Marketing offices are leased in 15 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 $28 thousand.
Protective generally purchases its investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, Protective has classified its fixed maturity investments as "available for sale" because Protective might sell such investments in response to changes in interest rates, needs for liquidity, and changes in the availability of alternative investments. The sales of investments that have occurred generally result from portfolio management decisions to maintain proper matching of assets and liabilities.
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.
Group pretax earnings were $0.7 million higher in 1994 as compared to 1993. Higher traditional group life and health earnings were complemented by higher earnings from the Division's cancer and dental products. The Division's results include approximately $3.0 million of expenses to establish a special marketing unit to sell dental plans through mail and telephone solicitations.
The Guaranteed Investment Contracts ("GIC") Division had pretax earnings of $33.2 million in 1994 and $27.2 million in 1993. GIC earnings have increased due to the growth in GIC deposits placed with Protective. At December 31, 1994, GIC deposits totaled $2.3 billion compared to $2.0 billion one year earlier.
The Individual Life Division had 1994 pretax earnings of $17.2 million, $3.1 million lower than 1993. Mortality experience, while still favorable, was approximately $2.5 million less favorable than 1993. The Division also spent approximately $3.0 million during 1994 to develop new ventures including a special program for parents and guardians of persons with disabilities; a special product for owners of privately held companies; and the sale of policies in the life insurance brokerage market.
The Investment Products Division's pretax earnings were $3.3 million lower in 1994 compared to 1993. These results are after approximately $2.0 million of additional amortization of deferred policy acquisition costs related to the compression of interest spreads caused by rising interest rates on the Division's fixed annuities, and expenses of approximately $4.5 million related to the development and introduction of the
The following table sets forth net income for the periods shown:
Compared to 1993, net income in 1994 increased 29.5%, reflecting improved earnings in the Acquisitions, Financial Institutions, Group, and GIC Divisions and Corporate and Other segment, and higher realized investment gains partially offset by lower earnings in the Individual Life and Investment Products Divisions.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." In October 1994, the FASB amended SFAS No. 114 with the issuance of SFAS No. 118, "Accounting by Creditors for Impairment of Loan - Income Recognition and Disclosures." Protective anticipates that the impact of adopting SFAS Nos. 114 and 118 on its financial condition will be immaterial.
To the Directors and Stockholder Protective Life Insurance Company Birmingham, Alabama
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 34 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.
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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The consolidated financial statements include the accounts, after intercompany eliminations, of Protective Life Insurance Company and its wholly-owned subsidiaries including Wisconsin National Life Insurance Company ("Wisconsin National") and American Foundation Life Insurance Company ("American Foundation"). Protective is a wholly-owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company.
Additionally, the financial statements include the accounts of majority-owned subsidiaries. The ownership interest of the other stockholders of these subsidiaries is called a minority interest and is reported as a liability of Protective and as an adjustment to income.
Protective adopted 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. As prescribed by SFAS No. 115, these investments are recorded at their market values with the resulting unrealized gains and losses, net of income tax, reported as a component of stockholder's equity reduced by a related adjustment to deferred policy acquisition costs. 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.
In 1994, Protective adopted SFAS No. 119 "Disclosure about Derivative Financial Instruments and Fair Values of Financial Instruments," which requires additional disclosures related to derivative financial instruments. Also, in 1994, Protective adopted new disclosure requirements required by Statement of Position 94-4 of the Accounting Standards Division of the American Institute of Certified Public Accountants concerning disclosures related to Protective's liability for unpaid claims. The adoption of these accounting standards had no effect on Protective's financial statements.
- Fixed maturities (bonds, bank loan participations, and redeemable preferred stocks) -- at current market value.
- Other long-term investments -- at a variety of methods similar to those listed above, as deemed appropriate for the specific investment.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Realized gains and losses on sales of investments are recognized in net income using the specific identification basis.
Protective uses interest rate swap contracts to convert certain investments from a variable to a fixed rate of interest. 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. At December 31, 1993, related open interest rate swap contracts with a notional amount of $245.0 million were in a $9.0 million net unrealized gain position.
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SEPARATE ACCOUNTS Protective operates separate accounts, some in which Protective bears the investment risk and others in which the investments risk rests with the contractholder. The assets and liabilities related to separate accounts in which Protective does not bear the investment risk are valued at market and reported separately as assets and liabilities related to separate accounts in the accompanying consolidated financial statements.
