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TVI
Time Value Investments 9725 3rd Avenue NE, Suite 610 Seattle, WA 98115 Toll Free: (877) 707 - 7787 Chris Bateman Institutional Investment Specialist chris.bateman@timevalueinv.com Tel: (206) 365 - 3003 Peter Becker Vice President peter.becker@timevalueinv.com Tel: (206) 365 - 3000 Proposal (Further Clarification) Broker/Dealer Service s City of La Quinta ATTACHMENTS TABLE OF CONTENTS - Broker/Dealer Request For Information RESUMES 4 WALL STREET DEALER LIST 5 TRANSACTION CONFIRMATION 6 FEE SCHEDULE EXPLANATION 7 SAMPLE PLATINUM REPORT 8 SAMPLE MONTHLY MARKET UPDATE 9 CREDIT CHANGE NOTIFICATION SYSTEM 10 PROOF OF INSURANCE 11 PROEQUITIES OFFICES MAP 12 EXAMPLE OF NETXINVESTOR 3.0 13 FORM X-17A-5/10-K 14 FINRA BROKER CHECK REPORT (INDIVIDUALS) 15 FINRA BROKER CHECK REPORT (COMPANY) 16 PROPOSAL BY SECTION RELATED SERVICES 1 QUESTIONNAIRE 2 SIGNATURE PAGE 3 PDF PAGE # 4 - 5 6 - 9 12 - 16 17 - 19 27 - 29 20 - 26 30 - 43 44 - 50 51 - 53 54 - 64 65 - 67 NET CAPITAL REQUIREMENTS 17 585 - 589 449 - 584 441 - 448 75 - 440 68 - 74 10 - 11 *Click anywhere along a Sections horizontal line to navigate to that location. Click anywhere on any page marked "Return to Table of Contents" to return to this page.* Time Value Investments, Inc. Tel: (206) 365 - 3000 9725 3rd Ave. NE, Suite 610 Toll Free: (877) 707 - 7787 Seattle, WA 98115 Fax: (206) 417 - 6000 June 19, 2019 Rosemary Hallick, Financial Services Analyst City of La Quinta 78495 Calle Tampico La Quinta CA, 92253 Dear Rosemary, Thank you for considering TVI as a provider of Broker/Dealer Services to the City of La Quinta. Time Value Investments is a FINRA registered branch of ProEquities, Inc. ProEquities is a wholly owned subsidiary of Protective Life Corporation. TVI has earned a reputation as a premier public funds brokerage provider. We believe the factors below, as well as the points made throughout this document, will clearly demonstrate that we are the ideal candidate for the City. Extensive Public Funds Investment Experience TVI has a multi-state public entity clientele and significant experience in the institutional investment sector, serving well over 300 public entities, including over 70 in California. Managing Institutional investments for public entities requires unique discipline and care. Yield is important, but safety and liquidity are higher priorities. And when assessing bond market risk, there is no substitute for experience. TVI’s fixed income specialists have assisted public entities through the Great Recession from 12/07 to 6/09, the 17 Fed Funds rate increases from 6/04 to 6/06, Y2K, and the dot-com bubble bursting in 2001. This experience has provided perspective and judgment that the City will find to be very valuable. Comprehensive Dealer Access Due to TVI’s status as a FINRA registered branch of ProEquities (a wholly owned subsidiary of Protective Life Insurance), our firm enjoys direct access to virtually all major institutional Wall Street bond inventories. This access allows TVI to provide the City with investment options that other investment managers may not even know existed. You will find a list of the Wall Street dealers from whom we purchase directly, with no middle-man, in Section 5. Institutional Investment Specialist, Chris Bateman and Vice President Peter Becker are the proposed broker representatives to the City of La Quinta and have extensive experience advising and brokering public entity transactions. They look forward to assisting the City in this capacity. The undersigned (Chris Bateman and Peter Becker) are officers of the firm, authorized to act in this capacity and are prepared to perform the services enumerated within the RFI. Chris Bateman will be the primary representative and Peter Becker will be the secondary representative for this project. LETTER OF INTRODUCTION Chris Bateman, Investment Specialist, Primary Representative Time Value Investments chris.bateman@timevalueinv.com Peter Becker, Vice President, Secondary Representative Time Value Investments peter.becker @timevalueinv.com - Broker/Dealer Request For Information Related Services It is important that the firm provide related services that will enhance the account relationship, which could include the items noted below. Please ensure your response to the RFP indicates which of these, if any, you offer: • An active secondary market for its securities. The City’s access to an active secondary market will be as robust as our Wall Street Dealer list (provided in Section 5). If the City ever needs to sell an investment in the secondary market, we will receive bids from several different Wall Street dealers (e.g. Morgan Stanley, JP Morgan Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs, etc.). Notably, we have no financial incentive to only show bids from one dealer over the other—we are simply looking for the best price on Wall Street to pass along to the City. • Access to multiple broker/dealer inventories for competitive pricing. One of the greatest advantages of utilizing institutional bond market specialists is gaining access to major Wall Street bond inventories that the client wouldn’t otherwise have. There are about 40 of these inventories posted on Bloomberg. Being able to purchase directly from those inventories with no middle man is a rare privilege. This broad access means the firm is under no pressure to “push” any one dealer’s inventory. With access to virtually all the major Wall Street bond inventories, Time Value Investments is able to provide bonds other firms may not even know existed. Please see Section 5 for a list of Wall Street dealers from whom we purchase directly. • Internal credit research analysis on commercial paper, bankers’ acceptances and other securities it offers for sale. We conduct internal credit research analysis on the issuers we present to our clients, using several sources to cross reference each other. The Bloomberg terminal, for example, allows us to better understand a corporation’s likelihood for default (at a glance) by assigning a “1-Year Default Risk” rating to a particular security. We analyze credit fundamentals, look at the issuer’s ratings history and ratings outlook from at least two nationally recognized statistical rating organizations (NRSROs), and examine the price of a “credit default swap” for the bond in question. The terminal offers a similar breakdown for municipal bonds—which is used alongside the Electronic Municipal Market Access (“EMMA”) database to formulate an opinion on a bond issuer. • Be willing to purchase securities from the City’s portfolio. In addition to leveraging our comprehensive market access to find a buyer on the secondary market, we are able and willing to purchase securities from the City’s portfolio and do so for other public entities as the circumstances warrant. Nevertheless, we avoid maintaining a large inventory of securities as doing so can potentially create bias for a firm’s “in-house” inventory. • Be capable of providing market analysis, economic projections, portfolio analysis, interest earnings projections, and newsletters. Please see, Section 8 “Sample Platinum Report”; Section 9 “Sample Monthly Market Update”; and Section 10 “Credit Change Notification Process” Furthermore, through the “NetXInvestor” platform (discussed on the following page), clients have access to the latest industry, economic and market news, provided by Argus, Thomson Reuters, FactSet, Midnight Trader, Markit Research Team, DowJones, and Morningstar. FURTHER CLARIFICATION - Broker/Dealer Request For Information • Online platform for investment research, portfolio management, inventory availability, and/or trading. Clients enjoy complimentary access to “NetXInvestor 3.0.” This online platform allows clients to perform credit research without entirely relying on a broker (who has a financial incentive to sell a bond). Please see an overview of the online platform in Section 13. • If FINRA report has and Disclosure Events resolved within the last three years, or any which are still pending, please provide explanation of the findings and, if applicable, steps taken to avoid future occurrences. Time Value Investments (TVI) has never had any disclosure events since its inception in 2010. Chris Bateman, Peter Becker, and Paul Jarvis (individuals proposed within this RFI) do not have any disclosure events. However, given the size of ProEquities (approximately 650 salespeople), the firm and its personnel are, at times, the subject of regulatory proceedings and/or litigation with respect to the SEC, federal and state agencies, regulatory bodies, and/or the courts. None of these inquiries relate to the institutional fixed-income business of the firm. A thorough review of ProEquities’ brokercheck report reveals that all disclosures within the past 3 years deal with retail financial advisors. ProEquities compliance department, made up of 12 professionals, have taken appropriate steps to protect against future occurrences. FURTHER CLARIFICATION - Broker/Dealer Request For Information BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION Name: Chris Bateman Title: Institutional Investment Specialist Telephone: (206) 365 - 3003 Name: Peter Becker Title: Vice President Telephone: (206) 365 - 3000 5. Manager/Partner-in-charge (attach resume): Name: Paul Jarivs Title: Managing Director Telephone: (206) 365 - 3000 1 0 6. Please indicate the staffing level for your office: 4 Management: Trading: Sales: 2 Operations/Clearing: 10% U.S. Treasuries 0% BA's 0% Commercial Paper 15% CD’s 0% Mutual Funds 65% Agencies (U.S. Government) 0% Repos 0% Reverse Repos 0% CMO’s 0% Derivatives 0% Stocks/Equities 10% Other (Corporate Bonds) 1. Name of Firm: Time Value Investments(a FINRA registered branch of ProEquities) 2. Physical Address of Trading Office: 2801 Hwy 280 South, Birmingham, AL 35223 Physical Address of Corporate Headquarters: 2801 Hwy 280 South, Birmingham, AL 35223 3. Telephone of Trading Office: (206) 365 - 3000 Telephone of Corporate Headquarters: (800) 288 - 3035 4. Broker's Representative(s) to the City (attach resume(s)): Which of the above personnel have read the City's Investment Policy? Chris Bateman and Peter Becker the proposed co-representatives to the City and Paul Jarvis, TVI's Managing Director, have all read the City's Investment Policy. Which instruments are offered regularly by your local office? (Must equal 100%) 8. 7. References -- Please identify your most directly comparable public sector clients in our geographical area. Entity City of Chula Vista Contact David Bilby Telephone (619) 407-3584 Client Since August 2018 Entity City of La Mesa Contact Bud Vogt Telephone (619) 667-1496 Client Since June 2012 10. Has your firm been subject to any litigation, arbitration, or regulatory proceedings, either pending, adjudicated, or settled, that involved allegations of improper, fraudulent, disreputable or unfair activities related to the sale of securities to or the purchase of securities from institutional clients? If so, explain. Time Value Investments (TVI) has never been subject to regulatory, state, or federal agency investigations. Given that ProEquities has approximately 650 salespeople, from time to time and in the normal course of business, the firm and its personnel are the subject of regulatory proceedings and/or litigation with respect to the SEC, federal and state agencies, regulatory bodies, and/or the courts. None of these inquiries relate to the institutional or retail fixed-income business of the firm. Time Value Investments (TVI) has never been subject to regulatory, state, or federal agency investigations. 11. Has your firm or your local office, or representatives assigned to this account, been subject to a regulatory or state/ federal agency investigation for alleged improper, fraudulent, disreputable or unfair activities related to the sale of securities or money market instruments that resulted in a suspension or censure? If so, explain. TVI and all representatives assigned to this account have never been subject to a regulatory or state/federal agency investigation. For further detail, please see question 10, above. 12. Are you aware of any current or pending complaints that are unreported to FINRA against you or your firm? If so, explain. No. 13. Explain your clearing and safekeeping procedures, custody and delivery process. We clear through Pershing and deliver vs. payment (DVP) to the third-party custodian our client utilizes. Who audits these fiduciary responsibilities? ProEquities internal auditors; FINRA. Latest Audit Report Date: ProEquities (2/28/19, monthly); FINRA (9/2018) 14. Describe the method your firm would use to establish capital trading limits for the City of La Quinta. 9. Yes No If yes, please provide their full name, position and department. 21. Is your firm a member of the Financial Industry Regulatory Authority (FINRA)? List your FINRA/NASD Registration Number and attach current FINRA broker check report. Time Value Investments is a FINRA registered branch of ProEquities and our FINRA Registration number is CRD# 15708. Please find a copy of ProEquities current broker check report in Section 11. 22. Do you have any relatives who work at the City of La Quinta? 15. 23. Is your firm currently licensed as a broker/dealer by the State of California? Do you maintain an office in California? TVI is the fully licensed in the State of California. Over 70 CA public entities have opened accounts and purchased securities through TVI. There are 20 FINRA registered branches of ProEquities in California. These branches would be available to us for support and assistance, but the Seattle branch, “Time Value Investments,” focuses exclusively on Public Funds Investing. Please see Section 9 for a detailed map of all ProEquities office locations. 24. Do you maintain an office in La Quinta or Riverside County? Yes No Does your firm regularly report to the Market Reports Division of the Federal Reserve Bank of New York as a “primary dealer”? Yes No NoIs your firm owned by a holding company? Yes quidelines? Yes No Does your firm comply with the Federal Reserve Bank’s capital a dequacy No ,sey fI oN Does your firm offer investment training to clients? Yes Does your firm have professional liability insurance? Yes Is your firm a memb .)CP IS( noitaroproC noitcetorP rotsevnI seitiruceS eht ni re insurance program? Yes .sreirr ac dna egarevoc ssecxe dna yramirp nialpxe ,sey fI oN ProEquities is a member SIPC (https://www.sipc.org/list-of-members) which protects against the loss of securities and cash of up to $500,000. please provide the insurance carrier, limits and expiration date. Our firm policy sets trading limits for inventory at $2Omm. As to riskless trading, our firm can facilitate trades up to $50mm without further authorization. Our clearing firm, Pershing, provides for an additional line of $50mm to facilitate larger trades. We are provided insurance by Zurich American Insurance Company. This contract enumerates a liability limit of $2,000,000 for each claim/ each named certificate holder as well as a $2,000,000 limit aggregate/ each named certificate holder. The expiration date is 02/15/2020, renewed annuallyPlease find a copy of TVI’s Certificate ofInsurance in Section 8 of this proposal. 16. 17. 18. 19. 20. 25. Please enclose the following: Latest audited financial statements; Samples of reports, transaction confirmations and any other research/publications the City would receive if you were approved; Samples of research reports and/or publications that your firm regularly provides to clients; and Complete schedule of fees and charges for transactions. Please find a table of contents for our attachments on the page following ACKNOWLEDGEMENT and CERTIFICATION. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 4 RESUMES - Broker/Dealer Request For Information CHRIS BATEMAN TIME VALUE INVESTMENTS Seattle, WA 2017 - Present W Seattle, WA 2015 - 2017 JURIS DOCTORATE Seattle University Seattle, WA PHILOSOPHY Brigham Young Univ. Provo, UT SERIES 7 SERIES 66 AGFOA CSMFO WFOA Philosophy from Brigham Young University. E X P E R I E N C E Chris provides Investment Services to public entities throughout the western states. He has helped large public entities completely renovate their investment programs as well as assisted public entities with establishing their first investment programs. Chris uses the Bloomberg terminal (8 monitors) and its analytic capabilities to prepare investment information that he communicates to his clients in lay-man’s terms without resorting to the dreaded ”bond-speak Provided Investment Management Services to clients with an emphasis on strategic portfolio allocation. Establish diversified stock, bond, and mutual fund portfolios to meet specific needs of client base. E D U C A T I O N After earning his bachelor’s degree, Chris continued his education at Seattle University where he earned a Juris Doctor degree. While attending Seattle University, Chris also began working in the Pierce County Prosecuting Attorney’s Office. Chris earned his Bachelor’s degree in philosophy. He graduated Cum Laude from Brigham Young University in 2011. L I C E N S E S Uniform Securities Agent State Law Examination Uniform Combined State Law Examination O R G A N I Z A T I O N P A R T I C I P A T I O N Alaska Government Finance Officers Association California Society of Municipal Finance Officers Washington Finance Officers Association Washington Public Treasurers Association POSITION Institutional Investments PHONE (206) 365 - 3003 EMAIL chris.bateman@timevalueinv.com PETER BECKER TIME VALUE INVESTMENTS Seattle, WA 2011 - Present BUSINESS ADMIN: FINANCE University of Washington Seattle, WA WFOA WPTA WHAAP CSMFO CMTA POSITION Vice President PHONE (206)365 - 3000 EMAIL peter.becker@timevalueinv.com SERIES 7 SERIES 63 SERIES 66 As Vice President at Time Value Investments, Peter assists over 100 public ." E X P E R I E N C E Peter’s primary role at TVI is assisting institutional investors with the implementation and continuation of their investment portfolios. He also frequently speaks at various public entity conferences and trainings regarding public funds investing. Peter currently serves over 100 institutional investors and has been in his current role with TVI since 2011. E D U C A T I O N Peter Becker received his bachelors degree in Business Administration with a focus in Finance from the University of Washington, a consistently top-ranking university. L I C E N S E S Uniform Securities Agent State Law Examination General Securities Representative Examination Uniform Combined State Law Examination O R G A N I Z A T I O N P A R T I C I P A T I O N California Society of Municipal Finance Officers Washington Finance Officers Association Washington Housing Authority Accounting Professionals PAUL JARVIS TIME VALUE INVESTMENTS Seattle, WA 2010 - Present PIPER JAFFRAY Seattle, WA 2001 - 2010 US BANCORP INVESTMENTS Seattle, WA 1989 - 2001 RAGEN MACKENZIE Seattle, WA 1988 - 1989 MBA Bloomington, IN BUSINESS MANAGEMENT Westminster College SERIES 7 SERIES 63 SERIES 66 WFOA E X P E R I E N C E As Managing Director of Time Value Investments, Paul continues his career serving public entities across the West Coast. His , operating as the manager for a number of institutional investment portfolios as well as providing securities on a brokerage basis to institutional investors. served as a at investors. In this capacity, bonds public entity investors in the Northwest region. fixed income responsibility bonds entity investors. E D U C A T I O N at the time one of the top MBA programs in the nation. L I C E N S E S Uniform Securities Agent State Law Examination General Securities Representative Examination O R G A N I Z A T I O N P A R T I C I P A T I O N POSITION Managing Director PHONE (206)365-3000 EMAIL paul.jarvis@timevalueinv.com NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 5 WALL STREET DEALER LIST - Broker/Dealer Request For Information WALL STREET DEALER LIST TVI’s Wall Street Dealers One of the many advantages that TVI provides is that we have direct access to virtually every major Wall Street Bond inventory. There are currently over 40 of them. We review and buy directly from the trader’s inventories as posted on Bloomberg. Given that institutional bond market access is one of the primary benefits provided by an broker/dealer, we recommend directly comparing our list to our competition. 1.AMHERST PIERPONT 2.BANK OF AMERICA/MERRILL LYNCH 3.BANK OF MONTREAL (BMO) 4.BANK OF NEW YORK 5.BANK OF OKLAHOMA 6.BARCLAYS 7.BB&T CAPITAL MARKETS 8.BREAN CAPITAL 9.CANTOR FITZGERALD 10.CITIGROUP 11.CRT CAPITAL GROUP 12.DAIWA SECURITIES 13.DEUTSCHE BANK 14.INTL FC STONE 15.FIDELITY CAPITAL MARKETS 16.FINANCE 500 17.FINANCIAL NORTHEASTERN 18.FIRST TENNESSEE 19.GOLDMAN SACHS 20.GUGGENHEIM SECURITIES 21.HAPOALIM 22.HILLTOP SECURITIES 23.HOPWOOD LANE TRADING 24.INCAPITAL 25.JANNEY MONTGOMERY SCOTT 26.JEFFERIES 27.JP MORGAN 28.JVB FINANCIAL 29.KEY CAPITAL BANK 30.MESIROW FINANCIAL 31.MIZUHO SECURITIES 32.MORGAN STANLEY 33.MULTI-BANK SECURITIES 34.NATWEST MARKETS 35.NOMURA 36.PERSHING 37.RBC (ROYAL BANK OF CANADA) 38.RBS (ROYAL BANK OF SCOT- LAND) 39.RW BAIRD 40.STIFEL NICOLAUS 41.SUNTRUST ROBINSON HUM- PHREY 42.SUSQUEHANNA 43.TD SECURITIES 44.UBS 45.WELLS FARGO - Broker/Dealer Request For Information NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 6 TRANSACTION CONFIRMATION - Broker/Dealer Request For Information Time Value Investments, Inc. 9725 3rd Ave. NE, Suite 610 Seattle, WA 98115 Tel: 206-365-3003; Toll Free: 877-707-7787 Public Funds Investing: Trade Confirmation Attn: [SAFEKEEPING AGENT] Re: [PUBLIC ENTITY NAME] Please see the attached trade confirmation for a bond being delivered into [SAFEKEEPING ACCOUNT] on its respective settlement date. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 7 FEE SCHEDULE EXPLANATION - Broker/Dealer Request For Information FEE SCHEDULE “Complete schedule of fees and charges for transactions.” In a typical brokerage transaction, brokers compete against each other to provide a security at the best price to the client. If the client purchases the security from the broker, the broker earns a commission. This commission was already in the price of the security when it was presented to the client. Therefore the yield offered to the client is the yield the client receives. There are no “fees” outside of this built-in commission (which, due to the competitive nature of the purchasing process, varies per transaction). TVI/ProEquities does not charge customers a fee to deliver the security to the third party of their choice or any sort of “ticket charge” related to the transaction. Furthermore, TVI/ProEquities does not charge any fees for our proprietary bond reports, timely “credit change” notifications regarding corporate bond ratings changes, credit and interest rate analysis, or any other fee associated with utilizing our brokerage services. - Broker/Dealer Request For Information NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 8 SAMPLE PLATINUM REPORT - Broker/Dealer Request For Information Time Value Investments’ (TVI) proprietary Platinum Reporting makes it easy for the non-investment specialist as well as the investment professional, to hone in on the most relevant components of the institutional fixed-income investment portfolio. Platinum Reporting provides simple as well as more unique and powerful portfolio metrics in an easy to read format. Examples of simple analysis include: A visual depiction of the upcoming maturities (“Maturity Distribution”): * Purchase Yield to Maturity ** Purchase Yield to Worst **** All ratings are shown in S&P format. 