As filed with the Securities and Exchange Commission on April 13, 2023
Registration No. 333-255192
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. o
POST-EFFECTIVE AMENDMENT NO. 5 x
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
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| Tennessee | 63-0169720 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
2801 Highway 280 South
Birmingham, Alabama 35223
(205) 879-9230
(Address, including zip code, and telephone number, including area code
of registrant’s principal executive offices)
Brandon Cage, Esq.
Protective Life Insurance Company
P.O. Box 2606
Birmingham, Alabama 35202
(205) 268-1000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Stephen E. Roth, Esq.
Thomas E. Bisset, Esq.
Eversheds Sutherland (US) LLP
700 Sixth Street, NW
Washington, D.C. 20001
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: o
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or reinvestment plans, check the following box. x
If this Form is filed to register additional securities for an offering pursuant to Rule 462 (b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box. o
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box. o
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus contained herein also relates to Registration Statement Nos.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
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| | (Do not check if a smaller reporting company) |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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Protective® Market Defender Annuity | Protective Life Insurance Company P.O. Box 10648 Birmingham, Alabama 35202-0648 Telephone: 1-800-456-6330 www.protective.com |
This Prospectus describes a limited flexible premium deferred annuity contract with fixed and index-linked features offered by Protective Life Insurance Company (the “Contract”). The Contract is designed for investors who desire to accumulate capital on a tax deferred basis for retirement or other long-term investment purposes. It may be purchased by individuals, corporations, financial institutions, trusts, and certain retirement plans that qualify for special federal income tax treatment, as well as those that do not qualify for such treatment. Certain Contract features and/or certain Allocation Options offered under the Contract may not be available through all broker-dealers or in all states. For further details, please contact us at 1-800-456-6330.
We only accepted Purchase Payments that we received, or orders that were initiated, on or before the earlier of (1) the first Contract Anniversary, and (2) the 86th birthday of the oldest Owner or Annuitant. We are no longer accepting Purchase Payments. You generally may allocate your investment in the Contract among the Declared Rate Account, the Guaranteed Interest Strategy, or the various Indexed Strategies (collectively, the “Allocation Options”). Depending upon which Allocation Option you select, you will bear a greater or lesser degree of risk, and you may lose all or part of your investment. Each Indexed Strategy has a Floor that places a limit on the negative performance of the reference index that may be used to calculate the return of an Indexed Segment, and, in turn, limits the amount attributable to negative index performance that may be deducted from your investment in an Indexed Segment. With each Indexed Segment, you bear a risk of potential loss of principal and previously credited interest from negative index performance up to the Floor. Each Indexed Strategy also has a Participation Rate and may have a Cap. The Participation Rate may be greater than but will never be less than 100% (the minimum Participation Rate). The Cap, if applicable to the Indexed Strategy, will place a limit on the positive performance of the reference Index that we will use to calculate the return of an Indexed Segment, and, in turn, limit the amount that may be credited to the investment in an Indexed Segment. We will always offer a Guaranteed Interest Strategy and at least one Indexed Strategy with a Floor between 0% and -10%. However, we reserve the right to stop offering other Indexed Strategies.
If you make a withdrawal from an Indexed Segment or surrender the Contract before the Segment Maturity Date, we calculate the Interim Value of the Segment(s). The Interim Value may be less than the Segment Investment and may be less than the amount you would receive had you held the investment until the Segment Maturity Date. Application of the Interim Value calculation may result in a reduction of the Segment Investment that is significantly larger than the withdrawal amount requested and could result in loss of principal and previously credited interest.
The Interim Value calculation reflects negative Index Performance between the Start Date and the calculation date but does not take into account positive Index Performance. Positive indexed interest is credited only on a Segment Maturity Date.
You also bear a risk of potential loss of principal and previously credited interest from the application of a Market Value Adjustment and withdrawal charge from withdrawals or surrender of the Contract. The withdrawal charge percentage starts at 9% and decreases to zero after the first six (6) Contract Years (the withdrawal charge period). During the withdrawal charge period, we will apply a Market Value Adjustment. A negative result from the Market Value Adjustment formula reduces the amount you receive or your Contract Value, while a positive result from the Market Value Adjustment formula increases the amount you receive or your Contract Value. During the withdrawal charge period, application of the Market Value Adjustment to a withdrawal request or a surrender that exceeds the Free Withdrawal Amount could reduce the Contract Value to less than the amount protected by any applicable Floor(s). For more information about Risk Factors for this Contract, see “Risk Factors” on p. 11. This product is a complex insurance and investment vehicle. Before you invest, you should speak with a financial professional about the Contract’s features, benefits, risks and fees and whether the Contract is appropriate for you based on your financial situation and objectives.
This Prospectus sets forth basic information about the Contract that a prospective investor should know before investing. You may obtain an electronic copy of the Prospectus, as well as other material that we file electronically and certain material incorporated by reference, at the SEC web site (http://www.sec.gov).
The Company’s ability to meet its obligations under the Contract are subject to the creditworthiness and claims-paying ability of the Company.
The Prospectus describes all material rights and obligations of purchasers under the Contract, including all state variations.
Please read this Prospectus carefully. You should keep a copy for future reference.
The Protective® Market Defender Annuity is not a deposit or obligation of, or guaranteed by, any bank or financial institution. It is not insured by the Federal Deposit Insurance Corporation or any other government agency, and it is subject to investment risk, including the possible loss of principal and previously credited interest.
The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
The date of this Prospectus is May 1, 2023
TABLE OF CONTENTS
No one is authorized to make any statement that contradicts this prospectus. You must not rely upon any such statement. This prospectus is not an offer to inquire about, or purchase the securities described in any jurisdiction where it is unlawful to do so. You should not assume that the information provided in this prospectus is accurate as of any date other than the date on the front of each such document, regardless of the time of delivery of this prospectus or any sale of a security.
DEFINITIONS
“We”, “us" “our”, “Protective Life”, and “Company” refer to Protective Life Insurance Company. “You”, “your” and “Owner” refer to the person(s) to who a Contract has been issued.
Administrative Office: Protective Life Insurance Company, P. O. Box 10648, Birmingham, Alabama 35202-0648 (for Written Notice sent by U.S. postal service) or Protective Life Insurance Company, 2801 Highway 280 South, Birmingham, Alabama 35223 (for Written Notice sent by a nationally recognized overnight delivery service).
Allocation Options: The options to which you may allocate Purchase Payments or transfer Contract Value under this Contract. The Declared Rate Account is the default Allocation Option. You must provide us with instructions if you want to make an allocation to one of the Strategies.
Annuity Date: The date as of which the Contract Value, less any applicable premium tax, is applied to an Annuity Option.
Annuity Option: The method you choose by which we will determine the amount, frequency and term of the annuity income payments beginning on the Annuity Date.
Business Day: Any day on which Protective Life is open for regular business and on which every Index used to determine any value under this Contract is compiled and published by its owner. A Business Day ends at 4 p.m. Eastern Time.
Cap: The maximum percentage of positive Index Performance that will be credited to a Segment over its Term.
Code: The Internal Revenue Code of 1986, as amended.
Contract: The Protective® Market Defender Annuity.
Contract Anniversary: The same month and day as the Issue Date in each subsequent calendar year.
Contract Value: On any day before the Annuity Date, the sum of the value in the Declared Rate Account, plus the Segment values of all the Guaranteed Interest Segments, plus the Segment Values of all the Indexed Segments. Depending upon the date the Contract Value is being determined, the Segment Value of an Indexed Segment can be either its Interim Value or its Maturity Value.
Contract Year: The 12-month period beginning on the Issue Date or any Contract Anniversary.
Crediting Method: The specific interest credit calculation method(s), in the form of a Participation Rate and/or Cap, that applies to an Indexed Strategy.
Declared Rate Account: An account designed to receive and hold Purchase Payments and the Maturity Value of Segments until we receive further allocation instructions from you.
Downside Protection: The specific Floor applicable to an Indexed Strategy.
Due Proof of Death: Receipt at our Administrative Office of a certified death certificate or judicial order from a court of competent jurisdiction or similar tribunal.
Floor: The maximum negative Index Performance that we may use to determine the Segment Return Amount. The Floor is the maximum Index percentage loss you can experience over the Segment’s Term, even if negative Index Performance exceeds that percentage.
Free Withdrawal Amount: The amount that may be withdrawn each Contract Year without being subject to the Market Value Adjustment or withdrawal charges. The available free withdrawal amount is calculated for each withdrawal requested.
Good Order (“good order”): A request or transaction generally is considered in “Good Order” if we receive it in our Administrative Office within the time limits, if any, prescribed in this Prospectus for a particular transaction or instruction, it includes all information necessary for us to execute the requested instruction or transaction, and is signed by the individual or individuals authorized to provide the instruction or engage in the transaction. A request or transaction may be rejected or delayed if not in Good Order. Good Order generally means the actual receipt by us of the instructions relating to the request or transaction in writing (or, when permitted, by telephone or Internet as described in the Prospectus) along with all forms, information and supporting legal documentation we require to effect the instruction or transaction. The specific requirements for Good Order for particular transactions are discussed in the relevant section of the Prospectus.
Guaranteed Interest Segment: A Segment that uses a Guaranteed Interest Strategy.
Guaranteed Interest Strategy: A Strategy where we credit a specified rate of interest declared in advance for a Segment that will not change during the Term of the Segment.
Index Performance: The measure of the percentage increase or decrease in the Indexed Strategy’s reference Index between two points in time.
Indexed Segment: A Segment that uses an Indexed Strategy.
Indexed Strategy: A Strategy comprised of one of the Indices offered with your Contract, as well as specific Crediting Method(s) and Downside Protection.
Interim Value: The value of an Indexed Segment on any day other than its Start Date and its Maturity Date.
Issue Date: The date as of which we credit the initial Purchase Payment to the Contract and the Contract takes effect.
Maturity Date: The date on which a Segment is scheduled to end.
Maturity Value: The value of a Segment on its Maturity Date.
Market Value Adjustment (“MVA”): An adjustment that we will make to your Contract Value if you take a withdrawal, or to the amount we pay you if you surrender the Contract, during the withdrawal charge period. The MVA helps offset our costs and risks of owning fixed income and other investments used to back the guarantees under your Contract from the Issue Date to the date you take a withdrawal or surrender the Contract. The MVA may be either negative or positive. This means that the MVA may decrease or increase the remaining Contract Value or the amount we withdraw from your Contract Value to pay your withdrawal request or the amount we pay you if you surrender the Contract.
Participation Rate: A specified percentage of Index Performance that we use to calculate the Segment Return Amount.
Purchase Payment: The amount(s) paid by the Owner and accepted by the Company as consideration for this Contract.
Qualified Contracts: Contracts issued in connection with retirement plans that receive favorable tax treatment under Sections 401, 408, 408A or 457 of the Code.
Qualified Plans: Retirement plans that receive favorable tax treatment under Sections 401, 408, 408A or 457 of the Code.
Segment: An allocation option under your Contract with a specific Term and Strategy to which you may allocate some or all of your Contract Value.
Segment Investment: The amount allocated initially to establish a Segment on its Start Date subsequently adjusted by any withdrawals from that Segment, including applicable withdrawal charges and Market Value Adjustments, if any.
Segment Return Amount: The amount added to, or subtracted from, your Segment Investment to determine your Interim Value on a Business Day or your Maturity Value on the Segment Maturity Date.
Segment Value: The value of a Segment at the end of each day. Depending upon the date, the Segment Value of an Indexed Segment can be either its Interim Value or its Maturity Value. For information on how we calculate the Segment Value, see “Segments using a Guaranteed Interest Strategy (“Guaranteed Interest Segment”)” and “Segments using an Indexed Strategy (“Indexed Segment”).”
Start Date: The date on which a Segment is established. They occur on the first and third Wednesday of each month, that is also a Business Day. If the first or third Wednesday of a month is not a Business Day, the Start Date would be the following Business Day.
Strategy: An Allocation Option with a specifically defined method for calculating the amount of interest credited to — or amount deducted from — Segments established using the Strategy. We offer two categories of Strategies: Guaranteed Interest Strategies and Indexed Strategies.
Surrender Value: The amount you are entitled to receive under the Contract in the event the Contract is terminated prior to the Annuity Date. The Surrender Value of the Contract is equal to: (1) the Declared Rate Account Value; (2) plus Guaranteed Interest Segment Values; (3) plus Indexed Interest Segment Values (Interim Value or Maturity Value, as applicable); (4) adjusted for any Market Value Adjustment; (5) less any withdrawal charge.
Term: The duration of a Segment which is generally the one (1) year period from the Segment Start Date to its Maturity Date.
Written Notice: A notice or request submitted in writing in a form satisfactory to the Company that we receive at the Administrative Office via U.S. postal service or nationally recognized overnight delivery service. Please note that we use the term “written notice” in lower case to refer to a notice that we may send to you.
SUMMARY
The Protective® Market Defender Annuity is a limited flexible premium deferred annuity contract issued by Protective Life. We only accepted Purchase Payments that we received, or orders that were initiated, on or before the earlier of (1) the first Contract Anniversary, and (2) the 86th birthday of the oldest Owner or Annuitant. This restriction on the acceptance of Purchase Payments limits your ability to increase your Contract Value or the Death Benefit under the Contract, employ dollar cost averaging strategies, or make additional contributions to a Qualified Contract, including periodic contributions to an employer-sponsored retirement plan or an IRA. (See “QUALIFIED RETIREMENT PLANS.”). We are no longer accepting Purchase Payments.
You may allocate your investment in the Contract among the Declared Rate Account, Guaranteed Interest Strategies and Indexed Strategies (collectively, the “Allocation Options”). We credit Contract Value allocated to the Declared Rate Account with a rate of interest we declare in advance and which we may change from time to time in our sole discretion. We also credit interest to Contract Value allocated to a Guaranteed Interest Strategy based on a specified rate of interest we declare in advance and guarantee for the one-year term of a Guaranteed Interest Segment. We credit interest to your investment in the Declared Rate Account and the Guaranteed Interest Strategies daily and will not credit a rate of interest for the Declared Rate Account or a Guaranteed Interest Strategy below the minimum rate of interest we identify for that Allocation Option on the Schedule Page of your Contract. See the minimum interest rates set forth in “Declared Rate Account” and “Guaranteed Interest Strategy.” The Contract offers Indexed Strategies that credit interest based in part on the performance of a broad based securities index (an “Index”) for an Indexed Segment over a one-year term.
Interest credited to your investment in the Declared Rate Account will always be positive and is paid by Protective Life and subject to our claims paying ability. We refer to the interest we credit for a Guaranteed Interest Segment or credit or deduct for an Indexed Segment as the Segment Return Amount. The Segment Return Amount for a Guaranteed Interest Segment will always be positive while the Segment Return Amount for an Indexed Segment may be positive or negative. Segment Return Amounts are paid by Protective Life and subject to our claims paying ability. We calculate the Segment Return Amount for an Indexed Segment based on changes in the value of the Index referenced by the Indexed Strategy. Currently the Indexed Strategies calculate interest based on the S&P 500® Price Return Index (“S&P 500 Index”) and the MSCI EAFE Price Return Index (“MSCI EAFE Index”).
We offer Indexed Strategies that differ based on the available Crediting Method and Downside Protection that provide potential for investment gains and limitations on investment losses. A Crediting Method is provided in the form of a Participation Rate and/or a Cap and Downside Protection is provided in the form of a Floor. Each Indexed Strategy is composed of a Floor and Participation Rate and may include a Cap. We will always offer at least one Indexed Strategy with a Floor between 0% and -10%; however, we reserve the right to stop offering other Indexed Strategies.
The Floor establishes a limit on the level of negative Index Performance that may be used to calculate a negative Segment Return Amount that results in a reduction of Segment Value. The Participation Rate is a specified percentage of positive Index Performance used to calculate the Segment Return Amount. The Cap establishes the maximum percentage of positive Index Performance that may be used to calculate the Segment Return Amount for an Indexed Segment.
We establish the Floor, Participation Rate and Cap, if applicable, for an Indexed Segment prior to the Start Date for the Indexed Segment. The Participation Rate and Cap will never be less than the minimum Participation Rate and Cap we establish for each Indexed Strategy with the same Crediting Method and Downside Protection. We guarantee the minimum Caps and Participation Rates for the life of the Contract.
Amounts allocated to any Indexed Strategy will fluctuate in value based on the performance of the Index, Crediting Method and Downside Protection of the Strategy that you select. You may lose money that you allocate to an Indexed Strategy. Depending on the performance of the Index, the Crediting Method, and the Downside Protection of the Strategy you select, such loss may be significant. If you have one or more Indexed Segments and you make a withdrawal from an Indexed Segment or surrender the Contract before the Segment Maturity Date, we
will apply an Interim Value calculation, which reflects negative Index Performance between the Start Date and the calculation date but does not take into account positive Index Performance. Positive indexed interest is credited only on a Segment Maturity Date. The Interim Value may be less than the Segment Investment and may be less than the amount you would receive had you held the investment until the Segment Maturity Date. Application of the Interim Value calculation may result in a reduction of the Segment Investment that is significantly larger than the withdrawal amount requested and could result in loss of principal and previously credited interest. Whether the Interim Value calculation is applied to the amount withdrawn or the remaining Segment Investment depends on whether you request a “gross” withdrawal or a “net” withdrawal. For an explanation on how we calculate “gross” withdrawals and “net” withdrawals, see “Withdrawal Value” in the “ACCESSING YOUR MONEY” section.
Withdrawals from the Declared Rate Account, Guaranteed Interest Strategies and Indexed Strategies during withdrawal charge period will be subject to a withdrawal charge and Market Value Adjustment, which may reduce your Contract Value or the amount you receive from the requested withdrawal.
Protective Life Insurance Company is not an investment adviser and does not provide any investment advice to you with respect to the Contract.
You may apply to purchase the Contract through Investment Distributors, Inc. (“IDI”), the principal underwriter for the Contract or other broker-dealers that have entered into a selling agreement with IDI.
This product is a complex insurance and investment vehicle. Before you invest, you should speak with a financial professional about the Contract’s features, benefits, risks and fees and whether the Contract is appropriate for you based on your financial situation and objectives.
DECLARED RATE ACCOUNT
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Minimum Guaranteed Interest Rate |
| 1 | % |
GUARANTEED INTEREST STRATEGY
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Minimum Guaranteed Interest Rate |
| 1 | % |
INDEXED STRATEGIES
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| Index | | Current
Floor | | Minimum
Participation
Rate | | Minimum
Cap |
| S&P 500 | | -5 | % | | 100 | % | | 2 | % |
| S&P 500 | | -10 | % | | 100 | % | | 3 | % |
| S&P 500 | | -20 | % | | 100 | % | | 5 | % |
| MSCI EAFE | | -5 | % | | 100 | % | | 2 | % |
| MSCI EAFE | | -10 | % | | 100 | % | | 3 | % |
| MSCI EAFE | | -20 | % | | 100 | % | | 5 | % |
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| Key Features of Your Contract |
| Your Contract | | The Contract | | The Protective® Market Defender Annuity is a limited flexible premium deferred annuity contract with fixed and index-linked features. |
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| | How to Buy | | The Contracts are sold through registered representatives of broker-dealers. Protective Life will issue your Contract when it receives and accepts your complete application information and an initial Purchase Payment through the broker-dealer you have selected. (See “Issuance of a Contract.”) |
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Purchasing the Contract | | Purchase Payment | | The minimum initial Purchase Payment is $25,000. The minimum amount of any subsequent Purchase Payment is $5,000. Our prior approval is required for Purchase Payments that total more than $1,000,000. We only accepted Purchase Payments received, or orders initiated, on or before the earlier of (1) the first Contract Anniversary, and (2) the 86th birthday of the oldest Owner or Annuitant. We are no longer accepting Purchase Payments. |
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| | Issue Age | | The Contract must be issued before the oldest Owner’s or Annuitant’s 86th birthday. |
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| | Right to Cancel | | You have the right to return the Contract within a certain number of days (which varies by state, but is never less than ten) after you receive it. The returned Contract will be treated as if it were never issued, and you will receive a refund of the Contract Value, plus or minus the Market Value Adjustment, in states where permitted. This amount may be more or less than the Purchase Payments. In other states, we refund the amount of your Purchase Payment. |
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Allocating Your Contract Value | | Declared Rate Account | | The Declared Rate Account is an account designed to receive and hold Purchase Payments and the Maturity Value of Segments for which we have not received an allocation instruction. The interest rate for the Declared Rate Account is declared in advance, but is not guaranteed for any specific period of time. Please consult your financial advisor for information on the current interest rate for the Declared Rate Account. |
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| | Guaranteed Interest Strategy | | Under a Guaranteed Interest Strategy, we credit interest to the Contract Value allocated to a Segment based on a specified rate of interest that we declare in advance and guarantee for the Term of the Segment. For new Segments, we may change the interest rate for each Guaranteed Interest Strategy, subject to the minimum guaranteed interest rate. Please consult your financial advisor for information on the current interest rate for the Guaranteed Interest Strategy. |
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| | Indexed Strategy | | Under an Indexed Strategy, we credit interest to, or deduct an amount from, a Segment based, in part, upon the performance of one of the market Indices over the Term of the Segment, as described in this Prospectus. The actual amount of the interest credited, or the amount deducted from, an Indexed Segment will depend upon the Crediting Method and Downside Protection that you choose. We offer Crediting Methods in the form of a Participation Rate and/or a Cap and Downside Protection in the form of a Floor. We are currently offering Floor options of -5%, -10%, and -20%. For new Segments, we may change the Floor, Cap or Participation Rate applicable to each Indexed Strategy, subject to the minimum Cap and Participation Rate. We will always offer at least one Indexed Strategy with a Floor between 0% and -10%; however, we reserve the right to stop offering other Indexed Strategies. You can obtain information on the Crediting Methods and Downside Protection associated with each Indexed Strategy the following ways: •Directly from us by calling 1-800-456-6330; •On our website at www.myaccount.protective.com; or •From the financial advisor who sold or services your Contract. |
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| | Term | | The one (1) year period from the Start Date to the Maturity Date of a Guaranteed Interest Segment or an Indexed Segment. |
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| | Index | | For Indexed Strategies, the current indices we offer are the S&P 500 Price Return Index and the MSCI EAFE Index. |
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| | Transfers | | At the end of a Segment Term (i.e., following the Maturity Date), you may use all or part of the Maturity Value to establish a new Segment provided you satisfy the requirements for establishing new Segments. You may not transfer any amounts from one Segment to another Segment or to the Declared Rate Account before the Segment Maturity Date. |
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| Determining the Value of Your Contract | | Contract Value | | On any day before the Annuity Date, the sum of the value in the Declared Rate Account, plus the Segment Values of all the Guaranteed Interest Segments, plus the Segment Values of all the Indexed Segments. Depending upon the date the Contract Value is being determined, the Segment Value of an Indexed Segment can be either its Interim Value or its Maturity Value. |
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| | Interim Value | | The value of your Segment Investment allocated to an Indexed Segment after the Segment Start Date but before the Maturity Date. See “Determining the Value of a Segment”. If you have one or more Indexed Segments and you make a withdrawal from an Indexed Segment or surrender the Contract before the Segment Maturity Date, we will apply an Interim Value Calculation, which reflects negative Index Performance between the Start Date and the calculation date but does not take into account positive Index Performance. The Interim Value may be less than the Segment Investment and may be less than the amount you would receive had you held the investment until the Segment Maturity Date. Application of the Interim Value calculation may result in a reduction of the Segment Investment that is significantly larger than the withdrawal amount requested and could result in loss of principal and previously credited interest. Positive indexed interest is credited only on a Segment Maturity Date. |
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| | Maturity Value | | The value of your Segment Investment plus or minus your Segment Return Amount on the Segment Maturity Date. For Guaranteed Interest Segments, your Segment Return Amount will depend on the rate of interest we credit for the Term of the Guaranteed Interest Segment. For Indexed Segments, your Segment Return Amount may be positive or negative depending on the value of the relevant Index on the Segment Start Date and the Segment Maturity Date. See “Determining the Value of a Segment”. Because the performance of an Index is calculated on the Segment Maturity Date Segment, you may experience negative Index Performance even if the Index has experienced gains through some, or most, of the Term. |
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| Accessing Your Money | | Withdrawals and Surrenders | | On or before the Annuity Date, you may request a withdrawal of a portion of your Contract Value or surrender your Contract. The amount of the withdrawal request must be at least $100 and the Contract Value after the withdrawal is processed must be at least $25,000 (not required for withdrawals taken to satisfy federal income tax rules concerning minimum distribution requirements applicable to your Contract). To determine the Surrender Value of your Contract, we add the values of the Declared Rate Account, Guaranteed Interest Segment Values and the Indexed Segment Values (Interim Value or Maturity Value, as applicable) adjusted for any Market Value Adjustment and any applicable withdrawal charge. We will then apply any applicable premium tax, and any required or requested tax withholding. Withdrawals and surrenders that exceed the Free Withdrawal Amount in the first six (6) Contract Years (the withdrawal charge period) are subject to a withdrawal charge, Market Value Adjustment, and any applicable premium tax. The withdrawal charge percentage is 9% for the first Contract Year and decreases to zero at the end of the withdrawal charge period. During the withdrawal charge period, application of the Market Value Adjustment (MVA) and the withdrawal charge to a withdrawal request that exceeds the Free Withdrawal Amount could reduce the Contract Value to less than the amount protected by any applicable Floor(s). If you make a withdrawal from a Segment or surrender the Contract before the Maturity Date, we calculate the Interim Value of the Segment(s), which reflects negative Index Performance between the Start Date and the calculation date but does not take into account positive Index Performance. The Interim Value calculation may result in a reduction of the Segment Value and Segment Investment that is significantly larger than the withdrawal amount requested. Withdrawals will reduce the amount of the death benefit. Withdrawals and surrenders may be subject to federal and state income taxes and, if taken before age 591/2, an additional 10% tax. |
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| | Market Value Adjustment | | We apply a Market Value Adjustment (“MVA”) when you withdraw all or a portion of your Contract Value, in excess of the Free Withdrawal Amount, during the withdrawal charge period. It can decrease, increase, or have no effect on the amount we deduct from your Contract Value or the amount you receive from your withdrawal request when processing a withdrawal. |
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| Accessing Your Money | | Withdrawal Charges and Premium Taxes | | We will apply an MVA and assess a withdrawal charge, if you withdraw or surrender all or a portion of your Contract Value from the Contract, in excess of the Free Withdrawal Amount, before the end of the withdrawal charge period. In determining the amount of the withdrawal charge, we multiply the amount of Contract Value withdrawn, in excess of the Free Withdrawal Amount, adjusted by the MVA, by the applicable withdrawal charge percentage. If the MVA is positive, it will increase the amount of the withdrawal charge while a negative MVA will decrease the amount of the withdrawal charge. The maximum withdrawal charge percentage under the Contract is 9%. We will deduct any applicable state premium tax from Purchase Payments or Contract Value if premium taxes apply to your Contract. See “CHARGES AND DEDUCTIONS”. For an example of how we calculate the amount you receive when you make a withdrawal or surrender your Contract during a Segment, see Appendix A to this Prospectus. |
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| | Death Benefit | | The death benefit included with the Contract is the greater of: •The value of the Declared Rate Account plus the Segment Value of all the Guaranteed Interest Segments and the Segment Investment of the Indexed Segments (does not include Interim Value); or •The Contract Value plus the MVA, but only if the MVA would increase the death benefit. The amount of the death benefit is reduced by any applicable premium tax. |
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| Annuitizing Your Contract | | Annuity Options | | We currently offer the following Annuity Options: (1) payments for a certain period or (2) life income with or without payments for a certain period for one or two Annuitants. |
Risk Factors
Your Contract has various risks associated with it. We list these risk factors below, as well as other important information you should know before purchasing a Contract.
•Liquidity Risk — The Contract is intended to be a long-term investment that you may use to help save for retirement; it is not designed for short-term investing. While you are always permitted to take withdrawals or surrender the Contract at any time, a surrender or withdrawal in excess of the Free Withdrawal Amount at any time during the withdrawal charge period is subject to a withdrawal charge and, if applicable, a Market Value Adjustment. A withdrawal or surrender may also be subject to federal and state income taxes and, if taken before age 591/2, an additional 10% tax.
•Risk of Loss — There is a risk of substantial loss of your Segment Investment depending upon the Indexed Strategy(ies) to which you allocated your Contract Value. Negative Index Performance may cause your Segment Return Amount to be negative down to the amount of the Floor. If the selected Index related to a Strategy declines, you will bear the portion of the loss down to the amount of the Floor.
For example, assume on a Segment Start Date you invest $10,000 in an S&P 500 Indexed Strategy with a -10% Floor. On the Maturity Date, the S&P 500 Index is down -15%. As a result, your Segment Investment will be reduced by 10% and will have a Maturity Value of $9,000.
If you make a withdrawal from a Segment or surrender the Contract before the Segment Maturity Date, we calculate the Interim Value of the Segment(s). In addition, withdrawals and surrenders during the withdrawal charge period, which is the first six (6) Contract Years, are subject to a withdrawal charge and Market Value Adjustment. You may lose principal and previously credited interest when we calculate the Interim Value and apply the MVA and withdrawal charge, even if Index Performance has been positive. In an increasing interest rate environment, the MVA could reduce the amount received to less than the protection provided by the Floor.
•Limitation on Allocations among Strategies — You may re-allocate your Contract Value among available Indexed Strategies and Guaranteed Interest Strategies only if the Segment Maturity Date occurs before the Annuity Date. For new Segments, we may change the Floor, Cap or Participation Rate applicable to each Indexed Strategy and the interest rate for each Guaranteed Interest Strategy. Not less than 30 days before the Maturity Date for a Segment, we will advise you of the upcoming Maturity Date and you may provide us instructions for allocation of the Maturity Value. The notice we send will include a description of the maturing Segment’s Strategy, Term, Crediting Method and Downside Protection and how to obtain information on the interest rate for the Guaranteed Interest Strategy and the Crediting Method(s) and Downside Protection for each Indexed Strategy that will be offered on the upcoming Segment Start Date. Because the notice will be sent to you well in advance of the Maturity Date, the notice will not include the Maturity Value for the Segment nor will it provide information on the Strategies that will be offered at that time. On the Start Date, the Company will establish new Segments that you can invest in by allocating Purchase Payments made during the first Contract Year, by allocating balances in the Declared Rate Account, or by allocating Maturity Value from a maturing Segment. Two weeks prior to these Segment Start Dates, the Company will declare the interest rate for the Guaranteed Interest Strategy and the Crediting Method(s) and Downside Protection for each Indexed Strategy that will be offered on the upcoming Segment Start Date. You may obtain this information the following ways:
•Directly from us by calling 1-800-456-6330;
•On our website at www.myaccount.protective.com; or
•From the financial advisor who sold or services your Contract.
Some Indexed Strategies may not be offered in the future, and you assume the risk that the new Floor, Cap and Participation Rate for each Indexed Strategy and interest rate for each Guaranteed Interest Strategy may be less favorable than the Floor, Participation Rate and Cap, if applicable, or interest rate under your current Segment. You will have the choice of allocating your Contract Value to the Guaranteed Interest Strategy with the new interest rate or an Indexed Strategy with the new Participation Rate, Cap, if applicable, and Floor with the same Index or a different Index. If you do not inform us that you want to move your Contract Value to a Strategy, either through previously established automatic renewal instructions or new allocation instructions, we will allocate your Contract Value to the Declared Rate Account. If you choose to make a withdrawal or surrender your Contract, an MVA and withdrawal charge may apply.
•Strategy Discontinuation — We will always offer a Guaranteed Interest Strategy and at least one Indexed Strategy with a Floor between 0% and -10%. However, we reserve the right to stop offering other Indexed Strategies. We regularly monitor the performance of each of the Strategies. From time to time, it may become necessary to cease offering a particular Indexed Strategy for new Segments completely or temporarily. We reserve the right to discontinue making available new Segments of certain Indexed Strategies when our ability to offer those Indexed Strategies has been reduced due to changes in external forces such as the economic environment or actions taken by competitors. We may also discontinue a particular Indexed Strategy if there is insufficient volume to justify the continuation. If you instructed us to allocate an amount to a particular Indexed Strategy for an upcoming Segment Start Date, and we do not offer that Indexed Strategy on the Segment Start Date, that amount will either remain in or be transferred to the Declared Rate Account. You will be notified in writing that this has occurred, and provided the opportunity to reallocate the amount on the next Segment Start Date to the then available Strategies. The amount you instructed us to allocate to that particular (no longer available) Indexed Strategy will remain in the Declared Rate Account until you provide us new allocation instructions. It is important to note that we will not discontinue a Segment once it has begun.
•Risks Associated with the Reference Indices — Because the S&P 500® Price Return Index and the MSCI EAFE Price Return Index are each comprised of a collection of equity securities, in each case the value of the component securities is subject to market risk, or the risk that market fluctuations may cause the value of the component securities to go up or down, sometimes rapidly and unpredictably. In addition, the value
of equity securities may decline for reasons directly related to the issuers of the securities. These market fluctuations may cause losses in Indexed Strategies. The S&P 500 Index and the MSCI EAFE Index are both “price return” indexes and do not reflect dividends paid on the securities comprising the Index, and therefore the Index Performance under the Contract does not reflect the full investment performance of those securities.
In recent years, the financial markets have experienced periods of significant volatility and negative returns, contributing to an uncertain and evolving economic environment. The performance of the markets has been impacted by several interrelating factors such as, but not limited to, the COVID-19 pandemic, geopolitical turmoil, rising inflation, fluctuating interest rates, and actions by governmental authorities. These market conditions have impacted the performance of the indexes to which the Strategies are linked. It is not possible to predict future performance of the markets. Depending on your individual circumstances (e.g., your selected Strategies and the timing of any transfer or withdrawal), you may experience (perhaps significant) negative returns under the Contract, including the application of a negative MVA in the case of a withdrawal or surrender. You should consult with a financial professional about how recent market conditions may impact your future investment decisions related to the Contract, such as purchasing the Contract or making transfers or withdrawals, based on your individual circumstances.
S&P 500® Index. The S&P 500® Index is comprised of equity securities issued by large-capitalization U.S. companies. In general, large-capitalization companies may be unable to respond quickly to new competitive challenges, and also may not be able to attain the high growth rate of successful smaller companies, especially during periods of economic expansion.
MSCI EAFE Index. MSCI EAFE Index is an equity index that captures large and mid-cap representation across developed markets countries around the world. The securities comprising the MSCI EAFE Index are subject to the risks related to investments in foreign markets (e.g., increased price volatility; changing currency exchange rates; and greater political, regulatory, and economic uncertainty). The MSCI EAFE Index is an unmanaged, capitalization-weighted index of companies representing the stock markets of Europe, Australasia and the Far East. It is designed to measure the equity market performance of developed markets, excluding the United States and Canada. The MSCI EAFE Index used in the Contract is expressed in U.S. dollars, and therefore takes into account the performance of the local currency (or currencies) relative to the dollar. In general, foreign markets may be less liquid, more volatile and subject to less government supervision than domestic markets.
See Appendix C for important information regarding the publishers of the Indices.
Note: When you purchase the Contract, you are not investing in a securities index or buying shares of stock.
•Risk That We May Eliminate or Substitute an Index — There is no guarantee that an Index will be available during the entire time you own your Contract. We may eliminate or substitute an Index if there is a significant change in the calculation or composition of the Index, the cost to license, the cost to support Indexed Strategies tied to the Index, requirements set forth by distribution partners, or the Index is discontinued or otherwise becomes unavailable. If we substitute the Index, the performance of the new Index may differ from the original Index. This, in turn, may affect the Index Interest you earn and affect how you want to allocate Contract Value among the available Strategies. We will not substitute the Index until the new Index has been approved by the appropriate insurance regulatory authority. Upon substitution of an Index during the term, we will calculate your Index Performance on the replaced Index up until the date of substitution and the substitute Index from the date of substitution to the Segment Maturity Date or the date we calculate a request for a withdrawal or surrender. An Index substitution will not change the Crediting Method or Downside Protection for an existing Indexed Segment. The performance of the new Index may not be as good as the one that it replaced and as a result your Index Performance may have been better if there had been no substitution. See Appendix B for an Index Substitution example. If we substitute the Index and you do not wish to allocate your Contract Value to the Strategies available under the Contract, you may surrender your Contract, but you may be subject to a withdrawal charge and an MVA,
which may result in a loss of principal and previously credited interest. A surrender may also be subject to federal and state income taxes and, if taken before age 591/2, an additional 10% tax.
•Creditor and Solvency Risk — Our general account assets support the guarantees under the Contract and are subject to the claims of our creditors. As such, the guarantees under the Contract are subject to our financial strength and claims-paying ability, and therefore, to the risk that we may default on those guarantees. You need to consider our financial strength and claims-paying ability in meeting the guarantees under the Contract. You may obtain information on our financial condition by reviewing our financial statements. Our statutory financial statements and information concerning our business and operations is included later in this Prospectus.
•Business Disruption and Cyber-Security Risks - We rely heavily on interconnected computer systems and digital data to conduct our business activities. Our annuity business is highly dependent upon the effective operation of our computer systems and those of our business partners, so that our business is vulnerable to disruptions from utility outages, and susceptible to operational and information security risks resulting from information systems failure (e.g., hardware and software malfunctions), and cyber-attacks. These risks include, among other things, the loss, theft, misuse, corruption and destruction of data maintained online or digitally, interference with or denial of service on our website and other operational disruption and unauthorized release of confidential Owner information. Systems failures and cyber-attacks affecting us, intermediaries and other affiliated or third-party service providers may adversely affect us and your Contract Value. For instance, cyber-attacks may interfere with our processing of Contract transactions, impact our ability to calculate Contract Value, cause the release and possible destruction of confidential Owner or business information, impede order processing, subject us and/or our service providers and intermediaries to litigation, regulatory fines and financial losses and/or cause reputational damage. These risks may also impact the issuers of securities that compose the Indices, which may negatively impact the Index Performance and the value of the Indexed Accounts. The risk of cyberattacks may be higher during periods of geopolitical turmoil. There can be no assurance that we or our service providers will avoid losses affecting your Contract due to cyber-attacks or information security breaches in the future.
We are also exposed to risks related to natural and man-made disasters, such as storms, fires, floods, earthquakes, epidemics, pandemics (such as COVID-19), malicious acts, and terrorist acts, which could adversely affect our ability to conduct business. A natural or man-made disaster, including a pandemic (such as COVID-19), could affect the ability, or willingness, of our workforce and employees of service providers and third party administrators to perform their job responsibilities. Disasters may negatively affect the computer and other systems on which we rely and may interfere with our processing of Contract-related transactions, including processing of orders from Owners, impact our ability to calculate Contract Value, or have other possible negative impacts. These events may also impact the issuers of securities that compose the Indices, which may negatively impact the Index Performance and the value of the Indexed Accounts. There can be no assurance that we or our service providers will avoid losses affecting your Contract due to a natural or man-made disaster.
Other Important Information You Should Know
•No Ownership Rights — You have no ownership rights in the underlying stocks comprising the Index. Purchasing the Contract is not equivalent to investing in the underlying stocks comprising the Index and you do not have any ownership interest or rights arising from the underlying stocks comprising the Index, such as voting rights, dividend payments, or other distributions. Further, if the performance of an Index is greater than your applicable Cap, the Segment Return Amount that you receive may be lower than the gain you would have received on an investment in a mutual fund or exchange traded fund designed to track the performance of the selected Index.
•No Affiliation with Index or Underlying Stocks — We are not affiliated with the sponsor of the Index or the underlying stocks comprising that Index. Consequently, the Index and the issuers of the underlying stocks comprising the Index have no involvement with the Contract.
•Possible Tax Law Changes — There always is the possibility that the tax treatment of the Contract could change by legislation or otherwise. We have the right to modify the Contract in response to legislative changes that could diminish the favorable tax treatment that Owners receive. You should consult a tax adviser with respect to legislative developments and their effect on the Contract.
HOW YOUR CONTRACT WORKS
Purchasing the Contract
Purchase Payments
We are no longer accepting Purchase Payments. The information provided in this section is for informational purposes only. The minimum initial Purchase Payment is $25,000. The minimum subsequent Purchase Payment is $5,000. Initial and subsequent Purchase Payments are payable at our Administrative Office. We may amend this minimum subsequent Purchase Payment amount at any time. You may make Purchase Payments by check payable to Protective Life Insurance Company or by any other method we deem acceptable. All Purchase Payments will be allocated to the Declared Rate Account or transferred into one or more Segments in accordance with your allocation instructions. See “Allocation of Purchase Payments.” Under certain circumstances, we may be required by law to reject a Purchase Payment.
We will only accept Purchase Payments that we receive, or orders that are initiated, on or before the earlier of (1) the first Contract Anniversary, and (2) the 86th birthday of the oldest Owner or Annuitant. An order is initiated when you or your financial adviser submit an electronic ticket order for a Purchase Payment(s) or signed forms requesting the transfer or exchange of assets from another account or insurance contract.
Protective Life retains the right to limit the maximum aggregate Purchase Payments that can be made without prior Administrative Office approval. This amount is currently $1,000,000. We may impose conditions for our acceptance of aggregate Purchase Payments greater than $1,000,000.
We reserve the right to limit, suspend, or reject any Purchase Payment at any time. We may also limit the available Allocation Options, following written notice to Contract Owners. We may do so for all Contracts or only certain classes of Contracts.
Because of limitations that we impose or may impose on your ability to make subsequent Purchase Payments, including our refusal to accept subsequent Purchase Payments on or after the first Contract Year, you may be unable to, or limited in your ability to, increase your Contract Value (and therefore the Death Benefit payable under the Contract) through subsequent Purchase Payments. In evaluating the purchase of a Qualified Contract, purchasers should take into consideration that they will not be able to make annual contributions to the Qualified Contract because Purchase Payments are not permitted after the first Contract Anniversary and Protective Life reserves the right to limit, suspend or reject any Purchase Payment at any time. You should consult with your financial advisor prior to purchasing the Contract.
Parties to the Contract
Owner
The Owner is the person or persons who own the Contract and is entitled to exercise all rights and privileges provided in the Contract. Two persons may own the Contract together. In the case of two Owners, provisions relating to action by the Owner means both Owners acting together. However, Protective Life may accept instructions from one Owner on behalf of both Owners. Protective Life will only issue a Contract prior to each Owner’s 86th birthday. Individuals as well as nonnatural persons, such as corporations or trusts, may be Owners. In the case of Owners who are nonnatural persons, age restrictions apply to the Annuitant.
The Owner of this Contract may be changed by Written Notice provided:
(1)each new Owner’s 86th birthday is after the Issue Date; and
(2)each new Owner’s 95th birthday is on or after the Annuity Date.
Naming a nonnatural person as an Owner or changing the Owner may result in a tax liability. See “Taxation of Annuities in General.”
Beneficiary
The Beneficiary is the person or persons who may receive the benefits of this Contract upon the death of any Owner.
Primary — The Primary Beneficiary is the surviving Owner, if any. If there is no surviving Owner, the Primary Beneficiary is the person or persons designated by the Owner and named in our records.
Contingent — The Contingent Beneficiary is the person or persons designated by the Owner and named in our records to be Beneficiary if the Primary Beneficiary is not living at the time of the Owner’s death.
If no Beneficiary designation is in effect or if no Beneficiary is living at the time of an Owner’s death, the Beneficiary will be the estate of the deceased Owner. If any Owner dies on or after the Annuity Date, the Beneficiary will become the new Owner.
Unless designated irrevocably, the Owner may change the Beneficiary by Written Notice prior to the death of any Owner. An irrevocable Beneficiary is one whose written consent is needed before the Owner can change the Beneficiary designation or exercise certain other rights. In the case of certain Qualified Contracts, Treasury Department regulations prescribe certain limitations on the designation of a Beneficiary.
Annuitant
The Annuitant is the person or persons on whose life annuity income payments may be based. The first Owner shown on the application for the Contract is the Annuitant unless the Owner designates another person as the Annuitant. The Contract must be issued prior to the Annuitant’s 86th birthday. If the Annuitant is not an Owner and dies before the Annuity Date, the Owner will become the new Annuitant unless the Owner designates otherwise. However, if the Owner is a nonnatural person, the death of the Annuitant will be treated as the death of the Owner.
The Owner may change the Annuitant by Written Notice prior to the Annuity Date. However, if any Owner is not a natural person, then the Annuitant may not be changed. The new Annuitant’s 95th birthday must be on or after the Annuity Date in effect when the change of Annuitant is requested.
Payee
The Payee is the person or persons designated by the Owner to receive the annuity income payments under the Contract. The Annuitant is the Payee unless the Owner designates another party as the Payee. The Owner may change the Payee at any time.
Issuance of a Contract
To purchase a Contract, you must submit certain application information and an initial Purchase Payment to Protective Life through a licensed representative of Protective Life. Any such licensed representative must also be a registered representative of a broker/dealer having a distribution agreement with Investment Distributors, Inc. Protective Life reserves the right to accept or decline a request to issue a Contract. Contracts may be sold to or in connection with retirement plans which do not qualify for special tax treatment as well as retirement plans that qualify for special tax treatment under the Code.
If the necessary application information for a Contract accompanies the initial Purchase Payment, we will issue the Contract. If we do not receive the necessary application information, Protective Life will retain the Purchase Payment for up to five business days while it attempts to complete the information. If the necessary application information is not complete after five business days, Protective Life will inform the applicant of the reason for the delay and return the initial Purchase Payment immediately unless the applicant specifically consents to Protective Life retaining it until the information is complete. Once the information is complete, we will issue the Contract. We do not require allocation instructions for your application to be complete. If you provide allocation instructions with your application, we will apply the initial Purchase Payment in accordance with your allocation instructions subject to the availability and restrictions of your Allocation Options. If you do not provide us with allocation instructions, your application may still be complete, and we will allocate your entire Purchase Payment to the Declared Rate
Account. You may transmit information necessary to complete an application to Protective Life by telephone, facsimile, or electronic media.
Right to Cancel
If for any reason you are not satisfied with your Contract, you have the right to return the Contract within a certain number of days, which is at least ten, after you receive it, along with a written cancellation request, to our Administrative Office or the financial advisor who sold it. If state law requires, this “free look” period may be longer than 10 days.
Generally, if you cancel your Contract during your “free look” period, we will not assess a withdrawal charge and your refund will equal whatever your Contract Value is, plus or minus the Market Value Adjustment, on the day that we receive your Contract cancellation request.
Some states, however, require that we refund the full amount of your Purchase Payment (not reflecting investment gain or loss). In addition, in some states, the amount of your refund (either your Contract Value or the full amount of your Purchase Payments), and the length of your “free look” period, depend on whether you purchased the Contract as a replacement. Other material state variations may apply. See Appendix D for information on material state variations. State variations are identified in a special contract form used in that state. If you would like to review a copy of the contract form for your particular state, contact our Customer Service at 1-800-456-6330 or your financial representative.
For any IRA contract returned to us within seven days after you receive it, we are required to refund the full amount of your Purchase Payment. For individual retirement annuities and Contracts issued in states where, upon cancellation, we return at least your Purchase Payments, we reserve the right to allocate all or a portion of your initial Purchase Payment (and any subsequent Purchase Payments) to the Declared Rate Account during the “free look” period. After the expiration of the “free look” period, we will allocate your Purchase Payments according to your allocation instructions on the next Segment Start Date.
We may require that you wait six months before you may apply for a Contract with us again if:
•you cancel your Contract during the free look period; or
•you change your mind before you receive your Contract whether we have received your Purchase Payment or not.
Please see “Federal Tax Matters” later in this Prospectus for possible consequences of cancelling your Contract. Our Administrative Office, or your financial professional, can provide you with the cancellation instructions.
Use of the Contract in Qualified Plans
You may purchase the Contract on a non-qualified basis. You may also purchase it for use within certain qualified retirement plans or in connection with other employee benefit plans or arrangements that receive favorable tax treatment. Such qualified plans include individual retirement accounts and individual retirement annuities (IRAs), and pension and profit sharing plans (including H.R. 10 Plans). Many of these qualified plans, including IRAs, provide the same type of tax deferral as provided by the Contract. The Contract, however, provides benefits and features not provided by such retirement plans and employee benefit plans or arrangements alone. There may be costs and expenses under the Contract related to these benefits and features. You should consult a qualified tax and/or financial adviser regarding the use of the Contract within a Qualified Plan or in connection with other employee benefit plans or arrangements. You should carefully consider the benefits and features provided by the Contract in relation to their costs as they apply to your particular situation (See “Qualified Retirement Plans.”)
Allocating your Purchase Payments
You may allocate your Purchase Payments to the Declared Rate Account or one or more Strategies. The total number of Segments that may be active under a Contract at any time is 100. Allocations must be in dollars or whole percentages.
We do not require allocation instructions for your application to be complete, but an Owner may indicate in the application how their initial Purchase Payment is to be allocated among the Allocation Options. The default Allocation Option is the Declared Rate Account. If you have not provided us instructions to allocate all or a portion of your Purchase Payments to a Strategy, we will allocate all or that portion of your Purchase Payments to the Declared Rate Account. You must provide us new allocation instructions for any subsequent Purchase Payments, otherwise your Purchase Payments will be allocated to the Declared Rate Account.
The Contract is between you and Protective Life. The Contract is not an investment advisory account, and Protective Life is not providing any investment advice or managing the allocations under your Contract. In the absence of a specific written arrangement to the contrary, you, as the owner of the Contract, have the sole authority to make investment allocations and other decisions under the Contract.
Owners may change allocation instructions by Written Notice at any time. Owners may also change instructions by telephone, facsimile, automated telephone system or via the Internet at www.protective.com (“non-written instructions”). For non-written instructions regarding allocations, we may require a form of personal identification prior to acting on instructions and we will record any telephone voice instructions. If we follow these procedures, we will not be liable for any losses due to unauthorized or fraudulent instructions. We reserve the right to limit or eliminate any of these non-written communication methods for any Contract at any time for any reason.
Declared Rate Account
The default Allocation Option is the Declared Rate Account. You may choose to allocate all or a portion of your Purchase Payments or the Maturity Value of Segments to the Declared Rate Account. If you have not provided us instructions to allocate all or a portion of your Purchase Payments to a Strategy, we will allocate all or that portion of your Purchase Payments to the Declared Rate Account. Likewise, if you have not instructed us to allocate the Maturity Value of Segments to a new Strategy, we will allocate the Maturity Value to the Declared Rate Account. Amounts applied to the Declared Rate Account remain there until you instruct us otherwise. We will not declare an interest rate for the Declared Rate Account less than a minimum interest rate of 1%. The minimum interest rate may be higher in some states. Please consult your financial advisor for information on the current interest rate for the Declared Rate Account.
You can request to transfer amounts from the Declared Rate Account to any of the available Segments at any time up to the close of business on the day the Segment starts.
The interest rate for the Declared Rate Account is declared in advance, but is not guaranteed for any specific period of time. Generally, we review and declare the interest rate for this account at certain intervals — for example: every two weeks — but we reserve the right to declare a new interest rate at any time, and without any prior notice to you.
Interest rates for the Declared Rate Account have an effective date — the date on which the rate takes effect. The effective date will not be earlier than the day immediately following the day on which the rate is declared, but it may be later. On and after each effective date, that rate applies to the entire Declared Rate Account, and remains in effect until we set a different rate.
Because only one interest rate applies to the entire Declared Rate Account at any particular time, we do not establish discrete segments in the Declared Rate Account and it is not treated as a Strategy.
Prior to the Annuity Date the Declared Rate Account Value is equal to:
•Aggregate amounts applied to the Declared Rate Account since the Issue Date; plus,
•Aggregate interest credited to the Declared Rate Account since the Issue Date; minus,
•Amounts transferred from the Declared Rate Account to establish Segments; minus,
•Aggregate amounts deducted from the Declared Rate Account to satisfy prior withdrawal requests (including applicable withdrawal charges and Market Value Adjustment, if any).
Strategies
The Contract offers two types of Strategies for allocating your Contract Value: (1) Guaranteed Interest Strategies and (2) Indexed Strategies. You may invest in a Strategy only on Segment Start Dates, which occur twice each month, by allocating Purchase Payments made during the first Contract Year, by allocating balances in the Declared Rate Account, or by allocating Maturity Value from a maturing Segment.
On the Start Date, the Company will establish new Segments. Two weeks prior to these Segment Start Dates, the Company will declare the interest rate for the Guaranteed Interest Strategy and the Crediting Method(s) and Downside Protection for each Indexed Strategy that will be offered on the upcoming Segment Start Date. You may obtain this information the following ways:
•Directly from us by calling 1-800-456-6330;
•On our website at www.myaccount.protective.com; or
•From the financial advisor who sold or services your Contract.
Note: We will always offer at least one Indexed Strategy with a Floor between 0% and -10%; however, we reserve the right to stop offering other Indexed Strategies. If we decline to offer a particular Strategy on a Segment Start Date, it will not impact any Segments previously established.
Guaranteed Interest Strategy
We will declare a credited rate of interest for each Segment under the Guaranteed Interest Strategy, but the minimum interest rate will not be less than 1%. The credited rate of interest is declared in advance and established on the Start Date and will not change during the Term of the Segment. For each Guaranteed Interest Segment, interest will be credited daily from the Start Date to the Maturity Date. Please consult your financial advisor for information on the current rates of interest we credit.
Indexed Strategies
The Indexed Strategies credit interest based in part on the performance of an Index. Investments in Indexed Strategies are not investments in the securities markets, or in underlying mutual funds sometimes known as “index funds.”
Index Performance
Index Performance is the measure of the percentage increase or decrease in the reference Index between two points in time. For Indexed Segments, we calculate the Index Performance on each Business Day for purposes of determining the Segment Value and your Contract Value; however, Index Performance is only applied on the Maturity Date of a Segment, or the date you make a withdrawal from a Segment before its Maturity Date. That is, we credit interest resulting from positive Index Performance only on the Segment Maturity Date. On the other hand, we deduct amounts resulting from negative Index Performance on the Segment Maturity Date or the date we calculate a withdrawal or surrender because the Interim Value calculation reflects negative Index Performance but does not take into account positive Index Performance.
Crediting Methods
Each Indexed Strategy will have a Crediting Method that we apply to your Segment Investment to determine your Maturity Value on the Segment Maturity Date. The Crediting Method for each Indexed Strategy will not change during the Term of the Segment. The Crediting Methods we offer include a Participation Rate and may include a Cap and are described in the table below. The Participation Rate may be greater than but will never be less than 100% (the minimum Participation Rate). The Cap, if applicable to the Indexed Strategy, will place a limit on
the positive performance of the reference Index that we will use to calculate the return for any Indexed Strategy, and, in turn, limit the amount that may be credited to the investment in an Indexed Segment.
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Participation Rate | | A Participation Rate is a specified percentage of Index Performance that we use to calculate the Segment Return Amount. The Participation Rate may be greater than but will never be less than the minimum Participation Rate, which is 100%. The Participation Rate only applies to positive Index Performance. |
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Cap | | The Cap is the maximum percentage of positive Index Performance that may be used to calculate the Segment Return Amount for an Indexed Segment. The Cap for our currently offered Index Strategies will never be less than the minimum Cap we identify in the chart in the Summary section of this Prospectus and on the Schedule Page of your Contract, but the minimum Cap for any Indexed Strategy offered under this Contract will not be less than 1%, regardless of the Participation Rate or Downside Protection. On the Maturity Date, the positive Index Performance used to calculate the Segment Return Amount for an Indexed Segment would be the lesser of the actual positive percentage change in the value of the Index over the Term for the Segment or the Cap. |
Please consult your financial advisor for information on current Participation Rates and Caps.
The following three examples demonstrate three potential Crediting Method combinations. Assume you invested in an S&P 500 Indexed Segment with a Floor of -10% and a Segment Investment on the Maturity Date of $10,000. Only positive Index Performance is illustrated, as the Cap only applies to positive performance.
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Example 1: 12% Cap and 100% Participation Rate |
| | | | | Formula |
| S&P 500 Index Performance = | | 15 | % | | |
| Credited Rate of Interest = | | 12 | % | | (lesser of [Cap (12%)] or [Participation Rate (100%) x Index Performance (15%)]) |
| Segment Return Amount = | | $ | 1,200 | | | ($10,000 x [Cap (12%)]) |
| Segment Maturity Value = | | $ | 11,200 | | | ($10,000 + $1,200) |
| | | | | |
Example 2: No Cap and 120% Participation Rate |
| | | | | Formula |
| S&P 500 Index Performance = | | 15 | % | | |
| Credited Rate of Interest = | | 18 | % | | [Participation Rate (120%) x Index Performance (15%)] |
| Segment Return Amount = | | $ | 1,800 | | | ($10,000 x [Participation Rate (120%) x 15%]) |
| Segment Maturity Value = | | $ | 11,800 | | | ($10,000 + $1,800) |
| | | | | |
Example 3: 12% Cap and 120% Participation Rate |
| | | | | Formula |
| S&P 500 Index Performance = | | 15 | % | | |
| Credited Rate of Interest = | | 12 | % | | (lesser of [Cap (12%)] or [Participation Rate (120%) x Index Performance (15%)]) |
| Segment Return Amount = | | $ | 1,200 | | | ($10,000 x [Cap (12%)]) |
| Segment Maturity Value = | | $ | 11,200 | | | ($10,000 + $1,200) |
Downside Protection
Each Indexed Strategy will have Downside Protection that will not change during the Term of the Indexed Segment. The Downside Protection we offer is described in the table below.
| | | | | |
Floor | The Floor is a limit on negative Index Performance that results in a reduction of the Segment Value. The Floor is the maximum percentage loss you can experience over the Segment Term, even if negative Index Performance falls below the Floor. We are currently offering Floor options of -5%, -10%, and -20%. |
For example, a Strategy could be the S&P 500/-10% Floor/100% Participation Rate/12% Cap. We will measure the performance of the S&P 500 for the Term beginning on the Segment Start Date. If the Index performs positively during the Term, your Segment Return Amount on the Maturity Date could be as much as 12% for that Term. If the Index performs negatively during this period, on the Maturity Date you will be protected from any Index decline greater than 10 percent. Please note, Strategies with greater Downside Protection tend to have lower Caps and Participation Rates than Strategies with less Downside Protection.
Suspension or Termination of an Indexed Strategy
We reserve the right to suspend or terminate a particular Indexed Strategy at any time. If an Indexed Strategy is suspended or terminated, the Contract Value (or Maturity Value for maturing Segments) designated to be transferred to new Segments in the suspended or terminated Indexed Strategy(ies) will remain in the Declared Rate Account (or transferred into the Declared Rate Account for maturing Segments) until you choose to open a Segment(s) in a currently available Indexed Strategy or you withdraw the Contract Value from the Declared Rate Account. We will provide you written notice when money is not transferred from the Declared Rate Account into a Segment due to the suspension or termination of an Indexed Strategy.
Segments
We establish Segments by allocating Purchase Payments made during the first Contract Year, by allocating balances in the Declared Rate Account, or by allocating Maturity Value from a maturing Segment. Segments allow us to separately track and report the subsequent financial activity associated with each allocation. Every Segment is characterized by:
•the Strategy, including its Crediting Method and Downside Protection;
•the Purchase Payment, Contract Value, or Maturity Value you applied to establish it; and
•the Segment Start Date and Maturity Date.
The time period from the Start Date to the Maturity Date (including both of those days) is the Segment Term. These elements will not change during the Term.
Start Date, Maturity Date and Term
We establish Segments only on a Start Date. Start Dates are the 1st and 3rd Wednesday of each month, unless a scheduled Start Date is not a Business Day (a holiday, for example). In that case, the next Business Day will be the Start Date.
Segments mature on their Maturity Date. A Segment Maturity Date is the 1st or 3rd Wednesday in the month during which the Segment Term ends that corresponds to the Wednesday of the same calendar month in which the Term began. If a scheduled Maturity Date is not a Business Day, the next Business Day will be the Segment Maturity Date.
We will always offer Strategies with a one (1) year Term, and may offer other Terms. Note, however, that while Terms are typically measured in years, they will not correspond to annual calendar dates. So, for example, a one
(1) year Term established on the 3rd Wednesday in January will mature on the 3rd Wednesday in January in the following calendar year. Accordingly, the Term may contain more or less than 365 days.
Establishing a Segment
A Segment may be established by selecting one of the Strategies that we currently offer. You must fund a Segment in order for us to establish it. You may fund Segments with a Purchase Payment, Contract Value in the Declared Rate Account, or all or part of the Maturity Value from maturing Segments.
Because we will only accept Purchase Payments that were initiated on or before the first Contract Anniversary, after the first Contract Anniversary new Segments under the Contract will only be established through the transfer of Contract Value from the Declared Rate Account and the transfer of Maturity Value from maturing Segments.
We will process your allocation instruction to establish a new Segment(s) on the next Start Date after we receive your allocation instruction in good order, including your instruction to allocate Contract Value to establish the Segment(s). You may also cancel or change any existing allocation instructions provided we receive it not later than 4 pm Eastern Time on the Start Date on which the Segment is scheduled to be established.
You may not have more than 100 Segments open at any one time. If, after we were to execute any allocation instruction, your Contract would contain more than 100 Segments, we will consider the allocation instruction to be not in good order. We will not be honor your instruction, but will apply the Contract Value you would have allocated to the Segment to the Declared Rate Account.
We will not establish a Segment if the Maturity Date is later than the Contract’s Annuity Date.
We may change or modify the requirements and restrictions to establish a Segment at any time with advance written notice to you. Any change or modification we make will not affect Segments established before the effective date of the change or modification
You may not use any part of existing Segment Value to establish a new Segment.
If we are unable to establish a Segment according to the allocation instructions you have provided, the amount you intended to fund the Segment will be applied to — or remain in — the Declared Rate Account.
Funding a Segment with a Purchase Payment
If we receive your Purchase Payment and allocation instruction in good order on a date prior to the next scheduled Start Date, we will allocate your Purchase Payment to the Declared Rate Account until the next Schedule Start Date and then allocate your Contract Value in the Declared Rate Account to the Segment(s) on the scheduled Start Date. If we receive your Purchase Payment and allocation instruction in good order on a scheduled Start Date before 4 pm Eastern Time, we will establish the Segment(s) and allocate your Purchase Payment directly to the new Segment(s), unless you instruct us otherwise. If we receive your Purchase Payment and allocation instruction in good order after 4 pm Eastern Time on a scheduled Start Date, we will allocate your Purchase Payment to the Declared Rate Account until the next scheduled Start Date and then allocated your Contract Value in the Declared Rate Account to the Segment(s) on the scheduled Start Date, unless you instruct us otherwise.
Determining the Value of a Segment
Segments using a Guaranteed Interest Strategy (“Guaranteed Interest Segment”)
Crediting Guaranteed Interest — Amounts allocated to a Guaranteed Interest Strategy earn interest daily beginning on the Start Date. We determine and declare a rate of interest in advance of the Start Date and the rate is guaranteed not to change over the Term for the Guaranteed Interest Segment. We credit interest at the end of each Business Day. The interest rate we credit each Business Day is the rate that, when compounded, yields the annual effective interest rate in effect for the Guaranteed Interest Segment. At the end of each Business Day, we multiply the daily interest rate by the Segment Value to determine the dollar amount of the interest credited.
Guaranteed Segment Value — On any day, the Segment Value of a Guaranteed Interest Segment is equal to:
•the Contract Value applied to establish the Segment; plus,
•aggregate interest added since the Segment Start Date; minus,
•Contract Value deducted from the Segment to satisfy prior withdrawal requests (including applicable withdrawal charges and Market Value Adjustments, if any).
Segments using an Indexed Interest Strategy (“Indexed Segment”)
Crediting Indexed Interest — Interest credited to or amounts deducted from Indexed Segments depend, in part, upon the performance of one of the broad-based securities Indices. (See “Indices”.)
We credit interest to an Indexed Segment resulting from positive Index Performance only on the Maturity Date. Therefore, no interest is earned or payable on amounts withdrawn from an Indexed Segment before the Maturity Date.
On the other hand, any negative Index Performance is reflected by the Indexed Segment Value for amounts withdrawn prior to the Maturity Date for an Indexed Segment. (See “Withdrawals” and “Interim Value of an Indexed Segment”")
Index Performance — Index Performance is the measure of the percentage increase or decrease in the reference Index between two points in time. We calculate the Index Performance percentage separately for each Indexed Segment you have established, according to the formula:
Index Performance % = [(IVE – IVS) ÷ IVS] x 100
where,
IVE is the Index Value as of the date the Index Performance is calculated (i.e., the Maturity Date of a Segment, or the date Contract Value is withdrawn from a Segment); and
IVS is the Index Value as of the Segment Start Date.
The Index Value is the closing value of the Index at the end of each Business Day, as determined and published by the compiler of the Index. For any day that is not a Business Day, the Index Value is the closing value of the Index as of the next Business Day.
Because Segment Start Dates and Maturity Dates occur on the same day, the Index Value on a Maturity Date for an existing Segment will be the same as the Index Value of a new Segment established on that date, provided both Segments use the same reference Index.
Maturity Value of an Indexed Segment
We calculate the Maturity Value of an Indexed Segment on the Maturity Date as follows:
•We determine the Index Performance percentage for the Segment using the Index Value on the Maturity Date for IVE in the formula.
•We then apply the Crediting Method or Downside Protection.
◦Crediting Method: If the Index Performance percentage is positive, we credit interest at a rate equal to the lesser of: a) the Index Performance percentage multiplied by the Participation Rate; or, b) the Cap, if applicable.
◦Downside Protection: If the Index Performance percentage is negative, the percentage amount we deduct will equal the smaller of: a) the Index Performance percentage or b) the Floor.
•The percentage derived above from either the Crediting Method or Downside Protection is multiplied by the Segment Investment to determine the actual dollar amount of interest credited or amount deducted. That result is applied to the Segment Investment to arrive at the Segment Maturity Value.
The following examples show how interest is credited or amounts deducted in 4 typical scenarios. In each scenario, assume that you invested $10,000 in an S&P 500 Indexed Strategy with a one (1) Year Term and -10% percent Floor. On the Start Date, the Crediting Method consists of a 13% Cap and a 100% Participation Rate. You do not take any withdrawals.
1.Index Performance percentage is positive and greater than the Cap. If the calculated Index Performance percentage for the S&P 500 Price Return Index is 20% over the Term, we will calculate the Segment Maturity Value as follows:
•The Participation Rate multiplied by the Index Performance percentage (100% x 20% = 20%) is greater than the Cap (13%). Under your chosen Crediting Method, the Segment earns interest at the lower of those two rates. We therefore multiply the Segment Investment by the Cap to determine the interest credited (13% x $10,000 = $1,300). The Maturity Value is the Segment Investment plus the interest earned $10,000 + $1,300 = $11,300.
2.Index Performance percentage is positive, but less than the Cap. If the calculated Index Performance percentage for the S&P 500 Index is 5% over the Term, we will calculate the Segment Maturity Value as follows:
•The Participation Rate multiplied by the Index Performance percentage (100% x 5% = 5%) is less than the Cap (13%). The Segment earns interest at the lower of those two rates. We therefore multiply the Segment Investment by the Index Performance percentage to determine that the interest earned is $500 (5% x $10,000 = $500). The Maturity Value is the Segment Investment plus the interest earned $10,000 + $500 = $10,500.
3.Index Performance percentage is negative, but higher than the Floor. If the calculated Index Performance percentage for the S&P 500 Index is -5% over the Term, we will calculate the Segment Maturity Value as follows:
•Applying the Index Performance percentage (-5%) would result in a smaller reduction in the Segment Investment than the Floor(-10%). We therefore multiply the Segment Investment by the Index Performance to calculate a $500 reduction in the Segment Investment. ($10,000 x -5% = -$500). The Segment Investment is reduced by $500, resulting in a Segment Maturity Value of $9,500.
4.Index Performance percentage is negative and exceeds the Floor. If the calculated Index Performance percentage for the S&P 500 Index is -15% over the Term, we will apply the Downside Protection and calculate the Segment Maturity Value as follows:
•The Index Performance percentage (-15%) results in a greater reduction in the Segment Investment than the Floor(-10%). We therefore multiply the Segment Investment by the Floor to calculate a $1,000 reduction in the Segment Investment. ($10,000 x -10% = -$1,000). The Segment Investment is reduced by $1,000, resulting in a Segment Maturity Value of $9,000.
Because the Index Performance percentage is calculated on the Maturity Date of an Indexed Segment, you may experience negative Index Performance even if the Index has experienced gains through some, or most, of the Term.
Interim Value of an Indexed Segment
The Interim Value of an Indexed Segment is its value on any day other than the Start Date or Maturity Date. The Interim Value is used in two ways:
•To facilitate daily valuation of the Contract for various accounting and reporting purposes.
•To establish the Segment Value as the starting point for a withdrawal or surrender on a Business Day other than the Segment Maturity Date. (See “Effect of a Withdrawal During the Withdrawal Charge Period.”)
The method we use to calculate the Interim Value of a Segment is generally the same method we use to calculate the value of the Segment on the Segment Maturity Date, except we do not take positive Index Performance into account. We start by determining the Index Performance percentage for the Segment on the date of withdrawal or surrender, the calculation date, by measuring the Index Performance from the Start Date to the calculation date. If the Index Performance percentage is positive or zero, the Interim Value will equal the Segment Investment.
If the Index Performance percentage is negative, the percentage amount we deduct from the Segment Investment will equal the greater of: a) the Index Performance percentage or b) the Floor. That percentage would be multiplied by the Segment Investment to determine the actual dollar amount by which the Segment Investment would be reduced to arrive at the Interim Value.
The Interim Value calculation reflects negative Index Performance between the Start Date and the calculation date but does not take into account positive Index Performance. Positive Indexed interest is credited only on a Maturity Date. The Interim Value calculation does not take into account any applicable withdrawal charge or Market Value Adjustment.
The Interim Value of an Indexed Segment will always be equal to or less than your Segment Investment on the calculation date.
The following examples show how we calculate Interim Value. Assume you invest $10,000 in an S&P 500 Indexed Strategy with a one (1) Year Term and -10% Floor. On the Start Date, the Crediting Method consists of a 13% Cap and a 100% Participation Rate. You do not take any withdrawals from the Segment.
1.Index Performance percentage positive (greater than 0%). In this scenario, we disregard the Index Performance. Your Interim Value is equal to your Segment Investment ($10,000).
2.Index Performance percentage is negative, but remains above the Floor. If the calculated Index Performance percentage for the S&P 500 Index is -5% from the Start Date to the calculation date, we will calculate the Interim Value as follows:
•The Index Performance percentage (-5%) would result in a smaller reduction in the Segment Investment than the Floor(-10%). We therefore multiply the Segment Investment by the Index Performance to calculate a $500 reduction in the Segment Investment. ($10,000 x -5% = -$500). The $500 reduction is applied to the Segment Investment for an Interim Value of $9,500.
3.Index Performance percentage is negative and exceeds the Floor. If the calculated Index Performance percentage for the S&P 500 Price Return Index is -15% from the Start Date to the calculation date, we will apply your chosen Downside Protection and calculate the Interim Value as follows:
•The Index Performance percentage (-15%) would result in a greater reduction in the Segment Investment than the Floor(-10%). We therefore multiply the Segment Investment by the Floor to calculate a $1,000 reduction in the Segment Investment. ($10,000 x -10% = -$1,000). We deduct the $1,000 from the Segment Investment, resulting in an Interim Value of $9,000.
If you make a withdrawal from a Segment or surrender the Contract before the Maturity Date, we will apply an Interim Value calculation, which may result in a reduction of the Segment Value and Segment Investment that is significantly larger than the withdrawal amount requested and could result in loss of principal and previously credited interest.
Withdrawals during the middle of a Term reduce the Interim Value on a dollar-for-dollar basis and reduce the Segment Investment by the same proportion that the withdrawal reduces the Interim Value. The reduction in the Segment Investment is allocated on a pro-rata basis among the available Segments. For example, assume you have
Segment Investment of $10,000 in an Indexed Strategy with a -10% Floor and take a withdrawal of $3,600. In this example, assume there are no applicable surrender charges or MVA.
1.The Interim Value is less than the Segment Investment. In this example, Index Performance was negative (-15%) and fell below the Floor on the calculation date. Therefore, you have an Interim Value of $9,000 ($10,000 – the lesser of $1,500 [the -15% index performance x $10,000] or $1,000 [the -10% Floor x $10,000]. The $3,600 withdrawal will reduce the Interim Value dollar-for-dollar (by an amount equal to $3,600). Your Interim Value after the withdrawal is $5,400 ($9,000 – $3,600 = $5,400). The proportion that your withdrawal reduces your Interim Value is 40% ($3,600 / $9,000 = 40%). Your Segment Investment is reduced by that same proportion, which is $4,000 (40% x $10,000). As a result, your Segment Investment after the withdrawal is $6,000 ($10,000 – $4,000 = $6,000).
2.The Interim Value is the same as the Segment Investment. In this example, Index Performance was positive on the calculation date. Therefore, we disregard the Index Performance, and you have an Interim Value of $10,000. The $3,600 withdrawal will reduce the Interim Value dollar-for-dollar (by an amount equal to $3,600). Your Interim Value after the withdrawal is $6,400 ($10,000 – $3,600 = $6,400). The proportion that your withdrawal reduces your Interim Value is 36% ($3,600 / $10,000 = 36%). Your Segment Investment is reduced by that same proportion, which is $3,600 (36% x $10,000). As a result, your Segment Investment after the withdrawal is $6,400 ($10,000 – $3,600 = $6,400).
A withdrawal during the Term will not change the Crediting Method or Downside Protection applicable to the Segment Investment remaining in the Indexed Segment.
A total surrender during the middle of a Term will result in you receiving the Interim Value less any applicable surrender charges and MVA. You will not participate in any positive Index Performance of that segment if you make a total surrender during the middle of a Term. For example, assume you have Segment Investment of $100,000, representing your entire investment in the Contract, in an Indexed Strategy with a -10% Floor and you surrender your Contract. In this example, assume there are no applicable surrender charges or MVA.
1.The Interim Value is below the Segment Investment. In this example, Index Performance was negative (-15%) and fell below the Floor on the calculation date. Therefore, you have an Interim Value of $90,000 ($100,000 – the lesser of $15,000 [the -15% index performance x $100,000] or $10,000 [the -10% Floor x $100,000], and this is the amount you would receive upon surrender.
2.The Interim Value is the same as the Segment Investment. In this example, Index Performance was positive on the calculation date. Therefore, we disregard the Index Performance, and you have an Interim Value of $100,000. This is the amount you would receive upon surrender.
For more examples of how we calculate Interim Value, see Appendix A to this Prospectus.
Segment Transfers and Renewals
Restrictions on Transfers of Segment Value
You may not transfer all or part of the value of an existing Segment during its term to any other existing Segment.
You may not use all or part of the value of an existing Segment to establish a new Segment on any day other than the Maturity Date for the existing Segment.
You may not transfer all or part of the value of an existing Segment to the Declared Rate Account on any day other than the Maturity Date for the existing Segment.
Any instruction from you for any of these transactions will be treated as not in good order and will not be honored.
Transfer of Maturity Value on a Maturity Date
Not less than 30 days before the Maturity Date for a Segment, we will advise you of the upcoming Maturity Date and you may provide us instructions for allocation of the Maturity Value. The notice we send will include a description of the maturing Segment’s Strategy, Term, Crediting Method and Downside Protection. Because the notice will be sent to you well in advance of the Maturity Date, the notice will not include the Maturity Value for the Segment nor will it provide information on the Strategies that will be offered at that time. Two weeks prior to a Segment Maturity Date, you can obtain information about the interest rate for the Guaranteed Interest Strategy and the Crediting Method(s) and Downside Protection for each Indexed Strategy that will be offered on the Segment Start Date occurring on the same day as the upcoming Segment Maturity Date. You may obtain this information the following ways:
•Directly from us by calling 1-800-456-6330;
•On our website at www.myaccount.protective.com; or
•From the financial advisor who sold or services your Contract.
On a Maturity Date, you may transfer all or part of the Maturity Value to the Declared Rate Account, or you may use all or part of the Maturity Value to establish new Segments selected from among the Strategies we offer at that time, provided your allocation instructions conform to the requirements and restrictions in effect at that time. (See “Establishing a Segment”.) We must receive your allocation instructions by 4 PM Eastern on the Maturity Date. If we do not receive instructions by that time, the Maturity Value will be transferred to the Declared Rate Account.
Automatic Segment Renewal
Anytime during a Segment Term, you may instruct us to automatically allocate Maturity Value into a new Segment using the same Strategy, Term, and Downside Protection, if we are offering it at that time. Since the Participation Rate and Caps are guaranteed only for a single Term and are set by us from time to time, the Crediting Method for the renewal Segment may or may not be the same Crediting Method of the maturing Segment.
After we receive an automatic renewal instruction from you, it will remain in effect until you change or cancel it. Like all other allocation instructions, an automatic renewal instruction will be accepted and may be modified or cancelled up to 4 PM Eastern on the Maturity Date. If cancelled, automatic renewals will be terminated as of the date of the request, and you must send a new automatic renewal instruction to begin them again.
If you instructed us to automatically renew a particular Indexed Strategy on a Segment’s Maturity Date, and we do not offer that Indexed Strategy at that time, the Segment’s Maturity Value will be transferred to the Declared Rate Account. You will be notified in writing that this has occurred, and provided the opportunity to reallocate the amount on the next Segment Start Date to the then available Strategies. The Segment Maturity Value you instructed us to allocate to the no longer available Indexed Strategy will remain in the Declared Rate Account until you provide us new allocation instructions.
Effect of an Emergency Close
It is possible that an Index could experience an emergency close on a Business Day, thereby affecting the Index’s ability to publish a price and our ability to mature or start Indexed Segments based on the affected Index. Therefore, if an Index experiences an emergency close and cannot publish any prices, we will delay the Maturity Date or Start Date of all Indexed Segments for the affected Index. If an emergency close occurs on a scheduled Maturity Date, then the Maturity Date for that Segment will be delayed until the next Business Day.
ACCESSING YOUR MONEY
Withdrawals and Surrenders
Anytime on or before the Annuity Date you may request a withdrawal from — or a surrender of — your Contract Value, by Written Notice or any other method we permit at that time. Federal and state income taxes may apply to distributions from the Contract, and a 10% additional tax may apply if the distribution occurs before an Owner’s age 59 1/2. (See “Federal Tax Matters.”)
Requests for a withdrawal or surrender must be by Written Notice, or by any other method we permit at that time. These methods may include facsimile or electronic communications. Provided you have completed our Telephone Authorization form prior to a telephone withdrawal request and we accepted it, you may submit your withdrawal instruction by phone. Currently, we allow an Owner to withdraw up to the lesser of $50,000 or 25% of the Contract Value to be requested by phone. We will require authentication of the Owner’s identity during the call prior to processing a telephone withdrawal request. We may change the requirements for telephone withdrawals or eliminate the privilege completely at any time without prior notice.
If we receive your request for withdrawal or surrender in good order before 4 pm Eastern Time on a Business Day, we will process the request that Business Day. If we receive the request on or after 4 pm Eastern Time on a Business Day, it will be processed the next Business Day.
We typically pay withdrawal and surrender requests within 5 Business Days of the date we receive the request in good order. However, under certain circumstances it may be necessary to delay payment for up to six months, subject to all necessary approvals from the appropriate state insurance regulatory authorities.
Withdrawals and surrenders during the withdrawal charge period that exceed the Free Withdrawal Amount are subject to an MVA and a withdrawal charge. (See “Market Value Adjustment.”)
Free Withdrawal Amount
During the first six (6) Contract Years (the withdrawal charge period), you can withdraw your Contract Value up to the amount of the Free Withdrawal Amount without being subject to an MVA and withdrawal charge. However, withdrawals from an Indexed Segment prior to the Maturity Date would be subject to an Interim Value calculation. Application of the Interim Value calculation may result in a reduction of the Segment Value and Segment Investment that is significantly larger than the withdrawal amount requested. See “Interim Value of an Indexed Segment”.
We calculate the available Free Withdrawal Amount with each withdrawal. It is equal to 10% of the sum of A + B + C, minus the sum of all prior withdrawals that Contract Year, where:
“A” is the Declared Rate Account Value
“B” is the Guaranteed Account Value
“C” is the sum of the Segment Investment of all Indexed Segments
The Free Withdrawal Amount is not cumulative. Any portion of the Free Withdrawal Amount not taken during a Contract Year does not carry forward to future Contract years.
Withdrawals
On or before the Annuity Date, you may request a withdrawal of a portion of your Contract Value, provided:
•the amount you request is at least $100; and
•the Contract Value after the withdrawal is processed is at least $25,000 (not required for withdrawals taken to satisfy federal income tax rules concerning minimum distribution requirements applicable to your Contract).
If any of these requirements is not met, we will treat your withdrawal request as not in good order and will not process the request. If this occurs, we will notify you and provide the opportunity to modify the instruction so the requirements are met.
How Withdrawals are Taken from your Contract Value
Generally, you may tell us how to apportion a withdrawal from the Allocation Options. However, if on the date we process the withdrawal you have Contract Value in the Declared Rate Account, we will first deduct the Contract Value in the Declared Rate Account to pay the withdrawal request. If your Contract Value in the Declared Rate Account is not sufficient to pay the withdrawal request, we will deduct Contract Value from the Segment(s) according to your instructions. If you request a withdrawal on the Maturity Date of a Segment, we will fulfill the withdrawal request first from the Maturity Value of that Segment, and then in the order previously described.
If you do not specify how a withdrawal should be apportioned and your request is otherwise in good order, we will deduct amounts in the following order:
•First, from the Declared Rate Account;
•Next, from the Guaranteed Interest Segment(s) on a “last established-first withdrawn” basis, regardless of the interest rate being applied to the Segment; and
•Finally, from the Indexed Segment(s) on a “last established-first withdrawn” basis, regardless of the Crediting Method and Downside Protection associated with the Segment(s).
If we receive your withdrawal request on a Start Date before 4 pm Eastern Time, the request may prevent us from processing any prior instruction from you to establish a new Segment(s) on that Start Date. If the Contract Value in the Declared Rate Account and any available Maturity Value is not sufficient to fulfill both instructions, we will process the withdrawal request. We will treat the instruction to establish a new Segment(s) as not in good order due to insufficient funds and will not process the request. If this occurs, we will notify you and provide the opportunity to modify the instruction. When your instruction to establish new Segment(s) is in good order, we will execute the instruction on that, or the next available Start Date.
A withdrawal during the Term will not change the Crediting Method or Downside Protection applicable to the Segment Investment remaining in an Indexed Segment.
Surrenders
On or before the Annuity Date, you may request a surrender of your Contract and receive its Surrender Value. If your Contract Value is $50,000 or less, you may request a surrender by telephone if you have previously provided (and we accepted) your written Telephone Authorization form. Unless you instruct us otherwise, we will pay the Surrender Value in a lump sum.
Signature Guarantees
Signature guarantees are required for withdrawals or surrenders of more than $50,000.
Signature guarantees are relied upon as a means of preventing the perpetuation of fraud in financial transactions, including the disbursement of funds or assets from a victim’s account with a financial institution or a provider of financial services. They provide protection to investors by, for example, making it more difficult for a person to take another person’s money by forging a signature on a written request for the disbursement of funds.
An investor can obtain a signature guarantee from more than 7,000 financial institutions across the United States and Canada that participate in a Medallion signature guarantee program. The best source of a signature guarantee is a bank, savings and loan association, brokerage firm, or credit union with which you do business. Guarantor firms may, but frequently do not, charge a fee for their services.
A notary public cannot provide a signature guarantee. Notarization will not substitute for a signature guarantee.
Withdrawal Value
The withdrawal value of any surrender or withdrawal request is calculated by adding the values of the Declared Rate Account, Guaranteed Interest Segments and the Indexed Segments (Interim Value or Maturity Value, as applicable). We then apply any applicable Market Value Adjustment, and subtract any applicable withdrawal charge, premium tax, and any required or requested tax withholding. The amount we will pay you if you request a withdrawal depends on whether you request a “gross” withdrawal or a “net” withdrawal. For a “gross” withdrawal, you instruct us to withdraw a specified amount of Contract Value from your Contract and that amount less the Free Withdrawal Amount will be increased or decreased by the application of any applicable MVA, and then reduced by the applicable withdrawal charge and any required or requested tax withholding, if any. You may receive more or less than the amount of Contract Value you instructed us to withdraw. If an MVA applies to the Contract Value withdrawn less the Free Withdrawal Amount and the MVA is positive and increases that amount, the amount of the withdrawal charge you pay will be higher since the withdrawal charge would apply to both the Contract Value withdrawn less the Free Withdrawal Amount and the increase resulting from application of the MVA. Conversely, if the MVA applied to the Contract Value withdrawn less the Free Withdrawal Amount is negative and lowers that amount, the amount of the withdrawal charge you pay will be lower since the withdrawal charge would apply to an amount that is less than the Contract Value withdrawn less the Free Withdrawal Amount.
For a “net” withdrawal, you instruct us to withdraw a specified amount of Contract Value from your Contract and we will pay you that amount less any required or requested tax withholding. We will apply any applicable MVA and then any applicable withdrawal charge against the Contract Value remaining in your Contract after we process the withdrawal. The MVA would be based on the Contract Value Withdrawn less the Free Withdrawal Amount. If the MVA applied to the Contract Value remaining in your Contract is positive and increases that amount, the amount of the withdrawal charge you pay will be higher since the withdrawal charge would apply to both the Contract Value withdrawn less the Free Withdrawal Amount and the increase resulting from application of the MVA. Conversely, if the MVA applied to the Contract Value remaining in the Contract is negative and lowers that amount, the amount of the withdrawal charge you pay will be lower since the withdrawal charge would apply to an amount less than the Contract Value withdrawn less the Free Withdrawal Amount. See CHARGES AND DEDUCTIONS. For examples of how the MVA can affect the amount you receive for a full surrender or withdrawal requested during the withdrawal charge period, see Appendix A to this Prospectus.
If you make a withdrawal from a Segment or surrender the Contract before the Segment Maturity Date, the Interim Value may be less than the Segment Investment and may be less than the amount you would receive had you held the investment until the Segment Maturity Date. Application of the Interim Value calculation may result in a reduction of the Segment Investment that is significantly larger than the withdrawal amount requested and could result in loss of principal and previously credited interest. In addition, the Interim Value calculation reflects negative Index Performance between the Start Date and the calculation date but does not take into account positive Index Performance.
We will determine the withdrawal value as of the end of the Business Day on during which we receive your request in good order at our Administrative Office. A transaction request will be deemed in good order if the transaction service form is fully and accurately completed and signed by the Owner(s) and received by us at our Administrative Office. A Business Day ends at the close of regular trading on the New York Stock Exchange, which is generally at 4:00 p.m. Eastern Time. We will process any request received at our Administrative Office after the end of a Business Day on the next Business Day.
Surrender and Withdrawal Restrictions
The Owner’s right to make surrenders and withdrawals is subject to any restrictions imposed by applicable law or by the Qualified Contract.
In the case of certain Qualified Plans, federal tax law imposes restrictions on the form and manner in which benefits may be paid. For example, spousal consent may be needed in certain instances before a distribution may be made.
Suspension or Delay in Payments
Payments of a withdrawal or surrender of the Contract Value or death benefit are usually made within seven (7) calendar days. However, we may delay such payment of a withdrawal or surrender of the Contract Value or death benefit if a reference Index is not published or your Purchase Payment check has not cleared your bank.
We may delay payment of a withdrawal or surrender for up to six months where permitted.
DEATH BENEFIT
If any Owner dies before the Annuity Date and while the Contract is in force, we will pay a death benefit, less any applicable premium tax, to the Beneficiary. The death benefit terminates on the Annuity Date.
We calculate the death benefit as of the date we receive proof of death. The death benefit is the greater of (A) or (B), as described below.
(a)The Declared Rate Account value plus the Segment Value(s) of all the Guaranteed Interest Segments plus the Segment Investment(s) of all the Indexed Segments (does not include Interim Value); or
(b)The Contract Value plus the Market Value Adjustment, but only if the Market Value Adjustment increases the death benefit.
Only one death benefit is payable under this Contract, even though the Contract may, in some circumstances, continue beyond an Owner’s death.
We will determine the death benefit as of the end of the Business Day on which we receive at our Administrative Office Due Proof of Death of the Owner, either by certified death certificate or by judicial order from a court of competent jurisdiction or similar tribunal. If we receive Due Proof of Death after the end of the Business Day, we will determine the death benefit on the next Business Day.
If any Owner is not a natural person, the death of the Annuitant is treated as the death of an Owner.
The death benefit provisions of the Contract will be interpreted to comply with the requirements of Section 72(s) of the Code. We reserve the right to endorse the Contract, as necessary, to conform with regulatory requirements. We will send you a copy of any endorsement containing such Contract modifications. In the case of certain Qualified Contracts, Treasury Department regulations prescribe certain limitations on the designation of a Beneficiary. The following discussion generally applies to Qualified Contracts and non-Qualified Contracts, except where noted otherwise. In that regard, the post-death distribution requirements for Qualified Contracts and non-Qualified Contracts are similar, but there are some significant differences. For a discussion of the post-death distribution requirements for Qualified Contracts, see “QUALIFIED RETIREMENT PLANS, Required Minimum Distributions Upon Your Death.”
The death benefit provisions of this Contract shall be interpreted to comply with the requirements of Section 72(s) of the Code in the case of a non-Qualified Contract, and Section 401(a)(9) of the Code in the case of a Qualified Contract. We reserve the right to endorse the Contract, as necessary, to conform with regulatory requirements. We will send you a copy of any endorsement containing such Contact modifications.
Payment of the Death Benefit
The Beneficiary may take the death benefit in one sum immediately, in which event the Contract will terminate. If the death benefit is not taken in one sum immediately, the death benefit will become the new Contract Value as of the end of the Business Day on which we receive Due Proof of Death of the Owner, and the entire interest in the Contract will be transferred to the Declared Rate Account and must be distributed under one of the following options:
(1)The entire interest must be distributed over the life of the Beneficiary, or over a period not extending beyond the life expectancy of the Beneficiary, with distributions beginning within one year of the Owner’s death and subject to certain further limits in the case of a Qualified Contract; or,
(2)The entire interest must be distributed within (i) 5 years of the Owner’s death if the Contract is a Non-Qualified Contract or, in some cases, a Qualified Contract, or (ii) within 10 years of the Owner’s death if the Contract is a Qualified Contract and the 5-year requirement does not apply under applicable federal tax rules.
The tax rules for Qualified Contracts differ in some material respects from the tax rules for Non-Qualified Contracts, including by limiting the types of beneficiaries who can elect option (1) above and the circumstances in which a 5-year or 10-year distribution requirement will apply. See “QUALIFIED RETIREMENT PLANS, Temporary Rules under the CARES Act and Required Minimum Distributions Upon Your Death.”
If there is more than one Beneficiary, the foregoing provisions apply to each Beneficiary individually.
Continuation of the Contract by a Surviving Spouse
In the case of non-Qualified Contracts and Contracts that are individual retirement annuities within the meaning of Code Section 408(b), if the deceased Owner’s spouse is the sole Beneficiary, the surviving spouse may elect, in lieu of receiving a death benefit, to continue the Contract and become the new Owner. This election is only available, however, if the deceased Owner’s spouse’s 86th birthday is after the Issue Date.
If the surviving spouse elects to continue the Contract, no death benefit is paid at that time and the Contract continues in force from the claim date with the surviving spouse as the new Owner. The surviving spouse may select a new Beneficiary to whom the death benefit will be paid upon the surviving spouse’s death. At that time, the Beneficiary may take the death benefit in a lump sum immediately or may elect to have it distributed by one of the two options described in the “Payment of the Death Benefit” section, above.
A Contract may be continued by a surviving spouse only once. This benefit will not be available to any subsequent surviving spouse under the continued Contract.
The rights of a Beneficiary under an annuity contract depend in part upon whether the Beneficiary is recognized as a “spouse” under federal tax law. A Beneficiary who is recognized as a spouse is treated more favorably than a Beneficiary who is not a spouse for federal tax purposes. Specifically, a Beneficiary who is the spouse of the deceased Owner may continue the Contract and become the new Owner, as described above. In contrast, a Beneficiary who is not recognized as a spouse of the deceased Owner generally must surrender the Contract within 5 or 10 years of the Owner’s death, or take distributions from the Contract over the Beneficiary’s life or life expectancy, beginning within one year of the deceased Owner’s death, with the applicable rules different depending on whether the Contract is a Non-Qualified Contract or a Qualified Contract.
U.S. Treasury Department regulations provide that for federal tax purposes, the term “spouse” does not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship that is not denominated as a marriage under the laws of the state where the relationship was entered into, regardless of domicile. In addition, if the Owner and the Beneficiary are no longer married as of the date of death, such individuals are no longer treated as spouses for federal tax law purposes. As a result, if a Beneficiary of a deceased Owner and the Owner were parties to a civil union or domestic partnership, or if the Beneficiary and the deceased Owner were no longer married as of the date of death, the Beneficiary will be required by federal tax law to take distributions from the Contract in the manner applicable to non-spouse Beneficiaries and will not be able to continue the Contract.
If you have questions concerning your status as a spouse for federal tax purposes and how that status might affect your rights under the Contract, you should consult your legal adviser.
Escheatment of Death Benefit
Every state has unclaimed property laws which generally declare annuity contracts to be abandoned after a period of inactivity of 3 to 5 years from the Contract’s Annuity Date or date the death benefit is due and payable. For example, if the payment of a death benefit has been triggered, but, if after a thorough search, we are still unable to locate the beneficiary of the death benefit, or the beneficiary does not come forward to claim the death benefit in a timely manner, the death benefit will be paid to the abandoned property division or unclaimed property office of the state in which the beneficiary or the Owner last resided, as shown on our books and records, or to our state of domicile. Once the death benefit has been paid or “escheated” to the state, however, your designated beneficiary may submit a claim to the state for payment of those funds. The state is obligated to pay the death benefit (without interest) if your beneficiary steps forward to claim the death benefit with the proper documentation. To prevent such
escheatment, it is important that you update your beneficiary designations, including addresses, if and as they change. Such updates should be communicated in writing, by telephone, or other approved electronic means to our Administrative Office.
CHARGES AND DEDUCTIONS
Market Value Adjustment
During the first six (6) Contract Years (the withdrawal charge period), we will apply a “market value adjustment” or “MVA” to any withdrawal or surrender that exceeds the Free Withdrawal Amount. The MVA is based, in part, on the change in market interest rates between the Issue Date and the withdrawal date. We use MVA Rates to measure this change. Application of the MVA to a withdrawal or surrender request that exceeds the Free Withdrawal Amount could reduce the Contract Value or Surrender Value, as applicable to less than the amount protected by the Floor(s). We will only apply the MVA to the death benefit if it would increase the amount of the death benefit. We will not apply the MVA to amounts applied to an Annuity Option on the Annuity Date.
An MVA Rate is a proprietary measure of market interest rates. We use them in the MVA formula, below.
An MVA Rate is identified on each Business Day during the withdrawal charge period. It is the sum of the prior Business Day’s closing values of:
a)the Constant Maturity Treasury Rate for a duration equal to the Contract’s withdrawal charge period; plus,
b)Barclay’s US Long Credit Option Adjusted Spread (“OAS”).
The Constant Maturity Treasury Rate is the yield on actively traded U.S. Treasury securities based on their time to maturity, as obtained by the Federal Reserve Bank of New York. The Barclay’s US Long Credit Option Adjusted Spread is a measure of the average difference between the yield of USD-denominated corporate bonds and U.S. Treasury issues for a similar duration.
Market Value Adjustment Formula
We use the MVA formula in determining the MVA. During the withdrawal charge period, the MVA is an amount by which we adjust either (1) the amount you will receive from a withdrawal or surrender, or (2) the Contract Value remaining in your Contract after we process the withdrawal. For an explanation on how we calculate a “gross” withdrawals and “net” withdrawals, see “Withdrawal Value” in the “ACCESSING YOUR MONEY” section.
Market Value Adjustment = ( I — C ) x ( N/12 ), where
I = the initial MVA Rate (the MVA Rate on the Issue Date)
C = the current MVA Rate as of the withdrawal date
N = the number of complete months remaining in the withdrawal charge period
The result of the MVA formula is a percentage (negative, positive, or zero). That percentage is multiplied by the amount the requested withdrawal or surrender exceeds the available Free Withdrawal Amount to determine the dollar amount of the MVA. Therefore, a negative result from the MVA formula decreases the amount you will receive from a withdrawal or surrender or decreases the Contract Value remaining in your Contract from a withdrawal. Conversely, a positive result from the MVA formula increases the amount you will receive from a withdrawal or surrender or increases the Contract Value remaining in your Contract from a withdrawal. If the MVA is $0, it has no effect on the amount you will receive from a withdrawal or surrender or the Contract Value remaining in your Contract from a withdrawal.
In general, if the Constant Maturity Treasury Rate and Barclay’s US Long Credit Option Adjusted Spread (“OAS”) have increased as of the withdrawal date over their levels on the Issue Date, the MVA will be negative and will decrease the amount you receive from a withdrawal or surrender or the Contract Value remaining in your Contract from a withdrawal. Similarly, if the Constant Maturity Treasury Rate and OAS have decreased as of the withdrawal date from their levels on the Issue Date, the MVA will be positive and will increase the amount you receive from a withdrawal or surrender or the Contract Value remaining in your Contract from a withdrawal.
For examples of how the MVA can affect the amount you receive for a full surrender or withdrawal requested during the withdrawal charge period, see Appendix A to this Prospectus.
Discontinuation of or Substantial Change Elements Used to Determine the MVA Rates: If the Constant Maturity Treasury Rates or Barclay’s US Long Credit OAS are no longer available to us, or if the manner in which they are determined is substantially changed, we will substitute equivalent rates or indices, subject to prior approval by the insurance regulatory authority of the state in which this Contract is delivered. We will send you an endorsement describing the substitution prior to the date it becomes effective.
Withdrawal Charge
We do not deduct any charge for sales expenses from Purchase Payments at the time you make them. However, within certain time limits described below, we deduct a withdrawal charge when you make a surrender or withdrawal before the Annuity Date during the withdrawal charge period. We do not apply the withdrawal charge to the payment of a death benefit or when we apply your Contract Value to an Annuity Option.
Determining the Withdrawal Charge
For surrenders and withdrawals made in the first six (6) Contract Years, we calculate the withdrawal charge in the following manner:
1.We deduct any available Free Withdrawal Amount from the requested withdrawal amount or surrender;
2.We deduct any withdrawal amount in excess of the Free Withdrawal Amount from the Declared Rate Account; and
3.If there are insufficient funds in the Declared Rate Account to satisfy your withdrawal request, we will deduct all or a portion of the remaining amount of the withdrawal according to your instructions, or if you did not provide us with instructions, then from your Contract Value in the Guaranteed Interest Segments. If your Contract Value in the Declared Rate Account and Guaranteed Interest Segments is not sufficient to pay the withdrawal request, we will deduct the balance from your Contract Value in the Indexed Segments. See “How Withdrawals are Taken from Your Contract Value.”
We multiply the sum of amounts in 2. and 3. above by the applicable withdrawal charge percentage identified in the table below to determine the amount of the withdrawal charge. The withdrawal charge is assessed after we apply the MVA. A positive result from the MVA formula increases the amount of the withdrawal charge and a negative result from the MVA formula decreases the amount of the withdrawal charge. If the MVA is $0, it has no effect on the amount of the withdrawal charge.
| | | | | | | | | | | |
Number of Full Years Elapsed Between the Contract Issue Date and the Date of Withdrawal | | Withdrawal Charge
Percentage |
0 | | | 9 | % |
1 | | | 8 | % |
2 | | | 7 | % |
3 | | | 6 | % |
4 | | | 5 | % |
5 | | | 4 | % |
6 | + | | 0 | % |
Effect of a Withdrawal During the Withdrawal Charge Period
The amount you receive from a withdrawal is the amount requested, minus any required or requested tax withholding and, if a net withdrawal is requested, minus the withdrawal charge and MVA. During the withdrawal charge period, we will adjust the Contract Value or the amount you receive from a withdrawal depending upon the
result of the Market Value Adjustment formula and then assess the withdrawal charge. A negative result from the Market Value Adjustment formula reduces the amount you receive or your Contract Value, while a positive result from the Market Value Adjustment formula increases the amount you receive or your Contract Value. During the withdrawal charge period, application of the Market Value Adjustment to a withdrawal request or a surrender that exceeds the Free Withdrawal Amount could reduce the amount you receive or, for a withdrawal request, reduce your Contract Value to less than the amount protected by any applicable Floor(s).
The amount we will pay you if you request a withdrawal depends on whether you request a “gross” withdrawal or a “net” withdrawal. For an explanation on how we calculate a “gross” withdrawals and “net” withdrawals, see “Withdrawal Value” in the “ACCESSING YOUR MONEY” section. For examples of how the MVA can affect the amount you receive for a full surrender or withdrawal requested during the withdrawal charge period, see Appendix A to this Prospectus. For an explanation on how we calculate Interim Value, see “Interim Value of an Indexed Segment”.
The amount we deduct for withdrawals requested during the withdrawal charge period may be significantly greater than the amount you request and/or receive.
For an example of how we calculate the amount you receive or your remaining Contract Value when you make a withdrawal or surrender your Contract during a Segment, see Appendix A to this Prospectus.
Waiver of Withdrawal Charge and Market Value Adjustment
Terminal Condition and Nursing Facility Confinement
We will waive any applicable withdrawal charge and MVA if, at any time after the first Contract Year:
(1)you or your spouse are first diagnosed as having a terminal illness by a physician who is not related to you or the Annuitant; or,
(2)you or your spouse enter, for a period of at least ninety (90) days, a facility which is both
(a)licensed by the state or operated pursuant to state law; and
(b)qualified as a skilled nursing home facility under Medicare or Medicaid.
The term “terminal illness” means that you or your spouse are diagnosed as having a non-correctable medical condition that, with a reasonable degree of medical certainty, will result in you or your spouse’s death in 12 months or less. A “physician” is a medical doctor licensed by a state’s Board of Medical Examiners, or similar authority in the United States, acting within the scope of his or her license. You must submit written proof satisfactory to us of a terminal illness or nursing home confinement. We reserve the right to require an examination by a physician of our choice at our expense.
Once we have granted the waiver of withdrawal charge and MVA, no withdrawal charge or MVA will apply to the Contract in the future. If any Owner is not an individual, this waiver of withdrawal charge and MVA provision will apply to the Annuitant or the Annuitant’s spouse. For a period of one year after any change of ownership involving a natural person, we will not waive the withdrawal charge or MVA under this provision.
The waiver of withdrawal charge and MVA for terminal illness or nursing facility confinement may not be available in all states and may not be available with new contracts in the future. Please check with your financial advisor to determine availability.
Unemployment
We will waive any applicable withdrawal charge and MVA if, at any time after the Issue Date, you or your spouse meet the following conditions when you request a withdrawal (“unemployment conditions”):
(1)you or your spouse were employed full-time on the Issue Date;
(2)have been unemployed for at least 60 consecutive calendar days prior to claiming the waiver; and
(3)remain unemployed on the date the withdrawal is requested.
Once we have granted the waiver of withdrawal charge and MVA, no withdrawal charge or MVA will apply to the Contract in the future as long as the unemployment conditions described above continue, unless you submit and we accept a Purchase Payment and apply it to the Contract.
If this occurs, you may request a subsequent waiver, provided the unemployment conditions are met at the time you submit your withdrawal request.
If any Owner is not an individual, this waiver of withdrawal charge and MVA provision will apply to the Annuitant or the Annuitant’s spouse. For a period of one year after any change of ownership involving a natural person, we will not waive the withdrawal charge or MVA under this provision.
Waiver of Withdrawal Charge
We may decrease or waive the withdrawal charge on Contracts issued to a trustee, employer or similar entity pursuant to a retirement plan or when sales are made in a similar arrangement where offering the Contracts to a group of individuals under such a program lowers our sales expenses. We determine the amount of any decrease or waiver of the withdrawal charge based on our cost savings.
We also will waive withdrawal charge for Contracts issued to employees and registered representatives of any member of the selling group, or to officers, directors, trustees or bona-fide full time employees of Protective Life or their affiliated companies (based upon the Owner’s status at the time the Contract is purchased). In either case, no marketing expenses or sales commissions are associated with such Contracts.
Premium Taxes
Some states impose premium taxes at rates currently ranging up to 3.5%. If premium taxes apply to your Contract, we will deduct them from the Purchase Payment(s) when accepted or from the Contract Value upon a withdrawal or surrender, death or amounts applied to an Annuity Option.
Other Information
We sell the Contracts through registered representatives of broker-dealers. These registered representatives are also appointed and licensed as insurance agents of Protective Life. We pay commissions and other compensation to the broker-dealers for selling the Contracts. You do not directly pay the commissions and other compensation, we do. We intend to recover commissions and other compensation, marketing, administrative and other expenses and costs of Contract benefits through the fees and charges imposed under the Contracts as well as any amounts we earn on investments. See “Distribution of the Contracts” for more information about payments we make to the broker-dealers.
ANNUITY PAYMENTS
Annuity Date
On the Issue Date, the Annuity Date is the oldest Owner’s or Annuitant’s 95th birthday. You may elect a different Annuity Date, provided that it is no later than the oldest Owner’s or Annuitant’s 95th birthday (the “Maximum Annuity Date”). You may not choose an Annuity Date that is earlier than (1) your first Contract Anniversary or (2) before the Maturity Date of any of your active Segments. Distributions from Qualified Contracts may be required before the Annuity Date.
Changing the Annuity Date
The Owner may change the Annuity Date by Written Notice. The new Annuity Date must be at least 30 days after the date we receive the written request and no later than the oldest Owner’s or Annuitant’s 95th birthday. You may not choose a new Annuity Date that is earlier than (1) your first Contract Anniversary or (2) before the Maturity Date of any of your active Segments.
PayStream Plus® Annuitization Benefit
(not available in New Hampshire or Utah)
If your Annuity Date is on or after your 10th Contract Anniversary and you select Annuity Option B (life income with or without a certain period) with a certain period of at least 10 years, the amount annuitized will be your Contract Value on the Annuity Date plus 2% of the Contract Value on that date, less any applicable premium tax.
Annuity Income Payments
On the Annuity Date, we will apply the Contract Value to the Annuity Option you have selected to determine your annuity income payment.
Annuity Options
You may select an Annuity Option, or change your selection by Written Notice that Protective Life receives no later than 30 days before the Annuity Date. You may not change your selection of an Annuity Option less than 30 days before the Annuity Date. We will send you a notice in advance of your Annuity Date which asks you to select your Annuity Option. Your choice of Annuity Options may be limited depending on your use of the Contract. If you have not selected an Annuity Option within 30 days of the Annuity Date, we will apply your Contract Value to Option B — Life Income with Payments for a 10 Year Certain Period.
Generally, you may select from among the Annuity Options described below. However, certain Annuity Options and/or certain period durations may not be available, depending on the age of the Annuitant and whether your Contract is a Qualified Contract that is subject to limitations under the Required Minimum Distribution rules of Section 401(a)(9) of the Code. In addition, once annuity payments start under an Annuity Option, it may be necessary to modify those payments following the Annuitant’s death in order to comply with the Required Minimum Distribution rules, if your Contract is a Qualified Contract. For a discussion of the post-death distribution requirements for Qualified Contracts, see “QUALIFIED RETIREMENT PLANS, Required Minimum Distributions Upon Your Death.”
Option A — Payments For a Certain Period:
We will make payments for the period you select. No certain period may be shorter than 10 years or longer than 30 years, without our consent. Payments under this Annuity Option do not depend on the life of an Annuitant.
Option B — Life Income With Or Without A Certain Period:
Payments are based on the life of the named Annuitant(s). If you elect to include a certain period, we will make payments for the lifetime of the Annuitant(s), with payments guaranteed for the certain period you select. No certain period may be longer than 30 years without our consent. Payments stop at the end of the selected certain period or
when the Annuitant(s) dies, whichever is later. We reserve the right to demand proof that the Annuitant(s) is living prior to making any payment under Option B. If no certain period is selected, no payments will be made after the death of the Annuitant(s), no matter how few or how many payments have been made. This means the Payee will receive no annuity payments if the Annuitant(s) dies before the first scheduled payment, will receive only one payment if death occurs before the second scheduled payment, and so on. However, if no certain period is selected and the Annuitant dies within one month of the Annuity Date but before the first income payment has been made, we will terminate this Contract and immediately pay the Beneficiary the amount applied to the Annuity Option in a lump sum.
Additional Option:
You may use the Contract Value to purchase any annuity contract that we offer on the date you elect this option.
When selecting an Annuity Option, you should bear in mind that the amount of each payment for a certain period compared to the amount of each payment for life (either with or without a certain period) depends on the length of the certain period chosen and the life expectancy of the Annuitant(s). The longer the life expectancy, the lower the payments. Generally, the shorter the certain period chosen, the higher the payments. You also should consider that, assuming Annuitants with the same life expectancy, choosing Option B — Life Income Without a Certain Period will result in larger annuity payments than Option B — Life Income with a Certain Period (although the Payee will receive more payments under Option B — Life Income with a Certain Period if the Annuitant dies before the end of the certain period). You should consult your financial advisor to discuss which Annuity Option would be most appropriate for your circumstances.
At this time Protective does not allow a “partial annuitization,” i.e., we do not allow you to apply a portion of your Contract Value to an annuity option while maintaining the remaining Contract Value available for withdrawals or a surrender. However, in the future we may allow a partial annuitization subject to our then applicable rules and procedures.
Minimum Amounts
If at any time your annuity income payments are less than $20, we reserve the right to change the frequency to an interval that will result in a payment at least equal to the minimum.
Death of Annuitant or Owner After Annuity Date
In the event of the death of any Owner on or after the Annuity Date, the Beneficiary will become the new Owner. If any Owner or Annuitant dies on or after the Annuity Date and before all benefits under the Annuity Option you selected have been paid, we generally will pay any remaining portion of such benefits at least as rapidly as under the Annuity Option in effect when the Owner or Annuitant died. However, in the case of a Qualified Contract, the Required Minimum Distribution rules of Code Section 401(a)(9) may require any remaining portion of such benefits to be paid more rapidly than originally scheduled. In that regard. it is important to understand that in the case of a Qualified Contract, once annuity payments start under an Annuity Option it may be necessary to modify those payments following the Annuitant’s death in order to comply with the Required Minimum Distribution rules. See “QUALIFIED RETIREMENT PLANS, Requires Minimum Distributions Upon Your Death.” After the death of the Annuitant, any remaining payments shall be payable to the Beneficiary unless you specified otherwise before the Annuitant’s death.
FEDERAL TAX MATTERS
Introduction
The following discussion of the federal income tax treatment of the Contracts is not exhaustive, does not purport to cover all situations, and is not intended as tax advice. The federal income tax treatment of the Contracts is unclear in certain circumstances, and a qualified tax adviser should always be consulted with regard to the application of law to individual circumstances. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Department regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and judicial decisions.
This discussion does not address federal estate, gift, or generation skipping transfer taxes, or any state or local tax consequences associated with the purchase of the Contracts. In addition, the Company makes no guarantee regarding any tax treatment — federal, state or local — of any Contract or of any transaction involving a Contract.
Protective’s Tax Status
Protective is taxed as a life insurance company under the Code. The assets underlying the Contracts will be owned by Protective, and the income derived from such assets will be includible in Protective’s income for federal income tax purposes.
TAXATION OF ANNUITIES IN GENERAL
Tax Deferral During Accumulation Period
Under existing provisions of the Code (and except as described below), the Contracts should be treated as annuities and any increase in an Owner’s Contract Value is generally not taxable to the Owner or Annuitant until received, either in the form of annuity payments as contemplated by the Contracts, or in some other form of distribution.
As a general rule, Contracts held by “non-natural persons” such as a corporation, trust or other similar entity, as opposed to a natural person, are not treated as annuity contracts for federal tax purposes. The income on such Contracts (as defined in the tax law) is taxed as ordinary income that is received or accrued by the Owner during the taxable year. There are several exceptions to this general rule for Contracts held by non-natural persons. First, Contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the Contract as an agent for a natural person.
In addition, exceptions to the general rule for non-natural Contract owners will apply with respect to (1) Contracts acquired by an estate of a decedent by reason of the death of the decedent, (2) Contracts issued in connection with certain Qualified Plans, (3) Contracts purchased by employers upon the termination of certain Qualified Plans, (4) certain Contracts used in connection with structured settlement agreements, and (5) Contracts purchased with a single premium when the annuity starting date is no later than a year from purchase of the Contract and substantially equal periodic payments are made, not less frequently than annually, during the annuity period.
If the Contract’s Annuity Date occurs (or is scheduled to occur) at a time when the Annuitant has reached an advanced age, e.g., past age 95, it is possible that the Contract would not be treated as an annuity for federal income tax purposes. In that event, any increases in the Contract Value could be currently includable in the Owner’s income.
The remainder of this discussion assumes that the Contract will constitute an annuity for federal tax purposes.
Taxation of Withdrawals and Surrenders
In the case of withdrawal, amounts received generally are includible in income to the extent the Owner’s Contract Value before the withdrawal exceeds his or her “investment in the contract” (defined below). All amounts includible in income with respect to the Contract are taxed as ordinary income. No amounts are taxed at the special lower rates applicable to long-term capital gains and corporation dividends. In the case of a surrender, amounts received are includible in income to the extent they exceed the “investment in the contract.” For these purposes the “investment in the contract” at any time equals the premiums paid under the Contract (to the extent such premium payments were neither deductible when made nor excludable from income as, for example, in the case of certain contributions to Qualified Contracts) less any amounts previously received from the Contract which were not includible in income.
Other than in the case of Qualified Contracts (which generally cannot be assigned or pledged), any assignment or pledge of (or agreement to assign or pledge) any portion of the Contract Value is treated as a withdrawal of such amount or portion. If the entire Contract Value is assigned or pledged, subsequent increases in the Contract Value are also treated as withdrawals for as long as the assignment or pledge remains in place. The investment in the contract is increased by the amount included in income with respect to such assignment or pledge, though it is not affected by any other aspect of the assignment or pledge (including its release). If an Owner transfers a Contract without adequate consideration to a person other than the Owner’s spouse (or to a former spouse incident to divorce), the Owner will be taxed on the difference between the “cash surrender value” and the investment in the contract at the time of transfer. In such case, the transferee’s investment in the contract will be increased to reflect the increase in the transferor’s income. The exceptions for transfers to the Owner’s spouse (or to a former spouse) are limited to individuals that are treated as spouses under federal law.
There is some uncertainty regarding the treatment of the Market Value Adjustment for purposes of determining the amount includible in income as a result of any withdrawal, assignment or pledge or transfer without adequate
consideration. Congress has given the Internal Revenue Service (“IRS”) regulatory authority to address this uncertainty.
However, as of the date of this Prospectus, the IRS has not issued any regulations addressing these determinations. At this time, the Company plans to determine for tax reporting purposes the amount includible in income as a result of any withdrawal, assignment or pledge or transfer without adequate consideration without regard to the Market Value Adjustment. The IRS could disagree with this treatment with the result that, depending on the circumstance, the Owner could have either more or less income than reported by the Company.
Withdrawals, surrenders and amounts includible in income as a result of an assignment, pledge, or transfer without adequate consideration may be subject to a 10% additional tax. (See “Additional Tax on Premature Distributions.”) Withdrawals and surrenders may be subject to federal income tax withholding. (See “Federal Income Tax Withholding.”)
Taxation of Annuity Payments
Normally, the portion of each annuity income payment equal to the excess of the payment over the excludable amount is the taxable amount. The excludable amount is the amount determined by multiplying (1) the payment by (2) the ratio of the investment in the contract, adjusted for any period certain or refund feature, to the total expected value of annuity payments for the term of the Contract (determined under Treasury Department regulations) which take into account the Annuitant’s life expectancy and the form of annuity benefit selected.
Once the total amount of the investment in the contract is excluded using this ratio, annuity income payments will be fully taxable. If annuity income payments cease because of the death of the Annuitant and before the total amount of the investment in the contract is recovered, the unrecovered amount generally will be allowed as a deduction.
There may be special income tax issues present in situations where the Owner and the Annuitant are not the same person and are not married to one another within the meaning of federal law. A tax advisor should be consulted in these situations.
Annuity income payments may be subject to a 10% additional tax. (See “Additional Tax on Premature Distributions.”) Annuity income payments also may be subject to federal income tax withholding. (See “Federal Income Tax Withholding.”)
Taxation of Death Benefit Proceeds
Prior to the Annuity Date, amounts may be distributed from a Contract because of the death of an Owner or, in certain circumstances, the death of the Annuitant. Such Death Benefit proceeds are includible in income as follows:
(1)if distributed in a lump sum, they are taxed in the same manner as a surrender, as described above, or
(2)if distributed under an Annuity Option, they are taxed in the same manner as annuity payments, as described above.
After the Annuity Date, if a guaranteed period exists under a life income Annuity Option and the Annuitant dies before the end of that period, payments made to the Beneficiary for the remainder of that period are includible in income as follows:
(1)if received in a lump sum, they are includible in income to the extent that they exceed the unrecovered investment in the contract at that time, or
(2)if distributed in accordance with the existing Annuity Option selected, they are fully excludable from income until the remaining investment in the contract is deemed to be recovered, and all annuity income payments thereafter are fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding. (See “Federal Income Tax Withholding”.)
Additional Tax on Premature Distributions
Where a Contract has not been issued in connection with a Qualified Plan, there generally is a 10% additional tax on the taxable amount of any payment from the Contract (e.g., withdrawals, surrenders, annuity income payments, death benefits, assignments, pledges, and gratuitous transfers) that is includible in income unless the payment is:
(a)received on or after the Owner reaches age 591/2;
(b)attributable to the Owner becoming disabled (as defined in the tax law);
(c)made on or after the death of the Owner or, if an Owner is not an individual, on or after the death of the primary annuitant (as defined in the tax law);
(d)made as part of a series of substantially equal periodic payments (not less frequently than annually) for the life (or life expectancy) of the Owner or the joint lives (or joint life expectancies) of the Owner and a designated beneficiary (as defined in the tax law); or
(e)made under a Contract purchased with a single premium when the annuity starting date is no later than a year from purchase of the Contract and substantially equal periodic payments are made, not less frequently than annually, during the annuity period.
Certain other exceptions to the 10% additional tax not described herein may also apply. (Similar rules, described below, generally apply in the case of Qualified Contracts.)
Aggregation of Contracts
In certain circumstances, the IRS may determine the amount of an annuity income payment, a withdrawal, or a surrender from a Contract that is includible in income by combining some or all of the annuity contracts owned by an individual that were not issued in connection with a Qualified Plan. For example, if a person purchases a Contract offered by this Prospectus and also purchases at approximately the same time an immediate annuity issued by Protective or its affiliates, the IRS may treat the two contracts as one contract. In addition, if a person purchases two or more deferred annuity contracts from the same insurance company (or its affiliates) during any calendar year, all such contracts will be treated as one contract for purposes of determining whether any payment not received as an annuity (including withdrawals and surrenders prior to the Annuity Date) is includible in income. The effects of such aggregation are not always clear; however, it could affect the amount of a withdrawal, a surrender, or an annuity income payment that is taxable and the amount which might be subject to the 10% additional tax described above.
Exchanges of Annuity Contracts
We may issue the Contract in exchange for all or part of another annuity contract that you own. Such an exchange will be tax free if certain requirements are satisfied. If you exchange all of another annuity contract and the exchange is tax free, your investment in the contract immediately after the exchange will generally be the same as that of the annuity contract exchanged, increased by any additional Purchase Payment made as part of the exchange. If you exchange part of another annuity contract and the exchange is tax free, your investment in the contract immediately after the exchange will generally be increased by a pro-rata portion of the investment in the contract exchanged. In either case, your Contract Value immediately after the exchange may exceed your investment in the contract. That excess may be includible in income should amounts subsequently be withdrawn or distributed from the Contract (e.g., as withdrawal, surrender, annuity income payment, or death benefit).
If you exchange part of an existing contract for the Contract, and within 180 days of the exchange you receive a payment other than certain annuity payments (e.g., you make a withdrawal) from either contract, the exchange may not be treated as a tax free exchange. Rather, some or all of the amount exchanged into the Contract could be includible in your income and subject to a 10% additional tax.
You should consult your tax advisor in connection with an exchange of all or part of an annuity contract for the Contract, especially if you may make a withdrawal from either contract within 180 days after the exchange.
Medicare Hospital Insurance Tax on Certain Distributions
A Medicare hospital insurance tax of 3.8% will apply to some types of investment income. This tax will apply to all taxable distributions from non-Qualified Contracts. This tax only applies to taxpayers with “modified adjusted gross income” above $250,000 in the case of married couples filing jointly or a qualifying widow(er) with dependent child, $125,000 in the case of married couples filing separately, and $200,000 for all others. For more information regarding this tax and whether it may apply to you, please consult your tax advisor.
Loss of Interest Deduction Where Contracts Are Held by or for the Benefit of Certain Non-natural Persons
In the case of Contracts issued after June 8, 1997 to a non-natural taxpayer (such as a corporation or a trust), or held for the benefit of such an entity, that entity’s general interest deduction under the Code may be limited. More specifically, a portion of its otherwise deductible interest may not be deductible by the entity, regardless of whether the interest relates to debt used to purchase or carry the Contract. However, this interest deduction disallowance does not affect Contracts where the income on such Contracts is treated as ordinary income that the Owner received or accrued during the taxable year. Entities that are considering purchasing the Contract, or entities that will be Beneficiaries under a Contract, should consult a tax advisor.
QUALIFIED RETIREMENT PLANS
In General
The Contracts are also offered for use in connection with certain types of retirement plans which receive favorable treatment under the Code. Those who are considering the purchase of a Contract for use in connection with a Qualified Plan should consider, in evaluating the suitability of the Contract, that the Contract requires a Purchase Payment of at least $25,000 and that no Purchase Payments may be made after the first year. Many Qualified Plans provide the same type of tax deferral as provided by the Contract. The Contract, however, provides benefits and features not provided by such retirement plans and employee benefit plans alone. Numerous special tax rules apply to participants in Qualified Plans and to Contracts used in connection with Qualified Plans. Therefore, no attempt is made in this prospectus to provide more than general information about the use of the Contracts with the various types of Qualified Plans. State income tax rules applicable to Qualified Plans and Qualified Contracts often differ from federal income rules, and this prospectus does not describe any of these differences. Those who intend to use the Contract in connection with Qualified Plans should seek competent advice.
The tax rules applicable to Qualified Plans vary according to the type of plan and the terms and conditions of the plan itself. For example, both the amount of the contribution that may be made, and the tax deduction or exclusion that you and/or your employee may claim for such contribution, are limited under Qualified Plans and vary with the type of plan. Also, in the case of withdrawals, surrenders, and annuity income payments under Qualified Contracts, there may be no “investment in the contract” and the total amount received may be taxable.
Temporary Rules under the CARES Act
On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act included temporary relief during 2020 from certain of the tax rules applicable to IRAs and qualified plans. For example, the CARES Act modified the required minimum distribution rules for 2020 and provided more favorable tax treatment for certain qualified “coronavirus-related distributions” in 2020. Some of this temporary relief may continue to impact federal income taxes for years after 2020. You should consult with a tax and/or legal adviser to determine if any CARES Act relief you may have received affects your taxes for years after 2020.
Required Minimum Distributions
In general. In the case of Qualified Contracts, rules imposed by Section 401(a)(9) of the Code determine the time at which distributions must commence to you or your beneficiary and the manner in which the minimum amount of the distribution is computed (the “RMD” rules). Legislation passed in 2019 (the “SECURE Act”) and in 2022 (the “SECURE 2.0 Act”) changed a number of the RMD rules applicable to distributions after the death of a Qualified Contact owner. The changes were generally effective for deaths occurring after 2019, and the changes made by the SECURE 2.0 Act are generally effective for deaths occurring after 2022. This discussion describes only the new RMD rules implemented by the SECURE and SECURE 2.0 Acts and not those of prior law, which remain applicable in certain circumstances. Failure to comply with the RMD rules may result in the imposition of an excise tax. This excise tax generally equals 25% of the amount by which the minimum required distribution exceeds the actual distribution from the Qualified Plan. The excise tax is reduced to 10% if a taxpayer receives a distribution, during the “correction window,” of the amount of the missed RMD from the same plan to which the excise tax relates and satisfies certain other conditions.
