PROTECTIVE LIFE INSURANCE CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1993 33-31940
33-39345
33-57052

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PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)

TENNESSEE 63-0169720
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal (Zip Code)
executive offices)

Registrant's telephone number, including area code: (205) 879-9230

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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_

Aggregate market value of voting stock held by nonaffiliates of the
registrant: None

Number of shares of Common Stock, $1.00 Par Value, outstanding as of March
11, 1994: 5,000,000

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION J(2).

DOCUMENTS INCORPORATED BY REFERENCE

None, except Exhibits

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PART I

ITEM 1. BUSINESS

Protective Life Insurance Company ("Protective") is a wholly-owned and the
principal operating subsidiary of Protective Life Corporation ("PLC"), an
insurance holding company. Founded in 1907, Protective provides financial
services through the production, distribution, and administration of insurance
and investment products.

Protective markets individual life and health insurance and annuities
nationally through professional, independent general agents. Protective serves
the individual payroll deduction market by offering universal life and cancer
insurance, and Protective distributes group life, health, and dental insurance
products through full-time field representatives who market to employers and
associations through agents and brokers. Protective markets annuities and
investment products, credit life, and disability products through broker-dealers
and financial institutions to their customers, and Protective sells guaranteed
investment contracts.

Over the last twenty-five years PLC has made thirty-two acquisitions of
smaller insurance companies or blocks of policies. Many of these transactions
included Protective. Additionally, PLC has from time to time merged other life
insurance companies it has acquired into Protective. In 1990 Protective
reinsured two separate blocks of insurance which were assumed by Protective
during 1991. PLC acquired a small life insurance company and merged it into
Protective in early 1992. In July 1992, Protective assumed a block of credit
life and credit accident and health insurance business. In July 1993, Protective
acquired a Wisconsin insurer and Protective reinsured a block of universal life
policies.

Since 1983, Protective has owned 100% of American Foundation Life Insurance
Company ("American Foundation"). Since 1988, Protective owned convertible
preferred stock of Southeast Health Plan, Inc. ("SEHP"), a Birmingham-based
health maintenance organization. On August 31, 1991, Protective converted the
preferred stock into 80% of the common stock of SEHP. In January 1993,
Protective's ownership of SEHP was transferred to PLC. In August 1993, PLC sold
its interest in SEHP.

ITEM 2. PROPERTIES

Protective's administrative 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.

Protective leases administrative space in Birmingham, Alabama; Brentwood,
Tennessee; Greenville, South Carolina; Cary, North Carolina; and Oklahoma City,
Oklahoma. Substantially all of these offices are rented under leases that run
for periods of three to five years. The aggregate monthly rent is approximately
$28 thousand.

Marketing offices are leased in 15 cities, substantially all under leases
for periods of three to five years with only two leases being over five years.
The aggregate monthly rent is approximately $24 thousand.

ITEM 3. LEGAL PROCEEDINGS

There are no material legal proceedings pending by or against Protective
other than routine litigation incidental to its insurance business.

2

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not required in accordance with General Instruction J(2)(c).

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

Protective is a wholly-owned subsidiary of PLC which also owns all of the
redeemable preferred stock issued by Protective's subsidiary, American
Foundation. Therefore, neither Protective's Common Stock nor American
Foundation's Preferred Stock is publicly traded.

At December 31, 1993, $295 million of consolidated stockholder's equity
represented net assets of Protective that cannot be transferred to PLC in the
form of dividends, loans, or advances. In addition, under the insurance laws of
the States of Tennessee, Alabama and Wisconsin, certain restrictions are imposed
on dividends from insurers domiciled in those states. Also, distributions,
including cash dividends to PLC in excess of approximately $184 million would be
subject to Federal income tax at rates then effective. Protective does not
anticipate involuntarily paying tax on such distributions.

The American Foundation Preferred Stock pays, when and if declared, annual
minimum cumulative dividends of $0.1 million and noncumulative participating
dividends to the extent American Foundation's statutory earnings for the
immediately preceding fiscal year exceed $1 million.

In 1993 and 1992, respectively American Foundation paid preferred dividends
of $1.5 million and $1.4 million. During 1993, Protective transferred its
ownership interest in SEHP to PLC in the form of a common dividend. Protective
paid no other dividends to PLC during 1993. Protective paid common dividends of
$1.9 million in 1992. Protective and American Foundation expect to continue to
pay cash dividends, subject to their earnings and financial condition and other
relevant factors.

ITEM 6. SELECTED FINANCIAL DATA

Not required in accordance with General Instruction J(2)(a).

ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

In accordance with General Instruction J(2)(a), Protective includes the
following analysis with the reduced disclosure format.

REVENUES

The following table sets forth revenues by source for the periods shown:

YEAR ENDED PERCENTAGE
DECEMBER 31 INCREASE
---------------------- -------------
1993 1992 (DECREASE)
---------- ---------- -------------
(IN THOUSANDS)

Premiums and Policy Fees........................... $ 351,423 $ 323,136 8.8%
Net Investment Income.............................. 354,165 274,991 28.8
Realized Investment Gains (Losses)................. 5,054 (154) --
Other Income....................................... 4,756 10,675 (55.4)
---------- ----------
$ 715,398 $ 608,648
---------- ----------
---------- ----------

Premiums and policy fees increased 8.8% in 1993 over 1992. The transfer of
Protective's ownership of SEHP to PLC represents a $40.5 million decrease in
premiums and policy fees. Increases in premiums and

3

policy fees from the Agency, Group, and Financial Institutions Divisions
represented increases of $14.6 million, $13.0 million and $30.4 million,
respectively. Effective July 1, 1992, the Financial Institutions Division
assumed Durham Life Insurance Company's credit business representing $15.1
million of the segment's $30.4 million increase. On July 30, 1993, Protective
completed its acquisition of Wisconsin National Life Insurance Company
("Wisconsin National"). The acquisition increased premiums and policy fees by
$11.7 million. The reinsurance of a block of universal life policies on July 1,
1993 resulted in a $3.2 million increase. Decreases in older acquired blocks of
ordinary policies represented a $5.6 million decrease in premiums and policy
fees.

Net investment income increased 28.8% in 1993 over 1992 primarily due to an
increase in the average amount of invested assets. Invested assets increased
during 1993 primarily due to receiving individual annuity and guaranteed
investment contract ("GIC") deposits and the acquisition of Wisconsin National.
Annuity and GIC deposits are not considered revenues in accordance with
generally accepted accounting principles. These deposits are included in the
liability section of the balance sheet. The Wisconsin National acquisition
increased 1993 investment income approximately $14.5 million. Due to the general
decline in interest rates, Protective's percentage earned on average cash and
investment was 8.4% for 1993, slightly below the 8.6% for 1992.

Protective generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash flow needs. The sales
of investments that have occurred result from portfolio management decisions to
maintain proper matching of assets and liabilities.

Protective maintains an allowance for uncollectible amounts on investments
based upon industry default rates for different asset types. The allowance
totaled $35.2 million at December 31, 1993. Additions to the allowance are
treated as realized investment losses. During 1993, Protective added $8.7
million to this allowance which partially offset the $13.8 million of net
realized investment gains in the period.

Other income consists primarily of fees from administrative-services-only
types of group accident and health insurance contracts, and from rental of space
in its administrative building to PLC. The transfer of SEHP to PLC decreased
other income $5.1 million.

4

INCOME BEFORE INCOME TAX

The following table sets forth income or loss before income tax by business
segment for the periods shown:

INCOME (LOSS) BEFORE
INCOME TAX
---------------------
YEAR ENDED DECEMBER
31
---------------------
1993 1992
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(IN THOUSANDS)

BUSINESS SEGMENT
Agency........................................................... $ 20,324 $ 12,976
Group............................................................ 10,435 7,762
Financial Institutions........................................... 7,220 4,669
Investment Products.............................................. 3,402 4,191
Guaranteed Investment Contracts*................................. 27,218 18,266
Acquisitions..................................................... 29,845 20,031
Corporate and Other*............................................. (14,208) (7,543)
Unallocated Realized Investment Gains (Losses)................... 1,876 (1,589)
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$ 86,112 $ 58,763
---------- ---------
---------- ---------

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*Income before income tax for the Corporate and Other segment has not been
reduced by pretax minority interest of $90 in 1992.

In 1993 Protective changed the method used to apportion net investment
income to the various divisions. This change resulted in increased income
attributable to the Agency, Investment Products, and Acquisitions Divisions of
$3.0 million, $2.0 million, and $2.6 million, respectively, while decreasing
income of the Corporate and Other segment.

Agency pretax earnings increased $7.3 million in 1993 as compared to 1992.
The improvement in earnings is largely due to growth in the amount of business
in force brought about by sales, continued strong persistency, and favorable
mortality experience.

Group pretax earnings were $2.7 million higher in 1993 as compared to 1992.
Group life and annuity earnings improved by $1.7 million, and group health
earnings improved by $1.0 million primarily due to improved cancer and dental
earnings.

Pretax earnings of the Financial Institutions Division were $2.6 million
higher in 1993 as compared to 1992. Effective July 1, 1992, Protective assumed
all of the policy obligations associated with the credit life and credit
accident and health insurance business produced by Durham Life Insurance Company
("Durham"). The Durham acquisition represented $0.7 million of the increase. The
balance of the increase was due to premium growth and improved claims ratios in
the Division's other lines.

The Investment Products Division's pretax earnings were $0.8 million lower
in 1993 compared to 1992 primarily due to the $3.2 million more rapid
amortization of deferred policy acquisition costs, in part, to shorten the
amortization period on book value annuities, sales of which were substantially
discontinued at the end of 1992. Annuity deposits were $836 million at December
31, 1993 compared to $674 million at December 31, 1992. Average deposits for the
year were $742 million, 42% higher than for 1992.

