Protective leases administrative space in 4 cities, substantially all under leases for periods of three to five years. The aggregate monthly rent is approximately $51 thousand.
Premiums and policy fees.................$462,050 $411,682 12.2% Net investment income.................... 498,781 458,433 8.8% Realized investment gains (losses)....... 5,510 1,951 182.4% Other income............................. 5,010 1,355 269.7% ----------- ----------- $971,351 $873,421
Net investment income for 1996 was $40.3 million or 8.8% 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. The assumption of four blocks of policies during 1996 resulted in an increase in net investment income of $18.4 million in 1996. The percentage earned on average cash and investments was 7.8% in 1996 and 7.9% in 1995.
In 1996, realized investment losses on the sale of fixed maturity and equity securities of $5.4 million were more than offset by realized investment gains of $10.9 million incurred from sales of mortgage loans and other investments that occurred to maintain proper matching of assets and liabilities. Protective has established an allowance for uncollectible amounts on investments. The allowance totaled $30.9 million at December 31, 1996 and $32.7 million at December 31, 1995. Additions and reductions to the allowance are included in realized investment gains (losses).
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. Other income increased $3.7 million in 1996 as compared to 1995.
Income Before Income Tax The following table sets forth income or loss before income tax by business segment for the periods shown:
Income (Loss) Before Income Tax Year Ended December 31 1996 1995 -------- ------ (in thousands)
Business Segment Acquisitions...................................$ 53,564 $ 50,376 Financial Institutions......................... 8,966 7,701 Group.......................................... 821 9,107 Guaranteed Investment Contracts................. 32,130 28,979 Individual Life................................. 15,898 16,206 Investment Products............................. 9,823 10,933 Corporate and Other............................. (2,410) (6,490) Unallocated Realized Investment Gains (Losses).. 6,517 921 --------- --------- $125,309 $ 117,733 ======== ==========
In the 1996 first quarter Protective changed the way it allocates certain expenses to its operating divisions. Accordingly, prior period division results have been restated to reflect the change.
The Investment Products Division's 1996 pretax operating earnings were $7.8 million which was $0.3 million higher than 1995. Earnings increased due to growth in variable annuity deposits. Realized investment gains, net of related amortization of deferred policy acquisition costs, were $2.0 million in 1996 as compared with $3.4 million in 1995. As a result, total pretax earnings were $9.8 million in 1996 and $10.9 million in 1995.
The Corporate and Other segment consists of several small insurance lines of business, net investment income and other operating expenses not identified with the preceding business segments (including interest on substantially all debt). Pretax losses for this segment were $4.1 million lower in 1996 as compared to 1995 primarily due to increased net investment income on capital.
Compared to 1995, net income in 1996 increased 6.2%, reflecting improved operating earnings in the Acquisitions, Financial Institutions, GIC and Investment products, and the Corporate and Other segment, and higher realized investment gains, offset by lower operating earnings in the Group and Individual Life Divisions.
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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS In 1995 Protective adopted Statement of Financial Accounting Standards ("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. The adoption of this accounting standard did not have a material effect on Protective's financial statements.
In 1996 Protective adopted 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." The adoption of these accounting standards did not have a material effect on Protective's financial statements.
Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $3.4 million in bank deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," certain investments are recorded at their market values with the resulting unrealized gains and losses reduced by a related adjustment to deferred policy acquisition costs, net of income tax, reported as a component of 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 stockholder's equity will fluctuate significantly as interest rates change.
DERIVATIVE FINANCIAL INSTRUMENTS Protective does not use derivative financial instruments for trading purposes. Combinations 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, mortgage-backed securities, and liabilities arising from interest-sensitive products such as guaranteed investment contracts and individual annuities. Realized investment gains and losses on such contracts are deferred and amortized over the life of the hedged asset. Net realized losses of $0.2 million and $15.2 million were deferred in 1996 and 1995 respectively. At December 31, 1996 and 1995, options and open futures contracts with notional amounts of $805.0 million and $25.0 million, respectively, had net unrealized losses of $1.9 million and $0.6 million respectively.
CASH Cash includes all demand deposits reduced by the amount of outstanding checks and drafts.
Home office building........................... $36,586 $35,284 Other, principally furniture and equipment..... 35,401 30,356 ------- -------- 71,987 65,640 Accumulated depreciation....................... 36,498 31,429 -------- -------- $35,489 $34,211
REVENUES, BENEFITS, CLAIMS, AND EXPENSES o 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.
Incurred related to: Current year....................... 288,816 217,366 203,453 Prior year......................... (2,417) (8,337) (6,683) ---------- --------- -------- Total incurred.................... 286,399 209,029 196,770 --------- -------- --------
o Universal Life and Investment Products-- Universal life and investment products include universal life insurance, guaranteed investment contracts, deferred annuities, and annuities without life contingencies. Revenues for universal life and investment products consist of policy fees that have been assessed against policy account balances for the costs of insurance, policy administration, and surrenders. That is, universal life and investment product deposits are not considered revenues in accordance with generally accepted accounting principles. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. Interest credit rates for universal life and investment products ranged from 3.0% to 9.4% in 1996.