When distributions must begin. In general. In the case of Qualified Contracts, rules imposed by Section 401(a)(9) of the Code determine the time at which distributions must commence to you or your beneficiary and the manner in which the minimum amount of the distribution is computed (the “RMD” rules). Legislation passed in 2019 (the “SECURE Act”) and in 2022 (the “SECURE 2.0 Act”) changed a number of the RMD rules applicable to distributions after the death of a Qualified Contact owner. The changes were generally effective for deaths occurring after 2019, and the changes made by the SECURE 2.0 Act are generally effective for deaths occurring after 2022. This discussion describes only the new RMD rules implemented by the SECURE and SECURE 2.0 Acts and not those of prior law, which remain applicable in certain circumstances. Failure to comply with the RMD rules may result in the imposition of an excise tax. This excise tax generally equals 25% of the amount by which the minimum
required distribution exceeds the actual distribution from the Qualified Plan. The excise tax is reduced to 10% if a taxpayer receives a distribution, during the “correction window,” of the amount of the missed RMD from the same plan to which the excise tax relates and satisfies certain other conditions.
| | | | | |
If you were born… | Your “applicable age” is… |
Before July 1, 1949 | 70½ |
After June 30, 1949 and before 1951 | 72 |
After 1950 and before 1960* | 73* |
After 1958* | 75* |
*If you were born in 1959, you should consult your tax adviser regarding your “applicable age,” because it is not clear whether your “applicable age” is age 73 or age 75.
Annual distribution amount. If you choose to take RMDs in the form of withdrawals, the annual amount to be distributed is determined by dividing your Contract’s account value by the applicable factor from IRS life expectancy tables. The death benefit under the Contract, the PayStream Plus Annuitization Benefit, the Waiver of Withdrawal Charge and Market Value Adjustment for Unemployment, the Waiver of Withdrawal Charge and Market Value Adjustment for Terminal Condition or Nursing Facility Confinement, and certain other benefits of your Contract may increase the amount of the minimum required distribution that must be taken from your Contract. If your Contract is an IRA, Protective Life will calculate your RMDs during your lifetime if you ask us to do so.
Death before your required beginning date. In general, if you die before your required beginning date, and you have a designated beneficiary, any remaining interest in your Contract must be distributed within 10 years after your death, unless the designated beneficiary is an “eligible designated beneficiary” (“EDB”). A designated beneficiary is any individual designated as a beneficiary by the IRA owner or an employee-annuitant. An EDB is any designated beneficiary who is (1) your surviving spouse, (2) your minor child, (3) disabled, (4) chronically ill, or (5) an individual not more than 10 years younger than you. An EDB (other than a minor child) can generally stretch distributions over their life or life expectancy if payments begin within a year of your death. Special rules apply to EDBs who are minors and beneficiaries that are not individuals.
Death on or after your required beginning date. In general, if you die on or after your required beginning date, and you have a designated beneficiary who is not an EDB, any remaining interest in your Contract must continue to be distributed over the longer of your remaining life expectancy and your beneficiary’s life expectancy (or more rapidly), but all amounts must be distributed within 10 years of your death. If your beneficiary is an EDB (other than a minor child), distributions must continue over the longer of your remaining life expectancy and the EDB’s life expectancy (or more rapidly), but all amounts must be distributed within 10 years of the EDB’s death. Special rules apply to EDBs who are minors, EDBs who are older than the Owner, and beneficiaries that are not individuals.
Spousal continuation. If your beneficiary is your spouse, your surviving spouse can delay the application of the post-death distribution requirements until after their death by transferring the remaining interest tax-free to your surviving spouse’s own IRA, or by treating your IRA as your surviving spouse’s own IRA.
Annuity payments. If you choose to take some or all of your RMDs in the form of annuity payments rather than withdrawals, the payments may be made over your life, your life and the life of your designated beneficiary, for a certain period, or for life with or without a period certain. If you commence taking distributions in the form of an annuity that can continue after your death, such as in the form of a joint and survivor annuity or an annuity with a guaranteed period of more than 10 years, any distributions after your death that are scheduled to be made beyond the applicable distribution period imposed under the new law might need to be accelerated at the end of that period (or otherwise modified after your death if permitted under federal tax law and by Protective Life) in order to comply with the post-death distribution requirements.
The minimum distribution requirements are complex and unclear in numerous respects. The manner in which these requirements will apply will depend on your particular facts and circumstances. You may wish to consult a professional tax adviser for tax advice as to your particular situation.
Additional Tax on Premature Distributions
There may be 10% additional tax on the taxable amount of payments from Qualified Contracts. In the case of an IRA, exceptions provide that the additional tax does not apply to a payment:
(a)received on or after the Owner reaches age 591/2;
(b)received on or after the Owner’s death or because of the Owner’s disability (as defined in the tax law); or
(c)made as part of a series of substantially equal periodic payments (not less frequently than annually) for the life (or life expectancy) of the Owner or for the joint lives (or joint life expectancies) of the Owner and the Owner’s designated beneficiary (as defined in the tax law).
These exceptions generally apply to taxable distributions from other Qualified Plans (although, in the case of plans qualified under sections 401 and 403, exception “c” above for substantially equal periodic payments applies only if the Owner has separated from service). Certain other exceptions to the 10% additional tax not described herein also may apply. Please consult your tax adviser.
Other Considerations
When issued in connection with a Qualified Plan, we will amend a Contract as generally necessary to conform to the requirements of the plan. However, Owners, Annuitants, and Beneficiaries are cautioned that the rights of any person to any benefits under Qualified Plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the Contract. In addition, the Company shall not be bound by terms and conditions of Qualified Plans to the extent such terms and conditions contradict the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in connection with which the Company will generally issue a Contract.
Individual Retirement Accounts and Annuities
Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an IRA. If you use this Contract in connection with an IRA, the Owner and Annuitant generally must be the same individual and generally may not be changed. IRAs are subject to limits on the amounts that may be contributed and deducted, on the persons who may be eligible, and on the time when distributions may commence. Also, subject to the direct rollover and mandatory withholding requirements (discussed below), distributions from certain Qualified Plans may be “rolled over” on a tax-deferred basis into an IRA.
Special rules apply to conversions from IRAs to Roth IRAs, and recharacterizations from one type of IRA to another type of IRA. A tax advisor should be consulted in these situations.
The Contract may not, however, be used in connection with a “Coverdell Education Savings Account” (formerly known as an “Education IRA”) under Section 530 of the Code, a “Simplified Employee Pension” under Section 408(k) of the Code, or as a “SIMPLE IRA” under Section 408(p) of the Code.
Roth IRAs
Section 408A of the Code permits eligible individuals to contribute to a type of IRA known as a “Roth IRA.” Roth IRAs are generally subject to the same rules as non-Roth IRAs, but differ in several respects. Among the differences is that, although contributions to a Roth IRA are not deductible, “qualified distributions” from a Roth IRA will be excludable from income.
A qualified distribution is a distribution that satisfies two requirements:
•First, the distribution must be made in a taxable year that is at least five years after the first taxable year for which a contribution was made to any Roth IRA established for the Owner.
•Second, the distribution must be either:
1)made after the Owner reaches age 591/2;
2)made after the Owner’s death;
3)attributable to the Owner being disabled; or
4)a qualified first-time homebuyer distribution within the meaning of Section 72(t)(2)(F) of the Code.
In addition, distributions from Roth IRAs need not commence during the Owner’s lifetime. A Roth IRA may accept a “qualified rollover contribution” from (1) a non-Roth IRA, (2) a “designated Roth account” maintained under a Qualified Plan, and (3) Certain Qualified Plans of eligible individuals. Special rules apply to rollovers to Roth IRAs from Qualified Plans and designated Roth accounts under Qualified Plans. You should seek competent advice before making such a rollover.
A conversion of a traditional IRA to a Roth IRA, and a rollover from any other eligible retirement plan to a Roth IRA, made after December 31, 2017, cannot be recharacterized as having been made to a traditional IRA.
IRA to IRA Rollovers and Transfers
A rollover contribution is a tax-free movement of amounts from one IRA to another within 60 days after you receive the distribution. In particular, a distribution from a non-Roth IRA generally may be rolled over tax-free within 60 days to another non-Roth IRA, and a distribution from a Roth IRA generally may be rolled over tax-free within 60 days to another Roth IRA. A distribution from a Roth IRA may not be rolled over (or transferred) tax-free to a non-Roth IRA.
A rollover from any one of your IRAs (including IRAs you have with another company) to another IRA is allowed only once within a one-year period. This limitation applies on an aggregate basis and applies to all types of your IRAs, meaning that you cannot make an IRA to IRA rollover if you have made such a rollover involving any of your IRAs in the preceding one-year period. For example, a rollover between your Roth IRAs would preclude a separate rollover within the one-year period between your non-Roth IRAs, and vice versa. The one-year period begins on the date that you receive the IRA distribution, not the date it is rolled over into another IRA.
If the IRA distribution does not satisfy the rollover rules, it may be (1) taxable in the year distributed, (2) subject to a 10% tax on early distributions, and (3) treated as a regular contribution to the recipient IRA, which could result in an excess contribution, subject to an additional excise tax.
If you inherit an IRA from your spouse, you generally can roll it over into an IRA established for you, or you can choose to make the inherited IRA your own. If you inherit an IRA from someone other than your spouse, you cannot roll it over, make it your own, or allow it to receive rollover contributions.
A rollover from one IRA to another is different from a direct trustee-to-trustee transfer of your IRA assets from one IRA trustee to another IRA trustee. A “trustee-to-trustee” transfer is not considered a rollover and is not subject to the 60-day rollover requirement or the one rollover per year rule. In addition, a rollover between IRAs is different from a direct rollover from certain Qualified Plans to a non-Roth IRA and a “qualified rollover contribution” to a Roth IRA.
Pension and Profit-Sharing Plans
Section 401(a) of the Code permits employers to establish various types of tax-favored retirement plans for employees. The Self-Employed Individuals’ Tax Retirement Act of 1962, as amended, commonly referred to as “H.R. 10” or “Keogh,” permits self-employed individuals also to establish such tax-favored retirement plans for themselves and their employees. Such retirement plans may permit the purchase of the Contract in order to provide benefits under the plans. These types of plans may be subject to rules under Sections 401(a)(11) and 417 of the Code that provide rights to a spouse or former spouse of a participant. In such a case, the participant may need the consent of the spouse or former spouse to change annuity options or to make a withdrawal or surrender of the Contract.
Pension and profit sharing plans are also subject to nondiscrimination rules. The nondiscrimination rules generally require that benefits, rights or features of the plan not discriminate in favor of highly compensated employees. In evaluating whether the Contract is suitable for purchase in connection with such a plan, you should consider the extent to which certain aspects of the Contract, e.g., the $25,000 minimum initial Purchase Payment requirement, may affect the plan’s compliance with applicable nondiscrimination requirements. Violation of these rules can cause loss of the plan’s tax favored status under the Code. Employers intending to use the Contract in connection with such plans should seek competent advice.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations
Section 457 of the Code permits employees of state and local governments and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. Generally, a Contract purchased by a state or local government or a tax-exempt organization under a Section 457 plan will not be treated as an annuity contract for federal income tax purposes. The Contract will be issued in connection with a Section 457 deferred compensation plan sponsored by a state or local government only if the plan has established a trust to hold plan assets, including the Contract.
Direct Rollovers
If your Contract is used in connection with a pension or profit-sharing plan qualified under Section 401(a) of the Code, or is used with an eligible deferred compensation plan that has a government sponsor and that is qualified under Section 457(b) of the Code, any “eligible rollover distribution” from the Contract will be subject to direct rollover and mandatory withholding requirements. An eligible rollover distribution generally is any taxable distribution from a qualified pension plan under Section 401(a) of the Code, or an eligible Section 457(b) deferred compensation plan that has a government sponsor, excluding certain amounts (such as minimum distributions required under Section 401(a)(9) of the Code, distributions which are part of a “series of substantially equal periodic payments” made for life or a specified period of 10 years or more, or hardship distributions as defined in the tax law).
Under these requirements, federal income tax equal to 20% of the eligible rollover distribution will be withheld from the amount of the distribution. Unlike withholding on certain other amounts distributed from the Contract, discussed below, you cannot elect out of withholding with respect to an eligible rollover distribution. However, this 20% withholding will not apply if, instead of receiving the eligible rollover distribution, you elect to have it directly transferred to certain eligible retirement plans (such as an IRA). Prior to receiving an eligible rollover distribution, you will receive a notice (from the plan administrator or the Company) explaining generally the direct rollover and mandatory withholding requirements and how to avoid the 20% withholding by electing a direct transfer.
FEDERAL INCOME TAX WITHHOLDING
In General
Protective will withhold and remit to the U.S. government a part of the taxable portion of each distribution made under a Contract, including amounts that escheat to the state, unless the distributee notifies Protective at or before the time of the distribution that he or she elects not to have any amounts withheld. In certain circumstances, Protective may be required to withhold tax. The withholding rates applicable to the taxable portion of periodic annuity payments (other than the eligible rollover distributions) are the same as the withholding rates generally applicable to payments of wages. A 10% withholding rate is applicable to the taxable portion of non-periodic payments (including a surrender or withdrawal prior to the Annuity Date) and conversions of, or rollovers from, non-Roth IRAs and Qualified Plans to Roth IRAs. Regardless of whether you elect not to have federal income tax withheld, you are still liable for payment of federal income tax on the taxable portion of the payment. As described above, the withholding rate applicable to eligible rollover distributions is 20%.
Nonresident Aliens and Foreign Corporations
The discussion above provides general information regarding federal withholding tax consequences to annuity contract purchasers or beneficiaries that are U.S. citizens or residents. Purchasers or beneficiaries that are not U.S. citizens or residents will generally be subject to U.S. federal withholding tax on taxable distributions from annuity contracts at a 30% rate, unless a lower treaty rate applies. Prospective purchasers that are not U.S. citizens or residents are advised to consult with a tax advisor regarding federal tax withholding with respect to the distributions from a Contract.
FATCA Withholding
In order for the Company to comply with income tax withholding and information reporting rules which may apply to annuity contracts, the Company may request documentation of “status” for tax purposes. “Status” for tax purposes generally means whether a person is a “U.S. person” or a foreign person with respect to the United States; whether a person is an individual or an entity; and if an entity, the type of entity. Status for tax purposes is best documented on the appropriate IRS Form or substitute certification form (IRS Form W-9 for a U.S. person or the appropriate type of IRS Form W-8 for a foreign person). If the Company does not have appropriate certification or documentation of a person’s status for tax purposes on file, it could affect the rate at which the Company is required to withhold income tax. Information reporting rules could apply not only to specified transactions, but also to contract ownership. For example, under the Foreign Account Tax Compliance Act (“FATCA”), which applies to certain U.S.-source payments, and similar or related withholding and information reporting rules, the Company may be required to report contract values and other information for certain contractholders. For this reason the Company may require appropriate status documentation at purchase, change of ownership, and affected payment transactions, including death benefit payments. FATCA and its related guidance is extraordinarily complex and its effect varies considerably by type of payor,type of payee and type of distributee or recipient.
THE “NON-UNITIZED” SEPARATE ACCOUNT
We hold assets in a “non-unitized”separate account we have established under the Tennessee Insurance Law to support our obligations under the Indexed Strategies. We own the assets of the separate account, as well as any favorable investment performance on those assets. As owner of the Contract, you do not participate in the performance of assets held in the separate account and do not have any direct claim on them. The separate account is not registered under the Investment Company Act of 1940. We are obligated to pay all money we owe under the Contract. If the obligation exceeds the assets of the non-unitized separate account, funds will be transferred to the non-unitized separate account from the general account. We may, subject to state law that applies, transfer all assets allocated to the separate account to our general account.
The assets in this separate account are subject to our general liabilities from business operations and are chargeable with those liabilities. The assets in the separate account are subject to claims by our creditors. It is important to note that there is no guarantee that we will always be able to meet our claims-paying obligations, and that there are risks to purchasing any insurance product. For this reason, you should consider our financial strength and claims-paying ability to meet our obligations under the Contract when purchasing a Contract and making investment decisions under the Contract. We encourage both existing and prospective Contract owners to read and understand our financial statements. We prepare our financial statements on a statutory basis, as required by state regulators.
Our current plans are to invest separate account assets in fixed-income obligations, including corporate bonds, mortgage-backed and asset-backed securities, and government and agency issues. We may also invest in interest rate swaps, options and futures. Although the above generally describes our plans for investing the assets supporting our obligations under the Indexed Strategy, we are not obligated to invest those assets according to any particular plan except as we may be required to by state insurance laws.
LEGAL PROCEEDINGS
Advance Trust & Life Escrow Services, LTA, as Securities Intermediary of Life Partners Position Holder Trust v. Protective Life Insurance Company, Case No. 2:18-CV-01290, is a putative class action that was filed on August 13, 2018 in the United States District Court for the Northern District of Alabama. Plaintiff alleges that Protective Life Insurance Company required policyholders to pay unlawful and excessive cost of insurance (“COI”) charges. Plaintiff seeks to represent all owners of universal life and variable universal life policies issued or administered by the Company or its predecessors that provide that cost of insurance rates are to be determined based on expectations of future mortality experience. Plaintiff seeks class certification, compensatory damages, pre-judgment and post-judgment interest, costs, and other unspecified relief. On August 8, 2022, the US District Court granted the Company’s Motion for Judgment on the Pleadings, concluding Protective Life has no contractual duty to lower COI rates if expectations as to future mortality improve. This favorable decision was appealed by the Plaintiff to the Eleventh Circuit Court of Appeals on August 26, 2022. Protective Life will continue vigorously defending this matter and cannot predict the outcome of or reasonably estimate the possible loss or range of loss that might result from this litigation.
The Company is currently defending two putative class actions (Beverly Allen v. Protective Life Insurance Company, Civil Action No. 1:20-cv-00530-JLT (E.D. Cal. filed Apr. 14, 2020) and Janice Schmidt v. Protective Life Insurance Company, et al., Civil Action No. 1:21-cv-01784-SAB (E.D. Cal. filed Dec. 17, 2021)) in which the plaintiffs claim that defendants’ alleged failure to comply with certain California statutes which address contractual grace periods and lapse notice requirements for certain life insurance policies requires that these policies remain in force. The plaintiffs seek unspecified monetary damages and injunctive relief. No class has been certified in either putative class action. The Company maintains various defenses to the merits of the plaintiffs’ claims and to class certification. However, the Company cannot predict the outcome of or reasonably estimate the possible loss or range of loss that might result from this litigation.
To the knowledge and in the opinion of management, there are no other material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of our properties is the subject.
EXPERTS
The statutory financial statements and financial statement schedules of Protective Life Insurance Company as of December 31, 2022 and 2021, and for each of the years in the three-year period ended December 31, 2022, have been included herein in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The audit report covering the December 31, 2022 statutory financial statements includes explanatory language that states that the financial statements are prepared by Protective Life Insurance Company using statutory accounting practices prescribed or permitted by the Department of Commerce and Insurance of the State of Tennessee, which is a basis of accounting other than U.S. generally accepted accounting principles. Accordingly, the audit report states that the financial statements are not intended to be and, therefore, are not presented fairly in accordance with U.S. generally accepted accounting principles and further states that those financial statements are presented fairly, in all material respects, in accordance with statutory accounting practices prescribed or permitted by the Department of Commerce and Insurance of the State of Tennessee.
The business address for KPMG LLP is 420 20th Street North, Suite 1800, Birmingham, Alabama 35203.
LEGAL MATTERS
Eversheds Sutherand (US) LLP of Washington, D.C. has provided advice on certain matters relating to the applicability of federal securities laws to the Contracts.
REGISTRATION STATEMENT
A Registration Statement has been filed with the United States Securities and Exchange Commission (the “SEC” under the Securities Act of 1933, as amended, with respect to the Contracts. This Prospectus does not contain all information set forth in the Registration Statement, its amendments and exhibits, to all of which reference is made for further information concerning Protective Life and the Contracts. Statements contained in this Prospectus as to the content of the Contracts and other legal instruments are summaries. For a complete statement of the terms thereof, reference is made to the instruments filed as exhibits to the Registration Statement.
The SEC maintains a web site that contains the complete Registration Statement, including the instruments filed as exhibits to the Registration Statement, and other information that we file electronically pursuant to EDGAR under CIK No. 0000310826. The address of the site is http://www.sec.gov.
You can also review and copy any materials filed with the SEC at its Public Reference Room at 100 F Street, NE., Washington D.C., 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
GENERAL MATTERS
Reliability of Communications System
The internet and telephone systems may not always be available. Any computer or telephone system, whether it is yours, your service providers’, your registered representative’s, or ours, can experience unscheduled outages or slowdowns for a variety of reasons. Such outages or delays may delay or prevent our processing of your request. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. If you experience problems, you can make your transaction request by writing to us.
Suspension of Contracts
If mandated under applicable law, we may be required to reject a Purchase Payment. We also may be required to provide additional information about your account to government regulators or law enforcement authorities. In addition, we may be required to block an Owner’s account and thereby refuse to process any request for transfers,
withdrawals, surrenders, or death benefits until instructions are received from the appropriate regulator or law enforcement authorities.
Error in Age or Gender
When a benefit of the Contract is contingent upon any person’s age or gender, we may require proof of such. We may suspend payments until we receive proof. When we receive satisfactory proof, we will make the payments which were due during the period of suspension. Where the use of unisex mortality rates is required, we will not determine or adjust benefits based upon gender.
If after we receive proof of age and gender (where applicable), we determine that the information you furnished was not correct, we will adjust any benefit under this Contract to that which would be payable based upon the correct information. If we have underpaid a benefit because of the error, we will make up the underpayment in a lump sum. If the error resulted in an overpayment, we will deduct the amount of the overpayment from any current or future payment due under the Contract. We will deduct up to the full amount of any current or future payment until the overpayment has been fully repaid. Underpayments and overpayments will bear interest at an annual effective interest rate of 3% when permitted by the state of issue.
Incontestability
We will not contest the Contract.
Non-Participation
The Contract is not eligible for dividends and will not participate in Protective Life’s surplus or profits.
Assignment or Transfer of a Contract
You have the right to assign or transfer a Contract if it is permitted by law. Generally, you do not have the right to assign or transfer a Qualified Contract. We do not assume responsibility for any assignment or transfer. Any claim made under an assignment or transfer is subject to proof of the nature and extent of the assignee’s or transferee’s interest before we make a payment. Assignments and transfers have federal income tax consequences. An assignment or transfer may result in the Owner recognizing taxable income. (See “Taxation of Annuities in General, Assignments, Pledges and Gratuitous Transfers” in the prospectus.)
Notice
All instructions and requests to change or assign the Contract must be in writing in a form acceptable to us, signed by the Owner(s), and received at our Administrative Office. The instruction, change or assignment will relate back to and take effect on the date it was signed, except we will not be responsible for following any instruction or making any change or assignment before we receive it.
Modification
No one is authorized to modify or waive any term or provision of this Contract unless we agree to the modification or waiver in writing and it is signed by our President, Vice-President or Secretary. We reserve the right to change or modify the provisions of this Contract to conform to any applicable laws, rules or regulations issued by a government agency, or to assure continued qualification of the Contract as an annuity contract under the Code. We will send you a copy of the endorsement that modifies the Contract, and where required we will obtain all necessary approvals, including that of the Owner(s).
Reports
At least annually prior to the Annuity Date, we will send to you at the address contained in our records a report showing the current Contract Value and any other information required by law.
Settlement
Benefits due under this Contract are payable from our Administrative Office. You may apply the settlement proceeds to any payout option we offer for such payments at the time you make the election. Unless directed otherwise in writing, we will make payments according to the Owner’s instructions as contained in our records at the time we make the payment. We shall be discharged from all liability for payment to the extent of any payments we make.
Receipt of Payment
If any Owner, Annuitant, Beneficiary or Payee is incapable of giving a valid receipt for any payment, we may make such payment to whomever has legally assumed his or her care and principal support. Any such payment shall fully discharge us to the extent of that payment.
Protection of Proceeds
To the extent permitted by law and except as provided by an assignment, no benefits payable under this Contract will be subject to the claims of creditors.
Minimum Values
The values available under the Contract are at least equal to the minimum values required in the state where the Contract is delivered.
Application of Law
The provisions of the Contract are to be interpreted in accordance with the laws of the state where the Contract is delivered, with the Code and with applicable regulations.
No Default
The Contract will not be in default if subsequent Purchase Payments are not made.
DISTRIBUTION OF THE CONTRACTS
Distribution
We have entered into an agreement (the “Agreement”) with Investment Distributors, Inc. (“IDI”) under which IDI has agreed to distribute the Contracts on a “best efforts” basis. Under the agreement, IDI serves as principal underwriter (as defined under Federal securities laws and regulations) for the Contracts. Also under the Agreement, Protective Life agreed to indemnify IDI and its officers, directors, employees and agents, for certain losses and claims that result from an untrue statement of material fact or an omission of a material fact in the registration statement for the Contracts filed under the Securities Act of 1933 or in this prospectus or any document filed under the securities laws of a State in order to qualify the Contracts for sale in the State and for losses and claims that result from a material breach of the Agreement. IDI is a Tennessee corporation and was established in 1993. IDI, a wholly-owned subsidiary of our parent company, Protective Life Corporation (“PLC”), is an affiliate of and shares the same address as Protective Life. IDI is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the Financial Industry Regulatory Authority (“FINRA”).
IDI, together with Protective Life, enters into distribution agreements with other broker-dealers, including Concourse Financial Group Securities, Inc. (formerly ProEquities, Inc.), an affiliate of Protective Life and IDI, (collectively, “Selling Broker-Dealers”) for the sale of the Contracts. Registered representatives of the Selling Broker-Dealers sell the Contracts directly to individuals and groups who have established accounts with them. Registered representatives of the Selling Broker-Dealers must be licensed as insurance agents by applicable state insurance authorities and appointed as agents of Protective in order to sell the Contracts. IDI may also offer the Contracts directly to members of certain other eligible groups or other eligible individuals.
We pay commissions and may pay additional asset-based compensation to Selling Broker-Dealers through IDI. IDI does not retain any commission payment or other amounts as principal underwriter for the Contracts. We may pay some or all of IDI’s operating and other expenses, however.
We offer the Contract on a continuous basis. While we anticipate continuing to offer the Contracts, we reserve the right to discontinue the offering at any time.
Selling Broker-Dealers
We pay commissions and may provide some form of non-cash compensation to all Selling Broker-Dealers in connection with the promotion and sale of the Contracts. A portion of any payments made to Selling Broker-Dealers may be passed on to their registered representatives in accordance with their internal compensation programs. We may use any of our corporate assets to pay commissions and other costs of distributing the Contracts, including any profit from the fees and charges imposed under the Contracts. Commissions and other incentives or payments described below are not charged directly to Contract owners. We intend to recoup commissions and other sales expenses through fees and charges deducted under the Contracts or from our general account.
Compensation Paid to All Selling Broker-Dealers. We pay commissions as a percentage of each Purchase Payment. While the amount and timing of commissions may vary depending on the distribution agreement, we do not expect them to exceed 8% of any Purchase Payment. In the normal course of business, we may also provide non-cash compensation in connection with the promotion of the Contracts, including conferences and seminars (including travel, lodging, and meals in connection therewith), and items of relatively small value, such as promotional gifts, meals, or tickets to sporting or entertainment events.
The registered representative who sells you the Contract typically receives a portion of the compensation we pay to his or her Selling Broker-Dealer, depending on the agreement between the Selling Broker-Dealer and your registered representative and the Selling Broker-Dealer’s internal compensation program. These programs may include other types of cash and non-cash compensation and other benefits. If you would like information about what your registered representative and the Selling Broker-Dealer for whom he or she works may receive in connection with your purchase of a Contract, please ask your registered representative.
Additional Compensation Paid to Selected Selling Broker-Dealers. In addition to ordinary commissions and non-cash compensation, we may pay additional asset-based compensation to selected Selling Broker-Dealers. These payments are made through IDI. These payments may be (1) additional amounts as a percentage of Annuity Deposits we receive under the Contracts and other contracts we sell, such as our variable insurance products, (2) additional “trail” commissions, which are periodic payments as a percentage of the Contract Values of the Contracts and of the Contract and policy values or variable contract values of our variable insurance products; and/or (3) marketing allowances as a percentage of fixed annuity assets under management relating to the Contracts. Some or all of these additional asset-based compensation payments may be conditioned upon the Selling Broker-Dealer producing a specified amount of new Annuity Deposits (including Purchase Payments and/or premiums for our variable insurance products) and/or maintaining a specified amount of Contract Value (including contract and policy value for our variable insurance products) with us.
The Selling Broker-Dealers to whom we pay additional asset-based compensation may provide preferential treatment with respect to our products (including the Contracts) in their marketing programs. Preferential treatment of our products by a Selling Broker-Dealer may include any or all of the following: (1) enhanced marketing of our products over non-preferred products; (2) increased access to the Selling Broker-Dealer’s registered representatives; and (3) payment of higher compensation to registered representatives for selling our products (including the Contracts) than for selling non-preferred products.
These additional asset-based compensation arrangements are not offered to all Selling Broker-Dealers. These arrangements are designed to specially encourage the sale of our products (and/or our affiliates’ products) by such Selling Broker-Dealers. The prospect of receiving, or the receipt of, additional asset-based compensation may provide Selling Broker-Dealers and/or their registered representatives with an incentive to favor sales of our Contracts over other market value adjusted annuities or other investments (as well as favoring our variable insurance products over other variable insurance products) with respect to which a Selling Broker-Dealer does not receive
additional compensation, or receives lower levels of additional compensation. You may wish to take such payment arrangements into account when considering and evaluating any recommendation relating to the Contracts. If you would like information about what your registered representative and the Selling Broker-Dealer for whom he or she works may receive in connection with your purchase of a Contract, please ask your registered representative.
We may also pay to selected Selling Broker-Dealers, including those listed above as well as others, additional compensation in the form of (1) payments for participation in meetings and conferences that include presentations about our products (including the Contracts), and (2) payments to help defray the costs of sales conferences and educational seminars for the Selling Broker-Dealers’ registered representatives.
Arrangements with Affiliated Selling Broker-Dealer. In addition to the ordinary commissions and non-cash compensation that we pay to all Selling Broker-Dealers, including Concourse Financial Group, Inc., we or our parent company, PLC, pay some of the operating and other expenses of Concourse Financial Group, Inc., such as paid-in-capital and certain overhead expenses. Additionally, employees of Concourse Financial Group, Inc. may be eligible to participate in various employee benefit plans offered by PLC.
Inquiries
You may make inquiries regarding a Contract by writing to Protective Life at its Administrative Office.
CEFLI
Protective Life Insurance Company is a member of The Compliance & Ethics Forum for Life Insurers (“CEFLI”), and as such may include the CEFLI logo and information about CEFLI membership in its advertisements. Companies that belong to CEFLI subscribe to a set of ethical standards covering the various aspects of sales and service for individually sold life insurance and annuities.
THE COMPANY
Protective Life Insurance Company (“Protective Life” or the “Company”) is a stock life insurance company founded in 1907. Protective Life is a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company and until December 31, 2022, was a wholly owned subsidiary of The Dai-ichi Life Holdings, Inc.(“Dai-ichi Life”). Effective January 1, 2023, PLC became a wholly owned subsidiary of Dai-ichi Life International Holding LLC, a godo kaisha organized under the laws of Japan and subsidiary of Dai-ichi Life (“Dai-ichi Life International”), upon the transfer of all of the outstanding shares of the PLC’s common stock from Dai-ichi Life to Dai-ichi Life International. Dai-ichi Life remains the ultimate controlling parent corporation of the Company.
The Company provides financial services primarily in the United States through the production, distribution, and administration of insurance and investment products. Protective Life is currently licensed to transact life insurance business in 49 states and the District of Columbia.
The Company’s home office is located at 2801 Highway 280 South, Birmingham, Alabama. The Company also leases administrative and marketing office space in various cities to support its operations. As of December 31, 2022, PLC and the Company had approximately 3,700 employees across our offices, of which 3,634 were full-time and 63 were part-time employees. The Company believes its people are a critical component for the Company’s long-term success. The Company has strong values and a culture that supports its ability to attract, engage, and retain key talent.
Protective Life relies on the exemption from the reporting requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), provided by Rule 12h-7 under the 1934 Act.
Our Business
The Company divides its business into several operating segments distinguished by products, channels of distribution, and other strategic distinctions. The Company's primary operating segments are Retail Life and Annuity, Acquisitions, Stable Value Products, and Asset Protection.
Retail Life and Annuity
The Retail Life and Annuity segment markets fixed universal life, indexed universal life, variable universal life, level premium term insurance, bank-owned life insurance, corporate-owned life insurance, fixed annuity, registered index linked annuity, and variable annuity products on a national basis primarily through networks of independent insurance agents and brokers, broker-dealers, financial institutions, independent distribution organizations, and affinity groups.
Acquisitions
The Acquisitions segment focuses on acquiring and servicing policies and contracts from other companies. The segment’s primary focus is on life insurance policies and annuity products that were sold to individuals. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, potential return on capital, and market dynamics. The Company expects acquisition opportunities to continue to be available. However, the Company believes it may face increased competition and evolving capital requirements that may affect the environment and the form of future acquisitions.
Policies acquired through the Acquisitions segment are typically blocks of business where no new policies are being marketed, however, some recent acquisitions have included ongoing new business activities. Ongoing new product sales written by the Company from these acquisitions are included in either the Retail Life and Annuity segment or the Asset Protection segment, depending on the transaction. As a result, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage, unless new acquisitions are made. The segment’s revenues and earnings may fluctuate from year to year depending upon the level of acquisition activity. In transactions where some marketing activity was included, the Company may cease future marketing efforts, redirect those efforts to another segment of the Company, or elect to continue marketing new policies as a component of other segments.
The Company believes that its focused and disciplined approach to the acquisition process and its experience in the assimilation, conservation, and servicing of acquired policies provides a significant competitive advantage.
Stable Value Products
The Stable Value Products segment sells fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. The segment also issues funding agreements to institutional investors and the Federal Home Loan Bank (“FHLB”) and markets guaranteed investment contracts to 401(k) and other qualified retirement savings plans. Guaranteed investment contracts are contracts which specify a return on funds for a specified period and often provide flexibility for withdrawals at book value in keeping with the benefits provided by the plan. The demand for guaranteed investment contracts is related to the relative attractiveness of the “fixed rate” investment option in a 401(k) plan compared to the equity-based investment options which may be available to plan participants. The Company also has an unregistered funding agreement-backed notes program which provides for offers of notes to both domestic and international institutional investors.
The segment’s products complement the Company’s overall asset/liability management in that the terms may be tailored to the needs of the Company as the seller of the contracts. The Company’s emphasis is on a consistent and disciplined approach to product pricing and asset/liability management, careful underwriting of early withdrawal risks, and maintaining low distribution and administration costs. Most guaranteed investment contracts and funding agreements the Company has written have maturities of one to twelve years.
Asset Protection
The Asset Protection segment markets extended service contracts, and other specialized ancillary products to protect consumers’ investments in automobiles, watercraft, powersports, and recreational vehicles. In addition, the segment markets a guaranteed asset protection product. Guaranteed asset protection products are designed to cover the difference between the scheduled loan pay-off amount and an asset’s actual cash value in the case of a total loss. Each type of specialized ancillary product protects against damage or other loss to a particular aspect of the
underlying asset. The Company previously marketed a credit life and disability product but exited that market at the beginning of 2021. The segment’s products are primarily marketed through a national network of approximately 8,250 automobile, marine, powersports, financial institutions, and recreational vehicle dealers. A network of direct employee sales representatives and general agents distribute these products to the financial institution and dealer market.
Corporate/Other
The Corporate and Other segment primarily consists of net investment income on assets supporting our equity capital, unallocated corporate overhead, and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, various financing and investment related transactions. The results of this segment may fluctuate from year to year.
Underwriting
The underwriting policies of the Company and its insurance subsidiaries are established by management. With respect to individual insurance, the Company uses information from the application, and in some cases, third party medical information providers, inspection reports, credit reports, motor vehicle records, previous underwriting records, attending physician statements and/or the results of a medical exam, to determine whether a policy should be issued as applied for, other than applied for, or rejected. Substandard risks may be referred to reinsurers for evaluation. The Company does utilize a “simplified issue” approach for certain policies. In the case of “simplified issue” policies, coverage is rejected if the responses to certain health questions contained in the application, or the applicant’s inability to make an unqualified health certification, indicate adverse health of the applicant.
The Company and its insurance subsidiaries generally require blood samples to be drawn with individual insurance applications above certain face amounts based on the applicant’s age. Blood samples are tested for a wide range of chemical values and are screened for antibodies to certain viruses. Applications also contain questions permitted by law regarding certain viruses which must be answered by the proposed insureds.
The Company utilizes an advanced underwriting system, TeleLife®, for certain product lines in its life business. TeleLife® streamlines the application process through a telephonic interview of the applicant, schedules medical exams, and accelerates the underwriting process and the ultimate issuance of a policy mostly through electronic means. The Company also introduced a streamlined underwriting approach that utilizes the TeleLife® process and noninvasive risk selection tools to approve some applications without requiring a paramedical exam or lab testing.
The Company’s maximum retention limit on directly issued business is $5,000,000 for any one life on certain of its traditional life and universal life products.
Reinsurance Ceded
The Company and its insurance subsidiaries cede life insurance to other insurance companies. The ceding insurance company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations assumed by it.
For approximately 10 years prior to mid-2005, the Company entered into reinsurance contracts in which the Company ceded approximately 90% of its newly written traditional life insurance business on a first dollar quota share basis under coinsurance contracts. In mid-2005, the Company substantially discontinued coinsuring its newly written traditional life insurance and moved to yearly renewable term reinsurance. The amount of insurance retained by the Company on any one life on traditional life insurance was $500,000 in years prior to mid-2005. In 2005, this retention amount was increased to $1,000,000 for certain policies, and during 2008, was increased to $2,000,000 for certain policies. During 2016, the retention amount was increased to $5,000,000.
For approximately 15 years prior to 2012, the Company reinsured 90% of the mortality risk on the majority of its newly written universal life insurance on a yearly renewable term basis. During 2012, the Company moved to reinsure only amounts in excess of its $2,000,000 retention, which was increased to $5,000,000 during 2016, for the majority of its newly written universal life and level premium term insurance.
Risk Management
Risk management is a critical part of the Company’s business, and the Company has adopted risk management processes in multiple aspects of its operations, including product development and management, business acquisitions, underwriting, investment management, asset-liability management, hedging, and technology. The Company’s Enterprise Risk Management office, under the direction of the Chief Risk Officer, along with other departments, management groups and committees, have responsibilities for managing different risks throughout the Company. Risk management includes the assessment of risk, a decision process which includes determining which risks are acceptable and the monitoring and management of identified risks on an ongoing basis. The primary objectives of these risk management processes are to determine the acceptable level of variations the Company experiences from its expected results and to implement strategies designed to limit such variations to these levels.
Investments
As of December 31, 2022, the Company’s investment portfolio was $63.0 billion. The types of assets in which the Company may invest are influenced by various state insurance laws which prescribe qualified investment assets. Within the parameters of these laws, the Company invests in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.
The Company invests a portion of its investment portfolio in commercial mortgage loans. As of December 31, 2022, the Company’s commercial mortgage loan holdings were $10.6 billion, $10.6 billion net of allowance for credit losses. As of December 31, 2021, our commercial mortgage loan holdings were $9.6 billion, $9.6 billion net of allowance for credit losses. The Company has specialized in making loans on credit-oriented commercial properties. The Company’s underwriting procedures relative to its commercial mortgage loan portfolio are based, in the Company’s view, on a conservative and disciplined approach. The Company concentrates on a small number of commercial real estate types associated with the necessities of life (grocery anchored and credit tenant retail, industrial, multi-family, senior living, and credit tenant and medical office). The Company believes that these asset types tend to weather economic downturns better than other commercial asset classes in which it has chosen not to participate. The Company believes this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout its history. The majority of the Company’s commercial mortgage loan portfolio was underwritten by the Company. From time to time, the Company may acquire loans in conjunction with an acquisition.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about our investment portfolio.
Ratings
Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including the Company and its insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer’s products, its ability to market its products and its competitive position.
The Company’s ratings are subject to review and change by the rating organizations at any time and without notice. A downgrade or other negative action by a rating organization with respect to the financial strength ratings of the Company and its insurance subsidiaries could adversely affect sales, relationships with distributors, the level of policy surrenders and withdrawals, the Company’s acquisitions strategy or competitive position in the marketplace, and the cost or availability of reinsurance. The rating agencies may take various actions, positive or negative, with respect to the financial strength ratings of the Company and its insurance subsidiaries, including as a result of the Company’s status as an indirect subsidiary of Dai-ichi Life.
Rating organizations also publish credit ratings for the issuers of debt securities, including PLC. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner. PLC is an important source of funding for the Company, so its credit ratings may affect the Company’s liquidity. These ratings are
important in the debt issuer’s overall ability to access credit markets and other types of liquidity. Ratings are not recommendations to buy the PLC’s securities or products. A downgrade or other negative action by a rating organization with respect to PLC’s credit rating could limit PLC’s access to capital markets or increase the cost of issuing debt, and a downgrade of sufficient magnitude, combined with other negative factors, could require PLC to post collateral. The rating organizations may take various actions, positive or negative, with respect to PLC’s debt ratings, including as a result of PLC’s status as an indirect subsidiary of Dai-ichi Life.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about our ratings.
Competition
Life and health insurance is a mature and highly competitive industry. In recent years, the industry’s life insurance sales have been relatively flat, though the aging population has increased the demand for retirement savings products. The Company encounters significant competition in all lines of business, including in the Acquisitions segment.
The Company encounters competition for sales of life insurance and retirement products from other insurance companies, many of which have greater financial resources than the Company and which may have a greater market share, offer a broader range of products, services or features, assume a greater level of risk, have lower operating or financing costs, or have lower profitability expectations. The Company also faces competition from other providers of financial services. Competition could result in, among other things, lower sales or higher lapses of existing products.
The Company’s ability to compete is dependent upon, among other things, its ability to attract and retain distributors to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain low unit costs, and its maintenance of adequate ratings from rating organizations.
As technology evolves, a comparison of a particular product of any company for a particular customer with competing products for that customer is more readily available, which could lead to increased competition as well as agent or customer behavior, including persistency, which differs from past behavior.
The Company encounters competition in its Acquisitions segment from other insurance companies as well as from other types of acquirers, including private equity investors. Many of these competitors may have greater financial resources than the Company and may be willing to assume a greater level of risk, have lower operating or financing costs, or have lower profitability expectations.
Regulation
The Company is subject to a wide variety of federal and state laws and regulations. This section provides an overview of the regulatory framework that governs our business.
State Regulation
The Company is subject to government regulation in each of the states in which it conducts business. In many instances, the regulatory models emanate from the National Association of Insurance Commissioners (“NAIC”). Such regulation is vested in state agencies having broad administrative and in some instances discretionary power dealing with many aspects of the Company’s business, which may include, among other things, premium and cost of insurance rates and increases thereto, interest crediting policy, underwriting practices, reserve requirements, marketing practices, advertising, privacy, data security, cybersecurity, policy forms, reinsurance reserve requirements, insurer use of captive reinsurance companies, acquisitions, mergers, capital adequacy, claims practices and the remittance of unclaimed property. In addition, some state insurance departments may enact rules or regulations with extra-territorial application, effectively extending their jurisdiction to areas such as permitted insurance company investments that are normally the province of an insurance company’s domiciliary state regulator.
The Company and its insurance subsidiaries are required to file periodic reports with the regulatory agencies in each of the jurisdictions in which they do business, and their business and accounts are subject to examination by such agencies at any time. Under the rules of the NAIC, insurance companies are examined periodically (generally every three to five years) by one or more of the regulatory agencies on behalf of the states in which they do business. At any given time, a number of financial and/or market conduct examinations of the Company and its subsidiaries may be ongoing. From time to time, regulators raise issues during examinations or audits for the Company and its subsidiaries that could, if determined adversely, have a material adverse impact on the Company. To date, no such insurance department examinations have produced any significant adverse findings regarding any of the Company and any of its insurance company subsidiaries.
Under the insurance guaranty fund laws in most states, insurance companies doing business in the state can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. From time to time, companies may be asked to contribute amounts beyond prescribed limits. It is possible that the Company could be assessed with respect to product lines not offered by the Company. In addition, legislation may be introduced in various states with respect to guaranty fund assessment laws related to insurance products, including long-term care insurance and other specialty products, that increases the cost of future assessments or alters future premium tax offsets received in connection with guaranty fund assessments. The Company cannot predict the amount, nature or timing of any future assessments or legislation, any of which could have a material and adverse impact on the Company’s financial condition or results of operations.
In addition, many states, including the states in which the Company and its insurance subsidiaries are domiciled, have enacted legislation or adopted regulations regarding insurance holding company systems. These laws require registration of and periodic reporting by insurance companies domiciled within the jurisdiction which control or are controlled by other corporations or persons so as to constitute an insurance holding company system. These laws also affect the acquisition of control of insurance companies as well as transactions between insurance companies and companies controlling them. Most states, including Tennessee, where the Company is domiciled, require administrative approval of the acquisition of control of an insurance company domiciled in the state or the acquisition of control of an insurance holding company whose insurance subsidiary is incorporated in the state. In Tennessee, the acquisition of 10% of the voting securities of an entity is deemed to be the acquisition of control for the purpose of the insurance holding company statute and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition.
The states in which the Company and its insurance subsidiaries are domiciled also impose certain restrictions on the subsidiaries’ ability to pay dividends to the Company. These restrictions are based in part on the prior year’s statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by the insurance commissioner of the state of domicile. In addition, certain states may prohibit the payment of dividends from other than the insurance company’s earned surplus. The insurance subsidiaries may pay, without the approval of the Insurance Commissioners of the state of domicile, $153.2 million of distributions in 2023. No assurance can be given that more stringent restrictions will not be adopted from time to time by states in which the Company and its insurance subsidiaries are domiciled; such restrictions could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to the Company by such subsidiaries without prior approval by state regulatory authorities.
State insurance regulators and the NAIC regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer and may lead to additional expense for the insurer. Furthermore, some NAIC pronouncements, particularly as they affect accounting issues, take effect automatically in various states without affirmative action by those states.
Sales of life insurance policies and annuity contracts offered by the Company are subject to a wide variety of state regulations relating to sales practices. The NAIC finalized revisions to the Suitability in Annuity Transactions Model Regulation which is intended to impose a higher standard of care on insurers who sell annuities. Additionally, several states are considering or have adopted legislation or regulatory measures that would implement new requirements and standards applicable to the sale of annuities and, in some cases, life insurance products. These new
and proposed requirements and standards, which vary widely in scope, applicability, and timing of implementation, include requiring insurers, investment advisers, broker-dealer, and/or agents to disclose conflicts of interest to clients or to meet standards that their advice and sales recommendations must be in the customer’s best interest. There remains significant uncertainty surrounding these new and proposed requirements and standards, and the impact they may have on our current distributors and sales of our life insurance policies and annuity contracts.
The insurance laws of U.S. jurisdictions govern the marketplace activities of insurers, affecting the form and content of disclosure to consumers, product illustrations, advertising, product replacement, sales and underwriting practices, and complaint and claims handling, and these provisions are generally enforced through periodic market conduct examinations. Most state insurance laws prohibit insurers from engaging in unfair trade practices. The kinds of practices addressed are (i) misrepresentation and false advertising, (ii) unfair discrimination in premiums and policy benefits, (iii) boycott, coercion and intimidation, (iv) discrimination based on race, color, creed or national origin, sex or marital status, and (v) rebating of premium. In January 2019, the New York Department of Financial Services (“DFS”) issued a circular letter that relates to use by life insurers of data or information sources that are not directly related to the medical condition of the applicant (with certain exclusions), for certain types of underwriting or rating purposes, including as a proxy for traditional medical underwriting. The circular letter generally prohibits life insurers from using such data or information, including algorithms or predictive models, in this fashion unless: (i) the insurer can establish that the data source does not use and is not based in any way on prohibited criteria, such as race, color, creed, etc.; and (ii) this use is not unfairly discriminatory and otherwise complies with the requirements of the New York insurance laws. In addition, the circular letter requires insurers using such data or information, including predictive models, to make certain additional disclosures to consumers.
Federal Regulation
At the federal level, the executive branch or federal agencies may issue orders or take other action with respect to financial services and life insurance matters, and bills are routinely introduced in both chambers of the United States Congress which could affect the Company’s business. In the past, Congress has considered legislation that would impact insurance companies in numerous ways, such as providing for an optional federal charter or a federal presence for insurance, preempting state law in certain respects regarding the regulation of reinsurance, increasing federal oversight in areas such as consumer protection and solvency regulation, setting tax rates, and other matters. The Company cannot predict whether or in what form legislation will be enacted and, if so, the impact of such legislation on the Company.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) made sweeping changes to the regulation of financial services entities, products and markets. The Dodd-Frank Act directed existing and newly-created government agencies and bodies to perform studies and promulgate a multitude of regulations implementing the law, a process that has substantially advanced but is not yet complete.
Among other things, the Dodd-Frank Act imposed a comprehensive new regulatory regime on the over-the-counter (“OTC”) derivatives marketplace and granted new joint regulatory authority to the Securities and Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading Commission (“CFTC”) over OTC derivatives. In collaboration with U.S. federal banking regulators, the CFTC has adopted regulations which categorize the Company as a “financial end-user” which is thereby required to post and collect margin in a variety of derivatives transactions. Recommendations and reports from entities created under the Dodd-Frank Act, such as the Federal Insurance Office and the Financial Stability Oversight Council, could also affect the manner in which insurance and reinsurance are regulated in the U.S. and, thereby, the Company’s business. The Dodd-Frank Act also created the Consumer Financial Protection Bureau (“CFPB”), an independent division of the Department of Treasury with jurisdiction over credit, savings, payment, and other consumer financial products and services, other than investment products already regulated by the SEC or the CFTC. The Company and certain of its subsidiaries sell products that may be regulated by the CFPB.
Sales of life insurance policies and annuity contracts offered by the Company are subject to regulations relating to sales practices adopted by a variety of federal regulatory authorities. Certain annuities and life insurance policies such as variable annuities and variable universal life insurance are regulated under the federal securities laws administered by the SEC. On June 30, 2020, the SEC’s Regulation Best Interest (“Regulation BI”) went into effect.
Regulation BI relates to the standard of conduct applicable to broker-dealers, investment advisers, and their representatives when making certain recommendations to retail customers. Specifically, a broker-dealer is required to act in the best interest of a retail customer when recommending any securities transaction or investment strategy involving securities to the retail customer. Regulation BI also requires broker-dealers and investment advisers to provide each customer with a summary of the nature of the customer’s relationship with the investment professional, and provides a restriction on the use of the terms “adviser” and “advisor” by broker-dealers.
In addition, broker-dealers, insurance agencies and other financial institutions sell the Company’s annuities to employee benefit plans governed by provisions of the Employee Retirement Income Security Act (“ERISA”) and Individual Retirement Accounts (“IRAs”) that are governed by similar provisions under the Internal Revenue Code (the “Code”). Consequently, our activities and those of the firms that sell the Company’s products are subject to restrictions that require ERISA fiduciaries to perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that prohibit ERISA fiduciaries from causing a covered plan or retirement account to engage in certain prohibited transactions absent an exemption. Also, on December 31, 2020, the U.S. Department of Labor (“DOL”) issued its final investment advice prohibited transaction exemption, with a February 16, 2021 effective date. The final regulation confirmed the reinstatement of the traditional “five-part test” for determining fiduciary status and established a new prohibited transaction exemption that aligns with the SEC’s Regulation BI.
There remains significant uncertainty surrounding the final form that these regulations may take and the impact they may have on our current distributors and sales of our life insurance policies and annuity contracts. In addition, the Company continues to incur expenses in connection with initial and ongoing compliance obligations with respect to these regulations and in the aggregate these expenses may be significant.
The federal securities laws to which certain of our life insurance policies and annuity contracts are subject contain regulatory restrictions and criminal, administrative, and private remedial provisions. From time to time, the SEC and the Financial Industry Regulatory Authority (“FINRA”) examine or investigate the activities of insurance companies, broker-dealers and investment advisers, including the Company’s affiliated broker-dealers and investment advisers. These examinations or investigations often focus on the activities of the registered representatives and registered investment advisers doing business through such entities and the entities’ supervision of those persons.
The Company is also subject to various federal laws and regulations intended to promote financial transparency and to identify and prevent money laundering and other financial crimes. Under these laws and regulations, the Company is required to maintain certain internal compliance practices, procedures, and controls for verifying the identity of its customers, monitoring for and reporting suspicious transactions, and responding to requests for information from regulatory authorities and law enforcement agencies.
Cybersecurity and Privacy Regulations
In response to the growing threat of cyber attacks several jurisdictions enacted cybersecurity measures, including the adoption of cybersecurity regulations that, among other things, would require insurance companies to establish and maintain a cybersecurity program and implement and maintain cybersecurity policies and procedures. Many states have adopted a standard based on or identical to the 2017 NAIC Insurance Data Security Model Law, which serves as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. Additionally, the DFS issued regulations governing cybersecurity requirements for financial services companies, which became effective in March 2017. The DFS regulations require insurance companies, among others, licensed in New York to assess their specific cyber risk profiles and design cybersecurity programs to address such risks. The DFS and the NAIC Insurance Data Security Model Law also require certain insurers to file annually a certification pertaining to their compliance with those jurisdictions’ cybersecurity requirements. The Company continues to monitor whether the other states in which it conducts business, as well as federal governmental agencies, adopt data security laws or regulations.
The Company has implemented information security policies that are designed to address the security of the Company’s information assets, which include personally identifiable information and protected health information,
as well as other proprietary and confidential information about the Company, its employees, customers, agents, affiliates, and business partners. Additionally, the Company has an information risk management committee that, among other things, reviews emerging risks and monitors regulatory requirements and industry standards relating to the security of the Company’s information assets, monitors the Company’s cybersecurity initiatives, and approves the Company’s cyber incident response plans. This committee meets regularly, and the Board of Directors receives reports regarding cybersecurity matters. Furthermore, as part of the Company’s information security program, the Company has included security features in its systems that are intended to protect the privacy and integrity of the Company’s information assets, including personally identifiable information and protected health information. Notwithstanding these efforts, cyber threats and related legal and regulatory standards applicable to the insurance industry are rapidly evolving, and the Company’s and the Company’s business partners’ and service providers’ systems may continue to be vulnerable to security breaches, viruses, programming errors, and other similar disruptive problems or incidents.
In addition to laws and regulations relating to cyber security, states have proposed or adopted broad privacy laws and regulations that apply to all types of businesses. Since 2018, five states (California, Virginia, Colorado, Connecticut, and Utah) have passed consumer privacy laws which create new consumer rights and business responsibilities. As part of the Company’s customer privacy programs, the Company included processes to respond to requests from consumers with respect to their rights under such privacy laws and regulations. The Company continues to monitor whether the other states in which it conducts business, as well as federal governmental agencies, adopt additional customer privacy laws or regulations.
Other Regulation
Other types of regulation that could affect the Company and its subsidiaries include insurance company investment laws and regulations, state statutory accounting practices, tax laws, antitrust laws, minimum solvency requirements, enterprise risk requirements, state securities laws, federal privacy laws, technology and data regulations, insurable interest laws, federal anti-money laundering and anti-terrorism laws, employment and immigration laws and, because the Company owns and operates real property, state, federal, and local environmental laws. The Company may also be subject to regulations influenced by or related to international regulatory authorities or initiatives. PLC’s ultimate controlling parent, Dai-ichi Life, is subject to regulation by the Japanese Financial Services Agency (“JFSA”). Under applicable laws and regulations, Dai-ichi Life is required to provide notice to or obtain the consent of the JFSA prior to taking certain actions or engaging in certain transactions, either directly or indirectly through its subsidiaries, including PLC, the Company, and their respective consolidated subsidiaries. Domestically, the NAIC may be influenced by the initiatives or regulatory structures or schemes of international regulatory bodies, and those initiatives or regulatory structures or schemes may not translate readily into the regulatory structures or schemes of the legal system (including the interpretation or application of standards by juries) under which U.S. insurers must operate. Changes in laws and regulations or in interpretations thereof, or to initiatives or regulatory structures or schemes of international regulatory bodies, which are applicable to the Company could have a significant adverse impact on the Company.
Intellectual Property
The Company relies on a combination of intellectual property laws, confidentiality procedures and policies, and contractual provisions to protect its brand and its intellectual property, which includes copyrights, trademarks, patents, domain names, and trade secrets. The success of the Company’s business depends on its continued ability to use and protect its intellectual property, including its trademark and service mark portfolio which is composed of both United States registered and common law trademarks and service marks, including the Company’s Protective name and logo. The Company’s intellectual property assets are valuable to the Company in maintaining its brand and marketing its products; thus, the Company maintains and protects its intellectual property assets from infringement and dilution.
RISK FACTORS
This Prospectus includes “forward-looking statements” that represent the Company’s beliefs concerning future operations. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future
results, performance, or achievements instead of historical facts and may contain words like “believe”, “expect”, “estimate”, “project”, “budget”, “forecast”, “anticipate”, “plan”, “will”, “shall”, “may”, and other words, phrases, or expressions with similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and we cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
The operating results of companies in the insurance industry have historically been subject to significant fluctuations. The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and known trends and uncertainties which are discussed more fully below.
Risks Related to the COVID-19 Pandemic
The coronavirus (COVID-19) global pandemic has adversely impacted the Company’s business, and the ultimate effect on its business, results of operations, and financial condition will depend on future developments that are uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
Beginning in 2020, the COVID-19 pandemic created both a public health crisis in the United States and worldwide that impacted the Company’s results of operations. The spread of COVID-19 resulted in excess deaths in the population that can be both directly and indirectly attributed to the virus. The rollout of COVID-19 vaccines throughout 2021 mitigated mortality risk. However, the negative impact to overall mortality continued into 2022.
The extent to which the COVID-19 pandemic could continue to impact the Company’s business, results of operations, or financial condition will depend on future developments which are uncertain and cannot be predicted, including the rate and long-term efficacy of vaccinations, the impact of new COVID-19 variants, Long COVID, mortality effects of the pandemic indirectly attributed to COVID-19, and actions taken by governmental authorities and other third parties in response to the pandemic.
The Company has implemented risk management and business continuity plans, performed stress testing, and taken other precautions with respect to the COVID-19 global pandemic. However, such measures may not adequately protect the Company’s business from the full impacts of the pandemic.
Risks Related to the Financial Environment
Interest rate fluctuations and sustained periods of low or high interest rates could negatively affect the Company’s interest earnings and spread income, or otherwise impact its business.
Significant changes in interest rates expose the Company to the risk of not earning anticipated interest on assets supporting products, or not realizing anticipated spreads between the interest rate earned on investments and the credited interest rates paid on in-force policies and contracts that have significant account balances. Both rising and declining interest rates as well as sustained periods of low interest rates could negatively affect the Company’s interest earnings and spread income.
Lower interest rates may also result in lower sales of certain of the Company’s life insurance and annuity products. Additionally, during periods of declining or low interest rates, certain previously-issued life insurance and annuity products may be relatively more attractive investments to consumers, resulting in increased premium payments on products with flexible premium features, repayment of policy loans, and increased persistency, or a higher percentage of insurance policies remaining in force from year to year during a period when the Company’s investments earn lower returns. Certain of the Company’s life insurance and annuity products guarantee a minimum credited interest rate, and the Company could become unable to earn its spread income or may earn less interest on its investments than it is required to credit to policyholders should interest rates decrease significantly and/or remain low for sustained periods. Additionally, the profitability of certain of the Company’s life insurance products that do
not have significant account balances could be reduced should interest rates decrease significantly and/or remain low for sustained periods.
Lower interest rates may also result in increases to certain policyholder benefit reserves.
Higher interest rates may create a less favorable environment for the origination of commercial mortgage loans and decrease the investment income the Company receives in the form of prepayment fees, make-whole payments, and commercial mortgage loan participation income. Higher interest rates could also adversely affect the fair value of fixed-income securities within the Company’s investment portfolio and increase the cost of debt and other obligations of the Company having floating rate or rate reset provisions. During periods of increasing market interest rates, the Company may offer higher crediting rates on interest-sensitive products, such as universal life insurance and fixed annuities, and it may increase crediting rates on in-force products to keep these products competitive. In addition, rapidly-rising interest rates may cause increased policy surrenders, withdrawals from life insurance policies and annuity contracts, and requests for policy loans as policyholders and contract holders shift assets into higher yielding investments. Increases in crediting rates, as well as surrenders and withdrawals, could have an adverse effect on the Company’s financial condition and results of operations, including earnings, equity AOCI, and statutory risk-based capital ratios.
Additionally, the Company’s asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve) and relationships between risk-adjusted and risk-free interest rates, market liquidity, and other factors. The effectiveness of the Company’s asset/liability management programs and procedures may be negatively affected whenever actual results differ from these assumptions.
The Company’s investments are subject to market and credit risks. These risks could be heightened during periods of extreme volatility or disruption in financial and credit markets.
Significant volatility or disruption in domestic or foreign credit, capital, and equity markets, including as a result of social or political unrest or instability domestically or abroad, could have an adverse impact in several ways on either the Company’s financial condition or results from operations. The Company’s invested assets and derivative financial instruments are subject to risks of credit defaults and changes in fair values which could be heightened by volatility or disruption. The factors affecting the financial and credit markets could lead to credit and other losses in the Company’s investment portfolio.
The Company’s exposure to these markets presents a number of risks including:
•The fair value of the Company’s invested assets, derivative financial instruments, and commercial mortgage loans may be affected by interest rate levels, financial market performance, general economic conditions, inflation, and conditions affecting certain sectors of the economy, as well as particular circumstances affecting the individual tenants, borrowers, issuers, and guarantors.
•Changes in interest rates and credit spreads could increase unrealized losses in the Company’s investment portfolio and could cause market price and cash flow variability in the Company’s fixed-income instruments.
•Significant volatility and lack of liquidity in the credit markets could cause issuers of the fixed-income securities in the Company’s investment portfolio to default on either principal or interest payments on these securities.
•The Company’s statutory surplus is impacted by widening credit spreads as a result of the accounting for the assets and liabilities on its fixed MVA annuities. Volatile credit markets could result in statutory separate account asset market value losses.
•Volatility or disruption in the credit markets could impact the Company’s ability to efficiently access financial solutions for purposes of issuing long-term debt for financing purposes, its ability to obtain
financial solutions for purposes of supporting certain traditional and UL insurance products for capital management purposes, or result in an increase in the cost of existing securitization structures.
•When the credit and capital markets are disrupted and confidence is eroded the Company may not be able to borrow money, including through the issuance of debt securities, or the cost of borrowing or raising capital may be prohibitively high. If the Company’s internal sources of liquidity are inadequate during such periods, the Company could suffer negative effects from not being able to borrow money, or from having to do so on unfavorable terms. The negative effects could include being forced to sell assets at a loss, a lowering of the Company’s credit ratings and the financial strength ratings of its insurance subsidiaries, and the possibility that customers, lenders, ratings agencies, or regulators develop a negative perception of the Company and its financial prospects.
•Volatility in equity markets may deter prospective purchasers of variable life and annuity products and fixed annuity products that have returns linked to the performance of equity markets and may cause some existing customers to withdraw cash values or reduce investments in those products.
•Changes in interest rates, equity market movements and changes in the volatility of equity markets can impact the valuation of both the reserves relating to GMxB riders and the derivatives entered into in connection with these riders. Changes in the valuation of derivatives used to hedge GMxB riders may not fully offset changes in the valuation of statutory reserves. Such differences may have a material adverse effect on total statutory capital and surplus.
•Market volatility can make it difficult for the Company to value certain of its assets, especially if trading becomes less frequent. Additionally, valuations may include assumptions or estimates that may have significant period-to-period changes.
In addition, financial markets may be adversely affected by the current or anticipated impact of military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events.
On March 10, 2023, the California Department of Financial Protection and Innovation took possession of Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver. On March 12, 2023, the New York State Department of Financial Services took possession of Signature Bank and appointed the FDIC as receiver. In response to these events, the Federal Reserve announced that it would make additional funding available via a new Bank Term Funding Program (“BTFP”) offering loans of up to one year to eligible depository institutions to ensure they have the ability to meet the needs of all depositors. The impact of these developments remains uncertain. However, they may influence future regulatory policies or affect the way that banking institutions (including the Federal Home Loan Banks) and other financial market participants conduct business, such as the terms or amounts of funding they make available to the Company.
The risks described above could have a material adverse impact on the Company’s results of operations, financial condition, statutory capital ratios, risk-based capital ratios, cash flows through realized losses, the allowance for expected credit losses, unrealized loss positions, and may cause increased demands on capital, including obligations to post additional capital and collateral.
Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and may adversely affect our investment portfolio.
There are concerns that the increased frequency and severity of weather-related catastrophes and other losses, such as wildfires, incurred by the industry in recent years is indicative of changing weather patterns, whether as a result of global climate change caused by human activities or otherwise, which could cause such events to persist. The global business community has increased its political and social awareness surrounding the issue, and the United States has entered into international agreements in an attempt to reduce global temperatures, such as reentering the Paris Agreement. Further, the U.S. Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change.
The Company cannot predict how legal, regulatory and social responses to concerns about global climate change will impact its business or the value of our investments. Climate change regulation and market forces reacting to climate change may affect the prospects of companies and other entities whose securities we hold, or our willingness to continue to hold their securities. It may also impact other counterparties, including reinsurers, and affect the value of investments, including real estate investments we hold or manage for others. We cannot predict the long-term impacts on us from climate change or related regulation or market impact.
The elimination of LIBOR may adversely affect the interest rates on and value of certain derivatives and floating rate securities we hold and floating rate securities we have issued, the value and profitability of certain real estate lending and other activities we conduct, and any other assets or liabilities whose value is tied to LIBOR.
Actions by regulators have resulted in the establishment of alternative reference rates to LIBOR in most major currencies. On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On March 5, 2021, the IBA announced that it will cease the publication of one week and two-month U.S. Dollar LIBOR and all non-USD (GBP, EUR, CHF and JPY) LIBOR settings at the end of December 2021, but will extend the publication of the remaining U.S. Dollar LIBOR settings (overnight and one, three, six and 12 month U.S. Dollar LIBOR) until the end of June 2023. U.S. bank regulators have advised banks to cease writing, subject to certain limited exceptions, new U.S. Dollar LIBOR contracts by the end of 2021 and the New York Federal Reserve’s ARCC has identified the SOFR as the recommended risk-free alternative rate for USD LIBOR. The extended cessation date for most USD LIBOR tenors will allow for more time for existing legacy USD LIBOR contracts to mature and provide additional time to continue to prepare for the transition from LIBOR on certain derivatives and floating rate securities the Company holds, securities the Company has issued, real estate lending, and other activities the Company conducts, and any other assets or liabilities, as well as contractual rights and obligations, whose value is tied to LIBOR. The value or profitability of these products and instruments may be adversely affected.
The Company uses LIBOR and other interbank offered rates as interest reference rates in certain of its financial instruments. Existing contract fallback provisions, and whether, how, and when the Company and others develop and adopt alternative reference rates, will influence the effect of any changes to or discontinuation of LIBOR on the Company. The Company is identifying, assessing and monitoring market and regulatory developments, assessing agreement terms, and evaluating operational readiness. The Company is utilizing the International Swaps and Derivatives Association, Inc. (“ISDA”) 2020 IBOR Fallbacks Protocol to address the transition from LIBOR and other interbank offered rates to other risk-free rates in its OTC bilateral derivatives contracts governed under ISDA Master Agreements with trading counterparties. The Company also monitors the Financial Accounting Standards Board’s, and U.S. Treasury Department’s updates on the accounting and tax implications of reference rate reform. The Company continues to assess current and alternative reference rates’ merits, limitations, risks and suitability for its investment and insurance processes.
The Company’s use of derivative financial instruments within its risk management strategy may not be effective or sufficient.
The Company uses derivative financial instruments within its risk management strategy to mitigate risks to which it is exposed, including risks related to credit and equity markets, interest rate levels, foreign exchange, and volatility on its fixed indexed annuity and variable annuity products and associated guaranteed benefit features. The Company may also use derivative financial instruments within its risk management strategy to mitigate risks arising from its exposure to investments in individual issuers or sectors of issuers and to mitigate the adverse effects of interest rate levels or volatility on its overall financial condition or results of operations.
These derivative financial instruments may not effectively offset the changes in the carrying value of the exposures due to, among other things, the time lag between changes in the value of such exposures and the changes in the value of the derivative financial instruments purchased by the Company, extreme credit and/or equity market and/or interest rate levels or volatility, contract holder behavior that differs from the Company’s expectations, and basis risk.
The use of derivative financial instruments by the Company generally to hedge various risks that impact earnings may have an adverse impact on the level of statutory capital and risk-based capital. The Company may also choose not to hedge, in whole or in part, these or other risks that it has identified, due to, for example, the availability and/or cost of a suitable derivative financial instrument. In addition, the Company may fail to identify risks, or the magnitude of risks, to which it is exposed. The derivative financial instruments used by the Company in its risk management strategy may not be properly designed, may not be properly implemented as designed and/or may be insufficient to hedge the risks in relation to the Company’s obligations. The Company is subject to the risk that its derivative counterparties or clearinghouse may fail or refuse to meet their obligations to the Company, which may result in associated derivative financial instruments becoming ineffective or inefficient.
The above factors, either alone or in combination, may have a material adverse effect on the Company’s financial condition and results of operations.
The Company’s ability to grow depends in large part upon the continued availability of capital.
The Company deploys significant amounts of capital to support its sales and acquisitions efforts. Although the Company believes it has sufficient capital to fund its immediate capital needs, the amount of capital available can vary significantly from period to period due to a variety of circumstances, some of which are not predictable or within the Company’s control. Furthermore, our ultimate controlling parent is not obligated to provide us with additional capital. A lack of sufficient capital could have a material adverse impact on the Company’s financial condition and/or results of operations.
The Company could be forced to sell investments at a loss to cover policyholder withdrawals.
Many of the products offered by the Company allow policyholders and contract holders to withdraw their funds under defined circumstances. The Company manages its liabilities and configures its investment portfolios so as to provide and maintain sufficient liquidity to support expected withdrawal demands and contract benefits and maturities. While the Company owns a significant amount of liquid assets, a certain portion of its assets are relatively illiquid. If the Company experiences unexpected withdrawal or surrender activity, it could exhaust its liquid assets and be forced to liquidate other assets, perhaps at a loss or on other unfavorable terms. If the Company is forced to dispose of assets at a loss or on unfavorable terms, it could have an adverse effect on the Company’s financial condition, the degree of which would vary in relation to the magnitude of the unexpected surrender or withdrawal activity.
The Company could be adversely affected by an inability to access its credit facility or FHLB lending.
The Company relies on its credit facility as a potential source of liquidity. The availability of these funds could be critical to the Company’s credit and financial strength ratings and its ability to meet obligations, particularly when alternative sources of credit or liquidity are either difficult to access or costly. The availability of the Company’s credit facility is dependent in part on the ability of the lenders to provide funds under the facility. The Company’s credit facility contains various affirmative and negative covenants and events of default, including covenants requiring the Company to maintain a specified minimum consolidated net worth. The Company’s right to make borrowings under the facility is subject to the fulfillment of certain conditions, including its compliance with all covenants. The Company’s failure to comply with the covenants in the credit facility could restrict its ability to access this credit facility when needed. In addition, certain subsidiaries of the Company are members of the FHLB of Cincinnati, the FHLB of New York, and the FHLB of Atlanta. Membership provides these subsidiaries with access to FHLB financial services, including advances that provide an attractive funding source for short-term borrowing and for the sale of funding agreements. The ability of its subsidiaries to access liquidity from the FHLB is impacted by other factors that are dependent on market conditions or policies established by the FHLB. Fluctuations in the fair value of collateral can adversely impact available borrowing capacity. The extent to which membership or the FHLB services are available could be impacted by legislative or regulatory action at the state or federal level.
The Company’s inability to access some or all of the line of credit under the credit facility or its subsidiaries inability to access some or all of the FHLB financial services could lead to downgrades in our credit and financial strength ratings and have a material adverse effect on its liquidity and/or results of operations.
The amount of statutory capital or risk-based capital that the Company has and the amount of statutory capital or risk-based capital that it must hold to maintain its financial strength and credit ratings and meet other requirements can vary significantly from time to time and such amounts are sensitive to a number of factors outside of the Company’s control.
Insurance regulators have established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life and property and casualty companies. The risk-based capital formula for life insurance companies establishes capital requirements relating to insurance, business, asset, interest rate, and certain other risks. The risk-based capital formula for property and casualty companies establishes capital requirements relating to asset, credit, underwriting, and certain other risks.
In any particular year, statutory surplus amounts and risk-based capital ratios may increase or decrease depending on a variety of factors, including, but not limited to, the amount of statutory income or losses generated by the Company and its insurance subsidiaries, the amount of additional capital the Company and its insurance subsidiaries must hold to support business growth, changes in the Company’s statutory reserve requirements, the Company’s ability to secure capital market solutions to provide statutory reserve relief, changes in equity market levels, the value of certain fixed-income and equity securities in its investment portfolio, the credit ratings of investments held in its portfolio, including those issued by, or explicitly or implicitly guaranteed by, a government, the value of certain derivative instruments, changes in interest rates, foreign currency exchange rates or tax rates, credit market volatility, changes in consumer behavior, and changes to the NAIC risk-based capital formulas. Most of these factors are outside of the Company’s control.
The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and risk-based capital ratios of its insurance company subsidiaries. Rating organizations may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital the Company must hold in order to maintain its current ratings. In addition, rating agencies may downgrade the investments held in the Company’s portfolio, which could result in a reduction of the Company’s capital and surplus and/or its risk-based capital ratio.
In scenarios of equity market declines, the amount of additional statutory reserves or risk-based capital the Company is required to hold for its variable product guarantees may increase at a rate greater than the rate of change of the markets. Increases in reserves or risk-based capital could result in a reduction to the Company’s capital, surplus, and/or risk-based capital ratio. In scenarios of interest rate increases, the losses on the Company’s hedge assets supporting the variable annuity block are typically larger than the reduction in statutory reserves. As such, rising interest rates commonly result in a reduction to the Company’s capital and risk-based capital ratio. Also, in environments where there is not a correlative relationship between interest rates and spreads, the Company’s market value adjusted annuity product can have a material adverse effect on the Company’s statutory surplus position.
A ratings downgrade or other negative action by a rating organization could adversely affect the Company.
Various rating organizations review the financial performance and condition of insurers, including the Company’s insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. While financial strength ratings are not a recommendation to buy the Company’s securities or products, these ratings are important to maintaining public confidence in the Company, its products, its ability to market its products, and its competitive position. A downgrade or other negative action by a rating organization with respect to the financial strength ratings of the Company’s insurance subsidiaries or the debt ratings of the Company could adversely affect the Company in many ways, including, but not limited to, reducing new sales of insurance and investment products, adversely affecting relationships with distributors and sales agents, increasing the number or amount of policy surrenders and withdrawals of funds, requiring a reduction in prices for the Company’s insurance products and services in order to remain competitive, negatively impacting the Company’s ability to execute its acquisition strategy, and adversely affecting the Company’s ability to obtain reinsurance at a reasonable price, on reasonable terms, or at all. A downgrade of sufficient magnitude could result in the Company, its insurance subsidiaries, or both being required to collateralize reserves, balances, or obligations under certain contractual obligations, including reinsurance, funding, swap, and securitization agreements. A downgrade of sufficient magnitude could also result in the termination of certain funding and swap agreements.
Rating organizations also publish credit ratings for issuers of debt securities, including the Company. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner. These ratings are important to the Company’s overall ability to access credit markets and other types of liquidity. Credit ratings are not recommendations to buy our securities or products. Downgrades of the Company’s credit ratings, or an announced potential downgrade or other negative action, could have a material adverse effect on our financial conditions and results of operations in many ways, including, but not limited to, limiting the Company’s access to capital markets, increasing the cost of debt, impairing our ability to raise capital to refinance maturing debt obligations, limiting its capacity to support its growth and the growth of its insurance subsidiaries, requiring it to pay higher amounts in connection with certain existing or future financing arrangements or transactions, and making it more difficult to maintain or improve the current financial strength ratings of its insurance subsidiaries. A downgrade of sufficient magnitude, in combination with other factors, could require the Company to post collateral pursuant to certain contractual obligations.
Rating organizations assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating organization, general economic conditions, ratings of parent companies, and other circumstances outside the rated company’s control. Changes to the models could impact the rating organizations’ judgment of the rating to be assigned to the rated company. Rating organizations may take various actions, positive or negative, with respect to the Company’s debt ratings and its financial strength ratings and the financial strength ratings of our insurance subsidiaries, including as a result of our status as a subsidiary of the Company, which is a subsidiary of Dai-ichi Life. Any negative action by a rating organization could have a material adverse impact on the Company’s financial condition or results of operations.
The Company’s securities lending program may subject it to liquidity and other risks.
The Company maintains a securities lending program in which securities are loaned to third parties, including brokerage firms and commercial banks. The borrowers of the Company’s securities provide the Company with collateral, typically in cash, which it separately maintains. The Company invests the collateral in other securities, including primarily short-term government repo and money market funds. Securities loaned under the program may be returned to the Company by the borrower at any time, requiring the Company to return the related cash collateral. In some cases, the Company may use the cash collateral provided to purchase other securities to be held as invested collateral, and the maturity of such securities may exceed the term of the securities loaned under the program and/or the fair value of such securities may fall below the amount of cash collateral that the Company is obligated to return to the borrower of the Company’s loaned securities. If the Company is required to return significant amounts of cash collateral on short notice and is forced to sell the securities held as invested collateral to meet the obligation, the Company may have difficulty selling such securities in a timely manner and/or the Company may be forced to sell the securities in a volatile or illiquid market for less than it otherwise would have been able to realize under normal market conditions. In addition, the Company’s ability to sell securities held as invested collateral may be restricted under stressful market and economic conditions in which liquidity deteriorates.
The Company’s financial condition or results of operations could be adversely impacted if the Company’s assumptions regarding the fair value and future performance of its investments differ from actual experience.
The Company makes assumptions regarding the fair value and expected future performance of its investments. Expectations that the Company’s investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms are based on assumptions a market participant would use in determining the current fair value and consider the performance of the underlying assets. It is reasonably possible that the underlying collateral of these investments will perform worse than current market expectations and that such reduced performance may lead to adverse changes in the cash flows on the Company’s holdings of these types of securities. In addition, expectations that the Company’s investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual terms are based on evidence gathered through its normal credit surveillance process. It is possible that issuers of the Company’s investments in corporate securities and/or debt obligations will perform worse than current expectations.
As a result of both Silicon Valley Bank and Signature Bank being placed into receivership and the acquisition of Credit Suisse by UBS in March 2023, the banking industry has experienced volatility. Additional banks may be at
risk of failing. As a result, in the first quarter of 2023, the Company has realized approximately $11.1 million in losses on sales of fixed maturity securities and recognized impairments of approximately $78.6 million on its holdings of preferred stock and fixed maturity investments. The level of impairments recorded is based on management’s current assessment of the severity of the impacts of these events on the debt and equity markets. Any worsening in the banking sector has the potential to cause additional losses.
The occurrence of any of the foregoing events could lead the Company to recognize additional write-downs within its portfolio of mortgage and asset-backed securities or its portfolio of corporate securities and/or debt obligations. It is also possible that such events would lead the Company to dispose of additional such investments and recognize the effects of any market movements in its financial statements. The Company also makes certain assumptions when utilizing internal models to value certain of its investments. It is possible that actual results will differ from the Company’s assumptions. Such events could result in a material change in the value of the Company’s investments.
Adverse actions of certain funds or their advisers could have a detrimental impact on the Company’s ability to sell its variable life and annuity products, or maintain current levels of assets in those products.
Certain of the Company’s insurance subsidiaries have arrangements with various open-end investment companies, or “mutual funds”, and the investment advisers to those mutual funds, to offer the mutual funds as investment options in the Company’s variable life and annuity products. It is possible that the termination of one or more of those arrangements by a mutual fund or its adviser could have a detrimental impact on the Company’s ability to sell its variable life and annuity products, or maintain current levels of assets in those products, which could have a material adverse effect on the Company’s financial condition and/or results of operations.
Industry and Regulatory Related Risks
The business of the Company is highly regulated and is subject to routine audits, examinations, and actions by regulators, law enforcement agencies, and self-regulatory organizations.
The Company and its insurance subsidiaries are subject to regulation by each of the states in which they conduct business. In many instances, the regulatory models emanate from the NAIC. Such regulation is vested in state agencies having broad administrative and, in some instances, discretionary power dealing with many aspects of the Company’s business, which may include, among other things, premium and cost of insurance rates and increases thereto, interest crediting policy, underwriting practices, reserve requirements, marketing practices, advertising, privacy, cybersecurity, policy forms, reinsurance reserve requirements, insurer use of captive reinsurance companies, acquisitions, mergers, capital adequacy, claims practices, and the remittance of unclaimed property. In addition, some state insurance regulators may enact rules or regulations with extra-territorial application, effectively extending their jurisdiction to areas such as permitted insurance company investments that are normally the province of an insurance company’s domiciliary state regulator. Actions by any of the state insurance regulators could have a material adverse effect on the Company’s business, financial condition and results of operations.
At any given time, a number of financial, market conduct, unclaimed property, or other examinations or audits of the Company’s subsidiaries, as well as certain other insurance companies from whom the Company has coinsured blocks of life insurance and annuity policies, may be ongoing. It is possible that any examination or audit may result in payments of fines and penalties, payments to customers, or both, as well as changes in systems or procedures, or restrictions on business activities, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s insurance subsidiaries are required to obtain state regulatory approval for rate increases for certain health insurance products. The Company’s financial condition and results of operations may be adversely affected if the requested rate increases are not approved in full by regulators in a timely fashion.
State insurance regulators and the NAIC regularly examine existing laws and regulations applicable to insurance companies and their products. Changes in state laws and regulations, or in interpretations thereof, could have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, legislators in some states have introduced or plan to introduce bills that could affect the Company’s ability to
underwrite based on an applicant’s COVID-19 vaccination status. While the Company does not collect this data, strict restrictions could negatively impact our future underwriting practices.
PLC’s broker-dealer subsidiaries are also subject to regulation by state securities regulators. In many instances, the state regulatory models emanate from the North American Securities Administrators Association. State securities regulators may bring regulatory or other legal actions against PLC’s broker-dealer subsidiaries if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines or penalties, or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, financial condition and results of operations.
At the federal level, certain of the Company’s insurance subsidiaries and its broker-dealer subsidiaries are subject to regulation by the SEC and the FINRA. Federal laws and regulations generally grant the SEC and FINRA broad administrative powers, including the power to limit or restrict regulated entities from carrying on their businesses in the event that a regulated entity fails to comply with applicable federal laws and regulations. The SEC and FINRA, as well as the DOL and others, have the authority to review our products and business practices and those of our agents, registered representatives, associated persons, and employees. Adverse action by any of these regulatory bodies against the Company or any of its subsidiaries could have a material adverse effect on the Company’s business, financial condition and results of operations.
The executive branch of the federal government or federal agencies may issue orders or take other action with respect to financial services and life insurance matters, and bills are routinely introduced in both chambers of the United States Congress that could affect the Company and its business. In the past, Congress has considered legislation that would impact insurance companies in numerous ways, such as providing for an optional federal charter or a federal presence for insurance, preempting state law in certain respects regarding the regulation of reinsurance, increasing federal oversight in areas such as consumer protection and solvency regulation, setting tax rates, and other matters. The Company cannot predict whether or in what form administrative actions will take or legislation will be enacted. Such actions or legislation could, however, have a material adverse effect on the Company’s business, financial condition and results of operations.
Federal regulatory or governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices, or those of our agents or employees, are improper. These actions can result in substantial fines or penalties, or prohibitions or restrictions on our business activities and could have a material adverse effect on our business, financial condition and results of operations.
The Company may be subject to regulations of, or regulations influenced by, international regulatory authorities or initiatives.
The NAIC and the Company’s state regulators may be influenced by the initiatives of international regulatory bodies, and those initiatives may not translate readily into the legal system under which U.S. insurers must operate. There is increasing pressure to conform to international standards due to the globalization of the business of insurance and the systemic nature of recent financial crises. In addition to developments at the NAIC and in the United States, the FSB, consisting of representatives of national financial authorities of the G20 nations, and the G20 have issued a series of proposals intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated.
The IAIS, at the direction of the FSB, has published an evolving method for identifying G-SIIs and high-level policy measures that will apply to G-SIIs. These policy measures include higher capital requirements and enhanced supervision. The IAIS also developed a holistic framework for the assessment and mitigation of systemic risk in the insurance sector (the “Holistic Framework”). The Holistic Framework proposes enhanced supervisory and corrective measures and disclosures for any build-up of systemic risk in liquidity risk, macroeconomic exposure, counterparty exposure and substitutability. Although neither the Company nor Dai-ichi Life has been designated as a G-SII, the list of designated insurers may be updated in the future by the FSB. It is possible that due to the size and reach of the combined Dai-ichi Life group, or a change in the method of identifying G-SIIs, the combined group, including the Company, could be designated as a G-SII.
The IAIS has also developed ComFrame for the supervision of IAIGs. The details of this global capital standard and its applicability to the Company are evolving and uncertain at this time, but Dai-ichi Life has been designated an IAIG by JFSA. As such, the Company, may be subject to supervision requirements, capital measurement standards, and enhanced disclosures beyond those applicable to any competitors who are not designated as an IAIG.
PLC’s ultimate controlling parent, Dai-ichi Life, is also subject to regulation by the JFSA. Under applicable laws and regulations, Dai-ichi Life is required to provide notice to or obtain the consent of the JFSA prior to taking certain actions or engaging in certain transactions, either directly or indirectly through its subsidiaries, including the Company, and its consolidated subsidiaries, which could limit the ability of the Company to engage in certain transactions or business initiatives.
While it is not yet known how or the extent to which the Company will be impacted by these regulations, the Company may experience increased costs of compliance, increased disclosure, less flexibility in capital management, and more burdensome regulation and capital requirements for specific lines of business. In addition, such regulations could impact the business of the Company and its reserve and capital requirements, financial condition, or results of operations.
NAIC actions, pronouncements and initiatives may affect the Company’s product profitability, reserve and capital requirements, financial condition, or results of operations.
Although some NAIC pronouncements, particularly as they affect accounting, reserving and risk-based capital issues, may take effect automatically without affirmative action taken by the states, the NAIC is not a governmental entity and its processes and procedures do not comport with those to which governmental entities typically adhere. Therefore, it is possible that actions could be taken by the NAIC that become effective without the procedural safeguards that would be present if governmental action was required. In addition, with respect to some financial regulations and guidelines, states sometimes defer to the interpretation of the insurance department of a non-domiciliary state. Neither the action of the non-domiciliary state nor the action of the NAIC is binding on a domiciliary state. Accordingly, a state could choose to follow a different interpretation. The Company is also subject to the risk that compliance with any particular regulator’s interpretation of a legal, accounting, or actuarial issue may result in non-compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. There is an additional risk that any particular regulator’s interpretation of a legal, accounting or actuarial issue may change over time to the Company’s detriment, or that changes to the overall legal or market environment may cause the Company to change its practices in ways that may, in some cases, limit its growth or profitability. Statutes, regulations, interpretations, and instructions may be applied with retroactive impact, particularly in areas such as accounting, reserve and risk-based capital requirements. Also, regulatory actions with prospective impact can potentially have a significant impact on currently sold products.
The NAIC is also considering changes to accounting and risk-based capital regulations, risk-based capital calculations, governance practices of insurers, and other items. Additionally, the NAIC has developed a group capital calculation that measures capital across U.S.-based insurance groups using an RBC aggregation method with adjustments for all entities within the insurance holding company system. The Company cannot currently estimate what impact these more focused inquiries or proposed changes, if they occur, will have on its product mix, product profitability, reserve and capital requirements, financial condition, or results of operations.
The Company is subject to insurance guaranty fund laws, rules and regulations that could adversely affect the Company’s financial condition or results of operations.
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. From time to time, companies may be asked to contribute amounts beyond prescribed limits. It is possible that the Company could be assessed with respect to product lines not offered by the Company. In 2017, the NAIC adopted revisions to the Life and Health Insurance Guaranty Association Model Act, which has been adopted by thirty-seven states as of December 2022 and more states are expected to follow suit. As adopted by the NAIC, the Model Act would result in an increase to the percentage of liabilities attributable to any future long term care provider insolvency that can be assessed to life insurers. Legislation may be introduced in various states with respect to guaranty fund assessment laws related to
insurance products, including long term care insurance and other specialty products, that differs from the revised Model Act and which increases the cost of future assessments and/or alters future premium tax offsets received in connection with guaranty fund assessments. Additionally, judicial review may affect liquidation orders against insolvent companies, which could impact the guaranty fund system. The Company cannot predict the amount, nature or timing of any future assessments or legislation, any of which could have a material and adverse impact on the Company’s financial condition or results of operations.
Laws, rules, and regulations promulgated in connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely affect the results of operations or financial condition of the Company.
The Dodd-Frank Act enacted in July 2010 made sweeping changes to the regulation of financial services entities, products and markets. The Dodd-Frank Act generally provides for enhanced federal supervision of financial institutions, including insurance companies in certain circumstances, and financial activities that represent a systemic risk to financial stability or the economy. Certain provisions of the Dodd-Frank Act are or may become applicable to us, our competitors or those entities with which we do business, including, but not limited to: the establishment of a comprehensive federal regulatory regime with respect to derivatives; the establishment of the Federal Insurance Office; changes to the regulation of broker-dealers and investment advisors; changes to the regulation of reinsurance; the imposition of additional regulation over credit rating agencies; the imposition of concentration limits on financial institutions that restrict the amount of credit that may be extended to a single person or entity; and mandatory on-facility execution and clearing of certain derivative contracts. We cannot predict with certainty how the Dodd-Frank Act will continue to affect the financial markets generally, or impact our business, ratings, results of operations, financial condition or liquidity.
Among other things, the Dodd-Frank Act imposed a comprehensive regulatory regime on the OTC derivatives marketplace and granted new joint regulatory authority to the SEC and the CFTC over OTC derivatives. Certain of the Company’s derivatives operations are subject to, among other things, new recordkeeping, reporting and documentation requirements and execution and clearing requirements for certain swap transactions ((currently, certain interest rate swaps and index-based credit default swaps; cleared swaps require the posting of margin to a clearinghouse via a futures commission merchant and, in some case, to the futures commission merchant as well). As a result of the transition to central clearing and the margin requirements for OTC derivatives, the Company will be required to hold more cash and highly liquid securities resulting in lower yields in order to satisfy the projected increase in margin required. In addition, increased capital charges imposed by regulators on non-cash collateral held by bank counterparties and central clearinghouses is expected to result in higher hedging costs, causing a reduction in income from investments.
The Dodd-Frank Act authorized the creation of the CFPB, which has supervisory authority over certain non-banks whose activities or products it determines pose risks to consumers. Certain of the Company’s subsidiaries sell products that may be regulated by the CFPB. The CFPB continues to bring enforcement actions involving a growing number of issues, including actions brought jointly with state Attorneys General, which could directly or indirectly affect the Company or any of its subsidiaries. The Company is unable at this time to predict the impact of these activities on the Company.
New and amended regulations regarding the standard of care or standard of conduct applicable to investment professionals, insurance agencies, and financial institutions that recommend or sell annuities or life insurance products may have a material adverse impact on our ability to sell annuities and other products and to retain in-force business and on our financial condition or results of operations.
Sales of life insurance policies and annuity contracts offered by the Company are subject to regulations relating to sales practices adopted by a variety of federal and state regulatory authorities. Certain annuities and life insurance policies such as variable annuities and variable universal life insurance are regulated under the federal securities laws administered by the SEC. On June 5, 2019, the SEC adopted a comprehensive package of rulemakings and interpretations relating to the standard of conduct applicable to broker-dealers, investment advisers, and their representatives when making certain recommendations to retail customers. Regulation Best Interest (“Regulation BI”), a new rule establishing a “best interest” standard of conduct for broker-dealers and their natural associated
persons applies when making recommendations to retail customers of any securities transaction or investment strategy involving securities or regarding the opening of an account. In addition to Regulation BI, the SEC also adopted a new rule and amended existing rules to require broker-dealers and registered investment advisers to provide a brief relationship summary to retail investors (“Form CRS Rules”). The obligations under Regulation BI and Form CRS became effective on June 30, 2020. The rulemaking package also included two interpretations: (i) the investment adviser interpretation, which clarifies certain aspects of the standard of conduct applicable to registered investment advisers under section 206 of the Investment Advisers Act of 1940 (“Advisers Act”), and (ii) the “solely incidental” interpretation, which clarifies the broker-dealer exclusion from the definition of “investment adviser” under section 202 of the Advisers Act.
In addition, broker-dealers, insurance agencies and other financial institutions sell the Company’s annuities to employee benefit plans governed by provisions of the ERISA and IRAs that are governed by similar provisions under the Code. Consequently, our activities and those of the firms that sell the Company’s products are subject to restrictions that require ERISA fiduciaries to perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that prohibit ERISA fiduciaries from causing a covered plan or retirement account to engage in certain prohibited transactions absent an exemption. The DOL issued its fiduciary rule package on June 29, 2020 and published in the Federal Register on July 7, 2020.
The NAIC passed revisions to the Suitability in Annuity Transactions Model Regulation which are intended to impose a higher standard of care on insurers who sell annuities. Likewise, several states are considering or have adopted legislation or regulatory measures that would implement new requirements and standards applicable to the sale of annuities and, in some cases, life insurance products. While many states are pursuing uniformity through NAIC’s model , these standards can vary widely in scope, applicability, and timing of implementation. The adoption and enactment of these or any revised standards as law or regulation could have a material adverse effect upon the manner in which the Company’s products are sold and impact the overall market for such products.
There remains significant uncertainty surrounding the final form that these regulations may take. Our current distributors may continue to move forward with their plans to limit the number of products they offer, including the types of products offered by the Company. The Company may find it necessary to change sales representative and/or broker compensation, to limit the assistance or advice it can provide to owners of the Company’s annuities, to replace or engage additional distributors, or otherwise change the manner in which it designs, supervises, and supports sales of its annuities and, where applicable, life insurance products. In addition, the Company continues to incur expenses in connection with initial and ongoing compliance obligations with respect to such rules, and in the aggregate these expenses may be significant. Any of the foregoing regulatory, legislative, or judicial measures or the reaction to such activity by consumers or other members of the insurance industry could have a material adverse impact on our ability to sell annuities and other products, to retain in-force business, and on our financial condition or results of operations.
The Company may be subject to regulation, investigations, enforcement actions, fines and penalties imposed by the SEC, FINRA and other federal and international regulators in connection with its business operations.
Certain life insurance policies, contracts, and annuities offered by the Company are subject to regulation under the federal securities laws administered by the SEC. The federal securities laws contain regulatory restrictions and criminal, administrative, and private remedial provisions. From time to time, the SEC and the FINRA examine or investigate the activities of broker-dealers, insurer’s separate accounts and investment advisors, including the Company’s affiliated broker-dealers and investment advisers. These examinations or investigations often focus on the activities of the registered representatives and registered investment advisers doing business through such entities and the entities’ supervision of those persons. It is possible that any examination or investigation could lead to enforcement action by the regulator and/or may result in payments of fines and penalties, payments to customers, or both, as well as changes in systems or procedures of such entities, any of which could have a material adverse effect on the Company’s financial condition or results of operations.
The Company may also be subject to regulation by governments of the countries in which it currently does, or may in the future, do, business, as well as regulation by the U.S. Government with respect to its operations in foreign countries, such as the Foreign Corrupt Practices Act. Penalties for violating the various laws governing the
Company’s business in other countries may include restrictions upon business operations, fines and imprisonment, both within the U.S. and abroad. U.S. enforcement of anti-corruption laws continues to increase in magnitude, and penalties may be substantial.
The Company is subject to conditions and requirements set forth in the TCPA, which places restrictions on the use of automated telephone and facsimile machines. Class action lawsuits alleging violations of the act have been filed against a number of companies, including life insurance carriers. These class action lawsuits contain allegations that defendant carriers were vicariously liable for the alleged wrongful conduct of agents who violated the TCPA. Some of the class actions have resulted in substantial settlements against other insurers. Any such actions against the Company could result in a material adverse effect upon our financial condition or results of operations.
Other types of regulation that could affect the Company and its subsidiaries include, but are not limited to, insurance company investment laws and regulations, state statutory accounting and reserving practices, antitrust laws, minimum solvency requirements, enterprise risk requirements, state securities laws, federal privacy laws, cybersecurity regulation, technology and data regulations, insurable interest laws, federal anti-money laundering and anti-terrorism laws, employment and immigration laws (including laws in Alabama where over half of the Company’s employees are located), and because the Company owns and operates real property, state, federal, and local environmental laws. Under some circumstances, severe penalties may be imposed for breach of these laws.
The Company cannot predict what form any future changes to laws and/or regulations affecting participants in the financial services sector and/or insurance industry, including the Company and its competitors or those entities with which it does business, may take, or what effect, if any, such changes may have.
The Company’s ability to enter into certain transactions is influenced by how such a transaction might affect Dai-ichi Life’s taxation in Japan.
Changes to tax law, or interpretations of existing tax law could adversely affect the Company and its ability to compete with non-insurance products or reduce the demand for certain insurance products.
In general, the tax law exempts policyholders from current taxation on the increase in value of their life insurance and annuity products during their accumulation phase. This favorable tax treatment provides most of the Company’s products with a competitive advantage over products offered by non-insurance companies. To the extent that the law is revised to either reduce the tax-favored status of life insurance and annuity products, or instead establishes the tax-favored status of competing products, then all life insurance companies (including the Company and its subsidiaries) would be adversely affected regarding the marketability of their products. Absent grandfathering, such changes would generally cause increased surrenders of existing life insurance and annuity products. For example, a change in law that further restricts the deductibility of interest expense when a business owns a life insurance product would result in increased surrenders of these products.
The Company is subject to corporate income, excise, franchise, and premium taxes. The tax law provides certain benefits to the Company, such as the dividends-received deduction, the deferral of current taxation on certain financial instruments’ economic income, and the current deduction for future policy benefits and claims.
Financial services companies and their subsidiaries are frequently the targets of legal proceedings and increased regulatory scrutiny, including class action litigation which could result in substantial judgments, and law enforcement investigations.
A number of judgments have been returned against insurers, broker-dealers, and other providers of financial services involving, among other things, sales, underwriting practices, product design, product disclosure, product administration, denial or delay of benefits, benefit payment methods, charging excessive or impermissible fees, recommending unsuitable products to customers, breaching fiduciary or other duties to customers, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or other persons with whom the company does business, employment-related matters, payment of sales or other contingent commissions, and other matters. Often these legal proceedings have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-
economic compensatory damages, which creates the potential for unpredictable material adverse judgments or awards in any given legal proceeding. Arbitration awards are subject to very limited appellate review. In addition, in some legal proceedings, companies have made material settlement payments. In some instances, substantial judgments may be the result of a party’s perceived ability to satisfy such judgments as opposed to the facts and circumstances regarding the claims.
The financial services and insurance industries also are sometimes the target of law enforcement and regulatory investigations and actions relating to the numerous laws and regulations that govern such companies. Resulting publicity about one company may generate inquiries into or litigation against other financial service providers, even those who do not engage in the business lines or practices at issue in the original action. From time to time, the Company receives subpoenas, requests, or other inquiries and responds to them in the ordinary course of business.
Group health coverage issued through associations and credit insurance coverages have received some negative publicity in the media as well as increased regulatory consideration and review and litigation. The Company has a small closed block of group health insurance coverage that was issued to members of an association.
A number of lawsuits and investigations regarding the method of paying claims have been initiated against life insurers. The Company offers payment methods that may be similar to those that have been the subject of such lawsuits and investigations.
The Company, like other financial services companies in the ordinary course of business, and its subsidiaries, including the Company, are involved in legal proceedings and regulatory actions. The occurrence of such matters may become more frequent and/or severe when general economic conditions deteriorate. The Company may be unable to predict the outcome of such matters, whether they will expand into other areas not yet contemplated, whether they will result in changes in regulation, whether activities currently thought to be lawful will be characterized as unlawful, or the impact, if any, of such scrutiny on the financial services and insurance industry or the Company, and may be unable to or provide a reasonable range of potential losses. Given the inherent difficulty in predicting the outcome of such matters, it is possible that an adverse outcome in certain such matters could be material to the Company’s results for any particular reporting period.
The use of reinsurance introduces variability in the Company’s statements of operations.
The timing of premium payments to and receipt of expense allowances from reinsurers differs from the Company’s receipt of customer premium payments and incurrence of expenses. These timing differences introduce variability in certain components of the Company’s statements of operations and may also introduce variability in the Company’s quarterly financial results.
The Company’s reinsurers could fail to meet assumed obligations, increase rates, terminate agreements or be subject to adverse developments that could affect the Company.
The Company and its insurance subsidiaries cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets or other issues, the Company remains liable with respect to ceded insurance should any reinsurer fail to meet the assumed obligations. Therefore, the failure, insolvency, or inability or unwillingness to pay under the terms of the reinsurance agreement with the Company of one or more of the Company’s reinsurers could negatively impact the Company’s earnings and financial position.
The Company’s results and its ability to compete are affected by the availability and cost of reinsurance. Premium rates charged by the Company are based, in part, on the assumption that reinsurance will be available at a certain cost. Certain reinsurers have attempted to or may attempt to increase the rates they charge the Company for reinsurance, including rates for new policies the Company is issuing and rates related to policies that the Company has already issued. The Company may not be able to increase the premium rates it charges for policies it has already issued, and for competitive reasons it may not be able to raise the premium rates it charges for new policies to offset the increase in rates charged by reinsurers. If the cost of reinsurance were to increase, if reinsurance were to become unavailable, if alternatives to reinsurance were not available to the Company, or if a reinsurer should fail to meet its obligations, the Company could be adversely affected.
The number of life reinsurers has remained relatively constant in recent years. If the reinsurance market contracts in the future, the Company’s ability to continue to offer its products on terms favorable to it could be adversely impacted.
In addition, reinsurers may face challenges regarding illiquid credit and/or capital markets, investment downgrades, rating agency downgrades, deterioration of general economic conditions, and other factors negatively impacting the financial services industry. If reinsurers, including those with significant exposure to international markets are unable to meet their obligations, the Company would be adversely impacted.
The Company has implemented a reinsurance program through the use of a captive reinsurer. Under this arrangement, the captive owned by the Company serves as the reinsurer, and results of ceding business to this captive reinsurer are reflected in accordance with Statutory accounting guidelines. The success of the Company’s captive reinsurance program is dependent on a number of factors outside the control of the Company, including, but not limited to, continued access to financial solutions, a favorable regulatory environment, and the overall tax position of the Company. If the captive reinsurance program is not successful, the Company’s financial condition could be adversely impacted.
The Company’s policy claims fluctuate from period to period resulting in earnings volatility.
The Company’s results may fluctuate from period to period due to fluctuations in the amount of policy claims received. In addition, certain of the Company’s lines of business may experience higher claims if the economy is growing slowly or in recession, or if equity markets decline. Also, insofar as the Company continues to retain a larger percentage of the risk of newly written life insurance products than it has in the past, its financial results may have greater variability due to fluctuations in mortality results. As a result of COVID-19, the Company has experienced, and it may continue to experience, an elevated incidence and level of life insurance claims. The Company expects to incur higher claims expense in our life insurance and deferred annuity business, partially offset by lower life contingent payments in our payout annuity and structured settlement business, as a result of COVID-19 related mortality.
The Company operates in a mature, highly competitive industry, which could limit our ability to gain or maintain its position in the industry and negatively affect profitability.
The insurance industry is a mature and highly competitive industry. The Company encounters significant competition in all lines of business from other insurance companies, many of which have greater financial resources and higher ratings than the Company and which may have a greater market share, offer a broader range of products, services or features, assume a greater level of risk, have lower operating or financing costs, or have different profitability expectations than the Company. The Company also faces competition from other providers of financial services. Competition could result in, among other things, lower sales or higher lapses of existing products. Consolidation and expansion among banks, insurance companies, distributors, and other financial service companies with which the Company does business could also have an adverse effect on the Company’s financial condition and results of operations if such companies require more favorable terms than previously offered to the Company or if such companies elect not to continue to do business with the Company following consolidation or expansion.
The Company’s ability to compete is dependent upon, among other things, its ability to attract and retain distribution channels to market its insurance and investment products, its ability to develop competitive and profitable products, its ability to maintain competitive unit costs, and its maintenance of adequate ratings from rating agencies. As technology evolves, comparison of a particular product of any company for a particular customer with competing products for that customer is more readily available, which could lead to increased competition as well as agent or customer behavior, including persistency that differs from past behavior.
Developments in technology may impact our business.
Technological developments and unforeseen changes in technology may impact our business. Technology changes are increasing customer choices about how to interact with companies generally. Evolving customer preferences may drive a need to redesign our products, and our distribution channels and customer service areas may need to change to become more automated and available at the place and time of the customer’s choosing.
Additionally, changes in technology may impact our operational effectiveness and could have an adverse effect on our unit cost competitiveness. Such changes have the potential to disrupt our business model.
Technology may also have a significant impact on the companies in which we invest. For example, consumers may change their purchasing behavior to favor online shopping activity, which may adversely affect the value of retail properties in which we invest.
Advancements in medical technologies may also impact our business. For example, genetic testing and the availability of that information unequally to consumers and insurers can result in anti-selection risks if data from genetic testing gives our prospective customers a clearer view into their future health and longevity expectations, allowing them to select products protecting them against likelihoods of mortality or longevity with more precision based on information that is not available to us. Also, advancements in medical technologies that extend lives may challenge our actuarial assumptions, especially in the annuity business.
The Company’s ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business.
The Company’s ability to maintain competitive unit costs is dependent upon a number of factors, such as the level of new sales, persistency of existing business, the impact of inflation, and expense management. A decrease in sales or persistency without a corresponding reduction in expenses may result in higher unit costs. Additionally, a decrease in persistency of existing business may result in lower reported earnings. Some of the Company’s products do not contain surrender charge features and such products can be surrendered or exchanged without penalty. A decrease in persistency may also result in higher claims.
Risks Related to Privacy and Cyber Security
A disruption or cyberattack affecting the electronic, communication and information technology systems or other technologies of the Company or those on whom the Company relies could adversely affect the Company’s business, financial condition, and results of operations.
In conducting its business, the Company relies extensively on various electronic systems, including computer systems, networks, data processing and administrative systems, and communication systems. The Company’s business partners, counterparties, service providers, and distributors also rely on such systems, as do securities exchanges and financial markets that are important to the Company’s ability to conduct its business. These systems or their functionality could be disabled, disrupted, damaged, or destroyed by intentional or unintentional acts or events such as cyberattacks, viruses, sabotage, unauthorized tampering, physical or electronic break-ins or other security breaches, acts of war or terrorism, human error, system failures, failures of power or water supply, or the loss or malfunction of other utilities or services. They may also be disabled, disrupted, damaged, or destroyed by natural events such as storms, tornadoes, fires, floods or earthquakes. Disruption, damage, or destruction of any of these systems could cause the Company or others on whom the Company relies to be unable to conduct business for an extended period of time or could result in significant expenditures to replace, repair, or reinstate functionality, which could materially adversely impact the Company’s business and its financial condition and results of operations.
While the Company and others on whom it depends try to identify threats and implement measures to protect their systems, such protective measures may not be sufficient. Additionally, the Company may not become aware of sophisticated cyberattacks for some time after they occur, which could increase the Company’s exposure. The Company may have to incur significant costs to address or remediate interruptions, threats, and vulnerabilities in its information and technology systems and to comply with existing and future regulatory requirements related thereto. These risks are heightened as the frequency and sophistication of cyberattacks increase. The risk of cyberattacks may be greater during periods of geopolitical turmoil. In February 2022, the New York State Department of Financial Services issued a warning that the Russian invasion of Ukraine significantly elevates the cyber risk for the U.S. financial sector.
The Company has relationships with vendors, distributors, and other third parties that provide operational and/or information technology services to the Company. Although the Company conducts due diligence, negotiates
contractual provisions, and, in many cases, conducts periodic reviews of such third parties to confirm compliance with its information security standards, the failure of such third parties’ computer systems and/or their disaster recovery plans for any reason might cause significant interruptions to the Company’s operations. The Company maintains cyber liability insurance that provides both third-party liability and first party liability coverages, its insurance may not be sufficient to protect us against all losses.
Confidential information maintained in the systems of the Company or other parties upon which the Company relies could be compromised or misappropriated as a result of security breaches or other related lapses or incidents, damaging the Company’s business and reputation and adversely affecting its financial condition and results of operations.
In the course of conducting its business, the Company retains confidential information, including information about its customers and proprietary business and financial information. The Company retains confidential information in various electronic systems, including computer systems, networks, data processing and administrative systems, and communication systems. The Company maintains physical, administrative, and technical safeguards to protect such information and it relies on commercial technologies to maintain the security of its systems and the transmission of such information to other parties, including its business partners, counterparties and service providers. The Company’s business partners, counterparties and service providers likewise maintain confidential information, including, in some cases, customer information, on behalf of the Company. An intentional breach or unintentional compromise of the security measures of the Company or such other parties could result in the disclosure, misappropriation, misuse, alteration, or destruction of the confidential information retained by or on behalf of the Company, or the inability of the Company to conduct business for an indeterminate amount of time. Any of these events or circumstances could damage the Company’s business and adversely affect its financial condition and results of operations by, among other things, causing harm to the Company’s business operations, reputation and customers, deterring customers and others from doing business with the Company, subjecting the Company to significant regulatory, civil, and criminal liability, and requiring the Company to incur significant legal and other expenses.
Despite the Company’s efforts to ensure the integrity of its systems, it is possible that the Company may not be able to anticipate and implement effective preventative or detective measures against security breaches of all types because the techniques used to attack technologies and data systems change frequently or are not recognized until launched and because cyberattacks can originate from a wide variety of sources or parties. Those parties may also attempt to fraudulently induce employees, customers, or other users of the Company’s system, through phishing, phone calls, or other efforts, to deliberately or inadvertently disclose sensitive information in order to gain access to our data or that of the Company’s customers or clients.
Additionally, cyber threats and related legal and regulatory standards applicable to our business are rapidly evolving and may subject the Company to heightened legal standards, new theories of liability, and material claims and penalties that the Company cannot currently predict or anticipate. As cyber threats and applicable legal standards continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance its protective measures and computer systems, and to investigate and remediate any information security vulnerabilities. If the Company experiences cyberattacks or other data security events or other technological failures or lapses, including unauthorized access to, loss of, or acquisition of information collected or maintained by the Company or its business partners or vendors, the Company may be subject to regulatory inquiries or proceedings, litigation or reputational damage, or be required to pay claims, fines, or penalties. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to the Company’s customer data, the Company may also have obligations to notify customers about the incident, and the Company may need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. The Company has experienced cyber and data security events in the past, both directly and indirectly through a third-party relationship. None of those events caused the Company material harm or loss, but there can be no assurance that the Company will not suffer such harm or loss in the future.
Compliance with existing and emerging privacy regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of consumer information could adversely affect our reputation and have a material adverse effect on our business, financial condition and results of operations.
The collection and maintenance of personal data from customers, beneficiaries, agents, employees, and other consumers, including personally identifiable non-public financial and health information, subjects the Company to regulation under various federal and state privacy laws. These laws require that the Company institute certain policies and procedures in its business to safeguard its consumers’ personal data against improper use or disclosure. The requirements vary by jurisdiction, and it is expected that additional laws and regulations will continue to be enacted. Since 2018, five other states (California, Virginia, Colorado, Connecticut, and Utah) passed consumer privacy laws which create new consumer rights and business responsibilities. Complying with these and other existing, emerging and changing privacy requirements could cause the Company to incur substantial costs or require it to change its business practices and policies. Non-compliance could result in monetary penalties or significant legal liability.
Many of the associates who conduct our business have access to, and routinely process, personal information of consumers through a variety of media, including information technology systems. The Company relies on various internal processes and controls to protect the confidentiality of consumer information that is accessible to, or in the possession of, its associates. It is possible that an associate could, intentionally or unintentionally, disclose or misappropriate confidential consumer information or our data could be the subject of a cybersecurity attack. If the Company fails to maintain adequate internal controls or if its associates fail to comply with its policies and procedures, misappropriation or intentional or unintentional inappropriate disclosure or misuse of consumer information could occur. Such internal control inadequacies or non-compliance could materially damage the Company’s reputation or lead to regulatory, civil or criminal investigations and penalties.
In addition, the Company analyzes customer data to better manage our business. There has been increased scrutiny, including from U.S. state and federal regulators, regarding the use of “big data” techniques such as price optimization. In August 2020, members of the NAIC unanimously adopted guiding principles on artificial intelligence, to inform and articulate general expectations for businesses, professionals and stakeholders across the insurance industry as they implement artificial intelligence tools to facilitate operations. The Company cannot predict what, if any, actions may be taken with regard to “big data,” but any inquiries and limitations could have a material impact on our business, financial condition and results of operations.
Risk Related to Acquisitions, Dispositions or Other Corporate Structural Matters
The Company may not realize its anticipated financial results from its acquisitions strategy.
The Company’s Acquisitions segment focuses on the acquisitions of companies and business operations, and the coinsurance of blocks of insurance business, which have increased the Company’s earnings. However, there can be no assurance that the Company will have future suitable opportunities for, or sufficient capital available to fund, such transactions. The Acquisitions segment faces significant competition, and if our competitors have access to capital on more favorable terms or at a lower cost, lower investment return requirements, advantageous tax treatment, or lower risk tolerances, then our ability to compete for acquisitions may be diminished. In addition, there can be no assurance that the Company will be able to realize any projected operating efficiencies or achieve the anticipated financial results from such transactions.
The Company may be unable to complete an acquisition transaction. Completion of an acquisition transaction may be more costly or take longer than expected, or may have a different or more costly financing structure than initially contemplated. In addition, the Company may not be able to complete or manage multiple acquisition transactions at the same time, or the completion of such transactions may be delayed or be more costly than initially contemplated. The Company, its affiliates, or other parties to the transaction may be unable to obtain in a timely manner regulatory approvals required to complete an acquisition transaction. If the Company identifies and completes suitable acquisitions, it may not be able to successfully integrate the business in a timely or cost-effective manner, or retain key personnel and business relationships necessary to achieve anticipated financial results. In
addition, a number of risks may arise in connection with businesses or blocks of insurance business that the Company acquires or reinsures, including unforeseen liabilities or asset impairments; rating agency reactions; and regulatory requirements that could impact our operations or capital requirements. Additionally, in connection with its acquisition transactions that involve reinsurance, the Company assumes, or otherwise becomes responsible for, the obligations of policies and other liabilities of other insurers. Any regulatory, legal, financial, or other adverse development affecting the other insurer could also have an adverse effect on the Company.
The Company depends on the ability of its subsidiaries to transfer funds to it to meet its obligations.
The Company owns insurance companies. A portion of the Company’s funding comes from dividends from its operating subsidiaries, revenues from investment, data processing, legal, and management services rendered to subsidiaries, investment income, and external financing. These funding sources support the Company’s general corporate needs including its debt service. If the funding the Company receives from its subsidiaries is insufficient for it to fund its debt service and other obligations, it may be required to raise funds through the incurrence of debt, or the sale of assets.
The states in which the Company’s subsidiaries are domiciled impose certain restrictions on the subsidiaries’ ability to pay dividends and make other payments to the Company. State insurance regulators may prohibit the payment of dividends or other payments to the Company by its subsidiaries if they determine that the payments could be adverse to the insurance subsidiary or its policyholders or contract holders. In addition, the amount of surplus that the Company’s subsidiaries could pay as dividends is constrained by the amount of surplus they hold to maintain their financial strength ratings, to provide an additional layer of margin for risk protection and for future investment in our businesses.
The Company’s use of affiliate and captive reinsurance companies to finance statutory reserves related to its fixed annuity and term and universal life products and to reduce volatility affecting its variable annuity products may be limited or adversely affected by regulatory action, pronouncements, and interpretations.
The Company currently uses a captive reinsurance company to finance certain statutory reserves based on a regulation entitled “Valuation of Life Insurance Policies Model Regulation,” commonly known as “Regulation XXX,” and a supporting guideline entitled “The Application of the Valuation of Life Insurance Policies Model Regulation,” commonly known as “Guideline AXXX,” which are associated with term life insurance and universal life insurance with secondary guarantees, respectively. NAIC and state adoption of Actuarial Guideline XLVIII and the Term and Universal Life Insurance Reserve Financing Model Regulation may make the use of new captive structures in the future less capital efficient and/or lead to lower product returns and could impact the Company’s ability to engage in certain reinsurance transactions with non-affiliates.
The NAIC adopted revisions to the Preamble of the NAIC Financial Regulation Standards and Accreditation Program that includes within the definition of “multi-state insurer” certain insurer-owned captives and special purpose vehicles that are single-state licensed but assume reinsurance from cedants operating in multiple states. The revised definition subjects certain captives, including XXX/AXXX captives, variable annuity and long-term care captives, to all of the accreditation standards applicable to other traditional multi-state insurers, including standards related to capital and surplus requirements, risk-based capital requirements, investment laws, and credit for reinsurance laws. We do not expect the revised definition to affect our existing life insurance captives (or our ability to engage in life insurance captive transactions in the future).
The Company uses an affiliated Bermuda domiciled reinsurance company, Protective Life Reinsurance Bermuda Ltd. (“PL Re”) to reinsure certain fixed annuity business. PL Re is licensed as a Class C entity for affiliate reinsurance and holds reserves based on Bermuda insurance regulations.
Any regulatory action or change in interpretation that materially adversely affects the Company’s use or materially increases the Company’s cost of using captives or reinsurers for the affected business, either retroactively or prospectively, could have a material adverse impact on the Company’s financial condition or results of operations. If the Company were required to discontinue its use of captives or affiliate reinsurers for intercompany reinsurance transactions on a retroactive basis, adverse impacts would include early termination fees payable to third party finance providers with respect to certain structures, diminished capital position, and higher cost of capital.
Additionally, finding alternative means to support policy liabilities efficiently is an unknown factor that would be dependent, in part, on future market conditions and the Company’s ability to obtain required regulatory approvals. On a prospective basis, discontinuation of the use of captives or affiliate reinsurers could impact the types, amounts and pricing of products offered by the Company’s subsidiaries.
General Risks
The Company is exposed to risks related to natural and man-made disasters and catastrophes, such as diseases, epidemics, pandemics (including the coronavirus, COVID-19), malicious acts, cyberattacks, terrorist acts, and climate change, which could adversely affect the Company’s operations and results.
While the Company has obtained insurance, implemented risk management and contingency plans, and taken preventive measures and other precautions, no predictions of specific scenarios can be made and such measures may not adequately predict the impact on the Company from such events. A natural or man-made disaster or catastrophe, including a severe weather or geological event such as a storm, tornado, fire, flood, earthquake, disease, epidemic, pandemic (e.g. the novel coronavirus COVID-19), malicious act, cyberattack, terrorist act, or the effects of climate change, could cause the Company’s workforce to be unable to engage in operations at one or more of its facilities or result in short- or long-term interruptions in the Company’s business operations, any of which could be material to the Company’s operating results for a particular period. Certain of these events could also adversely affect the mortality, morbidity, or other experience of the Company or its reinsurers and have a significant negative impact on the Company. In addition, claims arising from the occurrence of such events or conditions could have a material adverse effect on the Company’s financial condition and results of operations. Such events or conditions could also have an adverse effect on lapses and surrenders of existing policies, as well as sales of new policies. In addition, such events or conditions could result in a decrease or halt in economic activity in large geographic areas, as well as additional regulation or restrictions on the Company in the conduct of its business. The possible macroeconomic effects of such events or conditions could also adversely affect the Company’s asset portfolio, as well as many other aspects of the Company’s business, financial condition, and results of operations.
The Company’s results and financial condition may be negatively affected should actual experience differ from management’s models, assumptions, or estimates.
In the conduct of business, the Company makes certain assumptions and utilizes certain internal models regarding mortality, morbidity, persistency, expenses, interest rates, equity markets, tax, business mix, casualty losses, contingent liabilities, investment performance, and other factors appropriate to the type of business it expects to experience in future periods. These assumptions and models are used to calculate statutory liabilities for some products, accruals, future earnings, and various other components of the Company’s statements of admitted assets, liabilities, and capital and surplus. These assumptions and models are also used in the operation of the Company’s business in making decisions crucial to the success of the Company, including the pricing of acquisitions and products. The Company’s actual experience along with estimates of future cash flows are used to prepare the Company’s financial statements. To the extent the Company’s actual experience or estimates of future cash flows differ from original estimates, the Company’s financial condition may be adversely affected.
Mortality, morbidity, and casualty assumptions incorporate underlying assumptions about many factors. Such factors may include, for example, how a product is distributed, for what purpose the product is purchased, the mix of customers purchasing the products, persistency and lapses, future progress in the fields of health and medicine, and the projected level of used vehicle values. Actual mortality, morbidity, and/or casualty experience may differ from expectations derived from the Company’s models. In addition, continued activity in the viatical, stranger-owned, and/or life settlement industry could cause the Company’s level of lapses to differ from its assumptions about premium persistency and lapses, which could negatively impact the Company’s performance.
Additionally, the calculations the Company uses to estimate various components of its statements of admitted assets, liabilities, and capital and surplus, and statements of operations are necessarily complex and involve analyzing and interpreting large quantities of data. The systems and procedures that the Company develops in connection and the Company’s reliance upon third parties could result in errors in the calculations that impact our financial statements or affect our financial condition.
Models, assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revisions over time. Accordingly, the Company’s results may be affected, positively or negatively, from time to time, by errors in the design, implementation, or use of its models, actual results differing from assumptions, by changes in estimates, and by changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.
The Company is dependent on the performance of others.
The Company’s results may be affected by the performance of others because the Company has entered into various arrangements involving other parties. For example, variable life and annuity deposits are invested in funds managed by third parties, certain modified coinsurance assets are managed by third parties, and the Company enters into derivative transactions with various counterparties and clearinghouses. The Company may rely upon third parties to administer certain portions of its business or business that it reinsures. Any of the other parties upon which the Company depends may default on their obligations to the Company due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud, or other reasons. Such defaults could have a material adverse effect on the Company’s financial condition and results of operations.
Certain of these other parties may act on behalf of the Company or represent the Company in various capacities. Consequently, the Company may be held responsible for obligations that arise from the acts or omissions of these other parties.
Most of the Company’s products are sold through independent third-party distribution channels. There can be no assurance that the terms of these relationships will remain acceptable to us or the distributors, as they are subject to change as a result of business combinations, mergers, consolidation, or changes in business models, compensation arrangements, or new distribution channels. If one or more key distributors terminated their relationship with us, increased the costs of selling our products, or reduced the amount of sales they produce for us, our results of operations could be adversely affected. If we are unsuccessful in attracting and retaining key associates who conduct our business, sales of our products could decline and our results of operations and financial condition could be materially adversely affected.
Because our products are distributed through unaffiliated third-party distributors, we may not be able to fully monitor or control the manner of their distribution despite our training and compliance programs. If our products are distributed by such firms in an inappropriate manner, or to customers for whom they are unsuitable, we may suffer reputational and other harm to our business. In addition, our distributors may also sell our competitors’ products. If our competitors offer products that are more attractive than ours, or pay higher compensation than we do, these distributors may concentrate their efforts on selling our competitors’ products instead of ours.
The Company’s risk management policies, practices, and procedures could leave it exposed to unidentified or unanticipated risks, which could negatively affect its business or result in losses.
The Company has developed risk management policies and procedures and expects to continue enhancing them in the future. Nonetheless, the Company’s policies and procedures to identify, monitor, and manage both internal and external risks may not predict future exposures, which could be different or significantly greater than expected.
These identified risks may not be the only risks facing the Company. Additional risks and uncertainties not currently known to the Company may adversely affect its business, financial condition and/or results of operations.
The Company’s strategies for mitigating risks arising from its day-to-day operations may prove ineffective resulting in a material adverse effect on its results of operations and financial condition.