The Guaranteed Investment Contracts ("GIC") Division had pretax earnings of
$27.2 million in 1993 and $18.2 million in 1992. GIC earnings have increased due
to the growth in GIC deposits placed with Protective. At December 31, 1993, GIC
deposits totaled $2.0 billion compared to $1.7 billion one year earlier.

5

Pretax earnings from the Acquisitions Division increased $9.8 million in
1993 as compared to 1992. Earnings from the Acquisitions Division are normally
expected to decline over time (due to the lapsing of policies resulting from
deaths of insureds or terminations of coverage) unless new acquisitions are
made. On July 30, 1993, Protective completed its acquisition of Wisconsin
National. Protective also reinsured a block of universal life policies in the
1993 third quarter. These two acquisitions contributed approximately $5.1
million to 1993 earnings. The Division also experienced improved results in its
other blocks of acquired policies.

The Corporate and Other segment consists of several small insurance lines of
business, net investment income and other operating expenses not identified with
the preceding business segments (including interest on substantially all debt),
and the operations of a small noninsurance subsidiary. Pre-tax losses for this
segment were 6.7 million higher in 1993 as compared to 1992 primarily due to the
aforementioned reapportionment of net investment income within Protective.

INCOME TAX EXPENSE

The following table sets forth the effective income tax rates for the
periods shown:

YEAR ENDED EFFECTIVE INCOME TAX
DECEMBER 31 RATES
- ------------ ---------------------

1993..................................... 33.4%
1992..................................... 29.6

For the year ended December 31, 1992, the effective income tax rate was
29.6%. In August 1993, the corporate income tax rate was increased from 34% to
35%, which resulted in a one-time increase to income tax expense of $1.2 million
due to a recalculation of Protective's deferred income tax liability. The
effective income tax rate for 1993, excluding the one-time increase, was 33.4%.
Management's estimate of the effective income tax rate for 1994 is 32%.

NET INCOME

The following table sets forth net income for the periods shown:

NET INCOME
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YEAR ENDED PERCENTAGE
DECEMBER 31 AMOUNT INCREASE
- ------------- --------------- -------------
(IN THOUSANDS)

1993.................................... $ 56,155 39.6%
1992.................................... 40,227 27.7

Compared to 1992, net income in 1993 increased 39.6%, reflecting improved
earnings in most of its major lines which were partially offset by a higher
effective income tax rate and the $1.2 million one-time increase to income tax
expense discussed above. Additionally, 1992 includes a reduction to income of
approximately $1.1 million representing the cumulative effect of a change in
accounting principle associated with Protective's adoption of Statement of
Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions."

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." Protective anticipates that
the impact of adopting SFAS No. 114 on its financial condition will be
insignificant.

ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA

6

REPORT OF INDEPENDENT ACCOUNTANTS

To the Directors and Stockholder
Protective Life Insurance Company
Birmingham, Alabama

We have audited the consolidated financial statements and the financial
statement schedules of Protective Life Insurance Company and Subsidiaries listed
in the index on page 33 of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protective Life
Insurance Company and Subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.

As discussed in Note A to the Consolidated Financial Statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1993. Also, as discussed in Note L to the Consolidated Financial
Statements, the Company changed its method of accounting for postretirement
benefits other than pensions in 1992.

COOPERS & LYBRAND

February 14, 1994

7

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31
----------------------------------
1993 1992 1991
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REVENUES
Premiums and policy fees (net of premiums ceded: 1993 - $126,912; 1992 -
$109,355; 1991 - $89,927)................................................. $ 351,423 $ 323,136 $ 273,975
Net investment income...................................................... 354,165 274,991 222,619
Realized investment gains (losses)......................................... 5,054 (154) (3,085)
Other income............................................................... 4,756 10,675 7,495
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715,398 608,648 501,004
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BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance: 1993 - $95,708; 1992
- $74,904; 1991 - $68,070)................................................ 461,636 409,557 346,591
Amortization of deferred policy acquisition costs.......................... 73,335 48,403 39,831
Other operating expenses................................................... 94,315 91,925 69,617
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629,286 549,885 456,039
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INCOME BEFORE INCOME TAX..................................................... 86,112 58,763 44,965
INCOME TAX EXPENSE
Current.................................................................... 33,039 19,475 11,699
Deferred................................................................... (3,082) (2,082) 325
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29,957 17,393 12,024
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INCOME BEFORE MINORITY INTEREST.............................................. 56,155 41,370 32,941
MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES................. 90 1,437
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INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............ 56,155 41,280 31,504
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF INCOME TAX:
$542)....................................................................... 1,053
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NET INCOME................................................................... $ 56,155 $ 40,227 $ 31,504
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See notes to consolidated financial statements.

8

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

DECEMBER 31
------------------------
1993 1992
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ASSETS
Investments:
Fixed maturities, 1993 at market (amortized cost: $2,985,670); 1992 at
amortized cost (market: $2,247,828).......................................... $3,051,292 $2,185,015
Equity securities, at market (cost: 1993-$33,331; 1992-$21,804)............... 40,596 26,588
Mortgage loans on real estate................................................. 1,408,444 1,178,864
Investment real estate, net of accumulated depreciation (1993-$3,126;
1992-$1,229)................................................................. 21,928 16,887
Policy loans.................................................................. 141,136 117,873
Other long-term investments................................................... 22,760 21,183
Short-term investments........................................................ 79,772 50,500
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Total investments........................................................... 4,765,928 3,596,910
Cash............................................................................ 23,951 11,567
Accrued investment income....................................................... 51,330 41,547
Accounts and premiums receivable, net of allowance for uncollectible
amounts (1993-$5,024; 1992-$1,108)............................................. 20,473 27,461
Reinsurance receivables......................................................... 102,559 4,406
Deferred policy acquisition costs............................................... 299,307 274,923
Property and equipment, net..................................................... 33,046 32,029
Receivables from related parties................................................ 382 279
Other assets.................................................................... 7,473 7,629
Assets held in separate accounts................................................ 3,400 3,406
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$5,307,849 $4,000,157
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LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims............................................. $1,380,845 $ 929,592
Unearned premiums............................................................. 88,785 75,177
---------- ----------
1,469,630 1,004,769
Guaranteed investment contract deposits......................................... 2,015,075 1,694,530
Annuity deposits................................................................ 1,005,742 674,062
Other policyholders' funds...................................................... 141,975 122,770
Other liabilities............................................................... 74,375 64,350
Accrued income taxes............................................................ 7,483 2,410
Deferred income taxes........................................................... 69,118 51,842
Short-term debt................................................................. 20 34
Long-term debt.................................................................. 98 2,014
Indebtedness to related parties................................................. 48,943 41,143
Liabilities related to separate accounts........................................ 3,400 3,406
Minority interest in consolidated subsidiaries.................................. 1,311
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Total liabilities......................................................... 4,835,859 3,662,641
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COMMITMENTS AND CONTINGENCIES -- NOTE G
REDEEMABLE PREFERRED STOCK, $1.00 par value, at redemption value
Shares authorized and issued: 2,000............................................ 2,000 2,000
---------- ----------
STOCKHOLDER'S EQUITY
Common Stock, $1.00 par value................................................... 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital...................................................... 126,494 85,494
Net unrealized gains on investments (Net of income tax: 1993-$19,774;
1992-$1,628)................................................................... 39,284 3,156
Retained earnings............................................................... 305,176 247,986
Note receivable from PLC Employee Stock Ownership Plan.......................... (5,964) (6,120)
---------- ----------
Total stockholder's equity................................................ 469,990 335,516
---------- ----------
$5,307,849 $4,000,157
---------- ----------
---------- ----------

See notes to consolidated financial statements.

9

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NET NOTE
ADDITIONAL UNREALIZED RECEIVABLE TOTAL
COMMON PAID-IN GAINS (LOSSES) RETAINED FROM PLC STOCKHOLDER'S
STOCK CAPITAL ON INVESTMENTS EARNINGS ESOP EQUITY
------ ---------- --------------- -------- ---------- -------------

Balance, December 31, 1990................... $5,000 $ 74,011 $ (486) $185,501 $ (6,890) $ 257,136
Net income for 1991........................ 31,504 31,504
Common dividends ($.70 per share).......... (3,492) (3,492)
Preferred dividends ($1,250 per share)..... (2,500) (2,500)
Decrease in net unrealized losses on
investments............................... 4,467 4,467
Sale of PLC Stock to PLC ESOP (2,137
shares)................................... 28 28
Decrease in note receivable from PLC
ESOP...................................... 627 627
Purchase of minority interest of National
Deposit................................... 10,698 10,698
------ ---------- ------- -------- ---------- -------------
Balance, December 31, 1991................... 5,000 84,737 3,981 211,013 (6,263) 298,468
Net income for 1992........................ 40,227 40,227
Common dividends ($.38 per share).......... (1,904) (1,904)
Preferred dividends ($675 per share)....... (1,350) (1,350)
Decrease in net unrealized gains on
investments............................... (825) (825)
Sale of PLC Stock to PLC ESOP (728
shares)................................... 16 16
Sale of PLC Stock to PLC (39,688 shares)... 643 643
Transfer of assets from PLC................ 98 98
Decrease in note receivable from PLC
ESOP...................................... 143 143
------ ---------- ------- -------- ---------- -------------
Balance, December 31, 1992................... 5,000 85,494 3,156 247,986 (6,120) 335,516
Net income for 1993........................ 56,155 56,155
Preferred dividends ($750 per share)....... (1,500) (1,500)
Transfer of Southeast Health Plan, Inc.
common stock to PLC....................... 2,535 2,535
Increase in net unrealized gains on
investments............................... 36,128 36,128
Capital contribution from PLC.............. 41,000 41,000
Decrease in note receivable from PLC
ESOP...................................... 156 156
------ ---------- ------- -------- ---------- -------------
Balance, December 31, 1993 -- Note H......... $5,000 $ 126,494 $ 39,284 $305,176 $ (5,964) $ 469,990
------ ---------- ------- -------- ---------- -------------
------ ---------- ------- -------- ---------- -------------

See notes to consolidated financial statements.

