a $3.6 million
increase in premiums and policy fees. Premiums and policy fees in the Dental
Division increased $40.5 million. The full year effect of the September 1997
acquisition of the Western Diversified Group ("Western Diversified") and a
coinsured block of credit insurance policies by the Financial Institutions
Division increased premiums and policy fees $49.8 million. The increase in
premiums and policy fees from the Investment Products Division was $6.4 million.
Net investment income for 1998 was $46.3 million or 8.3% 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 full
year effect of the 1997 acquisition of West Coast, Western Diversified, and the
block of credit insurance policies resulted in an increase in net investment
income of $43.1 million in 1998. The coinsurance of a block of policies from
Lincoln National Corporation increased 1998 net investment income $6.0 million.
The percentage earned on average cash and investments was 7.2% in 1998 and 7.6%
in 1997.
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 $24.1 million at December 31, 1998 and $23.0
million at December 31, 1997. Realized investment gains in 1998 of $36.1 million
were largely offset by realized investment losses of $34.0 million. Realized
investment losses include a $1.1 million net increase to the allowance for
uncollectible amounts of investments.
Other income consists primarily of revenues of Protectove's non-insurance
subsidiaries and rental of space in its administrative building to PLC. Other
income increased $14.1 million in 1998 as compared to 1997. The full year effect
of the 1997 acquisition of Western Diversified increased other income $12.8
million.
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)
1998 1997
---- ----
Operating Income (Loss)(1)
Life Insurance
Individual Life $ 30,183 $ 22,480
West Coast 20,983 8,202
Acquisitions 52,940 56,672
Specialty Insurance Products
Dental 10,206 11,767
Financial Institutions 17,650 13,017
Retirement Savings and
Investment Products
GIC 30,780 28,117
Investment Products 10,639 8,303
Corporate and Other 5,718 (259)
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Total operating income 179,099 148,299
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Realized Investment Gains (Losses)
GIC 1,609 (3,180)
Investment Products 1,318 589
Unallocated Realized
Investment Gains (Losses) (791) 4,415
Related Amortization of Deferred
Policy Acquisition Costs
Individual Life
Investment Products (890) (373)
------------------------------------------------------------------------------------
Total net 1,246 1,451
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Income (Loss) Before Income Tax
Life Insurance
Individual Life 30,183 22,480
West Coast 20,983 8,202
Acquisitions 52,940 56,672
Specialty Insurance Products
Dental 10,206 11,767
Financial Institutions 17,650 13,017
Retirement Savings and
Investment Products
GIC 32,389 24,937
Investment Products 11,067 8,519
Corporate and Other 5,718 (259)
Unallocated Realized
Investment Gains (Losses) (791) 4,415
------------------------------------------------------------------------------------
Total income before
income tax $180,345 $149,750
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(1)Income before income tax excluding realized investment gains
and losses and related amortization of deferred policy
acquisition costs.
The Individual Life Division's 1998 pretax income was $30.2 million, $7.7
million above 1997. The Division's mortality experience was at expected levels
in 1998 and approximately $5.1 million more favorable than 1997.
Headquartered in San Francisco, West Coast was acquired by the Company in
June 1997. For the seven months of 1997 that it was a subsidiary of the company,
the West Coast Division had pretax income of $8.2 million.
The Division's 1998 pretax income was $21.0 million.
In the ordinary course of business, the Acquisitions Division regularly
considers acquisitions of smaller insurance companies or blocks of policies.
Blocks of policies acquired through the Division are usually administered as
"closed" blocks; i.e., no new policies are being marketed. Therefore, earnings
from the Acquisitions Division are normally expected to decline over time (due
to the lapsing of policies resulting from deaths of insureds of terminations of
coverage) unless new acquisitions are made.
The Acquisitions Division's 1998 pretax income decreased $3.7 million to
$52.9 million, compared to 1997. The Division's mortality experience was at
expected levels in 1998 compared to being approximately $5.1 million better than
expected in 1997. In October 1998, the Division acquired approximately 260,000
policies from Lincoln National Corporation. The policies represent the payroll
deduction business originally marketed and underwritten by Aetna.
The Dental Division's 1998 pretax income was $10.2 million compared to
$11.8 million in 1997. Dental earnings were $5.1 million, before a $2.5 million
loss relating to its discounted fee-for-service dental program.
At the end of the 1997 third quarter, the Financial Institutions Division
acquired Western Diversified and coinsured an unrelated block of policies. The
Division's 1998 pretax income increased $4.6 million to $17.7 million. Western
Diversified and the coinsured block of policies represented $2.8 million of the
increase.
The GIC Division's 1998 pretax operating income increased to $30.8 million
from $28.1 million in 1997 due to increased investment income. Realized
investment gains associated with this Division in 1998 were $1.6 million as
compared to realized investment losses of $3.2 million in 1997. As a result,
total pretax income was $32.4 million in 1998 and $24.9 million in 1997.
The Investment Products Division's 1998 pretax operating income was $10.6
million, an increase of $2.3 million. Realized investment gains, net of related
amortization of deferred policy acquisition costs, were $0.4 million in 1998 as
compared with $0.2 million in 1997. As a result, total pretax income was $11.1
million in 1998 and $8.5 million in 1997.
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 earnings for this segment were $5.7 million, $6.0 million higher
in 1998 as compared to 1997, 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
----------- ----------------
1998............................. 35.0%
1997............................. 34.9%
Management's current estimate of the effective income tax rate for 1999 is
between 35% and 36%.
Net Income
The following table sets forth net income for the periods shown:
Net Income
---------------------
Year Ended Percentage
December 31 Amount Increase
(in thousands)
1998.................................. $117,183 20.3%
1997.................................. $ 97,448 18.1%
Compared to 1997, net income in 1998 increased 20.3%, reflecting improved
operating earnings in the Individual Life, West Coast, Financial Institutions,
GIC, and Investment Products Divisions, and the Corporate and Other segment, and
higher realized investment gains, offset by lower operating earnings in the
Acquisitions and Dental Divisions.
Recently Issued Accounting Standards
For additional information regarding recently issued accounting standards
see Note A to the consolidated financial statements included herein.
Year 2000 Disclosure
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 often is denoted by such hardware
and software as "98." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including Protective, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
Protective shares computer hardware and software with its parent, PLC. PLC
began work on the Year 2000 problem in 1995. At that time, PLC identified and
assessed PLC's critical mainframe systems, and prioritized the remediation
efforts that were to follow. During 1998 all other hardware and software,
including non-information technology (non-IT) related hardware and software,
were included in the process. PLC's Year 2000 plan includes all subsidiaries.