The Company’s performance is highly dependent on its ability to manage risks that arise from a large number of its day-to-day business activities, including, but not limited to, policy pricing, reserving and valuation, underwriting, claims processing, policy administration and servicing, administration of reinsurance, execution of its investment and hedging strategy, financial and tax reporting, and other activities, many of which are very complex. The Company also may rely on third parties for such activities. The Company seeks to monitor and control its exposure to risks arising out of or related to these activities through a variety of internal controls, management review
processes, and other mechanisms. However, the occurrence of unanticipated risks, or the occurrence of risks of a greater magnitude than expected, including those arising from a failure in processes, procedures or systems implemented by the Company or a failure on the part of employees or third parties upon which the Company relies in this regard, may have a material adverse effect on the Company’s financial condition or results of operations.
Events that damage our reputation or the reputation of our industry could adversely impact our business, results of operations, or financial condition.
There are events which could harm our reputation, including, but not limited to, regulatory investigations, adverse media commentary, legal proceedings, and cyber or other information security events. Depending on the severity of damage to the Company’s reputation, our sales of new business, and/or retention of existing business could be negatively impacted, and our ability to compete for acquisition transactions or engage in financial transactions may be diminished, all of which could adversely affect our results of operations or financial condition.
As with all financial services companies, the Company’s ability to conduct business is dependent upon consumer confidence in the industry and its products. Actions of competitors and financial difficulties of other companies in the industry could undermine consumer confidence and adversely affect retention of existing business and future sales of the Company’s insurance and investment products.
The Company may not be able to protect its intellectual property and may be subject to infringement claims.
The Company relies on a combination of contractual rights and copyright, trademark, patent, and trade secret laws to establish and protect its intellectual property. Although the Company uses a broad range of measures to protect its intellectual property rights, third parties may infringe or misappropriate its intellectual property. The Company may have to litigate to enforce and protect its copyrights, trademarks, patents, trade secrets, and know-how or to determine their scope, validity, or enforceability, which represents a diversion of resources that may be significant in amount and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of the Company’s intellectual property assets could have a material adverse effect on its business and ability to compete.
The Company also may be subject to costly litigation in the event that another party alleges its operations or activities infringe upon that party’s intellectual property rights. Any such claims and any resulting litigation could result in significant liability for damages. If the Company were found to have infringed third party patent or other intellectual property rights, it could incur substantial liability, and in some circumstances could be enjoined from providing certain products or services to its customers or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets, or licenses, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on the Company’s business, results of operations, and financial condition.
The Company may be required to establish a valuation allowance against its deferred tax assets, which could have a material adverse effect on the Company’s results of operations, financial condition, and capital position.
Deferred tax assets are attributable to certain differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets represent future savings of taxes which would otherwise be paid in cash. The realization of deferred tax assets is dependent upon the future generation of a sufficient amount of taxable income to ensure that the future tax deductions underlying such assets will result in a tax benefit. Realization may also be limited for other reasons, including but not limited to changes in tax rules or regulations. If it is determined that a certain deferred tax asset cannot be realized, then a deferred tax valuation allowance is established, with a corresponding charge to either adjusted operating income or other comprehensive income (depending on the nature of the deferred tax asset).
Based on the Company’s current assessment of its estimated future taxable income (including available tax planning opportunities) it is more likely than not that the Company will generate sufficient taxable income to realize its material deferred tax assets.. If future events differ from the Company’s current forecasts, a valuation allowance will be established, which could have a material adverse effect on the Company’s results of operations, financial condition, or capital position.
New accounting rules, changes to existing accounting rules, or the granting of permitted accounting practices to competitors could negatively impact the Company.
The Company is required to comply with SAP. SAP and various components of SAP (such as actuarial reserving methodology) are subject to constant review by the NAIC and its task forces and committees as well as state insurance departments in an effort to address emerging issues and otherwise improve or alter financial reporting. Certain NAIC pronouncements related to accounting and reporting matters take effect automatically without affirmative action by the states, and various proposals either are currently or have previously been pending before committees and task forces of the NAIC, some of which, if enacted, would negatively affect the Company. The NAIC is also currently working to reform model regulation in various areas. The Company cannot predict whether or in what form reforms will be enacted by state legislatures and, if so, whether the enacted reforms will positively or negatively affect the Company. In addition, the NAIC Accounting Practices and Procedures manual provides that state insurance departments may permit insurance companies domiciled in the state to depart from SAP by granting them permitted accounting practices. The Company cannot predict whether or when the insurance departments of the states of domicile of its competitors may permit them to utilize advantageous accounting practices that depart from SAP, the use of which is not permitted by the insurance departments of the states of domicile of the Company’s insurance subsidiaries. With respect to regulations and guidelines, states sometimes defer to the interpretation of the insurance department of the state of domicile. Neither the action of the domiciliary state nor action of the NAIC is binding on a state. Accordingly, a state could choose to follow a different interpretation. The Company can give no assurance that future changes to SAP or components of SAP or the granting of permitted accounting practices to its competitors will not have a negative impact on the Company.
Directors and Executive Officers
The following table contains information regarding our current directors and executive officers. All of our executive officers and directors are elected annually and serve at the pleasure of our Board of Directors (the “Company Board”). No immediate family relationship exists between any directors of the Company or PLC or executive officers and any other directors or executive officers. Certain of our executive officers also serve as executive officers and/or directors of various of the Company’s subsidiaries. Our directors, Mr. Bielen, Mr. Walker and Mr. Wells, are officers of the Company and officers and employees of PLC. Accordingly, none of our directors qualifies as an independent director under the independence standards of the NYSE.
| | | | | | | | | | | | | | |
Name | | Age (as of 3/31/2023) | | Title |
Richard J. Bielen | | 62 | | President, Chief Executive Officer, Director and Chairman of the Board |
D. Scott Adams | | 59 | | Executive Vice President, Corporate Responsibility, Strategy, and Innovation |
Lance Black | | 52 | | Executive Vice President, Acquisitions and Corporate Development |
| Kathryn Cox | | 54 | | Senior Vice President and President, Protection Division |
Mark L. Drew | | 61 | | Executive Vice President and Chief Legal Officer |
Wendy Evesque | | 54 | | Executive Vice President and Chief Human Resources Officer |
Wade Harrison | | 51 | | Executive Vice President and Chief Retail Officer |
Scott Karchunas | | 56 | | Senior Vice President and President, Asset Protection Division |
Philip Passafiume | | 55 | | Executive Vice President and Chief Investment Officer |
Aaron Seurkamp | | 43 | | Senior Vice President and President, Retirement Division |
Steven G. Walker | | 63 | | Vice Chairman, Finance and Risk, and Director |
| Paul R. Wells | | 49 | | Executive Vice President and Chief Financial Officer, and Director |
| Cissy Williams | | 61 | | Executive Vice President and Chief Operations Officer |
Mr. Bielen has been Chairman of the Board of the Company since July 2017, Chief Executive Officer of the Company and PLC since July 2017, President of the Company since February 2016, and President of PLC since January 2016. Mr. Bielen also served as Chief Operating Officer of the Company and PLC from February 2016 (Company) and January 2016 (PLC) to July 2017. From June 2007 to January 2016, Mr. Bielen served as Vice Chairman and Chief Financial Officer of PLC. Mr. Bielen became a director of the Company on September 11, 2006, and a director of PLC on February 1, 2015. Mr. Bielen has been employed by PLC and its subsidiaries since 1991. Before joining Protective, Mr. Bielen was Senior Vice President of Oppenheimer & Company. Prior to joining Oppenheimer, Mr. Bielen was a Senior Accountant with Arthur Andersen and Company. Mr. Bielen serves on the Board of Directors of the United Way of Central Alabama and as a trustee of Children’s of Alabama. Mr. Bielen is a former Director of the McWane Science Center and previously served on the Board of Directors of Infinity Property and Casualty Corporation until July 2018. Mr. Bielen received his undergraduate degree and Masters of Business Administration from New York University. Mr. Bielen has served on the Board of Directors of the US Chamber of Commerce since March 2020 and the Board of Directors of the American Council of Life Insurers since October 2020. We believe that Mr. Bielen’s background in business; his skills and experience as a senior executive of PLC and Oppenheimer and as a leader in other business, civic, educational and charitable organizations; his knowledge and experience as a leader in the life insurance industry, along with his long-standing knowledge of PLC and his seasoned business judgment, are valuable to us and the Board.
Mr. Adams has been Executive Vice President, Corporate Responsibility, Strategy, and Innovation of the Company and PLC since February 2020. From March 2018 to February 2020, he served as Executive Vice President and Chief Digital and Innovation Officer of the Company and PLC. From February 2016 to March 2018, Mr. Adams served as Executive Vice President of the Company, and from January 2016 to March 2018, Mr. Adams served as Executive Vice President and Chief Administrative Officer of PLC. Mr. Adams served as Senior Vice President and
Chief Human Resources Officer of the Company and PLC from April 2006 to February 2016 (Company) or January 2016 (PLC). Mr. Adams has been employed by the Company and its subsidiaries since April 2006.
Mr. Black has been Executive Vice President, Acquisitions and Corporate Development of the Company and PLC since March 2022. From June 2021 to March 2022, Mr. Black served as Senior Vice President, Acquisitions and Corporate Development of the Company and PLC. Prior to that, Mr. Black served as Treasurer of the Company and PLC from June 2007 to June 2021. Additionally, Mr. Black served as Senior Vice President of the Company from May 2008 to June 2021, and he served as Senior Vice President of PLC from June 2008 to June 2021. Mr. Black has been employed by the Company and its subsidiaries since March 2003.
Ms. Cox has been Senior Vice President and President, Protection Division of the Company and PLC since July 2022. From September 2014 to June 2022, Ms. Cox served as the Senior Vice President and Head of Business Development of the Reinsurance Group of America. Additionally, Ms. Cox served as Vice President, Business Development from January 2007 to August 2014, and she served as Vice President, Retrocession Management from September 2002 to December 2006. Ms. Cox has been employed by the Company and its subsidiaries since July 2022.
Mr. Drew has been Executive Vice President and Chief Legal Officer of the Company and PLC and Secretary of PLC since March 2020. From August 2018 to March 2020, Mr. Drew served as Executive Vice President and General Counsel of the Company and PLC and Secretary of PLC. From August 2016 to August 2018, Mr. Drew served as Executive Vice President and General Counsel of the Company and PLC. From 2006 to August 2016, Mr. Drew served as Managing Shareholder of Maynard, Cooper & Gale, P.C., a Birmingham, Alabama based law firm, where Mr. Drew worked from 1988 until July 2016. Mr. Drew has been employed by the Company and its subsidiaries since July 2016.
Ms. Evesque has been an Executive Vice President of the Company since June 2020 and Chief Human Resources Officer of the Company since February 2016. From February 2016 to June 2020, she served as a Senior Vice President of the Company. From July 2015 to February 2016, she served as Vice President, Senior Human Resources Partner of the Company. Additionally, Ms. Evesque has been an Executive Vice President of PLC since March 2020 and Chief Human Resources Officer of PLC since January 2016. From January 2016 to March 2020, she served as a Senior Vice President of PLC. From May 2008 to January 2016, she served as Vice President, Senior Human Resources Partner of PLC. Ms. Evesque has been employed by the Company and its subsidiaries since February 2005.
Mr. Harrison has been an Executive Vice President and the Chief Retail Officer of the Company since June 2022. Prior to that, Mr. Harrison was a Senior Vice President of the Company since June 2014 and of PLC since February 2020. Mr. Harrison has been President, Protection Division of the Company and PLC since February 2020. From June 2014 to February 2020, Mr. Harrison served as Chief Product Actuary of the Company. Mr. Harrison has been employed by the Company and its subsidiaries since June 2014.
Mr. Karchunas has been a Senior Vice President of the Company since June 2009 and President, Asset Protection Division of the Company since February 2020. From January 2013 to February 2020, Mr. Karchunas served as the Senior Vice President, Asset Protection Division of the Company. Additionally, Mr. Karchunas has been a Senior Vice President of PLC since May 2010 and President, Asset Protection Division of PLC since February 2020. From January 2013 to February 2020, he served as Senior Vice President, Asset Protection Division of PLC. Mr. Karchunas has been employed by the Company and its subsidiaries since 1988.
Mr. Passafiume has been an Executive Vice President of the Company since March 2022 and Chief Investment Officer of the Company since June 2020. From June 2008 to March 2022, he served as Senior Vice President of the Company. Prior to that, Mr. Passafiume served as Director of Fixed Income of the Company from June 2008 to June 2020. Additionally, Mr. Passafiume has served as Senior Vice President and Chief Investment Officer of PLC since June 2020. From May 2008 to June 2020, Mr. Passafiume served as Senior Vice President, Director of Fixed Income of PLC. Mr. Passafiume has been employed by the Company and its subsidiaries since January 2003.
Mr. Seurkamp has been a Senior Vice President of the Company since July 2013, and President, Retirement Division of the Company since February 2020. From March 2018 to February 2020, Mr. Seurkamp was Senior Vice
President, Life and Annuity Executive of the Company. From August 2016 to March 2018, Mr. Seurkamp was Senior Vice President and Chief Distribution Officer of the Company, and from August 2016 to August 2017, he was also Chief Sales Officer of the Company. Additionally, Mr. Seurkamp has been a Senior Vice President of PLC since March 2018, and he has been President, Retirement Division of PLC since February 2020. From March 2018 to February 2020, Mr. Seurkamp was Senior Vice President, Life and Annuity Executive of PLC. Mr. Seurkamp has been employed by the Company and its subsidiaries since 2004.
Mr. Walker has been the Vice Chairman, Finance and Risk and a Director of the Company since June 2022. From February 2016 to June 2022, Mr. Walker served as Executive Vice President and Chief Financial Officer of the Company. From September 2003 to March 2017, Mr. Walker also served as Controller of the Company. From May 2004 to February 2016, Mr. Walker served as Senior Vice President of the Company, and from September 2003 to February 2016, Mr. Walker served as Chief Accounting Officer. Mr. Walker has been Executive Vice President and Chief Financial Officer of PLC since January 2016. From September 2003 to March 2017, Mr. Walker also served as Controller of PLC. From March 2004 to January 2016, Mr. Walker served as Senior Vice President of PLC, and from September 2003 to March 2017, Mr. Walker served as Chief Accounting Officer of PLC. Mr. Walker has been employed by PLC and its subsidiaries since 2002. Mr. Walker became a director of the Company on June 12, 2020. Mr. Walker brings to the Board industry and risk management experience, financial and accounting experience, as well as an in-depth knowledge of our business.
Mr. Wells has been the Chief Financial Officer and an Executive Vice President of the Company and a Director of the Company since June 2022. Prior to that, Mr. Wells had served as a Senior Vice President of the Company since June 2014 and Chief Accounting Officer of the Company since March 2017. Mr. Wells served as Controller of the Company from March 2017 to April 2020, and he served as a Vice President of the Company from July 2007 to June 2014. From July 2007 to March 2017, Mr. Wells served as Chief Financial Officer of the Life and Annuity Division of the Company. Additionally, Mr. Wells has been the Chief Financial Officer and an Executive Vice President of PLC since June 2022. Prior to that, he had served as a Senior Vice President and Chief Accounting Officer of PLC from March 2017 to June 2022. Mr. Wells served as Controller of PLC from March 2017 to April 2020, and he served a Senior Vice President and the Chief Financial Officer of the Life and Annuity Division of PLC from May 2014 to March 2017. Mr. Wells has been employed by the Company and its subsidiaries since 2007. Mr. Wells brings to the Board significant financial and accounting expertise, detailed knowledge of the Company’s business, and over 15 years of experience working at the Company.
Ms. Williams has been the Chief Operations Officer and an Executive Vice President of the Company since June 2022. Prior to that, Ms. Williams served as a Senior Vice President of the Company from November 2015 to June 2022. Ms. Williams also served as Chief Customer Officer of the Company from June 2019 until June 2022, and prior to that she served as Senior Vice President, Customer Experience, of the Company from November 2015 to June 2019. Additionally, Ms. Williams has served as the Chief Operations Officer and an Executive Vice President of PLC since June 2022. Prior to that, Ms. Williams served as Senior Vice President, Customer Experience of PLC from May 2017 to March 2019. Ms. Williams has been employed by the Company and its subsidiaries since 2015.
Executive Compensation
The Company does not have a separately designated compensation committee or other board committee which performs equivalent functions. All compensation and related decisions for the named executive officers of Protective Life are made by the Board of Directors of PLC (the “PLC Board”) upon the recommendation of the Compensation and Management Succession Committee of the PLC Board (the “PLC Compensation Committee”), which consists of four independent PLC directors. The PLC Compensation Committee retained Meridian Compensation Partners, LLC, as an independent compensation consultant for its 2022 compensation cycle, to review, assess and provide input with respect to certain aspects of the compensation program for our executive officers. The compensation consultant recommends a compensation package for our CEO. Our CEO, with advice from the compensation consultant, recommends compensation packages for our executive officers; however, he does not provide recommendations about his own compensation.
In this section, we describe the material components of PLC’s executive compensation program in 2022 for our named executive officers, whose compensation is set forth in the Summary Compensation Table and other compensation tables contained herein:
Named Executive Officers
(1)Richard J. Bielen, President and Chief Executive Officer;
(2)Paul R. Wells, Executive Vice President and Chief Financial Officer;
(3)Steven G. Walker, Vice Chairman, Finance and Risk;
(4)Mark L. Drew, Executive Vice President and Chief Legal Officer;
(5)Wade V. Harrison, Executive Vice President, Chief Retail Officer;
(6)Aaron Seurkamp, Senior Vice President and President, Retirement Division; and
(7)Michael G. Temple, Former Vice Chairman and Chief Operating Officer
Compensation Committee Interlocks and Insider Participation. None of our executive officers has served as a member of the compensation committee (or other committee serving an equivalent function) or board of directors of any other entity whose executive officers served as a director of the Company Board or members of the PLC Board or the PLC Compensation Committee.
Compensation Philosophy
The objectives of PLC’s executive compensation program are to: 1) attract and retain the most qualified executives; 2) reward them for achieving high levels of performance; and 3) align the interests of our executives with the interests of Dai-ichi Life, which is the ultimate controlling parent corporation of our parent, PLC. To meet PLC’s executive compensation objectives, PLC designs the compensation program to: 1) align compensation with business goals and results; 2) compete for executive talent; 3) support risk management practices; 4) take into account market and industry pay and practices; and 5) be communicated effectively so that our officers understand how compensation is linked to performance.
The key components of PLC’s executive compensation program for our executive officers are: 1) base salaries; 2) annual cash incentive awards; 3) long-term cash incentives; and 4) retirement and deferred compensation plans. The PLC Board has adopted the Protective Life Corporation Annual Incentive Plan (as amended and restated, the “AIP”) and the Protective Life Corporation Long-Term Incentive Plan (as amended and restated, the “LTIP”), under which annual and long-term cash incentives have been made available to our named executive officers.
The PLC Compensation Committee considers each component (separately and with the others) for our executive officers. The PLC Compensation Committee targets the total annual compensation package to be within a market competitive range of median pay levels for a peer group of life insurance and financial services companies that are similar to us in size and business mix. As part of this review, the PLC Compensation Committee considers the total “mix” of the base salary, annual cash incentive and long-term compensation delivered to our executive officers, and compares that compensation mix to the compensation mix of comparable officers at other companies. The annual incentive and long-term incentive components of the program are designed so above-average company performance will result in above-median total compensation, and below-average company performance will result in below-median total compensation. The PLC Compensation Committee does not have formal policies regarding these factors, but tries to make PLC’s practices generally consistent with the practices of the peer group.
To evaluate its implementation of this pay for performance philosophy, the PLC Compensation Committee members consider a wide range of information (including information they receive both as PLC Compensation Committee members and as PLC Board members), including: 1) PLC’s deployment of capital for acquisitions and products; 2) PLC’s adjusted operating earnings, the rate of growth of PLC’s adjusted operating earnings, and the degree of difficulty in achieving PLC’s earnings goals; 3) PLC’s financial strength (as measured by PLC’s statutory
capital, RBC, and rating agency ratings); 4) PLC’s budgets, expense management, and budget variances; and 5) pay for performance analyses prepared by the compensation consultant. PLC’s financial statements, including its adjusted operating earnings, are prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). The PLC Compensation Committee does not place a particular weighting on any of these factors, but instead considers the information as a whole.
Base Salaries
Base salary is the primary fixed portion of executive pay. It compensates individuals for performing their day-to-day duties and responsibilities and provides them with a level of income certainty. Salary adjustments have historically been made in late February/early March and have been effective March 1 of that year. In making its base salary recommendations to the PLC Board, the PLC Compensation Committee considers the responsibilities of the job, individual performance, the relative value of a position, experience, comparisons to salaries for similar positions in other companies, and internal pay equity. For the CEO, the PLC Compensation Committee also considers PLC performance. No particular weighting is given to any of these factors.
The PLC Compensation Committee reviewed the performance and base salaries of our named executive officers at its February 2022 meeting. At the recommendation of the PLC Compensation Committee, the PLC Board approved the following annual base salaries (and the related percentage increases from the previously-effective base salaries) for our named executive officers, effective March 1, 2022: 1) Mr. Bielen, $1,000,000 (8.1%); 2) Mr. Walker, $600,000 (12.1%); 3) Mr. Wells, $475,000 (46.2%); 4) Mr. Drew, $580,000 (3.6%); 5) Mr. Harrison $515,000 (17.0%); 6) Mr. Seurkamp, $490,000 (3.2%); and 7) Mr. Temple $620,000 (0%).
Annual Incentive Plan Awards
Our executive officers are eligible for annual cash incentive opportunities under the AIP. The AIP’s purpose is to attract, retain, motivate, and reward qualified officers and key employees by providing them with the opportunity to earn competitive compensation directly linked to PLC’s performance.
The PLC Compensation Committee recommends to the PLC Board for its approval the target annual incentive opportunities and performance objectives for our executive officers for the current year. Historically, in recommending these target opportunities, the PLC Compensation Committee has considered the responsibilities of the job, individual performance, the relative value of a position, comparisons to annual incentive opportunities for similar positions in other companies, and internal pay equity. No particular weight has been given to any of these factors. There are no guaranteed minimum payments for any officer under the AIP.
Payment of annual incentives is based on achievement of one or more performance goals. The performance objectives established under the AIP shall be related to one of the following criteria, which may be determined solely by reference to the performance of PLC or a subsidiary or a division or business unit or based on comparative performance relative to other companies: net income; operating income; book value; embedded value or economic value added; return on equity, assets or invested capital; assets, sales or revenues or growth in assets, sales or revenues; efficiency or expense management; capital adequacy (including RBC); investment returns or asset quality; completion of acquisitions, financings, or similar transactions; customer service metrics; the value of new business or sales; or such other reasonable criteria as the PLC Compensation Committee may recommend and the PLC Board may approve. With respect to any executive officer, the PLC Compensation Committee may establish multiple performance objectives.
The PLC Compensation Committee will establish a target amount for each participant in the AIP and that participant’s targeted amounts may be aggregated to create a pool to be allocated in the discretion of the PLC Compensation Committee. The PLC Compensation Committee may establish the pool in respect of any performance objective based on the extent to which the objective is met or exceeded, or the extent to which objectives are only partially achieved. The PLC Compensation Committee may provide that amounts below or in excess of the aggregate of all targets for such performance objective will be funded for performance in excess of, or at stated levels below, targeted performance. The PLC Compensation Committee may also establish a threshold level of achievement for any performance objective below which no amount shall be funded in respect of such performance objective. Additionally, the PLC Compensation Committee may, in its discretion, allocate the pool among divisions
or business units, in which case the authorized manager of each division or business unit will then (i) make individual determinations regarding the contribution of each participant in his or her respective division or business unit to the achievement of the overall stated performance objectives, and (ii) recommend, for approval by the PLC Compensation Committee, the amount payable, if any, from such division or business unit allocation to each such participant.
Any other provision of the AIP to the contrary notwithstanding, (i) the PLC Compensation Committee has the right, in its sole discretion, to pay to any executive officer an annual incentive payment for such year in an amount based on individual performance or any other criteria or the occurrence of any such event that the PLC Compensation Committee deems appropriate, and (ii) the PLC Compensation Committee may, in its sole discretion, provide for a minimum incentive payment to any or all executive officers in respect of any calendar year, regardless of whether any applicable performance objectives are attained. In connection with its determination as to the extent to which any performance objective or criteria has been satisfied, the PLC Compensation Committee has full discretion to adjust the calculation of any performance objective or criteria or otherwise adjust the objectives or criteria applicable to an annual incentive payment, including, without limitation, to recognize special or nonrecurring situations or circumstances for PLC or any other subsidiary, corporation or entity (including, without limitation, changes in accounting principles) for the applicable year or any portion thereof.
Termination or Change in Control. Unless the PLC Compensation Committee otherwise determines to pay the executive officer a greater amount, if an officer’s employment terminates due to death, disability or, if after at least five months of employment service to PLC during such year, due to normal or early retirement under the terms of PLC’s tax-qualified pension plan (the “Qualified Pension Plan”), the executive officer will receive an annual incentive payment equal to the amount the executive officer would have received if the named officer had remained employed through the end of the year, pro-rated based on the number of days that elapsed during the year in which the termination occurs; provided, however, no such officer will be eligible to receive an annual incentive payment for such year if such officer is subject to a reduction in force or the recipient of severance. Except as provided in the prior sentence, unless the PLC Compensation Committee determines to authorize a payment, no amount will be payable to an executive officer as an annual incentive award unless the officer is still an employee of PLC or one of its subsidiaries on the date payment is made or such earlier date as the PLC Compensation Committee may specify.
2022 AIP Performance Goals. For 2022, the PLC Board established, at the recommendation of the PLC Compensation Committee, the following performance goals (weighted as shown in the table) for our named executive officers:
| | | | | | | | | | | | | | | | | | | | |
| Goal (in millions, except percentages) | | Threshold (25% payout) | | Target (100% payout) | | Maximum (225% payout) |
| After-tax Adjusted Operating Income (60%) | | $ | 210 | | | $ | 350 | | | $ | 420 | |
| | | | | | | | | | | | | | | | | | | | |
| | (50% payout) | | (100% payout) | | (200% payout) |
| Value of New Business (30%) | | $ | 130 | | | $ | 200 | | | $ | 270 | |
Expense Management (10%)(1) | | $ | 690 | | | $ | 670 | | | $ | 650 | |
| RBC below 350% (Negative modifier (20%)) | | 350 | % | | 350 | % | | 350 | % |
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(1)Subject to expense modifiers for costs that vary based on actual sales volumes, expenses related to new acquisitions are excluded from the expense goal.
After-tax adjusted operating income, measured from January 1 through December 31, 2022, is derived from pre-tax adjusted operating income with the inclusion of income tax expense or benefits associated with pre-tax adjusted operating income. Pre-tax adjusted operating income (loss) is calculated by adjusting “income (loss) before income tax” by excluding the following items:
•realized gains and losses on investments and derivatives;
•losses from the impairment of intangible assets;
•changes in the GLWB embedded derivatives exclusive of the portion attributable to the economic cost of the GLWB;
•actual GLWB incurred claims;
•immediate impacts from changes in current market conditions on estimates on future profitability on variable annuity and variable universal life products, including impacts on DAC, VOBA, reserves and other items;
•the amortization of DAC, VOBA, and certain policy liabilities that is impacted by the exclusion of these items;
•changes in the fair value of company-owned life insurance, exclusive of the long-term expected return of the underlying assets; and
•impairment losses recorded on goodwill.
Income tax expense or benefits is allocated to the items excluded from pre-tax adjusted operating income at the statutory federal income tax rate of twenty-one percent. Income tax expense or benefits allocated to after-tax adjusted operating income can vary period to period based on changes in PLC’s effective income tax rate.
Value of new business is measured as the expected value of new policies written from January 1 through December 31, 2022. The value of new business includes income expected to be realized in both the current year and future years. For purposes of the value of new business goal, the variable annuity business measurement is based on a market consistent embedded value analysis. All other business is measured as present value of expected future earnings from new sales above the assumed cost of capital.
The expense management performance goal provides management with an incentive to prudently manage operating expenses and to maintain efficient operations. The expense management performance goal is measured from January 1 through December 31, 2022 and is defined as other operating expenses before the effect of policy acquisition cost deferrals, excluding interest expense, the effects of reinsurance, certain performance incentives, agent commissions, certain selling costs, certain expenses associated with acquisition-related activity (or similar strategic relationships), expenses incurred as part of long-term expense reduction initiatives, certain legal costs, certain regulatory fees or other expenses imposed on PLC, and management fees paid to Dai-ichi Life. In addition, certain expense items are considered variable and are therefore adjusted based on variations in new business volumes.
RBC is the company action level “risk based capital” percentage of the Company as of December 31, 2022, determined as set forth in the applicable instructions established by the NAIC and filed with the state of Tennessee, and based on SAP. RBC is intended to be a limit on the amount of risk PLC can take, and it requires a company with a higher amount of risk to hold a higher amount of capital. The PLC Board determined that the overall results achieved in adjusted operating earnings, expense management, and capital deployment goals would be reduced by 20% if RBC was less than 350% on December 31, 2022.
The amount payable is based on each of the above-described performance objectives. At the target level of performance, 100% of the allocable portion of the target award will be payable. For achievement between the stated performance levels (i.e., between threshold and target, and between target and maximum), the amount payable will be determined by mathematical interpolation. No amount is payable below the threshold levels of performance. The PLC Compensation Committee recommends to the PLC Board for its determination the achievement of the performance objectives for the incentive opportunities granted to certain of our officers, including our named executive officers in the previous year.
At its February 2023 meeting, the PLC Board determined that, in respect to 2022 performance: 1) PLC’s after-tax adjusted operating income was $515 million; 2) PLC’s value of new business was $295 million; 3) PLC’s expense management amount was $658 million (given that actual expenses were increased to include $12 million of expense modifiers); and 4) PLC’s RBC was approximately 415%.
The Grants of Plan-Based Awards Table contains additional information about annual incentive payments under the AIP.
Long-Term Incentive Awards
The PLC Board adopted a long-term incentive plan that established a formula equity value for PLC under which our executive officers receive awards, payable in cash, that will increase or decrease in value as the value determined under this formula changes based on the operation of PLC’s business.
Under the LTIP, our executive officers are eligible to receive three types of incentive awards (collectively, “Awards”):
1.“Performance Unit”, an Award which becomes vested and non-forfeitable upon the attainment, in whole or in part, of performance objectives, determined by the PLC Compensation Committee, during an award period, and which is payable in cash based amounts set by the PLC Compensation Committee.
2.“Restricted Unit”, an Award which becomes vested and non-forfeitable, in whole or in part, upon the satisfaction of such conditions as shall be determined by the PLC Compensation Committee, and which is payable in cash based on PLC’s “Tangible Book Value Per Unit”, as defined in the LTIP.
3.“Parent-Based Award”, a cash-denominated Award based on the value of the common stock of PLC’s ultimate controlling parent, Dai-ichi Life or its successor over the life of the Award.
In determining the total target value of long-term incentive awards in a given year, the PLC Compensation Committee considers an executive officer’s responsibilities, performance, previous long-term incentive awards, the amount of long-term cash incentives provided to officers in similar positions at PLC’s peer companies, and internal compensation equity. No particular weight is given to any of these factors.
The PLC Compensation Committee selects the number of Awards each executive officer will be granted and the performance criteria (if any) for each Award. In the case of Performance Units, the performance objectives shall be related to at least one of the following criteria, which may be determined solely by reference to the performance of PLC or a division or subsidiary or based on comparative performance relative to other companies: (i) pre-tax and/or after-tax adjusted operating income, operating earnings, net income, operating income, book value, embedded value or economic value added of PLC or a subsidiary, division or business unit (including measures on a per share basis) or the accumulated earnings of any of the foregoing, (ii) return on equity, assets or invested capital, (iii) assets, sales or revenues, or growth in assets, sales or revenues, of PLC or a subsidiary, division or business unit, iv) efficiency or expense management (such as unit cost), (v) risk management or third-party ratings, (vi) capital adequacy (including RBC), (vii) investment returns or asset quality, (viii) premium income or earned premium, (ix) value of new business or sales, (x) negotiation or completion of acquisitions, financings or similar transactions, (xi) customer service metrics, and (xii) such other reasonable criteria as the PLC Compensation Committee may determine.
The PLC Compensation Committee may change the performance objectives applicable with respect to any Performance Units to reflect such factors, including changes in an executive officer’s duties or responsibilities or changes in business objectives, as the PLC Compensation Committee deems necessary or appropriate.
Termination or Change in Control. Upon termination of an executive officer’s employment, awards under the LTIP provide for different vesting and payment terms depending on the type of termination. Unless otherwise noted, any Restricted Unit Awards or Parent-Based Awards that become vested as a result of a termination of employment will be payable in accordance with the normal vesting schedule as if the officer had remained employed through the last vesting date, and any Performance Unit Awards that are earned as a result of a termination of employment will be payable as if the officer had remained employed for the duration of the award period.
•In the case of a termination of an executive officer’s employment due to death, disability, or normal retirement, all Restricted Units and Parent-Based Awards will become fully vested and, unless the PLC Compensation Committee determines to provide for treatment that is more favorable, all Performance Units
will vest pro rata based on the officer’s period of employment during the award period relative to the total length of the award period.
•In the case of an early retirement of an executive officer under the terms of the Qualified Pension Plan, unless the PLC Compensation Committee determines to provide for more favorable treatment, all Performance Units, Restricted Units and Parent-Based Awards will vest pro rata based on the officer’s period of employment during the award period relative to the total length of the award period.
•In the case of a special termination of an executive officer, which consists of a termination of employment due to (i) a divestiture of a business segment or a significant portion of the assets of PLC or (ii) a significant reduction by PLC of its work force, the PLC Compensation Committee determines to what extent, and on what terms, any unvested Restricted Unit Awards, Parent-Based Awards, and any outstanding and unpaid Performance Unit Awards will be paid.
•In the case of a termination “for cause” (as defined in the LTIP), all vested and unvested awards are forfeited.
•Otherwise, unvested amounts generally are forfeited upon termination of employment.
Termination with Advance Written Notice. Employees in Executive Vice President or above roles who accept an Award of any type under the LTIP on or after November 2, 2022 are eligible for special vesting treatment of his or her Awards, as described below, if such officer: (i) provides written notice to the Company of his or her intention to terminate employment at least six months in advance (the “notice period”), (ii) assists the Company with transition plans as needed during the notice period, and (iii) remains in good standing.
•In the case of a termination due to normal retirement under the terms of PLC’s Qualified Pension Plan, all Performance Units will vest in full, subject to performance achieved through the end of the award period applied against the applicable performance schedules.
•In the case of a termination due to early retirement under the terms of PLC’s Qualified Pension Plan, (i) all Restricted Units and Parent-Based Awards will vest in full, and (ii) all Performance Units will also vest in full, subject to performance achieved through the end of the award period applied against the applicable performance schedules.
The LTIP provides for special payouts of awards upon certain change of control transactions of PLC as defined in the LTIP. In the case of a change in control of PLC:
•Our executive officers will be deemed to have earned the greater of (i) 100% of the Performance Units and (ii) the percentage of such Performance Units that would derive from applying the usual schedules through the date of the change in control event, and will be settled in cash within 45 days following the date of the change in control event, based upon PLC Change in Control Book Value Per Unit, (as defined in the LTIP), if available within 10 days before such payment date; or, if PLC Change in Control Book Value Per Unit is not then available, then 90% of the value of such Performance Units, based on the PL Tangible Book Value Per Unit, (as defined in the LTIP), determined as of the most recently reported quarterly balance sheet preceding such change in control shall be paid within 45 days of the change in control, followed by an additional payment in respect of such Performance Units within 75 days of such change in control equal to the excess, if any, of (i) the Change in Control Book Value Per Unit over (ii) 90% of the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding such Company change in control;
•The Restricted Units will immediately vest in full and be settled in cash, within 45 days following the date of the change in control event, based upon PLC Change in Control Book Value Per Unit, if available within 10 days before such payment date; or, if PLC Change in Control Book Value Per Unit is not then available, then 90% of the value of such Restricted Units, based on the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding such Company change in control shall be paid within 45 days of PLC change in control, followed by an additional payment in respect of such
Restricted Units within 75 days of such Company change in control equal to the excess, if any, of (i) PLC Change in Control Book Value Per Unit over (ii) 90% of the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding such Company change in control; and
•The Parent-Based Awards will vest immediately and be settled in cash within 60 days following the date of the change in control event, based on the Parent Stock Percentage (as defined in the LTIP) but the Final Parent Stock Value (as defined in the LTIP) shall be determined based on the average of the closing prices of Dai-ichi Life common stock on all trading days during the 30-calendar day period ended on the date on which the change in control occurs.
In addition, upon a change of control of Dai-ichi Life that results in the common stock of Dai-ichi Life no longer being actively traded on a public securities exchange (“Parent Change in Control”), the Parent-Based Awards will be converted to Restricted Units as follows: First, the dollar value of the Parent-Based Awards will be determined as of the Parent Change in Control, with the Final Parent Stock Value, (as defined in the LTIP), used to determine the Parent Stock Percentage determined using the average of the closing prices of the Parent common stock on all trading days during the 30-calendar day period ended on the date on which the Parent Change in Control occurs. The resulting dollar value of the Parent-Based Awards shall then be converted into Restricted Units by dividing such dollar value by the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding the Parent Change in Control. After such conversion, the converted units will continue to be subject to the terms of the Parent-Based Award Agreement, including but not limited to, the vesting schedule and timing provisions of such agreement.
2022 LTIP Awards. In February 2022, the PLC Compensation Committee and the PLC Board determined a total target value of the long-term incentive awards to be granted to each named executive officer in 2022. Such awards again consisted of Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards, which will vest and may be earned in 2024. In 2022, none of our named executive officers had a guaranteed minimum target amount for awards to be granted under the LTIP.
In February 2022, the PLC Compensation Committee exercised its authority under the LTIP to adjust the calculation of any performance objective or criteria to recognize special or nonrecurring situations or circumstances for PLC to exclude changes in the fair value of company-owned life insurance, exclusive of the long-term expected return of the underlying assets from the calculation of after-tax adjusted operating income.
The PLC Compensation Committee considered a number of factors when it granted long-term incentive awards in 2022, including the desire to maintain the appropriate balance between performance-based and retention-based incentives and information provided by the compensation consultant comparing the value of PLC’s long-term incentive awards granted to named executive officers to the value provided by PLC’s compensation peer group.
The long-term incentive opportunities for our named executive officers are comprised of four separate awards:
•Performance Unit Awards: Performance Units are generally designed to vest based on the achievement of two objectives - cumulative after-tax adjusted operating income (“Operating Income Objective”) and average return on equity (“ROE Objective”) - over the period from January 1, 2022 to December 31, 2024 and generally subject to the named executive officer’s continued employment until the applicable payment date of the earned award (the “Performance Unit Awards”);
•Restricted Unit Awards: Restricted Units are generally designed to vest on December 31, 2024, are valued based on the tangible book value of PLC on the vesting date and are generally subject to the named executive officer’s continued employment until such respective dates (the “Restricted Unit Awards”);
•Parent-Based Awards: A dollar denominated award that is generally designed to vest on December 31, 2024 based on the named executive officer’s continued employment, the value of which will be adjusted to reflect the change in the value of Dai-ichi Life’s common stock over the three-year measurement period from February 1, 2022 to December 31, 2024 (the “Parent-Based Awards”); and
•35% Enhanced 2021 Performance Unit Awards: For 2021, the named executive officers also received a 35% Enhanced 2021 Performance Unit Award (“Enhanced PU”) pursuant to the same provisions for vesting and performance applicable to Performance Unit Awards. The 2021 Enhanced PU is discussed herein as a Performance Unit Award unless otherwise noted. The 2021 Enhanced PU was a one-time award equal to 35% of the named executive officer’s 2021 Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards to address the lack of retention value of outstanding long-term incentive opportunities, and it will vest on December 31, 2023.
Performance Unit Awards Granted in 2022. The purpose of the Performance Unit Awards is to encourage our named executive officers to focus on earnings growth and returns on equity. The number of units subject to each Performance Unit Award granted in 2022 is determined by dividing 50% of each named executive officer’s target long-term incentive opportunity by an amount equal to 90% of PLC’s applicable tangible book value per unit as of January 1, 2022. One-half of the units subject to each Performance Unit Award will be subject to achieving the ROE Objective and one-half will be subject to achieving the Operating Income Objective. The amount payable in respect of each unit can range from 0% (for performance against the applicable objective below the threshold level) to 225% (for performance at or above maximum). One hundred percent (100%) of the award will be payable for performance at target. For achievement between the stated performance levels (i.e., between threshold and target, and between target and maximum), the amount will be determined by mathematical interpolation.
Specifically, payment with respect to the ROE Objective will be based on the following schedule:
| | | | | | | | |
| Average Return on Equity | | Percentage of Performance Units Earned Attributable to ROE Objective |
| Less than 3.07% | | 0% |
| 3.07% | | 25% |
| 4.91% | | 100% |
| 5.77% | | 225% |
There will be straight-line interpolation between each level of average return on equity to determine the exact percentage of Performance Units earned.
Payment with respect to the Operating Income Objective will be based on the following schedule:
| | | | | | | | |
Cumulative After-Tax Adjusted Operating Income (Dollars In Millions) | | Percentage of Performance Units Earned Attributable to Operating Income Objective |
| Less than $765 | | 0% |
| $765 | | 25% |
| $1,275 | | 100% |
| $1,530 | | 225% |
There will be straight-line interpolation between each level of cumulative after-tax adjusted operating income to determine the exact percentage of Performance Units earned.
Restricted Unit Awards Granted in 2022. The purpose of the Restricted Unit Awards is to encourage our named executive officers to focus on retention and value creation. The number of Restricted Units subject to each Restricted Unit Award granted in 2022 was determined by dividing 40% of each named executive officer’s target long-term incentive opportunity by an amount equal to PLC’s applicable tangible book value per unit as of January 1, 2022. The Restricted Unit Awards vest on December 31, 2024 and are valued at payout based on the tangible book value of PLC on the applicable vesting date.
Parent-Based Awards Granted in 2022. The purpose of the Parent-Based Awards is to align PLC’s and the Company’s values with our parent company. The initial cash value of the Parent-Based Awards is equal to 10% of the target long-term incentive award opportunity for each named executive officer. At vesting, the amount payable in respect of such Parent-Based Awards shall be such initial value multiplied by the percentage change in the value
of the common stock of Dai-ichi Life, whether such value has increased or decreased, over the period from January 1, 2022 to December 31, 2024, as measured based on the average value of such common stock in January 2022 and December 2024, respectively.
The Grants of Plan-Based Awards Table contains additional information about Awards under the LTIP.
Long-Term Incentive Awards Vested in 2022. The following long-term incentive awards were earned in 2022: (i) the second tranche of the Restricted Unit Awards that were granted in 2019 (with a four-year vesting period); (ii) the first tranche of the Restricted Unit Awards that were granted in 2020 (with a three-year vesting period); (iii) the Parent-Based Awards that were granted in 2020 (with a three-year vesting period); and (iv) the Performance Unit Awards that were granted in 2020 (with a three-year performance period that ended December 31, 2022). The performance measures related to such awards had the following levels of achievement.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Unit Awards |
| Award | | Performance Measure | | Beginning Tangible Book Value ($ in millions) | | Ending Tangible Book Value ($ in millions) | | Tangible Book Value Per Unit Performance |
| 2019 Restricted Unit Awards (4-year vest) | | Tangible Book Value per Unit | | $ | 6,017 | | | $ | 7,214 | | | $ | 115.17 | |
| 2020 Restricted Unit Awards (3-year vest) | | Tangible Book Value per Unit | | $ | 6,713 | | | $ | 7,747 | | | $ | 115.42 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Parent-Based Awards |
| Award | | Performance Measure | | Initial Dai-ichi Stock Value | | Final Dai-ichi Stock Value | | Percentage of Award Earned |
| 2020 Parent-Based Awards | | Dai-ichi stock performance | | 1,665 | | yen | | 2,738 | | yen | | 164.51 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Performance Unit Awards |
Award | | Performance Measure | | Beginning Tangible Book Value ($ in millions) | | Ending Tangible Book Value ($ in millions) | | Tangible Book Value Per Unit Performance | | Actual Result for ROE or COE Performance Measure | | Percentage of Award Earned |
2020 Performance Unit Awards | | 50% based on Tangible Book Value per Unit x ROE Performance (%) | | $ | 6,713 | | | $ | 7,747 | | | $ | 115.42 | | | 5.13 | % | | 44 | % |
| | 50% of awards based on Tangible Book Value per Unit x Cumulative Operating Earnings (“COE”) Performance ($) | | $ | 6,713 | | | $ | 7,747 | | | $ | 115.42 | | | $ | 1,282 | | | 26 | % |
The amounts paid to our named executive officers based upon the applicable levels of achievement of these awards are set forth in the “Non-equity incentive plan compensation - 2022” column of the Summary Compensation Table and the applicable footnote thereto.
Retirement and Deferred Compensation Plans
PLC believes it is important to provide its employees, including our named executive officers, with the opportunity to accumulate retirement savings. All similarly-situated employees earn benefits under PLC’s tax-qualified pension plan (“Qualified Pension Plan”) using the same formula. Benefits under the Qualified Pension Plan are limited by the Internal Revenue Code. PLC believes that it should provide retirement savings without imposing the restrictions on benefits contained in the Internal Revenue Code that would otherwise limit PLC’s employees’ retirement security. Therefore, like many large companies, PLC has implemented a nonqualified excess benefit pension plan (“Nonqualified Excess Pension Plan”) that makes up the difference between: 1) the benefit determined
under the Qualified Pension Plan formula, without applying these limits; and 2) the benefit actually payable under the Qualified Pension Plan, taking these limits into account. All of our named executive officers participate in the Nonqualified Excess Pension Plan.
In addition, PLC provides a nonqualified deferred compensation plan (“DCP”) for our named executive officers and other key officers. Through December 31, 2022, eligible officers could defer: 1) up to 75% of their base salary; 2) up to 85% of any annual incentive award; and/or 3) up to 85% of the amounts payable when Performance Unit Awards, Restricted Unit Awards, or Parent-Based Awards are earned (for the Restricted Unit Awards and Parent-Based Awards, percentages are subject to reduction if the employee is eligible for early retirement). Prior to the amendment to the DCP effective on January 1, 2019, certain senior officers were allowed a maximum deferral up to 94% for Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards (for the Restricted Unit Awards and Parent-Based Awards, percentages were subject to reduction if the employee is eligible for early retirement).
Employees that contribute a portion of their salary, overtime and cash incentives to PLC’s tax-qualified 401(k) plan (“401(k) Plan”) receive a dollar-for-dollar company matching contribution, which may be at the maximum 4% of the employee’s eligible pay (which is subject to limits imposed by the Internal Revenue Code).
The Pension Benefits Table and Nonqualified Deferred Compensation Arrangements Table contain additional information about our retirement and deferred compensation plans.
Perquisites and Other Benefits
PLC has other programs that help us attract and retain key talent and enhance productivity. In 2022, PLC provided certain perquisites to our named executive officers, including a financial and tax planning program for certain senior officers. PLC also reimburses officers for business-related meals in accordance with our standard business policies. Officers pay for all personal meals. From time to time, our named executive officers may also use PLC sponsored tickets for sporting, cultural and/or other events for personal use. PLC also provides tax gross up payments, if applicable, related to sporting events, sporting club memberships, corporate jet usage, gifts, and spousal travel. In October and November 2022, respectively, the PLC Compensation Committee and Board approved the provision of perquisites by the Company to senior officers, subject in each case to an annual cap of $30,000 for each of 2022 and 2023; provided, however, that the cost of the CEO’s personal use of the Company aircraft is subject to the separately established policy described below and does not count towards the annual cap. The PLC Compensation Committee and Board also delegated the authority (subject to the annual cap) to the CEO to approve, or pre-approve pursuant to a policy or procedures established by the CEO, the types, categories, and amounts of perquisites to be provided to non-CEO senior officers, including more restrictive caps for certain perquisites per senior officer.
The Summary Compensation Table contains additional information about perquisites and other benefits.
Company Aircraft Policy. PLC does business in every state in the United States and has offices in several states. Our named executive officers routinely use commercial air service for business travel, and PLC generally reimburses them only for the coach fare for domestic air travel. PLC also maintains a company aircraft program in order to provide for timely and cost-effective travel to these wide-spread locations.
Under this program, PLC does not operate any aircraft, own a hangar, or employ pilots. Instead, PLC has purchased a fractional interest in two aircrafts. PLC pays a fixed annual fee per aircraft, plus a variable charge for hours actually flown, in exchange for the right to use the two aircraft for an aggregate of approximately 230 hours per year. Our directors, officers, and employees use these aircraft for selected business trips, and, in certain circumstances, a spouse or guest of a director or officer may accompany him or her on business-related travel. All travel under the program must be approved by the Chief Executive Officer. Whether a particular trip will be made on a Company aircraft or on a commercial flight depends, in general, upon the availability of commercial air service at the destination, the schedule and cost of the commercial air travel, the number of employees who are making the trip, the expected travel time, and the need for flexible travel arrangements.
The PLC Compensation Committee has adopted a policy that allows the CEO (and the CEO’s guests) to use PLC aircraft for personal trips for up to 25 hours per year to reduce his personal travel time and thereby increase the time he can effectively conduct Company business. The hours of use under this policy are calculated based on the incremental hourly amount charged by the operating company to PLC, such that, where the operating company charges PLC for hours of use at less than a 1:1 ratio for a particular aircraft, such ratio is applied in determining the total number of hours deemed to be used by the CEO against the 25-hour limit. PLC does not provide tax reimbursement payments with respect to this air travel.
Spousal Travel Policy. If an employee’s spouse travels with the employee on Company business, and the spouse’s presence is deemed necessary and appropriate for the purpose of the trip, PLC will reimburse the employee for the associated travel expenses. Spousal travel is grossed up for tax purposes.
Compensation Policies and Practices as Related to Risk Management
The PLC Compensation Committee meets at least once a year with PLC’s Chief Risk Officer to review incentive compensation arrangements across PLC in order to identify any features that might encourage unnecessary or excessive risk taking. In conducting this review, PLC considered numerous factors pertaining to each such program, including the following: the purpose of the program; the design of the plan, including risk adjustments; the number of participants, as well as key employees or employee groups; the total amount that could be paid under the program; the ability of the participants to take actions that could influence the calculation of the compensation payable; the scope of the risks that could be created by actions taken; alignment with PLC’s risk appetite; and the manner in which PLC’s risk management policies and practices serve to reduce these risks. Based on this review, PLC has concluded that none of PLC’s compensation programs create risks that are reasonably likely to have a material adverse effect on PLC.
COVID-19 and Plan Design Considerations
The COVID-19 pandemic adversely impacted the Company’s and PLC’s financial performance, which in turn impacted the performance of its incentive plans. The PLC Compensation Committee made adjustments in 2021 to address concerns related to the ongoing impact of the volatility and uncertainty of the COVID-19 pandemic on PLC’s business and its incentive plan design, and to make certain broader changes related to the mix, alignment, and structure of the program, including (i) widening the performance range and payout range for the After Tax Operating Income goal for the AIP and the After Tax Operating Income and Average Return on Equity goals for the LTIP Performance Unit awards, (ii) providing an enhancement to the 2021 LTIP awards, (iii) shifting the mix of LTIP awards to have a heavier weight on time-based awards, (iv) changing the vesting schedule for Restricted Units to 100% vesting at 3 years (a permanent change), and (v) providing for a possible adjustment of the performance targets for Performance Unit awards, as applicable, if projected results are trending below threshold. In addition to addressing retention concerns, the PLC Compensation Committee believes that these adjustments helped to align compensation with market practices, ensured that there is reasonable pay for performance alignment for the benefit of Dai-ichi Life, PLC and plan participants, and set incentives to accommodate greater volatility and uncertainty in PLC’s financial and operational performance. The PLC Compensation Committee has carried forward certain adjustments for 2022 and 2023, including (i) maintaining the wider performance range and payout range for the After Tax Operating Income goal for the AIP and the After Tax Operating Income and Average Return on Equity goals for the LTIP Performance Unit awards, and (ii) maintaining the shift in the mix of LTIP awards to have a heavier weight on time-based awards (a permanent change). Notwithstanding the foregoing, the PLC Compensation Committee may revisit some of the previous program adjustments and/or apply discretion if external events out of management control materially adversely impact the performance of the incentive program.
Summary Compensation Table
The following table sets forth the total compensation earned by each of the Company’s named executive officers for the fiscal years ended December 31, 2022, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary Compensation Table |
Name and principal position with the Company(a) | | Year(b) | | Salary ($)(c) | | Bonus ($)(d) | | Non-equity incentive plan compensation(1) ($)(g) | | Change in pension value & nonqualified deferred compensation earnings ($)(h) | | All other compensation ($)(i) | | Total Compensation ($)(j) |
Richard J. Bielen | | 2022 | | $ | 987,500 | | | $ | — | | | $ | 6,282,138 | | | $ | (1,058,375) | | | $ | 197,867 | | | $ | 6,409,130 | |
| President and Chief Executive Officer (principal executive officer) | | 2021 | | $ | 916,667 | | | $ | — | | | $ | 3,707,993 | | | $ | 1,063,005 | | | $ | 152,956 | | | $ | 5,840,621 | |
| | 2020 | | $ | 870,833 | | | $ | — | | | $ | 2,642,039 | | | $ | 2,833,979 | | | $ | 120,652 | | | $ | 6,467,503 | |
Paul R. Wells(2) | | 2022 | | $ | 450,000 | | | $ | — | | | $ | 1,033,560 | | | $ | (31,618) | | | $ | 37,959 | | | $ | 1,489,901 | |
| Executive Vice President and Chief Financial Officer (principal financial officer) | | | | | | | | | | | | | | |
Steven G. Walker | | 2022 | | $ | 589,167 | | | $ | — | | | $ | 2,249,687 | | | $ | (749) | | | $ | 56,527 | | | $ | 2,894,632 | |
| Vice Chairman, Finance and Risk | | 2021 | | $ | 527,500 | | | $ | — | | | $ | 1,104,119 | | | $ | 81,518 | | | $ | 47,458 | | | $ | 1,760,595 | |
| | 2020 | | $ | 482,500 | | | $ | — | | | $ | 723,825 | | | $ | 151,821 | | | $ | 45,812 | | | $ | 1,403,958 | |
Mark L. Drew | | 2022 | | $ | 576,667 | | | $ | — | | | $ | 1,890,987 | | | $ | 55,889 | | | $ | 61,804 | | | $ | 2,585,347 | |
| Executive Vice President, Chief Legal Officer; Secretary of PLC | | 2021 | | $ | 557,000 | | | $ | — | | | $ | 1,058,819 | | | $ | 55,971 | | | $ | 51,516 | | | $ | 1,723,306 | |
| | 2020 | | $ | 535,000 | | | $ | — | | | $ | 772,535 | | | $ | 45,387 | | | $ | 50,328 | | | $ | 1,403,250 | |
Wade V. Harrison(3) | | 2022 | | $ | 502,500 | | | $ | — | | | $ | 1,205,284 | | | $ | 8,494 | | | $ | 34,270 | | | $ | 1,750,548 | |
Executive Vice President, Chief Retail Officer | | | | | | | | | | | | | | |
Aaron Seurkamp(4) | | 2022 | | $ | 487,500 | | | $ | — | | | $ | 1,197,112 | | | $ | (106,607) | | | $ | 36,329 | | | $ | 1,614,334 | |
Senior Vice President and President, Retirement Division | | 2021 | | $ | 472,833 | | | $ | — | | | $ | 738,337 | | | $ | 39,279 | | | $ | 29,963 | | | $ | 1,280,412 | |
Michael G. Temple | | 2022 | | $ | 317,946 | | | $ | — | | | $ | 1,613,761 | | | $ | (342,776) | | | $ | 106,382 | | | $ | 1,695,313 | |
Former Vice Chairman and Chief Operating Officer (5) | | 2021 | | $ | 616,667 | | | $ | — | | | $ | 1,577,980 | | | $ | 80,252 | | | $ | 55,573 | | | $ | 2,330,472 | |
| | 2020 | | $ | 590,000 | | | $ | — | | | $ | 1,044,395 | | | $ | 79,505 | | | $ | 54,180 | | | $ | 1,768,080 | |
__________________
(1)For 2022, these numbers include: (i) the following amounts of cash incentives that were paid on or prior to March 15, 2023 for 2022 performance under PLC’s AIP: Mr. Bielen, $3,692,500; Mr. Walker, $1,582,500; Mr. Wells, $851,900; Mr. Drew, $1,223,800; Mr. Harrison, $923,700; Mr. Seurkamp, $755,200; Mr. Temple, $721,300; (ii) the following amounts with respect to the Performance Unit
Awards earned with respect to the 2020-2022 performance period (granted in 2020) that were paid in cash on or prior to March 15, 2023: Mr. Bielen, $919,032; Mr. Walker, $242,382; Mr. Wells, $63,423; Mr. Drew, $242,382; Mr. Harrison, $107,658; Mr. Seurkamp, $161,588; Mr. Temple, $323,176; (iii) the following amounts with respect to the second installment of the Restricted Unit Awards that vested on December 31, 2022 (granted in 2019) that were paid in cash on or prior to March 15, 2023: Mr. Bielen, $518,265; Mr. Walker, $120,929; Mr. Wells, $38,870; Mr. Drew, $120,929; Mr. Harrison, $38,870; Mr. Seurkamp, $77,740; Mr. Temple, $164,117; (iv) the following amounts with respect to the first installment of the Restricted Unit Awards that vested on December 31, 2022 (granted in 2020) that were paid in cash on or prior to March 15, 2023: Mr. Bielen, $590,950; Mr. Walker, $155,817; Mr. Wells, $40,686; Mr. Drew, $155,817; Mr. Harrison, $69,252; Mr. Seurkamp, $103,878; Mr. Temple, $207,756; and (v) the following amounts of Parent-Based Awards that vested on December 31, 2022 (granted in 2020), and that were paid in cash on or prior to March 15, 2023: Mr. Bielen, $561,390; Mr. Walker, $148,059; Mr. Wells, $38,681; Mr. Drew, $148,059; Mr. Harrison, $65,804; Mr. Seurkamp, $98,706; Mr. Temple, $197,412.
(2)Mr. Wells was not a named executive officer for 2020 and 2021.
(3)Mr. Harrison was not a named executive officer in 2020 and 2021.
(4)Mr. Seurkamp was not a named executive officer in 2020.
(5)Mr. Temple retired in June 2022.
Column (c)-Salary. These amounts include any portion of the named executive officer’s base salary for the applicable year that such officer contributed to PLC’s 401(k) Plan or deferred under PLC’s DCP. The Nonqualified Deferred Compensation Table has more information about our named executive officers’ participation in PLC’s DCP in 2022.
Column (g)-Non-equity incentive plan compensation. For 2022, these amounts reflect (i) the cash incentives paid on or prior to March 15, 2023 for 2022 performance under PLC’s AIP, (ii) the Performance Unit Awards earned with respect to the 2020-2022 performance period (granted in 2020), and that were paid on or prior to March 15, 2023, (iii) the second installment of the Restricted Unit Awards that vested on December 31, 2022 (granted in 2019) and that were paid on or before March 15, 2023, (iv) the first installment of the Restricted Unit Awards that vested on December 31, 2022 (granted in 2020) and that were paid on or before March 15, 2023, and (v) the Parent-Based Awards that vested on December 31, 2022 (granted in 2020), and that were paid on or prior to March 15, 2023. For 2021, these amounts reflect (i) the cash incentives paid on or prior to March 15, 2022 for 2021 performance under PLC’s AIP, (ii) the second installment of the Restricted Unit Awards that vested on December 31, 2021 (granted in 2018) and that were paid on or before March 15, 2022, (iii) the first installment of the Restricted Unit Awards that vested on December 31, 2021 (granted in 2019) and that were paid on or before March 15, 2022, and (iv) the Parent-Based Awards that vested on December 31, 2021 (granted in 2019), and that were paid on or prior to March 15, 2022. For 2020, these amounts reflect (i) the cash incentives paid on or prior to March 15, 2021 for 2020 performance under PLC’s AIP, (ii) the second installment of the Restricted Unit Awards that vested on December 31, 2020 (granted in 2017) and that were paid on or before March 15, 2021, (iii) the first installment of the Restricted Unit Awards that vested on December 31, 2020 (granted in 2018) and that were paid on or before March 15, 2021, and (iv) the Parent-Based Awards that vested on December 31, 2020 (granted in 2018), and that were paid on or prior to March 15, 2021. These amounts are based on the achievement of performance goals under the AIP and the LTIP, as determined by the PLC Compensation Committee and the PLC Board. All amounts presented include any portion of the earned incentives that the named executive officer elected to contribute to PLC’s 401(k) Plan or defer under PLC’s DCP.
Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards granted in a particular year are not reflected in the Summary Compensation Table with respect to such year. These awards, which have multi-year performance periods, are instead reflected in the Summary Compensation Table in the year in which they are earned. The Grants of Plan-Based Awards Table and the narrative that accompanies such table provide information about the Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards that were granted in 2022.
Column (h)-Change in pension value and nonqualified deferred compensation earnings. These amounts represent the increase or decrease in the actuarial present value of the named executive officer’s benefits under PLC’s tax Qualified Pension Plan and PLC’s Nonqualified Excess Pension Plan. Changes in interest rates can
significantly affect these numbers from year to year. For 2022, the total change in the present value of pension benefits for each named executive officer was divided between the plans as follows:
| | | | | | | | | | | | | | | | | | | | |
| Name | | Qualified Pension Plan | | Nonqualified Excess Pension Plan | | Total |
| Bielen | | $ | (251,777) | | | $ | (806,598) | | | $ | (1,058,375) | |
| Wells | | $ | (35,150) | | | $ | 3,532 | | | $ | (31,618) | |
| Walker | | $ | (26,507) | | | $ | 25,758 | | | $ | (749) | |
| Drew | | $ | 13,405 | | | $ | 42,484 | | | $ | 55,889 | |
| Harrison | | $ | (83) | | | $ | 8,577 | | | $ | 8,494 | |
| Seurkamp | | $ | (54,584) | | | $ | (52,023) | | | $ | (106,607) | |
| Temple | | $ | (13,156) | | | $ | (329,620) | | | $ | (342,776) | |
The Pension Benefits Table has more information about each officer’s participation in these plans.
All of our named executive officers have account balances in PLC’s DCP. The earnings on a named executive officer’s balance reflect the earnings of notional investments selected by that named executive officer. These earnings are the same as for any other investor in these investments, and PLC does not provide any above-market or preferential earnings rates.
Column (i)—All other compensation. For 2022, these amounts include the following:
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| All Other Compensation Table |
| Name | | 401(k) matching | | Nonqualified deferred compensation plan contributions | | Financial planning program | | Tax Gross Up | | Other perquisites | | Total |
| Bielen | | $ | 12,200 | | | $ | 93,319 | | | $ | — | | | $ | 3,922 | | | $ | 88,426 | | | $ | 197,867 | |
| Wells | | $ | 12,200 | | | $ | 9,395 | | | $ | 15,103 | | | $ | — | | | $ | 1,261 | | | $ | 37,959 | |
| Walker | | $ | 12,200 | | | $ | 28,612 | | | $ | 14,960 | | | $ | — | | | $ | 755 | | | $ | 56,527 | |
| Drew | | $ | 12,200 | | | $ | 31,820 | | | $ | 14,941 | | | $ | 1,218 | | | $ | 1,625 | | | $ | 61,804 | |
| Harrison | | $ | 12,200 | | | $ | 19,160 | | | $ | — | | | $ | 637 | | | $ | 2,273 | | | $ | 34,270 | |
| Seurkamp | | $ | 12,200 | | | $ | 24,129 | | | $ | — | | | $ | — | | | $ | — | | | $ | 36,329 | |
| Temple | | $ | 12,200 | | | $ | 86,925 | | | $ | 6,910 | | | $ | — | | | $ | 347 | | | $ | 106,382 | |
401(k) Matching. PLC’s employees can contribute a portion of their salary, overtime, cash incentives and other eligible compensation to PLC’s 401(k) Plan and receive a dollar-for-dollar company matching contribution. The maximum match is 4% of the employee’s eligible pay (which is subject to limits imposed by the Internal Revenue Code). The table shows the company match received by our named executive officers during 2022.
Nonqualified Deferred Compensation Plan Contributions. The table includes, with respect to each of the executives, supplemental matching contributions that PLC made under PLC’s DCP to each named executive officer’s account in 2022 with respect to the officer’s participation in PLC’s DCP during 2021 (“DCP Supplemental Matching Contribution”) and, with respect to Mr. Temple, 2022. The Nonqualified Deferred Compensation Table and accompanying narrative provide more information about the DCP.
Financial Planning Program. These amounts include fees paid for program services as well as business travel and related expenses of the financial and tax planning third-party provider.
Tax Gross-Ups. A tax gross up occurs when PLC pays the projected tax expense for certain perquisite items. The amounts paid as a tax gross up in 2022 includes (i) a sporting club membership, sporting tickets and related entertainment for Mr. Drew, and (ii) sporting tickets and related entertainment for Mr. Bielen and Mr. Harrison.
Other Perquisites. These amounts include: (i) the amount we paid for a sporting club membership for Mr. Drew ($1,200); (ii) the amount we paid for sporting, cultural or other events for personal use and related entertainment for Mr. Bielen ($5,275), Mr. Drew ($425), Mr. Wells ($1,261), Mr. Walker ($755), Mr. Harrison ($1,641), and Mr. Temple ($315) (iii) the amount we paid for gifts for Mr. Bielen ($723), Mr. Temple ($32) and Mr. Harrison ($632), and (iv) the estimated incremental cost that we incurred in 2022 for Mr. Bielen and his guests to use the Company aircraft for personal trips ($82,428).
With respect to personal use of the corporate aircraft, the estimated incremental cost is based on incremental hourly charges and fuel allocable to the personal travel time on the aircraft, as well as any international flat fees related to the flight. From time-to-time, friends or family members of our named executive officers are accommodated as additional passengers on flights on Company aircraft. There is no incremental cost to PLC for this perquisite.
Grants of Plan-Based Awards
The long-term incentive opportunities granted to our named executive officers in 2022 are comprised of three separate awards: 1) Performance Unit Awards; 2) Restricted Unit Awards; and 3) Parent-Based Awards.
PLC’s annual incentive awards for 2022 were granted pursuant to PLC’s AIP based on target amounts for (i) after-tax adjusted operating income, (ii) value of new business, (iii) expense management, and (iv) RBC. For Mr. Seurkamp, his payout is weighted 50% to the foregoing PLC metrics and 50% to PLC’s after-tax adjusted operating income, value of new business, expense management and sales for his business unit (Retirement Division).
This table presents information about: 1) the awards granted in 2022 pursuant to the LTIP which will vest in 2024 and 2) the awards granted in 2022 pursuant to the AIP, which were paid in March 2023. All awards earned under the AIP and LTIP are payable in cash.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grants of Plan-Based Awards Table |
| | | | | | | | | | | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards |
Name(a) | | Grant Date(b) | | Compensation Committee Meeting Date | | Type of Award | | Number of Units | | Threshold ($)(c) | | Target ($)(d) | | Maximum ($)(e) |
Bielen | | | | 2/23/22 | | Annual Incentive Plan | | n/a | | | $ | 612,500 | | (1) | | $ | 1,750,000 | | (1) | | $ | 3,762,500 | | (1) |
| | 3/15/22 | | 2/23/22 | | Performance Units | | 28,890 | | (2) | | 722,250 | | (2) | | 2,889,000 | | (2) | | 6,500,250 | | (2) |
| | 3/15/22 | | 2/23/22 | | Restricted Units | | 20,800 | | (3) | | n/a | | | 2,080,000 | | (3) | | n/a | |
| | 3/15/22 | | 2/23/22 | | Parent Stock-Based | | 5,200 | | (4) | | n/a | | | 520,000 | | (4) | | n/a | |
Wells | | | | 2/23/22 | | Annual Incentive Plan | | n/a | | | $ | 141,300 | | (1) | | $ | 403,800 | | (1) | | $ | 868,100 | | (1) |
| | 3/15/22 | | 2/23/22 | | Performance Units | | 3,470 | | (2) | | 86,750 | | (2) | | 347,000 | | (2) | | 780,750 | | (2) |
| | 3/15/22 | | 2/23/22 | | Restricted Units | | 2,500 | | (3) | | n/a | | | 250,000 | | (3) | | n/a | |
| | 3/15/22 | | 2/23/22 | | Parent Stock-Based | | 625 | | (4) | | n/a | | | 62,500 | | (4) | | n/a | |
Walker | | | | 2/23/22 | | Annual Incentive Plan | | n/a | | | $ | 262,500 | | (1) | | $ | 750,000 | | (1) | | $ | 1,612,500 | | (1) |
| | 3/15/22 | | 2/23/22 | | Performance Units | | 6,665 | | (2) | | 166,625 | | (2) | | 666,500 | | (2) | | 1,499,625 | | (2) |
| | 3/15/22 | | 2/23/22 | | Restricted Units | | 4,800 | | (3) | | n/a | | | 480,000 | | (3) | | n/a | |
| | 3/15/22 | | 2/23/22 | | Parent Stock-Based | | 1,200 | | (4) | | n/a | | | 120,000 | | (4) | | n/a | |
Drew | | | | 2/23/22 | | Annual Incentive Plan | | n/a | | | $ | 203,000 | | (1) | | $ | 580,000 | | (1) | | $ | 1,247,000 | | (1) |
| | 3/15/22 | | 2/23/22 | | Performance Units | | 6,110 | | (2) | | 152,750 | | (2) | | 611,000 | | (2) | | 1,374,750 | | (2) |
| | 3/15/22 | | 2/23/22 | | Restricted Units | | 4,400 | | (3) | | n/a | | | 440,000 | | (3) | | n/a | |
| | 3/15/22 | | 2/23/22 | | Parent Stock-Based | | 1,100 | | (4) | | n/a | | | 110,000 | | (4) | | n/a | |
Harrison | | | | 2/23/22 | | Annual Incentive Plan | | n/a | | | $ | 153,200 | | (1) | | $ | 437,800 | | (1) | | $ | 941,300 | | (1) |
| | 3/15/22 | | 2/23/22 | | Performance Units | | 3,890 | | (2) | | 97,250 | | (2) | | 389,000 | | (2) | | 875,250 | | (2) |
| | 3/15/22 | | 2/23/22 | | Restricted Units | | 2,800 | | (3) | | n/a | | | 280,000 | | (3) | | n/a | |
| | 3/15/22 | | 2/23/22 | | Parent Stock-Based | | 700 | | (4) | | n/a | | | 70,000 | | (4) | | n/a | |
Seurkamp | | | | 2/23/22 | | Annual Incentive Plan | | n/a | | | $ | 133,200 | | (1) | | $ | 367,500 | | (1) | | $ | 785,500 | | (1) |
| | 3/15/22 | | 2/23/22 | | Performance Units | | 3,610 | | (2) | | 90,250 | | (2) | | 361,000 | | (2) | | 812,250 | | (2) |
| | 3/15/22 | | 2/23/22 | | Restricted Units | | 2,600 | | (3) | | n/a | | | 260,000 | | (3) | | n/a | |
| | 3/15/22 | | 2/23/22 | | Parent Stock-Based | | 650 | | (4) | | n/a | | | 65,000 | | (4) | | n/a | |
Temple | | | | 2/23/22 | | Annual Incentive Plan | | n/a | | | $ | 119,600 | | (1) | | $ | 341,800 | | (1) | | $ | 735,000 | | (1) |
| | 3/15/22 | | 2/23/22 | | Performance Units | | 7,780 | | (2) | | 194,500 | | (2) | | 778,000 | | (2) | | 1,750,500 | | (2) |
| | 3/15/22 | | 2/23/22 | | Restricted Units | | 5,600 | | (3) | | n/a | | | 560,000 | | (3) | | n/a | |
| | 3/15/22 | | 2/23/22 | | Parent Stock-Based | | 1,400 | | (4) | | n/a | | | 140,000 | | (4) | | n/a | |
__________________
(1)These amounts reflect threshold, target, and maximum payouts to our named executive officers under the AIP. The level of payout is tied to PLC’s after-tax adjusted operating income, value of new business, expense management, and RBC. For Mr. Seurkamp, the payout is weighted 50% to the foregoing PLC metrics and 50% to PLC’s after-tax adjusted operating income, value of new business, expense management and sales for his business unit (Retirement Division). The amount in the “Threshold” column reflects the amount that would be payable to our named executive officers under the AIP if each performance goal were achieved at the threshold level. There is no minimum payout.
(2)These amounts reflect the Performance Unit Awards granted to each named executive officer under the LTIP, along with the estimated payouts at the threshold, target, and maximum amounts. The number of Performance Unit Awards determined to be granted reflect a discount to the book value to reflect the risk of forfeiture associated with performance conditions. The level of payout for the Performance Unit Awards is tied to PLC’s ROE and cumulative after-tax adjusted operating income. These values reflect a reasonable estimate based on a value of each unit at $100 at the date of grant using the grant-date tangible book value of PLC. The amount in the “Threshold” column reflects the amount that would be payable to our named executive officers under the LTIP if each performance goal were achieved at the threshold level. There is no minimum payout.
(3)These amounts reflect the Restricted Unit Awards and target value of Restricted Unit Awards granted to each named executive officer under the LTIP.
(4)These amounts reflect the Parent-Based Awards and target value of the Parent-Based Awards granted to each named executive officer under the LTIP.
Column (b) - Grant date. At its February 23, 2022 meeting, the PLC Compensation Committee granted long-term incentive awards valued in the amounts reflected in the table with a grant date of March 15, 2022.
Column - Number of units. These amounts reflect the number of each of the Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards granted to our named executive officers in 2022. The threshold, target, and maximum value of each award is reflected in columns (c), (d), and (e), respectively.
Columns (c), (d), and (e) - Estimated possible payouts under non-equity incentive plan awards.
In November 2019, the PLC Compensation Committee approved that, in the event that Mr. Temple had a mutually agreed upon separation from service prior to July 1, 2022 (which is the date on which he would be eligible for early retirement under the terms of the Qualified Pension Plan), all of his outstanding awards under the LTIP would vest on a pro rata basis (based on the number of months served during the applicable vesting or award period), with such awards to be payable at the same time and in the same manner as they would have had Mr. Temple remained employed through the end of each applicable vesting or award period. For any retirement on or after July 1, 2022, all of Mr. Temple’s awards under the LTIP would vest in accordance with the terms of the applicable award agreements. In November 2021, the PLC Compensation Committee revised its previous November 2019 approval to provide for full vesting of his outstanding awards under the LTIP in the event he had a mutually agreed upon retirement in or after June 2022. Mr. Temple retired on June 10, 2022, and all of his outstanding awards under the LTIP consequently vested, to be paid out under the terms of the award.
In November 2021, the PLC Compensation Committee approved that, in the event that Mr. Temple had a mutually agreed retirement prior to the completion of six months of employment service in the year of his separation, then Mr. Temple would be entitled to receive an annual incentive payment, if earned, of any then outstanding annual incentive plan award (subject to any valid deferral elections under the Deferred Compensation Plan), equal to the amount he would have received if he had remained employed through the end of the year, multiplied by the number of days that elapsed during the year in which his retirement occurred before and including the date of his retirement divided by 365. Mr. Temple retired on June 10, 2022, and he was consequently eligible to receive a pro-rated portion of the then outstanding annual incentive plan award in relation to his service during 2022, to be paid after end of the year of retirement.
See “Annual Incentive Plan Awards” and “Long-Term Incentive Awards” for information about performance targets and estimated possible payouts under non-equity incentive plan awards.
Pension Benefits
The following table contains information about benefits payable to our named executive officers upon their retirement under the terms of PLC’s “defined benefit” pension plans.
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| Pension Benefits Table |
Name(a) | | Plan Name(b) | | Number of years credited service (#)(c)(1) | | Present value of accumulated benefit ($)(d)(2) | | Payments during last fiscal year ($)(e) |
Bielen | | Pension | | 32 | | | $ | 1,284,987 | | | $ | — | |
| | Excess Pension | | 32 | | | 12,231,237 | | | — | |
| | Total | | | | $ | 13,516,224 | | | $ | — | |
Wells | | Pension | | 17 | | | $ | 260,449 | | | $ | — | |
| | Excess Pension | | 17 | | | 125,596 | | | — | |
| | Total | | | | $ | 386,045 | | | $ | — | |
Walker | | Pension | | 21 | | | $ | 525,907 | | | $ | — | |
| | Excess Pension | | 21 | | | 764,800 | | | — | |
| | Total | | | | $ | 1,290,707 | | | $ | — | |
Drew | | Pension | | 6 | | | $ | 76,890 | | | — | |
| | Excess Pension | | 6 | | | 195,845 | | | — | |
| | Total | | | | $ | 272,735 | | | $ | — | |
Harrison | | Pension | | 9 | | | $ | 113,487 | | | $ | — | |
| | Excess Pension | | 9 | | | 150,347 | | | — | |
| | Total | | | | $ | 263,834 | | | $ | — | |
Seurkamp | | Pension | | 18 | | | $ | 243,763 | | | $ | — | |
| | Excess Pension | | 18 | | | 276,647 | | | — | |
| | Total | | | | $ | 520,410 | | | $ | — | |
Temple | | Pension | | 10 | | | $ | 118,160 | | | $ | — | |
| | Excess Pension | | 10 | | | — | | | 391,519 | |
| | Total | | | | $ | 118,160 | | | $ | 391,519 | |
__________________
(a)The number of years of service that are used to calculate the named executive officer’s benefit under each plan, as of December 31, 2022 or at the time of retirement or termination of employment.
(b)The actuarial present value of the named executive officer’s benefit under each plan as of December 31, 2022.
All of PLC’s eligible employees participate in the Qualified Pension Plan. Benefits under the Qualified Pension Plan are fully vested after three years of service. Upon termination of employment for any reason, employees are entitled to receive their vested benefits. Each named executive officer would be entitled to receive the amounts designated as pension benefits represented in the “Present Value of Accumulated Benefit” column of the Pension Benefits Table. The Pension Benefits Table also shows the amounts payable to each named executive officer upon separation from service under Section 409A of the Internal Revenue Code under the Nonqualified Excess Pension Plan.
Qualified Pension Plan
The Qualified Pension Plan provides different benefit formulas for three different groups: 1) the “grandfathered group” (any employee employed on December 31, 2007 whose age plus years of vesting service total 55 or more as of that date); 2) the “non-grandfathered group” (any employee employed on December 31, 2007 whose age plus years of vesting service was less than 55 as of that date); and 3) the “post-2007 group” (any employee first hired after December 31, 2007 or any former employee who is rehired after that date).
Mr. Bielen is in the grandfathered group; Mr. Walker, Mr. Wells, and Mr. Seurkamp are in the non-grandfathered group; Mr. Drew and Mr. Harrison are in the post-2007 group; and Mr. Temple was in the post-2007 group.
For employees in the grandfathered group and non-grandfathered group, the monthly life annuity benefit payable under the Qualified Pension Plan at normal retirement age (usually age 65) for credited service before 2008 equals:
(1)1.1% of the employee’s final average pay times years of credited service through 2007 (up to 35 years), plus
(2)0.5% of the employee’s final average pay in excess of the employee’s Social Security covered pay times years of credited service through 2007 (up to 35 years), plus
(3)0.55% of the employee’s final average pay times years of credited service through 2007 (in excess of 35 years).
For service after 2007, employees in the grandfathered group continue to earn a monthly life annuity benefit payable at normal retirement age (usually age 65), calculated as follows:
(1)1.0% of the employee’s final average pay times years of credited service after 2007 (up to 35 years minus credited service before 2008), plus
(2)0.45% of the employee’s final average pay over the employee’s Social Security covered pay times years of credited service after 2007 (up to 35 years minus credited service before 2008), plus
(3)0.50% of the employee’s final average pay times the lesser of years of credited service after 2007 and total years of credited service minus 35 years.
The total benefit payable to employees in the grandfathered group will not be less than the benefit the employee would have received had he been a non-grandfathered employee.
For credited service after 2007, employees in the non-grandfathered group and post-2007 group earn a hypothetical account balance that is credited with pay credits and interest credits. Interest is credited to a participant’s account effective on December 31 of each year (or a participant’s benefit commencement date in the year payments begin), based on the value of the participant’s account on January 1 of that year. The interest rate is based on the average daily rate during the month of the 30-year Treasuries’ constant maturities rate published by the IRS. The rate for a calendar year is the rate published for October of the previous year, but not less than 3.25%. Pay credits for a year are based on a percentage of eligible pay for that year, as follows:
| | | | | | | | |
| Credited Service | | % of Pay Credit |
| 1 - 4 years | | 4 | % |
| 5 - 8 years | | 5 | % |
| 9 - 12 years | | 6 | % |
| 13 - 16 years | | 7 | % |
| 17 or more years | | 8 | % |
Final average pay for grandfathered employees is the average of the employee’s eligible pay for the 60 consecutive months that produces the highest average. (However, if the employee’s average eligible pay for any 36 consecutive months as of December 31, 2007 is greater than the 60-consecutive month average, the 36-month average will be used.) For non-grandfathered employees, final average pay is the average of the employee’s eligible pay for the 36 consecutive months before January 1, 2008 that produces the highest average.
Eligible pay includes components of pay such as base salary, overtime, annual incentive awards and other eligible compensation. Pay does not include payment of certain commissions, performance shares, gains on SAR exercises, vesting of restricted stock units, severance pay, or other extraordinary items.
Social Security covered pay is one-twelfth of the average of the Social Security wage bases for the 35-year period ending when the employee reaches Social Security retirement age. For non-grandfathered participants, Social Security covered pay is determined as of December 31, 2007. The wage base is the maximum amount of pay for a year for which Social Security taxes are paid. Social Security retirement age is between ages 65 and 67, depending on the employee’s date of birth.
Unless special IRS rules apply, benefits are not paid before employment ends. An employee may elect to receive:
(1)a life annuity (monthly payments for the employee’s life only), or
(2)a 50%, 75%, or 100% joint and survivor annuity (the employee receives a smaller benefit for life, and the employee’s designated survivor receives a benefit of 50%, 75%, or 100% of the reduced amount for life), or
(3)a five, ten, or 15-year period certain and life annuity benefit (the employee receives a smaller benefit for life and, if the employee dies before the selected period, the employee’s designated survivor receives the reduced amount until the end of the period), or
(4)a lump sum benefit.
If an employee chooses one of these benefit options, the benefit may be adjusted using the interest rate assumptions and mortality tables specified in the Qualified Pension Plan, so it has the same actuarial value as the benefit determined by the Qualified Pension Plan formulas.
An employee whose employment ends before age 65 may begin benefit payments after termination of employment. The benefit for service before 2008 is reduced for commencement before age 65, so the benefit remains the actuarial equivalent of a benefit beginning at age 65.
If an employee retires on or after age 55 with at least 10 years of vesting service, the employee may take an “early retirement” benefit with respect to benefits earned through 2007, beginning immediately after employment ends. Mr. Bielen and Mr. Walker are eligible for early retirement. The early retirement benefit for pre-2008 service is based on the Qualified Pension Plan formula. The benefit is reduced below the level of the age 65 benefit; however, the reduction for an early retirement benefit is not as great as the reduction for early commencement of a vested benefit.
(For example, the early retirement reduction at age 55 is 50%; the actuarial reduction (using the Qualified Pension Plan interest rates and mortality tables) is 62%. At age 62, the early retirement reduction is 20%, and the actuarial reduction is 27%).
Nonqualified Excess Pension Plan
Benefits under PLC’s Qualified Pension Plan are limited by the Internal Revenue Code. PLC believes it should pay PLC’s employees the total pension benefit they have earned without imposing these Code limits. Therefore, like many large companies, PLC has a Nonqualified Excess Pension Plan that makes up the difference between: (1) the benefit determined under the Qualified Pension Plan formula, without applying these limits; and (2) the benefit actually payable under the Qualified Pension Plan, taking these limits into account. Payment of the excess pension benefit is made from PLC’s general assets (and is therefore subject to the claims of PLC’s creditors) and not from the assets of the Qualified Pension Plan. An employee’s post-2004 excess pension benefit is paid in the form elected by the employee (i.e., lump sum or annuity) and is in the third month following the employee’s termination date. If the employee is a “specified employee” under Section 409A of the Internal Revenue Code, the excess pension benefit is payable six months following termination of employment.
Pursuant to the Nonqualified Excess Pension Plan’s change of control provision, an employee will receive a lump sum payment of the pre-2005 excess pension benefit, if applicable, in January of the calendar year immediately following the employee’s date of termination.
Nonqualified Deferred Compensation Arrangements
This table presents certain information about our named executive officers’ participation in nonqualified deferred compensation arrangements in 2022.
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| Nonqualified Deferred Compensation Table |
Name(a) | | Executive contributions in last FY ($)(b)(1) | | Registrant contributions in last FY ($)(c)(2) | | Aggregate earnings in last FY ($)(d) | | Aggregate withdrawals/ distributions ($)(e) | | Aggregate balance at last FYE ($)(f)(3) |
| Bielen | | $ | 187,200 | | | $ | 93,319 | | | $ | (80,447) | | | $ | 6,400,222 | | | $ | 5,009,663 | |
| Wells | | $ | 232,119 | | | $ | 9,395 | | | $ | (294,901) | | | $ | 525,475 | | | $ | 1,798,426 | |
| Walker | | $ | 63,300 | | | $ | 28,612 | | | $ | 58,371 | | | $ | 19,248 | | | $ | 2,466,585 | |
| Drew | | $ | 100,000 | | | $ | 31,820 | | | $ | (170,236) | | | $ | — | | | $ | 795,061 | |
| Harrison | | $ | 136,221 | | | $ | 19,160 | | | $ | (165,509) | | | $ | 133,159 | | | $ | 960,681 | |
| Seurkamp | | $ | — | | | $ | 24,129 | | | $ | (228,653) | | | $ | — | | | $ | 1,214,475 | |
| Temple | | $ | — | | | $ | 86,925 | | | $ | 9,915 | | | $ | 571,670 | | | $ | 79,954 | |
______________
(1)These amounts include:
◦the following amounts that are also included in column (c) (Salary) of the Summary Compensation Table as compensation earned and deferred by the officer in 2022 under the DCP: Mr. Bielen, $39,500; Mr. Wells, $22,500; and Mr. Harrison, $50,250; and
◦the following amounts that are also included in column (g) (Non-equity incentive plan compensation) of the Summary Compensation Table for 2022 as compensation earned under the AIP with respect to 2022 performance and deferred by the officer in 2023 under the DCP: Mr. Bielen, $147,700; Mr. Walker, $63,300; Mr. Wells, $127,785; Mr. Drew, $100,000; and Mr. Harrison, $73,896.
(2)These amounts represent the DCP Supplemental Matching Contributions allocated to the officer’s account in 2022 with respect to the officer’s participation during 2021 in PLC’s DCP, the terms of which provide that the officer will not receive the matching contribution unless the officer is employed on the date of the allocation or terminated due to death, disability, or while eligible for normal or early retirement under PLC’s Qualified Pension Plan. PLC will incur the expense at the time of allocation. These DCP Supplemental Matching Contributions are reported in the Summary Compensation Table as compensation for 2022.
(3)These amounts reflect the following amounts that have been reported as compensation to the officer in previous proxy statements of PLC (with respect to periods prior to February 1, 2015), Annual Reports on Forms 10-K of PLC and the Company (for periods after February 1, 2015), and Registration Statements on Form S-1 of the Company (for periods after April 2022): Mr. Bielen, $13,178,570; Mr. Walker, $2,327,405; Mr. Drew, $709,390; Mr. Seurkamp, $153,603; and Mr. Temple, $516,286
In general, our named executive officers and other key officers can elect to participate in PLC’s unfunded, unsecured DCP. An officer who defers compensation under the DCP does not pay income taxes on the compensation at that time. Instead, the officer pays income taxes on the compensation (and any earnings on the compensation) only when the officer receives the compensation and earnings from the DCP.
Through December 31, 2022, eligible officers could defer: 1) up to 75% of their base salary; 2) up to 85% of any annual incentive award; and/or 3) up to 85% of the amounts payable when Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards are earned (for the Restricted Unit Awards and Parent-Based Awards, percentages are subject to reduction if the employee is eligible for early retirement). Prior to the amendment to the DCP effective on January 1, 2019, certain senior officers were allowed a maximum deferral up to 94% for Performance Unit Awards, Restricted Unit Awards, and Parent-Based Awards (for the Restricted Unit Awards and Parent-Based Awards, percentages were subject to reduction if the employee is eligible for early retirement).
An election to defer base salary for a calendar year must be made by December 31 of the previous year. Generally, an election to defer any annual incentive payout for a calendar year must be made by June 30 of that year. Generally, an election to defer earned Performance Units must be made by June 30 of the last year in the award’s performance period. An election to defer earned Restricted Unit Awards or Parent-Based Awards must be made within 30 days after the date of the award. Deferred compensation accrues earnings based on the participant’s election among notional investment choices available under the DCP.
For 2022, the investment returns for each of the notional investment choices were:
| | | | | | | | |
| Investment Choice | | Return |
| Allspring Government Money Market Institutional | | 1.47 | % |
| BlackRock Total Return Fund | | (14.14) | % |
| DFA Emerging Markets I | | (16.88) | % |
| DFA US Small Cap | | (13.53) | % |
| Dodge & Cox International Stock | | (6.78) | % |
| Dodge and Cox Stock | | (7.22) | % |
| Fidelity 500 Index Fund | | (18.13) | % |
| Fidelity International Index | | (14.24) | % |
| Fidelity Mid Cap Index | | (17.28) | % |
| Fidelity US Bond Index | | (13.03) | % |
| JP Morgan Mid-Cap Growth R5 | | (27.01) | % |
| Metropolitan West Low Duration Bond I | | (4.97) | % |
| PIMCO Real Return Institutional | | (11.86) | % |
| T. Rowe Price Growth Stock | | (40.14) | % |
| Templeton Foreign A | | (3.59) | % |
| Vanguard High-Yield Corporate Admiral | | (8.97) | % |
| Vanguard Real Estate Index Admiral | | (26.20) | % |
| William Blair International | | (28.55) | % |
Protective Life LIBOR Fund(1) | | 2.47 | % |
__________________
(1)This fund was replaced with the Protective Life Treasury Rate Fund, effective January 1, 2023.
An officer may elect to receive payments in a lump sum or in up to ten annual installments, which election can be changed under certain circumstances. An officer may elect to receive a deferred amount (and earnings) upon termination of employment and if such election is made, the officer may not change this election. An officer may instead elect to receive a deferred amount (and earnings) on a fixed date (which must be a February 15, and must begin no later than the officer’s 70th birthday), which election can be changed under certain circumstances. An officer may also request a distribution if the officer has an extreme and unexpected financial hardship, as determined under IRS rules.
Each named executive officer is currently fully vested in the amounts reported in the “Aggregate Balance at FYE” column of the Nonqualified Deferred Compensation Table, and, unless a specific date of payment has been selected by the named executive officer, these amounts would be payable to each named executive officer upon termination of employment for any reason. In addition, a named executive officer whose employment terminated due to normal or early retirement, death, or disability would receive the DCP Supplemental Matching Contribution that would have been allocated under PLC’s DCP to each named executive officer’s account with respect to the officer’s service during 2022.
Supplemental Matching. PLC makes supplemental matching contributions to the account of eligible officers under the DCP. These contributions provide matching that PLC would otherwise contribute to PLC’s 401(k) Plan, but which PLC cannot contribute because of Internal Revenue Code limits on 401(k) plan matching. For a calendar year, the supplemental match that an officer receives is:
•the lesser of
•4% of eligible compensation payable during the year, whether received in cash or deferred, and
•the total amount the officer deferred during the year under the 401(k) Plan and deferrals of base salary and cash bonuses under the DCP; minus
•the actual matching contribution the officer received under the 401(k) Plan for that year, as determined while applying the restrictions imposed by the Internal Revenue Code.
An officer’s supplemental matching contributions may be allocated in one percent increments among the same notional investment funds available for deferrals under the DCP. Supplemental matching is paid only after termination of employment. The officer can elect payment in a lump sum or in up to ten annual installments, and such election cannot be changed.
Other Provisions. Notional investment choices under the DCP must be in one percent increments. An officer may transfer money between the notional investment choices on any business day. PLC does not provide any above-market or preferential earnings rates and do not guarantee that an officer’s notional investments will make money.
Upon an officer’s death or disability, the officer’s plan balance is paid in a lump sum. Account balances are paid in cash.
Potential Payments upon Termination or Change of Control
The following tables and footnotes describe the potential payments to our named executive officers upon a termination of each named executive officer’s employment or a change-in-control of PLC on December 31, 2022. The tables do not include:
•compensation or benefits previously earned by our named executive officers or incentive awards that were already fully vested;
•the value of pension benefits that are disclosed in the 2022 Pension Benefits Table, except for any pension enhancement triggered by the event, if applicable;
•the amounts payable under the DCP that are disclosed in the 2022 Nonqualified Deferred Compensation Table; or
•the value of any benefits (such as retiree health coverage, life insurance and disability coverage) provided on the same basis to substantially all other employees.
The actual benefit to a named executive officer can only be determined at the time of the change-in-control event or such executive’s separation from PLC. None of our named executive officers are party to any written employment arrangements that provide for payments in the event of a change in control or termination of employment.
Change of Control
The table set forth below shows the cash payments and other benefits that would have been payable to each of our named executive officers (other than Mr. Temple) had a change of control of PLC occurred on December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Performance Units(1) | | Restricted Units(1) | | Parent-Based Awards(1) | | Total |
| Bielen | | $ | 7,665,937 | | | $ | 5,500,598 | | | $ | 1,686,664 | | | $ | 14,853,199 | |
| Wells | | $ | 663,537 | | | $ | 483,765 | | | $ | 141,824 | | | $ | 1,289,126 | |
| Walker | | $ | 1,909,534 | | | $ | 1,358,503 | | | $ | 424,571 | | | $ | 3,692,608 | |
| Drew | | $ | 1,803,956 | | | $ | 1,296,007 | | | $ | 406,559 | | | $ | 3,506,522 | |
| Harrison | | $ | 898,610 | | | $ | 637,168 | | | $ | 199,434 | | | $ | 1,735,212 | |
| Seurkamp | | $ | 1,122,591 | | | $ | 812,691 | | | $ | 257,287 | | | $ | 2,192,569 | |
__________________
(1)The amounts in these columns include (i) with respect to LTIP awards with performance periods that ended on December 31, 2022, the amounts that were actually earned and paid to the named executive officer based on actual performance under the terms of the applicable award (which amounts are also reflected in the Summary Compensation Table), and (ii) with respect to LTIP awards with performance periods ending after December 31, 2022, an amount that could be earned by the named executive officer under the terms of the applicable
awards based on a projected level of achievement as of December 31, 2022. In the event of such a termination of employment on December 31, 2022, the actual amounts, if any, that may be earned and paid to our named executive officers with respect to an LTIP award with a performance period ending after December 31, 2022 is based on the actual performance for the applicable performance period and therefore cannot be determined until after completion of such performance period.
Death or Disability
The table set forth below shows the cash payments and other benefits that would have been payable to each of our named executive officers (other than Mr. Temple) had his employment been terminated due to death or disability. Pursuant to the plans, upon normal retirement, a named executive officer would receive the same amount as he or she would receive due to death or disability. As of December 31, 2022, none of our named executive officers are eligible for normal retirement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Cash(1) | | 2022 DCP Supplemental Matching Contribution | | Performance Units(2) | | Restricted Units(2) | | Parent-Based Awards(2) | | Annual Incentive Payments(3) | | Total(1) |
| Bielen | | $ | 50,000 | | | $ | 121,836 | | | $ | 5,430,218 | | | $ | 5,878,814 | | | $ | 1,686,664 | | | $ | 3,692,500 | | | $ | 16,860,032 | |
| Wells | | $ | 50,000 | | | $ | 17,188 | | | $ | 416,744 | | | $ | 522,232 | | | $ | 141,824 | | | $ | 851,900 | | | $ | 1,999,888 | |
| Walker | | $ | 50,000 | | | $ | 42,611 | | | $ | 1,382,308 | | | $ | 1,449,625 | | | $ | 424,571 | | | $ | 1,582,500 | | | $ | 4,931,615 | |
| Drew | | $ | 50,000 | | | $ | 40,299 | | | $ | 1,317,194 | | | $ | 1,381,039 | | | $ | 406,559 | | | $ | 1,223,800 | | | $ | 4,418,891 | |
| Harrison | | $ | 50,000 | | | $ | 26,976 | | | $ | 609,724 | | | $ | 684,520 | | | $ | 199,434 | | | $ | 923,700 | | | $ | 2,494,354 | |
| Seurkamp | | $ | 50,000 | | | $ | 28,960 | | | $ | 831,031 | | | $ | 864,519 | | | $ | 257,287 | | | $ | 755,200 | | | $ | 2,786,997 | |
__________________
(1)Represents the amounts that would have been paid to our named executive officers under the Protective Life Corporation Pre-Retirement Death Benefit Plan had his employment been terminated due to death.
(2)The amounts in these columns include (i) with respect to LTIP awards with performance periods that ended on December 31, 2022, the amounts that were actually earned and paid to the named executive officer based on actual performance under the terms of the applicable award (which amounts are also reflected in the Summary Compensation Table), and (ii) with respect to LTIP awards with performance periods ending after December 31, 2022, an amount that could be earned by the named executive officer under the terms of the applicable awards based on a projected level of achievement as of December 31, 2022. In the event of such a termination of employment on December 31, 2022, the actual amounts, if any, that may be earned and paid to our named executive officers with respect to an LTIP award with a performance period ending after December 31, 2022 is based on the actual performance for the applicable performance period and therefore cannot be determined until after completion of such performance period.
(3)Represents the amounts that were earned and paid to the named executive officer based on actual performance under the terms of the applicable AIP award that was made in 2022 (which amounts are also reflected in the Summary Compensation Table).
Early Retirement
The table set forth below shows the cash payments and other benefits that would have been payable to each of our named executive officers (other than Mr. Temple) had his employment been terminated due to early retirement on December 31, 2022. With respect to Mr. Temple, the table below presents the cash payments and other benefits that became payable to him based on his retirement on June 10, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | 2022 DCP Supplemental Matching Contribution | | Performance Units(3) | | Restricted Units(3) | | Parent-Based Awards(3) | | Annual Incentive Payments(4) | | Total |
| Bielen | | $ | 121,836 | | | $ | 9,327,679 | | | $ | 5,878,814 | | | $ | 1,686,664 | | | $ | 3,692,500 | | | $ | 20,707,494 | |
Wells(1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Walker(1) | | $ | 42,611 | | | $ | 2,331,057 | | | $ | 1,449,625 | | | $ | 424,571 | | | $ | 1,582,500 | | | $ | 5,830,364 | |
Drew(1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Harrison(1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Seurkamp(1) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Temple(2) | | $ | 45,778 | | | $ | 3,071,631 | | | $ | 1,875,747 | | | $ | 555,224 | | | $ | — | | | $ | 5,548,380 | |
_____________
(1)Mr. Wells, Mr. Drew, Mr. Harrison, and Mr. Seurkamp would not be eligible for early retirement on December 31, 2022.
(2)In November 2019, the PLC Compensation Committee approved that, in the event that Mr. Temple has a mutually agreed upon separation from service prior to July 1, 2022 (which is the date on which he would be eligible for early retirement under the terms of the Qualified Pension Plan), all of his outstanding awards under the LTIP would vest on a pro rata basis (based on the number of months served during the applicable vesting or award period), with such awards to be payable at the same time and in the same manner as they would had Mr. Temple remained employed through the end of each applicable vesting or award period. For any retirement on or after July 1, 2022, all of Mr. Temple’s awards under the LTIP would vest in accordance with the terms of the applicable award agreements. In November 2021, the PLC Compensation Committee revised its previous November 2019 approval to provide for full vesting of his outstanding awards under the LTIP in the event he had a mutually agreed upon retirement in or after June 2022. Mr. Temple retired on June 10, 2022, and all of his outstanding awards under the LTIP consequently vested, to be paid out under the terms of the award. In November 2021, the PLC Compensation Committee approved that, in the event that Mr. Temple had a mutually agreed retirement prior to the completion of six months of employment service in the year of his separation, then Mr. Temple would be entitled to receive an annual incentive payment, if earned, of any then outstanding annual incentive plan award (subject to any valid deferral elections under the Deferred Compensation Plan), equal to the amount he would have received if he had remained employed through the end of the year, multiplied by the number of days that elapsed during the year in which his retirement occurs before and including the date of his retirement divided by 365. Mr. Temple retired on June 10, 2022, and he was consequently eligible to receive a pro-rated portion of the then outstanding annual incentive plan award in relation to his service during 2022, to be paid after end of the year of retirement.
(3)The amounts in these columns include (i) with respect to LTIP awards with performance periods that ended on December 31, 2022, the amounts that were actually earned and paid to the named executive officer based on actual performance under the terms of the applicable award (which amounts are also reflected in the Summary Compensation Table), and (ii) with respect to LTIP awards with performance periods ending after December 31, 2022, an amount that could be earned by the named executive officer under the terms of the applicable awards based on a projected level of achievement as of December 31, 2022. In the event of such a termination of employment on December 31, 2022, the actual amounts, if any, that may be earned and paid to our named executive officers with respect to an LTIP award with a performance period ending after December 31, 2022 is based on the actual performance for the applicable performance period and therefore cannot be determined until after completion of such performance period.
(4)Represents the amounts that were earned and paid to the named executive officer based on actual performance under the terms of the applicable AIP award that was made in 2022 (which amounts are also reflected in the Summary Compensation Table).
Other Termination (other than for “cause”)
The table set forth below shows the cash payments and other benefits that would have been payable to Mr. Wells, Mr. Drew, Mr. Harrison or Mr. Seurkamp had their employment been terminated (other than for “cause” or for one of the reasons specified in the tables above) on December 31, 2022. Except as described above with respect to Mr. Temple’s retirement in 2022, Mr. Wells, Mr. Drew, Mr. Harrison and Mr. Seurkamp are our only named executive officers who would not be eligible for normal or early retirement on December 31, 2022. For Mr. Bielen and Mr. Walker, for any termination other than “for cause”, the payments are reflected above in the “Early Retirement” table.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Restricted Units(1) | | Parent-Based Awards | | Total |
| Bielen | | $ | — | | | $ | — | | | $ | — | |
| Walker | | $ | — | | | $ | — | | | $ | — | |
| Wells | | $ | 79,555 | | | $ | 38,681 | | | $ | 118,236 | |
| Drew | | $ | 276,746 | | | $ | 148,059 | | | $ | 424,805 | |
| Harrison | | $ | 108,122 | | | $ | 65,804 | | | $ | 173,926 | |
| Seurkamp | | $ | 181,618 | | | $ | 98,706 | | | $ | 280,324 | |
______________
(1)The amounts in these columns include the amounts that were actually earned and paid to the named executive officer based on actual performance under the terms of the second installment of the 2019 Restricted Units (which amounts are also reflected in the Summary Compensation Table).
CEO Pay Ratio
In accordance with SEC rules, we are providing the following comparison of the annual total compensation of the Company’s employees and the annual total compensation of Mr. Bielen, our CEO and President.
For 2022:
•the median of the annual total compensation of all employees of the Company (other than our CEO) was $80,562; and
•the annual total compensation of our CEO was $6,409,130.
Based on this information, for 2022 our estimate of the ratio of the total compensation of Mr. Bielen, our current CEO and President, to the median of the annual total compensation of all employees was 80 to 1.
To identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of the Company’s median employee and our CEO, the Company took the following steps:
•We identified the Company’s employee population, consisting of full-time, part-time, and temporary employees, as of December 31, 2022.
•To identify the “median employee” from the Company’s employee population, we compared the amount of Box 5 earnings (Box 5 is Medicare taxable wages and includes all forms of compensation) of the Company’s employees as reflected in the Company’s payroll records as reported to the Internal Revenue Service on Form W-2 for 2022.
•We identified a potential median employee using this compensation measure, which was consistently applied to all the Company’s employees included in the calculation.
•Once we identified the Company’s median employee, we combined all of the elements of such employee’s compensation for 2022 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $80,562.
•With respect to the annual total compensation of our CEO, we included the amounts reported in the 2022 Summary Compensation Table included in this prospectus.
Given the different methodologies that various companies will use to determine an estimate of their pay ratio, the estimated ratio reported above should not be used as a basis for comparison between companies.
Director Compensation
The compensation of each of our directors, Mr. Bielen, Mr. Walker and Mr. Wells, is discussed above.
Security Ownership of Certain Beneficial Owners and Management
PLC owns 100% of the outstanding voting stock of the Company. Effective January 1, 2023, PLC became a wholly owned subsidiary Dai-ichi Life International Holding, LLC, a godo kaisha organized under the laws of Japan and subsidiary of Dai-ichi Life (“Dai-ichi Life International”), upon the transfer of all of the outstanding shares of PLC’s common stock from Dai-ichi Life to Dai-ichi Life International. Dai-ichi Life remains the ultimate controlling parent corporation of PLC.
Transactions with Related Persons, Promoters and Certain Control Persons
We review all relationships and transactions in which we and “related parties” (our directors, director nominees, executive officers, their immediate family members, and certain affiliated entities) participate to determine if any related party has a direct or indirect material interest. PLC’s Chief Legal Officer’s Office is primarily responsible for developing and implementing processes to obtain the necessary information and for determining, based on the facts and circumstances, whether a direct or indirect material interest exists, and we have written policies in place regarding relationships and transactions with “related parties”.
Pursuant to PLC’s policies, if the Chief Legal Officer’s Office determines that a transaction may require disclosure under SEC rules, the Chief Legal Officer’s Office will notify:
•the PLC Corporate Governance and Nominating Committee, if the transaction involves one of our directors or director nominees; otherwise
•the PLC Audit Committee.
The relevant PLC Board committee will approve or ratify the transaction only if it determines that the transaction is in our best interests. In considering the transaction, the committee will consider all relevant factors, including (as applicable):
•our business rationale for entering into the transaction;
•the alternatives to entering into the transactions;
•whether the terms of the transaction are comparable to those that could be obtained in arms-length dealings with an unrelated third party;
•the potential for the transaction to lead to an actual or apparent conflict of interest, and any safeguards imposed to prevent actual or apparent conflicts; and
•the overall fairness of the transaction to us.
Based on the information available to PLC’s Chief Legal Officer’s Office and to the PLC Board, except as described below, there have been no transactions between the Company and any related party since January 1, 2022, nor are any currently proposed, for which disclosure is required under the SEC rules.
The Company provides furnished office space and computers to affiliates through an intercompany agreement. Revenues from this agreement were $9.9 million, $10.5 million and $7.4 million, for the years ended December 31, 2022, 2021, and 2020, respectively. The Company purchases data processing, legal, investment, and management services from affiliates. The costs of such services were $301.7 million, $275.8 million and $242.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company also received $111.4 million, $96.1 million, and $90.4 million from affiliates for these services in 2022, 2021, and 2020 respectively. In addition, the Company has an intercompany payable with affiliates as of December 31, 2022 and 2021 of $39.5 million and $40.5 million, respectively. There was a $13.3 million and $9.5 million intercompany receivable balance as of December 31, 2022 and 2021, respectively.
The Company has joint venture interests in real estate for which the Company holds the underlying real estate’s loan. During 2022, 2021, and 2020, the Company received $20 million, $7 million and $5 million, respectively, in mortgage loan payments corresponding to the joint venture interests and $15 million in principal was collected on loans that paid off in December 2022.
During the periods ending December 31, 2022, 2021, and 2020, PLC paid a management fee to Dai-ichi Life of $12 million, $13 million and $12 million, respectively, for certain services provided to the Company.
FINANCIAL INFORMATION
Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our audited statutory financial statements and related notes included herein. Please refer to the “Our Business” section of this Prospectus for information about the Company’s background and operations.
Our financial condition and results of operations are subject to certain risks and uncertainties. Please refer to the “Risk Factors” section of this Prospectus for more information about the risks, uncertainties and other factors that could affect our future results.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements requires management to make judgments relating to a variety of assumptions and estimates that affect amounts reported in the financial statements and notes thereto. Because of the inherent uncertainty when using assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in our financial statements. The most significant areas that require the use of management’s judgment relate to expectations of current and future mortality, morbidity, persistency, expenses, and interest rates, as well as expectations around the valuations of certain investments. Please refer to Note 1 of our financial statements for a summary of significant accounting policies.
RECENT EVENTS AND SIGNIFICANT TRANSACTIONS
The Company maintained a strong statutory capital position during 2022 driven by the Company’s core operating fundamentals and the continued impact of capital markets and reinsurance transactions that were entered into during, and prior to 2022. Each of these factors is discussed in further detail below.
Accounting Changes
Effective January 1, 2021, the Company adopted revisions to SSAP No. 32, “Preferred Stock” (“SSAP No. 32R”), which refined definitions of preferred stock categories and updated accounting guidance for certain categories of preferred stock. Under the revised guidance in SSAP No. 32R, all perpetual preferred stocks shall be reported at fair value, not to exceed any currently effective call price. The Company recorded an unrealized gain of $21.4 million upon adoption of the revisions and an unrealized loss of $7.6 million for the year ended December 31, 2021.
As of January 1, 2020, VM-21 replaced AG43 for the valuation of statutory reserves for variable annuities. The cumulative net impact of this regulation change was a $59.3 million decrease in reserves. The change was recorded directly in “Unassigned funds – surplus” as a “Change in reserve on account of change in valuation basis”. The financial statement impact of this change was to decrease “Aggregate reserves: life policies and contracts” and increase both “Change in reserve on account of change in valuation basis” and “Unassigned funds - surplus” by $59.3 million. In accordance with the provisions of SSAP No. 3, “Accounting Changes and Corrections of Errors” (“SSAP No. 3”), the $59.3 million cumulative effect represents the January 1, 2020 impact of the change.
Realized Losses and Recognized Impairments in Connection with Recent Banking Industry Volatility
As a result of events that occurred at certain financial institutions and the subsequent regulatory actions taken during March of 2023, the Company has evaluated the impact of these events to certain holdings within its investment portfolio. As a result of this evaluation, the Company sold certain bonds and recognized a pre-tax realized investment loss of $11.1 million. In addition, the Company identified certain investments in bonds on which it will take other-than-temporary impairments as of March 31, 2023, based on the fair value of the underlying holdings. As of the date of this report, the Company expects to recognize pre-tax other-than-temporary impairments of approximately $78.6 million, related to certain investment holdings within the banking sector.
Significant Transactions
As part of a statutory merger approved by the Department of Commerce and Insurance of the State of Tennessee (the “Department”) and the Vermont Department of Financial Regulation, the Company was merged with its affiliate, Shades Creek Captive Insurance Company (“Shades Creek”), effective January 1, 2021 (“the Merger”). After the Merger, the Company remained as the surviving legal entity, and Shades Creek ceased to exist effective January 1, 2021. Prior to the Merger, both the Company and Shades Creek were wholly owned subsidiaries of Protective Life Corporation (“PLC”). The Company did not pay or receive any consideration in connection with the Merger. As a result of the Merger, all issued and outstanding capital stock of Shades Creek was cancelled.
Merger was accounted for using the statutory merger method pursuant to SSAP No. 68, “Business Combinations and Goodwill” (“SSAP No. 68”). In accordance with SSAP No. 68, the Company’s Statements of Operations, Statements of Changes in Capital and Surplus, Statements of Cash Flow and other prior year amounts included herein have been restated to reflect the merged results of the Company and Shades Creek in accordance with the provisions of SSAP No. 68 and SSAP No. 3.
On May 2, 2022, the Company completed the transaction to acquire leading automotive finance and insurance provider A.U.L. Corp (“AUL”). AUL offers a variety of finance and insurance products, including warranties, vehicle service contracts, and a suite of ancillary products. The transaction was announced on March 21, 2022. The Company accounted for this transaction under the statutory purchase method of accounting as required by SSAP No. 68. The aggregate purchase price was $347.0 million and is subject to adjustments. AUL is carried at $307.1 million at December 31, 2022. No goodwill was recorded in the transaction. Please refer to Note 4 of the Audited Financial Statements for further information regarding the Company’s acquisition of AUL.
Wholly owned insurance subsidiaries of the Company as of December 31, 2022 include Protective Life and Annuity Insurance Company (“PLAIC”), GGCIC, West Coast Life Insurance Company (“WCL”), MONY Life Insurance Company (“MONY”), and Protective Property & Casualty Insurance Company (“PP&C”) (formerly Lyndon Property Insurance Company (“LPIC”).
RESULTS OF OPERATIONS
Statements of Admitted Assets, Liabilities, and Capital and Surplus (Statutory Basis)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ($ in Thousands) |
| Admitted Assets | | | |
| Bonds | $ | 47,180,219 | | | $ | 47,120,591 | |
| Preferred stocks | 540,147 | | | 707,270 | |
| Common stocks - affiliated | 1,796,429 | | | 1,445,092 | |
| Common stocks - unaffiliated | 174,544 | | | 146,568 | |
| Mortgage loans on real estate | 10,558,447 | | | 9,557,217 | |
| Real estate | 117,968 | | | 120,602 | |
| Contract loans | 830,400 | | | 847,471 | |
| Cash and cash equivalents | 369,091 | | | 449,128 | |
| Short-term investments | — | | | 2,626 | |
| Other invested assets | 804,833 | | | 809,003 | |
| Receivable for securities | 4,485 | | | 1,851 | |
| Securities lending reinvested collateral assets | 162,119 | | | 179,083 | |
| Derivatives | 366,106 | | | 1,248,717 | |
| Derivative collateral and receivables | 60,639 | | | 192,298 | |
| Total cash and investments | 62,965,427 | | | 62,827,517 | |
| Amounts recoverable from reinsurers | 123,881 | | | 139,923 | |
| Deferred and uncollected premiums | 1,096 | | | (36,891) | |
| Investment income due and accrued | 525,295 | | | 507,118 | |
| Receivable from parent, subsidiaries and affiliates | 13,307 | | | 9,505 | |
| Current federal and foreign income tax recoverable | 12,628 | | | 16,579 | |
| Deferred tax asset | 185,709 | | | 180,054 | |
| Other assets | 754,347 | | | 791,067 | |
| Assets held in Separate Accounts | 14,111,642 | | | 16,385,944 | |
Total admitted assets | $ | 78,693,332 | | | $ | 80,820,816 | |
Statements of Admitted Assets, Liabilities, and Capital and Surplus (Statutory Basis)
(continued)
| | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| ($ in Thousands) |
| Liabilities | | | |
| Aggregate reserves: | | | |
| Life policies and contracts | $ | 39,751,133 | | | $ | 40,891,066 | |
| Accident and health | 345,393 | | | 336,499 | |
| Liability for deposit-type contracts | 11,906,051 | | | 10,373,334 | |
| Policy and contract claims: | | | |
| Life | 464,809 | | | 533,075 | |
| Accident and health | 20,249 | | | 22,832 | |
| Policyholders’ dividends | 20,688 | | | 28,903 | |
| Funds at interest and experience rated refunds | 78,776 | | | 136,850 | |
| Interest maintenance reserve (“IMR”) | 778,140 | | | 1,269,536 | |
| General expenses due or accrued | 95,653 | | | 70,908 | |
| Transfers from Separate Accounts due or accrued, net | (50,739) | | | (338,156) | |
| Remittances and items not allocated | 64,976 | | | 56,115 | |
| Borrowed money and interest thereon | 925,223 | | | 1,308,328 | |
| Asset valuation reserve (“AVR”) | 362,132 | | | 468,260 | |
| Payable to parent, subsidiaries, and affiliates | 39,475 | | | 40,465 | |
| Derivatives | 267,352 | | | 960,050 | |
| Derivative collateral and payables | 62,269 | | | 195,926 | |
| Payable for securities lending | 162,119 | | | 179,083 | |
| Funds held under reinsurance treaties | 3,481,734 | | | 2,131,334 | |
| Other liabilities | 471,541 | | | 451,894 | |
| Liabilities held in Separate Accounts | 14,111,642 | | | 16,385,944 | |
| Total liabilities | 73,358,616 | | | 75,502,246 | |
| Capital and surplus | | | |
| Common stock, $1.00 par value; 5,000,000 shares authorized, issued and outstanding | 5,000 | | | 5,000 | |
| Surplus Notes | 110,000 | | | 110,000 | |
| Gross paid-in and contributed surplus | 3,240,393 | | | 3,140,393 | |
| Unassigned fund - surplus | 1,979,323 | | | 2,063,177 | |
| Total capital and surplus | 5,334,716 | | | 5,318,570 | |
Total liabilities and capital and surplus | $ | 78,693,332 | | | $ | 80,820,816 | |
Statements of Operations (Statutory Basis)
| | | | | | | | | | | | | | | | | |
| For The Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in Thousands) |
| Revenue | | | | | |
| Premiums and annuity considerations | $ | 3,438,207 | | | $ | 5,098,113 | | | $ | 3,842,843 | |
| Net investment income | 2,475,360 | | | 2,385,384 | | | 2,285,955 | |
| Commissions and expense allowances on reinsurance ceded | 408,185 | | | 462,914 | | | 437,894 | |
| Amortization of interest maintenance reserve | 132,476 | | | 123,509 | | | 107,047 | |
| Net gain (loss) from operations from Separate Accounts | (112,311) | | | 20,010 | | | 10,088 | |
| Reserve adjustments on reinsurance ceded | (167,198) | | | (157,219) | | | (392,899) | |
| Other income | 548,017 | | | 636,979 | | | 610,473 | |
| Total revenue | 6,722,736 | | | 8,569,690 | | | 6,901,401 | |
| Benefits and expenses | | | | | |
| Death and annuity benefits | 2,262,459 | | | 2,292,755 | | | 2,106,267 | |
| Accident and health benefits | 56,856 | | | 59,175 | | | 68,224 | |
| Surrender benefits and other fund withdrawals | 3,514,730 | | | 3,023,567 | | | 2,913,334 | |
| Other policy and contract benefits | 419,381 | | | 217,876 | | | 236,954 | |
| Increase in aggregate reserves | (1,137,253) | | | 1,054,549 | | | 618,761 | |
| Commissions and commission expense allowance | 469,937 | | | 499,239 | | | 379,326 | |
| General expenses | 574,343 | | | 541,211 | | | 524,794 | |
| Insurance taxes, licenses and fees | 110,307 | | | 100,202 | | | 74,030 | |
| Transfer to Separate Accounts, net | (151,823) | | | (27,834) | | | (931,195) | |
| Change in assumed MODCO reserves | 47 | | | 205 | | | 184 | |
| Other expenses | 136,678 | | | 117,209 | | | 125,743 | |
| Total benefits and expenses | 6,255,662 | | | 7,878,154 | | | 6,116,422 | |
Net income from operations before dividends to policyholders and federal income taxes | 467,074 | | | 691,536 | | | 784,979 | |
| Dividends to policyholders | 18,929 | | | 29,487 | | | 29,586 | |
| Federal income tax expense | 125,600 | | | 122,732 | | | 80,173 | |
Net income from operations | 322,545 | | | 539,317 | | | 675,220 | |
| Net realized capital gains (losses) | (16,718) | | | (113,001) | | | 16,493 | |
Net income | $ | 305,827 | | | $ | 426,316 | | | $ | 691,713 | |
December 31, 2022 to December 31, 2021 Comparison
Results of Operations
Income
Premiums and annuity considerations - Direct premiums decreased $0.5 million primarily due to lower fixed annuity, FIA, and VA sales, offset in part by increases in UL sales. Additional premium decreases were attributable to continued run-off from closed blocks of previously-acquired business with direct premiums. Life insurance in-force increased 2.6% which was due primarily to an increase in new policy issues, partially offset by lapses.
Assumed premiums decreased $165.2 million primarily due to the run-off of closed blocks of assumed business.
Ceded premiums increased $1.5 billion primarily due to the cession of certain fixed annuity business to PL Re during 2022, which included premium transfers of $1.5 billion. This increase is partially offset by the run-off of closed blocks of ceded business.
Net investment income increased $90.0 million, which was primarily due to fixed maturity income, in addition to dividends from subsidiaries of $68.0 million during the twelve months ending December 31, 2022, compared $62.0 million during the twelve months ending December 31, 2021.
Commission and expense allowances on reinsurance ceded decreased $54.7 million, primarily due to a decrease in previously deferred gains being amortized into income during the twelve months ending December 31, 2022, partially offset by recognition of the $23.7 million initial gain related to the cession of certain fixed annuity business to PL Re on April 1, 2022.
Net gain (loss) from operations from Separate Accounts changed by $132.3 million primarily driven by the MVAA Separate Account due to unfavorable changes in mark to market on assets.
Other income decreased $89.0 million primarily due to losses related to COLI.
Benefits and Expenses
Surrender benefits and other fund withdrawals increased $491.2 million primarily due to increased surrenders in the fixed annuity products, driven by the higher interest rates during 2022.
Other policy and contract benefits increased $201.5 million primarily due to an increase in Stable Value reserves related to the higher interest rate environment during 2022, partially offset by lower benefit expense on acquired blocks in runoff.
Increase in aggregate reserves changed by $2.2 billion primarily due to decreases in FIA and SPDA reserves as a result of the cession to PL Re on April 1, 2022.
Transfers to Separate Accounts, net decreased $124.0 million due to decreases in fixed fund transfers, partially offset by increases in VA and VUL premium transfers and surrenders.
Net Income
Net realized capital gains (losses) was a loss of $16.7 million for the year ending December 31, 2022 (net of federal income taxes and IMR transfers), which included net bond and stock gains of $21.8 million, $10.0 million of OTTI on bonds and stocks, derivative realized losses of $474.1 million, net realized losses on mortgage loans of $10.4 million, income tax benefit of $96.9 million, and favorable IMR transfers of $359.0 million. Net realized capital gains (losses) was a loss of $113.0 million for the year ending December 31, 2021 (net of federal income taxes and IMR transfers), which included net bond and stock gains of $49.0 million, $0.2 million of OTTI on bonds and stocks, derivative realized losses of $102.3 million, net realized losses on mortgage loans of $3.5 million, income tax expense of $11.9 million, and IMR transfers of $44.1 million.
December 31, 2021 to December 31, 2020 Comparison
Results of Operations
Income
Premiums and annuity considerations - Direct premiums increased $1.2 billion which was due primarily to ordinary life product sales increases, specifically BOLI and SPWL product lines, offset in part by lower FIA sales during 2021. These increases were partially offset by premium decreases attributable to continued run-off from closed blocks of previously-acquired business with direct premiums. Life insurance in-force increased 4.8% which was due primarily to an increase in new issues, partially offset by mortality, surrenders, and lapses.
Assumed and ceded premiums decreased $430.2 million and $538.8 million, respectively, primarily due to the run-off of closed blocks of assumed and ceded business.
Reserve adjustments on reinsurance ceded decreased $235.7 million primarily due to the impact of the reinsurance of certain universal life policies, previously ceded to GGIICIC, on a combination coinsurance and coinsurance with funds withheld basis on October 1, 2020, which resulted in the transfer of $218.5 million of reserves to GGCIC on October 1, 2020. The reserve transfer was attributable to the Captive Merger in 2020 as more fully discussed in the Capital Resources section under Golden Gate Captive Insurance Company.
Benefits and Expenses
Death and annuity benefits increased $186.5 million primarily reflecting higher claims on UL and term policies during 2021 and partially offset by a decrease in structured settlements with life contingency benefits payments.
Increase in aggregate reserve increased $435.8 million primarily due to increases in BOLI, SPDA, SPWL, and UL reserves which were partly offset by decreases in FIA, VA, and SPIA reserves. Additional decreases were driven by run-off of the Company’s closed assumed blocks of business.
Commissions and commissions expense allowance increased $120.0 million primarily due to increases in UL and traditional product sales, in addition to an increase within the Great West block of business driven by a non-recurring adjustment in 2020 to reduce the initial commission allowance.
Transfers to Separate Accounts, net decreased $903.4 million driven by decreased net transfers from the VDA Separate Account due to higher sales and lower surrenders and withdrawals, as well as unfavorable net premium transfers driven by increased COLI VUL sales.
