EXHIBIT 13
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1993 1992 1991
REVENUES Premiums and policy fees (net of premiums ceded:
1993 - $126,912; 1992 - $109,355; 1991 - $89,927) $370,758 $323,136 $273,975
Net investment income 362,130 284,069 233,502
Realized investment gains (losses) 5,054 (14) (3,085)
Other income 21,695 18,835 11,556
Total revenues 759,637 626,026 515,948
BENEFITS AND Benefits and settlement expenses (net of reinsurance:
EXPENSES 1993 - $95,708; 1992 - $74,904; 1991 - $68,070) 473,884 409,557 346,591
Amortization of deferred policy acquisition costs 73,605 48,951 40,264
Other operating expenses 127,104 107,571 77,390
Total benefits and expenses 674,593 566,079 464,245
INCOME BEFORE
INCOME TAX 85,044 59,947 51,703
INCOME TAX EXPENSE Current 33,748 18,720 11,120
Deferred (5,273) (1,336) 3,357
Total income tax expense 28,475 17,384 14,477
INCOME BEFORE
MINORITY INTEREST 56,569 42,563 37,226
MINORITY INTEREST
IN INCOME OF
CONSOLIDATED
SUBSIDIARIES 19 90 1,437
INCOME BEFORE
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING PRINCIPLE 56,550 42,473 35,789
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING PRINCIPLE
(NET OF INCOME
TAX: $542) (1,053)
NET INCOME $ 56,550 $ 41,420 $ 35,789
INCOME PER SHARE
BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE $ 4.13 $ 3.11 $ 2.62
CUMULATIVE EFFECT
OF A CHANGE IN
ACCOUNTING
PRINCIPLE PER SHARE (.08)
NET INCOME
PER SHARE $ 4.13 $ 3.03 $ 2.62
DIVIDENDS PAID
PER SHARE $ 1.01 $ .90 $ .82
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
(DOLLARS IN THOUSANDS) 1993 1992
ASSETS INVESTMENTS:
Fixed maturities,1993 at market (amortized cost: $2,985,670);
1992 at amortized cost (market: $2,247,828) $3,051,292 $2,185,015
Equity securities, at market
(cost: 1993 - $33,331; 1992 - $21,804) 40,596 26,588
Mortgage loans on real estate 1,407,744 1,178,164
Investment real estate, net of accumulated
depreciation (1993 - $4,483; 1992 - $2,497) 22,061 17,020
Policy loans 141,135 117,873
Other long-term investments 20,191 19,618
Short-term investments 83,692 52,792
Total investments 4,766,711 3,597,070
Cash 27,119 14,959
Accrued investment income 51,337 41,045
Accounts and premiums receivable, net
of allowance for uncollectible
amounts (1993 - $5,024; 1992 - $1,108) 26,315 28,345
Reinsurance receivables 102,559 4,406
Deferred policy acquisition costs 299,584 275,212
Property and equipment, net 35,664 34,746
Other assets 3,316 7,478
Assets held in separate accounts 3,400 3,406
TOTAL ASSETS $5,316,005 $4,006,667
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1993 1992
LIABILITIES Policy liabilities and accruals
Future policy benefits and claims $1,380,845 $ 929,592
Unearned premiums 88,785 75,177
Total policy liabilities and accruals 1,469,630 1,004,769
Guaranteed investment contract deposits 2,015,075 1,694,530
Annuity deposits 1,005,742 674,062
Other policyholders' funds 141,975 122,770
Other liabilities 96,682 81,326
Accrued income taxes 6,381 118
Deferred income taxes 69,269 54,727
Short-term debt 9,520 57,234
Long-term debt 137,598 31,014
Liabilities related to separate accounts 3,400 3,406
Minority interest in consolidated subsidiaries 1,311
Total liabilities 4,955,272 3,725,267
COMMITMENTS AND
CONTINGENCIES - Note G
STOCKHOLDERS' Preferred Stock, $1 par value
EQUITY Shares authorized: 850,000
Issued: none
Junior Participating Cumulative
Preferred Stock, $1 par value
Shares authorized: 150,000
Issued: none
Common Stock, $.50 par value 7,834 7,834
Shares authorized: 20,000,000
Issued: 1993 and 1992 - 15,668,231
Additional paid-in capital 70,469 70,335
Net unrealized gains on investments
(net of income tax: 1993 - $19,774; 1992 - $1,628) 39,284 3,156
Retained earnings 267,361 224,638
Treasury stock, at cost (1993 - 1,974,987 shares; 1992 - 1,978,433 shares) (18,359) (18,363)
Unallocated stock in Employee Stock Ownership Plan
(1993 - 442,000 shares; 1992 - 468,000 shares) (5,856) (6,200)
Total stockholders' equity 360,733 281,400
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY $5,316,005 $4,006,667
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET
UNREALIZED
GAINS
ADDITIONAL (LOSSES) UNALLOCATED TOTAL
(DOLLARS IN THOUSANDS COMMON PAID-IN ON RETAINED TREASURY STOCK IN STOCKHOLDERS'
EXCEPT PER SHARE AMOUNTS) STOCK CAPITAL INVESTMENTS EARNINGS STOCK ESOP EQUITY
Balance, December 31, 1990 $7,834 $69,460 $ (486) $170,943 $(18,535) $(6,890) $222,326
Net income for 1991 35,789 35,789
Cash dividends
($.82 per share) (11,210) (11,210)
Decrease in net unrealized
losses on investments 4,467 4,467
Reissuance of treasury stock
to ESOP (2,137 shares) 28 (28) 0
Allocation of stock to employee
accounts (28,137 shares) 373 373
Balance, December 31, 1991 7,834 69,488 3,981 195,522 (18,535) (6,545) 251,745
Net income for 1992 41,420 41,420
Cash dividends
($.90 per share) (12,304) (12,304)
Decrease in net unrealized
gains on investments (825) (825)
Reissuance of treasury stock
to ESOP (728 shares) 16 (16) 0
Allocation of stock to employee
accounts (26,728 shares) 361 361
Reissuance of treasury stock
(39,688 shares) 831 172 1,003
Balance, December 31, 1992 7,834 70,335 3,156 224,638 (18,363) (6,200) 281,400
Net income for 1993 56,550 56,550
Cash dividends
($1.01 per share) (13,827) (13,827)
Increase in net unrealized
gains on investments 36,128 36,128
Reissuance of treasury stock
to ESOP (103 shares) 3 (3) 0
Allocation of stock to employee
accounts (26,103 shares) 347 347
Reissuance of treasury stock
(3,343 shares) 131 4 135
Balance, December 31, 1993
- Note H $7,834 $70,469 $39,284 $267,361 $(18,359) $(5,856) $360,733
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS) 1993 1992 1991
CASH FLOWS Net income $ 56,550 $ 41,420 $ 35,789
FROM Adjustments to reconcile net income to net cash
OPERATING provided by operating activities:
ACTIVITIES Amortization of deferred policy acquisition costs 73,605 48,951 40,624
Capitalization of deferred policy acquisition costs (91,564) (81,481) (63,071)
Depreciation expense 3,742 3,946 4,668
Deferred income taxes 14,253 (2,514) 4,107
Accrued income taxes 6,230 691 (1,085)
Interest credited to universal life and
investment products 220,772 173,658 132,533
Policy fees assessed on universal life
and investment products (67,314) (46,383) (37,546)
Change in accrued investment income
and other receivables (97,908) (9,157) (20,871)
Change in policy liabilities and other
policyholders' funds of traditional
life and health products 42,901 4,307 (8,003)
Change in other liabilities 12,432 5,610 11,203
Other (net) 14,959 (4,276) (3,940)
Net cash provided by operating activities 188,658 134,772 94,408
CASH FLOWS Cost of investments acquired (2,334,171) (1,991,950) (1,526,085)
FROM Maturities and principal reductions of investments 1,341,818 882,950 574,018
INVESTING Sale of investments 244,683 338,850 191,896
ACTIVITIES Acquisitions and bulk reinsurance assumptions 14,190 23,274
Purchase of property and equipment (4,682) (3,731) (5,988)
Sale of property and equipment 3,023 180 394
Net cash used in investing activities (735,139) (750,427) (765,765)
CASH FLOWS Proceeds from borrowings under line of credit
FROM arrangements and long-term debt 719,173 341,000 140,365
FINANCING Principal payments on line of credit