PLC estimates that Year 2000 remediation is complete for most of its
insurance administration and general administration systems. Of the general
administration systems that are not yet remediated, the majority are new systems
that were implemented during 1998 and are scheduled to be upgraded to the
current release of the system during the second quarter of 1999. All remediated
systems are currently in production. Personal computer network hardware and
software have been reviewed, with upgrades implemented where necessary. A review
of personal computer desktop software is in progress, but not complete. All Year
2000 personal computer preparations are expected to be completed by June 30,
1999. With respect to non-IT equipment and processes, the assessment and
remediation is progressing on schedule and all known issues are expected to be
remediated before December 31, 1999.
Two insurance administration systems identified as mission critical are
not yet fully remediated. A personal computer database system that processes
member information for one subsidiary is currently being remediated. This effort
is on schedule and targeted to be complete by June 30, 1999. Also, another
personal computer application, which processes policy information for one line
of business, is being re-written and is currently in test. This system is
targeted to be in production by April 30, 1999.
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of PLC's mission-critical systems. A
large portion of the testing is conducted by a contract programming staff
dedicated full time to Year 2000 preparations. These resources have been part of
PLC's Year 2000 project since 1995.
Integrated tests involve multiple system testing and are used to verify
the Year 2000 readiness of interfaces and connectivity across multiple systems.
PLC is using its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing. Integrated testing will
continue throughout 1999.
Business partners and suppliers that provide products or services critical
to PLC's operations are being reviewed and in some cases their Year 2000
preparations are being monitored by the Company. To date, no partners or
suppliers have reported that they expect to be unable to continue supplying
products and services after January 1, 2000. Initial reviews are targeted to be
completed in the first quarter of 1999. Monitoring and testing of critical
partners and suppliers will continue throughout 1999. Formal contingency
planning will begin in March 1999 and continue throughout the year. These plans
will augment PLC's existing disaster recovery plans.
PLC cannot specifically identify all of the costs to develop and implement
its Year 2000 plan. The cost of new systems to replace non-compliant systems
have been capitalized in the ordinary course of business. Other costs have been
expensed as incurred. Through December 31, 1998, costs that have been
specifically identified as relating to the Year 2000 problem total $3.9 million,
with an additional $1.3 million estimated to be required to support continued
testing activity. PLC's Year 2000 efforts have not adversely affected its normal
procurement and development of information technology.
Although PLC believes that a process is in place to successfully address
Year 2000 issues, there can be no assurances that PLC's efforts will be
successful, that interactions with other service providers with Year 2000 issues
will not impair Protective's operations, or that the Year 2000 issue will not
otherwise adversely affect Protective.
Should some of PLC's systems not be available due to Year 2000 problems,
in a reasonably likely worst case scenario,Protective may experience significant
delays in its ability to perform certain functions, but does not expect to be
unable to perform critical functions or to otherwise conduct business.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Share-Owner's Equity for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Share Owner
Protective Life Insurance Company
Birmingham, Alabama
In our opinion, the consolidated financial statements and the financial
statement schedules listed in the index on page 10 of this Form 10-K present
fairly, in all material respects, the consolidated financial position of
Protective Life Insurance Company and Subsidiaries at December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
February 11, 1999
Birmingham, Alabama
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Year Ended December 31
1998 1997 1996
---- ---- ----
REVENUES
Premiums and policy fees............................................... $1,027,340 $ 814,420 $770,224
Reinsurance ceded ..................................................... (459,215) (334,214) (308,174)
--------- -------- -------
Net of reinsurance ceded............................................. 568,125 480,206 462,050
Net investment income.................................................. 603,795 557,488 498,781
Realized investment gains.............................................. 2,136 1,824 5,510
Other income........................................................... 20,201 6,149 5,010
--------- --------- -------
1,194,257 1,045,667 971,351
--------- --------- -------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded: 1998-$330,494;
1997-$180,605; 1996-$215,424)........................................ 730,496 658,872 626,893
Amortization of deferred policy acquisition costs ..................... 111,188 107,175 91,001
Other operating expenses (net of reinsurance ceded: 1998-$166,375;
1997-$90,045; 1996-$81,839).......................................... 172,228 129,870 128,148
--------- -------- -------
1,013,912 895,917 846,042
--------- -------- -------
INCOME BEFORE INCOME TAX ................................................. 180,345 149,750 125,309
INCOME TAX EXPENSE (BENEFIT)
Current.............................................................. 48,237 66,283 44,908
Deferred............................................................. 14,925 (13,981) (2,142)
--------- -------- -------
63,162 52,302 42,766
--------- -------- -------
NET INCOME ................................................... $ 117,183 $ 97,448 $ 82,543
========= ======== =======
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31
1998 1997
---- ----
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1998-$6,307,274; 1997-$6,221,871)... $ 6,400,262 $ 6,348,252
Equity securities, at market (cost: 1998-$15,151; 1997-$24,983).................. 12,258 15,006
Mortgage loans on real estate.................................................... 1,623,603 1,313,478
Investment real estate, net of accumulated depreciation (1998-$782; 1997-$671)... 14,868 13,469
Policy loans..................................................................... 232,670 194,109
Other long-term investments...................................................... 70,078 54,704
Short-term investments........................................................... 159,655 54,337
---------- ---------
Total investments 8,513,394 7,993,355
Cash ............................................................................... 39,197
Accrued investment income .......................................................... 100,395 94,095
Accounts and premiums receivable, net of allowance for uncollectible
amounts (1998-$4,304; 1997-$5,292).............................................. 31,265 42,255
Reinsurance receivables ............................................................ 756,370 591,457
Deferred policy acquisition costs .................................................. 841,425 632,605
Property and equipment, net ........................................................ 42,374 36,407
Other assets ....................................................................... 34,632 14,445
Assets related to separate accounts ................................................
Variable Annuity................................................................ 1,285,952 924,406
Variable Universal Life......................................................... 13,606 3,634
Other........................................................................... 3,482 3,425
--------- -----------
$11,622,895 $10,375,281
=========== ===========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims............................................. $ 4,140,003 $ 3,324,294
Unearned premiums............................................................. 389,294 396,696
--------- ---------
4,529,297 3,720,990
Guaranteed investment contract deposits ........................................... 2,691,697 2,684,676
Annuity deposits .................................................................. 1,519,820 1,511,553
Other policyholders' funds ........................................................ 219,356 183,324
Other liabilities ................................................................. 226,310 246,081
Accrued income taxes .............................................................. (10,992) 941
Deferred income taxes ............................................................. 51,735 49,417
Note payable ...................................................................... 2,363
Indebtedness to related parties ................................................... 20,898 28,055
Liabilities related to separate accounts ..........................................
