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.
Marketing offices are leased in 10 cities, substantially all under leases for periods of three to five years with only two leases running longer than five years. The aggregate monthly rent is approximately $23 thousand.
Premiums and policy fees decreased $32.9 million or 8.2% in 1995 over 1994. Premiums and policy fees from the Financial Institutions Division decreased $74.2 million. This resulted from a reinsurance arrangement begun in the 1995 first quarter whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. Increases in premiums and policy fees from the Group and Individual Life Divisions represent increases of $11.4 million and $14.1 million, respectively. Policy fees related to Protective's annuity products increased $2.9 million in 1995. The 1994 coinsurance of two blocks of policies resulted in a $11.1 million increase in premiums and policy fees in 1995. On June 15, 1995, Protective coinsured a block of policies which resulted in a $8.3 million increase in premiums and policy fees. Decreases in premiums and policy fees in older acquired blocks resulted in a $7.2 million decrease.
Net investment income for 1995 was $49.5 million or 12.1% higher than for the preceding year primarily due to increases in the average amount of invested assets. Invested assets have increased primarily due to receiving annuity and guaranteed investment contract (GIC) deposits and to acquisitions. (Annuity and GIC deposits are not considered revenues in accordance with generally accepted accounting principles.) The coinsurance of two blocks of policies in 1994 and one block of policies in the second quarter of 1995 resulted in an increase in net investment income of $8.9 million in 1995. The percentage earned on average cash and investments was 7.9% in 1995 and 8.2% in 1994.
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. During 1994, Protective recognized approximately $8.2 million in settlement of litigation in which Protective was a plaintiff relating to an acquisition made in 1974. Other income from all other sources decreased $0.2 million in 1995 as compared to 1994.
The following table sets forth income or loss before income tax by business segment for the periods shown:
Pretax earnings from the Acquisitions Division increased $13.0 million in 1995 as compared to 1994. Earnings from the Acquisitions Division are normally expected to decline over time (due to the lapsing of policies resulting from deaths of insureds or terminations of coverage) unless new acquisitions are made. The two blocks of policies coinsured during 1994 and the block of policies coinsured during the second quarter of 1995 represent $11.7 million of the increase.
The Individual Life Division had 1995 pretax earnings of $17.7 million, $0.5 million higher than 1994. Favorable mortality experience and a growing amount of business in force contributed to the increase, although lower investment income allocated to the Division and expenses relating to the development of a new variable universal life product largely offset the increase.
For the year ended December 31, 1995, the effective income tax rate was 34.0%. Management's estimate of the effective income tax rate for 1996 is 34.0%.
Compared to 1994, net income in 1995 increased 6.8%, reflecting improved earnings in the Acquisitions, Financial Institutions, Individual Life, and Investment Products Divisions, and higher investment income partially offset by lower earnings in the Group and GIC Divisions and the Corporate and Other segment as well as lower realized investment gains.
For additional information regarding recently issued accounting standards see Note A to the consolidated financial statements included herein.
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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 1995 Protective adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Under these new standards, a loan is considered impaired, based on current information and events, if it is probable that Protective will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In 1995 the Financial Accounting Standards Board issued: SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts;" SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;" and SFAS No. 122, "Accounting for Mortgage Servicing Rights." Protective anticipates that the impact of adopting these three accounting standards will be immaterial to its financial condition.
- Mortgage loans on real estate -- at unpaid balances, adjusted for loan origination costs, net of fees, and amortization of premium or discount.
Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $5.2 million in bank deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of stockholder's equity. The market values of fixed maturities increase or decrease as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115 does not affect Protective's operations, its reported stockholders' equity will fluctuate significantly as interest rates change.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property and equipment consisted of the following at December 31:
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Activity in the liability for unpaid claims is summarized as follows:
- Universal Life and Investment Products -- Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Revenues for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. That is, universal life and investment product deposits are not considered revenues in accordance with generally accepted accounting principles. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life and investment products ranged from 3.0% to 9.4% in 1995.
- Policy Acquisition Costs -- Commissions and other costs of acquiring traditional life and health insurance, universal life insurance, and investment products that vary with and are primarily related to the production of new business have been deferred. Traditional life and health insurance acquisition costs are amortized over the premium-payment period of the related policies in proportion to the ratio of annual premium income to total anticipated premium income. Acquisition costs for universal life and investment products are being amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and investment, mortality, and expense margins. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," Protective makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from initial assumptions. Additionally, relating to SFAS No. 115, these costs have been adjusted by an amount equal to the amortization that would have been recorded if unrealized gains or losses on investments associated with Protective's universal life and investment products had been realized.
Participating business comprises approximately 1% of the individual life insurance in force and 2% of the individual life insurance premium income. Policyholder dividends totaled $2.6 million in 1995, 1994, and 1993.
Protective uses the asset and liability method of accounting for income taxes. Income tax provisions are generally based on income reported for financial statement purposes. Deferred federal income taxes arise from the recognition of temporary differences between the bases of assets and liabilities determined for financial reporting purposes and the bases determined for income tax purposes. Such temporary differences are principally related to the deferral of policy acquisition costs and the provision for future policy benefits and expenses.