Net Income
Federal income tax expense increased $42.6 million which was driven primarily by unfavorable tax adjustments related to the Shades Creek merger and other prior period adjustments, unfavorable federal current tax true-up and other unfavorable adjustments for tax basis deferred acquisition costs, offset in part by a decrease in taxable income and favorable adjustments for policy benefits reserves in 2021.
Net realized capital gains (losses) was a loss of $113.0 million for the year ending December 31, 2021 (net of federal income taxes and IMR transfers), which included net bond and stock trading gains of $49.0 million, $0.2 million of OTTI on bonds and stocks, derivative realized losses of $102.3 million, net realized losses on mortgage loans of $3.5 million, income tax expense of $11.9 million, and IMR transfers of $44.1 million. Net realized capital gains of $16.5 million for the year ending December 31, 2020 (net of federal income taxes and IMR transfers), included net bond and stock trading gains of $114.8 million, $52.0 million of OTTI on bonds and stocks, derivative realized gains of $296.9 million, net realized losses on mortgage loans of $3.0 million, partnership impairment of $0.3 million, income tax expense of $31.8 million, and IMR transfers of $308.1 million.
Assets
As of December 31, 2022, the Company had total admitted assets of $78.7 billion, a decrease of $2.1 billion from December 31, 2021. Assets, excluding separate accounts, increased $146.8 million to $64.6 billion as of December 31, 2022, primarily due to growth in bonds, common stock, and mortgage loans, partially offset by a decrease in preferred stock, derivatives and derivative collateral.
Amounts recoverable from reinsurers decreased $16.0 million as compared to December 31, 2021, which is due in part to the recapture of previously reinsured business during 2022, as well as the timing of reinsurance claims and settlements during 2022, as compared to 2021.
Deferred and uncollected premiums changed $38.0 million from December 31, 2021 to December 31, 2022. The increase is due in part to the recapture of previously reinsured business during 2022.
Derivatives decreased $882.6 million as of December 31, 2022 due to changes in the equity and interest rate markets and the closeout of all interest rate swap positions held as a result of the LIBOR transition.
Derivatives collateral and receivables decreased $131.7 million as of December 31, 2022 primarily due to changes in the equity and interest rate markets, which reduced the fair value of collateral held, in addition to the closeout of all interest rate swap positions held as a result of the LIBOR transition.
Separate account assets were $14.1 billion and $16.4 billion as of December 31, 2022 and December 31, 2021, respectively. The decrease from December 31, 2021 to December 31, 2022 was primarily driven by a decrease in equity markets, partially offset by an increase in BOLI and COLI sales.
Liabilities
As of December 31, 2022, the Company had total liabilities of $73.4 billion, a decrease of $2.1 billion from December 31, 2021.
The Company’s aggregate reserves for life contracts decreased $1.1 billion as of December 31, 2022 primarily due to decreases in FIA and SPDA reserves as a result of the cession to PL Re on April 1, 2022, partially offset by an increase in UL and VA reserves.
Liability for deposit-type contracts increased $1.5 billion due to the growth in the Stable Value account balances, which was due to new sales and investment earnings credited exceeding maturities and withdrawals during 2022.
Policy and contract claims decreased $70.8 million at December 31, 2022 as compared to December 31, 2021. The decrease is primarily due to a lower claim liability related to life products and is driven by the timing of claims and settlements during 2022, as compared to 2021.
Policyholder dividends decreased $8.2 million at December 31, 2022 as compared to December 31, 2021. The decrease is driven by a decrease in dividends payable within assumed closed blocks of business during 2022.
Funds at interest and experience related refunds decreased $58.1 million at December 31, 2022 as compared to December 31, 2021. The decrease is driven by a decrease in the experience rate refund liability on an acquired block of business, as a result of higher disability claims and reserve changes during the current year.
IMR decreased $491.4 million at December 31, 2022 as compared to December 31, 2021. The decrease is primarily due to net-of-tax interest-related losses of $359.0 million (including derivatives of $372.6 million) and amortization of $132.4 million during 2022.
General expenses due or accrued increased $24.7 million. at December 31, 2022 as compared to December 31, 2021, primarily due to increased corporate overhead and administration costs, which included increased expenses associated with higher product sales.
Transfers from Separate Accounts due or accrued changed $287.4 million at December 31, 2022 as compared to December 31, 2021 primarily due to net transfers on VUL and VA products. These changes were driven by higher sales on the COLI VUL product during 2022, offset by runoff in the acquired blocks of BOLI VUL and VA.
Remittances and items not allocated increased $8.9 million or at December 31, 2022, when compared to December 31, 2021. The increase is primarily due to volume of applications and other unprocessed items received during December of 2022, as compared to December of 2021.
The Company had $925.2 million of borrowed money at December 31, 2022, as compared to $1.3 billion outstanding at December 31, 2021. The decrease was due to lower repurchase agreements outstanding at December 31, 2022 as compared to December 31, 2021.
Derivatives decreased $692.7 million as of December 31, 2022 due to changes in the equity and interest rate markets, and the closeout of all interest rate swap positions held as a result of the LIBOR transition.
Derivative collateral and payables decreased $133.7 million as of December 31, 2022 primarily due to changes in the equity and interest rate markets, which reduced the fair value of collateral held, in addition to the closeout of all interest rate swap positions held as a result of the LIBOR transition.
Payable for securities lending decreased $17.0 million as of December 31, 2022 due to a decrease in the collateral obligation to collateral investment counterparties.
Funds held under reinsurance treaties increased $1.4 billion primarily as a result of the cession to PL Re on April 1, 2022, in which the Company transferred assets backing economic reserves to a segregated funds withheld account owned by the Company for the benefit of PL Re.
Separate account liabilities were $14.1 billion and $16.4 billion as of December 31, 2022 and December 31, 2021, respectively. The decrease from December 31, 2021 to December 31, 2022 was primarily driven by a decrease in equity markets, partially offset by an increase in BOLI and COLI sales.
Asset Valuation Reserve
As of December 31, 2022, the Company had an AVR of $362.1 million as compared to $468.3 million as of December 31, 2021. The decrease of $106.2 million was primarily due to unrealized losses on General Account and Separate Account bonds and preferred stocks, as well as realized losses on General Account bonds, partially offset by an overall increase in invested asset balances.
Capital and Surplus
The Company’s capital and surplus was $5.3 billion as of December 31, 2022, an increase of $16.1 million, compared to the prior year end. The primarily drivers of the increase were net income of $305.8 million, a $100.0 million capital contribution from PLC, a favorable change in AVR of $106.1 million, and a favorable change in non-admitted assets of $94.3 million, driven by non-admission of DTA and repurchase agreement collateral. These increases were partially offset by dividends of $339 million to PLC, unrealized capital losses of $167.2 million, driven by derivative instruments, and change in surplus as a result of reinsurance of $82.9 million.
The Company’s total adjusted capital (“TAC”) and company action level risk-based capital (“RBC”) were $5.9 billion and $1.4 billion, respectively, providing an RBC ratio, based on Company Action Level, of approximately 415% at December 31, 2022.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Liquidity refers to a company’s ability to generate adequate amounts of cash to meet its needs. The Company meets its liquidity requirements primarily through positive cash flows from operating activities. Primary sources of cash are premiums, deposits for policyholder accounts, investment sales and maturities, and investment income. Primary uses of cash include benefit payments, withdrawals from policyholder accounts, investment purchases, policy acquisition costs, interest payments, and other operating expenses. The Company believes that it has sufficient liquidity to fund its cash needs under normal operating scenarios.
In the event of significant unanticipated cash requirements beyond its normal liquidity requirements, the Company has additional sources of liquidity available depending on market conditions and the amount and timing of the liquidity need. These additional sources of liquidity include the sale of liquid assets, accessing a credit facility, and other sources described herein. The Company’s decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of cost basis. Under stressful market and economic conditions, liquidity may broadly deteriorate, which could negatively impact the Company’s ability to sell investment assets. If the Company requires, on short notice, significant amounts of cash in excess of normal requirements, the Company may have difficulty selling investment assets in a timely manner, be forced to sell them for less than the Company otherwise would have been able to realize, or both.
Liquidity
While the Company anticipates that the cash flows of its operations will be sufficient to meet investment commitments and operating cash needs in a normal credit market environment, the Company recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, the Company has established repurchase agreement programs to provide liquidity when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Under this program, the Company may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are for a term less than ninety days. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provide for net settlement in the event of default or on termination of the agreements. Due to the short tenor of the repurchase agreements the Company would not expect any stress on liquidity to be an issue. As of December 31, 2022, the statutory carrying value of securities and mortgage loans pledged under the repurchase program was $1.3 billion and the repurchase obligation of $925.0 million was included as “borrowed money” on the Company’s 2022 Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. As of December 31, 2021, the statutory carrying value of securities and mortgage loans pledged under the repurchase program was $1.4 billion and the repurchase obligation of $1.3 billion was included as “borrowed money” on the Company’s 2021 Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The Company participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time. The Company requires collateral at least equal to 102% of the fair value of the loaned securities to be separately maintained. The loaned securities’ fair value is monitored on a daily basis and collateral is adjusted accordingly. The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. As collateral for the loaned securities, the Company receives cash, which is primarily reinvested in short-term repurchase agreements, which are also collateralized by U.S. Government or U.S. Government Agency securities, and government money market funds. As of December 31, 2022, securities with a fair value of $156.5 million were loaned under these agreements. As of December 31, 2022, the fair value of the invested collateral related to these agreements was $162.1 million, and the Company has an obligation to return $162.1 million of collateral to the collateral investment counterparties. As of December 31, 2021, securities with a fair value of $173.5 million were loaned under these agreements. As of December 31, 2021, the fair value of the invested collateral related to these agreements was $179.1 million, and the Company has an obligation to return $179.1 million of collateral to the collateral investment counterparties.
Sources and Use of Cash
The Company’s primary sources of funding are from its insurance operations, which include external cash flows from insurance premiums, commissions and expense allowances on reinsurance ceded, investment income, reinsurance recoveries, and proceeds from sale or maturity of invested assets. The Company’s cash flows also include dividends and distributions from subsidiaries and capital contributions from its parent. The Company's operations primarily use funds for the payment of insurance benefits, operating expenses, commissions, the purchase of new investments, and payment of federal income taxes. The Company also may make capital contributions to subsidiaries and pay dividends to its stockholder, PLC.
The Company owns various insurance companies. With the exception of the Special Purpose Financial Captive subsidiary, GGCIC, distributions may be paid without the approval of the Insurance Commissioner of the state of domicile as prescribed by law. Normally distributions may be paid up to an amount equal to the greater of 10% of the policyholders’ surplus as of the preceding December 31, or the company’s net gain from operations for the
preceding year. The insurance subsidiaries may pay, without the approval of the Insurance Commissioners of the state of domicile, the following distributions in 2023:
| | | | | | | | |
| Insurance Subsidiaries | | (Dollars In Millions) |
| PP&C | | $ | 20.9 | |
| PLAIC | | 10.7 | |
| MONY | | 35.0 | |
| WCL | | 86.6 | |
| Total dividends that could be paid without approval | | $ | 153.2 | |
The Company is a member of the Federal Home Loan Bank (“FHLB”) of Cincinnati. FHLB advances provide an attractive funding source for short-term borrowing and for the sale of funding agreements. Membership in the FHLB requires that the Company purchase FHLB capital stock based on a minimum requirement and a percentage of the dollar amount of advances outstanding. The Company’s borrowing capacity is determined by criteria established by each respective bank. In addition, the Company’s obligations under the advances must be collateralized. The Company maintains control over any such pledged assets, including the right of substitution. Through its membership, the Company received cash advances in the amount of $3.1 billion as of December 31, 2022. These cash advances are the result of the Company issuing funding agreements to and entering repurchase agreements with the FHLB of Cincinnati, for $2.2 billion and $925.0 million, respectively.
The Company’s liquidity requirements primarily relate to the liabilities associated with its various insurance and investment products, operating expenses, and income taxes. Liabilities arising from insurance and investment products include the payment of policyholder benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans, and obligations to redeem funding and repurchase agreements.
Approximately 83% of the Company’s annuity liabilities and deposit type contract liabilities are either not subject to withdrawal or subject to withdrawal with market value adjustments or at market. These features in the annuity and deposit type contract business enable the Company to better predict cash flow needs for these products which allows for better asset/liability matching.
The Company maintains investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans, and redemption obligations without forced sales of investments. In addition, the Company holds highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund its expected operating expenses, surrenders, and withdrawals. At December 31, 2022, the Company held cash and investments of $63.0 billion. As discussed below, the Company was committed as of December 31, 2022, to fund mortgage loans in the amount of $917.6 million.
The Company’s positive cash flows from operations are used to fund an investment portfolio that provides for future benefit payments. The Company employs a formal asset/liability program to manage the cash flows of its investment portfolio relative to its long-term benefit obligations.
Dividends are noncumulative and are paid as determined by the Board of Directors. Normally, dividends may be paid without approval of the Insurance Commissioner of the State of Tennessee up to an amount equal to the greater of 10% of policyholders’ surplus as of the preceding December 31 or the Company’s net gain from operations for the preceding year. During 2023, the Company may pay $533.4 million of dividends without the approval of the Insurance Commissioner of the State of Tennessee.
At December 31, 2022, the Company is restricted to 3% of its admitted assets or $2.4 billion which it could loan to PLC without approval by the Insurance Commissioner of the State of Tennessee.
Cash Flow Comparison
December 31, 2022 to December 31, 2021 Comparison
Net cash from operations - Net cash flow from operations was $612.5 million in 2022 and $1.6 billion in 2021. The differences in cash flow from operations for the twelve months ending December 31, 2022, as compared to the twelve months ending December 31, 2021, included higher benefit payments, a decrease in premium receipts, and lower cash receipts from reinsurers, which are offset by lower transfers to the Separate Account, lower net federal tax paid, and higher investment income collected. The decrease in premiums receipts is attributable, in part, to the PL Re cession during 2022. The increase in investment income is attributable to an increase in invested asset balances held in 2022, as compared to 2021. The increase in benefits paid is attributable to unfavorable adjustments on GIC reserves and higher death benefits paid during 2022. The lower transfers to the Separate Account are primarily due to lower Executive Benefit new transfers during 2022.
Net cash from investments - In 2022, net cash paid for investments was $1.6 billion compared to net cash paid for investments of $4.5 billion in 2021. The decrease in cash outflow for investments in 2022 as compared to 2021 was mainly due to a decrease in bonds acquired. The amount of bonds acquired in any given year is a factor of operating and financing activities. As a result of lower premiums and annuity considerations, lower miscellaneous income, higher benefit and loss payments, lower borrowed funds and lower net deposits on deposit-type contracts, the Company had less cash that it needed to invest through the acquisition of bonds.
Net cash from financing and miscellaneous sources - In 2022, net cash received from financing and miscellaneous sources was $870.6 million, as compared to net cash received of $2.7 billion in 2021. The change in net cash received during 2022 versus 2021 was driven by lower deposit-type contract receipts in excess of payouts, which was driven primarily by Stable Value contracts. Additionally, the Company had net repurchase agreement payments during 2022 compared to net repurchase agreement receipts during 2021 and paid dividends of $339.0 million to PLC during 2022 compared to no dividend payments during 2021. These cash flow decreases were offset, in part, by a $100.0 million contribution from PLC during 2022 with no contributions received during 2021 and the purchase of new a COLI policy during 2021.
December 31, 2021 to December 31, 2020 Comparison
Net cash provided by operating activities - Net cash flow from operations was $1.6 billion in both 2021 and 2020. The differences in cash flow from operations for the twelve months ending December 31, 2021, as compared to the twelve months ending December 31, 2020, included an increase in premium receipts, higher investment income collected, higher cash receipts from reinsurers, and lower benefit payments, which are offset by higher transfers to the Separate Account, higher cash commissions paid, and higher net federal tax paid. The increase in premiums receipts is driven by increased annuity sales during 2021, as compared to 2020. The increase in investment income is attributable to an increase in invested asset balances held in 2021, as compared to 2020. The decrease in benefits paid is attributable to favorable adjustments on GIC reserves and lower death benefits paid during 2021. The higher transfers to the Separate Account are primarily due to higher sales and lower surrenders and withdrawals during 2021. The higher commissions paid is due to higher sales.
Net cash from investments - In 2021, net cash paid for investments was $4.5 billion compared to net cash paid for investments of $2.6 billion in 2020. The increase in new cash outflow for investments in 2021 as compared to 2020 is attributable to securities and mortgage loans acquired exceeding proceeds received from disposals by a higher margin in 2021, as compared to 2020.
Net cash from financing and miscellaneous sources - In 2021, net cash received from financing and miscellaneous activities was $2.7 billion, as compared to net cash received of $1.3 billion in 2020. The change in net cash received during 2021 versus 2020 was driven by higher deposit-type contract receipts in excess of payouts, which was driven primarily by Stable Value contracts and higher repurchase agreement receipts during 2021. These cash flow increases were offset, in part, by a $120.0 million contribution from PLC to Shades Creek, which was merged into the Company, during 2020 with no contributions received during 2021, the purchase of new COLI policy during 2021, and lower change in funds withheld balances during 2021 versus 2020.
Contributions and Distributions to/from Parent and Subsidiaries and Other Transactions with Subsidiaries
As part of its overall capital management strategy, the Company receives dividends/distributions from its subsidiaries, and may make capital contributions to its subsidiaries. Similarly, the Company pays dividends to and receives contributions from PLC. Certain of these transactions are subject to approval notification requirements with regulators, and those requirements are monitored and complied with by the Company.
During 2022, the Company received a capital contribution of $100.0 million from PLC. PLC made no cash capital contributions to the Company during the years ended December 31, 2021 and 2020. During 2022, the Company paid ordinary dividends of $239.0 million and $100.0 million to PLC. The Company did not pay any dividends to PLC during 2021 and 2020.
The Company received dividends/distributions from the following subsidiaries. In accordance with SSAP No. 97, “Investments in Subsidiary, Controlled and Affiliated Entities” (“SSAP No. 97”), certain of these dividends were treated as a return of capital.
| | | | | | | | | | | | | | | | | |
| For The Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in Thousands) |
| West Coast Life Insurance Company | $ | 40,000 | | | $ | 25,000 | | | $ | — | |
| MONY Life Insurance Company | 18,000 | | | 37,000 | | | 38,000 | |
| USWC Holding Company | 2,000 | | | 10,000 | | | 6,500 | |
| Protective Property & Casualty Insurance Company | 10,000 | | | — | | | 10,000 | |
| Protective Asset Protection, Inc. | — | | | 1,725 | | | 23,300 | |
| Western Diversified Services, Inc. | — | | | 4,000 | | | 7,000 | |
| Golden Gate Captive Insurance Company | 91,000 | | | 25,000 | | | 35,000 | |
| A.U.L. Corp | 30,000 | | | — | | | — | |
| Total distributions received | $ | 191,000 | | | $ | 102,725 | | | $ | 119,800 | |
The Company made the following capital contributions.
| | | | | | | | | | | | | | | | | |
| For The Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in Thousands) |
| Protective Life and Annuity Insurance Company | $ | — | | | $ | — | | | $ | 100,000 | |
| Golden Gate Captive Insurance Company | 8,500 | | | 9,600 | | | 10,230 | |
| Total contributions paid | $ | 8,500 | | | $ | 9,600 | | | $ | 110,230 | |
These distributions and capital contributions were primarily in the form of cash, but some involved the exchange of securities and/or intangible assets.
Capital Resources
A life insurance company’s statutory capital is computed according to rules prescribed by the NAIC, as modified by state law. Generally speaking, other states in which a company does business defer to the interpretation of the domiciliary state with respect to NAIC rules, unless inconsistent with such other state’s regulations. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs. The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth requires growth in the statutory capital of our insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, including retained statutory earnings, dividends from subsidiaries, or our equity contributions. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval of the insurance commissioner of the state of domicile. Dividends in larger
amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as an ordinary dividend to us from our insurance subsidiaries in 2023 is $533 million.
State insurance regulators and the NAIC have adopted RBC requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense, and reserve items. Regulators can then measure the adequacy of a company’s statutory surplus by comparing it to RBC. We manage our capital consumption by using the ratio of our total adjusted capital, as defined by the insurance regulators, to our company action level RBC (known as the RBC ratio), also as defined by insurance regulators. As of December 31, 2022, our total adjusted capital and company action level RBC were $5.9 billion and $1.4 billion, respectively, providing an RBC ratio of approximately 415%.
Statutory reserves established for VA contracts are sensitive to changes in the equity markets and are affected by the level of account values relative to the level of any guarantees and product design. As a result, the relationship between reserve changes and equity market performance may be non-linear during any given reporting period. Market conditions greatly influence the capital required due to their impact on the valuation of reserves and derivative investments mitigating the risk in these reserves. Risk mitigation activities may result in material and sometimes counterintuitive impacts on statutory surplus and RBC ratio. Notably, as changes in these market and non-market factors occur, both our potential obligation and the related statutory reserves and/or required capital can vary at a non-linear rate.
Our statutory surplus is impacted by credit spreads as a result of accounting for the assets and liabilities on our fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates based on U.S. Treasuries. In many capital market scenarios, current crediting rates based on U.S. Treasuries are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment assets may increase or decrease sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value gains or losses. As actual credit spreads are not fully reflected in current crediting rates based on U.S. Treasuries, the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in a change in statutory surplus. The result of this mismatch had a negative impact to our statutory surplus of $119 million on a pre-tax basis for the year ended December 31, 2022, as compared to a positive impact to our statutory surplus of $18 million on a pre-tax basis for the year ended December 31, 2021.
Golden Gate Captive Insurance Company
On January 15, 2016, GGCIC entered into a reinsurance agreement (the “2016 PLICO-GGC Reinsurance Agreement”) with the Company, its parent, whereby the Company ceded certain term life insurance policies to GGCIC. These policies were originally coinsured by the Company from Genworth Life and Annuity Insurance Company (“GLAIC”) (the “GLAIC Reinsurance Agreement”) and were then retroceded from the Company to GGCIC concurrent with this transaction.
On December 31, 2019, GGCIC amended and restated the 2016 PLICO-GGC Reinsurance Agreement whereby the Company ceded certain acquired term life insurance policies to GGCIC. These policies were originally coinsured by the Company from Liberty Life Assurance Company of Boston (the “LLAC Block”) and were then retroceded from the Company to GGCIC concurrent with this amendment. The cession from the Company to GGCIC included the initial estimated transfer of $76.6 million of policyholder liabilities. As a result of this amendment and restatement, GGCIC recorded an estimated initial ceding allowance payable to the Company of $76.4 million and initial premium transfers from GGCIC of $76.6 million There was no change to the reinsurance arrangement with
respect to the policies originally ceded under the 2016 PLICO-GGC Reinsurance Agreement. These blocks of business are now reinsured under the 2020 PLICO-GGCIC agreement as discussed below.
Effective October 1, 2020, GGCIC entered into separate amended and restated indemnity reinsurance agreements with the Company (the “2020 PLICO-GGCIC Agreement”) and WCL (the “2020 WCL-GGCIC Agreement”).
On October 1, 2020, GGCIC entered into a transaction with a term of 20 years, that may be extended up to a maximum term of 25 years, to finance up to $5.0 billion of “XXX” and “AXXX” reserves related to the term life insurance business and universal life insurance with secondary guarantee business that is reinsured to GGCIC by the Company and WCL under the 2020 PLICO-GGCIC and 2020 WCL-GGCIC Agreements. This financing transaction is pursuant to an Excess of Loss Reinsurance Agreement (the “XOL Agreement”) with Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and RGA Reinsurance Company (Barbados) Ltd. (collectively, the “Retrocessionaires”). Pursuant to the XOL Agreement, in exchange for periodic fees, the Retrocessionaires assume, on an excess of loss basis, the obligation to pay (the “XOL Payments”) each quarter the lesser of (a) the greater of (i) statutory reserves in excess of economic reserves and (ii) the financed amount and (b) if total claims for such quarter exceed the available assets (as set forth in the XOL Agreement) of GGCIC, the amount of such excess. The transaction is “non-recourse” to PLC, WCL and the Company, meaning that none of these companies are liable to reimburse the Retrocessionaires for any XOL Payments required to be made.
The Company ceded to GGCIC premiums of $88.6 million, $115.5 million, and $166.9 million for the years ended December 31, 2022, 2021 and 2020, respectively, and ceded statutory reserves of $4.9 billion and $5.2 billion as of December 31, 2022 and 2021, respectively.
Protective Life Reinsurance Bermuda Ltd.
Effective April 1, 2020, the Company reinsured certain fixed annuity business under a coinsurance with funds withheld treaty to Protective Life Reinsurance Bermuda Ltd. (“PL Re”). PL Re, a wholly owned subsidiary of PLC, is domiciled in Bermuda and holds reserves based on Bermuda insurance regulations. The policies ceded under the agreement (the “PLICO-PL Re Reinsurance Agreement”) were in force on or before April 1, 2020. The cession to PL Re included the initial estimated transfer of $485.2 million of annuity reserves. As a result of the transaction, the Company recorded an estimated initial ceding allowance of $28.6 million and estimated initial premium transfers of $485.2 million. Pursuant to SSAP No. 61R, “Life, Deposit Type and Accident and Health Reinsurance”, and Appendix A-791, the Company recognized $6.0 million, representing 21% of the initial net gain, in net income upon the cession to PL Re. $22.6 million, or 79% of the initial net gain, was included as a component of surplus which was deferred and will be amortized into income in future periods.
On April 1, 2022, the Company amended the PLICO-PL Re Reinsurance Agreement whereby the Company reinsures certain fixed annuity business under a coinsurance with funds withheld treaty to Protective Life Reinsurance Bermuda Ltd. (“PL Re”). The cession to PL Re included the initial estimated transfer of $1,458.6 million of annuity reserves. As a result of the amendment, the Company recorded an estimated initial ceding allowance of $113.0 million and estimated initial premium transfers of $1,458.6 million. Pursuant to SSAP No. 61R, “Life, Deposit Type and Accident and Health Reinsurance”, and Appendix A-791, the Company recognized $23.7 million, representing 21% of the initial net gain, in net income upon the cession to PL Re. $89.3 million, or 79% of the initial net gain, was included as a component of surplus which was deferred and will be amortized into income in future periods.
In connection with the agreement and amendment, the Company transferred assets backing economic reserves to a segregated funds withheld account owned by the Company for the benefit of PL Re. The balance in this account was $1.8 billion and $469.1 million as of December 31, 2022 and 2021, respectively. The Company ceded premiums of $1.5 billion, $38 thousand, and $487.3 million for the years ended December 31, 2022, 2021, and 2020, respectively and ceded statutory reserves of $1.9 billion and $495.6 million as of December 31, 2022 and 2021, respectively. For the years ended December 31, 2022, 2021, and 2020, $1.1 million, $0, and $11.8 million, respectively was amortized into income.
Debt and other capital resources
The Company may, from time to time, sell short-duration stable value products to complement its cash management practices.
The Company entered into an agreement with WCL in 2011 in which a loan up to $800.0 million can be given and a loan up to $200 million can be borrowed from WCL at variable interest rates. The Company had no outstanding loaned or borrowed amounts as of December 31, 2022 or 2021, under this agreement. No interest expense was incurred under this agreement during the three-year period ended December 31, 2022.
The Company entered into an agreement with PLAIC in 2012 in which a loan can be given to or received from PLAIC subject to certain limitations as described in the agreement. The Company had no loaned or borrowed amounts as of December 31, 2022 or 2021, under this agreement. No interest expense was incurred under this agreement during the three-year period ended December 31, 2022.
The Company entered into an agreement with MONY in 2014 in which a loan can be given to or received from MONY subject to certain limitation as described in the agreement. The Company had no loaned or borrowed amounts as of December 31, 2022 and 2021, under this agreement. No interest expense was incurred under this agreement during the three-year period ended December 31, 2022.
Credit Facility
Under a revolving line of credit arrangement (the “2018 Credit Facility”), the Company and PLC had the ability to borrow on an unsecured basis up to an aggregate principal amount of $1.0 billion. Under certain circumstances the 2018 Credit Facility allowed for a request that the commitment be increased up to a maximum principal amount of $1.5 billion.
On April 5, 2022, the Company amended and restated the 2018 Credit Facility and entered into a Second Amended and Restated Credit Agreement (the “2022 Credit Facility”) among PLC, the Company, the several lenders from time to time party thereto, and Regions Bank, as administrative agent and swingline lender. Under the 2022 Credit Facility, the Company and PLC has the ability to borrow on an unsecured basis up to an aggregated principal amount of $1.5 billion. The Company and PLC also has the right in certain circumstances to request that the commitment under the 2022 Credit Facility be increased up to a maximum principal amount of $2.0 billion. Balances outstanding under the 2022 Credit Facility accrue interest at a rate equal to, at the option of PLC and the Company, (i) Adjusted Term SOFR Rate plus a spread based on the ratings of PLC’s Senior Debt, or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent’s Prime Rate, (y) 0.50% above the Federal Funds Rate, or (z) the one-month Adjusted Term SOFR Rate plus 1.00% and (B) a spread based on the ratings of the PLC’s Senior Debt subject to adjustments based upon the achievement of certain environmental, social and governance metrics (“ESG Metrics”) by PLC, the Company and their subsidiaries. The 2022 Credit Facility also provides for a facility fee at a rate that varies with the ratings of the PLC’s Senior Debt, subject to adjustments based upon the achievement of certain ESG Metrics by PLC, the Company and their subsidiaries. The facility fee is calculated based on the aggregate amount of commitments under the 2022 Credit Facility, whether used or unused. The maturity date of current borrowings under the 2022 Credit Facility is April 5, 2027, subject to certain extension options available to the Company. The Company is not aware of any non-compliance with the financial debt covenants of the 2022 Credit Facility as of December 31, 2022. The Company did not have an outstanding balance under the 2022 Credit Facility as of December 31, 2022. PLC had no outstanding balance as of December 31, 2022.
Reinsurance Ceded
The Company reinsures certain of its risks with (cedes), and assumes risks from, other insurers under yearly renewable term, coinsurance, and modified coinsurance agreements. Under yearly renewable term agreements, the Company reinsures only the mortality risk, while under coinsurance the Company reinsures a proportionate share of all risks arising under the reinsured policy. Under coinsurance, the reinsurer receives a proportionate share of the premiums less commissions and is liable for a corresponding share of all benefit payments. Modified coinsurance is accounted for in a manner similar to coinsurance except that the liability for future policy benefits is held by the ceding company, and settlements are made on a net basis between the companies.
The Company has reinsurance agreements with WCL and GGCIC. For further details on these reinsurance agreements, please see Note 7 (Information Concerning Parent and Subsidiaries) of our financial statements.
Ratings
The Company has insurer financial strength ratings of A+ (Superior, 2nd highest of 15 ratings) from A.M. Best, AA- (Very Strong, 4th highest of 21 ratings) from Standard & Poor’s, AA- (Very High Quality, 4th highest of 22 ratings) from Fitch and A1 (5th highest of 21 ratings) from Moody’s Investor Services.
INVESTMENTS
As of December 31, 2022, our total cash and investments was $63.0 billion. The types of assets in which we may invest are influenced by various state insurance laws which prescribe qualified investment assets. Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.
Net Investment Income
Net investment income consists of the following:
| | | | | | | | | | | | | | | | | |
| For The Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in thousands) |
| Bonds | $ | 1,972,029 | | | $ | 1,876,482 | | | $ | 1,811,919 | |
| Common stocks (unaffiliated) | 6,126 | | | 1,864 | | | 1,640 | |
| Common stocks (affiliated) | 68,000 | | | 62,000 | | | 83,000 | |
| Preferred stocks | 32,308 | | | 26,559 | | | 16,004 | |
| Mortgage loans | 480,651 | | | 467,193 | | | 408,940 | |
| Income from real estate investments | 18,545 | | | 15,536 | | | 15,341 | |
| Cash, cash equivalents, and short-term investments | 5,771 | | | (130) | | | 2,785 | |
| Contract loans | 43,029 | | | 44,317 | | | 47,953 | |
| Derivatives | 33,219 | | | 49,782 | | | 35,628 | |
| Securities lending | 798 | | | 333 | | | 613 | |
| Other invested assets | 35,282 | | | 33,164 | | | 31,107 | |
| Total investment income | 2,695,758 | | | 2,577,100 | | | 2,454,930 | |
| Investment expenses | 220,398 | | | 191,716 | | | 168,975 | |
| Net investment income | $ | 2,475,360 | | | $ | 2,385,384 | | | $ | 2,285,955 | |
Due and accrued income is excluded from investment income on the following basis:
| | | | | |
Mortgage loans - | Income is excluded on loans delinquent more than 90 days. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. |
| |
Bonds - | When the Company determines collection of interest to be uncertain or interest is 90 days past due, the accrual of interest is discontinued. |
The total amount excluded from investment income due and accrued as of December 31, 2022 and 2021 was $0 and $0, respectively.
Unrealized Gains and Losses
The change in net unrealized capital gains and losses included in unassigned funds is as follows:
| | | | | | | | | | | | | | | | | |
| For The Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in thousands) |
| Bonds | $ | 280 | | | $ | 35 | | | $ | (109) | |
| Preferred stocks | (124,747) | | | 13,803 | | | — | |
| Common stocks (affiliated) | 14,838 | | | (33,489) | | | (18) | |
| Common stocks (unaffiliated) | (490) | | | 1,358 | | | (180,523) | |
| Mortgage loans | 809 | | | (4,327) | | | (8,844) | |
| Derivative instruments | (108,999) | | | (259,376) | | | 17,844 | |
| Other | 6,550 | | | 660 | | | (459) | |
| Less: | | | | | |
| Federal income tax expense (benefit) | (44,544) | | | (52,048) | | | 1,767 | |
| Total change in net unrealized capital gains and losses | $ | (167,215) | | | $ | (229,288) | | | $ | (173,876) | |
As of December 31, 2022, gross unrealized gains pertaining to common stocks were $241.1 million and gross unrealized losses were $639.6 million. As of December 31, 2021, gross unrealized gains pertaining to common stocks were $165.6 million and gross unrealized losses were $578.4 million. $639.6 million and $578.4 million of unrealized losses for 2022 and 2021, respectively, and $240.3 million and $164.3 million of unrealized gains for 2022 and 2021, respectively, relate to the Company's investments in subsidiaries which are recorded at statutory book value or GAAP equity in accordance with NAIC SAP.
During 2022, the Company recorded $109.0 million in unrealized losses on derivative instruments due to changes in fair value. The losses included $31.1 million of losses related to interest rate forwards, $29.4 million of losses related to interest rate swaps, and $5.2 million of losses related to equity futures, offset by $28.4 million of gains related to total return swaps, $1.2 million of gains related to foreign currency futures, $0.6 million of gains related to interest rate futures, and $46.2 million of gains related to equity options, which were used to mitigate risks associated with the Company’s variable annuity products. In addition, there were losses of $83.7 million related to equity options and $0.8 million of losses related to equity futures, which were used to mitigate risks associated with the Company’s fixed indexed annuity products. There were losses of $17.2 million related to equity options, which were used to mitigate risks associated with the Company’s indexed universal life products. There were losses of $3.2 million related to equity options and losses of $6.4 million related to equity futures, offset by $6.1 million of gains related to total return swaps, which were used to mitigate risks associated with the Company’s structured annuity products. Also, there were losses of $14.5 million related to a derivative qualifying for hedge accounting. The derivative instrument was entered into in connection with the issuance of a funding agreement reported in accordance with Actuarial Guideline 33; the derivative has a remaining cost basis of $4.4 million, and the $14.5 million of losses is the accumulated foreign currency translation adjustment.
The statement value and estimated fair value of the Company's bond and preferred stock investments as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Statement Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| 2022 | | ($ in thousands) |
| Bonds: | | | | | | | | |
| US Government | | $ | 376,951 | | | $ | 261 | | | $ | (52,723) | | | $ | 324,489 | |
| Non-US Government | | 105,886 | | | 580 | | | (10,577) | | | 95,889 | |
| US states, territories, and possessions | | 379,985 | | | 2,654 | | | (22,092) | | | 360,547 | |
| US political subdivision | | 170,045 | | | 737 | | | (14,726) | | | 156,056 | |
| US special revenue & special assessment | | 2,554,735 | | | 37,872 | | | (327,429) | | | 2,265,178 | |
| Industrial and miscellaneous | | 34,373,809 | | | 197,714 | | | (4,144,458) | | | 30,427,065 | |
| Hybrids | | 450,086 | | | 12,091 | | | (24,600) | | | 437,577 | |
| Total bonds, excluding loan-backed and structured securities | | 38,411,497 | | | 251,909 | | | (4,596,605) | | | 34,066,801 | |
| Loan-backed and structured securities: | | | | | | | | |
| Residential mortgage-backed securities | | 5,379,517 | | | 4,933 | | | (1,163,593) | | | 4,220,857 | |
| Commercial mortgage-backed securities | | 1,501,642 | | | 299 | | | (150,444) | | | 1,351,497 | |
| Asset-backed securities | | 1,887,563 | | | 5,483 | | | (90,510) | | | 1,802,536 | |
| Total loan-backed and structured securities | | 8,768,722 | | | 10,715 | | | (1,404,547) | | | 7,374,890 | |
| Total bonds | | 47,180,219 | | | 262,624 | | | (6,001,152) | | | 41,441,691 | |
| Preferred stocks | | 540,147 | | | 486 | | | (75,176) | | | 465,457 | |
| Total bonds and preferred stocks | | $ | 47,720,366 | | | $ | 263,110 | | | $ | (6,076,328) | | | $ | 41,907,148 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Statement Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| 2021 | | ($ in thousands) |
| Bonds: | | | | | | | | |
| US Government | | $ | 341,353 | | | $ | 8,804 | | | $ | (11,241) | | | $ | 338,916 | |
| Non-US Government | | 278,005 | | | 42,350 | | | (986) | | | 319,369 | |
| US states, territories, and possessions | | 399,664 | | | 56,881 | | | — | | | 456,545 | |
| US political subdivision | | 170,253 | | | 14,076 | | | (96) | | | 184,233 | |
| US special revenue & special assessment | | 2,663,423 | | | 405,274 | | | (13,259) | | | 3,055,438 | |
| Industrial and miscellaneous | | 34,098,019 | | | 4,516,821 | | | (96,492) | | | 38,518,348 | |
| Hybrids | | 471,425 | | | 96,814 | | | (1,122) | | | 567,117 | |
| Total bonds, excluding loan-backed and structured securities | | 38,422,142 | | | 5,141,020 | | | (123,196) | | | 43,439,966 | |
| Loan-backed and structured securities: | | | | | | | | |
| Residential mortgage-backed securities | | 5,424,612 | | | 34,747 | | | (81,287) | | | 5,378,072 | |
| Commercial mortgage-backed securities | | 1,823,653 | | | 67,540 | | | (2,939) | | | 1,888,254 | |
| Asset-backed securities | | 1,488,288 | | | 30,367 | | | (8,427) | | | 1,510,228 | |
| Total loan-backed and structured securities | | 8,736,553 | | | 132,654 | | | (92,653) | | | 8,776,554 | |
| Total bonds | | 47,158,695 | | | 5,273,674 | | | (215,849) | | | 52,216,520 | |
| Preferred stocks | | 707,270 | | | 9,518 | | | (244) | | | 716,544 | |
| Total bonds and preferred stocks | | $ | 47,865,965 | | | $ | 5,283,192 | | | $ | (216,093) | | | $ | 52,933,064 | |
The statement value and estimated fair value of bonds as of December 31, 2022, by expected maturity, is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain of these obligations.
| | | | | | | | | | | |
| Statement Value | | Estimated Fair Value |
| ($ in thousands) |
| Bonds, excluding loan-backed and structured securities: | | | |
| Due in 1 year or less | $ | 869,336 | | | $ | 863,600 | |
| Due after 1 year through 5 years | 6,459,151 | | | 6,146,139 | |
| Due after 5 years through 10 years | 8,681,409 | | | 7,700,136 | |
| Due after 10 years | 22,401,601 | | | 19,356,926 | |
| Total bonds, excluding loan-backed and structured securities | 38,411,497 | | | 34,066,801 | |
| Total loan-backed and structured securities | 8,768,722 | | | 7,374,890 | |
| Total bonds | $ | 47,180,219 | | | $ | 41,441,691 | |
The statement value and estimated fair value of bonds as of December 31, 2021, by expected maturity, is shown below.
| | | | | | | | | | | |
| Statement Value | | Estimated Fair Value |
| ($ in thousands) |
| Bonds, excluding loan-backed and structured securities: | | | |
| Due in 1 year or less | $ | 825,050 | | | $ | 839,202 | |
| Due after 1 year through 5 years | 5,943,139 | | | 6,268,322 | |
| Due after 5 years through 10 years | 8,878,500 | | | 9,501,592 | |
| Due after 10 years | 22,775,453 | | | 26,830,850 | |
| Total bonds, excluding loan-backed and structured securities | 38,422,142 | | | 43,439,966 | |
| Total loan-backed and structured securities | 8,736,553 | | | 8,776,554 | |
| Total bonds | $ | 47,158,695 | | | $ | 52,216,520 | |
The Company’s investment gross unrealized losses and estimated fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated Fair Value | | Gross Unrealized Loss | | Estimated Fair Value | | Gross Unrealized Loss | | Estimated Fair Value | | Gross Unrealized Loss |
| 2022 | ($ in thousands) |
| Bonds: | | | | | | | | | | | |
| US Government | $ | 180,025 | | | $ | (7,350) | | | $ | 133,234 | | | $ | (45,373) | | | $ | 313,259 | | | $ | (52,723) | |
| Non-US Government | 89,941 | | | (10,577) | | | — | | | — | | | 89,941 | | | (10,577) | |
| US states, territories, and possessions | 296,391 | | | (22,092) | | | — | | | — | | | 296,391 | | | (22,092) | |
| US political subdivision | 119,338 | | | (13,852) | | | 1,534 | | | (874) | | | 120,872 | | | (14,726) | |
| US special revenue & special assessment | 1,617,794 | | | (226,299) | | | 200,850 | | | (101,130) | | | 1,818,644 | | | (327,429) | |
| Industrial and miscellaneous | 24,828,578 | | | (3,431,952) | | | 2,224,413 | | | (712,506) | | | 27,052,991 | | | (4,144,458) | |
| Hybrids | 273,922 | | | (22,529) | | | 4,357 | | | (2,071) | | | 278,279 | | | (24,600) | |
| Total bonds, excluding loan-backed and structured securities | 27,405,989 | | | (3,734,651) | | | 2,564,388 | | | (861,954) | | | 29,970,377 | | | (4,596,605) | |
| Loan-backed and structured securities: | | | | | | | | | | | |
| Residential mortgage-backed securities | 2,207,095 | | | (507,504) | | | 1,949,584 | | | (656,089) | | | 4,156,679 | | | (1,163,593) | |
| Commercial mortgage-backed securities | 1,258,869 | | | (136,353) | | | 86,634 | | | (14,091) | | | 1,345,503 | | | (150,444) | |
| Asset-backed securities | 1,221,071 | | | (69,198) | | | 456,757 | | | (21,312) | | | 1,677,828 | | | (90,510) | |
| Total loan-backed and structured securities | 4,687,035 | | | (713,055) | | | 2,492,975 | | | (691,492) | | | 7,180,010 | | | (1,404,547) | |
| Total bonds | 32,093,024 | | | (4,447,706) | | | 5,057,363 | | | (1,553,446) | | | 37,150,387 | | | (6,001,152) | |
| Preferred stocks | 148,734 | | | (66,930) | | | 12,025 | | | (8,246) | | | 160,759 | | | (75,176) | |
| Total bonds and preferred stocks | $ | 32,241,758 | | | $ | (4,514,636) | | | $ | 5,069,388 | | | $ | (1,561,692) | | | $ | 37,311,146 | | | $ | (6,076,328) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated Fair Value | | Gross Unrealized Loss | | Estimated Fair Value | | Gross Unrealized Loss | | Estimated Fair Value | | Gross Unrealized Loss |
| 2021 | ($ in thousands) |
| Bonds: | | | | | | | | | | | |
| US Government | $ | 89,600 | | | $ | (4,058) | | | $ | 87,976 | | | $ | (7,183) | | | $ | 177,576 | | | $ | (11,241) | |
| Non-US Government | 18,932 | | | (986) | | | — | | | — | | | 18,932 | | | (986) | |
| US political subdivision | 4,525 | | | (96) | | | — | | | — | | | 4,525 | | | (96) | |
| US special revenue & special assessment | 232,240 | | | (9,094) | | | 72,952 | | | (4,165) | | | 305,192 | | | (13,259) | |
| Industrial and miscellaneous | 3,211,358 | | | (73,254) | | | 334,775 | | | (23,238) | | | 3,546,133 | | | (96,492) | |
| Hybrids | 16,948 | | | (833) | | | 1,977 | | | (289) | | | 18,925 | | | (1,122) | |
| Total bonds, excluding loan-backed and structured securities | 3,573,603 | | | (88,321) | | | 497,680 | | | (34,875) | | | 4,071,283 | | | (123,196) | |
| Loan-backed and structured securities: | | | | | | | | | | | |
| Residential mortgage-backed securities | 3,682,775 | | | (80,529) | | | 17,666 | | | (758) | | | 3,700,441 | | | (81,287) | |
| Commercial mortgage-backed securities | 88,810 | | | (1,167) | | | 47,534 | | | (1,772) | | | 136,344 | | | (2,939) | |
| Asset-backed securities | 266,450 | | | (1,103) | | | 354,111 | | | (7,324) | | | 620,561 | | | (8,427) | |
| Total loan-backed and structured securities | 4,038,035 | | | (82,799) | | | 419,311 | | | (9,854) | | | 4,457,346 | | | (92,653) | |
| Total bonds | 7,611,638 | | | (171,120) | | | 916,991 | | | (44,729) | | | 8,528,629 | | | (215,849) | |
| Preferred stocks | 19,772 | | | (228) | | | 254 | | | (16) | | | 20,026 | | | (244) | |
| Total bonds and preferred stocks | $ | 7,631,410 | | | $ | (171,348) | | | $ | 917,245 | | | $ | (44,745) | | | $ | 8,548,655 | | | $ | (216,093) | |
For securities other than loan-backed securities, the Company generally considers a number of factors in determining whether an impairment is other-than-temporary (see the “Loan-backed and Structured Securities” section for information on loan-backed and structured security other-than-temporary-impairments (“OTTIs”)). These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security's amortized cost, 5) the duration of the decline, 6) an economic analysis of the issuer's industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security-by-security review each quarter in evaluating the need for any OTTIs. Although no set formula is used in this process, the investment performance, collateral position and continued viability of the issuer are significant measures considered. For securities in an unrealized loss position for which an OTTI was not recognized, the Company believes that it is probable that all amounts will be collected as due according to the contractual terms of the debt security in effect at the date of acquisition and has the intent and ability to hold these securities until recovery. The Company recognized $8.6 million, $0, and $44.0 million of OTTIs on non-loan-backed securities during 2022, 2021, and 2020, respectively.
The Company had securities with a fair value of $5.1 billion in an unrealized loss position for greater than twelve months as of December 31, 2022, and the related unrealized loss of $1.6 billion pertains primarily to residential mortgage-backed, banking, insurance, and communications securities. The Company had securities with a fair value of $917.0 million in an unrealized loss position for greater than twelve months as of December 31, 2021, and the related unrealized loss of $44.7 million pertains primarily to energy, student loan, collateralized loan obligations, electric, and other financial securities. The aggregate decline in fair value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors such as credit ratings, the financial health of the investee, the continued access of the investee to capital
markets, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.
As of December 31, 2022 and 2021, bonds and cash having a fair value of $14.4 million and $16.0 million, respectively, were on deposit with various governmental authorities as required by law.
There were no individual bonds that exceeded 10% of capital and surplus as of December 31, 2022 and 2021.
Commercial Mortgage Loans
We invest a portion of our investment portfolio in commercial mortgage loans. As of December 31, 2022 and December 31, 2021, our commercial mortgage loan holdings were $10.6 billion and $9.6 billion, respectively.
We specialize in making commercial mortgage loans on credit-oriented commercial properties. Our underwriting procedures relative to our commercial mortgage loan portfolio are based, in our view, on a conservative and disciplined approach. We concentrate on a small number of commercial real estate asset types associated with the necessities of life (grocery anchored and credit tenant retail, industrial, multi-family, senior living, and credit tenant and medical office). We believe that these asset types tend to weather economic downturns better than other commercial asset classes in which we have chosen not to participate. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history. The majority of our commercial mortgage loan portfolio was underwritten by us. From time to time, we may acquire loans in conjunction with an acquisition.
Mortgage loans on real estate are stated at the aggregate unpaid principal balance. Book value adjustments are made for other-than-temporary declines. Temporary declines in value are reflected in “Change in net unrealized capital gains and losses” in unassigned funds.
The minimum and maximum lending rates for commercial mortgage loans originated by the Company during 2022 were 2.25% and 5.25%, respectively. The minimum and maximum lending rates for commercial mortgage loans originated by the Company during 2021 were 1.875% and 4.5%, respectively. The minimum and maximum lending rates for commercial mortgage loans originated by the Company during 2020 were 2.88% and 4.75%, respectively. The maximum percentage of any one loan to the value of security at the time of the loan was 88%. The target percentage of any one loan to the value of collateral at the time of the loan, exclusive of insured, guaranteed, or purchase money mortgages is generally 75%.
The Company also offers a commercial loan product under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. The Company uses this loan-to-value ratio as a credit quality indicator, which is a component of the Company’s ongoing monitoring of the credit risk of its mortgage loan portfolio. The Company also monitors borrower conditions such as payment practices, borrower credit, operating performance, and property conditions, as well as ensuring the timely payment of property taxes and insurance. Through this monitoring process, the Company assesses the risk of each loan. As of December 31, 2022, the Company had mortgage loans with outstanding principal totaling $392.1 million which exceeded a 75% loan-to-value ratio in the total amount of $32.1 million. For loans the Company held as of December 31, 2022, the maximum percentage of any one loan to the value of security as of the most recent appraisal was 83%. As of December 31, 2021, the Company had mortgage loans with outstanding principal totaling $487.1 million which exceeded a 75% loan-to-value ratio in the total amount of $38.3 million. For loans the Company held as of December 31, 2021, the maximum percentage of any one loan to the value of security as of the most recent appraisal was 87%.
The Company’s had no investments in impaired loans as of December 31, 2022 and 2021.
As of December 31, 2022 and 2021, the Company had no mortgages more than 90 days past due. During 2022 and 2021, the Company excluded no interest from investment income due and accrued due to delinquency or uncollectibility on outstanding loans.
It is our policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place.
OFF-BALANCE SHEET ARRANGEMENTS
The Company enters into certain off balance sheet financial instruments in the course of business, including commitments to extend mortgage loans and office space leasing agreements.
Commitments to extend mortgage loans are agreements to lend to a borrower, provided there is no violation of any condition established in the contract. The Company enters into these agreements to commit to future loan fundings at a predetermined interest rate. Commitments generally have fixed expiration dates or other termination clauses. The Company had $917.6 and $967.0 million in commitments to extend mortgage loans as of December 31, 2022 and 2021, respectively. These amounts do not represent amounts at risk if the counterparty defaults. The collateral held for commitments to extend mortgage loans is a cash commitment fee, which is forfeited if the counterparty fails to perform.
The Company leases administrative and marketing office space in 6 cities, with most leases being for periods of ten to twenty-five years. Rent expense for 2022, 2021, and 2020 was $1.9 million, $2.6 million, and $3.3 million, respectively. Although the Company is legally obligated for these leases, rent expense will be less than projected lease commitments due to rent paid by affiliates.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
MARKET RISK EXPOSURES
Our financial position and earnings are subject to various market risks including changes in interest rates, the yield curve, spreads between risk-adjusted and risk-free interest rates, foreign currency rates, used vehicle prices, equity price risks and issuer defaults. We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations. Our asset/liability management programs and procedures 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, credit and market risk, and cash flow characteristics to maintain an appropriate balance between risk and profitability for each product category, and for us as a whole.
It is our policy to maintain asset and liability durations within one year of one another, although, from time to time, a broader interval may be allowed.
We are exposed to credit risk within our investment portfolio and through derivative counterparties. Credit risk relates to the uncertainty of an obligor's continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. We manage credit risk through established investment policies which attempt to address quality of obligors and counterparties, credit concentration limits, diversification requirements, and acceptable risk levels under expected and stressed scenarios. Derivative counterparty credit risk is measured as the amount owed to us, net of collateral held, based upon current market conditions. In addition, we periodically assess exposure related to potential payment obligations between us and our counterparties. We minimize the credit risk in derivative financial instruments by entering into transactions with high quality counterparties (A-rated or higher at the time we enter into the contract), and we maintain credit support annexes with certain of those counterparties.
We utilize a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, currency exchange risk, volatility risk, and
equity market risk. These strategies are developed through our analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into our risk management program.
Derivative instruments expose us to credit and market risk and could result in material changes from period to period. We attempt to minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. We monitor our use of derivatives in connection with our overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by our risk management department.
Derivative instruments that are used as part of our interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps, and interest rate swaptions.
Derivative instruments that are used as part of the Company's foreign currency exchange risk management strategy include foreign currency swaps, foreign currency futures, foreign currency options, foreign equity futures, and foreign equity options.
We may use the following types of derivative contracts to mitigate our exposure to certain guaranteed benefits related to VA contracts, fixed indexed annuities, and indexed universal life:
•Foreign Currency Futures
•Foreign Currency Options
•Variance Swaps
•Interest Rate Futures
•Equity Options
•Equity Futures
•Credit Derivatives
•Interest Rate Swaps
•Interest Rate Swaptions
•Volatility Futures
•Volatility Options
•Funds Withheld Agreement
•Total Return Swaps
Please refer to Note 11 of the audited financial statements for additional discussion of our exposure to derivative counterparties and financial instruments with off-balance sheet risk.
Impact of Current Interest Rate Environment
Significant changes in interest rates expose us to the risk of not realizing anticipated spreads between the interest rate earned on investments and the interest rate credited to in-force policies and contracts. In addition, certain of our insurance and investment products guarantee a minimum guaranteed interest rate ("MGIR"). In periods of volatile interest rate movements, the interest spread earned may be negatively impacted to the extent our ability to adjust crediting rates is limited or if the market to invest in invest in assets with sufficient yields is limited. Additionally, floating rate contracts may negatively impact the interest spread earned to the extent corresponding assets do not have similar adjustments to effective yields.
We are active in mitigating the impact of a volatile interest rate environment through product design, as well as adjusting crediting rates on current in-force policies and contracts. We also manage interest rate and reinvestment risks through our asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations; cash flow testing under various interest rate scenarios; and the regular rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk.
Certain of the Company’s products are subject to higher withdrawals in periods of prolonged higher interest rate environments. This risk is mitigated to some degree by market value adjustments and/or by surrender charge features. The following tables provide more details regarding contracts that potentially have an elevated risk of withdrawals under this type of interest rate environment.
Withdrawal characteristics of annuity actuarial reserves and deposit-type contract liabilities as of December 31, 2022 are as follows:
Individual Annuities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 6,606,182 | | | $ | 433,845 | | | $ | — | | | $ | 7,040,027 | | | 25.1 | % |
| b. At book value less current surrender charge of 5% or more | 360,459 | | | — | | | — | | | 360,459 | | | 1.3 | |
| c. At fair value | — | | | — | | | 10,708,787 | | | 10,708,787 | | | 38.1 | |
| d. Total with market value adjustment or at fair value (total of a through c) | 6,966,641 | | | 433,845 | | | 10,708,787 | | | 18,109,273 | | | 64.5 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 5,448,642 | | | 7,048 | | | — | | | 5,455,690 | | | 19.4 | |
| (2) Not subject to discretionary withdrawal provision | 4,508,828 | | | — | | | 7,252 | | | 4,516,080 | | | 16.1 | |
| (3) Total (gross: direct + assumed) | 16,924,111 | | | 440,893 | | | 10,716,039 | | | 28,081,043 | | | 100.0 | % |
| (4) Reinsurance ceded | 2,632,151 | | | — | | | — | | | 2,632,151 | | | |
| (5) Total (net) (3) - (4) | $ | 14,291,960 | | | $ | 440,893 | | | $ | 10,716,039 | | | $ | 25,448,892 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | 245,475 | | | $ | — | | | $ | — | | | $ | 245,475 | | | |
Group Annuities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 4,999 | | | $ | 546,994 | | | $ | — | | | $ | 551,993 | | | 63.9 | % |
| b. At book value less current surrender charge of 5% or more | — | | | — | | | — | | | — | | | — | |
| c. At fair value | — | | | — | | | — | | | — | | | — | |
| d. Total with market value adjustment or at fair value (total of a through c) | 4,999 | | | 546,994 | | | — | | | 551,993 | | | 63.9 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 40,425 | | | 16,294 | | | — | | | 56,719 | | | 6.6 | |
| (2) Not subject to discretionary withdrawal provision | 254,941 | | | — | | | — | | | 254,941 | | | 29.5 | |
| (3) Total (gross: direct + assumed) | 300,365 | | | 563,288 | | | — | | | 863,653 | | | 100.0 | % |
| (4) Reinsurance ceded | 1,418 | | | — | | | — | | | 1,418 | | | |
| (5) Total (net) (3) - (4) | $ | 298,947 | | | $ | 563,288 | | | $ | — | | | $ | 862,235 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Deposit-type Contracts (no life contingencies):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 322,581 | | | $ | — | | | $ | — | | | $ | 322,581 | | | 2.7 | % |
| b. At book value less current surrender charge of 5% or more | 143,056 | | | — | | | — | | | 143,056 | | | 1.2 | |
| c. At fair value | — | | | — | | | — | | | — | | | — | |
| d. Total with market value adjustment or at fair value (total of a through c) | 465,637 | | | — | | | — | | | 465,637 | | | 3.9 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 758,380 | | | — | | | — | | | 758,380 | | | 6.4 | |
| (2) Not subject to discretionary withdrawal provision | 10,684,092 | | | — | | | 1,518 | | | 10,685,610 | | | 89.7 | |
| (3) Total (gross: direct + assumed) | 11,908,109 | | | — | | | 1,518 | | | 11,909,627 | | | 100.0 | % |
| (4) Reinsurance ceded | 2,058 | | | — | | | — | | | 2,058 | | | |
| (5) Total (net) (3) - (4) | $ | 11,906,051 | | | $ | — | | | $ | 1,518 | | | $ | 11,907,569 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | 4,031 | | | $ | — | | | $ | — | | | $ | 4,031 | | | |
Sensitivities
In accordance with Statutory Account Principles, the significant majority of the Company’s assets are carried at amortized cost and not at fair value. The elements of market risk that could potentially have a detrimental impact on investment fair values do not have a significant direct impact on the Company’s investments that are carried at amortized cost.
Impact of Inflation
Inflation increases the need for life insurance. Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefit and protection. Higher interest rates may result in higher sales of certain of our investment products.
The higher interest rates that have traditionally accompanied inflation could also affect our operations. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase. The fair value of our fixed-rate, long-term investments may decrease, we may be unable to implement fully the interest rate reset and call provisions of our commercial mortgage loans, and our ability to make attractive commercial mortgage loans, including participating commercial mortgage loans, may decrease. In addition, participating mortgage loan income may decrease. The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates.
FINANCIAL STATEMENTS
The audited statutory statements of admitted assets, liabilities, and capital and surplus of Protective Life Insurance Company as of December 31, 2022 and 2021, and the related statutory statements of operations, changes in capital and surplus, and cash flow for each of the years in the three-year period ended December 31, 2022, as well as the Independent Auditors’ Report are included on the pages that follow.
Independent Auditors’ Report
The Board of Directors
Protective Life Insurance Company:
Opinions
We have audited the statutory financial statements of Protective Life Insurance Company (the Company), which comprise the statutory statements of admitted assets, liabilities, and capital and surplus as of December 31, 2022 and 2021, and the related statutory statements of operations, changes in capital and surplus, and cash flow for each of the years in the three-year period ended December 31, 2022, and the related notes to the statutory financial statements.
Unmodified Opinion on Statutory Basis of Accounting
In our opinion, the accompanying statutory financial statements present fairly, in all material respects, the admitted assets, liabilities, and capital and surplus of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flow for each of the years in the three-year period ended December 31, 2022 in accordance with accounting practices prescribed or permitted by the Department of Commerce and Insurance of the State of Tennessee described in Notes 1 and 2.
Adverse Opinion on U.S. Generally Accepted Accounting Principles
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles section of our report, the statutory financial statements do not present fairly, in accordance with U.S. generally accepted accounting principles, the financial position of the Company as of December 31, 2022 and 2021, or the results of its operations or its cash flows for each of the years in the three-year period ended December 31, 2022.
Basis for Opinions
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Statutory Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.
Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles
As described in Notes 1 and 2 to the statutory financial statements, the statutory financial statements are prepared by the Company using accounting practices prescribed or permitted by the Department of Commerce and Insurance of the State of Tennessee, which is a basis of accounting other than U.S. generally accepted accounting principles. Accordingly, the statutory financial statements are not intended to be presented in accordance with U.S. generally accepted accounting principles. The effects on the December 31, 2022 statutory financial statements of the variances between the statutory accounting practices described in Note 2 and U.S. generally accepted accounting principles, although not reasonably determinable, are presumed to be material and pervasive. The effects on the December 31, 2021 and 2020 statutory financial statements of the variances between the statutory accounting practices and U.S. generally accepted accounting principles are described in Note 2.
Responsibilities of Management for the Statutory Financial Statements
Management is responsible for the preparation and fair presentation of the statutory financial statements in accordance with accounting practices prescribed or permitted by the Department of Commerce and Insurance of the State of Tennessee. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of statutory financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the statutory financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that the statutory financial statements are issued.
Auditors’ Responsibilities for the Audit of the Statutory Financial Statements
Our objectives are to obtain reasonable assurance about whether the statutory financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the statutory financial statements.
In performing an audit in accordance with GAAS, we:
•Exercise professional judgment and maintain professional skepticism throughout the audit.
•Identify and assess the risks of material misstatement of the statutory financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the statutory financial statements.
•Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.
•Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the statutory financial statements.
•Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.
Supplementary Information
Our audits were conducted for the purpose of forming an opinion on the statutory financial statements as a whole. The supplementary information included in the supplemental Schedule I Summary of Investments - Other Than Investments in Related Parties and Schedule IV Reinsurance is presented for purposes of additional analysis and is not a required part of the statutory financial statements but is
supplementary information required by the Securities and Exchange Commission’s Regulation S-X. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the statutory financial statements. The information has been subjected to the auditing procedures applied in the audits of the statutory financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the statutory financial statements or to the statutory financial statements themselves, and other additional procedures in accordance with GAAS. In our opinion, the information is fairly stated in all material respects in relation to the statutory financial statements as a whole.
/s/ KPMG LLP
Birmingham, Alabama
March 31, 2023
PROTECTIVE LIFE INSURANCE COMPANY
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, AND CAPITAL AND SURPLUS
(Statutory Basis)
| | | | | | | | | | | |
| December 31 |
| 2022 | | 2021 |
| ($ in thousands, except share amounts) |
|
Bonds (fair value: 2022 - $41,441,691; 2021 - $52,216,520) | $ | 47,180,219 | | | $ | 47,120,591 | |
Preferred stocks (fair value: 2022 - $465,457; 2021 - $716,544) | 540,147 | | | 707,270 | |
Common stocks-affiliated (cost: 2022 - $2,263,479; 2021 - $1,948,513) | 1,796,429 | | | 1,445,092 | |
Common stocks-unaffiliated (cost: 2022 - $173,730; 2021 - $145,265) | 174,544 | | | 146,568 | |
| Mortgage loans on real estate | 10,558,447 | | | 9,557,217 | |
| Real estate | 117,968 | | | 120,602 | |
| Contract loans | 830,400 | | | 847,471 | |
| Cash and cash equivalents | 369,091 | | | 449,128 | |
| Short-term investments | — | | | 2,626 | |
| Other invested assets | 804,833 | | | 809,003 | |
| Receivable for securities | 4,485 | | | 1,851 | |
| Securities lending reinvested collateral assets | 162,119 | | | 179,083 | |
| Derivatives | 366,106 | | | 1,248,717 | |
| Derivative collateral and receivables | 60,639 | | | 192,298 | |
| Total cash and investments | 62,965,427 | | | 62,827,517 | |
| Amounts recoverable from reinsurers | 123,881 | | | 139,923 | |
| Deferred and uncollected premiums | 1,096 | | | (36,891) | |
| Investment income due and accrued | 525,295 | | | 507,118 | |
| Receivables from parent, subsidiaries, and affiliates | 13,307 | | | 9,505 | |
| Current federal and foreign income tax recoverable | 12,628 | | | 16,579 | |
| Deferred tax asset | 185,709 | | | 180,054 | |
| Other assets | 754,347 | | | 791,067 | |
| Assets held in Separate Accounts | 14,111,642 | | | 16,385,944 | |
| Total admitted assets | $ | 78,693,332 | | | $ | 80,820,816 | |
PROTECTIVE LIFE INSURANCE COMPANY
STATEMENTS OF ADMITTED ASSETS, LIABILITIES, AND CAPITAL AND SURPLUS
(Statutory Basis)
| | | | | | | | | | | |
| December 31 |
| 2022 | | 2021 |
| ($ in thousands, except share amounts) |
|
| Aggregate reserves: | | | |
| Life policies and contracts | $ | 39,751,133 | | | $ | 40,891,066 | |
| Accident and health | 345,393 | | | 336,499 | |
| Liability for deposit-type contracts | 11,906,051 | | | 10,373,334 | |
| Policy and contract claims: | | | |
| Life | 464,809 | | | 533,075 | |
| Accident and health | 20,249 | | | 22,832 | |
| Policyholders' dividends | 20,688 | | | 28,903 | |
| Funds at interest and experience rated refunds | 78,776 | | | 136,850 | |
| Interest maintenance reserve (IMR) | 778,140 | | | 1,269,536 | |
| General expenses due or accrued | 95,653 | | | 70,908 | |
| Transfers from Separate Accounts due or accrued, net | (50,739) | | | (338,156) | |
| | | |
| Remittances and items not allocated | 64,976 | | | 56,115 | |
| Borrowed money and interest thereon | 925,223 | | | 1,308,328 | |
| Asset valuation reserve (AVR) | 362,132 | | | 468,260 | |
| Payable to parent, subsidiaries, and affiliates | 39,475 | | | 40,465 | |
| Derivatives | 267,352 | | | 960,050 | |
| Derivative collateral and payables | 62,269 | | | 195,926 | |
| Payable for securities lending | 162,119 | | | 179,083 | |
| Funds held under reinsurance treaties | 3,481,734 | | | 2,131,334 | |
| Other liabilities | 471,541 | | | 451,894 | |
| Liabilities held in Separate Accounts | 14,111,642 | | | 16,385,944 | |
| Total liabilities | 73,358,616 | | | 75,502,246 | |
| Capital and surplus: | | | |
| Common stock, $1.00 par value; 5,000,000 shares authorized, | | | |
| issued and outstanding | 5,000 | | | 5,000 | |
| Surplus notes | 110,000 | | | 110,000 | |
| Gross paid-in and contributed surplus | 3,240,393 | | | 3,140,393 | |
| Unassigned funds - surplus | 1,979,323 | | | 2,063,177 | |
| Total capital and surplus | 5,334,716 | | | 5,318,570 | |
| Total liabilities and capital and surplus | $ | 78,693,332 | | | $ | 80,820,816 | |
See Notes to the Financial Statements (Statutory Basis)
F-6
PROTECTIVE LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
(Statutory Basis)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2022 | | 2021 | | 2020* |
| ($ in thousands) |
| Revenue: | | | | | |
| Premiums and annuity considerations | $ | 3,438,207 | | | $ | 5,098,113 | | | $ | 3,842,843 | |
| Net investment income | 2,475,360 | | | 2,385,384 | | | 2,285,955 | |
| Commissions and expense allowances on reinsurance ceded | 408,185 | | | 462,914 | | | 437,894 | |
| Amortization of interest maintenance reserve | 132,476 | | | 123,509 | | | 107,047 | |
| Net gain (loss) from operations from Separate Accounts | (112,311) | | | 20,010 | | | 10,088 | |
| Reserve adjustments on reinsurance ceded | (167,198) | | | (157,219) | | | (392,899) | |
| Other income | 548,017 | | | 636,979 | | | 610,473 | |
| Total revenue | 6,722,736 | | | 8,569,690 | | | 6,901,401 | |
| Benefits and expenses: | | | | | |
| Death and annuity benefits | 2,262,459 | | | 2,292,755 | | | 2,106,267 | |
| Accident and health benefits | 56,856 | | | 59,175 | | | 68,224 | |
| Surrender benefits and other fund withdrawals | 3,514,730 | | | 3,023,567 | | | 2,913,334 | |
| Other policy and contract benefits | 419,381 | | | 217,876 | | | 236,954 | |
| Increase in aggregate reserves | (1,137,253) | | | 1,054,549 | | | 618,761 | |
| Commissions and commission expense allowances | 469,937 | | | 499,239 | | | 379,326 | |
| General expenses | 574,343 | | | 541,211 | | | 524,794 | |
| Insurance taxes, licenses, and fees | 110,307 | | | 100,202 | | | 74,030 | |
| Transfers from Separate Accounts, net | (151,823) | | | (27,834) | | | (931,195) | |
| Change in assumed MODCO reserves | 47 | | | 205 | | | 184 | |
| Other expenses | 136,678 | | | 117,209 | | | 125,743 | |
| Total benefits and expenses | 6,255,662 | | | 7,878,154 | | | 6,116,422 | |
| Net income (loss) from operations before dividends to policyholders and federal income taxes | 467,074 | | | 691,536 | | | 784,979 | |
| Dividends to policyholders | 18,929 | | | 29,487 | | | 29,586 | |
| Federal income tax expense | 125,600 | | | 122,732 | | | 80,173 | |
| Net income (loss) from operations | 322,545 | | | 539,317 | | | 675,220 | |
Net realized capital gains (losses) (less $(96,944), $11,883, and $31,811 of capital gains tax (benefit) in 2022, 2021, and 2020, respectively, and excluding $(358,987), $44,123, and $308,075 transferred to the IMR in 2022, 2021 and 2020, respectively) | (16,718) | | | (113,001) | | | 16,493 | |
| Net income (loss) | $ | 305,827 | | | $ | 426,316 | | | $ | 691,713 | |
__________________
*All 2020 amounts were restated in 2021 for Merger on January 1, 2021. See Notes 1 and 4.
See Notes to the Financial Statements (Statutory Basis)
F-7
PROTECTIVE LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS
(Statutory Basis)
| | | | | |
| ($ in thousands)* |
Capital and surplus, December 31, 2019 | $ | 5,089,318 | |
| |
| Net income | 691,713 | |
Change in net unrealized capital gains and losses, less capital gains tax of $1,767 | (173,876) | |
| Change in nonadmitted assets | 32,798 | |
| Change in liability for reinsurance in unauthorized companies | 1,667 | |
| Change in reserve on account of change in valuation basis | 59,252 | |
| Change in asset valuation reserve | (76,159) | |
| Change in net deferred income tax | (55,834) | |
| Change in surplus as a result of reinsurance | (251,818) | |
| Funds withheld losses | (16,944) | |
| Change in acquired unauthorized liability | 5 | |
| Paid in capital | 120,000 | |
Capital and surplus, December 31, 2020 | 5,420,122 | |
| |
| Net income | 426,316 | |
Change in net unrealized capital gains and losses, less capital gains tax (benefit) of $(52,048) | (229,288) | |
| Change in nonadmitted assets | (103,155) | |
| Change in liability for reinsurance in unauthorized companies | (973) | |
| Change in asset valuation reserve | (87,845) | |
| Change in net deferred income tax | 67,051 | |
| Change in surplus as a result of reinsurance | (219,242) | |
| Funds withheld gains | 7,557 | |
| Prior period adjustments | 38,380 | |
| Change in acquired unauthorized liability | (353) | |
Capital and surplus, December 31, 2021 | 5,318,570 | |
| |
| Net income | 305,827 | |
Change in net unrealized capital gains and losses, less capital gains tax (benefit) of $(44,544) | (167,215) | |
| Change in net unrealized foreign exchange capital gain | 14,481 | |
| Change in nonadmitted assets | 94,264 | |
| Change in liability for reinsurance in unauthorized companies | (1,364) | |
| |
| Change in asset valuation reserve | 106,128 | |
| |
| Change in net deferred income tax | 3,373 | |
| Change in surplus as a result of reinsurance | (82,828) | |
| Funds withheld gains | 15,898 | |
| Prior period adjustments | (34,820) | |
| Paid in capital | 100,000 | |
| Change in acquired unauthorized liability | 1,402 | |
| Dividends to parent | (339,000) | |
Capital and surplus, December 31, 2022 | $ | 5,334,716 | |
__________________
*All 2020 amounts were restated in 2021 for Merger on January 1, 2021. See Notes 1 and 4.
See Notes to the Financial Statements (Statutory Basis)
F-8
PROTECTIVE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(Statutory Basis)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2022 | | 2021 | | 2020* |
| ($ in thousands) |
| Cash from operations | | | | | |
| Premiums and annuity considerations | $ | 4,794,234 | | | $ | 5,151,370 | | | $ | 4,392,497 | |
| Net investment income | 2,475,883 | | | 2,436,005 | | | 2,371,117 | |
| Miscellaneous income | 641,967 | | | 1,124,123 | | | 618,603 | |
| | | | | |
| Benefit and loss payments | (6,463,941) | | | (5,597,022) | | | (5,717,602) | |
| Net transfers from Separate Accounts | 439,240 | | | (49,817) | | | 912,505 | |
| Commissions, expenses paid and miscellaneous | (1,225,127) | | | (1,223,184) | | | (903,824) | |
| Dividends paid to policyholders | (27,143) | | | (29,733) | | | (30,024) | |
| Federal income taxes | (22,624) | | | (234,752) | | | (73,754) | |
| Net cash from operations | 612,489 | | | 1,576,990 | | | 1,569,518 | |
| Cash from investments | | | | | |
| Proceeds from investments sold, matured or repaid: | | | | | |
| Bonds | 3,277,837 | | | 5,635,863 | | | 4,867,361 | |
| Stocks | 202,717 | | | 130,168 | | | 267,306 | |
| Mortgage loans | 1,098,099 | | | 1,236,175 | | | 616,072 | |
| | | | | |
| Other invested assets | 19,597 | | | 9,498 | | | 2,729 | |
| Net losses on cash, cash equivalents, and short-term investments | (56) | | | 131 | | | 1,295 | |
| Securities lending collateral assets | — | | | — | | | 6,810 | |
| Derivatives and other miscellaneous proceeds | 26,496 | | | 20,729 | | | 302,341 | |
| Total investment proceeds | 4,624,690 | | | 7,032,564 | | | 6,063,914 | |
| Cost of investments acquired: | | | | | |
| Bonds | (3,337,186) | | | (8,775,550) | | | (6,816,210) | |
| Stocks | (414,015) | | | (441,653) | | | (286,927) | |
| Mortgage loans | (2,111,300) | | | (1,935,519) | | | (1,415,557) | |
| Real estate | (1,078) | | | (940) | | | (5,343) | |
| Other invested assets | (12,718) | | | (95,241) | | | (24,761) | |
| | | | | |
| Derivatives and other miscellaneous applications | (329,123) | | | (327,742) | | | (157,759) | |
| Total investments acquired | (6,205,420) | | | (11,576,645) | | | (8,706,557) | |
| Net change in contract loans | 14,988 | | | 24,607 | | | 32,217 | |
| Net cash from investments | (1,565,742) | | | (4,519,474) | | | (2,610,426) | |
| Cash from financing and miscellaneous sources | | | | | |
| Cash provided (applied): | | | | | |
| | | | | |
| Capital and paid in surplus | 100,000 | | | — | | | 120,000 | |
| Borrowed funds | (383,106) | | | 953,327 | | | 84,989 | |
| Net deposits on deposit-type contract funds | 1,551,722 | | | 2,243,042 | | | 357,812 | |
| Dividends to parent | (339,000) | | | — | | | — | |
| Securities lending liability | (16,964) | | | 120,413 | | | 6,810 | |
| Other cash provided (applied), net | (42,062) | | | (645,559) | | | 759,275 | |
| Net cash from financing and miscellaneous sources | 870,590 | | | 2,671,223 | | | 1,328,886 | |
| Net change in cash, cash equivalents, and short-term investments | (82,663) | | | (271,261) | | | 287,978 | |
| Cash, cash equivalents, and short-term investments, beginning of year | 451,754 | | | 723,015 | | | 435,037 | |
| Cash, cash equivalents, and short-term investments, end of year | $ | 369,091 | | | $ | 451,754 | | | $ | 723,015 | |
__________________
*All 2020 amounts were restated in 2021 for Merger on January 1, 2021. See Notes 1 and 4.
PROTECTIVE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(Statutory Basis)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31 |
| 2022 | | 2021 | | 2020* |
| ($ in thousands) |
| Non-cash transactions | | | | | |
| Protective Life Reinsurance Bermuda Ltd. reinsurance transaction initial impact (Operations) | $ | 1,357,675 | | | $ | — | | | $ | — | |
| Protective Life Reinsurance Bermuda Ltd. reinsurance transaction initial impact (Financing and miscellaneous sources) | (1,357,675) | | | — | | | — | |
| Non-cash exchange of securities (Investments) | 428,799 | | | 523,872 | | | 721,853 | |
| Non-cash change in retained asset account (Operations) | (19,004) | | | 81,301 | | | 61,631 | |
| Non-cash change in reinsurance loss contingency reserve (Operations) | 21,866 | | | (5,569) | | | 61,234 | |
| Non-cash transfer of Bonds from West Coast Life Insurance Company in conjunction with reinsurance novation(includes investment income due and accrued of $8,548,107) (Investments) | — | | | — | | | 733,519 | |
| Protective Life Reinsurance Bermuda Ltd. reinsurance transaction initial impact (Operations and Financing and miscellaneous sources) | — | | | — | | | 460,489 | |
| Adjustment for deposit liability pursuant to reinsurance treaty modification (Operations and Financing and miscellaneous sources) | — | | | — | | | 131,411 | |
| Reclassification of security from Bonds to Other invested assets (Investments) | — | | | — | | | 81,472 | |
| Non-cash transfer of Other Invested Assets from West Coast Life Insurance Company in conjunction with reinsurance novation (includes investment income due and accrued of $93,118) (Investments) | — | | | — | | | 9,035 | |
| | | | | |
| | | | | |
__________________
*All 2020 amounts were restated in 2021 for Merger on January 1, 2021. See Notes 1 and 4.
See Notes to the Financial Statements (Statutory Basis)
F-10
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
.
1. General
Basis of Presentation – The statutory basis financial statements of Protective Life Insurance Company (the “Company”) have been prepared in conformity with accounting practices prescribed or permitted by the Department of Commerce and Insurance of the State of Tennessee (the “Department”). The Company is a stock, legal reserve, life and accident and health insurer domiciled in the State of Tennessee.
All outstanding shares of the Company’s common stock are owned by Protective Life Corporation (“PLC”), an insurance holding company domiciled in the State of Delaware. PLC was a wholly owned subsidiary of Dai-ichi Life Holdings, Inc. (“Dai-ichi Life”), a kabushiki kaisha organized under the laws of Japan. Effective January 1, 2023, PLC became a wholly owned subsidiary of Dai-ichi Life International Holding, LLC, a godo kaisha organized under the laws of Japan and subsidiary of Dai-ichi Life (“Dai-ichi Life International”), upon the transfer of all of the outstanding shares of PLC’s common stock from Dai-ichi Life to Dai-ichi Life International. Dai-ichi Life remains the ultimate controlling parent corporation of PLC. Wholly owned insurance subsidiaries of the Company as of December 31, 2022, include Protective Life and Annuity Insurance Company (“PLAIC”), MONY Life Insurance Company (“MONY”), West Coast Life Insurance Company (“WCL”), and Protective Property & Casualty Insurance Company (“PP&C”) (formerly Lyndon Property Insurance Company (“LPIC”)) and Golden Gate Captive Insurance Company (“GGCIC”). The Company also owns two investment companies, Protective Finance Corporation (“PFC”) and Protective Finance Corporation II (“PFCII”), and three non-insurance and non-investment subsidiaries, Western Diversified Services, Inc. (“WDS”), Protective Asset Protection, Inc. (“PAPI”) (formerly Lyndon Insurance Group, Inc.) and USWC Holding Company (“USWC”) and one automotive finance and insurance provider A.U.L. Corp. (“AUL”).
As part of a statutory merger approved by the Department and the Vermont Department of Financial Regulation, the Company was merged with its affiliate, Shades Creek Captive Insurance Company (“Shades Creek”), effective January 1, 2021 (“the Merger”). After the Merger, the Company remained as the surviving legal entity, and Shades Creek ceased to exist effective January 1, 2021. Prior to the Merger, both the Company and Shades Creek were wholly owned subsidiaries of PLC. The Company did not pay or receive any consideration in connection with the Merger. As a result of the Merger, all issued and outstanding capital stock of Shades Creek was cancelled.
The Merger was accounted for using the statutory merger method pursuant to Statement of Statutory Accounting Principles (“SSAP”) No. 68, “Business Combinations and Goodwill” (“SSAP No. 68”). In accordance with SSAP No. 68, the Company’s Statements of Operations, Statements of Changes in Capital and Surplus, Statements of Cash Flow and other prior year amounts included herein have been restated to reflect the merged results of the Company and Shades Creek in accordance with the provisions of SSAP No. 68 and SSAP No. 3, “Accounting Changes and Corrections of Errors” (“SSAP No. 3”).
The Department recognizes only statutory practices prescribed or permitted by the State of Tennessee for determining and reporting the financial condition and results of operations of an insurance company, and for determining its solvency under Tennessee Insurance Law. The National Association of Insurance Commissioners’ (“NAIC”) Accounting Practices and Procedures Manual, effective January 1, 2001 (“NAIC SAP”), has been adopted as a component of prescribed or permitted practices by the State of Tennessee. The Company had no permitted practices as of December 31, 2022 or 2021, or for each of the years in the three-year period ended December 31, 2022. The State has adopted certain prescribed accounting practices that differ from those found in NAIC SAP. Specifically, Tennessee Insurance Law requires that goodwill arising from the purchase of a subsidiary, controlled or affiliated entity is charged directly to surplus in the year it originates. In NAIC SAP, goodwill in amounts not to exceed 10% of an insurer’s capital and surplus may be capitalized and all amounts of goodwill are amortized as a component of unrealized gains and losses on investments over periods not to exceed 10 years.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The following reconciles the Company's net income (loss) and capital and surplus as of and for the years ended December 31, prepared in accordance with NAIC SAP as compared to that prepared in accordance with practices prescribed and permitted by the Department.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31 |
| SSAP # | | 2022 | | 2021 | | 2020 |
| | | ($ in thousands) |
| NET INCOME (LOSS) | | | | | | | |
| State basis | XXX | | $ | 305,827 | | | $ | 426,316 | | | $ | 691,713 | |
| State prescribed practices that are an increase/(decrease) from NAIC SAP: | | | | | | | |
| None | XXX | | — | | | — | | | — | |
| State permitted practices that are an increase/(decrease) from NAIC SAP: | | | | | | | |
| None | XXX | | — | | | — | | | — | |
| Net income (loss), NAIC SAP | XXX | | $ | 305,827 | | | $ | 426,316 | | | $ | 691,713 | |
| SURPLUS | | | | | | | |
| State basis | XXX | | $ | 5,334,716 | | | $ | 5,318,570 | | | |
| State prescribed practices that are an increase/(decrease) from NAIC SAP: | | | | | | | |
| Goodwill asset nonadmitted | 68 | | (28,557) | | | (66,633) | | | |
| State permitted practices that are an increase/(decrease) from NAIC SAP: | | | | | | | |
| None | XXX | | $ | — | | | $ | — | | | |
| Statutory surplus, NAIC SAP | XXX | | $ | 5,363,273 | | | $ | 5,385,203 | | | |
The preparation of financial statements in conformity with NAIC SAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities, as well as reported amounts of revenues and expenses. Actual results could differ from those estimates.
The Company elected to use rounding in reporting amounts throughout the statutory financial statements and in the accompanying notes to the statutory financial statements (collectively, the “statements”) and therefore summation of amounts and consistency between related amounts within the statements may be impacted by immaterial amounts.
Nature of Operations – The Company markets individual life insurance, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, and fixed and variable annuities. Its products are distributed nationally through various channels, including independent agents, insurance brokers, stockbrokers, financial institutions, company sales representatives, and automobile dealerships. The Company also seeks to acquire insurance policies from other insurers.
The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to competition, economic conditions, interest rates, investment performance, maintenance of insurance ratings, inflation, and other factors.
Summary of Significant Accounting Policies - The Company uses the following significant accounting policies:
Cash and Investments
Investments are stated at values determined by methodologies prescribed by the NAIC. Bonds not backed by other loans are stated at amortized cost using the interest method, except for bonds with a NAIC designation of 6 which are carried at the lower of amortized cost or fair value. For bonds carried at fair value, the difference between cost and fair value is reflected in “Change in net unrealized capital gains and losses” in unassigned funds.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Loan-backed bonds and structured securities stated at amortized cost utilize anticipated prepayments to determine the effective yield at purchase. The majority of prepayment assumptions for loan-backed bonds and structured securities are obtained from Bloomberg; other sources are broker-dealer surveys, trustee information, and internal estimates. These assumptions are consistent with current interest rates and the economic environment. Changes in the timing of estimated future cash flows from the original purchase assumptions are accounted for using the retrospective method.
Bonds and preferred stock fair values are obtained from a nationally recognized pricing service. The Company uses quotes obtained from brokers and internally developed pricing models to price those bonds that are not priced by this service.
Redeemable preferred stocks are stated at amortized cost or fair value, depending on the assigned credit ratings. Perpetual preferred stocks are stated at fair value, not to exceed any currently effective call price. For preferred stocks carried at fair value, the difference between cost and fair value is reflected in “Change in net unrealized capital gains and losses” in unassigned funds.
Common stocks, other than of subsidiary, controlled and affiliated entities are generally stated at a fair value obtained from a nationally recognized pricing service.
The Company’s 100% ownership interest in the outstanding common stock of its life insurance company, PLAIC, is stated at its audited statutory book value less the $2.0 million redemption value of PLAIC’s preferred stock, which is held by PLC.
The Company’s 100% ownership interest in the outstanding common stock of its life insurance company, WCL, is stated at statutory capital and surplus, consistent with SSAP No. 97, “Investments in Subsidiary, Controlled and Affiliated Entities” (“SSAP No. 97”).
The Company’s 100% ownership interest in the outstanding common stock of its life insurance company, MONY, is stated at statutory capital and surplus, also consistent with SSAP No. 97.
The Company’s 100% ownership interest in the outstanding common stock of its insurance company PP&C, is stated at statutory values, consistent with SSAP No. 97.
The Company’s 100% ownership in the outstanding common stock of its wholly-owned Special Purpose Financial Insurer, GGCIC, is nonadmitted due to permitted practices received by GGCIC from its domiciliary state of Vermont. For GGCIC, Vermont allows the admission of the XOL Asset Value as an admitted asset. A similar permitted practice was not requested by the Company from the Department to include this XOL Asset Value in the Company’s carrying value of GGCIC.
The Company’s 100% ownership interests in the outstanding common stock of its investment companies, PFC and PFCII, are carried at zero since no GAAP audit is completed.
The Company’s 100% ownership interests in the outstanding common stock of its non-insurance companies, WDS, PAPI, and USWC are carried at zero since no GAAP audit is completed.
The Company’s 100% ownership interests in the outstanding common stock of its automotive finance and insurance provider AUL is carried at $307.1 million at December 31, 2022. See Notes 4 and 7 for details of the Company’s May 2, 2022 acquisition of AUL.
Mortgage loans on real estate are stated at the aggregate unpaid principal balance. Book value adjustments are made for other-than-temporary declines. Temporary declines in value are reflected in “Change in net unrealized capital gains and losses” in unassigned funds.
Properties held for the production of income and home office real estate are stated at depreciated cost less encumbrances. Properties held for sale are stated at the lower of depreciated cost or fair value. Depreciation is computed on the straight-line method for all real estate holdings. Accumulated depreciation totaled $61.5 million
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
and $57.7 million as of December 31, 2022 and 2021, respectively. There were no encumbrances as of December 31, 2022 or 2021.
Contract loans are carried at the unpaid principal balance. The excess of unpaid contract loan balances over the cash surrender value, if any, is nonadmitted and reflected as an adjustment to unassigned funds. Interest is capitalized as additional loan amounts on the respective anniversary dates.
Cash includes all demand deposits reduced by the amount of outstanding checks. The Company has deposits with certain financial institutions which exceed federally insured limits; however, total deposits are maintained within the bank-specific deposit level guidelines established by the Company’s Investments Policy Committee (IPC). The Company reviews the credit worthiness of these financial institutions and believes there is minimal risk of material loss.
Short-term investments are stated at amortized cost, which the Company believes approximates fair value. Short-term investments include those investments whose maturities at the time of acquisition were one year or less. Money market mutual funds are classified as cash equivalents with measurement at fair value.
The Company’s investment in surplus notes with an NAIC Credit Rating Provider (“NAIC CRP”) designation of NAIC 1 or NAIC 2, are reported at amortized cost. Surplus notes held with no NAIC CRP designation, or with a designation of NAIC 3, 4, 5, or 6, are carried at the lesser of amortized cost or fair value. Investments in surplus notes are reported as “Other invested assets”.
The Company owns majority and minority interests in several joint ventures. The Company carries these interests in accordance with SSAP No. 48, “Joint Ventures, Partnerships, and Limited Liability Companies”. The Company carries the majority owned interests based on the underlying statutory equity or audited (“GAAP”), accounting principles generally accepted in the United States of America, equity of the investee, depending on the nature of the business of the investee. The Company carries the minority owned interests based on the underlying audited GAAP equity of the investee. None of these investments exceeded 10% of the Company’s admitted assets at either December 31, 2022 or 2021.
Receivables and payables for securities represent balances outstanding with brokers related to purchase and sale transactions. These balances are cleared as amounts are received or paid.
Investment income is recorded when earned.
Realized gains and losses on the sale or maturity of investments are determined on the basis of specific identification and are included in the Statements of Operations on the trade date, net of the amount transferred to the Interest Maintenance Reserve (“IMR”) and net of applicable federal income taxes. The Company analyzes various factors to determine if any specific other-than-temporary impairment (“OTTI”) exists. Once a determination has been made that a specific OTTI exists, a realized loss is incurred and the cost basis of the impaired asset, other than loan-backed and structured securities, is adjusted to its fair value. Impaired loan-backed and structured securities are adjusted to the sum of their discounted future expected cash flows.
Derivatives
Derivative instruments expose the Company to credit and market risk. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. The Company manages its market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. The Company monitors its use of derivatives in connection with its overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by the Company’s risk management department.
The Company uses various derivative instruments to manage risks related to certain life insurance and annuity products. The derivative instruments the Company may use include interest rate swaps, interest rate swaptions, interest rate forwards, interest rate futures, equity futures, equity options, foreign currency options, foreign currency futures, variance swaps, total return swaps, volatility futures, volatility options, and credit derivatives. The Company can use these derivatives as economic hedges against risks inherent in the products. These risks have a direct impact
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
on the cost of these products and are correlated with the equity markets, interest rates, foreign currency levels, and overall volatility.
All derivative instruments qualifying for hedge accounting are valued consistently with the hedged item and are included in the Statements of Admitted Assets, Liabilities, and Capital and Surplus. The changes in carrying value for these derivatives, which qualify for hedge accounting, are recorded consistently with the hedged item. All derivative instruments used in hedging transactions that do not meet the criteria of an effective hedge are reported at fair value and are included in the Statements of Admitted Assets, Liabilities, and Capital and Surplus. The changes in the fair value of these derivatives are recognized immediately in “Change in net unrealized capital gains and losses, less capital gains tax” in unassigned funds.
The Company has an accounting hedge that is described more fully in Note 11. The derivative instrument was entered into in connection with the issuance of a certain funding agreement and is accounted for in a manner that is consistent with the accounting for the hedged item. The funding agreement is reported in accordance with Actuarial Guideline 33. The derivative entered into in conjunction with the funding agreement has a remaining cost basis of $4.4 million and accumulated foreign currency translation adjustments of $14.5 million; therefore, the derivative is reported in the Statements of Admitted Assets, Liabilities, and Capital and Surplus at an $18.9 million carrying value, as of December 31, 2022.
In connection with the issuance of a fixed rate funding agreement denominated in a foreign currency, the Company entered into a fixed-to-fixed foreign currency swap in order to hedge the foreign currency exchange risk associated with the funding agreement. The Company’s maximum length of exposure to the foreign exchange element of the Company’s funding agreement is until December 2028. The cash flows received on the swap are identical to the cash flows paid on the funding agreement. There were no changes to the swap or the funding agreement during the period. Therefore, the Company did not recognize any unrealized gains or losses related to the cash flow hedge during the period.
The Company also had an effective accounting hedge in the form of an interest rate swap to hedge the interest rate risk associated with the Company’s funding agreement. The Company’s maximum length of exposure to the interest rate element of the Company’s funding agreement was until July 2020, at which time the swap matured.
All of the Company’s other derivatives are not effective accounting hedges. Therefore, they are reported in the Statements of Admitted Assets, Liabilities, and Capital and Surplus at their respective fair values. Any posted collateral and any upfront fees received or paid are also reported at their face amount on the Statements of Admitted Assets, Liabilities, and Capital and Surplus. The change in these positions’ fair market values during the year is reported in “Change in net unrealized capital gains and losses, less capital gains tax” in unassigned funds.
Upon termination of a derivative that qualified for hedge accounting, the realized gain or loss shall adjust the basis of the hedged item and be recognized in income consistent with the hedged item.
Upon termination of a derivative that did not or no longer meets the criteria for hedge accounting, the realized gain or loss is recorded in “Net realized capital gains (losses)” in the Statements of Operations.
The Company had no derivatives contracts with financing premiums at December 31, 2022 and 2021.
Refer to Note 11 for further information regarding the Company’s derivative instruments.
Premium Revenue and Related Commissions
Annuity considerations are recognized as revenue when received. Premiums for flexible premium/universal life and single premium credit life policies are recognized as revenue when collected. Premiums for traditional life insurance products are recognized as revenue when due. Accident and health premiums are earned ratably over the terms of the related insurance contracts.
Considerations for deposit type contracts, which do not have any life contingencies, are recorded directly to the related liability.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Acquisition costs, such as commissions and other costs related to new or renewal business, are expensed as incurred.
The amount of dividends to be paid to policyholders is determined annually by the Company’s Board of Directors. The aggregate amount of policyholders’ dividends is related to actual interest, mortality, morbidity and expense experience for the year, and judgment as to the appropriate level of statutory surplus to be retained by the Company.
Aggregate Reserves for Policies and Contracts
Policy reserves for future life insurance policy benefits are actuarially computed using methods and assumptions in accordance with certain state statutes and administrative regulations including both net level and modified reserve bases. The mortality tables and interest assumptions currently being used on the majority of policies in force are the 1941, 1958, 1980, and 2001 Commissioner’s Standard Ordinary tables with 2.0% to 8.0% interest. These liabilities are computed using statutory actuarial tables, which do not allow for modification based on the Company’s experience, investment yields, mortality or withdrawals. Aggregate reserves are shown net of the credit taken for reinsurance ceded. Effective in 2017 the Company began calculating reserves for certain newly-issued policies in accordance with NAIC Valuation Manual 20, “Requirements for Principle-Based Reserves for Life Products” (“VM-20”), and effective in 2020, reserves for all new issues are in accordance with VM-20.
The Company waives deduction of deferred fractional premiums upon death of the insureds and returns any portion of the final premium beyond the month of death. The Company has certain surrender values in excess of the legally computed reserves, which are included in “Aggregate reserves: Life policies and contracts” in the Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The method used in the valuation of substandard policies is based on the normal tabular reserves plus a portion of the substandard extra premium. For policies with a Mean reserve method, the extra substandard reserve is one half of the annualized extra premium (less a deferred premium). For policies with a Mid-terminal reserve method, the extra substandard reserve is the unearned modal substandard extra premium. For certain acquired business, a substandard mortality table is used.
As of December 31, 2022 and 2021, the Company had $9.0 billion and $9.0 billion, respectively, of insurance in-force for which the gross premiums are less than the net premiums according to the standard valuation set by the State of Tennessee. Reserves to cover this insurance totaled $114.9 million and $116.6 million as of December 31, 2022 and 2021, respectively, and were reported in “Aggregate reserves: Life policies and contracts” in the Statements of Admitted Assets, Liabilities, and Capital and Surplus. Tabular interest, tabular less actual reserves released, and tabular cost are determined by formula.
For the determination of investment earnings on funds not involving life contingencies, for each valuation rate of interest, the tabular interest is calculated as one-hundredth of the product of such valuation rate of interest times the mean of the amounts of funds subject to such valuation rate of interest held at the beginning and the end of the year of valuation. The tabular interest on funds not involving life contingencies is generally the interest actually credited or paid on such funds.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The detail for other net changes in reserves is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | | | | | ORDINARY | | | | GROUP |
| ITEM | | Total | | Industrial Life | | Life Insurance | | Individual Annuities | | Supplementary Contracts | | Credit Life Group and Individual | | Life Insurance | | Annuities |
| | ($ in thousands) |
| Excess interest on universal life products | | $ | 104,170 | | | $ | — | | | $ | 102,812 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,358 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total | | $ | 104,170 | | | $ | — | | | $ | 102,812 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,358 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| 2021 | | | | | | ORDINARY | | | | GROUP |
| ITEM | | Total | | Industrial Life | | Life Insurance | | Individual Annuities | | Supplementary Contracts | | Credit Life Group and Individual | | Life Insurance | | Annuities |
| | ($ in thousands) |
| Excess interest on universal life products | | $ | 100,099 | | | $ | — | | | $ | 98,661 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,438 | | | $ | — | |
| Total | | $ | 100,099 | | | $ | — | | | $ | 98,661 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,438 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| 2020 | | | | | | ORDINARY | | | | GROUP |
| ITEM | | Total | | Industrial Life | | Life Insurance | | Individual Annuities | | Supplementary Contracts | | Credit Life Group and Individual | | Life Insurance | | Annuities |
| | ($ in thousands) |
| Excess interest on universal life products | | $ | 96,530 | | | $ | — | | | $ | 96,530 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Conversion from Modco to coinsurance | | (218,452) | | | — | | | (213,949) | | | — | | | — | | | — | | | (4,503) | | | — | |
| Additional reserves ceded to GGCIC | | (28,991) | | | — | | | (28,976) | | | — | | | — | | | — | | | (15) | | | — | |
| Total | | $ | (150,913) | | | $ | — | | | $ | (146,395) | | | $ | — | | | $ | — | | | $ | — | | | $ | (4,518) | | | $ | — | |
The Company’s variable annuity (“VA”) contracts contain guaranteed minimum death benefit (“GMDB”), guaranteed minimum income benefit (“GMIB”) and guaranteed living withdrawal benefit (“GLWB”). Some of the Company's variable universal life (“VUL”) contracts contain GMDB features.
The VA GMDB becomes payable upon death. The guaranteed amount varies by the particular contract and option elected, and may be based on amounts deposited, amounts deposited accumulated at guaranteed interest, maximum account value on prior anniversaries, or some combination. All guarantees are reduced for prior partial withdrawal activity. The charge for the GMDB can either be based on a percentage of account value, a percentage of the GMDB, or a percentage of net amount at risk (GMDB amount less account value).
The VA GMIB, which is only available in selected contracts, becomes payable only upon annuitization after a specific number of years have passed since the contract effective date. The guarantee is based on total amounts deposited less amounts previously withdrawn.
The VA GLWB is only available on more recent contracts and applies to amounts withdrawn. The charge is a percentage of the guaranteed benefit base, and the annual guaranteed withdrawal amount is equal to 3.0% to 10.0% depending on the contract owner's age.
Effective January 1, 2020, statutory reserves for variable annuities are calculated according to NAIC Valuation Manual 21, “Requirements for Principal-Based Reserves for Variable Annuities” (“VM-21”). This replaces the prior reserve calculations under Actuarial Guidelines 43 (“AG43”). There is not a standalone reserve for GMDB, GMIB, or GLWB. The base reserve incorporates the risk of all of these guarantees.
The VUL GMDB provides lapse protection by holding the policy in force during periods when the account value is less than or equal to zero. The charges, duration of the guarantee, and catch-up provisions depend on the terms of the underlying contract or rider. Reserves for GMDB are calculated in accordance with Actuarial
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Guideline 37, “Variable Life Insurance Reserves for Guaranteed Minimum Death Benefits". Reserves for the VUL GMDB were $40.0 million and $35.7 million as of December 31, 2022 and 2021, respectively.
In addition, the VA business acquired through the 2006 acquisition of the Chase Life Insurance Group (“Chase”) contains some GMDB and GMIB riders. This entire block is 100% ceded to Commonwealth Annuity and Life Insurance Company, so there are zero net reserves recorded by the Company for the Chase VA block.
Liabilities for policy reserves on fixed annuity contracts are calculated based on the Commissioner’s Annuity Reserve Valuation Method (“CARVM”). The reserve calculation considers the interest credited rates and guarantee periods specific to each policy as well as the appropriate mortality table depending on the contract issue date.
The Company’s fixed indexed annuity products (“FIA”) and single premium deferred annuity (“SPDA”) contracts contain an optional GLWB. The annual guaranteed withdrawal amount is applied to the benefit base and equals 3.75%-7.75% for FIA and 4.5%-8.64% for SPDA depending on the contract owner's age. The benefit is a part of the CARVM calculation under Actuarial Guideline 35. The base reserve incorporates the risk of this guarantee.
The Company sells Structured Annuities which are a fixed indexed annuity with floored downside equity risk. Due to the potential for negative equity performance and the presence of a death benefit, the reserves are also calculated under VM-21.
Reserves for deposit type funds are equal to deposits received and interest credited to contract holders less surrenders and withdrawals that represent a return to the contract holder. Interest rates credited ranged from 0.23% to 5.5% for guaranteed investment contracts and funding agreements and 0.0% to 11.25% for immediate annuities during 2022. Interest rates credited ranged from 0.23% to 3.58% for guaranteed investment contracts and funding agreements and 0.0% to 11.25% for immediate annuities during 2021. Interest rates credited ranged from 0.36% to 3.58% for guaranteed investment contracts and funding agreements and 1.0% to 11.25% for immediate annuities during 2020.
Certain of the Company's policy reserves relate to universal life policies with secondary guarantees (“ULSG”) which guarantee that insurance coverage will remain in force (subject to the payment of specified premiums). These products do not allow the Company to adjust policyholder premiums after a policy is issued, and most of these products do not have significant account values upon which interest is credited. Policy reserves for these products are actuarially computed using methods and assumptions in accordance with Actuarial Guideline 38 (“AG38”) for policies issued between 2003-2019, and in accordance with VM-20 for policies issued in 2020 and later. Total reserves for ULSG policies were $7.0 billion and $6.6 billion as of December 31, 2022 and 2021, respectively.
Liabilities for accident and health policies include unearned premiums and additional reserves. The liability for future policy benefits and claims on life and health insurance products includes estimated unpaid claims that have been reported to the Company and claims incurred but not yet reported. Changes in estimates are reflected in operations during the period in which the change occurred.
Liabilities for losses and loss adjustment expenses for accident and health contracts are estimated by the Company’s valuation actuary using statistical claim development models to develop best estimates of liabilities for medical expense business and using tabular reserves employing mortality/morbidity tables and discount rates specified by regulatory authorities for disability income business.
The Company anticipates investment income as a factor in the premium deficiency calculation, in accordance with SSAP No. 54, "Individual and Group Accident and Health Contracts".
Policy and Contract Claims
Policy and contract claims include provisions for reported life, accident and health claims in process of settlement, valued in accordance with the terms of the related policies and contracts, as well as provisions for claims incurred but not reported based primarily on prior experience of the Company. As such amounts are necessarily estimates, the ultimate liability may differ from the amount recorded and will be reflected in the results of operations when additional information becomes known.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Asset Valuation Reserve (“AVR”) and Interest Maintenance Reserve (“IMR”)
The Company established certain reserves as required by NAIC SAP. The AVR is based upon a statutory formula as prescribed by the NAIC to provide a standardized reserve for realized and unrealized losses from default and/or equity risks associated with all invested assets, excluding cash, contract loans, premium notes, collateral loans, and investment receivables. Realized gains and losses related to fixed maturity investments resulting from changes in credit quality and capital gains and losses related to all other investments, net of applicable federal income taxes, are reflected in the calculation of AVR. Unrealized gains and losses, net of applicable deferred federal income taxes, are also reflected in the calculation. Changes in AVR are charged or credited directly to unassigned funds.
The IMR captures realized gains and losses, net of applicable federal income taxes, from the sale of certain investments. The portion of these realized gains and losses resulting from changes in the general level of interest rates is not recognized currently but is amortized into income over the approximate remaining life of the investment sold.
Federal Income Taxes
The provision for federal income taxes is computed in accordance with those sections of the Internal Revenue Code applicable to life insurance companies. Deferred income taxes are provided based upon the expected future impact of differences between the financial statement and tax basis of assets and liabilities. The admission of gross deferred income tax assets is subject to various limitations as specified by NAIC SAP. Changes in deferred tax assets and liabilities are recognized as a separate component of unassigned funds.
Reinsurance
In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance from other reinsurers. Amounts recoverable from reinsurers related to paid policy claims are included in “Amounts recoverable from reinsurers” and insurance liabilities are reported net of reinsurance recoverables in the Statements of Admitted Assets, Liabilities, and Capital and Surplus. Receivables and payables from the same reinsurer, including funds withheld, are generally offset. For reserve credits taken related to reinsurers considered to be unauthorized by the Department, the Company must obtain letters of credit, funds withheld, or other forms of collateral in amounts at least equal to reserve credits. To the extent such collateral is not obtained, the Company must record a liability for reinsurance in unauthorized companies.
Reinsurance premiums ceded and reinsurance recoveries on policy claims and benefit reserves are netted against the respective “Premiums and annuity considerations” and “Death and annuity benefits” in the Statements of Operations. Revenues from commissions and expense allowances on reinsurance ceded are recognized in the period in which the transaction occurs and recorded in “Commissions and expense allowances on reinsurance ceded” in the Statements of Operations. The change in modified coinsurance (“MODCO”) reserves ceded and related expenses are included in “Reserve adjustments on reinsurance ceded” in the Statements of Operations.
The Company remains liable with respect to ceded insurance should any reinsurer fail to meet the obligations it assumed. The Company evaluates the financial condition of its reinsurers and monitors the associated concentration of credit risk.
Separate Accounts
The Company issues variable annuities, variable life contracts, market value adjusted annuities (“MVAA”), and fixed rate universal life contracts that are all Bank Owned Life Insurance (“BOLI”) contracts. Absent any contract guarantees of either a minimum return or account value upon death or annuitization, variable annuity and life contract holders bear the investment risk that the Separate Accounts’ funds may not meet their stated investment objectives. The assets and liabilities related to Separate Accounts are recorded at fair value and reported separately as assets and liabilities held in Separate Accounts except for the BOLI contracts. The BOLI Separate Account assets and liabilities are stated at book value. Fees charged on Separate Account contract owner deposits are included in “Other income” in the Statements of Operations. In the event that the asset value of certain contract holder accounts
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
is projected to be below the value guaranteed by the Company, a liability is established through a charge to operations.
2. Statutory and Generally Accepted Accounting Principles Differences
Accounting practices prescribed or permitted by the Department vary in some respects from accounting principles generally accepted in the United States of America (“GAAP”). A summary of significant statutory accounting practices (“SAP”) and their difference to GAAP, is as follows:
1.The costs related to acquiring business, principally commissions and certain policy issue expenses, are charged to operations in the year incurred and thus are not amortized over the period benefited, whereas premiums are taken into revenue over the premium paying period of the related policies. Under GAAP, acquisition costs on successful efforts are capitalized and charged to operations as the revenues or expected gross profits are recognized;
2.Deposits to universal life contracts, investment contracts and limited payment contracts are credited to revenue. Under GAAP, these items are accounted for as deposits on the balance sheet and do not flow through the income statement;
3.Under SAP rules that precede Principles Based Reserves (“PBR”), policy reserves for future policy benefits are actuarially computed in accordance with certain state statutes and administrative regulations including reserve bases appropriate for life, accident and health, and annuity products. These liabilities are computed using statutory actuarial tables which do not allow for modification based on the Company’s experience. Under PBR, company experience is utilized in setting certain assumptions for the scenario-based reserves for life and annuity products as defined under VM-20 and VM-21. Aggregate statutory reserves are shown net of the credit taken for reinsurance. Under GAAP, reserves for life-contingent annuity and traditional life insurance products are based on the present value of future benefits less the present value of future net premiums based on mortality, lapse, and other assumptions, which were appropriate at the time the policies were issued or acquired. Reserves for non-life-contingent annuity and universal life insurance products are recognized by establishing a liability equal to the current account value of the policyholders’ contracts, with an additional reserve for certain guaranteed benefits. Aggregate reserves are shown gross with an offsetting reinsurance recoverable;
4.Certain assets must be included in the statutory financial statements at “admitted asset value” and “nonadmitted assets” must be excluded through a charge against surplus. No such reduction of asset values is required under GAAP;
5.Bonds and redeemable preferred stocks are generally stated at amortized cost and perpetual preferred stocks are stated at fair value. For bonds and preferred stocks stated at fair value, the difference between cost and fair value is reflected in “Change in net unrealized capital gains and losses” in unassigned funds. Under GAAP, bonds and preferred stocks, other than those classified as held to maturity, are stated at fair value with changes recorded in accumulated other comprehensive income (loss) in the balance sheet if classified as available-for-sale securities or in the income statement if classified as trading securities;
6.Subsidiaries and affiliates are carried as investments at net statutory book value, their periodic net income or loss is recorded in “Change in net unrealized capital gains and losses” in unassigned funds, and dividends are recorded as investment income. GAAP requires subsidiaries and certain variable interest entities to be consolidated and results of operations are included in net income (loss);
7.Certain assets and liabilities are reported net of ceded reinsurance balances, which is not permitted by GAAP;
8.Realized capital gains and losses are reflected net of transfers to IMR and federal income tax in the Statements of Operations. Under GAAP realized capital gains and losses are reflected on a gross basis in the Income Statement as the IMR concept does not exist in GAAP;
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
9.Deferred federal income tax is provided based upon the expected future impact of differences between the financial statement and tax basis of assets and liabilities. The admission of gross deferred income taxes is subject to various limitations as specified by NAIC SAP. Under GAAP, gross deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the assets will not be realized. In addition, changes in deferred tax assets and liabilities are recognized as a separate component of unassigned funds, while under GAAP, these changes are included in income tax expense or benefit in the Income Statement;
10.The AVR is reported as a liability rather than as a reduction in investments and is charged directly to surplus. No such reserve is required under GAAP;
11.The IMR is reported as a liability and the amortization of the IMR is reported in the revenue section of the Statements of Operations. No such reserve is required under GAAP;
12.The Statements of Cash Flow are presented in the required statutory format which differs in certain respects from the presentation required by GAAP, including the presentation of the changes in cash, cash equivalents and short-term investments instead of cash and cash equivalents. Short-term investments include securities with maturities of one year or less at the time of acquisition. SAP requires no reconciliation between net income and net cash provided by operating activities as required by GAAP;
13.The change in the unrealized gains or losses on certain investments is recorded as an increase or decrease in statutory surplus under SAP. Under GAAP, such unrealized gains and losses are recorded as a component of comprehensive income (loss);
14.Any premiums due that are not yet paid, and premiums paid on other than an annual basis, are included in premiums deferred and uncollected on the Statements of Admitted Assets, Liabilities, and Capital and Surplus. On a GAAP basis, deferred premiums are netted against policy reserves and are generally calculated as a component of gross premiums;
15.For reserve credits taken related to reinsurers considered “unauthorized” by the Department, the Company must obtain letters of credit, funds withheld or other forms of collateral in amounts at least equal to the reserve credits. To the extent such collateral is not obtained, the Company must record a liability for reinsurance in unauthorized companies with a charge to unassigned funds. No such liability is recorded for GAAP;
16.Market value adjusted annuities are included in the Company’s general account for GAAP purposes, but are included in Separate Accounts on a statutory basis;
17.Contracts that contain an embedded derivative are not bifurcated between components and are accounted for as part of the host contract, whereas under GAAP, the embedded derivative would be bifurcated from the host contract and accounted for separately;
18.Under SAP, surplus notes are reported as equity rather than as a liability for GAAP; and
19.Acquisitions and reinsurance transactions can be subject to different accounting treatments due to differences in risk transfer and business combination assessments. Certain acquisitions of inforce business are accounted for as reinsurance pursuant to Statutory guidelines but are subject to Purchase GAAP accounting (“PGAAP”) guidelines for GAAP reporting purposes due to their qualification as a business combination.
Beginning in 2022, the Company no longer prepared GAAP financial statements. Accordingly, the differences between NAIC SAP and GAAP have not been quantified as of December 31, 2022 or for the year then ended; however, the differences are presumed to be material.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company’s consolidated net income and equity reported in conformity with GAAP as of and for the years ended December 31 are as follows:
| | | | | | | | | | | | | | | | | | | |
| | Net Income | | Equity | |
| | | | | |
| | 2021 | | 2020 | | 2021 | |
| | ($ in thousands) | |
| GAAP-basis amounts | | $ | 284,656 | | | $ | 237,671 | | | $ | 12,764,450 | | |
3. Accounting Changes and Prior Period Adjustments
Accounting Changes
The NAIC Statutory Accounting Principles Working Group adopted revisions to SSAP No. 86 “Derivatives”. These revisions provide for more consistency between SAP and U.S. GAAP with respect to the assessment of effective hedge relationships and introduce additional guidance for the application of certain hedging methods. The revisions are effective January 1, 2023. The revised guidance will not impact the Company’s financial position or results of operations.
Effective January 1, 2021, the Company adopted revisions to SSAP No. 32, “Preferred Stock” (“SSAP No. 32R”), which refined definitions of preferred stock categories and updated accounting guidance for certain categories of preferred stock. Under the revised guidance in SSAP No. 32R, all perpetual preferred stocks shall be reported at fair value, not to exceed any currently effective call price. The Company recorded an unrealized gain of $21.4 million upon adoption of the revisions and an unrealized loss of $7.6 million for the year ended December 31, 2021.
Effective January 1, 2021, the Company adopted revisions to SSAP No.106, “Affordable Care Act Section 9010 Assessment” (“SSAP No. 106R”) which relate to the repeal by Congress of the Affordable Care Act Section 9010 Assessment, also known as the health insurer’s tax (HIT). The adoption of these revisions had no effect on the Company’s financial statements.
As of January 1, 2020, VM-21 replaced AG43 for the valuation of statutory reserves for variable annuities. The cumulative net impact of this regulation change was a $59.3 million decrease in reserves. The change was recorded directly in “Unassigned funds – surplus” as a “Change in reserve on account of change in valuation basis”. The financial statement impact of this change was to decrease “Aggregate reserves: life policies and contracts” and increase both “Change in reserve on account of change in valuation basis” and “Unassigned funds - surplus” by $59.3 million. In accordance with the provisions of SSAP No. 3, the $59.3 million cumulative effect represents the January 1, 2020 impact of the change.
Effective January 1, 2020, the Company adopted SSAP No. 108, “Derivative Hedging Variable Annuity Guarantees” (“SSAP No. 108”), which prescribes guidance for derivatives that hedge interest rate risk of variable annuity guarantees reserved under VM-21. The guidance in SSAP No. 108 is not currently applicable to the Company’s derivatives, and the adoption had no effect on the Company’s financial statements.
Effective January 1, 2020, the Company adopted revisions to SSAP No. 22. “Leases”, (“SSAP No. 22R”). SSAP No. 22R rejected GAAP guidance on operating leases, but incorporated, with modification, guidance on sale-leaseback transactions, lessor accounting and leveraged leases for all new leases, and for existing leases reassessed due to a change in terms and conditions. The adoption of these revisions had no effect on the Company’s financial statements.
Effective June 30, 2020, the Company adopted revisions to SSAP No. 105, “Working Capital Finance Investments” (“SSAP No. 105R”), which provided substantive updates to the Working Capital Finance Investments Program requirements. The Company holds no working capital finance investments, and therefore this adoption had no effect on the Company’s financial statements.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Prior Period Adjustments
During the December 31, 2022 statutory filing, the Company corrected an error in its accounting for a hedging transaction associated with a foreign-denominated funding agreement. The Company’s “Derivatives” liability was understated by $8.4 million. The effect of this correction was a decrease to “Unassigned funds – surplus” of $8.4 million as of January 1, 2022 which was reported as “Prior period adjustments” in accordance with the provisions of SSAP No. 3.
During the June 30, 2022 statutory filing, the Company identified an error in the process to identify post-level claims which had caused claims to be incorrectly ceded to Golden Gate Captive Insurance Company related to the December 31, 2021 statutory annual statement. The Company’s “Amounts recoverable from reinsurers” were overstated by $8.5 million and “Life contract claims” were understated by $3.9 million. The net effect of these changes was a decrease to “Unassigned funds - surplus” of $12.4 million which was reported as “Prior period adjustments”. In accordance with the provisions of SSAP No. 3, this amount represents the January 1, 2022 impact of the correction.
During the June 30, 2022 statutory filing, the Company identified a coding error concerning guaranteed credited rates related to the December 31, 2021 statutory annual statement. The Company’s “Aggregate reserves for life contracts” were understated by $6.2 million and “Transfers to separate accounts due or accrued” were understated by $9.9 million. The adjustments related to this correction resulted an increase to “Current federal income tax recoverable” of $2.1 million, in addition to an increase in “Deferred tax asset” of $1.3 million, with an offsetting increase in “Deferred tax asset” non-admitted of $1.3 million. The net effect of these changes resulted in a decrease to “Unassigned funds - surplus” of $14.0 million which was reported as “Prior period adjustments”. In accordance with the provisions of SSAP No. 3, this amount represents the January 1, 2022 impact of the correction.
During the September 30, 2021 statutory filing, the Company identified an error in its experience rating refund calculation related to the December 31, 2020 statutory annual statement. The error was due to an incorrect purchase price adjustment made to an acquired block of group life and accident and health policies. The adjustments related to this correction included an increase to “Funds at interest and experience rated refunds” of $14.1 million, and an increase to “Current federal and foreign income tax recoverable” of $3.0 million. The net effect of these changes was a decrease to “Unassigned funds - surplus” of $11.2 million as of January 1, 2021 which was reported as a “Prior period adjustments” in accordance with the provisions of SSAP No. 3.
During the June 30, 2021 statutory filing, the Company identified an error in its policyholder reserve calculation related to the December 31, 2020 statutory annual statement. The error was due to the use of an incorrect rate in the policyholder reserve calculation for certain FIA and SPDA contracts. The adjustments related to this correction included a decrease to “Aggregate reserves: Life policies and contracts” of $18.6 million, a decrease in “Deferred tax asset” of $3.9 million, with an offsetting increase in “Deferred tax asset” non-admitted of $3.9 million. The net effect of these changes was an increase to “Unassigned funds - surplus” of $18.6 million as of January 1, 2021 which was reported as a “Prior period adjustments” in accordance with the provisions of SSAP No. 3.
During the June 30, 2021 statutory filing, the Company identified an error in its calculation of accrued premium ceded related to the December 31, 2020 statutory annual statement. The error was related to the Company’s December 31, 2020 recognition of premium in the fourth quarter of 2020 in conjunction with the amended and restated indemnity reinsurance agreement (the “2020 PLICO-GGCIC Agreement”) with GGCIC which was effective on October 1, 2020. The Company’s premium and annuity considerations, uncollected premiums and commissions and expense allowances on reinsurance ceded were understated in the Company’s 2020 Statutory annual statement due to the inadvertent accrual of initial premium ceded on certain policies under the amended reinsurance agreement, which had been previously paid under reinsurance agreements that were in effect prior to the October 1, 2020 amendments. These understatements also resulted in related impacts to reinsurance receivables, deferred tax asset, current federal income taxes payable, federal income taxes, and change in net deferred income tax as reported in the December 31, 2020 statutory annual statement. The adjustments related to this correction included an increase to “Deferred and uncollected premiums” of $23.3 million, a decrease to “Other assets” of $2.7 million, a decrease to “Deferred tax asset” of $4.9 million, an increase to “Current federal and foreign income taxes” of $0.4 million, a decrease to “Common stocks-affiliated” of $24.7 million and a decrease to “Common stocks” non-
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
admitted of $40.3 million. The net effect of these changes was an increase to “Unassigned funds - surplus” of $30.9 million as of January 1, 2021 which was reported as a “Prior period adjustments” in accordance with the provisions of SSAP No. 3.
4. Business Combinations and Goodwill
Statutory Purchase Method
On May 2, 2022, the Company completed the transaction to acquire leading automotive finance and insurance provider AUL. AUL offers a variety of finance and insurance products, including warranties, vehicle service contracts, and a suite of ancillary products. The transaction was announced on March 21, 2022. The Company accounted for this transaction under the statutory purchase method of accounting as required by SSAP No. 68. The aggregate purchase price was $347.0 million and is subject to adjustments. AUL is carried at $307.1 million at December 31, 2022. No goodwill was recorded in the transaction. Please refer to Note 7 – Information Concerning Parent and Subsidiaries for further information regarding the Company’s acquisition of AUL.
Goodwill
On October 1, 2013, the Company completed the acquisition contemplated by the master agreement (the “Master Agreement”) dated April 11, 2013, with AXA Financial, Inc. (“AXA”) and AXA Equitable Financial Services, LLC (“AEFS”), pursuant to which the Company acquired the stock of MONY from AEFS. The Company accounted for this transaction under the statutory purchase method of accounting as required by SSAP No. 68. The aggregate purchase price for MONY was $688.6 million. As a result of this transaction, the Company recorded $380.8 million of goodwill. Goodwill amortization for the years ended December 31, 2022, 2021, and 2020, was $38.1 million and was recorded in “Change in net unrealized gains and losses, less capital gains tax”, and total accumulated goodwill amortization was $352.2 million and $314.2 million as of December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the Company had $28.6 million and $66.6 million, respectively, of goodwill remaining. Under Tennessee statute, goodwill is inadmissible and accordingly has been non-admitted. Refer to Note 1 for further discussion of this prescribed practice under Tennessee statutes.