ACTIVITIES arrangements and long-term debt (661,717) (310,331) (163,931)
Dividends to stockholders (13,827) (12,304) (11,210)
Change in universal life and investment
product deposits 515,012 607,721 686,458
Net cash provided by financing activities 558,641 626,086 651,682
INCREASE (DECREASE)
IN CASH 12,160 10,431 (19,675)
CASH AT BEGINNING
OF YEAR 14,959 4,528 24,203
CASH AT END
OF YEAR $ 27,119 $ 14,959 $ 4,528
SUPPLEMENTAL
DISCLOSURES Cash paid during the year:
OF CASH Interest on debt $ 6,426 $ 4,457 $ 5,746
FLOW INFORMATION Income taxes $ 27,493 $ 18,007 $ 10,901
SUPPLEMENTAL Change in minority interest in consolidated
SCHEDULE OF subsidiaries $ (1,311) $ 90 $ (4,549)
NONCASH INVESTING Reissuance of treasury stock to ESOP $ 3 $ 16 $ 28
AND FINANCING Unallocated stock in ESOP $ 344 $ 345 $ 345
ACTIVITIES Reissuance of treasury stock $ 135 $ 1,003
Acquisitions and bulk reinsurance assumptions
Assets acquired $ 423,167 $ 103,557
Liabilities assumed (429,580) (130,008)
Net $ (6,413) $ (26,451)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Protective Life
Corporation and subsidiaries (the Company) are prepared on the basis of
generally accepted accounting principles. Such accounting principles differ from
statutory reporting practices used by insurance companies in reporting to state
regulatory authorities. (See also Note B.)
ENTITIES INCLUDED
The consolidated financial statements include the accounts, after intercompany
eliminations, of Protective Life Corporation and its wholly owned subsidiaries.
Protective Life Insurance Company (Protective Life) is the Company's principal
operating subsidiary.
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 the Company and as an adjustment to income.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1992, the Company 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.
In 1993, the Company adopted SFAS No. 109, "Accounting For Income Taxes."
Adoption of this accounting standard did not have a material effect on the
Company's financial statements.
The Company 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. The Company has
not restated any previously reported financial statements as a result of
adopting this statement.
At December 31, 1993, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." For purposes of adopting
SFAS No.115 the Company has classified all of its investments in fixed
maturities, equity securities, and short-term investments as "available for
sale." As prescribed by SFAS No. 115, these investments are recorded at their
market values at December 31, 1993 with the resulting net unrealized gain
recorded as an increase in stockholders' equity. The effect of adopting SFAS
No. 115 at December 31, 1993 was to increase fixed maturities by $65.6 million,
decrease deferred policy acquisition costs by $12.4 million, increase the
liability for deferred income taxes by $18.6 million, and increase stockholders'
equity by $34.6 million. In accordance with the provisions of SFAS No. 115, 1992
amounts have not been restated.
INVESTMENTS
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
- - 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.
- - Equity securities (common and nonredeemable preferred stocks) - at current
market value.
- - Mortgage loans on real estate - at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
- - Investment real estate - at cost, less allowances for depreciation computed on
the straight-line method. With respect to real estate acquired through
foreclosure, cost is the lesser of the loan balance plus foreclosure costs or
appraised value.
- - Policy loans - at unpaid balances.
- - Other long-term investments - at a variety of methods similar to those listed
above, as deemed appropriate for the specific investment.
- - Short-term investments - at cost, which approximates current market value.
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 stockholders' equity (net of income tax) and accordingly have no
effect on net income.
A combination 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. The Company also uses
interest rate swap contracts to convert certain investments from a variable to a
fixed rate of interest. At December 31, 1993, open interest rate swap contracts
were in a $9.0 million unrealized gain position.
CASH
Cash includes all demand deposits reduced by the amount of outstanding checks
and drafts.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. The Company 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.
Property and equipment consisted of the following at December 31:
1993 1992
Home Office building $35,284 $35,267
Data processing equipment 13,301 11,101
Other, principally furniture and equipment 15,034 15,344
63,619 61,712
Accumulated depreciation 27,955 26,966
$35,664 $34,746
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
- - 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 the
Company'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 the Company and
claims incurred but not yet reported. Policy claims are charged to expense in
the period that the claims are incurred.
- - 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 1993.
At December 31, 1993, the Company estimates the fair value of its
guaranteed investment contracts to be $2,105 million using discounted cash
flows. The surrender value of the Company's annuities which approximates fair
value was $1,003 million.
- - 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 being 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 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. For 1993, these costs have been reduced by an
amount equal to the amortization that would have been recorded if unrealized
gains or losses on investments associated with the Company's universal life and
investment products had been realized.
At the time it adopted Statement of Financial Accounting Standards No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments," the
Company made certain assumptions regarding the mortality, persistency, expenses,
and interest rates it expected to experience in future periods. Under SFAS
No. 97, these assumptions are to be best estimates and are to be periodically
updated whenever actual experience and/or expectations for the future change
from initial assumptions. Accordingly, the Company has substituted its actual
experience to date for that previously assumed.
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, the Company 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 POLICIES
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.
INCOME TAXES
The Company uses the 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.
INCOME PER SHARE OF COMMON STOCK
Per share data are based on the weighted average number of shares of Common
Stock outstanding which was 13,690,789, 13,657,993, and 13,649,031, in 1993,
1992, and 1991, respectively.
RECLASSIFICATIONS
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 stockholders' equity.
NOTE B. RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted accounting
principles (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
stockholders' 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.