Variable Annuity.............................................................. 1,285,952 924,406
Variable Universal Life....................................................... 13,606 3,634
Other......................................................................... 3,482 3,425
---------- ---------
Total liabilities........................................................... 10,553,524 9,356,502
---------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G
SHARE-OWNER'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 ........................................................ 327,992 327,992
Note receivable from PLC Employee Stock Ownership Plan ............................ (5,199) (5,378)
Retained earnings ................................................................. 686,519 629,436
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 1998-$29,646; 1997-$33,238) 55,057 61,727
------------ -----------
Total share-owner's equity.................................................... 1,069,371 1,018,779
------------ -----------
$11,622,895 $10,375,281
============ ===========
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHARE-OWNER'S EQUITY
(Dollars in thousands, except per share amounts)
Note
Receivable Net Total
Additional From Unrealized Share-
Preferred Common Paid-In PLC Retained Gains (Losses) Owner's
Stock Stock Capital ESOP Earnings on Investments Equity
--------- ------- ---------- --------- -------- -------------- ---------
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
Net income for 1998................................ 117,183 117,183
Decrease in net unrealized
gains on investments (net of income tax-($2,844)) (5,281) (5,281)
Reclassification adjustment for amounts included
in net income (net of income tax: $(747))....... (1,389) (1,389)
---------
Comprehensive income for 1998...................... 110,513
---------
Common dividends ($12 per share)................... (60,000) (60,000)
Preferred dividends ($50 per share)................ (100) (100)
Decrease in note receivable from PLC ESOP.......... 179 179
-------- -------- -------- ------- -------- --------- ----------
Balance, December 31, 1998 ........................$ 2 $ 5,000 $327,992 $(5,199) $686,519 $ 55,057 $1,069,371
======== ======== ======== ======== ======== ========= ==========
See notes to consolidated financial statements.
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
December 31
-----------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................... $ 117,183 $ 97,448 $ 82,543
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs......................... 111,188 107,175 91,001
Capitalization of deferred policy acquisition costs....................... (192,838) (135,211) (77,078)
Depreciation expense...................................................... 7,110 5,124 5,333
Deferred income taxes..................................................... 14,925 (17,918) (2,442)
Accrued income taxes...................................................... (11,933) (5,558) 893
Interest credited to universal life and investment products............... 352,721 299,004 280,377
Policy fees assessed on universal life and investment products............ (139,689) (131,582) (116,401)
Change in accrued investment income and other receivables................. (159,362) (158,798) (70,987)
Change in policy liabilities and other policyholder funds of traditional life
and health products 322,464 279,522 133,621
Change in other liabilities............................................... (19,771) 65,393 7,209
Other (net)............................................................... (22,634) (1,133) (4,281)
------- ------- -------
Net cash provided by operating activities.......................................... 379,364 403,466 329,788
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale............................................ 10,445,407 6,462,663 1,327,323
Other..................................................................... 198,559 324,242 168,898
Sale of investments:
Investment available for sale............................................. 1,080,265 1,108,058 1,569,119
Other..................................................................... 155,906 695,270 568,218
Cost of investments acquired:
Investments available for sale............................................ (11,507,234) (8,428,804) (3,798,631)
Other..................................................................... (662,350) (718,335) (400,322)
Acquisitions and bulk reinsurance assumptions ................................ (169,124) 264,126
Purchase of property and equipment ........................................... (13,077) (6,087) (6,899)
Sale of property and equipment ............................................... 2,681 288
----------- ---------- -----------
Net cash used in investing activities.............................................. (302,524) (729,436) (307,880)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term debt .............. 1,975,800 1,159,538 941,438
Capital contribution from PLC ................................................ 90,000 91,500
Principal payments on line of credit arrangements and long-term debt ......... (1,973,437) (1,159,538) (941,438)
Principal payment on surplus note to PLC ..................................... (2,000) (4,693) (10,000)
Dividends to share-owner ..................................................... (60,100) (100) (100)
Investment product deposits and change in universal life deposits ............ 981,124 910,659 949,122
Investment product withdrawals ............................................... (1,037,424) (745,083) (944,244)
---------- ---------- ----------
Net cash provided by (used in) financing activities................................ (116,037) 250,783 86,278
---------- ---------- ----------
INCREASE(DECREASE) IN CASH......................................................... (39,197) (75,187) 108,186
CASH AT BEGINNING OF YEAR.......................................................... 39,197 114,384 6,198
---------- ----------- -----------
CASH AT END OF YEAR................................................................ $ 0 $ 39,197 $ 114,384
========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year:
Interest on debt.......................................................... $ 8,338 $ 4,343 $ 4,633
Income taxes.............................................................. $ 57,429 $ 70,133 $ 43,478
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP ..................................... $ 179 $ 201 $ 186
Acquisitions and bulk reinsurance assumptions
Assets acquired........................................................... $ 247,894 $ 1,114,832 $ 296,935
Liabilities assumed....................................................... (380,405) (902,267) (364,862)
Net....................................................................... $ (132,511) $ 212,565 $ (67,927)
See notes to consolidated financial statements.
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 provides financial services through the production,
distribution, and administration of insurance 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 1997 Protective adopted Statement of Financial Accounting Standards
("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."
In 1998 PLC adopted SFAS No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits."
The adoption of these accounting standards did not have a material effect
on PLC's or Protective's financial statements.
INVESTMENTS
Protective has classified all of its investments in fixed maturities,
equity securities, and short-term investments as "available for sale."
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 $0.9 million in bank
deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses reduced by a related adjustment
to deferred policy acquisition costs, net of income tax reported as a component
of share-owner'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 share-owner'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:
1998 1997
---- ----
Total investments.................... $ 8,412,167 $ 7,876,952
Deferred policy acquisition costs.. . 857,949 654,043
All other assets..................... 2,268,076 1,749,321
----------- -----------
$11,538,192 $10,280,316
=========== ===========
Deferred income taxes............... $ 22,089 $ 16,179
All other liabilities............... 10,501,789 9,307,085
---------- ---------
10,523,878 9,323,264
Share-owner's equity................ 1,014,314 957,052
---------- ----------
$11,538,192 $10,280,316
========== ==========
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
DERIVATIVE FINANCIAL INSTRUMENTS
Protective does not use derivative financial instruments for trading
purposes. Combinations of swaps, 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. No realized investment gains or losses were deferred in 1998.
Net realized gains of $1.5 million were deferred in 1997. At December 31, 1998
and 1997, options and open futures contracts with notional amounts of $975.0
million and $925.0 million, respectively, had net unrealized losses of $0.5
million and $0.4 million respectively.
Protective uses interest rate swap contracts to convert certain investments
and liabilities from a variable to a fixed rate of interest and from a fixed
rate to variable rate of interest. At December 31, 1998, related open interest
rate swap contracts with a notional amount of $55.3 million were in a $0.2
million net unrealized loss position. 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.
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:
1998 1997
---- ----
Home office building..........................$37,959 $37,459
Other, principally furniture and equipment.... 58,958 46,937
------ -------
96,917 84,396
Accumulated depreciation...................... 54,543 47,989
------ -------
$42,374 $36,407
====== ======
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 AND BENEFITS EXPENSE
Traditional Life and Health Insurance Products--
Traditional life insurance products consist principally of those products with
fixed and guaranteed premiums and benefits and include whole life insurance
policies, term and term-like life insurance policies, limited-payment life
insurance policies, and certain annuities with life contingencies. Life
insurance and immediate annuity premiums are recognized as revenue when due.