10

PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31
----------------------------------
1993 1992 1991
---------- ---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................................... $ 56,155 $ 40,227 $ 31,504
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred policy acquisition costs............................. 73,335 48,403 39,831
Capitalization of deferred policy acquisition costs........................... (92,935) (81,160) (62,711)
Depreciation expense.......................................................... 2,660 2,974 2,803
Deferred income taxes......................................................... 16,987 (3,280) 1,077
Accrued income taxes.......................................................... 5,040 2,368 (743)
Interest credited to universal life and investment products................... 220,772 173,658 132,533
Policy fees assessed on universal life and investment products................ (67,314) (46,383) (37,546)
Change in accrued investment income and other receivables..................... (91,864) (2,135) (32,082)
Change in policy liabilities and other policyholder funds of traditional life
and health products.......................................................... 47,212 4,307 (8,003)
Change in other liabilities................................................... 11,970 6,230 5,682
Other (net)................................................................... 10,517 (3,377) 8,236
---------- ---------- ----------
Net cash provided by operating activities......................................... 192,535 141,832 80,581
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of investments acquired.................................................... (2,320,628) (1,997,470) (1,521,244)
Maturities and principal reductions of investments.............................. 1,319,590 881,795 574,018
Sale of investments............................................................. 244,683 338,850 191,896
Acquisitions and bulk reinsurance assumptions................................... 14,170 23,274
Principal payments on subordinated debenture of PLC............................. 3,678 282
Purchase of property and equipment.............................................. (3,451) (2,679) (3,857)
Sale of property and equipment.................................................. 1,817 181 392
---------- ---------- ----------
Net cash used in investing activities............................................. (743,819) (752,371) (758,513)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowing under line of credit arrangements and long-term debt.... 574,423 297,300 132,465
Proceeds from borrowing from PLC................................................ 4,700
Proceeds from surplus note to PLC............................................... 35,000 15,000
Capital contribution from PLC................................................... 41,000
Principal payments on line of credit arrangements and long-term debt............ (577,767) (297,331) (154,188)
Principal payment on surplus note to PLC........................................ (22,500) (4,500) (1,000)
Dividends to stockholder........................................................ (1,500) (3,254) (5,992)
Change in universal life and investment product deposits........................ 515,012 607,721 686,458
---------- ---------- ----------
Net cash provided by financing activities......................................... 563,668 619,636 657,743
---------- ---------- ----------
INCREASE(DECREASE) IN CASH........................................................ 12,384 9,097 (20,189)
CASH AT BEGINNING OF YEAR......................................................... 11,567 2,470 22,659
---------- ---------- ----------
CASH AT END OF YEAR............................................................... $ 23,951 $ 11,567 $ 2,470
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on notes and mortgages payable....................................... $ 3,803 $ 326 $ 1,026
Income taxes.................................................................. $ 27,432 $ 17,278 $ 10,495
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Minority interest in consolidated subsidiary.................................... $ (1,311) $ 90 $ (4,549)
Merger of subsidiary............................................................ $ 10,698
Sale of PLC stock to PLC........................................................ $ 643
Sale of PLC stock to ESOP....................................................... $ 16 $ 28
Reduction of principal on note from ESOP........................................ $ 156 $ 143 $ 627
Acquisitions and bulk reinsurance assumptions
Assets acquired............................................................... $ 423,140 $ 103,557
Liabilities assumed........................................................... (429,580) (130,008)
---------- ----------
Net........................................................................... $ (6,440) $ (26,451)
---------- ----------
---------- ----------

See notes to consolidated financial statements.

11

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements of Protective Life
Insurance Company and subsidiaries ("Protective") are prepared on the basis of
generally accepted accounting principles. Such accounting principles differ from
statutory reporting practices used by insurance companies in reporting to state
regulatory authorities. See also Note B.

ENTITIES INCLUDED

The consolidated financial statements include the accounts, after
intercompany eliminations, of Protective Life Insurance Company and its
wholly-owned subsidiaries including Wisconsin National Life Insurance Company
("Wisconsin National") and American Foundation Life Insurance Company ("American
Foundation"). Protective is a wholly-owned subsidiary of Protective Life
Corporation ("PLC"), an insurance holding company.

Additionally, the financial statements include the accounts of
majority-owned subsidiaries. The ownership interest of the other stockholders of
these subsidiaries is called a minority interest and is reported as a liability
of Protective and as an adjustment to income.

PLC has from time to time merged other life insurance companies it has
acquired (or formed) into Protective. Acquisitions have been accounted for as
purchases by PLC. The results of such mergers have been included in the
accompanying financial statements as if the mergers into Protective had occurred
on the dates the merged companies were acquired (or formed) by PLC. Such mergers
into Protective have been accounted for in a manner similar to that in
pooling-of-interests accounting.

RECENTLY ISSUED ACCOUNTING STANDARDS

In 1992, Protective adopted Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting For Postretirement Benefits Other Than
Pensions." SFAS No. 106 was accounted for as a change in accounting principle
with the cumulative effect reported as a reduction to income.

In 1993, Protective adopted SFAS No. 109, "Accounting for Income Taxes."
Adoption of this accounting standard did not have a material effect on
Protective's financial statements.

Protective also adopted in 1993 SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This statement
eliminates the reporting of insurance activities net of the effects of
reinsurance ceded. The adoption of this statement increased reported assets and
liabilities by approximately $97.9 million at December 31, 1993. Protective has
not restated any previously reported financial statements as a result of
adopting this statement.

At December 31, 1993, Protective adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." For purposes of adopting
SFAS No. 115 Protective has classified all of its investments in fixed
maturities, equity securities, and short-term investments as "available for
sale." As prescribed by SFAS No. 115, these investments are recorded at their
market values at December 31, 1993 with the resulting net unrealized gain
recorded as an increase in stockholder's equity. The effect of adopting SFAS No.
115 at December 31, 1993 was to increase fixed maturities by $65.6 million,
decrease deferred policy acquisition

12

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
costs by $12.4 million, increase the liability for deferred income taxes by
$18.6 million, and increase stockholder's equity by $34.6 million. In accordance
with the provisions of SFAS No. 115, 1992 amounts have not been restated.

INVESTMENTS

Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:

- Fixed maturities (bonds, bank loan participations, and redeemable
preferred stocks) -- 1993: at current market value; 1992: at cost,
adjusted for amortization of premium or discount and other than temporary
market value declines.

- Equity securities (common and nonredeemable preferred stocks) -- at
current market value.

- Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.

- Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate acquired
through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.

- Policy loans -- at unpaid balances.

- Other long-term investments -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.

- Short-term investments -- at cost, which approximates current market
value.

Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $11 million in bank
deposits voluntarily restricted as to withdrawal.

Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis. Temporary changes in market
values of certain investments are reflected as unrealized gains or losses
directly in stockholder's equity (net of income tax) and accordingly have no
effect on net income.

A combination of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, and liabilities arising
from interest sensitive products such as guaranteed investment contracts and
individual annuities. Realized investment gains and losses on such contracts are
deferred and amortized over the life of the hedged asset. Protective also uses
interest rate swap contracts to convert certain investments from a variable to a
fixed rate of interest. At December 31, 1993, open interest rate swap contracts
were in a $9.0 million unrealized gain position.

CASH

Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.

13

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT

Property and equipment are reported at cost. Protective uses both
accelerated and straight-line methods of depreciation based upon the estimated
useful lives of the assets. Major repairs or improvements are capitalized and
depreciated over the estimated useful lives of the assets. Other repairs are
expensed as incurred. The cost and related accumulated depreciation of property
and equipment sold or retired are removed from the accounts, and resulting gains
or losses are included in income.

Property and equipment consisted of the following at December 31:

1993 1992
--------- ---------

Administrative office building.......................................... $ 35,284 $ 35,267
Other, principally furniture and equipment.............................. 21,576 19,901
--------- ---------
56,860 55,168
Accumulated depreciation................................................ 23,814 23,139
--------- ---------
$ 33,046 $ 32,029
--------- ---------
--------- ---------

REVENUES, BENEFITS, CLAIMS, AND EXPENSES

- Traditional Life and Health Insurance Products -- Traditional life
insurance products consist principally of those products with fixed and
guaranteed premiums and benefits, and include whole life insurance
policies, term life insurance policies, limited-payment life insurance
policies, and certain annuities with life contingencies. Life insurance
and immediate annuity premiums are recognized as revenue when due. Health
insurance premiums are recognized as revenue over the terms of the
policies. Benefits and expenses are associated with earned premiums so
that profits are recognized over the life of the contracts. This is
accomplished by means of the provision for liabilities for future policy
benefits and the amortization of deferred policy acquisition costs.

Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions
as to investment yields, mortality, persistency, and other assumptions
based on Protective's experience modified as necessary to reflect
anticipated trends and to include provisions for possible adverse
deviation. Reserve investment yield assumptions are graded and range from
2.5% to 7.0%. The liability for future policy benefits and claims on
traditional life and health insurance products includes estimated unpaid
claims that have been reported to Protective and claims incurred but not
yet reported. Policy claims are charged to expense in the period that the
claims are incurred.