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:
Protective has established an allowance for uncollectible amounts on investments. The allowance totaled $32.7 million at December 31, 1995 and $35.2 million at December 31, 1994. Additions to the allowance are included in realized investment gains (losses). Without such additions/reductions, Protective had realized investment losses of $0.5 million in 1995 and realized investment gains of $6.3 million and $13.8 million in 1994 and 1993, respectively.
NOTE C -- INVESTMENT OPERATIONS (CONTINUED) The amortized cost and estimated market values of Protective's investments classified as available for sale at December 31 are as follows:
The approximate percentage distribution of Protective's fixed maturity investments by quality rating at December 31 is as follows:
The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities for the years ended December 31 is summarized as follows:
in smaller towns and cities. No single tenant's leased space represents more than 4% of mortgage loans. Approximately 82% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: South Carolina, Georgia, Alabama, Tennessee, Texas, Florida, North Carolina, Virginia, California, Mississippi, Colorado, Ohio, Kentucky, Louisiana, Indiana, and Illinois.
At December 31, 1994, the average mortgage loan was $1.6 million, and the weighted average interest rate was 9.3%. The largest single mortgage loan was $13.1 million. While Protective's mortgage loans do not have quoted market values, at December 31, 1995 and 1994, Protective estimates the market value of its mortgage loans to be $2,001.1 million and $1,535.3 million, respectively, using discounted cash flows from the next call date.
At December 31, 1995 and 1994, Protective's problem mortgage loans and foreclosed properties totaled $26.1 million and $24.0 million, respectively. Protective expects no significant loss of principal.
Mortgage loans to affiliates of both Fletcher Bright and Edens & Avant totaled $95.4 million and $69.1 million, respectively, at December 31, 1995. Most of such loans were not made to, or in reliance on the credit of, Mr. Bright or Edens & Avant.
NOTE D -- FEDERAL INCOME TAXES (CONTINUED) The components of Protective's net deferred income tax liability as of December 31 were as follows:
Included in indebtedness to related parties are three surplus debentures issued by Protective to PLC. At December 31, 1995, the balance of the three surplus debentures combined was $34.7 million. Future maturities of these debentures are $14.7 million in 1996 and $20.0 million in 2003.
NOTE F -- ACQUISITIONS In April 1994 Protective acquired through coinsurance a block of payroll deduction policies. In October 1994, Protective acquired through coinsurance a block of individual life insurance policies. In June 1995 Protective acquired through coinsurance a block of term life insurance policies.
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. Protective does not
A number of civil jury verdicts have been returned against life and health insurers in the jurisdictions in which Protective does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. Protective and its subsidiaries, like other life and health insurers, from time to time are involved in such litigation. To date, no such lawsuit has resulted in the award of any significant amount of damages against Protective. Although the outcome of any litigation cannot be predicted with certainty, Protective is not aware of any litigation that will have a material adverse effect on the financial position of Protective.
NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS At December 31, 1995, approximately $329 million of consolidated stockholder's equity excluding net unrealized gains and losses represented net assets of Protective that cannot be transferred in the form of dividends, loans, or advances to PLC. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as ordinary dividends to PLC by Protective in 1996 is estimated to be $129 million.
On August 6, 1990, PLC announced that its Board of Directors approved the formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990, Protective transferred to the ESOP 520,000 shares of PLC's common stock held by it in exchange for a note. The outstanding balance of the note, $5.8 million at December 31, 1995, 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.
NOTE J -- RELATED PARTY MATTERS (CONTINUED) $21.1 million, and $10.3 million in 1995, 1994, and 1993, respectively. Protective and/or PLC paid commissions, interest, and service fees to these same corporations totaling $5.3 million, $4.9 million, and $6.1 million, in 1995, 1994, and 1993, respectively.
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 80% 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.
Protective's share of the net pension cost was $1.2 million, $1.2 million, and $1.5 million, in 1995, 1994, and 1993, respectively.
NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED) plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP's note payable to Protective less dividends on shares held by the ESOP. At December 31, 1995, PLC had committed 70,088 shares to be released to fund employee benefits. The expense recorded by PLC for this employee benefit was $0.7 million, $0.6 million and $0.2 million in 1995, 1994, and 1993, respectively.
Protective has reinsured approximately $17.5 billion, $8.6 billion, and $7.5 billion, in face amount of life insurance risks with other insurers representing $116.1 million, $46.0 million, and $37.9 million of premium income for 1995, 1994, and 1993, respectively. Protective has also reinsured accident and health risks representing $217.1 million, $126.5 million and $88.9 million, of premium income for 1995, 1994, and 1993, respectively. In 1995 and 1994, policy and claim reserves relating to insurance ceded of $232.3 million and $120.0 million respectively are included in reinsurance receivables. Should any of the reinsurers be unable to meet its obligation at the time of the claim, obligation to pay such claim would remain with Protective. At December 31, 1995 and 1994, Protective had paid $4.1 million and $5.4 million, respectively, of ceded benefits which are recoverable from reinsurers.
NOTE N -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS The carrying amount and estimated market values of Protective's financial instruments at December 31 are as follows:
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES (IN THOUSANDS)