0 - 3mo 3 - 6mo 6 - 12mo 1 - 2yr 2 - 3yr 3 - 4yr 4 - 5yr 5 - 7yr 7 - 10yr Over 10yr Maturity Distribution 11.0%, $2.5MM 13.5%, $3.1MM 17.6%, $4.0MM 35.8%, $8.1MM 13.2%, $3.0MM 8.8%, $2.0MM 0.0%, $0.0 0.0%, $0.0 0.0%, $0.0 0.0%, $0.0 $0 $1MM $2MM $3MM $4MM $5MM $6MM $7MM $8MM $9MM Monthly cash ows per security for the next 12 months (“Extended Cash Flows”): #Cusip Par Value Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Year 1 Total 1 3135G0TP8 1,000,000 1,006,250 0 0 0 0 0 0 0 0 0 0 0 1,006,250 2 3133EFC96* 1,000,000 0 1,005,700 0 0 0 0 0 0 0 0 0 0 1,005,700 3 3133EFC70* 500,000 0 502,800 0 0 0 0 0 0 0 0 0 0 502,800 4 31771EAU5 1,063,000 0 0 0 0 0 1,063,000 0 0 0 0 0 0 1,063,000 5 912828XV7 2,000,000 0 0 0 0 0 2,012,500 0 0 0 0 0 0 2,012,500 6 9128282X7 2,000,000 0 0 13,750 0 0 0 0 0 2,013,750 0 0 0 2,027,500 7 912828UF5 2,000,000 0 0 0 0 0 11,250 0 0 0 0 0 2,011,250 2,022,500 8 313378J77 3,000,000 0 0 28,125 0 0 0 0 0 28,125 0 0 0 56,250 9 3133EF2L0*1,000,000 0 0 0 7,000 0 0 0 0 0 7,000 0 0 14,000 10 3133EJ3L1 3,000,000 0 0 0 0 0 41,250 0 0 0 0 0 41,250 82,500 11 76116FAE7 1,108,000 0 0 0 0 0 0 0 0 0 0 0 0 0 12 3130A8HH9* 1,000,000 0 0 0 0 0 8,100 0 0 0 0 0 8,100 16,200 13 3133EGKA2* 1,000,000 7,500 0 0 0 0 0 7,500 0 0 0 0 0 15,000 14 3134G93Q8* 1,000,000 0 8,400 0 0 0 0 0 8,400 0 0 0 0 16,800 15 3134GSL60** 2,000,000 0 0 0 0 0 30,000 0 0 0 0 0 2,030,000 2,060,000 TOTAL 22,671,000 1,013,750 1,516,900 41,875 7,000 0 3,166,100 7,500 8,400 2,041,875 7,000 0 4,090,600 11,901,000 * Callable - currently not likely to be called See Cash-Flows graph above "Recognizing Likelihood of Call" for current projected cash-flows ** Callable - currently likely to be called Extended Cash-Flows TVI Platinum Reporting Prepared for: SAMPLE PORTFOLIO As of April 23, 2018 Recipient Info:Provider Info: Sample Client Time Value Investments, Inc. 123 Main Street 9725 3rd Ave NE, Suite 610 Anytown, Anystate 98765 Seattle, WA 98115 Monthly cash ows per security for the next 12 months (“Extended Cash Flows”): Portfolio Composition 1.7% 36.7% 3.4%23.4% 31.5% Agencies Treasuries Certificates of Deposit Corporate Bonds Liquid Balances The ratings of the securities in the portfolio (“Portfolio Ratings”): Portfolio Ratings (Best*) 57.6% 1.2% 2.7% 7.7% 11.5% 8.1% 1.2%9.9% AAA AA+AA AA-A+A A-NR Platinum Reporting provides metrics that are unique and powerful. ese include calculations providing the likelihood of a callable security being called on the next call date. In fact, the report will actually estimate the bond market interest rate change necessary to trigger a call feature for each callable security in the portfolio! TVI’s proprietary Platinum Reporting also provides portfolio performance versus benchmarks (including Local Government Investment Pools) from a Yield to Maturity as well as a Total Return standpoint: Sophisticated investment policy compliance reports are also included in Time Value Investments’ Platinum Reporting: ALLOCATION ACTUAL RESULT Issuer Type Minimum Maximum US Treasury Obligations 0.0% 100.0%0.0% Complies Government Sponsored Enterprises - Agency Securities 0.0% 100.0%2.0% Complies FHLB 0.0% 100.0%12.1% Complies FFCB 0.0% 100.0%31.7% Complies FHLMC 0.0% 100.0%18.1% Complies FNMA 0.0% 100.0%0.0% Complies Investment Policy Compliance Report Estimated Estimated Bps to Call Redem. Date 1/30/2019 (66)2/19/2019 (68)2/22/2019 6/6/2019 6/30/2019 9/30/2019 12/31/2019 3/13/2020 (140)4/13/2020 6/24/2020 10/15/2020 (128)6/23/2021 (140)7/6/2021 (112)8/25/2021 32 12/27/2019 Yield to Maturity: Portfolio 2-Year Treasury Fed Funds LGIP (per most recent month end) Total Return: Portfolio ** Benchmark Index - Barclay's 1-3Yr US Govt Performance versus Benchmark as of 12/31/2018 Naturally, the expected components of professional portfolio reporting are included, such as weighted average yield (assum- ing no bonds called), weighted average yield (assuming all bonds called), weighted average maturity, percentage of portfolio in various types of bonds, cash ows per security, portfolio cash ow, etc: e common GASB 72 and GASB 40 reports are also provided: Maturity Market Market Pricing GASB Type Sec Desc 1 CUSIP/Sec-ID Coupon Date Par Value Value Price Date Level Agenci es FFCB 1 1/4 08/19/19 3133EGAW5 1.25 8/19/2019 1,020,000 1,011,544 99.17 12/31/2018 LEVEL 2 Agencies FFCB 1.12 10/11/19 3133EGXK6 1.12 10/11/2019 1,010,000 998,244 98.84 12/31/2018 LEVEL 2 Agencies FFCB 1.17 01/13/20 3133EGLA1 1.17 1/13/2020 2,000,000 1,968,468 98.42 12/31/2018 LEVEL 2 Agencies FFCB 1.17 01/13/20 3133EGLA1 1.17 1/13/2020 1,000,000 984,234 98.42 12/31/2018 LEVEL 2 Agenci es FFCB 1.19 07/13/20 3133EGLB9 1.19 7/13/2020 1,000,000 978,715 97.87 12/31/2018 LEVEL 2 GASB 72 Duration to Duration to Effective Type Sec Desc 1 CUSIP/Sec-ID Weight Par Value Book Value Market Value Moody S&P Maturity Call Date Maturity Call/Mat Duration Agencies FFCB 1 1/4 08/19/19 3133EGAW5 7.0%1,020,000 1,019,929 1,011,544 Aaa AA+8/19/2019 1/7/2019 0.63 0.02 0.62 Agencies FFCB 1.12 10/11/19 3133EGXK6 6.9%1,010,000 1,006,802 998,244 Aaa AA+10/11/2019 1/7/2019 0.78 0.02 0.76 Agencies FFCB 1.17 01/13/20 3133EGLA1 13.7%2,000,000 2,000,000 1,968,468 Aaa AA+1/13/2020 1/7/2019 1.04 0.02 1.01 Agencies FFCB 1.17 01/13/20 3133EGLA1 6.9%1,000,000 1,000,000 984,234 Aaa AA+1/13/2020 1/7/2019 1.04 0.02 1.01 GASB 40 TVI Platinum Reporting Prepared for: Sample Portfolio As of February 08, 2018 Recipient Info:Provider Info: Time Value Investments, Inc. 9725 3rd Ave NE, Suite 610 Seattle, WA 98115 Disclaimer: Information contained within investment reports provided by Time Value Investments, Inc (TVI) are believed to be reliable but may not have been independently verified. TVI does not guaranty, represent or warrant, or accept any responsibility or liability as to, the accuracy, completeness or appropriateness of the information contained in these reports. Information contained herein may not be current due to, among other things, changes in the financial markets or economic environment. Opinions reflected in these reports are subject to change without notice. Forecasts represent estimates. Investing carries risk of losses. Information provided by Time Value Investments does not constitute, and should not be used as a substitute for, tax, legal or investment advice. Clients retain responsibility for their internal accounting policies, implementing and enforcing internal controls and generating ledger entries or otherwise recording transactions. Market prices on TVI reports are typically derived from the client's custodian's reports. Client is encouraged to confirm that market values on this report match those on custodian’s report. Although TVI believes the prices to be reliable, the values of the securities do not always represent the prices at which the securities could have been bought or sold. Callable securities are subject to redemption prior to maturity and may be redeemed in whole or in part before maturity by the issuer, which could affect the yield represented. Certain call dates may not appear on the report if the call date has passed and if the security is continuously callable. Information provided for credit ratings is based upon a good faith inquiry of selected sources, but its accuracy and completeness is not guaranteed. All opinions expressed in this report constitute the judgments as of the dates indicated and are subject to change without notice. This report is for informative purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any product. Investment in securities involves risks, including the possible loss of the amount invested. None of the securities in this portfolio are in any way guaranteed from loss. Sample Portfolio Wgtd Avg YTM *1.66%Par Value Weight Wgtd Avg YTW **1.66%Agencies 156,095,000 100.0% Wgtd Avg Mat (no call)2.69 yrs Treasuries Wgtd Avg Mat (all called)1.11 yrs Certificates of Deposit Municipal Bonds Corporate Bonds Market Value 2/8/2018 151,362,044 Mortgages Commercial Paper * All ratings are shown in S&P format. * YTM - Purchase Yield to Maturity ** YTW - Purchase Yield to Worst 0 - 3mo 3 - 6mo 6 - 12mo 1 - 2yr 2 - 3yr 3 - 4yr 4 - 5yr 5 - 7yr 7 - 10yr Over 10yr As of As of 2/8/2018 1Mo Ago 12/31/2017 1Yr Ago 3Yrs Ago 5Yrs Ago Cusip Par Amount Yield to Maturity: Portfolio 1.66% Benchmark Index - 2Yr Tsy (Constant Maturity)2.15%1.92%1.92%1.16%0.65%0.25% Benchmark Index - Fed Funds (Upper Bnd)1.50%1.50%1.50%0.75%0.25%0.25% Total Return:1Mo YTD 1Yr 3Yrs *5Yrs * Portfolio n/a n/a n/a n/a n/a Benchmark Index - Barclay's 1-3Yr US Govt -0.23%-0.23%-0.07%0.47%0.52%-0.54% 6Mos n/an/a Excluded SecuritiesPerformance versus Benchmark as of 2/8/2018 1Yr Average 1.49% 1.18% 3Mos -0.46% Portfolio Summary Maturity Distribution Portfolio Composition Portfolio Ratings (Best*) Sector 1.36%1.63% 1.25%1.25% 6Mos Ago3Mos Ago 100.0% Agencies 70.6% 29.4% AAA NR U.S. Gov't Agency 0.0%, $0.0 0.0%, $0.0 5.6%, $8.8MM 22.7%, $35.4MM 36.4%, $56.8MM 25.7%, $40.2MM 9.6%, $15.0MM 0.0%, $0.0 0.0%, $0.0 0.0%, $0.0 $0 $10MM $20MM $30MM $40MM $50MM $60MM Maturity Distribution 2 Report Date: 2/8/2018 Sample Portfolio Type Par Value Apr-18 May-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Callable 80,170,000 48,000 76,847 231,250 178,750 48,000 76,847 96,500 50,000 5,231,250 Non-Callable 75,925,000 50,000 131,215 0 34,375 5,050,000 3,931,215 0 0 0 TOTAL 156,095,000 98,000 208,062 231,250 213,125 5,098,000 4,008,062 96,500 50,000 5,231,250 Interest Payments Principal Payments Cash-Flows - from 03/2018 to 02/2019 - Assuming None Called Mar-18 Jun-18 Jul-18 213,125 96,500 50,000 34,375 0 0 178,750 96,500 50,000 0 50,000 100,000 150,000 200,000 250,000 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 3 Report Date: 2/8/2018 Sample Portfolio Type Par Value Apr-18 May-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Callable 80,170,000 48,000 76,847 231,250 178,750 48,000 76,847 96,500 50,000 5,231,250 Non-Callable 75,925,000 50,000 131,215 0 34,375 5,050,000 3,931,215 0 0 0 TOTAL 156,095,000 98,000 208,062 231,250 213,125 5,098,000 4,008,062 96,500 50,000 5,231,250 * Likelihood based on 02/08/2018 market rates Cash-Flows - from 03/2018 to 02/2019 - Recognizing Likelihood of Call* Mar-18 Jun-18 Jul-18 34,375 0 0 Interest Payments Principal Payments 178,750 96,500 50,000 213,125 96,500 50,000 0 50,000 100,000 150,000 200,000 250,000 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 4 Report Date: 2/8/2018 Sample Portfolio #Cusip Par Value Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Year 1 Total 1 3133EGG82*5,720,000 0 0 43,472 0 0 0 0 0 43,472 0 0 0 86,944 2 3130A9Z61*4,450,000 0 0 33,375 0 0 0 0 0 33,375 0 0 0 66,750 3 76116FAA5 5,211,000 0 0 0 0 0 0 0 0 0 0 0 0 0 4 76116FAE7 10,677,000 0 0 0 0 0 0 0 0 0 0 0 0 0 5 3130A8V26*5,000,000 0 0 0 0 0 26,250 0 0 0 0 0 5,026,250 5,052,500 6 3130A9AE1 5,000,000 0 21,875 0 0 0 0 0 5,021,875 0 0 0 0 5,043,750 7 31315PD97 3,800,000 0 0 30,590 0 0 0 0 0 3,830,590 0 0 0 3,861,180 8 3137EADZ9 5,000,000 0 28,125 0 0 0 0 0 28,125 0 0 0 0 56,250 9 3135G0R96 5,000,000 0 0 28,750 0 0 0 0 0 28,750 0 0 0 57,500 10 3137EADR7 5,000,000 0 0 34,375 0 0 0 0 0 34,375 0 0 0 68,750 11 313380WG8 5,000,000 34,375 0 0 0 0 0 34,375 0 0 0 0 0 68,750 12 3135G0F73 5,000,000 0 0 37,500 0 0 0 0 0 37,500 0 0 0 75,000 13 3130AAL55*5,000,000 0 0 0 0 50,000 0 0 0 0 0 50,000 0 100,000 14 3133EGAZ8*5,000,000 0 0 0 0 0 39,500 0 0 0 0 0 39,500 79,000 15 3133EHTY9*10,000,000 0 0 0 0 0 102,500 0 0 0 0 0 102,500 205,000 16 3133EF4A2*5,000,000 0 48,000 0 0 0 0 0 48,000 0 0 0 0 96,000 17 76116FAG2 10,604,000 0 0 0 0 0 0 0 0 0 0 0 0 0 18 76116FAD9 10,474,000 0 0 0 0 0 0 0 0 0 0 0 0 0 19 3136G3J97*10,000,000 0 0 0 0 0 63,000 0 0 0 0 0 63,000 126,000 20 3130ACF33*10,000,000 93,750 0 0 0 0 0 93,750 0 0 0 0 0 187,500 21 3136G4PE7*10,000,000 85,000 0 0 0 0 0 85,000 0 0 0 0 0 170,000 22 76116FAA5 5,159,000 0 0 0 0 0 0 0 0 0 0 0 0 0 23 3133EHXM0*10,000,000 0 0 0 96,500 0 0 0 0 0 96,500 0 0 193,000 TOTAL 156,095,000 213,125 98,000 208,062 96,500 50,000 231,250 213,125 5,098,000 4,008,062 96,500 50,000 5,231,250 15,593,874 * Callable - currently not likely to be called See Cash-Flows graph above "Recognizing Likelihood of Call" for current projected cash-flows ** Callable - currently likely to be called Extended Cash-Flows 5 Report Date: 2/8/2018 Sample Portfolio Estimated Estimated #CUSIP/Sec-ID Sec Desc 1 Weight Par Value Coupon *Settle Dt Mat Dt Nxt Call Dt Rating ***YTM **YTW **Duration Call Type Bps to Call Redem. Date 1 3130A9AE1 FHLB 0 7/8 10/01/18 3.2%5,000,000 0.88 12/9/2017 10/1/2018 AAA 1.05 1.05 0.64 10/1/2018 2 31315PD97 FAMCA 1.61 11/14/18 2.4%3,800,000 1.61 10/22/2015 11/14/2018 NR AGY 1.05 1.05 0.75 11/14/2018 3 3130A8V26 FHLB 1.05 02/12/19 3.2%5,000,000 1.05 12/9/2016 2/12/2019 2/14/2018 AAA 1.23 1.23 0.99 Anytime (106)2/12/2019 4 3137EADZ9 FHLMC 1 1/8 04/15/19 3.2%5,000,000 1.13 11/29/2016 4/15/2019 AAA 1.12 1.12 1.16 4/15/2019 5 3136G3J97 FNMA 1.26 08/02/19 6.4%10,000,000 1.26 8/10/2017 8/2/2019 5/2/2018 AAA 1.43 1.43 1.45 Quarterly (83)8/2/2019 6 76116FAA5 RFCSP 0 10/15/19 3.3%5,211,000 0.00 12/9/2016 10/15/2019 NR AGY 1.46 1.46 1.67 10/15/2019 7 76116FAA5 RFCSP 0 10/15/19 3.3%5,159,000 0.00 11/2/2017 10/15/2019 NR AGY 1.62 1.62 1.67 10/15/2019 8 3135G0R96 FNMA 1.15 11/29/19 3.2%5,000,000 1.15 11/29/2016 11/29/2019 AAA 1.33 1.33 1.77 11/29/2019 9 3137EADR7 FHLMC 1 3/8 05/01/20 3.2%5,000,000 1.38 11/29/2016 5/1/2020 AAA 1.37 1.37 2.17 5/1/2020 10 76116FAD9 RFCSP 0 07/15/20 6.7%10,474,000 0.00 8/10/2017 7/15/2020 NR AGY 1.59 1.59 2.41 7/15/2020 11 313380WG8 FHLB 1 3/8 09/11/20 3.2%5,000,000 1.38 11/29/2016 9/11/2020 AAA 1.45 1.45 2.51 9/11/2020 12 3136G4PE7 FNMA 1.7 09/29/20 6.4%10,000,000 1.70 11/2/2017 9/29/2020 3/29/2018 AAA 1.80 1.80 2.54 Quarterly (77)9/29/2020 13 76116FAE7 RFCSP 0 10/15/20 6.8%10,677,000 0.00 12/9/2016 10/15/2020 NR AGY 1.71 1.71 2.66 10/15/2020 14 3135G0F73 FNMA 1 1/2 11/30/20 3.2%5,000,000 1.50 11/29/2016 11/30/2020 AAA 1.48 1.48 2.73 11/30/2020 15 76116FAG2 RFCSP 0 01/15/21 6.8%10,604,000 0.00 8/10/2017 1/15/2021 NR AGY 1.72 1.72 2.91 1/15/2021 16 3133EGAZ8 FFCB 1.58 02/17/21 3.2%5,000,000 1.58 2/8/2017 2/17/2021 2/14/2018 AAA 1.77 1.77 2.91 Anytime (112)2/17/2021 17 3130AAL55 FHLB 2 07/26/21 3.2%5,000,000 2.00 1/6/2017 7/26/2021 4/26/2018 AAA 2.00 2.00 3.23 Quarterly (65)7/26/2021 18 3130ACF33 FHLB 1 7/8 09/13/21 6.4%10,000,000 1.88 11/2/2017 9/13/2021 3/13/2018 AAA 2.02 2.02 3.37 Quarterly (82)9/13/2021 19 3130A9Z61 FHLB 1 1/2 11/09/21 2.9%4,450,000 1.50 12/9/2016 11/9/2021 2/14/2018 AAA 1.87 1.87 3.61 Anytime (134)11/9/2021 20 3133EGG82 FFCB 1.52 11/15/21 3.7%5,720,000 1.52 12/9/2016 11/15/2021 2/14/2018 AAA 1.92 1.92 3.63 Anytime (132)11/15/2021 21 3133EHXM0 FFCB 1.93 12/06/21 6.4%10,000,000 1.93 11/2/2017 12/6/2021 2/14/2018 AAA 2.05 2.05 3.62 Anytime (93)12/6/2021 22 3133EF4A2 FFCB 1.92 04/19/22 3.2%5,000,000 1.92 8/10/2017 4/19/2022 2/14/2018 AAA 1.96 1.96 3.93 Anytime (99)4/19/2022 23 3133EHTY9 FFCB 2.05 08/08/22 6.4%10,000,000 2.05 8/10/2017 8/8/2022 8/8/2018 AAA 2.05 2.05 4.19 Anytime (84)8/8/2022 TOTAL and AVERAGES 156,095,000 1.15 2.69 yrs 1.11 yrs 1.66 1.66 2.58 * Semi-Annual interest payment ** Yields calculated using cost price, at settlement date *** NR AGY = Non-Rated U.S. Government Agency Portfolio Details - Sorted by Maturity Maturity Distribution 0.0%0.0% 5.6% 22.7% 36.4% 25.7% 9.6% 0.0%0.0%0.0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 0 - 3mo 3 - 6mo 6 - 12mo 1 - 2yr 2 - 3yr 3 - 4yr 4 - 5yr 5 - 7yr 7 - 10yr Over 10yr 6 Report Date: 2/8/2018 Sample Portfolio Estimated Estimated #CUSIP/Sec-ID Sec Desc 1 Weight Par Value Coupon *Settle Dt Mat Dt Nxt Call Dt Rating ***YTM **YTW **Duration Call Type Bps to Call Redem. Date 1 3133EGG82 FFCB 1.52 11/15/21 3.7%5,720,000 1.52 12/9/2016 11/15/2021 2/14/2018 AAA 1.92 1.92 3.63 Anytime (132)11/15/2021 2 3130A9Z61 FHLB 1 1/2 11/09/21 2.9%4,450,000 1.50 12/9/2016 11/9/2021 2/14/2018 AAA 1.87 1.87 3.61 Anytime (134)11/9/2021 3 3130A8V26 FHLB 1.05 02/12/19 3.2%5,000,000 1.05 12/9/2016 2/12/2019 2/14/2018 AAA 1.23 1.23 0.99 Anytime (106)2/12/2019 4 3133EGAZ8 FFCB 1.58 02/17/21 3.2%5,000,000 1.58 2/8/2017 2/17/2021 2/14/2018 AAA 1.77 1.77 2.91 Anytime (112)2/17/2021 5 3133EF4A2 FFCB 1.92 04/19/22 3.2%5,000,000 1.92 8/10/2017 4/19/2022 2/14/2018 AAA 1.96 1.96 3.93 Anytime (99)4/19/2022 6 3133EHXM0 FFCB 1.93 12/06/21 6.4%10,000,000 1.93 11/2/2017 12/6/2021 2/14/2018 AAA 2.05 2.05 3.62 Anytime (93)12/6/2021 7 3130ACF33 FHLB 1 7/8 09/13/21 6.4%10,000,000 1.88 11/2/2017 9/13/2021 3/13/2018 AAA 2.02 2.02 3.37 Quarterly (82)9/13/2021 8 3136G4PE7 FNMA 1.7 09/29/20 6.4%10,000,000 1.70 11/2/2017 9/29/2020 3/29/2018 AAA 1.80 1.80 2.54 Quarterly (77)9/29/2020 9 3130AAL55 FHLB 2 07/26/21 3.2%5,000,000 2.00 1/6/2017 7/26/2021 4/26/2018 AAA 2.00 2.00 3.23 Quarterly (65)7/26/2021 10 3136G3J97 FNMA 1.26 08/02/19 6.4%10,000,000 1.26 8/10/2017 8/2/2019 5/2/2018 AAA 1.43 1.43 1.45 Quarterly (83)8/2/2019 11 3133EHTY9 FFCB 2.05 08/08/22 6.4%10,000,000 2.05 8/10/2017 8/8/2022 8/8/2018 AAA 2.05 2.05 4.19 Anytime (84)8/8/2022 12 76116FAA5 RFCSP 0 10/15/19 3.3%5,211,000 0.00 12/9/2016 10/15/2019 NR AGY 1.46 1.46 1.67 10/15/2019 13 76116FAE7 RFCSP 0 10/15/20 6.8%10,677,000 0.00 12/9/2016 10/15/2020 NR AGY 1.71 1.71 2.66 10/15/2020 14 3130A9AE1 FHLB 0 7/8 10/01/18 3.2%5,000,000 0.88 12/9/2017 10/1/2018 AAA 1.05 1.05 0.64 10/1/2018 15 31315PD97 FAMCA 1.61 11/14/18 2.4%3,800,000 1.61 10/22/2015 11/14/2018 NR AGY 1.05 1.05 0.75 11/14/2018 16 3137EADZ9 FHLMC 1 1/8 04/15/19 3.2%5,000,000 1.13 11/29/2016 4/15/2019 AAA 1.12 1.12 1.16 4/15/2019 17 3135G0R96 FNMA 1.15 11/29/19 3.2%5,000,000 1.15 11/29/2016 11/29/2019 AAA 1.33 1.33 1.77 11/29/2019 18 3137EADR7 FHLMC 1 3/8 05/01/20 3.2%5,000,000 1.38 11/29/2016 5/1/2020 AAA 1.37 1.37 2.17 5/1/2020 19 313380WG8 FHLB 1 3/8 09/11/20 3.2%5,000,000 1.38 11/29/2016 9/11/2020 AAA 1.45 1.45 2.51 9/11/2020 20 3135G0F73 FNMA 1 1/2 11/30/20 3.2%5,000,000 1.50 11/29/2016 11/30/2020 AAA 1.48 1.48 2.73 11/30/2020 21 76116FAG2 RFCSP 0 01/15/21 6.8%10,604,000 0.00 8/10/2017 1/15/2021 NR AGY 1.72 1.72 2.91 1/15/2021 22 76116FAD9 RFCSP 0 07/15/20 6.7%10,474,000 0.00 8/10/2017 7/15/2020 NR AGY 1.59 1.59 2.41 7/15/2020 23 76116FAA5 RFCSP 0 10/15/19 3.3%5,159,000 0.00 11/2/2017 10/15/2019 NR AGY 1.62 1.62 1.67 10/15/2019 TOTAL and AVERAGES 156,095,000 1.15 2.69 yrs 1.11 yrs 1.66 1.66 2.58 * Semi-Annual interest payment ** Yields calculated using cost price, at settlement date *** NR AGY = Non-Rated U.S. Government Agency Portfolio Details - Sorted by Call 7 Report Date: 2/8/2018 Sample Portfolio Callables purchased at Discount Unrealized #CUSIP/Sec-ID Sec Desc 1 Cpn Mat Dt Par Value Cost Purch Px Book Val Book Px Book YTM Mkt Val Mkt Px Mkt YTM Gain/Loss 1 3130A9AE1 FHLB 0 7/8 10/01/18 0.88 10/1/2018 5,000,000 4,993,000 99.86 4,994,408 99.89 1.01 4,970,850 99.42 1.78 (23,558) 2 31315PD97 FAMCA 1.61 11/14/18 1.61 11/14/2018 3,800,000 3,863,840 101.68 3,816,164 100.43 1.47 3,790,006 99.74 1.96 (26,158) 3 3130A8V26 FHLB 1.05 02/12/19 1.05 2/12/2019 5,000,000 4,980,720 99.61 4,990,980 99.82 1.13 4,956,800 99.14 1.92 (34,180) 4 3137EADZ9 FHLMC 1 1/8 04/15/19 1.13 4/15/2019 5,000,000 5,000,000 100.00 5,000,000 100.00 1.12 4,946,750 98.94 2.04 (53,250) 5 3136G3J97 FNMA 1.26 08/02/19 1.26 8/2/2019 10,000,000 9,966,910 99.67 9,975,095 99.75 1.39 9,866,600 98.67 2.18 (108,495) 6 76116FAA5 RFCSP 0 10/15/19 0.00 10/15/2019 5,211,000 4,999,454 95.94 5,085,094 97.58 0.86 5,019,496 96.33 2.24 (65,599) 7 76116FAA5 RFCSP 0 10/15/19 0.00 10/15/2019 5,159,000 4,999,164 96.90 5,020,928 97.32 1.40 4,969,407 96.33 2.24 (51,521) 8 3135G0R96 FNMA 1.15 11/29/19 1.15 11/29/2019 5,000,000 4,974,000 99.48 4,984,182 99.68 1.26 4,907,650 98.15 2.20 (76,532) 9 3137EADR7 FHLMC 1 3/8 05/01/20 1.38 5/1/2020 5,000,000 5,000,000 100.00 5,000,000 100.00 1.37 4,911,650 98.23 2.19 (88,350) 10 76116FAD9 RFCSP 0 07/15/20 0.00 7/15/2020 10,474,000 9,999,182 95.47 10,077,981 96.22 1.32 9,915,526 94.67 2.26 (162,455) 11 313380WG8 FHLB 1 3/8 09/11/20 1.38 9/11/2020 5,000,000 4,986,500 99.73 4,990,675 99.81 1.43 4,883,200 97.66 2.31 (107,475) 12 3136G4PE7 FNMA 1.7 09/29/20 1.70 9/29/2020 10,000,000 9,971,710 99.72 9,974,217 99.74 1.79 9,825,200 98.25 2.39 (149,017) 13 76116FAE7 RFCSP 0 10/15/20 0.00 10/15/2020 10,677,000 9,999,694 93.66 10,200,488 95.54 1.19 10,013,531 93.79 2.41 (186,957) 14 3135G0F73 FNMA 1 1/2 11/30/20 1.50 11/30/2020 5,000,000 5,004,000 100.08 5,002,802 100.06 1.49 4,891,000 97.82 2.30 (111,802) 15 76116FAG2 RFCSP 0 01/15/21 0.00 1/15/2021 10,604,000 9,999,127 94.30 10,084,369 95.10 1.47 9,872,324 93.10 2.45 (212,045) 16 3133EGAZ8 FFCB 1.58 02/17/21 1.58 2/17/2021 5,000,000 4,962,500 99.25 4,971,567 99.43 1.73 4,862,900 97.26 2.53 (108,667) 17 3130AAL55 FHLB 2 07/26/21 2.00 7/26/2021 5,000,000 5,000,000 100.00 5,000,000 100.00 2.00 4,917,150 98.34 2.50 (82,850) 18 3130ACF33 FHLB 1 7/8 09/13/21 1.88 9/13/2021 10,000,000 9,946,240 99.46 9,949,831 99.50 2.01 9,780,000 97.80 2.52 (169,831) 19 3130A9Z61 FHLB 1 1/2 11/09/21 1.50 11/9/2021 4,450,000 4,372,975 98.27 4,390,555 98.66 1.78 4,275,338 96.08 2.60 (115,217) 20 3133EGG82 FFCB 1.52 11/15/21 1.52 11/15/2021 5,720,000 5,612,767 98.13 5,637,129 98.55 1.83 5,486,567 95.92 2.66 (150,563) 21 3133EHXM0 FFCB 1.93 12/06/21 1.93 12/6/2021 10,000,000 9,953,120 99.53 9,955,928 99.56 2.04 9,754,300 97.54 2.61 (201,628) 22 3133EF4A2 FFCB 1.92 04/19/22 1.92 4/19/2022 5,000,000 4,991,000 99.82 4,991,904 99.84 1.96 4,827,100 96.54 2.80 (164,804) Amortization/Accretion Book Calculations Portfolio CompositionAgency Distribution Callable Breakdown 19.2% 6.4% 22.1% 22.9% 27.0% 2.4% FNMA FHLMC FHLB FFCB FICO RFCSP Other 100.0% Agencies Treasuries Certificates of Deposit Municipal Bonds Corporate Bonds Mortgages Commercial Paper 51.4% 48.6% Callable Non-Callable As percent of Callables As percent of Portfolio 81.3%41.8% 8 Report Date: 2/8/2018 Sample Portfolio Unrealized #CUSIP/Sec-ID Sec Desc 1 Cpn Mat Dt Par Value Cost Purch Px Book Val Book Px Book YTM Mkt Val Mkt Px Mkt YTM Gain/Loss Amortization/Accretion Book Calculations 23 3133EHTY9 FFCB 