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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-12332
PROTECTIVE LIFE CORPORATION
(Exact name of Registrant as specified in its charter)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices, including zip code)
DELAWARE 95-2492236
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code (205) 879-9230
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.50 PAR VALUE
SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK, $1.00 PAR VALUE
PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A
PLC CAPITAL TRUST I 8.25% TRUST ORIGINATED PREFERRED SECURITIES
FELINE PRIDES UNITS
GUARANTEES ISSUED FOR THE BENEFIT OF HOLDERS OF:
PLC CAPITAL L.L.C. 9% CUMULATIVE MONTHLY INCOME PREFERRED SECURITIES, SERIES A
PLC CAPITAL TRUST I 8.25% TRUST ORIGINATED PREFERRED SECURITIES
(Title of class)
Name of each exchange
ON WHICH REGISTERED
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by nonaffiliates of the Registrant
as of March 6, 1998: $1,973,867,813
Number of shares of Common Stock, $0.50 Par Value, outstanding as of March 6,
1998: 30,879,132
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Annual Report To Stockholders (the "1997
Annual Report To Stockholders") are incorporated by reference into Parts I, II,
and IV of this Report.
Portions of the Registrant's Proxy Statement dated March 27, 1998, are
incorporated by reference into Part III of this Report.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
PROTECTIVE LIFE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
2
PART I
ITEM 1. BUSINESS
Protective Life Corporation is a holding company, whose subsidiaries
provide financial services through the production, distribution, and
administration of insurance and investment products. The Company also
participates in a joint venture which owns a life insurance company in Hong
Kong. Founded in 1907, Protective Life Insurance Company is the Company's
principal operating subsidiary. Unless the context otherwise requires, the
"Company" refers to the consolidated group of Protective Life Corporation and
its subsidiaries.
Copies of the Company's Proxy Statement and 1997 Annual Report to
Stockholders will be furnished to anyone who requests such documents from the
Company. Requests for copies should be directed to: Stockholder Relations,
Protective Life Corporation, P. O. Box 2606, Birmingham, Alabama 35202,
Telephone (205) 868-3573, FAX (205) 868-3541. The information incorporated
herein by reference is also electronically accessible through the Internet from
the "EDGAR Database of Corporate Information" on the Securities and Exchange
Commission's World Wide Web site (http://www.sec.gov).
The Company operates seven divisions whose principal strategic focuses
can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products.
Additional information concerning the Company's divisions may be found
in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - RESULTS OF OPERATIONS" and Note J to Consolidated Financial
Statements in the Company's 1997 Annual Report to Stockholders, which are
incorporated herein by reference.
LIFE INSURANCE
A strategic focus of the Company is to expand its life insurance
operations through internal growth and acquisitions. The Acquisitions,
Individual Life, and West Coast Divisions support this strategy.
ACQUISITIONS DIVISION
The Company is an active participant in the consolidation of the life
and health insurance industry. The Acquisitions Division focuses on acquiring,
converting, and servicing business acquired from other companies. These
acquisitions may be accomplished through acquisitions of companies or through
the assumption or reinsurance of life insurance and related policies. Thirty-
nine transactions have been closed by the Division since 1970, including 12
since 1989. Blocks of policies acquired through the Division are usually
administered as "closed" blocks; i.e., no new policies are sold. Therefore, the
amount of insurance in force for a particular acquisition is expected to decline
with time due to lapses and deaths of the insureds. However, in the case of the
most recent acquisition closed by the Division, West Coast Life Insurance
Company ("West
3
Coast") which is discussed below, the Company has elected to continue the
marketing of new policies.
The Company believes that its highly focused and disciplined approach
to the acquisition process and its extensive experience in the assimilation,
conservation, and servicing of purchased business give it a significant
competitive advantage over many other companies that attempt to make similar
acquisitions. The Company expects acquisition opportunities to continue to be
available as the life and health industry continues to consolidate; however,
management believes that the Company may face increased competition for future
acquisitions.
Total revenues and income before income tax from the Acquisitions
Division are expected to decline with time unless new acquisitions are made.
Therefore, the Division's revenues and earnings may fluctuate from year to year
depending upon the level of acquisition activity.
In the second quarter of 1995, the Division coinsured a block of 28,000
policies. In January 1996, the Division coinsured a block of 38,000 policies. In
December 1996, the Division acquired Community National Assurance Company with
16,000 policies and coinsured a related block of 22,000 policies. In June 1997,
the Company acquired West Coast which is discussed below.
From time to time other of the Company's Divisions have acquired
companies and blocks of policies which are included in their respective results.
INDIVIDUAL LIFE DIVISION
The Individual Life Division markets universal life, variable universal
life and other life insurance products on a national basis through a network of
independent insurance agents. In addition, the Division has grown sales by
developing niche marketing strategies. The strategies include marketing
specialty products through insurance brokerage channels and traditional life
insurance products through regional stockbrokers and banks. The Division also
offers its products on a "private label" basis to other insurance companies and
their distribution systems. The Division has experienced increased sales even
though the life insurance industry is a mature industry.
The Division primarily utilizes a distribution system based on
experienced independent personal producing general agents who are recruited by
regional sales managers. At December 31, 1997, there were 37 regional sales
managers located throughout the United States. Approximately 51% of the
Division's 1997 sales came from this distribution system. In addition, the
Division distributes insurance products in the life insurance brokerage market
through a wholly-owned subsidiary, Empire General Life Assurance Corporation,
representing approximately 39% of sales. The remaining 10% of 1997 sales came
from stockbrokers, banks, and private label arrangements.
The Division also includes ProEquities, Inc. ("PES"), an affiliated
securities broker-dealer. Through PES, members of the Division's field force who
are licensed to sell securities can sell stocks, bonds, mutual funds, and
investment products that may be manufactured or issued by companies other than
the Company.
4
WEST COAST DIVISION
On June 3, 1997, the Company acquired West Coast. Headquartered in San
Francisco, West Coast sells universal and traditional ordinary life products in
the life insurance brokerage market and in the "bank owned life insurance"
market.
Most acquisitions closed by the Acquisitions Division do not include
the acquisition of an active sales force. In transactions where some marketing
capacity was included, the Company either ceased future marketing efforts or
combined those efforts with another Division. In the West Coast case, the
Company elected to continue the marketing of new policies, operating the company
as a separate Division.
The West Coast Division primarily utilizes a distribution system
comprised of brokerage general agencies ("BGAs") with a network of independent
life agents. The BGAs provide varying levels of service to the independent
agents based on the size and structure of the individual BGA organizations. At
December 31, 1997, the Division worked with 42 BGAs located throughout the
United States.
SPECIALTY INSURANCE PRODUCTS
A second strategic focus of the Company is to participate in
specialized segments of the insurance industry that offer attractive growth
opportunities. The Dental and Consumer Benefits and Financial Institutions
Divisions support this strategy.
DENTAL AND CONSUMER BENEFITS DIVISION
The Division (formerly known as the Group Division) recently exited
from the traditional group major medical business, fulfilling the Division's
strategy to focus primarily on dental and related products. Accordingly, the
Division was renamed the Dental and Consumer Benefits ("Dental") Division.
The Dental Division's primary strategic emphasis is on indemnity and
managed-care dental products. At December 31, 1997, the Division had
approximately 527,000 members in its dental managed care programs, and
approximately 1,157,000 members in all of its dental programs.
The Division was a pioneer in developing indemnity dental products for
the voluntary payroll deduction market. In 1995, the Division entered the dental
managed care segment when it acquired a dental managed care company which
transacts business under the trade name "DentiCare". The acquisition combined
DentiCare's high quality service and product capabilities with the Dental
Division's marketing strength and capacity to distribute dental products through
a much broader geographic distribution framework. The Division's strategy is to
promote a "dual choice" option by offering DentiCare's products through the
Division's existing indemnity dental distribution channels. The Division has
also developed an innovative system for prospecting and selling dental insurance
products by telephone.
5
The Division also plans to grow the dental business through
acquisitions. In 1996, the Division extended the geographical reach of its
dental managed care operations into Oklahoma, Arkansas and Missouri and added
approximately 38,000 new members through the acquisition of two related dental
managed care plans doing business in those states. In 1997, the Division
acquired three similar organizations: one with approximately 18,000 members in
Wisconsin, a second with approximately 14,000 members in Texas, and a third with
approximately 57,000 members in Georgia.
The Division recently launched Dental Network Plans, which offers
discounted fee-for-service dental programs to individual consumers and groups
where enrolled consumers have access to a contracted network of dental providers
who have agreed to a discounted fee schedule.
The Division also markets group life and disability coverages, and
administers an essentially closed block of individual cancer insurance policies.
FINANCIAL INSTITUTIONS DIVISION
The Financial Institutions Division specializes in marketing credit
life and disability insurance products through banks, consumer finance companies
and automobile dealers. The majority of these policies cover consumer loans made
by financial institutions located primarily in the southeastern United States
and automobile dealers throughout the United States. Therefore, the demand for
credit life and credit health insurance is related to the general level of loan
demand. The Division markets through employee field representatives, independent
brokers and wholly-owned subsidiaries. The Company believes it has been a
beneficiary of a "flight to quality," as financial institutions and automobile
dealers increasingly prefer to do business with insurers having quality
products, strong balance sheets and high-quality training and service
capabilities.
On September 30, 1997, the Division acquired the Western Diversified
Group. The Western Diversified Group markets credit insurance and related
products through automobile dealers primarily in the midwestern United States.
The Western Diversified Group includes a small property and casualty insurer
that sells automobile extended warranty coverages, which the Division plans to
market nationally through its other distribution channels. In addition, on
October 1, 1997, the Division acquired an unrelated closed block of credit
policies.
RETIREMENT SAVINGS AND INVESTMENT PRODUCTS
A third strategic focus of the Company is to offer products that
respond to the shift in consumer preference to savings products brought about by
demographic trends as "baby-boomers" move into the saving stage of their life
cycle. The two Divisions that support this strategy are the Guaranteed
Investment Contracts and Investment Products Divisions.