Health insurance premiums are recognized as revenue over the terms of the
policies. Benefits and expenses are associated with earned premiums so that
profits are recognized over the life of the contracts. This is accomplished by
means of the provision for liabilities for future policy benefits and the
amortization of deferred policy acquisition costs.
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:
1998 1997 1996
---- ---- ----
Balance beginning of year ..................... $106,121 $108,159 $ 73,642
Less reinsurance........................... 18,673 6,423 3,330
------- ------- ------
Net balance beginning of year ................. 87,448 101,736 70,312
------- ------- ------
Incurred related to:
Current year .................................. 288,015 258,322 275,524
Prior year .................................... (10,198) (14,540) (2,417)
------- ------- -------
Total incurred............................. 277,817 243,782 273,107
------- ------- -------
Paid related to:
Current year .................................. 236,001 203,381 197,163
Prior year .................................... 58,951 58,104 57,812
------- ------- -------
Total paid................................. 294,952 261,485 254,975
------- ------- -------
Other changes:
Acquisitions and
reserve transfers....................... 0 3,415 13,292
------- ------- -------
Net balance end of year ....................... 70,313 87,448 101,736
Plus reinsurance........................... 20,019 18,673 6,423
------- ------- -------
Balance end of year .......................... $ 90,332 $106,121 $108,159
======== ======== ========
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 3.4% to 9.4%
in 1998.
Protective's accounting policies with respect to variable universal life and
variable annuities are identical except that policy account balances (excluding
account balances that earn a fixed rate) are valued at market and reported as
components of assets and liabilities related to separate accounts.
Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life and health
insurance, universal life insurance, and investment products that vary with and
are primarily related to the production of new business have been deferred.
Traditional life and health insurance acquisition costs are 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 before
amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," 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 for
the future change from that assumed. Additionally, relating to SFAS No. 115,
these costs have been adjusted by an amount equal to the amortization that would
have been recorded if unrealized gains or losses on investments associated with
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. Protective amortizes the present value of future profits over
the premium payment period including accrued interest of up to approximately 8%.
The unamortized present value of future profits for all acquisitions was
approximately $370.3 million and $274.9 million at December 31, 1998 and 1997,
respectively. During 1998 $132.5 million of present value of future profits on
acquisitions made during the year was capitalized and $37.1 million was
amortized. During 1997 $136.2 million of present value of future profits on
acquisitions made during the year was capitalized, and $28.9 million was
amortized.
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 share-owner's equity.
Note B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (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 stock-owner'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.
Note B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (Continued)
The reconciliations of net income and share-owner's equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
Net Income Share-Owner's Equity
-----------------------------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
In conformity with statutory reporting
practices:(1)................................... $147,077 $134,417 $102,337 $ 531,956 $ 579,111 $ 456,320
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization.............................. 68,155 10,310 (2,830) 841,425 632,605 488,201
Deferred income tax......................... (14,925) 13,981 2,142 (51,735) (49,417) (37,722)
Asset Valuation Reserve..................... 66,922 67,369 64,233
Interest Maintenance Reserve................ (1,355) (1,434) (2,142) 15,507 9,809 17,682
Nonadmitted items........................... 42,835 30,500 21,610
Other timing and valuation adjustments...... (76,214) (54,494) (11,210) (282,480) (215,448) (197,227)
Noninsurance affiliates..................... 18,171 17,530 11,104 (4) 4
Consolidation elimination................... (23,726) (22,862) (16,858) (95,059) (35,746) (36,910)
-------- ------- ------ ------- ------- -------
In conformity with generally accepted
accounting principles ................. $117,183 $ 97,448 $ 82,543 $1,069,371 $1,018,779 $ 776,191
======== ====== ====== ========= ========= =======
(1) Consolidated
Note C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
1998 1997 1996
---- ---- ----
Fixed maturities.................................... $463,416 $396,255 $310,353
Equity securities................................... 905 1,186 2,124
Mortgage loans on real estate....................... 158,461 161,604 153,463
Investment real estate.............................. 1,224 2,004 1,875
Policy loans........................................ 12,346 11,370 10,378
Other, principally short-term investments........... 16,536 21,876 51,637
------- ------- -------
652,888 594,295 529,830
Investment expenses................................. 49,093 36,807 31,049
------- ------- -------
$603,795 $557,488 $498,781
======= ======= =======
Realized investment gains (losses) for the years ended December 31
are summarized as follows:
Fixed maturities.................................... $4,374 $ (8,355) $ (7,101)
Equity securities................................... (4,465) 5,975 1,733
Mortgage loans and other investments................ 2,227 4,204 10,878
------ ----- ------
$2,136 $ 1,824 $ 5,510
====== ===== =====
Protective recognizes permanent impairments through changes to an
allowance for uncollectible amounts on investments. The allowance totaled $24.1
million at December 31, 1998 and $23.0 million at December 31, 1997. Additions
and reductions to the allowance are included in realized investment gains
(losses). Without such additions/reductions, Protective had net realized
investment gains of $3.2 million in 1998, net realized investment losses of $6.1
million in 1997, and net realized investment gains of $3.7 million in 1996.
In 1998, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $32.3 million and
gross losses were $32.5 million. In 1997, gross gains were $21.3 million and
gross losses were $23.5 million. In 1996, gross gains were $6.9 million and
gross losses were $11.8 million.
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
1998 Cost Gains Losses Values
---- --------- ---------- ---------- ---------
Fixed maturities:
Bonds:
Mortgage-backed............................. $2,581,561 $ 41,626 $33,939 $2,589,248
United States Government and
authorities............................... 72,697 2,812 75,509
States, municipalities, and
political subdivisions.................... 29,521 1,131 30,652
Public utilities............................ 533,082 15,066 548,148
Convertibles and bonds with
warrants.................................. 694 179 515
All other corporate bonds................... 3,083,782 98,992 32,629 3,150,145
Redeemable preferred stocks ..................... 5,937 108 6,045
----------- --------- ------- ----------
6,307,274 159,735 66,747 6,400,262
Equity securities................................... 15,151 456 3,349 12,258
Short-term investments.............................. 159,655 159,655
----------- -------- ------- ----------
$6,482,080 $160,191 $70,096 $6,572,175
=========== ======== ======= ==========
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
========= ======= ====== =========
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
--------- ------------
1998
- ----
Due in one year or less.......................... $ 705,859 $ 709,686
Due after one year through five years............ 3,255,973 3,325,078
Due after five years through ten years........... 1,655,055 1,690,581
Due after ten years.............................. 690,387 674,917
-------- ---------
$6,307,274 $6,400,262
========== ==========
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
========== ==========
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
Rating 1998 1997
------ ---- ----
AAA................................................. 34.3% 41.1%
AA.................................................. 6.2 4.8
A................................................... 29.4 29.1
BBB................................................. 26.5 21.9
BB or less......................................... 3.5 3.0
Redeemable preferred stocks......................... 0.1 0.1
100.0% 100.0%
At December 31, 1998 and 1997, Protective had bonds which were rated less
than investment grade of $222.9 million and $195.2 million, respectively, having
an amortized cost of $252.0 million and $193.6 million, respectively. At
December 31, 1998, approximately $83.5 million of the bonds rates less than
investment grade were securities issued in company-sponsored commercial mortgage
loan securitizations. Approximately $817.9 million of bonds are not
publically traded.