2.05 08/08/22 2.05 8/8/2022 10,000,000 10,000,000 100.00 10,000,000 100.00 2.05 9,718,700 97.19 2.72 (281,300) TOTAL 156,095,000 153,575,903 154,094,298 1.56 151,362,044 2.37 (2,732,254) 9 Report Date: 2/8/2018 NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 9 SAMPLE MONTHLY MARKET UPDATE - Broker/Dealer Request For Information Public Funds Investing Monthly Market Update – March Sent: 3/8/2019 1 PUBLIC FUNDS INVESTMENT MARKET UPDATE Good morning, Today the "Change in Nonfarm Payrolls" and "Unemployment Rate" statistics were released for the month of February. This data is important to monitor as it tends to influence interest rates. Below, please find an economic update for the last month, including current market information reflecting the most current data. EMPLOYMENT FIGURES Two of the popular measures of US employment status are “Change in Nonfarm Payrolls” and “Unemployment Rate.” • The “Surv(M)” column shows that economic analysts expected Nonfarm Payrolls to increase by 180,000 new jobs in February. The “Actual” column shows that Payrolls only increased by 20,000 new jobs, coming in significantly under projections. • The “Revised” column shows that the prior month’s 304,000 job increase was revised up to 311,000 new jobs. • Analysts were expecting the Unemployment Rate to drop from 4.0% to 3.9%, while instead it decreased even further to 3.8%. Source: Bloomberg Public Funds Investing Monthly Market Update – March Sent: 3/8/2019 2 US TREASURY CURVE This graph shows the United States Treasury interest rates for maturities ranging from 1 month to 30 years. •The dotted yellow line represents the US Treasury Curve as of last month and the solid green line represents today's US Treasury Curve. The difference in yield between these two curves is shown in the bottom line of the table below the graph. •You will notice that interest rates across the board are relatively unchanged, with no increase or decrease for any term greater than .04%. Additionally, note that the 1 year Treasury rate is higher than the 2 year, 3 year, and 5 year Treasury rates (see circled section of the curve below). •This situation (short rates slightly higher than longer rates) first occurred on Monday December 5th and has, for the most part, persisted throughout the last 3 months. The current yield curve shape is still relatively new, and it is difficult to predict what the effect will be on the markets going forward. Source: Bloomberg Public Funds Investing Monthly Market Update – March Sent: 3/8/2019 3 3-YEAR TREASURY GRAPH Many public funds investment portfolios have a 2-3 year weighted average maturity. • Over the last month the 3-year Treasury rate saw some sharp increases and decreases but ended at roughly the same level. Source: Bloomberg UNITED STATES EQUITY MARKETS Stocks are not permitted for public funds investing. However, they do play a role in the broader economic picture and consequently can influence interest rates. • The far right column shows the Dow is up 8.42% year-to-date, the S&P 500 is up 8.71%, and the NASDAQ is up 10.80%. Source: Bloomberg Public Funds Investing Monthly Market Update – March Sent: 3/8/2019 4 FEDERAL FUNDS RATE The Federal Funds Rate is the overnight rate on overnight loans set by the Federal Open Market Committee (FOMC) at the Federal Reserve. Rates offered by local government investment pools and money market funds tend to correlate with the Federal Funds Rate. The Federal Funds Rate is therefore a baseline for short term investments and cash accounts. The graph below shows the Federal Funds Rate over the past 5 years. • At the most recent meeting on January 30th, the FOMC elected to maintain the Federal Funds Rate target in the previous range of 2.25%-2.50% after increasing the range by 0.25% at their previous meeting in December. The FOMC did not meet in the month of February so the Federal Funds Rate remained unchanged. Source: Bloomberg Public Funds Investing Monthly Market Update – March Sent: 3/8/2019 5 FEDERAL OPEN MARKET COMMITTEE MEETING CALENDAR The Federal Open Market Committee (FOMC) meets approximately every six weeks and determines the level of the Federal Funds Rate. • The last meeting was January 30th, when the FOMC elected to maintain the Federal Funds Rate target range at 2.25%-2.50%. • The next meeting is March 20th, and the futures market is currently assigning a 0% probability of another 0.25% rate hike at that meeting and a 2.30% probability of a rate cut at that meeting. Source: Bloomberg NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 10 CREDIT CHANGE NOTIFICATION PROCESS - Broker/Dealer Request For Information Risk Monitoring: Credit Change Notification* Our Bloomberg terminals are programmed to notify us if certain bonds experience a ratings change. This starts a 4-step process that provides the public entity with useful information on how to proceed in light of a credit downgrade. Below is a real example of this process with a public entity that buys corporate bonds: Step 1: TVI receives notification from Bloomberg that credit rating has changed: Step 2: TVI verifies ratings change and sends notification to client, including a history of rating changes for the bond in question: Step 3: TVI searches for context surrounding credit change: Step 4: TVI discusses context of ratings change with public entity and a decision is made (keep the bond, sell the bond, etc.) *Disclaimer: Investors ultimately assume responsible for monitoring the credit quality on all investments. Any credit reporting or updates is purely a courtesy, particularly when utilizing TVI's brokerage services. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 11 PROOF OF INSURANCE (for Chris Bateman, Peter Becker, Paul Jarvis) - Broker/Dealer Request For Information CERTIFICATE OF INSURANCE – Sponsored Insurance Agents Errors and Omissions Liability Policy This insurance is provided by the Company designated by a "X" in the box below: Zurich American Insurance Company Steadfast Insurance Company Policy Number: Certificate Number: Replaces: EOC-6556117-08 THIS IS A CLAIMS MADE AND REPORTED POLICY. "CLAIMS" MUST FIRST BE MADE AND REPORTED IN WRITING TO THE COMPANY DURING THE "CERTIFICATE PERIOD" OR ANY APPLICABLE EXTENDED REPORTING PERIOD OF THE POLICY. "DEFENSE COSTS" ARE PAID IN ADDITION TO THE LIMITS OF LIABILITY. PLEASE READ THE POLICY CAREFULLY. TERMS IN QUOTATION MARKS HAVE THE MEANING SET FORTH IN THE POLICY. Item 1. "Named Certificate Holder" and Address: Item 2. "Additional Insured": Protective Life Insurance Company, Empire General Life Insurance Company, West Coast Life Insurance Company and ProEquities, Inc. Item 3. Producer and Mailing Address: Insurance Specialties Services, Inc. Item 4. Limits of Liability: Each "Claim"/Each "Named Certificate Holder" Aggregate/Each "Named Certificate Holder" Item 5. "Certificate Period": From: To: 12:01 am local time at the address shown in Item 1. Item 6. Deductible: $ 500 each Claim each for covered claims involving Protective Life, West Coast Life, Empire General $2,500 each Claim each for covered claims involving ProEquities, Inc. and all other covered products; Item 7. Premium: Item 8. Endorsements Effective at Inception: Please see Form and Endorsement Schedule THIS "CERTIFICATE OF INSURANCE" IS ISSUED IN ACCORDANCE WITH THE "MASTER POLICY" ISSUED TO THE INSURANCE PROFESSIONALS PROTECTION GROUP, INC., A RISK PURCHASING GROUP. BY ACCEPTANCE OF THE POLICY THE "NAMED CERTIFICATE HOLDER" AGREES THAT THE STATEMENTS IN THE "CERTIFICATE OF INSURANCE" AND THE APPLICATION AND ANY ATTACHMENTS HERETO ARE THE "NAMED CERTIFICATE HOLDER'S" AGREEMENTS AND REPRESENTATIONS AND THE POLICY EMBODIES ALL AGREEMENTS EXISTING BETWEEN THE "NAMED CERTIFICATE HOLDER" AND THE COMPANY OR ANY OF ITS REPRESENTATIVES RELATING TO THIS INSURANCE. Request a Copy of the Policy: You can obtain a complete copy of the Master Policy and Endorsements at https://www.issisvs.com/Landing/12/plwcpes.aspx or by contacting Insurance Specialties Services, Inc. directly at 800/533-4579. EOC 6556117-09 175763 Christopher Bateman Seattle, WA 98115 $2,292.00 $2,000,000.00 2/15/2019 2/15/2020 $2,000,000.00 Suite 610 9725 3rd Ave NE NOTICE TO CERTIFICATE HOLDER THIS DOCUMENT CERTIFIES THAT THE POLICY OF INSURANCE LISTED ABOVE HAS BEEN OR SHALL BE ISSUED TO THE "NAMED CERTIFICATE HOLDER" NAMED ABOVE FOR THE "CERTIFICATE PERIOD" INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN. THIS "CERTIFICATE OF INSURANCE” IS NOT A CONTRACT OF INSURANCE, BUT ATTESTS THAT A POLICY AS NUMBERED HEREIN, AND AS IT STANDS AT THE DATE OF THIS CERTIFICATE, HAS BEEN OR SHALL BE ISSUED BY THE COMPANY. RIGHTS UNDER THE INSURANCE POLICY EVIDENCED BY THIS "CERTIFICATE OF INSURANCE" CAN BE DETERMINED ONLY WITH REFERENCE TO THE ACTUAL "MASTER POLICY". THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE "CERTIFICATE HOLDER". THIS "CERTIFICATE OF INSURANCE” NEITHER AFFIRMATIVELY NOR NEGATIVELY AMENDS, EXTENDS, OR ALTERS THE COVERAGE AFFORDED BY THE POLICY OF INSURANCE LISTED ABOVE. NOTWITHSTANDING ANY REQUIREMENT, TERM, OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS "CERTIFICATE OF INSURANCE” MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICY DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF THE POLICY. A "CERTIFICATE HOLDER" SHOULD OBTAIN THE INSURANCE POLICY TO ASCERTAIN THE SPECIFIC TERMS, EXCLUSIONS AND CONDITIONS OF THE POLICY. THIS CERTIFICATE OR VERIFICATION OF INSURANCE IS NOT AN INSURANCE POLICY. Agents should report actual or potential "claims" to: As a condition precedent to the right of insurance coverage afforded under the described policy, you shall as soon as practicable, but no later than sixty (60) days after the "Termination of Coverage", give the Company written notice to the following: Zurich North America Commercial NY Specialties Claims P.O.Box 968041 Schaumburg, IL 60196-8041 Immediately forward to the above every claim, notice, summons, or other process received by you or your representative. You have specific duties in the event of the claim for which you should consult the Company above. Do not disclose or discuss any facts or information relating to your claim with anyone other than the above or a representative of the E&O carrier or someone appointed by the E&O carrier to handle your claim. NOTICE TO CERTIFICATE HOLDER OF POLICY EXCLUSIONS THE POLICY REFERENCED ABOVE DOES NOT APPLY TO THE FOLLOWING TYPES OF "CLAIMS" (SEE SUMMARIES BELOW): Arising out of dishonest, fraudulent, criminal, malicious or knowingly wrongful purpose or intent. Alleging bodily injury, sickness or death of any person or destruction or damage to any tangible property, including loss of use thereof. Alleging liability of others assumed by the "Insured" under a contract. By an enterprise owned, operated, controlled or managed by an "Insured"; or any "Claim" by an enterprise which owns, operates, controls or manages an "Insured". Arising out of services performed by the "Insured" as an actuary, accountant, attorney, real estate agent or broker, named fiduciary or third party claims administrator. Arising out of any commingling of, or use of client funds. Arising out of insolvency, receivership or bankruptcy of any organization in which the "Insured" has obtained coverage, unless at the time of placement, that organization had an AM Best Rating of “B+” or better. Arising out of the "Insured’s" activities in computer programming or processing if the resulting programs or software are sold or distributed or if a fee is charged for use of such program or software. Arising out of disputes between the "Insured” and the insurance companies through which the "Insured" did business. Made against any "Insured" or the "Additional Insured" by Any "Insured"; Any "Additional Insured"; Any "Broker/Dealer"; Any other insurance company; Any other insurance agency; or Any person or entities who in the past were, but are not currently, parties to an agent contract with the "Additional Insured". Arising out of the use of confidential information by the "Insured". Arising out of the "Insured’s" inability to pay or collect premium, claim or tax monies. Arising from the placement of client’s coverage or funds with any organization that is not licensed to do business in the state or jurisdiction with authority to regulate such business. Arising out of the ownership, formation, operation, or administration of or advise regarding, referral to, recommendation of or placement of coverage with any self-insured health maintenance organization (HMO), self- insured provider organization (PPO), risk retention group, self-insurance program, or purchasing group. Arising out of the purchase, sale or the giving of advice regarding promissory notes, viatical settlements, viaticated insurance benefits or any security backed by viatical settlements. Brought by SIPC or any other governmental entity. Brought by any clearing agency. Arising out of the "Insured's" activities in exercising discretionary authority over a customer's account; however, this exclusion shall not apply to the activities of a “Named Certificate Holder” who has been granted such authority in writing by the client with the consent of the “Additional Insured”. Arising out of the infringement of intellectual property rights. For "Personal Injury" sustained by the "Insured" or "Additional Insured". Arising out of alleged discrimination of any kind. Prior to the first effective date of coverage. Based upon or arising out of any Pension, Profit Sharing, Health and Welfare or other Employee Benefit Plan or Trust sponsored by the "Insured" as an employer. Arising out of the "Insured" making representations, promises or guarantees as to the future value of any investment including but not limited to, representations, promises or guarantees as to interest rates, fluctuation in interest rates, future premium payments or market value(s). Arising out of or involving investment products partially or totally owned by the "Insured". Arising out of the brokering of structured settlements; however, this exclusion does not apply to any "Claim" arising from or contributed to the sale of annuity products used to fund the structured settlements. Brought as class action or purported class action suit against the “Insured” or “Additional Insured” Arising out of any Property & Casualty Insurance sales. CERTIFICATE OF INSURANCE – Sponsored Insurance Agents Errors and Omissions Liability Policy This insurance is provided by the Company designated by a "X" in the box below: Zurich American Insurance Company Steadfast Insurance Company Policy Number: Certificate Number: Replaces: EOC-6556117-08 THIS IS A CLAIMS MADE AND REPORTED POLICY. "CLAIMS" MUST FIRST BE MADE AND REPORTED IN WRITING TO THE COMPANY DURING THE "CERTIFICATE PERIOD" OR ANY APPLICABLE EXTENDED REPORTING PERIOD OF THE POLICY. "DEFENSE COSTS" ARE PAID IN ADDITION TO THE LIMITS OF LIABILITY. PLEASE READ THE POLICY CAREFULLY. TERMS IN QUOTATION MARKS HAVE THE MEANING SET FORTH IN THE POLICY. Item 1. "Named Certificate Holder" and Address: Item 2. "Additional Insured": Protective Life Insurance Company, Empire General Life Insurance Company, West Coast Life Insurance Company and ProEquities, Inc. Item 3. Producer and Mailing Address: Insurance Specialties Services, Inc. Item 4. Limits of Liability: Each "Claim"/Each "Named Certificate Holder" Aggregate/Each "Named Certificate Holder" Item 5. "Certificate Period": From: To: 12:01 am local time at the address shown in Item 1. Item 6. Deductible: $ 500 each Claim each for covered claims involving Protective Life, West Coast Life, Empire General $2,500 each Claim each for covered claims involving ProEquities, Inc. and all other covered products; Item 7. Premium: Item 8. Endorsements Effective at Inception: Please see Form and Endorsement Schedule THIS "CERTIFICATE OF INSURANCE" IS ISSUED IN ACCORDANCE WITH THE "MASTER POLICY" ISSUED TO THE INSURANCE PROFESSIONALS PROTECTION GROUP, INC., A RISK PURCHASING GROUP. BY ACCEPTANCE OF THE POLICY THE "NAMED CERTIFICATE HOLDER" AGREES THAT THE STATEMENTS IN THE "CERTIFICATE OF INSURANCE" AND THE APPLICATION AND ANY ATTACHMENTS HERETO ARE THE "NAMED CERTIFICATE HOLDER'S" AGREEMENTS AND REPRESENTATIONS AND THE POLICY EMBODIES ALL AGREEMENTS EXISTING BETWEEN THE "NAMED CERTIFICATE HOLDER" AND THE COMPANY OR ANY OF ITS REPRESENTATIVES RELATING TO THIS INSURANCE. Request a Copy of the Policy: You can obtain a complete copy of the Master Policy and Endorsements at https://www.issisvs.com/Landing/12/plwcpes.aspx or by contacting Insurance Specialties Services, Inc. directly at 800/533-4579. EOC 6556117-09 172346 Peter Becker Seattle, WA 98115 $2,292.00 $2,000,000.00 2/15/2019 2/15/2020 $2,000,000.00 9725 3rd Ave NE, Suite 610 NOTICE TO CERTIFICATE HOLDER THIS DOCUMENT CERTIFIES THAT THE POLICY OF INSURANCE LISTED ABOVE HAS BEEN OR SHALL BE ISSUED TO THE "NAMED CERTIFICATE HOLDER" NAMED ABOVE FOR THE "CERTIFICATE PERIOD" INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN. THIS "CERTIFICATE OF INSURANCE” IS NOT A CONTRACT OF INSURANCE, BUT ATTESTS THAT A POLICY AS NUMBERED HEREIN, AND AS IT STANDS AT THE DATE OF THIS CERTIFICATE, HAS BEEN OR SHALL BE ISSUED BY THE COMPANY. RIGHTS UNDER THE INSURANCE POLICY EVIDENCED BY THIS "CERTIFICATE OF INSURANCE" CAN BE DETERMINED ONLY WITH REFERENCE TO THE ACTUAL "MASTER POLICY". THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE "CERTIFICATE HOLDER". THIS "CERTIFICATE OF INSURANCE” NEITHER AFFIRMATIVELY NOR NEGATIVELY AMENDS, EXTENDS, OR ALTERS THE COVERAGE AFFORDED BY THE POLICY OF INSURANCE LISTED ABOVE. NOTWITHSTANDING ANY REQUIREMENT, TERM, OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS "CERTIFICATE OF INSURANCE” MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICY DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF THE POLICY. A "CERTIFICATE HOLDER" SHOULD OBTAIN THE INSURANCE POLICY TO ASCERTAIN THE SPECIFIC TERMS, EXCLUSIONS AND CONDITIONS OF THE POLICY. THIS CERTIFICATE OR VERIFICATION OF INSURANCE IS NOT AN INSURANCE POLICY. Agents should report actual or potential "claims" to: As a condition precedent to the right of insurance coverage afforded under the described policy, you shall as soon as practicable, but no later than sixty (60) days after the "Termination of Coverage", give the Company written notice to the following: Zurich North America Commercial NY Specialties Claims P.O.Box 968041 Schaumburg, IL 60196-8041 Immediately forward to the above every claim, notice, summons, or other process received by you or your representative. You have specific duties in the event of the claim for which you should consult the Company above. Do not disclose or discuss any facts or information relating to your claim with anyone other than the above or a representative of the E&O carrier or someone appointed by the E&O carrier to handle your claim. NOTICE TO CERTIFICATE HOLDER OF POLICY EXCLUSIONS THE POLICY REFERENCED ABOVE DOES NOT APPLY TO THE FOLLOWING TYPES OF "CLAIMS" (SEE SUMMARIES BELOW): Arising out of dishonest, fraudulent, criminal, malicious or knowingly wrongful purpose or intent. Alleging bodily injury, sickness or death of any person or destruction or damage to any tangible property, including loss of use thereof. Alleging liability of others assumed by the "Insured" under a contract. By an enterprise owned, operated, controlled or managed by an "Insured"; or any "Claim" by an enterprise which owns, operates, controls or manages an "Insured". Arising out of services performed by the "Insured" as an actuary, accountant, attorney, real estate agent or broker, named fiduciary or third party claims administrator. Arising out of any commingling of, or use of client funds. Arising out of insolvency, receivership or bankruptcy of any organization in which the "Insured" has obtained coverage, unless at the time of placement, that organization had an AM Best Rating of “B+” or better. Arising out of the "Insured’s" activities in computer programming or processing if the resulting programs or software are sold or distributed or if a fee is charged for use of such program or software. Arising out of disputes between the "Insured” and the insurance companies through which the "Insured" did business. Made against any "Insured" or the "Additional Insured" by Any "Insured"; Any "Additional Insured"; Any "Broker/Dealer"; Any other insurance company; Any other insurance agency; or Any person or entities who in the past were, but are not currently, parties to an agent contract with the "Additional Insured". Arising out of the use of confidential information by the "Insured". Arising out of the "Insured’s" inability to pay or collect premium, claim or tax monies. Arising from the placement of client’s coverage or funds with any organization that is not licensed to do business in the state or jurisdiction with authority to regulate such business. Arising out of the ownership, formation, operation, or administration of or advise regarding, referral to, recommendation of or placement of coverage with any self-insured health maintenance organization (HMO), self- insured provider organization (PPO), risk retention group, self-insurance program, or purchasing group. Arising out of the purchase, sale or the giving of advice regarding promissory notes, viatical settlements, viaticated insurance benefits or any security backed by viatical settlements. Brought by SIPC or any other governmental entity. Brought by any clearing agency. Arising out of the "Insured's" activities in exercising discretionary authority over a customer's account; however, this exclusion shall not apply to the activities of a “Named Certificate Holder” who has been granted such authority in writing by the client with the consent of the “Additional Insured”. Arising out of the infringement of intellectual property rights. For "Personal Injury" sustained by the "Insured" or "Additional Insured". Arising out of alleged discrimination of any kind. Prior to the first effective date of coverage. Based upon or arising out of any Pension, Profit Sharing, Health and Welfare or other Employee Benefit Plan or Trust sponsored by the "Insured" as an employer. Arising out of the "Insured" making representations, promises or guarantees as to the future value of any investment including but not limited to, representations, promises or guarantees as to interest rates, fluctuation in interest rates, future premium payments or market value(s). Arising out of or involving investment products partially or totally owned by the "Insured". Arising out of the brokering of structured settlements; however, this exclusion does not apply to any "Claim" arising from or contributed to the sale of annuity products used to fund the structured settlements. Brought as class action or purported class action suit against the “Insured” or “Additional Insured” Arising out of any