In accordance with General Instruction J(2)(a), Protective includes the following analysis with the reduced disclosure format.
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.
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.
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.
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.
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.
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.
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.
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.
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.
- 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.
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.
Cash includes all demand deposits reduced by the amount of outstanding checks and drafts.
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.
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.
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.
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.
NOTE C -- INVESTMENT OPERATIONS Major categories of investment income for the years ended December 31 are summarized as follows:
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.
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.
Certain investments, principally real estate, with a carrying value of $9.9 million were nonincome producing for the twelve months ended December 31, 1993.
NOTE D -- FEDERAL INCOME TAXES (CONTINUED) Details of the deferred income tax provision for the years ended December 31 are as follows:
The components of Protective's net deferred income tax liability as of December 31, 1993 were as follows:
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.
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 (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.
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.
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:
Net pension cost includes the following components for the years ended December 31:
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.
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."
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.
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.