The change in unrealized gains (losses), net of income tax on fixed
maturity and equity securities for the years ended December 31 is summarized as
follows:
1998 1997 1996
---- ---- ----
Fixed maturities................ $(21,705) $72,741 $(56,898)
Equity securities............... 4,605 (8,813) $ 207
At December 31, 1998, all of Protective's mortgage loans were commercial
loans of which 75% were retail, 10% were apartments, 8% were warehouses, and 6%
were office buildings. 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 82% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: Georgia, Florida, Texas, North Carolina,
Tennessee, Virginia, Alabama, South Carolina, Kentucky, Ohio, Maryland,
California, Mississippi, and Washington.
Note C -- INVESTMENT OPERATIONS (Continued)
Many of the mortgage loans have call provisions after three to ten years.
Assuming the loans are called at their next call dates, approximately $48.1
million would become due in 1999, $348.9 million in 2000 to 2003, and $209.1
million in 2004 to 2008.
At December 31, 1998, the average mortgage loan was approximately $2.0
million, and the weighted average interest rate was 8.3%. The largest single
mortgage loan was $12.8 million.
At December 31, 1998 and 1997, Protective's problem mortgage loans and
foreclosed properties totaled $11.7 million and $17.7 million, respectively.
Since 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
$10.6 million were nonincome producing for the twelve months ended December 31,
1998.
Policy loan interest rates generally range from 4.5% to 8.0%.
Note D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
1998 1997 1996
---- ---- ----
Statutory federal income tax rate applied to pretax income................. 35.0% 35.0% 35.0%
Dividends received deduction and tax-exempt interest....................... (0.1) (0.2) (0.4)
Low-income housing credit.................................................. (0.5) (0.6) (0.6)
Tax benefits arising from prior acquisitions and other
adjustments............................................................... 0.1 0.7 0.1
State income taxes......................................................... 0.5
----- ----- -----
Effective income tax rate.................................................. 35.0% 34.9% 34.1%
===== ===== =====
The provision for federal income tax differs from amounts currently
payable due to certain items reported for financial statement purposes in
periods which differ from those in which they are reported for income tax
purposes.
Details of the deferred income tax provision for the years ended December
31 are as follows:
1998 1997 1996
---- ---- ----
Deferred policy acquisition costs..................................... $60,746 $ 7,054 $15,542
Benefit and other policy liability changes............................ (41,268) (23,564) (16,321)
Temporary differences of investment income............................ (3,491) 2,516 (1,163)
Other items........................................................... (1,062) 13 (200)
------- -------- --------
$14,925 $(13,981) $(2,142)
Note D -- FEDERAL INCOME TAXES (Continued)
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
1998 1997
---- ----
Deferred income tax assets:
Policy and policyholder liability reserves................... $190,328 $138,701
Other........................................................ 2,091 1,029
-------- --------
192,419 139,730
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs............................ 211,641 150,895
Unrealized gain on investments............................... 32,513 38,252
-------- -------
244,154 189,147
-------- -------
Net deferred income tax liability $ 51,735 $ 49,417
======== ========
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, 1998 was approximately $70.5 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
$769 million, such excess would be subject to federal income taxes at rates then
effective. Deferred income taxes have not been provided on amounts designated as
Policyholders' Surplus. Under current income tax laws, 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, 1998, PLC had borrowed $18.5 million at a rate of 5.8%.
PLC had also borrowed $30.0 million at a rate of 5.4% 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, 1998 and 1997. Also, Protective
has a mortgage note on investment real estate amounting to approximately $2.4
million that matures in 2003.
Included in indebtedness to related parties is a surplus debenture issued
by Protective to PLC. At December 31, 1998, the balance of the surplus debenture
was $18.0 million. The debenture matures in 2003.
Indebtedness to related parties also consists of payables to affiliates
under control of PLC in the amount of $2.9 million at December 31, 1998.
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 $8.3 million, $4.3 million, and
$4.6 million, in 1998, 1997, and 1996, respectively.
Note F -- RECENT ACQUISITIONS
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.
In October 1998 Protective coinsured a block of life insurance policies
from Lincoln National Corporation. The policies represent the payroll deduction
business originally marketed and underwritten by Aetna.
These transactions have been accounted for as purchases, and the results
of the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
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 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 insurers, in
the ordinary course of business, are involved in such litigation or
alternatively in arbitration. Although the outcome of any litigation or
arbitration 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 -- SHARE-OWNER'S EQUITY AND RESTRICTIONS
At December 31, 1998, approximately $608.6 million of consolidated
share-owner'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 1999 is estimated to be $138.9 million. Dividends of $60.0
million were paid to PLC in 1998.
Note I -- PREFERRED STOCK
PLC owns all of the 2,000 shares of preferred stock issued by Protective's
subsidiary, Protective Life and Annuity Insurance Company ("PL&A"). During 1996,
PL&A's articles of incorporation were amended such that the preferred stock is
redeemable solely at the discretion of PL&A. Prior to November 1998, the stock
paid, when and if declared, annual minimum cumulative dividends of $50 per
share, and noncumulative participating dividends to the extent PL&A's statutory
earnings for the immediately preceding fiscal year exceeded $1 million.
Dividends of $0.1 million were paid to PLC in 1998, 1997, and 1996. Effective
November 3, 1998, PL&A's articles of incorporation were amended such that the
provision for an annual minimum cumulative dividend was removed.
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, $5.2 million at
December 31, 1998, is accounted for as a reduction to share-owner'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 $3.0 million in 1998, $3.1 million in 1997, and $3.7 million
in 1996. Protective purchases data processing, legal, investment and management
services from affiliates. The costs of such services were $56.2 million, $51.6
million, and $50.4 million, in 1998, 1997, and 1996, respectively. Commissions
paid to affiliated marketing organizations of $8.4 million, $5.2 million, and
$7.4 million, in 1998, 1997, and 1996, respectively, were included in deferred
policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums, policy fees, or deposits for various types of insurance and
investment products. Such premiums, policy fees, and deposits amounted to $28.6
million, $21.4 million and $31.2 million in 1998, 1997, and 1996, respectively.