- Universal Life and Investment Products -- Universal life and investment
products include universal life insurance, guaranteed investment
contracts, deferred annuities, and annuities without life contingencies.
Revenues for universal life and investment products consist of policy fees
that have been assessed against policy account balances for the costs of
insurance, policy administration, and surrenders. That is, universal life
and investment product deposits are not considered revenues in accordance
with generally accepted accounting principles. Benefit reserves for
universal life and

14

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investment products represent policy account balances before applicable
surrender charges plus certain deferred policy initiation fees that are
recognized in income over the term of the policies. Policy benefits and
claims that are charged to expense include benefit claims incurred in the
period in excess of related policy account balances and interest credited
to policy account balances. Interest credit rates for universal life and
investment products ranged from 3.0% to 9.4% in 1993.

At December 31, 1993, Protective estimates the fair value of its
guaranteed investment contracts to be $2,105 million using discounted cash
flows. The surrender value of Protective's annuities which approximates
fair value was $1,003 million.

- Policy Acquisition Costs -- Commissions and other costs of acquiring
traditional life and health insurance, universal life insurance, and
investment products that vary with and are primarily related to the
production of new business have been deferred. Traditional life and health
insurance acquisition costs are amortized over the premium-payment period
of the related policies in proportion to the ratio of annual premium
income to total anticipated premium income. Acquisition costs for
universal life and annuities are being amortized over the lives of the
policies in relation to the present value of estimated gross profits from
surrender charges and investment, mortality, and expense margins. For
1993, these costs have been reduced by an amount equal to the amortization
that would have been recorded if unrealized gains or losses on investments
associated with Protective's universal life and investment products had
been realized.

At the time it adopted SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," Protective made certain assumptions
regarding the mortality, persistency, expenses, and interest rates it
expected to experience in future periods. Under SFAS No. 97, these
assumptions are to be best estimates and are to be periodically updated
whenever actual experience and/or expectations for the future change from
initial assumptions. Accordingly, Protective has substituted its actual
experience to date for that previously assumed.

The cost to acquire blocks of insurance representing the present value of
future profits from such blocks of insurance is also included in deferred
policy acquisition costs, discounted at interest rates averaging 15%. For
acquisitions occurring after 1988, Protective amortizes the present value
of future profits over the premium-payment period including accrued
interest at 8%. The unamortized present value of future profits for such
acquisitions was approximately $39.4 million and $29.9 million at December
31, 1993 and 1992, respectively. During 1993 $12.4 million of present
value of future profits on acquisitions made during the year was
capitalized, and $0.4 million was amortized. The unamortized present value
of future profits for all acquisitions was $69.9 million at December 31,
1993 and $65.4 million at December 31, 1992.

15

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PARTICIPATING POLICIES

Participating business comprises approximately 4% of the ordinary life
insurance in force and 4% of the ordinary life insurance premium income.
Policyholder dividends totaled $2.6 million in 1993, $2.6 million in 1992, and
$2.8 million in 1991, respectively.

INCOME TAXES

Protective uses the liability method of accounting for income taxes. Income
tax provisions are generally based on income reported for financial statement
purposes. Deferred federal income taxes arise from the recognition of temporary
differences between income determined for financial reporting purposes and
income tax purposes. Such temporary differences are principally related to the
deferral of policy acquisition costs and the provision for future policy
benefits and expenses.

RECLASSIFICATIONS

Certain reclassifications have been made in the previously reported
financial statements to make the prior year amounts comparable to those of the
current year. Such reclassifications had no effect on the previously reported
net income, total assets, or stockholder's equity.

NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principals ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method and are based on realistic
estimates of expected mortality, interest, and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions, (c) deferred
income taxes are provided for significant temporary differences between
financial and taxable earnings, (d) the Asset Valuation Reserve and Interest
Maintenance Reserve are restored to stockholder's equity, (e) furniture and
equipment, agents' debit balances, and prepaid expenses are reported as assets
rather than being charged directly to surplus (referred to as nonadmitted
items), (f) certain items of interest income, principally accrual of mortgage
and bond discounts are amortized differently, and (g) bonds are stated at market
instead of amortized cost.

16

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED)
The reconciliations of net income and stockholder's equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:

NET INCOME STOCKHOLDER'S EQUITY
------------------------------- -------------------------------
1993 1992 1991 1993 1992 1991
--------- --------- --------- --------- --------- ---------

In conformity with statutory reporting
practices:
Protective Life Insurance Company............. $ 41,471 $ 25,138 $ 28,071 $ 263,075 $ 206,476 $ 177,285
Wisconsin National Life Insurance Company..... 9,591 50,885
American Foundation Life Insurance Company.... 1,415 2,155 2,401 18,290 18,394 17,717
Empire General Life Assurance Corporation..... 408 (201) 10,588 5,178
Capital Investors Life Insurance Company...... 228 879
Protective Life Insurance Corporation of
Alabama...................................... 25 2,073
National Deposit Life Insurance Company1...... 5,386 5,730 10,188
Protective Life Insurance Acquisition
Corporation2................................. 22 (6) 2,009
Consolidation elimination..................... (74) (1,000) (80,715) (21,572) (17,726)
--------- --------- --------- --------- --------- ---------
53,138 32,426 35,196 265,075 208,476 189,473
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization................................. 25,686 33,476 22,908 299,307 274,923 214,895
Policy liabilities and accruals............... (15,586) (26,486) (16,474) (69,844) (45,583) (16,215)
Deferred income tax........................... 3,081 2,082 (325) (69,118) (51,842) (55,121)
Asset Valuation Reserve....................... 43,398 25,341 27,821
Interest Maintenance Reserve.................. (1,432) (93) 10,489 1,634
Nonadmitted items............................. 1,190 685 (27) 7,742 (10,178) (1,521)
Timing differences on mortgage loans on real
estate and fixed maturity investments........ 1,645 1,296 3,297 7,350 (11,608) (16,131)
Net unrealized losses on investments.......... (334) (378) (1,648)
Realized investment losses.................... (7,860) (2,565) (8,741)
Noninsurance affiliates....................... (12) 934 (1,606) 31 (2,535) 16,171
Consolidation elimination..................... (2,107) (5,310) (1,492) (26,002) (49,916) (56,791)
Minority interest in consolidated
subsidiaries................................. (90) (1,437) (1,311) (1,221)
Other adjustments, net........................ (1,588) 3,872 205 1,896 (1,507) (1,244)
--------- --------- --------- --------- --------- ---------
In conformity with generally accepted
accounting principles........................ $ 56,155 $ 40,227 $ 31,504 $ 469,990 $ 335,516 $ 298,468
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------

- --------------------------
(1) Merged into Protective in September 1992.
(2) Formed to facilitate Protective's acquisition of Employers National Life
Insurance Company. See Note F.

17

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE C -- INVESTMENT OPERATIONS
Major categories of investment income for the years ended December 31 are
summarized as follows:

1993 1992 1991
---------- ---------- ----------

Fixed maturities......................................... $ 211,566 $ 174,051 $ 132,206
Equity securities........................................ 1,519 939 2,573
Mortgage loans on real estate............................ 130,262 108,128 88,664
Investment real estate................................... 2,119 1,848 1,095
Policy loans............................................. 7,558 6,781 6,395
Other, principally short-term investments................ 18,779 3,799 9,615
---------- ---------- ----------
371,803 295,546 240,548
Investment expenses...................................... 17,638 20,555 17,929
---------- ---------- ----------
$ 354,165 $ 274,991 $ 222,619
---------- ---------- ----------
---------- ---------- ----------

Realized investment gains (losses) for the years ended December 31 are
summarized as follows:

1993 1992 1991
--------- ---------- ---------

Fixed maturities............................................ $ 10,508 $ 8,163 $ 2,547
Equity securities........................................... 2,230 3,688 763
Other investments........................................... (7,684) (12,005) (6,395)
--------- ---------- ---------
$ 5,054 $ (154) $ (3,085)
--------- ---------- ---------
--------- ---------- ---------

Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $35.2, $26.5 million, and $16.8 million at
December 31, 1993, 1992, and 1991, respectively. Additions to the allowance are
included in realized investment losses. Without such additions, Protective had
realized investment gains of $13.8 million, $9.5 million, and $7.4 million in
1993, 1992, and 1991, respectively.

In 1993, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $8.3 million and
gross losses were less than $0.4 million. In 1992, gross gains on the sale of
fixed maturities were $12.8 million and gross losses were $1.7 million. In 1991,
gross gains were $4.8 million and gross losses were $1.9 million.

18

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market value of Protective's investments
classified as available for sale at December 31, 1993 are as follows:

GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1993 COST GAINS LOSSES VALUES
- ----------------------------------------- ------------ ---------- ---------- ------------

Fixed maturities:
Bonds:
Mortgage-backed securities........... $ 1,531,012 $ 31,532 $ 957 $ 1,561,587
United States Government and
authorities......................... 89,372 2,818 0 92,190
States, municipalities, and political
subdivisions........................ 15,024 133 2 15,155
Public utilities..................... 339,613 4,262 252 343,623
Convertibles and bonds with
warrants............................ 1,421 0 167 1,254
All other corporate bonds............ 822,505 28,799 688 850,616
Bank loan participations............... 151,278 0 0 151,278
Redeemable preferred stocks............ 35,445 226 82 35,589
------------ ---------- ---------- ------------
2,985,670 67,770 2,148 3,051,292
Equity securities........................ 33,331 8,560 1,295 40,596
Short-term investments................... 79,772 0 0 79,772
------------ ---------- ---------- ------------
$ 3,098,773 $ 76,330 $ 3,443 $ 3,171,660
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------

19

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of Protective's investments
in fixed maturities at December 31, 1992 are as follows:

GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1992 COST GAINS LOSSES VALUES
- ----------------------------------------- ------------ ----------- ----------- ------------

Bonds:
Mortgage-backed securities............. $ 1,269,620 $ 35,637 $ 0 $ 1,305,257
United States Government and
authorities........................... 21,307 2,595 0 23,902
States, municipalities, and political
subdivisions.......................... 935 228 0 1,163
Public utilities....................... 260,590 7,787 0 268,377
Convertibles and bonds with warrants... 5,224 193 0 5,417
All other corporate bonds.............. 473,536 15,883 0 489,419
Bank loan participations................. 148,683 0 0 148,683
Redeemable preferred stocks.............. 5,120 490 0 5,610
------------ ----------- ----------- ------------
$ 2,185,015 $ 62,813 $ 0 $ 2,247,828
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------

The amortized cost and estimated market value of fixed maturities at
December 31, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay certain of these obligations.