GUARANTEED INVESTMENT CONTRACTS DIVISION
The Company entered the Guaranteed Investment Contracts ("GIC")
business in 1989. The GIC Division markets GICs to 401(k) and other qualified
retirement savings plans. GICs are
6
generally contracts which specify a return on deposits for a specified period
and often provide flexibility for withdrawals, in keeping with the benefits
provided by the plan. The Division also offers related products, including
guaranteed funding agreements offered to the trustees of municipal bond
proceeds, floating rate contracts offered to bank trust departments, and
long-term annuity contracts offered to fund certain state obligations. The
Division's emphasis is on a consistent and disciplined approach to product
pricing and asset/liability management, careful underwriting of early withdrawal
risks and maintaining low distribution and administration costs.
Most GIC contracts written by the Company have maturities of three to
five years. Prior to 1993, few GIC contracts were maturing because the contracts
were newly written. Therefore, GIC account balances grew at a significant rate.
Beginning in 1993, GIC contracts began to mature as contemplated when the
contracts were sold. Hence, the rate of growth in GIC deposits has decreased as
the amount of maturing contracts has increased.
INVESTMENT PRODUCTS DIVISION
The Investment Products Division manufactures, sells, and supports
fixed and variable annuity products. These products are primarily sold through
stockbrokers, but are also sold through financial institutions and the
Individual Life Division's sales force. The demand for annuity products is
related to the general level of interest rates and performance of the equity
markets.
Since 1990, the Division has offered modified guaranteed annuity
products which guarantee an interest rate for a fixed period. Because contract
values are "market-value adjusted" upon surrender prior to maturity, these
products afford the Company a measure of protection from changes in interest
rates. In 1992, the Division ceased most new sales of single premium deferred
annuities. In 1994, the Division introduced a variable annuity product which
offers the policyholder the opportunity to invest in various investment
accounts.
Variable annuity products represent approximately 49% of the Division's
account balances at December 31, 1997 and 64% of the Division's 1997 sales.
CORPORATE AND OTHER
The Company has an additional business segment herein referred to as
Corporate and Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the Divisions described above
(including net investment income on capital and interest on substantially all
debt). This segment also includes earnings from various investment-related
transactions and the operations of several small subsidiaries. The earnings of
this segment may fluctuate from year to year.
In 1994, the Company entered into a joint venture arrangement to enter
the Hong Kong insurance market. The Company owns a 50% interest in a Hong Kong
insurer which commenced business in early 1995. Management believes that this
joint venture will position the Company to market life insurance in mainland
China when that opportunity unfolds. The Company continues to investigate other
possible opportunities in Asia.
7
INSURANCE IN FORCE
The Company's total consolidated life insurance in force at December 31,
1997 was $89.3 billion. The following table shows sales by face amount and
insurance in force for the Company's divisions.
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
NEW BUSINESS WRITTEN
INDIVIDUAL LIFE..................... $10,588,594 $ 9,245,002 $ 7,564,983 $ 6,329,630 $ 4,440,510
WEST COAST.......................... 1,984,928
DENTAL.............................. 124,230 115,748 119,357 184,429 252,345
FINANCIAL INSTITUTIONS.............. 4,183,216 3,956,581 3,563,177 2,524,212 2,776,276
--------------------------------------------------------------------------
TOTAL.......................... $16,880,968 $13,317,331 $11,247,517 $ 9,038,271 $ 7,469,131
=========== =========== =========== ============ ============
BUSINESS ACQUIRED
ACQUISITIONS........................ $ 1,286,673 $ 6,129,159 $ 4,756,371 $ 4,378,812
WEST COAST.......................... $10,237,731
FINANCIAL INSTITUTIONS.............. 3,364,617 $ 1,607,463
---------------------------------------------------------------------------
TOTAL.......................... $13,602,348 $ 2,894,136 $ 6,129,159 $ 4,756,371 $ 4,378,812
===========================================================================
INSURANCE IN FORCE AT END OF YEAR(1)
ACQUISITIONS........................ $20,955,836 $20,037,857 $16,778,359 $11,728,569 $ 8,452,114
INDIVIDUAL LIFE..................... 39,715,608 35,765,841 32,500,935 25,843,232 22,975,577
WEST COAST.......................... 12,004,967
DENTAL.............................. 6,393,076 6,054,947 6,371,313 7,464,501 6,716,724
FINANCIAL INSTITUTIONS.............. 10,183,997 7,468,761 6,233,256 4,841,318 4,306,179
---------------------------------------------------------------------------
TOTAL.......................... $89,253,484 $69,327,406 $61,883,863 $49,877,620 $42,450,594
===========================================================================
(1)REINSURANCE ASSUMED HAS BEEN INCLUDED; REINSURANCE CEDED (1997-$34,139,554;
1996-$18,840,221; 1995- $17,524,366; 1994-$8,639,272; 1993-$7,484,566) HAS
NOT BEEN DEDUCTED.
The ratio of voluntary terminations of individual life insurance to
mean individual life insurance in force, which is determined by dividing the
amount of insurance terminated due to lapses during the year by the mean of the
insurance in force at the beginning and end of the year, adjusted for the timing
of major acquisitions and assumptions was:
RATIO OF
YEAR ENDED VOLUNTARY
DECEMBER 31 TERMINATIONS
1993........................................ 8.7%
1994........................................ 7.0
1995........................................ 6.9
1996........................................ 6.4
1997........................................ 6.9
Net terminations reflect voluntary lapses, some of which may be due to
the replacement of the Company's products with competitors' products. Also, a
higher percentage of voluntary lapses typically occurs in the first 15 months of
a policy, and accordingly, lapses will tend to
8
increase or decrease in proportion to the change in new insurance written during
the immediately preceding periods.
The amount of investment products in force is measured by account
balances. The following table shows guaranteed investment contract and annuity
account balances.
GUARANTEED MODIFIED
YEAR ENDED INVESTMENT GUARANTEED FIXED VARIABLE
DECEMBER 31 CONTRACTS ANNUITIES ANNUITIES ANNUITIES
----------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
1993 $2,015,075 $468,689 $537,053
1994 2,281,673 661,359 542,766 $ 170,454
1995 2,451,693 741,849 472,656 392,237
1996 2,474,728 862,747 390,461 624,714
1997 2,684,676 926,071 453,418 1,057,186
UNDERWRITING
The underwriting policies of the Company's insurance subsidiaries are
established by management. With respect to individual insurance, the
subsidiaries use information from the application and, in some cases, inspection
reports, attending physician statements, or medical examinations to determine
whether a policy should be issued as applied for, rated, or rejected. Medical
examinations of applicants are required for individual life insurance in excess
of certain prescribed amounts (which vary based on the type of insurance) and
for most individual insurance applied for by applicants over age 50. In the case
of "simplified issue" policies, which are issued primarily through the Financial
Institutions Division and the Individual Life Division in the payroll deduction
market, coverage is rejected if the responses to certain health questions
contained in the application indicate adverse health of the applicant. For other
than "simplified issue" policies, medical examinations are requested of any
applicant, regardless of age and amount of requested coverage, if an examination
is deemed necessary to underwrite the risk. Substandard risks may be referred to
reinsurers for full or partial reinsurance of the substandard risk.
The Company's insurance subsidiaries require blood samples to be drawn
with individual insurance applications for coverage at age 16 and above except
in the payroll deduction market where the face amount must be $100,000 or more
before blood testing is required. Blood samples are tested for a wide range of
chemical values and are screened for antibodies to the HIV virus. Applications
also contain questions permitted by law regarding the HIV virus which must be
answered by the proposed insureds.
Group insurance underwriting policies are administered by experienced
group underwriters. The underwriting policies are designed for single employer
groups. Initial premium rates are based on prior claim experience and manual
premium rates with relative weights depending on the size of the group and the
nature of the benefits.
9
INVESTMENTS
The types of assets in which the Company may invest are influenced by
state laws which prescribe qualified investment assets. Within the parameters of
these laws, the Company invests its assets giving consideration to such factors
as liquidity needs, investment quality, investment return, matching of assets
and liabilities, and the composition of the investment portfolio by asset type
and credit exposure.
The following table shows the Company's investments at December 31,
1997 valued on the basis of generally accepted accounting principles.
PERCENT OF TOTAL
ASSET VALUE INVESTMENTS
(DOLLARS IN THOUSANDS)
FIXED MATURITIES:
BONDS:
MORTGAGE-BACKED SECURITIES $3,019,790 37.5%
UNITED STATES GOVERNMENT
AND GOVERNMENT AGENCIES
AND AUTHORITIES 161,850 2.0
STATES, MUNICIPALITIES, AND
POLITICAL SUBDIVISIONS 32,153 0.4
PUBLIC UTILITIES 488,922 6.1
CONVERTIBLES AND BONDS
WITH WARRANTS ATTACHED 526 -
ALL OTHER CORPORATE BONDS 2,665,146 33.1
REDEEMABLE PREFERRED STOCKS 5,941 0.1
---------- -----
TOTAL FIXED MATURITIES 6,374,328 79.2
---------- -----
EQUITY SECURITIES:
COMMON STOCKS - INDUSTRIAL,
MISCELLANEOUS, AND ALL OTHER 4,605 0.1
NONREDEEMABLE PREFERRED STOCKS 10,401 0.1
--------- -----
TOTAL EQUITY SECURITIES 15,006 0.2
MORTGAGE LOANS ON REAL ESTATE 1,312,778 16.3
INVESTMENT REAL ESTATE 13,602 0.2
POLICY LOANS 194,109 2.4
OTHER LONG-TERM INVESTMENTS 63,511 0.8
SHORT-TERM INVESTMENTS 76,086 0.9
---------- ------
TOTAL INVESTMENTS $8,049,420 100.0%
========== ======
A significant portion of the Company's bond portfolio is invested in
mortgage-backed securities. Mortgage-backed securities are constructed from
pools of residential mortgages, and may have cash flow volatility as a result of
changes in the rate at which prepayments of principal occur with respect to the
underlying loans. Prepayments of principal on the underlying residential loans
can be expected to accelerate with decreases in interest rates and diminish with
increases in interest rates. In its mortgage-backed securities portfolio, the
Company has focused on sequential, planned amortization class and targeted
amortization class securities, which tend to be less volatile than other classes
of mortgage-backed securities.
10
The Company obtains ratings of its fixed maturities from Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P").