Protective and/or PLC paid commissions, interest on debt and investment
products, and fees to these same corporations totaling $7.3 million, $5.4
million and $5.0 million in 1998, 1997, and 1996, respectively.
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
Individual Life Division. The Individual Life Division markets universal
life, variable universal life, and level premium term and term-like insurance
products on a national basis through a network of independent insurance agents.
West Coast Division. The West Coast Division sells universal life and
level premium term-like insurance products in the life insurance brokerage
market and in the "bank owned life insurance" market.
Acquisitions Division. The Acquisitions Division focuses solely on
acquiring, converting, and servicing policies 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.
Specialty Insurance Products
Dental and Consumer Benefits Division. The Division's primary focus is on
indemnity and prepaid dental products. In 1997, the Division exited from the
traditional group major medical business, fulfilling the Division's strategy to
focus primarily on dental and related products.
Financial Institutions Division. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, consumer finance companies and automobile dealers. The Division also
includes a small property casualty insurer that sells automobile service
contracts.
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 fixed and
floating rate funding agreements offered to the trustees of municipal bond
proceeds, bank trust departments, and money market funds, and long-term annuity
contracts offered to fund certain state obligations.
Investment Products Division. The Investment Products Division
manufactures, sells, and supports fixed and variable annuity products. These
products are primarily sold through stockbrokers, but are also sold through
financial institutions and the Individual Life Division's sales force.
Corporate and Other
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:
Life Insurance
Individual
Operating Segment Income Life West Coast Acquisitions
- --------------------------------------------------------------------------------------------------------------------------
1998
Premiums and policy fees $ 228,701 $ 75,757 $ 125,329
Reinsurance ceded (102,533) (53,377) (28,594)
- --------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 126,168 22,380 96,735
Net investment income 55,779 63,492 112,154
Realized investment gains (losses)
Other income 70 6 1,713
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 182,017 85,878 210,602
- --------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 106,308 54,617 112,051
Amortization of deferred policy acquisition costs 30,543 4,924 18,894
Other operating expenses 14,983 5,354 26,717
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 151,834 64,895 157,662
- --------------------------------------------------------------------------------------------------------------------------
Income before income tax 30,183 20,983 52,940
Income tax expense
- --------------------------------------------------------------------------------------------------------------------------
Net income
- --------------------------------------------------------------------------------------------------------------------------
1997
Premiums and policy fees $ 182,746 $ 41,290 $ 120,504
Reinsurance ceded (55,266) (27,168) (17,869)
- --------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 127,480 14,122 102,635
Net investment income 54,593 30,194 110,155
Realized investment gains (losses)
Other income 617 10
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 182,690 44,316 212,800
- --------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 114,678 28,304 116,506
Amortization of deferred policy acquisition costs 27,354 961 16,606
Other operating expenses 18,178 6,849 23,016
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 160,210 36,114 156,128
- --------------------------------------------------------------------------------------------------------------------------
Income before income tax 22,480 8,202 56,672
Income tax expense
- --------------------------------------------------------------------------------------------------------------------------
Net income
- --------------------------------------------------------------------------------------------------------------------------
1996
Premiums and policy fees $ 154,295 $ 125,798
Reinsurance ceded (37,585) (19,255)
- --------------------------------------------------------------------------------------------------------------------------
Net of reinsurance ceded 116,710 106,543
Net investment income 48,442 106,015
Realized investment gains (losses) 3,098
Other income 1,056 641
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 169,306 213,199
- --------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 96,404 118,181
Amortization of deferred policy acquisition costs 28,393 17,162
Other operating expenses 28,611 24,292
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 153,408 159,635
- --------------------------------------------------------------------------------------------------------------------------
Income before income tax 15,898 53,564
Income tax expense
- --------------------------------------------------------------------------------------------------------------------------
Net income
- --------------------------------------------------------------------------------------------------------------------------
Operating Segment Assets
1998
Investments and other assets $1,076,202 $1,149,642 $1,600,123
Deferred policy acquisition costs 301,941 144,455 255,347
- --------------------------------------------------------------------------------------------------------------------------
Total assets $1,378,143 $1,294,097 $1,855,470
- --------------------------------------------------------------------------------------------------------------------------
1997
Investments and other assets $ 960,316 $ 910,030 $1,401,294
Deferred policy acquisition costs 252,321 108,126 138,052
- --------------------------------------------------------------------------------------------------------------------------
Total assets $1,212,637 $1,018,156 $1,539,346
- --------------------------------------------------------------------------------------------------------------------------
1996
Investments and other assets $ 814,728 $1,423,081
Deferred policy acquisition costs 220,232 156,172
- --------------------------------------------------------------------------------------------------------------------------
Total assets $1,034,960 $1,579,253
- --------------------------------------------------------------------------------------------------------------------------
(1)Adjustments represent the inclusion of unallocated realized investment gains
(losses) and the recognition of income tax expense. There are no asset
adjustments.
