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.
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 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.
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.
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 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.
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.
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%.
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."
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.
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.
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.
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.
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
- Equity securities (common and nonredeemable preferred stocks) -- at current market value.
- 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.
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.
- 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.
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.
- 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.
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.
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.
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:
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:
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.
NOTE C -- INVESTMENT OPERATIONS (CONTINUED) The approximate percentage distribution of Protective's fixed maturity investments by quality rating at December 31 is as follows:
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.
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.
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.
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.
At December 31, 1993 Protective has no unused income tax loss carryforwards.
NOTE E -- DEBT Short-term and long-term debt at December 31 are summarized as follows:
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.
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.
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
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.
Protective's share of the net pension cost was $1,543 thousand, $816 thousand, and $315 thousand, in 1993, 1992, and 1991, respectively.
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.
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.