Premiums and policy fees increased $51.3 million or 14.6% in 1994 over 1993. In the third quarter of 1993 Protective completed its acquisition of Wisconsin National Life Insurance Company ("Wisconsin National") and reinsured a block of universal life policies. This acquisition and reinsurance arrangement resulted in an increase in premiums and policy fees of $10.5 million in 1994. The reinsurance of a block of payroll deduction policies effective April 1, 1994 resulted in a $7.9 million increase. On October 3, 1994 Protective acquired through coinsurance a block of policies from Reliance Standard Life Insurance Company ("Reliance Standard"), which added $12.5 million of premiums in 1994. Decreases in older acquired blocks of policies represented a $3.1 million decrease in premiums and policy fees. Increases in premiums and policy fees from the Financial Institutions, Group, and Individual Life (formerly, Agency) Divisions represented increases of $10.7 million, $5.1 million, and $7.6 million, respectively.
Net investment income increased $54.8 million or 15.5% in 1994 over 1993 primarily due to an increase 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. These deposits are included in the liability section of the balance sheet. Wisconsin National and other recent acquisitions represented $23.9 million of the increase in net investment income in 1994. Protective's percentage earned on average cash and investments was 8.2% for 1994, slightly below the 8.4% for 1993.
In 1994, realized investment gains on the sale of equity securities and other long-term investments of $14.9 million were partially offset by realized investment losses of $8.6 million incurred from sales of fixed maturity investments that occurred to maintain proper matching of assets and liabilities. Protective has established an allowance for uncollectible amounts on investments. The allowance totaled $35.2 million at December 31, 1994. Additions to the allowance are treated as realized investment losses.
Pretax earnings from the Acquisitions Division increased $9.3 million in 1994 as compared to 1993. 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 Wisconsin National acquisition and the reinsurance of a block of universal life policies in 1993 added $9.2 million to the Division's 1994 earnings. The acquisition of a block of policies from Reliance Standard in the 1994 fourth quarter reduced earnings $1.3 million but should contribute to earnings next year. The Division also experienced improved results in its other blocks of acquired policies.
Pretax earnings of the Financial Institutions Division were $1.0 million higher in 1994 as compared to 1993 due to premium growth and improved claims ratios.
Division's variable annuity. Realized investment losses from the sale of investments to maintain proper matching of assets and liabilities in 1994 were $2.5 million compared to realized investment gains of $2.9 million last year. Fixed annuity deposits totaled $983 million, and variable annuity deposits totaled $171 million at December 31, 1994. Variable annuity deposits of $121 million are reported in the accompanying financial statements as "liabilities related to separate accounts."
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). Pre-tax losses for this segment were $5.5 million lower in 1994 as compared to 1993. The segment's 1994 results include approximately $8.2 million relating to the settlement of litigation relating to an acquisition made in 1974, which was partially offset by increases in other expenses.
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%. For the year ended December 31, 1994, the effective income tax rate was 31.1%. Management's estimate of the effective income tax rate for 1995 is 33%.
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.
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."
Investments are reported on the following bases less allowances for uncollectible amounts on investments, if applicable:
Substantially all short-term investments have maturities of three months or less at the time of acquisition and include approximately $9.7 million in bank deposits voluntarily restricted as to withdrawal.
At December 31, 1994, Protective estimates the fair value of its guaranteed investment contracts to be $2,200 million using discounted cash flows. The surrender value of Protective's annuities which approximates fair value was $1,221 million.
Protective has established an allowance for uncollectible amounts on investments. The allowance totaled $35.2 million at December 31, 1994 and 1993. Additions to the allowance are included in realized investment losses. Without such additions, Protective had realized investment gains of $6.3 million, $13.8 million, and $9.5 million in 1994, 1993, and 1992, respectively.
NOTE C -- INVESTMENT OPERATIONS (CONTINUED) 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.
At December 31, 1994 and 1993, Protective had bonds which were rated less than investment grade of $82.5 million and $67.3 million, respectively, having an amortized cost of $89.4 million and $66.7 million, respectively. Additionally, Protective had bank loan participations which were rated less than investment grade of $195.1 million and $121.7 million, respectively, having an amortized cost of $195.1 million and $121.7 million, respectively.
NOTE C -- INVESTMENT OPERATIONS (CONTINUED) 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:
At December 31, 1994, all of Protective's mortgage loans were commercial loans of which 79% were retail, 8% were warehouses, and 7% 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 5% of mortgage loans. Approximately 84% of the mortgage loans are on properties located in the following states listed in decreasing order of significance: Alabama, South Carolina, Tennessee, Texas, Georgia, North Carolina, Florida, Mississippi, Virginia, California, Colorado, Louisiana, Illinois, Ohio, Kentucky, and Indiana.
Many of the mortgage loans have call provisions after five to seven years. Assuming the loans are called at their next call dates, approximately $107.9 million would become due in 1995, $478.0 million in 1996 to 1999, and $233.9 million in 2000 to 2004.
At December 31, 1994 and 1993, Protective's problem mortgage loans and foreclosed properties totaled $24.0 million and $27.1 million, respectively. Protective expects no significant loss of principal.
Mortgage-backed securities consist primarily of sequential and planned amortization class (PAC) securities. Mortgage-backed securities issued by Independent National Mortgage Corporation totaling $54.9 million exceeded ten percent of stockholder's equity at December 31, 1994.
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.
At December 31, 1994 Protective has no material 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.
At December 31, 1994, 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.
NOTE F -- ACQUISITIONS In July 1993, Protective acquired Wisconsin National Life Insurance Company ("Wisconsin National"). Also in 1993, Protective acquired through reinsurance a block of universal life 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 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 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
NOTE J -- RELATED PARTY MATTERS Receivables from related parties consisted of receivables from affiliates under control of PLC in the amounts of $0.3 million and $0.4 million at December 31, 1994 and 1993, 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, $5.9 million at December 31, 1994, 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.
For a discussion of indebtedness to related parties, see Note E.
NOTE K -- BUSINESS SEGMENTS (CONTINUED) There are no significant intersegment transactions.
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. 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, 1994, PLC had committed 33,250 shares to be released to fund employee benefits. The expense recorded by PLC for this employee benefit was $0.6 million, $0.2 million and $0.4 million in 1994, 1993, and 1992, 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 $500,000 individual life insurance on a single risk.