A summary of the transaction described above, which was accounted for as a statutory purchase, is as follows for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ($ in thousands) |
| Purchased Entity | | Acquisition Date | | Cost of Acquired Entity | | Original Amount Goodwill | | Original Amount of Admitted Goodwill | | Admitted Goodwill as of the Reporting Date | | Amount of Goodwill Amortized During the Reporting Period | | Book Value of SCA | | Admitted Goodwill as a % of SCA BACV, Gross of Admitted Goodwill |
| MONY Life Insurance Company | | 10/1/2013 | | $ | 688,560 | | | $ | 380,758 | | | $ | — | | | $ | — | | | $ | 38,076 | | | $ | 350,843 | | | 0 | % |
Statutory Merger
As discussed in Note 1, Shades Creek merged with and into the Company on January 1, 2021, with the Company being the surviving entity. Shades Creek was a captive insurance company domiciled in Vermont. The transaction was accounted for as a statutory merger in accordance with SSAP No. 68. There was no goodwill recorded as a result of the merger of Shades Creek with and into the Company. No shares of stock were issued in the transaction. As the Merger was effective January 1, 2021, there are no prior period separate entity revenue, net income, or other surplus adjustments included in current period results. Both parties to the Merger previously filed statutory financial statements, so no adjustments were recorded to surplus.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
5. Investments
Net Investment Income
Net investment income consists of the following:
| | | | | | | | | | | | | | | | | |
| For The Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in thousands) |
| Bonds | $ | 1,972,029 | | | $ | 1,876,482 | | | $ | 1,811,919 | |
| Common stocks (unaffiliated) | 6,126 | | | 1,864 | | | 1,640 | |
| Common stocks (affiliated) | 68,000 | | | 62,000 | | | 83,000 | |
| Preferred stocks | 32,308 | | | 26,559 | | | 16,004 | |
| Mortgage loans | 480,651 | | | 467,193 | | | 408,940 | |
| Income from real estate investments | 18,545 | | | 15,536 | | | 15,341 | |
| Cash, cash equivalents, and short-term investments | 5,771 | | | (130) | | | 2,785 | |
| Contract loans | 43,029 | | | 44,317 | | | 47,953 | |
| Derivatives | 33,219 | | | 49,782 | | | 35,628 | |
| Securities lending | 798 | | | 333 | | | 613 | |
| Other invested assets | 35,282 | | | 33,164 | | | 31,107 | |
| Total investment income | 2,695,758 | | | 2,577,100 | | | 2,454,930 | |
| Investment expenses | 220,398 | | | 191,716 | | | 168,975 | |
| Net investment income | $ | 2,475,360 | | | $ | 2,385,384 | | | $ | 2,285,955 | |
Due and accrued income is excluded from investment income on the following basis:
| | | | | |
| Mortgage loans - | Income is excluded on loans delinquent more than 90 days. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. |
| Bonds - | When the Company determines collection of interest to be uncertain or interest is 90 days past due, the accrual of interest is discontinued. |
The total amount excluded from investment income due and accrued as of December 31, 2022 and 2021 was $0 and $0, respectively.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Realized Gains and Losses
Realized investment gains (losses) are summarized as follows:
| | | | | | | | | | | | | | | | | |
| For The Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in thousands) |
| Bonds | $ | 15,159 | | | $ | 42,442 | | | $ | 109,441 | |
| Preferred stocks | 851 | | | 2,432 | | | 2,217 | |
| Common stocks (unaffiliated) | 3,907 | | | 2,058 | | | 19 | |
| Cash, cash equivalents, and short-term investments | (56) | | | 131 | | | 1,295 | |
| Mortgage loans | (10,387) | | | (3,465) | | | (3,053) | |
| | | | | |
| Derivative instruments | (474,057) | | | (101,419) | | | 294,828 | |
| Other investments | 1,977 | | | 1,044 | | | 3,880 | |
| Other-than-temporary impairments | (10,043) | | | (218) | | | (52,248) | |
| Less: | | | | | |
| Amount transferred to interest maintenance reserve | (358,987) | | | 44,123 | | | 308,075 | |
| Federal income tax expense | (96,944) | | | 11,883 | | | 31,811 | |
| Net realized investment gains (losses) | $ | (16,718) | | | $ | (113,001) | | | $ | 16,493 | |
Proceeds from the sales of investments in bonds and stocks during 2022, 2021, and 2020 were $1.4 billion, $1.8 billion and $2.4 billion, respectively. The Company realized gross gains of $31.5 million, $55.1 million, and $122.5 million on those sales for the years ended 2022, 2021, and 2020, respectively. Gross losses of $11.6 million, $8.1 million, and $9.6 million were realized on those sales for the years ended December 31, 2022, 2021, and 2020, respectively.
Unrealized Gains and Losses
The change in net unrealized capital gains and losses included in unassigned funds is as follows:
| | | | | | | | | | | | | | | | | |
| For The Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| ($ in thousands) |
| Bonds | $ | 280 | | | $ | 35 | | | $ | (109) | |
| Preferred stocks | (124,747) | | | 13,803 | | | — | |
| Common stocks (affiliated) | 14,838 | | | (33,489) | | | (18) | |
| Common stocks (unaffiliated) | (490) | | | 1,358 | | | (180,523) | |
| Mortgage loans | 809 | | | (4,327) | | | (8,844) | |
| Derivative instruments | (108,999) | | | (259,376) | | | 17,844 | |
| Other | 6,550 | | | 660 | | | (459) | |
| Less: | | | | | |
| Federal income tax expense (benefit) | (44,544) | | | (52,048) | | | 1,767 | |
| Total change in net unrealized capital gains and losses | $ | (167,215) | | | $ | (229,288) | | | $ | (173,876) | |
As of December 31, 2022, gross unrealized gains pertaining to common stocks were $241.1 million and gross unrealized losses were $639.6 million. As of December 31, 2021, gross unrealized gains pertaining to common stocks were $165.6 million and gross unrealized losses were $578.4 million. $639.6 million and $578.4 million of unrealized losses for 2022 and 2021, respectively, and $240.3 million and $164.3 million of unrealized gains for 2022 and 2021, respectively, relate to the Company's investments in subsidiaries which are recorded at statutory book value or GAAP equity in accordance with NAIC SAP.
During 2022, the Company recorded $109.0 million in unrealized losses on derivative instruments due to changes in fair value. The losses included $31.1 million of losses related to interest rate forwards, $29.4 million of
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
losses related to interest rate swaps, and $5.2 million of losses related to equity futures, offset by $28.4 million of gains related to total return swaps, $1.2 million of gains related to foreign currency futures, $0.6 million of gains related to interest rate futures, and $46.2 million of gains related to equity options, which were used to mitigate risks associated with the Company’s variable annuity products. In addition, there were losses of $83.7 million related to equity options and $0.8 million of losses related to equity futures, which were used to mitigate risks associated with the Company’s fixed indexed annuity products. There were losses of $17.2 million related to equity options, which were used to mitigate risks associated with the Company’s indexed universal life products. There were losses of $3.2 million related to equity options and losses of $6.4 million related to equity futures, offset by $6.1 million of gains related to total return swaps, which were used to mitigate risks associated with the Company’s structured annuity products. Also, there were losses of $14.5 million related to a derivative qualifying for hedge accounting. The derivative instrument was entered into in connection with the issuance of a funding agreement reported in accordance with Actuarial Guideline 33; the derivative has a remaining cost basis of $4.4 million, and the $14.5 million of losses is the accumulated foreign currency translation adjustment.
During 2021, the Company recorded $259.4 million in unrealized losses on derivative instruments due to changes in fair value. The losses included $183.1 million of losses related to interest rate swaps, $18.2 million of losses related to total return swaps, $53.2 million of losses related to equity options, and $0.7 million of losses related to interest rate futures, offset by $1.8 million of gains related to foreign currency futures, and $5.4 million of gains related to equity futures, which were used to mitigate risks associated with the Company’s variable annuity products. In addition, there were losses of $11.6 million related to equity options, and $0.1 million of losses related to equity futures, which were used to mitigate risks associated with the Company’s fixed indexed annuity products. There were losses of $0.1 million related to equity options, which were used to mitigate risks associated with the Company’s indexed universal life products. Also, there were losses of $0.2 million related to total return swaps, offset by $0.6 million of gains related to equity futures, which were used to mitigate risks associated with the Company’s structured annuity products.
During 2020, the Company recorded $17.8 million in unrealized gains on derivative instruments due to changes in fair value. The gains included $3.6 million of gains related to interest rate futures and $41.8 million of gains related to equity options, offset by $44.6 million of losses related to interest rate swaps, $9.2 million of losses related to total return swaps, and $1.9 million of losses related to foreign currency futures, which were used to mitigate risks associated with the Company’s variable annuity products. In addition, there were gains of $24.8 million related to equity options, which were used to mitigate risks associated with the Company’s fixed indexed annuity products. There were gains of $2.5 million related to equity options, which were used to mitigate risks associated with the Company’s indexed universal life products. Also, there were gains of $2.0 million related to equity options, offset by $1.2 million of losses related to total return swaps, which were used to mitigate risks associated with the Company’s structured annuity products.
Bonds and Preferred Stocks
Statement values in the following tables for December 31, 2021 do not reflect the nonadmission of $38.1 million of bonds at December 31, 2021, related to assets pledged as collateral to Federal Home Loan Bank.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The statement value and estimated fair value of the Company's bond and preferred stock investments as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Statement Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated
Fair Value |
| 2022 | ($ in thousands) |
| Bonds: | | | | | | | |
| US Government | $ | 376,951 | | | $ | 261 | | | $ | (52,723) | | | $ | 324,489 | |
| Non-US Government | 105,886 | | | 580 | | | (10,577) | | | 95,889 | |
| | | | | | | |
| US states, territories, and possessions | 379,985 | | | 2,654 | | | (22,092) | | | 360,547 | |
| US political subdivision | 170,045 | | | 737 | | | (14,726) | | | 156,056 | |
| US special revenue & special assessment | 2,554,735 | | | 37,872 | | | (327,429) | | | 2,265,178 | |
| Industrial and miscellaneous | 34,373,809 | | | 197,714 | | | (4,144,458) | | | 30,427,065 | |
| Hybrids | 450,086 | | | 12,091 | | | (24,600) | | | 437,577 | |
| Total bonds, excluding loan-backed and structured securities | 38,411,497 | | | 251,909 | | | (4,596,605) | | | 34,066,801 | |
| Loan-backed and structured securities: | | | | | | | |
| Residential mortgage-backed securities | 5,379,517 | | | 4,933 | | | (1,163,593) | | | 4,220,857 | |
| Commercial mortgage-backed securities | 1,501,642 | | | 299 | | | (150,444) | | | 1,351,497 | |
| Asset-backed securities | 1,887,563 | | | 5,483 | | | (90,510) | | | 1,802,536 | |
| Total loan-backed and structured securities | 8,768,722 | | | 10,715 | | | (1,404,547) | | | 7,374,890 | |
| Total bonds | 47,180,219 | | | 262,624 | | | (6,001,152) | | | 41,441,691 | |
| Preferred stocks | 540,147 | | | 486 | | | (75,176) | | | 465,457 | |
| Total bonds and preferred stocks | $ | 47,720,366 | | | $ | 263,110 | | | $ | (6,076,328) | | | $ | 41,907,148 | |
| | | | | | | |
| Statement Value | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated
Fair Value |
| 2021 | ($ in thousands) |
| Bonds: | | | | | | | |
| US Government | $ | 341,353 | | | $ | 8,804 | | | $ | (11,241) | | | $ | 338,916 | |
| Non-US Government | 278,005 | | | 42,350 | | | (986) | | | 319,369 | |
| | | | | | | |
| US states, territories, and possessions | 399,664 | | | 56,881 | | | — | | | 456,545 | |
| US political subdivision | 170,253 | | | 14,076 | | | (96) | | | 184,233 | |
| US special revenue & special assessment | 2,663,423 | | | 405,274 | | | (13,259) | | | 3,055,438 | |
| Industrial and miscellaneous | 34,098,019 | | | 4,516,821 | | | (96,492) | | | 38,518,348 | |
| Hybrids | 471,425 | | | 96,814 | | | (1,122) | | | 567,117 | |
| Total bonds, excluding loan-backed and structured securities | 38,422,142 | | | 5,141,020 | | | (123,196) | | | 43,439,966 | |
| Loan-backed and structured securities: | | | | | | | |
| Residential mortgage-backed securities | 5,424,612 | | | 34,747 | | | (81,287) | | | 5,378,072 | |
| Commercial mortgage-backed securities | 1,823,653 | | | 67,540 | | | (2,939) | | | 1,888,254 | |
| Asset-backed securities | 1,488,288 | | | 30,367 | | | (8,427) | | | 1,510,228 | |
| Total loan-backed and structured securities | 8,736,553 | | | 132,654 | | | (92,653) | | | 8,776,554 | |
| Total bonds | 47,158,695 | | | 5,273,674 | | | (215,849) | | | 52,216,520 | |
| Preferred stocks | 707,270 | | | 9,518 | | | (244) | | | 716,544 | |
| Total bonds and preferred stocks | $ | 47,865,965 | | | $ | 5,283,192 | | | $ | (216,093) | | | $ | 52,933,064 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The statement value and estimated fair value of bonds as of December 31, 2022, by expected maturity, is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain of these obligations.
| | | | | | | | | | | |
| Statement Value | | Estimated Fair Value |
| ($ in thousands) |
| Bonds, excluding loan-backed and structured securities: | | | |
| Due in 1 year or less | $ | 869,336 | | | $ | 863,600 | |
| Due after 1 year through 5 years | 6,459,151 | | | 6,146,139 | |
| Due after 5 years through 10 years | 8,681,409 | | | 7,700,136 | |
| Due after 10 years | 22,401,601 | | | 19,356,926 | |
| Total bonds, excluding loan-backed and structured securities | 38,411,497 | | | 34,066,801 | |
| Total loan-backed and structured securities | 8,768,722 | | | 7,374,890 | |
| Total bonds | $ | 47,180,219 | | | $ | 41,441,691 | |
The statement value and estimated fair value of bonds as of December 31, 2021, by expected maturity, is shown below.
| | | | | | | | | | | |
| Statement Value | | Estimated Fair Value |
| ($ in thousands) |
| Bonds, excluding loan-backed and structured securities: | | | |
| Due in 1 year or less | $ | 825,050 | | | $ | 839,202 | |
| Due after 1 year through 5 years | 5,943,139 | | | 6,268,322 | |
| Due after 5 years through 10 years | 8,878,500 | | | 9,501,592 | |
| Due after 10 years | 22,775,453 | | | 26,830,850 | |
| Total bonds, excluding loan-backed and structured securities | 38,422,142 | | | 43,439,966 | |
| Total loan-backed and structured securities | 8,736,553 | | | 8,776,554 | |
| Total bonds | $ | 47,158,695 | | | $ | 52,216,520 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company’s investment gross unrealized losses and estimated fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated
Fair Value | | Gross
Unrealized
Loss | | Estimated
Fair Value | | Gross
Unrealized
Loss | | Estimated
Fair Value | | Gross
Unrealized
Loss |
| 2022 | ($ in thousands) |
| Bonds: | | | | | | | | | | | |
| US Government | $ | 180,025 | | | $ | (7,350) | | | $ | 133,234 | | | $ | (45,373) | | | $ | 313,259 | | | $ | (52,723) | |
| Non-US Government | 89,941 | | | (10,577) | | | — | | | — | | | 89,941 | | | (10,577) | |
| | | | | | | | | | | |
| US states, territories, and possessions | 296,391 | | | (22,092) | | | — | | | — | | | 296,391 | | | (22,092) | |
| US political subdivision | 119,338 | | | (13,852) | | | 1,534 | | | (874) | | | 120,872 | | | (14,726) | |
| US special revenue & special assessment | 1,617,794 | | | (226,299) | | | 200,850 | | | (101,130) | | | 1,818,644 | | | (327,429) | |
| Industrial and miscellaneous | 24,828,578 | | | (3,431,952) | | | 2,224,413 | | | (712,506) | | | 27,052,991 | | | (4,144,458) | |
| Hybrids | 273,922 | | | (22,529) | | | 4,357 | | | (2,071) | | | 278,279 | | | (24,600) | |
| Total bonds, excluding loan-backed and structured securities | 27,405,989 | | | (3,734,651) | | | 2,564,388 | | | (861,954) | | | 29,970,377 | | | (4,596,605) | |
| Loan-backed and structured securities: | | | | | | | | | | | |
| Residential mortgage-backed securities | 2,207,095 | | | (507,504) | | | 1,949,584 | | | (656,089) | | | 4,156,679 | | | (1,163,593) | |
| Commercial mortgage-backed securities | 1,258,869 | | | (136,353) | | | 86,634 | | | (14,091) | | | 1,345,503 | | | (150,444) | |
| Asset-backed securities | 1,221,071 | | | (69,198) | | | 456,757 | | | (21,312) | | | 1,677,828 | | | (90,510) | |
| Total loan-backed and structured securities | 4,687,035 | | | (713,055) | | | 2,492,975 | | | (691,492) | | | 7,180,010 | | | (1,404,547) | |
| Total bonds | 32,093,024 | | | (4,447,706) | | | 5,057,363 | | | (1,553,446) | | | 37,150,387 | | | (6,001,152) | |
| Preferred stocks | 148,734 | | | (66,930) | | | 12,025 | | | (8,246) | | | 160,759 | | | (75,176) | |
| Total bonds and preferred stocks | $ | 32,241,758 | | | $ | (4,514,636) | | | $ | 5,069,388 | | | $ | (1,561,692) | | | $ | 37,311,146 | | | $ | (6,076,328) | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total |
| Estimated
Fair Value | | Gross
Unrealized
Loss | | Estimated
Fair Value | | Gross
Unrealized
Loss | | Estimated
Fair Value | | Gross
Unrealized
Loss |
| 2021 | ($ in thousands) |
| Bonds: | | | | | | | | | | | |
| US Government | $ | 89,600 | | | $ | (4,058) | | | $ | 87,976 | | | $ | (7,183) | | | $ | 177,576 | | | $ | (11,241) | |
| Non-US Government | 18,932 | | | (986) | | | — | | | — | | | 18,932 | | | (986) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| US political subdivision | 4,525 | | | (96) | | | — | | | — | | | 4,525 | | | (96) | |
| US special revenue & special assessment | 232,240 | | | (9,094) | | | 72,952 | | | (4,165) | | | 305,192 | | | (13,259) | |
| Industrial and miscellaneous | 3,211,358 | | | (73,254) | | | 334,775 | | | (23,238) | | | 3,546,133 | | | (96,492) | |
| Hybrids | 16,948 | | | (833) | | | 1,977 | | | (289) | | | 18,925 | | | (1,122) | |
| Total bonds, excluding loan-backed and structured securities | 3,573,603 | | | (88,321) | | | 497,680 | | | (34,875) | | | 4,071,283 | | | (123,196) | |
| Loan-backed and structured securities: | | | | | | | | | | | |
| Residential mortgage-backed securities | 3,682,775 | | | (80,529) | | | 17,666 | | | (758) | | | 3,700,441 | | | (81,287) | |
| Commercial mortgage-backed securities | 88,810 | | | (1,167) | | | 47,534 | | | (1,772) | | | 136,344 | | | (2,939) | |
| Asset-backed securities | 266,450 | | | (1,103) | | | 354,111 | | | (7,324) | | | 620,561 | | | (8,427) | |
| Total loan-backed and structured securities | 4,038,035 | | | (82,799) | | | 419,311 | | | (9,854) | | | 4,457,346 | | | (92,653) | |
| Total bonds | 7,611,638 | | | (171,120) | | | 916,991 | | | (44,729) | | | 8,528,629 | | | (215,849) | |
| Preferred stocks | 19,772 | | | (228) | | | 254 | | | (16) | | | 20,026 | | | (244) | |
| Total bonds and preferred stocks | $ | 7,631,410 | | | $ | (171,348) | | | $ | 917,245 | | | $ | (44,745) | | | $ | 8,548,655 | | | $ | (216,093) | |
For securities other than loan-backed securities, the Company generally considers a number of factors in determining whether an impairment is other-than-temporary (see the “Loan-backed and Structured Securities” section for information on loan-backed and structured security OTTIs). These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security's amortized cost, 5) the duration of the decline, 6) an economic analysis of the issuer's industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security-by-security review each quarter in evaluating the need for any OTTIs. Although no set formula is used in this process, the investment performance, collateral position and continued viability of the issuer are significant measures considered. For securities in an unrealized loss position for which an OTTI was not recognized, the Company believes that it is probable that all amounts will be collected as due according to the contractual terms of the debt security in effect at the date of acquisition and has the intent and ability to hold these securities until recovery. The Company recognized $8.6 million, $0, and $44.0 million of OTTIs on non-loan-backed securities during 2022, 2021, and 2020, respectively.
The Company had securities with a fair value of $5.1 billion in an unrealized loss position for greater than twelve months as of December 31, 2022, and the related unrealized loss of $1.6 billion pertains primarily to residential mortgage-backed, banking, insurance, and communications securities. The Company had securities with a fair value of $917.0 million in an unrealized loss position for greater than twelve months as of December 31, 2021, and the related unrealized loss of $44.7 million pertains primarily to energy, student loan, collateralized loan obligations, electric, and other financial securities. The aggregate decline in fair value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors such as credit ratings, the financial health of the investee, the continued access of the investee to capital
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
markets, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.
As of December 31, 2022 and 2021, bonds and cash having a fair value of $14.4 million and $16.0 million, respectively, were on deposit with various governmental authorities as required by law.
There were no individual bonds that exceeded 10% of capital and surplus as of December 31, 2022 and 2021.
Loan-Backed and Structured Securities
For the impairment review of loan-backed and structured securities, the Company employed the retrospective method during the period, and based its prepayment assumptions regarding expected maturity dates on market interest rates and overall economic conditions. The information used for these assumptions was provided by a nationally recognized, real-time database.
For each of the years in the three-year period ended December 31, 2022, the Company recorded no OTTIs due to intent to sell these securities. Also, no such impairments were recorded due to an inability or lack of intent to retain those securities in a gross unrealized loss position for a period of time sufficient to recover their amortized cost.
During 2022, 2021 and 2020, the Company recognized $1.4 million, $0.2 million and $8.0 million, respectively, of OTTIs on loan-backed securities.
All impaired securities (fair value is less than cost or amortized cost) for which an OTTI has not been recognized in the Statements of Operations as a realized loss (including securities with a recognized OTTI for non-interest related declines when a non-recognized interest related impairment remains) are as follows as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| The aggregate amount of unrealized losses: | | | |
| Less than 12 months | $ | 713,050 | | | $ | 82,799 | |
| 12 months or longer | $ | 691,486 | | | $ | 10,053 | |
| The aggregate related fair value of securities with unrealized losses: | | | |
| Less than 12 months | $ | 4,686,974 | | | $ | 4,038,035 | |
| 12 months or longer | $ | 2,492,935 | | | $ | 419,377 | |
In determining whether a loan-backed security had experienced an OTTI, the Company considers the delinquency (and foreclosure status, if applicable) of the underlying loans or mortgages, the expected recovery value of the underlying collateral in relation to the current amount of the investment, and the degree to which such losses, based upon the foregoing factors, will first be absorbed by tranches that are subordinate to the Company’s securities.
The Company's exposure to subprime mortgage related risk is limited to investments in residential mortgage-backed securities that are backed by loans to borrowers with lower credit ratings. These securities are classified as subprime at issuance. The Company has exposure to Alt-A bonds which were made to borrowers with less than conventional documentation of their income and/or net assets. The Company has exposure to unrealized losses on these holdings from changes in fair values due to widening spreads in a difficult and illiquid market environment. In addition, the Company has exposure to realized losses if it is determined that the securities are other-than-temporarily impaired. These risks are mitigated somewhat by the Company's ability and intent to hold these securities to recovery, which may be at maturity. These securities are reviewed monthly to ensure they are performing as expected and to ensure sufficient credit support.
The Company has no direct exposure through investments in subprime mortgage loans. The Company has no underwriting exposure to subprime mortgage risk.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The following information relates to the Company’s other investments with subprime exposure at December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Actual Cost | | Book/Adjusted Carrying Value (excluding interest) | | Fair Value | | Other Than Temporary Impairment Losses Recognized |
| 2022 | ($ in thousands) |
| Residential mortgage-backed securities | $ | 12,177 | | | $ | 14,269 | | | $ | 18,381 | | | $ | — | |
| 2021 | |
| Residential mortgage-backed securities | $ | 19,794 | | | $ | 21,973 | | | $ | 30,760 | | | $ | 1,134 | |
Repurchase Agreements and Securities Lending Transactions
For repurchase agreements, the Company initiates short-term (typically less than 30 days) collateralized borrowings whereby cash is received, and securities or mortgage loans are posted as collateral. The Company reports the cash proceeds as a liability, and the difference between the cash proceeds and the amount at which the securities or mortgage loans are reacquired as interest expense. As of December 31, 2022, the Company had borrowed money obligations of $925.0 million which represents the cash amount to be paid at the repurchase agreement’s maturity on January 3, 2023. As of December 31, 2021, the Company had borrowed money obligations of $1,308.3 million which represents the cash amounts of $1,150.0 million to be paid at the repurchase agreement’s maturity on January 3, 2022, and $158.3 million which was an open repo and had no stated maturity date as of December 31, 2021.
As of December 31, 2022, the Company has posted $1,270.3 million (statutory carrying value) of its assets as repurchase agreement collateral, all of which was classified as “Bonds” as of December 31, 2022. In connection with the outstanding repurchase agreement, the Company has also recognized a liability of $925.0 million, which is classified as “Borrowed money and interest thereon” on the Company’s December 31, 2022 Statement of Admitted Assets, Liabilities, and Capital and Surplus.
As of December 31, 2021, the Company has posted $1,441.3 million (statutory carrying value, prior to the nonadmission of $38.1 million of bonds) of its assets as repurchase agreement collateral, of which $363.5 million was classified as “Mortgage loans on real estate” and $1,077.8 million was classified as “Bonds” as of December 31, 2021. In connection with the outstanding repurchase agreement, the Company has also recognized a liability of $1,308.3 million, which is classified as “Borrowed money and interest thereon” on the Company’s December 31, 2021 Statement of Admitted Assets, Liabilities, and Capital and Surplus.
The Company participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned to third parties for short periods of time. The Company requires collateral at least equal to 102% of the fair value of the loaned securities to be separately maintained. The loaned securities’ fair value is monitored on a daily basis and collateral is adjusted accordingly. The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. As collateral for the loaned securities, the Company receives cash, which is primarily reinvested in short-term repurchase agreements, which are also collateralized by U.S. Government or U.S. Government Agency securities, and government money market funds. As of December 31, 2022, securities with a fair value of $156.5 million consisting of bonds and preferred stocks were loaned under these agreements. As of December 31, 2022, the fair value of the invested collateral related to these agreements was $162.1 million. The Company has an obligation to return $162.1 million of collateral to the collateral investment counterparties.
As of December 31, 2021, securities with a fair value of $173.5 million consisting of bonds and preferred stocks were loaned under these agreements. As of December 31, 2021, the fair value of the invested collateral related to these agreements was $179.1 million. The Company has an obligation to return $179.1 million of collateral to the collateral investment counterparties.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The collateral received related to the Company’s securities lending activities for 30 days or less was $162.1 million as of December 31, 2022. The fair value of that collateral and the portion of that collateral that was sold or repledged was also $162.1 million as of December 31, 2022. The collateral received related to the Company’s securities lending activities for 30 days or less was $179.1 million as of December 31, 2021. The fair value of that collateral and the portion of that collateral that was sold or repledged was also $179.1 million as of December 31, 2021.
The Company receives primarily cash collateral in an amount in excess of the fair value of the loaned securities. The Company reinvests the cash in overnight U.S. Government repurchase agreements.
The Company’s securities lending program is not administered by an affiliated agent.
The following details the collateral reinvested related to the Company’s securities lending as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| ($ in thousands) |
| 30 Days or Less | $ | 162,119 | | | $ | 162,119 | | | $ | 179,083 | | | $ | 179,083 | |
The cash the Company receives is invested in short-term U.S. Government repurchase agreements, and therefore, matches the maturity date of the collateral to be returned.
The Company did not accept any collateral that was not permitted by contract or custom to sell or repledge during the period. The Company did not have any securities lending collateral transactions that extend beyond one year from the reporting date.
Repurchase Agreements Transactions Accounted for as Secured Borrowing
While the Company anticipates that the cash flows of its operations will be sufficient to meet its investment commitments and operating cash needs in a normal credit market environment, the Company recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, the Company has established repurchase agreement programs to provide liquidity when needed. The Company expects that the rate received on collateral posted will equal or exceed its borrowing rate. Under this program, the Company may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are typically for a term less than 90 days. The fair value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provided for net settlement in the event of default or on termination of the agreements. Due to the short tenor of the repurchase agreements, the Company would not expect any stress on liquidity to be an issue.
If market deterioration is detected and/or additional sources of liquidity are needed to manage asset/liability mismatches, the Company would draw down short-term investment positions and conserve cash by ceasing new investment activity. The Company is also a member of the Federal Home Loan Bank of Cincinnati, also has a revolving line of credit which could be accessed, as well as intercompany loan agreements set up with PLAIC, WCL, and MONY, if needed.
The types of repurchase agreement trades used during 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Bilateral (Yes/No) | Yes | | Yes | | Yes | | Yes |
| Tri-Party (Yes/No) | Yes | | Yes | | Yes | | Yes |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The types of repurchase agreement trades used during 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Bilateral (Yes/No) | No | | Yes | | Yes | | Yes |
| Tri-Party (Yes/No) | Yes | | Yes | | Yes | | Yes |
The types of repurchase agreement trades used during 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Bilateral (Yes/No) | No | | No | | No | | No |
| Tri-Party (Yes/No) | Yes | | Yes | | Yes | | Yes |
A summary of the maturity time frame and ending balance of repurchase agreement transactions during 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| Open - No Maturity | | $ | 164,685 | | | $ | 3,407 | | | $ | — | | | $ | — | |
| Overnight | | 1,450,000 | | | 1,600,000 | | | 1,425,000 | | | 1,250,000 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Ending Balance | | | | | | | | |
| Open - No Maturity | | $ | 86,829 | | | $ | — | | | $ | — | | | $ | — | |
| Overnight | | 650,000 | | | 1,020,000 | | | 1,200,000 | | | 925,000 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
A summary of the maturity time frame and ending balance of repurchase agreement transactions during 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| Open - No Maturity | | $ | — | | | $ | 69,856 | | | $ | 216,366 | | | $ | 169,478 | |
| Overnight | | 1,000,000 | | | 875,000 | | | 1,000,000 | | | 1,600,000 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Ending Balance | | | | | | | | |
| Open - No Maturity | | $ | — | | | $ | 69,856 | | | $ | 169,478 | | | $ | 158,290 | |
| Overnight | | 785,000 | | | 875,000 | | | 850,000 | | | 1,150,000 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
The Company had no securities sold and/or acquired that resulted in default during 2022 and 2021.
A summary of securities "sold" under repurchase agreement - secured borrowing during 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| BACV | | XXX | | XXX | | XXX | | $ | 1,744,427 | |
| | | | | | | | |
| Fair Value | | $ | 1,762,332 | | | $ | 1,784,643 | | | $ | 1,508,899 | | | 1,326,989 | |
| Ending Balance | | | | | | | | |
| BACV | | XXX | | XXX | | XXX | | $ | 1,270,342 | |
| | | | | | | | |
| Fair Value | | $ | 791,378 | | | $ | 1,115,916 | | | $ | 1,265,980 | | | 967,487 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
A summary of securities "sold" under repurchase agreement - secured borrowing during 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| BACV | | XXX | | XXX | | XXX | | $ | 1,958,165 | |
| | | | | | | | |
| Fair Value | | $ | 1,073,514 | | | $ | 1,004,517 | | | $ | 1,246,148 | | | 1,933,591 | |
| Ending Balance | | | | | | | | |
| BACV | | XXX | | XXX | | XXX | | $ | 1,441,341 | |
| | | | | | | | |
| Fair Value | | $ | 842,960 | | | $ | 1,004,517 | | | $ | 1,034,816 | | | 1,417,256 | |
A summary of securities "sold" under repurchase agreement - secured borrowing during 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| BACV | | XXX | | XXX | | XXX | | $ | 731,247 | |
| | | | | | | | |
| Fair Value | | $ | 523,027 | | | $ | 206,552 | | | $ | 593,693 | | | 751,937 | |
| Ending Balance | | | | | | | | |
| BACV | | XXX | | XXX | | XXX | | $ | 355,132 | |
| | | | | | | | |
| Fair Value | | $ | — | | | $ | 103,190 | | | $ | 153,681 | | | 366,012 | |
As of December 31, 2022, the Company held securities “sold” under repurchase agreement – secured borrowing consisting of NAIC 1 bonds with a carrying value of $1.3 billion and fair value of $1.0 billion.
As of December 31, 2021, the Company held securities “sold” under repurchase agreement – secured borrowing consisting of NAIC 1 bonds with a carrying value of $1.4 billion and fair value of $1.4 billion, and NAIC 2 bonds with a carrying value of $7.9 million and fair value of $9.1 million. The fair value of nonadmitted bonds was $38.1 million as of December 31, 2021.
Details of the collateral received - secured borrowing for the year ended December 31, 2022, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| Cash | | $ | 1,614,685 | | | $ | 1,603,407 | | | $ | 1,425,000 | | | $ | 1,250,000 | |
| Ending Balance | | | | | | | | |
| Cash | | $ | 736,829 | | | $ | 1,020,000 | | | $ | 1,200,000 | | | $ | 925,000 | |
Details of the collateral received - secured borrowing for the year ended December 31, 2021, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| Cash | | $ | 1,000,000 | | | $ | 944,856 | | | $ | 1,216,366 | | | $ | 1,769,478 | |
| Ending Balance | | | | | | | | |
| Cash | | $ | 785,000 | | | $ | 944,856 | | | $ | 1,019,478 | | | $ | 1,308,290 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company had cash collateral received - secured borrowing of $0.9 billion and $1.3 billion as of December 31, 2022 and 2021, respectively.
The allocation of aggregate collateral by remaining contractual maturity as of December 31 is as follows:
| | | | | | | | | | | |
| Fair Value |
| 2022 | | 2021 |
| ($ in thousands) |
| Overnight and Continuous | $ | 925,000 | | | $ | 1,308,290 | |
The Company did not receive any cash collateral that was reinvested in 2022 and 2021.
The Company recognized the following liability to return cash collateral for 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| Cash (Collateral-All) | | $ | 1,614,685 | | | $ | 1,603,407 | | | $ | 1,425,000 | | | $ | 1,250,000 | |
| | | | | | | | |
| Ending Balance | | | | | | | | |
| Cash (Collateral-All) | | $ | 736,829 | | | $ | 1,020,000 | | | $ | 1,200,000 | | | $ | 925,000 | |
| | | | | | | | |
The Company recognized the following liability to return cash collateral for 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| | ($ in thousands) |
| Maximum Amount | | | | | | | | |
| Cash (Collateral-All) | | $ | 1,000,000 | | | $ | 944,856 | | | $ | 1,216,366 | | | $ | 1,769,478 | |
| | | | | | | | |
| Ending Balance | | | | | | | | |
| Cash (Collateral-All) | | $ | 785,000 | | | $ | 944,856 | | | $ | 1,019,478 | | | $ | 1,308,290 | |
| | | | | | | | |
For 2022 and 2021, the Company had no reverse repurchase agreements transactions accounted for as secured borrowing and no repurchase agreements or reverse repurchase agreement transactions accounted for as a sale.
Mortgage Loans
The Company's mortgage loan portfolio was characterized by the following as of December 31:
| | | | | | | | | | | |
| Percent of Portfolio |
| 2022 | | 2021 |
| Retail | 25.6 | % | | 29.0 | % |
| Other | 22.5 | | | 22.1 | |
| Apartments | 18.7 | | | 17.5 | |
| Industrial | 19.6 | | | 16.4 | |
| Office | 12.3 | | | 13.5 | |
| Lodging | 1.2 | | | 1.4 | |
| Mixed use | 0.1 | | | 0.1 | |
| Total | 100.0 | % | | 100.0 | % |
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. The Company’s mortgage loan
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
portfolio had the following concentrations by location greater than or equal to 5% as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | Percent of Portfolio | | | | Percent of Portfolio |
| State | | 2022 | | State | | 2021 |
| California | | 10.7 | % | | California | | 10.8 | % |
| Florida | | 7.9 | | | Florida | | 7.7 | |
| Texas | | 7.1 | | | Texas | | 7.0 | |
| North Carolina | | 6.1 | | | Alabama | | 6.3 | |
| Alabama | | 5.7 | | | North Carolina | | 5.4 | |
| Michigan | | 5.3 | | | | | |
The minimum and maximum lending rates for commercial mortgage loans originated by the Company during 2022 were 2.25% and 5.25%, respectively. The minimum and maximum lending rates for commercial mortgage loans originated by the Company during 2021 were 1.875% and 4.5%, respectively. The minimum and maximum lending rates for commercial mortgage loans originated by the Company during 2020 were 2.88% and 4.75%, respectively.
The maximum percentage of any one loan to the value of security at the time of the loan was 88%. The target percentage of any one loan to the value of collateral at the time of the loan, exclusive of insured, guaranteed, or purchase money mortgages is generally 75%. The Company also offers a commercial loan product under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. The Company uses this loan-to-value ratio as a credit quality indicator, which is a component of the Company’s ongoing monitoring of the credit risk of its mortgage loan portfolio. The Company also monitors borrower conditions such as payment practices, borrower credit, operating performance, and property conditions, as well as ensuring the timely payment of property taxes and insurance. Through this monitoring process, the Company assesses the risk of each loan. As of December 31, 2022, the Company had mortgage loans with outstanding principal totaling $392.1 million which exceeded a 75% loan-to-value ratio in the total amount of $32.1 million. For loans the Company held as of December 31, 2022, the maximum percentage of any one loan to the value of security as of the most recent appraisal was 83%. As of December 31, 2021, the Company had mortgage loans with outstanding principal totaling $487.1 million which exceeded a 75% loan-to-value ratio in the total amount of $38.3 million. For loans the Company held as of December 31, 2021, the maximum percentage of any one loan to the value of security as of the most recent appraisal was 87%.
The Company had $61 thousand and $0 of taxes, assessments, or any amounts advanced and not included in the mortgage loan total as of December 31, 2022 and 2021, respectively.
An aging analysis of the Company’s commercial mortgage loans as of December 31 is as follows:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| | ($ in thousands) |
| Recorded Investment (All) | | | | |
| Current | | $ | 10,558,447 | | | $ | 9,528,847 | |
| 30-59 days past due | | — | | | 28,370 | |
| | | | |
| Participant or Co-lender in a Mortgage Loan Agreement | | | | |
| Recorded investment | | $ | 329,782 | | | $ | 455,983 | |
The Company’s had no investments in impaired loans as of December 31, 2022 and 2021.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company had the following allowances for credit losses:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Balance at beginning of period | $ | 16,727 | | | $ | 12,400 | |
| Additions charged to operations | 10,434 | | | 8,712 | |
| Less: Direct write-downs charged against the allowances | 10,387 | | | — | |
| Less: Recoveries of amounts previously charged off | 856 | | | 4,385 | |
| Balance at end of period | $ | 15,918 | | | $ | 16,727 | |
The Company had no mortgage loans held in the General Account derecognized as a result of foreclosure in 2022 and 2021.
As of December 31, 2022 and 2021, the Company had no mortgages more than 90 days past due. During 2022 and 2021, the Company excluded no interest from investment income due and accrued due to delinquency or uncollectibility on outstanding loans.
Debt Restructuring
On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was signed into law. Section 4013 of the CARES Act provides additional relief for certain loan modifications made as a result of the COVID-19 pandemic. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, which slightly modified and extended the original CARES Act through January 1, 2022. In conjunction with the Consolidated Appropriations Act, the NAIC Statutory Accounting Principles Working Group extended certain limited time exceptions in INT 20-03 and INT 20-07, which align with the provisions of the CARES Act, as amended, and provide relief from the requirement to assess certain loan modifications as troubled debt restructurings or more than minor modifications for certain loans modified in response to COVID-19. In consideration of this guidance, the Company has provided certain relief to certain of its commercial loan borrowers via its COVID-19 Commercial Mortgage Loan Program (the “Loan Modification Program”). The provisions of INT 20-03 and 20-07 expired on January 2, 2022. As of December 31, 2021, the Company had a total of 224 loans with $1.8 billion in unpaid principal balance under the Loan Modification Program. The modifications under this program may have included agreements to defer principal payments only or to defer principal and interest payments for a specified period of time. None of these modifications were considered troubled debt restructurings.
During the year ended December 31, 2022, certain mortgage loan transactions occurred that were accounted for as troubled debt restructurings pursuant to SSAP No. 36, “Troubled Debt Restructuring”. Transactions accounted for as troubled debt restructurings during the year included the recognition of permanent impairments to principal and were the result of agreements between the creditor and debtor. During the year ended December 31, 2022, the Company identified two loans whose principal was permanently impaired. The loans with a carrying value of $17.3 million were settled with a discounted payoff. During the year ended December 31, 2021, the Company identified one loan whose principal was permanently impaired. The loan with a carrying value of $20.0 million was settled with a discounted payoff. During the year ended December 31, 2020, the Company identified four loans whose principal was permanently impaired. Two loans with a carrying value of $3.7 million were settled with a discounted payoff.
During the years ended December 31, 2022, 2021, and 2020, the realized loss reported by the Company for these transactions was $7.4 million, $1.7 million, and $3.0 million, respectively. These transactions did not adversely affect the Company’s liquidity or ability to maintain proper matching of assets and liabilities.
The Company had no investment in restructured loans as of December 31, 2022 and 2021.
The Company accrues interest income on impaired loans to the extent it is deemed collectible (delinquent less than 90 days) and the loan continues to perform under its original or restructured contractual terms. Interest income on non-performing loans is generally recognized on a cash basis.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Common Stocks-Affiliated
The Company’s 100% ownership interest in the outstanding common stock of its affiliates (admitted value) as of December 31 was as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Protective Life and Annuity Ins. Co. | $ | 540,797 | | | $ | 503,367 | |
| West Coast Life Insurance Co. | 388,591 | | | 403,828 | |
| MONY Life Insurance Company | 350,843 | | | 334,549 | |
| Protective Property & Casualty Insurance Co. | 209,094 | | | 203,348 | |
| A.U.L. Corp. | 307,104 | | | — | |
| Total common stocks-affiliated | $ | 1,796,429 | | | $ | 1,445,092 | |
Common Stock-Federal Home Loan Bank (“FHLB”) Agreements
The Company is a member of the FHLB of Cincinnati. Through its membership, the Company received cash advances in the amount of $3,125.0 million and $2,800.0 million as of December 31, 2022 and 2021, respectively. These cash advances are the result of the Company issuing funding agreements to and entering repurchase agreements with the FHLB of Cincinnati, for $2,200.0 million and $925.0 million, respectively for 2022, and $1,650.0 million and $1,150.0 million, respectively, for 2021.
The Company uses the funds obtained from the funding agreements in an investment spread strategy, consistent with its other investment spread operations. The Company applies SSAP No. 52, “Deposit-Type Contracts” accounting treatment to the funding agreements, consistent with its other deposit-type contracts. It is not part of the Company’s strategy to utilize these funds for operations, and any funds obtained from issuing funding agreements to the FHLB of Cincinnati for use in general operations would be accounted for consistently with SSAP No. 15, “Debt and Holding Company Obligations”. Amounts received under repurchase agreements are accounted for pursuant to SSAP No. 103R.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company’s aggregate totals of FHLB capital stock as of December 31 are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | 1
Total
2+3 | | 2
General
Account | | 3
Separate
Accounts |
| ($ in thousands) |
| Membership stock - Class A | $ | — | | | $ | — | | | $ | — | |
| Membership stock - Class B | 20,000 | | | 20,000 | | | — | |
| Activity stock | 152,500 | | | 152,500 | | | — | |
| Excess stock | — | | | — | | | — | |
| Aggregate total | $ | 172,500 | | | $ | 172,500 | | | $ | — | |
| Actual or estimated borrowing capacity as determined by the insurer | $ | 4,040,679 | | | XXX | | XXX |
| | | | | |
| 2021 | 1
Total
2+3 | | 2
General
Account | | 3
Separate
Accounts |
| Membership stock - Class A | $ | — | | | $ | — | | | $ | — | |
| Membership stock - Class B | 25,000 | | | 25,000 | | | — | |
| Activity stock | 118,475 | | | 118,475 | | | — | |
| Excess stock | — | | | — | | | — | |
| Aggregate total | $ | 143,475 | | | $ | 143,475 | | | $ | — | |
| Actual or estimated borrowing capacity as determined by the insurer | $ | 4,175,517 | | | XXX | | XXX |
The Company’s Class B membership stock is not eligible for redemption.
The amounts pledged as of December 31 are as follows:
| | | | | | | | | | | | | | | | | |
| Fair Value | | Carrying Value | | Aggregate Total Borrowing |
| ($ in thousands) |
December 31, 2022 Total General and Separate Accounts Total Collateral Pledged | $ | 3,440,499 | | | $ | 4,358,606 | | | $ | 3,125,000 | |
December 31, 2022 General Account Total Collateral Pledged | $ | 3,440,499 | | | $ | 4,358,606 | | | $ | 3,125,000 | |
December 31, 2022 Separate Accounts Total Collateral Pledged | $ | — | | | $ | — | | | $ | — | |
December 31, 2021 Total General and Separate Accounts Total Collateral Pledged | $ | 3,122,870 | | | $ | 3,148,979 | | | $ | 2,800,000 | |
December 31, 2021 General Account Total Collateral Pledged | $ | 3,122,870 | | | $ | 3,148,979 | | | $ | 2,800,000 | |
December 31, 2021 Separate Accounts Total Collateral Pledged | $ | — | | | $ | — | | | $ | — | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The maximum amount pledged during the reporting period is as follows:
| | | | | | | | | | | | | | | | | |
| Fair Value | | Carrying Value | | Aggregate Total Borrowing |
| ($ in thousands) |
2022 Total General and Separate Accounts Total Collateral Pledged | $ | 3,810,133 | | | $ | 4,803,655 | | | $ | 3,450,000 | |
2022 General Account Total Collateral Pledged | $ | 3,810,133 | | | $ | 4,803,655 | | | $ | 3,450,000 | |
2022 Separate Accounts Total Collateral Pledged | $ | — | | | $ | — | | | $ | — | |
2021 Total General and Separate Accounts Total Collateral Pledged | $ | 3,292,287 | | | $ | 3,318,862 | | | $ | 2,950,000 | |
2021 General Account Total Collateral Pledged | $ | 3,292,287 | | | $ | 3,318,862 | | | $ | 2,950,000 | |
2021 Separate Accounts Total Collateral Pledged | $ | — | | | $ | — | | | $ | — | |
2020 Total General and Separate Accounts Total Collateral Pledged | $ | 2,519,845 | | | $ | 2,620,747 | | | $ | 2,300,000 | |
2020 General Account Total Collateral Pledged | $ | 2,519,845 | | | $ | 2,620,747 | | | $ | 2,300,000 | |
2020 Separate Accounts Total Collateral Pledged | $ | — | | | $ | — | | | $ | — | |
Information regarding borrowings from the FHLB is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts as of reporting date December 31, 2022 | | 1
Total
2+3 | | 2
General
Account | | 3
Separate
Accounts | | 4
Funding Agreements
Reserves Established |
| | ($ in thousands) |
| Debt | | $ | 925,000 | | | $ | 925,000 | | | $ | — | | | XXX |
| Funding agreements | | 2,200,000 | | | 2,200,000 | | | — | | | 2,206,410 | |
| Other | | — | | | — | | | — | | | XXX |
| Aggregate total | | $ | 3,125,000 | | | $ | 3,125,000 | | | $ | — | | | $ | 2,206,410 | |
| | | | | | | | |
Amounts as of reporting date December 31, 2021 | | 1
Total
2+3 | | 2
General
Account | | 3
Separate
Accounts | | 4
Funding Agreements
Reserves Established |
| | ($ in thousands) |
| Debt | | $ | 1,150,000 | | | $ | 1,150,000 | | | $ | — | | | XXX |
| Funding agreements | | 1,650,000 | | | 1,650,000 | | | — | | | 1,635,843 | |
| Other | | — | | | — | | | — | | | XXX |
| Aggregate total | | $ | 2,800,000 | | | $ | 2,800,000 | | | $ | — | | | $ | 1,635,843 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | | | | |
Maximum amount: 2022 | | 1
Total
2+3 | | 2
General
Account | | 3
Separate
Accounts |
| | ($ in thousands) |
| Debt | | $ | 1,250,000 | | | $ | 1,250,000 | | | $ | — | |
| Funding agreements | | 2,200,000 | | | 2,200,000 | | | — | |
| Other | | — | | | — | | | — | |
| Aggregate total | | $ | 3,450,000 | | | $ | 3,450,000 | | | $ | — | |
| | | | | | |
Maximum amount: 2021 | | 1
Total
2+3 | | 2
General
Account | | 3
Separate
Accounts |
| | ($ in thousands) |
| Debt | | $ | 1,600,000 | | | $ | 1,600,000 | | | $ | — | |
| Funding agreements | | 1,350,000 | | | 1,350,000 | | | — | |
| Other | | — | | | — | | | — | |
| Aggregate total | | $ | 2,950,000 | | | $ | 2,950,000 | | | $ | — | |
FHLB - prepayment obligations for 2022, 2021 and 2020:
| | | | | |
| Does the company have prepayment obligations under the following arrangements (YES/NO)? |
| Debt | NO |
| Funding agreements | YES |
| Other | NO |
Real Estate
The book values of the Company's investments in real estate, by category, as of December 31 are as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Property occupied by the Company | $ | 109,754 | | | $ | 112,410 | |
| Properties held for the production of income | 3,331 | | | 3,211 | |
| Properties held for sale | 4,883 | | | 4,981 | |
| Total real estate | $ | 117,968 | | | $ | 120,602 | |
The Company did not recognize any permanent impairment write-downs in real estate property held as of December 31, 2022 and 2021.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Restricted Assets
The Company had the following restricted assets, all within the General Account, as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Asset Category | | 2022 | | 2021 | | Increase/(Decrease) | | % of Admitted Assets |
| | ($ in thousands) | | |
| Collateral held under security lending agreements | | $ | 162,119 | | | $ | 179,083 | | | $ | (16,964) | | | 0.206 | % |
| Subject to repurchase agreements | | — | | | 166,068 | | | (166,068) | | | — | % |
| Federal home loan bank capital stock | | 172,500 | | | 143,475 | | | 29,025 | | | 0.219 | % |
| On deposit with states | | 15,074 | | | 14,964 | | | 110 | | | 0.019 | % |
| Pledged as collateral to FHLB (including assets backing funding agreements) | | 4,358,606 | | | 3,110,875 | | | 1,247,731 | | | 5.539 | % |
| Collateral for derivative instruments | | 150,111 | | | 273,130 | | | (123,019) | | | 0.191 | % |
| Total restricted assets | | $ | 4,858,410 | | | $ | 3,887,595 | | | $ | 970,815 | | | 6.174 | % |
The Company had no other restricted assets as of December 31, 2022 and 2021.
The Company had $62.2 million of cash collateral received and $162.1 million of reinvested collateral assets owned that are reflected as assets within the Company’s Statement of Admitted Assets, Liabilities and Capital and Surplus as of December 31, 2022, representing 0.096% and 0.251% of total admitted assets excluding Separate Accounts, respectively. The recognized obligation to return the collateral assets was $224.3 million, representing 0.379% of total liabilities excluding Separate Accounts as of December 31, 2022.
The Company had $187.5 million of cash collateral received and $179.1 million of reinvested collateral assets owned that are reflected as assets within the Company’s Statement of Admitted Assets, Liabilities, and Capital and Surplus as of December 31, 2021, representing 0.291% and 0.278% of total admitted assets excluding Separate Accounts, respectively. The recognized obligation to return the collateral assets was $366.6 million, representing 0.620% of total liabilities excluding Separate Accounts as of December 31, 2021.
There was no collateral received and reflected as assets within the Company’s Separate Accounts as of December 31, 2022 and 2021.
Joint Ventures, Partnerships, and Limited Liability Companies
The Company had no investments in joint ventures, partnerships, or limited liability companies that exceed 10% of its admitted assets as of December 31, 2022 or 2021. The Company did not recognize any impairment write-downs for its investments in joint ventures, partnerships, and limited liability companies as of December 31, 2022 and 2021.
Wash Sales
In the normal course of the Company’s investment management, securities can be sold and reacquired within 30 days. This practice is known as wash sales. The Company did not record any wash sales for the years ended December 31, 2022, 2021 or 2020.
6. Income Taxes
The Company is included in the consolidated federal income tax return of PLC and its subsidiaries. The method of allocation of current income taxes between the affiliates is subject to a written agreement under which the Company incurs a liability to PLC to the extent that a separate return calculation indicates that the Company has a federal income tax liability. If the Company has an income tax benefit, the benefit is recorded currently to the extent that it can be carried back against prior years’ separate company income tax expense. Any amount not carried back is carried forward on a separate company basis. Income taxes recoverable (payable) are recorded in the federal income taxes receivable (payable) account and are settled periodically, per the tax sharing agreement.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The components of the net deferred tax asset/(deferred tax liability) (“DTA”/(“DTL”)) as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2022 | | 12/31/2021 | | Change |
| 1. | (1) Ordinary | | (2) Capital | | (3) (Col 1+2) Total | | (4) Ordinary | | (5) Capital | | (6) (Col 4+5) Total | | (7) Ordinary | | (8) Capital | | (9) (Col 7+8) Total |
| ($ in thousands) |
| (a) Gross Deferred Tax Assets | $ | 695,120 | | | $ | 5,798 | | | $ | 700,918 | | | $ | 659,581 | | | $ | 4,740 | | | $ | 664,321 | | | $ | 35,539 | | | $ | 1,058 | | | $ | 36,597 | |
| (b) Statutory Valuation Allowance Adjustments | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| (c) Adjusted Gross Deferred Tax Assets (1a - 1b) | 695,120 | | | 5,798 | | | 700,918 | | | 659,581 | | | 4,740 | | | 664,321 | | | 35,539 | | | 1,058 | | | 36,597 | |
| (d) Deferred Tax Assets Nonadmitted | 425,820 | | | — | | | 425,820 | | | 380,494 | | | — | | | 380,494 | | | 45,326 | | | — | | | 45,326 | |
| (e) Subtotal Net Admitted Deferred Tax Asset) (1c-1d) | 269,300 | | | 5,798 | | | 275,098 | | | 279,087 | | | 4,740 | | | 283,827 | | | (9,787) | | | 1,058 | | | (8,729) | |
| (f) Deferred Tax Liabilities | 89,389 | | | — | | | 89,389 | | | 103,773 | | | — | | | 103,773 | | | (14,384) | | | — | | | (14,384) | |
| (g)Net Admitted Deferred Tax Asset/(Net Deferred Tax Liability) (1e-1f) | $ | 179,911 | | | $ | 5,798 | | | $ | 185,709 | | | $ | 175,314 | | | $ | 4,740 | | | $ | 180,054 | | | $ | 4,597 | | | $ | 1,058 | | | $ | 5,655 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2022 | | 12/31/2021 | | Change |
| 2. | (1) Ordinary | | (2) Capital | | (3) (Col 1+2) Total | | (4) Ordinary | | (5) Capital | | (6) (Col 4+5) Total | | (7) Ordinary | | (8) Capital | | (9) (Col 7+8) Total |
| ($ in thousands) |
| Admission Calculation Components - SSAP No. 101 | | | | | | | | | | | | | | | | | |
| (a) Federal Income Taxes Paid in Prior Years Recoverable Through Loss Carryback | $ | — | | | $ | 5,798 | | | $ | 5,798 | | | $ | — | | | $ | 4,740 | | | $ | 4,740 | | | $ | — | | | $ | 1,058 | | | $ | 1,058 | |
| (b) Adjusted Gross Deferred Tax Assets Expected to be Realized (Excluding The Amount of Deferred Tax Assets from 2(a) above) After Application of the Threshold Limitation (The Lesser of 2(b)(1) and 2(b)2 Below) | 179,911 | | | — | | | 179,911 | | | 175,314 | | | — | | | 175,314 | | | 4,597 | | | — | | | 4,597 | |
| 1) Adjusted Gross Deferred Tax Assets Expected to be Realized Following the Balance Sheet Date | 179,911 | | | — | | | 179,911 | | | 175,314 | | | — | | | 175,314 | | | 4,597 | | | — | | | 4,597 | |
| 2) Adjusted Gross Deferred Tax Assets Allowed per Limitation Threshold | XXX | | XXX | | 772,351 | | | XXX | | XXX | | 770,777 | | | XXX | | XXX | | 1,574 | |
| (c) Adjusted Gross Deferred Tax Assets (Excluding The Amount of Deferred Tax Assets From 2(a) and 2(b) above) Offset by Gross Deferred Tax Liabilities | 89,389 | | | — | | | 89,389 | | | 103,773 | | | — | | | 103,773 | | | (14,384) | | | — | | | (14,384) | |
| (d) Deferred Tax Assets Admitted as the result of Application of SSAP No. 101. Total 2(a) +2(b) +2(c) | $ | 269,300 | | | $ | 5,798 | | | $ | 275,098 | | | $ | 279,087 | | | $ | 4,740 | | | $ | 283,827 | | | $ | (9,787) | | | $ | 1,058 | | | $ | (8,729) | |
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| (a) Ratio Percentage Used To Determine Recovery Period And Threshold Limitation Amount | 803 | % | | 926 | % |
| (b) Amount Of Adjusted Capital And Surplus Used To Determine Recovery Period And Threshold Limitation In 2(b)2 Above. | $ | 5,670,263 | | | $ | 5,775,017 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/31/2022 | | 12/31/2021 | | Change |
| (1) Ordinary | | (2) Capital | | (3) Ordinary | | (4) Capital | | (5) (Col 1-3) Ordinary | | (6) (Col 2-4) Capital |
| ($ in thousands) |
| Impact of Tax Planning Strategies | | | | | | | | | | | |
| (a) Determination of Adjusted Gross Deferred Tax Assets and Net Admitted Deferred Tax assets, By Tax Character as a Percentage | | | | | | | | | | | |
| 1. Adjusted Gross DTA Amount From 1(c) | $ | 695,120 | | | $ | 5,798 | | | $ | 659,581 | | | $ | 4,740 | | | $ | 35,539 | | | $ | 1,058 | |
| 2. Percentage of Adjusted Gross DTAs By Tax Character Attributable to the Impact of Tax Planning Strategies | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
| 3. Net Admitted Adjusted Gross DTA Amount From 1(e) | $ | 269,300 | | | $ | 5,798 | | | $ | 279,087 | | | $ | 4,740 | | | $ | (9,787) | | | $ | 1,058 | |
| 4. Percentage of Net Admitted Adjusted Gross DTAs by Tax Character Admitted Because of the Impact of Tax Planning Strategies | — | % | | — | % | | — | % | | — | % | | — | % | | — | % |
| Does the Company’s tax-planning strategies include the use of reinsurance? | | Yes | | | | No | | X |
The Company has no DTLs that are not recognized.
Current income taxes incurred consist of the following major components:
| | | | | | | | | | | | | | | | | |
| 1. | (1) 2022 | | (2) 2021 | | (3) (Col 1-2) Change |
| ($ in thousands) |
| (a) Federal | $ | 125,600 | | | $ | 122,732 | | | $ | 2,868 | |
| (b) Foreign | — | | | — | | | — | |
| (c) Subtotal (1a+1b) | 125,600 | | | 122,732 | | | 2,868 | |
| (d) Federal income tax on capital gains | (96,944) | | | 11,883 | | | (108,827) | |
| (e) Utilization of capital loss carryforwards | — | | | — | | | — | |
| (f) Other | — | | | — | | | — | |
| (g) Federal and foreign income taxes incurred (1c+1d+1e+1f) | $ | 28,656 | | | $ | 134,615 | | | $ | (105,959) | |
| | | | | | | | | | | | | | | | | |
| 1. | (1) 2021 | | (2) 2020 | | (3) (Col 1-2) Change |
| ($ in thousands) |
| (a) Federal | $ | 122,732 | | | $ | 80,174 | | | $ | 42,558 | |
| (b) Foreign | — | | | — | | | — | |
| (c) Subtotal (1a+1b) | 122,732 | | | 80,174 | | | 42,558 | |
| (d) Federal income tax on capital gains | 11,883 | | | 31,810 | | | (19,927) | |
| (e) Utilization of capital loss carryforwards | — | | | — | | | — | |
| (f) Other | — | | | — | | | — | |
| (g) Federal and foreign income taxes incurred (1c+1d+1e+1f) | $ | 134,615 | | | $ | 111,984 | | | $ | 22,631 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
| | | | | | | | | | | | | | | | | |
| 2. | | | | | |
| Deferred Tax Assets | (1) 12/31/2022 | | (2) 12/31/2021 | | (3) (Col 1-2) Change |
| ($ in thousands) |
| (a) Ordinary: | | | | | |
| (1)Discounting of unpaid losses | $ | 56 | | | $ | 66 | | | $ | (10) | |
| (2)Unearned premium reserve | — | | | — | | | — | |
| (3)Policyholder reserves | 171,790 | | | 174,678 | | | (2,888) | |
| (4)Investments | 25,966 | | | 5,213 | | | 20,753 | |
| (5)Deferred acquisition costs | 438,179 | | | 422,821 | | | 15,358 | |
| (6)Policyholder dividends accrual | 4,344 | | | 6,070 | | | (1,726) | |
| (7)Fixed assets | — | | | — | | | — | |
| (8)Compensation and benefits accrual | 11,610 | | | 7,300 | | | 4,310 | |
| (9)Pension accrual | — | | | — | | | — | |
| (10)Receivables - nonadmitted | 15,273 | | | 14,909 | | | 364 | |
| (11)Net operating loss carryforward | — | | | — | | | — | |
| (12)Tax credit carryforward | — | | | — | | | — | |
| (13)Other | 27,902 | | | 28,524 | | | (622) | |
| | | | | |
| | | | | |
| | | | | |
| (99)Subtotal (sum of 2a1 through 2a13) | 695,120 | | | 659,581 | | | 35,539 | |
| | | | | |
| (b) Statutory valuation allowance adjustment | — | | | — | | | — | |
| (c) Nonadmitted | 425,820 | | | 380,494 | | | 45,326 | |
| (d) Admitted ordinary deferred tax assets (2a99-2b-2c) | 269,300 | | | 279,087 | | | (9,787) | |
| | | | | |
| (e) Capital: | | | | | |
| (1)Investments | 5,798 | | | 4,740 | | | 1,058 | |
| (2)Net capital loss carryforward | — | | | — | | | — | |
| (3)Real estate | — | | | — | | | — | |
| (4)Other | — | | | — | | | — | |
| (99)Subtotal (2e1+2e2+2e3+2e4) | 5,798 | | | 4,740 | | | 1,058 | |
| | | | | |
| (f) Statutory valuation allowance adjustment | — | | | — | | | — | |
| (g) Nonadmitted | — | | | — | | | — | |
| (h) Admitted capital deferred tax assets (2e99-2f-2g) | 5,798 | | | 4,740 | | | 1,058 | |
| (i) Admitted deferred tax assets (2d+2h) | $ | 275,098 | | | $ | 283,827 | | | $ | (8,729) | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | |
| 3. | | | | | |
| Deferred Tax Liabilities | (1) 12/31/2022 | | (2) 12/31/2021 | | (3) (Col 1-2) Change |
| ($ in thousands) |
| (a)Ordinary | | | | | |
| (1)Investments | $ | 52,072 | | | $ | 57,025 | | | $ | (4,953) | |
| (2)Fixed assets | 2,026 | | | 2,350 | | | (324) | |
| (3)Deferred and uncollected premium | 230 | | | — | | | 230 | |
| (4) Policyholder reserves | 28,262 | | | 36,012 | | | (7,750) | |
| (5)Other | 6,799 | | | 8,386 | | | (1,587) | |
| | | | | |
| (99)Subtotal (3a1+3a2+3a3+3a4+3a5) | 89,389 | | | 103,773 | | | (14,384) | |
| | | | | |
| (b)Capital: | | | | | |
| (1)Investments | — | | | — | | | — | |
| (2)Real estate | — | | | — | | | — | |
| (3)Other | — | | | — | | | — | |
| (99)Subtotal (3b1+3b2+3b3) | — | | | — | | | — | |
| (c) Deferred tax liabilities (3a99+3b99) | $ | 89,389 | | | $ | 103,773 | | | $ | (14,384) | |
| | | | | |
| 4. Net deferred tax assets/liabilities (2i-3c) | $ | 185,709 | | | $ | 180,054 | | | $ | 5,655 | |
The change in net deferred income taxes as of December 31 is comprised of the following (this analysis is exclusive of nonadmitted assets as the change in nonadmitted assets is reported separately from the change in net deferred income tax in the Statements of Changes in Capital and Surplus):
| | | | | | | | | | | | | | | | | |
| (1) 12/31/2022 | | (2) 12/31/2021 | | (3) (Col 1-2) Change |
| ($ in thousands) |
| Adjusted gross deferred tax assets | $ | 700,918 | | | $ | 664,321 | | | $ | 36,597 | |
| Total deferred tax liabilities | 89,389 | | | 103,773 | | | (14,384) | |
| Net deferred tax assets (liabilities) | $ | 611,529 | | | $ | 560,548 | | | 50,981 | |
| Tax effect of unrealized gains/(losses) | | | | | 44,544 | |
| Tax effect of prior period corrections through surplus | | | | | 3,064 | |
| Change in net deferred income tax | | | | | $ | 3,373 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | |
| (1) 12/31/2021 | | (2) 12/31/2020 | | (3) (Col 1-2) Change |
| ($ in thousands) |
| Adjusted gross deferred tax assets | $ | 664,321 | | | $ | 660,282 | | | $ | 4,039 | |
| Total deferred tax liabilities | 103,773 | | | 210,039 | | | (106,266) | |
| Net deferred tax assets (liabilities) | $ | 560,548 | | | $ | 450,243 | | | 110,305 | |
| Tax effect of unrealized gains/(losses) | | | | | 52,048 | |
| Tax effect of prior period corrections through surplus | | | | | (8,794) | |
| Change in net deferred income tax | | | | | $ | 67,051 | |
On August 16, 2022, H.R. 5376, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. In general, beginning in 2023, it imposes a 15% Corporate Alternative Minimum Tax (“CAMT”) on U.S. corporations if their average annual financial statement pre-tax income exceeds $1 billion. When applicable, this criterion includes such income of a U.S. corporation’s foreign parent. The Company expects to meet this criterion and may be liable for this new tax in the future. The income tax related impacts of the IRA are not material to the Company’s financial statements for the period ended December 31, 2022.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The provision for federal and foreign income taxes incurred is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference at December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | Effective Tax Rate (%) | | 2021 | | Effective Tax Rate (%) | | 2020 | | Effective Tax Rate (%) |
| ($ in thousands) |
| Provision computed at statutory rate | $ | 94,111 | | | 21.0 | % | | $ | 139,030 | | | 21.0 | % | | $ | 158,633 | | | 21.0 | % |
| | | | | | | | | | | |
| Tax on STAT capital gains (losses) | (99,256) | | | (22.1) | | | (11,969) | | | (1.8) | | | 75,638 | | | 10.0 | |
| Amortization of IMR | (27,820) | | | (6.2) | | | (25,937) | | | (3.9) | | | (22,480) | | | (3.0) | |
| Change in nonadmitted assets | 6,813 | | | 1.5 | | | (13,150) | | | (2.0) | | | (3,546) | | | (0.5) | |
| Nondeductible expense | 1,546 | | | 0.3 | | | 766 | | | 0.1 | | | 1,127 | | | 0.2 | |
| Tax-exempt income deduction | 7,973 | | | 1.8 | | | (7,828) | | | (1.1) | | | (9,045) | | | (1.2) | |
| Dividends received deduction | (8,156) | | | (1.8) | | | (10,230) | | | (1.5) | | | — | | | — | |
| Prior year deferred tax true-up | (2,483) | | | (0.6) | | | (12,631) | | | (1.9) | | | 6,686 | | | 0.9 | |
| Prior year current tax true-up | 4,857 | | | 1.1 | | | 18,650 | | | 2.8 | | | (7,275) | | | (0.9) | |
| Loss on reinsurance | (17,394) | | | (3.9) | | | (46,041) | | | (7.0) | | | (52,882) | | | (7.0) | |
| Elimination of intercompany dividend | (14,280) | | | (3.2) | | | (13,020) | | | (2.0) | | | (17,430) | | | (2.3) | |
| Intercompany operating loss carryforward | 79,573 | | | 17.8 | | | 57,760 | | | 8.7 | | | 59,121 | | | 7.8 | |
| Intercompany capital loss carryforward | 1,169 | | | 0.3 | | | (5,112) | | | (0.8) | | | 1,123 | | | 0.1 | |
| Foreign tax credit | (2,523) | | | (0.6) | | | (1,874) | | | (0.3) | | | (2,328) | | | (0.3) | |
| Tax contingencies | — | | | — | | | (1,733) | | | (0.2) | | | — | | | — | |
| Assets in support of IMR | 2,353 | | | 0.5 | | | 2,010 | | | 0.3 | | | (5,274) | | | (0.7) | |
| Reserve change through surplus | — | | | — | | | — | | | — | | | 12,443 | | | 1.6 | |
| Derivative URGL through surplus | (2,975) | | | (0.7) | | | (423) | | | (0.1) | | | (248) | | | — | |
| Prior period adjustment through surplus | 1,355 | | | 0.3 | | | (954) | | | (0.1) | | | — | | | — | |
| Rate differential on carryback of intercompany operating loss | — | | | — | | | — | | | — | | | 125 | | | — | |
| STAT reserve change treated as a prior period adjustment | — | | | — | | | — | | | — | | | 1,964 | | | 0.3 | |
| Deferred intercompany gain of affiliate | — | | | — | | | — | | | — | | | (28,714) | | | (3.8) | |
| Section 162(m) limitation | 420 | | | 0.1 | | | 250 | | | — | | | 180 | | | — | |
| Total | $ | 25,283 | | | 5.6 | % | | $ | 67,564 | | | 10.2 | % | | $ | 167,818 | | | 22.2 | % |
| | | | | | | | | | | |
| Federal and foreign income taxes incurred | $ | 125,600 | | | 28.0 | % | | $ | 122,732 | | | 18.5 | % | | $ | 80,174 | | | 10.6 | % |
| Tax on capital gains/(losses) | (96,944) | | | (21.6) | | | 11,883 | | | 1.8 | | | 31,810 | | | 4.2 | |
| Change in net deferred income taxes charge/(benefit) | (3,373) | | | (0.8) | | | (67,051) | | | (10.1) | | | 55,834 | | | 7.4 | |
| Total statutory income taxes | $ | 25,283 | | | 5.6 | % | | $ | 67,564 | | | 10.2 | % | | $ | 167,818 | | | 22.2 | % |
As of December 31, 2022, the Company had no operating loss, no capital loss, and no foreign tax credit carryforwards available to offset future net income subject to federal income taxes.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company incurred the following income taxes in the current year and preceding years that would be available for recoupment in the event of future net losses:
| | | | | | | | | | | | | | | | | |
| Ordinary | | Capital | | Total |
| ($ in thousands) |
2020 | $ | — | | | $ | 26,910 | | | $ | 26,910 | |
2021 | — | | | 1,376 | | | 1,376 | |
2022 | — | | | 9,314 | | | 9,314 | |
| Total | $ | — | | | $ | 37,600 | | | $ | 37,600 | |
The Company had no deposits admitted under Section 6603 of the Internal Revenue Code as of December 31, 2022 and 2021 .
The Company had no state transferable tax credits at December 31, 2022 or 2021.
The Company's federal income tax return for 2022 will be consolidated with the following entities:
| | | | | |
| A.U.L. Corp. | New World Warranty Corp. |
| Asset Protection Financial, Inc. | PIPCO Reinsurance Company, Ltd. |
| Atlas Peak Insurance Company, Ltd. | Protective Administrative Services, Inc. |
| AUL Insurance Agency, Inc. | Protective Asset Protection, Inc. |
| Chesterfield International Reinsurance Limited | Protective Finance Corporation |
| Concourse Financial Group Agency, Inc. | Protective Finance Corporation II |
| Concourse Financial Group Securities, Inc. | Protective Finance Corporation IV |
| D.R.G., Inc. | Protective Life and Annuity Insurance Company |
| Dealer Services Reinsurance, Ltd. | Protective Life Corporation |
| Empower Financial Resources, Inc. | Protective Property & Casualty Insurance Company |
| First Protection Company | Protective Real Estate Holdings, Inc. |
| First Protection Corporation | The Advantage Warranty Corporation |
| First Protection Corporation of Florida | United States Warranty Corp. |
| Golden Gate Captive Insurance Company | USWC Holding Company |
| Interstate Administrative Services, Inc. | USWC Installment Program, Inc. |
| Interstate National Corporation | Warranty Business Services Corporation |
| Interstate National Dealer Services of Florida, Inc. | Warranty Direct, Inc. |
| Interstate National Dealer Services, Inc. | Warranty Topco, Inc. |
| Investment Distributors, Inc. | West Coast Life Insurance Company |
| LASAS Technologies, Inc. | Western Diversified Services, Inc. |
| MONY Life Insurance Company | Western General Dealer Services, Inc. |
| National Warranty Corp. | Western General Warranty Corporation |
| New World Re | Wisconsin A.U.L., Inc. |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | |
| 12/31/2022 | | 12/31/2021 |
| ($ in thousands) |
| Balance, beginning of year | $ | — | | | $ | 1,733 | |
| Additions for tax positions of the current year | — | | | — | |
| Additions for tax positions of prior years | — | | | — | |
| Reductions of tax positions of prior years: | | | |
| Changes in judgment | — | | | — | |
| Settlements during the year | — | | | — | |
| Lapses of applicable statute of limitations | — | | | (1,733) | |
| Balance, end of year | $ | — | | | $ | — | |
There are no unrecognized tax benefits for the years ended December 31, 2022 and 2021.
Any accrued interest related to the unrecognized tax benefits and other accrued income taxes have been included in income tax expense. There were no amounts included in the three-year period ended December 31, 2022, as the parent company maintains responsibility for the interest on unrecognized tax benefits. The Company has no accrued interest associated with unrecognized tax benefits as of December 31, 2022 or 2021.
In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2019. Due to IRS adjustments to the Company’s pre-2017 taxable income, the Company has amended certain of its 2014 through 2016 state income tax returns. Such amendments will cause such years to remain open, pending the states’ acceptances of the returns.
The Company does not have any federal income tax loss contingencies for which it is reasonably possible that the total liability will significantly increase within twelve months of the reporting date.
7. Information Concerning Parent and Subsidiaries
Subsidiary Acquisition
On May 2, 2022, the Company completed the acquisition of AUL (the “Acquisition”), as contemplated by an agreement reached in March 2022. The Company accounted for this transaction under the statutory purchase method of accounting as required by SSAP No. 68. The aggregate purchase price was $347.0 million and is subject to adjustments. AUL is carried at $307.1 million at December 31, 2022. No goodwill was recorded in the transaction. The Acquisition was subject to receipt of standard regulatory approvals and satisfaction of customary closing conditions. AUL offers a variety of finance and insurance products, including warranties, vehicle service contracts, and a suite of ancillary products.
Dividends and Capital Contributions
In the first quarter of 2022 the Company paid a $239.0 million ordinary dividend to its parent, PLC. In the second quarter of 2022, the Company paid a $100.0 million ordinary dividend to PLC. The Company paid no dividends to PLC during 2021 and 2020.
During 2022, the Company received a cash capital contribution of $100.0 million from PLC. PLC made no cash capital contribution to the Company during 2021 and 2020.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company received the following distributions from subsidiaries during the years ended December 31, certain of which were treated as a return of capital:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| ($ in thousands) |
| West Coast Life Insurance Company | $ | 40,000 | | | $ | 25,000 | | | $ | — | |
| MONY Life Insurance Company | 18,000 | | | 37,000 | | | 38,000 | |
| USWC Holding Company | 2,000 | | | 10,000 | | | 6,500 | |
| Protective Property & Casualty Insurance Company | 10,000 | | | — | | | 10,000 | |
| Protective Asset Protection, Inc. | — | | | 1,725 | | | 23,300 | |
| Western Diversified Services, Inc. | — | | | 4,000 | | | 7,000 | |
| Golden Gate Captive Insurance Company | 91,000 | | | 25,000 | | | 35,000 | |
| A.U.L. Corp. | 30,000 | | | — | | | — | |
| | | | | |
| | | | | |
| Total distributions received | $ | 191,000 | | | $ | 102,725 | | | $ | 119,800 | |
The Company made the following capital contributions for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| ($ in thousands) |
| Protective Life and Annuity Insurance Company | $ | — | | | $ | — | | | $ | 100,000 | |
| | | | | |
| Golden Gate Captive Insurance Company | 8,500 | | | 9,600 | | | 10,230 | |
| | | | | |
| Total contributions paid | $ | 8,500 | | | $ | 9,600 | | | $ | 110,230 | |
These dividends, distributions and capital contributions were primarily in the form of cash, but some involved the exchange of subsidiary companies and/or intangible assets. The following provides further detail regarding certain of these contributions and distributions:
•During the first quarter of 2022, the Company’s wholly owned subsidiary, PP&C, paid an ordinary cash dividend of $10.0 million to the Company.
•During 2022, pursuant to its licensing agreement, GGCIC paid extraordinary cash distributions to the Company of $46.0 million and $45.0 million. These distributions were treated as return of capital distributions.
•During the fourth quarter of 2022, the Company made a scheduled cash capital contribution of $8.5 million to GGCIC.
•During the fourth quarter of 2022, the Company’s wholly owned subsidiary, AUL, paid a cash distribution of $30.0 million to the Company. This distribution was treated as a return of capital distribution.
•During the fourth quarter of 2022, the Company’s wholly owned subsidiary, USWC Holding Company paid a cash distribution of $2.0 million to the Company. This distribution was treated as a return of capital distribution.
•During the fourth quarter of 2022, the Company’s wholly owned subsidiary, MONY, paid an ordinary cash dividend in the amount of $18.0 million to the Company.
•During the fourth quarter of 2022, the Company’s wholly owned subsidiary, WCL, paid an ordinary cash dividend of $40.0 million to the Company.
•During the first quarter of 2021, pursuant to its licensing agreement, GGCIC paid extraordinary cash distributions to the Company in the amount of $25.0 million. This distribution was treated as a return of capital distribution.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
•In the fourth quarter of 2021, the Company made a scheduled cash capital contribution of $9.6 million to GGCIC.
•During the fourth quarter of 2021, the Company’s wholly owned subsidiary, WDS, paid a cash distribution of $4.0 million to the Company. This distribution was treated as a return of capital distribution.
•During the fourth quarter of 2021, the Company’s wholly owned subsidiary, USWC Holding Company paid a cash distribution of $10.0 million to the Company. This distribution was treated as a return of capital distribution.
•During the fourth quarter of 2021, the Company’s wholly owned subsidiary, PAPI, paid a cash distribution of $1.7 million to the Company. This distribution was treated as a return of capital distribution.
•During the fourth quarter of 2021, the Company’s wholly owned subsidiary, MONY, paid an ordinary cash dividend in the amount of $37.0 million to the Company.
•During the fourth quarter of 2021, the Company’s wholly owned subsidiary, WCL, paid an ordinary cash dividend of $25.0 million to the Company.
•During 2020, the Company received extraordinary dividends of $20.0 million and $15.0 million from GGCIC. These distributions were treated as dividends.
•During 2020, the Company made a cash capital contribution of $100.0 million to PLAIC.
•During 2020, the Company made a scheduled cash capital contribution of $10.2 million to GGCIC.
•During 2020, the Company’s wholly owned subsidiary, MONY, paid an ordinary cash dividend in the amount of $38.0 million to the Company.
•During 2020, the Company’s wholly owned subsidiary, USWC Holding Company paid a cash distribution of $6.5 million to the Company. This distribution was treated as a return of capital distribution.
•During 2020, the Company’s wholly owned subsidiary, PP&C, paid an ordinary cash dividend of $10.0 million to the Company.
•During 2020, the Company’s wholly owned subsidiary, PAPI, paid a cash dividend of $23.3 million to the Company.
•During 2020, the Company’s wholly owned subsidiary, WDS, paid a cash distribution of $7.0 million to the Company. This distribution was treated as a return of capital distribution.
Intercompany Agreements and Settlements
The Company routinely receives from, or pays to, affiliates under the control of PLC reimbursements for expenses incurred on one another’s behalf. Receivables and payables among affiliates are generally settled monthly. As of December 31, 2022, the Company had an intercompany receivable of $13.3 million and an intercompany payable of $39.5 million. As of December 31, 2021, the Company had an intercompany receivable of $9.5 million and an intercompany payable of $40.5 million.
The Company entered into an agreement with WCL in 2011 to loan up to $800 million and borrow up to $200 million at variable interest rates. The Company had no outstanding loaned or borrowed amounts as of December 31, 2022 or 2021, under this agreement. No interest expense was incurred under this agreement during the three-year period ended December 31, 2022.
The Company entered into an agreement with PLAIC in 2012 in which a loan can be given to or received from PLAIC subject to certain limitations as described in the agreement. The Company had no loaned or borrowed amounts as of December 31, 2022 or 2021, under this agreement. No interest expense was incurred under this agreement during the three-year period ended December 31, 2022.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company entered into an agreement with MONY in 2014 in which a loan can be given to or received from MONY subject to certain limitation as described in the agreement. The Company had no loaned or borrowed amounts as of December 31, 2022 and 2021, under this agreement. No interest expense was incurred under this agreement during the three-year period ended December 31, 2022.
The Company, WCL, and PLC have contracts with certain affiliates to provide investment, legal, and data processing services on a fee basis and other managerial and administrative services on a shared cost basis. In addition, the affiliates have a joint contract relating to allocation of costs for services performed by employees of one affiliate for another. The Company paid $301.7 million, $275.8 million, and $242.0 million during the years ended December 31, 2022, 2021, and 2020, respectively, for these services. The Company also received $111.4 million, $96.1 million, and $90.4 million under these agreements in 2022, 2021, and 2020 respectively.
Certain affiliates lease office space, equipment and/or electronic data processing equipment from the Company based upon amounts that would be similar to those charged to an unrelated company in an arm’s length transaction. The Company received $9.9 million, $10.5 million, and $7.4 million for the years ended December 31, 2022, 2021, and 2020, respectively, for these items.
Intercompany Reinsurance
See Note 10 – Reinsurance for a discussion of the Company’s reinsurance transactions with affiliates.
Subsidiary Guarantees and Support Agreements
There are no guarantees or undertakings for the benefit of an affiliate which result in an actual contingent exposure of the Company’s or any affiliated insurer’s assets to liability, other than insurance contracts entered into in the ordinary course of business, except as follows:
The Company entered into a guaranty agreement on October 27, 1993, with PLAIC. The Company has guaranteed the payment of all insurance policy claims made by the holders or beneficiaries of any policies which were issued after the date of the guaranty agreement in accordance with the terms of said policies. Total liabilities for policies covered by this agreement were $1.8 billion as of December 31, 2022, and $2.0 billion as of December 31, 2021. No payments were made under this guaranty agreement during the three-year period ended December 31, 2022.
The Company entered into a guaranty agreement on December 31, 1995, whereby the Company guaranteed that PLAIC will perform all of the obligations of the Company pursuant to the terms and conditions of an indemnity coinsurance agreement between the Company and an unaffiliated life insurance company. Total liabilities related to this coinsurance agreement were $5.4 million as of December 31, 2022 and $5.5 million as of December 31, 2021. No payments were made under this guaranty agreement during the three-year period ended December 31, 2022.
The Company entered into a guaranty agreement, effective December 23, 1997, whereby the Company has agreed to guarantee that WCL will pay all insurance policy claims made on insurance policies or binders issued by WCL to SouthTrust Corporation (now Wells Fargo & Company) or its affiliated banks. Total liabilities for policies covered by this agreement were $64.9 million as of December 31, 2022 and $64.3 million as of December 31, 2021. No payments were made under this guaranty agreement during the three-year period ended December 31, 2022.
The Company entered into a guaranty agreement on January 12, 1998, whereby the Company guaranteed that the capital and surplus of WCL as of the end of any calendar quarter will be maintained at a level no less than 250% of the "Company Action Level RBC" as defined by the State of Nebraska. In the event that the capital and surplus of WCL is less than the "Company Action Level RBC" at the end of a calendar quarter, the Company will make a capital contribution to WCL in such amount necessary to cure the deficiency. However, in no event shall the cumulative capital contributions be more than 2% of the Company’s admitted assets as of the prior December 31 year end. As of December 31, 2022, 2021 and 2020 the Company had not been required to make capital contributions to WCL in connection with this agreement.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Effective October 1, 2020, GGCIC entered into separate amended and restated indemnity reinsurance agreements with the Company (the “2020 PLICO-GGCIC Agreement”) and WCL (the “2020 WCL-GGCIC Agreement”).
On October 1, 2020, GGCIC entered into a transaction with a term of 20 years, that may be extended up to a maximum term of 25 years, to finance up to $5.0 billion of “XXX” and “AXXX” reserves related to the term life insurance business and universal life insurance with secondary guarantee business that is reinsured to GGCIC by the Company and WCL under the 2020 PLICO-GGCIC and 2020 WCL-GGCIC Agreements. This financing transaction is pursuant to an Excess of Loss Reinsurance Agreement (the “XOL Agreement”) with Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and RGA Reinsurance Company (Barbados) Ltd. (collectively, the “Retrocessionaires”). Pursuant to the XOL Agreement, in exchange for periodic fees, the Retrocessionaires assume, on an excess of loss basis, the obligation to pay (the “XOL Payments”) each quarter the lesser of (a) the greater of (i) statutory reserves in excess of economic reserves and (ii) the financed amount and (b) if total claims for such quarter exceed the available assets (as set forth in the XOL Agreement) of GGCIC, the amount of such excess. The transaction is “non-recourse” to PLC, WCL and the Company, meaning that none of these companies are liable to reimburse the Retrocessionaires for any XOL Payments required to be made.
PLC entered into a guaranty dated as of October 1, 2020, pursuant to which PLC agreed to guarantee GGCIC’s payment of certain fees due to the Retrocessionaires under the XOL Agreement. This includes annual contributions to GGCIC to pre-fund estimated fees payable to the Retrocessionaires for the subsequent calendar year. A scheduled contribution of $8.5 million, paid by PLICO, occurred during the fourth quarter of 2022 with respect to estimated fees payable to the Retrocessionaires during 2023. A scheduled contribution of $9.6 million, paid by PLICO, occurred during the fourth quarter of 2021 with respect to estimated fees payable to the Retrocessionaires during 2022. A scheduled contribution of $10.2 million, paid by PLICO, occurred during the fourth quarter of 2020 with respect to estimated fees payable to the Retrocessionaires during 2021.
8. Capital and Surplus, Shareholder’s Dividend Restrictions
Dividends are noncumulative and are paid as determined by the Board of Directors. A life insurance company may pay a dividend without prior approval of the Commissioner of the Department. (“the Commissioner”) in an amount, together with other dividends paid in the past twelve months, that does not exceed an amount equal to the greater of 10% of policyholders’ surplus as of the preceding December 31 or the Company’s net gain from operations, for the preceding year. During 2023, the Company may pay $533.4 million of dividends without the approval of the Commissioner.
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 risk inherent in the insurer's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. The Company was adequately capitalized under the formula as of December 31, 2022 and 2021.
The portion of unassigned funds represented or reduced for cumulative unrealized gains and losses was $(666.1) million and $(454.4) million as of December 31, 2022 and 2021, respectively.
The portion of unassigned funds reduced for nonadmitted assets was $1.1 billion and $1.1 billion as of December 31, 2022 and 2021, respectively.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
As of December 31, 2022, the Company had issued the following surplus debentures or similar obligations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date Issued | | Interest Rate | | Original Issue Amount of Notes | | Carrying Value of Note | | Current Year Interest Expense Recognized | | Life-To-Date Interest Expense Recognized | | Date of Maturity |
| 5/1/2018 | | 3.550 | % | | $ | 55,000 | | | 55,000 | | | 1,953 | | | 9,112 | | | 5/1/2038 |
| 5/1/2018 | | 3.550 | % | | 55,000 | | | 55,000 | | | 1,953 | | | 9,112 | | | 5/1/2038 |
Total | | | | $ | 110,000 | | | $ | 110,000 | | | $ | 3,906 | | | $ | 18,224 | | | |
As of December 31, 2021, the Company had issued the following surplus debentures or similar obligations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date Issued | | Interest Rate | | Original Issue Amount of Notes | | Carrying Value of Note | | Current Year Interest Expense Recognized | | Life-To-Date Interest Expense Recognized | | Date of Maturity |
| 5/1/2018 | | 3.550 | % | | $ | 55,000 | | | $ | 55,000 | | | $ | 1,953 | | | $ | 7,159 | | | 5/1/2038 |
| 5/1/2018 | | 3.550 | % | | 55,000 | | | 55,000 | | | 1,953 | | | 7,159 | | | 5/1/2038 |
Total | | | | $ | 110,000 | | | $ | 110,000 | | | $ | 3,906 | | | $ | 14,318 | | | |
On May 1, 2018, the Company issued two fixed rate 20-year Surplus Notes (the “Notes”), each with a face amount of $55.0 million. The Company received cash for the Notes. The Notes were issued to Liberty Mutual Insurance Company and The Lincoln National Life Insurance Company (“Lincoln Life”), respectively (the “Note Holders”), in conjunction with the reinsurance transaction discussed in Note 10 “Reinsurance Assumed”. The Notes are direct financial obligations of the Company, and the Holders of the Notes cannot require repayment from PLC, or any affiliates and subsidiaries, other than the Company, the direct issuer of the Notes.
The Company pays interest on the principal amount of the Notes on a semi-annual basis subject to regulatory approval. The first payment was made on December 31, 2018. Any payment of principal, including by redemption, or interest on the Notes may only be made with the prior approval of the Commissioner. The Company has received approval from the Commissioner to pay interest on the Notes through December 31, 2023. Except in certain instances that are considered “Events of Default”, the Note Holders have no rights to accelerate payment of principal on the Notes. “Events of Default” include a failure to pay interest or principal on the Notes when it becomes due and payable, or any state or federal agency obtaining an order or grant of approval for the rehabilitation, liquidation, conservation, or dissolution of the Company. The Company reserves the right to repay the Notes at any time, subject to the terms of the Notes and prior regulatory approval.
In the event that the Company is subject to liquidation, holders of Indebtedness, Policy Claims and Prior Claims would be afforded a greater priority under the Liquidation Act and accordingly, would have the right to be paid in full before any payments of interest or principal are made to Note Holders. The Note Holders would have the right to be paid before any payments are made to common stockholders. In addition, the Notes will rank pari passu with future surplus notes issued by the Company and with all other similarly subordinated claims.
9. Liabilities, Contingencies and Assessments
Assessments
Under the insurance guaranty fund laws of most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. From time to time, companies may be asked to contribute amounts beyond prescribed limits. It is possible that the Company could be assessed with respect to product lines not offered by the Company. In addition, legislation may be introduced in various states with respect to guaranty fund assessment laws related to insurance products, including long term care insurance and other specialty products, that alters future premium tax offsets received in connection with guaranty fund assessments. As of December 31, 2022 and 2021, the Company accrued liabilities of $6.4 million and $4.3 million, respectively, for future assessments. The Company accrued related assets for future premium tax credits of $5.3 million and $3.3 million as of December 31, 2022 and 2021, respectively. In addition, assets of $0.9 million
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
and $1.3 million as of December 31, 2022 and 2021, respectively, relate to assessments already paid that will be taken as credits on future premium tax returns.
Other Commitments and Contingencies
Scottish Re (U.S.), Inc. ("SRUS") was placed in rehabilitation on March 6, 2019 by the State of Delaware. Under the related order, the Insurance Commissioner of the State of Delaware has been appointed the receiver of SRUS (the “Receiver”) and provided with authority to conduct and continue the business of SRUS in the interest of its cedents, creditors, and stockholder. The order was accompanied by an injunction requiring the continued payment of reinsurance premiums to SRUS and temporarily prohibiting cedents, including the Company, from offsetting premiums payable against receivables from SRUS. On June 20, 2019, the Delaware Court of Chancery (the “Court”) entered an order approving a Revised Offset Plan, which allows cedents, including the Company, to offset premiums under certain circumstances.
A proposed Rehabilitation Plan (“Original Rehabilitation Plan”) was filed by the Receiver on June 30, 2020. The Original Rehabilitation Plan presents the following two options to each cedent: 1) remain in business with SRUS and be governed by the Rehabilitation Plan, or 2) recapture business ceded to SRUS. Due to SRUS’s financial status, neither option would pay 100% of the Company’s outstanding claims. The Original Rehabilitation Plan would impose certain financial terms and conditions on the cedents based on the election made, the type of business ceded, the manner in which the business is collateralized, and the amount of losses sustained by the cedent. On October 9, 2020, the Receiver filed a proposed order setting forth a schedule to present the Original Rehabilitation Plan for Court approval, which order contemplated possible modifications to the Rehabilitation Plan to be filed with the Court by March 16, 2021. The Court approved the order. On March 16, 2021, the Receiver filed a draft Amended Rehabilitation Plan (“Amended Plan”). The majority of the substance and form of the original Rehabilitation Plan, including its two-option structure described above, remained in place.
For much of 2020 and into early 2021, a group of interested parties collectively requested certain information and financial data from the Receiver that would allow them to more fully evaluate first the Original Rehabilitation Plan and then the Amended Plan. This group also had a number of conversations with counsel for the Receiver regarding concerns over the Plan. On June 30, 2022, the Receiver filed a motion seeking approval of a Modified Plan, along with a number of financial disclosure documents, including a liquidation analysis. While there are significant changes proposed in the Modified Plan (as compared to the Original Rehabilitation Plan and the Amended Plan), much of the economic substance (including not paying claims in full) of the Original/Amended Rehabilitation Plan are included in the Modified Plan.
The Court provided a framework to be followed by the Receiver to seek formal approval of the Rehabilitation Plan. This framework included filing the motion specifically seeking that relief and supporting that motion with the disclosure document containing the information that the Receiver believes is sufficient to enable parties to evaluate whether to object. In response to that document, interested parties (those with standing) may file objections and seek discovery. On October 24, 2022, a number of interested parties filed objections to the Modified Plan. After discovery, the parties will brief the issues and an evidentiary hearing on the Rehabilitation Plan will follow. A tentative timeline, beginning in August 2022, has been set, although given the inherent delays associated with the case, the tentative timeline is likely to be extended.
As of December 31, 2022, the Company had outstanding claim reserves from SRUS of $9.1 million, including a recoverable of $6.1 million. In addition, the Company had a statutory reserve credit of $53.8 million at December 31, 2022. As of December 31, 2022, the Company accrued a loss contingency reserve of $33.8 million under SSAP No. 5R, “Liabilities, Contingencies, and Impairment of Assets” with respect to amounts receivable from SRUS for ceded claims and reserves. As of December 31, 2021, the Company had outstanding claim reserves from SRUS of $10.9 million, including a $6.8 million recoverable. In addition, the Company had a statutory reserve credit of $66.5 million at December 31, 2021. As of December 31, 2021, the Company accrued a loss contingency reserve of $55.7 million under SSAP No. 5R, “Liabilities, Contingencies, and Impairment of Assets” with respect to amounts receivable from SRUS for ceded claims and reserves. The Company continues to monitor SRUS and the actions of the receiver through discussions with legal counsel and review of publicly available information. As of
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
December 31, 2022, management does not believe that the ultimate outcome of the rehabilitation process will have a material impact on the Company’s financial position or results of operations.
A number of judgments have been returned against insurers, broker dealers and other providers of financial services involving, among other things, sales, underwriting practices, product design, product disclosure, administration, denial or delay of benefits, benefit payment methods, charging excessive or impermissible fees, recommending unsuitable products to customers, breaching fiduciary or other duties to customers, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, payment of sales and other contingent commissions, and other matters. Often these legal proceedings have resulted in the award of substantial judgments that are disproportionate to actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given legal proceeding. Arbitration awards are subject to very limited appellate review. In addition, in some legal proceedings, companies have made material settlement payments. In some instances, substantial judgments may be the result of a party’s perceived ability to satisfy such judgments as opposed to the facts and circumstances regarding the claims made.
At any given time, a number of financial, market conduct, or other examinations or audits of the Company’s subsidiaries, as well as other insurance companies from whom the Company has coinsured blocks of life insurance and annuity policies, may be ongoing. It is possible that any examination or audit may result in payments of fines and penalties, payments to customers, or both, as well as changes in systems or procedures, or restrictions on business activities, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company monitors these matters for any developments that may make a loss contingency associated with any such audit or exam reasonably estimable.
The Company, like other insurance companies, in the ordinary course of business, is involved in legal proceedings. The Company cannot predict the outcome of any legal proceeding, nor can it provide an estimate of the possible loss, or range of loss, that may result from such legal proceeding. However, with respect to such legal proceedings, the Company does not expect that its ultimate liability, if any, will be material to its financial condition.
Advance Trust & Life Escrow Services, LTA, as Securities Intermediary of Life Partners Position Holder Trust v. Protective Life Insurance Company, Case No. 2:18-CV-01290, is a putative class action that was filed on August 13, 2018 in the United States District Court for the Northern District of Alabama. Plaintiffs seek to represent all owners of universal life and variable universal life policies issued or administered by PLICO or its predecessors that provide that cost of insurance rates are to be determined based on expectations of future mortality experience. Plaintiffs’ complaint alleges PLICO breached those policies by failing to periodically adjust its COI rates based on improved expectations of future mortality, and they seek class certification, compensatory damages, pre-judgment and post-judgment interest, costs, and other unspecified relief. On August 8, 2022, the US District Court granted PLICO’s Motion for Judgment on the Pleadings, concluding Protective has no contractual duty to lower COI rates if expectations as to future mortality improve. This favorable decision was appealed by the plaintiffs to the Eleventh Circuit Court of Appeals on August 26, 2022. The Company will continue to vigorously defend this matter and cannot predict the outcome of or reasonably estimate the possible loss or range of loss that might result from this litigation.
The Company is currently defending two putative class actions (Beverly Allen v. Protective Life Insurance Company, Civil Action No. 1:20-cv-00530-JLT (E.D. Cal. filed Apr. 14, 2020), and Janice Schmidt v. Protective Life Insurance Company, et al., Civil Action No. 1:21-cv-01784-SAB (E.D. Cal. filed Dec. 17, 2021) in which the plaintiffs claim that defendants’ alleged failure to comply with certain California statutes which address contractual grace periods and lapse notice requirements for certain life insurance policies requires that these policies remain in force. The plaintiffs seek unspecified monetary damages and injunctive relief. No class has been certified in either putative class action. In continuing to defend these matters, the Company maintains various defenses to the merits of the plaintiffs’ claims and to class certification. However, the Company cannot predict the outcome of or reasonably estimate the possible loss or range of loss that might result from this litigation.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company leases administrative and marketing office space in 6 cities, with most leases being for periods of ten to twenty-five years. Rent expense for 2022, 2021, and 2020 was $1.9 million, $2.6 million, and $3.3 million, respectively. Although the Company is legally obligated for these leases, rent expense will be less than projected lease commitments due to rent paid by affiliates.
The projected commitment under these leases for the next 5 years is as follows:
| | | | | | | | |
| Years | | ($ in thousands) |
| 2023 | | $ | 4,625 | |
| 2024 | | 4,803 | |
| 2025 | | 2,858 | |
| 2026 | | 1,283 | |
| 2027 | | 1,236 | |
| Thereafter | | 6,187 | |
| Total | | $ | 20,992 | |
Refer to Note 7 for a description of the contingent commitments and guarantees involving affiliates of the Company, and to Note 11 for commitments to extend mortgage loans.
10. Reinsurance
The Company remains liable with respect to ceded reinsurance should any reinsurer fail to meet the obligations that it assumed. The Company evaluates the financial condition of its reinsurers and monitors the associated concentration of credit risk.
Reinsurance Ceded
The Company has ceded insurance contracts with its affiliates as of and for the years ended December 31 as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Life: | | | |
| Insurance in-force | $ | 88,690,638 | | | $ | 97,543,332 | |
| Policy and claim reserves ceded | 6,845,313 | | | 5,687,970 | |
| Policy and claim liabilities ceded | 38,661 | | | 52,756 | |
| Premiums ceded | 1,549,971 | | | 116,524 | |
| | | |
| Accident and health: | | | |
| Policy and claim reserves ceded | $ | 183 | | | $ | 359 | |
| Policy and claim liabilities ceded | 182 | | | 276 | |
| Premiums ceded | 1,448 | | | 1,033 | |
For the year ended December 31, 2020, the Company ceded life insurance premiums of $673.1 million and accident and health premiums of $5 thousand to its affiliates
Effective October 1, 2020, GGCIC entered into separate amended and restated indemnity reinsurance agreements with the Company (the “2020 PLICO-GGCIC Agreement”) and WCL (the “2020 WCL-GGCIC Agreement”). The Company ceded to GGCIC premiums of $88.6 million, $115.5 million, and $166.9 million for the years ended December 31, 2022, 2021 and 2020, respectively, and ceded statutory reserves of $4.9 billion and $5.2 billion as of December 31, 2022 and 2021, respectively.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Effective April 1, 2020, the Company reinsured certain fixed annuity business under a coinsurance with funds withheld treaty to Protective Life Reinsurance Bermuda Ltd. (“PL Re”). PL Re, a wholly owned subsidiary of PLC, is domiciled in Bermuda and holds reserves based on Bermuda insurance regulations. The policies ceded under the agreement (the “PLICO-PL Re Reinsurance Agreement”) were in force on or before April 1, 2020. The cession to PL Re included the initial estimated transfer of $485.2 million of annuity reserves. As a result of the transaction, the Company recorded an estimated initial ceding allowance of $28.6 million and estimated initial premium transfers of $485.2 million. Pursuant to SSAP No. 61R, “Life, Deposit Type and Accident and Health Reinsurance”, and Appendix A-791, the Company recognized $6.0 million, representing 21% of the initial net gain, in net income upon the cession to PL Re. $22.6 million, or 79% of the initial net gain, was included as a component of surplus which was deferred and will be amortized into income in future periods.
On April 1, 2022, the Company amended the PLICO-PL Re Reinsurance Agreement whereby the Company reinsures certain fixed annuity business under a coinsurance with funds withheld treaty to PL Re. The cession to PL Re included the initial estimated transfer of $1.5 billion of annuity reserves. As a result of the amendment, the Company recorded an estimated initial ceding allowance of $113.0 million and estimated initial premium transfers of $1.5 billion. Pursuant to SSAP No. 61R, “Life, Deposit Type and Accident and Health Reinsurance”, and Appendix A-791, the Company recognized $23.7 million, representing 21% of the initial net gain, in net income upon the cession to PL Re. $89.3 million, or 79% of the initial net gain, was included as a component of surplus which was deferred and will be amortized into income in future periods.
In connection with the agreement and amendment, the Company transferred assets backing economic reserves to a segregated funds withheld account owned by the Company for the benefit of PL Re. The balance in this account was $1.8 billion and $469.1 million as of December 31, 2022 and 2021, respectively. The Company ceded premiums of $1.5 billion, $38 thousand, and $487.3 million for the years ended December 31, 2022, 2021, and 2020, respectively and ceded statutory reserves of $1.9 billion and $495.6 million as of December 31, 2022 and 2021, respectively. For the years ended December 31, 2022, 2021, and 2020, $1.1 million, $0, and $11.8 million, respectively was amortized into income.
The Company has ceded insurance contracts with non-affiliated insurers as of and for the years ended December 31 as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Life: | | | |
| Insurance in-force | $ | 125,166,957 | | | $ | 135,221,772 | |
| Policy and claim reserves ceded | 3,164,022 | | | 3,395,548 | |
| Policy and claim liabilities ceded | 170,545 | | | 192,351 | |
| Premiums ceded | 1,013,650 | | | 938,134 | |
| | | |
| Accident and health: | | | |
| Policy and claim reserves ceded | $ | 11,181 | | | $ | 12,880 | |
| Policy and claim liabilities ceded | 52 | | | 34 | |
| Premiums ceded | 699 | | | 2,083 | |
The Company ceded to non-affiliated insurers life premiums of $912.1 million and accident and health premiums of $3.1 million during the year ended December 31, 2020.
None of the Company’s non-affiliated reinsurers were owned in excess of 10% or controlled, either directly or indirectly, by the Company or by any representative, officer, trustee, or director of the Company. Certain policies issued by the Company have been reinsured with a company chartered in a country other than the United States (excluding U.S. branches of such companies) which is owned in excess of 10% or controlled directly or indirectly by an insured, a beneficiary, a creditor of an insured, or any other person not primarily engaged in the insurance
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
business. Numerous reinsurers relate to auto dealerships or finance companies that established reinsurance companies to supplement their primary business.
The Company does not have any reinsurance agreements in effect under which the reinsurer may unilaterally cancel any reinsurance for reasons other than for nonpayment of premium or other similar credits. The Company does not have any reinsurance agreements in effect such that the amount of losses paid or accrued through the statement date may result in a payment to the reinsurer of amounts which, in aggregate and allowing for offset of mutual credits from other reinsurance agreements with the same reinsurer, exceed the total direct premium collected under the reinsured policies.
The Company had no aggregate reductions to surplus for terminations of reinsurance agreements during 2022, 2021, and 2020.
No new reinsurance agreements were entered into during 2022. As discussed above, the PL Re agreement was amended in 2022.
The Company did not write off any material reinsurance receivables during the three-year period ended December 31, 2022. The Company nonadmitted $49.9 million and $39.4 million of reinsurance receivables as of December 31, 2022 and 2021, respectively.
During the year ended December 31, 2022, commutation of ceded reinsurance with Transamerica Life Insurance Company had a net unfavorable $26.1 million effect on the Company’s operations in the following categories:
| | | | | | | | |
| | ($ in thousands) |
| Claims incurred | | $ | 47,262 | |
| Premiums earned | | $ | 21,186 | |
During the year ended December 31, 2021, commutation of ceded reinsurance with RGA Reassurance Company had a favorable $13.3 million effect on the Company’s operations.
As of December 31, 2022 and 2021, the Company had the following reinsurance recoverable balances relating to paid losses included in “Amounts recoverable from reinsurers” in the Statements of Admitted Assets, Liabilities, and Capital and Surplus:
| | | | | | | | | | | | | | | | | |
| Amount Recoverable as of December 31, 2022 | | % of Total | | Rating |
| ($ in thousands) | | | | |
| Golden Gate Captive Insurance Company | $ | 59,347 | | | 47.9 | % | | Not rated |
| Swiss Re Life & Health America Inc. | 17,081 | | | 13.8 | | | A.M. Best Company A+ |
| Scottish Re (U.S.) Inc. | 6,145 | | | 5.0 | | | Not rated |
| Munich American Reassurance Company | 5,944 | | | 4.8 | | | A.M. Best Company A+ |
| RGA Reinsurance Company | 5,722 | | | 4.6 | | | A.M. Best Company A+ |
| SCOR Global Life Americas Reinsurance Company | 5,042 | | | 4.1 | | | A.M. Best Company A+ |
| Security Life of Denver Insurance Company | 4,328 | | | 3.5 | | | Not rated |
| Transamerica Life Insurance Company | 4,121 | | | 3.3 | | | A.M. Best Company A |
| SCOR Global Life USA Reinsurance Company | 4,052 | | | 3.3 | | | A.M. Best Company A+ |
| All other | 12,099 | | | 9.7 | | | |
| $ | 123,881 | | | 100.0 | % | | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | |
| Amount Recoverable as of December 31, 2021 | | % of Total | | Rating |
| ($ in thousands) | | | | |
| Golden Gate Captive Insurance Company | $ | 78,073 | | | 55.8 | % | | Not rated |
| Swiss Re Life & Health America Inc. | 12,592 | | | 9.0 | | | A.M. Best Company A+ |
| Scottish Re (U.S.) Inc. | 6,751 | | | 4.8 | | | Not rated |
| Munich American Reassurance Company | 5,520 | | | 3.9 | | | A.M. Best Company A+ |
| SCOR Global Life Americas Reinsurance Company | 4,895 | | | 3.5 | | | A.M. Best Company A+ |
| RGA Reinsurance Company | 4,822 | | | 3.4 | | | A.M. Best Company A+ |
| SCOR Global Life USA Reinsurance Company | 4,742 | | | 3.4 | | | A.M. Best Company A+ |
| The Canada Life Assurance Company | 4,022 | | | 2.9 | | | Not rated |
| All other | 18,506 | | | 13.3 | | | |
| $ | 139,923 | | | 100.0 | % | | |
Reinsurance Assumed
During 2005, the Company executed a treaty with WCL to reinsure certain new annuity business. Under this agreement, the Company received $0, $68 thousand, and $0 in premiums from WCL during 2022, 2021, and 2020, respectively. The Company assumed reserves of $49.2 million and $54.4 million as of December 31, 2022 and 2021, respectively.
Effective during 2008, the Company reinsured certain term life insurance business from GGCIC, an affiliate, under a monthly renewable term treaty. The Company assumed $36.0 million in premiums for the year ended December 31, 2020. This agreement was terminated as of October 1, 2020.
Effective October 1, 2012, the Company reinsured certain universal life with secondary guarantee business from WCL, an affiliate, under a coinsurance treaty. The Company assumed $6.8 million, $11.6 million, and $26.3 million in premiums for the years ended December 31, 2022, 2021, and 2020, respectively, and assumed statutory reserves of $562.3 million and $556.9 million as of December 31, 2022 and 2021, respectively.
The Company was party to several stop loss indemnity reinsurance agreements with WCL, whereby the Company assumed from WCL any mortality risk in excess of a contractually defined threshold with respect to certain Captive-related level premium term life and universal life with secondary guarantee business. Premiums of $0.4 million were assumed under these agreements in 2020. These agreements were terminated on October 1, 2020.
The Company has assumed from its subsidiaries and affiliates as of and for the years ended December 31 as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Life: | | | |
| Insurance in-force | $ | 4,106,092 | | | $ | 4,412,977 | |
| Policy and claim reserves assumed | 611,594 | | | 611,245 | |
| Policy and claim liabilities assumed | 10,105 | | | 14,150 | |
| Premiums ceded | 6,803 | | | 11,657 | |
The Company assumed from affiliated insurers life premiums of $62.6 million during the year ended December 31, 2020.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company has assumed from non-affiliated insurers as of and for the years ended December 31 as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Life: | | | |
| Insurance in-force | $ | 132,972,941 | | | $ | 180,513,376 | |
| Policy and claim reserves assumed | 24,056,577 | | | 25,059,148 | |
| Policy and claim liabilities assumed | 239,618 | | | 315,143 | |
| Premiums ceded | 720,759 | | | 866,380 | |
| | | |
| Accident and health: | | | |
| Policy and claim reserves assumed | $ | 291,299 | | | $ | 345,503 | |
| Policy and claim liabilities assumed | 1,218 | | | 16,654 | |
| Premiums ceded | 13,985 | | | 28,740 | |
The Company assumed from non-affiliated insurers life premiums of $1.2 billion and accident and health premiums of $64.6 million during the year ended December 31, 2020.
11. Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk
Derivative Financial Instruments
The table below summarizes the notional amount of the Company's financial instruments with off-balance sheet risk as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | Liabilities |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($ in thousands) |
| Swaps | $ | 225,241 | | | $ | 1,716,810 | | | $ | 397,297 | | | $ | 2,639,619 | |
| Futures | 147,683 | | | 334,673 | | | 284,547 | | | 168,896 | |
| Options | 7,681,876 | | | 8,623,582 | | | 6,624,706 | | | 6,829,003 | |
| Totals | $ | 8,054,800 | | | $ | 10,675,065 | | | $ | 7,306,550 | | | $ | 9,637,518 | |
Derivative instruments expose the Company to credit and market risk. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. The Company manages market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. The Company monitors its use of derivatives in connection with its overall asset / liability management programs and risk management strategies. In addition, all derivative programs are monitored by the Company’s risk management department.
All derivative instruments qualifying for hedge accounting are accounted for in a manner that is consistent with the accounting for the hedged item. The hedged items are the Company’s funding agreements which are reported in accordance with Actuarial Guideline 33. The derivative entered into in conjunction with the funding agreement has a remaining cost basis of $4.4 million and accumulated foreign currency translation adjustments of $14.5 million; therefore, the derivative is reported in the Statement of Admitted Assets, Liabilities, and Capital and Surplus at an $18.9 million carrying value as of December 31, 2022. All derivative instruments used in hedging transactions that do not meet the criteria of an effective hedge are reported at fair value and are included in the Statements of Admitted Assets, Liabilities, and Capital and Surplus. The changes in the fair value of these derivatives are recognized immediately as “Change in net unrealized capital gains and losses, less capital gains tax” in unassigned funds.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company did not exclude any component of the hedging derivative instrument’s gain or loss from the assessment of hedge effectiveness.
During the year ended December 31, 2022, the Company recognized $109.0 million of unrealized losses related to derivatives. Of this amount, $94.5 million of unrealized losses related to derivatives that did not qualify for hedge accounting. The Company recognized $14.5 million of unrealized losses as a result of foreign currency translation adjustments for derivatives that did qualify for hedge accounting. During the year ended December 31, 2021, the Company had $259.4 million of unrealized losses related to derivatives that did not qualify for hedge accounting. During the year ended December 31, 2020, the Company had $17.8 million of unrealized gains related to derivatives that did not qualify for hedge accounting.
The following sections provide a description of the Company’s objectives for using derivatives.
Derivatives related to the management of certain risks within the Company’s funding agreement obligations
In connection with the issuance of a fixed rate funding agreement denominated in a foreign currency, the Company entered into a fixed-to-fixed foreign currency swap in order to hedge the foreign currency exchange risk associated with the funding agreement. The cash flows received on the swap are identical to the cash flows paid on the funding agreement. The swap required an exchange of the notional amounts at inception and maturity.
In connection with the issuance of a floating rate funding agreement, the Company entered into an interest rate swap in order to hedge the interest rate risk associated with the funding agreement. The cash flows received on the swap were identical to the cash flow variability paid on the funding agreement. This interest rate swap matured in July 2020.
Derivatives related to the management of certain risks within the Company’s fixed indexed annuity products
The Company uses equity options to manage its equity risk in its fixed indexed annuity products. The Company may purchase and sell index call and put options which have underlyings based upon several equity indexes. As of December 31, 2022 and 2021, the Company had paid a net amount of $101.5 million and $109.1 million, respectively, for its open call options.
The Company uses US equity index futures and volatility futures transactions. These positions are traded on recognized exchanges, and they require the posting of margin through the broker. Because the counterparties also are required to post margin, these positions do not contain significant counterparty credit risk.
Derivatives related to the management of certain risks within the Company’s indexed universal life products
The Company uses equity options to manage its equity risk in its indexed universal life products. The Company may purchase and sell index call options which have underlyings based upon several equity indexes. As of December 31, 2022 and 2021, the Company had paid a net amount of $21.3 million and $18.0 million, respectively, for its open call options.
The Company uses US equity index futures transactions. These positions are traded on recognized exchanges, and they require the posting of margin through the broker. Because the counterparties also are required to post margin, these positions do not contain significant counterparty credit risk.
Derivatives related to the management of certain risks within the Company’s variable annuity products
The Company uses a combination of derivative instruments to mitigate volatility, interest rate, credit, and equity risk related to certain guaranteed minimum benefits, including GLWBs, within the Company’s variable annuity products.
The Company uses interest rate futures, US and foreign equity market index futures, and foreign currency futures transactions. These positions are traded on recognized exchanges, and they require the posting of margin through the broker. Because the counterparties also are required to post margin, these positions do not contain significant counterparty credit risk.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The Company used forward swaps and interest rate swaps, whereby the Company primarily paid a floating rate of interest based upon a 3-month LIBOR rate, while it received a fixed rate. As of December 31, 2022, the Company held no forward swaps or interest rate swaps. The Company also uses total return swaps, where the Company primarily makes payments based on the return of the underlying equity index, while it receives a floating rate of interest based upon either the 3-month LIBOR rate or the federal funds rate, both adjusted by stated basis points. Certain positions may be cleared through a central clearing house and require the posting of margin through the clearing member. The Company also uses interest rate forwards, where primarily it agrees to purchase a treasury bond on a future date at a predetermined price.
The Company uses index put options which have underlyings based upon several equity indexes, both US and foreign. As of December 31, 2022 and 2021, the cost of the open options was $123.0 million and $196.9 million, respectively.
Derivatives related to the management of certain risks within the Company’s structured annuity products
The Company uses equity options to manage its equity risk in its structured annuity products. The Company may purchase and sell index options which have underlyings based upon several equity indexes. As of December 31, 2022 and 2021, the cost of the open options was $6.4 million and $4.7 million, respectively.
The Company uses US equity index futures transactions. These positions are traded on recognized exchanges, and they require the posting of margin through the broker. Because the counterparties also are required to post margin, these positions do not contain significant counterparty credit risk.
The Company also entered into a total return swap, where the Company makes payments based on the return of certain hedges associated with certain structured annuity products, while it receives a floating rate of interest based upon the 1-month LIBOR rate.
As of December 31, 2022, the Company had posted cash and securities (at fair value) for its derivatives as collateral of $60.3 million and $81.4 million, respectively. Of this amount, $13.1 million and $40.5 million of cash and securities, respectively, posted as collateral related to futures, and $47.2 million and $40.9 million of cash and securities, respectively, posted as collateral related to options and non-cleared swaps.
As of December 31, 2021, the Company had posted cash and securities (at fair value) for its derivatives as collateral of $182.7 million and $85.5 million, respectively. Of this amount, $3.0 million and $29.6 million of cash and securities, respectively, posted as collateral related to futures, $151.1 million and $45.7 million of cash and securities, respectively, posted as collateral related to cleared swaps, and $28.6 million and $10.2 million of cash and securities, respectively, posted as collateral related to options and non-cleared swaps.
Collateral received may include both cash and non-cash collateral. Cash collateral received by the Company is reported in “Derivative collateral and receivables” in the Statements of Admitted Assets, Liabilities, and Capital and Surplus, with a corresponding amount recorded “Derivative collateral and payables” representing the Company’s obligation to return the collateral. Non-cash collateral received by the Company is not recognized in the Statements of Admitted Assets, Liabilities, and Capital and Surplus unless the Company exercises its right to sell or re-pledge the underlying asset. As of December 31, 2022, the Company received $62.2 million of cash as collateral, all of which related to options and non-cleared swaps. As of December 31, 2022, the fair value of non-cash collateral received was $10.9 million, which related to non-cleared swaps. As of December 31, 2021, the Company received $187.5 million of cash as collateral. Of this amount $1.6 million of cash received as collateral related to futures, $10.3 million of cash received as collateral related to cleared swaps, and $175.6 million of cash received as collateral related to options and non-cleared swaps. As of December 31, 2021, the Company had not received any non-cash collateral.
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. The credit exposure of swaps and over-the-counter options is represented by the fair value of contracts with a positive fair value at the reporting date. As of December 31, 2022, the Company had received $62.2 million of cash pledged as collateral and non-cash collateral with a fair value of $10.9 million. As of December 31, 2021, the
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Company had received $187.5 million of cash pledged as collateral. Because exchange-traded futures and options are effected through a regulated exchange and positions are marked to market on a daily basis, the Company has little exposure to credit-related losses in the event of nonperformance by counterparties to such financial instruments
The current credit exposure of the Company’s derivative contracts is limited to the fair value at the reporting date. Credit risk is managed by entering into transactions with creditworthy counterparties. The Company also attempts to minimize its exposure to credit risk through the use of multiple highly-rated counterparties.
Other Off-Balance Sheet Financial Instruments
The table below presents a summary of the contractual amounts of off-balance sheet financial instruments, other than derivative financial instruments, as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Commitments to extend mortgage loans | $ | 917,633 | | | $ | 967,038 | |
Commitments to extend mortgage loans are agreements to lend to a borrower, provided there is no violation of any condition established in the contract. The Company enters into these agreements to commit to future loan fundings at a predetermined interest rate. Commitments generally have fixed expiration dates or other termination clauses.
For commitments to extend mortgage loans, the amounts presented above do not represent amounts at risk if the counterparty defaults.
The collateral held for commitments to extend mortgage loans is a cash commitment fee, which is forfeited if the counterparty fails to perform.
12. Borrowed Money
Under a revolving line of credit arrangement (the “2018 Credit Facility”), the Company and PLC had the ability to borrow on an unsecured basis up to an aggregate principal amount of $1.0 billion. Under certain circumstances the 2018 Credit Facility allowed for a request that the commitment be increased up to a maximum principal amount of $1.5 billion.
On April 5, 2022, the Company amended and restated the 2018 Credit Facility and entered into a Second Amended and Restated Credit Agreement (the “2022 Credit Facility”) among PLC, the Company, the several lenders from time to time party thereto, and Regions Bank, as administrative agent and swingline lender. Under the 2022 Credit Facility, the Company and PLC has the ability to borrow on an unsecured basis up to an aggregated principal amount of $1.5 billion. The Company and PLC also has the right in certain circumstances to request that the commitment under the 2022 Credit Facility be increased up to a maximum principal amount of $2.0 billion. Balances outstanding under the 2022 Credit Facility accrue interest at a rate equal to, at the option of PLC and the Company, (i) Adjusted Term SOFR Rate plus a spread based on the ratings of PLC’s Senior Debt, or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent’s Prime Rate, (y) 0.50% above the Federal Funds Rate, or (z) the one-month Adjusted Term SOFR Rate plus 1.00% and (B) a spread based on the ratings of the PLC’s Senior Debt subject to adjustments based upon the achievement of certain environmental, social and governance metrics (“ESG Metrics”) by PLC, the Company and their subsidiaries. The 2022 Credit Facility also provides for a facility fee at a rate that varies with the ratings of the PLC’s Senior Debt, subject to adjustments based upon the achievement of certain ESG Metrics by PLC, the Company and their subsidiaries. The facility fee is calculated based on the aggregate amount of commitments under the 2022 Credit Facility, whether used or unused. The maturity date of current borrowings under the 2022 Credit Facility is April 5, 2027, subject to certain extension options available to the Company. The Company is not aware of any non-compliance with the financial debt covenants of the 2022 Credit Facility as of December 31, 2022. The Company did not have an outstanding balance under the 2022 Credit Facility as of December 31, 2022. PLC had no outstanding balance as of December 31, 2022. The Company did not have an outstanding balance under the Credit Facility as of December 31, 2021. PLC had an outstanding balance of $275.0 million bearing interest at a rate of LIBOR plus 1.00% as of December 31, 2021.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Please refer to the Note 5 section “Repurchase Agreements and Securities Lending Transactions” for information regarding the Company’s repurchase agreements and the Note 7 section “Intercompany Agreements and Settlements” for a discussion of the Company’s intercompany loan agreements.
13. Change in Incurred Losses and Loss Adjustment Expenses
Activity in the liability for accident and health policy and contract claims is summarized as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| ($ in thousands) |
| Balance at January 1 | $ | 257,725 | | | $ | 282,740 | |
| Less reinsurance recoverables | — | | | — | |
| Net balance at January 1 | 257,725 | | | 282,740 | |
| Incurred: | | | |
| Related to current year | 69,246 | | | 53,577 | |
| Related to prior years | (1,725) | | | (19,821) | |
| Total incurred | 67,521 | | | 33,756 | |
| Paid: | | | |
| Related to current year | 18,350 | | | 19,075 | |
| Related to prior years | 34,522 | | | 39,696 | |
| Total paid | 52,872 | | | 58,771 | |
| Net balance at December 31 | 272,374 | | | 257,725 | |
| Plus reinsurance recoverables | — | | | — | |
| Balance at December 31 | $ | 272,374 | | | $ | 257,725 | |
Reserves and liabilities as of January 1, 2022, were $257.7 million. As of December 31, 2022, $34.5 million had been paid for incurred claims attributable to insured events of prior years. Reserves remaining for prior years at December 31, 2022, were $221.5 million as a result of re-estimation of unpaid claims and claim adjustment expenses, principally on acquired business, as well as cancer and credit lines of insurance. Therefore, there has been a $1.7 million favorable development from January 1, 2022 to December 31, 2022. Reserves and liabilities as of January 1, 2021, were $282.7 million. As of December 31, 2021, $39.7 million had been paid for incurred claims attributable to insured events of prior years. Reserves remaining for prior years at December 31, 2021, were $223.2 million as a result of re-estimation of unpaid claims and claim adjustment expenses, principally on acquired business, as well as cancer and credit lines of insurance. Therefore, there was a $19.8 million favorable development from January 1, 2021 to December 31, 2021. Original estimates are increased or decreased as additional information becomes known regarding individual claims. No additional premiums or return premiums have been accrued as a result of the prior year effects.
There have been no significant changes in methodologies or assumptions used in calculating the liability for unpaid losses.