The reconciliations of net income and stockholders' equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
NET INCOME STOCKHOLDERS' EQUITY
1993 1992 1991 1993 1992 1991
In conformity with statutory
reporting practices:
Protective Life
Insurance Company $41,471 $25,138 $28,071 $263,075 $206,476 $177,285
Wisconsin National Life
Insurance Company 9,591 50,885
American Foundation
Life Insurance Company 1,415 2,155 2,401 18,290 18,394 17,717
Empire General Life
Assurance Corporation 408 (201) 10,588 5,178
Capital Investors Life
Insurance Company 228 879
Protective Life Insurance
Corporation of Alabama 25 2,073
National Deposit Life
Insurance Company(1) 5,386 5,730 10,188
Protective Life Insurance
Acquisition Corporation(2) 22 (6) 2,009
Consolidation elimination (74) (1,000) (80,715) (21,572) (17,726)
53,138 32,426 35,196 265,075 208,476 189,473
Additions (deductions) by
adjustment:
Deferred policy acquisition
costs, net of amortization 25,392 32,928 22,475 299,584 275,212 215,411
Policy liabilities and accruals (15,586) (26,486) (16,474) (69,844) (45,583) (16,216)
Deferred income tax 5,273 1,336 (3,357) (69,269) (54,727) (57,241)
Asset Valuation Reserve 43,398 25,341 27,821
Interest Maintenance Reserve (1,432) (93) 10,489 1,634
Nonadmitted items 1,190 685 (27) 7,742 (10,178) (1,521)
Timing differences on
mortgage loans on
real estate and fixed
maturity investments 1,645 1,296 3,297 7,350 (11,608) (16,131)
Net unrealized gains on
investments (334) (378) (1,648)
Realized investment losses (7,860) (2,550) (8,757)
Noninsurance affiliates (4,081) 2,990 4,666 87,693 100,435 123,930
Minority interest in
consolidated subsidiaries (19) (90) (1,437) (1,311) (1,221)
Consolidation elimination (222,790) (205,625) (209,670)
Other adjustments, net (1,110) (1,022) 207 1,639 (288) (1,242)
In conformity with generally
accepted accounting
principles $56,550 $41,420 $35,789 $360,733 $281,400 $251,745
<FN>
(1) MERGED INTO PROTECTIVE LIFE IN SEPTEMBER 1992.
(2) FORMED TO FACILITATE PROTECTIVE LIFE'S ACQUISITION OF EMPLOYERS NATIONAL
LIFE INSURANCE COMPANY. SEE NOTE F.
NOTE C. INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31 are
summarized as follows:
1993 1992 1991
Fixed maturities $212,816 $172,919 $131,959
Equity securities 1,519 939 2,581
Mortgage loans on
real estate 130,262 108,128 88,664
Investment
real estate 2,166 1,893 1,146
Policy loans 7,558 6,781 6,395
Other, principally
short-term
investments 17,790 3,023 9,499
372,111 293,683 240,244
Investment
expenses 9,981 9,614 6,742
$362,130 $284,069 $233,502
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
1993 1992 1991
Fixed maturities $ 10,508 $ 8,163 $ 2,547
Equity securities 2,230 3,688 763
Mortgage loans and
other investments (7,684) (11,865) (6,395)
$ 5,054 $ (14) $ (3,085)
The Company has established an allowance for uncollectible amounts on
investments. The allowance totaled $35.9 million, $27.2 million, and $17.5
million at December 31, 1993, 1992, and 1991, respectively. Additions to the
allowance are included in realized investment losses. Without such additions the
Company had realized investment gains of $13.8 million, $9.7 million, and $7.4
million in 1993, 1992, and 1991, respectively.
In 1993, gross gains on the sale of investments available for sale (fixed
maturities, equity securities, and short-term investments) 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. In
1991, gross gains were $4.8 million, and gross losses were $1.9 million.
The amortized cost and estimated market values of the Company's investments
classified as available for sale at December 31, 1993 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1993 COST GAINS LOSSES VALUES
Fixed maturities:
Bonds:
Mortgage-backed securities $1,531,012 $31,532 $ 957 $1,561,587
United States Govern-
ment and authorities 89,372 2,818 0 92,190
States, municipalities,
and political subdivisions 15,024 133 2 15,155
Public utilities 339,613 4,262 252 343,623
Convertibles and
bonds with warrants 1,421 0 167 1,254
All other corporate bonds 822,505 28,799 688 850,616
Bank loan participations 151,278 0 0 151,278
Redeemable preferred stocks 35,445 226 82 35,589
2,985,670 67,770 2,148 3,051,292
Equity securities 33,331 8,560 1,295 40,596
Short-term investments 83,692 0 0 83,692
$3,102,693 $76,330 $3,443 $3,175,580
The amortized cost and estimated market values of the Company's investments
in fixed maturities at December 31, 1992 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1992 COST GAINS LOSSES VALUES
Bonds:
Mortgage-backed securities $1,269,620 $35,637 $0 $1,305,257
United States Govern-
ment and authorities 21,307 2,595 0 23,902
States, municipalities,
and political subdivisions 935 228 0 1,163
Public utilities 260,590 7,787 0 268,377
Convertibles and
bonds with warrants 5,224 193 0 5,417
All other corporate bonds 473,536 15,883 0 489,419
Bank loan participations 148,683 0 0 148,683
Redeemable preferred stocks 5,120 490 0 5,610
$2,185,015 $62,813 $0 $2,247,828
The amortized cost and estimated market value of fixed maturities at
December 31, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or to prepay certain of these obligations.
ESTIMATED ESTIMATED
AMORTIZED MARKET
1993 COST VALUES
Due in one year or less $ 24,667 $ 24,755
Due after one year through five years 359,545 367,836
Due after five years through ten years 550,773 567,778
Due after ten years 2,050,685 2,090,923
$2,985,670 $3,051,292
ESTIMATED ESTIMATED
AMORTIZED MARKET
1992 COST VALUES
Due in one year or less $ 26,474 $ 26,790
Due after one year through five years 305,732 310,355
Due after five years through ten years 271,307 281,648
Due after ten years 1,581,502 1,629,035
$2,185,015 $2,247,828
The approximate percentage distribution of the Company's fixed maturity
investments by quality rating at December 31 is as follows:
RATING 1993 1992
AAA 52.5% 51.7%
AA 7.8 10.0
A 15.1 15.8
BBB
Bonds 16.2 12.9
Bank loan participations 1.0 2.7
BB or less
Bonds 2.2 2.5
Bank loan participations 4.0 4.1
Redeemable preferred stocks 1.2 0.3
100.0% 100.0%
At December 31, 1993, the Company had bonds which were rated less than
investment grade of $67.3 million having an amortized cost of $66.7 million.
Additionally, the Company had bank loan participations which were rated less
than investment grade of $121.7 million having an amortized cost of $121.7
million.
The change in unrealized gains (losses), net of tax, on fixed maturity and
equity securities for the years ended December 31 is summarized as follows:
1993 1992 1991
Fixed maturities $1,198 $ 76 $65,955
Equity securities $1,565 $(825) $ 4,467
At December 31, 1993, all of the Company's mortgage loans were commercial
loans of which 79% were retail, 9% were warehouses, and 8% were office
buildings. The Company 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.
Many of the mortgage loans have call provisions after 5 to 7 years.
Assuming the loans are called at their next call dates, approximately $50.2
million would become due in 1994, $480.1 million in 1995 to 1998, and $218.7
million in 1999 to 2003.
At December 31, 1993, the average mortgage loan was $1.4 million, and the
weighted average interest rate was 9.6%. The largest single mortgage loan was
$9.3 million. While the Company's $1,407.7 million of mortgage loans do not have
quoted market values, at December 31, 1993, the Company estimates the market
value of its mortgage loans to be $1,524.2 million using discounted cash flows
from the next call date.
At December 31, 1993 and 1992, the Company's problem mortgage loans and
foreclosed properties totaled $27.1 million and $16.4 million, respectively. The
Company expects no significant loss of principal.
Certain investments, principally real estate, with a carrying value of $9.9
million, were nonincome producing for the twelve months ended December 31, 1993.
Mortgage loans to Fletcher Bright, Kenneth Karl, and Edens & Avant totaling
$92.1 million, $48.5 million, and $40.1 million, respectively, exceeded ten
percent of stockholders' equity at December 31, 1993.
The Company 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 the Company's other long-term
investments approximate cost.