If a bond is not rated by Moody's or S&P, the Company uses ratings from the
Securities Valuation Office of the National Association of Insurance
Commissioners ("NAIC"), or the Company rates the bond based upon a comparison of
the unrated issue to rated issues of the same issuer or rated issues of other
issuers with similar risk characteristics. At December 31, 1997, approximately
99.6% of bonds were rated by Moody's, S&P, or the NAIC.
The following table shows the approximate percentage distribution of
the Company's fixed maturities by rating, utilizing S&P rating categories, at
December 31, 1997:
PERCENTAGE OF
TYPE FIXED MATURITIES
BONDS
AAA 41.0%
AA 4.8
A 28.9
BBB 21.8
BB OR LESS 3.4
REDEEMABLE PREFERRED STOCK 0.1
TOTAL 100.0%
At December 31, 1997, approximately $6,147.2 million of the Company's
$6,368.4 million bond portfolio was invested in U.S. Government or agency-backed
securities or investment grade corporate bonds and only approximately $221.2
million of its bond portfolio was rated less than investment grade, of which
$89.6 million were securities issued in Company-sponsored commercial mortgage
loan securitizations. Approximately $719.9 million of bonds are not publicly
traded.
Risks associated with investments in less than investment grade debt
obligations may be significantly higher than risks associated with investments
in debt securities rated investment grade. Risk of loss upon default by the
borrower is significantly greater with respect to such debt obligations than
with other debt securities because these obligations may be unsecured or
subordinated to other creditors. Additionally, there is often a thinly traded
market for such securities and current market quotations are frequently not
available for some of these securities. Issuers of less than investment grade
debt obligations usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment-grade issuers.
The Company also invests a significant portion of its portfolio in
mortgage loans. Results for these investments have been excellent due to careful
management and a focus on a specialized segment of the market. The Company
generally does not lend on speculative properties and has specialized in making
loans on either credit-oriented commercial properties or credit-anchored strip
shopping centers. The average size of loans made during 1997 was $3.0 million.
The average size mortgage loan in the Company's portfolio is approximately $1.6
million. The largest single loan amount is $12.8 million.
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The following table shows a breakdown of the Company's mortgage loan
portfolio by property type:
PERCENTAGE OF
MORTGAGE LOANS
PROPERTY TYPE ON REAL ESTATE
RETAIL 75%
APARTMENTS 9
OFFICE BUILDING 7
WAREHOUSES 7
OTHER 2
----
TOTAL 100%
Retail loans are generally on strip shopping centers located in smaller
towns and anchored by one or more strong regional or national retail stores. The
anchor tenants enter into long-term leases with the Company's borrowers. These
centers provide the basic necessities of life, such as food, pharmaceuticals,
and clothing, and have been relatively insensitive to changes in economic
conditions. The following are some of the largest anchor tenants (measured by
the Company's exposure) in the strip shopping centers at December 31, 1997:
PERCENTAGE OF
MORTGAGE LOANS
ANCHOR TENANTS ON REAL ESTATE
------------------ --------------
FOOD LION, INC. 5%
KMART CORPORATION 3
WINN DIXIE STORES, INC. 3
WAL-MART STORES, INC. 2
CVS CORPORATION 2
The Company's mortgage lending criteria generally require that the
loan-to-value ratio on each mortgage be at or under 75% at the time of
origination. Projected rental payments from credit anchors (i.e., excluding
rental payments from smaller local tenants) generally exceed 70% of the
property's projected operating expenses and debt service.
For several years the Company has offered a commercial loan product under
which the Company will permit a loan-to-value ratio of up to 85% in exchange for
a participating interest in the cash flows from the underlying real estate.
Approximately $465 million of the Company's mortgage loans have this
participation feature.
Many of the Company's mortgage loans have call or interest rate reset
provisions after five to seven years. However, if interest rates were to
significantly increase, the Company may be unable to call the loans or increase
the interest rates on its existing mortgage loans commensurate with the
significantly increased market rates.
At December 31, 1997, $17.7 million or 1.4% of the mortgage loan portfolio
was nonperforming. It is the Company's policy to cease to carry accrued interest
on loans that are over 90 days delinquent. For loans less than 90 days
delinquent, interest is accrued unless it is determined that the accrued
interest is not collectible. If a loan becomes over 90 days delinquent,
12
it is the Company's general policy to initiate foreclosure proceedings unless a
workout arrangement to bring the loan current is in place.
In 1996, the Company sold approximately $554 million of its commercial
mortgage loans in a securitization transaction. In 1997, the Company sold
approximately $445 million of its loans in a second securitization transaction.
The Company continues to service the securitized mortgage loans.
As a general rule, the Company does not invest directly in real estate.
The investment real estate held by the Company consists largely of properties
obtained through foreclosures or the acquisition of other insurance companies.
In the Company's experience, the appraised value of foreclosed properties often
approximates the mortgage loan balance on the property plus costs of
foreclosure. Also, foreclosed properties often generate a positive cash flow
enabling the Company to hold and manage the property until the property can be
profitably sold.
The Company has established an allowance for uncollectible amounts on
investments. This allowance was $23.7 million at December 31, 1997.
Combinations of futures contracts and options on treasury notes are used
as hedges for asset/liability management of certain investments, primarily
mortgage loans on real estate, mortgage-backed securities, and liabilities
arising from interest sensitive products such as GICs and annuities. Realized
investment gains and losses on such contracts are deferred and amortized over
the life of the hedged asset. From time to time the Company has used interest
rate swap contracts to convert certain investments from a variable rate of
interest to a fixed rate of interest and vice versa.
For further discussion regarding the Company's investments and the
maturity of and the concentration of risk among the Company's invested assets,
see Note C to the Consolidated Financial Statements.
13
The following table shows the investment results of the Company for the
years 1993 through 1997:
CASH, ACCRUED PERCENTAGE
INVESTMENT INCOME, EARNED ON AVERAGE REALIZED
YEAR ENDED AND INVESTMENTS NET OF CASH INVESTMENT
DECEMBER 31 AT DECEMBER 31 INVESTMENT INCOME AND INVESTMENTS GAINS (LOSSES)
- ------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1993 $4,845,167 $362,130 8.7% $5,054
1994 5,362,016 417,825 8.3 6,298
1995 6,097,455 475,924 8.2 1,612
1996 6,743,770 517,483 8.1 5,510
1997 8,192,538 591,376 8.0 830
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES" in the Company's 1997
Annual Report to Stockholders for certain information relating to the Company's
investments and liquidity.
INDEMNITY REINSURANCE
As is customary in the insurance industry, the Company's insurance
subsidiaries cede insurance to other insurance companies. The ceding insurance
company remains liable with respect to ceded insurance should any reinsurer fail
to meet the obligations assumed by it. The Company sets a limit on the amount of
insurance retained on the life of any one person. In the individual lines it
will not retain more than $500,000, including accidental death benefits, on any
one life; for group insurance, the maximum amount retained on any one life is
$100,000. In many cases the retention is less. At December 31, 1997, the Company
had insurance in force of $89.3 billion of which approximately $34.1 billion was
ceded to reinsurers.
POLICY LIABILITIES AND ACCRUALS
The applicable insurance laws under which the Company's insurance
subsidiaries operate require that each insurance company report policy
liabilities to meet future obligations on the outstanding policies. These
liabilities are the amounts which, with the additional premiums to be received
and interest thereon compounded annually at certain assumed rates, are
calculated in accordance with applicable law to be sufficient to meet the
various policy and contract obligations as they mature. These laws specify that
the liabilities shall not be less than liabilities calculated using certain
named mortality tables and interest rates.
The policy liabilities and accruals carried in the Company's financial
reports (presented on the basis of generally accepted accounting principles)
differ from those specified by the laws of the various states and carried in the
insurance subsidiaries' statutory financial statements (presented on the basis
of statutory accounting principles mandated by state insurance regulation). For
policy liabilities other than those for universal life policies, annuity
contracts, and GICs, these differences arise from the use of mortality and
morbidity tables and interest rate assumptions which are deemed under generally
accepted accounting principles to be more appropriate for financial reporting
purposes than those required for statutory accounting purposes; from the
introduction of lapse assumptions into the calculation; and from the use of the
net level premium
14
method on all business. Policy liabilities for universal life policies, annuity
contracts, and GICs are carried in the Company's financial reports at the
account value of the policy or contract.
FEDERAL INCOME TAX CONSEQUENCES
The Company's insurance subsidiaries are taxed by the federal
government in a manner similar to companies in other industries. However,
certain restrictions on consolidating life insurance company income with
noninsurance income are applicable to the Company; thus, the Company is not able
to consolidate all of the operating results of its subsidiaries for federal
income tax purposes.
Under pre-1984 tax law, certain income of the Company was not taxed
currently, but was accumulated in the "Policyholders' Surplus Account" for each
insurance company subsidiary to be taxed only when such income was distributed
to the stockholders or when certain limits on accumulated amounts were exceeded.
Consistent with current tax law, amounts accumulated in the Policyholders'
Surplus Account have been carried forward, although no accumulated income may be
added to these accounts. As of December 31, 1997, the combined Policyholders'
Surplus Accounts for the life insurance subsidiaries of the Company and the
estimated tax which would become payable on these amounts if distributed to
stockholders were $73 million and $26 million, respectively. The Company does
not anticipate any of its life insurance subsidiaries exceeding applicable
limits on amounts accumulated in these accounts and, therefore, does not expect
to involuntarily pay tax on the amounts held therein.
COMPETITION
Life and health insurance is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products. Life
and health insurance is a highly competitive industry and the Company's
divisions encounter significant competition in all their respective lines of
business from other insurance companies, many of which have greater financial
resources than the Company, as well as competition from other providers of
financial services.
The life and health insurance industry is consolidating, with larger,
more efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to develop
competitive and profitable products, its ability to maintain low unit costs, and
its maintenance of strong claims-paying and financial strength ratings from
rating agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
15
REGULATION
The Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such regulation
is vested in state agencies having broad administrative power dealing with all
aspects of the insurance business, including premium rates, marketing practices,
advertising, policy forms, and capital adequacy, and is concerned primarily with
the protection of policyholders rather than stockholders. The Company cannot
predict the form of any future proposals or regulation.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance Commissioners ("NAIC")
as modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view, for example, requiring immediate
expensing of policy acquisition costs and more conservative computations of
policy liabilities. The NAIC's risk-based capital requirements require insurance
companies to calculate and report information under a risk-based capital
formula. These requirements are intended to allow insurance regulators to
identify inadequately capitalized insurance companies based upon the types and
mixtures of risks inherent in the insurer's operations. The formula includes
components for asset risk, liability risk, interest rate exposure, and other
factors. Based upon the December 31, 1997 statutory financial reports, the
Company's insurance subsidiaries are adequately capitalized under the formula.