14. Participating Policies
Direct and assumed premiums under individual life participating policies were $50.6 million and 1.2%, $54.2 million and 1.5%, and $55.9 million and 2.0% for the years ended December 31, 2022, 2021, and 2020, respectively, of total direct and assumed individual life premium earned. The Company accrues dividends when declared by the Board of Directors in “Policyholders’ dividends”. Dividends to policyholders were $18.9 million, $29.5 million, and $29.6 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company has not allocated any additional income to participating policyholders.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
15. Analysis of Annuity Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics
Withdrawal characteristics of annuity actuarial reserves and deposit-type contract liabilities as of December 31, 2022 are as follows:
Individual Annuities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 6,606,182 | | | $ | 433,845 | | | $ | — | | | $ | 7,040,027 | | | 25.1 | % |
| b. At book value less current surrender charge of 5% or more | 360,459 | | | — | | | — | | | 360,459 | | | 1.3 | |
| c. At fair value | — | | | — | | | 10,708,787 | | | 10,708,787 | | | 38.1 | |
| d. Total with market value adjustment or at fair value (total of a through c) | 6,966,641 | | | 433,845 | | | 10,708,787 | | | 18,109,273 | | | 64.5 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 5,448,642 | | | 7,048 | | | — | | | 5,455,690 | | | 19.4 | |
| (2) Not subject to discretionary withdrawal provision | 4,508,828 | | | — | | | 7,252 | | | 4,516,080 | | | 16.1 | |
| (3) Total (gross: direct + assumed) | 16,924,111 | | | 440,893 | | | 10,716,039 | | | 28,081,043 | | | 100.0 | % |
| (4) Reinsurance ceded | 2,632,151 | | | — | | | — | | | 2,632,151 | | | |
| (5) Total (net) (3) - (4) | $ | 14,291,960 | | | $ | 440,893 | | | $ | 10,716,039 | | | $ | 25,448,892 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | 245,475 | | | $ | — | | | $ | — | | | $ | 245,475 | | | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Group Annuities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 4,999 | | | $ | 546,994 | | | $ | — | | | $ | 551,993 | | | 63.9 | % |
| b. At book value less current surrender charge of 5% or more | — | | | — | | | — | | | — | | | — | |
| c. At fair value | — | | | — | | | — | | | — | | | — | |
| d. Total with market value adjustment or at fair value (total of a through c) | 4,999 | | | 546,994 | | | — | | | 551,993 | | | 63.9 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 40,425 | | | 16,294 | | | — | | | 56,719 | | | 6.6 | |
| (2) Not subject to discretionary withdrawal provision | 254,941 | | | — | | | — | | | 254,941 | | | 29.5 | |
| (3) Total (gross: direct + assumed) | 300,365 | | | 563,288 | | | — | | | 863,653 | | | 100.0 | % |
| (4) Reinsurance ceded | 1,418 | | | — | | | — | | | 1,418 | | | |
| (5) Total (net) (3) - (4) | $ | 298,947 | | | $ | 563,288 | | | $ | — | | | $ | 862,235 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Deposit-type Contracts (no life contingencies):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 322,581 | | | $ | — | | | $ | — | | | $ | 322,581 | | | 2.7 | % |
| b. At book value less current surrender charge of 5% or more | 143,056 | | | — | | | — | | | 143,056 | | | 1.2 | |
| c. At fair value | — | | | — | | | — | | | — | | | — | |
| d. Total with market value adjustment or at fair value (total of a through c) | 465,637 | | | — | | | — | | | 465,637 | | | 3.9 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 758,380 | | | — | | | — | | | 758,380 | | | 6.4 | |
| (2) Not subject to discretionary withdrawal provision | 10,684,092 | | | — | | | 1,518 | | | 10,685,610 | | | 89.7 | |
| (3) Total (gross: direct + assumed) | 11,908,109 | | | — | | | 1,518 | | | 11,909,627 | | | 100.0 | % |
| (4) Reinsurance ceded | 2,058 | | | — | | | — | | | 2,058 | | | |
| (5) Total (net) (3) - (4) | $ | 11,906,051 | | | $ | — | | | $ | 1,518 | | | $ | 11,907,569 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | 4,031 | | | $ | — | | | $ | — | | | $ | 4,031 | | | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Reconciliation of Total Annuity Actuarial Reserves and Deposit Fund Liabilities:
| | | | | |
| Life & Accident & Health Annual Statement: | ($ in thousands) |
| Exhibit 5, Annuities Section, Total (net) | $ | 14,467,892 | |
| Exhibit 5, Supplementary Contracts with Life Contingencies Section, Total (net) | 123,016 | |
| Exhibit 7, Deposit-Type Contracts, Line 14, column 1 | 11,906,051 | |
| Subtotal | 26,496,959 | |
| Separate Accounts Annual Statement: | |
| Exhibit 3, Line 0299999, Column 2 | 11,721,737 | |
| Subtotal | 11,721,737 | |
| Combined Total | $ | 38,218,696 | |
Withdrawal characteristics of annuity actuarial reserves and deposit-type contract liabilities as of December 31, 2021 are as follows:
Individual Annuities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 6,196,289 | | | $ | 397,072 | | | $ | — | | | $ | 6,593,361 | | | 21.3 | % |
| b. At book value less current surrender charge of 5% or more | 762,836 | | | — | | | — | | | 762,836 | | | 2.5 | |
| c. At fair value | — | | | — | | | 13,184,862 | | | 13,184,862 | | | 42.6 | |
| d. Total with market value adjustment or at fair value (total of a through c) | 6,959,125 | | | 397,072 | | | 13,184,862 | | | 20,541,059 | | | 66.4 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 5,698,184 | | | 6,958 | | | — | | | 5,705,142 | | | 18.4 | |
| (2) Not subject to discretionary withdrawal provision | 4,704,188 | | | — | | | 8,953 | | | 4,713,141 | | | 15.2 | |
| (3) Total (gross: direct + assumed) | 17,361,497 | | | 404,030 | | | 13,193,815 | | | 30,959,342 | | | 100.0 | % |
| (4) Reinsurance ceded | 959,935 | | | — | | | — | | | 959,935 | | | |
| (5) Total (net) (3) - (4) | 16,401,562 | | | 404,030 | | | 13,193,815 | | | 29,999,407 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | 625,743 | | | $ | — | | | $ | — | | | $ | 625,743 | | | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Group Annuities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 5,527 | | | $ | 613,003 | | | $ | — | | | $ | 618,530 | | | 64.9 | % |
| b. At book value less current surrender charge of 5% or more | — | | | — | | | — | | | — | | | — | |
| c. At fair value | — | | | — | | | — | | | — | | | — | |
| d. Total with market value adjustment or at fair value (total of a through c) | 5,527 | | | 613,003 | | | — | | | 618,530 | | | 64.9 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 43,481 | | | 17,207 | | | — | | | 60,688 | | | 6.3 | |
| (2) Not subject to discretionary withdrawal provision | 274,343 | | | — | | | — | | | 274,343 | | | 28.8 | |
| (3) Total (gross: direct + assumed) | 323,351 | | | 630,210 | | | — | | | 953,561 | | | 100.0 | % |
| (4) Reinsurance ceded | 1,397 | | | — | | | — | | | 1,397 | | | |
| (5) Total (net) (3) - (4) | 321,954 | | | 630,210 | | | — | | | 952,164 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | — | | | $ | — | | | $ | — | | | $ | — | | | |
Deposit-type Contracts (no life contingencies):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| General Account | | Separate Account with Guarantees | | Separate Account Non-guaranteed | | Total | | % of Total |
| ($ in thousands) | | |
| (1) Subject to discretionary withdrawals | | | | | | | | | |
| a. With market value adjustments | $ | 249,326 | | | $ | — | | | $ | — | | | $ | 249,326 | | | 2.4 | % |
| b. At book value less current surrender charge of 5% or more | 167,909 | | | — | | | — | | | 167,909 | | | 1.6 | |
| c. At fair value | — | | | — | | | — | | | — | | | — | |
| d. Total with market value adjustment or at fair value (total of a through c) | 417,235 | | | — | | | — | | | 417,235 | | | 4.0 | |
| e. At book value without adjustment (minimal or no charge or adj.) | 725,559 | | | — | | | — | | | 725,559 | | | 7.0 | |
| (2) Not subject to discretionary withdrawal provision | 9,232,476 | | | — | | | 1,742 | | | 9,234,218 | | | 89.0 | |
| (3) Total (gross: direct + assumed) | 10,375,270 | | | — | | | 1,742 | | | 10,377,012 | | | 100.0 | % |
| (4) Reinsurance ceded | 1,936 | | | — | | | — | | | 1,936 | | | |
| (5) Total (net) (3) - (4) | $ | 10,373,334 | | | $ | — | | | $ | 1,742 | | | $ | 10,375,076 | | | |
| (6) Amount included in (1)b above that will move to (1)e in the year after the statement date | $ | 6,761 | | | $ | — | | | $ | — | | | $ | 6,761 | | | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Reconciliation of Total Annuity Actuarial Reserves and Deposit Fund Liabilities:
| | | | | |
| Life & Accident & Health Annual Statement: | ($ in thousands) |
| Exhibit 5, Annuities Section, Total (net) | $ | 16,591,600 | |
| Exhibit 5, Supplementary Contracts with Life Contingencies Section, Total (net) | 131,916 | |
| Exhibit 7, Deposit-Type Contracts, Line 14, column 1 | 10,373,334 | |
| Subtotal | 27,096,850 | |
| Separate Accounts Annual Statement: | |
| Exhibit 3, Line 0299999, Column 2 | 14,229,797 | |
| Subtotal | 14,229,797 | |
| Combined total | $ | 41,326,647 | |
16. Analysis of Life Actuarial Reserves by Withdrawal Characteristics
Withdrawal characteristics of the Company’s life actuarial reserves as of December 31, 2022, are as follows:
General Account
| | | | | | | | | | | | | | | | | |
| Account Value | | Cash Value | | Reserve |
| ($ in thousands) |
| Subject to discretionary withdrawal, surrender values, or policy loans: | | | | | |
| Term Policies with Cash Value | $ | — | | | $ | 46,081 | | | $ | 497,313 | |
| Universal Life | 14,876,652 | | | 15,441,221 | | | 15,872,700 | |
| Universal Life with Secondary Guarantees | 1,981,849 | | | 1,621,794 | | | 6,903,469 | |
| Indexed Universal Life | 532,850 | | | 326,040 | | | 442,711 | |
| Other Permanent Cash Value Life Insurance | — | | | 2,896,432 | | | 3,109,881 | |
| Variable Universal Life | 633,535 | | | 663,550 | | | 694,114 | |
| | | | | |
| Not subject to discretionary withdrawal or no cash values | | | | | |
| Term Policies without cash value | XXX | | XXX | | 4,615,099 | |
| Accidental Death Benefits | XXX | | XXX | | 4,975 | |
| Disability - Active Lives | XXX | | XXX | | 43,421 | |
| Disability - Disabled Lives | XXX | | XXX | | 181,657 | |
| Miscellaneous Reserves | XXX | | XXX | | 168,594 | |
| Total (Gross: direct + assumed) | 18,024,886 | | | 20,995,118 | | | 32,533,934 | |
| Reinsurance Ceded | 406,145 | | | 377,402 | | | 7,373,709 | |
| Total (net) | $ | 17,618,741 | | | $ | 20,617,716 | | | $ | 25,160,225 | |
Separate Account with Guarantees
| | | | | | | | | | | | | | | | | |
| Account Value | | Cash Value | | Reserve |
| ($ in thousands) |
| Subject to discretionary withdrawal, surrender values, or policy loans: | | | | | |
| Universal Life | $ | 15,387 | | | $ | 15,387 | | | $ | 15,387 | |
| Total (Gross: direct + assumed) | 15,387 | | | 15,387 | | | 15,387 | |
| Reinsurance Ceded | — | | | — | | | — | |
| Total (net) | $ | 15,387 | | | $ | 15,387 | | | $ | 15,387 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Separate Account Nonguaranteed
| | | | | | | | | | | | | | | | | |
| Account Value | | Cash Value | | Reserve |
| ($ in thousands) |
| Subject to discretionary withdrawal, surrender values, or policy loans: | | | | | |
| Variable Universal Life | $ | 2,469,442 | | | $ | 2,365,038 | | | $ | 2,353,557 | |
| Total (Gross: direct + assumed) | 2,469,442 | | | 2,365,038 | | | 2,353,557 | |
| Reinsurance Ceded | — | | | — | | | — | |
| Total (net) | $ | 2,469,442 | | | $ | 2,365,038 | | | $ | 2,353,557 | |
Reconciliation of Total Life Reserves
| | | | | |
| Life & Accident & Health Annual Statement: | ($ in thousands) |
| Exhibit 5, Life Insurance Section, Total (net) | $ | 24,800,573 | |
| Exhibit 5, Accidental Death Benefits Section, Total (net) | 4,289 | |
| Exhibit 5, Disability - Active Lives Section, Total (net) | 41,149 | |
| Exhibit 5, Disability - Disabled Lives Section, Total (net) | 168,244 | |
| Exhibit 5, Miscellaneous Reserves Section Total (net) | 145,970 | |
| Subtotal | 25,160,225 | |
| Separate Accounts Annual Statement: | |
| Exhibit 3, Line 0199999, Column 2 | 2,368,944 | |
| Subtotal | 2,368,944 | |
| Combined total | $ | 27,529,169 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Withdrawal characteristics of the Company’s life actuarial reserves as of December 31, 2021, are as follows:
General Account
| | | | | | | | | | | | | | | | | |
| Account Value | | Cash Value | | Reserve |
| ($ in thousands) |
| Subject to discretionary withdrawal, surrender values, or policy loans: | | | | | |
| Term Policies with Cash Value | $ | — | | | $ | 42,707 | | | $ | 486,764 | |
| Universal Life | 14,494,443 | | | 14,984,033 | | | 15,408,247 | |
| Universal Life with Secondary Guarantees | 2,081,396 | | | 1,636,976 | | | 6,582,203 | |
| Indexed Universal Life | 466,948 | | | 292,557 | | | 408,519 | |
| Other Permanent Cash Value Life Insurance | — | | | 2,877,581 | | | 3,091,864 | |
| Variable Universal Life | 467,769 | | | 473,837 | | | 500,499 | |
| | | | | |
| Not subject to discretionary withdrawal or no cash values | | | | | |
| Term Policies without cash value | XXX | | XXX | | 5,403,159 | |
| Accidental Death Benefits | XXX | | XXX | | 5,261 | |
| Disability - Active Lives | XXX | | XXX | | 46,678 | |
| Disability - Disabled Lives | XXX | | XXX | | 190,032 | |
| Miscellaneous Reserves | XXX | | XXX | | 164,572 | |
| Total (Gross: direct + assumed) | 17,510,556 | | | 20,307,691 | | | 32,287,798 | |
| Reinsurance Ceded | 441,998 | | | 388,763 | | | 8,120,248 | |
| Total (net) | $ | 17,068,558 | | | $ | 19,918,928 | | | $ | 24,167,550 | |
Separate Account with Guarantees
| | | | | | | | | | | | | | | | | |
| Account Value | | Cash Value | | Reserve |
| ($ in thousands) |
| Subject to discretionary withdrawal, surrender values, or policy loans: | | | | | |
| Universal Life | $ | 3,684 | | | $ | 3,684 | | | $ | 3,684 | |
| Total (Gross: direct + assumed) | 3,684 | | | 3,684 | | | 3,684 | |
| Reinsurance Ceded | — | | | — | | | — | |
| Total (net) | $ | 3,684 | | | $ | 3,684 | | | $ | 3,684 | |
Separate Account Nonguaranteed
| | | | | | | | | | | | | | | | | |
| Account Value | | Cash Value | | Reserve |
| ($ in thousands) |
| Subject to discretionary withdrawal, surrender values, or policy loans: | | | | | |
| Variable Universal Life | $ | 1,974,438 | | | $ | 1,896,321 | | | $ | 1,883,507 | |
| Total (Gross: direct + assumed) | 1,974,438 | | | 1,896,321 | | | 1,883,507 | |
| Reinsurance Ceded | — | | | — | | | — | |
| Total (net) | $ | 1,974,438 | | | $ | 1,896,321 | | | $ | 1,883,507 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Reconciliation of Total Life Reserves
| | | | | |
| Life & Accident & Health Annual Statement: | ($ in thousands) |
| Exhibit 5, Life Insurance Section, Total (net) | $ | 23,803,473 | |
| Exhibit 5, Accidental Death Benefits Section, Total (net) | 4,554 | |
| Exhibit 5, Disability - Active Lives Section, Total (net) | 43,977 | |
| Exhibit 5, Disability - Disabled Lives Section, Total (net) | 175,954 | |
| Exhibit 5, Miscellaneous Reserves Section Total (net) | 139,592 | |
| Subtotal | 24,167,550 | |
| Separate Accounts Annual Statement: | |
| Exhibit 3, Line 0199999, Column 2 | 1,887,191 | |
| Subtotal | 1,887,191 | |
| Combined total | $ | 26,054,741 | |
17. Premiums Deferred and Uncollected
Life insurance premiums deferred and uncollected represent annual or fractional premiums, either due and uncollected or not yet due, where policy reserves have been provided on the assumption that the full premium for the current policy year has been collected.
Deferred and uncollected life insurance premiums, net of reinsurance, as of December 31 were as follows:
| | | | | | | | | | | | | | |
| 2022 | | | | |
| Type | | Gross | | Net of Loading |
| | ($ in thousands) |
| Industrial | | $ | 10 | | | $ | 6 | |
| Ordinary new business | | 78 | | | 48 | |
| Ordinary renewal | | 7,749 | | | 3,350 | |
| Group Life | | (2,687) | | | (2,595) | |
| Totals | | $ | 5,150 | | | $ | 809 | |
| | | | | | | | | | | | | | |
| 2021 | | | | |
| Type | | Gross | | Net of Loading |
| | ($ in thousands) |
| Industrial | | $ | 10 | | | $ | 6 | |
| Ordinary new business | | 48 | | | 35 | |
| Ordinary renewal | | (30,403) | | | (34,780) | |
| Group Life | | (2,881) | | | (2,818) | |
| Totals | | $ | (33,226) | | | $ | (37,557) | |
18. Separate Accounts
The Company utilizes Separate Accounts to record and account for assets and liabilities for particular lines of business. For the current reporting year, the Company reported assets and liabilities from the following product lines into a Separate Account:
•Market value adjusted annuities
•Variable annuities
•Variable life contracts
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
•BOLI fixed universal life contracts
Separate Accounts held by the Company are for market value adjusted annuities and individual and group variable annuity and life contracts. The Separate Account for market value adjusted annuities provides the opportunity for the policyholder to invest in one or any combination of interest rate guarantee periods. The assets for this account are carried at fair value and are held in a non-unitized Separate Account. Amounts withdrawn from the contract in excess of the free withdrawal amount are subject to market value adjustment, which can be positive or negative. The market value adjusted annuity business has been included in the “Non-indexed Guarantee more than 4%” and the “Non-indexed Guarantee less than 4%” columns of the table disclosing information regarding the Company’s Separate Account as shown later in Note 18.
The Separate Accounts for the individual and group variable business invest in shares of various mutual funds with external investment advisors. The net investment experience of the Separate Account is credited directly to the policyholder and can be positive or negative. The individual and group variable business has been included in the “Nonguaranteed Separate Accounts” column of the table disclosing information regarding the Company’s Separate Accounts as shown later in Note 18.
Some of the variable annuity contracts contain GMDB, GMIB, and GLWB features, which are described in Note 1.
The Separate Accounts for the structured annuity business invest in funds tied to various market indices. The annual year-over-year return is credited directly to the policyholder and can be positive or negative subject to contractual floors and caps. The structured annuity business has been included in the “Indexed” column in the table later in Note 18.
These products are included within the Separate Accounts pursuant to Tennessee Code Section 56-3-501.
In accordance with the products recorded within the Separate Account, the Separate Account assets are considered legally insulated from the General Account, except for market value adjusted annuities. As of December 31, 2022 and 2021, the Company’s Separate Account included legally insulated assets of $13.3 billion and $15.3 billion, respectively. As of December 31, 2022 and 2021, the Company’s Separate Account statement included not legally insulated assets of $0.8 billion and $1.1 billion, respectively. The Separate Account assets as of December 31 are attributed to the following products:
| | | | | | | | | | | | | | |
| 2022 | | | | |
| Product | | Legally Insulated Assets | | Separate Account Assets
(Not Legally Insulated) |
| | ($ in thousands) |
| Variable annuities | | $ | 10,813,155 | | | $ | — | |
| Variable life contracts | | 2,474,038 | | | — | |
| Market value adjusted annuities | | — | | | 808,132 | |
| BOLI fixed universal life | | 16,317 | | | — | |
| Total | | $ | 13,303,510 | | | $ | 808,132 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | |
| 2021 | | | | |
| Product | | Legally Insulated Assets | | Separate Account Assets
(Not Legally Insulated) |
| | ($ in thousands) |
| Variable annuities | | $ | 13,294,478 | | | $ | — | |
| Variable life contracts | | 1,984,116 | | | — | |
| Market value adjusted annuities | | — | | | 1,103,784 | |
| BOLI fixed universal life | | 3,565 | | | — | |
| Total | | $ | 15,282,159 | | | $ | 1,103,784 | |
In accordance with the products recorded within the Separate Account, some Separate Account liabilities are guaranteed by the General Account. To compensate the General Account for the risk taken, the Separate Account paid risk charges of $231.2 million in 2022, $244.6 million in 2021, $230.2 million in 2020, $244.5 million in 2019, and $260.2 million in 2018.
For the year ended December 31, 2022, $9.2 million was paid by the General Account toward Separate Account guarantees. The total Separate Account guarantees paid by the General Account for the preceding four years ended December 31, 2021, 2020, 2019, and 2018, were $4.4 million, $4.5 million, $3.2 million, and $2.8 million, respectively.
The Company did not have securities lending transactions within the Separate Accounts during either 2022, 2021 or 2020.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Information regarding the Company's Separate Accounts is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | | | | | | | | |
| Indexed | | Nonindexed Guarantee Less Than 4% | | Nonindexed Guarantee More Than 4% | | Nonguaranteed Separate Account | | Total |
| ($ in thousands) |
(1) Premiums, consideration or deposits for the year ended 12/31/2022 | $ | 80,800 | | | $ | 5 | | | $ | 11 | | | $ | 1,345,508 | | | $ | 1,426,324 | |
Reserves at 12/31/2022 | | | | | | | | | |
| (2) For accounts with assets at: | | | | | | | | | |
| (a) Fair value | $ | 202,305 | | | $ | 191,197 | | | $ | 610,679 | | | $ | 13,086,501 | | | $ | 14,090,682 | |
| (b) Amortized cost | — | | | — | | | — | | | — | | | — | |
| (c) Total reserves | $ | 202,305 | | | $ | 191,197 | | | $ | 610,679 | | | $ | 13,086,501 | | | $ | 14,090,682 | |
| (3) By withdrawal characteristics: | | | | | | | | | |
| (a) Subject to discretionary withdrawal: | | | | | | | | | |
1. With market value adjustment | $ | 202,305 | | | $ | 191,197 | | | $ | 610,679 | | | $ | — | | | $ | 1,004,181 | |
2. At book value without market value adjustment and with current surrender charge of 5% or more | — | | | — | | | — | | | — | | | — | |
3. At fair value | — | | | — | | | — | | | 13,086,501 | | | 13,086,501 | |
4. At book value without market value adjustment and with current surrender charge less than 5% | — | | | — | | | — | | | — | | | — | |
5. Subtotal | 202,305 | | | 191,197 | | | 610,679 | | | 13,086,501 | | | 14,090,682 | |
| (b) Not subject to discretionary withdrawal | — | | | — | | | — | | | — | | | — | |
| (c) Total | $ | 202,305 | | | $ | 191,197 | | | $ | 610,679 | | | $ | 13,086,501 | | | $ | 14,090,682 | |
| (4) Reserves for Asset Default Risk in Lieu of AVR | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | | | | | | | | |
| Indexed | | Nonindexed Guarantee Less Than 4% | | Nonindexed Guarantee More Than 4% | | Nonguaranteed Separate Account | | Total |
| ($ in thousands) |
(1) Premiums, consideration or deposits for the year ended 12/31/2021 | $ | 96,875 | | | $ | 614 | | | $ | 777 | | | $ | 1,396,240 | | | $ | 1,494,506 | |
Reserves at 12/31/2021 | | | | | | | | | |
| (2) For accounts with assets at: | | | | | | | | | |
| (a) Fair value | $ | 138,594 | | | $ | 230,665 | | | $ | 664,980 | | | $ | 15,082,749 | | | $ | 16,116,988 | |
| (b) Amortized cost | — | | | — | | | — | | | — | | | — | |
| (c) Total reserves | $ | 138,594 | | | $ | 230,665 | | | $ | 664,980 | | | $ | 15,082,749 | | | $ | 16,116,988 | |
| (3) By withdrawal characteristics: | | | | | | | | | |
| (a) Subject to discretionary withdrawal: | | | | | | | | | |
1. With market value adjustment | $ | 138,594 | | | $ | 230,665 | | | $ | 664,981 | | | $ | — | | | $ | 1,034,240 | |
2. At book value without market value adjustment and with current surrender charge of 5% or more | — | | | — | | | — | | | — | | | — | |
3. At fair value | — | | | — | | | — | | | 15,082,749 | | | 15,082,749 | |
4. At book value without market value adjustment and with current surrender charge less than 5% | — | | | — | | | — | | | — | | | — | |
5. Subtotal | 138,594 | | | 230,665 | | | 664,981 | | | 15,082,749 | | | 16,116,989 | |
| (b) Not subject to discretionary withdrawal | — | | | — | | | — | | | — | | | — | |
| (c) Total | $ | 138,594 | | | $ | 230,665 | | | $ | 664,981 | | | $ | 15,082,749 | | | $ | 16,116,989 | |
| (4) Reserves for Asset Default Risk in Lieu of AVR | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | | | | | |
| | Indexed | | Nonindexed Guarantee Less Than 4% | | Nonindexed Guarantee More Than 4% | | Nonguaranteed Separate Account | | Total |
| | ($ in thousands) |
Premiums, consideration or deposits for the year ended 12/31/2020 | | $ | 24,711 | | | $ | 3,008 | | | $ | 5 | | | $ | 275,158 | | | $ | 302,882 | |
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
A reconciliation of net transfers to (from) Separate Accounts is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | ($ in thousands) |
| Transfers as reported in the Summary of Operations of the Separate Accounts Statement: | | | | | | |
| Transfers to Separate Accounts | | $ | 1,434,970 | | | $ | 1,504,853 | | | $ | 311,895 | |
| Less: Transfers from Separate Accounts | | 1,132,706 | | | 1,217,637 | | | 1,175,648 | |
| Net transfers to/(from) Separate Accounts | | 302,264 | | | 2,722,490 | | | 1,487,543 | |
| Reconciling adjustments: | | | | | | |
| Transfers ceded/assumed under Modco Agreements | | (454,087) | | | (315,050) | | | (67,442) | |
| Transfers as reported in the Statements of Operations | | $ | (151,823) | | | $ | 2,407,440 | | | $ | 1,420,101 | |
19. Fair Value Measurements
The Company determines the fair value of its financial instruments in accordance with SSAP No. 100R, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. The definition of fair value in SSAP No. 100R focuses on an “exit price”, the price that would be received to sell the asset or paid to transfer the liability. Included in various line items in the statutory financial statements are certain financial instruments carried at fair value. Other financial instruments are periodically measured at fair value, such as when impaired, or, for certain bonds and preferred stocks, when carried at the lower of cost or fair value.
The Company's financial assets and liabilities carried at fair value have been classified, for disclosure purposes, based on a hierarchy defined by SSAP No. 100R. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. The hierarchy is defined as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2: Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:
(a)Quoted prices for similar assets or liabilities in active markets,
(b)Quoted prices for identical or similar assets or liabilities in non-active markets,
(c)Inputs other than quoted market prices that are observable, and
(d)Inputs that are derived principally from or corroborated by observable market data through correlation or other means.
Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The following table provides information as of December 31 about the Company’s financial assets (other than derivative instruments) measured at fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | |
| Description | | Level 1 | | Level 2 | | Level 3 | | Net Asset Value (NAV) | | Total |
| | ($ in thousands) |
| Assets at fair value | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Perpetual preferred stocks | | | | | | | | | | |
| Industrial and miscellaneous | | $ | 259,475 | | | $ | 35,572 | | | $ | 5,940 | | | $ | — | | | $ | 300,987 | |
| Total perpetual preferred stocks | | 259,475 | | | 35,572 | | | 5,940 | | | — | | | 300,987 | |
| Common stocks | | | | | | | | | | |
| Industrial and miscellaneous | | 2,028 | | | — | | | 172,515 | | | — | | | 174,543 | |
| Total common stocks | | 2,028 | | | — | | | 172,515 | | | — | | | 174,543 | |
| Separate Accounts | | 13,304,618 | | | 701,357 | | | 89,350 | | | — | | | 14,095,325 | |
| Total assets at fair value | | $ | 13,566,121 | | | $ | 736,929 | | | $ | 267,805 | | | $ | — | | | $ | 14,570,855 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | |
| Description | | Level 1 | | Level 2 | | Level 3 | | Net Asset Value (NAV) | | Total |
| | ($ in thousands) |
| Assets at fair value | | | | | | | | | | |
| Bonds | | | | | | | | | | |
| Residential mortgage-backed securities | | $ | — | | | $ | 481 | | | $ | — | | | $ | — | | | $ | 481 | |
| Total bonds | | — | | | 481 | | | — | | | — | | | 481 | |
| Perpetual preferred stocks | | | | | | | | | | |
| Industrial and miscellaneous | | 419,774 | | | 40,096 | | | 6,240 | | | — | | | 466,110 | |
| Total perpetual preferred stocks | | 419,774 | | | 40,096 | | | 6,240 | | | — | | | 466,110 | |
| Common stocks | | | | | | | | | | |
| Industrial and miscellaneous | | 3,083 | | | — | | | 143,485 | | | — | | | 146,568 | |
| Total common stocks | | 3,083 | | | — | | | 143,485 | | | — | | | 146,568 | |
| Separate Accounts | | 15,306,095 | | | 868,093 | | | 208,190 | | | — | | | 16,382,378 | |
| Total assets at fair value | | $ | 15,728,952 | | | $ | 908,670 | | | $ | 357,915 | | | $ | — | | | $ | 16,995,537 | |
The following is the Level 3 reconciliation of the beginning balance to the ending balance:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | | | | | | | | | | | | | | | | | | | | |
| Description | | Beginning Balance at 1/1/2022 | | Transfers into Level 3 | | Transfers out of Level 3 | | Total gains and (losses) included in Net Income | | Total gains and (losses) included in Surplus | | Purchases | | Issuances | | Sales | | Settlements | | Ending Balance at 12/31/2022 |
| | ($ in thousands) |
| Assets: | | | | | | | | | | | | | | | | | | | | | |
| Separate Account mortgage loans | | $ | 155,597 | | | $ | — | | | $ | — | | | $ | (15,100) | | | | $ | — | | | $ | — | | | $ | — | | | $ | (64,084) | | | $ | — | | | $ | 76,413 | |
| Separate Account bonds | | 52,593 | | | — | | | (26,420) | | | (2,278) | | * | | — | | | — | | | — | | | (10,958) | | | — | | | 12,937 | |
| Common stocks - FHLB | | 143,475 | | | — | | | — | | | — | | | | — | | | 36,405 | | | — | | | (7,380) | | | — | | | 172,500 | |
| Common stocks - other | | 10 | | | — | | | — | | | — | | | | 5 | | | — | | | — | | | — | | | — | | | 15 | |
| Perpetual preferred stock | | 6,240 | | | — | | | — | | | — | | | | (300) | | | — | | | — | | | — | | | — | | | 5,940 | |
| Total assets | | $ | 357,915 | | | $ | — | | | $ | (26,420) | | | $ | (17,378) | | | | $ | (295) | | | $ | 36,405 | | | $ | — | | | $ | (82,422) | | | $ | — | | | $ | 267,805 | |
|
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
__________________
*Transferred out of Level 3 into Level 2 due to a change in price source.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | | | | | | | | | | | | | | | | | | | |
| Description | | Beginning Balance at 1/1/2021 | | Transfers into Level 3 | | Transfers out of Level 3 | | Total gains and (losses) included in Net Income | | Total gains and (losses) included in Surplus | | Purchases | | Issuances | | Sales | | Settlements | | Ending Balance at 12/31/2021 |
| | ($ in thousands) |
| Assets: | | | | | | | | | | | | | | | | | | | | |
| Separate Account mortgage loans | | $ | 206,229 | | | $ | — | | | $ | — | | | $ | (6,882) | | | $ | — | | | $ | 12,322 | | | $ | — | | | $ | (56,072) | | | $ | — | | | $ | 155,597 | |
| Separate Account bonds | | 19,299 | | | — | | | — | | | (417) | | | — | | | 38,500 | | | — | | | (4,789) | | | — | | | 52,593 | |
| Common stocks - FHLB | | 83,000 | | | — | | | — | | | — | | | — | | | 90,038 | | | — | | | (29,563) | | | — | | | 143,475 | |
| Common stocks - other | | 3 | | | — | | | — | | | — | | | 7 | | | — | | | — | | | — | | | — | | | 10 | |
| Perpetual preferred stock * | | 6,270 | | | — | | | — | | | — | | | (30) | | | — | | | — | | | — | | | — | | | 6,240 | |
| Total Assets | | $ | 314,801 | | | $ | — | | | $ | — | | | $ | (7,299) | | | $ | (23) | | | $ | 140,860 | | | $ | — | | | $ | (90,424) | | | $ | — | | | $ | 357,915 | |
__________________
*Includes perpetual preferred stock valued at fair value as of 1/1/2021 pursuant to SSAP. No, 32B.
Fair Value Methodology
Description of Pricing Inputs
The Company predominantly uses third-party pricing services and broker quotes to determine fair values. The third-party pricing services and brokers use certain inputs to determine the value of loan-backed and structured securities, including residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities. For these securities, the valuation consists of inputs such as, but not limited to: 1) monthly principal and interest payments on the underlying assets, 2) average lives of the securities, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, 6) discount margins, and 7) credit ratings of the securities.
To price corporate bonds, U.S. government-related securities, and other government-related securities, the brokers and third-party pricing services utilize a valuation model that consists of a hybrid income and market approach to valuation, while the Company uses a discounted cash flow model with both observable and unobservable inputs to determine a price when the securities are illiquid bonds. The external and internal pricing models include inputs such as, but not limited to: 1) principal and interest payments, 2) coupon, 3) maturity, 4) treasury yield curve, 5) credit spreads from new issue and secondary trading markets, 6) dealer quotes with adjustments for issues with early redemption features, 7) illiquidity premiums, 8) discount margins from dealers in the new issue market, 9) underlying collateral, and 10) comparative bond analysis.
The third-party pricing services price equity securities using market observable prices for the same or similar securities traded in an active market.
Mortgage loan valuations are categorized as Level 3. The Company utilizes an internally developed model to estimate fair value. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage lending rate and an expected cash flow analysis based on a review of the mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to nonperformance and liquidity risks.
The Company’s Separate Account assets consist of financial instruments similar to those held in the General Account. The Company utilizes the same valuation methodology as described above in determining the fair value of Separate Account assets as the Company does for General Account assets. All assets in the Separate Account are held at fair value, except for BOLI contracts. The BOLI Separate Account assets and liabilities are stated at book value. The Separate Account liability matches the Separate Account asset value and its fair value is determined from valuation methods that are consistent with the Separate Account assets.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Determination of Fair Values
The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for financial instruments owned by the Company.
The fair values of corporate bonds, government securities, equity securities, and mortgage-backed securities are determined by management after considering one of three primary sources of information: third-party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a ‘‘waterfall’’ approach whereby publicly available prices are first sought from third-party pricing services and the remaining unpriced securities are submitted to independent brokers for non-binding prices. Typical inputs used by these pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Based on the typical trading volumes and the lack of quoted market prices for fixed maturity investments, third-party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third-party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non-binding independent broker quotations, the Company obtains two quotes per security when available. Where multiple broker quotes are obtained, the Company reviews the quotes and selects the quote that provides the best estimate of the price a market participant would pay for these specific assets in an arm’s-length transaction. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third-party pricing service or an independent broker quotation.
The Company has analyzed the third-party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third-party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.
The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.
For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the years ended December 31, 2022, 2021 and 2020.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The fair value hierarchy of derivative instruments measured at fair value at December 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | |
| Description | | Level 1 | | Level 2 | | Level 3 | | Net Asset Value (NAV) | | Total |
| | ($ in thousands) |
| Derivative assets | | | | | | | | | | |
| Interest rate contracts | | $ | 2,589 | | | $ | 783 | | | $ | — | | | $ | — | | | $ | 3,372 | |
| Foreign currency contracts | | 1,295 | | | — | | | — | | | — | | | 1,295 | |
| Equity contracts | | 21,977 | | | 339,462 | | | — | | | — | | | 361,439 | |
| Total derivative assets | | $ | 25,861 | | | $ | 340,245 | | | $ | — | | | $ | — | | | $ | 366,106 | |
| | | | | | | | | | |
| Derivative liabilities | | | | | | | | | | |
| Interest rate contracts | | $ | 1,889 | | | $ | 31,840 | | | $ | — | | | $ | — | | | $ | 33,729 | |
| Foreign currency contracts | | 1,752 | | | 15,208 | | | — | | | — | | | 16,960 | |
| Equity contracts | | 7,546 | | | 205,462 | | | — | | | — | | | 213,008 | |
| Total derivative liabilities | | $ | 11,187 | | | $ | 252,510 | | | $ | — | | | $ | — | | | $ | 263,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | |
| Description | | Level 1 | | Level 2 | | Level 3 | | Net Asset Value (NAV) | | Total |
| | ($ in thousands) |
| Derivative assets | | | | | | | | | | |
| Interest rate contracts | | $ | 4,528 | | | $ | 203,342 | | | $ | — | | | $ | — | | | $ | 207,870 | |
| Foreign currency contracts | | 365 | | | — | | | — | | | — | | | 365 | |
| Equity contracts | | 54,006 | | | 986,476 | | | — | | | — | | | 1,040,482 | |
| Total derivative assets | | $ | 58,899 | | | $ | 1,189,818 | | | $ | — | | | $ | — | | | $ | 1,248,717 | |
| | | | | | | | | | |
| Derivative liabilities | | | | | | | | | | |
| Interest rate contracts | | $ | 4,416 | | | $ | 173,931 | | | $ | — | | | $ | — | | | $ | 178,347 | |
| Foreign currency contracts | | 2,049 | | | 12,708 | | | — | | | — | | | 14,757 | |
| Equity contracts | | 13,102 | | | 766,552 | | | — | | | — | | | 779,654 | |
| Total derivative liabilities | | $ | 19,567 | | | $ | 953,191 | | | $ | — | | | $ | — | | | $ | 972,758 | |
There were no Level 3 derivatives held by the Company as of December 31, 2022 or 2021.
Derivative instruments are valued using exchange prices or counterparty quotations. The Company performs quantitative and qualitative analysis each quarter on derivative valuations. Derivative instruments classified as Level 1 generally include futures, options, and warrants, all of which are traded on active exchange markets. Derivative instruments classified as Level 2 primarily include swaps, options, forwards, and swaptions, which are traded over the counter. Level 2 also includes certain centrally cleared derivatives. These Level 2 derivative valuations are determined using independent broker quotations, which are corroborated with observable market inputs.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
The following table presents the Company’s fair value hierarchy for its financial instruments as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | |
| Type of Financial Instrument | | Aggregate Fair Value | | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | ($ in thousands) |
| Assets | | | | | | | | | | |
| Bonds | | $ | 41,441,691 | | | $ | 47,180,219 | | | $ | 298,362 | | | $ | 39,184,615 | | | $ | 1,958,714 | |
| Common stocks * | | 174,544 | | | 174,544 | | | 2,029 | | | — | | | 172,515 | |
| Preferred stocks | | 465,457 | | | 540,147 | | | 423,945 | | | 35,572 | | | 5,940 | |
| Mortgage loans | | 9,744,553 | | | 10,558,447 | | | — | | | — | | | 9,744,553 | |
| Cash | | 6,142 | | | 6,142 | | | 6,142 | | | — | | | — | |
| Cash equivalents | | 362,949 | | | 362,949 | | | 362,949 | | | — | | | — | |
| | | | | | | | | | |
| Contract loans | | 830,400 | | | 830,400 | | | — | | | — | | | 830,400 | |
| Derivative assets | | 366,106 | | | 366,106 | | | 25,860 | | | 340,246 | | | — | |
| Derivative collateral and receivables | | 60,639 | | | 60,639 | | | 60,639 | | | — | | | — | |
| Securities lending collateral | | 162,119 | | | 162,119 | | | — | | | 162,119 | | | — | |
| Other invested assets * | | 673,066 | | | 801,636 | | | — | | | 648,038 | | | 25,028 | |
| Separate Account assets | | 14,111,355 | | | 14,111,642 | | | 13,307,270 | | | 714,735 | | | 89,350 | |
| Liabilities | | | | | | | | | | |
| Guaranteed investment contracts (GICs) | | 9,510,471 | | | 9,806,466 | | | — | | | — | | | 9,510,471 | |
| Deposit-type contracts other than GICs | | 2,197,819 | | | 2,099,585 | | | — | | | — | | | 2,197,819 | |
| Derivative liabilities | | 263,697 | | | 267,352 | | | 11,188 | | | 252,509 | | | — | |
| Derivative collateral and payables | | 62,269 | | | 62,269 | | | 62,269 | | | — | | | — | |
| Surplus Notes | | 82,585 | | | 110,000 | | | — | | | — | | | 82,585 | |
__________________
*Excluding investments accounted for under the equity method
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | |
| Type of Financial Instrument | | Aggregate Fair Value | | Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | ($ in thousands) |
| Assets | | | | | | | | | | |
| Bonds | | $ | 52,216,520 | | | $ | 47,120,591 | | | $ | 288,925 | | | $ | 49,897,680 | | | $ | 2,029,915 | |
| Common stocks* | | 146,568 | | | 146,568 | | | 3,083 | | | — | | | 143,485 | |
| Preferred stocks | | 716,544 | | | 707,270 | | | 670,208 | | | 40,096 | | | 6,240 | |
| Mortgage loans | | 9,977,072 | | | 9,557,217 | | | — | | | — | | | 9,977,072 | |
| Cash | | 33,923 | | | 33,923 | | | 33,923 | | | — | | | — | |
| Cash equivalents | | 415,205 | | | 415,205 | | | 415,205 | | | — | | | — | |
| Short-term investments | | 2,696 | | | 2,626 | | | — | | | 2,696 | | | — | |
| Contract loans | | 847,471 | | | 847,471 | | | — | | | — | | | 847,471 | |
| Derivative assets | | 1,248,717 | | | 1,248,717 | | | 58,899 | | | 1,189,818 | | | — | |
| Derivative collateral and receivables | | 192,298 | | | 192,298 | | | 192,298 | | | — | | | — | |
| Securities lending collateral | | 179,083 | | | 179,083 | | | — | | | 179,083 | | | — | |
| Other invested assets | | 910,872 | | | 809,003 | | | — | | | 908,487 | | | 2,385 | |
| Separate Account assets | | 16,385,818 | | | 16,385,944 | | | 15,306,358 | | | 871,270 | | | 208,190 | |
| Liabilities | | | | | | | | | | |
| Guaranteed investment contracts (GICs) | | 8,598,320 | | | 8,194,685 | | | — | | | — | | | 8,598,320 | |
| Deposit-type contracts other than GICs | | 2,311,603 | | | 2,178,649 | | | — | | | — | | | 2,311,603 | |
| Derivative liabilities | | 972,758 | | | 960,050 | | | 19,567 | | | 953,191 | | | — | |
| Derivative collateral and payables | | 195,926 | | | 195,926 | | | 195,926 | | | — | | | — | |
| Surplus Notes | | 116,027 | | | 110,000 | | | — | | | — | | | 116,027 | |
__________________
*Excluding investments accounted for under the equity method
Bond and preferred stock fair values are determined using methodologies prescribed by the NAIC. The fair values of bonds and preferred stocks are determined by management after considering one of three primary sources of information: third-party pricing services, non-binding independent broker quotations, or pricing matrices.
Publicly traded unaffiliated common stock is valued based on market trades and is a Level 1 valuation under SSAP No. 100R. As of December 31, 2022 and 2021, the Company held $172.5 million and $143.5 million, respectively, of FHLB stock, which is classified as Level 3. The Company believes that the cost of the FHLB stock approximates fair value. The remaining amount of equity securities classified as Level 3 consists primarily of holdings obtained through bankruptcy proceedings, debt restructurings or tender offers, including $15 thousand and $10 thousand of Hercules Inc. publicly traded common stock warrants obtained through a tender offer as of December 31, 2022 and 2021, respectively.
The carrying value of the Company’s cash and short-term investments approximates fair value.
Cash equivalent fair values are determined using methodologies prescribed by the NAIC. The fair value of cash equivalents is provided by a third-party pricing service.
The Company estimates the fair value of mortgage loans using an internally developed model. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage loan lending rate and an expected cash flow analysis based on a review of the mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to nonperformance and liquidity risks.
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
Contract loans are funds provided to policy holders in return for a claim on the account value of the policy. The funds provided are limited to a certain percent of the account balance. The nature of contract loans is to have low default risk as the loans are fully collateralized by the value of the policy. The majority of contract loans do not have a stated maturity and the balances and accrued interest are repaid with proceeds from the policy account balance. Due to the collateralized nature of contract loans and unpredictable timing of repayments, the Company’s fair value of contract loans approximates carrying value.
For the fair value of domestic securities categorized as securities lending collateral, the Securities Lending program administrator uses four vendors as information sources for prices and other indicative data. Pricing data is requested daily, as available. In the event multiple prices are received for the same security, the lower price is utilized.
The Separate Account assets are carried at fair value and are equal to the Separate Account liabilities, which represent the policyholder’s equity in those assets, except for BOLI contracts. The BOLI Separate Account assets are stated at book value. These amounts are reported separately as assets and liabilities related to Separate Accounts in the accompanying financial statements. Separate Account assets are invested in bonds, mortgage loans, preferred stocks, and open-ended mutual funds. The fair values of bonds and preferred stocks held in Separate Accounts are determined using methodologies prescribed by the NAIC. The fair values of bonds and preferred stocks are determined by management after considering one of three primary sources of information: third-party pricing services, non-binding independent broker quotations, or pricing matrices. These valuations are generally categorized as a Level 2 valuation as defined by SSAP No. 100R. The fair value of open-ended mutual funds held in Separate Accounts was obtained from unadjusted quoted market prices. These valuations are categorized as a Level 1 valuation as defined by SSAP No. 100R.
Other invested assets, excluding investments accounted for under the equity method, include investments in unaffiliated surplus debentures and investments in partnerships. The fair value of investments accounted for under the equity method approximates par value. The fair value of certain surplus notes reported as "Other invested assets" is determined using methodologies prescribed by the NAIC. The fair value of these surplus notes is determined by management after considering one of three primary sources of information: third-party pricing services, non-binding independent broker quotations, or pricing matrices. The fair value of certain partnerships reported as “Other Invested assets” is determined using the cost method, net of any impairment.
Fair values of the Company's guaranteed investment contracts are estimated using discounted cash flows. Other deposit-type contracts include annuities certain, supplemental contracts, dividend accumulations, and retained assets. The Company estimates the fair values of annuities certain and supplemental contracts using models based on discounted estimated cash flows. The discount rates used in the models were based on a current market rate for similar financial instruments. The Company estimates that the fair value of dividend accumulations and retained asset balances approximate carrying value.
Included in the derivative liabilities fair value disclosure are $15.2 million and $12.7 million related to a derivative instrument qualifying for hedge accounting that have an $18.9 million and $0 carrying value in the Statements of Admitted Assets, Liabilities, and Capital and Surplus as of December 31, 2022 and 2021, respectively.
The Company estimates the fair value of its Surplus Notes using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.
The Company held no financial instruments as of December 31, 2022 and 2021, for which it was not practicable to estimate fair value. The Company held no financial instruments measured at NAV as of December 31, 2022 and 2021.
20. Retained Assets
The Company accounts for retained assets in a manner similar to supplementary contracts. Claims expense is reported in “Death and annuity benefits” in the Statements of Operations. In lieu of a cash payment to the beneficiary, a liability is established in “Liability for deposit-type contracts” in the Statements of Admitted Assets, Liabilities, and Capital and Surplus. For 2020 and through March 2021, the credited rate for direct retained asset
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
accounts was 0.40% for accounts opened prior to May 1, 2019, and 1.0% for accounts opened on or after May 1, 2019. After April 1, 2021 and for 2022, the credited rate for all direct retained asset accounts was 0.40%.
In the event of a claim, the beneficiary is given the option of a direct payment, a settlement option provided by the policy or a retained asset account. Retained asset accounts are generally used as the default method for settlement of claims when an election for payment has not been made. For some assumed business, however, retained asset accounts are not the default method for settlement of claims.
The table below summarizes the number and balance of retained asset accounts in force, by aging category, as of December 31:
| | | | | | | | | | | | | | |
| In Force
($ in thousands) |
| 2022 | 2021 |
| Number | Balance | Number | Balance |
| Up to and including 12 Months | 1,159 | $ | 157,750 | | 1,420 | $ | 204,839 | |
| 13 to 24 Months | 952 | 105,455 | | 862 | 95,251 | |
| 25 to 36 Months | 637 | 60,012 | | 612 | 59,434 | |
| 37 to 48 Months | 472 | 44,564 | | 473 | 31,884 | |
| 49 to 60 Months | 352 | 22,348 | | 379 | 21,648 | |
| Over 60 Months | 2,267 | 117,668 | | 2,198 | 113,744 | |
| Total | 5,839 | 507,797 | 5,944 | 526,800 |
The Company’s retained asset accounts are individual contracts. The table below shows retained asset components as of December 31:
| | | | | | | | | | | | | | |
| ($ in thousands) |
| 2022 | 2021 |
| Number | Balance | Number | Balance |
| Number/Balance of Retained Asset Accounts at the Beginning of the Year | 5,944 | $ | 526,800 | | 5,594 | | $ | 445,499 | |
| Number/Balance of Retained Asset Account Issue/Added During the Year | 2,214 | 467,213 | | 2,452 | | 474,218 | |
| Investment Earnings Credited to Retained Asset Accounts During the Year | XXX | 2,349 | | XXX | 2,702 | |
| Fees and Other Charges Assessed to Retained Asset Accounts During the Year | XXX | — | | XXX | — | |
| Number/Amount of Retained Asset Accounts Transferred to State Unclaimed Property funds During the Year | 79 | 67 | | 6 | | 18 | |
| Number/Amount of Retained Asset Accounts Closed/Withdrawn During the Year | 2,240 | 488,498 | | 2,096 | | 395,601 | |
| Number/Balance of Retained Asset Accounts at the End of the Year | 5,839 | $ | 507,797 | | 5,944 | | $ | 526,800 | |
21. Company-owned Life Insurance
The Company is the owner and beneficiary of life insurance policies included in the “Other assets” line of the Statements of Admitted Assets, Liabilities, and Capital and Surplus at their cash surrender values pursuant to SSAP No. 21R. At December 31, 2022 the cash surrender value in an investment vehicle was $666.7 million. This was allocated into the following categories based on primary underlying investment characteristics, other invested assets 72.8%, stocks 25.3%, and cash and short-term investments 1.9%. At December 31, 2021, the cash surrender value in an investment vehicle was $710.0 million. This was allocated into the following categories based on primary
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
(Statutory Basis)
underlying investment characteristics, other invested assets 68.3%, stocks 29.6%, and cash and short-term investments 2.1%.
22. Subsequent Events
As a result of events that occurred at certain financial institutions and the subsequent regulatory actions taken during March of 2023, the Company has evaluated the impact of these events to certain holdings within its investment portfolio. As a result of this evaluation, the Company sold certain bonds and recognized a pre-tax realized investment loss of $11.1 million. In addition, the Company identified certain investments in bonds on which it will take other-than-temporary impairments as of March 31, 2023, based on the fair value of the underlying holdings. As of the date of this report, the Company expects to recognize pre-tax other-than-temporary impairments of approximately $78.6 million, related to certain investment holdings within the banking sector.
The Company has evaluated the effects of events subsequent to December 31, 2022, and through March 31, 2023 (the date of the issuance of the Statutory statements included herein), and there are no other material subsequent events to report.
PROTECTIVE LIFE INSURANCE COMPANY
SCHEDULE I
Summary of Investments-Other than Investments in Related Parties
as of December 31, 2022
| | | | | | | | | | | | | | | | | | | | |
| Type of investment | | Cost | | Fair Value | | Amount at which shown in the balance sheet |
| ($ in thousands) |
| Fixed maturities: | | | | | | |
| Bonds: | | | | | | |
| United States Government and government agencies and authorities | | $ | 3,691,153 | | | $ | 3,207,186 | | | $ | 3,691,153 | |
| States, municipalities and political subdivisions | | 550,031 | | | 516,605 | | | 550,031 | |
| Foreign governments | | 105,885 | | | 95,888 | | | 105,885 | |
| Public utilities | | 4,420,176 | | | 3,894,222 | | | 4,420,176 | |
| Convertibles and bonds with warrants attached | | 72,316 | | | 72,109 | | | 72,316 | |
| All other corporate bonds | | 38,340,657 | | | 33,655,682 | | | 38,340,657 | |
| Redeemable preferred stocks | | 239,160 | | | 164,470 | | | 239,160 | |
| Total fixed maturities | | 47,419,378 | | | 41,606,162 | | | 47,419,378 | |
| Equity securities: | | | | | | |
| Common stocks: | | | | | | |
| Banks, trust and insurance companies | | 172,500 | | | 172,500 | | | 172,500 | |
| Industrial, miscellaneous and all other | | 1,230 | | | 2,044 | | | 2,044 | |
| Nonredeemable preferred stocks | | 411,931 | | | 300,987 | | | 300,987 | |
| Total equity securities | | 585,661 | | | 475,531 | | | 475,531 | |
| Mortgage loans on real estate | | 10,558,447 | | | 9,744,553 | | | 10,558,447 | |
| Policy loans | | 830,400 | | | 830,400 | | | 830,400 | |
| Other long-term investments | | 1,399,159 | | | 1,265,127 | | | 1,393,697 | |
| | | | | | |
| Total investments | | $ | 60,793,045 | | | $ | 53,921,773 | | | $ | 60,677,453 | |
See accompanying independent auditors’ report.
PROTECTIVE LIFE INSURANCE COMPANY
SCHEDULE IV
Reinsurance
as of and for the years ended December 31, 2022, 2021, and 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross amount | | Ceded to other companies | | Assumed from other companies | | Net amount | | Percentage of amount assumed to net |
| ($ in thousands) | | |
| 2022 | | | | | | | | | |
| Life insurance in force | $ | 701,879,708 | | | $ | 213,857,595 | | | $ | 137,079,032 | | | $ | 625,101,145 | | | 21.9 | % |
| Premiums: | | | | | | | | | |
| Life insurance | $ | 5,182,542 | | | $ | 2,544,520 | | | $ | 727,562 | | | $ | 3,365,584 | | | 21.6 | % |
| Accident and health insurance | 57,869 | | | 2,148 | | | 13,985 | | | 69,706 | | | 20.1 | % |
| Total | $ | 5,240,411 | | | $ | 2,546,668 | | | $ | 741,547 | | | $ | 3,435,290 | | | 21.6 | % |
| | | | | | | | | |
| 2021 | | | | | | | | | |
| Life insurance in force | $ | 633,068,368 | | | $ | 232,765,104 | | | $ | 184,926,353 | | | $ | 585,229,617 | | | 31.6 | % |
| Premiums: | | | | | | | | | |
| Life insurance | $ | 5,229,653 | | | $ | 1,050,368 | | | $ | 878,036 | | | $ | 5,057,321 | | | 17.4 | % |
| Accident and health insurance | 11,287 | | | 3,116 | | | 28,740 | | | 36,911 | | | 77.9 | % |
| Total | $ | 5,240,940 | | | $ | 1,053,484 | | | $ | 906,776 | | | $ | 5,094,232 | | | 17.8 | % |
| | | | | | | | | |
| 2020 | | | | | | | | | |
| Life insurance in force | $ | 579,902,781 | | | $ | 268,256,639 | | | $ | 200,708,224 | | | $ | 512,354,366 | | | 39.2 | % |
| Premiums: | | | | | | | | | |
| Life insurance | $ | 4,075,575 | | | $ | 1,657,228 | | | $ | 1,272,377 | | | $ | 3,690,724 | | | 34.5 | % |
| Accident and health insurance | 14,463 | | | 3,147 | | | 64,614 | | | 75,930 | | | 85.1 | % |
| Total | $ | 4,090,038 | | | $ | 1,660,375 | | | $ | 1,336,991 | | | $ | 3,766,654 | | | 35.5 | % |
See accompanying independent auditors’ report.
Appendix A
The following examples illustrate how the MVA, withdrawal charge, and Interim Value can affect the amount you receive for a full surrender or withdrawal requested during the withdrawal charge period. During the withdrawal charge period and before the Segment Maturity Date, application of the MVA to a withdrawal request or a surrender that exceeds the Free Withdrawal Amount could reduce the Contract Value to less than the protection provided by any applicable Floor(s), as shown below.
| | | | | | | | |
| Full Surrender Example: | | |
| | |
Segment Investment: | $ | 100,000 | | |
Cap: | 12 | % | |
Floor: | -10 | % | |
Participation Rate: | 100 | % | |
Index Performance (on date we calculate withdrawal): | -15 | % | |
Interim Value (Contract Value): | $ | 90,000 | | ($100,000 x (1 + greater of Index Performance,-15%, and Floor, -10%)) |
Months Remaining in Withdrawal Charge Period: | 75 | | |
Initial MVA Rate: | 5 | % | |
Withdrawal Charge: | 9 | % | |
| | |
| Scenario 1: Negative MVA | | |
| | |
| The current MVA rate as of the withdrawal date is 6%, resulting in an MVA of -6.25%. When the Contract is surrendered, the Surrender Value of your Contract is $78,250. In this scenario, the Surrender Value is lower than the amount protected by the -10% Floor ($90,000). |
| | |
| | Formula |
Free Withdrawal Amount = | $ | 10,000 | | (10% x $100,000) |
Interim Value – Free Withdrawal Amount = | $ | 80,000 | | ($90,000 – $10,000) |
Market Value Adjustment (%) = | -6.25 | % | (5% – 6%) x (75 / 12) |
Market Value Adjustment ($) = | $ | -5,000 | | ($80,000 x -6.25%) |
Withdrawal Charge = | $ | 6,750 | | ($80,000 – $5,000) x 9 |
Amount Received = | $ | 78,250 | | ($90,000 – $5,000 – $6,750) |
| | |
| Scenario 2: Positive MVA | | |
| | |
| The current MVA rate as of the withdrawal date is 4%, resulting in an MVA of 6.25%. When the Contract is surrendered, the Surrender Value of the Contract is $87,350. In this scenario, the Surrender Value is lower than the amount protected by the -10% Floor($90,000). |
| | |
| | Formula |
Free Withdrawal Amount = | $ | 10,000 | | (10% x $100,000) |
Interim Value – Free Withdrawal Amount = | $ | 80,000 | | ($90,000 – $10,000) |
Market Value Adjustment (%) = | 6.25 | % | (5% – 4%) x (75 / 12) |
Market Value Adjustment ($) = | $ | 5,000 | | ($80,000 x 6.25%) |
| | | | | | | | |
Withdrawal Charge = | $ | 7,650 | | ($80,000 + $5,000) x 9 |
Amount Received = | $ | 87,350 | | ($90,000 + $5,000 – $7,650) |
| Withdrawal Example: | | |
| | |
Segment Investment: | | $100,000 | |
Cap: | | 12 | % |
Floor: | | -10 | % |
Participation Rate: | | 100 | % |
Months Remaining in Withdrawal Charge Period: | | 75 | |
Initial MVA Rate: | | 5 | % |
Current MVA Rate: | | 6 | % |
Market Value Adjustment (%): | | -6.25 | % |
Withdrawal Charge: | | 9 | % |
| | |
| Scenario 1: Negative Index Performance | | |
| | |
| You request a withdrawal of $20,000. To satisfy this withdrawal request, we must deduct $21,722 from your Contract. |
| | |
| | Formula |
Total Gross Withdrawal Amount = | $ | 21,722 | | |
Free Withdrawal Amount = | $ | 10,000 | | (10% x $100,000) |
Excess Withdrawal = | $ | 11,722 | | ($21,722 – $10,000) |
Market Value Adjustment ($) = | $ | -733 | | ($11,722 x -6.25%) |
Withdrawal Charge = | $ | 989 | | ($11,722 – $733) x 9 |
Amount Received = | $ | 20,000 | | ($21,722 – $733 – $989) |
| | |
| The total withdrawal amount reduces your Contract value dollar-for-dollar and reduces your Segment Investment on a pro-rata basis by the same proportion that the withdrawal reduces the Interim Value, as demonstrated below. The resulting deduction to the Segment Investment in this example is $24,135. |
| | |
| | Formula |
Index Performance (on date we calculate withdrawal) = | -15 | % | |
Interim Value = | $ | 90,000 | | ($100,000 x (1 + greater of Index Performance, -15%, and Floor, -10%)) |
Proportion that the withdrawal reduces the Contract Value = | -24.1 | % | (-$21,722 / $90,000) |
Reduction to Segment Investment due to withdrawal = | $ | -24,135 | | ($100,000 x -24.1%) |
Remaining Segment Investment after withdrawal = | $ | 75,865 | | ($100,000 – $24,135) |
Remaining Contract Value after withdrawal = | $ | 68,278 | | ($75,865 x (1 + greater of Index Performance, -15%, and Floor, -10%)) |
| | |
| The remaining Segment Investment is used to determine the Segment Return Amount and Segment Maturity Value at the end of the Term. |
| | | | | | | | |
| | Formula |
Index Performance at Maturity Date = | -7 | % | |
Segment Investment = | $ | 75,865 | | |
Segment Return Amount = | $ | 5,311 | | ($75,865 x (greater of Index Performance, -7%, and Floor, -10%, subject to 12% Cap)) |
Segment Maturity Value = | $ | 70,554 | | ($75,865 – $5,311) |
| | |
| Scenario 2: Positive Index Performance followed by Negative Index Performance with Two Withdrawals |
| | |
| You first request a withdrawal of $20,000. To satisfy this withdrawal request, we must deduct $21,722 from your Contract. This calculation is the same as Scenario 1. |
| | |
Withdrawal 1 | | Formula |
Total Gross Withdrawal Amount = | $ | 21,722 | | |
Free Withdrawal Amount = | $ | 10,000 | | (10% x $100,000) |
Excess Withdrawal = | $ | 11,722 | | ($21,722 – $10,000) |
Market Value Adjustment ($) = | $ | -733 | | ($11,722 x -6.25%) |
Withdrawal Charge = | $ | 989 | | ($11,722 – $733) x 9 |
Amount Received = | $ | 20,000 | | ($21,722 – $733 – $989) |
| | |
| Because the Index Performance is positive, the Interim Value is the same as the Segment Investment. Thus, both the Interim Value and the Segment Value are reduced by the same amount, which is $21,722. |
| | |
Withdrawal 1 | | Formula |
Index Performance (on date we calculate 1st withdrawal) = | 8 | % | |
Interim Value = | 100,000 | ($100,000 x (1 + lesser of Index Performance, 8%, and 0%)) |
Proportion that the withdrawal reduces the Contract Value = | -21.7 | % | (-$21,722 / $100,000) |
Reduction to Segment Investment due to withdrawal = | $ | 21,722 | | ($100,000 x -21.7%) |
Remaining Segment Investment after withdrawal = | $ | 78,278 | | ($100,000 – $21,722) |
Remaining Contract Value after withdrawal = | $ | 78,278 | | ($78,278 x (1 + lesser of Index Performance, 8%, and 0%)) |
| | |
| One month later, in the same Contract Year, you then request another withdrawal of $20,000. To satisfy this withdrawal request, we must deduct $23,443 from your Contract. This calculation is slightly different than above, since the Free Withdrawal Amount of $10,000 has been exhausted. |
| | |
Withdrawal 2 | | Formula |
Total Gross Withdrawal Amount = | $ | 23,443 | | |
Market Value Adjustment ($) = | $ | -1,465 | | ($23,443 x -6.25%) |
Withdrawal Charge = | $ | 1,978 | | ($23,443 – $1465) x 9 |
Amount Received = | $ | 20,000 | | ($23,443 – $1,465 – $1,978) |
| | |
| | | | | | | | |
| The total withdrawal amount reduces your Contract Value dollar-for-dollar and reduces your Segment Investment on a pro-rata basis by the same proportion that the withdrawal reduces the Interim Value, as demonstrated below. The resulting deduction to the Segment Investment in this example is $25,519. |
| | |
| | Formula |
Index Performance (on date we calculate 2nd withdrawal) = | -8.0 | % | |
Interim Value = | $ | 72,016 | | ($78,278 x (1 + greater of Index Performance,-8%, and Floor, -10%)) |
Proportion that the withdrawal reduces the Contract Value = | -32.6 | % | (-$23,443 / $72,016) |
Reduction to Segment Investment due to withdrawal = | $ | -25,519 | | ($78,278 x -32.6%) |
Remaining Segment Investment after withdrawal = | $ | 52,759 | | ($78,278 – $25,519) |
Remaining Contract Value after withdrawal = | $ | 48,538 | | ($52,759 x (1 + greater of Index Performance,-8%, and Floor, -10%)) |
| | |
| The remaining Segment Investment is used to determine the Segment Return Amount and Segment Maturity Value at the end of the Term. |
| | Formula |
Index Performance at Maturity Date = | 4 | % | |
Segment Investment = | $ | 52,759 | | |
Segment Return Amount = | $ | -2,110 | | ($52,759 x (greater of Index Performance, -4%, and Floor, -10%, subject to 12% Cap)) |
Segment Maturity Value = | $ | 50,649 | | ($52,759 – $2,110) |
APPENDIX B
EXAMPLE OF INDEX SUBSTITUTION
The following example demonstrates how we would determine your Segment Return Amount on the Maturity Date of a Segment when there has been an Index substitution. This example assumes a Segment with a $100,000 Segment Investment into a S&P 500 Index / -10% Floor Strategy with a Cap of 12% and Participation Rate of 100%.
| | | | | |
| Initial Segment Investment: | |
Segment Investment | $ | 100,000 | |
Term | 1-Year |
Index | S&P 500 Index |
Initial S&P 500 Index Level | 1,000 | |
Floor | -10 | % |
Cap | 12 | % |
Participation Rate | 100 | % |
Assume the MSCI EAFE Index is substituted for the S&P 500 Index during the Term of the Segment above.
| | | | | |
| S&P 500 Index Performance at the Date of Substitution: | |
Index | S&P 500 Index |
Initial S&P 500 Index Level | 1,000 | |
S&P 500 Index Level at Date of Substitution | 900 | |
Index Performance | -10 | % |
| |
| MSCI EAFE Index Performance for the Remainder of the Segment Term: | |
Index | MSCI EAFE Index |
MSCI EAFE Index Level at Date of Substitution | 2,000 | |
MSCI EAFE Index Level at Maturity Date | 2,400 | |
Index Performance | 20 | % |
| |
| Calculation of Segment Return Amount and Maturity Value: | |
S&P 500 Index Performance | -10 | % |
MSCI EAFE Index Performance | 20 | % |
Combined Index Performance(1) | 8 | % |
Segment Return Amount(2) | $ | 8,000 | |
Maturity Value | $ | 108,000 | |
__________________
(1)The Combined Index Performance is calculated as follows:(1 + 1st Index Performance) x (1 + 2nd Index Performance) – 1 = (1 + -10%) x (1 + 20%) – 1 = 8%
(2)Because the Combined Index Performance is positive, the Segment Return Amount is calculated as follows: (Segment Investment) x (lesser of Cap or (combined Index Performance x Participation Rate)) = $100,000 x (lesser of Cap or (combined Index Performance x 100%)) = $8,000
Appendix C
INDEX PUBLISHERS
Protective Life uses the Index under license from the Indices’ respective publishers. The following information about the Indices is included in this prospectus in accordance with Protective Life’s license agreements with the publishers of the Indices:
S&P 500® Index Information
The “S&P 500 Index” is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”), and has been licensed for use by Protective Life. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). It is not possible to invest directly in an index. Protective Market Defender is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices does not make any representation or warranty, express or implied, to the owners of the Protective Market Defender or any member of the public regarding the advisability of investing in securities generally or in Protective Market Defender particularly or the ability of the S&P 500 Index to track general market performance. Past performance of an index is not an indication or guarantee of future results. S&P Dow Jones Indices only relationship to Protective Life with respect to the S&P 500 Index is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The S&P 500 Index is determined, composed and calculated by S&P Dow Jones Indices without regard to Protective Life or the Protective Market Defender. S&P Dow Jones Indices have no obligation to take the needs of Protective Life or the owners of Protective Market Defender into consideration in determining, composing or calculating the S&P 500 Index. S&P Dow Jones Indices are not responsible for and have not participated in the determination of the prices, and amount of Protective Market Defender or the timing of the issuance or sale of Protective Market Defender or in the determination or calculation of the equation by which Protective Market Defender is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of Protective Market Defender. There is no assurance that investment products based on the S&P 500 Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment or tax advisor. A tax advisor should be consulted to evaluate the impact of any tax-exempt securities on portfolios and the tax consequences of making any particular investment decision. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.
NEITHER S&P DOW JONES INDICES NOR THIRD PARTY LICENSOR GUARANTEES THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P 500 INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY PROTECTIVE LIFE, OWNERS OF THE PROTECTIVE MARKET DEFENDER, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW
JONES INDICES AND PROTECTIVE LIFE, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
MSCI EAFE Index Information
THIS PRODUCT IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI INC. (“MSCI”), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE “MSCI PARTIES”). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY PROTECTIVE LIFE. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY REGARDING THE ADVISABILITY OF INVESTING IN PRODUCTS GENERALLY OR IN THIS PRODUCT PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THIS PRODUCT OR THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THIS PRODUCT TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY OR THE CONSIDERATION INTO WHICH THIS PRODUCT IS REDEEMABLE. FURTHER, NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE ISSUER OR OWNERS OF THIS PRODUCT OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THIS PRODUCT.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER OF THE PRODUCT, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO EACH MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Appendix D
STATE CONTRACT AVAILABILITY AND
VARIATIONS OF CERTAIN FEATURES
The following chart describes the material variations of certain features and/or benefits of the Contract in the states where the Contract has been approved as of the date of this Prospectus. Please consult your financial advisor for more information about availability in your state.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| STATE | | FEATURE | | VARIATION |
Alaska | | Declared Rate Account | | The minimum guaranteed interest rate for the Declared Rate Account is 1.20%. |
| | | | | | | | | | |
| | Strategies | | The minimum guaranteed interest rate for the Guaranteed Interest Strategy is 1.20%. |
| | | | | | | | | | |
| | | | The Index, Floor and minimum Participation Rate and Cap for each Indexed Strategy that we currently offer are identified in the chart below. |
| | | | | | | | | | |
| | | | INDEXED STRATEGIES |
| | | | Index | | Floor | | Minimum Participation Rate | | Minimum Cap |
| | | | S&P 500 | | -5% | | 100% | | 5% |
| | | | S&P 500 | | -10% | | 100% | | 5% |
| | | | S&P 500 | | -20% | | 100% | | 5% |
| | | | MSCI EAFE | | -5% | | 100% | | 5% |
| | | | MSCI EAFE | | -10% | | 100% | | 5% |
| | | | MSCI EAFE | | -20% | | 100% | | 5% |
| | | | | | | | | | |
| | Market Value Adjustment | | We will not apply a Market Value Adjustment when you withdraw all or a portion of your Contract Value during the withdrawal charge period. |
| | | | | | | | | | |
| | Withdrawals and Surrenders | | Withdrawals and surrenders during the withdrawal charge period that exceed the Free Withdrawal Amount are subject to a withdrawal charge but not a Market Value Adjustment. During the withdrawal charge period, we calculate the withdrawal charge by multiplying the amount that exceeds the Free Withdrawal Amount by the applicable withdrawal charge. |
| | | | | | | | | | |
| | Death Benefit | | The death benefit is equal to the sum of (A) + (B) + (C), where: (A) is the Declared Rate Account value, (B) is the Segment Value(s) of all the Guaranteed Interest Segments, and (C) is the Segment Investment(s) of all the Indexed Segments (not subject to an Interim Value calculation). |
| | | | | | | | | | |
Arizona | | Right to Cancel | | You may cancel this Contract for any reason by returning it to our administrative office, or to the agent who sold it to you, with a written request for cancellation. The Contract’s return and the cancellation request must be made within 10 days of your receipt of the Contract; or within 30 days of receipt if either: the Contract is issued in replacement of an existing contract; or, any Owner or Annuitant is 65 years of age or older on the date of application. |
| | | | | | | | | | |
Idaho | | Right to Cancel | | You may cancel this Contract within 20 days after you receive it by returning it to our administrative office, or to the agent who sold it to you, with a written request for cancellation. |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| STATE | | FEATURE | | VARIATION |
Minnesota | | Declared Rate Account | | The minimum guaranteed interest rate for the Declared Rate Account is 1.20%. |
| | | | | | | | | | |
| | Strategies | | The minimum guaranteed interest rate for the Guaranteed Interest Strategy is 1.20%. The Index, Floor and minimum Participation Rate and Cap for each Indexed Strategy that we currently offer are identified in the chart below. |
| | | | | | | | | | |
| | | | INDEXED STRATEGIES |
| | | | Index | | Floor | | Minimum Participation Rate | | Minimum Cap |
| | | | S&P 500 | | -5 | % | | 100 | % | | 5 | % |
| | | | S&P 500 | | -10 | % | | 100 | % | | 5 | % |
| | | | S&P 500 | | -20 | % | | 100 | % | | 5 | % |
| | | | MSCI EAFE | | -5 | % | | 100 | % | | 5 | % |
| | | | MSCI EAFE | | -10 | % | | 100 | % | | 5 | % |
| | | | MSCI EAFE | | -20 | % | | 100 | % | | 5 | % |
| | | | | | | | | | |
| | Market Value Adjustment | | We will not apply a Market Value Adjustment when you withdraw all or a portion of your Contract Value during the withdrawal charge period. |
| | | | | | | | | | |
| | Withdrawals and Surrenders | | Withdrawals and surrenders during the withdrawal charge period that exceed the Free Withdrawal Amount are subject to a withdrawal charge but not a Market Value Adjustment. During the withdrawal charge period, we calculate the withdrawal charge by multiplying the amount that exceeds the Free Withdrawal Amount by the applicable withdrawal charge. |
| | | | | | | | | | |
| | Death Benefit | | The death benefit is equal to the sum of (A) + (B) + (C), where: (A) is the Declared Rate Account value, (B) is the Segment Value(s) of all the Guaranteed Interest Segments, and (C) is the Segment Investment(s) of all the Indexed Segments (not subject to an Interim Value calculation). |
| | | | | | | | | | |
| New Jersey | | Declared Rate Account | | The minimum guaranteed interest rate for the Declared Rate Account is 1.20%. |
| | | | | | | | | | |
| | Strategies | | The minimum guaranteed interest rate for the Guaranteed Interest Strategy is 1.20%. The Index, Floor and minimum Participation Rate and Cap for each Indexed Strategy that we currently offer are identified in the chart below. |
| | | | INDEXED STRATEGIES |
| | | | Index | | Floor | | Minimum Participation Rate | | Minimum Cap |
| | | | S&P 500 | | -5 | % | | 100 | % | | 5 | % |
| | | | S&P 500 | | -10 | % | | 100 | % | | 5 | % |
| | | | S&P 500 | | -20 | % | | 100 | % | | 5 | % |
| | | | MSCI EAFE | | -5 | % | | 100 | % | | 5 | % |
| | | | MSCI EAFE | | -10 | % | | 100 | % | | 5 | % |
| | | | MSCI EAFE | | -20 | % | | 100 | % | | 5 | % |
| | | | | | | | | | |
| | Market Value Adjustment | | We will not apply a Market Value Adjustment when you withdraw all or a portion of your Contract Value during the withdrawal charge period. |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| STATE | | FEATURE | | VARIATION |
| | Withdrawals and Surrenders | | Withdrawals and surrenders during the withdrawal charge period that exceed the Free Withdrawal Amount are subject to a withdrawal charge but not a Market Value Adjustment. During the withdrawal charge period, we calculate the withdrawal charge by multiplying the amount that exceeds the Free Withdrawal Amount by the applicable withdrawal charge. |
| | | | | | | | | | |
| | Death Benefit | | The death benefit is equal to the sum of (A) + (B) + (C), where: (A) is the Declared Rate Account value, (B) is the Segment Value(s) of all the Guaranteed Interest Segments, and (C) is the Segment Investment(s) of all the Indexed Segments (not subject to an Interim Value calculation). |
| | | | | | | | | | |
| North Dakota | | Right to Cancel | | You may cancel this Contract within 20 days after you receive it by returning it to our administrative office, or to the agent who sold it to you, with a written request for cancellation. |
| | | | | | | | | | |
Texas | | Right to Cancel | | You may cancel this Contract within 20 days after you receive it (within 30 days after you receive it if the Contract is issued in replacement of an existing contract) by returning it to our Administrative Office, or to the agent who sold it to you, with a written request for cancellation. |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.*
The expenses of the issuance and distribution of the Contracts, other than any underwriting discounts and commissions, are as follows:
| | | | | |
Securities and Exchange Commission Registration Fees | $ | — | |
Printing and engraving | 50,000 | |
Accounting fees and expenses | 15,000 | |
Legal fees and expenses | 15,000 | |
Miscellaneous | — | |
TOTAL EXPENSES | $ | 80,000 | |
_________________
*Estimated.
Item 14. Indemnification of Directors and Officers.
Section 6.5 of Article VI of the Certificate of Incorporation of Protective Life Corporation (“PLC”) provides, in substance, that any of PLC’s directors and officers and certain directors and officers of Protective, who is a party or is threatened to be made a party to any action, suit or proceeding, other than an action by or in the right of PLC, by reason of the fact that he is or was an officer or director, shall be indemnified by PLC against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of PLC and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. If the action or suit is or was by or in the right of PLC to procure a judgment in its favor, such person shall be indemnified by PLC against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to PLC unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. To the extent that any officer or director has been successful on the merits or otherwise in defense of any such action, suit or proceeding, or in defense of any issue or matter therein, he shall be indemnified by PLC against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith without the necessity of any action being taken by PLC other than the determination, in good faith, that such defense has been successful. In all other cases, unless ordered by a court, indemnification shall be made by PLC only as authorized in the specific case upon a determination that indemnification of the officer or director is proper in the circumstances because he has met the applicable standard of conduct. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (c) by the holders of a majority of the shares of capital stock of PLC entitled to vote thereon. By means of a by-law, Protective offers its directors and certain executive officers similar indemnification.
In addition, the executive officers and directors are insured by PLC’s Directors’ and Officers’ Liability Insurance Policy including Company Reimbursement and are indemnified by a written contract with PLC which supplements such coverage.
Item 15. Recent Sales of Unregistered Securities
Not Applicable
Item 16(a). Exhibits.
| | | | | | | | |
Item Number | | Document |
| *1.(a) | | |
| *1.(b) | | |
| *2.(a) | | |
| *2.(b) | | |
| *2.(c) | | |
| *3.(a) | | |
| *3.(b) | | |
| *4.(a) | | |
| *4.(b) | | |
| *4.(c) | | |
| *4.(d) | | |
| *4.(e) | | |
| *4.(f) | | |
| *4.(g) | | |
| *4.(h) | | |
| *4.(i) | | |
| *5. | | |
| 8. | | Opinion re Tax Matters. Not Applicable. |
| 9. | | Voting Trust Agreement. Not Applicable. |
| *10(a) | | |
| | | | | | | | |
| *10(b) | | |
| 10(c) | | |
| *10(d) | | |
| *10(e) | | |
| *10(f) | | |
| *10(g) | | |
| *10(h) | | |
| *10(i) | | |
| *10(j) | | |
| *10(k) | | |
*10(l)† | | |
*10(m)† | | |
*10(n)† | | |
*10(o)† | | |
*10(p)† | | |
*10(q)† | | |
*10(r)† | | |
*10(s)† | | |
10(s.1)† | | |
| | | | | | | | |
*10(t)† | | |
*10(u)† | | |
*10(v)† | | |
*10(w)† | | |
10(w.1)† | | |
*10(x)† | | |
10(y)† | | |
*10(z)† | | |
*10(aa)† | | |
*10(bb)† | | |
10(cc)† | | |
10(dd)† | | |
*10(ee)† | | |
*10(ff)† | | |
*10(gg)† | | |
*10(hh)† | | |
*10(ii)† | | |
*10(jj)† | | |
10(kk)† | | |
10(ll)† | | |
10(mm)† | | |
*10(nn)† | | |
*10(oo)† | | |
*10(pp)† | | |
*10(qq)† | | |
*10(rr)† | | |
| | | | | | | | |
*10(ss)† | | |
*10(tt)† | | |
10(uu)† | | |
*10(vv)† | | |
*10(ww)† | | |
*10(xx)† | | |
*10(yy)† | | |
*10(zz)† | | |
*10(aaa)† | | |
*10(bbb) | | |
*10(ccc) | | |
*10(ddd) | | |
*10(eee) | | |
| 15. | | Letter re Unaudited Interim Financial Information. Not Applicable. |
| 16. | | Letter re Change in Certifying Accountant. Not Applicable. |
| 21. | | |
| 22. | | Subsidiary guarantors and issuers of guaranteed securities and affiliates whose securities collateralize securities of the registrant. Not Applicable. |
| 23.(a) | | |
| 23.(b) | | |
| 24. | | Power of Attorney. Not Applicable. |
| 25. | | Statement of Eligibility of Trustee. Not Applicable. |
| 96. | | Technical Report Summary. Not Applicable. |
| 99. | | Additional Exhibits. Not Applicable. |
| 101. | | Interactive Data File. Not Applicable. |
| *107. | | |
*Incorporated by Reference
† Management contract or compensatory plan or arrangement
Item 16(b). Financial Statement Schedules
All required financial statement schedules of Protective Life Insurance Company are included in Part I of this Registration Statement.
Item 17. Undertakings.
(A)The undersigned Registrant hereby undertakes:
(1)To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2)That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3)To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4)That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5)That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i)Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii)Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii)The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv)Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(B)Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officers or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-Effective Amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Birmingham, State of Alabama, on April 13, 2023.
| | | | | |
| PROTECTIVE LIFE INSURANCE COMPANY |
| |
| By: | /s/ RICHARD J. BIELEN |
| Richard J. Bielen |
| President, Chief Executive Officer, and Chairman of the Board |
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
(i) Principal Executive Officer | | | | |
| | | | |
| | | | |
| /s/ RICHARD J. BIELEN | | President, Chief Executive Officer, and Chairman of the Board | | April 13, 2023 |
| Richard J. Bielen | | |
| | | | |
(ii) Principal Financial Officer | | | | |
| | | | |
| | | | |
| /s/ PAUL R. WELLS | | Executive Vice President and Chief Financial Officer | | April 13, 2023 |
| Paul R. Wells | | |
| | | | |
| (iii) Principal Accounting Officer | | | | |
| | | | |
| | | | |
| /s/ BARBARA N. PUGH | | Chief Accounting Officer and Senior Vice President | | April 13, 2023 |
| Barbara N. Pugh | | |
| | | | |
(iv) Board of Directors: | | | | |
| | | | |
| | | | |
| /s/ PAUL R. WELLS | | Director | | April 13, 2023 |
| Paul R. Wells | | |
| | | | |
| | | | |
| /s/ RICHARD J. BIELEN | | Director | | April 13, 2023 |
| Richard J. Bielen | | |
| | | | |
| | | | |
| /s/ STEVEN G. WALKER | | Director | | April 13, 2023 |
| Steven G. Walker | | |
Exhibit Index
| | | | | | | | |
| Number | | Description |
| 10.(c) | | |
| 10.(y) | | |
| 10.(s.1) | | |
| 10.(w.1) | | |
| 10.(cc) | | |
| 10.(dd) | | |
| 10.(kk) | | |
| 10.(ll) | | |
| 10.(mm) | | |
| 10.(uu) | | |
| 21 | | |
| 23. (a) | | |
| 23. (b) | | |
Exhibit 10c
Execution Version
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of April 5, 2022
among
PROTECTIVE LIFE CORPORATION
and
PROTECTIVE LIFE INSURANCE COMPANY,
as Borrowers
THE SEVERAL LENDERS FROM TIME
TO TIME PARTY HERETO
and
REGIONS BANK,
as Administrative Agent and Swingline Lender,
[Cover Page Continues Next Page]
MIZUHO BANK, LTD.,
PNC CAPITAL MARKETS, LLC,
SUMITOMO MITSUI BANKING CORPORATION,
U.S. BANK NATIONAL ASSOCIATION,
WELLS FARGO SECURITIES, LLC,
MORGAN STANLEY SENIOR FUNDING, INC.
and
MUFG BANK, LTD.,
as Syndication Agents
REGIONS CAPITAL MARKETS,
a Division of Regions Bank,
as Joint Lead Arranger and Sole Bookrunner,
MIZUHO BANK, LTD.,
PNC CAPITAL MARKETS, LLC,
SUMITOMO MITSUI BANKING CORPORATION,
U.S. BANK NATIONAL ASSOCIATION,
WELLS FARGO SECURITIES, LLC,
MORGAN STANLEY SENIOR FUNDING, INC.
and
MUFG BANK, LTD.,
as Joint Lead Arrangers,
BANK OF AMERICA, N.A.,
BARCLAYS BANK PLC,
BNP PARIBAS,
CITIBANK, N.A.,
DEUTSCHE BANK SECURITIES INC.,
TD BANK
and
TRUIST BANK,
as Documentation Agents,
BNP PARIBAS and PNC CAPITAL MARKETS, LLC,
as Sustainability Structuring Agents,
TABLE OF CONTENTS
| | | | | | | | | | | |
| | | Page |
| | | |
ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION | 1 |
| | | |
| 1.1. | Terms Defined in this Agreement. | 1 |
| 1.2. | Rules of Interpretation. | 32 |
| 1.2.1 | Terms Generally. | 32 |
| 1.2.2 | Computations of Time Periods. | 33 |
| 1.2.3 | Document Preparation. | 33 |
| 1.2.4 | Time. | 33 |
| 1.2.5 | Letter of Credit Calculations. | 33 |
| 1.3. | Computations: Accounting Principles. | 33 |
| 1.4. | Division. | 34 |
| 1.5. | Rates. | 34 |
| 1.6. | Conforming Changes Relating to Term SOFR. | 35 |
| | | |
ARTICLE II CREDIT EXTENSIONS | 35 |
| | | |
| 2.1. | Revolving Loans. | 35 |
| 2.1.1 | Making of Revolving Loans. | 35 |
| 2.1.2 | Borrowing Mechanics for Revolving Loans. | 35 |
| 2.1.3 | Increase in Aggregate Revolving Commitments. | 36 |
| 2.2. | Swingline Loans. | 38 |
| 2.2.1 | Making of Swingline Loans and Purchases of Participations Therein. | 38 |
| 2.2.2 | Borrowing Mechanics for Swingline Loans. | 38 |
| 2.3. | Issuances of Letters of Credit and Purchase of Participations Therein. | 40 |
| 2.3.1 | Letters of Credit. | 40 |
| 2.3.2 | Notice of Issuance. | 41 |
| 2.3.3 Responsibility of Issuing Banks With Respect to Requests for Drawings and Payments. | 42 |
| 2.3.4 Reimbursement by the Borrowers of Amounts Drawn or Paid Under Letters of Credit. | 42 |
| 2.3.5 | Lenders’ Purchase of Participations in Letters of Credit. | 43 |
| 2.3.6 | Obligations Absolute. | 44 |
| 2.3.7 | Indemnification. | 44 |
| 2.3.8 | Applicability of ISP. | 44 |
| 2.3.9 | Letters of Credit Issued for Subsidiaries. | 44 |
| | | | | | | | | | | |
| 2.3.10 | Reporting by Issuing Banks. | 45 |
| 2.4. | Pro Rata Shares; Availability of Funds. | 45 |
| 2.4.1 | Pro Rata Shares. | 45 |
| 2.4.2 | Availability of Funds. | 45 |
| 2.5. | Evidence of Debt; Register; Lenders’ Books and Records; Notes. | 46 |
| 2.5.1 | Lenders’ Evidence of Debt. | 46 |
| 2.5.2 | Notes. | 47 |
| 2.6. | Scheduled Principal Payments. | 47 |
| 2.6.1 | Revolving Loans. | 47 |
| 2.6.2 | Swingline Loans. | 47 |
| 2.7. | Interest on Loans. | 47 |
| 2.7.1 | Interest Rate. | 47 |
| 2.7.2 | Determination of Interest Rate. | 47 |
| 2.7.3 | Failure to Specify Rate. | 48 |
| 2.7.4 | Calculation of Interest. | 48 |
| 2.7.5 | Interest Payable in Arrears. | 48 |
| 2.7.6 | Interest Due Issuing Banks. | 48 |
| 2.7.7 | Interest Distributed by Issuing Banks. | 49 |
| 2.8. | Conversion/Continuation. | 49 |
| 2.8.1 | Options to Convert/Continue. | 49 |
| 2.8.2 | Conversion/Continuation Notice. | 49 |
| 2.9. | Default Rate of Interest. | 49 |
| 2.9.1 | Principal Due. | 49 |
| 2.9.2 | Other Amounts Due. | 50 |
| 2.9.3 | Bankruptcy Defaults. | 50 |
| 2.9.4 | Other Defaults. | 50 |
| 2.9.5 | Past Due Amounts. | 50 |
| 2.9.6 | No Permitted Alternative. | 50 |
| 2.10. | Fees. | 50 |
| 2.10.1 | Facility Fee. | 50 |
| 2.10.2 | Letter of Credit Fees. | 51 |
| 2.10.3 | Fronting Fee and Other Fees Payable to an Issuing Bank. | 51 |
| 2.10.4 | Other Fees. | 51 |
| 2.11. | Prepayments/Commitment Reductions. | 52 |
| 2.11.1 | Voluntary Prepayments. | 52 |
| 2.11.2 | Voluntary Commitment Reductions. | 52 |
| 2.11.3 | Mandatory Prepayments. | 53 |
| | | | | | | | | | | |
| 2.12. | Application of Prepayments. | 53 |
| 2.12.1 | Voluntary Prepayments. | 53 |
| 2.12.2 | Mandatory Prepayments. | 53 |
| 2.12.3 | Payment to Lenders. | 53 |
| 2.13. | General Provisions Regarding Payments. | 53 |
| 2.13.1 | Auto Debit. | 53 |
| 2.13.2 | Time for Payments. | 54 |
| 2.13.3 | Payments Applied to Interest First. | 54 |
| 2.13.4 | Distributions to Lenders. | 54 |
| 2.13.5 | Affected Lender’s Payments. | 54 |
| 2.13.6 | Payment Date Not on Business Day. | 54 |
| 2.13.7 | Non-conforming Payments. | 55 |
| 2.14. | Sharing of Payments by Lenders. | 55 |
| 2.15. | Cash Collateral. | 56 |
| 2.15.1 | Grant of Security Interest. | 56 |
| 2.15.2 | Application. | 56 |
| 2.15.3 | Termination of Requirement. | 56 |
| 2.16. | Defaulting Lenders. | 57 |
| 2.16.1 | Defaulting Lender Adjustments. | 57 |
| 2.16.2 | Defaulting Lender Cure. | 59 |
| 2.16.3 | New Letters of Credit. | 59 |
| 2.17. | Making or Maintaining Interest Rates. | 59 |
| 2.17.1 | Inability to Determine Applicable Interest Rate. | 59 |
| 2.17.2 | Illegality or Impracticability of the Benchmark. | 60 |
| 2.17.3 | Compensation for Breakage or Non Commencement of Interest Periods. | 62 |
| 2.17.4 | Booking of Term SOFR Rate Loans. | 63 |
| 2.17.5 | [Reserved]. | 63 |
| 2.17.6 | Certificates for Reimbursement. | 63 |
| 2.17.7 | Delay in Requests. | 63 |
| 2.18. | Increased Costs. | 63 |
| 2.18.1 | Increased Costs Generally. | 63 |
| 2.18.2 | Capital Requirements. | 64 |
| 2.18.3 | Certificates for Reimbursement. | 64 |
| 2.18.4 | Delay in Requests. | 64 |
| 2.19. | Taxes. | 65 |
| 2.19.1 | Issuing Bank. | 65 |
| | | | | | | | | | | |
| 2.19.2 | Payments Free of Taxes; Obligation to Withhold; Payments on Account of Taxes. | 65 |
| 2.19.3 | Payment of Other Taxes by the Borrowers. | 65 |
| 2.19.4 | Tax Indemnification. | 65 |
| 2.19.5 | Evidence of Payments. | 66 |
| 2.19.6 | Status of Lenders; Tax Documentation. | 66 |
| 2.19.7 | Treatment of Certain Refunds. | 68 |
| 2.19.8 | Survival. | 68 |
| 2.20. | Mitigation Obligations; Designation of a Different Lending Office. | 69 |
| 2.20.1 | Designation of a Different Lending Office. | 69 |
| 2.20.2 | Replacement of Lenders. | 69 |
| 2.21. | Maximum PLICO Liability Amount. | 70 |
| 2.22. | Extension of Revolving Commitment Termination Date. | 71 |
| 2.22.1 | Request for Extension. | 71 |
| 2.22.2 | Lenders’ Election to Extend. | 71 |
| 2.22.3 | Notification by Administrative Agent. | 71 |
| 2.22.4 | Additional Commitment Lenders. | 71 |
| 2.22.5 | Minimum Extension Requirement. | 71 |
| 2.22.6 | Conditions to Effectiveness of Extensions. | 72 |
| 2.22.7 | Amendment; Sharing of Payments. | 72 |
| 2.23. | ESG Adjustments. | 73 |
| | | |
ARTICLE III CONDITIONS PRECEDENT | 76 |
| | | |
| 3.1. | Initial Advance. | 76 |
| 3.1.1 | Credit Documents. | 76 |
| 3.1.2 | Charter Documents. | 76 |
| 3.1.3 | Organizational Documents Certificate. | 76 |
| 3.1.4 | Certificates of Good Standing. | 76 |
| 3.1.5 | Foreign Qualification. | 76 |
| 3.1.6 | Closing Certificate. | 76 |
| 3.1.7 | UCC Searches. | 77 |
| 3.1.8 | Funding of Fees/Expenses. | 77 |
| 3.1.9 | Financial Information. | 77 |
| 3.1.10 | Opinion. | 77 |
| 3.1.11 | Funding Indemnity Letter. | 77 |
| 3.1.12 | Funding Notice; Funds Disbursement Instructions. | 77 |
| 3.1.13 | Refinancing of Existing Credit Agreement. | 77 |
| 3.1.14 | Patriot Act; Anti-Money Laundering Laws. | 77 |
| | | | | | | | | | | |
| 3.1.15 | Other Documents. | 78 |
| 3.2. | Each Credit Extension. | 78 |
| 3.2.1 | No Default. | 78 |
| 3.2.2 | Warranties. | 78 |
| 3.2.3 | Covenants. | 78 |
| 3.2.4 | Funding Notice. | 78 |
| | | |
ARTICLE IV REPRESENTATIONS AND WARRANTIES | 79 |
| | | |
| 4.1. | Corporate Existence and Standing. | 79 |
| 4.2. | Authorization and Validity. | 79 |
| 4.3. | No Conflict; Government Consent. | 79 |
| 4.4. | Financial Statements. | 79 |
| 4.5. | Material Adverse Change. | 80 |
| 4.6. | Taxes. | 80 |
| 4.7. | Litigation and Guaranteed Obligations. | 80 |
| 4.8. | List of Significant Subsidiaries. | 80 |
| 4.9. | ERISA. | 80 |
| 4.10. | Accuracy of Information. | 80 |
| 4.11. | Regulation U. | 80 |
| 4.12. | Material Agreements. | 81 |
| 4.13. | Compliance With Laws. | 81 |
| 4.14. | Investment Company Act. | 81 |
| 4.15. | Solvency. | 81 |
| 4.16. | Insurance Licenses. | 81 |
| 4.17. | Ownership of Properties. | 81 |
| 4.18. | Anti-Terrorism Laws. | 82 |
| 4.19. | Default. | 83 |
| | | |
ARTICLE V COVENANTS | 83 |
| | | |
| 5.1. | Financial Reporting. | 83 |
| 5.2. | Use of Proceeds. | 85 |
| 5.3. | Notice of Default. | 86 |
| 5.4. | Conduct of Business. | 86 |
| 5.5. | Taxes. | 86 |
| 5.6. | Insurance. | 86 |
| 5.7. | Compliance with Laws. | 87 |
| 5.8. | Maintenance of Properties. | 87 |
| 5.9. | Inspection. | 87 |
| | | | | | | | | | | |
| 5.10. | Merger, Consolidation and Sale of Assets. | 87 |
| 5.11. | Liens. | 88 |
| 5.12. | Adjusted Consolidated Net Worth. | 88 |
| 5.13. | Ratio of Adjusted Consolidated Indebtedness to Consolidated Capitalization. | 88 |
| 5.14. | [Reserved]. | 88 |
| 5.15. | [Reserved]. | 88 |
| 5.16. | Affiliates. | 88 |
| 5.17. | Compliance with ERISA. | 88 |
| 5.18. | Payment of Obligations. | 89 |
| 5.19. | Further Assurances. | 89 |
| 5.20. | Amendments to Organizational Agreements. | 89 |
| 5.21. | Changes in Accounting Policies or Reporting Practices. | 89 |
| | | |
ARTICLE VI DEFAULTS | 89 |
| | | |
| 6.1. | Representations and Warranties. | 89 |
| 6.2. | Payments. | 89 |
| 6.3. | Specific Covenants. | 89 |
| 6.4. | Other Covenants. | 90 |
| 6.5. | Default on Other Indebtedness and Additional Amounts. | 90 |
| 6.6. | Voluntary Petitions. | 90 |
| 6.7. | Involuntary Bankruptcy or Receivership Proceedings. | 90 |
| 6.8. | Condemnation. | 90 |
| 6.9. | Undischarged Judgments. | 91 |
| 6.10. | ERISA. | 91 |
| 6.11. | Distribution Limitations. | 91 |
| 6.12. | Environmental Investigation. | 91 |
| 6.13. | Change in Control. | 91 |
| 6.14. | Licenses. | 91 |
| 6.15. | Tax Lien. | 91 |
| 6.16. | Enforceability Contest. | 91 |
| | | |
ARTICLE VII REMEDIES | 92 |
| | | |
| 7.1. | Remedies. | 92 |
| 7.2. | Application of Funds. | 92 |
| 7.3. | Setoff. | 93 |
| | | |
ARTICLE VIII AGENCY | 93 |
| | | |
| 8.1. | Appointment and Authority. | 93 |
| 8.2. | Rights as a Lender. | 94 |
| | | | | | | | | | | |
| 8.3. | Exculpatory Provisions. | 94 |
| 8.3.1 | No Fiduciary Duties. | 94 |
| 8.3.2 | No Liability. | 94 |
| 8.3.3 | No Responsibility. | 95 |
| 8.4. | Reliance by Administrative Agent. | 95 |
| 8.5. | Delegation of Duties. | 95 |
| 8.6. | Resignation of Administrative Agent. | 96 |
| 8.6.1 | Resignation. | 96 |
| 8.6.2 | Removal. | 96 |
| 8.6.3 | Successor. | 96 |
| 8.7. | Non-Reliance on Administrative Agent, Sustainability Structuring Agents and Other Lenders. | 97 |
| 8.8. | No Other Duties, etc. | 97 |
| 8.9. | Administrative Agent May File Proofs of Claim. | 97 |
| 8.10. | Erroneous Payments. | 98 |
| | | |
ARTICLE IX BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATION | 101 |
| | | |
| 9.1. | Successors and Assigns Generally. | 101 |
| 9.2. | Assignments By Lenders. | 102 |
| 9.2.1 | Minimum Amounts. | 102 |
| 9.2.2 | Proportionate Amounts. | 102 |
| 9.2.3 | Required Consents. | 102 |
| 9.2.4 | Assignment and Assumption. | 103 |
| 9.2.5 | No Assignment to Borrowers, Affiliates or Subsidiaries. | 103 |
| 9.2.6 | No Assignment to Natural Persons. | 103 |
| 9.2.7 | Certain Additional Payments. | 103 |
| 9.3. | Register. | 104 |
| 9.4. | Participations. | 104 |
| 9.4.1 | Participants. | 104 |
| 9.4.2 | Entitled to Certain Benefits. | 105 |
| 9.4.3 | No Greater Payment. | 105 |
| 9.4.4 | Participant Register. | 105 |
| 9.4.5 | [Reserved]. | 105 |
| 9.5. | Disclosure of Confidential Information. | 105 |
| 9.6. | Certain Pledges. | 106 |
| | | |
ARTICLE X GENERAL PROVISIONS | 106 |
| | | |
| 10.1. | Notices. | 106 |
| | | | | | | | | | | |
| 10.1.1 | Notices Generally. | 106 |
| 10.1.2 | Electronic Communications. | 106 |
| 10.1.3 | Change of Address, Etc. | 107 |
| 10.1.4 | Platform. | 107 |
| 10.2. | Renewal, Extension, or Rearrangement. | 107 |
| 10.3. | Amendments and Waivers. | 108 |
| 10.3.1 | Required Lenders’ Consent. | 108 |
| 10.3.2 | Affected Lenders’ Consent. | 108 |
| 10.3.3 | Other Consents. | 109 |
| 10.3.4 | Execution of Amendments, etc. | 110 |
| 10.4. | Integration; Effectiveness. | 110 |
| 10.5. | Electronic Execution of Assignments and Other Documents. | 110 |
| 10.6. | Consent to Jurisdiction. | 112 |
| 10.7. | No Advisory or Fiduciary Relationship. | 112 |
| 10.8. | Marshalling; Payments Set Aside. | 113 |
| 10.9. | Obligations Several; Independent Nature of Lenders’ Rights. | 113 |
| 10.10. | Independence of Covenants. | 113 |
| 10.11. | Resignation As Swingline Lender After Assignment. | 113 |
| 10.12. | Standard of Care: Limitation of Damages. | 113 |
| 10.13. | Incorporation of Schedules. | 114 |
| 10.14. | Indulgence Not Waiver. | 114 |
| 10.15. | Cumulative Remedies. | 114 |
| 10.16. | Survival of Representations, Warranties and Agreements. | 114 |
| 10.17. | Usury Savings Clause. | 114 |
| 10.18. | Entire Agreement. | 115 |
| 10.19. | Severability. | 115 |
| 10.20. | Time of Essence. | 115 |
| 10.21. | Applicable Law. | 115 |
| 10.22. | Captions Not Controlling. | 115 |
| 10.23. | WAIVER OF JURY TRIAL. | 115 |
| 10.24. | Waiver of Venue. | 116 |
| 10.25. | Termination. | 116 |
| 10.26. | Expenses; Indemnity. | 117 |
| 10.26.1 | Costs and Expenses. | 117 |
| 10.26.2 | Indemnification by Borrowers. | 117 |
| 10.26.3 | Reimbursement by Lenders. | 118 |
| 10.26.4 | Payments. | 118 |
| | | | | | | | | | | |
| 10.26.5 | Survival. | 118 |
| 10.27. | Set Off. | 118 |
| 10.28. | Treatment of Certain Information.. | 119 |
| 10.28.1 | Confidentiality. | 119 |
| 10.28.2 | Information. | 119 |
| 10.28.3 | Disclosure of Fee Letters and Engagement Letter. | 119 |
| 10.29. | Patriot Act; Beneficial Ownership Regulation.. | 120 |
| 10.30. | Amendment and Restatement of Existing Credit Agreement. | 120 |
| 10.31. | Acknowledgement and Consent to Bail-In of Affected Financial Institutions. | 120 |
| 10.32. | Certain ERISA Matters. | 121 |
| 10.33. | Waiver of Breakage Costs. | 122 |
| 10.34. | Acknowledgement Regarding Any Supported QFCs. | 122 |
List of Exhibits, Schedules and Appendices
| | | | | | | | |
| Exhibit 2.5.2A | – | Revolving Loan Note |
| Exhibit 2.5.2B | – | Swingline Note |
| Exhibit 2.19.6 | – | U.S. Tax Compliance Certificates |
| Exhibit A | – | Assignment and Assumption |
| Exhibit B | – | Compliance Certificate |
| Exhibit C | – | Conversion/Continuation Notice |
| Exhibit D | – | Funding Notice |
| Exhibit E | – | Issuance Notice |
| Exhibit F | – | Additional Permitted Liens |
| Exhibit G | – | Pricing Certificate |
| | |
| Schedule 4.7 | – | Litigation |
| Schedule 4.8 | – | Significant Subsidiaries |
| | |
| Appendix A | – | Revolving Commitment Amounts and Percentages |
| Appendix B | – | Addresses |
| Appendix C | – | ESG Table |
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of April 5, 2022 (this “Agreement”) is entered into by and among PROTECTIVE LIFE CORPORATION, a Delaware corporation (“PLC”), PROTECTIVE LIFE INSURANCE COMPANY, a Tennessee corporation (“PLICO”; PLC and PLICO are together referred to as the “Borrowers”), the various lenders identified on the signature pages hereto (collectively, with all other persons that may from time to time hereafter become Lenders hereunder by execution of an Assignment and Assumption, the “Lenders”), and REGIONS BANK, in its capacity as the administrative agent for the Lenders (the “Administrative Agent”).
RECITALS
A. The Borrowers, the lenders party thereto (the “Existing Lenders”), and the Administrative Agent are parties to that certain Amended and Restated Credit Agreement dated as of February 2, 2015 (as amended, modified, supplemented, increased or extended from time to time, including pursuant to that certain First Amendment to Amended and Restated Credit Agreement dated as of May 3, 2018, the “Existing Credit Agreement”) pursuant to which the Existing Lenders agreed to make available to the Borrowers a credit facility in the maximum principal amount of $1,000,000,000.
B. The Borrowers, the Lenders and the Administrative Agent wish to amend and restate the Existing Credit Agreement in its entirety, as hereinafter set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, and of the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Lenders and the Administrative Agent agree as follows:
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.1. Terms Defined in this Agreement. As used below in this Agreement, the following capitalized terms shall have the following meanings, unless the context expressly requires otherwise:
“2022 KPI Metrics Report” means the KPI Metrics Report including the KPI Metrics Assurance Provider’s review report of each KPI Metric as of December 31, 2022, provided in accordance with Section 2.23.
“Additional Commitment Lender” has the meaning set forth in Section 2.22.4.
“Adjusted Consolidated Indebtedness” means (i) Consolidated Indebtedness, less (ii) Short-Term Indebtedness for advance fundings of guaranteed investment contracts, annuities and other similar insurance and investment products.
“Adjusted Consolidated Net Worth” means at any date of determination, Consolidated Net Worth excluding (i) goodwill and intangible assets (other than value of business acquired) and (ii) all unrealized net losses and gains on assets held for sale pursuant to FASB ASC 320 and other accumulated comprehensive income pursuant to FASB ASC 220 or subsequent accounting pronouncements having substantially similar impact as these provisions, to the extent such unrealized net losses and gains have been taken into account in determining Consolidated Net Worth.
“Adjusted Daily Simple SOFR Rate” means an interest rate per annum equal to Daily Simple SOFR plus 0.150% (15 basis points).
“Adjusted Term SOFR Rate” means, for any Interest Period, an interest rate per annum equal to Term SOFR for such Interest Period plus the Term SOFR Adjustment.
“Administrative Agent” means Regions Bank in its capacity as agent for the Lenders pursuant to Article VIII of this Agreement, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article VIII hereof.
“Administrative Questionnaire” means an administrative questionnaire provided by the Lenders in a form supplied by the Administrative Agent.
“Affected Financial Institution” means (a) any EEA Financial Institution or (b) any UK Financial Institution.
“Affected Lender” has the meaning set forth in Section 2.17.2.
“Affected Loans” has the meaning set forth in Section 2.17.2.
“Affiliate” of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise.
“Aggregate Revolving Commitments” means the Revolving Commitments of all the Lenders. The aggregate principal amount of the Aggregate Revolving Commitments in effect on the Closing Date is One Billion Five Hundred Million Dollars ($1,500,000,000).
“Agreement” means this Credit Agreement (including all schedules and exhibits hereto), as it may be further amended or modified and in effect from time to time.
“Annual Statement” means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its
jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary's jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements recommended by the NAIC to be used for filing annual statutory financial statements and shall contain the type of information recommended by the NAIC to be disclosed therein, together with all exhibits or schedules filed therewith.
“Anti-Corruption Laws” means the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq., the UK Bribery Act of 2010 and all other laws, rules, and regulations of any jurisdiction applicable to each Borrower or any of its Affiliates from time to time concerning or relating to bribery, corruption or money laundering.
“Applicable Fitch Rating” means the highest long-term senior, unsecured, non-credit enhanced, monitored credit rating of PLC that is published by Fitch.
“Applicable Margin” means the rates per annum set forth opposite the appropriate test in the pricing grid below:
| | | | | | | | | | | | | | | | | | | | |
Applicable Rating of PLC | | Base Rate Loans in Basis Points | | Term SOFR Rate
Loans and Letter
of Credit Fee in
Basis Points | | Facility Fee Rate in Basis Points |
| | | | | | |
| Greater than or equal to A or A2 | | 0.0 bps | | 90.0 bps | | 7.5 bps |
| | | | | | |
| Less than A or A2 but greater than or equal to A- or A3 | | 0.0 bps | | 100.0 bps | | 10.0 bps |
| | | | | | |
| Less than A- or A3 but greater than or equal to BBB+ or Baa1 | | 10.0 bps | | 110.0 bps | | 12.5 bps |
| | | | | | |
| Less than BBB+ or Baa1 but greater than or equal to BBB or Baa2 | | 30.0 bps | | 130.0 bps | | 17.5 bps |
| | | | | | |
| Less than BBB and Baa2 or no Applicable Rating | | 45.0 bps | | 145.0 bps | | 27.5 bps |
Upon any change in the Applicable Rating, the Applicable Margin shall be adjusted effective upon the date of any such change in the Applicable Rating. As of the date of this Agreement, PLC is currently rated A- by S&P and Baa1 by Moody’s and the Applicable Margin for Term SOFR Rate Loans is therefore 100.0 basis points and the Applicable Margin for the Facility Fee Rate is therefore 10.0 basis points. It is hereby understood and agreed that (a) the Facility Fee Rate in basis points shall be adjusted from time to time based upon the ESG Fee Adjustment (to be calculated and applied as set forth in Section 2.23) and (b) the Applicable Margin for Term SOFR Rate Loans and the Letter of Credit Fee in basis points and the Applicable Margin for Base Rate Loans in basis points each shall be adjusted from time to time based upon the ESG Rate Adjustment (to be calculated and applied as set forth in Section 2.23).
“Applicable Moody’s Rating” means the highest long-term senior, unsecured, non-credit enhanced, monitored credit rating of PLC that is published by Moody’s.
“Applicable Rating” means (a) at all times prior to the Administrative Agent’s receipt of the Fitch Rating Election Notice, the Applicable S&P Rating or the Applicable Moody’s Rating; provided, that, if PLC has an Applicable S&P Rating and an Applicable Moody’s Rating, the Applicable Rating shall be the higher of the two, unless the two are separated by more than one level, in which case the Applicable Rating shall be that at the level immediately below the higher of the two levels and (b) upon the Administrative Agent’s receipt of the Fitch Rating Election Notice and at all times thereafter, the Applicable Fitch Rating or the Applicable Surviving Rating; provided, that, if PLC has an Applicable Fitch Rating and an Applicable Surviving Rating, the Applicable Rating shall be the higher of the two, unless the two are separated by more than one level, in which case the Applicable Rating shall be that at the level immediately below the higher of the two levels.
“Applicable S&P Rating” means the highest long-term senior, unsecured, non-credit enhanced, monitored credit rating of PLC that is published by S&P.
“Applicable Surviving Rating” means, at any time following the delivery of a Fitch Rating Election Notice, whichever of the Applicable S&P Rating and Applicable Moody’s Rating was not identified by the Borrowers as being replaced with the Applicable Fitch Rating in such Fitch Rating Election Notice.
“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
“Approving Lenders” has the meaning set forth in Section 2.22.5.
“Article” means an article of this Agreement.
“Assignment and Assumption” means the assignment and assumption agreement entered into by a Lender and an Eligible Assignee with all required consents and accepted by the Administrative Agent, in substantially the form of Exhibit A or any other form approved by the Administrative Agent.
“Authorized Officer” means any of the President, Chief Executive Officer, Chief Financial Officer, Treasurer, Chief Accounting Officer, any Executive Vice President or any Senior Vice President of the Borrowers, acting singly.
“Available Tenor” means, as of any date of determination and with respect to the then-current Benchmark, as applicable, any tenor for such Benchmark or payment period for interest calculated with reference to such Benchmark, as applicable, that is or may be used for determining the length of an Interest Period pursuant to this Agreement as of such date.
“Bail-In Action” means the exercise of any Write-Down and Conversion Powers by the applicable Resolution Authority in respect of any liability of an Affected Financial Institution.
“Bail-In Legislation” means, (a) with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law, rule, regulation or requirement for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule, and (b) with respect to the United Kingdom, Part I of the United Kingdom Banking Act 2009 (as amended from time to time) and any other law, regulation or rule applicable in the United Kingdom relating to the resolution of unsound or failing banks, investment firms or other financial institutions or their affiliates (other than through liquidation, administration or other insolvency proceedings).
“Bankruptcy Code” means Title 11 of the United States Code, as amended from time to time, or any similar federal or state law for the relief of debtors.
“Base Rate” means, for any day, a rate per annum equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus one half of one percent (0.5%) and (iii) the Adjusted Term SOFR Rate for a one-month tenor in effect on such day plus one percent (1.0%). Any change in the Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or Term SOFR shall be effective on the effective day of such change in the Prime Rate, the Federal Funds Effective Rate or Term SOFR, respectively. Notwithstanding anything to the contrary herein, the Base Rate shall not be less than zero percent (0%).
“Base Rate Loan” means a Loan bearing interest at a rate determined by reference to the Base Rate.
“Benchmark” means, initially, Term SOFR; or if any Benchmark Replacement is incorporated into this Agreement pursuant to Section 2.17, then “Benchmark” means the applicable Benchmark Replacement.
“Benchmark Conforming Changes” means, with respect to the use, administration of or any conventions associated with Term SOFR or any implementation of a Benchmark Replacement, any technical, administrative or operational changes (including changes to the definition of “Base Rate,” the definition of “Term SOFR,” the definition of “Term SOFR Reference Rate,” the definition of “U.S. Government Securities Business Day,” the definition of “Interest Period,” timing and frequency of determining rates and making payments of interest, timing of borrowing requests or prepayment, conversion or continuation notices, length of lookback periods, the applicability of breakage provisions, and other technical, administrative or operational matters) that the Administrative Agent decides in its reasonable discretion (in consultation with the Borrowers) may be appropriate to reflect such use, administration or conventions or the adoption and implementation of such applicable rate and to permit the administration thereof by the Administrative Agent in a manner substantially consistent with market practice (or, if the Administrative Agent decides (in consultation with the Borrowers) that adoption of any portion of such market practice is not administratively feasible or if the Administrative Agent determines (in consultation with the Borrowers) that no market practice for the administration of such applicable rate exists, in such other manner of administration as the Administrative Agent decides (in consultation with the Borrowers) is reasonably necessary in connection with the administration of this Agreement and any other Credit Document).
“Benchmark Illegality/Impracticability Event” means the occurrence of any one or more of the following: (a) that the making, maintaining or continuation of the then-current Benchmark by any Lender has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful), (b) with respect to any Benchmark, that any successor administrator of the published screen rate for such Benchmark or a Governmental Authority having jurisdiction over the Administrative Agent or administrator of such Benchmark has made a public statement establishing a specific date (expressly or by virtue of such public statement) after which an Available Tenor of such Benchmark or the published screen rate for such Benchmark shall or will no longer be representative or made available, or used for determining the interest rate of loans, or shall or will otherwise cease, provided, that, at the time of such statement, there is no successor administrator that is satisfactory to the Administrative Agent that will continue to provide such representative interest periods of such Benchmark after such specific date, (c) that the making, maintaining or continuation of the then-current Benchmark by any Lender has become impracticable, as a result of contingencies occurring after the Closing Date which materially and adversely affect the ability of a Lender to make, maintain or continue its Loans at the then-current Benchmark (including because the published screen rate for such Benchmark in any relevant tenor is not available or published on a current basis and such circumstances are unlikely to be temporary) or (d) with respect to any Lender, that the then-current Benchmark (including any related mathematical or other adjustments thereto) will not adequately and fairly reflect the cost to such Lender of making, funding or maintaining its Loans at the then-current Benchmark. For the avoidance of doubt, a “Benchmark Illegality/Impracticability Event” will be deemed to have occurred with respect to any Benchmark if a public statement or publication of information set forth above has occurred with respect to each then-current Available Tenor of such Benchmark (or the published component used in the calculation thereof).
“Benchmark Replacement” means (a) the Adjusted Daily Simple SOFR Rate, so long as such rate can be determined by the Administrative Agent for the applicable Benchmark Replacement Date and (b) otherwise, the alternative benchmark rate and adjustments thereto implemented by the Administrative Agent and Borrowers pursuant to Section 2.17.2(b). Notwithstanding anything to the contrary herein, the Benchmark Replacement shall not be less than zero percent (0%).
“Benchmark Replacement Date” has the meaning specified in Section 2.17.2(b).
“Beneficial Ownership Certification” has the meaning specified in Section 3.1.14.
“Beneficial Ownership Regulation” means 31 C.F.R. § 1010.230.
“Benefit Plan” means any of (a) an “employee benefit plan” (as defined in Section 3(3) of ERISA) that is subject to Title I of ERISA, (b) a “plan” to which Section 4975 of the Internal Revenue Code applies or (c) any Person whose underlying assets include “plan assets” of any such “employee benefit plan” or “plan” within the meaning of 29 CFR 2510.3-101 as modified by Section 3(42) of ERISA.
“Board” means the Board of Governors of the US Federal Reserve System (or any successor thereto).
“Borrowers” means collectively, PLC and PLICO.
“Borrowing” means (a) a borrowing consisting of simultaneous Loans of the same Type of Loan and, in the case of Term SOFR Rate Loans, having the same Interest Period, or (b) a borrowing of Swingline Loans, as appropriate.
“Business Day” means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the State of Alabama or New York or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close; provided, that, with respect to notices and determinations in connection with, and payments of principal and interest on Term SOFR Rate Loans, such day is also a U.S. Government Securities Business Day.
“Capitalized Lease” of a Person means any lease of Property by such Person as lessee that would be capitalized on a balance sheet of such Person prepared in accordance with GAAP.
“Capitalized Lease Obligations” of a Person means the amount of the obligations of such Person under Capitalized Leases that would be shown as a liability on a balance sheet of such Person prepared in accordance with GAAP.
“Cash Collateralize” means, to pledge and deposit with or deliver to the Administrative Agent, for the benefit of any Issuing Bank, the Swingline Lender or the Lenders, as applicable, as collateral for Letter of Credit Obligations or Swingline Loans, as applicable, or obligations of the Lenders to fund participations in respect thereof, cash or deposit account balances or, if the Administrative Agent, any Issuing Bank and/or the Swingline Lender, as applicable, shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to the Administrative Agent, such Issuing Bank and/or the Swingline Lender, as applicable. “Cash Collateral” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.
“Cash Management Bank” means any Person that is a Lender or any Affiliate of a Lender at the time it provides any Cash Management Services, or that is a Lender or an Affiliate of Lender at any time after it has provided any Cash Management Services.
“Cash Management Obligations” means obligations owed by any Borrower to any Cash Management Bank in connection with, or in respect of, any Cash Management Services.
“Cash Management Services” means any one or more of the following types of services or facilities provided to any Borrower by a Cash Management Bank: (a) ACH transactions and (b) cash management services, including, without limitation, controlled disbursement services, treasury, depository, overdraft, and electronic funds transfer services.
“Change in Control” means:
(a) Dai-ichi or one of its direct or indirect wholly-owned subsidiaries shall cease to own and control, of record and beneficially, directly at least a majority of the outstanding Equity Interests of PLC; or
(b) PLC shall cease to own and control, of record and beneficially, directly 100% of the outstanding Equity Interests of PLICO.
“Change in Law” means the occurrence after the date of this Agreement of: (a) the adoption or effectiveness of any law, rule, regulation, judicial ruling, judgment or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application by any Governmental Authority of any law, rule, regulation or treaty, or (c) the making or issuance by any Governmental Authority of any request, rule, guideline or directive, whether or not having the force of law; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith, (y) all requests, rules, guidelines or directives concerning capital adequacy promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III and (z) all requests, rules, guidelines or directives issued by a Governmental Authority in connection with a Lender’s submission or re-submission of a capital plan under 12 C.F.R. § 225.8 or a Governmental Authority’s assessment thereof shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.
“Closing Date” means April 5, 2022.
“Code” means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time.
“Commitment” means, with respect to any Lender, such Lender’s Revolving Commitment.
“Commodity Exchange Act” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.).
“Communication” means (except as otherwise defined in Section 10.1.4 for purposes of such Section) this Agreement, any Credit Document and any document, amendment, approval, consent, information, notice, certificate, request, statement, disclosure or authorization related to any Credit Document.
“Compliance Certificate” means a Compliance Certificate substantially in the form of Exhibit B.
“Connection Income Taxes” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
“Consolidated Capitalization” means, at any date of determination, the sum of (i) Adjusted Consolidated Net Worth as at such date plus (ii) Adjusted Consolidated Indebtedness as at such time.
“Consolidated Indebtedness” means the Indebtedness of PLC and its Subsidiaries determined on a consolidated basis in accordance with GAAP.
“Consolidated Net Income” means, for any period, the consolidated net income of PLC and the Subsidiaries for such period, as shown on the consolidated financial statements of PLC and the Subsidiaries delivered in accordance with Section 5.1.
“Consolidated Net Worth” means, at any date of determination, the amount of consolidated common shareholders' equity of PLC and its Subsidiaries, determined as at such date in accordance with GAAP.
“Consolidated Subsidiary” means, a Subsidiary, the accounts of which are customarily consolidated with those of PLC for the purpose of reporting to stockholders of PLC or, in the case of a recently acquired Subsidiary, the accounts of which would, in accordance with PLC's regular practice, be so consolidated for that purpose.
“Consolidated Total Assets” means, at any time, the total assets of PLC and its Consolidated Subsidiaries, determined on a consolidated basis, as set forth or reflected on the most recent consolidated balance sheet of PLC and its Consolidated Subsidiaries, prepared in accordance with GAAP.
“Conversion/Continuation Date” means the effective date of a continuation or conversion, as the case may be, as set forth in the applicable Conversion/Continuation Notice.
“Conversion/Continuation Notice” means a Conversion/Continuation Notice substantially in the form of Exhibit C.
“Credit Date” means the date of a Credit Extension.
“Credit Documents” means, collectively, each writing delivered at any time by the Borrowers to the Lenders or the Administrative Agent relating to the Loans, the Swingline Loans or the Letters of Credit to evidence or secure any of the Obligations.
“Credit Extension” means the making of a Loan or the issuing, increase, extension, amendment or renewal of a Letter of Credit.
“Credit for Reinsurance Letter of Credit” has the meaning set forth in Section 2.3.1.
“Dai-ichi” means Dai-ichi Life Holdings, Inc., a corporation organized under the laws of Japan (formerly known as The Dai-ichi Life Insurance Company, Limited).
“Daily Simple SOFR” means, for any day, SOFR, with the conventions for this rate (which will include a lookback) being established by the Administrative Agent in accordance with the conventions for such rate selected or recommended by the Relevant Governmental Body
for determining “Daily Simple SOFR” for business loans; provided, that, if the Administrative Agent decides that any such convention is not administratively feasible for the Administrative Agent, then the Administrative Agent may establish another convention in its reasonable discretion. Notwithstanding anything to the contrary herein, Daily Simple SOFR shall not be less than zero percent (0%).
“Debtor Relief Laws” means the Bankruptcy Code and all other liquidation, bankruptcy, assignment for the benefit of creditors, conservatorship, moratorium, receivership, insolvency, rearrangement, reorganization or similar debtor relief laws of the US or other applicable jurisdictions in effect from time to time.
“Default” means an event described in Article VI.
“Default Rate” means an interest rate equal to (a) with respect to Obligations other than Term SOFR Rate Loans (including Base Rate Loans referencing the Adjusted Term SOFR Rate) and the Letter of Credit Fee, the Base Rate plus the Applicable Margin, if any, applicable to such Loans plus two percent (2%) per annum, (b) with respect to Term SOFR Rate Loans, the Adjusted Term SOFR Rate plus the Applicable Margin, if any, applicable to Term SOFR Rate Loans plus two percent (2%) per annum and (c) with respect to the Letter of Credit Fee, the Applicable Margin plus two percent (2%) per annum.