NOTE D. FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the maximum federal income
tax rate as follows:
1993 1992 1991
Statutory federal income tax rate
applied to pretax income 35.0% 34.0% 34.0%
Amortization of nondeductible goodwill 0.1 1.1 0.4
Dividends received deduction and
tax-exempt interest (0.5) (1.3) (1.5)
Tax benefits arising from prior acquisitions
and other adjustments (2.6) (4.8) (4.9)
32.0% 29.0% 28.0%
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 $1.3 million or
$.09 per share due to a recalculation of the Company's deferred income tax
liability. The effective income tax rate for 1993 of 32% excludes the one-time
increase.
The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for tax purposes.
Details of the deferred income tax provision for the years ended
December 31 are as follows:
1993 1992 1991
Deferred policy acquisition costs $ 8,861 $ 7,164 $ 2,886
Benefit and other policy liability changes (10,416) (9,005) (5,601)
Temporary differences of investment income 336 1,153
Effect of operating loss carryforward 5,799
Other items (3,718) 169 (880)
$ (5,273) $ (1,336) $ 3,357
The components of the Company's net deferred income tax liability as of
December 31, 1993 were as follows:
1993
Deferred income tax assets:
Policy and policyholder liability reserves $25,123
Other 4,333
29,456
Deferred income tax liabilities:
Deferred policy acquisition costs 79,199
Unrealized gain on investments 19,526
98,725
Net deferred income tax liability $69,269
Under pre-1984 life insurance company income tax laws, a portion of the
Company'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 of the life insurance subsidiaries exceed certain
stated maximums, or should distributions including cash dividends be made to
Protective Life Corporation in excess of approximately $184.0 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. The Company does not anticipate involuntarily paying
income tax on amounts in the Policyholders' Surplus accounts.
At December 31,1993, the Company has no unused income tax loss
carryforwards.
NOTE E. DEBT
Short-term and long-term debt at December 31 are summarized as follows:
1993 1992
Short-term debt:
Notes payable to banks $49,700
Current portion of long-term debt $ 9,520 7,534
$ 9,520 $57,234
Long-term debt:
Notes payable to banks $137,500 $29,000
Mortgage and other notes payable
less current portion 98 2,014
$137,598 $31,014
Under a three-year revolving line of credit arrangement with several banks,
the Company can borrow up to $138 million on an unsecured basis. No compensating
balances are required to maintain the line of credit. At December 31, 1993, the
Company had borrowed $118.0 million under this credit arrangement at a weighted
average interest rate of 4.0%.
At December 31, 1993, the Company had borrowed $29.0 million under a
variable rate term note to be repaid in installments through 1996. At
December 31, 1993, the note's rate of interest was 4.4%.
The aforementioned term note and revolving line of credit arrangement
contain, among other provisions, requirements for maintaining certain financial
ratios and restrictions on indebtedness incurred by the Company and its
subsidiaries. Additionally, the Company, on a consolidated basis, cannot incur
debt in excess of 40% of its total capital.
The Company believes the fair value of its debt approximates book value due
to the debt being either short-term or variable rate.
Future maturities of the long-term debt are $9.5 million in 1994, $9.5
million in 1995, and $128.0 million in 1996.
Interest expense on debt totaled $6.3 million, $4.8 million, and $5.7 million in
1993, 1992, and 1991, respectively.
NOTE F. ACQUISITIONS AND SALE OF SUBSIDIARY
In March 1992, regulatory approval was received to merge Employers National Life
Insurance Company into Protective Life. Additionally, effective July 1, 1992,
the Company assumed all of the policy obligations associated with the credit
life and credit accident and health insurance business produced by Durham Life
Insurance Company.
In July 1993, the Company acquired Wisconsin National Life Insurance
Company (Wisconsin National). In addition, the Company reinsured a block of
universal life policies.
These transactions have been accounted for as purchases, and the results of
the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
Summarized below are the consolidated results of operations for 1993 and
1992, on an unaudited proforma basis, as if the Wisconsin National acquisition
had occurred as of January 1, 1992. The pro forma information is based on the
Company'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.
1993 1992
(UNAUDITED)
Total revenues $791,396 $693,950
Net income $ 58,428 $ 45,613
Net income per share $ 4.27 $ 3.34
In August 1993, the Company sold its ownership interest in Southeast Health
Plan, Inc.
NOTE G. COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 1993, the Company was committed to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $168.0
million. Also, the Company has issued a guarantee in connection with the sale of
certain tax-exempt mortgage loans which may be put to the Company in the event
of default. At December 31, 1993, the loans totaled $25.8 million.
At December 31, 1993, the Company was contingently liable as a guarantor of
$8.1 million in mortgage debt in the name of a motel joint venture in which the
Company is a partner. Should the joint venture become unable to meet its
obligation on this debt, the Company would assume title to the real estate
development along with the debt.
The Company is contingently liable to obtain a $20 million letter of credit
under indemnity agreements with its directors. Such agreements provide insurance
protection in excess of the directors' and officers' liability insurance in
force at the time up to $20 million. Should certain events occur constituting a
change in control of the Company, the Company must obtain the letter of credit
upon which directors may draw for defense or settlement of any claim relating to
performance of their duties as directors. The Company has similar agreements
with certain of its officers providing up to $10 million in indemnification
which are not secured by the obligation to obtain a letter of credit.
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. The Company 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 H. STOCKHOLDERS' EQUITY AND RESTRICTIONS
The Company has adopted a Share Purchase Rights Plan that provides rights to
holders of the Company's Common Stock to receive Junior Participating Cumulative
Preferred Stock under certain circumstances. The Company can redeem the rights
at $.01 per right until ten business days following a public announcement that
20% or more of the Company's Common Stock has been acquired by one or more
related investors. If, after the rights become exercisable, the Company becomes
involved in a merger or certain other major corporate transactions, each right
then outstanding (other than those held by the 20% holder) would entitle its
holder to buy from the acquirer or the Company or its successor, Common Stock of
the acquirer or the Company or its successor worth twice the exercise price.
Stockholders have authorized 1,000,000 shares of Preferred Stock, $1.00 par
value. Other terms, including preferences, voting, and conversion rights, may be
established by the Board of Directors. In connection with the Share
Purchase Rights Plan, 150,000 of these shares have been designated as Junior
Participating Cumulative Preferred Stock, $1.00 par value, and were unissued at
December 31, 1993. The remaining 850,000 shares of Preferred Stock, $1.00 par
value, were also unissued at December 31, 1993.
During 1990, the Company's Board of Directors approved the formation of an
Employee Stock Ownership Plan (ESOP). In December 1990, 520,000 shares of the
Company's Common Stock, which had been held by Protective Life and accounted for
as treasury shares, were transferred to the ESOP in exchange for a $6.9 million
note. The stock is used to match employee contributions to the Company's 401(k)
Plan. The stock held by the ESOP that has not yet been used to match employee
contributions is the unallocated stock shown as a reduction to stockholders'
equity. The ESOP shares are dividend-paying and therefore are considered
outstanding for earnings per share calculations. Dividends on the shares will be
used to pay the ESOP's note to Protective Life. If certain events associated
with a change in control of the Company occur, any unallocated shares held by
the ESOP will become allocable to employee 401(k) accounts.
The Company may from time to time transfer or buy in the open market
additional shares of Common Stock to complete its 401(k) employer match
obligation. Accordingly, in 1992, the Company transferred 728 shares of Common
Stock to the ESOP and transferred another 103 shares during 1993.
