Protective leases administrative space in 4 cities, substantially all under leases for periods of three to five years. The aggregate monthly rent is approximately $61 thousand.
Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, Protective may sell any of its investments to maintain proper matching of assets and liabilities. Accordingly, Protective has classified its fixed maturities and certain other investments as "available for sale." The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities.
In 1995, realized investment gains on the sale of fixed maturity and equity securities of $6.2 million were partially offset by realized investment losses of $4.2 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 $32.7 million at December 31, 1995 and $35.2 million at December 31, 1994. Additions to the allowance are treated as realized investment losses.
The Financial Institutions Division's 1995 pretax earnings were relatively unchanged as compared to 1994. The Division has entered into a reinsurance arrangement whereby all of the Division's new credit insurance sales are being ceded to a reinsurer. In the 1995 second quarter the Division also ceded a block of older policies. These reinsurance transactions are expected to improve the Division's return on investment.
Group 1995 pretax earnings were $0.7 million lower than 1994. Although total dental earnings were up $2.6 million, lower traditional group life and health earnings offset the increase.
The Guaranteed Investment Contracts ("GIC") Division had pretax operating earnings of $34.5 million in 1995 and $30.2 million in 1994. Operating earnings in 1995 were benefited by lower expenses and a favorable interest rate environment. This increase was also partially due to the growth in GIC deposits placed with Protective. At December 31, 1995, GIC deposits totaled $2.5 billion compared to $2.3 billion one year earlier. Realized investment gains associated with this Division in 1994 were $3.0 million as compared to
realized investment losses of $3.9 million in 1995. As a result, total pretax earnings were $33.2 million in 1994 and $30.6 million in 1995. The rate of growth in GIC deposits has decreased as the amount of maturing contracts has increased.
The Investment Products Division's 1995 pretax earnings of $12.0 million were $11.8 million higher than 1994. During 1994 the Division completed the amortization of the deferred policy acquisition costs related to its book value annuities. Accordingly, 1995 operating earnings were $7.2 million higher due to lower amortization. The Division also benefited from a favorable interest rate environment. Realized investment losses, net of related amortization of deferred policy acquisition costs were $0.8 million in 1994, as compared with realized investment gains, net of amortization, of $3.4 million in 1995. Fixed annuity deposits totaled $996 million and variable annuity deposits totaled $392 million at December 31, 1995. Variable annuity deposits of $322 million are reported in the accompanying financial statements as "liabilities related to separate accounts."
The following table sets forth the effective income tax rates for the periods shown:
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 6 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.
PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
Protective markets individual life insurance; group life, health, dental, and cancer insurance; annuities and investment products; credit life and disability insurance; and guaranteed investment contracts. Its products are distributed nationally through independent agents and brokers; through broker-dealers and financial institutions to their customers; through full-time sales representatives; and through other insurance companies. Protective also seeks to acquire blocks of insurance policies from other insurers.
Protective adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," at December 31, 1993, which requires Protective to carry its investment in fixed maturities and certain other securities at market value instead of amortized cost.
Since Protective's mortgage loans are collateralized by real estate, any assessment of impairment is based upon the estimated fair value of the real estate. Based on Protective's evaluation of its mortgage loan portfolio, Protective does not expect any material losses on its mortgage loans, and therefore no allowance for losses is required under SFAS No. 114 at December 31, 1995.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Protective's balance sheets at December 31, prepared on the basis of reporting investments at amortized cost rather than at market values, are as follows:
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, 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 $15.2 million were deferred in 1995 and net realized gains of $7.9 million were deferred in 1994. At December 31, 1995 and 1994, open futures contracts with notional amounts of $25.0 million and $137.5 million, respectively, had net unrealized losses of $0.6 million and $0.4 million respectively.
Protective uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. At December 31, 1995, related open interest rate swap contracts with a notional amount of $170.3 million were in a $1.3 million net unrealized gain position. At December 31, 1994, related open interest rate swap contracts with a notional amount of $230.0 million were in an $8.9 million net unrealized loss position.
Property and equipment are reported at cost. Protective uses both accelerated and straight-line methods of depreciation based upon the estimated useful lives of the assets. Major repairs or improvements are capitalized and depreciated over the estimated useful lives of the assets. Other repairs are expensed as incurred. The cost and related accumulated depreciation of property and equipment sold or retired are removed from the accounts, and resulting gains or losses are included in income.
PROTECTIVE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
At December 31, 1995, Protective estimates the fair value of its guaranteed investment contracts to be $2,660.0 million using discounted cash flows. The surrender value of Protective's annuities which approximates fair value was $1,296.7 million.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $102.5 million and $84.4 million at December 31, 1995 and 1994, respectively. During 1995 $26.5 million of present value of future profits on acquisitions made during the year was capitalized, and $3.2 million was amortized. The unamortized present value of future profits for all acquisitions was $123.9 million at December 31, 1995 and $110.3 million at December 31, 1994.
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on net income, total assets, or stockholder's equity.
NOTE C -- INVESTMENT OPERATIONS Major categories of net investment income for the years ended December 31 are summarized as follows:
At December 31, 1995, all of Protective's mortgage loans were commercial loans of which 81% were retail, 7% were warehouses, and 6% 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
Many of the mortgage loans have call provisions after five to seven years. Assuming the loans are called at their next call dates, approximately $174.3 million would become due in 1996, $497.3 million in 1997 to 2000, and $275.7 million in 2001 to 2005.
Certain investments, principally real estate, with a carrying value of $9.5 million were nonincome producing for the twelve months ended December 31, 1995.
Protective 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.
NOTE D -- FEDERAL INCOME TAXES Protective's effective income tax rate varied from the maximum federal income tax rate 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, 1995 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 $322 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.
At December 31, 1995 Protective has an unused capital loss carryforward of $5.7 million which will expire in 2000.
NOTE E -- DEBT At December 31, 1995, 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.
Interest expense totaled $6.0 million, $5.0 million, and $5.0 million, in 1995, 1994, and 1993, respectively.
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) 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 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, $0.9 million, and $1.5 million were paid to PLC in 1995, 1994, and 1993, respectively.
NOTE J -- RELATED PARTY MATTERS Receivables from related parties consisted of receivables from affiliates under control of PLC in the amounts of $2.0 million and $0.3 million at December 31, 1995 and 1994, 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.
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 $21.2 million,
NOTE K -- BUSINESS SEGMENTS Protective operates predominantly in the life and accident and health insurance industry. The following table sets forth total revenues, income before income tax, and identifiable assets of Protective's business segments. The primary components of revenues are premiums and policy fees, net investment income, and realized investment gains and losses. Premiums and policy fees are attributed directly to each business segment. Net investment income is allocated based on directly related assets required for transacting that segment of business.
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, 1995, the projected benefit obligation of this plan totaled $5.7 million.
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, 1995, the liability for such benefits totaled $1.5 million. The expense recorded by PLC was $0.2 million in 1995, 1994, and 1993. PLC's obligation is not materially affected by a 1% change in the healthcare cost trend assumptions used in the calculation of the obligation.
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
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, generally, will not carry more than $500,000 individual life insurance on a single risk.
During 1995 the Company entered into a reinsurance agreement whereby all of the Company's new credit insurance sales are being ceded to a reinsurer. Included in the preceding paragraph are credit life and credit accident and health insurance premiums of $68.2 million and $57.6 million respectively, and reserves totaling $100.8 million which were ceded during 1995.