“Defaulting Lender” means, subject to Section 2.16.2, any Lender that (a) has failed to (i) fund all or any portion of its Loans within two (2) Business Days of the date such Loans were required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrowers in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent, any Issuing Bank, the Swingline Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swingline Loans) within two (2) Business Days of the date when due, (b) has notified the Borrowers, the Administrative Agent or any Issuing Bank or the Swingline Lender in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three (3) Business Days after written request by the Administrative Agent or the Borrowers, to confirm in writing to the Administrative Agent and the Borrowers that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrowers), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity or (iii) become the subject of a Bail-In Action; provided that a Lender shall not be a Defaulting
Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.16.2) upon delivery of written notice of such determination to the Borrowers, each Issuing Bank, the Swingline Lender and each Lender.
“Dollars” or “$” means dollars of the United States of America.
“EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
“EEA Member Country” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
“EEA Resolution Authority” means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
“Electronic Record” and “Electronic Signature” shall have the meanings assigned to them, respectively, by 15 USC §7006, as it may be amended from time to time.
“Eligible Assignee” means any Person that meets the requirements to be an assignee under Section 9.2 subject to any consents and representations as may be required therein.
“Engagement Letter” means that certain engagement letter dated February 8, 2022 among the Borrowers and Regions Capital Markets, a division of Regions Bank.
“Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
“ERISA Affiliate” means any Person that is a member of PLC's controlled group, or under common control with PLC, within the meaning of Section 414 of the Code.
“ERISA Event” means (i) a “reportable event” within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(c) of the Internal Revenue Code), the failure to make by its due date any minimum required contribution or any required installment under Section 430(j) of the Internal Revenue Code with respect to any Pension Plan or the failure to make by its due date any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal from any Pension Plan with two (2) or more contributing sponsors or the termination of any such Pension Plan, in either case resulting in material liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition reasonably likely to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability pursuant to Section 4062(a) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA, each case reasonably likely to result in material liability; (vii) the withdrawal of any Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if such withdrawal is reasonably likely to result in material liability, or the receipt by any Borrower, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in insolvency pursuant to Section 4241 or 4245 of ERISA, or that it is in “critical” or “endangered” status within the meaning of Section 305 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA, if such insolvency or termination is reasonably likely to result in material liability; (viii) the imposition of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Pension Plan if such fines, penalties, taxes or related charges are reasonably likely to result in material liability; (ix) the assertion of a material claim (other than routine claims for benefits and funding obligations in the ordinary course) against any Pension Plan other than a Multiemployer Plan or the assets thereof, or against any Person in connection with any Pension Plan such Person sponsors or maintains reasonably likely to result in material liability; (x) receipt from the Internal Revenue Service of a final written determination of the failure of any Pension Plan intended to be qualified under Section 401(a) of the Internal Revenue Code to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any such plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a lien pursuant to Section 430(k) of the Internal Revenue Code or pursuant to Section 303(k) or 4068 of ERISA or any violation of Section 436 of the Internal Revenue Code or Section 206(g) of ERISA.
“Erroneous Payment” has the meaning set forth in Section 8.10.1.
“Erroneous Payment Deficiency Assignment” has the meaning set forth in Section 8.10.4.
“Erroneous Payment Impacted Class” has the meaning set forth in Section 8.10.4.
“Erroneous Payment Return Deficiency” has the meaning set forth in Section 8.10.4.
“Erroneous Payment Subrogation Rights” has the meaning set forth in Section 8.10.6.
“ESG Fee Adjustment” means, with respect to any Pricing Certificate for any calendar year, an amount (whether positive, negative or zero), expressed in basis points, equal to the sum of (a) the Women Employees Fee Adjustment Amount, plus (b) the Racial Diversity Fee Adjustment Amount, in each case for such calendar year.
“ESG Pricing Adjustment Date” has the meaning specified in Section 2.23(a).
“ESG Rate Adjustment” means, with respect to any Pricing Certificate for any calendar year, an amount (whether positive, negative or zero), expressed in basis points, equal to the sum of (a) the Women Employees Applicable Rate Adjustment Amount, plus (b) the Racial Diversity Applicable Rate Adjustment Amount, in each case for such calendar year.
“EU Bail-In Legislation Schedule” means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.
“Excluded Swap Obligation” means, with respect to any Borrower, any Swap Obligation if, and to the extent that, all or a portion of the guarantee of such Borrower of, or the grant under a Credit Document by such Borrower of a security interest to secure, such Swap Obligation (or any guarantee thereof) is or becomes illegal under the Commodity Exchange Act (or the application or official interpretation thereof) by virtue of such Borrower’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act (determined after giving effect to any “keepwell”, support or other agreement for the benefit of such Borrower and any and all guarantees of such Borrower’s Swap Obligations by other Borrowers) at the time the guarantee of such Borrower, or grant by such Borrower of a security interest, becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a Master Agreement governing more than one (1) Hedge Agreement, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to Hedge Agreements for which such guarantee or security interest becomes illegal.
“Excluded Taxes” means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on, determined by reference to, or measured by, net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having an office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the
date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by the Borrowers under Section 2.20.2) or (ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 2.19, amounts with respect to such Taxes were payable either to such Lender's assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its lending office, (c) Taxes attributable to such Recipient’s failure to comply with Section 2.19.6 and (d) any withholding Taxes imposed under FATCA.
“Exempt Employees” means employees who satisfy the requirements for “exempt employees” under the Fair Labor Standards Act and/or are paid salaries.
“Existing Credit Agreement” has the meaning set forth in Recital A.
“Facility Fee” has the meaning set forth in Section 2.10.1.
“FATCA” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof, any agreements entered into pursuant to Section 1471(b)(1) of the Code and any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement, treaty or convention among Governmental Authorities and implementing such Sections of the Code.
“Federal Funds Effective Rate” means for any day, the rate per annum (expressed, as a decimal, rounded upwards, if necessary, to the next higher one one-hundredth of one percent (1/100 of 1%)) equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided, (i) if such day is not a Business Day, the Federal Funds Effective Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Effective Rate for such day shall be the average rate charged to Regions Bank or any other Lender selected by the Administrative Agent on such day on such transactions as determined by the Administrative Agent. Notwithstanding anything to the contrary herein, the Federal Funds Effective Rate shall not be less than zero percent (0%).
“Fee Letters” means, collectively, the Regions Fee Letter and the Sustainability Structuring Agents Fee Letter.
“Fitch” means Fitch Ratings, Inc., together with its successors.
“Fitch Rating Election Notice” means a written notice delivered by the Borrowers to the Administrative Agent specifying that the Borrowers have elected to replace either the Applicable S&P Rating or the Applicable Moody’s Rating with the Applicable Fitch Rating (provided, that there shall be only one Fitch Rating Election Notice during the term of this Agreement).
“Foreign Lender” means any Lender that is not a US Person.
“Fronting Exposure” means, at any time there is a Defaulting Lender, (a) with respect to any Issuing Bank, such Defaulting Lender’s Revolving Commitment Percentage of the outstanding Letter of Credit Obligations with respect to Letters of Credit issued by such Issuing Bank other than Letter of Credit Obligations as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the Swingline Lender, such Defaulting Lender’s Revolving Commitment Percentage of outstanding Swingline Loans made by the Swingline Lender other than Swingline Loans as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders.
“Fund” means any Person (other than a natural Person) that makes, purchases, holds or otherwise invests in commercial loans and similar extensions of credit in the ordinary course of its activities.
“Funding Notice” means a notice substantially in the form of Exhibit D.
“GAAP” means generally accepted accounting principles as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.1.
“Governmental Acts” means any act or omission, whether rightful or wrongful, of any present or future Governmental Authority.
“Governmental Authority” means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank and any group or body charged with setting financial accounting or regulatory capital rules or standards (including, without limitation, the Financial Accounting Standards Board, the Bank for International Settlements or the Basel Committee on Banking Supervision or any successor or similar authority to any of the foregoing)).
“Guaranteed Obligations” of a Person means all guaranties, endorsements, assumptions and other contingent obligations with respect to, or to purchase or to otherwise pay or acquire, Indebtedness of others.
“Hedge Agreement” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, currency swap transactions, cross-currency rate swap transactions, currency options, cap transactions, floor transactions, collar transactions, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options or warrants to enter into any of the foregoing), whether or not any such transaction is governed by, or otherwise subject to, any master agreement or any netting agreement, and (b) any and all transactions or arrangements of
any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement (or similar documentation) published from time to time by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such agreement or documentation, together with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any Master Agreement.
“Indebtedness” of a Person means, without duplication, such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (iii) obligations, whether or not assumed, payable out of the proceeds or production from Property now or hereafter owned or acquired by such Persons, (iv) obligations evidenced by notes, acceptances or other similar debt instruments, (v) Capitalized Lease Obligations, (vi) obligations for reimbursement of drafts drawn or available to be drawn under letters of credit, (vii) Synthetic Lease Obligations, and (viii) Guaranteed Obligations. It is understood and agreed, for the avoidance of doubt, that (a) annuities, guaranteed investment contracts, funding agreements, Federal Home Loan Bank advances and similar instruments and agreements, (b) obligations (including without limitation trust obligations) under reinsurance, coinsurance, modified coinsurance agreements or similar agreements and related trust agreements, and (c) obligations and liabilities arising under insurance products created or entered into in the normal course of business shall not constitute “Indebtedness”. Notwithstanding the foregoing, Indebtedness of the Borrowers and its Subsidiaries shall not include: (1) the following obligations issued in connection with the funding or financing of statutory reserves and with respect to which the Borrowers have no obligation to repay: (A) Surplus Notes or other obligations of the Borrowers or any Subsidiaries of the Borrowers (“Reserve Financing Notes”), (B) any securities backed by such Reserve Financing Notes, (C) letters of credit issued for the account of Subsidiaries of the Borrowers that are not issued under this Agreement, (D) any guarantees by the issuers of the obligations described in (A), (B) and (C) above, and (E) any guarantee of a parent of the obligations of a Subsidiary in connection with any such funding or financing of statutory reserves, including guarantees of the obligations described in (A) and (B) above, provided that any such guarantee is either approved or not disapproved, as the case may be, by the applicable Governmental Authority; (2) the sale and issuance of $800 million of senior notes of PLC during the fourth quarter of 2009, the proceeds of which were used to purchase Reserve Financing Notes in connection with the funding of statutory reserves, including any refinancing thereof from time to time, and any subsequent reserve financing transaction for which the Borrowers will receive approval from the Required Lenders to exclude from this definition of Indebtedness; (3) any Short-Term Indebtedness incurred for the pre-funding of anticipated policy obligations or anticipated investment cash flow; (4) obligations that are not otherwise included in items (i) through (viii) of the definition of Indebtedness, but which would be classified as a liability on the Borrowers’ financial statements only by reason of FASB ASC 810 or a subsequent accounting pronouncement having a substantially similar impact so long as such obligations remain nonrecourse; (5) any indebtedness of a separate account maintained by a Subsidiary for which there is no recourse to the Borrowers; or (6) any indebtedness consisting of Cash Management Obligations.
“Indemnified Taxes” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by any Borrower under any Credit Document and (b) to the extent not otherwise described in (a), Other Taxes.
“Insufficiency” means, with respect to any Plan, the amount, if any, of its unfunded benefit liabilities as defined in Section 4001(a)(18) of ERISA.
“Insurance Subsidiary” means any Subsidiary that is engaged in the insurance business.
“Interest Payment Date” means with respect to (a) any Base Rate Loan and any Swingline Loan, (i) the last Business Day of each calendar quarter, commencing on the first such date to occur after the Closing Date and (ii) the Revolving Commitment Termination Date; and (b) any Term SOFR Rate Loan, (i) the last day of each Interest Period applicable to such Loan; provided, that, in the case of each Interest Period of longer than three (3) months “Interest Payment Date” shall also include each date that is three (3) months, or an integral multiple thereof, after the commencement of such Interest Period and (ii) the Revolving Commitment Termination Date.
“Interest Period” means, in connection with a Term SOFR Rate Loan, an interest period of one (1), three (3) or six (6) months, as selected by the Borrowers in the applicable Funding Notice or Conversion/Continuation Notice, (a) initially, commencing on the Credit Date or Conversion/Continuation Date thereof, as the case may be; and (b) thereafter, commencing on the day on which the immediately preceding Interest Period expires; provided, that, (i) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless no further Business Day occurs in such month, in which case such Interest Period shall expire on the immediately preceding Business Day, (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month and (iii) no Interest Period with respect to any portion of the Revolving Loans shall extend beyond the Revolving Commitment Termination Date.
“Interest Rate Determination Date” means, with respect to any Interest Period, the date that is two (2) Business Days prior to the first day of such Interest Period.
“ISP” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice, Inc. (or such later version thereof as may be in effect at the time of issuance of such Letter of Credit).
“Issuance Notice” means an Issuance Notice substantially in the form of Exhibit E.
“Issuing Banks” means Regions Bank and up to four (4) other Lenders designated by the Borrowers and reasonably acceptable to the Administrative Agent from time to time and who have agreed in writing to act as an Issuing Bank hereunder, each in its capacity as issuer of Letters of Credit hereunder, together with its permitted successors and assigns in such capacity and “Issuing Bank” means any one of the foregoing.
“Joint Lead Arrangers” means Regions Capital Markets, a division of Regions Bank, Mizuho Bank, Ltd., PNC Capital Markets, LLC, Sumitomo Mitsui Banking Corporation, U.S. Bank National Association, Wells Fargo Securities, LLC, Morgan Stanley Senior Funding, Inc. and MUFG Bank, Ltd., in their respective capacities as joint lead arrangers.
“KPI Metric” means each of (a) Women Employment and (b) Racial Diversity.
“KPI Metrics Assurance Provider” means a nationally recognized accounting firm or another accounting firm designated by PLC and identified to the Lenders, so long as Lenders constituting the Required Lenders do not object to such designation within 5 Business Days after notice thereof, and which shall apply, with respect to each KPI Metrics Report for calendar year 2023 and thereafter, substantially the same standards and methodology used in the 2022 KPI Metrics, except for any changes to such standards and/or methodology that (i) are consistent with then generally accepted industry standards or (ii) if not so consistent, are proposed by PLC and notified to the Lenders, so long as Lenders constituting Required Lenders do not object to such changes within 5 Business Days after notice thereof.
“KPI Metrics Report” means an annual report provided by PLC that sets forth the calculations for each KPI Metric for a specific calendar year including the KPI Metrics Assurance Provider’s review report of each KPI Metric.
“Law” or “Laws” means all applicable constitutional provisions, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, and requirements of all Governmental Authorities.
“L/C Commitment” means, with respect to each Issuing Bank, the commitment of such Issuing Bank to issue Letters of Credit hereunder. If a Lender has agreed in writing to act as an Issuing Bank hereunder, such Issuing Bank’s L/C Commitment shall be the amount set forth for such Issuing Bank in such writing. The L/C Commitment of an Issuing Bank may be modified from time to time by agreement between such Issuing Bank and the Borrowers, and notified to the Administrative Agent.
“Lender” means (a) Regions Bank in its capacity as a Lender and each Person listed on the signature pages hereto and identified as a Lender and (b) each Person that becomes a party hereto pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption.
“Letter of Credit” means any standby letter of credit issued hereunder.
“Letter of Credit Fee” has the meaning set forth in Section 2.10.2.
“Letter of Credit Borrowing” means any drawing under any Letter of Credit that has not been reimbursed or refinanced as a Borrowing of Revolving Loans pursuant to Section 2.3.4.
“Letter of Credit Obligations” means, at any time, the sum of (a) the maximum amount available to be drawn under Letters of Credit then outstanding, assuming compliance with all requirements for drawings referenced therein, plus (b) the aggregate amount of all drawings under Letters of Credit that have not been reimbursed by the Borrowers, including Letter of
Credit Borrowings, minus (c) the Dollar amount of Cash Collateral provided by Borrowers with the proceeds of Revolving Loans in order to Cash Collateralize any Fronting Exposure related to any Letter(s) of Credit pursuant to Section 2.15. For all purposes of this Agreement, (i) amounts available to be drawn under Letters of Credit will be calculated as provided in Section 1.2.5, and (ii) if a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.
“Letter of Credit Sublimit” means, as of any date of determination, the lesser of (i) Five Hundred Million Dollars ($500,000,000) and (ii) the aggregate unused amount of the Revolving Commitments then in effect; provided that no Issuing Bank shall be obligated to issue Letters of Credit in excess of its L/C Commitment. The Letter of Credit Sublimit is part of, and not in addition to, the Revolving Facility.
“License” means any license, certificate of authority, permit or other authorization required to be obtained from a Governmental Authority in connection with the operation, ownership or transaction of the insurance business.
“Lien” means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). Notwithstanding the foregoing, a Lien shall not include any such agreement or arrangement with respect to: (1) the following obligations issued in connection with the funding or financing of statutory reserves and with respect to which the Borrowers have no obligation to repay (including, for the avoidance of doubt, Liens in respect of the surplus accounts of any Subsidiaries in connection therewith): (A) Reserve Financing Notes, (B) any securities backed by such Reserve Financing Notes, (C) letters of credit issued for the account of Subsidiaries of the Borrowers that are not issued under this Agreement, (D) any guarantees by the issuers of the obligations described in (A), (B) and (C) above, and (E) any guarantee of a parent of the obligations of a Subsidiary in connection with any such funding or financing of statutory reserves, including guarantees of the obligations described in (A) and (B) above, provided that any such guarantee is either approved or not disapproved, as the case may be, by the applicable Governmental Authority; (2) the sale and issuance of $800 million of senior notes of PLC during the fourth quarter of 2009, the proceeds of which were used to purchase Reserve Financing Notes in connection with the funding of statutory reserves, including any refinancing thereof from time to time, and any subsequent reserve financing transaction for which the Borrowers will receive approval from the Required Lenders to exclude from the definition of Indebtedness; (3) any Short-Term Indebtedness incurred for the pre-funding of anticipated policy obligations or anticipated investment cash flow; (4) obligations that are not otherwise included in items (i) through (viii) of the definition of Indebtedness, but which would be classified as a liability on the Borrowers' financial statements only by reason of FASB ASC 810 or a subsequent accounting pronouncement having a substantially similar impact so long as such obligations remain nonrecourse; (5) any indebtedness of a separate account maintained by a Subsidiary for which there is no recourse to the Borrowers; (6) Cash Management Obligations; and (7) Hedge Agreements.
“Loan” means any or all of the Revolving Loans and Swingline Loans and all extensions and renewals thereof made by any Lender hereunder.
“Material Adverse Effect” means a material adverse effect on (i) the business, Property, condition (financial or otherwise), results of operations or prospects of the Borrowers and their Subsidiaries taken as a whole, (ii) the ability of the Borrowers to perform their obligations under the Credit Documents or (iii) the validity or enforceability of any of the Credit Documents or the rights or remedies of the Administrative Agent, the Issuing Banks or the Lenders thereunder.
“Material Transaction” means any acquisition by PLC or any of its Subsidiaries (including pursuant to a merger transaction in which PLC or any of its Subsidiaries is the surviving Person) that PLC and the Sustainability Structuring Agents reasonably determine to have a material impact on the ability of PLC and its Subsidiaries to achieve the Racial Diversity Target Percentage, the Women Employees Percentage Target A, the Women Employees Percentage Target B, the Women Employees Percentage Threshold and/or the Racial Diversity Percentage Threshold.
“Maximum Lawful Rate” means the maximum lawful amount of interest, loan charges, Facility Fees or other charges that may be assessed under New York law or, if higher, under applicable federal law.
“Moody’s” means Moody’s Investors Service, Inc., together with its successors.
“Multiemployer Plan” means a “multiemployer plan” as defined in Section 3(37) of ERISA.
“Multiple Employer Plan” means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (i) is maintained for employees of PLC or an ERISA Affiliate and at least one Person other than PLC and its ERISA Affiliates or (ii) was so maintained and with respect to which PLC or an ERISA Affiliate could have liability under Section 4064 or 4049 of ERISA in the event such plan has been or were to be terminated.
“NAIC” means the National Association of Insurance Commissioners or any successor thereto, or in lieu thereof, any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissions and similar Governmental Authorities of the various states of the United States of America toward the promotion of uniformity in the practices of such Governmental Authorities.
“Non-Consenting Lender” means any Lender that does not approve any consent, waiver or amendment that (a) requires the approval of all affected Lenders pursuant to the terms of Section 10.3.2 and (b) has received the approval of the Required Lenders.
“Non-Defaulting Lender” at any time, means each Lender that is not a Defaulting Lender at such time.
“Non-Extending Lender” has the meaning set forth in Section 2.22.2.
“Notes” means any or all of the Revolving Loan Notes and the Swingline Note.
“Notice” means a Funding Notice, an Issuance Notice or a Conversion/Continuation Notice.
“Notice Date” has the meaning set forth in Section 2.22.2.
“Obligations” means, without duplication, the obligation of the Borrowers to the Lenders to repay the Loans, the obligation of the Borrowers to the Swingline Lender to repay the Swingline Loans, the outstanding obligations of the Borrowers to reimburse disbursements made under Letters of Credit, interest thereon and obligations to provide Cash Collateral therefor, interest and any fees and all other obligations of the Borrowers to the Lenders, the Issuing Banks, the Swingline Lender and to the Administrative Agent under this Agreement and the other Credit Documents, including without limitation the Erroneous Payment Subrogation Rights, subject to the limitations regarding PLICO set forth in Section 2.21 of this Agreement; provided, however, that the “Obligations” of a Borrower shall exclude any Excluded Swap Obligations with respect to such Borrower.
“OFAC” means the U.S. Department of the Treasury’s Office of Foreign Assets Control.
“Other Connection Taxes” with respect to any Recipient, means Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing the Tax (other than a connection arising from the execution, delivery or enforcement of, or performance under, or receipt of payments under any Credit Document, or from the sale or assignment of an interest in any Loan or Credit Document).
“Other Taxes” means any and all present or future stamp, court, recording, filing, intangible, documentary or similar Taxes or any other excise or property Taxes, charges or similar levies arising from any payment made hereunder or under any other Credit Document or from the execution, delivery or enforcement or registration of, or performance under, or from the receipt or perfection of a security interest under or otherwise with respect to this Agreement or any other Credit Document (other than any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 2.20.2))
“Outstanding Amount” means (a) with respect to Revolving Loans and Swingline Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any Borrowings and prepayments or repayments of Revolving Loans and Swingline Loans, as the case may be, occurring on such date; and (b) with respect to any Letter of Credit Obligations on any date, the aggregate outstanding amount of such Letter of Credit Obligations on such date after giving effect to any Credit Extension of a Letter of Credit occurring on such date and any other changes in the amount of the Letter of Credit Obligations as of such date, including as a result of any reimbursements by the Borrowers of any drawing under any Letter of Credit.
“Participant” has the meaning set forth in Section 9.4.1.
“Participant Register” has the meaning set forth in Section 9.4.4.
“Patriot Act” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended from time to time.
“Payment Recipient” has the meaning set forth in Section 8.10.1.
“PBGC” means the Pension Benefit Guaranty Corporation, or any successor thereto.
“Pension Plan” means any “employee pension benefit plan” as defined in Section 3(2) of ERISA other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA and which is sponsored, maintained or contributed to by, or required to be contributed to by, any Borrower or any of its ERISA Affiliates or with respect to which any Borrower or any of its ERISA Affiliates previously sponsored, maintained or contributed to, or was required to contribute to, and still has liability.
“Periodic Term SOFR Determination Day” has the meaning set forth in the definition of “Term SOFR”.
“Permitted Liens” means any of the following:
(a) Liens existing on the Closing Date of this Agreement securing Indebtedness outstanding on the Closing Date and Liens set forth on Exhibit F;
(b) any Lien existing on any asset of (i) corporation or partnership at the time such corporation or such partnership becomes a Consolidated Subsidiary of PLC, or (ii) Subsidiary at the time it becomes a Subsidiary, and in either case not created in contemplation of such event;
(c) any Lien on any asset securing Indebtedness incurred for the purposes of financing all or any part of the cost of constructing such asset, provided that such Lien attaches to such asset concurrently with or within 18 months after the completion of construction thereof;
(d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Borrowers or their Subsidiaries and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the acquisition thereof by the Borrowers or another Subsidiary of the Borrowers and not created in contemplation or such acquisition;
(f) Liens securing Indebtedness owing by any Subsidiary to the Borrowers;
(g) Any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this definition provided that (i) such Indebtedness is not secured by any additional assets, and (ii) the amount of such Indebtedness secured by any such Lien is not increased;
(h) Liens incidental to the conduct of the business of the Borrowers or any of their Subsidiaries or the ownership of their respective assets which (i) do not secure Indebtedness and (ii) do not in the aggregate materially detract from the value of
their respective assets or materially impair the use thereof in the operation of their respective businesses;
(i) Any Lien on margin stock (as defined in Regulation U);
(j) Liens for impositions or taxes either not yet delinquent or which are being contested in good faith by appropriate proceedings;
(k) Liens not securing Indebtedness which are created by or relate to any legal proceedings which at the time are being contested in good faith by appropriate proceedings;
(l) Any other statutory or inchoate Lien securing amounts other than Indebtedness which are not delinquent;
(m) Liens securing purchase money debt, or Indebtedness arising under Capitalized Leases; provided, however, that in each case any such Lien attaches only to the specific item(s) or property or asset(s) financed with such purchase money debt or Capitalized Lease; and
(n) Liens not otherwise permitted by the foregoing paragraphs of this definition securing Indebtedness and other obligations in an aggregate principal amount at any time outstanding not to exceed 15% of Adjusted Consolidated Net Worth.
“Person” (whether or not capitalized) means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government, limited liability company, governmental agency or political subdivision thereof or other governmental authority, or any other form of entity.
“Plan” means a Single Employer Plan or a Multiple Employer Plan.
“Platform” has the meaning set forth in Section 10.1.4.
“PLC” has the meaning set forth in the introductory paragraph hereto.
“PLICO” has the meaning set forth in the introductory paragraph hereto.
“Prime Rate” shall be that rate announced by the Administrative Agent from time to time as its Prime Rate and is one of several interest rate bases used by the Administrative Agent. The Lenders and the Administrative Agent lend at rates both above and below the Administrative Agent's Prime Rate and the Borrowers acknowledge that the Prime Rate is not represented or intended to be the lowest or most favorable rate of interest offered by any Lender or Administrative Agent.
“Principal Office” means, for the Administrative Agent, the Swingline Lender and each Issuing Bank, such Person’s “Principal Office” as set forth on Appendix B, or such other office as it may from time to time designate in writing to the Borrowers and each Lender.
“Property” of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person.
“PTE” means a prohibited transaction class exemption issued by the U.S. Department of Labor, as any such exemption may be amended from time to time.
“Pricing Certificate” means a certificate substantially in the form of Exhibit G executed by the chief executive officer, chief operating officer, chief financial officer, treasurer, assistant treasurer, controller or senior vice president of finance of PLC and attaching (a) a true and correct copy of the KPI Metrics Report for the most recently ended calendar year and setting forth each of the ESG Fee Adjustment and the ESG Rate Adjustment for the period covered thereby and computations in reasonable detail in respect thereof and (b) a review report of the KPI Metrics Assurance Provider confirming that the KPI Metrics Assurance Provider is not aware of any material modifications that should be made to such computations in order for them to be presented in all material respects in conformity with the applicable reporting criteria.
“Pricing Certificate Inaccuracy” has the meaning set forth in Section 2.23(d).
“Racial Diversity” means the percentage of all Exempt Employees of the Borrowers and their Subsidiaries who have disclosed their racial identities to be non-white (excluding any Exempt Employee of the Borrowers or any of their Subsidiaries who became an employee of the Borrowers or any of their Subsidiaries pursuant to a Material Transaction for the period of the first twenty-four (24) months after the consummation of such Material Transaction).
“Racial Diversity Actual Percentage” means, with respect to any calendar year, the percentage equal to (a) the number of Exempt Employees of the Borrowers and their Subsidiaries who disclose their racial identities to be “non-white” as of the last day of such calendar year divided by (b) the number of Exempt Employees of the Borrowers and their Subsidiaries who disclose their racial identities as of the last day of such calendar year; provided that (x) Exempt Employees of the Borrowers and their Subsidiaries who do not disclose their racial identities shall be omitted from both clauses (a) and (b) of any such calculation and (y) any calculation of Racial Diversity Actual Percentage shall exclude any Exempt Employee of the Borrowers or any of their Subsidiaries who became an employee of the Borrowers or any of their Subsidiaries pursuant to a Material Transaction for the period of the first twenty-four (24) months after the consummation of such Material Transaction.
“Racial Diversity Applicable Rate Adjustment Amount” means, with respect to any calendar year, (a) if the Racial Diversity Actual Percentage for such calendar year is equal to or greater than the Racial Diversity Target Percentage for such calendar year, then minus 2.0 basis points, (b) if the Racial Diversity Actual Percentage for such calendar year is less than the Racial Diversity Target Percentage but greater than the Racial Diversity Percentage Threshold for such calendar year, then no change and (c) if the Racial Diversity Actual Percentage for such calendar year is less than the Racial Diversity Percentage Threshold for such calendar year, then plus 2.0 basis points.
“Racial Diversity Fee Adjustment Amount” means, with respect to any calendar year, (a) if the Racial Diversity Actual Percentage for such calendar year is equal to or greater than the
Racial Diversity Target Percentage for such calendar year, then minus 0.5 basis points, (b) if the Racial Diversity Actual Percentage for such calendar year is less than the Racial Diversity Target Percentage but greater than the Racial Diversity Percentage Threshold for such calendar year, then no change and (c) if the Racial Diversity Actual Percentage for such calendar year is less than the Racial Diversity Percentage Threshold for such calendar year, then plus 0.5 basis points.
“Racial Diversity Percentage Threshold” means, with respect to any calendar year, the percentage for “Racial Diversity Percentage Threshold” for such calendar year as set forth in the table entitled “Racial Diversity” on Appendix C.
“Racial Diversity Target Percentage” means, with respect to any calendar year, the percentage for “Racial Diversity Target Percentage” for such calendar year as set forth in the table entitled “Racial Diversity” on Appendix C.
“Recipient” means (a) the Administrative Agent, (b) any Lender and (c) any Issuing Bank, as applicable.
“Refunded Swingline Loan” has the meaning set forth in Section 2.2.2(c).
“Regions” means Regions Bank, an Alabama banking corporation, as a Lender, and its successors and assigns.
“Regions Fee Letter” means that certain letter agreement dated February 8, 2022 among the Borrowers, Regions Bank and Regions Capital Markets, a division of Regions Bank.
“Register” has the meaning set forth in Section 9.3.
“Regulation U” means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System.
“Reimbursement Date” has the meaning set forth in Section 2.3.4.
“Related Parties” with respect to any Person, means such Person's Affiliates and the directors, officers, employees, partners, agents, trustees, administrators, managers, advisors and representatives of it and its Affiliates.
“Relevant Governmental Body” means the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York, or a committee officially endorsed or convened by the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York, or any successor thereto.
“Removal Effective Date” has the meaning set forth in Section 8.6.2.
“Required Lenders” means, as of any date of determination, the Lenders having more than fifty percent (50%) of the aggregate amount of the unfunded Commitments, the outstanding
Loans and the Letter of Credit Obligations, or, if the Commitments have been terminated, Lenders holding in the aggregate more than fifty percent (50%) of the outstanding Loans and Letter of Credit Obligations (including, in each case, the aggregate amount of each Lender’s risk participation and funded participation in Letter of Credit Obligations and Swingline Loans); provided that the Commitments of, and the portion of the Loans held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.
“Resignation Effective Date” has the meaning set forth in Section 8.6.1.
“Resolution Authority” means an EEA Resolution Authority or, with respect to any UK Financial Institution, a UK Resolution Authority.
“Revolving Commitment” means the commitment of a Lender to make or otherwise fund any Revolving Loan and to acquire participations in Letters of Credit and Swingline Loans hereunder. The amount of each Lender’s Revolving Commitment is set forth on Appendix A or in the applicable Assignment and Assumption, subject to any increase, adjustment or reduction pursuant to the terms and conditions hereof.
“Revolving Commitment Percentage” means, for each Lender, a fraction (expressed as a percentage carried to the ninth decimal place), the numerator of which is such Lender’s Revolving Commitment and the denominator of which is the Aggregate Revolving Commitments. The initial Revolving Commitment Percentages are set forth on Appendix A.
“Revolving Commitment Period” means (i) in the case of Revolving Loans and Swingline Loans, the period from and including the Closing Date to the Revolving Commitment Termination Date, and (ii) in the case of the Letters of Credit, the period from and including the issuance thereof to the earlier of the expiration date thereof and the date that is seven (7) days prior to the Revolving Commitment Termination Date.
“Revolving Commitment Termination Date” means the earliest to occur of (a) the later of (i) April 5, 2027 and (ii) with respect to some or all of the Lenders (as applicable) for whom the Revolving Commitment Termination Date has been extended pursuant to Section 2.22, such extended Revolving Commitment Termination Date; (b) the date the Revolving Commitments are permanently reduced to zero pursuant to Section 2.11.2; and (c) the date of the termination of the Revolving Commitments pursuant to Section 7.1.
“Revolving Loan” means a Loan made by a Lender to a Borrower pursuant to Section 2.1.1.
“Revolving Loan Note” means a promissory note in the form of Exhibit 2.5.2A, as it may be amended, supplemented or otherwise modified from time to time.
“Revolving Obligations” means the Revolving Loans, the Letter of Credit Obligations and the Swingline Loans.
“S&P” means Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw Hill Corporation, together with its successors.
“Sanction(s)” means any sanction administered, imposed or enforced by the United States Government (including without limitation, OFAC and the U.S. Department of State), the United Nations Security Council, the European Union, Her Majesty’s Treasury (“HMT”) or other relevant sanctions authority.
“Sanctioned Entity” means (a) a country or territory or a government of a country or territory, (b) an agency of the government of a country or territory, (c) an organization directly or indirectly controlled by a country or territory or its government, or (d) a person or entity located, organized or resident in or determined to be resident in a country or territory, in each case, that is subject to any Sanction.
“Sanctioned Person” means a person that is or is owned or controlled by Persons that are the target of Sanctions or are named on the list of Specially Designated Nationals maintained by OFAC or any other similar list maintained by OFAC or any other relevant sanctions authority which is applicable to the Borrowers or their Subsidiaries.
“SAP” means, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) from time to time in the jurisdiction of incorporation of such Insurance Subsidiary for the preparation of annual statements and other financial reports by insurance companies of the same type as such Insurance Subsidiary.
“Section” means a numbered section of this Agreement, unless another document is specifically referenced.
“Short-Term Indebtedness” means all indebtedness that by its terms matures within one year from and that is not renewable at the option of the obligor to a date later than one year after, the date such indebtedness was incurred. Any indebtedness which is extended or renewed (other than pursuant to the option of the obligor) shall be deemed to have been incurred at the date of such extension or renewal.
“Significant Insurance Subsidiary” means any Significant Subsidiary that is an Insurance Subsidiary.
“Significant Subsidiary” means any Subsidiary which meets or exceeds any of the following conditions:
(1) PLC's and its other Subsidiaries' investments in and advances to the Subsidiary exceed 10 percent of the total assets of PLC and its Subsidiaries consolidated as of the end of the most recently completed calendar year; or
(2) PLC's and its other Subsidiaries' proportionate share of the total assets (after intercompany eliminations) of the Subsidiary exceeds 10 percent of the total assets of PLC and its Subsidiaries consolidated as of the end of the most recently completed fiscal year; or
(3) PLC's and its other Subsidiaries' equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting
principle of the Subsidiary exceeds 10 percent of such income of PLC and its Subsidiaries consolidated for the most recently completed fiscal year.
“Single Employer Plan” means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (i) is maintained for employees of PLC or an ERISA Affiliate and no Person other than PLC and its ERISA Affiliates or (ii) was so maintained and with respect to which PLC or an ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.
“SOFR” means, with respect to any Business Day, a rate per annum equal to the secured overnight financing rate for such Business Day published by the SOFR Administrator on the SOFR Administrator’s Website on the immediately succeeding U.S. Government Securities Business Day; provided, that, if the published rate is subsequently corrected and provided by the SOFR Administrator or on the SOFR Administrator’s Website within the longer of one hour of the time when such rate is first published and the republication cut-off time for SOFR, if any, as specified by the SOFR Administrator in the SOFR benchmark methodology then the secured overnight financing rate for such Business Day will be subject to those corrections.
“SOFR Administrator” means the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate).
“SOFR Administrator’s Website” means the website of the Federal Reserve Bank of New York, currently at http://www.newyorkfed.org, or any successor source for the secured overnight financing rate identified as such by the SOFR Administrator from time to time.
“Solvent” with respect to any Person as of any date of determination, means that on such date, (a) the present fair salable value of the property and assets of such Person exceeds the debts and liabilities, including contingent liabilities, of such Person, (b) the present fair salable value of the property and assets of the such Person is greater than the amount that will be required to pay the probable liability of such Person on its debts and other liabilities, including contingent liabilities, as such debts and other liabilities become absolute and matured, (c) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts and liabilities, including contingent liabilities, beyond its ability to pay such debts and liabilities as they become absolute and matured, and (d) such Person does not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
“Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by PLC. A separate account established pursuant to SAP or any applicable insurance regulatory requirement shall be deemed not to be a Subsidiary.
“Substantial Portion” means, with respect to the Property of PLC and its Subsidiaries, Property that (i) represents more than 10% of the consolidated assets of PLC and its Subsidiaries
as would be shown in the consolidated financial statements of PLC and its Subsidiaries as at the beginning of the twelve-month period ending with the month in which such determination is made or (ii) is responsible for more than 10% of the consolidated net sales or of the consolidated net income of PLC and its Subsidiaries as reflected in the financial statements referred to in clause (i) above.
“Surplus Note” means a promissory note executed by an Insurance Subsidiary of the type generally described in the insurance industry as a “surplus note”, the principal amount of which an insurance regulator permits the issuer to record as an addition to capital and surplus rather than as a liability in accordance with SAP.
“Sustainability Structuring Agents” means BNP Paribas and PNC Capital Markets, LLC, in their capacity as co-sustainability structuring agents.
“Sustainability Structuring Agents Fee Letter” means that certain letter agreement dated March 16, 2022 among the Borrowers and the Sustainability Structuring Agents.
“Swap Obligation” means with respect to any Borrower any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.
“Swingline Lender” means Regions Bank in its capacity as Swingline Lender hereunder, together with its permitted successors and assigns in such capacity.
“Swingline Loan” means a Loan made by the Swingline Lender to the Borrowers pursuant to Section 2.2.1.
“Swingline Note” means a promissory note in the form of Exhibit 2.5.2B, as it may be amended, supplemented or otherwise modified from time to time.
“Swingline Rate” means the Base Rate plus the Applicable Margin applicable to Base Rate Loans.
“Swingline Sublimit” means, at any time of determination, the lesser of (a) Seventy-Five Million Dollars ($75,000,000) and (b) the aggregate unused amount of Revolving Commitments then in effect.
“Synthetic Lease Obligations” of a Person means the amount of the obligations of such Person under any lease that would not be shown as a liability, but would be treated as an operating lease, in accordance with GAAP, but which arise under a transaction in which the property subject to such lease is owned by the lessee for the purposes of the Code.
“Taxes” means any and all present or future income, stamp or other taxes, levies, imposts, duties, deductions, charges, fees or withholdings imposed, levied, withheld or assessed by any Governmental Authority, together with any interest, additions to tax or penalties imposed thereon and with respect thereto.
“Term SOFR” means, for any calculation with respect to a Term SOFR Rate Loan, the Term SOFR Reference Rate for a tenor comparable to the applicable Interest Period on the day (such day, the “Periodic Term SOFR Determination Day”) that is two (2) U.S. Government Securities Business Days prior to the first day of such Interest Period, as such rate is published by the Term SOFR Administrator; provided, that, if as of 11:00 a.m. (New York City time) on any Periodic Term SOFR Determination Day the Term SOFR Reference Rate for the applicable tenor has not been published by the Term SOFR Administrator, then Term SOFR will be the Term SOFR Reference Rate for such tenor as published by the Term SOFR Administrator on the first preceding U.S. Government Securities Business Day for which such Term SOFR Reference Rate for such tenor was published by the Term SOFR Administrator, subject to Section 2.17. Notwithstanding anything to the contrary herein, Term SOFR shall not be less than zero percent (0%).
“Term SOFR Adjustment” means, 0.100% (10 basis points) for an Interest Period of one-month’s duration, 0.150% (15 basis points) for an Interest Period of three-month’s duration, and 0.250% (25 basis points) for an Interest Period of six-months’ duration.
“Term SOFR Administrator” means CME Group Benchmark Administration Limited (CBA) (or a successor administrator of the Term SOFR Reference Rate selected by the Administrative Agent in its reasonable discretion).
“Term SOFR Rate Loan” means a Loan that bears interest at a rate based on the Adjusted Term SOFR Rate, other than pursuant to clause (iii) of the definition of “Base Rate”.
“Term SOFR Reference Rate” means the forward-looking term rate based on SOFR.
“Type” means a Base Rate Loan or a Term SOFR Rate Loan.
“UK Financial Institution” means any BRRD Undertaking (as such term is defined under the PRA Rulebook (as amended from time to time) promulgated by the United Kingdom Prudential Regulation Authority) or any person subject to IFPRU 11.6 of the FCA Handbook (as amended from time to time) promulgated by the United Kingdom Financial Conduct Authority, which includes certain credit institutions and investment firms, and certain affiliates of such credit institutions or investment firms.
“UK Resolution Authority” means the Bank of England or any other public administrative authority having responsibility for the resolution of any UK Financial Institution.
“Unmatured Default” means an event that, but for the lapse of time or the giving of notice, or both, would constitute a Default.
“United States” or “U.S.” means the United States of America.
“US Person” means any Person that is a “United States Person” as defined in Section 7701(a)(30) of the Code.
“U.S. Government Securities Business Day” means any day except for (a) a Saturday, (b) a Sunday or (c) a day on which the Securities Industry and Financial Markets Association
recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in United States government securities.
“U.S. Tax Compliance Certificate” has the meaning assigned to such term in Section 2.19.6(b)(ii)(3).
“Wholly-Owned Subsidiary” means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by PLC or one or more Wholly-Owned Subsidiaries of PLC, or by PLC and one or more Wholly-Owned Subsidiaries of PLC, or (ii) any partnership, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled.
“Withholding Agent” means any Borrower and the Administrative Agent.
“Women Employment” means the percentage of all Exempt Employees of the Borrowers and their Subsidiaries who identify as female (excluding any Exempt Employee of the Borrowers or any of their Subsidiaries who became an employee of the Borrowers or any of their Subsidiaries pursuant to a Material Transaction the period of the first twenty-four (24) months after the consummation of such Material Transaction).
“Women Employees Actual Percentage” means, with respect to any calendar year, the percentage equal to (a) the number of Exempt Employees of the Borrowers and their Subsidiaries who disclose their gender identity to be female as of the last day of such calendar year divided by (b) the number of Exempt Employees of the Borrowers and their Subsidiaries who disclose their gender identities as of the last day of such calendar year; provided that (x) Exempt Employees of the Borrowers and their Subsidiaries who do not disclose their gender shall be omitted from both clauses (a) and (b) of any such calculation and (y) any calculation of Women Employees Actual Percentage shall exclude any Exempt Employee of the Borrowers or any of their Subsidiaries who became an employee of the Borrowers or any of their Subsidiaries pursuant to Material Transaction for the period of the first twenty-four (24) months after the consummation of such Material Transaction.
“Women Employees Applicable Rate Adjustment Amount” means, with respect to any calendar year, (a) if the Women Employees Actual Percentage for such calendar year is equal to or greater than the Women Employees Percentage Target A for such calendar year, then minus 2.0 basis points, (b) if the Women Employees Actual Percentage for such calendar year is less than Women Employees Percentage Target A for such calendar year but is equal to or greater than then Women Employees Percentage Target B for such calendar year, then minus 1.2 basis points, (c) if the Women Employees Actual Percentage for such calendar year is less than Women Employees Percentage Target B for such calendar year but is equal or greater than the Women Employees Percentage Threshold for such calendar year, then no change and (d) if the Women Employees Actual Percentage for such calendar year is less than the Women Employees Percentage Threshold for such calendar year, then plus 2.0 basis points.
“Women Employees Fee Adjustment Amount” means, with respect to any calendar year, (a) if the Women Employees Actual Percentage for such calendar year is equal to or greater
than the Women Employees Percentage Target A for such calendar year, then minus 0.5 basis points, (b) if the Women Employees Actual Percentage for such calendar year is less than Women Employees Percentage Target A for such calendar year but is equal to or greater than then Women Employees Percentage Target B for such calendar year, then minus 0.3 basis points, (c) if the Women Employees Actual Percentage for such calendar year is less than Women Employees Percentage Target B for such calendar year but is equal or greater than the Women Employees Percentage Threshold for such calendar year, then no change and (d) if the Women Employees Actual Percentage for such calendar year is less than the Women Employees Percentage Threshold for such calendar year, then plus 0.5 basis points.
“Women Employees Percentage Target A” means, with respect to any calendar year, the percentage for “Women Employees Percentage Target A” for such calendar year as set forth in the table entitled “Women Employees” on Appendix C.
“Women Employees Percentage Target B” means, with respect to any calendar year, the percentage for “Women Employees Percentage Target B” for such calendar year as set forth in the table entitled “Women Employees” on Appendix C.
“Women Employees Percentage Threshold” means, with respect to any calendar year, the percentage for “Women Employees Percentage Threshold” for such calendar year as set forth in the table entitled “Women Employees” on Appendix C.
“Write-Down and Conversion Powers” means, (a) with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule, and (b) with respect to the United Kingdom, any powers of the applicable Resolution Authority under the Bail-In Legislation to cancel, reduce, modify or change the form of a liability of any UK Financial Institution or any contract or instrument under which that liability arises, to convert all or part of that liability into shares, securities or obligations of that person or any other person, to provide that any such contract or instrument is to have effect as if a right had been exercised under it or to suspend any obligation in respect of that liability or any of the powers under that Bail-In Legislation that are related to or ancillary to any of those powers.
1.2. Rules of Interpretation.
1.2.1 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any other Credit Document), (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “herein,” “hereof” and “hereunder,” and
words of similar import when used in any Credit Document, shall be construed to refer to such Credit Document in its entirety and not to any particular provision thereof, (iv) all references in a Credit Document to Sections, Exhibits, Appendices and Schedules shall be construed to refer to Sections of, and Exhibits, Appendices and Schedules to, the Credit Document in which such references appear, (v) any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
1.2.2 Computations of Time Periods. Unless otherwise expressly indicated, in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”, the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including”.
1.2.3 Document Preparation. This Agreement, the Fee Letters and the other Credit Documents are the result of negotiation among, and have been reviewed by counsel to, among others, the Administrative Agent and the Borrowers, and are the product of discussions and negotiations among all parties. Accordingly, this Agreement and the other Credit Documents are not intended to be construed against the Administrative Agent, the Issuing Banks or any of the Lenders merely on account of the Administrative Agent’s or any Lender’s involvement in the preparation of such documents.
1.2.4 Time. Unless otherwise indicated, all references to a specific time shall be construed to Central Standard Time or Central Daylight Savings Time, as the case may be. Unless otherwise expressly provided herein, all references to dollar amounts and “$” shall mean Dollars.
1.2.5 Letter of Credit Calculations. Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time (after giving effect to any permanent reduction in the stated amount of such Letter of Credit pursuant to the terms of such Letter of Credit); provided, however, that with respect to any Letter of Credit that, by its terms or the terms of any letter of credit application or other issuer document related thereto, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time.
1.3. Computations: Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, such determination or calculation, to the extent applicable and except as otherwise specified in this Agreement, shall be made in accordance with GAAP or SAP. If a change in GAAP or SAP after the date of this Agreement would require a change affecting the calculation of any requirement under this Agreement, then the Administrative Agent and the Borrowers shall negotiate in good faith for the amendment of the affected requirements (which amendment shall be subject to the approval of the Required Lenders as provided for in Section 10.3.1); provided, however, until
and unless such an amendment is agreed upon, the requirements of this Agreement shall remain as written and compliance therewith shall be determined according to GAAP or SAP, as applicable, in effect prior to the change. For the avoidance of doubt, FASB ASC 320 and FASB ASC 220 should apply, and continue to apply, as they exist on the Closing Date unless the Required Lenders and the Borrowers mutually agree otherwise. If PLC notifies the Administrative Agent that it intends to discontinue providing financial statements in accordance with GAAP or PLICO notifies the Administrative Agent that it intends to discontinue providing financial statements in accordance with SAP, then the Borrowers and the Required Lenders shall negotiate in good faith for a replacement accounting standard, provided, however, until such replacement accounting standard is agreed upon, the applicable Borrower shall continue to use GAAP or SAP, as applicable, in preparing its financial statements. Notwithstanding anything herein to the contrary, for purposes of calculating the financial covenants set forth in Sections 5.12 and 5.13 and other amounts hereunder, all liability amounts shall be determined excluding any liability relating to any operating lease, all asset amounts shall be determined excluding any right-of-use assets relating to any operating lease, all amortization amounts shall be determined excluding any amortization of a right-of-use asset relating to any operating lease, and all interest amounts shall be determined excluding any deemed interest comprising a portion of fixed rent payable under any operating lease, in each case of the foregoing, to the extent that such liability, asset, amortization or interest pertains to an operating lease under which the covenantor, or a member of its consolidated group, is the lessee and would not have been accounted for as such under GAAP as in effect on December 31, 2015.
1.4. Division. Any reference herein or in any other Credit Document to a merger, transfer, consolidation, amalgamation, assignment, sale or disposition, or similar term, shall be deemed to apply to a division of or by a limited liability company, or an allocation of assets to a series of a limited liability company (or the unwinding of such a division or allocation), as if it were a merger, transfer, consolidation, amalgamation, assignment, sale or disposition, or similar term, as applicable, to, of or with a separate Person. Any division of a limited liability company shall constitute a separate Person hereunder and under each other Credit Document (and each division of any limited liability company that is a Subsidiary, joint venture or any other like term shall also constitute such a Person or entity).
1.5. Rates. The Administrative Agent does not warrant, nor accept responsibility, nor shall the Administrative Agent have any liability with respect to (a) the continuation of, administration of, submission of, calculation of or any other matter related to the Base Rate, the Term SOFR Reference Rate or Term SOFR, or any component definition thereof or rates referred to in the definition thereof, or any alternative, successor or replacement rate thereto (including any Benchmark Replacement) or any related spread or other adjustment, including whether the composition or characteristics of any such alternative, successor or replacement rate (including any Benchmark Replacement) will be similar to, or produce the same value or economic equivalence of, or have the same volume or liquidity as, the Base Rate, the Term SOFR Reference Rate, Term SOFR or any other Benchmark prior to its discontinuance or unavailability, or (b) the effect, implementation or composition of any Benchmark Conforming Changes. The Administrative Agent and its affiliates or other related entities may engage in transactions that affect the calculation of the Base Rate, the Term SOFR Reference Rate, Term SOFR, any alternative, successor or replacement rate (including any Benchmark Replacement) or any relevant adjustments thereto, in each case, in a manner adverse to the Borrowers. The
Administrative Agent may select information sources or services in its reasonable discretion to ascertain the Base Rate, the Term SOFR Reference Rate, Term SOFR or any other Benchmark, in each case pursuant to the terms of this Agreement, and shall have no liability to the Borrowers, any Lender or any other person or entity for damages of any kind, including direct or indirect, special, punitive, incidental or consequential damages, costs, losses or expenses (whether in tort, contract or otherwise and whether at law or in equity), for any error or calculation of any such rate (or component thereof) provided by any such information source or service.
1.6. Conforming Changes Relating to Term SOFR. In connection with the use or administration of Term SOFR, the Administrative Agent (after consultation with the Borrowers) will have the right to make Benchmark Conforming Changes from time to time and, notwithstanding anything to the contrary contained herein or in any other Credit Document, any amendments implementing such Benchmark Conforming Changes will become effective without any further action or consent of any other party to this Agreement or any other Credit Document. The Administrative Agent will promptly notify the Borrowers and the Lenders of the effectiveness of any Benchmark Conforming Changes in connection with the use or administration of Term SOFR.
ARTICLE II
CREDIT EXTENSIONS
2.1. Revolving Loans.
2.1.1 Making of Revolving Loans. During the Revolving Commitment Period, subject to the terms and conditions hereof, each Lender severally agrees to make revolving loans in Dollars (each such loan, a “Revolving Loan”) to the Borrowers in an aggregate amount up to but not exceeding such Lender’s Revolving Commitment; provided, that after giving effect to the making of any Revolving Loan, in no event shall the Outstanding Amount of Revolving Obligations exceed the Aggregate Revolving Commitments. Amounts borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed without premium or penalty (subject to Section 2.17.3) during the Revolving Commitment Period. The Revolving Loans may consist of Base Rate Loans, Term SOFR Rate Loans, or a combination thereof, as the Borrowers may request. Each Lender’s Revolving Commitment shall expire on the Revolving Commitment Termination Date and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Commitments shall be paid in full no later than such date.
2.1.2 Borrowing Mechanics for Revolving Loans.
(a) Except pursuant to Section 2.2.2(c), all Revolving Loans shall be made in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess of that amount or, if less, the amount of the unused Aggregate Revolving Commitment.
(b) Whenever the Borrowers desire that the Lenders make a Revolving Loan, the Borrowers shall deliver to the Administrative Agent a fully executed Funding Notice
no later than (x) 12:00 p.m. at least three (3) U.S. Government Securities Business Days in advance of the proposed Credit Date in the case of a Term SOFR Rate Loan and (y) 9:00 a.m. on the proposed Credit Date in the case of a Loan that is a Base Rate Loan. Except as otherwise provided herein, any Funding Notice for any Loans that are Term SOFR Rate Loans shall be irrevocable on and after the related Interest Rate Determination Date, and the Borrowers shall be bound to make a borrowing in accordance therewith.
(c) Notice of receipt of each Funding Notice in respect of each Revolving Loan, together with the amount of each Lender’s Revolving Commitment Percentage thereof, together with the applicable interest rate, shall be provided by the Administrative Agent to each Lender with reasonable promptness.
(d) Each Lender shall make its Revolving Commitment Percentage of the requested Revolving Loan available to the Administrative Agent not later than (x) 12:00 p.m. on the applicable Credit Date in the case of a same day Borrowing of Base Rate Loans and (y) in all other cases, 11:00 a.m. on the applicable Credit Date, in each case, by wire transfer of same day funds in Dollars, at the Administrative Agent’s Principal Office. Except as provided herein, upon satisfaction or waiver of the applicable conditions precedent specified herein, the Administrative Agent shall make the proceeds of such Revolving Loan available to the Borrowers on the applicable Credit Date by causing an amount of same day funds in Dollars equal to the aggregate amount received by the Administrative Agent from the Lenders in connection with such Revolving Loan to be credited to the account of the Borrowers at the Administrative Agent’s Principal Office or such other account as may be designated in writing to the Administrative Agent by the Borrowers.
2.1.3 Increase in Aggregate Revolving Commitments. The Borrowers may, at any time and from time to time, upon prior written notice by the Borrowers to the Administrative Agent, increase the Aggregate Revolving Commitments (but not the Letter of Credit Sublimit or the Swingline Sublimit) subject to the following:
(a) the aggregate principal amount of any increases in the Revolving Commitments pursuant to this Section 2.1.3 shall not exceed Five Hundred Million Dollars ($500,000,000);
(b) the Borrowers may, at any time and from time to time, upon prior written notice by the Borrowers to the Administrative Agent increase the Aggregate Revolving Commitments (but not the Letter of Credit Sublimit or the Swingline Sublimit) with additional Revolving Commitments from any existing Lender with a Revolving Commitment or new Revolving Commitments from any other Person selected by the Borrowers and reasonably acceptable to the Administrative Agent, the Swingline Lender and the Issuing Bank; provided that:
(i) any such increase shall be in a minimum principal amount of $10,000,000 and in integral multiples of $1,000,000 in excess thereof;
(ii) no Unmatured Default or Default shall exist before and immediately after giving effect to such increase;
(iii) the Borrowers shall be in compliance, on a pro forma basis after giving effect to the incurrence of any such increase in the Aggregate Revolving Commitments, with the financial covenants set forth in Article V, recomputed as of the last day of the most recently ended fiscal quarter for which financial statements have been delivered pursuant to Section 5.1;
(iv) no existing Lender shall be under any obligation to increase its Revolving Commitment and any such decision whether to increase its Revolving Commitment shall be in such Lender’s sole and absolute discretion;
(v) (1) any new Lender providing a Revolving Commitment in connection with any increase in Aggregate Revolving Commitments shall join this Agreement by executing such joinder documents reasonably required by the Administrative Agent and/or (2) any existing Lender electing to increase its Revolving Commitment shall have executed a commitment agreement reasonably satisfactory to the Administrative Agent;
(vi) any such increase in the Revolving Commitments shall be subject to receipt by the Administrative Agent of a certificate of the Borrowers dated as of the date of such increase signed by an Authorized Officer of the Borrowers (x) certifying and attaching the resolutions adopted by the Borrowers approving or consenting to such increase, and (y) certifying that, before and after giving effect to such increase, (i) the representations and warranties contained in Article IV and the other Credit Documents are true and correct in all material respects on and as of the date of such increase, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects as of such earlier date, and except that for purposes of this Section 2.1.3, the representations and warranties contained in Sections 4.4 and 4.5 shall be deemed to refer to the most recent statements furnished pursuant to Section 5.1, and (ii) no Unmatured Default or Default exists;
(vii) the additional Revolving Commitments shall have terms identical to those for the existing Revolving Commitments at such time, except for fees payable to the Lenders providing such additional Revolving Commitments (including any applicable upfront and arrangement fees); provided, that, to the extent that the joinder or commitment agreements described in subparagraph (v) above provide for an applicable margin of, and/or facility fee for, additional Revolving Commitments greater than the Applicable Margin and/or Facility Fee with respect to the existing Revolving Commitments at such time, the Applicable Margin and/or the Facility Fee (as applicable) for the existing Revolving Commitments shall be increased automatically (without the consent of Required Lenders) such that the Applicable Margin and/or the Facility Fee (as applicable) for such existing Revolving Commitments is not less than the applicable margin
and/or the facility fee (as applicable) for such additional Revolving Commitments;
(viii) Neither any Joint Lead Arranger nor any Lender shall have any responsibility for arranging any such additional Revolving Commitments without their prior written consent and subject to such conditions, including fee arrangements, as they may provide in connection therewith; and
(ix) the Borrowers shall have paid any applicable upfront and arrangement fees.
The Borrowers shall prepay any Revolving Loans owing under this Agreement on the date of any such increase in the Revolving Commitments to the extent necessary to keep the outstanding Revolving Loans ratable with any revised Revolving Commitments arising from any nonratable increase in the Revolving Commitments under this Section.
2.2. Swingline Loans.
2.2.1 Making of Swingline Loans and Purchases of Participations Therein. During the Revolving Commitment Period, subject to the terms and conditions hereof, the Swingline Lender may, in its sole but reasonable discretion, make Swingline Loans to the Borrowers in the aggregate amount up to but not exceeding the Swingline Sublimit; provided, that after giving effect to the making of any Swingline Loan, in no event shall the Outstanding Amount of the Revolving Obligations exceed the Revolving Commitments then in effect. Amounts borrowed pursuant to this Section 2.2.1 may be repaid and reborrowed during the Revolving Commitment Period. The Swingline Lender’s Revolving Commitment shall expire on the Revolving Commitment Termination Date and all Swingline Loans and all other amounts owed hereunder with respect to the Swingline Loans and the Revolving Commitments shall be paid in full no later than such date.
2.2.2 Borrowing Mechanics for Swingline Loans.
(a) Whenever the Borrowers desire that the Swingline Lender make a Swingline Loan, the Borrowers shall deliver to the Administrative Agent a Funding Notice no later than 11:00 a.m. on the proposed Credit Date.
(b) The Swingline Lender shall make the amount of its Swingline Loan available to the Administrative Agent not later than 2:00 p.m. on the applicable Credit Date by wire transfer of same day funds in Dollars, at the Administrative Agent’s Principal Office. Except as provided herein, upon satisfaction or waiver of the conditions precedent specified herein, the Administrative Agent shall make the proceeds of such Swingline Loans available to the Borrowers on the applicable Credit Date by causing an amount of same day funds in Dollars equal to the amount received by the Administrative Agent from the Swingline Lender in connection with such Swingline Loan to be credited to the account of the Borrowers at the Administrative Agent’s Principal Office, or to such other account as may be designated in writing to the Administrative Agent by the Borrowers. Each Swingline Loan shall be made in a minimum amount of $100,000.
(c) With respect to any Swingline Loans which have not been voluntarily prepaid by the Borrowers pursuant to Section 2.11.1, the Swingline Lender may at any time in its sole and absolute discretion, deliver to the Administrative Agent (with a copy to the Borrowers), no later than 10:00 a.m. on the day of the proposed Credit Date, a notice (which shall be deemed to be a Funding Notice given by the Borrowers) requesting that each Lender holding a Revolving Commitment make Revolving Loans that are Base Rate Loans to the Borrowers on such Credit Date in accordance with its respective Revolving Commitment Percentage in an amount equal to all or any portion of the amount of such Swingline Loans (the “Refunded Swingline Loans”) outstanding on the date such notice is given which the Swingline Lender requests the Lenders to prepay. Anything contained in this Agreement to the contrary notwithstanding, (i) the proceeds of such Revolving Loans made by the Lenders other than the Swingline Lender shall be immediately delivered by the Administrative Agent to the Swingline Lender (and not to the Borrowers) and applied to repay a corresponding portion of the Refunded Swingline Loans and (ii) on the day such Revolving Loans are made, the Swingline Lender’s Revolving Commitment Percentage of the Refunded Swingline Loans shall be deemed to be paid with the proceeds of a Revolving Loan made by the Swingline Lender to the Borrowers, and such portion of the Swingline Loans deemed to be so paid shall no longer be outstanding as Swingline Loans and shall no longer be due under the Swingline Note of the Swingline Lender but shall instead constitute part of the Swingline Lender’s outstanding Revolving Loans to the Borrowers and shall be due under the Revolving Loan Note issued by the Borrowers to the Swingline Lender. The Borrowers hereby authorize the Administrative Agent and the Swingline Lender to charge the Borrowers’ accounts with the Administrative Agent and the Swingline Lender (up to the amount available in each such account) in order to immediately pay the Swingline Lender the amount of the Refunded Swingline Loans to the extent of the proceeds of such Revolving Loans made by the Lenders, including the Revolving Loans deemed to be made by the Swingline Lender, are insufficient to repay in full the Refunded Swingline Loans. If any portion of any such amount paid (or deemed to be paid) to the Swingline Lender should be recovered by or on behalf of the Borrowers from the Swingline Lender in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared among all Lenders in the manner contemplated by Section 2.14.
(d) If for any reason Revolving Loans are not made pursuant to Section 2.2.2(c) in an amount sufficient to repay any amounts owed to the Swingline Lender in respect of any outstanding Swingline Loans on or before the third Business Day after demand for payment thereof by the Swingline Lender, each Lender holding a Revolving Commitment shall be deemed to, and hereby agrees to, have purchased a participation in such outstanding Swingline Loans, and in an amount equal to its Revolving Commitment Percentage of the applicable unpaid amount together with accrued interest thereon. On the Business Day that notice is provided by the Swingline Lender (or by the 10:00 a.m. on the following Business Day if such notice is provided after 1:00 p.m.), each Lender holding a Revolving Commitment shall deliver to the Swingline Lender an amount equal to its respective participation in the applicable unpaid amount in same day funds at the Principal Office of the Swingline Lender. In order to evidence such participation each Lender holding a Revolving Commitment agrees to
enter into a participation agreement at the request of the Swingline Lender in form and substance reasonably satisfactory to the Swingline Lender. In the event any Lender holding a Revolving Commitment fails to make available to the Swingline Lender the amount of such Lender’s participation as provided in this paragraph, the Swingline Lender shall be entitled to recover such amount on demand from such Lender together with interest thereon for three (3) Business Days at the rate customarily used by the Swingline Lender for the correction of errors among banks and thereafter at the Base Rate, as applicable.
(e) Notwithstanding anything contained herein to the contrary, (i) each Lender’s obligation to make Revolving Loans for the purpose of repaying any Refunded Swingline Loans pursuant to paragraph (c) above and each Lender’s obligation to purchase a participation in any unpaid Swingline Loans pursuant to the immediately preceding paragraph shall be absolute and unconditional and shall not be affected by any circumstance, including (1) any set off, counterclaim, recoupment, defense or other right which such Lender may have against the Swingline Lender, any Borrower or any other Person for any reason whatsoever; (2) the occurrence or continuation of an Unmatured Default or Default; (3) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of any Borrower; (4) any breach of this Agreement or any other Credit Document by any party thereto; or (5) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided that such obligations of each Lender are subject to the condition that the Swingline Lender had not received prior notice from the Borrowers or the Required Lenders that any of the conditions under Section 3.2 to the making of the applicable Refunded Swingline Loans or other unpaid Swingline Loans were not satisfied at the time such Refunded Swingline Loans or other unpaid Swingline Loans were made; and (ii) the Swingline Lender shall not be obligated to make any Swingline Loans (1) if it has elected not to do so after the occurrence and during the continuation of an Unmatured Default or Default, or (2) it does not in good faith believe that all conditions under Section 3.2 to the making of such Swingline Loan have been satisfied or waived by the Required Lenders.
2.3. Issuances of Letters of Credit and Purchase of Participations Therein.
2.3.1 Letters of Credit. During the Revolving Commitment Period, subject to the terms and conditions hereof, each Issuing Bank agrees to issue standby Letters of Credit for the account of the Borrowers or any of their Subsidiaries in the aggregate amount up to but not exceeding the Letter of Credit Sublimit; provided, (a) each Letter of Credit shall be denominated in Dollars; (b) the stated amount of each Letter of Credit shall not be less than $50,000 or such lesser amount as is reasonably acceptable to the applicable Issuing Bank; (c) after giving effect to such issuance, in no event shall the Outstanding Amount of the Revolving Obligations exceed the Revolving Commitments then in effect; (d) after giving effect to such issuance, in no event shall the Outstanding Amount of the Letter of Credit Obligations exceed the Letter of Credit Sublimit then in effect; (e) the aggregate amount of the outstanding Letters of Credit issued by any Issuing Bank shall not exceed its L/C Commitment; and (f) in no event shall any Letter of Credit have an expiration date later than the earlier of (i) seven (7) days prior to the Revolving Commitment Termination Date, and (ii) the date which is one (1) year from the date of issuance
of such Letter of Credit. Subject to the foregoing (other than clause (e)) any Issuing Bank may agree that a Letter of Credit will automatically be extended for one or more successive periods not to exceed one (1) year each, unless such Issuing Bank elects not to extend for any such additional period; provided, no Issuing Bank shall be required to extend any such Letter of Credit if it has received written notice that a Default has occurred and is continuing at the time such Issuing Bank must elect to allow such extension; provided, further, in the event that any Lender is at such time a Defaulting Lender, unless the applicable Issuing Bank has entered into arrangements satisfactory to such Issuing Bank (in its sole discretion) with the Borrowers or such Defaulting Lender to eliminate such Issuing Bank’s Fronting Exposure with respect to such Defaulting Lender (after giving effect to Section 2.16.1(d) and any Cash Collateral provided by the Defaulting Lender), including by Cash Collateralizing such Defaulting Lender’s Revolving Commitment Percentage of the Outstanding Amount of the Letter of Credit Obligations in a manner reasonably satisfactory to Administrative Agent, such Issuing Bank shall not be obligated to issue or extend any Letter of Credit hereunder. The Issuing Bank may send a Letter of Credit or conduct any communication to or from the beneficiary via the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) message or overnight courier, or any other commercially reasonable means of communicating with a beneficiary. Each Letter of Credit specified as a “Credit for Reinsurance Letter of Credit” in the Issuance Notice delivered by Borrowers shall be in the Issuing Bank’s standard form for letters of credit qualifying for credit for reinsurance under applicable state insurance laws and regulation, with such changes as mutually agreed by the Issuing Bank and the Borrowers, and shall satisfy the requirements for letters of credit under the credit for reinsurance provisions of the insurance laws and regulations of the jurisdiction of domicile of the beneficiary thereof as to which the Borrowers provide written notice to the Issuing Bank prior to the date of issuance (each such Letter of Credit a “Credit for Reinsurance Letter of Credit”); provided that the Issuing Bank shall not be obligated to verify such satisfaction.
2.3.2 Notice of Issuance. Whenever the Borrowers desire the issuance of a Letter of Credit, the Borrowers shall deliver to the Administrative Agent an Issuance Notice together with other standard documentation required by the applicable Issuing Bank that, among other things, identifies the Issuing Bank that Borrowers have selected to issue the requested Letter of Credit, no later than 12:00 p.m. at least three (3) Business Days or such shorter period as may be agreed to by such Issuing Bank in any particular instance, in advance of the proposed date of issuance. Upon satisfaction or waiver of the conditions set forth in Section 3.2, the selected Issuing Bank shall issue the requested Letter of Credit in accordance with such Issuing Bank’s standard operating procedures. Upon the issuance of any Letter of Credit or amendment or modification to a Letter of Credit, the applicable Issuing Bank shall promptly notify the Administrative Agent of such issuance, which notice shall be accompanied by a copy of such Letter of Credit or amendment or modification to a Letter of Credit. Upon receipt of such notice and documentation from such Issuing Bank, the Administrative Agent shall promptly forward such notice and documentation to each Lender together with the amount of such Lender’s respective participation in such Letter of Credit pursuant to Section 2.3.5. Except for Letters of Credit issued for the account of PLICO, PLC shall be the account party for each Letter of Credit, including Letters of Credit issuable to a beneficiary having a claim or potential claim against a Wholly-Owned Subsidiary of PLC.
2.3.3 Responsibility of Issuing Banks With Respect to Requests for Drawings and Payments. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the applicable Issuing Bank shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in accordance with the terms and conditions of such Letter of Credit. As between the Borrowers and any Issuing Bank, the Borrowers assume all risks of the acts and omissions of, or misuse of the Letters of Credit issued by such Issuing Bank, by the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, no Issuing Bank shall be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of such Issuing Bank, including any Governmental Acts; none of the above shall affect or impair, or prevent the vesting of, any Issuing Bank’s rights or powers hereunder. Without limiting the foregoing and in furtherance thereof, any action taken or omitted by any Issuing Bank under or in connection with the Letters of Credit or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not give rise to any liability on the part of such Issuing Bank to any Borrower. Notwithstanding anything to the contrary contained in this Section 2.3.3, the Borrowers shall retain any and all rights they may have against any Issuing Bank for any liability arising solely out of the gross negligence or willful misconduct of such Issuing Bank, as determined by a court of competent jurisdiction in a final, non-appealable order.
2.3.4 Reimbursement by the Borrowers of Amounts Drawn or Paid Under Letters of Credit. In the event an Issuing Bank has determined to honor a drawing under a Letter of Credit, it shall immediately notify the Borrowers and the Administrative Agent, and the Borrowers shall reimburse such Issuing Bank through the Administrative Agent on or before the Business Day immediately following the date on which such drawing is honored (the “Reimbursement Date”) in an amount in Dollars and in same day funds equal to the amount of such honored drawing together with interest as provided for in Section 2.7.6; provided, anything contained herein to the contrary notwithstanding, (a) unless the Borrowers shall have notified the Administrative Agent and the applicable Issuing Bank prior to 10:00 a.m. on the date such drawing is honored that the Borrowers intend to reimburse such Issuing Bank through the Administrative Agent for the amount of such honored drawing with funds other than the proceeds of Revolving Loans, the Borrowers shall be deemed to have given a timely Funding Notice to the Administrative Agent requesting the Lenders to make Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars equal to the amount of such honored drawing, and
(b) subject to satisfaction or waiver of the conditions specified in Section 3.2, the Lenders shall, on the Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount of such honored drawing, the proceeds of which shall be applied directly by the Administrative Agent to reimburse the applicable Issuing Bank for the amount of such honored drawing; and provided further, if for any reason proceeds of Revolving Loans are not received by the applicable Issuing Bank on the Reimbursement Date in an amount equal to the amount of such honored drawing, the Borrowers shall reimburse such Issuing Bank, on demand, in an amount in same day funds equal to the excess of the amount of such honored drawing over the aggregate amount of such Revolving Loans, if any, which are so received. Nothing in this Section 2.3.4 shall be deemed to relieve any Lender from its obligation to make Revolving Loans on the terms and conditions set forth herein, and the Borrowers shall retain any and all rights they may have against any Lender resulting from the failure of such Lender to make such Revolving Loans under this Section 2.3.4.
2.3.5 Lenders’ Purchase of Participations in Letters of Credit. Immediately upon the issuance of each Letter of Credit, each Lender having a Revolving Commitment shall be deemed to have purchased, and hereby agrees to irrevocably purchase, from the applicable Issuing Bank a participation in such Letter of Credit and any drawings honored thereunder in an amount equal to such Lender’s Revolving Commitment Percentage (with respect to the Revolving Commitments) of the maximum amount which is or at any time may become available to be drawn thereunder. In the event that the Borrowers shall fail for any reason to reimburse an Issuing Bank as provided in Section 2.3.4, the Administrative Agent shall promptly notify each Lender of the unreimbursed amount of such honored drawing and of such Lender’s respective participation therein based on such Lender’s Revolving Commitment Percentage. Each Lender shall make available to the Administrative Agent for the account of the applicable Issuing Bank an amount equal to its respective participation, in Dollars and in same day funds, at the Principal Office of the Administrative Agent, not later than 11:00 a.m. on the first Business Day after the date notified by the Administrative Agent. In the event that any Lender fails to make available to the Administrative Agent on such Business Day the amount of such Lender’s participation in such Letter of Credit as provided in this Section 2.3.5, such Issuing Bank shall be entitled to recover such amount on demand from such Lender together with interest thereon for three (3) Business Days at the rate customarily used by the applicable Issuing Bank for the correction of errors among banks and thereafter at the Base Rate. Nothing in this Section 2.3.5 shall be deemed to prejudice the right of any Lender to recover from any Issuing Bank any amounts made available by such Lender to such Issuing Bank pursuant to this Section in the event that it is determined that the payment with respect to a Letter of Credit in respect of which payment was made by such Lender constituted gross negligence or willful misconduct on the part of such Issuing Bank, as determined by a court of competent jurisdiction in a final, non-appealable order. In the event an Issuing Bank shall have been reimbursed by other Lenders pursuant to this Section 2.3.5 through the Administrative Agent for all or any portion of any drawing honored by such Issuing Bank under a Letter of Credit, the Administrative Agent for the account of the Issuing Bank shall distribute to each Lender which has paid all amounts payable by it under this Section 2.3.5 with respect to such honored drawing such Lender’s Revolving Commitment Percentage of all payments subsequently received by the Administrative Agent for the account of the Issuing Bank from the Borrowers in reimbursement of such honored drawing when such payments are received. Any such distribution shall be made to a Lender at its primary address set forth below its name on Appendix B or at such other address as such Lender may request.
2.3.6 Obligations Absolute. The obligation of the Borrowers to reimburse the applicable Issuing Bank for drawings honored under the Letters of Credit issued by it and to repay any Revolving Loans made by the Lenders pursuant to Section 2.3.4 and the obligations of the Lenders under Section 2.3.5 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms hereof under all circumstances including any of the following circumstances: (a) any lack of validity or enforceability of this Agreement, the Credit Documents or any Letter of Credit; (b) the existence of any claim, set off, defense (other than that such drawing has been repaid) or other right which the Borrowers or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Issuing Bank, a Lender or any other Person or, in the case of a Lender, against the Borrowers, whether in connection herewith, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between the Borrowers or any of their Subsidiaries and the beneficiary for which any Letter of Credit was procured); (c) any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (d) payment by any Issuing Bank under any Letter of Credit against presentation of a draft or other document which does not substantially comply with the terms of such Letter of Credit; (e) any adverse change in the business, operations, properties, assets, or financial condition of the Borrowers or any of their Subsidiaries; (f) any breach hereof or any other Credit Document by any party thereto; (g) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or (h) the fact that a Default or an Unmatured Default shall have occurred and be continuing; provided, in each case, that payment by the applicable Issuing Bank under the applicable Letter of Credit shall not have constituted gross negligence or willful misconduct of such Issuing Bank under the circumstances in question, as determined by a court of competent jurisdiction in a final, non-appealable order.
2.3.7 Indemnification. Without duplication of any obligation of the Borrowers under Section 10.26, in addition to amounts payable as provided herein, each of the Borrowers hereby agrees, on a joint and several basis, to protect, indemnify, pay and save harmless each Issuing Bank from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable and documented out-of-pocket fees, expenses and disbursements of counsel) which each Issuing Bank may incur or be subject to as a consequence, direct or indirect, of (a) the issuance of any Letter of Credit by such Issuing Bank, other than as a result of (i) the gross negligence or willful misconduct of such Issuing Bank, as determined by a court of competent jurisdiction in a final, non-appealable order, or (ii) the wrongful dishonor by such Issuing Bank of a proper demand for payment made under any Letter of Credit issued by it, or (b) the failure of such Issuing Bank to honor a drawing under any such Letter of Credit as a result of any Governmental Act.
2.3.8 Applicability of ISP. Unless otherwise expressly agreed by the applicable Issuing Bank and the Borrowers when a Letter of Credit is issued, the rules of the ISP shall apply to each Letter of Credit.
2.3.9 Letters of Credit Issued for Subsidiaries. Notwithstanding that a Letter of Credit issued or outstanding hereunder is in support of any obligations of, or is for the account of, a Subsidiary of either Borrower, Borrowers shall be obligated to reimburse the applicable Issuing Bank hereunder for any and all drawings under such Letter of Credit subject to the terms
of Section 2.21 with respect to PLICO. Borrowers hereby acknowledge that the issuance of Letters of Credit for the account of the Subsidiaries inures to the benefit of Borrowers, and that Borrowers’ business derives substantial benefits from the businesses of such Subsidiaries.
2.3.10 Reporting by Issuing Banks. Unless otherwise agreed by the Administrative Agent, each Issuing Bank shall, in addition to its notification obligations set forth elsewhere in this Section 2.3, report in writing to the Administrative Agent (a) periodic activity (for such period or recurrent periods as shall be reasonably requested by the Administrative Agent and in any event no more frequently than monthly) in respect of all Letters of Credit issued by such Issuing Bank, including all issuances, extensions, amendments and renewals, all expirations and cancellations and all disbursements and reimbursements, (b) reasonably prior to the time that such Issuing Bank issues, amends, renews or extends any Letter of Credit, the date of such issuance, amendment, renewal or extension, and the stated amount of the Letters of Credit issued, amended, renewed or extended by it and outstanding after giving effect to such issuance, amendment, renewal or extension (and whether the amounts thereof shall have changed), (c) on each Business Day on which such Issuing Bank makes any payment on a Letter of Credit, the date and amount of such payment, (d) on any Business Day on which the Borrowers fail to reimburse any reimbursement obligation to be reimbursed to such Issuing Bank on such day, the date of such failure and the amount of such reimbursement obligation and (e) on any other Business Day, such other information as the Administrative Agent shall reasonably request as to the Letters of Credit issued by such Issuing Bank. No failure on the part of any Issuing Bank to provide such information pursuant to this Section 2.3.10 shall limit the obligations of the Borrowers or any Lender hereunder with respect to its reimbursement and participation obligations hereunder.
2.4. Pro Rata Shares; Availability of Funds.
2.4.1 Pro Rata Shares. All Loans shall be made, and all participations purchased, by the Lenders simultaneously and proportionately to their respective Revolving Commitment Percentage of the Loans, it being understood that no Lender shall be responsible for any default by any other Lender in such other Lender’s obligation to make a Loan requested hereunder or purchase a participation required hereby nor shall any Revolving Commitment, or the portion of the aggregate outstanding principal amount of the Revolving Loans, of any Lender be increased or decreased as a result of a default by any other Lender in such other Lender’s obligation to make a Loan requested hereunder or purchase a participation required hereby. Each Lender acknowledges and agrees that its participation in each Letter of Credit and Swingline Loan will be automatically adjusted based on such Lender’s Revolving Commitment Percentage at each time such Lender’s Revolving Commitment is amended pursuant to the operation of Section 2.22.
2.4.2 Availability of Funds.
(a) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing (or, in the case of any Borrowing of Base Rate Loans, prior to 12:00 p.m. on the date of such Borrowing) that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on
such date in accordance with Section 2.1.2 or, in the case of a Borrowing of Base Rate Loans, that such Lender has made such share available in accordance with and at the time required by Section 2.1.2 and may, in reliance upon such assumption, make available to the Borrowers a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrowers severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount in immediately available funds with interest thereon, for each day from and including the date such amount is made available to the Borrowers to but excluding the date of payment to the Administrative Agent, at (A) in the case of a payment to be made by such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and (B) in the case of a payment to be made by the Borrowers, the interest rate applicable to Base Rate Loans, plus, in either case, any administrative, processing or similar fees customarily charged by the Administrative Agent in connection therewith. If the Borrowers and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrowers the amount of such interest paid by the Borrowers for such period. If such Lender pays its share of the applicable Borrowing to the Administrative Agent, then the amount so paid shall constitute such Lender’s Loan included in such Borrowing. Any payment by the Borrowers shall be without prejudice to any claim the Borrowers may have against a Lender that shall have failed to make such payment to the Administrative Agent.
(b) Unless the Administrative Agent shall have received notice from the Borrowers prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or any Issuing Bank hereunder that the Borrowers will not make such payment, the Administrative Agent may assume that the Borrowers have made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or each applicable Issuing Bank, as the case may be, the amount due. In such event, if the Borrowers have not in fact made such payment, then each of the Lenders or each applicable Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or such Issuing Bank, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate reasonably determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
Notices given by the Administrative Agent under this Section 2.4.2 shall be conclusive absent manifest error.
2.5. Evidence of Debt; Register; Lenders’ Books and Records; Notes.
2.5.1 Lenders’ Evidence of Debt. Each Lender shall maintain on its internal records an account or accounts evidencing the Obligations of the Borrowers to such Lender, including the amounts of the Loans made by it and each repayment and prepayment in respect thereof. Any such recordation shall be conclusive and binding on the Borrowers, absent manifest error;
provided, that the failure to make any such recordation, or any error in such recordation, shall not affect any Lender’s Commitment or the Borrowers’ obligations in respect of any applicable Loans; and provided, further, in the event of any inconsistency between the Register and any Lender’s records, the recordations in the Register shall govern in the absence of demonstrable error therein.
2.5.2 Notes. The Borrowers shall execute and deliver to each (i) Lender on the Closing Date, (ii) Person who is a permitted assignee of such Lender pursuant to Section 9.2 and (iii) Person who becomes a Lender in accordance with Section 2.1.3, 2.20.2 or 2.22, in each case to the extent requested by such Person, a Note or Notes to evidence such Person’s portion of the Revolving Loans or Swingline Loans, as applicable.
2.6. Scheduled Principal Payments.
2.6.1 Revolving Loans. The principal amount of Revolving Loans is due and payable in full on the Revolving Commitment Termination Date.
2.6.2 Swingline Loans. The principal amount of the Swingline Loans is due and payable in full on the earlier to occur of (i) the date of demand by the Swingline Lender and (ii) the Revolving Commitment Termination Date.
2.7. Interest on Loans.
2.7.1 Interest Rate. Except as otherwise set forth herein, each Loan shall bear interest on the unpaid principal amount thereof from the date made through repayment (whether by acceleration or otherwise) thereof as follows:
(a) in the case of Revolving Loans:
(i) if a Base Rate Loan (including a Base Rate Loan referencing the Adjusted Term SOFR Rate), the Base Rate plus the Applicable Margin; or
(ii) if a Term SOFR Rate Loan, the Adjusted Term SOFR Rate plus the Applicable Margin; and
(b) in the case of Swingline Loans, at the Swingline Rate.
2.7.2 Determination of Interest Rate. The basis for determining the rate of interest with respect to any Loan (except a Swingline Loan, which may only be made and maintained at the Swingline Rate (unless and until converted into a Revolving Loan pursuant to the terms and conditions hereof)), and the Interest Period with respect to any Term SOFR Rate Loan, shall be selected by the Borrowers and notified to the Administrative Agent and the Lenders pursuant to the applicable Funding Notice or Conversion/Continuation Notice, as the case may be. If on any day a Loan is outstanding with respect to which a Funding Notice or Conversion/Continuation Notice has not been delivered to the Administrative Agent in accordance with the terms hereof specifying the applicable basis for determining the rate of interest, then for that day (a) if such Loan is a Term SOFR Rate Loan, such Loan shall become a Base Rate Loan and (b) if such Loan is a Base Rate Loan, such Loan shall remain a Base Rate Loan.
2.7.3 Failure to Specify Rate. In connection with Term SOFR Rate Loans, there shall be no more than five (5) Interest Periods outstanding at any time. In the event the Borrowers fail to specify between a Base Rate Loan or a Term SOFR Rate Loan in the applicable Funding Notice or Conversion/Continuation Notice, such Loan (a) if outstanding as a Term SOFR Rate Loan, will be automatically continued as a Term SOFR Rate Loan, with an Interest Period of the same duration as the current Interest Period of the Loan being continued, on the last day of the then current Interest Period for such Loan, (b) if outstanding as a Base Rate Loan will remain as a Base Rate Loan and (c) if such Loan is not already outstanding, it shall be made as a Base Rate Loan. In the event the Borrowers fail to specify an Interest Period for any Term SOFR Rate Loan in the applicable Funding Notice or Conversion/Continuation Notice, the Borrowers shall be deemed to have selected an Interest Period of one (1) month. As soon as practicable after 9:00 a.m. on each Interest Rate Determination Date, the Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to each of the Term SOFR Rate Loans for which an interest rate is then being determined (and for the applicable Interest Period in the case of Term SOFR Rate Loans) and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to the Borrowers and each Lender.
2.7.4 Calculation of Interest. Interest payable pursuant to this Section 2.7 shall be computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Term SOFR Rate Loan, the date of conversion of such Term SOFR Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of principal or interest on such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Term SOFR Rate Loan, the date of conversion of such Base Rate Loan to such Term SOFR Rate Loan, as the case may be, shall be excluded; provided, if the principal amount of a Loan is repaid on the same day on which it is made, one (1) day’s interest shall be paid on that Loan.
2.7.5 Interest Payable in Arrears. Except as otherwise set forth herein, interest on each Loan shall accrue on a daily basis and accrued and unpaid interest shall be payable in arrears (a) on each Interest Payment Date applicable to that Loan; (b) upon any prepayment of that Loan (other than a voluntary prepayment of a Revolving Loan which interest shall be payable in accordance with clause (a) above), to the extent accrued on the amount being prepaid; and (c) at maturity, including final maturity.
2.7.6 Interest Due Issuing Banks. The Borrowers agree to pay to the Administrative Agent for the account of the applicable Issuing Bank, with respect to drawings honored under any Letter of Credit issued by such Issuing Bank, interest on the amount paid by the Issuing Bank in respect of each such honored drawing from the date such drawing is honored to but excluding the date such amount is reimbursed by or on behalf of the Borrowers at a rate equal to (a) for the period from the date such drawing is honored to but excluding the applicable Reimbursement Date, the rate of interest otherwise payable hereunder with respect to Revolving Loans that are Base Rate Loans, and (b) thereafter, without duplication of any Default Rate interest that may be payable under this Agreement, a rate which is the lesser of (i) 2% per annum
in excess of the rate of interest otherwise payable hereunder with respect to Revolving Loans that are Base Rate Loans, and (ii) the Maximum Lawful Rate.
2.7.7 Interest Distributed by Issuing Banks. Interest payable pursuant to Section 2.7.6 shall be computed on the basis of a year of three hundred sixty (360) days, for the actual number of days elapsed in the period during which it accrues, and shall be payable on demand or, if no demand is made, on the Reimbursement Date for the related drawing under a Letter of Credit. In the event the Issuing Bank shall have been reimbursed by the Lenders through the Administrative Agent for all or any portion of such honored drawing, the Administrative Agent shall distribute to each Lender which has paid all amounts payable by it under Section 2.3.5 with respect to such honored drawing such Lender’s Revolving Commitment Percentage of any interest received by the Administrative Agent for the account of the Issuing Bank in respect of that portion of such honored drawing so reimbursed by the Lenders for the period from the date on which the Issuing Bank was so reimbursed by the Lenders to but excluding the date on which such portion of such honored drawing is reimbursed by the Borrowers.
2.8. Conversion/Continuation.
2.8.1 Options to Convert/Continue. So long as no Unmatured Default or Default shall have occurred and then be continuing or would result therefrom, the Borrowers shall have the option:
(a) to convert at any time all or any part of any Loan equal to $100,000 and integral multiples of $50,000 in excess of that amount from one Type of Loan to another Type of Loan; provided, a Term SOFR Rate Loan may only be converted on the expiration of the Interest Period applicable to such Term SOFR Rate Loan unless the Borrowers shall pay all amounts due under Section 2.17.3 in connection with any such conversion; or
(b) upon the expiration of any Interest Period applicable to any Term SOFR Rate Loan, to continue all or any portion of such Loan as a Term SOFR Rate Loan.
2.8.2 Conversion/Continuation Notice. The Borrowers shall deliver a Conversion/Continuation Notice to the Administrative Agent no later than 12:00 p.m. at least three (3) U.S. Government Securities Business Days in advance of the proposed Conversion/Continuation Date (except for any conversion from a Term SOFR Rate Loan to a Base Rate Loan, which shall be no later than 9:00 a.m. on the proposed Conversion/Continuation Date). Except as otherwise provided herein, a Conversion/Continuation Notice for conversion to, or continuation of, any Term SOFR Rate Loans (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and the Borrowers shall be bound to effect a conversion or continuation in accordance therewith.
2.9. Default Rate of Interest.
2.9.1 Principal Due. If any amount of principal of any Loan is not paid when due, whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear
interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
2.9.2 Other Amounts Due. If any amount (other than principal of any Loan) payable by the Borrowers under any Credit Document is not paid when due (after the expiration of any applicable grace periods), whether at stated maturity, by acceleration or otherwise, then at the request of the Required Lenders, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
2.9.3 Bankruptcy Defaults. During the continuance of a Default under Section 6.6 or Section 6.7, the Borrowers shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
2.9.4 Other Defaults. During the continuance of a Default other than a Default under Section 6.6 or Section 6.7, the Borrowers shall, at the request of the Required Lenders, pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
2.9.5 Past Due Amounts. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.
2.9.6 No Permitted Alternative. In the case of any Term SOFR Rate Loan, upon the expiration of the Interest Period in effect at the time the Default Rate is effective, each such Term SOFR Rate Loan shall thereupon become a Base Rate Loan and shall thereafter bear interest at the Default Rate then in effect for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this Section 2.9 is not a permitted alternative to timely payment and shall not constitute a waiver of any Default or otherwise prejudice or limit any rights or remedies of the Administrative Agent or any Lender.
2.10. Fees.
2.10.1 Facility Fee. The Borrowers shall pay to the Administrative Agent for the account of each Lender in accordance with its Revolving Commitment Percentage, a facility fee (the “Facility Fee”) equal to the applicable Facility Fee Rate (set forth in the definition of the term “Applicable Margin”) of the Aggregate Revolving Commitments, subject to adjustments as provided in Section 2.16. The Facility Fee shall accrue at all times during the Revolving Commitment Period, including at any time during which one or more of the conditions in Article III is not met, and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the Closing Date, and on the Revolving Commitment Termination Date; provided that (1) no Facility Fee shall accrue on any of the Revolving Commitment of a Defaulting Lender so long as such Lender shall be a Defaulting Lender except as otherwise provided in Section 2.16.1(c)(ii)and (2) any Facility Fee accrued with respect to the Revolving Commitment of a Defaulting Lender during the period prior to the time such Lender became a Defaulting Lender and unpaid at such
time shall not be payable by the Borrowers so long as such Lender shall be a Defaulting Lender. The Facility Fee is not refundable or proratable.
2.10.2 Letter of Credit Fees. The Borrowers shall pay to the Administrative Agent for the account of each Lender in accordance with its Revolving Commitment Percentage a Letter of Credit fee for each Letter of Credit equal to the applicable Letter of Credit Fee (set forth in the definition of the term “Applicable Margin”) multiplied by the daily maximum amount available to be drawn under such Letter of Credit (the “Letter of Credit Fee”). For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.2.5. The Letter of Credit Fee shall be computed on a quarterly basis in arrears, and shall be due and payable on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the issuance of such Letter of Credit, on the expiration date thereof and thereafter on demand; provided that (i) no Letter of Credit Fee shall accrue in favor of a Defaulting Lender so long as such Lender shall be a Defaulting Lender except as otherwise provided in Section 2.16.1(c)(ii) and (ii) any Letter of Credit Fee accrued in favor of a Defaulting Lender during the period prior to the time such Lender became a Defaulting Lender and unpaid at such time shall not be payable by the Borrowers so long as such Lender shall be a Defaulting Lender. If there is any change in the Applicable Margin during any quarter, the daily maximum amount available to be drawn under each Letter of Credit shall be computed and multiplied by the Applicable Margin separately for each period during such quarter that such Applicable Margin was in effect. Notwithstanding anything to the contrary contained herein, during the continuance of a Default under Sections 6.6 and 6.7, the Letter of Credit Fee shall accrue at the Default Rate, and during the continuance of a Default other than a Default under Sections 6.6 or 6.7, then upon the request of the Required Lenders, the Letter of Credit Fee shall accrue at the Default Rate.
2.10.3 Fronting Fee and Other Fees Payable to an Issuing Bank. The Borrowers shall pay directly to each Issuing Bank for its own account a fronting fee at the rate per annum agreed upon by the Borrowers and such Issuing Bank, computed on a basis to be determined by the Borrowers and such Issuing Bank. Such fronting fee shall be due and payable on the last Business Day of each March, June, September and December in respect of the most recently ended quarterly period (or portion thereof, in the case of the first payment), commencing with the first such date to occur after the issuance of such Letter of Credit, on its expiration date and thereafter on demand. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.2.5. In addition, the Borrowers shall pay directly to the Issuing Bank for its own account the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the Issuing Bank relating to letters of credit as from time to time in effect. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable.
2.10.4 Other Fees. The Borrowers shall pay to the Joint Lead Arrangers, the Sustainability Structuring Agents and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Fee Letters. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever, except to the extent set forth in the Fee Letters.
2.11. Prepayments/Commitment Reductions.
2.11.1 Voluntary Prepayments.
(a) Any time and from time to time, the Loans may be repaid in whole or in part without premium or penalty (subject to Section 2.17):
(i) with respect to Base Rate Loans (including Base Rate Loans referencing the Adjusted Term SOFR Rate), the Borrowers may prepay any such Loans on any Business Day in whole or in part, in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess of that amount, or, if less, the full Outstanding Amount thereof;
(ii) with respect to Term SOFR Rate Loans, the Borrowers may prepay any such Loans on any Business Day in whole or in part (together with any amounts due pursuant to Section 2.17.3) in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess of that amount, or, if less, the full Outstanding Amount thereof; and
(iii) with respect to Swingline Loans, the Borrowers may prepay any such Loans on any Business Day in whole or in part in any amount;
(b) All such prepayments shall be made:
(i) upon written or telephonic notice on or before the date of prepayment in the case of Base Rate Loans or Swingline Loans; and
(ii) upon not less than three (3) U.S. Government Securities Business Days’ prior written or telephonic notice in the case of Term SOFR Rate Loans;
in each case given to the Administrative Agent, or the Swingline Lender, as the case may be, by 10:00 a.m. on the date required and, if given by telephone, promptly confirmed in writing to the Administrative Agent (and the Administrative Agent will promptly transmit such telephonic or original notice for a Credit Extension by telefacsimile or telephone to each Lender). Upon the giving of any such notice, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein, unless such notice is cancelled or revoked by Borrowers no later than one Business Day prior to such prepayment date. Any such voluntary prepayment shall be applied as specified in Section 2.12.1.
2.11.2 Voluntary Commitment Reductions.
(a) The Borrowers may, from time to time upon not less than three (3) Business Days’ prior written or telephonic notice confirmed in writing to the Administrative Agent (which original written or telephonic notice the Administrative Agent will promptly transmit by telefacsimile or telephone to each applicable Lender), at any time and from time to time terminate in whole or permanently reduce in part (i) the Revolving Commitments (ratably among the Lenders in accordance with their respective Revolving Commitment Percentage); provided, (i) any such partial reduction of the
Revolving Commitments shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount, (ii) the Borrowers shall not terminate or reduce the Aggregate Revolving Commitments if, after giving effect thereto and to any concurrent prepayments hereunder, the aggregate Outstanding Amount exceed the Aggregate Revolving Commitments and (iii) if, after giving effect to any reduction of the Aggregate Revolving Commitments, the Letter of Credit Sublimit and/or the Swingline Sublimit exceed the amount of the Aggregate Revolving Commitments, the Letter of Credit Sublimit and/or the Swingline Sublimit, as applicable, shall be automatically reduced by the amount of such excess.
(b) The Borrowers’ notice to the Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Commitments shall be effective on the date specified in the Borrowers’ notice and shall reduce the Revolving Commitments of each Lender proportionately to its Revolving Commitment Percentage thereof, unless such notice is cancelled or revoked by Borrowers no later than one Business Day prior to such prepayment date.
2.11.3 Mandatory Prepayments. If at any time the Administrative Agent notifies the Borrowers that (i) the Outstanding Amount of Revolving Obligations shall exceed the Aggregate Revolving Commitments, (ii) the Outstanding Amount of Letter of Credit Obligations shall exceed the Letter of Credit Sublimit, or (iii) the Outstanding Amount of Swingline Loans shall exceed the Swingline Sublimit, immediate prepayment will be made on or in respect of the Revolving Obligations in an amount equal to such excess; provided, however, that, except with respect to subparagraph (ii), Letter of Credit Obligations will not be Cash Collateralized hereunder until the Revolving Loans and Swingline Loans have been paid in full.
2.12. Application of Prepayments. Within each Loan, prepayments will be applied first to Base Rate Loans, then to Term SOFR Rate Loans in direct order of Interest Period maturities. In addition:
2.12.1 Voluntary Prepayments. Voluntary prepayments will be applied as specified by the Borrowers.
2.12.2 Mandatory Prepayments. Mandatory prepayments in respect of the Revolving Commitments under Section 2.11.3 above shall be applied to the respective Revolving Obligations as appropriate but without a permanent reduction thereof.
2.12.3 Payment to Lenders. Prepayments on the Obligations will be paid by the Administrative Agent to the Lenders ratably in accordance with their respective interests therein (except for Defaulting Lenders where their share will be applied as provided in Section 2.16.1 hereof).
2.13. General Provisions Regarding Payments.
2.13.1 Auto Debit. All payments by the Borrowers of principal, interest, fees and other Obligations hereunder or under any other Credit Document shall be made in Dollars in immediately available funds, without defense, recoupment, setoff or counterclaim, free of any
restriction or condition. The Administrative Agent shall, and the Borrowers hereby authorize the Administrative Agent to, debit a deposit account of the Borrowers or any of their Subsidiaries held with the Administrative Agent or any of its Affiliates and designated for such purpose by the Borrowers or such Subsidiary in order to cause timely payment to be made to the Administrative Agent of all principal, interest and fees due hereunder or under any other Credit Document (subject to sufficient funds being available in its accounts for that purpose).
2.13.2 Time for Payments. In the event that the Administrative Agent is unable to debit a deposit account of the Borrowers or any of their Subsidiaries held with the Administrative Agent or any of its Affiliates in accordance with Section 2.13.1 in order to cause timely payment to be made to the Administrative Agent of all principal, interest and fees due hereunder or any other Credit Document (including because insufficient funds are available in its accounts for that purpose), payments hereunder and under any other Credit Document shall be delivered to the Administrative Agent, for the account of the Lenders, not later than 1:00 p.m. on the date due at the Principal Office of the Administrative Agent or via wire transfer of immediately available funds to an account designated by the Administrative Agent (or at such other location as may be designated in writing by the Administrative Agent from time to time); for purposes of computing interest and fees, funds received by the Administrative Agent after that time on such due date shall be deemed to have been paid by the Borrowers on the next Business Day.
2.13.3 Payments Applied to Interest First. All payments in respect of the principal amount of any Loan (other than voluntary repayments of Revolving Loans) shall be accompanied by payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest then due and payable before application to principal.
2.13.4 Distributions to Lenders. The Administrative Agent shall promptly remit to each Lender at such address as such Lender shall indicate in writing, such Lender’s applicable pro rata share of all payments and prepayments of principal and interest due to such Lender hereunder, together with all other amounts due with respect thereto, including all fees payable with respect thereto, to the extent received by the Administrative Agent; provided that in the event payments received by the Administrative Agent by 1:00 p.m. at the Administrative Agent’s Principal Office with respect to any Loan are not remitted to Lenders by the end of the next Business Day, the Administrative Agent shall pay Lenders the Federal Funds Effective Rate for each day with respect to the amount of such payments not so timely remitted.
2.13.5 Affected Lender’s Payments. Notwithstanding the foregoing provisions hereof, if any Conversion/Continuation Notice is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its pro rata share of any Term SOFR Rate Loans, the Administrative Agent shall give effect thereto in apportioning payments received thereafter.
2.13.6 Payment Date Not on Business Day. Subject to the provisos set forth in the definition of “Interest Period,” whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the Facility Fee hereunder, but such payment shall be deemed to have been made on the date therefor for all other purposes hereunder; provided that there shall be no duplicative accrual of interest on the principal amount of any Obligation.
2.13.7 Non-conforming Payments. The Administrative Agent may, but shall not be obligated to, deem any payment by or on behalf of the Borrowers hereunder that is not made in same day funds prior to 1:00 p.m. to be a non conforming payment. Any such payment shall not be deemed to have been received by the Administrative Agent until the later of (a) the time such funds become available funds, and (b) the applicable next Business Day. The Administrative Agent shall give prompt telephonic notice to the Borrowers and each applicable Lender (confirmed in writing) if any payment is non conforming. Any non conforming payment may constitute a Default in accordance with the terms of Section 6.2. Interest shall continue to accrue on any principal as to which a non conforming payment is made until such funds become available funds (but in no event less than the period from the date of such payment to the next succeeding applicable Business Day) at the Default Rate (unless otherwise provided by the Required Lenders) from the date such amount was due and payable until the date such amount is paid in full.
2.14. Sharing of Payments by Lenders. If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or other obligations hereunder resulting in such Lender receiving payment of a proportion of the aggregate amount of such Loans and accrued interest thereon or other such obligations greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans and such other obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them; provided that:
(i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and
(ii) the provisions of this Section shall not be construed to apply to (1) any payment made by the Borrowers pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender), (2) any amounts applied by the Swingline Lender to outstanding Swingline Loans, (3) any amounts applied to Letter of Credit Obligations by the Issuing Bank or Swingline Loans by the Swingline Lender, as appropriate, from Cash Collateral provided under Section 2.15 or Section 2.16, or (4) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in Letter of Credit Obligations, Swingline Loans or other obligations hereunder to any assignee or participant, other than to the Borrowers or any Subsidiary thereof (as to which the provisions of this Section shall apply).
Each of the Borrowers consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against such Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of such Borrower in the amount of such participation.
2.15. Cash Collateral. At any time that there shall exist a Defaulting Lender, within one (1) Business Day following the written request of the Administrative Agent or any Issuing Bank (with a copy to the Administrative Agent) the Borrowers shall Cash Collateralize each applicable Issuing Bank’s Fronting Exposure related to Letters of Credit with respect to such Defaulting Lender in an amount sufficient to cover the applicable Fronting Exposure (after giving effect to Section 2.16.1(d) and any Cash Collateral provided by the Defaulting Lender). The Borrowers may use the proceeds of Revolving Loans to satisfy the obligation in this Section 2.15 to Cash Collateralize any Fronting Exposure related to any Letter of Credit.
2.15.1 Grant of Security Interest. The Borrowers, and to the extent provided by any Defaulting Lender, such Defaulting Lender, hereby grants to the Administrative Agent, for the benefit of the Issuing Banks, and agrees to maintain, a perfected first priority security interest in all such Cash Collateral as security for the Defaulting Lenders’ obligation to fund participations in respect of Letter of Credit Obligations, to be applied pursuant to Section 2.15.2 below. If at any time the Administrative Agent determines that Cash Collateral is subject to any right or claim of any Person other than the Administrative Agent and the Issuing Banks as herein provided (other than the Permitted Liens), or that the total amount of such Cash Collateral is less than the applicable Fronting Exposure, the Borrowers will, promptly upon demand by the Administrative Agent, pay or provide to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency (after giving effect to any Cash Collateral provided by the Defaulting Lender).
2.15.2 Application. Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under this Section 2.15 or Section 2.16 in respect of Letters of Credit shall be applied to the satisfaction of the Defaulting Lender’s obligation to fund participations in respect of Letter of Credit Obligations (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) for which the Cash Collateral was so provided, prior to any other application of such property as may otherwise be provided for herein.
2.15.3 Termination of Requirement. Cash Collateral (or the appropriate portion thereof) provided to reduce any Issuing Bank’s Fronting Exposure shall no longer be required to be held as Cash Collateral pursuant to this Section 2.15 and shall be released to the Borrowers (or Defaulting Lender, if applicable) following (a) the elimination of the applicable Fronting Exposure (including by the termination of Defaulting Lender status of the applicable Lender), or (b) the determination by the Administrative Agent and each Issuing Bank that there exists excess Cash Collateral; provided, however, (i) that Cash Collateral furnished by or on behalf of a Borrower shall not be released during the continuance of an Unmatured Default or Default (and following application as provided in this Section 2.15 may be otherwise applied in accordance with Section 7.2) but shall be released upon the cure, termination or waiver of such Unmatured Default or Default in accordance with the terms of this Agreement, and (ii) the Person providing
Cash Collateral and any Issuing Bank or the Swingline Lender, as applicable, may agree that Cash Collateral shall not be released but instead held to support future anticipated Fronting Exposure or other obligations.
2.16. Defaulting Lenders.
2.16.1 Defaulting Lender Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by applicable Law:
(a) Such Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in Section 10.3.1(c).
(b) Any payment of principal, interest, Letter of Credit Fees, Facility Fees or other amount (other than fees which any Defaulting Lender is not entitled to receive pursuant to Section 2.16.1(c)) received by the Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article VII or otherwise, and including any amounts made available to the Administrative Agent by that Defaulting Lender pursuant to Section 10.27), shall be applied at such time or times as may be determined by the Administrative Agent as follows: first, to the payment of any amounts owing by that Defaulting Lender to the Administrative Agent hereunder; second, to the payment on a pro rata basis of any amounts owing by that Defaulting Lender to any Issuing Bank or the Swingline Lender hereunder; third, if so determined by the Administrative Agent or requested by any Issuing Bank or the Swingline Lender, to be held as Cash Collateral for future funding obligations of that Defaulting Lender of any participation in any Swingline Loan or Letter of Credit; fourth, as the Borrowers may request (so long as no Unmatured Default or Default exists), to the funding of any Loan in respect of which that Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent; fifth, if so determined by the Administrative Agent and the Borrowers, to be held in a non-interest bearing deposit account and released in order to (x) satisfy obligations of that Defaulting Lender to fund Loans under this Agreement and (y) Cash Collateralize the Issuing Banks’ Fronting Exposure with respect to such Defaulting Lender with respect to future Letters of Credit issued under this Agreement in accordance with Section 2.15; sixth, to the payment of any amounts owing to the Lenders, the Issuing Banks or the Swingline Lender as a result of any judgment of a court of competent jurisdiction obtained by any Lender, any Issuing Bank or the Swingline Lender against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; seventh, so long as no Unmatured Default or Default exists, to the payment of any amounts owing to the Borrowers as a result of any judgment of a court of competent jurisdiction obtained by the Borrowers against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; and eighth, to that Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided, that, if (i) such payment is a payment of the principal amount of any Loans or Letter of Credit Borrowings in respect of which that Defaulting Lender has not fully funded its appropriate share and (ii) such Loans or Letter of Credit Borrowings were
made at a time when the conditions set forth in Section 3.2 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and Letter of Credit Borrowings owed to, all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or Letter of Credit Borrowings owed to, that Defaulting Lender. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 2.16.1(b) shall be deemed paid to (and the underlying obligations satisfied to the extent of such payment) and redirected by that Defaulting Lender, and each Lender irrevocably consents hereto.
(c) (i) Such Defaulting Lender shall not be entitled to receive any Facility Fee or Letter of Credit Fees with respect to Letters of Credit (except as provided in subparagraph (ii) below) for any period during which that Lender is a Defaulting Lender (and the Borrowers shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender).
(ii) Each Defaulting Lender shall be entitled to receive Facility Fees and Letter of Credit Fees for any period during which that Lender is a Defaulting Lender only to the extent allocable to its Revolving Commitment Percentage of the stated amount of Letters of Credit for which it has provided Cash Collateral pursuant to Section 2.15.
(iii) With respect to any fee not required to be paid to any Defaulting Lender pursuant to subparagraph (i) or (ii) above, the Borrowers shall (x) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lender’s participation in Letter of Credit Obligations or Swingline Loans that has been reallocated to such Non-Defaulting Lender pursuant to Section 2.16.1(d) below, (y) pay to the Swingline Lender the amount of any such fee otherwise payable to such Defaulting Lender to the extent allocable to the Swingline Lender’s Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount of any such fee.
(d) All or any part of such Defaulting Lender’s participation in Letter of Credit Obligations and Swingline Loans shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Revolving Commitment Percentages (calculated without regard to such Defaulting Lender’s Revolving Commitment) but only to the extent that (x) the conditions set forth in Section 3.2 are satisfied at the time of such reallocation (and, unless the Borrowers shall have otherwise notified the Administrative Agent at such time, the Borrowers shall be deemed to have represented and warranted that such conditions are satisfied at such time), and (y) such reallocation does not cause the aggregate Outstanding Amount of Revolving Loans of such Lender together with such Lender’s participation in Letter of Credit Obligations and Swingline Loans at such time to exceed such Non-Defaulting Lender’s Revolving Commitment. Subject to Section 10.31, no reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lender's increased exposure following such reallocation.
(e) If the reallocation described in Section 2.16.1(d) above cannot, or can only partially, be effected, the Borrowers shall, without prejudice to any right or remedy available to them hereunder or under law, (x) first, prepay Swingline Loans in an amount equal to the Swingline Lenders’ Fronting Exposure and (y) second, Cash Collateralize each Issuing Bank’s Fronting Exposure in accordance with the procedures set forth in Section 2.15.
2.16.2 Defaulting Lender Cure. If the Borrowers, the Administrative Agent and the Swingline Lender and each Issuing Bank agree in good faith in writing that a Lender is no longer a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase at par that portion of outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit and Swingline Loans to be held pro rata by the Lenders in accordance with the Revolving Commitment Percentages (without giving effect to Section 2.16.1(d)), whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrowers while that Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.
2.16.3 New Letters of Credit. So long as any Lender is a Defaulting Lender, no Issuing Bank shall be required to issue, extend, renew or increase any Letter of Credit unless it is reasonably satisfied that the participations in the Letter of Credit Obligations related to any existing Letters of Credit as well as the new, extended, renewed or increased Letter of Credit has been or will be fully allocated among the Non-Defaulting Lenders in a manner consistent with Section 2.16.1(d) above and such Defaulting Lender shall not participate therein except to the extent such Defaulting Lender’s participation has been or will be fully Cash Collateralized in accordance with Section 2.15.
2.17. Making or Maintaining Interest Rates.
2.17.1 Inability to Determine Applicable Interest Rate. Notwithstanding anything to the contrary in this Agreement or any Credit Document, in the event that the Administrative Agent shall have determined in good faith (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Term SOFR Rate Loans, that reasonable and adequate means do not exist for ascertaining the interest rate applicable to such Term SOFR Rate Loans on the basis provided for in the definition of SOFR or Term SOFR, the Administrative Agent shall give notice (by telefacsimile or by telephone confirmed in writing) to the Borrowers and each Lender of such determination, whereupon (a) no Loans may be made as, or converted to, Term SOFR Rate Loans until such time as the Administrative Agent notifies the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, (b) any Funding Notice or Conversion/Continuation Notice given by the Borrowers with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by the Borrowers and (c) all such Loans described in
clause (b) hereof shall be automatically made or continued as, or converted to, as applicable, Base Rate Loans on the last day of the then current Interest Period applicable thereto without reference to the Adjusted Term SOFR Rate component of the Base Rate, unless the Borrowers prepay such Loans in accordance with this Agreement. If the circumstances described in this Section 2.17.1 occur but only with respect to limited, but not all, tenors of the then applicable term rate Benchmark (including Term SOFR), then (x) the Administrative Agent may modify the definition of “Interest Period” (or any similar or analogous definition) for any Benchmark settings at or after such time to remove such illegal or impracticable tenor and (y) if a tenor that was removed pursuant to clause (x) of this sentence is subsequently displayed on a screen or information service for a Benchmark, then the Administrative Agent may modify the definition of “Interest Period” (or any similar or analogous definition) for all Benchmark settings at or after such time to reinstate such previously removed tenor.
2.17.2 Illegality or Impracticability of the Benchmark.
(a) Subject to Section 2.17.2(b), in the event that on any date any Lender shall have determined in good faith (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after notice to and consultation with the Borrowers and the Administrative Agent) that a Benchmark Illegality/Impracticability Event has occurred with respect to such Lender, such Lender shall be an “Affected Lender” and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to the Borrowers and the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each other Lender). Thereafter (i) the obligation of the Affected Lender to make Loans as, or to convert Loans to, Term SOFR Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (ii) to the extent such determination by the Affected Lender relates to a Term SOFR Rate Loan then being requested by the Borrowers pursuant to a Funding Notice or a Conversion/Continuation Notice, the Affected Lender shall make such Loan as (or continue such Loan as or convert such Loan to, as the case may be) a Base Rate Loan without reference to the Adjusted Term SOFR Rate (or other then-current Benchmark) component of the Base Rate, (iii) the Affected Lender’s obligation to maintain its outstanding Term SOFR Rate Loans (the “Affected Loans”) shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (iv) the Affected Loans shall automatically convert into Base Rate Loans without reference to the Adjusted Term SOFR Rate (or other then-current Benchmark) component of the Base Rate on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Term SOFR Rate Loan then being requested by the Borrowers pursuant to a Funding Notice or a Conversion/Continuation Notice, the Borrowers shall have the option, subject to the provisions of Section 2.17.1, to rescind such Funding Notice or Conversion/Continuation Notice as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to the Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission the Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this Section 2.17.2(a) shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or
to convert Loans to, Term SOFR Rate Loans in accordance with the terms hereof. If a Benchmark Illegality/Impracticability Event occurs but only with respect to limited, but not all, tenors of the then applicable term rate Benchmark (including Term SOFR), then (x) the Administrative Agent may modify the definition of “Interest Period” (or any similar or analogous definition) for any Benchmark settings at or after such time to remove such illegal or impracticable tenor and (y) if a tenor that was removed pursuant to clause (x) of this sentence is not, or is no longer, subject to a Benchmark Illegality/Impracticability Event, then the Administrative Agent may modify the definition of “Interest Period” (or any similar or analogous definition) for all Benchmark settings at or after such time to reinstate such previously removed tenor.
(b) Notwithstanding anything to the contrary in this Agreement or any other Credit Document, if the Administrative Agent determines (which determination shall be conclusive absent manifest error), or the Required Lenders (individually or jointly) notify the Administrative Agent (with, in the case of the Required Lenders, a copy to the Borrowers) that the Required Lenders (as applicable) have determined, that a Benchmark Illegality/Impracticability Event has occurred, then, on a date and time determined by the Administrative Agent (any such date, the “Benchmark Replacement Date”), which date shall be at the end of an Interest Period or on the relevant Interest Payment Date, as applicable, for interest calculated, the then current Benchmark will be replaced hereunder and under any other Credit Document with the alternative set forth in clause (a) of the definition of “Benchmark Replacement”.
Notwithstanding anything to the contrary in this Agreement or any other Credit Document, (x) if the Administrative Agent determines that the alternative set forth in clause (a) of the definition of “Benchmark Replacement” is not available on or prior to the Benchmark Replacement Date or (y) a Benchmark Illegality/Impracticability Event has occurred with respect to the non-Term SOFR Benchmark Replacement then in effect, then in each case, the Administrative Agent and the Borrowers may amend this Agreement solely for the purpose of replacing Term SOFR or any then current Benchmark Replacement in accordance with this Section 2.17 at the end of any Interest Period, relevant Interest Payment Date or payment period for interest calculated, as applicable, with another alternate benchmark rate giving due consideration to any evolving or then existing convention for similar Dollar denominated syndicated credit facilities for such alternative benchmarks and, in each case, including any mathematical or other adjustments to such benchmark giving due consideration to any evolving or then existing convention for similar Dollar denominated syndicated credit facilities for such benchmarks, which adjustment or method for calculating such adjustment shall be published on an information service as selected by the Administrative Agent from time to time in its reasonable discretion and may be periodically updated. For the avoidance of doubt, any such proposed rate and adjustments shall constitute a Benchmark Replacement. Any such amendment shall become effective at 5:00 p.m. (New York City time) on the fifth (5th) Business Day after the date the Administrative Agent shall have posted such proposed amendment to all Lenders and the Borrowers without any amendment to, or further action or consent of any other party to, this Agreement or any other Credit Document so long as the Administrative Agent has not received, by such
time, written notice of objection to such Benchmark Replacement from Lenders comprising the Required Lenders.
The Administrative Agent will notify (in one or more notices) the Borrowers and each Lender of the implementation of any Benchmark Replacement.
Any Benchmark Replacement shall be applied in a manner consistent with market practice; provided, that, to the extent such market practice is not administratively feasible for the Administrative Agent, such Benchmark Replacement shall be applied in a manner as otherwise reasonably determined by the Administrative Agent. It is understood and agreed that interest shall be payable with respect to each Loan bearing interest at the Adjusted Daily Simple SOFR Rate on the last Business Day of each calendar quarter and the Revolving Commitment Termination Date.
In connection with the implementation of a Benchmark Replacement, the Administrative Agent will have the right to make Benchmark Conforming Changes from time to time and, notwithstanding anything to the contrary herein or in any other Credit Document, any amendments implementing such Benchmark Conforming Changes will become effective without any further action or consent of any other party to this Agreement; provided, that, with respect to any such amendment effected, the Administrative Agent shall post each such amendment implementing such Benchmark Conforming Changes to the Borrowers and the Lenders reasonably promptly after such amendment becomes effective.
Any determination, decision or election that may be made by the Administrative Agent or, if applicable, any Lender (or group of Lenders) pursuant to this Section 2.17.2(b), including any determination with respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or refrain from taking any action or any selection, will be conclusive and binding absent manifest error and may be made in its or their sole discretion and without consent from any other party to this Agreement or any other Credit Document, except, in each case, as expressly required pursuant to this Section 2.17.2(b).
2.17.3 Compensation for Breakage or Non Commencement of Interest Periods. The Borrowers shall compensate each Lender, upon written request by such Lender (which request shall set forth the basis for requesting such amounts), for all reasonable out-of-pocket losses, expenses and liabilities (including any interest paid or calculated to be due and payable by such Lender to lenders of funds borrowed by it to make or carry its Term SOFR Rate Loans and any loss, expense or liability sustained by such Lender in connection with the liquidation or re-employment of such funds but excluding loss of anticipated profits) which such Lender sustains: (i) if for any reason (other than a default by such Lender) a borrowing of any Term SOFR Rate Loans does not occur on a date specified therefor in a Funding Notice or a telephonic request for borrowing, or a conversion to or continuation of any Term SOFR Rate Loans does not occur on a date specified therefor in a Conversion/Continuation Notice or a telephonic request for conversion or continuation, (ii) if any prepayment or other principal payment of, or any conversion of, any of its Term SOFR Rate Loans occurs on any day other than the last day of an Interest Period applicable to that Loan (whether voluntary, mandatory, automatic, by reason
of acceleration, or otherwise), including as a result of an assignment in connection with the replacement of a Lender pursuant to Section 2.20.2; or (iii) if any prepayment of any of its Term SOFR Rate Loans is not made on any date specified in a notice of prepayment given by the Borrowers.
2.17.4 Booking of Term SOFR Rate Loans. Any Lender may make, carry or transfer Term SOFR Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of such Lender; provided that any such action does not result in any increased costs to the Borrowers under this Section 2.17 or otherwise.
2.17.5 [Reserved].
2.17.6 Certificates for Reimbursement. A certificate of a Lender setting forth in reasonable detail the amount or amounts necessary to compensate such Lender, as specified in Section 2.17.3 and the circumstances giving rise thereto shall be delivered to the Borrowers and shall be conclusive absent manifest error. In the absence of any such manifest error, the Borrowers shall pay such Lender or such Issuing Bank, as the case may be, the amount shown as due on any such certificate within ten (10) Business Days after receipt thereof.
2.17.7 Delay in Requests. The Borrowers shall not be required to compensate a Lender pursuant to this Section for any such amounts incurred more than six (6) months prior to the date that such Lender delivers to the Borrowers the certificate referenced in Section 2.17.6.
2.18. Increased Costs.
2.18.1 Increased Costs Generally. If any Change in Law shall:
(a) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender or any Issuing Bank;
(b) subject any Recipient to any Taxes (other than (i) Indemnified Taxes, (ii) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (iii) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or
(c) impose on any Lender or any Issuing Bank any other condition, cost or expense (other than Taxes) affecting this Agreement or Loans made by such Lender or any Letter of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such Lender or such other Recipient of making, converting to, continuing or maintaining any Loan or of maintaining its obligation to make any such Loan, or to increase the cost to such Lender, Issuing Bank or other Recipient of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by such Lender, Issuing Bank or other Recipient hereunder (whether of
principal, interest or any other amount) then, upon request of such Lender, Issuing Bank or other Recipient, the Borrowers will pay to such Lender, Issuing Bank or other Recipient, as the case may be, such additional amount or amounts as will compensate such Lender, Issuing Bank or other Recipient, as the case may be, for such additional costs incurred or reduction suffered; provided that each Lender, Issuing Bank and other Recipient shall only exercise its rights under this Section 2.18.1 if and to the extent that it exercises any similar rights it may have under other similar transactions to which it is a party.
2.18.2 Capital Requirements. If any Lender, any Issuing Bank or the Swingline Lender (for purposes of this Section 2.18.2, may be referred to collectively as “the Lenders” or a “Lender”) determines that any Change in Law affecting such Lender or any lending office of such Lender or such Lender’s holding company, if any, regarding capital or liquidity ratios or requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement, the commitments of such Lender hereunder or the Loans made by, or participations in Letters of Credit and Swingline Loans held by, such Lender, or the Letters of Credit issued by such Issuing Bank, to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy), then from time to time the Borrowers will pay to such Lender, as the case may be, such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered; provided that each Lender shall only exercise its rights under this Section 2.18.2 if and to the extent that it exercises any similar rights it may have under other similar transactions to which it is a party.
2.18.3 Certificates for Reimbursement. A certificate of a Lender or an Issuing Bank setting forth in reasonable detail the amount or amounts necessary to compensate such Lender or such Issuing Bank or its holding company, as the case may be, as specified in Section 2.18.1 and 2.18.2 and the circumstances giving rise thereto shall be delivered to the Borrowers and shall be conclusive absent manifest error. In the absence of any such manifest error, the Borrowers shall pay such Lender or such Issuing Bank, as the case may be, the amount shown as due on any such certificate within ten (10) Business Days after receipt thereof.
2.18.4 Delay in Requests. Failure or delay on the part of any Lender or any Issuing Bank to demand compensation pursuant to this Section 2.18 shall not constitute a waiver of such Lender’s or such Issuing Bank’s right to demand such compensation, provided that the Borrowers shall not be required to compensate a Lender or an Issuing Bank pursuant to this Section for any increased costs incurred or reductions suffered more than six (6) months prior to the date that such Lender or such Issuing Bank, as the case may be, delivers to the Borrowers the certificate referenced in Section 2.18.3 and notifies the Borrowers of such Lender’s or such Issuing Bank’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof).