At December 31, 1993, approximately $172 million of consolidated
stockholders' equity represented net assets of the Company's insurance
subsidiaries that cannot be transferred in the form of dividends, loans, or
advances to the parent company. Generally, the net assets of the Company's
insurance subsidiaries available for transfer to the parent company are limited
to the amounts that the insurance subsidiaries' 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. RELATED PARTY MATTERS
Certain corporations with which the Company's directors were affiliated paid the
Company 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 J. BUSINESS SEGMENTS
The Company operates predominantly in the life and accident and health insurance
industry. The following table sets forth revenues, income before income tax, and
identifiable assets of the Company'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.
Realized investment gains (losses) and expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
Total revenues
(DOLLARS IN THOUSANDS) 1993 1992 1991
Agency $ 111,654 $ 90,690 $ 80,592
Group 143,423 129,778 129,576
Financial Institutions 97,511 64,376 36,041
Investment Products 80,115 55,768 35,742
Guaranteed Investment Contracts 167,233 138,616 104,803
Acquisitions 123,855 93,634 95,847
Corporate and Other 33,970 54,613 36,032
Unallocated Realized Investment Gains (Losses) 1,876 (1,449) (2,685)
$ 759,637 $ 626,026 $ 515,948
Agency 14.7% 14.5% 15.6%
Group 18.9 20.7 25.1
Financial Institutions 12.9 10.2 7.0
Investment Products 10.6 8.9 6.9
Guaranteed Investment Contracts 22.0 22.2 20.4
Acquisitions 16.3 15.0 18.5
Corporate and Other 4.4 8.7 7.0
Unallocated Realized Investment Gains (Losses) 0.2 (0.2) (0.5)
100.0% 100.0% 100.0%
Income Before Income Tax
Agency $ 20,064 $ 12,985 $ 12,087
Group 10,394 7,731 8,146
Financial Institutions 8,196 5,411 4,447
Investment Products 2,931 4,601 391
Guaranteed Investment Contracts* 25,405 14,533 9,933
Acquisitions 29,845 20,031 23,494
Corporate and Other* (13,667) (3,896) (4,110)
Unallocated Realized Investment Gains (Losses) 1,876 (1,449) (2,685)
$ 85,044 $ 59,947 $ 51,703
Agency 23.6% 21.7% 23.4%
Group 12.2 12.9 15.8
Financial Institutions 9.6 9.0 8.6
Investment Products 3.5 7.7 0.8
Guaranteed Investment Contracts 29.9 24.2 19.1
Acquisitions 35.1 33.4 45.4
Corporate and Other (16.1) (6.5) (7.9)
Unallocated Realized Investment Gains (Losses) 2.2 (2.4) (5.2)
100.0% 100.0% 100.0%
Identifiable Assets
Agency $ 642,325 $ 507,460 $ 412,019
Group 208,968 161,744 149,218
Financial Institutions 192,486 146,713 67,404
Investment Products 879,365 686,503 432,054
Guaranteed Investment Contracts 2,041,564 1,696,786 1,291,743
Acquisitions 1,145,357 599,022 576,549
Corporate and Other 205,940 208,439 191,303
$5,316,005 $4,006,667 $3,120,290
Agency 12.1% 12.7% 13.2%
Group 3.9 4.0 4.8
Financial Institutions 3.6 3.7 2.2
Investment Products 16.6 17.1 13.8
Guaranteed Investment Contracts 38.4 42.3 41.4
Acquisitions 21.5 15.0 18.5
Corporate and Other 3.9 5.2 6.1
100.0% 100.0% 100.0%
<FN>
*INCOME BEFORE INCOME TAX FOR THE GUARANTEED INVESTMENT CONTRACTS DIVISION HAS
NOT BEEN REDUCED BY PRETAX MINORITY INTEREST OF $1,631 IN 1991. INCOME BEFORE
INCOME TAX FOR THE CORPORATE AND OTHER SEGMENT HAS NOT BEEN REDUCED BY PRETAX
MINORITY INTEREST OF $19 IN 1993 AND $90 IN 1992 AND 1991.
NOTE K. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's highest
thirty-six consecutive months of compensation. The Company's funding policy is
to contribute amounts to the plan sufficient to meet the minimum funding
requirements of ERISA plus such additional amounts as the Company 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.
The actuarial present value of benefit obligations and the funded status of
the plan at December 31 are as follows:
1993 1992
Accumulated benefit obligation, including vested
benefits of $12,406 in 1993 and $10,306 in 1992 $ 12,692 $10,537
Projected benefit obligation for service
rendered to date $ 20,480 $16,999
Plan assets at fair value (group annuity contract
with Protective Life) 15,217 13,608
Plan assets less than the projected benefit obligation (5,263) (3,391)
Unrecognized net loss from past experience
different from that assumed 2,244 550
Unrecognized prior service cost 2,069 2,256
Unrecognized net transition asset (118) (135)
Net pension liability recognized in balance sheet $(1,068) $ (720)
Net pension cost includes the following components for the years ended
December 31:
1993 1992 1991
Service cost - benefits earned during the year $ 1,191 $ 970 $ 690
Interest cost on projected benefit obligation 1,396 1,257 956
Actual return on plan assets (1,270) (1,172) (1,102)
Net amortization and deferral 704 130 113
Net pension cost $ 2,021 $ 1,185 $ 657
Assumptions used to determine the benefit obligations as of December 31
were as follows:
1993 1992 1991
Weighted average discount rate 7.5% 8.0% 8.0%
Rates of increase in compensation level 5.5% 6.0% 6.0%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
Assets of the pension plan are included in the general assets of Protective
Life. Upon retirement, the amount of pension plan assets vested in the retiree
are used to purchase a single premium annuity from Protective Life in the
retiree's name. Therefore, amounts presented above as plan assets exclude assets
relating to retirees.
The Company 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.
In addition to pension benefits, the Company provides limited health care
benefits to eligible retired employees until age 65. The Company has adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
At January 1, 1992, the Company 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 the Company'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, 1993, the liability for such
benefits totaled $1.6 million. The expense recorded by the Company was $0.2
million in 1993 and 1992. The Company's obligation is not materially affected by
a 1% change in the health care 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 thousand face
amount of insurance.
In 1990, the Company established an Employee Stock Ownership Plan to match
employee contributions to the Company's existing 401(k) Plan. Previously, the
Company matched employee contributions in cash. The expense recorded by the
Company for this employee benefit was $249 thousand, $412 thousand, and $451
thousand in 1993, 1992, and 1991, respectively.
NOTE L. REINSURANCE
The Company 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, the Company will
not carry more than $500 thousand individual life insurance on a single risk.
The Company 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. The Company 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 the Company. At December 31, 1993
and 1992, the Company had paid $4.8 million and $4.4 million respectively, of
ceded benefits which are recoverable from reinsurers.
NOTE M. CONSOLIDATED QUARTERLY RESULTS - UNAUDITED
Protective Life Corporation's unaudited consolidated quarterly operating data
for the years ended December 31, 1993 and 1992 are presented below. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of quarterly results have been reflected in
the data which follow. It is also management's opinion, however, that quarterly
operating data for insurance enterprises are not indicative of results to be
achieved in succeeding quarters or years. In order to obtain a more accurate
indication of performance, there should be a review of operating results,
changes in stockholders' equity, and cash flows for a period of several years.
Fluctuation in short-term performance may be due to the long-term nature of the
insurance business, seasonal patterns in premium production and policy claims,
as well as to the varying yields obtained on invested assets. The data below
should be read in conjunction with the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein.