The Company's insurance subsidiaries are required to file detailed
annual reports with the supervisory agencies in each of the jurisdictions in
which they do business and their business and accounts are subject to
examination by such agencies at any time. Under the rules of the NAIC, insurance
companies are examined periodically (generally every three to five years) by one
or more of the supervisory agencies on behalf of the states in which they do
business. To date, no such insurance department examinations have produced any
significant adverse findings regarding any insurance company subsidiary of the
Company.
Under insurance guaranty fund laws in most states, insurance companies
doing business in such a state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. The Company's
insurance subsidiaries were assessed immaterial amounts in 1997, which will be
partially offset by credits against future state premium taxes.
In addition, many states, including the states in which the Company's
insurance subsidiaries are domiciled, have enacted legislation or adopted
regulations regarding insurance holding company systems. These laws require
registration of and periodic reporting by insurance companies domiciled within
the jurisdiction which control or are controlled by other corporations or
persons so as to constitute an insurance holding company system. These laws also
affect the acquisition of control of insurance companies as well as transactions
between insurance companies and companies controlling them. Most states,
including Tennessee, where Protective Life Insurance Company ("Protective Life")
is domiciled, require administrative approval of the acquisition of control of
an insurance company domiciled in the state or the acquisition of control of an
insurance holding company whose insurance subsidiary is incorporated in the
state. In
16
Tennessee, the acquisition of 10% of the voting securities of an entity is
generally deemed to be the acquisition of control for the purpose of the
insurance holding company statute and requires not only the filing of detailed
information concerning the acquiring parties and the plan of acquisition, but
also administrative approval prior to the acquisition.
The Company's insurance subsidiaries are subject to various state
statutory and regulatory restrictions on the insurance subsidiaries' ability to
pay dividends to Protective Life Corporation. In general, dividends up to
specified levels are considered ordinary and may be paid without prior approval.
Dividends in larger amounts are subject to approval by the insurance
commissioner of the state of domicile. The maximum amount that would qualify as
ordinary dividends to the Company by Protective Life in 1998 is estimated to be
$154 million. No assurance can be given that more stringent restrictions will
not be adopted from time to time by states in which the Company's insurance
subsidiaries are domiciled, which restrictions could have the effect, under
certain circumstances, of significantly reducing dividends or other amounts
payable to the Company by such subsidiaries without affirmative prior approval
by state regulatory authorities.
The Company's insurance subsidiaries may act as fiduciaries and may be
subject to regulation by the Department of Labor ("DOL") when providing a
variety of products and services to employee benefit plans governed by the
Employee Retirement Income Security Act of 1974 ("ERISA"). Severe penalties are
imposed by ERISA on fiduciaries which violate ERISA's prohibited transaction
provisions by breaching their duties to ERISA-covered plans. In a case decided
by the United States Supreme Court in December 1993 (JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY V. HARRIS TRUST AND SAVINGS BANK), the Court concluded that an
insurance company general account contract that had been issued to a pension
plan should be divided into its guaranteed and nonguaranteed components and that
certain ERISA fiduciary obligations applied with respect to the assets
underlying the nonguaranteed components. Although the Company's insurance
subsidiaries have not issued contracts identical to the one involved in HARRIS
TRUST, some of its policies relating to ERISA-covered plans may be deemed to
have nonguaranteed components subject to the principles announced by the Court.
The full extent to which HARRIS TRUST makes the fiduciary standards and
prohibited transaction provisions of ERISA applicable to all or part of
insurance company general account assets, however, cannot be determined at this
time. The Supreme Court's opinion did not resolve whether the assets at issue in
the case may be subject to ERISA for some purposes and not others. The life
insurance industry requested that the DOL issue exemptions from the prohibited
transaction provisions of ERISA in view of HARRIS TRUST. In July of 1995, the
DOL published, in final form, a prohibited transaction class exemption (PTE
95-60) which exempts from the prohibited transaction rules, prospectively and
retroactively to January 1, 1975, certain transactions engaged in by insurance
company general accounts in which employee benefit plans have an interest. The
exemption does not cover all such transactions, and the insurance industry is
seeking further relief. Pursuant to the Small Business Job Protection Act signed
into law on August 20, 1996, the DOL has published proposed final regulations
attempting to clarify the HARRIS TRUST decision. Until these and other matters
are clarified, the Company is unable to determine whether the decision will
result in any liability and, if so, its nature and scope.
Existing federal laws and regulations affect the taxation of the
Company's products. Income tax payable by policyholders on investment earnings
is deferred during the accumulation period of certain life insurance and annuity
products. Congress has from time to time considered
17
proposals that, if enacted, would have had an adverse impact on the federal
income tax treatment of such products, or would increase the tax-deferred status
of competing products. Currently under consideration is the President's Fiscal
Year 1999 Budget, submitted to Congress in February 1998, which contains several
proposals that, if enacted, would adversely affect the insurance industry. Three
of these proposals would affect the annuity market by (i) taxing all exchanges
involving a variable annuity contract and all reallocations within variable
annuity contracts, (ii) increasing the tax payable by annuity contract owners at
the time they surrender, withdraw from or annuitize the contract (other than for
life at the contract's guaranteed rates), and (iii) reducing the deductions
available to life insurance companies with respect to their state-mandated
reserves covering obligations to annuity policyholders. In addition, the Budget
proposals, if enacted, would also adversely affect owners of many life insurance
contracts. One of the proposals would impact corporate-owned life insurance by
eliminating or decreasing tax deductions currently available to companies who
purchase life insurance. If these proposals were to be adopted, they could
adversely affect the ability of all life insurance companies, including the
Company's subsidiaries, to sell such products and could result in the surrender
of existing contracts and policies. Such proposals are likely to be modified as
they are considered for enactment, and it cannot be predicted whether future
legislation will contain provisions that alter the tax treatment of these
products.
The Federal Government has from time to time advocated changes to the
current health care delivery system which will address both affordability and
availability issues. In addition to the federal initiatives, a number of states
have adopted legislative programs that are intended to affect the accessibility
and affordability of health care. Some states have enacted health care reform
legislation. However, in light of the small relative proportion of the Company's
earnings attributable to group health insurance, management does not expect that
either the federal or state proposals will have a material adverse effect on the
Company's earnings.
The Federal Government has advocated repeal of the Glass-Steagall Act
and certain other legislative changes, which would allow banks to diversify into
securities and other businesses, including possibly insurance. The ultimate
scope and effective date of any proposals are unknown at this time and are
likely to be modified as they are considered for enactment. It is anticipated
that these proposals may increase competition and, therefore, may adversely
affect the Company.
Additional issues related to regulation of the Company and its
insurance subsidiaries are discussed in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES"
in the Company's 1997 Annual Report to Stockholders.
RECENT DEVELOPMENTS
The Company expects that its various administrative systems will have
the capability to process transactions dated beyond 1999 by the second quarter
of 1998. The costs to complete its efforts to modify or replace such systems are
not expected to be material.
On March 2, 1998, the Company's Board of Directors approved a
two-for-one split of the Company's Common Stock in the form of a stock dividend
to be distributed April 1, 1998, to the stockholders of record at the close of
business on March 13, 1998.
18
On March 11, 1998, the Company announced a definitive agreement under
which the Company will acquire United Dental Care, Inc. ("United Dental Care").
The purchase price per share of United Dental Care common stock is payable in a
combination of $9.31 in cash and 0.14465 shares of the Company's Common Stock
(before taking into account the Company's stock split payable on April 1). The
definitive agreement also establishes collars at $55 and $79 per share of
Protective Common Stock before adjustment for the stock split. The transaction
values United Dental Care's outstanding common stock at approximately $175
million, and is subject to approval by United Dental Care stockholders and
regulators and other customary closing conditions.
United Dental Care provides dental coverage to over 1.8 million members
and is a leading provider of managed dental plans, providing a broad range of
dental benefit programs to employers and third parties across the U.S. from
offices in 32 major markets. United Dental Care has over 100,000 members in each
of Arizona, Texas, New Jersey, New Mexico, Missouri and Colorado.
EMPLOYEES
At December 31, 1997 the Company had approximately 1,650 employees,
including approximately 1,075 in Birmingham, Alabama. Most employees are covered
by contributory major medical, dental, group life, and long-term disability
insurance plans. The cost of these benefits in 1997 amounted to approximately
$3.5 million to the Company. In addition, substantially all of the employees are
covered by a pension plan. The Company also matches employee contributions to
its 401(k) Plan. See Note K to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's Home Office building is located at 2801 Highway 280
South, Birmingham, Alabama. This building includes the original 142,000
square-foot building which was completed in 1976 and a second contiguous 220,000
square-foot building which was completed in 1985. In addition, parking is
provided for approximately 1,000 vehicles.
The Company leases administrative space in nine cities, substantially
all under leases for periods of three to five years. The aggregate monthly rent
is approximately $250 thousand.
Marketing offices are leased in 22 cities, substantially all under
leases for periods of three to five years. The aggregate monthly rent is
approximately $60 thousand.
19
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the
Company or any of its subsidiaries is a party or of which any of the Company's
properties is the subject. See also "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES"
in the Company's 1997 Annual Report to Stockholders for certain information
relating to litigation involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1997 to a vote of
security holders of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed and principally traded on the New
York Stock Exchange (NYSE symbol: PL). The following table sets forth the
highest and lowest closing prices of the Company's Common Stock, $0.50 par
value, as reported by the New York Stock Exchange during the periods indicated,
along with the dividends paid per share of Common Stock during the same periods.
Closing prices and dividends have not been adjusted for the Company's recently
announced two-for-one stock split effective April 1, 1998.