Property & Casualty Insurance sales. CERTIFICATE OF INSURANCE – Sponsored Insurance Agents Errors and Omissions Liability Policy This insurance is provided by the Company designated by a "X" in the box below: Zurich American Insurance Company Steadfast Insurance Company Policy Number: Certificate Number: Replaces: EOC-6556117-08 THIS IS A CLAIMS MADE AND REPORTED POLICY. "CLAIMS" MUST FIRST BE MADE AND REPORTED IN WRITING TO THE COMPANY DURING THE "CERTIFICATE PERIOD" OR ANY APPLICABLE EXTENDED REPORTING PERIOD OF THE POLICY. "DEFENSE COSTS" ARE PAID IN ADDITION TO THE LIMITS OF LIABILITY. PLEASE READ THE POLICY CAREFULLY. TERMS IN QUOTATION MARKS HAVE THE MEANING SET FORTH IN THE POLICY. Item 1. "Named Certificate Holder" and Address: Item 2. "Additional Insured": Protective Life Insurance Company, Empire General Life Insurance Company, West Coast Life Insurance Company and ProEquities, Inc. Item 3. Producer and Mailing Address: Insurance Specialties Services, Inc. Item 4. Limits of Liability: Each "Claim"/Each "Named Certificate Holder" Aggregate/Each "Named Certificate Holder" Item 5. "Certificate Period": From: To: 12:01 am local time at the address shown in Item 1. Item 6. Deductible: $ 500 each Claim each for covered claims involving Protective Life, West Coast Life, Empire General $2,500 each Claim each for covered claims involving ProEquities, Inc. and all other covered products; Item 7. Premium: Item 8. Endorsements Effective at Inception: Please see Form and Endorsement Schedule THIS "CERTIFICATE OF INSURANCE" IS ISSUED IN ACCORDANCE WITH THE "MASTER POLICY" ISSUED TO THE INSURANCE PROFESSIONALS PROTECTION GROUP, INC., A RISK PURCHASING GROUP. BY ACCEPTANCE OF THE POLICY THE "NAMED CERTIFICATE HOLDER" AGREES THAT THE STATEMENTS IN THE "CERTIFICATE OF INSURANCE" AND THE APPLICATION AND ANY ATTACHMENTS HERETO ARE THE "NAMED CERTIFICATE HOLDER'S" AGREEMENTS AND REPRESENTATIONS AND THE POLICY EMBODIES ALL AGREEMENTS EXISTING BETWEEN THE "NAMED CERTIFICATE HOLDER" AND THE COMPANY OR ANY OF ITS REPRESENTATIVES RELATING TO THIS INSURANCE. Request a Copy of the Policy: You can obtain a complete copy of the Master Policy and Endorsements at https://www.issisvs.com/Landing/12/plwcpes.aspx or by contacting Insurance Specialties Services, Inc. directly at 800/533-4579. EOC 6556117-09 115286 Paul V. Jarvis Seattle, WA 98115 $2,292.00 $2,000,000.00 2/15/2019 2/15/2020 $2,000,000.00 9725 3rd Avenue NE, Suite 610 NOTICE TO CERTIFICATE HOLDER THIS DOCUMENT CERTIFIES THAT THE POLICY OF INSURANCE LISTED ABOVE HAS BEEN OR SHALL BE ISSUED TO THE "NAMED CERTIFICATE HOLDER" NAMED ABOVE FOR THE "CERTIFICATE PERIOD" INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN. THIS "CERTIFICATE OF INSURANCE” IS NOT A CONTRACT OF INSURANCE, BUT ATTESTS THAT A POLICY AS NUMBERED HEREIN, AND AS IT STANDS AT THE DATE OF THIS CERTIFICATE, HAS BEEN OR SHALL BE ISSUED BY THE COMPANY. RIGHTS UNDER THE INSURANCE POLICY EVIDENCED BY THIS "CERTIFICATE OF INSURANCE" CAN BE DETERMINED ONLY WITH REFERENCE TO THE ACTUAL "MASTER POLICY". THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE "CERTIFICATE HOLDER". THIS "CERTIFICATE OF INSURANCE” NEITHER AFFIRMATIVELY NOR NEGATIVELY AMENDS, EXTENDS, OR ALTERS THE COVERAGE AFFORDED BY THE POLICY OF INSURANCE LISTED ABOVE. NOTWITHSTANDING ANY REQUIREMENT, TERM, OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS "CERTIFICATE OF INSURANCE” MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICY DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF THE POLICY. A "CERTIFICATE HOLDER" SHOULD OBTAIN THE INSURANCE POLICY TO ASCERTAIN THE SPECIFIC TERMS, EXCLUSIONS AND CONDITIONS OF THE POLICY. THIS CERTIFICATE OR VERIFICATION OF INSURANCE IS NOT AN INSURANCE POLICY. Agents should report actual or potential "claims" to: As a condition precedent to the right of insurance coverage afforded under the described policy, you shall as soon as practicable, but no later than sixty (60) days after the "Termination of Coverage", give the Company written notice to the following: Zurich North America Commercial NY Specialties Claims P.O.Box 968041 Schaumburg, IL 60196-8041 Immediately forward to the above every claim, notice, summons, or other process received by you or your representative. You have specific duties in the event of the claim for which you should consult the Company above. Do not disclose or discuss any facts or information relating to your claim with anyone other than the above or a representative of the E&O carrier or someone appointed by the E&O carrier to handle your claim. NOTICE TO CERTIFICATE HOLDER OF POLICY EXCLUSIONS THE POLICY REFERENCED ABOVE DOES NOT APPLY TO THE FOLLOWING TYPES OF "CLAIMS" (SEE SUMMARIES BELOW): Arising out of dishonest, fraudulent, criminal, malicious or knowingly wrongful purpose or intent. Alleging bodily injury, sickness or death of any person or destruction or damage to any tangible property, including loss of use thereof. Alleging liability of others assumed by the "Insured" under a contract. By an enterprise owned, operated, controlled or managed by an "Insured"; or any "Claim" by an enterprise which owns, operates, controls or manages an "Insured". Arising out of services performed by the "Insured" as an actuary, accountant, attorney, real estate agent or broker, named fiduciary or third party claims administrator. Arising out of any commingling of, or use of client funds. Arising out of insolvency, receivership or bankruptcy of any organization in which the "Insured" has obtained coverage, unless at the time of placement, that organization had an AM Best Rating of “B+” or better. Arising out of the "Insured’s" activities in computer programming or processing if the resulting programs or software are sold or distributed or if a fee is charged for use of such program or software. Arising out of disputes between the "Insured” and the insurance companies through which the "Insured" did business. Made against any "Insured" or the "Additional Insured" by Any "Insured"; Any "Additional Insured"; Any "Broker/Dealer"; Any other insurance company; Any other insurance agency; or Any person or entities who in the past were, but are not currently, parties to an agent contract with the "Additional Insured". Arising out of the use of confidential information by the "Insured". Arising out of the "Insured’s" inability to pay or collect premium, claim or tax monies. Arising from the placement of client’s coverage or funds with any organization that is not licensed to do business in the state or jurisdiction with authority to regulate such business. Arising out of the ownership, formation, operation, or administration of or advise regarding, referral to, recommendation of or placement of coverage with any self-insured health maintenance organization (HMO), self- insured provider organization (PPO), risk retention group, self-insurance program, or purchasing group. Arising out of the purchase, sale or the giving of advice regarding promissory notes, viatical settlements, viaticated insurance benefits or any security backed by viatical settlements. Brought by SIPC or any other governmental entity. Brought by any clearing agency. Arising out of the "Insured's" activities in exercising discretionary authority over a customer's account; however, this exclusion shall not apply to the activities of a “Named Certificate Holder” who has been granted such authority in writing by the client with the consent of the “Additional Insured”. Arising out of the infringement of intellectual property rights. For "Personal Injury" sustained by the "Insured" or "Additional Insured". Arising out of alleged discrimination of any kind. Prior to the first effective date of coverage. Based upon or arising out of any Pension, Profit Sharing, Health and Welfare or other Employee Benefit Plan or Trust sponsored by the "Insured" as an employer. Arising out of the "Insured" making representations, promises or guarantees as to the future value of any investment including but not limited to, representations, promises or guarantees as to interest rates, fluctuation in interest rates, future premium payments or market value(s). Arising out of or involving investment products partially or totally owned by the "Insured". Arising out of the brokering of structured settlements; however, this exclusion does not apply to any "Claim" arising from or contributed to the sale of annuity products used to fund the structured settlements. Brought as class action or purported class action suit against the “Insured” or “Additional Insured” Arising out of any Property & Casualty Insurance sales. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 12 PROEQUITIES OFFICES MAP - Broker/Dealer Request For Information WA - 7 ND - 15 SD - 6 NE - 7 KS - 11 OK - 7 TX - 51 MN - 31 IA - 28 MO - 1 AR - 8 LA - 18 WI - 6 IL - 23 MS - 6 AL - 97 TN - 17 KY - 4 IN - 26OH - 38 MI - 18 FL - 64 GA - 46 SC - 7 NC - 22 VA - 15 WV - 1 PA - 36 NY - 2 ME - 1 VT - 0NH - 0MA - 1 RI - 0 CT - 6NJ - 8 DE - 0 MD - 1 OR - 5 CA - 20 HI - 3 AK - 0 NV - 0 ID - 3 MT - 1 WY - 2 UT - 2 CO - 7 AZ - 12 NM - 0 listen, think, respond ProEquities Producing Registered Reps by state using Branch Address. As of 6/30/2017 Securities offered through ProEquities, Inc. a Registered Broker-Dealer, Member, FINRA & SIPC. Any non-securities activities conducted by Time Value Investments, Inc. are independent of ProEquities, Inc. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 13 EXAMPLE OF NETXINVESTOR 3.0 - Broker/Dealer Request For Information • Clients enjoy complimentary access to “NetXInvestor 3.0.” This online platform allows clients to perform credit research without entirely relying on a broker (who has a financial incentive to sell a bond). Below is a brief overview of the platform: #1: Users can research corporate bond issuers “by symbol” –this provides a high-level overview of the company in question (share price, quarterly revenues, total debt/equity): #2 Clicking on the “Fundamentals” tab allows users to view a summary of key financial metrics for the company in question, and compared to the company’s industry as a whole: #3 The “Fundamentals” tab also provides even more detail, including information on the company’s balance sheet, income statement, and even cash flows: #4 The “Fundamentals” tab lets the user view any SEC Filings- which provides easy access to Annual Financials (10-K) and several other relevant filings: Interactive market sector “heat graph” where clients can research various “industry sectors” Events Calendar showing relevant upcoming events (below is a snapshot about the 6/19/2019 Fed Meeting): NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 14 FORM X-17A-5 Please find on the following pages a copy of the last two years of form X-17A-5 for Proequities, a wholly owned subsidiary of Protective Life Corporation. Protective Life Corporation’s Form 10-K is also provided. - Broker/Dealer Request For Information _____________________________________________________________________________________________________________________ _____________________________________________________________________________________________________________________ _____________________________________________________________________________________________________________________ _____________________________________________________________________________________________________________________ ANNUAL AUDITED REPORT FORM X-17A-5 PART III OMB APPROVAL OMB Number: 3235-0123 Expires: "VHVTU Estimated average burden hours per response.. . . . . 12.00 UNITEDSTATES SECURITIESANDEXCHANGECOMMISSION Washington, D.C. 20549 SEC FILE NUMBER 8- FACING PAGE Information Required of Brokers and Dealers Pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17a-5 Thereunder REPORT FOR THE PERIOD BEGINNING______________________________AND ENDING______________________________ MM/DD/YY MM/DD/YY A. REGISTRANT IDENTIFICATION NAME OF BROKER-DEALER: ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) OFFICIAL USE ONLY FIRM I.D. NO. ___________________________________________________________________________________________________________________ (No. and Street) (City) (State) (Zip Code) NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT (Area Code – Telephone Number) B. ACCOUNTANT IDENTIFICATION INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in this Report* (Name – if individual, state last, first, middle name) (Address) (City) (State) (Zip Code) CHECK ONE: Certified Public Accountant Public Accountant Accountant not resident in United States or any of its possessions. FOR OFFICIAL USE ONLY *Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See Section 240.17a-5(e)(2) Potential persons who are to respond to the collection of information contained in this form are not required to respondSEC 1410 (06-02) unless the form displays a currently valid OMB control number. Confidential 32590 01/01/18 12/31/18 ProEquities, Inc. 2801 Highway 280 South Birmingham Alabama 35223 Darren Guerrera 205-268-5553 PricewaterhouseCoopers LLP 569 Brookwood Village, Ste 851 Birmingham Alabama 35209 ✔ Confidential OATH OR AFFIRMATION 1, _D_a_r_re_n_G_u_e_rr_e_ra __________________________ , swear (or affirm) that, to the best of my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of ProEquities, Inc. ------------------------------------------------------, as of December 31 20 18 are true and correct. I further swear (or affirm) that neither the company nor any partner, proprietor, principal officer or director has any proprietary interest in any account classified solely as that of a customer, except as follows: My Commission Expires May 22,2022 S ignature Chief Financial Officer Notary Public MELISSA SIRLES SANDERS Notary Public Alabama State at Lar!!e This report** contains (check all applicable boxes): 0 (a) Facing Page . ./ (b) Statement of Financial Condition . .; (c) Statement of Income (Loss). (d) Statement of Changes in Financial Condition . Title (e) Statement of Changes in Stockholders' Equity or Partners ' or Sole Proprietors ' Capital. (f) Statement of Changes in Liabilities Subordinated to Claims of Creditors. ~ (g) Computation ofNet Capital. (h) Computation for Determination of Reserve Requirements Pursuant to Rule 15c3-3. (i) Information Relating to the Possession or Control Requirements Under Rule 15c3-3 . 0 (j) A Reconciliation, including appropriate explanation of the Computation ofNet Capital Under Rule 15c3-l and the Computation for Determination ofthe Reserve Requirements Under Exhibit A of Rule 15c3-3. 0 (k) A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to methods of consolidation. ~ (I) An Oath or Affirmation . 0 (m) A copy of the SIPC Suppl e mental Report. D (n) A report describing any material inadequacies found to exist or found to have existed since the date of the previous audit. **For conditions of c onfidential treatment of certain portions of this filing, se e section 24 0. !7a-5(e)(3). Confidential ProEquities, Inc. (a wholly owned subsidiary of Protective Life Corporation) Financial Statements and Supplementary Information Pursuant to SEC Rule 17a-5 December 31, 2018 ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Index to Financial Statements and Supplementary Information December 31, 2018 Report of Independent Registered Public Accounting Firm ............................................................. 1-2 Financial Statements Statement of Financial Condition ................................................................................................................. 3 Statement of Comprehensive Income .......................................................................................................... 4 Statement of Changes in Stockholder’s Equity ............................................................................................ 5 Statement of Cash Flows ............................................................................................................................. 6 Notes to Financial Statements ............................................................................................................... 7–20 Supplementary Schedules Schedule I - Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission ....................................................................................................................... 21 Schedule II - Computation for Determination of Reserve Requirements Under Rule 15c3-3 of the Securities and Exchange Commission ........................................................................ 22 PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholder of ProEquities, Inc. Opinion on the Financial Statements We have audited the accompanying statement of financial condition of ProEquities, Inc. (the “Company”), a wholly owned subsidiary of Protective Life Corporation, as of December 31, 2018, and the related statements of comprehensive income, changes in stockholder’s equity and cash flows for the year then ended, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Supplemental Information The accompanying information in Schedule I – Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission and Schedule II – Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3 -3 of the Securities and Exchange Commission has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with Rule 17a-5 under the Securities Exchange Act of 1934. In our opinion, the Schedule I – Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission and Schedule II – 2 of 2 Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission is fairly stated, in all material respects, in relation to the financial statements as a whole. Birmingham, Alabama February 28, 2019 We have served as the Company's auditor since 1995. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2018 The accompanying notes are an integral part of these financial statements. 3 Assets Cash and cash equivalents 3,574,782$ Investments, at fair value 23,584,470 Receivables from brokers and dealers 10,850,971 State income tax receivable 581,324 Fixed assets, net of accumulated depreciation of $498,397 399,203 Other assets, net of allowance for uncollectible amounts of $23,262 4,798,031 Deferred income taxes, net 296,160 Total assets 44,084,941$ Liabilities and Stockholder's Equity Liabilities Commissions payable 3,437,410$ Securities sold but not yet purchased 1,120,228 Due to parent and affiliates 2,399,257 Deferred compensation obligation 18,400,679 Other accrued expenses 6,043,810 Deferred revenue 337,585 Total liabilities 31,738,969$ Stockholder's equity Common stock, $1 par value; 250,000 shares authorized, 114,408 shares issued and outstanding 114,408$ Additional paid-in capital 18,475,311 Retained earnings (6,243,747) Total stockholder's equity 12,345,972$ Total liabilities and stockholder's equity 44,084,941$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Comprehensive Income Year Ended December 31, 2018 The accompanying notes are an integral part of these financial statements. 4 Revenues Commissions 72,402,340$ Advisory 39,071,888 Asset based 1,254,934 Transaction and fee 5,216,313 Interest and dividend income 1,792,102 Investment loss, net (2,614,133) Total revenues 117,123,444$ Expenses Commissions 89,232,967 Salaries and wages 10,824,562 Technology 4,431,294 Legal, accounting and consulting 3,255,694 Corporate and divisional allocations, related party 3,200,829 Clearing expense 2,042,065 Portfolio managers fee 1,881,694 Sales conference and promotions 922,651 Licenses, fees and assessments 737,134 Rent, related party 609,441 Travel and entertainment 264,558 Postage, copies and supplies 193,766 Depreciation 101,083 Other operating expenses 2,468,117 Total expenses 120,165,855$ Loss before income taxes (3,042,411)$ Income tax expense 4,748,447 Net loss (7,790,858)$ Other comprehensive income - Total comprehensive loss (7,790,858)$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Changes in Stockholder’s Equity December 31, 2018 The accompanying notes are an integral part of these financial statements. 5 Additional Total Paid-In Retained Stockholder's Shares Amount Capital Earnings Equity Balance at January 1, 2018 114,408 114,408$ 15,725,311$ 1,547,111$ 17,386,830$ Capital Contribution 2,750,000 2,750,000 Net Loss (7,790,858) (7,790,858) Balance at December 31, 2018 114,408 114,408$ 18,475,311$ (6,243,747)$ 12,345,972$ Common Stock ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Cash Flows December 31, 2018 The accompanying notes are an integral part of these financial statements. 6 Cash flows from operating activities Net loss (7,790,858)$ Adjustments to reconcile net income to net cash provided by operating activities Unrealized investment loss, net 2,970,400 Deferred income tax expense 4,552,302 Depreciation expense 101,083 Forgiveness of representative note receivable 491,993 Change in assets and liabilities Investments (5,349,925) Receivables from brokers and dealers (2,315,620) State income tax receivable (28,511) Payments received on representative loan receivables 120,959 Issuance of representative loans receivables (1,339,814) Other assets 224,625 Securities sold but not yet purchased 383,218 Commissions payable (451,663) Deferred compensation obligation (1,216,837) Due to parent and affiliates 451,416 Other accrued expenses 1,377,803 Deferred revenue (129,866) Net cash used in operating activities (7,949,295)$ Cash flows from investing activities Purchases of fixed assets (292,105) Net cash used in investing activities (292,105)$ Cash flows from financing activities Captial Contribution 2,750,000 Net cash provided by financing activities 2,750,000$ Change in cash (5,491,400)$ Cash and cash equivalents Beginning of year 9,066,182$ End of year 3,574,782$ Supplemental disclosure of cash flow information Cash paid for income taxes 1,017,673$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 7 1. General ProEquities, Inc. (the “Company”) is a full-service broker-dealer incorporated under the laws of the state of Alabama. The Company is also a registered investment advisor. The Company operates across the United States and is headquartered in Birmingham, Alabama. The Company is registered with the Securities and Exchange Commission (the “SEC”) and is a member of the Financial Industry Regulatory Authority ("FINRA”). The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”). On February 1, 2015, PLC became a wholly owned subsidiary of Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha under the laws of Japan. PLC provides operating capital to the Company, as needed, to provide supplemental funding for the operations and activities of the Company. In addition to the Company's core broker-dealer operations, the Company maintains a fixed income division that offers a wide variety of fixed income products and services to individual and institutional investors. The Company also maintains a wholesaling division supporting variable life insurance sales. 