FIRST SECOND THIRD FOURTH
1993 QUARTER QUARTER QUARTER QUARTER
Premiums and policy fees $ 85,848 $ 93,340 $ 94,421 $ 97,149
Net investment income 81,196 85,180 95,697 100,057
Realized investment gains (losses) 125 677 (39) 4,291
Other income 4,930 5,392 6,607 4,766
Total revenues 172,099 184,589 196,686 206,263
Benefits and expenses 154,804 164,484 176,654 178,651
Income before income tax 17,295 20,105 20,032 27,612
Income tax expense 5,361 6,607 7,671 8,836
Minority interest 15 4
Net income $ 11,919 $ 13,494 $ 12,361 $ 18,776
Net income per share $ .87 $ .99 $ .90 $ 1.37
Average shares outstanding 13,689,861 13,689,901 13,690,119 13,693,244
FIRST SECOND THIRD FOURTH
1992 QUARTER QUARTER QUARTER QUARTER
Premiums and policy fees $ 74,414 $ 77,105 $ 86,826 $ 84,791
Net investment income 65,243 68,477 73,109 77,240
Realized investment gains (losses) 656 (347) (203) (120)
Other income 4,201 4,517 4,463 5,654
Total revenues 144,514 149,752 164,195 167,565
Benefits and expenses 130,737 134,503 148,965 151,874
Income before income tax 13,777 15,249 15,230 15,691
Income tax expense 3,858 4,559 4,417 4,550
Minority interest 22 23 22 23
Change in accounting principle 1,053
Net income $ 8,844 $ 10,667 $ 10,791 $ 11,118
Net income per share $ .65 $ .78 $ .79 $ .81
Average shares outstanding 13,649,750 13,660,152 13,677,801 13,679,757
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of premiums and
policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
YEAR ENDED AMOUNT PERCENTAGE
DECEMBER 31 (IN THOUSANDS) INCREASE
1991 $273,975 10.3%
1992 323,136 17.9
1993 370,758 14.7
Premiums and policy fees increased $49.2 million or 17.9% in 1992 over
1991. In the 1991 third quarter, the Company converted preferred stock into
common stock to become the 80% owner of Southeast Health Plan, Inc. (SEHP), a
Birmingham-based health maintenance organization, in which the Company had an
investment since 1988. Beginning in the 1991 third quarter, the results of SEHP
are reported in the Company's financial statements on a consolidated basis. The
inclusion of SEHP's premiums in 1992 represents a $17.4 million increase.
Increases in premiums and policy fees from the Agency and Financial Institutions
Divisions represent $7.0 million and $25.7 million of the increase,
respectively. Effective July 1, 1992, the Financial Institutions Division
assumed Durham Life Insurance Company's (Durham) credit business representing
$15.1 million of the Division's $25.7 million increase. A small acquisition in
the 1992 first quarter increased premiums and policy fees $3.6 million.
Decreases in older acquired blocks of policies represent a $5.6 million decrease
in premiums and policy fees.
Premiums and policy fees increased $47.6 million or 14.7% in 1993 over
1992. Increases in premiums and policy fees from the Agency, Group, and
Financial Institutions Divisions represent increases of $14.6 million, $13.0
million, and $30.4 million, respectively. The Durham acquisition represents
$17.8 million of the Financial Institutions Division's $30.4 million increase.
On July 30, 1993, the Company completed its acquisition of Wisconsin National
Life Insurance Company (Wisconsin National). The acquisition increased premiums
and policy fees by $11.7 million. The reinsurance of a block of universal life
policies on July 1, 1993 resulted in a $3.2 million increase. Decreases in older
acquired blocks of policies represented a $4.5 million decrease in premiums and
policy fees. On August 6, 1993, the Company completed the sale of its ownership
interest in SEHP. The sale of SEHP decreased premiums and policy fees $21.2
million in 1993.
NET INVESTMENT INCOME
The following table sets forth for the periods shown the amount of net
investment income, the percentage change from the prior period, and the
percentage earned on average cash and investments:
NET INVESTMENT INCOME
PERCENTAGE EARNED
YEAR ENDED AMOUNT PERCENTAGE ON AVERAGE
DECEMBER 31 (IN THOUSANDS) INCREASE CASH AND INVESTMENTS
1991 $233,502 70.5% 9.4%
1992 284,069 21.7 8.9
1993 362,130 27.5 8.7
Net investment income for 1991 was $96.5 million or 70.5% higher, 1992 was
$50.6 million or 21.7% higher, and 1993 was $78.1 million or 27.5% higher than
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. 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. The Wisconsin National acquisition resulted in an increase in
1993 net investment income of $14.5 million. Due to the general decline in
interest rates, the Company's percentage earned on average cash and investments
has decreased slightly since 1991.
REALIZED INVESTMENT GAINS (LOSSES)
The Company generally purchases its investments with the intent to hold to
maturity by purchasing investments that match future cash-flow needs. The sales
of investments that have occurred result from portfolio management decisions to
maintain proper matching of assets and liabilities.
The following table sets forth realized investment gains or losses for the
periods shown:
REALIZED INVESTMENT GAINS (LOSSES)
REALIZED
YEAR ENDED INVESTMENT GAINS (LOSSES)
DECEMBER 31 (IN THOUSANDS)
1991 $(3,085)
1992 (14)
1993 5,054
The Company maintains an allowance for uncollectible amounts on investments
based upon industry default rates for different asset types. The allowance
totaled $35.9 million at December 31, 1993. Additions to the allowance are
treated as realized investment losses. During 1991, the Company added $10.5
million to this allowance which more than offset $7.4 million of net realized
investment gains. During 1992, the Company added $9.7 million to this allowance
which offset the $9.7 million of net realized investment gains. During 1993, the
Company added $8.7 million to this allowance which partially offset the $13.8
million of net realized investment gains.
OTHER INCOME
The following table sets forth other income for the periods shown:
OTHER INCOME
YEAR ENDED OTHER INCOME
DECEMBER 31 (IN THOUSANDS)
1991 $11,556
1992 18,835
1993 21,695
Other income consists primarily of revenues of the Company's broker-dealer
subsidiaries, fees from administrative-services-only types of group accident and
health insurance contracts, and revenues of the Company's wholly owned insurance
marketing organizations and other small noninsurance subsidiaries. The sale of
SEHP reduced other income approximately $2.0 million which was more than offset
by a $3.5 million gain on the sale of SEHP. Other income from recurring sources
increased $3.3 million in 1992 and $1.4 million in 1993.
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
INCOME BEFORE INCOME TAX
INCOME (LOSS) BEFORE INCOME TAX
YEAR ENDED DECEMBER 31
(IN THOUSANDS)
BUSINESS SEGMENT 1991 1992 1993
Agency $12,087 $12,985 $20,064
Group 8,146 7,731 10,394
Financial Institutions 4,447 5,411 8,196
Investment Products 391 4,601 2,931
Guaranteed Investment Contracts* 9,933 14,533 25,405
Acquisitions 23,494 20,031 29,845
Corporate and Other* (4,110) (3,896) (13,667)
Unallocated Realized Investment Gains (Losses) (2,685) (1,449) 1,876
$51,703 $59,947 $85,044
<FN>
* INCOME BEFORE INCOME TAX FOR THE GUARANTEED INVESTMENT CONTRACTS DIVISION HAS
NOT BEEN REDUCED BY PRETAX MINORITY INTEREST OF $1,631 IN 1991. INCOME BEFORE
INCOME TAX FOR THE CORPORATE AND OTHER SEGMENT HAS NOT BEEN REDUCED BY PRETAX
MINORITY INTEREST OF $90 IN 1991 AND 1992, AND $19 IN 1993.