- 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.
- 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. 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.
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 $84.4 million and $39.4 million at December 31, 1994 and 1993, respectively. During 1994 $56.0 million of present value of future
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 income determined for financial reporting purposes and 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 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 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.
In 1994, gross gains on the sale of investments available for sale (fixed maturities, equity securities and short-term investments) were $15.2 million and gross losses were $16.4 million. In 1993, gross gains were $8.3 million and gross losses were less than $0.4 million. In 1992, gross gains on the sale of fixed maturities were $12.8 million and gross losses were $1.7 million.
At December 31, 1994, the average mortgage loan was $1.5 million, and the weighted average interest rate was 9.6%. The largest single mortgage loan was $11.9 million. While Protective's mortgage loans do not have quoted market values, at December 31, 1994 and 1993, Protective estimates the market value of its mortgage loans to be $1,535.3 million and $1,524.2 million, respectively, using discounted cash flows from the next call date.
Certain investments, principally real estate, with a carrying value of $6.7 million were nonincome producing for the twelve months ended December 31, 1994.
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 were as follows:
NOTE D -- FEDERAL INCOME TAXES (CONTINUED) 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, 1994 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 $248 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.
Interest expense totaled $5.0 million, $5.0 million, and $3.3 million, in 1994, 1993, and 1992, respectively.
In April 1994, Protective acquired through reinsurance a block of payroll deduction policies. In October 1994, Protective acquired through reinsurance a block of individual life insurance policies.
Summarized below are the consolidated results of operations for 1993 and 1992, on an unaudited pro forma basis, as if the Wisconsin National acquisition had occurred as of January 1, 1992. The pro forma
NOTE F -- ACQUISITIONS (CONTINUED) information is based on Protective's consolidated results of operations for 1993 and 1992 and on data provided by Wisconsin National, after giving effect to certain pro forma adjustments. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.
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. Among the litigation currently pending is a class action filed in the state of Alabama concerning the sale of credit insurance for which a proposed settlement agreement has been filed with the supervising court for approval. Although the outcome of any litigation cannot be predicted with certainty, Protective believes that such litigation will not have a material adverse effect on the financial position of Protective.
NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS At December 31, 1994, approximately $321 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. 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.
Protective leases furnished office space and computers to affiliates. Lease revenues were $2.8 million in 1994, $2.8 million in 1993, and $2.6 million in 1992. Protective purchases data processing, legal, investment and management services from affiliates. The costs of such services were $29.8 million, $20.4 million, and $27.5 million in 1994, 1993, and 1992, respectively. Commissions paid to affiliated marketing organizations of $10.1 million, $5.8 million, and $4.8 million in 1994, 1993, and 1992, 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 $21.1 million, $10.3 million, and $10.9 million in 1994, 1993, and 1992, respectively.
Protective's share of the net pension cost was $1.2 million, $1.5 million, and $0.8 million, in 1994, 1993, and 1992, respectively.
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, 1994, the projected benefit obligation of this plan totaled $4.7 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. At January 1, 1992, PLC recognized a $1.6 million accumulated postretirement benefit obligation, of which $0.9 million relates to current retirees and $0.7 million relates to active employees. The $1.6 million (representing Protective's entire liability for such benefits), net of $0.5 million tax, was accounted for as a cumulative effect of a change in accounting principle and shown as a reduction to income. The postretirement benefit is provided by an unfunded plan. At December 31, 1994, the liability for such benefits totaled $1.6 million. The expense recorded by Protective was $0.2 million in 1994, 1993 and 1992. PLC's obligation is not materially affected by a 1% change in the health care cost trend assumptions used in the calculation of the obligation.
Protective has reinsured approximately $8.6 billion, $7.5 billion, and $7.0 billion in face amount of life insurance risks with other insurers representing $46.0 million, $37.9 million, and $34.8 million of premium income for 1994, 1993, and 1992, respectively. Protective has also reinsured accident and health risks representing $126.5 million, $88.9 million, and $74.6 million of premium income for 1994, 1993, and 1992, respectively. In 1994 and 1993, policy and claim reserves relating to insurance ceded of $120.0 million and $97.8 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, 1994 and 1993, Protective had paid $5.4 million and $4.8 million, respectively, of ceded benefits which are recoverable from reinsurers.