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
- -------------------------------------------------------------------------------------------------------------------------
$ 277,316 $ 301,230 $ 18,809 $ 198 $ 1,027,340
(85,753) (188,958) (459,215)
- -------------------------------------------------------------------------------------------------------------------------
191,563 112,272 18,809 198 568,125
15,245 25,068 $213,136 105,827 13,094 603,795
1,609 1,318 $ (791) 2,136
4,295 10,302 1,799 2,016 20,201
- -------------------------------------------------------------------------------------------------------------------------
211,103 147,642 214,745 127,753 15,308 1,194,257
- -------------------------------------------------------------------------------------------------------------------------
140,632 52,629 178,745 85,045 469 730,496
10,352 28,526 735 17,213 1 111,188
49,913 48,837 2,876 14,428 9,120 172,228
- -------------------------------------------------------------------------------------------------------------------------
200,897 129,992 182,356 116,686 9,590 1,013,912
- -------------------------------------------------------------------------------------------------------------------------
10,206 17,650 32,389 11,067 5,718 180,345
63,162 63,162
- -------------------------------------------------------------------------------------------------------------------------
$ 117,183
- -------------------------------------------------------------------------------------------------------------------------
$ 260,590 $ 196,694 $ 12,367 $ 229 $ 814,420
(109,480) (124,431) (334,214)
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
$ 288,050 $ 193,236 $ 8,189 $ 656 $ 770,224
(131,520) (119,814) (308,174)
- -------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------
$197,337 $645,909 $2,869,304 $2,542,536 $700,417 $10,781,470
23,836 39,212 1,448 75,177 9 841,425
- -------------------------------------------------------------------------------------------------------------------------
$221,173 $685,121 $2,870,752 $2,617,713 $700,426 $11,622,895
- -------------------------------------------------------------------------------------------------------------------------
$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
- -------------------------------------------------------------------------------------------------------------------------
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:
1998 1997
---- ----
Projected benefit obligation, beginning of the year ............................ $ 30,612 $25,196
Service cost - benefits earned during the year ................................. 2,585 2,112
Interest cost - on projected benefit obligation ................................ 2,203 2,036
Actuarial gain ................................................................. 2,115 3,421
Plan amendment ................................................................. 160
Benefits paid .................................................................. (1,128) (2,153)
------ ------
Projected benefit obligation, end of the year .................................. 36,547 30,612
------ ------
Fair value of plan assets beginning of the year ................................ 21,763 19,779
Actual return on plan assets ................................................... 1,689 1,625
Employer contribution .......................................................... 2,823 2,512
Benefits paid .................................................................. (1,128) (2,153)
------ ------
Fair value of plan assets end of the year ..................................... 25,147 21,763
------ ------
Plan assets less than the projected benefit obligation ......................... (11,400) (8,849)
Unrecognized net actuarial loss from past experience different from that assumed 9,069 6,997
Unrecognized prior service cost ................................................ 652 605
Unrecognized net transition asset .............................................. (34) (51)
-------- -------
Net pension liability recognized in balance sheet .............................. $ (1,713) $(1,298)
======== =======
Net pension cost of the defined benefit pension plan includes the following
components for the years ended December 31:
1998 1997 1996
---- ---- ----
Service cost ..............................$ 2,585 $ 2,112 $ 1,908
Interest cost ............................. 2,203 2,036 1,793
Expected return on plan assets ............ (1,950) (1,793) (1,593)
Amortization of prior service cost ........ 112 100 100
Amortization of transition asset .......... (17) (17) (17)
Recognized net actuarial loss ............. 305 152 210
----- ----- -----
Net pension cost ..........................$ 3,238 $ 2,590 $ 2,401
Protective's share of the net pension cost was $2.6 million, $1.8 million,
and $1.5 million, in 1998, 1997, and 1996, respectively.
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
1998 1997 1996
---- ---- ----
Weighted average discount rate ............... 6.75% 7.25% 7.75%
Rates of increase in compensation level ...... 4.75% 5.25% 5.75%
Expected long-term rate of return on assets .. 8.50% 8.50% 8.50%
Assets of the pension plan are 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, 1998 and 1997, the projected benefit
obligation of this plan totaled $11.7 million and $10.0 million, respectively,
of which $7.8 million and $6.6 million, respectively, have been recognized in
PLC's financial statements.
Net pension cost of the excess benefits plan includes the following
components for the years ended December 31:
1998 1997 1996
---- ---- ----
Service cost ............................... $ 611 $ 544 $ 424
Interest cost ............................... 722 651 505
Plan amendment ............................. 351
Amortization of prior service cost........... 112 112 112
Amortization of transition asset ............ 37 37 37
Recognized net actuarial loss................ 173 180 155
--- --- ---
Net pension cost............................. $1,655 $1,875 $1,233
====== ====== ======
In addition to pension benefits, PLC provides limited healthcare benefits to
eligible retired employees until age 65. The postretirement benefit is provided
by an unfunded plan. At December 31, 1998 and 1997, the liability for such
benefits totaled $1.2 million and $1.3 million, respectively. The expense
recorded by PLC was $0.1 million in 1998, 1997 and 1996. PLC's obligation is not
materially affected by a 1% change in the healthcare cost trend assumptions used
in the calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of
life insurance policies upon retirement equal to the employees' annual
compensation up to a maximum of $75,000. This plan is partially funded at a
maximum of $50,000 face amount of insurance.
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 ("ESOP") to match voluntary 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, 1998, PLC had committed up to 101,124
shares to be released to fund employee benefits. The expense recorded by PLC for
these employee benefits was less than $0.1 million in 1998 and 1997, and $1.0
million in 1996.
Note M -- STOCK BASED COMPENSATION
Certain Protective employees participate in PLC's Long-Term Incentive Plan
(previously known as the 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 or total return over a four year award period (earlier
upon the death, disability or retirement of the executive, or in certain
circumstances, of a change in control of 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
share-owners in 1992 and 1997, up to 6,400,000 shares may be issued in payment
of awards. The number of shares granted in 1998, 1997, and 1996 were 71,340,
98,780 and 104,580 shares, respectively, having an approximate market value on
the grant date of $2.3 million, $2.0 million, and $1.8 million, respectively. At
December 31, 1998, outstanding awards measured at target and maximum payouts
were 474,695 and 638,090 shares, respectively. The expense recorded by PLC for
the Performance Share Plan was $2.7 million, $2.7 million, and $3.0 million in
1998, 1997, and 1996, respectively.
During 1996, stock appreciation rights (SARs) were granted to certain
executives of 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, 1998 was
675,000. The SARs have a base price of $17.4375 per share of PLC Common Stock
(the market price on the grant date was $17.50 per share). The estimated fair
value of the SARs on the grant date was
$3.0 million. This estimate was derived using the Roll-Geske variation of the
Black-Sholes option pricing model. Assumptions used in the pricing model are as
follows: expected volatility rate of 15% (approximately equal to that of the S &
P Life Insurance Index), a risk free interest rate of 6.35%, a dividend yield
rate of 1.97%, and an expected exercise date of August 15, 2002. The expense
recorded by PLC for the SARs was $0.6 million in 1998 and 1997.
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.
Protective has reinsured approximately $64.8 billion, $34.1 billion, and
$18.8 billion in face amount of life insurance risks with other insurers
representing $294.4 million, $147.2 million, and $113.5 million of premium
income for 1998, 1997, and 1996, respectively. Protective has also reinsured
accident and health risks representing $164.8 million, $187.7 million, and
$194.7 million of premium income for 1998, 1997, and 1996, respectively. In 1998
and 1997, policy and claim reserves relating to insurance ceded of $658.7
million and $485.8 million respectively are included in reinsurance receivables.
Should any of the reinsurers be unable to meet its obligation at the time of the
claim, obligation to pay such claim would remain with Protective. At December
31, 1998 and 1997, Protective had paid $22.8 million and $25.6 million,
respectively, of ceded benefits which are recoverable from reinsurers. In
addition, at December 31, 1998, Protective had receivables of $75.0 million
related to insurance assumed.
A substantial portion of Protective's new life insurance and credit
insurance sales are being reinsured.