In 1993 the Company changed the method used to apportion net investment
income within the Company. 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.
Agency pretax earnings increased $0.9 million in 1992 as compared to 1991
reflecting increased sales, better persistency, and improved mortality. Agency
1993 pretax earnings of $20.1 million were $7.1 million higher than 1992. The
improvement was due primarily to a growing block of business, brought about by
sales, continued strong persistency, and favorable mortality experience.
Group pretax earnings were $0.4 million lower in 1992 as compared to 1991
due to both lower group health and group life earnings. Improved earnings in
cancer and dental products were more than offset by lower traditional group
health earnings. Group 1993 pretax earnings of $10.4 million were $2.7 million
higher than 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.
Pretax earnings of the Financial Institutions Division were $1.0 million
higher in 1992 as compared to 1991. Effective July 1, 1992, Protective Life
assumed all of the policy obligations associated with the credit life and credit
accident and health insurance business produced by Durham. The assumption
contributed $1.6 million to the Division's 1992 results, which was partially
offset by lower credit life and health earnings on account of higher mortality
and morbidity in the Division's other lines. The Financial Institutions
Division's 1993 pretax earnings of $8.2 million were up $2.8 million from 1992.
The Durham acquisition represented $0.7 million of the increase. The balance of
the increase was due to premium growth and improved claims ratios in the
Division's other lines.
The Investment Products Division's pretax earnings were $4.2 million higher
in 1992, compared to 1991. The earnings improvement was primarily due to having
a greater amount of annuity deposits. Annuity deposits associated with the
Division were $648 million at December 31, 1992, compared to $395 million at
December 31, 1991. The Division's 1993 earnings of $2.9 million were $1.7
million lower than 1992. These results reflect an increase of $3.2 million of
amortization of deferred policy acquisition costs, in part to shorten the
amortization period on book value annuities, sales of which were substantially
discontinued in 1992. Annuity deposits totaled $836 million at December 31,
1993. Average deposits for the year were $742 million, 42% higher than for 1992.
The Guaranteed Investment Contracts (GIC) Division had pretax earnings of
$14.5 million in 1992 and $25.4 million in 1993. GIC earnings have increased due
to the growth in GIC deposits placed with the Company. At December 31, 1993, GIC
deposits totaled $2.0 billion, compared to $1.7 billion one year earlier and
$1.3 billion at December 31, 1991.
A portion of the earnings of the GIC Division was earned in a
majority-owned subsidiary which became wholly owned in the 1991 third quarter.
The ownership interest of the other stockholders in the earnings of the
subsidiary before it became wholly owned was $1.3 million ($1.6 million pretax)
in 1991.
Pretax earnings from the Acquisitions Division decreased $3.5 million in
1992 as compared to 1991, primarily due to higher mortality and lapses in its
various blocks of acquired policies. 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 Acquisitions Division had pretax earnings of $29.8 million for 1993,
$9.8 million higher than 1992. On July 30, 1993, the Company completed its
acquisition of Wisconsin National. The Company also reinsured a block of
universal life policies during the 1993 third quarter. These two acquisitions
contributed $5.1 million to the Division's 1993 earnings. The Division also
experienced improved results in its other blocks of acquired policies.
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 operating divisions (including interest on substantially all
debt), the earnings of SEHP, and the operations of several small noninsurance
subsidiaries. Pretax losses for this segment were $0.2 million lower in 1992 as
compared to 1991 due to SEHP having a $0.6 million profit, compared to a loss in
1991, the SEHP increase being largely offset by several factors of negative
effect. Pretax losses of this segment were $9.8 million higher in 1993 as
compared to 1992 primarily due to the aforementioned reapportionment of net
investment income within the Company. On August 6, 1993, the Company sold its
ownership interest in SEHP. The sale has been accounted for in a manner similar
to an installment sale. The segment's 1993 results include a gain of $3.5
million attributable to the sale of SEHP which was more than offset by higher
expenses.
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the periods
shown:
INCOME TAX EXPENSE
YEAR ENDED DECEMBER 31 EFFECTIVE INCOME TAX RATES
1991 28%
1992 29
1993 32
For the year ended December 31, 1992, the effective income tax rate was
29%. 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 $1.3 million or
$.09 per share due to a recalculation of the Company's deferred income tax
liability. The effective income tax rate for 1993, excluding the one-time
increase, was 32%. Management's estimate of the effective income tax rate for
1994 is 32%.
NET INCOME
The following table sets forth net income and net income per share for the
periods shown:
NET INCOME
YEAR ENDED AMOUNT PER PERCENTAGE
DECEMBER 31 (IN THOUSANDS) SHARE INCREASE
1991 $35,789 $2.62 26.6%
1992 41,420 3.03 15.6
1993 56,550 4.13 36.3
Compared to 1991, net income per share in 1992 increased 15.6%, reflecting
improved earnings in its Agency, Financial Institutions, Investment Products,
and GIC Divisions, and higher realized investment gains which were partially
offset by an allowance for uncollectible amounts on investments and lower
earnings in the Group and Acquisitions Divisions. Additionally, 1992 includes a
reduction to income of $1.1 million reported as the cumulative effect of a
change in accounting principle associated with the Company's adoption of
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Net income per share in 1993 was
36.3% higher than 1992, reflecting improved earnings in the Agency, Group,
Financial Institutions, GIC, and Acquisitions Divisions, and higher realized
investment gains.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." The Company anticipates that the impact of adopting SFAS
No. 114 on its financial condition will be immaterial.
The American Institute of Certified Public Accountants has issued Statement
of Position 93-6, "Employers' Accounting For Employee Stock Ownership Plans"
(ESOP). Under certain "grandfathering" provisions in the Statement, employers
may elect not to apply the new accounting rules to shares acquired by ESOPs
before December 31, 1992. The Company does not plan to apply the new rules to
its existing ESOP.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations usually produce a positive cash flow. This cash flow is
used to fund an investment portfolio to finance future benefit payments
including those arising from various types of deposit contracts. Since future
benefit payments largely represent long-term obligations reserved using certain
assumed interest rates, the Company's investments are predominantly in
long-term, fixed-rate investments such as bonds and mortgage loans which provide
a sufficient return to cover these obligations.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to cover
the Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered. GICs and certain annuity contracts have market-value
adjustments which protect the Company against investment losses if interest
rates are higher at the time of surrender as compared to interest rates at the
time of issue.
The Company has adopted Statement of Financial Accounting Standards No.
115, "Accounting For Certain Investments In Debt And Equity Securities."
Accordingly, the Company's investments in debt and equity securities are
reported in the 1993 financial statements at market value, and investments in
mortgage loans are reported at amortized cost. At December 31, 1993, the fixed
maturity investments (bonds, bank loan participations, and redeemable preferred
stocks) had a market value of $3,051.3 million, which is 2.2% above amortized
cost (less allowances for uncollectible amounts on investments) of $2,985.7
million. The Company had $1,407.7 million in mortgage loans at December 31,
1993. While the Company's mortgage loans do not have quoted market values, at
December 31, 1993, the Company estimates the market value of its mortgage loans
to be $1,524.2 million(using discounted cash flows from the next call date)
which is 8.3% in excess of amortized book value. Most of the Company's mortgage
loans have significant prepayment penalties. These assets are invested for terms
approximately corresponding to anticipated future benefit payments. Thus, market
fluctuations should not adversely affect liquidity.