2. Significant Accounting Policies Basis of Presentation and Use of Estimates The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP and prevailing industry practices requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Accounting for Securities Transactions The Company clears all exchange-based brokerage security transactions through Pershing, LLC ("Pershing"). Under the clearing arrangement, Pershing confirms securities trades, processes securities movements and records transactions for customers in its accounts, for which it receives a ticket charge per transaction. The Company also engages in investment security transactions with other settlement agents and with the direct product sponsor as issuer for certain investment security transactions. These trading activities may be conducted by the Company, its registered representatives/agents or through direct customer purchases with the affiliate counterparties. The Company’s commission revenues and related expenses are recorded on a trade date basis. The Company has evaluated the credit worthiness of Pershing and its other counterparties and determined the risk of material financial loss due to credit risk exposure to be minimal. Cash and Cash Equivalents Cash and cash equivalents include demand deposits and investments in money market funds which are considered highly liquid instruments. The carrying amounts reported in the Statement of Financial Condition for these financial instruments approximate their fair values (as defined by the Accounting Standards Codification (“ASC”) Fair Value Measurement and Disclosure Topic) due to their short-term nature. Cash and cash equivalents are classified as Level 1 in accordance with the fair value hierarchy of the ASC Fair Value Measurement and Disclosure Topic. Investments Investments are reported at fair value, with the resulting unrealized and realized gains and losses recognized currently in earnings. Gains and losses realized on the sale of securities are computed using the specific identification method. Unrealized gains and losses and realized gains and losses are combined and included in "Investment loss, net" in the accompanying Statement of Comprehensive Income. Interest and Dividend Income Interest and dividend income primarily includes investment income derived from interest income on money market funds, fixed maturity securities, and income from securities related to the Company’s deferred compensation plans. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 8 Fixed Assets Fixed assets are recorded at cost and are depreciated using the straight-line method over their estimated useful lives which range from 3 to 5 years. Maintenance and repairs are charged to expense when incurred; betterments and improvements that materially prolong the lives of the assets are capitalized. The cost of assets sold or retired and the related accumulated depreciation are removed from the respective accounts, and the gain or loss on such disposition is recognized currently. Receivables from Brokers and Dealers The receivables from brokers and dealers represents commissions and other fees to be collected from the clearing broker, mutual fund companies, product sponsors, variable annuity and variable life companies. Additionally, this balance includes cash required to be held on deposit at Pershing of $0.1 million. Other Assets Other assets are comprised primarily of prepaid expenses, loans to the Company’s representatives and reimbursable expenses paid by the Company on its agents' behalf. The Company's finance receivables are primarily in the form of agent debit balances and agent notes receivable. Certain agent notes receivable contain terms which may result in the Company forgiving the principal and interest payments should the agent meet certain sales targets. The Company has recorded an allowance of $23,262 against these receivables based on the specific terms at December 31, 2018. The Company records an allowance for credit losses, which is developed based upon the Company's historical experience of write-offs of the related agent debit balances. Notes receivable are reserved based upon specific indicators of an inability to pay or intent not to pay. The amount of such receivables which were forgiven or written off during the year ended December 31 2018, was $491,993. Contingent Liabilities The Company recognizes liabilities for contingencies when there is an exposure that, when fully analyzed, indicates it is both probable a liability has been incurred and the amount of loss or obligation can be reasonably estimated. The determination of whether a loss is probable and the estimate of an associated range of loss is subject to significant judgments and assumptions based on currently available information as of the reporting date and may materially change based on facts and circumstances presented in future periods. When a loss is considered to be probable and a range of possible loss can be estimated, the Company accrues the most likely amount within that range based upon management's judgment after the consideration of facts currently known and after consultation with its legal counsel, if appropriate. As a result of the extensive regulation of the financial services industry, the Company's operations are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations. Such reviews and inspections can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censures to censures with fines or other monetary repercussions. See Note 11 for further discussion. Income Taxes The results of operations of the Company are included in the consolidated federal and state income tax returns of PLC and its subsidiaries. The Company utilizes the asset and liability method in accordance with the Accounting Standards Codification ("ASC") Income Taxes Topic. 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 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, and the tax benefit is reflected in future periods when the Company generates taxable income. With respect to state jurisdictions in which PLC and its subsidiaries file on a consolidated or unitary basis, the state tax benefit associated with separate company state net operating losses is paid by PLC in the year in which the loss is ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 9 generated. Income taxes recoverable (payable) are recorded in the due to/from affiliates account and are settled periodically, per the tax sharing agreement. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The legislation significantly changes U.S. tax law by, among other things, lowering the corporate income tax rate. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Concentration of Credit Risk The Company maintains depository accounts with certain financial institutions. Although these account balances exceed federally insured depository limits, the Company has evaluated the credit worthiness of these applicable financial institutions and determined the risk of material financial loss due to exposure from credit risk to be minimal. Accounting Pronouncements Recently Adopted ASU No. 2016-01 - Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the Update requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The Update also introduces a single- step impairment model for equity investments without a readily determinable fair value. Additionally, the Update requires changes in instrument-specific credit risk for fair value option liabilities to be recorded in other comprehensive income. The amendments in this Update were effective for annual and interim periods beginning after December 15, 2017. The Company adopted the updated guidance in ASU 2016-01 on January 1, 2018. The adoption of ASU 2016-01 effective January 1, 2018 did not have any impact on the Company’s financial statements. ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Update also requires new qualitative and quantitative disclosures, including disaggregation of revenues, along with and descriptions of associated performance obligations. The Update was effective for annual and interim periods beginning after December 15, 2017. The Company adopted the updated guidance in ASU 2014-09 on January 1, 2018 using the modified retrospective approach. The adoption did not impact the timing or amounts of the Company’s revenue recognition, and the Company made no material changes to its accounting policies and processes as a result of the adoption. Refer to Note 3, for disclosure of revenues disaggregated by category. Accounting Pronouncements Not Yet Adopted ASU No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change will relate to the accounting model used by lessees. The Update will require all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The lease asset and liability will be measured at the present value of the minimum lease payments less any upfront payments or fees. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in the Update upon adoption. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 10 ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including trade and other receivables. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if the asset recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its operations and financial results. 3. Revenues Revenue from contracts with customers includes commission revenues and asset management services. The recognition and measurement of revenue is based on the assessment of individual contract terms. Significant judgment is required to determine whether performance obligations are satisfied at a point in time or over time; how to allocate transaction prices where multiple performance obligations are identified; when to recognize revenue based on the appropriate measure of the Company’s progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events. The following table shows revenues disaggregated by category : The Company’s accounting with respect to revenue recognition for each of its significant categories of contracts are outlined below, along with significant judgments involved in determining the timing and amount of revenues. Commission Revenues The Company earns commissions by executing client transactions in stocks, mutual funds, variable annuities, and other financial products and services. Commission revenues may be received at the point of sale (sales-based) or on a trailing basis. Regardless of the timing of the commission, the Company has no material obligations outside of product placement. Sales based commission revenue is generally based on a percentage of the investment at the date of product placement, and is recognized on the trade date. Trailing commissions, including renewal commissions and 12b-1 fees, are generally based on a percentage of the investment’s average fund balance or premium, in accordance with the applicable selling agreement. Variable consideration associated with trailing commissions is fully constrained until the amount is determinable due to the investor holding the policy or shares for a given period. Commissions Sales Based 35,306,790$ Trailing 37,095,550 Advisory 39,071,888 Asset based 1,254,934 Transaction and fee 5,216,313 Interest and dividend income 1,792,102 Investment loss, net (2,614,133) 117,123,444$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 11 Advisory Revenues The Company receives advisory fees for providing investment advisory services and managing the assets of its advisory clients over the term of the applicable arrangement. Fees are calculated as a percentage of assets under management, and are accrued and recognized on a straight line basis over the period in which services are provided. Costs incurred by the Company to provide advisory services to its clients primarily consist of commissions paid to the Company’s agents and fees to money managers and service providers. Such costs are deferred and recognized on a straight-line basis over the period in which they are recovered through the recognition of related fee revenues. Asset Based Revenue Asset based revenues comprise of asset based sponsor revenue and cash sweep revenue. The Company receives fees from product sponsors for marketing support, education, and training efforts over a specified period. Compensation for these performance obligations included in asset based revenue is calculated as a percentage of the average assets under management or as a percentage of sales. Sales-based and asset-based fees represent variable consideration and are constrained until the date that the fees are determinable. The Company is the principal in these arrangements as it is responsible for and determines the level of servicing and marketing support it provides to the product sponsors. Money market cash sweep revenues are generated based on balances in advisors’ clients’ money market cash sweep accounts. Transaction and Fee Revenues Transaction and fee revenue include fees the Company charges advisors and their clients, fee-based sponsor revenue, and investment banking fees. The Company receives affiliation and technology fees from its contracts with financial advisors. These contracts grant the advisors the right to act as an advisor for the Company’s clients, to use the Company’s technology platform and to offer for sale to its clients the Company’s portfolio of products. The Company is the principal in these arrangements, as it has significant discretion in pricing and provides significant integration services in connection with providing the platform to its advisors. Affiliation fee revenue is recognized over time as the Company satisfies its obligation to provide access to its advisor platform. The Company has recorded deferred revenue of $337,585 as of December 31, 2018 associated with affiliation fees collected from the advisors during the renewal period at the end of 2018 for the following year. Amounts are unearned until 2019 when the Company will recognize the revenue. Ticket fees and other clearing revenues are charged to advisors and their clients for executing certain transactions. Ticket fees and other clearing revenues are recognized at the point in time that the related transaction is executed, generally on the trade date. The Company receives fees from product sponsors for marketing support, education, and training efforts over a specified period. Compensation for these performance obligations included in transaction and fees is calculated as a fixed fee. Fixed fees received from product sponsors are accrued on a straight-line basis over the term of the applicable agreement. The Company is the principal in these arrangements as it is responsible for and determines the level of servicing and marketing support it provides to the product sponsors. Transaction Price Allocated to Remaining Performance Obligations The Company has contract liabilities representing revenues that will be recognized in future periods upon the satisfaction of remaining performance obligations of $337,585 as of December 31, 2018. This deferred revenue ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 12 comprises of affiliation fees collected from the advisors during the renewal period at the end of 2018 for the following year. Amounts are unearned until 2019 when the Company will recognize the revenue. The following table shows the revenue recognized and deferred during 2018: 4. Related Parties The Company occupies office space under a monthly rental arrangement in the office building of an affiliate, Protective Life Insurance Company (PLICO), for which rent of approximately $0.6 million was expensed under contractual arrangements with PLC in 2018. In addition, during the year ended December 31, 2018, the Company expensed approximately $0.7 million in payments for providing various human resource services, approximately $0.5 million for providing legal services and approximately $1.8 million for providing technology support and infrastructure. The Company is billed by PLICO, which is also a wholly owned subsidiary of PLC, for these items and related amounts due are settled monthly in the normal course of the Company's operations. The Company also contracts with First Protective Insurance Group, Inc., an affiliate, for management and administrative services supporting its wholesaling division. The Company expensed $2.5 million for management and administrative services related to this agreement. The Company recorded commission revenue in 2018 from Investment Distributors, Inc., a subsidiary of PLC, of approximately $3.2 million. All employees of the Company participate in the PLC Defined Benefit Pension Plan and/or its Unfunded Excess Benefits Plan (collectively “the Plans”). The Plans are not separable by affiliates participating in the plans. The benefits are based on years of service and the employee's compensation. PLC's funding policy is to contribute amounts to the Plans sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act (ERISA) plus such additional amounts as PLC may determine appropriate from time to time. Contributions are intended to provide not only for benefits attributable for service to date but also for those benefits expected to be earned in the future. The employees of the Company also are eligible to participate in PLC's qualified, defined contribution employee benefit plan under Internal Revenue Code Section 401(k). PLC provides a match for employee contributions to the 401(k) plan in cash. PLC also has adopted a supplemental matching contribution program which is a nonqualified plan that provides supplemental matching contributions in excess of limits imposed on qualified deferred contribution plans by federal law. In addition, PLC provides limited health care benefits to eligible retired employees of the Company until age 65 and provides certain medical and other benefits to active employees of the Company. Charges related to these employee benefit plans provided by PLC were approximately $1.2 million and have been included in "Salaries and wages" in the Company’s Statement of Comprehensive Income for the year ended December 31, 2018. Deferred revenue balance at January 1, 2018 467,451$ Affiliation fee revenue recognized during 2018 (467,451) Affiliation fee revenue collected for 2019 337,585 Deferred revenue balance at December 31, 2018 337,585$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 13 5. Fixed Assets Fixed assets consist of the following as of December 31, 2018: Depreciation expense in the amount of $101,083 was recognized in 2018. 6. Income Taxes The Company's effective income tax rate varied from the maximum federal income tax rate as follows for the year ended December 31, 2018: The provision for income tax expense is as follows: The following table shows the significant components of the net deferred income tax asset as of December 31, 2018. System software 897,600$ Less: Accumulated depreciation (498,397) Net fixed assets 399,203 Provision for income tax expense Current 196,147$ Deferred 4,552,300 4,748,447$ Deferred income tax asset Deferred compensation 5,276,282$ Legal reserve and contingencies 128,421 Accrued vacation 24,895 Other 6,098 Valuation allowance (5,022,062) Total gross deferred income tax asset 413,634$ Deferred income tax liability Prepaid expense 109,029$ Software 8,445 Total gross deferred income tax liability 117,474$ Net deferred income tax asset 296,160$ Statutory federal income tax rate applied to pre-tax income 21.00 % State income taxes, including state valuation allowance (25.37)% Non deductible expenses (13.63)% Federal valuation allowance (138.08)% Effective income tax rate (156.08)% ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 14 Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2018, a valuation allowance of $5.0 million has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth. In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2014. As of December 31, 2018, the Company evaluated the need for the recognition of uncertain tax liability in accordance with the guidance of ASC 740, "Income Taxes," and determined none should be recorded or disclosed. The Company's policy is to recognize interest and penalties related to tax contingencies in income tax expense during the period in which they are identified. Included in the "Due to parent and affiliates" on the accompanying financial statements are current income taxes payable of $0.1 million at December 31, 2018. 7. Regulatory Requirements The Company is subject to the SEC’s Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital (as defined) and requires the ratio of aggregate indebtedness (as defined) to net capital shall not exceed 15 to 1. At December 31, 2018, the Company had computed net capital of $4.3 million which was $3.4 million in excess of its required minimum net capital of $0.8 million. The Company's aggregate indebtedness to net capital ratio at December 31, 2018 was 289.88%. The Company has claimed an exemption from the provisions of SEC Rule 15c3-3 under paragraph (k)(2)(ii), as it has disclosed that all exchange-based transactions are cleared with customers on a fully disclosed basis through a clearing broker or dealer and customer funds and securities are promptly transmitted to the clearing broker or dealer which carries all of the accounts of such customers. The Company has claimed an exemption from the provisions of SEC Rule 15c3-3 under paragraph (k)(2)(i), as it as it promptly transmits all customer funds received in connection with its activities as a broker or dealer, does not otherwise hold funds or securities for, or owe money or securities to, customers and effectuates all financial transactions between the broker or dealer and its customers through one or more bank accounts, each to be designated as “Special Account for the Exclusive Benefit of Customers” of the Company. 8. Deferred Compensation Plans The Company has established deferred compensation plans for the benefit of its registered representatives. Deferred compensation withheld under these plans is used to purchase investments (primarily mutual funds, equities, and life insurance policies), as directed by the participants. In addition, the Company may provide matching contributions for participants who meet certain production targets. Matching contributions of $22,000 were paid by the Company during 2018. A trust was established to aid the Company in meeting its obligations under the plans. Investments held by the trust are consolidated and reported as investments of the Company in the accompanying Statement of Financial Condition. Investments are reported at fair value with changes reported as "Investment gain, net" in the accompanying Statement of Comprehensive Income. Life insurance policies held by the trust are reported at their ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 15 cash surrender value with changes reported as “Investment gain, net” in the accompanying Statement of Comprehensive Income. The Company records a deferred compensation obligation equal to the total reported fair value of the trust assets (See Note 9). Changes in the deferred compensation obligation are recorded as commission expense in the accompanying Statement of Comprehensive Income. The registered representatives who are grantors of the trust, participating in the deferred compensation plans, bear the entire investment risk of the underlying investments of the deferred compensation plans. 