RANGE DIVIDENDS
------------------ ---------
HIGH LOW
------ ------
1996
FIRST QUARTER........................... $36.50 $30.50 $.16
SECOND QUARTER.......................... 38.38 33.13 .18
THIRD QUARTER........................... 37.75 31.38 .18
FOURTH QUARTER.......................... 41.63 34.50 .18
1997
FIRST QUARTER........................... $44.63 $37.63 $.18
SECOND QUARTER.......................... 50.75 40.63 .20
THIRD QUARTER........................... 53.50 47.63 .20
FOURTH QUARTER.......................... 65.25 50.13 .20
On March 6, 1998, there were approximately 2,050 holders of record of
Company Common Stock.
The Company (or its predecessor) has paid cash dividends each year
since 1926 and each quarter since 1934. The Company expects to continue to pay
cash dividends, subject to the earnings and financial condition of the Company
and other relevant factors. The ability of the Company to pay cash dividends is
dependent in part on cash dividends received by the Company from its life
insurance subsidiaries. See Item 7 - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES"
in the Company's 1997 Annual Report to Stockholders. Such subsidiary dividends
are restricted by the various insurance laws of the states in which the
subsidiaries are incorporated. See Item 1 "BUSINESS - REGULATION".
20
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA
PREMIUMS AND POLICY FEES $ 522,335 $ 494,153 $ 432,576 $ 402,772 $ 370,758
NET INVESTMENT INCOME 591,376 517,483 475,924 417,825 362,130
REALIZED INVESTMENT GAINS(LOSSES) 830 5,510 1,612 6,298 5,054
OTHER INCOME 32,784 20,857 11,768 21,553 21,695
------------- ------------ --------- --------- ---------
TOTAL REVENUES..............$ 1,147,325 $ 1,038,003 $ 921,880 $ 848,448 $ 759,637
=========== = ========= ======== ======== ========
BENEFITS AND EXPENSES $ 967,952 $ 898,262 $ 800,846 $ 742,275 $ 674,593
INCOME TAX EXPENSE $ 60,987 $ 47,512 $ 41,152 $ 33,976 $ 28,475
MINORITY INTEREST $ 6,393 $ 3,217 $ 3,217 $ 1,796 $ 19
NET INCOME $ 111,993 $ 89,012 $ 76,665 $ 70,401 $ 56,550(1)
PER SHARE DATA(2)
NET INCOME PER SHARE - BASIC $3.59 $2.94 $2.67 $2.56 $2.07(1)
AVERAGE SHARES OUTSTANDING - BASIC 31,214,625 30,285,391 28,660,112 27,476,386 27,381,582
NET INCOME
PER SHARE - DILUTED $3.56 $2.92 $2.66 $2.54 $2.04
AVERAGE SHARES
OUTSTANDING - DILUTED 31,424,809 30,484,832 28,852,849 27,729,612 27,655,996
CASH DIVIDENDS $.78 $.70 $.62 $.55 $ .505
STOCKHOLDERS' EQUITY $24.60 $19.98 $18.30 $9.86 $13.17
STOCKHOLDERS' EQUITY EXCLUDING NET
UNREALIZED GAINS AND LOSSES
ON INVESTMENTS $22.60 $19.76 $16.29 $13.78 $11.74
DECEMBER 31
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA
TOTAL ASSETS.......................... $10,511,635 $ 8,263,205 $ 7,231,257 $6,130,284 $5,316,005
LONG-TERM DEBT........................ 120,000 168,200 115,500 98,000 137,598
TOTAL DEBT............................ 120,000 181,000 115,500 98,000 147,118
9% CUMULATIVE MONTHLY INCOME
PREFERRED SECURITIES, SERIES A... 55,000 55,000 55,000 55,000
8.25% TRUST ORIGINATED PREFERRED
SECURITIES....................... 75,000
6.5%FELINE PRIDES..................... 115,000
STOCKHOLDERS' EQUITY.................. 758,197 615,316 526,557 270,373 360,733
STOCKHOLDERS' EQUITY EXCLUDING
UNREALIZED GAINS AND LOSSES
ON INVESTMENTS................... 696,470 608,628 468,694 377,905 321,449
(1) REDUCED BY $1,261 OR $.05 PER SHARE REPRESENTING A ONE-TIME ADJUSTMENT TO
INCOME TAX EXPENSE DUE TO THE CHANGE IN THE CORPORATE INCOME TAX RATE FROM
34% TO 35%.
(2) PRIOR PERIODS HAVE BEEN RESTATED TO REFLECT A TWO-FOR-ONE STOCK SPLIT ON
JUNE 1, 1995. PER SHARE DATA HAVE NOT BEEN ADJUSTED FOR THE COMPANY'S
RECENTLY ANNOUNCED TWO-FOR-ONE STOCK SPLIT EFFECTIVE APRIL 1, 1998.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information regarding the Company's financial condition and results of
operations is included under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Company's 1997 Annual
Report to Stockholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data for the Company and its
subsidiaries, which are included under the caption "CONSOLIDATED FINANCIAL
STATEMENTS" in the Company's 1997 Annual Report to Stockholders, are
incorporated herein by reference.
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
Protective Life Corporation
Birmingham, Alabama
Our report on the consolidated financial statements of Protective Life
Corporation and subsidiaries has been incorporated by reference in this Form
10-K from page 59 of the 1997 Annual Report to Stockholders of Protective Life
Corporation. In connection with our audits of such financial statements, we have
also audited the related financial statement schedules listed in the index on
pages 27 and 28 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/S/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Birmingham, Alabama
February 11, 1998
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information concerning executive officers of the Company
set forth below, the information called for by this Item 10 is incorporated
herein by reference to the section entitled "ELECTION OF DIRECTORS AND
INFORMATION ABOUT NOMINEES" in the Company's definitive proxy statement for the
Annual Meeting of Stockholders, April 27, 1998, to be filed with the Securities
and Exchange Commission by the Company pursuant to Regulation 14A within 120
days after the end of its 1997 fiscal year.
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Drayton Nabers, Jr. 57 Chairman of the Board and
Chief Executive Officer and Director
John D. Johns 46 President, Chief Operating Officer
and Director
R. Stephen Briggs 48 Executive Vice President
Jim E. Massengale 55 Executive Vice President,
Acquisitions
A. S. Williams III 61 Executive Vice President,
Investments and Treasurer
Danny L. Bentley 40 Senior Vice President, Dental
and Consumer Benefits
Richard J. Bielen 37 Senior Vice President, Investments
Carolyn King 47 Senior Vice President,
Investment Products
Deborah J. Long 44 Senior Vice President, Secretary and
General Counsel
Steven A. Schultz 44 Senior Vice President,
Financial Institutions
24
NAME AGE POSITION
- ---------------- ----- -----------------------
Wayne E. Stuenkel 44 Senior Vice President
and Chief Actuary
Judy Wilson 40 Senior Vice President,
Guaranteed Investment Contracts
Jerry W. DeFoor 45 Vice President and Controller,
and Chief Accounting Officer
All executive officers are elected annually and serve at the pleasure
of the Board of Directors. None of the executive officers is related to any
director of the Company or to any other executive officer.
Mr. Nabers has been Chairman of the Board and Chief Executive Officer and a
Director of the Company since August 1996. From May 1994 to August 1996, Mr.
Nabers was Chairman of the Board, President and Chief Executive Officer and a
Director of the Company. From May 1992 to May 1994, he was President and Chief
Executive Officer and a Director of the Company. Mr. Nabers has served in
various capacities with the Company and its subsidiaries since 1979 and has
served as a member of the Board since August 1982. He is also a director of
Energen Corporation, National Bank of Commerce of Birmingham, and Alabama
National Bancorporation.
Mr. Johns has been President and Chief Operating Officer of the Company
since August 1996 and a Director of the Company since May 1997. He was Executive
Vice President and Chief Financial Officer of the Company from October 1993 to
August 1996. From August 1988 to October 1993, he served as Vice President and
General Counsel of Sonat Inc. He is also a director of National Bank of Commerce
of Birmingham and Alabama National Bancorporation.
Mr. Briggs has been Executive Vice President of the Company since October
1993 and has responsibility for the Individual Life Division. From January 1993
to October 1993, he was Senior Vice President, Life Insurance and Investment
Products of the Company. Mr. Briggs had been Senior Vice President, Ordinary
Marketing of the Company since August 1988. Mr. Briggs has been associated with
the Company and its subsidiaries since 1971.
Mr. Massengale has been Executive Vice President, Acquisitions of the
Company since August 1996 and also has responsibility for the West Coast
Division. He was Senior Vice President of the Company from May 1992 to August
1996. Mr. Massengale has been employed by the Company and its subsidiaries since
1983.
Mr. Williams has been Executive Vice President, Investments and Treasurer
of the Company since August 1996. He was Senior Vice President, Investments and
Treasurer of the Company from July 1981 to August 1996. Mr. Williams has been
employed by the Company and its subsidiaries since 1964.
25
Mr. Bentley has been Senior Vice President, Dental and Consumer Benefits of
the Company since August 1996. From May 1989 to August 1996, he served as Vice
President, Group Marketing of Protective Life. Mr. Bentley has been employed by
the Company and its subsidiaries since 1980.
Mr. Bielen has been Senior Vice President, Investments of the Company since
August 1996. From August 1991 to August 1996, he served as Vice President,
Investments of Protective Life.
Ms. King has been Senior Vice President, Investment Products of the Company
since April 1995. From August 1994 to March 1995, she served as Senior Vice
President and Chief Investment Officer of Provident Life and Accident Insurance
Company and of its parent company, Provident Life and Accident Insurance Company
of America. She served as President of Provident National Assurance Company from
November 1987 to March 1995. From November 1986 to August 1994, she served as
Vice President of Provident Life and Accident Insurance Company and of its
parent company, Provident Life and Accident Insurance Company of America.
Ms. Long has been Senior Vice President, Secretary and General Counsel of
the Company since November 1996. She was Senior Vice President and General
Counsel of the Company from February 1994 to November 1996. From August 1993 to
January 1994, Ms. Long served as General Counsel of the Company and from
February 1984 to January 1994 she practiced law with the law firm of Maynard,
Cooper & Gale, P.C.
Mr. Schultz has been Senior Vice President, Financial Institutions of the
Company since March 1993. Mr. Schultz served as Vice President, Financial
Institutions of the Company from February 1993 to March 1993. Mr. Schultz has
been employed by the Company and its subsidiaries since 1989.