At December 31, 1993, delinquent mortgage loans and foreclosed real estate
were 0.5% of assets. Bonds rated less than investment grade were 1.3% of assets.
Additionally, the Company had bank loan participations that were less than
investment grade representing 2.3% of assets. The Company does not expect these
investments to adversely affect its liquidity or ability to hold its other
investments to maturity. The Company's allowance for uncollectible amounts on
investments was $35.9 million at December 31, 1993.
Policy loans at December 31, 1993 were $141.1 million, an increase of $23.3
million from December 31, 1992. The acquisition of Wisconsin National increased
policy loans by $13.5 million, and the reinsurance of a block of universal life
policies added an additional $12.1 million. Otherwise, policy loans decreased
$2.3 million. Policy loan rates are generally in the 4.5% to 8.0% range. Such
rates at least equal the assumed interest rates used for future policy benefits.
The Company believes its asset/liability matching practices and certain
product features provide significant protection for the Company against the
effects of changes in interest rates. However, approximately 24% of the
Company's liabilities relate to products (primarily whole life insurance) the
profitability of which may be affected by changes in interest rates. The effect
of such changes in any one year is not expected to be material. Additionally,
the Company believes its asset/liability matching practices provide sufficient
liquidity to enable it to fulfill its obligation to
pay benefits under its various insurance and deposit contracts.
The Company's asset/liability matching practices involve the monitoring of
asset and liability durations for various product lines; cash flow testing under
various interest rate scenarios; and the continuous rebalancing of assets and
liabilities with respect to yield, risk, and cash flow characteristics.
A combination 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 GICs and annuities. Realized investment
gains and losses of such contracts are deferred and amortized over the life of
the hedged asset. The Company also uses interest rate swap contracts to convert
certain investments from a variable to a fixed rate of interest.
In anticipation of receiving GIC and annuity deposits, the life insurance
subsidiaries were committed at December 31, 1993 to fund mortgage loans and to
purchase fixed maturity and other long-term investments in the amount of $168
million. The Company's subsidiaries held $108.4 million in cash and short-term
investments at December 31, 1993. Protective Life Corporation had an additional
$2.4 million in cash and short-term investments available for general corporate
purposes.
While the Company generally anticipates that the cash flows of its
subsidiaries will be sufficient to meet their investment commitments and
operating cash needs, the Company recognizes that investment commitments
scheduled to be funded may from time to time exceed the funds then available.
Therefore, the Company has arranged sources of credit for its insurance
subsidiaries to utilize to fund investments in such circumstances. The Company
expects that the rate received on its investments will equal or exceed its
borrowing rate. Additionally, the Company may from time to time sell
short-duration GICs to complement its cash management practices.
At December 31, 1993, Protective Life Corporation had borrowed $118 million
of its $138 million revolving line of credit on short-term notes bearing
interest rates averaging 4.0%. In addition, Protective Life Corporation has
borrowed $29 million under a four-year installment note at a rate of 4.4%. In
total, Protective Life Corporation's borrowings increased $60.8 million during
1993, approximately $35 million of which was used to finance acquisitions, and
the remainder contributed as additional statutory capital to its insurance
subsidiaries to support their future growth. Management expects to register
under the Securities Act of 1933, probably on a delayed (or "shelf") basis,
preferred stock and debt securities of Protective Life Corporation, and
preferred securities of a special purpose finance subsidiary, to reduce existing
bank borrowings and to give the Company flexibility in connection with future
acquisition opportunities.
Protective Life Corporation's cash flow is dependent on cash dividends from
its subsidiaries, payments on surplus notes, revenues from investment, data
processing, legal, and management services rendered to the subsidiaries, and
investment income. At December 31, 1993, approximately $172 million of
consolidated stockholders' equity represented net assets of the Company's
insurance subsidiaries that cannot be transferred to the Company in the form of
dividends, loans, or advances. In addition, the states in which the Company's
insurance subsidiaries are domiciled impose certain restrictions on the
insurance subsidiaries' ability to pay dividends to Protective Life Corporation.
Also, distributions, including cash dividends to Protective Life Corporation
from its life insurance subsidiaries, in excess of approximately $184 million,
would be subject to federal income tax at rates then effective. The Company does
not anticipate involuntarily making distributions that would be subject to tax.
For the foregoing reasons and due to the expected growth of the Company's
insurance sales, the Company will retain substantial portions of the earnings of
its life insurance subsidiaries in those companies primarily to support their
future growth. Because Protective Life Corporation's cash disbursements have
from time to time exceeded its cash receipts, such shortfalls have been funded
through various external financings. Therefore, Protective Life Corporation may
from time to time require additional external financing.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners (NAIC), as
modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The achievement of long-term
growth will require growth in the statutory capital of the Company's insurance
subsidiaries. The subsidiaries may secure additional statutory capital through
various sources, such as internally generated statutory earnings or equity
contributions by the Company from funds generated through debt or equity
offerings.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the types and mixtures of risks
inherent in the insurer's operations. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. Based upon the
December 31, 1993 statutory financial reports of the Company's insurance
subsidiaries, the Company's insurance subsidiaries are adequately capitalized
under the formula.
Under insurance guaranty fund laws, in most states, insurance companies
doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already provided for in the financial statements.
IMPACT OF INFLATION
Inflation increases the need for insurance. Many policyholders who once had
adequate insurance programs increase their life insurance coverage to provide
the same relative financial benefits and protection. The effect of inflation on
medical costs leads to accident and health policies with higher benefits. Thus,
inflation has increased the need for life and accident and health products.
The higher interest rates that have traditionally accompanied inflation
also affect the Company's investment operation. Policy loans increase as policy
loan interest rates become relatively more attractive. As interest rates
increase, disintermediation of GIC and annuity deposits and ordinary life policy
cash values may increase, the market value of the Company's fixed-rate long-term
investments may decrease, and the Company may be unable to implement fully the
interest rate reset and call provisions of its mortgage loans. The difference
between the interest rate earned on investments and the interest rate credited
to interest-sensitive products may also be adversely affected by rising interest
rates.
Inflation has materially increased the cost of health care. The adequacy of
premium rates in relation to the level of accident and health claims is
constantly monitored, and where appropriate, premium rates on such policies are
increased as policy benefits increase. Failure to make such increases
commensurate with health care cost increases may result in a loss from health
insurance.
The Company does not believe the current rate of inflation will
significantly affect its operations. However, lower interest rates may reduce
earnings as older higher-yielding investments are repaid, and the proceeds are
reinvested at lower current rates.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE We have audited the accompanying consolidated balance sheets
DIRECTORS AND of Protective Life Corporation and subsidiaries as of
STOCKHOLDERS December 31, 1993 and 1992, and the related consolidated
PROTECTIVE LIFE statements of income, stockholders' equity, and cash
CORPORATION flows for each of the three years in the period ended
BIRMINGHAM, December 31, 1993. These financial statements are the
ALABAMA responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of Protective Life
Corporation and subsidiaries as of December 31, 1993 and
1992, and the consolidated results of their operations and
their cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally
accepted accounting principles.
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 K, the Company changed its method
of accounting for postretirement benefits other than pensions
in 1992.
Coopers & Lybrand
BIRMINGHAM, ALABAMA
FEBRUARY 14, 1994