9. Investments The Company holds certain securities used for operational trading purposes with Pershing. The securities are classified as either marketable securities owned or securities sold but not yet purchased. The following table shows these securities at fair value as of December 31, 2018: The Company also holds securities related to the deferred compensation plans that are held at fair value. The investments in the deferred compensation plans consist of the following securities as of December 31, 2018: The Company has recorded an offsetting liability for the value of these investments held in the deferred compensation plan. The following table shows net unrealized losses and the net realized gains respectively. Generally, all investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible changes in risks in the near term could materially affect investment balances, the amounts reported in the Statement of Financial Condition and the amounts reported in the Statement of Comprehensive Income. Sold Not Yet Owned Purchased U.S. government & agency obligations -$ 1,117,198$ Municipal obligations 5,167,446 - Equity securities 25,710 3,030 5,193,156$ 1,120,228$ Mutual fund investments 17,277,240$ Life insurance policies 436,751 Equity securities 447,207 U.S. government and agency obligations 230,116 18,391,314$ Unrealized Gain (Loss) Realized Gain Gain (Loss), net Trading Securites 44,162$ 158,828$ 202,990$ Deferred Comp Plan (3,014,562) 197,439 (2,817,123) Investment Loss, net (2,970,400)$ 356,267$ (2,614,133)$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 16 10. Fair Value of Financial Instruments The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the ASC Fair Value Measurements and Disclosures Topic, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. 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. Financial assets and liabilities recorded at fair value on the Statement of Financial Condition are categorized 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 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. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 17 The following table presents the Company’s hierarchy for its assets measured at fair value on a recurring basis as of December 31, 2018. Level 1 Level 2 Level 3 Total Assets Inventory investments State, municipalities, and political subdivisions -$ 5,167,446$ -$ 5,167,446$ Equity securities 25,710 - - 25,710 Total inventory investments 25,710$ 5,167,446$ -$ 5,193,156$ Deferred compensation plan Equity securities 447,207$ -$ -$ 447,207$ US Government and authorities - 230,116 - 230,116 Mutual funds 17,277,240 - - 17,277,240 Life insurance policies - - 436,751 436,751 Total deferred compensation plan 17,724,447$ 230,116$ 436,751$ 18,391,314$ Cash and cash equivalents 3,574,782$ -$ -$ 3,574,782$ Total assets measured at fair value on a recurring basis 21,324,939$ 5,397,562$ 436,751$ 27,159,252$ Liabilities US Government and authorities -$ 1,117,198$ -$ 1,117,198$ Equity Securities 3,030 - - 3,030 Total liabilities measured at fair value on a recurring basis 3,030$ 1,117,198$ -$ 1,120,228$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 18 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. 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 the financial instruments, as listed in the above table. Fixed Maturity Securities and Securities Sold but Not Yet Purchased The fair value of fixed maturity securities and securities sold but not yet purchased is determined by management after considering third party pricing services as their primary source of information. Typical inputs used by this pricing method 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 maturities, third party pricing services normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. 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 that is in accordance with the ASC Fair Value Measurements and Disclosures Topic. 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 1 and 2 because they have quoted market prices, or significant inputs used in pricing the securities are market observable. In addition, the Company has sold securities that it does not currently own and will therefore be obligated to purchase such securities at a future date. The Company has recorded these obligations in the financial statements at December 31, 2018, at fair values of the related securities and will incur a loss if the fair value of the securities increases subsequent to December 31, 2018 prior to purchase or settlement. Deferred Compensation Plan Investments The Company holds investments in open-ended mutual funds, life insurance policies, equity securities, U.S. government and agency obligations, and other investments related to the deferred compensation plan. Open- ended mutual funds are classified as Level 1 as published net asset values are utilized for the individual securities. Equity securities are classified as Level 1 as the closing prices on exchanges are utilized for individual securities. U.S. government and authorities investments are classified as either Level 1 or Level 2 based on the principal market for the security. Life insurance policies held by a related party (PLICO) are carried at their cash surrender value and reported as Level 3 under the market approach. Cash surrender value represents the amount of cash that may be realized by the owner of a life insurance contract upon discontinuance and surrender of the contract prior to maturity. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 19 The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the year ended December 31, 2018, for which the Company has used significant unobservable inputs (Level 3): Total realized and unrealized losses on Level 3 assets are reported in "Investment loss, net" within the Statement of Comprehensive Income The Company did not transfer any Level 1, 2, or 3 investments for the year ended December 31, 2018. Purchases and settlements represent activity that occurred during the period that results in a change of the asset but does not represent changes in fair value for the instruments held at the beginning of the period. The following table presents the valuation method for material financial instruments included in Level 3, as well as unobservable inputs used in the valuation of those financial instruments: 11. Commitments and Contingencies A number of civil jury or arbitration verdicts have been returned against companies in the jurisdictions in which the Company does business involving sales practices of representatives, alleged misconduct, and other matters. These matters have often resulted in the awarding of judgments against these companies that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, juries or arbitrators have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damage suit. In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions. In addition, the Company may also be the subject of reviews of its operations by regulatory authorities and self-regulatory organizations. The Company contests liability and/or the amount of damages as appropriate in each pending matter brought against it. Related to any such matters, if the Company has information available to it which indicates that it is probable that a liability has been incurred as of the date of the financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated liability by a charge to income. In many instances it may be inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any potential loss. In addition, even where loss is possible or an exposure to loss exists in excess of the liability accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the amount of the possible loss or range of loss. Subject to the foregoing, management of the Company believes, based on currently available information, after consultation with outside legal counsel and taking into account its established reserves,that pending legal actions, investigations and regulatory inquiries will be resolved with no material adverse effect on the consolidated financial position of the Company. However, if during any period a potential adverse contingency should become probable or be resolved in an amount in excess of the established reserves, the results of operations in that period could be materially adversely affected. In addition, Beginning Realized and Ending Balance Unrealized Purchases Sales Balance Assets Life insurance policies 475,991$ (39,240)$ -$ -$ 436,751$ Total assets measured at fair value on a recurring basis 475,991$ (39,240)$ -$ -$ 436,751$ Fair Value Valuation Unobservable Dec 31, 2018 Technique Input Assets Life insurance policies held in Cash Surrender Financial Stability of deferred compensation plan 436,751 Value Insurer ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Notes to Financial Statements December 31, 2018 20 there can be no assurance that material losses will not be incurred from claims that have not yet been brought to the Company's attention or are not yet determined to be probable or reasonably possible to result in loss. The Company has established a total liability for all such matters of approximately $2.4 million, including amounts owed to regulatory agencies, as of December 31, 2018. This liability is included in "Other accrued expenses" on the Statement of Financial Condition. Management currently estimates the aggregate range of possible loss is from $0 to $1 million in excess of the accrued liability (if any) related to contingent matters as of December 31, 2018 where the likelihood of loss is at least reasonably possible. The Company policy for accounting for legal fees is to record such fees as the services are provided. In February 2018, the SEC announced a Share Class Selection Disclosure Initiative (“Initiative”) to encourage registered investment advisory firms to self-report failures to disclose conflicts of interest to clients concerning the selection of mutual fund share classes that paid fees pursuant to Rule 12b-1 of the Investment Company Act of 1940 for the period 2014 through the date that the receipt of such fees stopped. Under the Initiative, the SEC will require self-reporting firms, among other things, to disgorge to clients the 12b-1 fees received during the relevant period when lower-cost share classes were available. The Company has chosen to self-report under the Initiative and has taken reserves totaling $1.9 million. In the normal course of business, the Company’s customer activities involve the execution and settlement of various customer securities. The Company uses a clearing broker-dealer to execute exchanged-based and customer transactions which are held in brokerage accounts maintained by the clearing broker-dealer. Such transactions may expose the Company and the clearing broker-dealer to significant off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. In the event customers fail to satisfy their obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices in order to fulfill the customers’ obligations. 12. Subsequent Events The Company has evaluated events subsequent to December 31, 2018, and through the financial statement issuance date of February 28, 2019. The Company has not evaluated subsequent events after that date for presentation in these financial statements. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission December 31, 2018 Schedule I 21 There were no material differences between the above computation of net capital pursuant to Rule 15c3- 1 and that filed with the Company’s unaudited December 31, 2018 FOCUS Report. Total stockholder's equity 12,345,972$ Deductions and/or charges Nonallowable assets Receivables and other (7,224,798) Gross deferred income tax asset (413,634) Haircut on securities positions (452,202) Net capital 4,255,338 Aggregate Indebtedness Items included in statement of financial condition Commissions payable 3,437,410 Due to parent and affiliates 2,399,257 Other accrued expenses 6,498,869 Total aggregate indebtedness 12,335,536 Computation of Basic Net Capital Requirement Greater of 6-2/3% of aggregate indebtedness or $250,000 822,369$ Excess net capital (net capital, less net capital requirement) 3,432,969 Ratio: Aggregate indebtedness to net capital 289.88% Net Capital ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission December 31, 2018 Schedule II 22 Exemption Under Section (k)(2)(ii) Has Been Claimed The Company is not required to file the above schedule as it has claimed an exemption from Securities and Exchange Commission Rule 15c3-3 (SEC Rule 15c3-3) under Paragraph (k)(2)(ii) of the rule, as it has disclosed that all transactions are cleared with customers on a fully disclosed through a clearing broker or dealer and customer funds and securities are promptly transmitted to the clearing broker or dealer which carries all of the accounts of such customers or the product sponsor or settlement agent with whom the customer transacts. The Company is not required to file the above schedule as it has claimed an exemption from Securities and Exchange Commission Rule 15c3-3 (SEC Rule 15c3-3) under Paragraph (k)(2)(i) of the rule, as it promptly transmits all customer funds received in connection with its activities as a broker or dealer, does not otherwise hold funds or securities for, or owe money or securities to, customers and effectuates all financial transactions between the broker or dealer and its customers through one or more bank accounts, each to be designated as “Special Account for the Exclusive Benefit of Customers” of the Company. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Exemption Report Under SEC Rule 17a-5 ProEquities, Inc’s Exemption Report ProEquities, Inc. (the “Company”) is a registered broker-dealer subject to Rule 17a-5 promulgated by the Securities and Exchange Commission (17 C.F.R. §240.17a-5, “Reports to be made by certain brokers and dealers”). This Exemption Report was prepared as required by 17 C.F.R. § 240.17a-5(d)(1) and (4). To the best of its knowledge and belief, the Company states the following: 1. The Company claimed an exemption from 17 C.F.R. § 240.15c3-3 under the following provision of 17 C.F.R. § 240.15c3-3 (k)(2)(i) and (k)(2)(ii). 2. The Company met the identified exemption provisions in 17 C.F.R. § 240.15c3-3 (k) throughout the most recent fiscal year ended December 31, 2018 except as described below. For the 163 instances listed below, customer funds and securities were not promptly transmitted to the clearing broker, which carries all accounts of such customers, or the product sponsor or settlement agent with whom the customer transacts. Nature of Exception Number of Exceptions Dates of Exceptions Checks or securities were not remitted timely due to a representative error in timely remitting of the check or securities 82 January 2018 (11 exceptions) February 2018 (9 exceptions) March 2018 (10 exceptions) April 2018 (9 exceptions) May 2018 (8 exceptions) June 2018 (9 exceptions) July 2018 (4 exceptions) August 2018 (6 exceptions) September 2018 (2 exceptions) October 2018 (7 exceptions) December 2018 (7 exceptions) Checks were held by representatives until initial account paperwork could be processed 30 January 2018 (2 exceptions) February 2018 (5 exceptions) March 2018 (7 exceptions) April 2018 (3 exceptions) May 2018 (5 exceptions) June 2018 (2 exceptions) July 2018 (1 exception) August 2018 (1 exception) September 2018 (1 exception) October 2018 (1 exception) November 2018 (1 exception) December 2018 (1 exception) Checks were not remitted timely due to timing of pick up by mail or overnight delivery service 5 March 2018 (1 exception) April 2018 (2 exceptions) November 2018 (1 exception) December 2018 (1 exception) Checks were not remitted timely due to timing of representative vacations, holidays, and office hours held 13 March 2018 (2 exceptions) May 2018 (1 exception) July 2018 (2 exceptions) August 2018 (2 exceptions) October 2018 (2 exceptions) November 2018 (1 exception) December 2018 (3 exceptions) Checks were held at the customer’s request 2 January 2018 (2 exceptions) Checks were held due to home office input error 31 January 2018 (3 exception) February 2018 (4 exceptions) March 2018 (2 exceptions) PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Registered Public Accounting Firm To the Management of ProEquities, Inc. We have reviewed ProEquities, Inc.’s assertions, included in the accompanying ProEquities, Inc.’s Exemption Report, in which (1) the Company identified 17 C.F.R. § 240.15c3-3(k)(2)(i) and (k)(2)(ii) as the provisions under which the Company claimed an exemption from 17 C.F.R. § 240.15c3-3 (the "exemption provisions") and (2) the Company stated that it met the identified exemption provisions throughout the year ended December 31, 2018, except as described in its exemption report with respect to the following exceptions: Nature of Exception Number of Exceptions Dates of Exceptions Checks or securities were not remitted timely due to a representative error in timely remitting of the check or securities 82 January 2018 (11 exceptions) February 2018 (9 exceptions) March 2018 (10 exceptions) April 2018 (9 exceptions) May 2018 (8 exceptions) June 2018 (9 exceptions) July 2018 (4 exceptions) August 2018 (6 exceptions) September 2018 (2 exceptions) October 2018 (7 exceptions) December 2018 (7 exceptions) Checks were held by representatives until initial account paperwork could be processed 30 January 2018 (2 exceptions) February 2018 (5 exceptions) March 2018 (7 exceptions) April 2018 (3 exceptions) May 2018 (5 exceptions) June 2018 (2 exceptions) July 2018 (1 exception) August 2018 (1 exception) September 2018 (1 exception) October 2018 (1 exception) November 2018 (1 exception) December 2018 (1 exception) Checks were not remitted timely due to timing of pick up by mail or overnight delivery service 5 March 2018 (1 exception) April 2018 (2 exceptions) November 2018 (1 exception) December 2018 (1 exception) Checks were not remitted timely due to timing of representative vacations, holidays, and office hours held 13 March 2018 (2 exceptions) May 2018 (1 exception) July 2018 (2 exceptions) August 2018 (2 exceptions) October 2018 (2 exceptions) November 2018 (1 exception) 2 of 2 December 2018 (3 exceptions) Checks were held at the customer’s request 2 January 2018 (2 exceptions) Checks were held due to home office input error 31 January 2018 (3 exception) February 2018 (4 exceptions) March 2018 (2 exceptions) April 2018 (4 exception) May 2018 (4 exceptions) June 2018 (3 exceptions) July 2018 (1 exception) August 2018 (2 exceptions) September 2018 (2 exceptions) October 2018 (1 exception) December 2018 (5 exceptions) The Company’s management is responsible for the assertions and for compliance with the identified exemption provisions throughout the year ended December 31, 2018. Our review was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and, accordingly, included inquiries and other required procedures to obtain evidence about the Company’s compliance with the exemption provisions. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management's assertions. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to management's assertions referred to above for them to be fairly stated, in all material respects, based on the provisions set forth in paragraph (k)(2)(i) and (k)(2)(ii) of 17 C.F.R. § 240.15c3-3. February 28, 2019 Confidential ProEquities, Inc. (a wholly owned subsidiary of Protective Life Corporation) Financial Statements and Supplementary Information Pursuant to SEC Rule 17a-5 December 31, 2017 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL AUDITED REPORT FORM X-17 A-5 PART Ill FACING PAGE Confidential OMB APPROVAL OMB Number: 3235-0123 Expires: August 31, 2020 Estimated average burden hours per response ...... 12.00 SEC FILE NUMBER B-32590 Information Required of Brokers and Dealers Pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17a-5 Thereunder REPORT FOR THE PERIOD BEGINNING 01/01/17 AND ENDING 12/31/17 ------------------------------------------- MM/DD/YY A. REGISTRANT IDENTIFICATION NAME OF BROKER-DEALER: ProEquities, Inc. ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) 2801 Highway 280 South (No. and Street) Birmingham Alabama (City) (State) MM/DD/YY OFFICIAL USE ONLY FIRM 1.0. NO. 35223 (Zip Code) NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT Darren Guerrera 205-268-5553 (Area Code-Telephone Number) B. ACCOUNTANT IDENTIFICATION INDEPENDENT PUBLIC ACCOUNT ANT whose opinion is contained in this Report* PricewaterhouseCoopers LLP (Name-if individual, state last, first, middle name) 569 Brookwood Village, Ste 851 Birmingham Alabama 35209 (Address) (City) (State) (Zip Code) CHECK ONE: I v' I Certified Public Accountant BPublic Accountant Accountant not resident in United States or any of its possessions. FOR OFFICIAL USE ONLY *Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See Section 240.17 a-5 (e)(2) SEC 1410 (06-02) Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. Confidential OATH OR AFFIRMATION 1, Darren Guerrera , swear (or affirm) that, to the best of my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of ProEquities, Inc . ----~----------------------------------------------------------------------------------, as of December 31 20 17 are true and correct. I further swear (or affirm) that neither the company nor any partner, proprietor, principal officer or director has any proprietary interest in any account classified solely as that of a customer, except as follows: Notary Public This report** contains (check all applicable boxes): 0 (a) Facing Page . ./ (b) Statement of Financial Condition . .{ (c) Statement of Income (Loss). (d) Statement of Changes in Financial Condition. Signature Chief Financial Officer Title (e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital. (f) Statement of Changes in Liabilities Subordinated to Claims of Creditors. ~ (g) Computation ofNet Capital. (h) Computation for Determination of Reserve Requirements Pursuant to Rule 15c3-3. (i) Information Relating to the Possession or Control Requirements Under Rule 15c3-3 . 