Mr. Stuenkel has been Senior Vice President and Chief Actuary of the
Company since March 1987. Mr. Stuenkel is a Fellow of the Society of Actuaries
and has been employed by the Company and its subsidiaries since 1978.
Ms. Wilson has been Senior Vice President, Guaranteed Investment Contracts
of the Company since January 1, 1995. From July 1991 to December 31, 1994, she
served as Vice President, Guaranteed Investment Contracts of Protective Life.
Mr. DeFoor has been Vice President and Controller, and Chief Accounting
Officer of the Company since April 1989. Mr. DeFoor is a certified public
accountant and has been employed by the Company and its subsidiaries since 1982.
.
These executive officers also serve as executive officers and/or
directors of various other Company subsidiaries.
26
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Directors and executive officers of the Company are required to report
changes in their beneficial ownership of the Company's Common Stock to the
Securities and Exchange Commission. In 1997, all such reports were filed on a
timely basis.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 11 through 13 is incorporated
herein by reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders, April 27, 1998, to be filed with the Securities and
Exchange Commission by the Company pursuant to Regulation 14A within 120 days
after the end of its 1997 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
The following financial statements set forth in the Company's
1997 Annual Report to Stockholders as indicated in the
following table are incorporated by reference (see Exhibit
13).
PAGE
----
Report of Independent Accountants.......................
Consolidated Statements of Income for the years
ended December 31, 1997, 1996, and 1995...............
Consolidated Balance Sheets as of December 31,
1997 and 1996 ........................................
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements..............
2. Financial Statement Schedules:
The Report of Independent Accountants which covers the
financial statement schedules appears on page 23 of this
report. The following schedules are located in this report on
the pages indicated.
27
PAGE
----
Schedule II - Condensed Financial Information
of Registrant.........................................
Schedule III - Supplementary Insurance Information......
Schedule IV - Reinsurance...............................
All other schedules to the consolidated financial statements
required by Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and therefore
have been omitted.
3. Exhibits:
Included as exhibits are the items listed below. The Company
will furnish a copy of any of the exhibits listed upon the
payment of $5.00 per exhibit to cover the cost of the Company
in furnishing the exhibit.
ITEM NUMBER DOCUMENT
*3(a) 1985 Restated Certificate of
Incorporation of the Company filed as
Exhibit 3(a) to the Company's Form 10-K
Annual Report for the year ended
December 31, 1993.
*3(a)(1) Certificate of Amendment of 1985
Restated Certificate of Incorporation of
the Company filed with the Secretary of
State of Delaware on June 1, 1987 and
filed as Exhibit 3(a)(1) to the
Company's Form 10-K Annual Report for
the year ended December 31, 1993.
*3(a)(2) Certificate of Amendment of 1985
Restated Certificate of Incorporation of
the Company filed with the Secretary of
State of Delaware on May 5, 1994 and
filed as Exhibit 3(a)(5) to the
Company's Form 10-Q Quarterly Report for
the period ended March 31, 1994.
*3(a)(3) Certificate of Designation of Junior
Participating Cumulative Preferred Stock
of the Company filed with the Secretary
of State of Delaware on August 9, 1995
and filed as Exhibit A to Exhibit 1 to
the Company's Form 8-A Registration
Statement filed August 7, 1995 and filed
as Exhibit A to Exhibit 2 to the
Company's Form 8-K Current Report filed
August 7, 1995.
*incorporated by reference
28
*3(a)(4) Certificate of Decrease of Shares
Designated as Junior Participating
Cumulative Preferred Stock of the
Company filed with the Secretary of
State of Delaware on August 8, 1995 and
filed as Exhibit 3(a)(4) to the
Company's Form 10-K Annual Report for
the year ended December 31, 1995.
*3(b) 1995 Amended and Restated By-laws of the
Company, as amended effective March
1997, filed as Exhibit 3(b) to the
Company's Form 10-K Annual Report for
the year ended December 31, 1996.
*4(a) Reference is made to Exhibits 3(a)
through 3(a)(4) above.
*4(b) Reference is made to Exhibit 3(b) above.
*4(c) Certificate of Formation of PLC Capital
L.L.C. filed as Exhibit
4(c) to the Company's Registration
Statement on Form S-3 filed
March 25, 1994 (No. 33-52831).
*4(d) Amended and Restated Limited Liability
Company Agreement of PLC Capital L.L.C.
filed as Exhibit 4(d) to Amendment
No. 2, filed April 15, 1994, to the
Company's Registration
Statement on Form S-3 (No. 33-52831).
*4(e) Form of Action establishing series of
Preferred Securities (included as Annex
A to Exhibit 4(d) to the Company's
Registration Statement on Form S-3 (No.
33-52831)).
*4(f) Specimen Preferred Security Certificate
(included as Annex B to Exhibit 4(d) to
the Company's Registration Statement on
Form S-3 (No. 33-52831)).
*4(g) Form of Guarantee Agreement between the
Company and PLC Capital L.L.C. with
respect to the Preferred Securities to
be issued by PLC Capital L.L.C. filed as
Exhibit 4(i) to Amendment No. 2, filed
April 15, 1994, to the Company's
Registration Statement on Form S-3
(No. 33-52831).
*incorporated by reference
29
*4(h) Rights Agreement, dated as of August 7,
1995, between the Company and AmSouth
Bank of Alabama (formerly, AmSouth Bank
N.A.), as Rights Agent filed as Exhibit
2 to the Company's Form 8-K Current
Report filed August 7, 1995 and filed as
Exhibit 1 to the Company's Form 8-A
Registration Statement filed August 7,
1995.
*4(i) Rights Certificate filed as Exhibit 1 to
the Company's Form 8-A filed August 7,
1995.
*4(j) Certificate of Trust of PLC Capital
Trust I filed as Exhibit 4(a) to the
Company's Registration Statement on
Form S-3 filed April 11, 1997
(No. 333-25027).
*4(k) Declaration of Trust of PLC Capital
Trust I filed as Exhibit 4(b)
to the Company's Registration Statement
on Form S-3 filed
April 11, 1997 (No. 333-25027).
*4(l) Form of Amended and Restated Declaration
of Trust for PLC Capital Trust I filed
as Exhibit 4(c) to Amendment No. 1,
filed April 21, 1997, to the Company's
Registration Statement on
Form S-3 (No. 33-25027).
*4(m) Form of Preferred Security Certificate
for PLC Capital Trust I (included as
Exhibit A-1 of Exhibit 4(k)).
*4(n) Form of Guarantee with respect to
Preferred Securities of PLC Capital
Trust I filed as Exhibit 4(i) to the
Company's Registration Statement on Form
S-3 filed April 11, 1997 (No.
333-25027).
*4(o) Certificate of Trust of PLC Capital
Trust II filed as Exhibit
4(aa) to the Company's Registration
Statement on Form S-3
filed July 8, 1997 (No. 333-30905).
*4(p) Declaration of Trust of PLC Capital
Trust II filed as Exhibit
4(dd) to the Company's Registration
Statement on Form S-3
filed July 8, 1997 (No. 333-30905).
*4(q) Form of Amended and Restated Declaration
of Trust of PLC Capital II filed as
Exhibit 4(gg) to the Company's
Registration Statement on Form S-3 filed
July 8, 1997 (No. 333-30905).
*incorporated by reference
30
*4(r) Form of Preferred Security Certificate
for PLC Capital Trust II
(included in Exhibit 4(q)).
*4(s) Form of Guarantee Agreement with respect
to Preferred Securities to be issued by
PLC Capital Trust II filed as Exhibit
4(v) to the Company's Registration
Statement on Form S-3 filed July 8, 1997
(No. 333-30905).
*4(t) Form of Purchase Contract Agreement
between the Company and The Bank of New
York, as Purchase Contract Agent, filed
as Exhibit 4(y) to the Company's Current
Report on Form 8-K filed November 20,
1997.
*4(u) Form of Pledge Agreement, among the
Company, The Bank of New York, as
Purchase Contract Agent, and the Chase
Manhattan Bank, as Collateral Agent,
filed as Exhibit 4(z) to the Company's
Current Report on Form 8-K filed
November 20, 1997.
*10(a) The Company's Annual Incentive Plan
(effective as of January 1, 1997) filed
as Exhibit 10(b) to the Company's Form
10-Q Quarterly Report filed May 14,
1997.
*10(b) The Company's 1992 Performance Share
Plan filed as Exhibit
10(b)(3) to the Company's Form 10-Q
Quarterly Report filed
May 15, 1992.
*10(b)(1) First Amendment to the Company's 1992
Performance Share Plan and filed as
Exhibit 10(b)(1) to the Company's Form
10-K Annual Report for the year ended
December 31, 1995.
*10(b)(2) The Company's 1997 Performance Share
Plan filed as Exhibit 10(a) to the
Company's Form 10-Q Quarterly Report
filed May 14, 1997.
*10(c) Excess Benefit Plan amended and restated
as of January 1, 1989 filed as Exhibit
10(c)(1) to the Company's Form 10-K
Annual Report for the year ended
December 31, 1991.
*10(d) Form of Indemnity Agreement for
Directors filed as Exhibit 19.1 to the
Company's Form 10-Q Quarterly Report
filed August 14, 1986.
*incorporated by reference
31
*10(d)(1) Form of Indemnity Agreement for Officers
filed as Exhibit 10(d)(1) to the
Company's Form 10-K Annual Report for
the year ended December 31, 1996.
*10(e) Reference is made to Exhibit 4(g) above.
*10(f) Form of the Company's Employment
Continuation Agreement filed as Exhibit
10(a) to the Company's Form 10-Q
Quarterly Report filed September 30,
1997.
*10(g) The Company's Deferred Compensation Plan
for Directors Who Are Not Employees of
the Company as amended through March 3,
1997, filed as Exhibit 10(e) to the
Company's Form 10-Q Quarterly Report
filed May 14, 1997.
*10(h) The Company's Deferred Compensation Plan
for Officers as amended through March 3,
1997, filed as Exhibit 10(d) to the
Company's Form 10-Q Quarterly Report
filed May 14, 1997.