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. 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 $138.2 million and $102.5 million at December 31, 1996 and 1995, respectively. During 1996 $57.6 million of present value of future profits on acquisitions made during the year was capitalized, and $10.8 million was amortized. The unamortized present value of future profits for all acquisitions was $155.9 million at December 31, 1996 and $123.9 million at December 31, 1995.
PARTICIPATING POLICIES Participating business comprises approximately 1% of the individual life insurance in force and 2% of the individual life insurance premium income. Policyholder dividends totaled $4.1 million in 1996 and $2.6 million in 1995 and 1994.
Fixed maturities..................... $310,353 $272,942 $237,264 Equity securities................ ... 2,124 1,338 2,435 Mortgage loans on real estate........ 153,463 162,135 141,751 Investment real estate............... 1,875 1,855 1,950 Policy loans...................... . 10,378 8,958 8,397 Other, principally short-term investments 51,637 40,348 35,062 --------- -------- -------- 529,830 487,576 426,859 Investment expenses.................. 31,049 29,143 17,926 ---------- -------- -------- $498,781 $458,433 $408,933 ======== ======== ========
Fixed maturities..................... $ (7,101) $ 6,118 $ (8,646) Equity securities..................... 1,733 44 7,735 Mortgage loans and other investments.. 10,878 (4,211) 7,209 -------- -------- ------- $ 5,510 $ 1,951 $ 6,298 ======== ======== ========
The amortized cost and estimated market values of fixed maturities at December 31, by expected maturity, are shown below. Expected maturities are derived from rates of prepayment that may differ from actual rates of prepayment. Estimated Amortized Market Cost Values Due in one year or less..................... $ 417,463 $ 420,774 Due after one year through five years....... 1,547,805 1,546,278 Due after five years through ten years...... 2,090,149 2,095,781 Due after ten years......................... 593,108 600,164 ------------ ------------ $ 4,648,525 $4,662,997
Estimated Amortized Market Cost Values Due in one year or less..................... $ 409,514 $ 411,839 Due after one year through five years....... 1,087,735 1,101,226 Due after five years through ten years...... 1,477,807 1,524,555 Due after ten years......................... 814,870 854,312 ------------------------ $3,789,926 $3,891,932
Rating 1996 1995 ------ ----------------- AAA......................................... 48.3% 56.1% AA.......................................... 4.4 4.5 A........................................... 22.6 12.6 BBB Bonds..................................... 21.1 19.0 Bank loan participations.................. 0.1 0.4 BB or Less Bonds..................................... 2.5 2.0 Bank loan participations.................. 0.9 5.3 Redeemable preferred stocks................. 0.1 0.1 ------- ------- 100.0% 100.0% ===== =====
At December 31, 1996, all of Protective's mortgage loans were commercial loans of which 78% were retail, 8% were office buildings, and 7% were warehouses. 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 4% of mortgage loans. Approximately 84% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: South Carolina, Florida, Georgia, Tennessee, Texas, North Carolina, Alabama, Virginia, Mississippi, Kentucky, Ohio, Indiana, Arizona, and Washington.
Many of the mortgage loans have call provisions after five to seven years. Assuming the loans are called at their next call dates, approximately $126.7 million would become due in 1997, $761.8 million in 1998 to 2001, and $250.8 million in 2002 to 2006.
At December 31, 1996, the average mortgage loan was $1.7 million, and the weighted average interest rate was 9.3%. The largest single mortgage loan was $13.6 million. While Protective's mortgage loans do not have quoted market values, at December 31,1996 and 1995, Protective estimates the market value of its mortgage loans to be $1,581.7 million and $2,001.1 million, respectively, using discounted cash flows from the next call date.
Protective's effective income tax rate varied from the maximum federal income tax rate as follows:
At December 31, 1996, 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 50% of its total capital.
Included in indebtedness to related parties are three surplus debentures issued by Protective to PLC. At December 31, 1996, the balance of the three surplus debentures combined was $24.7 million. Future maturities of these debentures are $4.7 million in 1997 and $20.0 million in 2003.
At December 31, 1996, approximately $413 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 1997 is estimated to be $117 million.
PLC owns all of the 2,000 shares of preferred stock issued by Protective's subsidiary, American Foundation. During 1996, American Foundation's articles of incorporation were amended such that the preferred stock is redeemable solely at the discretion of American Foundation. At December 31, 1995 the preferred stock was reported "Redeemable Preferred Stock", whereas at December 31, 1996 it is reported as a component of stockholder's equity. 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 $0.1 million, $0.1 million, and $0.9 million were paid to PLC in 1996, 1995, and 1994, respectively.