0 U) A Reconciliation, including appropriate explanation of the Computation ofNet Capital Under Rule 15c3 -1 and the Computation for Determination of the Reserve Requirements Under Exhibit A of Rule 15c3-3. 0 (k) A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to methods of consolidation. ~ (I) An Oath or Affirmation . 0 (m) A copy of the SIPC Supplemental Report. 0 (n) A report describing any material inadequacies found to exist or found to have existed since the date of the previous audit. **For conditions of confidential treatment of certain portions of this filing, see section 240.17a-5 (e)(3). ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Index to Financial Statements and Supplementary Information December 31, 2017 Page(s) Report of Independent Registered Public Accounting Firm ............................................................. 1-2 Financial Statements Statement of Financial Condition ................................................................................................................. 3 Statement of Comprehensive Income .......................................................................................................... 4 Statement of Changes in Stockholder’s Equity ............................................................................................ 5 Statement of Cash Flows ............................................................................................................................. 6 Notes to Financial Statements ............................................................................................................... 7–19 Supplementary Schedules Schedule I - Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission ....................................................................................................................... 20 Schedule II - Computation for Determination of Reserve Requirements Under Rule 15c3-3 of the Securities and Exchange Commission ........................................................................ 21 Report of Independent Auditors on Agreed Upon Procedures Required by SEC Rule 17a-5(e)(4) .......................................................................................................................... 22–23 PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholder of ProEquities, Inc. Opinion on the Financial Statements We have audited the accompanying statement of financial condition of ProEquities, Inc. (“the Company”), a wholly owned subsidiary of Protective Life Corporation, as of December 31, 2017 , and the related statements of comprehensive income, changes in stockholder’s equity and cash flows for the year then ended, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all materia l respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Supplemental Information The accompanying information in Schedule I – Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission and Schedule II – Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission is supplemental information required by Rule 17a-5 under the Securities Exchange Act of 1934. The supplemental information is the responsibility of the Company’s management. The supplemental information has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. Our audit procedures included determining whether the supplemental information reconciles to the 2 of 2 financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with Rule 17a-5 under the Securities Exchange Act of 1934. In our opinion, the Schedule I – Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission and Schedule II – Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission is fairly stated, in all material respects, in relation to the financial statements as a whole. Birmingham, AL February 28, 2018 We have served as the Company's auditor since 1995. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 3 Assets Cash and cash equivalents 9,066,182$ Investments, at fair value 21,204,945 Receivables from brokers and dealers 8,535,351 State income tax receivable 552,813 Fixed assets, net of accumulated depreciation of $397,314 208,181 Other assets, net of allowance for uncollectible amounts of $31,625 4,295,794 Deferred income taxes, net 4,848,462 Total assets 48,711,728$ Liabilities and Stockholder's Equity Liabilities Commissions payable 3,889,073$ Securities sold but not yet purchased 737,010 Due to parent and affiliates 1,947,841 Deferred compensation obligation 19,617,516 Other accrued expenses 5,133,458 Total liabilities 31,324,898$ Stockholder's equity Common stock, $1 par value; 250,000 shares authorized, 114,408 shares issued and outstanding 114,408$ Additional paid-in capital 15,725,311 Retained earnings 1,547,111 Total stockholder's equity 17,386,830$ Total liabilities and stockholder's equity 48,711,728$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 4 Revenues Commissions 99,916,854$ Other revenues 6,086,235 Investment gain, net 1,966,956 Investment income 1,304,989 Total revenues 109,275,034$ Expenses Commissions 82,554,470 Salaries and wages 11,177,377 Technology 4,286,844 Legal, accounting and consulting 1,475,991 Clearing expense 1,750,437 Portfolio managers fee 1,577,120 Sales conference and promotions 816,794 Licenses, fees and assessments 672,226 Rent, related party 640,430 Corporate and divisional allocations, related party 2,442,792 Travel and entertainment 301,573 Postage, copies and supplies 249,637 Other operating expenses 2,455,909 Total expenses 110,401,600$ Loss before income taxes (1,126,566)$ Income tax expense (Note 5) 2,037,060 Net loss (3,163,626)$ Other comprehensive income - Total comprehensive loss (3,163,626)$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 5 Additional Total Paid-In Retained Stockholder's Shares Amount Capital Earnings Equity Balance at January 1, 2017 114,408 114,408$ 13,725,311$ 4,710,737$ 18,550,456$ Capital Contribution 2,000,000 2,000,000 Net Loss (3,163,626) (3,163,626) Balance at December 31, 2017 114,408 114,408$ 15,725,311$ 1,547,111$ 17,386,830$ Common Stock ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 6 Cash flows from operating activities Net loss (3,163,626)$ Adjustments to reconcile net income to net cash provided by operating activities Unrealized investment gain, net (1,376,359) Deferred income tax expense 2,067,238 Depreciation expense 33,120 Forgiveness of representative loans receivable 235,682 Change in assets and liabilities Investments (trading securities) (12,533) Investments (deferred compensation plan) (730,394) Receivables from brokers and dealers (1,759,317) State income tax receivable 235,725 Payments received on representative loans receivable 59,463 Issuance of representative loans receivable (2,414,860) Other assets (317,913) Securities sold but not yet purchased 193,148 Commissions payable 241,870 Deferred compensation obligation 2,118,054 Due to parent and affiliates 616,045 Other accrued expenses (201,334) Net cash used in operating activities (4,175,991)$ Cash flows from investing activities Purchases of fixed assets (241,301) Net cash used in investing activities (241,301)$ Cash flows from financing activities Captial Contribution 2,000,000 Net cash provided by financing activities 2,000,000$ Change in cash (2,417,292)$ Cash and cash equivalents Beginning of year 11,483,474$ End of year 9,066,182$ Supplemental disclosure of cash flow information Cash paid for income taxes 1,115,814$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 7 1. General ProEquities, Inc. (the “Company”) is a full-service broker-dealer incorporated under the laws of the state of Alabama. The Company is also a registered investment advisor. The Company operates across the United States and is headquartered in Birmingham, Alabama. The Company is registered with the Securities and Exchange Commission (the “SEC”) and is a member of the Financial Industry Regulatory Authority ("FINRA”). The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”). On February 1, 2015, PLC became a wholly owned subsidiary of Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha under the laws of Japan. PLC provides operating capital to the Company, as needed, to provide supplemental funding for the operations and activities of the Company. In addition to the Company's core broker-dealer operations, the Company maintains a fixed income division that offers a wide variety of fixed income products and services to individual and institutional investors. The Company also maintains a wholesaling division supporting variable life insurance sales. 2. Significant Accounting Policies Basis of Presentation and Use of Estimates The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP and prevailing industry practices requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Accounting for Securities Transactions The Company clears all exchange-based brokerage security transactions through Pershing, LLC ("Pershing"). Under the clearing arrangement, Pershing confirms securities trades, processes securities movements and records transactions for customers in its accounts, for which it receives a ticket charge per transaction. The Company also engages in investment security transactions with other settlement agents and with the direct product sponsor as issuer for certain investment security transactions. These trading activities may be conducted by the Company, its registered representatives/agents or through direct customer purchases with the affiliate counterparties. The Company’s commission revenues and related expenses are recorded on a trade date basis. The Company has evaluated the credit worthiness of Pershing and its other counterparties and determined the risk of material financial loss due to credit risk exposure to be minimal. Cash and Cash Equivalents Cash and cash equivalents include demand deposits and investments in money market funds which are considered highly liquid instruments. The carrying amounts reported in the Statement of Financial Condition for these financial instruments approximate their fair values (as defined by the Accounting Standards Codification (“ASC”) Fair Value Measurement and Disclosure Topic) due to their short-term nature. Cash and cash equivalents are classified as Level 1 in accordance with the fair value hierarchy of the ASC Fair Value Measurement and Disclosure Topic. Investments The Company has classified its investments as trading securities. Trading securities are reported at fair value, with the resulting unrealized and realized gains and losses recognized currently in earnings. Gains and losses realized on the sale of securities are computed using the specific ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 8 identification method. Unrealized gains and losses and realized gains and losses are combined and included in "Investment loss, net" in the accompanying Statement of Comprehensive Income. Fixed Assets Fixed assets are recorded at cost and are depreciated using the straight-line method over their estimated useful lives which range from 3 to 5 years. Maintenance and repairs are charged to expense when incurred; betterments and improvements that materially prolong the lives of the assets are capitalized. The cost of assets sold or retired and the related accumulated depreciation are removed from the respective accounts, and the gain or loss on such disposition is recognized currently. Other Assets Other assets are comprised primarily of prepaid expenses, loans to the Company’s representatives and reimbursable expenses paid by the Company on its agents' behalf. The Company's finance receivables are primarily in the form of agent debit balances and agent notes receivable. Certain agent notes receivable contain terms which may result in the Company forgiving the principal and interest payments should the agent meet certain sales targets. The Company has recorded an allowance of $31,625 against these receivables based on the specific terms at December 31, 2017. The Company records an allowance for credit losses, which is developed based upon the Company's historical experience of write-offs of the related agent debit balances. Notes receivable are reserved based upon specific indicators of an inability to pay or intent not to pay. The amount of such receivables which were forgiven or written off during the year ended December 31 2017, was $235,682. Contingent Liabilities The Company recognizes liabilities for contingencies when there is an exposure that, when fully analyzed, indicates it is both probable a liability has been incurred and the amount of loss or obligation can be reasonably estimated. The determination of whether a loss is probable and the estimate of an associated range of loss is subject to significant judgments and assumptions based on currently available information as of the reporting date and may materially change based on facts and circumstances presented in future periods. When a loss is considered to be probable and a range of possible loss can be estimated, the Company accrues the most likely amount within that range based upon management's judgment after the consideration of facts currently known and after consultation with its legal counsel, if appropriate. As a result of the extensive regulation of the financial services industry, the Company's operations are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations. Such reviews and inspections can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censures to censures with fines or other monetary repercussions. See Note 11 for further discussion. Recognition of Commission Revenue and Expense Commission revenues and commission expenses are recorded on a trade date basis for trades executed through the Company and are based on contractual agreements or terms for applicable investment security transactions. Trail fees, 12b-1 fees, marketing allowances received from product sponsors and advisory service fees are recognized as revenue when earned and are included in "Commissions" revenue in the Statement of Comprehensive Income. Marketing ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 9 allowance and advisory service fees totaling approximately $7.1 million were recognized as "Commissions" revenue during the year ended December 31, 2017. Investment Income Investment income primarily comprises interest income on money market funds, fixed maturity securities and income from securities related to the Company’s deferred compensation plans. Other Revenues Consisting primarily of representatives' technology and affiliation fees and miscellaneous clearing revenues, other revenues are recorded as earned. Income Taxes The results of operations of the Company are included in the consolidated federal and state income tax returns of PLC and its subsidiaries. The Company utilizes the asset and liability method in accordance with the Accounting Standards Codification ("ASC") Income Taxes Topic. 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 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, and the tax benefit is reflected in future periods when the Company generates taxable income. Income taxes recoverable (payable) are recorded in the due to/from affiliates account and are settled periodically, per the tax sharing agreement. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The legislation significantly changes U.S. tax law by, among other things, lowering the corporate income tax rate. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company does not believe any provisional tax impacts related to the Tax Reform Act are required in its financial statements for the year ended December 31, 2017. Concentration of Credit Risk The Company maintains depository accounts with certain financial institutions. Although these account balances exceed federally insured depository limits, the Company has evaluated the credit worthiness of these applicable financial institutions and determined the risk of material financial loss due to exposure from credit risk to be minimal. Accounting Pronouncements Not Yet Adopted ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Update is effective for annual and interim periods beginning after December 15, 2017. The Amendments in this Update are applicable to the Company’s Commission and Other Revenues, and will be adopted using the modified retrospective approach as of January 1, 2018. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 10 The Company does not anticipate a financial impact as a result of its adoption of the amendments in the Update. However, the Company plans to implement minor changes to its accounting policies and processes with respect to certain Commission Revenues to align its recognition of these revenues with the principles in ASC 606. ASU No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change will relate to the accounting model used by lessees. The Update will require all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The lease asset and liability will be measured at the present value of the minimum lease payments less any upfront payments or fees. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in the Update upon adoption. ASU No. 2016-01 - Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the Update requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The Update also introduces a single-step impairment model for equity investments without a readily determinable fair value. Additionally, the Update requires changes in instrument-specific credit risk for fair value option liabilities to be recorded in other comprehensive income. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2017 and will be applied on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the revised guidance. ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. The Update also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its operations and financial results. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 11 3. Related Parties The Company occupies office space under a monthly rental arrangement in the office building of an affiliate, Protective Life Insurance Company (PLICO), for which rent of approximately $0.6 million was expensed under contractual arrangements with PLC in 2017. In addition, during the year ended December 31, 2017, the Company expensed approximately $0.9 million in payments for providing various human resource services, approximately $0.5 million for providing legal services and approximately $1.9 million for providing technology support and infrastructure. The Company is billed by PLICO, which is also a wholly owned subsidiary of PLC, for these items and related amounts due are settled monthly in the normal course of the Company's operations. The Company also contracts with First Protective Insurance Group, Inc., an affiliate, for management and administrative services supporting its wholesaling division. The Company expensed $1.7 million for management and administrative services related to this agreement. The Company recorded commission revenue in 2017 from Investment Distributors, Inc., a subsidiary of PLC, of approximately $3.9 million. All employees of the Company participate in the PLC Defined Benefit Pension Plan and/or its Unfunded Excess Benefits Plan (collectively “the Plans”). The Plans are not separable by affiliates participating in the plans. The benefits are based on years of service and the employee's compensation. PLC's funding policy is to contribute amounts to the Plans sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act (ERISA) plus such additional amounts as PLC may determine appropriate from time to time. Contributions are intended to provide not only for benefits attributable for service to date but also for those benefits expected to be earned in the future. The employees of the Company also are eligible to participate in PLC's qualified, defined contribution employee benefit plan under Internal Revenue Code Section 401(k). PLC provides a match for employee contributions to the 401(k) plan in cash. PLC also has adopted a supplemental matching contribution program which is a nonqualified plan that provides supplemental matching contributions in excess of limits imposed on qualified deferred contribution plans by federal law. In addition, PLC provides limited health care benefits to eligible retired employees of the Company until age 65 and provides certain medical and other benefits to active employees of the Company. Charges related to these employee benefit plans provided by PLC were approximately $1.3 million and have been included in "Salaries and wages" in the Company’s Statement of Comprehensive Income for the year ended December 31, 2017. 4. Fixed Assets Fixed assets consist of the following as of December 31, 2017: Depreciation expense in the amount of $33,120 was recognized in 2017. System software 605,495$ Less: Accumulated depreciation (397,314) Net fixed assets 208,181 ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 12 5. Income Taxes The Company's effective income tax rate varied from the maximum federal income tax rate as follows for the year ended December 31, 2017: The provision for income tax expense is as follows: The following table shows the significant components of the net deferred income tax asset as of December 31, 2017. On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering the corporate income tax rate. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax assets at December 31, 2017, and recognized a $2.4 million tax expense in the Company’s statement of income for the year ended December 31, 2017. Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary Statutory federal income tax rate applied to pre-tax income 35.00 % State income taxes 0.57 % Non deductible expenses (1.77)% Federal Tax Law Changes (214.68)% Other 0.06 % Effective income tax rate (180.82)% Provision for income tax expense (benefit) Current (30,178)$ Deferred 2,067,238 2,037,060$ Deferred income tax asset Deferred compensation 4,768,246$ Legal reserve and contingencies 114,003 Accrued vacation 26,883 Other 8,290 Total gross deferred income tax asset 4,917,422$ Deferred income tax liability Prepaid expense 68,756$ Software 204 Total gross deferred income tax liability 68,960$ Net deferred income tax asset 4,848,462$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 13 information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company does not believe any provisional tax impacts related to the Tax Reform Act are required in its financial statements for the year ended December 31, 2017. The Company concluded, based on its recent history of operating income and anticipated operating income and cash flows for future periods, a valuation allowance on the gross deferred tax asset at December 31, 2017 was not required. The methodology for determining the realizability of deferred tax assets involves estimates of future taxable income from our core business operations, as well as estimated operating expenses to support that anticipated level of operations. Estimates of future taxable income generated from future operating results could change in the near term, perhaps materially, which may require the Company to provide a valuation allowance in future periods. Such allowance could be material to the Company's financial statements. In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2014. As of December 31, 2017, the Company evaluated the need for the recognition of uncertain tax liability in accordance with the guidance of ASC 740, "Income Taxes," and determined none should be recorded or disclosed. The Company's policy is to recognize interest and penalties related to tax contingencies in income tax expense during the period in which they are identified. Included in the "Due to parent and affiliates" on the accompanying financial statements are current income taxes payable of $0.9 million at December 31, 2017. 