*10(i) The Company's 1996 Stock Incentive Plan
as amended through March 3, 1997, filed
as Exhibit 10(c) to the Company's Form
10-Q Quarterly Report filed May 14,
1997.
*10(i)(1) The Company's specimen letter confirming
grants under the Company's 1996 Stock
Incentive Plan, filed as Exhibit 10(2)
to the Company's Form 10-Q Quarterly
Report filed November 13, 1996.
13 1997 Annual Report To Stockholders.
21 Organization Chart of the Company and
Affiliates.
23 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney.
27 Financial Data Schedule.
99 Safe Harbor for Forward-Looking
Statements.
*incorporated by reference
32
The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an
exhibit to this form pursuant to Item 14(c) of this Form 10-K:
Exhibit Item Numbers 10(a), 10(b), 10(b)(1), 10(b)(2), 10(c),
10(d), 10(d)(1), 10(f), 10(g), 10(h), 10(i) and 10(i)(1).
(b) Current Reports on Form 8-K:
(1) Form 8-K, dated February 11, 1997
- Item 5
- Item 7
(2) Form 8-K, dated April 23, 1997
- Item 5
- Item 7
(3) Form 8-K, dated July 23, 1997
- Item 5
- Item 7
(4) Form 8-K, dated October 23, 1997
- Item 5
- Item 7
(5) Form 8-K, dated November 20, 1997
- Item 7
33
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PROTECTIVE LIFE CORPORATION
By:/S/DRAYTON NABERS, JR.
Drayton Nabers, Jr.
Chairman of the Board and
Chief Executive Officer
March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
/S/DRAYTON NABERS, JR. Chairman of the Board and March 27, 1998
DRAYTON NABERS, JR. Chief Executive Officer
(Principal Executive Officer)
and Director
/S/JOHN D. JOHNS President and Chief Operating Officer March 27, 1998
JOHN D. JOHNS (Principal Financial Officer)
and Director
/S/JERRY W. DEFOOR Vice President and Controller, March 27, 1998
JERRY W. DEFOOR and Chief Accounting Officer
(Principal Accounting Officer)
* Chairman Emeritus and March 27, 1998
- ----------------------------
WILLIAM J. RUSHTON III Director
* Director March 27, 1998
- ----------------------------
JOHN W. WOODS
* Director March 27, 1998
- ----------------------------
WILLIAM J. CABANISS, JR.
34
* Director March 27, 1998
- ----------------------------
JOHN J. MCMAHON, JR.
* Director March 27, 1998
- ----------------------------
A. W. DAHLBERG
* Director March 27, 1998
- ----------------------------
JOHN W. ROUSE, JR.
* Director March 27, 1998
- ----------------------------
ROBERT T. DAVID
* Director March 27, 1998
- ----------------------------
RONALD L. KUEHN, JR.
* Director March 27, 1998
- ----------------------------
HERBERT A. SKLENAR
* Director March 27, 1998
- ----------------------------
JAMES S. M. FRENCH
* Director March 27, 1998
- ----------------------------
ROBERT A. YELLOWLEES
* Director March 27, 1998
- ----------------------------
ELAINE L. CHAO
* Director March 27, 1998
- ----------------------------
DONALD M. JAMES
*Drayton Nabers, Jr., by signing his name hereto, does sign this
document on behalf of each of the persons indicated above pursuant to powers of
attorney duly executed by such persons and filed with the Securities and
Exchange Commission.
By:/S/DRAYTON NABERS, JR.
DRAYTON NABERS, JR.
Attorney-in-fact
35
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENTS OF INCOME
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
1997 1996 1995
-------- -------- ------
REVENUES
DIVIDENDS FROM SUBSIDIARIES* $ 5,317 $ 3,391 $13,691
SERVICE FEES FROM SUBSIDIARIES* 54,712 40,850 37,410
NET INVESTMENT INCOME 10,433 2,489 3,671
REALIZED INVESTMENT GAINS (LOSSES) (994)
OTHER INCOME (LOSS) 2,186 (384) (1,879)
---------- --------- ---------
71,654 46,346 52,893
EXPENSES
OPERATING AND ADMINISTRATIVE 36,309 26,901 28,941
INTEREST - SUBSIDIARIES* 6,266 5,904 4,993
INTEREST - OTHERS 13,185 7,859 8,206
--------- --------- --------
55,760 40,664 42,140
INCOME BEFORE FEDERAL INCOME
TAX AND OTHER ITEMS BELOW 15,894 5,682 10,753
INCOME TAX EXPENSE 2,342 1,630 3
INCOME BEFORE EQUITY IN UNDISTRIBUTED -------- -------- --------
INCOME OF SUBSIDIARIES 13,552 4,052 10,750
EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES* 98,441 84,960 65,915
-------- -------- --------
NET INCOME $111,993 $89,012 $ 76,665
======== ======= ========
*ELIMINATED IN CONSOLIDATION.
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
36
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
BALANCE SHEETS
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
(IN THOUSANDS)
DECEMBER 31
----------------------------------
1997 1996
------------ --------
ASSETS
INVESTMENTS:
FIXED MATURITIES $ 26,000 $ 23,000
LONG-TERM INVESTMENTS 47 54
SHORT-TERM INVESTMENTS 7,000
INVESTMENT REAL ESTATE 133 133
INVESTMENTS IN SUBSIDIARIES (EQUITY METHOD)* 1,114,185 849,204
----------- ---------
1,147,365 872,391
CASH 305 1,024
RECEIVABLES FROM SUBSIDIARIES* 29,920 26,757
ACCRUED INCOME TAXES 7,636
OTHER 15,723 7,870
------------ ----------
TOTAL ASSETS $1,193,313 $ 915,678
========== ==========
LIABILITIES
ACCRUED EXPENSES AND OTHER LIABILITIES $ 48,102 $ 43,659
ACCRUED INCOME TAXES 415
DEFERRED INCOME TAXES 1,102 6,083
DEBT:
BANKS 61,000
SENIOR NOTES 75,000 75,000
MEDIUM-TERM NOTES 45,000 45,000
SUBSIDIARIES* 265,497 69,620
------------ -----------
TOTAL LIABILITIES 435,116 300,362
------------ ----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK
JUNIOR PARTICIPATING CUMULATIVE
PREFERRED STOCK
COMMON STOCK 16,668 16,668
ADDITIONAL PAID-IN CAPITAL 167,923 166,713
TREASURY STOCK (13,455) (11,874)
UNALLOCATED STOCK IN EMPLOYEE STOCK OWNERSHIP PLAN (4,592) (4,925)
RETAINED EARNINGS (INCLUDING UNDISTRIBUTED
INCOME OF SUBSIDIARIES: 1997 - $627,706; 1996 - $529,265) 529,926 442,046
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED GAINS (LOSSES) ON
INVESTMENTS (ALL FROM SUBSIDIARIES, NET
OF INCOME TAX: 1997 - $33,238; 1996 - $3,601) 61,727 6,688
------------ ----------
TOTAL STOCKHOLDERS' EQUITY 758,197 615,316
----------- ---------
$ 1,193,313 $ 915,678
=========== ==========
*ELIMINATED IN CONSOLIDATION.
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
37
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
STATEMENTS OF CASH FLOWS
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
1997 1996 1995
------------ ----------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $111,993 $ 89,012 $ 76,665
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES* (98,441) (84,960) (65,915)
DEFERRED INCOME TAXES (5,668) (222) 3,261
OTHER (NET)
3,633 (271) 7,043
--------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,517 3,559 21,054
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
PURCHASE OF AND/OR ADDITIONAL INVESTMENTS
IN SUBSIDIARIES* (111,168) (104,872) (27,731)
PRINCIPAL PAYMENTS RECEIVED ON LOAN
TO SUBSIDIARY* 10,000 4,750
CHANGE IN FIXED MATURITIES AND LONG-TERM
INVESTMENTS (2,993) (22,892) 5
CHANGE IN SHORT-TERM INVESTMENTS (7,000) 1,900
----------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (121,161) (117,764) (21,076)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
ISSUANCE OF COMMON STOCK 70,546
BORROWINGS UNDER LINE OF
CREDIT ARRANGEMENTS AND LONG-TERM DEBT 275,777 165,934 52,300
PRINCIPAL PAYMENTS ON LINE OF CREDIT
ARRANGEMENTS AND DEBT (140,900) (100,434) (34,800)
BORROWINGS UNDER
LONG-TERM DEBT TO SUBSIDIARY*
PURCHASE OF TREASURY STOCK (1,839) (3)
DIVIDENDS TO STOCKHOLDERS (24,113) (20,888) (17,600)
----------- -------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 108,925 115,158 (103)
---------- --------- -----------
INCREASE (DECREASE) IN CASH (719) 953 (125)
CASH AT BEGINNING OF YEAR 1,024 71 196
--------- -------- -----------
CASH AT END OF YEAR $ 305 $ 1,024 $ 71
========= ======== ===========
*ELIMINATED IN CONSOLIDATION.
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
38
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
PROTECTIVE LIFE CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
THE COMPANY PUBLISHES CONSOLIDATED FINANCIAL STATEMENTS THAT ARE ITS PRIMARY
FINANCIAL STATEMENTS. THEREFORE, THESE PARENT COMPANY CONDENSED FINANCIAL
STATEMENTS ARE NOT INTENDED TO BE THE PRIMARY FINANCIAL STATEMENTS OF THE
COMPANY, AND SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO OF PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES.
NOTE 1 - DEBT
AT DECEMBER 31, 1997, THE COMPANY HAD NO BORROWINGS OUTSTANDING UNDER ITS $70
MILLION REVOLVING LINE OF CREDIT. $75.0 MILLION OF SENIOR NOTES DUE 2004, $45.0
MILLION OF MEDIUM-TERM NOTES DUE 2011, $69.6 MILLION OF SUBORDINATED DEBENTURES
DUE 2024, $77.3 MILLION OF SUBORDINATED DEBENTURES DUE 2027 AND $118.6 MILLION
OF SUBORDINATED DEBENTURES DUE 2003 WERE OUTSTANDING AT DECEMBER 31, 1997. THE
SUBORDINATED DEBENTURES WERE ISSUED TO AFFILIATES IN CONNECTION WITH THE
ISSUANCE BY SUCH AFFILIATES OF 9% CUMULATIVE MONTHLY INCOME PREFERRED
SECURITIES, SERIES A; 8.25% TRUST ORIGINATED PREFERRED SECURITIES (TOPRS); AND
6.5% TRUST ORIGINATED PREFERRED SECURITIES (TOPRS) ISSUED AS PART OF THE
COMPANY'S FELINE PRIDES, RESPECTIVELY.