ESTIMATED ESTIMATED
AMORTIZED MARKET
COST VALUES
------------ ------------

1993
Due in one year or less.............................................. $ 24,667 $ 24,755
Due after one year through five years................................ 359,545 367,836
Due after five years through ten years............................... 550,773 567,778
Due after ten years.................................................. 2,050,685 2,090,923
------------ ------------
$ 2,985,670 $ 3,051,292
------------ ------------
------------ ------------
1992
Due in one year or less.............................................. $ 26,474 $ 26,790
Due after one year through five years................................ 305,732 310,355
Due after five years through ten years............................... 271,307 281,648
Due after ten years.................................................. 1,581,502 1,629,035
------------ ------------
$ 2,185,015 $ 2,247,828
------------ ------------
------------ ------------

20

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:

RATING 1993 1992
- ------------------------------------------------------------ ------ ------

AAA......................................................... 52.5% 51.7%
AA.......................................................... 7.8 10.0
A........................................................... 15.1 15.8
BBB
Bonds..................................................... 16.2 12.9
Bank loan participations.................................. 1.0 2.7
BB or Less
Bonds..................................................... 2.2 2.5
Bank loan participations.................................. 4.0 4.1
Redeemable preferred stocks................................. 1.2 0.3
------ ------
100.0% 100.0%
------ ------
------ ------

At December 31, 1993, Protective had bonds which were rated less than
investment grade of $67.3 million having an amortized cost of $66.7 million.
Additionally, Protective had bank loan participations which were rated less than
investment grade of $121.7 million, having an amortized cost of $121.7 million.

The change in unrealized gains (losses) on fixed maturity and equity
securities for the years ended December 31 is summarized as follows:

1993 1992 1991
--------- --------- ---------

Fixed maturities................................................. $ 1,198 $ 76 $ 65,955
Equity securities................................................ $ 1,565 $ (825) $ 4,467

At December 31, 1993, all of Protective's mortgage loans were commercial
loans of which 79% were retail, 9% were warehouses, and 8% were office
buildings. Protective specializes in making mortgage loans on either
credit-oriented or credit-anchored commercial properties, most of which are
strip shopping centers in smaller towns and cities. No single tenant's leased
space represents more than 7% of mortgage loans. Approximately 85% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: Alabama, North Carolina, Tennessee, Georgia,
South Carolina, Texas, Florida, Mississippi, Virginia, Colorado, California,
Ohio, Wisconsin, Illinois, Indiana, and Michigan.

Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $50.2
million would become due in 1994, $480.1 million in 1995 to 1998, and $218.7
million in 1999 to 2003.

At December 31, 1993, the average mortgage loan was $1.4 million, and the
weighted average interest rate was 9.6%. The largest mortgage loan was $9.3
million. While Protective's $1,408.4 million of mortgage loans do not have
quoted market values, at December 31, 1993, Protective estimates the market
value of its mortgage loans to be $1,524.2 million using discounted cash flows
from the next call date.

21

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
At December 31, 1993 and 1992, Protective's problem mortgage loans and
foreclosed properties totaled $27.1 million and $16.4 million, respectively.
Protective expects no significant loss of principal.

Certain investments, principally real estate, with a carrying value of $9.9
million were nonincome producing for the twelve months ended December 31, 1993.

Mortgage loans to Fletcher Bright and Kenneth Karl totaling $92.1 million
and $48.5 million, respectively, exceeded 10% of stockholder's equity at
December 31, 1993.

The Company believes it is not practicable to determine the fair value of
its policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0% The fair values of Protective's other long-term
investments approximate cost.

NOTE D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:

1993 1992 1991
------ ------ ------

Statutory federal income tax rate applied to pretax
income..................................................... 35.0% 34.0% 34.0%
Amortization of nondeductible goodwill...................... 0.4 0.1
Dividends received deduction and tax-exempt interest........ (0.5) (1.0) (1.1)
Tax benefits arising from prior acquisitions and other
adjustments................................................ (1.1) (3.8) (5.5)
Special deduction for life insurance companies.............. (.8)
------ ------ ------
Effective income tax rate................................... 33.4% 29.6% 26.7%
------ ------ ------
------ ------ ------

In August 1993, the corporate income tax rate was increased from 34% to 35%
which resulted in a one-time increase to income tax expense of $1.2 million due
to a recalculation of Protective's deferred income tax liability. The effective
income tax rate for 1993 of 33.4% excludes the one-time increase.

The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for income tax purposes.

22

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
Details of the deferred income tax provision for the years ended December 31
are as follows:

1993 1992 1991
--------- --------- ---------

Deferred policy acquisition costs............................. $ 8,861 $ 7,351 $ 3,033
Benefit and other policy liability changes.................... (10,416) (9,005) (5,601)
Temporary differences of investment income.................... 336 1,366
Effect of operating loss carryforward......................... 0 4,841
Other items................................................... (1,527) (764) (3,314)
--------- --------- ---------
$ (3,082) $ (2,082) $ 325
--------- --------- ---------
--------- --------- ---------

The components of Protective's net deferred income tax liability as of
December 31, 1993 were as follows:

1993
---------

Deferred income tax assets:
Policy and policyholder liability reserves....................................... $ 25,123
Other............................................................................ 4,484
---------
29,607
---------
Deferred income tax liabilities:
Deferred policy acquisition costs................................................ 79,199
Unrealized gain on investments................................................... 19,526
---------
98,725
---------
Net deferred income tax liability................................................ $ 69,118
---------
---------

Under pre-1984 life insurance company income tax laws, a portion of
Protective's gain from operations which was not subject to current income
taxation was accumulated for income tax purposes in a memorandum account
designated as Policyholders' Surplus. The aggregate accumulation in this account
at December 31, 1993 was approximately $50.7 million. Should the accumulation in
the Policyholders' Surplus account exceed certain stated maximums, or should
distributions including cash dividends be made to PLC in excess of approximately
$184 million, such excess would be subject to federal income taxes at rates then
effective. Deferred income taxes have not been provided on amounts designated as
Policyholders' Surplus. Protective does not anticipate involuntarily paying
income tax on amounts in the Policyholders' Surplus accounts.

At December 31, 1993 Protective has no unused income tax loss carryforwards.

Protective's income tax returns are included in the consolidated income tax
returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations.

23

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE E -- DEBT
Short-term and long-term debt at December 31 are summarized as follows:

1993 1992 1991
--------- --------- ---------

Short-term debt:
Current portion of mortgage and other notes payable........................ $ 20 $ 34 $ 31
--------- --------- ---------
--------- --------- ---------
Long-term debt:
Mortgage and other notes payable less current portion...................... $ 98 $ 2,014 $ 2,048
--------- --------- ---------
--------- --------- ---------

At December 31, 1993, PLC had borrowed under a term note that contains,
among other provisions, requirements for maintaining certain financial ratios,
and restrictions on indebtedness incurred by PLC's subsidiaries including
Protective. Additionally, PLC, on a consolidated basis, cannot incur debt in
excess of 40% of its total capital.

Included in indebtedness to related parties are three surplus debentures
issued by Protective to PLC. At December 31, 1993, the balance of the three
surplus debentures combined was $48.9 million.

Interest expense totaled $5.0 million, $3.3 million, and $3.5 million in
1993, 1992, and 1991, respectively.

NOTE F -- ACQUISITIONS
In March 1992, regulatory approval was received to merge Employers National
Life Insurance Company into Protective. Additionally, effective July 1, 1992,
Protective assumed all of the policy obligations associated with the credit life
and credit accident and health insurance business produced by Durham Life
Insurance Company.

In July 1993, Protective acquired Wisconsin National Life Insurance Company
("Wisconsin National"). In addition, Protective reinsured a block of universal
life policies.

These transactions have been accounted for as purchases, and the results of
the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.

Summarized below are the consolidated results of operations for 1993 and
1992, on an unaudited pro forma basis, as if the Wisconsin National acquisition
had occurred as of January 1, 1992. The pro forma information is based on
Protective's consolidated results of operations for 1993 and 1992 and on data
provided by Wisconsin National, after giving effect to certain pro forma
adjustments. The pro forma financial information does not purport to be
indicative of results of operations that would have occurred had the transaction
occurred on the basis assumed above nor are they indicative of results of the
future operations of the combined enterprises.

1993 1992
---------- ----------
(UNAUDITED)

Total revenues.................................................................. $ 747,157 $ 676,572
Net income...................................................................... $ 58,033 $ 44,109

24

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1993, Protective was committed to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of
approximately $168.0 million. Also, Protective has issued a guarantee in
connection with the sale of certain tax-exempt mortgage loans which may be put
to Protective in the event of default. At December 31, 1993, the loans totaled
$25.8 million.

Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Protective does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.

NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS
At December 31, 1993, approximately $295 million of consolidated
stockholder's equity represented net assets of Protective that cannot be
transferred in the form of dividends, loans, or advances to PLC. Generally, the
net assets of Protective available for transfer to PLC are limited to the
amounts that Protective's net assets, as determined in accordance with statutory
accounting practices, exceed certain minimum amounts. However, payments of such
amounts as dividends may be subject to approval by regulatory authorities.