2.19. Taxes.
2.19.1 Issuing Bank. For purposes of this Section 2.19, the term “Lender” shall include any Issuing Bank and the term “applicable law” includes FATCA.
2.19.2 Payments Free of Taxes; Obligation to Withhold; Payments on Account of Taxes. Any and all payments by or on account of any obligation of any Borrower hereunder or under any other Credit Document shall to the extent permitted by applicable Law be made free and clear of and without reduction or withholding for any Taxes. If, however, applicable Law (as determined in the good faith discretion of an applicable Withholding Agent) requires an applicable Withholding Agent to withhold or deduct any Tax, then (A) the applicable Withholding Agent shall withhold or make such deductions as are determined by the applicable Withholding Agent to be required based upon the information and documentation it has received pursuant to Section 2.19.6 below, (B) the applicable Withholding Agent shall timely pay the full amount withheld or deducted to the relevant Governmental Authority in accordance with applicable Law, and (C) to the extent that the withholding or deduction is made on account of Indemnified Taxes or Other Taxes, the sum payable by such Borrower shall be increased as necessary so that after any required withholding or the making of all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender, as the case may be, receives an amount equal to the sum it would have received had no such withholding or deduction been made.
2.19.3 Payment of Other Taxes by the Borrowers. Without limiting the provisions of Section 2.19.2 above, each of the Borrowers shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable Law.
2.19.4 Tax Indemnification.
(a) Without limiting the provisions of Section 2.19.2 or 2.19.3 above, each of the Borrowers shall, and does hereby, indemnify each Recipient, and shall make payment in respect thereof within ten (10) Business Days after demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) payable or paid by such Recipient or required to be withheld or deducted from a payment to such Recipient, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of any such payment or liability delivered to such Borrower by a Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error.
(b) Without limiting the provisions of Section 2.19.2 or 2.19.3, each Lender shall, and does hereby, indemnify the Administrative Agent, and shall make payment in respect thereof within ten (10) Business Days after demand therefor, for (i) Indemnified Taxes attributable to such Lender (but only to the extent that the Borrowers has not already indemnified the Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Borrowers to do so), (ii) any Taxes attributable to such
Lender’s failure to comply with the provisions of Section 9.4.4 relating to the maintenance of a Participant Register, and (iii) any Excluded Taxes attributable to such Lender, in each case that are payable or paid by the Administrative Agent in connection with any Credit Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Government Authority. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorize the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender or the Issuing Lender, as the case may be, under this Agreement or any other Credit Document against any amount due to the Administrative Agent under this subparagraph (b). The agreements in this subparagraph (b) shall survive the resignation and/or replacement of, a Lender, any assignment of rights by, or the replacement of, a Lender, the termination of the commitments hereunder and the repayment, satisfaction or discharge of all other Obligations.
2.19.5 Evidence of Payments. As soon as practicable after any payment of Taxes by a Borrower to a Governmental Authority as provided in this Section, such Borrower shall deliver to the Administrative Agent the original or a certified copy of any receipt issued by such Governmental Authority evidencing such payment, a copy of any return required by law to report such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent, as the case may be.
2.19.6 Status of Lenders; Tax Documentation.
(a) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Credit Document shall deliver to the Borrowers and the Administrative Agent, at the time or times reasonably requested by the Borrowers or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrowers or the Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrowers or the Administrative Agent, shall deliver such other documentation prescribed by applicable Law or reasonably requested by the Borrowers or the Administrative Agent as will enable the Borrowers or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in subparagraphs (b)(i), (b)(ii) and (b)(iv) below) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.
(b) Without limiting the generality of the foregoing,
(i) any Lender that is a US Person shall deliver to the Borrowers and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this
Agreement (and from time to time thereafter upon the reasonable request of the Borrowers or the Administrative Agent), executed originals of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;
(ii) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrowers and the Administrative Agent (in such number of copies as shall be requested by the Recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrowers or the Administrative Agent), whichever of the following is applicable:
(1) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (A) with respect to payments of interest under any Credit Document, executed originals of IRS Form W-8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (B) with respect to any other applicable payments under any Credit Document, IRS Form W-8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income” article of such tax treaty;
(2) executed originals of IRS Form W-8ECI;
(3) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (A) a certificate substantially in the form of Exhibit 2.19.6 to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Borrowers within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “U.S. Tax Compliance Certificate”) and (B) executed originals of IRS Form W-8BEN-E; or
(4) to the extent a Foreign Lender is not the beneficial owner, executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN-E, a U.S. Tax Compliance Certificate, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate on behalf of each such direct and indirect partner;
(iii) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrowers and the Administrative Agent (in such number of copies as shall be requested by the Recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrowers or the Administrative Agent), executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by
applicable law to permit the Borrowers or the Administrative Agent to determine the withholding or deduction required to be made; and
(iv) if a payment made to a Lender under any Credit Document would be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrowers and the Administrative Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrowers or the Administrative Agent such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrowers or the Administrative Agent as may be necessary for the Borrowers and the Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this subparagraph (iv), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.
Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrowers and the Administrative Agent in writing of its legal inability to do so.
2.19.7 Treatment of Certain Refunds. Unless required by applicable Law, at no time shall the Administrative Agent have any obligation to file for or otherwise pursue on behalf of a Lender, or have any obligation to pay to any Lender, any refund of Taxes withheld or deducted from funds paid for the account of such Lender. If any Recipient determines that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by any Borrower or with respect to which any Borrower has paid additional amounts pursuant to this Section, it shall pay to the Borrowers an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by any Borrower under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses incurred by such Recipient and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that each of the Borrowers, upon the request of the Recipient, agrees to repay the amount paid over to such Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Recipient in the event the Recipient is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this Section 2.19.7, in no event will the Recipient be required to pay any amount to such Borrower pursuant to this Section 2.19.7 the payment of which would place the Recipient in a less favorable net after-Tax position than the Recipient would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld, or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This subsection shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes that it deems confidential) to any Borrower or any other Person.
2.19.8 Survival. Each party’s obligations under this Section 2.19 shall survive the resignation or replacement of the Administrative Agent or any assignment of rights by, or the
replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all obligations under any Credit Document.
2.20. Mitigation Obligations; Designation of a Different Lending Office.
2.20.1 Designation of a Different Lending Office. If any Lender requests compensation under Section 2.18, or requires the Borrowers to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.19, then such Lender shall (at the request of the Borrowers) use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.18 or 2.19, as the case may be, in the future, and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrowers hereby agree to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
2.20.2 Replacement of Lenders. If (i) any Lender requests compensation under Section 2.18, (ii) the Borrowers are required to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.19 and, in each case, such Lender has declined or is unable to designate a different lending office in accordance with Section 2.20.1, (iii) any Lender is a Defaulting Lender or a Non-Consenting Lender or any Lender gives notice of an inability to fund Term SOFR Rate Loans under Section 2.17.2 or (iv) any Lender is a Non-Extending Lender pursuant to Section 2.22.2, then the Borrowers may, at their sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 9.2), all of its interests, rights (other than its existing rights to payments pursuant to Section 2.18 or Section 2.19) and obligations under this Agreement and the related Credit Documents to an Eligible Assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that:
(a) the Borrowers shall have paid to the Administrative Agent the assignment fee (if any) specified in Article 9;
(b) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in Letter of Credit Borrowings, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Credit Documents (including any amounts under Section 2.17) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts);
(c) in the case of any such assignment resulting from a claim for compensation under Section 2.18 or payments required to be made pursuant to Section 2.19, such assignment will result in a reduction in such compensation or payments thereafter;
(d) such assignment does not conflict with applicable Law;
(e) in the case of any such assignment resulting from a Lender becoming a Non-Consenting Lender, the applicable assignee shall have consented to the applicable amendment, waiver or consent; provided, that, the failure by such Non-Consenting Lender, as applicable, to execute and deliver an Assignment and Assumption shall not impair the validity of the removal of such Non-Consenting Lender, and the mandatory assignment of such Non-Consenting Lender’s interests, rights and obligations as described pursuant to this Section 2.20.2 shall nevertheless be effective without the execution by such Non-Consenting Lender of an Assignment and Assumption; and
(f) in the case of any such assignment resulting from a Non-Extending Lender’s failure to consent to a proposed extension of the Revolving Commitment Termination Date pursuant to Section 2.22, the applicable assignee consents to the proposed extension; provided, that, the failure by such Non-Extending Lender, as applicable, to execute and deliver an Assignment and Assumption shall not impair the validity of the removal of such Non-Extending Lender, and the mandatory assignment of such Non-Extending Lender’s interests, rights and obligations as described pursuant to this Section 2.20.2 shall nevertheless be effective without the execution by such Non-Extending Lender of an Assignment and Assumption.
A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrowers to require such assignment and delegation cease to apply.
2.21. Maximum PLICO Liability Amount. Notwithstanding anything to the contrary set forth elsewhere in this Agreement or any Credit Document, the liability of PLICO to the Administrative Agent, Issuing Banks and Lenders under this Agreement and the other Credit Documents shall be several and not joint with the liability of PLC under this Agreement and the other Credit Documents and shall not exceed the aggregate amount of the Loans (including principal, interest, fees and expenses) borrowed by, or the portion of Letters of Credit issued for the account of PLICO in accordance with the provisions of Section 2.1 (in the case of Revolving Loans), Section 2.3 (in the case of Letters of Credit) or Section 2.2 (in the case of Swingline Loans) or the portion of expenses and indemnification obligations directly attributable to PLICO (or to the Loans borrowed by PLICO or the Letters of Credit issued for the account of PLICO) in accordance with the provisions of Section 10.26.1 (in the case of expenses) or Section 10.26.2 (in the case of indemnification obligations); provided, however PLC shall be liable for the full amount of the Obligations (including those portions of Loans borrowed by PLICO, the portion of Letters of Credit issued for the account of PLICO and the portion of expenses and indemnification obligations directly attributable to PLICO (or to the Loans borrowed by PLICO or the Letters of Credit issued for the account of PLICO)) without limitation. If there is any doubt or uncertainty as to the Borrower for whose benefit a Loan has been received or used, such Loan shall be deemed to have been received by and used by or for the benefit of PLC. If there is any doubt or uncertainty as to the Borrower for whose benefit a Letter of Credit has been issued, such Letter of Credit shall be deemed to have been issued for the account of PLC and such Letter of Credit Obligations attributable to such Letter of Credit shall be attributed to PLC. If there is any doubt or uncertainty as to which Borrower is required to pay expenses or indemnification
obligations under this Agreement, such requirement to pay expenses or indemnification obligations shall be deemed to be the obligations of PLC.
2.22. Extension of Revolving Commitment Termination Date.
2.22.1 Request for Extension. The Borrowers may, by written notice to the Administrative Agent (who shall promptly notify the Lenders) given not more than ninety (90) calendar days and not less than thirty (30) calendar days prior to any anniversary of the Closing Date, request that each Lender extend the Revolving Commitment Termination Date for an additional one (1) year from the then existing Revolving Commitment Termination Date; provided, that, (a) the Borrowers shall only be permitted to exercise the extension option set forth in this Section 2.22 up to two (2) times during the term of this Agreement, and (b) in no case shall the Revolving Commitment Termination Date, as extended pursuant to this Section 2.22, exceed the date that is five (5) years from any then current date.
2.22.2 Lenders’ Election to Extend. Each Lender, acting in its sole and individual discretion, shall, by notice to the Administrative Agent given by not later than fifteen (15) calendar days following the date of receipt of notice of such request described in the foregoing Section 2.22.1 from the Administrative Agent (the “Notice Date”), advise the Administrative Agent in writing whether or not such Lender agrees to such extension (and each Lender that determines not to so extend its Revolving Commitment Termination Date (each, a “Non-Extending Lender”, and collectively the “Non-Extending Lenders”) and shall notify the Administrative Agent of such fact promptly after such determination (but, in any event, by no later than the Notice Date)) and any Lender that does not so advise the Administrative Agent on or before the Notice Date shall be deemed to be a Non-Extending Lender. The election of any Lender to agree to such extension shall not obligate any other Lender to so agree.
2.22.3 Notification by Administrative Agent. The Administrative Agent shall notify the Borrowers of each Lender’s determination under this Section 2.22 promptly and, in any event, by no later than the date that is seventeen (17) calendar days after the Notice Date (or, if such date is not a Business Day, on the next preceding Business Day).
2.22.4 Additional Commitment Lenders. The Borrowers shall have the right, on or before the applicable anniversary of the Closing Date, to replace each Non Extending Lender with, and add as “Lenders” under this Agreement in place thereof, one (1) or more Eligible Assignees (each, an “Additional Commitment Lender”) as provided in Section 2.20.2, each of which Additional Commitment Lenders shall have entered into an Assignment and Assumption, pursuant to which such Additional Commitment Lender shall undertake a Revolving Commitment (and, if any such Additional Commitment Lender is already a Lender, its Revolving Commitment shall be in addition to such Lender’s Revolving Commitment hereunder on such date).
2.22.5 Minimum Extension Requirement. If there exists any Non-Extending Lenders that are not being replaced by Additional Commitment Lenders, then the Borrowers shall (a) withdraw their extension request and the Revolving Commitment Termination Date will remain unchanged, or (b) solely if the Required Lenders (but, for the avoidance of doubt, not including any Additional Commitment Lenders) have agreed to such extension request (such Lenders
agreeing to such extension request, the “Approving Lenders”) by no later than the date that is twelve (12) calendar days prior to such anniversary of the Closing Date, the Borrowers may elect to extend the Revolving Commitment Termination Date solely as to the Approving Lenders and the Additional Commitment Lenders, with a reduced amount of Aggregate Revolving Commitments during such extension period being equal to the aggregate Revolving Commitments of the Approving Lenders and the Additional Commitment Lenders, taken together; it being understood that (i) the Revolving Commitment Termination Date relating to any Non-Extending Lenders that are not replaced by Additional Commitment Lenders shall not be extended, and the repayment of all of the Obligations owed to them, and the termination of their respective Revolving Commitments, shall occur on the already existing Revolving Commitment Termination Date, and (ii) the Revolving Commitment Termination Date relating to the Approving Lenders and the Additional Commitment Lenders, if any, shall be extended for an additional year, as applicable except that, if such date is not a Business Day, such Revolving Commitment Termination Date as so extended shall be the next preceding Business Day) and each Additional Commitment Lender shall thereupon become a “Lender” for all purposes of this Agreement.
2.22.6 Conditions to Effectiveness of Extensions. Notwithstanding anything to the contrary in the foregoing, any extension of the Revolving Commitment Termination Date pursuant to this Section 2.22 shall not be effective with respect to any Lender unless, on and as of the effective date of such extension:
(a) the conditions for a Borrowing provided in Sections 3.2.1, 3.2.2 and 3.2.3 shall be satisfied;
(b) the Administrative Agent shall have received a certificate, duly executed by an Authorized Officer of each Borrower, (i) certifying that, as of such effective date of such extension, the conditions in the foregoing clause (a) are satisfied and (ii) certifying and attaching the resolutions adopted by each Borrower approving or consenting to such extension; and
(c) the Borrowers shall prepay any Loans outstanding on such date (and pay any additional amounts required pursuant to Section 2.17.3) to the extent necessary to keep any such outstanding Loans ratable with any revised Revolving Commitment Percentages of the respective Lenders effective as of such date (after giving effect to such extension).
In addition, on the Revolving Commitment Termination Date of each Non-Extending Lender, the Borrowers shall prepay any Revolving Loans outstanding on such date (and pay any additional amounts required pursuant to Section 2.17.3) to the extent necessary to keep outstanding Revolving Loans ratable with any revised Revolving Commitment Percentages of the respective Lenders effective as of such date.
2.22.7 Amendment; Sharing of Payments. In connection with any extension of the Revolving Commitment Termination Date, the Borrowers, the Administrative Agent, each Additional Commitment Lender and Approving Lender may make such amendments to this Agreement as the Administrative Agent determines to be reasonably necessary to evidence the
extension. This Section 2.22.7 shall supersede any provisions in Section 2.14 or Section 10.3 to the contrary.
2.23. ESG Adjustments.
(a) Following the date on which PLC provides a Pricing Certificate in respect of the most recently ended calendar year, commencing with the calendar year ending December 31, 2022, (i) the Applicable Margin for Term SOFR Rate Loans and the Letter of Credit Fee in basis points and the Applicable Margin for Base Rate Loans in basis points otherwise then applicable in accordance with the pricing grid set forth in the definition of Applicable Margin in Section 1.1 of this Agreement each shall be increased or decreased (or neither increased nor decreased), as applicable, pursuant to the ESG Rate Adjustment as set forth in such Pricing Certificate and (ii) the Applicable Margin for the Facility Fee Rate in basis points otherwise then applicable in accordance with the pricing grid set forth in the definition of Applicable Margin in Section 1.1 of this Agreement shall be increased or decreased (or neither increased nor decreased), as applicable, pursuant to the ESG Fee Adjustment as set forth in such Pricing Certificate. For purposes of the foregoing, (A) each of the ESG Rate Adjustment and the ESG Fee Adjustment shall be determined as of the fifth (5th) Business Day following receipt by the Administrative Agent of a Pricing Certificate delivered pursuant to Section 5.1(xiv) based upon the KPI Metrics set forth in such Pricing Certificate and the calculations of the Applicable Margin for Term SOFR Rate Loans and the Letter of Credit Fee in basis points and the Applicable Margin for Base Rate Loans in basis points and the Applicable Margin for the Facility Fee Rate in basis points calculations, as applicable, therein (such day, the “ESG Pricing Adjustment Date”) and (B) each change in the Applicable Margin for Term SOFR Rate Loans and the Letter of Credit Fee in basis points and the Applicable Margin for Base Rate Loans in basis points and the Applicable Margin for the Facility Fee Rate in basis points resulting from a Pricing Certificate shall be effective during the period commencing on and including the applicable ESG Pricing Adjustment Date and ending on the date immediately preceding the next such ESG Pricing Adjustment Date (or, in the case of non-delivery of a Pricing Certificate, the last day such Pricing Certificate could have been delivered pursuant to the terms of Section 5.1(xiv)).
(b) For the avoidance of doubt, only one Pricing Certificate may be delivered in respect of any calendar year. It is further understood and agreed that the Applicable Margin for Term SOFR Rate Loans and the Letter of Credit Fee in basis points and the Applicable Margin for Base Rate Loans in basis points will never be reduced or increased by more than 5.0 basis points and the Applicable Margin for the Facility Fee Rate in basis points will never be reduced or increased by more than 1 basis point, in each case pursuant to the ESG Rate Adjustment or the ESG Fee Adjustment, as applicable, during any calendar year. For the avoidance of doubt, any adjustment to the Applicable Margin for Term SOFR Rate Loans and the Letter of Credit Fee in basis points and the Applicable Margin for Base Rate Loans in basis points or Applicable Margin for the Facility Fee Rate in basis points by reason of meeting one or several KPI Metrics in any year shall not be cumulative year-over-year. Each applicable adjustment shall only apply until the date on which the next adjustment is due to take place.
(c) It is hereby understood and agreed that if no such Pricing Certificate is delivered by PLC within the period set forth in to Section 5.1(xiv), the ESG Rate Adjustment will be plus 5.0 basis points and the ESG Fee Adjustment will be plus 1.0 basis point commencing on the last day such Pricing Certificate could have been
delivered pursuant to the terms of to Section 5.1(xiv) and continuing until PLC delivers a Pricing Certificate to the Administrative Agent.
(d) If (i)(A) PLC or any Lender becomes aware of any material inaccuracy in the ESG Rate Adjustment, the ESG Fee Adjustment or the KPI Metrics as reported in a Pricing Certificate (any such material inaccuracy, a “Pricing Certificate Inaccuracy”) and, in the case of any Lender, such Lender delivers, not later than ten (10) Business Days after obtaining knowledge thereof, a written notice to the Administrative Agent describing such Pricing Certificate Inaccuracy in reasonable detail (which description shall be shared with each Lender and PLC), or (B) PLC and the Lenders agree that there was a Pricing Certificate Inaccuracy at the time of delivery of a Pricing Certificate, and (ii) a proper calculation of the ESG Rate Adjustment, the ESG Fee Adjustment or the KPI Metrics would have resulted in an increase in the Applicable Margin for Term SOFR Rate Loans and the Letter of Credit Fee in basis points, the Applicable Margin for Base Rate Loans in basis points and/or the Applicable Margin for the Facility Fee Rate in basis points for any period, PLC shall be obligated to pay to the Administrative Agent for the account of the applicable Lenders or the applicable Issuing Banks, as the case may be, promptly on demand by the Administrative Agent (or, after the occurrence of an actual or deemed entry of an order for relief with respect to any Borrower under the Bankruptcy Code (or any comparable event under other applicable Debtor Relief Laws), automatically and without further action by the Administrative Agent, any Lender or any Issuing Bank), but in any event within ten (10) Business Days after PLC has received written notice of, or has agreed in writing that there was, a Pricing Certificate Inaccuracy (whichever is earlier), an amount equal to the excess of (1) the amount of interest and fees that should have been paid for such period over (2) the amount of interest and fees actually paid for such period.
(e) It is understood and agreed that any Pricing Certificate Inaccuracy shall not constitute a Default or Event of Default; provided, that, PLC complies with the terms of this Section 2.23 with respect to such Pricing Certificate Inaccuracy. Notwithstanding anything to the contrary herein, unless such amounts shall be due upon the occurrence of an actual or deemed entry of an order for relief with respect to any Borrower under the Bankruptcy Code (or any comparable event under other applicable Debtor Relief Laws), (a) any additional amounts required to be paid pursuant the immediate preceding paragraph shall not be due and payable until a written demand is made for such payment by the Administrative Agent in accordance with such paragraph, (b) any nonpayment of such additional amounts prior to or upon such demand for payment by Administrative Agent shall not constitute a Default or Event of Default (whether retroactively or otherwise) unless not paid within ten (10) Business Days after such demand and (c) none of such additional amounts shall be deemed overdue prior to such a demand or shall accrue interest at the Default Rate prior to such a demand.
(f) Notwithstanding anything to the contrary in this Section 2.23 or in any other provision of any other Credit Document, ESG Rate Adjustments shall not be given effect to the extent that such ESG Rate Adjustments would cause the Applicable Margin for Base Rate Loans to be less than 0.0 bps.
(g) Each party hereto hereby agrees that neither the Administrative Agent nor any Sustainability Structuring Agent shall have any responsibility for (or liability in respect of) reviewing, auditing or otherwise evaluating any calculation by PLC of any ESG Fee Adjustment or any ESG Rate Adjustment (or any of the data or computations that are part of or related to any such calculation) set forth in any Pricing Certificate (and the Administrative Agent may rely conclusively on any such certificate, without further inquiry).
ARTICLE III
CONDITIONS PRECEDENT
3.1. Initial Advance. This Agreement shall not be effective and the Lenders shall not be required to make the initial Credit Extension hereunder and the Issuing Banks shall not issue any Letters of Credit unless the following conditions precedent have been satisfied:
3.1.1 Credit Documents. The Administrative Agent shall have received executed counterparts of this Agreement, the Notes made by the Borrowers payable to the order of the respective Lenders in the maximum principal amounts of the Lenders' respective Commitments, the Swingline Note and the remaining Credit Documents.
3.1.2 Charter Documents. The Administrative Agent shall have received copies of articles of incorporation, certificate of organization or formation, or other like document for each of the Borrowers certified as of a recent date by the appropriate Governmental Authority.
3.1.3 Organizational Documents Certificate. The Administrative Agent shall have received (i) copies of bylaws, operating agreement, partnership agreement or like document, (ii) copies of resolutions approving the transactions contemplated in connection with the financing and authorizing execution and delivery of the Credit Documents, and (iii) incumbency certificates, for each of the Borrowers, in each case certified by an Authorized Officer in form and substance reasonably satisfactory to the Administrative Agent.
3.1.4 Certificates of Good Standing. The Administrative Agent shall have received certificates of good standing or existence, as applicable, dated no more than 60 days prior to the Closing Date, issued as to the Borrowers by the Secretaries of State for the states of their incorporation.
3.1.5 Foreign Qualification. The Administrative Agent shall have received Certificates of Qualification dated no more than 60 days prior to the Closing Date issued by the Secretary of State for the state of Alabama.
3.1.6 Closing Certificate. The Administrative Agent shall have received a certificate from an Authorized Officer of the Borrowers, in form and substance reasonably satisfactory to the Administrative Agent and the Required Lenders, confirming, among other things, (A) all consents, approvals, authorizations, registrations, or filings required to be made or obtained by the Borrowers, if any, in connection with this Agreement and the other Credit Documents and
the transactions contemplated herein and therein have been obtained and are in full force and effect, (B) no investigation or inquiry by any Governmental Authority regarding this Agreement and the other Credit Documents and the transactions contemplated herein and therein is ongoing, (C) since December 31, 2021, there has been no event or circumstance which could be reasonably expected to have a Material Adverse Effect, (D) the most-recent annual audited financial statements of each Borrower were prepared in accordance with GAAP (consistently applied, except as noted therein, and fairly presents in all material respects the financial condition and results from operations of such Borrower and its Subsidiaries, (E) the Borrowers and their Subsidiaries, taken as a whole, are Solvent after giving effect to the transactions contemplated hereby and the incurrence of Indebtedness related thereto and (F) the conditions set forth in Sections 3.2.1 and 3.2.2 are satisfied as of the Closing Date.
3.1.7 UCC Searches. The Administrative Agent shall have received UCC search reports on the Borrowers from such jurisdictions and filing offices as the Lenders and the Administrative Agent may reasonably require dated no more than 60 days prior to the Closing Date.
3.1.8 Funding of Fees/Expenses. Payment of all expenses and fees due in connection with the closing of the Loans in immediately available funds.
3.1.9 Financial Information. The Administrative Agent shall have received copies of (A) the unaudited, internally prepared quarterly financial statements of each Borrower prepared in accordance with GAAP for the fiscal quarter ending on December 31, 2021, (B) the audited financial statements of each Borrower prepared in accordance with GAAP for the fiscal year ending December 31, 2021 and (C) such other financial information as the Administrative Agent may reasonably request.
3.1.10 Opinion. The Administrative Agent shall have received a written opinion of the Borrowers' counsel, addressed to the Lenders in form and substance satisfactory to the Administrative Agent.
3.1.11 Funding Indemnity Letter. To the extent that any Term SOFR Rate Loans will be made on the Closing Date, the Administrative Agent shall have received a funding indemnity letter, in form and content reasonably satisfactory to the Administrative Agent, not less than three (3) Business Days prior to the Closing Date.
3.1.12 Funding Notice; Funds Disbursement Instructions. The Administrative Agent shall have received (a) a duly executed Funding Notice with respect to the Credit Extensions to occur on the Closing Date and (b) duly executed disbursement instructions (with wiring instructions and account information) for all disbursements to be made on the Closing Date.
3.1.13 Refinancing of Existing Credit Agreement. All accrued interest and fees under the Existing Credit Agreement and all other obligations owed to lenders under the Existing Credit Agreement who are not Lenders hereunder, if any, shall have been paid in full (or will be paid in full substantially simultaneous with the Borrowing on the Closing Date).
3.1.14 Patriot Act; Anti-Money Laundering Laws. The Administrative Agent and the Lenders shall have received the documentation and other information reasonably requested by
the Administrative Agent and the Lenders in connection with applicable “know your customer” and anti-money-laundering rules and regulations, including the Patriot Act, in each case at least five (5) days prior to the Closing Date. At least five (5) days prior to the Closing Date, if any Borrower qualifies as a “legal entity customer” under the Beneficial Ownership Regulation, it shall deliver a certification regarding beneficial ownership of legal entity customers (the “Beneficial Ownership Certification”) in relation to such Borrower.
3.1.15 Other Documents. Such other documents as any Lender or its counsel may have reasonably requested.
For purposes of determining compliance with the conditions specified in this Section 3.1, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.
3.2. Each Credit Extension. The Lenders shall not be required to make or continue any Loan or the Issuing Banks shall not be required to issue, increase, amend, extend or renew any Letter of Credit, unless on the applicable borrowing date or date of continuation or date of issuance:
3.2.1 No Default. There exists no Default or Unmatured Default and no Default or Unmatured Default would result therefrom.
3.2.2 Warranties. The representations and warranties contained in Article IV (other than Section 4.5) are true and correct as of such borrowing date or date of continuation, except for (i) those representations and warranties that were made as of a specified earlier date, which representations and warranties shall have been true and correct as of such earlier specified date, and (ii) changes in facts or circumstances that have previously been disclosed in writing to the Administrative Agent and the Lenders and do not constitute a Default or Unmatured Default that has not otherwise been waived or cured pursuant to the requirements set forth in this Agreement.
3.2.3 Covenants. All covenants made in the Credit Documents must have been complied with and shall have been complied with taking into account the funding of the requested Loan or the issuance of the requested Letter of Credit, except for any non-compliance that does not constitute a Default or Unmatured Default that has not otherwise been waived or cured pursuant to the requirements set forth in this Agreement.
3.2.4 Funding Notice. The Administrative Agent shall have received a fully executed and delivered Funding Notice, together with the documentation and certifications required therein with respect to each Credit Extension. Any Lender may require a duly completed Compliance Certificate as a condition to making or continuing a Loan or the issuance, increase, amendment, extension or renewal of any Letter of Credit by any Issuing Bank.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrowers represent and warrant to the Lenders and the Administrative Agent that:
4.1. Corporate Existence and Standing. Each of the Borrowers and its Significant Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted.
4.2. Authorization and Validity. The Borrowers have the corporate power and authority and legal right to execute and deliver the Credit Documents and to perform their obligations thereunder. The execution and delivery by the Borrowers of the Credit Documents and the performance of their obligations thereunder have been duly authorized by proper corporate proceedings, and the Credit Documents constitute legal, valid and binding obligations of the Borrowers enforceable against the Borrowers in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally.
4.3. No Conflict; Government Consent. Neither the execution and delivery by the Borrowers of the Credit Documents, nor the consummation of the transactions provided for therein, nor compliance with the provisions thereof, will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrowers or any of their Significant Subsidiaries or the Borrowers' or any of their Significant Subsidiaries' certificate or articles of incorporation or by-laws or the provisions of any indenture, instrument or agreement to which the Borrowers or any of their Significant Subsidiaries are parties or are subject, or by which they, or their Property, are bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the Property of the Borrowers or any of their Significant Subsidiaries pursuant to the terms of any such indenture, instrument or agreement, other than such violations, conflicts or defaults which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. No order, consent, notice, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any Governmental Authority is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, any of the Credit Documents, except such as would not have a Material Adverse Effect.
4.4. Financial Statements. The December 31, 2021 consolidated financial statements of PLC and its Subsidiaries heretofore delivered to the Lenders were prepared in accordance with GAAP in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of PLC and its Subsidiaries at such date and the consolidated results of their operations for the period then ended. The December 31, 2021 consolidated financial statements of PLICO and its Subsidiaries heretofore delivered to the Lenders were prepared in accordance with GAAP in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of PLICO and its Subsidiaries at such date and the consolidated results of the operations of PLICO and its Subsidiaries for the period then ended.
4.5. Material Adverse Change. Since December 31, 2021, there has been no change in the business, Property, prospects, condition (financial or otherwise) or results of operations of the Borrowers and their Significant Subsidiaries which would have a Material Adverse Effect.
4.6. Taxes. The Borrowers and their Significant Subsidiaries have filed all United States federal tax returns and all other tax returns required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrowers or any of their Significant Subsidiaries, except with respect to such tax returns or such taxes, if any, as are not material or are being contested in good faith and as to which, in the good faith judgment of the Borrowers, adequate reserves have been provided. To the best knowledge of the Borrowers, no tax liens have been filed with respect to any such taxes. The charges, accruals and reserves on the books of the Borrowers and their Significant Subsidiaries with respect to any taxes or other governmental charges are adequate in the good faith judgment of the Borrowers.
4.7. Litigation and Guaranteed Obligations. Except as disclosed on Schedule 4.7 hereto, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened in writing against or affecting the Borrowers or any of their Significant Subsidiaries which could reasonably be expected to have a Material Adverse Effect. The Borrowers have no material Guaranteed Obligations not provided for or disclosed in the financial statements referred to in Section 4.4.
4.8. List of Significant Subsidiaries. Schedule 4.8 hereto contains an accurate list of all of the now existing Significant Subsidiaries of the Borrowers, setting forth their respective jurisdictions of incorporation and the percentage of their respective capital stock owned by the Borrowers or other Subsidiaries. All the issued and outstanding shares of capital stock of such Significant Subsidiaries have been duly authorized and issued and are fully paid and non-assessable.
4.9. ERISA. Each Plan complies in all material respects with all applicable requirements of law and regulations, and no ERISA Event has occurred or is reasonably expected to occur with respect to any Plan. No Insufficiency exists with respect to any Plan. Neither PLC nor any ERISA Affiliate is required to contribute to or has ever had a liability to a Multiemployer Plan. As of the Closing Date, no Borrower or any of its Subsidiaries are, and will not be, a Benefit Plan.
4.10. Accuracy of Information.
(a) No information, exhibit or report furnished by the Borrowers or any of their Significant Subsidiaries to the Administrative Agent or any Lender in connection with the negotiation of, or compliance with, the Credit Documents contained any material misstatement of fact or purposely omitted to state a material fact.
(b) The information included in the Beneficial Ownership Certification is true and correct in all respects.
4.11. Regulation U. No Borrower or Significant Subsidiary is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U issued by the Board). No proceeds of any Loan will be used to purchase or carry any margin stock (within the meaning of Regulation U issued by the Board) in violation of applicable Law, including, without limitation, Regulation U issued by the Board.
4.12. Material Agreements. Neither the Borrowers nor any Significant Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction that could reasonably be expected to have a Material Adverse Effect. Neither the Borrowers nor any Significant Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. Neither the Borrowers nor any Significant Subsidiary is in default in the performance, observance or fulfillment of any of the material obligations, covenants or conditions contained in any agreement or instrument evidencing or governing Indebtedness.
4.13. Compliance With Laws. The Borrowers and their Significant Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any Governmental Authority, having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property, except where the failure so to comply could not reasonably be expected to have a Material Adverse Effect. Neither the Borrowers nor any Significant Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable federal, state and local environmental, health and safety statutes and regulations or the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a Material Adverse Effect.
4.14. Investment Company Act. Neither the Borrowers nor any Significant Subsidiary thereof is subject to regulation as an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.
4.15. Solvency. Each Borrower and Significant Subsidiary is Solvent as of the date hereof and will remain Solvent upon the consummation of the transactions contemplated hereby.
4.16. Insurance Licenses. Each Significant Insurance Subsidiary holds active Licenses, and is authorized to transact insurance business, in each jurisdiction wherein it transacts any insurance business except where failure to do so could not reasonably be expected to have a Material Adverse Effect. No such License is the subject of a proceeding for suspension or revocation, there is no sustainable basis for such suspension or revocation, and to the Borrowers' knowledge no such suspension or revocation has been threatened by any Governmental Authority except where any such suspension or revocation could not reasonably be expected to have a Material Adverse Effect.
4.17. Ownership of Properties. On the Closing Date, the Borrowers and their Significant Subsidiaries have beneficial ownership of the property and assets reflected in the financial statements referred to in Section 4.4 as owned by them, free of all Liens other than Permitted Liens.
4.18. Anti-Terrorism Laws.
(a) No Borrower nor any of its Subsidiaries is an “enemy” or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act of the United States of America (50 U.S.C. App. §§ 1 et seq.), as amended. To its knowledge, no Borrower nor any of its Subsidiaries is in violation of (a) the Trading with the Enemy Act, as amended, (b) any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto or (c) the Patriot Act. No Borrower nor any of its Subsidiaries (i) is a blocked person described in Section 1 of the Anti-Terrorism Order or (ii) to the best of its knowledge, engages in any dealings or transactions, or is otherwise associated, with any such blocked person.
(b) None of the Borrowers or their Subsidiaries, or to the knowledge of the Borrowers based upon due diligence and personal background inquiries that are customarily performed by the Borrowers in the ordinary course of business, any Affiliates that are owned indirectly or directly by the Borrowers or their Subsidiaries is in violation of and shall not violate any of the country or list based economic and trade sanctions administered and enforced by OFAC that are described or referenced at http://www.ustreas.gov/offices/enforcement/ofac/ or as otherwise published from time to time.
(c) None of the Borrowers or their Subsidiaries or, to the knowledge of the Borrowers based upon due diligence and personal background inquiries that are customarily performed by the Borrowers in the ordinary course of business, any Affiliates that are owned indirectly or directly by the Borrowers or their Subsidiaries (i) is a Sanctioned Person or a Sanctioned Entity, (ii) has more than ten percent (10%) of its assets located in Sanctioned Entities, or (iii) derives more than ten percent (10%) of its operating income from investments in, or transactions with Sanctioned Persons or Sanctioned Entities. The proceeds of any Loan will not be used and have not been used to fund any operations in, finance any investments or activities in or make any payments to, a Sanctioned Person or a Sanctioned Entity.
(d) Each Borrower and its Subsidiaries, and, to the knowledge of each Borrower and its Subsidiaries, each of their respective directors, officers, employees and Affiliates, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects. Each Borrower and its Subsidiaries have implemented and maintains in effect policies and procedures designed to promote compliance by such Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions. None of the Borrowers or their respective Subsidiaries has made a payment, offering, or promise to pay, or authorized the payment of, money or anything of value (a) in order to assist in obtaining or retaining business for or with, or directing business to, any foreign official, foreign political party, party official or candidate for foreign political office, (b) to a foreign official, foreign political party or party official or any candidate for foreign political office, and (c) with the intent to induce the recipient to misuse his or her official position to direct business wrongfully to such Borrower or any of its Subsidiaries or to any other Person, in violation of any Anti-Corruption Law. None of the Borrowers or their Subsidiaries has used any part of the proceeds of any Credit Extensions in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Law.
(e) To the extent applicable, each Borrower and its Subsidiaries are in compliance with the Patriot Act.
(f) No Borrower is an Affected Financial Institution.
4.19. Default. No Unmatured Default or Default has occurred and is continuing.
ARTICLE V
COVENANTS
Each Borrower covenants and agrees that until the Obligations shall have been paid in full in cash or otherwise satisfied, and the Commitments hereunder shall have expired or been terminated, such Borrower shall perform, and, where specifically required, shall cause each of its Subsidiaries (or specified type of Subsidiary) to perform, the covenants as set forth in this Article V.
5.1. Financial Reporting. PLC will maintain, for itself and each Consolidated Subsidiary, a system of accounting established and administered in accordance with GAAP and (where applicable) SAP, and furnish to the Lenders:
(i) Within the later of (x) 95 days after the close of each of its fiscal years or (y) 5 days after the date such information is filed with the Securities and Exchange Commission or other relevant Governmental Authority, an unqualified audit report certified by nationally recognized independent certified public accountants, prepared in accordance with GAAP (or, where applicable, SAP) on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and the Consolidated Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows (solely with respect to the consolidated statements).
(ii) Within 50 days after the close of each quarterly period of each of its fiscal years, for itself and the Consolidated Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating profit and loss statements and a consolidated statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by the Chief Financial Officer, the Chief Accounting Officer, any Senior Vice President or Executive Vice President in the finance or accounting department.
(iii) Together with the financial statements required hereunder, a Compliance Certificate in substantially the form attached hereto at Exhibit B signed by the Chief Financial Officer, the Chief Accounting Officer, any Senior Vice President or Executive Vice President in the finance or accounting department of PLC showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof.
(iv) In the event an Insufficiency exists, within 270 days after the close of each fiscal year, a statement of the Insufficiency with respect to each Plan, certified as correct by an actuary enrolled under ERISA.
(v) Promptly upon the request of any of the Lenders, copies of all the most recent material reports and notices in connection with Plans that PLC or any Significant Subsidiary is required to file under ERISA with the Internal Revenue Service or the PBGC or the U.S. Department of Labor, or which PLC or any Significant Subsidiary receives from such Governmental Authorities.
(vi) As soon as possible and in any event within 10 days after receipt by the Borrowers, a copy of (a) any notice or claim to the effect that the Borrowers or any of their Significant Subsidiaries are or may be liable to any Person as a result of the release by the Borrowers, any of their Significant Subsidiaries or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrowers or any of their Significant Subsidiaries, which, in either case, could reasonably be expected to have a Material Adverse Effect.
(vii) Upon the earlier of (a) 15 days after the regulatory filing date or (b) 90 days after the close of each fiscal year of each Significant Insurance Subsidiary copies of the Annual Statement of each of the Significant Insurance Subsidiaries prepared on the NAIC annual statement blanks (or such other form as shall be required by the jurisdiction of incorporation of each such Significant Insurance Subsidiary), all such statements to be prepared in accordance with SAP consistently applied throughout the periods reflected therein with such prescribed or permitted practices as authorized by state regulatory authorities; and within 15 days after the regulatory filing date, copies of such Annual Statements certified by independent certified public accountants reasonably acceptable to the Lenders if such certification is so required by any Governmental Authority.
(viii) Promptly upon the filing thereof, copies of all Forms 10-Q and 10-K (other than earnings press releases or filings made with respect to guaranteed investment contracts, funding agreements and similar instruments and agreements) that PLC or any Significant Subsidiary files with the Securities and Exchange Commission and, upon request, any Forms A and B that any Significant Insurance Subsidiary files with any insurance commission or department or analogous Governmental Authority.
(ix) Promptly upon the Borrowers' receipt thereof, copies of reports, notices, or claims prepared by or on behalf of any Governmental Authority with respect to any adverse action or event that has resulted in the reduction by 10% or more in the capital and surplus of any Significant Insurance Subsidiary.
(x) Promptly and in any event within 10 days after learning thereof, notification of any change after the Closing Date of any rating given (a) by S&P, Moody’s or, if
the Fitch Rating Notice shall have been provided, Fitch with respect to PLC or any Significant Subsidiary or (b) by A.M. Best & Co. with respect to any Significant Insurance Subsidiary.
(xi) Promptly notify the Administrative Agent and the Lenders of any issuance of equity by PLC, incurrence of Indebtedness in an amount in excess of $50,000,000, or disposition of tangible Property with a value in excess of $150,000,000.
(xii) Promptly notify the Administrative Agent and the Lenders of any material change in accounting or financial reporting practices (which may be accomplished by providing the information required in clauses (vii) and (viii) of this Section or otherwise).
(xiii) Promptly after acquiring knowledge thereof, notify the Administrative Agent in writing of any change to the information set forth in any Beneficial Ownership Certification that would result in a change to the list of beneficial owners set forth therein.
(xiv) As soon as available and in any event within 120 days following the end of each calendar year (commencing with the calendar year ending December 31, 2022), a Pricing Certificate for the most recently-ended calendar year; provided, that, for any calendar year PLC may elect not to deliver a Pricing Certificate, and such election shall not constitute a Default or Event of Default (but such failure to so deliver a Pricing Certificate by the end of such 120-day period shall result in the ESG Fee Adjustment and the ESG Rate Adjustment being applied as set forth in Section 2.23(c));
(xv) Such other information (including, without limitation, non-financial information) as the Administrative Agent or any Lender may from time to time reasonably request.
5.2. Use of Proceeds. The Borrowers will, and will cause each Subsidiary to, use the proceeds of any Credit Extension and to request the issuance of Letters of Credit (i) for general corporate and working capital purposes, (ii) to refinance, simultaneously with the closing of this Agreement, the outstanding Indebtedness under the Existing Credit Agreement, and/or (iii) to pay transaction fees, costs and expenses related to credit facilities established pursuant to this Agreement and the other Credit Documents, in each case not in contravention of applicable Laws or of any Credit Document. The Borrowers will not, nor will they permit any Subsidiary to, (i) use any of the proceeds of any Credit Extension to purchase or carry any “margin stock” (as defined in Regulation U) in violation of applicable Law, (ii) finance or refinance any Indebtedness, except for (A) any commercial paper issued by the Borrowers, (B) outstanding Indebtedness under the Existing Credit Agreement on the Closing Date and (C) Indebtedness that the Borrowers incurred for general corporate or working capital purposes, (iii) use any of the proceeds of any Credit Extension for any purpose that would result in a violation of any Anti-Corruption Laws, or (iv) use any of the proceeds of any Credit Extension or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or any other
Person for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Entity or in any other manner that would result in a violation by any Person (including any Person participating in the Loan hereunder, whether as Administrative Agent, Joint Lead Arranger, Sustainability Structuring Agent, Issuing Bank or Lender) of applicable Sanctions.
5.3. Notice of Default. The Borrowers will give prompt notice in writing to the Administrative Agent and the Lenders of (i) the occurrence of any Default or Unmatured Default, ERISA Event and of any other development, financial or otherwise, that could reasonably be expected to have a Material Adverse Effect, (ii) the receipt of any notice from any Governmental Authority of the expiration without renewal, revocation or suspension of, or the institution of any proceedings to revoke or suspend, any License now or hereafter held by any Significant Insurance Subsidiary which is required to conduct insurance business in compliance with all applicable Laws and regulations, other than such expiration, revocation or suspension or institution of such proceedings that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect, (iii) the receipt of any notice from any Governmental Authority of the institution of any disciplinary proceedings against or with respect to any Significant Insurance Subsidiary, or the issuance of any order, the taking of any action or any request for an extraordinary audit for cause by any Governmental Authority which is reasonably expected to have a Material Adverse Effect or (iv) any judicial or administrative order limiting or controlling the insurance business of any Significant Insurance Subsidiary (and not the insurance industry generally) which has been issued or adopted and which could reasonably be expected to have a Material Adverse Effect.
5.4. Conduct of Business. The Borrowers will, and will cause each Significant Subsidiary to, do all things necessary to remain duly incorporated, validly existing and in good standing as a domestic corporation in its jurisdiction of incorporation and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted except where such failure to do so would not have a Material Adverse Effect. The Borrowers will cause each Significant Insurance Subsidiary to (i) carry on or otherwise be associated with the business of a licensed insurance carrier and (ii) do all things necessary to renew, extend and continue in effect all Licenses that may at any time and from time to time be necessary for such Significant Insurance Subsidiary to operate its insurance business in compliance with all applicable laws and regulations; provided, however, that any such Significant Insurance Subsidiary may withdraw from one or more states as an admitted insurer or change the state of its domicile, if such withdrawal or change is in the best interests of the Borrowers and such Significant Insurance Subsidiary.
5.5. Taxes. The Borrowers will, and will cause each Significant Subsidiary to, pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except where the failure to file has not had and would not reasonably be expected to have, a Material Adverse Effect, and except those that are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside.
5.6. Insurance. The Borrowers will, and will cause each Significant Subsidiary to, maintain with financially sound and reputable insurance companies insurance on all or
substantially all of its Property in such amounts and covering such risks, and with such risk retention or self-insurance, as is consistent with sound business practice for Persons in substantially the same industry as the Borrowers or such Significant Subsidiary, and the Borrowers will furnish to any Lender upon request full information as to the insurance carried and any applicable risk retention or self-insurance.
5.7. Compliance with Laws. The Borrowers will, and will cause each Significant Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. The Borrowers will maintain in effect and enforce policies and procedures designed to promote compliance by the Borrowers, their Subsidiaries and their respective directors, officers, employees and agents (in each case, acting in their capacities as such) with Anti-Corruption Laws and applicable Sanctions. The Borrowers and each of their Subsidiaries will conduct their business in compliance in all material respects with all applicable Anti-Corruption Laws and Sanctions.
5.8. Maintenance of Properties. The Borrowers will, and will cause each Significant Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times, except where the failure to so maintain, preserve, protect and repair could not reasonably be expected to have a Material Adverse Effect.
5.9. Inspection. The Borrowers will, and will cause each Significant Subsidiary to, permit the Lenders, by their respective representatives and agents, upon reasonable notice to the Borrowers to make a reasonable inspection of any of the Property, corporate books and financial records of the Borrowers and each Significant Subsidiary, to examine and make copies of the books or accounts and other financial records of the Borrowers and each Significant Subsidiary, and to discuss the affairs, finances and accounts of the Borrowers and each Significant Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Lenders may designate, provided that the Lenders agree to keep this and all such information provided under this Agreement confidential. The Borrowers shall maintain current books of record and account as Borrowers ordinarily maintain in the conduct of their respective businesses.
5.10. Merger, Consolidation and Sale of Assets. The Borrowers will not, nor will they permit any Significant Subsidiary to, merge or consolidate with or into, or sell, lease or otherwise transfer all or any Substantial Portion of its assets to any other Person, except that (a) either Borrower or a Significant Subsidiary may merge with another Person if (i) such Person was organized under the laws of the United States of America or one of its states, (ii) either Borrower or a Significant Subsidiary is the corporation surviving such merger (provided that in a merger of either Borrower and a Significant Subsidiary, such Borrower shall be the corporation surviving such merger) and (iii) immediately after giving effect to such merger, no Default shall have occurred and be continuing and (b) Subsidiaries (other than PLICO) may merge with one another or into either Borrower. The foregoing limitation on merger and consolidation and the sale, lease or other transfer of assets shall not prohibit (i) sales of investment assets in the ordinary course of business and (ii) during any fiscal quarter, a merger, consolidation or any
transfer of assets (in a single transaction or a series of related transactions) unless the aggregate assets that are the subject of such merger or consolidation or to be so transferred, when combined with all other assets transferred (including as the result of a merger or consolidation) during such fiscal quarter and the immediately preceding 3 fiscal quarters, constituted more than 15% of Consolidated Total Assets at the end of the most recent fiscal year.
5.11. Liens. PLC will not, nor will it permit any Significant Subsidiary to, create, incur or suffer to exist any Lien in, of or on any Property of PLC or a Significant Subsidiary, except for Permitted Liens.
5.12. Adjusted Consolidated Net Worth. PLC will maintain at all times Adjusted Consolidated Net Worth equal to not less than the sum of (i) 70% of PLC’s Adjusted Consolidated Net Worth as of September 30, 2021 (but in no event less than $4,500,000,000) plus (ii) 25% of its Consolidated Net Income (if positive) earned after September 30, 2021 minus (iii) PLC’s consolidated allowance for potential future losses on investments at the end of such fiscal quarter not otherwise included for unrealized net gains and losses on assets held for sale pursuant to FASB ASC 320 and accumulated other comprehensive income pursuant to FASB ASC 220 at the end of such fiscal quarter.
5.13. Ratio of Adjusted Consolidated Indebtedness to Consolidated Capitalization. PLC will maintain at all times a ratio of Adjusted Consolidated Indebtedness to Consolidated Capitalization of not more than 0.4 to 1.0. Adjusted Consolidated Indebtedness shall be calculated without giving effect to any election under Accounting Standards Codification 825-10-25 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any indebtedness of the Borrower or any Subsidiary at “fair value”, as defined therein.
5.14. [Reserved].
5.15. [Reserved].
5.16. Affiliates. PLC will not, and will not permit any Significant Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make payments or transfer to, any Affiliate (other than a Wholly-Owned Subsidiary) except (i) any such transactions, payments or transfers with or to such Affiliates as are made in the ordinary course of business and pursuant to the reasonable requirements of PLC’s or such Significant Subsidiary's business and upon fair and reasonable terms no less favorable to PLC’s or such Significant Subsidiary than PLC or such Significant Subsidiary would obtain in a comparable arms-length transaction and (ii) any such other transactions, payments or transfers with or to such Affiliates as could not reasonably be expected to have a Material Adverse Effect.
5.17. Compliance with ERISA. The Borrowers will not (i) terminate, or permit any ERISA Affiliate to terminate, any Plan so as to result in any material (in the opinion of the Lenders) liability of the Borrowers or an ERISA Affiliate to the PBGC; (ii) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, that presents a material (in the opinion of the Lenders) risk of such a termination by
the PBGC of any Plan so as to result in any material (in the opinion of the Lenders) liability of the Borrowers or any ERISA Affiliate to the PBGC; (iii) be an “employer” (as defined in Section 3(5) of ERISA), or permit any ERISA Affiliate to be an “employer”, required to contribute to any Multiemployer Plan; or (iv) fail to comply in all material respects with any laws or regulations applicable to any Plan.
5.18. Payment of Obligations. The Borrowers shall pay all amounts owed under the Obligations when due.
5.19. Further Assurances. The Borrowers shall cooperate with the Administrative Agent and the other parties to the Credit Documents to promptly cure any defects in the creation, issuance, or delivery of the Credit Documents. The Borrowers at their expense will execute (or cause to be executed) and deliver to the Administrative Agent upon reasonable request all such other and further documents, agreements, and instruments in compliance with or accomplishment of the covenants and agreements applicable to them in the Credit Documents, or to correct any omissions in the Credit Documents, or to state more fully the Obligations and agreements set out in any of the Credit Documents, to file any notices, or to obtain any consents, all as may be reasonably necessary or appropriate in connection therewith.
5.20. Amendments to Organizational Agreements. No Borrower shall, nor shall it cause any of its Subsidiaries to, amend or permit any amendments to its organizational documents if such amendment could reasonably be expected to have a Material Adverse Effect.
5.21. Changes in Accounting Policies or Reporting Practices. No Borrower shall change its accounting policies or reporting practices, unless in the case of PLC, such change is permitted by GAAP and in the case of PLICO, such change is permitted by SAP, and provided such change does not have the effect of curing or preventing what would otherwise be an Unmatured Default or a Default had such change not taken place.
ARTICLE VI
DEFAULTS
The occurrence of any one or more of the following events shall constitute a Default:
6.1. Representations and Warranties. Any representation or warranty made or deemed made by or on behalf of the Borrowers or any of their Subsidiaries to the Lenders or the Administrative Agent under or in connection with this Agreement, any Loan or any certificate or written information delivered in connection with this Agreement or any other Credit Document shall be incorrect in any material respect on the date as of which made.
6.2. Payments. Nonpayment of principal of any Loan when due, or nonpayment of interest upon any Loan, the Facility Fees, amounts due under the Fee Letters, or any other Obligation under any of the Credit Documents, and the continuance of such breach for a period of three (3) Business Days after.
6.3. Specific Covenants. The breach by the Borrowers of any of the terms or provisions of Section 5.2, 5.3, 5.10, 5.11, 5.12 or 5.13.
6.4. Other Covenants. The breach by the Borrowers (other than a breach that constitutes a Default under Section 6.1, 6.2 or 6.3) of any covenant or condition contained in this Agreement, and the continuance of such breach for a period of thirty (30) days after there has been given, by registered or certified mail, to the Borrowers by the Administrative Agent a written notice specifying such breach and requiring it to be remedied and stating that such notice is a “notice of default” hereunder.
6.5. Default on Other Indebtedness and Additional Amounts. Failure of the Borrowers or, if such Indebtedness or the obligations described in clauses (2), (3) and (6) set forth in the last sentence of the definition of Indebtedness (collectively, the “Additional Amounts”) is recourse to the Borrowers, any of their Subsidiaries, to pay when due or within any applicable cure periods any Indebtedness (other than the Obligations) or the Additional Amounts, if the aggregate amount of all such Indebtedness and Additional Amounts involved exceeds $50,000,000; or if any event or condition shall occur that results in any Indebtedness and Additional Amounts of the Borrowers or, if such Indebtedness and Additional Amounts is recourse to the Borrowers, any Subsidiary, in each case other than the Obligations, being declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment or a payment made in the ordinary course of business and pursuant to a contractual obligation) prior to the stated maturity thereof, if the aggregate amount of all such Indebtedness and Additional Amounts involved exceeds $50,000,000; or the Borrowers or, if such Indebtedness and Additional Amounts is recourse to the Borrowers, any of PLC’s Subsidiaries shall not pay, or admit in writing their inability to pay, their debts generally as they become due.
6.6. Voluntary Petitions. Any Borrower or any of its Significant Subsidiaries shall (i) have an order for relief entered with respect to them under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for them or any Substantial Portion of their Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate them bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of them or their debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding, filed against them, (v) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 6.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 6.7.
6.7. Involuntary Bankruptcy or Receivership Proceedings. Without the application, approval or consent of any Borrower or any of its Significant Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for such Borrower or any of PLC’s Significant Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 6.6(iv) shall be instituted against any Borrower or any of PLC’s Significant Subsidiaries, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 30 consecutive days.
6.8. Condemnation. Any Governmental Authority shall condemn, seize or otherwise appropriate, or take custody or control of (each a “Condemnation”), all or any portion
of the Property of the Borrowers or any of PLC’s Significant Subsidiaries which, when taken together with all other Property of the Borrowers and PLC’s Significant Subsidiaries so condemned, seized, appropriated or taken custody or control of, during the twelve-month period ending with the month in which any such Condemnation occurs, constitutes a Substantial Portion.
6.9. Undischarged Judgments. The Borrowers, or if any such judgments are recourse to the Borrowers, any of PLC’s Subsidiaries, shall fail within 45 days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $50,000,000 which is not stayed on appeal or otherwise being appropriately contested in good faith.
6.10. ERISA. (i) Any ERISA Event shall have occurred or (ii) the sum of the aggregate Insufficiencies of all Plans shall exceed $30,000,000.
6.11. Distribution Limitations. Any Governmental Authority having jurisdiction shall prohibit or further limit the payment or distribution by PLICO or any other Significant Insurance Subsidiary to PLC of dividends, principal or interest payments or management fees, if such prohibition or further limitation could reasonably be expected to have a Material Adverse Effect.
6.12. Environmental Investigation. The Borrowers or any of PLC’s Subsidiaries shall be the subject of any proceedings or investigation of any toxic or hazardous waste or substance into the environment, or any violation of any federal, state or local environmental, health or safety law or regulation, which, in either case, could reasonably be expected to have a Material Adverse Effect.
6.13. Change in Control. Any Change in Control shall occur.
6.14. Licenses. Any License of any Significant Insurance Subsidiary held by such Insurance Subsidiary on the Closing Date or acquired by such Significant Insurance Subsidiary thereafter, the loss of which could reasonably be expected to have a Material Adverse Effect (i) shall be revoked by a final non-appealable order by the state that issued such License, or any action (whether administrative or judicial) to revoke such License shall have been commenced against such Insurance Subsidiary which shall not have been dismissed or contested in good faith within 30 days of the commencement thereof, (ii) shall be suspended by such state for a period in excess of 30 days or (iii) shall not be reissued or renewed by such state upon the expiration thereof following application for such reissuance or renewal by such Insurance Subsidiary.
6.15. Tax Lien. A federal tax lien shall attach against the Borrowers or any Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be filed against the Borrowers or any Subsidiary under Section 4068 of ERISA in an amount that would have, in the reasonable judgment of the Lenders, a Material Adverse Effect and in either case such lien shall remain undischarged for a period of 60 days after the attachment or filing, as the case may be.
6.16. Enforceability Contest. Any Borrower or Subsidiary shall contest the validity or enforceability of any Credit Document or either Borrower shall deny it has any further liability or obligation under this Agreement or any other Credit Document.
ARTICLE VII
REMEDIES
7.1. Remedies. Upon the occurrence of any Default described in Section 6.6 or Section 6.7, automatically, and upon the occurrence and during the continuance of any other Default, at the request of (or with the consent of) the Required Lenders, upon notice to the Borrowers by the Administrative Agent, (a) the Revolving Commitments, if any, of each Lender having such Revolving Commitments and the obligation of any Issuing Bank to issue, increase, amend, extend or renew any Letter of Credit shall immediately terminate; (b) each of the following shall immediately become due and payable, in each case without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by each of the Borrowers: (i) the unpaid principal amount of and accrued interest on the Loans and Letter of Credit Borrowings, and (ii) all other Obligations; provided, the foregoing shall not affect in any way the obligations of the Lenders under Section 2.2.2(c) or Section 2.3.5; and (c) the Administrative Agent shall direct the Borrowers to pay (and the Borrowers hereby agree upon receipt of such notice, or upon the occurrence of any Default specified in Section 6.6 and Section 6.7 to pay) to the Administrative Agent Cash Collateral, to be held as security for such Borrowers’ reimbursement obligations for an Issuing Bank’s Fronting Exposure in respect of Letters of Credit then outstanding under arrangements acceptable to the Administrative Agent, equal to the Outstanding Amount of the Letter of Credit Obligations at such time. Notwithstanding anything herein or otherwise to the contrary, any Default occurring hereunder shall continue to exist (and shall be deemed to be continuing) until such time as such Default has been cured to the satisfaction of the Required Lenders or waived in writing in accordance with the terms of Section 10.3.
7.2. Application of Funds. After the exercise of remedies provided for in Section 7.1 (or after the Loans have automatically become immediately due and payable), any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order:
First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (other than principal, interest, Facility Fees and Letter of Credit Fees but including without limitation all reasonable and documented out-of-pocket fees, expenses and disbursements of any law firm or other counsel and amounts payable under Section 2.17, Section 2.18 and Section 2.19) payable to the Administrative Agent, the Issuing Banks or the Swingline Lender;
Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal, interest, Facility Fees and Letter of Credit Fees) payable to the Lenders including without limitation all reasonable and documented out-of-pocket fees, expenses and disbursements of any law firm or other counsel and amounts payable under Section 2.17, Section 2.18 and Section 2.19), ratably among the Lenders in proportion to the respective amounts described in this clause Second payable to them;
Third, to payment of that portion of the Obligations constituting accrued and unpaid Letter of Credit Fees, Facility Fees and interest on the Loans, on the Letter of Credit Borrowings and on other Obligations ratably among such parties in proportion to the respective amounts described in this clause Third payable to them;
Fourth, to (a) payment of that portion of the Obligations constituting unpaid principal of the Loans and Letter of Credit Borrowings and (b) the Administrative Agent for the account of the Issuing Banks, to Cash Collateralize that portion of the Letter of Credit Obligations comprised of the aggregate undrawn amount of Letters of Credit, ratably among such parties in proportion to the respective amounts described in this clause Fourth payable to them;
Fifth, to the payment in full of all other Obligations, in each case ratably among the Administrative Agent, the Issuing Banks and the Lenders based upon the respective aggregate amounts of all such Obligations owing to them in accordance with the respective amounts thereof then due and payable; and
Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrowers or as otherwise required by applicable Laws.
Subject to Section 2.3, amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fourth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after such Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above.
Excluded Swap Obligations with respect to any Borrower shall not be paid with amounts received from such Borrower or such Borrower’s assets, but appropriate adjustments shall be made with respect to payments from other Borrowers to preserve the allocation to Obligations otherwise set forth above in this Section 7.2.
7.3. Setoff. Any Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits, or instruments that such Lender may have in its possession and which belong to any Borrower liable for the payment of any or all of the Obligations.
ARTICLE VIII
AGENCY
8.1. Appointment and Authority. Each of the Lenders and the Issuing Banks hereby irrevocably appoints Regions Bank to act on its behalf as the Administrative Agent hereunder and under the other Credit Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Section are solely for the benefit of the Administrative Agent, the Lenders and the Issuing Banks, and no Borrower nor any of its Subsidiaries shall have rights as a third party beneficiary of any of such provisions. It is understood and agreed that the use of the term “agent” herein or in any other Credit Documents (or any other similar term) with
reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead such term is used as a matter of market custom, and is intended to create or reflect only an administrative relationship between contracting parties.
8.2. Rights as a Lender. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, own securities of, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrowers or any Subsidiary of the Borrowers or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.
8.3. Exculpatory Provisions.
8.3.1 No Fiduciary Duties. The Administrative Agent, each Joint Lead Arranger and each Sustainability Structuring Agent shall not have any duties or obligations except those expressly set forth herein and in the other Credit Documents, and its duties hereunder shall be administrative in nature. Without limiting the generality of the foregoing, the Administrative Agent, each Joint Lead Arranger and each Sustainability Structuring Agent:
(a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Credit Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Credit Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Credit Document or applicable law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law or that may effect a forfeiture, modification or termination of property of a Defaulting Lender in violation of any Debtor Relief Law; and
(c) shall not, except as expressly set forth herein and in the other Credit Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrowers or any of their Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.
8.3.2 No Liability. The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other
number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 7.1 and 10.3) or (ii) in the absence of its own gross negligence or willful misconduct, as determined by a court of competent jurisdiction by final and nonappealable judgment. The Administrative Agent shall be deemed not to have knowledge of any Unmatured Default unless and until notice describing such Unmatured Default is given to the Administrative Agent in writing by the Borrowers, a Lender or an Issuing Bank.
8.3.3 No Responsibility. The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (a) any statement, warranty or representation made in or in connection with this Agreement or any other Credit Document, (b) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (c) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Unmatured Default, (d) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Credit Document or any other agreement, instrument or document or (e) the satisfaction of any condition set forth in Article III or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
8.4. Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan, or the issuance, extension, renewal or increase of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or an Issuing Bank, the Administrative Agent may presume that such condition is satisfactory to such Lender or such Issuing Bank unless the Administrative Agent shall have received notice to the contrary from such Lender or such Issuing Bank prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrowers and their Subsidiaries), independent accountants and other experts selected by it with respect to all matters pertaining to this Agreement and the other Credit Documents and its duties hereunder and thereunder, and shall not be liable for any action taken or not taken by it in good faith in accordance with the advice of any such counsel, accountants or experts.
8.5. Delegation of Duties. The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Credit Document by or through any one or more sub-agents appointed by the Administrative Agent; provided that the Administrative Agent’s delegation of duties to any sub-agent shall not relieve the Administrative Agent of any of its obligations under this Agreement. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Section shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent. The Administrative Agent shall not be responsible for the negligence or misconduct of any sub-agents except to the extent that a court of competent jurisdiction determines in a final and non-appealable judgment that the Administrative Agent acted with gross negligence or willful misconduct in the selection of such sub-agents.
8.6. Resignation of Administrative Agent.
8.6.1 Resignation. The Administrative Agent may at any time give no less than sixty (60) days’ prior written notice of its resignation to the Lenders, the Issuing Banks and the Borrowers. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, with the consent of the Borrowers, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent gives notice of its resignation (or such earlier day as shall be agreed by the Required Lenders) (the “Resignation Effective Date”), then the retiring Administrative Agent may (but shall not be obligated to) on behalf of the Lenders and the Issuing Banks, appoint a successor Administrative Agent meeting the qualifications set forth above. Such Resignation Effective Date shall not occur until the appointment of a successor Administrative Agent as provided in this Agreement.
8.6.2 Removal. If the Person servicing as Administrative Agent is a Defaulting Lender pursuant to clause (d) of the definition thereof, the Required Lenders may, to the extent permitted by applicable Law by notice in writing to the Borrowers and such Person remove such Person as the Administrative Agent and, with the consent of the Borrowers, appoint a successor. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days (or such earlier day as shall be agreed by the Required Lenders (the “Removal Effective Date”)), then such removal shall nonetheless become effective in accordance with such notice on the Removal Effective Date.
8.6.3 Successor. With effect from the Resignation Effective Date or the Removal Effective Date (as applicable) (1) the retiring or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Credit Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders or the Issuing Banks under any of the Credit Documents, the retiring or removed Administrative Agent shall continue to hold such collateral security until such time as a successor Administrative Agent is appointed) and (2) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender and each Issuing Bank directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring or removed Administrative Agent, and the retiring or removed Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Credit Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrowers to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrowers and such successor. After the
retiring or removed Administrative Agent’s resignation hereunder and under the other Credit Documents, the provisions of this Article VIII and Section 10.26 shall continue in effect for the benefit of such retiring or removed Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring or removed Administrative Agent was acting as Administrative Agent.
8.7. Non-Reliance on Administrative Agent, Sustainability Structuring Agents and Other Lenders. Each of the Lenders and the Issuing Banks acknowledges that it has, independently and without reliance upon the Administrative Agent, any Sustainability Structuring Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each of the Lenders and the Issuing Banks also acknowledges that it will, independently and without reliance upon the Administrative Agent, any Sustainability Structuring Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Credit Document or any related agreement or any document furnished hereunder or thereunder.
8.8. No Other Duties, etc. Anything herein to the contrary notwithstanding, none of the Sole Bookrunner, Joint Lead Arrangers, Syndication Agents or Documentation Agents listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Credit Documents, except in its capacity, as applicable, as the Administrative Agent, a Lender, a Sustainability Structuring Agent or an Issuing Bank hereunder.
8.9. Administrative Agent May File Proofs of Claim. In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to any Borrower, the Administrative Agent (irrespective of whether the principal of any Loan or Letter of Credit Obligation shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrowers) shall be entitled and empowered (but not obligated) by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, Letter of Credit Obligations and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders, the Issuing Banks and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders, the Issuing Banks and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders, the Issuing Banks and the Administrative Agent under Section 2.10 and Section 10.26) allowed in such judicial proceeding; and
(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and each Issuing Bank to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders and the Issuing Banks, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Section 2.10 and Section 10.26).
8.10. Erroneous Payments.
8.10.1 If the Administrative Agent notifies a Lender, an Issuing Bank, any other holder of the Obligations or any Person who has received funds on behalf of a Lender, an Issuing Bank or another holder of the Obligations (any such Lender, Issuing Bank, other holder of the Obligations or other recipient (and each of their respective successors and assigns), a “Payment Recipient”) that the Administrative Agent has determined in its sole discretion (whether or not after receipt of any notice under the immediately succeeding Section 8.10.2) that any funds (as set forth in such notice from the Administrative Agent) received by such Payment Recipient from the Administrative Agent or any of its respective Affiliates were erroneously or mistakenly transmitted to, or otherwise erroneously or mistakenly received by, such Payment Recipient (whether or not known to such Lender, Issuing Bank, other holder of the Obligations or other Payment Recipient on its behalf) (any such funds, whether transmitted or received as a payment, prepayment or repayment of principal, interest, fees, distribution or otherwise, individually and collectively, an “Erroneous Payment”) and demands in writing the return of such Erroneous Payment (or a portion thereof), such Erroneous Payment shall at all times remain the property of the Administrative Agent pending its return or repayment as contemplated below in this Section 8.10 and held in trust for the benefit of the Administrative Agent, and such Lender, Issuing Bank or other holder of the Obligations shall (or, with respect to any Payment Recipient who received such funds on its behalf, shall cause such Payment Recipient to) promptly, but in no event later than two (2) Business Days thereafter (or such later date as the Administrative Agent may, in its sole discretion, specify in writing), return to the Administrative Agent the amount of any such Erroneous Payment (or portion thereof) as to which such a demand was made, in same day funds (in the currency so received), together with interest thereon (except to the extent waived in writing by the Administrative Agent) in respect of each day from and including the date such Erroneous Payment (or portion thereof) was received by such Payment Recipient to the date such amount is repaid to the Administrative Agent in same day funds at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation from time to time in effect. A notice of the Administrative Agent to any Payment Recipient under this Section 8.10.1 shall be conclusive, absent manifest error.
8.10.2 Without limiting immediately preceding Section 8.10.1, each Lender, Issuing Bank, other holder of the Obligations or any Person who has received funds on behalf of a Lender, Issuing Bank or other holder of the Obligations (and each of their respective successors and assigns) hereby further agrees that if it receives a payment, prepayment or repayment (whether received as a payment, prepayment or repayment of principal, interest, fees, distribution or otherwise) from the Administrative Agent (or any of its Affiliates) (x) that is in a different amount than, or on a different date from, that specified in this Agreement or in a notice of
payment, prepayment or repayment sent by the Administrative Agent (or any of its Affiliates) with respect to such payment, prepayment or repayment, (y) that was not preceded or accompanied by a notice of payment, prepayment or repayment sent by the Administrative Agent (or any of its Affiliates), or (z) that such Lender, Issuing Bank, other holder of the Obligations or other such recipient, otherwise becomes aware was transmitted, or received, in error or by mistake (in whole or in part), then in each such case:
(a) it acknowledges and agrees that (i) in the case of Section 8.10.2(x) or (y), an error and mistake shall be presumed to have been made (absent written confirmation from the Administrative Agent to the contrary) or (ii) in the case of Section 8.10.2(z), an error and mistake has been made, in each case, with respect to such payment, prepayment or repayment; and
(b) such Lender, Issuing Bank or other holder of the Obligations shall (and shall cause any other recipient that receives funds on its respective behalf to) promptly (and, in all events, within one (1) Business Day of its knowledge of the occurrence of any of the circumstances described in Section 8.10.2(x), (y) and (z)) notify the Administrative Agent of its receipt of such payment, prepayment or repayment, the details thereof (in reasonable detail) and that it is so notifying the Administrative Agent pursuant to this Section 8.10.2.
For the avoidance of doubt, the failure to deliver a notice to the Administrative Agent pursuant to this Section 8.10.2 shall not have any effect on a Payment Recipient’s obligations pursuant to Section 8.10.1 or on whether or not an Erroneous Payment has been made.
8.10.3 Each Lender, Issuing Bank and other holder of the Obligations hereby authorizes the Administrative Agent to set off, net and apply any and all amounts at any time owing to such Lender, Issuing Bank or other holder of the Obligations under any Credit Document, or otherwise payable or distributable by the Administrative Agent to such Lender, Issuing Bank or other holder of the Obligations under any Credit Document with respect to any payment of principal, interest, fees or other amounts, against any amount that the Administrative Agent has demanded to be returned under Section 8.10.1.
8.10.4 In the event that an Erroneous Payment (or portion thereof) is not recovered by the Administrative Agent for any reason, after demand therefor in accordance with Section 8.10.1, from any Lender, Issuing Bank or other holder of the Obligations that has received such Erroneous Payment (or portion thereof) (and/or from any Payment Recipient who received such Erroneous Payment (or portion thereof) on its respective behalf) (such unrecovered amount, an “Erroneous Payment Return Deficiency”), upon the Administrative Agent’s notice to such Lender, Issuing Bank or other holder of the Obligations at any time, then effective immediately (with the consideration therefor being acknowledged by the parties hereto), (a) such Lender, Issuing Bank or other holder of the Obligations shall be deemed to have assigned its Loans (but not its Commitments) of the relevant class with respect to which such Erroneous Payment was made (the “Erroneous Payment Impacted Class”) in an amount equal to the Erroneous Payment Return Deficiency (or such lesser amount as the Administrative Agent may specify) (such assignment of the Loans (but not Commitments) of the Erroneous Payment Impacted Class, the
“Erroneous Payment Deficiency Assignment”) (on a cashless basis and such amount calculated at par plus any accrued and unpaid interest (with the assignment fee to be waived by the Administrative Agent in such instance)), and is hereby (together with the Borrowers) deemed to execute and deliver an Assignment and Assumption (or, to the extent applicable, an agreement incorporating an Assignment and Assumption by reference pursuant to a Platform as to which the Administrative Agent and such parties are participants) with respect to such Erroneous Payment Deficiency Assignment, and such Lender, Issuing Bank or other holder of the Obligations shall deliver any Notes evidencing such Loans to the Borrowers or the Administrative Agent (but the failure of such Person to deliver any such Notes shall not affect the effectiveness of the foregoing assignment), (b) the Administrative Agent as the assignee Lender shall be deemed to have acquired the Erroneous Payment Deficiency Assignment, (c) upon such deemed acquisition, the Administrative Agent as the assignee Lender shall become a Lender, Issuing Bank or other holder of the Obligations, as applicable, hereunder with respect to such Erroneous Payment Deficiency Assignment and the assigning Lender, Issuing Bank or other holder of the Obligations shall cease to be a Lender, Issuing Bank or other holder of the Obligations, as applicable, hereunder with respect to such Erroneous Payment Deficiency Assignment, excluding, for the avoidance of doubt, its obligations under the indemnification provisions of this Agreement and its applicable Commitments which shall survive as to such assigning Lender, Issuing Bank or other holder of the Obligations, (d) the Administrative Agent and the Borrowers shall each be deemed to have waived any consents required under this Agreement to any such Erroneous Payment Deficiency Assignment, and (e) the Administrative Agent shall reflect in the Register its ownership interest in the Loans subject to the Erroneous Payment Deficiency Assignment. For the avoidance of doubt, no Erroneous Payment Deficiency Assignment will reduce the Commitments of any Lender and such Commitments shall remain available in accordance with the terms of this Agreement.
8.10.5 Subject to Section 9.2 (but excluding, in all events, any assignment consent or approval requirements (whether from the Borrowers or otherwise)), the Administrative Agent may, in its discretion, sell any Loans acquired pursuant to an Erroneous Payment Deficiency Assignment and upon receipt of the proceeds of such sale, the Erroneous Payment Return Deficiency owing by the applicable Lender, Issuing Bank or other holder of the Obligations shall be reduced by the net proceeds of the sale of such Loan (or portion thereof), and the Administrative Agent shall retain all other rights, remedies and claims against such Lender, Issuing Bank or other holder of the Obligations (and/or against any recipient that receives funds on its respective behalf). In addition, an Erroneous Payment Return Deficiency owing by the applicable Lender (x) shall be reduced by the proceeds of prepayments or repayments of principal and interest, or other distribution in respect of principal and interest, received by the Administrative Agent on or with respect to any such Loans acquired from such Lender pursuant to an Erroneous Payment Deficiency Assignment (to the extent that any such Loans are then owned by the Administrative Agent), and (y) may in the sole discretion of the Administrative Agent be reduced by an amount specified by the Administrative Agent in writing to the applicable Lender from time to time.
8.10.6 The parties hereto agree that (x) irrespective of whether the Administrative Agent may be equitably subrogated, in the event that an Erroneous Payment (or portion thereof) is not recovered from any Payment Recipient that has received such Erroneous Payment (or portion thereof) for any reason, the Administrative Agent shall be subrogated to all the rights and
interests of such Payment Recipient (and, in the case of any Payment Recipient who has received funds on behalf of a Lender, Issuing Bank or other holder of the Obligations, to the rights and interests of such Lender, Issuing Bank or other holder of the Obligations, as the case may be) under the Credit Documents with respect to such amount (the “Erroneous Payment Subrogation Rights”) (provided, that, the Obligations under the Credit Documents in respect of the Erroneous Payment Subrogation Rights shall not be duplicative of such Obligations in respect of Loans that have been assigned to the Administrative Agent under an Erroneous Payment Deficiency Assignment) and (y) an Erroneous Payment shall not pay, prepay, repay, discharge or otherwise satisfy any Obligations owed by any Borrower; provided, that, this Section 8.10.6 shall not be interpreted to increase (or accelerate the due date for), or have the effect of increasing (or accelerating the due date for), the Obligations relative to the amount (and/or timing for payment) of the Obligations that would have been payable had such Erroneous Payment not been made by the Administrative Agent; provided, further, that, for the avoidance of doubt, the immediately preceding clauses (x) and (y) shall not apply except, in each case, to the extent such Erroneous Payment is, and solely with respect to the amount of such Erroneous Payment that is, comprised of funds received by the Administrative Agent from the Borrowers for the purpose of making such Erroneous Payment.
8.10.7 To the extent permitted by applicable Law, no Payment Recipient shall assert any right or claim to an Erroneous Payment, and hereby waives, and is deemed to waive, any claim, counterclaim, defense or right of set-off or recoupment with respect to any demand, claim or counterclaim by the Administrative Agent for the return of any Erroneous Payment received, including without limitation, any defense based on “discharge for value” or any similar doctrine.
8.10.8 Each party’s obligations, agreements and waivers under this Section 8.10 shall survive the resignation or replacement of the Administrative Agent, any transfer of rights or obligations by, or the replacement of, a Lender, Issuing Bank or other holder of the Obligations, the termination of the Commitments and/or the repayment, satisfaction or discharge of all Obligations (or any portion thereof) under any Credit Document.
ARTICLE IX
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATION
9.1. Successors and Assigns Generally. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements made by or on behalf of the Borrowers, the Administrative Agent, the Issuing Banks or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns, except that neither the Borrowers nor any other Borrower may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender, and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of Section 9.2, (ii) by way of participation in accordance with the provisions of Section 9.4 or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 9.6 (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than
the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in Section 9.4 and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
9.2. Assignments By Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments, Loans and obligations hereunder at the time owing to it); provided that any such assignment shall be subject to the following conditions:
9.2.1 Minimum Amounts.
(a) in the case of an assignment of the entire remaining amount of the assigning Lender’s commitments and the loans at the time owing to it or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
(b) in any case not described in Section 9.2.1(a), the aggregate amount of the commitment (which for this purpose includes loans and obligations in respect thereof outstanding thereunder) or, if the commitment is not then in effect, the principal outstanding balance of the loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than $5,000,000 (and in $1,000,000 increments thereafter), unless each of the Administrative Agent and, so long as no Default shall have occurred and is continuing, the Borrowers otherwise consent (each such consent not to be unreasonably withheld or delayed).
9.2.2 Proportionate Amounts. Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Commitments and Loans assigned.
9.2.3 Required Consents. No consent shall be required for any assignment except to the extent required by Section 9.2.1(b) and, in addition:
(a) the consent of the Borrowers (such consent not to be unreasonably withheld or delayed) shall be required unless (i) a Default shall have occurred and is continuing at the time of such assignment or (ii) such assignment is to a Lender or an Affiliate of a Lender or an Approved Fund; provided that the Borrowers shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within ten (10) Business Days after having received notice thereof;
(b) the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of the Revolving Commitments if such assignment is to a Person that is not a Lender with a Revolving Commitment or an Affiliate of such Lender or an Approved Fund with respect to such Lender;
(c) the consent of the Issuing Bank (such consent not to be unreasonably withheld or delayed) shall be required for any assignment in respect of any Revolving Commitment under which letters of credit are issued by it; and
(d) the consent of the Swingline Lender (such consent not to be unreasonably withheld or delayed) shall be required for any assignment in respect of any Revolving Commitment under which Swingline Loans are made by it.
9.2.4 Assignment and Assumption. The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500, unless waived, in whole or in part by the Administrative Agent in its discretion. The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
9.2.5 No Assignment to Borrowers, Affiliates or Subsidiaries. No such assignment shall be made to the Borrowers or any of the Borrowers’ Affiliates or Subsidiaries.
9.2.6 No Assignment to Natural Persons Or Defaulting Lenders. No such assignment shall be made to (a) a natural person (or holding company, investment vehicle or trust for, or owned and operated for the primary benefit of, a natural person) or (b) a Defaulting Lender.
9.2.7 Certain Additional Payments. In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Administrative Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other compensating actions, including funding, with the consent of the Borrowers and the Administrative Agent, the applicable pro rata share of Loans previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (a) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Administrative Agent, each Issuing Bank, each Swingline Lender and each other Lender hereunder (and interest accrued thereon), and (b) acquire (and fund as appropriate) its full pro rata share of all Loans and participations in Letters of Credit and Swingline Loans in accordance with its Revolving Commitment Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under applicable law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to Section 9.3, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the
case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 2.16, 2.20.2 and 10.26 with respect to facts and circumstances occurring prior to the effective date of such assignment. The Borrowers will execute and deliver on request, at their own expense, Notes to the assignee evidencing the interests taken by way of assignment hereunder. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 9.4.
9.3. Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrowers, shall maintain at its office at the address set forth in Section 10.1.1 a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts (and stated interest) of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive absent manifest error, and the Borrowers, the Administrative Agent, and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by each of the Borrowers and any Lender at any reasonable time and from time to time upon reasonable prior notice.
9.4. Participations.
9.4.1 Participants. Any Lender may at any time, without the consent of, or notice to, the Borrowers, the Issuing Banks, the Swingline Lender, the Administrative Agent or the Sustainability Structuring Agents, sell participations to any Person (other than a natural Person (or holding company, investment vehicle or trust for, or owned and operated for the primary benefit of, a natural person) or the Borrowers or any of the Borrowers’ Affiliates or Subsidiaries) (each, a “Participant”) in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged and such Lender shall not be relieved of its obligations under the Credit Documents as a result of such participation, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, and (iv) the Borrowers, the Administrative Agent, the Issuing Banks and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. For the avoidance of doubt, each Lender shall be responsible for the indemnity under Section 10.26.3 with respect to any payments made by such Lender to its Participants.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in Section 10.3.2 and Section 10.3.3 that affects such Participant.
9.4.2 Entitled to Certain Benefits. The Borrowers agree that each Participant shall be entitled to the benefits of Sections 2.17, 2.18 and 2.19 (subject to the requirements and limitations of those Sections (it being understood that the documentation required to be delivered under Section 2.19.6 shall be delivered to such Lender that has sold the participation)) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 9.2; provided that such Participant agrees to be subject to the provisions of Section 2.20.2 as if it were an assignee under Section 9.2. To the extent permitted by Law, each Participant also shall be entitled to the benefits of Section 10.27 as though it were a Lender; provided such Participant agrees to be subject to Section 2.14 as though it were a Lender.
9.4.3 No Greater Payment. A Participant shall not be entitled to receive any greater payment under Section 2.18 or 2.19 than the participating Lender would have been entitled to receive with respect to the participation sold to such Participant, except to the extent such entitlement to receive a greater payment results from a Change in Law that occurs after the Participant acquired the applicable participation. Each Lender that sells a participation to a Participant agrees to use reasonable efforts to cooperate with the Borrowers, at the Borrowers’ request and expense, to effectuate the provisions of Section 2.20.2 with respect to such Participant; provided that Borrowers shall not be required to pay, and the applicable Lender shall pay, any fee or other negotiated amount which such Lender had agreed to pay to such Participant.
9.4.4 Participant Register. Any Lender that sells a participation, acting solely for this purpose as a non-fiduciary agent of the Borrowers, shall maintain a register for the recordation of the name and address of each Participant, and the principal amount (and stated interest) of each Participant’s interest in the Loans or other obligations under this Agreement (the “Participant Register”); provided that no Lender shall have an obligation to disclose the Participant Register (including the identity of any Participant or any information relating to a Participant's interest in any commitments, loans, letters of credit or its other obligations under any Credit Document) to any Person except to the extent that such disclosure is necessary to establish that the Loans or other obligations under this Agreement are in registered form for tax purposes under United States Treasury Regulation Section 5f.103-1(c). The entries in the Participant Register shall be conclusive absent manifest error, and the Lender maintaining the Participant Register shall treat each person whose name is recorded in the register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Administrative Agent, in its capacity as such, shall have no responsibility for maintaining a Participant Register.
9.4.5 [Reserved].
9.5. Disclosure of Confidential Information. Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to Section 9.2 or 9.4, disclose to such assignee or participant any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers; provided, however, that, prior to any such disclosure, the assignee or participant shall agree to preserve the confidentiality of any Information received by it from such Lender.
9.6. Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender without the consent of any Person, including any pledge or assignment to secure obligations to a Federal Reserve Bank or any other central bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
ARTICLE X
GENERAL PROVISIONS
10.1. Notices.
10.1.1 Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in Section 10.1.2), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier or electronic mail as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:
(a) if to the Administrative Agent, the Borrowers or any other Borrower, to the address, telecopier number, electronic mail address or telephone number specified in Appendix B:
(b) if to any Lender, any Issuing Bank or the Swingline Lender, to the address, telecopier number, electronic mail address or telephone number in its Administrative Questionnaire on file with the Administrative Agent.
Notices and other communications sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices and other communications sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices and other communications delivered through electronic communications to the extent provided in Section 10.1.2 below, shall be effective as provided in Section 10.1.2.
10.1.2 Electronic Communications. Notices and other communications to the Lenders and the Issuing Banks hereunder may be delivered or furnished by electronic communication (including e-mail, FpML messaging and internet or intranet websites) pursuant to an electronic communications agreement (or such other procedures approved by the Administrative Agent in its sole discretion), provided that the foregoing shall not apply to notices to any Lender or any Issuing Bank pursuant to Article II if such Lender or such Issuing Bank has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent, Issuing Banks or the Borrowers may, in their discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.
Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgment from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement) and (ii) notices and other communications posted to an Internet or intranet website shall be deemed received by the intended recipient upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail address or other written acknowledgement) indicating that such notice or communication is available and identifying the website address therefor; provided that for both clauses (i) and (ii), if such notice or other communication is not sent during the normal business hours of the recipient, such notice, email or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient.
10.1.3 Change of Address, Etc. Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto.
10.1.4 Platform.
(i) Each Borrower agrees that the Administrative Agent may, but shall not be obligated to, make the Communications (as defined below) available to the Issuing Banks and the other Lenders by posting the Communications on Debt Domain, Intralinks, Syndtrak or a substantially similar electronic transmission system (the “Platform”).
(ii) The Platform is provided “as is” and “as available.” The Agent Parties (as defined below) do not warrant the adequacy of the Platform and expressly disclaim liability for errors or omissions in the Communications. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Communications or the Platform. In no event shall the Administrative Agent or any of its Related Parties (collectively, the “Agent Parties”) have any liability to the Borrowers or the other Borrowers, any Lender or any other Person or entity for damages of any kind, including, without limitation, direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of the Borrowers’ or the Administrative Agent’s transmission of communications through the Platform. “Communications” means, collectively, any notice, demand, communication, information, document or other material provided by or on behalf of any Borrower pursuant to any Credit Document or the transactions contemplated therein which is distributed to the Administrative Agent, any Lender or any Issuing Bank by means of electronic communications pursuant to this Section, including through the Platform.
10.2. Renewal, Extension, or Rearrangement. All provisions of this Agreement relating to Obligations shall apply with equal force and effect to each and all promissory notes executed hereafter which in whole or in part represent a renewal, extension for any period, increase, or rearrangement of any part of the Obligations originally represented by any part of such other Obligations.
10.3. Amendments and Waivers.
10.3.1 Required Lenders’ Consent. Subject to Section 10.3.2 and Section 10.3.3, no amendment, modification, termination or waiver of any provision of the Credit Documents, or consent to any departure by any Borrower therefrom, shall in any event be effective without the written concurrence of the Administrative Agent and the Required Lenders; provided that (a) the Administrative Agent may, with the consent of the Borrowers only, amend, modify or supplement this Agreement to cure any ambiguity, omission, defect or inconsistency, so long as such amendment, modification or supplement does not adversely affect the rights of any Lender or any Issuing Bank, (b) the Fee Letters may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto, (c) no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder (and any amendment, waiver or consent which by its terms requires the consent of all Lenders or each affected Lender may be effected with the consent of the applicable Lenders other than Defaulting Lenders), except that (i) the Commitments, Loans and/or Letter of Credit Obligations of such Lender may not be increased, reduced or extended without the consent of such Lender and (ii) any amendment, waiver or consent requiring the consent of all Lenders or each affected Lender that by its terms affects any Defaulting Lender disproportionately adversely relative to other affected Lenders shall require the consent of such Defaulting Lender, (d) each Lender is entitled to vote as such Lender sees fit on any bankruptcy reorganization plan that affects the Loans, and each Lender acknowledges that the provisions of Section 1126(c) of the Bankruptcy Code of the United States supersedes the unanimous consent provisions set forth herein, (e) the Required Lenders shall determine whether or not to allow any Borrower to use cash collateral in the context of a bankruptcy or insolvency proceeding and such determination shall be binding on all of the Lenders, (f) as to any amendment, amendment and restatement or other modifications otherwise approved in accordance with this Section 10.3, it shall not be necessary to obtain the consent or approval of any Lender that, upon giving effect to such amendment, amendment and restatement or other modification, would have no Commitment or outstanding Loans so long as such Lender receives payment in full of the principal of and interest accrued on each Loan made by, and all other amounts owing to, such Lender or accrued for the account of such Lender under this Agreement and the other Credit Documents at the time such amendment, amendment and restatement or other modification becomes effective, (g) the Administrative Agent and the Borrowers may make amendments contemplated by Section 2.17.2, (h) the Administrative Agent may make amendments contemplated by Section 1.6, (i) the Administrative Agent, the Borrowers, the applicable Approving Lenders and the applicable Additional Commitment Lenders may make amendments contemplated by Section 2.22 and (j) the L/C Commitment of any Issuing Bank may be amended in writing between only such Issuing Bank and the Borrowers (with written notice thereof to the Administrative Agent).
10.3.2 Affected Lenders’ Consent. Subject to Section 2.22, without the written consent of each Lender (other than a Defaulting Lender except as provided in Section 10.3.1(c) above) that would be affected thereby, no amendment, modification, termination, or consent shall be effective if the effect thereof would:
(a) extend the Revolving Commitment Termination Date;
(b) waive, reduce or postpone any scheduled repayment (but not prepayment) or alter the required application of any prepayment pursuant to Section 2.12, the required pro rata sharing of payments pursuant to Section 2.14 or the application of funds pursuant to Section 7.2, as applicable;
(c) extend the stated expiration date of any Letter of Credit, beyond the Revolving Commitment Termination Date;
(d) reduce the principal of or the rate of interest on any Loan (other than any waiver of the imposition of the Default Rate pursuant to Section 2.9) or any fee or premium payable hereunder; provided, however, that only the consent of the Required Lenders shall be necessary (i) to amend the definition of “Default Rate” or to waive any obligation of the Borrowers to pay interest at the Default Rate or (ii) to amend any financial covenant hereunder (or any defined term used therein) even if the effect of such amendment would be to reduce the rate of interest on any Loan or to reduce any fee payable hereunder;
(e) extend the time for payment of any such interest or fees;
(f) reduce the principal amount of any Loan or any reimbursement obligation in respect of any Letter of Credit, including Letter of Credit Borrowings;
(g) amend, modify, terminate or waive any provision of this Section 10.3.2 or Section 10.3.3 or any other provision of this Agreement that expressly provides that the consent of all Lenders is required;
(h) change the percentage of the outstanding principal amount of Loans that is required for the Lenders or any of them to take any action hereunder or amend the definition of “Required Lenders” or “Revolving Commitment Percentage” or modify the amount of the Commitment of any Lender;
(i) release any Borrower from its obligations hereunder;
(j) consent to the assignment or transfer by the Borrowers of any of their rights and obligations under any Credit Document (except pursuant to a transaction permitted hereunder);
(k) alter the reduction of Revolving Commitments pursuant to Section 2.11.2 in a manner other than as specified therein; or
(l) subordinate, or have the effect of subordinating, the Obligations hereunder to any other Indebtedness or other obligation.
10.3.3 Other Consents. No amendment, modification, termination or waiver of any provision of the Credit Documents, or consent to any departure by the Borrowers therefrom, shall:
(a) increase any Revolving Commitment of any Lender over the amount thereof then in effect without the consent of such Lender; provided, no amendment, modification or waiver of any condition precedent, covenant, Unmatured Default or Default shall constitute an increase in any Revolving Commitment of any Lender;
(b) amend, modify, terminate or waive any provision hereof relating to the Swingline Sublimit or the Swingline Loans without the consent of the Swingline Lender;
(c) amend, modify, terminate or waive any provision hereof affecting the rights or duties of an Issuing Bank under this Agreement without the consent of such Issuing Bank;
(d) amend, modify, terminate or waive any obligation of Lenders relating to the purchase of participations in Letters of Credit as provided in Section 2.3.5 without the written consent of the Administrative Agent and of each Issuing Bank; or
(e) amend, modify, terminate or waive any provision of this Section 10.3 as the same applies to the Administrative Agent, or any other provision hereof as the same applies to the rights or obligations of the Administrative Agent, without the consent of the Administrative Agent.
10.3.4 Execution of Amendments, etc. The Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of such Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any Borrower in any case shall entitle any Borrower to any other or further notice or demand in similar or other circumstances. Except for actions expressly permitted to be taken by the Administrative Agent, no amendment, modification, termination or waiver of any provision of this Agreement, or any consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent and the Borrowers, and by the Required Lenders or all affected Lenders, as applicable.
10.4. Integration; Effectiveness. This Agreement, the other Credit Documents and the Fee Letters, constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Article III, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.
10.5. Electronic Execution of Assignments and Other Documents. This Agreement, any Credit Document and any other Communication, including Communications required to be in writing, may be in the form of an Electronic Record and may be executed using Electronic Signatures. Each of the Borrowers and each of the Administrative Agent, each Issuing Bank, the Swingline Lender, and each Lender (collectively, each a “Credit Party”) agrees that any Electronic Signature on or associated with any Communication shall be valid and binding on
such Person to the same extent as a manual, original signature, and that any Communication entered into by Electronic Signature, will constitute the legal, valid and binding obligation of such Person enforceable against such Person in accordance with the terms thereof to the same extent as if a manually executed original signature was delivered. Any Communication may be executed in as many counterparts as necessary or convenient, including both paper and electronic counterparts, but all such counterparts are one and the same Communication. For the avoidance of doubt, the authorization under this paragraph may include, without limitation, use or acceptance of a manually signed paper Communication which has been converted into electronic form (such as scanned into PDF format), or an electronically signed Communication converted into another format, for transmission, delivery and/or retention. The Administrative Agent and each of the Credit Parties may, at its option, create one or more copies of any Communication in the form of an imaged Electronic Record (“Electronic Copy”), which shall be deemed created in the ordinary course of such Person’s business, and destroy the original paper document. All Communications in the form of an Electronic Record, including an Electronic Copy, shall be considered an original for all purposes, and shall have the same legal effect, validity and enforceability as a paper record. Notwithstanding anything contained herein to the contrary, neither the Administrative Agent, any Issuing Bank nor the Swingline Lender is under any obligation to accept an Electronic Signature in any form or in any format unless expressly agreed to by such Person pursuant to procedures approved by it; provided, further, without limiting the foregoing, (a) to the extent the Administrative Agent, any Issuing Bank and/or the Swingline Lender has agreed to accept such Electronic Signature, the Administrative Agent and each of the Credit Parties shall be entitled to rely on any such Electronic Signature purportedly given by or on behalf of any Borrower and/or any Credit Party without further verification and regardless of the appearance or form of such Electronic Signature, and (b) upon the request of the Administrative Agent or any Credit Party, any Communication executed using an Electronic Signature shall be promptly followed by a manually executed counterpart.
Neither the Administrative Agent, any Issuing Bank nor the Swingline Lender shall be responsible for or have any duty to ascertain or inquire into the sufficiency, validity, enforceability, effectiveness or genuineness of any Credit Document or any other agreement, instrument or document (including, for the avoidance of doubt, in connection with the Administrative Agent’s reliance on any Electronic Signature transmitted by telecopy, emailed .pdf or any other electronic means). The Administrative Agent shall be entitled to rely on, and shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon, any Communication (which writing may be a fax, any electronic message, Internet or intranet website posting or other distribution or signed using an Electronic Signature) or any statement made to it orally or by telephone and believed by it to be genuine and signed or sent or otherwise authenticated (whether or not such Person in fact meets the requirements set forth in the Credit Documents for being the maker thereof).
Each Borrower and each Lender hereby waives (i) any argument, defense or right to contest the legal effect, validity or enforceability of this Agreement, any other Credit Document based solely on the lack of paper original copies of this Agreement and/or such other Credit Document and (ii) waives any claim against the Administrative Agent, each Issuing Bank, each Lender and each Related Party for any liabilities arising solely from the Administrative Agent’s, any Issuing Bank’s and/or any Lender’s reliance on or use of Electronic Signatures, including
any liabilities arising as a result of the failure of the Borrowers to use any available security measures in connection with the execution, delivery or transmission of any Electronic Signature.
10.6. Consent to Jurisdiction. Each party hereto irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the courts of the State of New York sitting in New York County, New York and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any other Credit Document, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the fullest extent permitted by applicable Law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or in any other Credit Document shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any other Credit Document against any Borrower or its properties in the courts of any jurisdiction.
10.7. No Advisory or Fiduciary Relationship. In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Credit Document), each of the Borrowers acknowledges and agrees, and acknowledges its Affiliates’ understanding, that: (a)(i) the arranging and other services regarding this Agreement provided by the Administrative Agent, each Sustainability Structuring Agent and each Joint Lead Arranger, are arm’s-length commercial transactions between the Borrowers, on the one hand, and the Administrative Agent, each Sustainability Structuring Agent and each Joint Lead Arranger, on the other hand, (ii) the Borrowers have consulted their own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (iii) each of the Borrowers is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Credit Documents; (b)(i) each of the Administrative Agent, the Joint Lead Arrangers, the Sustainability Structuring Agents and the Lenders is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not and will not be acting as an advisor, agent or fiduciary, for any Borrower or any of its Affiliates or any other Person and (ii) each of the Administrative Agent, the Joint Lead Arrangers, the Sustainability Structuring Agents and the Lenders does not have any obligation to any Borrower or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Credit Documents; and (c) each of the Administrative Agent, the Joint Lead Arrangers, the Sustainability Structuring Agents and the Lenders and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrowers and their Affiliates, and each of the Administrative Agent, the Joint Lead Arrangers, the Sustainability Structuring Agents and the Lenders does not have any obligation to disclose any of such interests to any Borrower or its Affiliates. To the fullest extent permitted by Law, each of the Borrowers hereby waives and releases, any claims that it may have against the Administrative Agent, the Joint Lead Arrangers, the Sustainability Structuring Agents and the Lenders with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated hereby.
10.8. Marshalling; Payments Set Aside. Neither the Administrative Agent nor any Lender shall be under any obligation to marshal any assets in favor of any Borrower or any other Person or against or in payment of any or all of the Obligations. To the extent that any Borrower makes a payment or payments to the Administrative Agent, the Issuing Banks, the Swingline Lender or the Lenders (or to the Administrative Agent, on behalf of the Issuing Banks or Lenders), or the Administrative Agent, the Issuing Banks or the Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any Debtor Relief Law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred.
10.9. Obligations Several; Independent Nature of Lenders’ Rights. The obligations of the Lenders hereunder are several and no Lender shall be responsible for the obligations or Revolving Commitment of any other Lender hereunder. Nothing contained herein or in any other Credit Document, and no action taken by the Lenders pursuant hereto or thereto, shall be deemed to constitute the Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising under this Agreement and the other Credit Documents and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose.
10.10. Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Unmatured Default or Default if such action is taken or condition exists.
10.11. Resignation As Swingline Lender After Assignment. Notwithstanding anything to the contrary contained herein, if at any time Regions assigns all of its Commitments and Loans pursuant to Section 9.2, Regions may, upon 30 days' notice to the Borrowers, resign as the Swingline Lender. In the event of any such resignation as the Swingline Lender, the Borrowers shall be entitled to appoint from among the Lenders a successor Swingline Lender hereunder; provided, however, that no failure by the Borrowers to appoint any such successor shall affect the resignation of Regions as the Swingline Lender. If a Swingline Lender resigns as the Swingline Lender, it shall retain all the rights of the Swingline Lender provided for hereunder with respect to Swingline Loans made by it and outstanding as of the effective date of such resignation, including the right to require the Lenders to make Base Rate Loans or fund risk participations in outstanding Swingline Loans pursuant to the terms of this Agreement.
10.12. Standard of Care: Limitation of Damages. The Lenders, the Issuing Banks and the Administrative Agent shall be liable to the Borrowers only for matters arising from this Agreement or otherwise related to the Obligations resulting from such Lender's or the Administrative Agent's gross negligence or willful misconduct as finally determined by a court
of competent jurisdiction and not subject to any appeal or by settlement tantamount to such judgment, and liability for all other matters is hereby waived. The Lenders, the Issuing Banks and the Administrative Agent shall not in any event be liable to the Borrowers for special, punitive or consequential damages (as opposed to direct or actual damages) arising from this Agreement or otherwise related to the Obligations.
10.13. Incorporation of Schedules. All Schedules and Exhibits referred to in this Agreement are incorporated herein by this reference.
10.14. Indulgence Not Waiver. The Lenders’, the Issuing Banks’ or the Administrative Agent's indulgence in the existence of a default hereunder or any other departure from the terms of this Agreement shall not prejudice the Lenders’, the Issuing Banks’ or the Administrative Agent's rights to declare a default or otherwise demand strict compliance with this Agreement.
10.15. Cumulative Remedies. The remedies provided the Lenders, the Issuing Banks and the Administrative Agent in this Agreement are not exclusive of any other remedies that may be available to the Lenders, the Issuing Banks and the Administrative Agent under any other document or at law or equity.
10.16. Survival of Representations, Warranties and Agreements. All representations, warranties and agreements made herein shall survive the execution and delivery hereof and the making of any Credit Extension. Notwithstanding anything herein or implied by law to the contrary, the agreements of each Borrower set forth in Section 2.17.3, Section 2.18, Section 2.19, Section 10.26, Section 10.27, and Section 10.19 and the agreements of the Lenders and the Administrative Agent set forth in Section 2.14, Section 8.3 and Section 10.26.3 shall survive the payment of the Loans, the cancellation, expiration or cash collateralization of the Letters of Credit, and the termination hereof.
10.17. Usury Savings Clause. Notwithstanding any other provision herein, the aggregate interest rate charged or agreed to be paid with respect to any of the Obligations, including all charges or fees in connection therewith deemed in the nature of interest under applicable Laws shall not exceed the Maximum Lawful Rate. If the rate of interest (determined without regard to the preceding sentence) under this Agreement at any time exceeds the Maximum Lawful Rate, the aggregate outstanding amount of the Loans made hereunder shall bear interest at the Maximum Lawful Rate until the total amount of interest due hereunder equals the amount of interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect. In addition, if when the Loans made hereunder are repaid in full the total interest due hereunder (taking into account the increase provided for above) is less than the total amount of interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect, then to the extent permitted by law, the Borrowers shall pay to the Administrative Agent an amount equal to the difference between the amount of interest paid and the amount of interest which would have been paid if the Maximum Lawful Rate had at all times been in effect. Notwithstanding the foregoing, it is the intention of the Lenders and each of the Borrowers to conform strictly to any applicable usury laws. Accordingly, if any Lender contracts for, charges, or receives any consideration which constitutes interest in excess of the Maximum Lawful Rate,
then any such excess shall be cancelled automatically and, if previously paid, shall at such Lender’s option be applied to the aggregate outstanding amount of the Loans made hereunder or be refunded to each of the applicable Borrowers. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Lawful Rate, such Person may, to the extent permitted by applicable Laws, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest, throughout the contemplated term of the Obligations hereunder.
10.18. Entire Agreement. This Agreement and the other written agreements among the Borrowers, the Lenders and the Administrative Agent represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein. Provided, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the Obligations, the provisions in this Agreement shall control.
10.19. Severability. Should any provision of this Agreement be declared invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect.
10.20. Time of Essence. Time is of the essence of this Agreement, and all dates and time periods specified herein shall be strictly observed.
10.21. Applicable Law. The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Obligations shall be determined according to the laws of New York, without giving effect to its principles or rules of conflict of laws to the extent such principles or rules are not mandatorily applicable by statute and would require or permit the application of the laws of another jurisdiction.
10.22. Captions Not Controlling. Captions and headings have been included in this Agreement for the convenience of the parties, and shall not be construed as affecting the content of the respective Sections.
10.23. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
10.24. Waiver of Venue. Each party hereto irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Credit Document in any court referred to in Section 10.6. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
10.25. Termination. The termination of this Agreement shall not affect any rights of the Borrowers, the Lenders, the Issuing Banks or the Administrative Agent or any obligation of the Borrowers, the Lenders, the Issuing Banks or the Administrative Agent, arising prior to the effective date of such termination, and the provisions hereof shall continue to be fully operative until all transactions entered into or rights created or obligations incurred prior to such termination have been fully disposed of, concluded or liquidated and the Obligations arising prior to or after such termination have been irrevocably paid in full. The rights granted to the Administrative Agent for the benefit of the Lenders and the Issuing Banks hereunder and under the other Credit Documents shall continue in full force and effect, notwithstanding the termination of this Agreement, until all of the Obligations have been paid in full after the termination hereof or the Borrowers have furnished the Lenders with an indemnification satisfactory to the Lenders with respect thereto. All representations, warranties, covenants, waivers and agreements contained herein shall survive termination hereof until payment in full of the Obligations unless otherwise provided herein. Notwithstanding the foregoing, if after receipt of any payment of all or any part of the Obligations, the Administrative Agent, the Issuing Banks or the Lenders are for any reason compelled to surrender such payment to any Person because such payment is determined to be void or voidable as a preference, impermissible setoff, a diversion of trust funds or for any other reason, this Agreement shall continue in full force and the Borrowers shall be liable to, and shall indemnify and hold the Administrative Agent, the Issuing Banks and the Lenders harmless for, the amount of such payment surrendered until the Administrative Agent, the Issuing Banks and the Lenders shall have been finally and irrevocably paid in full. The provisions of the foregoing sentence shall be and remain effective notwithstanding any contrary action which may have been taken by the Administrative Agent, the Issuing Banks or the Lenders in reliance upon such payment, and any such contrary action so taken shall be without prejudice to the Administrative Agent's, the Issuing Banks’ or the Lenders' rights under this Agreement and shall be deemed to have been conditioned upon such payment having become final and irrevocable. If on any date on which the Borrowers wish to pay the Obligations in full and terminate this Agreement, there are any outstanding Letters of Credit, the Borrowers shall, unless otherwise agreed by the Administrative Agent in its sole discretion, make a cash prepayment to the Administrative Agent on such date in an amount equal to the then outstanding Letter of Credit Obligations, and the Administrative Agent shall hold such prepayment in an interest bearing cash collateral account in the name and under the sole control of the Administrative Agent (which account shall bear interest at the Administrative Agent's then current rate for such accounts) as security for the Letter of Credit Obligations. To the extent allowed by Law, such account shall not constitute an asset of the Borrowers, or either of them, subject to their rights therein under this Section 10.25. The Administrative Agent shall from time to time debit such account for the payment of the Letter of Credit Obligations as the same become due and payable and shall promptly refund any excess funds (including interest) held in said account to the Borrowers if and when no Letter of Credit Obligations remain outstanding hereunder and all of the Obligations have been paid in full. The
Borrowers shall remain liable for any Obligations in excess of the amounts paid from such account.
10.26. Expenses; Indemnity.
10.26.1 Costs and Expenses. The Borrowers shall pay (subject to Section 2.21 with respect to PLICO), without duplication of any other amounts otherwise payable hereunder, (i) all reasonable and documented out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable and documented out-of-pocket fees, charges and disbursements of counsel for the Administrative Agent) in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Credit Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable and documented out-of-pocket expenses incurred by any Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all reasonable and documented out-of-pocket expenses incurred by the Administrative Agent, any Lender or any Issuing Bank (including the reasonable and documented out-of-pocket fees, charges and disbursements of any counsel for the Administrative Agent, any Lender or any Issuing Bank) in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Credit Documents, including its rights under this Section, or (B) in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.
10.26.2 Indemnification by Borrowers. The Borrowers shall indemnify (subject to Section 2.21 with respect to PLICO) the Administrative Agent, the Issuing Banks, the Joint Lead Arrangers and each Lender and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable and documented fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby (including, without limitation, the Indemnitee’s reliance on any Communication executed using an Electronic Signature, or in the form of an Electronic Record), the performance by the parties hereto of their respective obligations hereunder or the consummation of the transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, including any of the foregoing relating to any actual or alleged presence or release of hazardous waste, substance or materials on or from any property owned or operated by the Borrowers or its Subsidiaries, or any environmental liability or violation of any federal, state or local environmental, health or safety law or regulation related in any way to the Borrowers or its Subsidiaries, or (iii) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and whether or not any such claim, litigation, investigation or proceeding is brought by the Borrowers, their equity holders, their Affiliates or any other Person; provided that the Borrowers shall have no obligation hereunder to any Indemnitee with respect to such losses, claims, damages, liabilities or related expenses resulting from the gross negligence or willful misconduct of such Indemnitee or its Related Parties as
determined by a court of competent jurisdiction by a final and nonappealable judgment or disputes that are solely between Indemnitees where the corresponding losses, claims, damages, liabilities and related expenses do not directly relate to an act or omission by any Borrower or its Subsidiaries.
10.26.3 Reimbursement by Lenders. To the extent that the Borrowers for any reason fail to pay any amount required under Section 10.26.1 and 10.26.2 to be paid by it to the Administrative Agent (or any sub-agent thereof), any Issuing Bank or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), the applicable Issuing Bank or such Related Party, as the case may be, such Lender’s pro rata share (in each case, determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) or such Issuing Bank in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) or such Issuing Bank in connection with such capacity. The obligations of the Lenders under this Section 10.26.3 are subject to the provisions of this Agreement that provide that their obligations are several in nature, and not joint and several.
10.26.4 Payments. All amounts due under this Section shall be payable promptly, but in any event within ten (10) Business Days after written demand therefor (including delivery of copies of applicable invoices).
10.26.5 Survival. The provisions of this Section shall survive resignation or replacement of the Administrative Agent, Collateral Agent, any Issuing Bank, the Swingline Lender or any Lender, termination of the commitments hereunder and repayment, satisfaction and discharge of the loans and obligations hereunder.
10.27. Set Off. Subject to Section 2.21, if a Default shall have occurred and be continuing, each Lender, each Issuing Bank, and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender, such Issuing Bank or any such Affiliate to or for the credit or the account of the Borrowers against any and all of the obligations of the Borrowers now or hereafter existing under this Agreement or any other Credit Document to such Lender or such Issuing Bank, irrespective of whether or not such Lender or such Issuing Bank shall have made any demand under this Agreement or any other Credit Document and although such obligations of the Borrowers may be contingent or unmatured or are owed to a branch or office of such Lender or such Issuing Bank different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Lender, each Issuing Bank and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender, such Issuing Bank or their respective Affiliates may have. Each of the Lenders and the Issuing Banks agrees to notify the Borrowers and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.
10.28. Treatment of Certain Information.
10.28.1 Confidentiality. Each of the Administrative Agent, the Lenders and the Issuing Banks agree to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its Related Parties on a “need to know” basis (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent required or requested by any Governmental Authority purporting to have jurisdiction over such Person or its Related Parties (including any self-regulatory authority, such as the National Association of Insurance Commissioners); (c) to the extent required by applicable Law or regulations or by any subpoena or similar legal process; (d) to any other party hereto; (e) in connection with the exercise of any remedies hereunder or under any other Credit Document or any action or proceeding relating to this Agreement or any other Credit Document or the enforcement of rights hereunder or thereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights and obligations under this Agreement, or (ii) any actual or prospective party (or its Related Parties) to any swap, derivative or other transaction under which payments are to be made by reference to the Borrowers and their obligations, this Agreement or payments hereunder; (g) with the consent of the Borrowers; (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section, or (y) becomes available to the Administrative Agent, any Lender, any Issuing Bank or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrowers; or (i) on a confidential basis to (i) any rating agency in connection with rating the Borrowers or the credit facilities provided hereunder or (ii) the CUSIP Service Bureau or any similar agency in connection with the application, issuance, publishing and monitoring of CUSIP numbers or other market identifiers with respect to the credit facilities provided hereunder. In addition, the Administrative Agent and the Lenders may disclose the existence of this Agreement and information about this Agreement to market data collectors, similar service providers to the lending industry and service providers to the Administrative Agent and the Lenders in connection with the administration of this Agreement, the other Credit Documents and the Commitments.
10.28.2 Information. For purposes of this Section, “Information” means all information received from the Borrowers or any of their Subsidiaries relating to the Borrowers or any of their Subsidiaries or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or any Issuing Bank on a nonconfidential basis prior to disclosure by the Borrowers or any of their Subsidiaries. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
10.28.3 Disclosure of Fee Letters and Engagement Letter. The Borrowers’ obligations in respect of the confidentiality and disclosure of the Fee Letters and the Engagement Letter shall not be superseded by this Section 10.28 and shall be governed by the terms and conditions set forth therein.
10.29. Patriot Act; Beneficial Ownership Regulation. Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies each Borrower that pursuant to the requirements of the Patriot Act and the Beneficial Ownership Regulation, it is required to obtain, verify, and record information that identifies each Borrower which information includes the name of each Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify such Borrower in accordance with the Patriot Act and the Beneficial Ownership Regulation, and each Borrower agrees to provide, and to cause each of its Subsidiaries to provide, such information from time to time to such Lender and the Administrative Agent, as applicable.
10.30. Amendment and Restatement of Existing Credit Agreement. Effective as of the Closing Date, the Existing Credit Agreement shall be amended and restated in its entirety by this Agreement. The proceeds of the Loans made on the Closing Date under this Agreement shall repay any Loans outstanding under the Existing Credit Agreement. The parties hereto acknowledge and agree that (a) all “Obligations” (as defined in the Existing Credit Agreement) under the Existing Credit Agreement shall be deemed to be Obligations outstanding hereunder; (b) this Agreement and the other Credit Documents, whether executed and delivered in connection herewith or otherwise, do not constitute a novation or termination of the “Obligations” (as defined in the Existing Credit Agreement) under the Existing Credit Agreement as in effect immediately prior to the Closing Date and which remain outstanding; (c) the “Obligations” (as amended and restated hereby and which are hereinafter subject to the terms herein) are in all respects continuing; and (d) all references in the other Credit Documents to the Existing Credit Agreement shall be deemed to refer without further amendment to this Agreement. The promissory notes held by the Lenders to evidence the indebtedness owing by the Borrowers to the Lenders under the Existing Credit Agreement shall be retained by the Lenders in their files until this Agreement is terminated. The parties hereto further acknowledge and agree that this Agreement constitutes an amendment to the Existing Credit Agreement made under and in accordance with the terms of Section 10.3 of the Existing Credit Agreement. All revolving loans outstanding under the Existing Credit Agreement immediately prior to the Closing Date shall, as of the Closing Date, be deemed to be a borrowing of Revolving Loans in an equivalent amount hereunder as of the Closing Date. The Administrative Agent, the Borrowers and the Lenders hereby acknowledge and agree that the revolving commitments and participation interests in all outstanding swingline loans and letters of credit in effect under the Existing Credit Agreement immediately prior to the Closing Date have been reallocated to the Revolving Commitments set forth on Appendix A and the revolving loans and of participation interests in swingline loans and letters of credit outstanding under the Existing Credit Agreement immediately prior to the Closing Date have been reallocated as necessary to give effect to the Revolving Commitments, and such reallocations shall be effective on the Closing Date and do not require any Assignment and Assumption or any other action of any Person.
10.31. Acknowledgement and Consent to Bail-In of Affected Financial Institutions.
Notwithstanding anything to the contrary in any Credit Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any Lender that is an Affected Financial Institution arising under any Credit Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of the applicable Resolution Authority and agrees and consents to,
and acknowledges and agrees to be bound by (a) the application of any Write-Down and Conversion Powers by the applicable Resolution Authority to any such liabilities arising hereunder which may be payable to it by any Lender that is an Affected Financial Institution; and (b) the effects of any Bail-in Action on any such liability, including, if applicable: (i) a reduction in full or in part or cancellation of any such liability; (ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such Affected Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Credit Document; or (iii) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of the applicable Resolution Authority.
10.32. Certain ERISA Matters.
(a) Each Lender (x) represents and warrants, as of the date such Person became a Lender party hereto, to, and (y) covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Administrative Agent and each Joint Lead Arranger and their respective Affiliates, and not, for the avoidance of doubt, to or for the benefit of the Borrowers, that at least one of the following is and will be true:
(i) such Lender is not using “plan assets” (within the meaning of Section 3(42) of ERISA or otherwise for purposes of Title I of ERISA or Section 4975 of the Code) of one or more Benefit Plans with respect to such Lender’s entrance into, participation in, administration of any performance of the Loans, the Letters of Credit or the Commitments or this Agreement;
(ii) the prohibited transaction exemption set forth in one or more PTEs, such as PTE 84-14 (a class exemption for certain transactions determined by independent qualified professional asset managers), PTE 95-60 (a class exemption for certain transactions involving insurance company general accounts), PTE 90-1 (a class exemption for certain transactions involving insurance company pooled separate accounts), PTE 91-38 (a class exemption for certain transactions involving bank collective investment funds) or PTE 96-23 (a class exemption for certain transactions determined by in-house asset managers), is applicable with respect to such Lender’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement; or
(iii) (A) such Lender is an investment fund managed by a “Qualified Professional Asset Manager” (within the meaning of Part VI of PTE 84-14), (B) such Qualified Professional Asset Manager made the investment decision on behalf of such Lender to enter into, participate in, administer and perform the Loans, the Letters of Credit, the Commitments and this Agreement, (C) the entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement satisfies the requirements of sub-sections (b) through (g) of Part I of PTE 84-14 and (D) to the best knowledge of such Lender, the requirements of subsection (a) of Part I of PTE 84-14 are satisfied with respect to such Lender’s entrance into,
participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement; or
(iv) such other representation, warranty and covenant as may be agreed in writing between the Administrative Agent, in its sole discretion, and such Lender.
(b) In addition, unless either (1) sub-clause (i) in the immediately preceding clause (a) is true with respect to a Lender or (2) a Lender has provided another representation, warranty and covenant in accordance with sub-clause (iv) in the immediately preceding clause (a), such Lender further (x) represents and warrants, as of the date such Person became a Lender party hereto, and (y) covenants, from the date such Person became a Lender party hereto to the date such Person ceases being a Lender party hereto, for the benefit of, the Administrative Agent, and not, for the avoidance of doubt, to or for the benefit of any Borrower, that the Administrative Agent is not a fiduciary with respect to the assets of such Lender involved in such Lender’s entrance into, participation in, administration of and performance of the Loans, the Letters of Credit, the Commitments and this Agreement (including in connection with the reservation or exercise of any rights by the Administrative Agent under this Agreement, any Credit Document or any documents related hereto or thereto).
10.33. Waiver of Breakage Costs.
Inasmuch as revolving loans are outstanding under the Existing Credit Agreement immediately prior to the Closing Date, the Borrowers must make prepayments and adjustments on such loans as are necessary to give effect to the Commitments of the Lenders hereunder. The Borrowers, in consultation with the Administrative Agent, have endeavored to manage the allocation of Commitments and the selection of Interest Periods with respect to Term SOFR Rate Loans outstanding on the Closing Date in such a manner as to minimize break-funding costs. Nonetheless, such prepayments of such loans under the Existing Credit Agreement likely will cause breakage costs. Notwithstanding the provisions of Section 2.17.3, each of the Lenders party hereto hereby waives its right to receive compensation or reimbursement for such breakage costs (a) in connection with the reallocation of Revolving Commitment Percentages on the Closing Date and (b) in connection with the resetting of the Interest Period for any Loan outstanding as of the Closing Date.
10.34. Acknowledgement Regarding Any Supported QFCs.
To the extent that the Credit Documents provide support, through a guarantee or otherwise, for Hedge Agreements or any other agreement or instrument that is a QFC (such support, “QFC Credit Support”, and each such QFC, a “Supported QFC”), the parties acknowledge and agree as follows with respect to the resolution power of the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (together with the regulations promulgated thereunder, the “U.S. Special Resolution Regimes”) in respect of such Supported QFC and QFC Credit Support (with the provisions below applicable notwithstanding that the Credit Documents and any Supported QFC may in fact be stated to be governed by the laws of the State of New York and/or of the United States or any other state of the United States):
(a) In the event a Covered Entity that is party to a Supported QFC (each, a “Covered Party”) becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer of such Supported QFC and the benefit of such QFC Credit Support (and any interest and obligation in or under such Supported QFC and such QFC Credit Support, and any rights in property securing such Supported QFC or such QFC Credit Support) from such Covered Party will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if the Supported QFC and such QFC Credit Support (and any such interest, obligation and rights in property) were governed by the laws of the United States or a state of the United States. In the event a Covered Party or a BHC Act Affiliate of a Covered Party becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under the Credit Documents that might otherwise apply to such Supported QFC or any QFC Credit Support that may be exercised against such Covered Party are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if the Supported QFC and the Credit Documents were governed by the laws of the United States or a state of the United States. Without limitation of the foregoing, it is understood and agreed that rights and remedies of the parties with respect to a Defaulting Lender shall in no event affect the rights of any Covered Party with respect to a Supported QFC or any QFC Credit Support.
(b) As used in this Section 10.34, the following terms have the following meanings:
“BHC Act Affiliate” means, with respect to any Person, an “affiliate” (as such term is defined under, and interpreted in accordance with, 12 U.S.C. § 1841(k)) of such Person.
“Covered Entity” means any of (i) a “covered entity” (as such term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b)); (ii) a “covered bank” (as such term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b)); or (iii) a “covered FSI” (as such term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b)).
“Default Right” means as defined in, and interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.
“QFC” means a “qualified financial contract” (as defined in, and interpreted in accordance with, 12 U.S.C. § 5390(c)(8)(D)).
[signatures on following pages]
IN WITNESS WHEREOF, the Borrowers, the Lenders and the Administrative Agent have executed this Agreement.
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| PROTECTIVE LIFE CORPORATION |
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| PROTECTIVE LIFE INSURANCE COMPANY |
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(Signature Page to Second Amended and Restated Credit Agreement)
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| REGIONS BANK, as a Lender and Issuing Bank |
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| [TBD], as a Lender [and Issuing Bank] | |
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| REGIONS BANK, as Administrative Agent | |
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| BNP PARIBAS, as a Sustainability Structuring Agent | |
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(Signature Page to Second Amended and Restated Credit Agreement)
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| PNC CAPITAL MARKETS, LLC, as a Sustainability Structuring Agent | |
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(Signature Page to Second Amended and Restated Credit Agreement)