NOTE 2 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1997 1996 1995
-------- -------- ------
CASH PAID (RECEIVED) DURING THE YEAR FOR:
INTEREST PAID TO NON-AFFILIATES $ 8,244 $6,809 $ 6,634
INTEREST PAID TO SUBSIDIARY* 10,768 6,266 6,266
-------- -------- --------
$19,012 $13,075 12,900
======= ======= ======
INCOME TAXES (REDUCED BY AMOUNTS RECEIVED
FROM AFFILIATES UNDER A TAX SHARING AGREEMENT $(2,026) $ 2,148 $ (538)
======== ======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES
REISSUANCE OF TREASURY STOCK TO ESOP $ 85 $ 669 $ 350
======== ======= =======
UNALLOCATED STOCK IN ESOP $ 333 $ 334 $ 333
======== ======= =======
REISSUANCE OF TREASURY STOCK $ 1,383 $ 261 $ 31,044
======== ======= =======
NOTE 3 - SUBSIDIARY SURPLUS DEBENTURES
PROTECTIVE LIFE INSURANCE COMPANY ("PROTECTIVE LIFE") HAS ISSUED SURPLUS
DEBENTURES TO THE COMPANY IN ORDER TO FINANCE ACQUISITIONS AND GROWTH. AT
DECEMBER 31, 1997, THE BALANCE OF THE SURPLUS DEBENTURES WAS $20.0 MILLION. THE
SURPLUS DEBENTURES ARE INCLUDED IN RECEIVABLES FROM SUBSIDIARIES. PROTECTIVE
LIFE MUST OBTAIN THE APPROVAL OF THE TENNESSEE COMMISSIONER OF INSURANCE BEFORE
IT MAY PAY INTEREST OR REPAY PRINCIPAL ON THE SURPLUS DEBENTURE.
*ELIMINATED IN CONSOLIDATION.
39
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES
(IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E COL. F COL. G
------ ------ ------ ------ ------ ------ ------
GIC AND
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS AND PREMIUMS
POLICY BENEFITS OTHER AND NET
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT
SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME(1)
------- ----------- -------- -------- -------------- ------------ ------------
YEAR ENDED
DECEMBER 31, 1997:
ACQUISITIONS $138,052 $1,025,340 $ 1,437 $ 311,151 $ 102,635 $110,155
INDIVIDUAL LIFE 252,321 920,924 356 16,334 127,480 54,647
WEST COAST 108,126 739,463 0 95,495 14,122 30,194
DENTAL 22,459 120,925 6,541 80,564 193,239 24,202
FINANCIAL INSTITUTIONS 52,837 159,422 391,085 6,791 72,263 16,462
GUARANTEED INVESTMENT
CONTRACTS 1,785 180,690 0 2,684,676 0 211,915
INVESTMENT PRODUCTS 56,074 177,150 0 1,184,268 12,367 105,321
CORPORATE AND OTHER 1,083 380 1,438 183 229 38,480
UNALLOCATED REALIZED
INVESTMENT GAINS (LOSSES) 0 0 0 0 0 0
------------------------------------------------------------------ ------------
TOTAL $632,737 $3,324,294 $400,857 $4,379,462 $522,335 $591,376
======== ========== ======== ========== ======== ========
YEAR ENDED
DECEMBER 31, 1996:
ACQUISITIONS $156,172 $1,117,159 $ 1,087 $ 251,450 $106,543 $106,015
INDIVIDUAL LIFE 220,232 793,370 685 15,577 116,710 48,478
DENTAL 27,944 119,010 5,957 83,632 188,633 16,540
FINANCIAL INSTITUTIONS 32,040 119,242 253,153 1,880 73,422 13,941
CONTRACTS 1,164 149,756 0 2,474,728 0 214,369
INVESTMENT PRODUCTS 50,657 149,742 0 1,120,557 8,189 98,767
CORPORATE AND OTHER 175 170 55 192 656 19,373
UNALLOCATED REALIZED
INVESTMENT GAINS (LOSSES) 0 0 0 0 0 0
--------------------------------------- --------------------------------------------
TOTAL $488,384 $2,448,449 $260,937 $3,948,016 $494,153 $517,483
======== ========== ======== ========== ======== ========
YEAR ENDED
DECEMBER 31, 1995:
ACQUISITIONS $123,889 $ 851,994 $ 590 $ 250,550 $ 98,501 $ 95,018
INDIVIDUAL LIFE 186,496 672,569 336 14,709 99,018 40,277
DENTAL 24,974 123,279 5,371 85,925 163,378 14,432
FINANCIAL INSTITUTIONS 36,283 84,162 189,973 1,495 65,668 9,377
CONTRACTS 993 68,704 0 2,451,693 0 203,376
INVESTMENT PRODUCTS 37,747 127,104 0 1,061,507 4,566 95,706
CORPORATE AND OTHER 14 342 62 263 1,445 17,738
UNALLOCATED REALIZED
INVESTMENT GAINS (LOSSES) 0 0 0 0 0 0
------------ ------------------------------------------ ------------ ------------
TOTAL $410,396 $1,928,154 $196,332 $3,866,142 $432,576 $475,924
======== ========== ======== ========== ======== ========
COL. H COL. I COL. J
------------------------------------------------------
Amortization
Benefits of Deferred
Realized and Policy Other
Investment Settlements Acquisition Operating
SEGMENT Gains (Losses) Expenses Costs Expenses
------- ------ -------- --------- -------
DECEMBER 31, 1997:
ACQUISITIONS $ 0 $116,506 $ 16,606 $ 24,050
INDIVIDUAL LIFE 0 114,678 27,374 37,921
WEST COAST 0 28,304 961 6,849
DENTAL 0 134,384 15,711 52,365
FINANCIAL INSTITUTIONS 0 27,643 30,812 21,120
GUARANTEED INVESTMENT
CONTRACTS (3,179) 179,235 618 3,946
INVESTMENT PRODUCTS 589 82,019 15,110 15,749
CORPORATE AND OTHER 0 339 35 15,617
UNALLOCATED REALIZED
INVESTMENT GAINS (LOSSES) 3,420 0 0 0
------------------------------------------------------------------
TOTAL $ 830 $683,108 $107,227 $177,617
======== ======== ======== ========
YEAR ENDED
DECEMBER 31, 1996:
ACQUISITIONS 0 118,181 17,162 25,186
INDIVIDUAL LIFE 3,098 96,404 28,393 40,969
DENTAL 0 143,944 5,326 52,956
FINANCIAL INSTITUTIONS 0 42,781 24,900 11,660
GUARANTEED INVESTMENT
CONTRACTS (7,963) 169,927 509 3,851
INVESTMENT PRODUCTS 3,858 73,093 14,710 15,323
CORPORATE AND OTHER 0 710 30 12,247
UNALLOCATED REALIZED
INVESTMENT GAINS (LOSSES) 6,517 0 0 0
---------------------------------------------------------------------
$ 5,510 $645,040 $91,030 $162,192
TOTAL ======================================================================
YEAR ENDED
DECEMBER 31, 1995:
ACQUISITIONS $ 0 $100,016 $20,601 $ 24,437
INDIVIDUAL LIFE 0 80,067 20,403 33,620
DENTAL 0 121,375 3,052 45,775
FINANCIAL INSTITUTIONS 0 24,019 26,809 17,123
GUARANTEED INVESTMENT
CONTRACTS (3,908) 165,963 386 5,470
INVESTMENT PRODUCTS 4,937 72,111 11,479 13,663
CORPORATE AND OTHER 0 1,476 3 12,998
UNALLOCATED REALIZED
INVESTMENT GAINS (LOSSES) 583 0 0 0
------------------------------------------------------------------
TOTAL $ 1,612 $565,027 $82,733 $153,086
==================================================================
(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.
40
SCHEDULE IV - REINSURANCE
PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E COL. F
--------------- ------ ------ ------ ------ ---------
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
YEAR ENDED
DECEMBER 31, 1997:
LIFE INSURANCE
IN FORCE $78,240,282 $34,139,554 $11,013,202 $55,113,930 20.0%
========================================================================
PREMIUMS AND
POLICY FEES:
LIFE INSURANCE $ 387,108 $ 147,184 $ 74,738 $ 314,662 23.8%
ACCIDENT/HEALTH
INSURANCE 378,704 187,539 10,510 201,675 5.3%
PROPERTY AND LIABILITY
INSURANCE 6,139 176 35 5,998 0.6%
------------------------------------------------------------------------
TOTAL $ 771,951 $ 334,899 $ 85,283 $ 522,335
========================================================================
YEAR ENDED
DECEMBER 31, 1996:
LIFE INSURANCE
IN FORCE $53,052,020 $18,840,221 $16,275,386 $50,487,185 32.2%
PREMIUMS AND
POLICY FEES:
LIFE INSURANCE $ 272,331 $ 113,487 $ 129,717 $ 288,561 45.0%
ACCIDENT/HEALTH
INSURANCE 370,812 194,687 29,467 205,592 14.3%
--------------------------------------------------------------------------
TOTAL 643,143 308,174 159,184 494,153
==========================================================================
YEAR ENDED
DECEMBER 31, 1995:
LIFE INSURANCE
IN FORCE $50,346,719 $ 17,524,366 $ 11,537,144 $ 44,359,497 26.0%
=========================================================================
PREMIUMS AND
POLICY FEES:
LIFE INSURANCE $ 308,422 $ 116,091 $ 66,565 $ 258,896 25.7%
ACCIDENT/HEALTH
INSURANCE 377,179 217,082 13,583 173,680 7.8%
---------------------------------------------------------------------------
TOTAL 685,601 333,173 80,148 432,576
===========================================================================
EXHIBITS TO FORM 10-K
OF
PROTECTIVE LIFE CORPORATION
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX TO EXHIBITS
Page
13........................................................................
21........................................................................
23........................................................................
24........................................................................
27........................................................................
99........................................................................