NOTE I -- REDEEMABLE PREFERRED STOCK
PLC owns all of the 2,000 shares of redeemable preferred stock issued by
Protective's subsidiary, American Foundation. The entire issue was reissued in
1991 and will be redeemed September 30, 1996 for $1 thousand per share, or $2
million. The stock pays, when and if declared, annual minimum cumulative
dividends of $50 per share, and noncumulative participating dividends to the
extent American Foundation's statutory earnings for the immediately preceding
fiscal year exceed $1 million. Dividends of $1.5 million, $1.4 million, and $2.5
million were paid to PLC in 1993, 1992, and 1991, respectively.

NOTE J -- RELATED PARTY MATTERS
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amounts of $382 thousand and $279 thousand at
December 31, 1993 and 1992, respectively. Protective routinely receives from or
pays to affiliates under the control of PLC reimbursements for expenses incurred
on one another's behalf. Receivables and payables among affiliates are generally
settled monthly.

On August 6, 1990, PLC announced that its Board of Directors approved the
formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990,
Protective transferred to the ESOP 520,000 shares of PLC's common stock held by
it in exchange for a note. The outstanding balance of the note, $6.0 million at
December 31, 1993, is accounted for as a reduction to stockholder's equity. The
stock will be used to match employee contributions to PLC's existing 401(k)
Plan. The ESOP shares are dividend paying. Dividends on the shares are used to
pay the ESOP's note to Protective.

Protective leases furnished office space and computers to affiliates. Lease
revenues were $2.8 million in 1993, $2.6 million in 1992, and $2.8 million in
1991. Protective purchases data processing, legal, investment

25

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE J -- RELATED PARTY MATTERS (CONTINUED)
and management services from affiliates. The costs of such services were $20.4
million, $27.5 million, and $24.7 million in 1993, 1992, and 1991, respectively.
Commissions paid to affiliated marketing organizations of $5.8 million, $4.8
million, and $2.8 million in 1993, 1992, and 1991, respectively, were included
in deferred policy acquisition costs.

Certain corporations with which PLC's directors were affiliated paid
Protective premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $10.3 million, $10.9 million, and $10.4
million in 1993, 1992, and 1991, respectively.

For a discussion of indebtedness to related parties, see Note E.

NOTE K -- BUSINESS SEGMENTS
Protective operates predominantly in the life and accident and health
insurance industry. The following table sets forth total revenues, income before
income tax, and identifiable assets of Protective's business segments. The
primary components of revenues are premiums and policy fees, net investment
income, and realized investment gains and losses. Premiums and policy fees are
attributed directly to each business segment. Net investment income is allocated
based on directly related assets required for transacting that segment of
business.

Realized investment gains (losses) and expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.

Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.

There are no significant intersegment transactions.

26

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE K -- BUSINESS SEGMENTS (CONTINUED)

1993 1992 1991
------------ ------------ ------------

TOTAL REVENUES
Agency........................................................ $ 111,497 $ 90,516 $ 80,381
Group......................................................... 143,423 129,778 129,576
Financial Institutions........................................ 96,443 63,041 35,419
Investment Products........................................... 69,550 47,678 31,000
Guaranteed Investment Contracts............................... 167,233 138,617 104,803
Acquisitions.................................................. 123,855 93,634 95,847
Corporate and Other........................................... 1,521 46,973 26,663
Unallocated Realized Investment Gains (Losses)................ 1,876 (1,589) (2,685)
------------ ------------ ------------
$ 715,398 $ 608,648 $ 501,004
------------ ------------ ------------
------------ ------------ ------------
Agency........................................................ 15.6% 14.9% 16.0%
Group......................................................... 20.0 21.3 25.9
Financial Institutions........................................ 13.5 10.4 7.1
Investment Products........................................... 9.7 7.8 6.2
Guaranteed Investment Contracts............................... 23.4 22.8 20.9
Acquisitions.................................................. 17.3 15.4 19.1
Corporate and Other........................................... 0.2 7.7 5.3
Unallocated Realized Investment Gains (Losses)................ 0.3 (0.3) (0.5)
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------
INCOME BEFORE INCOME TAX
Agency........................................................ $ 20,324 $ 12,976 $ 11,948
Group......................................................... 10,435 7,762 8,150
Financial Institutions........................................ 7,220 4,669 4,283
Investment Products........................................... 3,402 4,191 134
Guaranteed Investment Contracts*.............................. 27,218 18,266 10,887
Acquisitions.................................................. 29,845 20,031 23,493
Corporate and Other*.......................................... (14,208) (7,543) (11,245)
Unallocated Realized Investment Gains (Losses)................ 1,876 (1,589) (2,685)
------------ ------------ ------------
$ 86,112 $ 58,763 $ 44,965
------------ ------------ ------------
------------ ------------ ------------
Agency........................................................ 23.6% 22.1% 26.6%
Group......................................................... 12.1 13.2 18.1
Financial Institutions........................................ 8.4 7.9 9.5
Investment Products........................................... 4.0 7.1 0.3
Guaranteed Investment Contracts............................... 31.6 31.1 24.2
Acquisitions.................................................. 34.6 34.1 52.2
Corporate and Other........................................... (16.5) (12.8) (25.0)
Unallocated Realized Investment Gains (Losses)................ 2.2 (2.7) (5.9)
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------

27

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE K -- BUSINESS SEGMENTS (CONTINUED)

1993 1992 1991
------------ ------------ ------------
IDENTIFIABLE ASSETS

Agency........................................................ $ 641,992 $ 507,449 $ 411,955
Group......................................................... 208,790 161,445 149,090
Financial Institutions........................................ 189,943 145,014 65,785
Investment Products........................................... 876,691 683,450 430,286
Guaranteed Investment Contracts*.............................. 2,041,463 1,696,786 1,291,743
Acquisitions.................................................. 1,145,357 599,022 576,550
Corporate and Other........................................... 203,613 206,991 194,945
------------ ------------ ------------
$ 5,307,849 $ 4,000,157 $ 3,120,354
------------ ------------ ------------
------------ ------------ ------------
Agency........................................................ 12.1% 12.7% 13.2%
Group......................................................... 3.9 4.0 4.8
Financial Institutions........................................ 3.6 3.6 2.1
Investment Products........................................... 16.5 17.1 13.8
Guaranteed Investment Contracts............................... 38.5 42.4 41.4
Acquisitions.................................................. 21.6 15.0 18.5
Corporate and Other........................................... 3.8 5.2 6.2
------------ ------------ ------------
100.0% 100.0% 100.0%
------------ ------------ ------------
------------ ------------ ------------

- ------------------------
* Income before income tax for the Guaranteed Investment Contracts Division
has not been reduced for pretax minority interest of $1,631 in 1991. Income
before income tax for the Corporate and Other segment has not been reduced
by pretax minority interest of $90 in 1992 and 1991.

NOTE L -- EMPLOYEE BENEFIT PLANS
PLC has a defined benefit pension plan covering substantially all of its
employees. The plan is not separable by affiliates participating in the plan.
However, approximately 76% of the participants in the plan are employees of
Protective. The benefits are based on years of service and the employee's
highest thirty-six consecutive months of compensation. PLC's funding policy is
to contribute amounts to the plan sufficient to meet the minimum funding
requirements of ERISA plus such additional amounts as PLC may determine to be
appropriate from time to time. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future.

28

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED)
The actuarial present value of benefit obligations and the funded status of
the plan taken as a whole at December 31 is as follows:

1993 1992
--------- ---------

Accumulated benefit obligation, including vested benefits of $12,406 in 1993 and
$10,306 in 1992.................................................................. $ 12,692 $ 10,537
--------- ---------
Projected benefit obligation for service rendered to date......................... $ 20,480 $ 16,999
Plan assets at fair value (group annuity contract with Protective)................ 15,217 13,608
--------- ---------
Plan assets less than the projected benefit obligation............................ (5,263) (3,391)
Unrecognized net loss from past experience different from that assumed............ 2,244 550
Unrecognized prior service cost................................................... 2,069 2,256
Unrecognized net transition asset................................................. (118) (135)
--------- ---------
Net pension liability recognized in balance sheet................................. $ (1,068) $ (720)
--------- ---------
--------- ---------

Net pension cost includes the following components for the years ended
December 31:

1993 1992 1991
--------- --------- ---------

Service cost -- benefits earned during the year............... $ 1,191 $ 970 $ 690
Interest cost on projected benefit obligation................. 1,396 1,257 956
Actual return on plan assets.................................. (1,270) (1,172) (1,102)
Net amortization and deferral................................. 704 130 113
--------- --------- ---------
Net pension cost.............................................. $ 2,021 $ 1,185 $ 657
--------- --------- ---------
--------- --------- ---------

Protective's share of the net pension cost was $1,543 thousand, $816
thousand, and $315 thousand, in 1993, 1992, and 1991, respectively.

Assumptions used to determine the benefit obligations as of December 31 were
as follows:

1993 1992 1991
----------- ----------- -----------

Weighted average discount rate....................................... 7.5% 8.0% 8.0%
Rates of increase in compensation level.............................. 5.5% 6.0% 6.0%
Expected long-term rate of return on assets.......................... 8.5% 8.5% 8.5%

Assets of the pension plan are included in the general assets of Protective.
Upon retirement, the amount of pension plan assets vested in the retiree is used
to purchase a single premium annuity from Protective in the retiree's name.
Therefore, amounts presented above as plan assets exclude assets relating to
retirees.

PLC also sponsors an unfunded Excess Benefits Plan, which is a nonqualified
plan that provides defined pension benefits in excess of limits imposed by
federal tax law. At December 31, 1993, the projected benefit obligation of this
plan totaled $2.6 million.