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:
1998 1997
___________________________________ _______________________
Estimated Estimated
Carrying Market Carrying Market
Amount Values Amount Values
Assets (see Notes A and C):
Investments:
Fixed maturities..................... $6,400,262 $6,400,262 $6,348,252 $6,348,252
Equity securities.................... 12,258 12,258 15,006 15,006
Mortgage loans on real estate........ 1,623,603 1,774,379 1,313,478 1,405,474
Short-term investments............... 159,655 159,655 54,337 54,337
Cash ..................................... 39,197 39,197
Liabilities (see Notes A and E):
Guaranteed investment contract deposits 2,691,697 2,751,007 2,684,676 2,687,331
Annuity deposits..................... 1,519,820 1,513,148 1,511,553 1,494,600
Notes payable........................ 2,363 2,363
Other (see Note A):
Derivative Financial Instruments..... (734) (545)
Except as noted below, fair values were estimated using quoted market
prices. Protective estimates the fair value of its mortgage loans using
discounted cash flows from the next call date. Protective believes the fair
value of its short-term investments and notes payable approximate book value due
to either being short-term or having a variable rate of interest. Protective
estimates the fair value of its guaranteed investment contracts and annuities
using discounted cash flows and surrender values, respectively. 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.
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 COL. I COL. J
- -------------------------------------------------------------------------------------------------------------------
GIC and
Future Annuity Amortization
Deferred Policy Deposits Premiums Benefits of Deferred
Policy Benefits and Other and Net and Policy Other
Acquisition and Unearned Policyholders' Policy Investment Settlement Acquisition Operating
Segment Costs Claims Premiums Funds Fees Income (1) Expenses Costs Expenses (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31,1998:
Life Insurance
Individual Life $301,941 $1,054,253 $ 355 $ 10,802 $126,168 $ 55,779 $106,308 $ 30,543 $ 14,983
West Coast 144,455 1,006,280 0 77,254 22,380 63,492 54,617 4,924 5,354
Acquisitions 255,347 1,383,759 553 233,846 96,735 112,154 112,051 18,894 26,717
Specialty Insurance Products
Dental and Consumer
Benefits 23,836 111,916 3,341 78,224 191,563 15,245 140,632 10,352 49,913
Financial Institutions 39,212 215,451 385,006 105,434 112,272 25,068 52,629 28,526 48,837
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts 1,448 172,674 0 2,691,697 213,136 178,745 735 2,876
Investment Products 75,177 194,726 0 1,233,528 18,809 105,827 85,045 17,213 14,428
Corporate and Other 9 944 39 88 198 13,094 469 1 9,120
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $841,425 $4,140,003 $389,294 $4,430,873 $568,125 $603,795 $730,496 $111,188 $172,228
====================================================================================================================================
Year Ended
December 31,1997:
Life Insurance
Individual Life $252,321 $ 920,924 $ 356 $ 16,334 $127,480 $ 54,593 $114,678 $ 27,354 $ 18,178
West Coast 108,126 739,463 0 95,495 14,122 30,194 28,304 961 6,849
Acquisitions 138,052 1,025,340 1,437 311,150 102,635 110,155 116,506 16,606 23,016
Specialty Insurance Products
Dental and Consumer
Benefits 22,459 120,925 2,536 80,654 151,110 23,810 110,148 15,711 38,572
Financial Institutions 52,836 159,422 391,085 6,791 72,263 16,341 27,643 30,812 20,165
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts 1,785 180,690 0 2,684,676 0 211,915 179,235 618 3,945
Investment Products 56,074 177,150 0 1,184,268 12,367 105,196 82,019 15,110 12,312
Corporate and Other 952 380 1,282 185 229 5,284 339 3 6,833
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $632,605 $3,324,294 $396,696 $4,379,553 $480,206 $557,488 $658,872 $107,175 $129,870
===============================================================================================================================
Year Ended
December 31,1996:
Life Insurance
Individual Life $220,232 $ 793,370 $ 685 $ 15,577 $116,710 $ 48,442 $ 96,404 $ 28,393 $ 28,611
Acquisitions 156,172 1,117,159 1,087 251,450 106,543 106,015 118,181 17,162 24,292
Specialty Insurance Products
Dental and Consumer
Benefits 27,944 119,010 2,572 83,632 156,530 16,249 125,797 5,326 43,027
Financial Institutions 32,040 119,242 253,154 1,880 73,422 13,898 42,781 24,900 10,673
Retirement Savings and
Investment Products
Guaranteed Investment 1,164 149,755 0 2,474,728 0 214,369 169,927 509 3,840
Contracts
Investment Products 50,637 149,743 0 1,120,557 8,189 98,719 73,093 14,710 13,197
Corporate and Other 12 170 55 192 656 1,089 710 1 4,508
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $488,201 $2,448,449 $257,553 $3,948,016 $462,050 $498,781 $626,893 $ 91,001 $ 128,148
===============================================================================================================================
(1) Allocations of Net Investment Income and Other Operating Expenses are
based on a number of assumptions and estimates and results would change if
different methods were applied.
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE 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 31,1998:
Life insurance in force........................... $ 91,980,657 $ 64,846,246 $ 18,010,434 $ 45,144,845 39.9%
===================================================================================================================================
Premiums and policy fees:
Life insurance.................................... $ 537,002 $ 294,363 $ 87,964 $ 330,603 26.6%
Accident and health insurance..................... 361,705 164,852 14,279 211,132 6.8%
Property and liability insurance.................. 26,389 26,289 0.0%
- ----------------------------------------------------------------------------------------------------------------------
TOTAL......................................... $ 925,096 $ 459,215 $ 102,243 $ 568,124
======================================================================================================================
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
======================================================================================================================
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
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 25, 1999.
PROTECTIVE LIFE INSURANCE COMPANY
By:/s/ DRAYTON NABERS, JR.
------------------------
March 25, 1999 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 25, 1999
-----------------------
Drayton Nabers, Jr.
(ii) Principal Financial Officer
/s/ JOHN D. JOHNS President March 25, 1999
----------------------
John D. Johns
(iii) Principal Accounting Officer
/s/ JERRY W. DEFOOR Vice President and Controller, March 25, 1999
----------------------
Jerry W. DeFoor and Chief Accounting Officer
(iv) Board of Directors:
/s/ DRAYTON NABERS, JR. Director March 25, 1999
-----------------------
Drayton Nabers, Jr.
/s/ JOHN D. JOHNS Director March 25, 1999
------------------------
John D. Johns
* Director March 25, 1999
------------------------
Danny L. Bentley
* Director March 25, 1999
------------------------
Richard J. Bielen
* Director March 25, 1999
------------------------
R. Stephen Briggs
* Director March 25, 1999
------------------------
Carolyn King
* Director March 25, 1999
------------------------
Deborah J. Long
* Director March 25, 1999
------------------------
Jim E. Massengale
Signature Title Date
* Director March 25, 1999
-------------------------
Steven A. Schultz
* Director March 25, 1999
--------------------------
Wayne E. Stuenkel
* Director March 25, 1999
--------------------------
A. S. Williams III
*By: /s/ JERRY W. DEFOOR
----------------------------
Jerry W. DeFoor
Attorney-in-fact
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
99 -- Safe Harbor for Forward-Looking Statements
* 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 from Amendment No. 1 to Form S-1 Registration
Statement, Registration No. 333-02249.