1996 1995 1994 ---------- ---------- ------- TOTAL REVENUES Acquisitions.................................$213,199 $ 193,544 $171,259 Financial Institutions....................... 87,320 72,758 107,481 Group........................................ 174,971 159,263 148,835 Guaranteed Investment Contracts.............. 206,407 199,468 184,212 Individual Life.............................. 169,306 139,424 122,915 Investment Products.......................... 110,821 104,984 80,076 Corporate and Other.......................... 2,810 3,059 9,936 Unallocated Realized Investment Gains (Losses) 6,517 921 5,266 ---------- ------- -------- $971,351 $ 873,421 $ 829,980 ======== ========= =========
Acquisitions................................. 21.9% 22.2% 20.7% Financial Institutions....................... 9.0 8.3 12.9 Group........................................ 18.0 18.2 17.9 Guaranteed Investment Contracts.............. 21.3 22.8 22.3 Individual Life.............................. 17.4 16.0 14.7 Investment Products.......................... 11.4 12.0 9.7 Corporate and Other.......................... 0.3 0.4 1.2 Unallocated Realized Investment Gains (Losses) 0.7 0.1 0.6 ----------- ------------ -------- 100.0% 100.0% 100.0% ========= ========== =======
Acquisitions.............................. 19.3% 17.5% 19.7% Financial Institutions.................... 4.2 3.7 3.5 Group..................................... 2.9 3.3 3.5 Guaranteed Investment Contracts........... 32.0 35.3 36.2 Individual Life........................... 12.7 12.4 12.3 Investment Products....................... 22.9 22.0 21.0 Corporate and Other....................... 6.0 5.8 3.8 ---------- ---------- -------- 100.0% 100.0% 100.0% =========== ========== ==========
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 finding requirements of ERISA plus such additional amounts as PLC may determine to be appropriate from time to time. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future.
1996 1995 1994 --------- ---------- ------- Weighted average discount rate................. 7.75% 7.25% 8.00% Rates of increase in compensation level........ 5.75% 5.25% 6.00% Expected long-term rate of return on assets.... 8.50% 8.50% 8.50%
PLC also sponsors an unfunded Excess Benefits Plan, which is a nonqualified plan that provides defined pension benefits in excess of limits imposed by federal income tax law. At December 31, 1996 and 1995, the projected benefit obligation of this plan totaled $7.2 million and $5.7 million, respectively.
In addition to pension benefits, PLC provides limited healthcare benefits to eligible retired employees until age 65. The postretirement benefit is provided by an unfunded plan. At December 31, 1996 and 1995, the liability for such benefits totaled $1.4 million and $1.5 million, respectively. The expense recorded by PLC was $0.1 million in 1996 and $0.2 million in 1995 and 1994. PLC's obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of life insurance policies upon retirement equal to the employees' annual compensation. This plan is partially funded at a maximum of $50,000 face amount of insurance.
PLC sponsors a defined contribution plan which covers substantially all employees. Employee contributions are made on a before-tax basis as provided by Section 401(k) of the Internal Revenue Code. In 1990, PLC established an Employee Stock Ownership Plan to match employee contributions to PLC's 401(k) Plan. In 1994, a stock bonus was added to the 401(k) Plan for employees who are not otherwise under a bonus plan. Expense related to the ESOP consists of the cost of the shares allocated to participating employees plus the interest expense on the ESOP's note payable to Protective less dividends on shares held by the ESOP. At December 31, 1996, PLC had committed 52,388 shares to be released to fund employee benefits. The expense recorded by PLC for these employee benefits was $1.0 million, $0.7 million and $0.6 million in 1996, 1995, and 1994, respectively.
Since 1973 PLC has had a Performance Share Plan to motivate senior management to focus on PLC's long-range earnings performance. The criterion for payment of performance share awards is based upon a comparison of PLC's average return on average equity over a four year award period (earlier upon the death, disability or retirement of the executive, or in certain circumstances, of a change in control of PLC) to that of a comparison group of publicly held life insurance companies, multiline insurers, and insurance holding companies. If PLC's results are below the median of the comparison group, no portion of the award is earned. If PLC's results are at or above the 90th percentile, the award maximum is earned. Under the plan approved by stockholders in 1992, up to 1,200,000 shares may be issued in payment of awards. The number of shares granted in 1996, 1995, and 1994 were 52,290, 72,610, and 62,140 shares, respectively, having an approximate market value on the grant date of $1.8 million, $1.6 million, and $1.4 million, respectively. At December 31, 1996, outstanding awards measured at target and maximum payouts were 279,648 and 375,470 shares, respectively. The expense recorded by PLC for the Performance Share Plan was $3.0 million, $2.9 million, and $3.6 million in 1996, 1995, and 1994, respectively.
Protective has reinsured approximately $18.8 billion, $17.5 billion, and $8.6 billion, in face amount of life insurance risks with other insurers representing $113.5 million, $116.1 million, and $46.0 million of premium income for 1996,1995, and 1994, respectively. Protective has also reinsured accident and health risks representing $194.7 million, $217.1 million, and $126.5 million, of premium income for 1996, 1995, and 1994, respectively. In 1996 and 1995, policy and claim reserves relating to insurance ceded of $325.9 million and $266.9 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, 1996 and 1995, Protective had paid $6.7 million and $4.1 million, respectively, of ceded benefits which are recoverable from reinsurers.