29

PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)

NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED)
In addition to pension benefits, PLC provides limited health care benefits
to eligible retired employees until age 65. PLC and Protective have adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."

At January 1, 1992, PLC recognized a $1.6 million accumulated postretirement
benefit obligation, of which $0.9 million relates to current retirees and $0.7
million relates to active employees. The $1.6 million (representing Protective's
entire liability for such benefits), net of $0.5 million tax, was accounted for
as a cumulative effect of a change in accounting principle and shown as a
reduction to income. The postretirement benefit is provided by an unfunded plan.
At December 31, 1993, the liability for such benefits totaled $1.6 million. The
expense recorded by Protective was $0.2 million in 1993 and 1992. PLC's
obligation is not materially affected by a 1% change in the health care cost
trend assumptions used in the calculation of the obligation.

Life insurance benefits for retirees are provided through the purchase of
life insurance policies upon retirement equal to the employees' annual
compensation. This plan is partially funded at a maximum of $50 thousand face
amount of insurance.

In 1990, PLC established an Employee Stock Ownership Plan to match employee
contributions to PLC's existing 401(k) Plan. Previously, PLC matched employee
contributions in cash. The expense recorded by PLC for this employee benefit was
$249 thousand, $412 thousand and $451 thousand in 1993, 1992, and 1991,
respectively.

NOTE M -- REINSURANCE
Protective assumes risks from and reinsures certain parts of its risks with
other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies. While the amount retained on an individual life
will vary based upon age and mortality prospects of the risk, Protective will
not carry more than $500 thousand individual life insurance on a single risk.

Protective has reinsured approximately $7.5 billion, $7.0 billion, and $5.3
billion in face amount of life insurance risks with other insurers representing
$37.9 million, $34.8 million, and $28.3 million of premium income for 1993,
1992, and 1991, respectively. Protective has also reinsured accident and health
risks representing $88.9 million, $74.6 million, and $61.6 million of premium
income for 1993, 1992, and 1991, respectively. In 1992, policy liabilities and
accruals are shown net of policy and claim reserves relating to insurance ceded
of $90.1 million. In 1993, policy and claim reserves relating to insurance ceded
of $97.8 million are included in reinsurance receivables. Should any of the
reinsurers be unable to meet its obligation at the time of the claim, obligation
to pay such claim would remain with Protective. At December 31, 1993 and 1992,
Protective had paid $4.8 million and $4.4 million, respectively, of ceded
benefits which are recoverable from reinsurers.

30

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

Not required in accordance with General Instruction J(2)(c).

ITEM 11. EXECUTIVE COMPENSATION

Not required in accordance with General Instruction J(2)(c).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Not required in accordance with General Instruction J(2)(c).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not required in accordance with General Instruction J(2)(c).

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 (Item 8)

2. Financial Statement Schedules (see index annexed)

3. Exhibits:

The exhibits listed in the Exhibit Index on page 40 of this Form
10-K are filed herewith or are incorporated herein by reference. No
management contract or compensatory plan or arrangement is required
to be filed as an exhibit to this form. The Registrant will furnish
a copy of any of the exhibits listed upon the payment of $5.00 per
exhibit to cover the cost of the Registrant in furnishing the
exhibit.

(b) Reports on Form 8-K:

None

31

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama on March 25, 1994.

PROTECTIVE LIFE INSURANCE COMPANY

By: /s/ DRAYTON NABERS, JR.

-----------------------------------
President

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated:

SIGNATURE TITLE DATE
----------------------------------------- ---------------------------------- -----------------

(i) Principal Executive Officer
/s/ DRAYTON NABERS, JR. President March 25, 1994
--------------------------------
Drayton Nabers, Jr.
Principal Financial Officer
(ii)
/s/ JOHN D. JOHNS Executive Vice President and March 25, 1994
-------------------------------- Chief Financial Officer
John D. Johns
Principal Accounting Officer
(iii)
/s/ JERRY W. DEFOOR Vice President and Controller, March 25, 1994
-------------------------------- and Chief Accounting Officer
Jerry W. DeFoor
(iv) Board of Directors:
/s/ DRAYTON NABERS, JR. Director March 25, 1994
--------------------------------
Drayton Nabers, Jr.
/s/ JOHN D. JOHNS Director March 25, 1994
--------------------------------
John D. Johns
* Director March 25, 1994
--------------------------------
Ormond L. Bentley
* Director March 25, 1994
--------------------------------
R. Stephen Briggs
* Director March 25, 1994
--------------------------------
Jim E. Massengale
* Director March 25, 1994
--------------------------------
Steven A. Schultz
* Director March 25, 1994
--------------------------------
Wayne E. Stuenkel
* Director March 25, 1994
--------------------------------
A. S. Williams III
*By: /s/ JERRY W. DEFOOR
--------------------------------
Jerry W. DeFoor
ATTORNEY-IN-FACT

32

INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants...................................................... 7
Consolidated Statements of Income for the years ended December 31, 1993, 1992, and
1991.................................................................................. 8
Consolidated Balance Sheets as of December 31, 1993 and 1992........................... 9
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1993, 1992, and 1991..................................................... 10
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992, and
1991.................................................................................. 11
Notes to Consolidated Financial Statements............................................. 12
Financial Statement Schedules:
Schedule I -- Summary of Investments -- Other than Investments in Related Parties.... 34
Schedule II -- Amounts Receivable from Related Parties and Underwriters, Promoters,
and Employees Other Than Related Parties............................................ 35
Schedule IV -- Indebtedness of and to Related Parties................................ 36
Schedule V -- Supplementary Insurance Information.................................... 37
Schedule VI -- Reinsurance........................................................... 38
Schedule IX -- Short Term Borrowings................................................. 39

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.

33

SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
DECEMBER 31, 1993
(IN THOUSANDS)

- -----------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D
- -----------------------------------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- -------------------------------------------------------------------- ------------ ------------ ---------------

Fixed maturities:
Bonds:
Mortgage-backed securities...................................... $ 1,531,012 $ 1,561,587 $ 1,561,587
United States Government and government agencies and
authorities.................................................... 89,372 92,190 92,190
States, municipalities, and political subdivisions.............. 15,024 15,155 15,155
Public utilities................................................ 339,613 343,623 343,623
Convertibles and bonds with warrants attached................... 1,421 1,254 1,254
All other corporate bonds....................................... 822,505 850,616 850,616
Bank loan participations.......................................... 151,278 151,278 151,278
Redeemable preferred stocks....................................... 35,445 35,589 35,589
------------ ------------ ---------------
TOTAL FIXED MATURITIES........................................ 2,985,670 3,051,292 3,051,292
------------ ------------ ---------------
Equity securities:
Common stocks -- Industrial, miscellaneous, and all other......... 29,259 36,253 36,253
Nonredeemable preferred stocks.................................... 4,072 4,343 4,343
------------ ------------ ---------------
TOTAL EQUITY SECURITIES....................................... 33,331 40,596 40,596
------------ ------------ ---------------
Mortgage loans on real estate....................................... 1,408,444 -- 1,408,444
Investment real estate.............................................. 21,928 -- 21,928
Policy loans........................................................ 141,136 -- 141,136
Other long-term investments......................................... 22,760 -- 22,760
Short-term investments.............................................. 79,772 -- 79,772
------------ ---------------
TOTAL INVESTMENTS............................................. $ 4,693,041 -- $ 4,765,928
------------ ---------------
------------ ---------------

34

SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)

---------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
---------------------------------------------------------------------------------------------------
DEDUCTIONS
BALANCE AT (AMOUNTS BALANCE AT
YEAR ENDED BEGINNING ADDITIONS COLLECTED END OF PERIOD
DECEMBER 31 NAME OF DEBTOR OF PERIOD (NET) NET) (CURRENT)
- --------------- ---------------------------------------------- ----------- ----------- ------------- -------------

1993 Affiliates under common control of Protective
Life Corporation (Parent of Registrant) $ 279 $ 103 $ 382
1992 Affiliates under common control of Protective
Life Corporation (Parent of Registrant) 1,898 $ 1,619 279
1991 Affiliates under common control of Protective
Life Corporation (Parent of Registrant) (596) 2,494 1,898

35

SCHEDULE IV -- INDEBTEDNESS OF AND TO RELATED PARTIES
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)

---------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
---------------------------------------------------------------------------------------------------
BALANCE AT
YEAR ENDED BEGINNING BALANCE AT
DECEMBER 31 NAME OF PERSON OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- --------------- ------------------------------------------------- ----------- ----------- ----------- -------------
INDEBTEDNESS OF
----------------------------------------------------

1993 Protective Life Corporation
(Parent of Registrant).......................... $ 0 $ 0
1992 Protective Life Corporation
(Parent of Registrant).......................... 8,996 $ 8,996 0
1991 Protective Life Corporation
(Parent of Registrant).......................... 3,960 $ 5,318 282 8,996

INDEBTEDNESS TO
----------------------------------------------------

1993 Protective Life Corporation
(Parent of Registrant).......................... $ 41,143 $ 20,000 $ 12,200 $ 48,943
1992 Protective Life Corporation
(Parent of Registrant).......................... 25,943 19,700 4,500 41,143
1991 Protective Life Corporation
(Parent of Registrant).......................... 26,943 1,000 25,943

36

SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(IN THOUSANDS)

- ----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H
- ----------------------------------------------------------------------------------------------------------------------------------
GIC AND
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS PREMIUMS REALIZED BENEFITS
POLICY BENEFITS AND OTHER AND NET INVESTMENT AND
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT GAINS SETTLEMENT
SEGMENT COSTS CLAIMS PREMIUMS FUNDS FEES INCOME (1) (LOSSES) EXPENSES
- -------------------------- ----------- --------- ----------- ------------- ----------- ----------- ----------- -----------

Year Ended
December 31, 1993:
Agency.................. $ 129,265 $ 483,604 $ 368 $ 11,762 $ 77,338 $ 34,153 $ 55,972
Group................... 20,520 99,412 2,786 83,522 126,027 14,522 101,266
Financial
Institutions........... 59,163 39,508 85,042 2,913 87,355 8,921 42,840
Investment Products..... 18,934 52,516 0 789,668 856 66,691 $ 2,003 49,569
Guaranteed Investment
Contracts.............. 1,464 0 0 2,015,075 0 166,058 1,175 137,380
Acquisitions............ 69,942 705,487 501 259,513 58,562 65,290 73,463
Corporate and Other..... 19 318 88 339 1,285 (1,470) 1,146
Unallocated Realized
Investment Gains
(Losses)............... 0 0 0 0 0 0 1,876 0
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
TOTAL................. $ 299,307 $1,380,845 $ 88,785 $ 3,162,792 $ 351,423 $ 354,165 $ 5,054 $ 461,636
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
Year Ended
December 31, 1992:
Agency.................. $ 110,408 $ 382,025 $ 2 $ 8,847 $ 62,776 $ 27,723 $ 49,755
Group................... 14,801 66,551 2,422 77,671 112,985 12,620 93,380
Financial
Institutions........... 49,684 20,207 71,878 3,246 56,990 6,051 25,342
Investment Products..... 30,228 27,051 0 626,171 586 46,618 $ 473 37,021
Guaranteed Investment
Contracts.............. 2,256 0 0 1,694,530 0 137,654 962 117,321
Acquisitions............ 65,868 428,991 655 80,458 48,068 45,543 56,901
Corporate and Other..... 1,678 4,767 220 439 41,731 (1,218) 29,837
Unallocated Realized
Investment Gains
(Losses)............... 0 0 0 0 0 0 (1,589) 0
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
TOTAL................. $ 274,923 $ 929,592 $ 75,177 $ 2,491,362 $ 323,136 $ 274,991 $ (154) $ 409,557
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
Year Ended
December 31, 1991:
Agency.................. $ 87,801 $ 317,221 $ 2 $ 6,931 $ 55,755 $ 24,611 $ 44,316
Group................... 10,285 63,217 1,895 73,693 112,317 12,425 97,794
Financial
Institutions........... 24,997 5,815 34,541 432 31,267 4,060 8,917
Investment Products..... 20,791 17,280 0 392,215 205 30,675 $ 119 25,336
Guaranteed Investment
Contracts.............. 2,985 0 0 1,264,603 0 105,217 (519) 91,485
Acquisitions............ 65,873 406,622 880 82,634 50,104 45,742 55,195
Corporate and Other..... 2,163 8,453 1,531 591 24,327 (111) 23,548
Unallocated Realized
Investment Gains
(Losses)............... 0 0 0 0 0 0 (2,685) 0
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
TOTAL................. $ 214,895 $ 818,608 $ 38,849 $ 1,821,099 $ 273,975 $ 222,619 $ (3,085) $ 346,591
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------
----------- --------- ----------- ------------- ----------- ----------- ----------- -----------

- --------------------------
COL. A COL. I COL. J
- --------------------------

AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION OPERATING
SEGMENT COSTS EXPENSES (1)
- -------------------------- ------------- -------------

Year Ended
December 31, 1993:
Agency.................. $ 18,069 $ 17,133
Group................... 2,272 29,450
Financial
Institutions........... 31,202 15,181
Investment Products..... 12,788 3,790
Guaranteed Investment
Contracts.............. 1,170 1,466
Acquisitions............ 7,831 12,715
Corporate and Other..... 3 14,580
Unallocated Realized
Investment Gains
(Losses)............... 0 0
------------- -------------
TOTAL................. $ 73,335 $ 94,315
------------- -------------
------------- -------------
Year Ended
December 31, 1992:
Agency.................. $ 11,493 $ 16,292
Group................... 1,664 26,972
Financial
Institutions........... 21,605 11,426
Investment Products..... 4,485 1,980
Guaranteed Investment
Contracts.............. 1,267 1,763
Acquisitions............ 7,404 9,299
Corporate and Other..... 485 24,193
Unallocated Realized
Investment Gains
(Losses)............... 0 0
------------- -------------
TOTAL................. $ 48,403 $ 91,925
------------- -------------
------------- -------------
Year Ended
December 31, 1991:
Agency.................. $ 10,639 $ 13,478
Group................... 1,153 22,479
Financial
Institutions........... 16,575 5,644
Investment Products..... 2,238 3,293
Guaranteed Investment
Contracts.............. 826 1,604
Acquisitions............ 8,230 8,928
Corporate and Other..... 170 14,191
Unallocated Realized
Investment Gains
(Losses)............... 0 0
------------- -------------
TOTAL................. $ 39,831 $ 69,617
------------- -------------
------------- -------------

- ------------------------------
(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.

37

SCHEDULE VI -- REINSURANCE
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)

------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------- ------------ ------------ ------------- -------------

Year Ended December 31, 1993:
Life insurance in force.................. $ 40,149,017 $ 7,484,566 $ 2,301,577 $ 34,966,028 6.6%
------------- ------------ ------------ ------------- ---
------------- ------------ ------------ ------------- ---
Premiums and policy fees:
Life insurance......................... $ 230,706 $ 37,995 $ 8,329 $ 201,040 4.1%
Accident/health insurance.............. 254,672 88,917 3,963 169,718 2.3%
------------- ------------ ------------ -------------
TOTAL................................ $ 485,378 $ 126,912 $ 12,292 $ 370,758
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Year Ended December 31, 1992:
Life insurance in force.................. $ 33,811,280 $ 6,982,127 $ 665,733 $ 27,494,886 2.4%
------------- ------------ ------------ ------------- ---
------------- ------------ ------------ ------------- ---
Premiums and policy fees:
Life insurance......................... $ 180,018 $ 34,824 $ 16,092 $ 161,286 10.0%
Accident/health insurance.............. 228,192 74,531 8,189 161,850 5.1%
------------- ------------ ------------ -------------
TOTAL................................ $ 408,210 $ 109,355 $ 24,281 $ 323,136
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
Year Ended December 31, 1991:
Life insurance in force.................. $ 30,158,445 $ 5,292,080 $ 419,172 $ 25,285,537 1.7%
------------- ------------ ------------ ------------- ---
------------- ------------ ------------ ------------- ---
Premiums and policy fees:
Life insurance......................... $ 161,366 $ 28,378 $ 8,997 $ 141,985 6.3%
Accident/health insurance.............. 191,937 61,550 1,603 131,990 1.2%
------------- ------------ ------------ -------------
TOTAL................................ $ 353,303 $ 89,928 $ 10,600 $ 273,975
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------

38

SCHEDULE IX -- SHORT TERM BORROWINGS
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)

- ------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------------------------------------------------------------------
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
AT END OF INTEREST DURING THE DURING THE DURING THE
CATEGORY OF AGGREGATE SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD
- --------------------------------------------------- --------- ------------ ----------- ----------- -------------

Year Ended December 31, 1993:
Banks............................................ None None $ 45,000 $ 6,226 4.2%
Repurchase Agreements............................ None None 145,228 18,749 4.2
Year Ended December 31, 1992:
Banks............................................ None None $ 55,700 $ 6,670 4.9%
Year Ended December 31, 1991:
Banks............................................ None None $ 65,000 $ 7,659 7.0%
Repurchase Agreements............................ None None 29,156 4,009 6.3

39

EXHIBIT INDEX

ITEM
NUMBER DOCUMENT
- -------------------- -----------------------------------------------------------------------------------------------------

**** 2 -- Stock Purchase Agreement
* 3(a) -- Articles of Incorporation
* 3(b) -- By-laws
** 4(a) -- Group Modified Guaranteed Annuity Contract
*** 4(b) -- Individual Certificate
** 4(h) -- Tax-Sheltered Annuity Endorsement
** 4(i) -- Qualified Retirement Plan Endorsement
** 4(j) -- Individual Retirement Annuity Endorsement
** 4(l) -- Section 457 Deferred Compensation Plan Endorsement
* 4(m) -- Qualified Plan Endorsement
** 4(n) -- Application for Individual Certificate
** 4(o) -- Adoption Agreement for Participation in Group Modified Guaranteed Annuity
*** 4(p) -- Individual Modified Guaranteed Annuity Contract
** 4(q) -- Application for Individual Modified Guaranteed Annuity Contract
** 4(r) -- Tax-Sheltered Annuity Endorsement
** 4(s) -- Individual Retirement Annuity Endorsement
** 4(t) -- Section 457 Deferred Compensation Plan Endorsement
** 4(v) -- Qualified Retirement Plan Endorsement
**** 4(w) -- Endorsement -- Group Policy
**** 4(x) -- Endorsement -- Certificate
**** 4(y) -- Endorsement -- Individual Contract
**** 4(z) -- Endorsement (Annuity Deposits) -- Group Policy
**** 4(aa) -- Endorsement (Annuity Deposits) -- Certificate
**** 4(bb) -- Endorsement (Annuity Deposits) -- Individual Contracts
* 10(a) -- Bond Purchase Agreement
* 10(b) -- Escrow Agreement
24 -- Power of Attorney

- ------------------------
*Previously filed or incorporated by reference in Form S-1 Registration
Statement, Registration No. 33-31940.
**Previously filed or incorporated by reference in Amendment No. 1 to Form S-1
Registration Statement, Registration No. 33-31940.
***Previously filed or incorporated by reference from Amendment No. 2 to Form
S-1 Registration Statement, Registration No. 33-31940.
****Previously filed or incorporated by reference from Amendment No. 2 to Form
S-1 Registration Statement, Registration No. 33-57052.

40