6. Receivables from Brokers and Dealers The receivables from brokers and dealers represents commissions and other fees to be collected from the clearing broker, mutual fund companies, product sponsors, variable annuity and variable life companies. Additionally, this balance includes cash required to be held on deposit at Pershing of $0.1 million. 7. Regulatory Requirements The Company is subject to the SEC’s Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital (as defined) and requires the ratio of aggregate indebtedness (as defined) to net capital shall not exceed 15 to 1. At December 31, 2017, the Company had computed net capital of $5.7 million which was $5.0 million in excess of its required minimum net capital of $0.7 million. The Company's aggregate indebtedness to net capital ratio at December 31, 2017 was 190.91%. The Company has claimed an exemption from the provisions of SEC Rule 15c3-3 under paragraph (k)(2)(ii), as it has disclosed that all exchange-based transactions are cleared with customers on a fully disclosed basis through a clearing broker or dealer and customer funds and securities are promptly transmitted to the clearing broker or dealer which carries all of the accounts of such customers. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 14 8. Deferred Compensation Plans The Company has established deferred compensation plans for the benefit of its registered representatives. Deferred compensation withheld under these plans is used to purchase investments (primarily mutual funds, equities, and life insurance policies), as directed by the participants. In addition, the Company may provide matching contributions for participants who meet certain production targets. Matching contributions of $19,000 were paid by the Company during 2017. A trust was established to aid the Company in meeting its obligations under the plans. Investments held by the trust are consolidated and reported as investments of the Company in the accompanying Statement of Financial Condition. Investments are reported at fair value with changes reported as "Investment gain, net" in the accompanying Statement of Comprehensive Income. Life insurance policies held by the trust are reported at their cash surrender value with changes reported as “Investment gain, net” in the accompanying Statement of Comprehensive Income. The Company records a deferred compensation obligation equal to the total reported fair value of the trust assets (See Note 9). Changes in the deferred compensation obligation are recorded as commission expense in the accompanying Statement of Income. The registered representatives who are grantors of the trust, participating in the deferred compensation plans, bear the entire investment risk of the underlying investments of the deferred compensation plans. 9. Investments The Company holds certain securities used for operational trading purposes with Pershing. The securities are classified as either marketable securities owned or securities sold but not yet purchased. The following table shows these securities at fair value as of December 31, 2017: The Company also holds securities related to the deferred compensation plans that are classified as trading. The investments in the deferred compensation plans consist of the following securities as of December 31, 2017: Sold Not Yet Owned Purchased U.S. government & agency obligations -$ 737,010$ Municipal obligations 1,582,957 - Equity securities 20,656 - 1,603,613$ 737,010$ Mutual fund investments 18,423,804$ Life insurance policies 475,991 Equity securities 490,961 U.S. government and agency obligations 210,576 19,601,332$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 15 The Company has recorded an offsetting liability for the value of these investments held in the deferred compensation plan. As of December 31, 2017, $16,184 was accrued as a deferred compensation obligation, but has not yet been contributed to the plan. The following table shows net unrealized losses and the net realized gains respectively, which are included in “Investment gains, net” on the Statement of Income. Generally, all investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible changes in risks in the near term could materially affect investment balances, the amounts reported in the Statement of Financial Condition and the amounts reported in the Statement of Comprehensive Income. 10. Fair Value of Financial Instruments The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the ASC Fair Value Measurements and Disclosures Topic, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. 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. Financial assets and liabilities recorded at fair value on the Statement of Financial Condition are categorized 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 d. Inputs that are derived principally from or corroborated by observable market data through correlation or other means Unrealized Gain (Loss) Realized Gain Gain, net Trading Securites (10,493)$ 243,631$ 233,138$ Deferred Comp Plan 1,386,852 346,966 1,733,818 Investment Gain, net 1,376,359$ 590,597$ 1,966,956$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 16 Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The following table presents the Company’s hierarchy for its assets measured at fair value on a recurring basis as of December 31, 2017. Level 1 Level 2 Level 3 Total Assets Inventory investments State, municipalities, and political subdivisions -$ 1,582,957$ -$ 1,582,957$ Equity securities 20,656 - - 20,656 Total inventory investments 20,656$ 1,582,957$ -$ 1,603,613$ Deferred compensation plan Equity securities 490,961$ -$ -$ 490,961$ US Government and authorities - 210,576 - 210,576 Mutual funds 18,423,804 - - 18,423,804 Life insurance policies - 475,991 475,991 Total deferred compensation plan 18,914,765$ 210,576$ 475,991$ 19,601,332$ Cash and cash equivalents 9,066,182$ -$ -$ 9,066,182$ Total assets measured at fair value on a recurring basis 28,001,603$ 1,793,533$ 475,991$ 30,271,127$ Liabilities US Government and authorities -$ 737,010$ -$ 737,010$ Equity Securities - - - - Total liabilities measured at fair value on a recurring basis -$ 737,010$ -$ 737,010$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 17 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. 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 the financial instruments, as listed in the above table. Fixed Maturity Securities and Securities Sold but Not Yet Purchased The fair value of fixed maturity securities and securities sold but not yet purchased is determined by management after considering third party pricing services as their primary source of information. Typical inputs used by this pricing method 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 maturities, third party pricing services normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. 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 that is in accordance with the ASC Fair Value Measurements and Disclosures Topic. 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 1 and 2 because they have quoted market prices, or significant inputs used in pricing the securities are market observable. In addition, the Company has sold securities that it does not currently own and will therefore be obligated to purchase such securities at a future date. The Company has recorded these obligations in the financial statements at December 31, 2017, at fair values of the related securities and will incur a loss if the fair value of the securities increases subsequent to December 31, 2017 prior to purchase or settlement. Deferred Compensation Plan Investments The Company holds investments in open-ended mutual funds, life insurance policies, equity securities, U.S. government and agency obligations, and other investments related to the deferred compensation plan. Open-ended mutual funds are classified as Level 1 as published net asset values are utilized for the individual securities. Equity securities are classified as Level 1 at the closing prices on exchanges are utilized for individual securities. U.S. government and authorities investments are classified as either Level 1 or Level 2 based on the principal market for the security. Life insurance policies held by a related party (PLICO) are carried at their cash surrender value and reported as Level 3 under the market approach. Cash surrender value represents the amount of cash that may be realized by the owner of a life insurance contract upon discontinuance and surrender of the contract prior to maturity. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 18 The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the year ended December 31, 2017, for which the Company has used significant unobservable inputs (Level 3): Total realized and unrealized gains on Level 3 assets are reported in "Investment gain, net" within the Statement of Comprehensive Income The Company did not transfer any Level 1, 2, or 3 investments for the year ended December 31, 2017. Purchases and settlements represent activity that occurred during the period that results in a change of the asset but does not represent changes in fair value for the instruments held at the beginning of the period. The following table presents the valuation method for material financial instruments included in Level 3, as well as unobservable inputs used in the valuation of those financial instruments: 11. Commitments and Contingencies A number of civil jury or arbitration verdicts have been returned against companies in the jurisdictions in which the Company does business involving sales practices of representatives, alleged misconduct, and other matters. These matters have often resulted in the awarding of judgments against these companies that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, juries or arbitrators have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damage suit. In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions. In addition, the Company may also be the subject of reviews of its operations by regulatory authorities and self- regulatory organizations. The Company contests liability and/or the amount of damages as appropriate in each pending matter brought against it. Related to any such matters, if the Company has information available to it which indicates that it is probable that a liability has been incurred as of the date of the financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated liability by a charge to income. In many instances it may be inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any potential loss. In addition, even where loss is possible or an exposure to loss exists in excess Beginning Realized and Ending Balance Unrealized Purchases Sales Balance Assets Life insurance policies 399,206$ 76,785$ -$ -$ 475,991$ Total assets measured at fair value on a recurring basis 399,206$ 76,785$ -$ -$ 475,991$ Fair Value Valuation Unobservable Dec 31, 2017 Technique Input Assets Life insurance policies held in Cash Surrender Financial Stability of deferred compensation plan 475,991 Value Insurer ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 19 of the liability accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the amount of the possible loss or range of loss. Subject to the foregoing, management of the Company believes, based on currently available information, after consultation with outside legal counsel and taking into account its established reserves,that pending legal actions, investigations and regulatory inquiries will be resolved with no material adverse effect on the consolidated financial position of the Company. However, if during any period a potential adverse contingency should become probable or be resolved in an amount in excess of the established reserves, the results of operations in that period could be materially adversely affected. In addition, there can be no assurance that material losses will not be incurred from claims that have not yet been brought to the Company's attention or are not yet determined to be probable or reasonably possible to result in loss. The Company has established a total liability for all such matters of approximately $0.4 million as of December 31, 2017, which is included in "Other accrued expenses" on the Statement of Financial Condition. Management currently estimates the aggregate range of possible loss is from $0 to $1 million in excess of the accrued liability (if any) related to contingent matters as of December 31, 2017 where the likelihood of loss is at least reasonably possible. The Company policy for accounting for legal fees is to record such fees as the services are provided. In the normal course of business, the Company’s customer activities involve the execution and settlement of various customer securities. The Company uses a clearing broker-dealer to execute exchanged-based and customer transactions which are held in brokerage accounts maintained by the clearing broker-dealer. Such transactions may expose the Company and the clearing broker- dealer to significant off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. In the event customers fail to satisfy their obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices in order to fulfill the customers’ obligations. 12. Subsequent Events The Company has evaluated events subsequent to December 31, 2017, and through the financial statement issuance date of February 28, 2018. The Company has not evaluated subsequent events after that date for presentation in these financial statements. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission December 31, 2017 Schedule I 20 There were no material differences between the above computation of net capital pursuant to Rule 15c3- 1 and that filed with the Company’s unaudited December 31, 2017 FOCUS Report. Total stockholder's equity 17,386,830$ Deductions and/or charges Nonallowable assets Receivables and other (6,458,748) Gross deferred income tax asset (4,917,422) Haircut on securities positions (300,371) Net capital 5,710,289 Aggregate Indebtedness Items included in statement of financial condition Commissions payable 3,889,073 Due to parent and affiliates 1,947,841 Other accrued expenses 5,064,498 Total aggregate indebtedness 10,901,412 Computation of Basic Net Capital Requirement Greater of 6-2/3% of aggregate indebtedness or $250,000 726,761$ Excess net capital (net capital, less net capital requirement) 4,983,528 Ratio: Aggregate indebtedness to net capital 190.91% Net Capital ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission December 31, 2017 Schedule II 21 Exemption Under Section (k)(2)(ii) Has Been Claimed The Company is not required to file the above schedule as it has claimed an exemption from Securities and Exchange Commission Rule 15c3-3 (SEC Rule 15c3-3) under Paragraph (k)(2)(ii) of the rule, as it has disclosed that all transactions are cleared with customers on a fully disclosed through a clearing broker or dealer and customer funds and securities are promptly transmitted to the clearing broker or dealer which carries all of the accounts of such customers or the product sponsor or settlement agent with whom the customer transacts. PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Accountants To the Board of Directors and Management of ProEquities, Inc. In accordance with Rule 17a-5(e)(4) of the Securities Exchange Act of 1934, we have performed the procedures enumerated below with respect to the accompanying General Assessment Reconciliation (Form SIPC-7) of the Securities Investor Protection Corporation (SIPC) of ProEquities, Inc. for the year ended December 31, 201 7, which were agreed to by the Company, the Securities and Exchange Commission, Financial Industry Regulatory Authority, Inc., and the Securities Investor Protection Corporation (collectively, the "specified parties") solely to assist the specified parties in evaluating the Company's compliance with the applicable instructions of Form SIPC-7 during the year ended December 31, 2017. Management is responsible for the Company's compliance with those requirements. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of tho se parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures we performed and our findings are as follows: 1. Compared the listed assessment payments on page 1, items 2B and 2F of Form SIPC -7 with the respective cash disbursement records entries, as follows: a. Payment in the amount of $35,922 dated August 22, 2017, per Fed Reference Number 001263 compared to the SIPC-6 obtained from Darren Guerrera, Chief Financial Officer, noting no differences. b. Payment in the amount of $38,017 dated February 2, 2018, per Fed Reference Number 000722 compared to the SIPC-7 obtained from Darren Guerrera, Chief Financial Officer, noting no differences. 2. Compared the Total Revenue amount reported in the audited Form X-17A-5 for the year ended December 31, 2017 to the Total Revenue amount of $109,275,008 reported on page 2, item 2a of Form SIPC-7 for the year ended December 31, 2017, noting no differences. 3. Compared any adjustments reported on page 2, items 2b and 2c, of Form SIPC-7 with the supporting schedules and working papers, as follows: a. Compared deductions on line 2c of $60,267,983 to supporting documentation including general ledger balances for the year ended December 31, 201 7, provided by Darren Guerrera, Chief Financial Officer, noting no differences. 4. Recalculated the arithmetical accuracy of the calculations reflected in Form SIPC-7 and in the related schedules and working papers obtained in procedure 3, as follows: a. Recalculated the mathematical accuracy of the SIPC Net Operating Revenues on page 2, line 2d and the General Assessment @ .0015 on page 2, line 2e of $75,511 of the Form SIPC-7, noting no differences. b. Recalculated the applicable supporting schedules for the deduction in line 2c including the general ledger balances for the year ended December 31, 2017, obtained from Darren Guerrera, Chief Financial Officer , noting no differences. 5. Compared the amount of any overpayment applied to the current assessment on page 1, item 2C of Form SIPC-7 with page 1, item 2H of the Form SIPC-7T filed for the prior period ended December 31, 2016 on which it was originally computed noting no differences. 2 of 2 We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on the Company's preparation of Form SIPC-7 in accordance with the applicable instructions. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of management and the board of directors of ProEquities, Inc., the Securities and Exchange Commission, Financial Industry Regulatory Authority, Inc., and the Securities Investor Protection Corporation and is not intended to be and should not be used by anyone other than these specified parties. February 28, 2018 ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Exemption Report Under SEC Rule 17a-5 ProEquities, Inc’s Exemption Report ProEquities, Inc. (the “Company”) is a registered broker-dealer subject to Rule 17a-5 promulgated by the Securities and Exchange Commission (17 C.F.R. §240.17a-5, “Reports to be made by certain brokers and dealers”). This Exemption Report was prepared as required by 17 C.F.R. § 240.17a-5(d)(1) and (4). To the best of its knowledge and belief, the Company states the following: 1. The Company claimed an exemption from 17 C.F.R. § 240.15c3-3 under the following provision of 17 C.F.R. § 240.15c3-3 (k): (2) ii. 2. The Company met the identified exemption provisions in 17 C.F.R. § 240.15c3-3 (k) throughout the most recent fiscal year ended December 31, 2017 except as described below. For the 152 instances listed below, customer funds and securities were not promptly transmitted to the clearing broker, which carries all accounts of such customers, or the product sponsor or settlement agent with whom the customer transacts. Nature of Exception Number of Exceptions Dates of Exceptions Checks or securities were not remitted timely due to a representative error in timely remitting of the check or securities 101 January 2017 (5 exceptions) February 2017 (11 exceptions) March 2017 (8 exceptions) April 2017 (3 exceptions) May 2017 (9 exceptions) June 2017 (4 exceptions) July 2017 (7 exceptions) August 2017 (12 exceptions) September 2017 (12 exceptions) October 2017 (7 exceptions) November 2017 (4 exceptions) December 2017 (19 exceptions) Checks were held by representatives until initial account paperwork could be processed 23 January 2017 (1 exception) February 2017 (2 exceptions) March 2017 (4 exceptions) April 2017 (3 exceptions) June 2017 (5 exception) August 2017 (1 exception) September 2017 (1 exception) November 2017 (3 exceptions) December 2017 (3 exceptions) Checks were not remitted timely due to timing of representative vacations, holidays, and office hours held 16 January 2017 (2 exception) February 2017 (1 exceptions) March 2017 (1 exceptions) April 2017 (4 exception) May 2017 (1 exception) June 2017 (2 exception) September 2017 (4 exception) November 2017 (1 exception) Checks were held at the customer’s request 3 June 2017 (2 exception) December 2017 (1 exception) Checks were held due to home office input error 9 January 2017 (1 exception) April 2017 (1 exception) June 2017 (1 exception) ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Exemption Report Under SEC Rule 17a-5 August 2017 (4 exceptions) September 2017 (1 exceptions) October 2017 (1 exception) I, Darren Guerrera, swear (or affirm) that , to the best of my knowledge and belief, this Exemption Report is true and coccec~ J'1 By : 1/vV\.J-.-./ ~ Darren Guerrera Title: Chief Financial Officer Date : February 28, 2018 PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Registered Public Accounting Firm To the Management of ProEquities, Inc. We have reviewed ProEquities, Inc.’s assertions, included in the accompanying ProEquities, Inc.’s Exemption Report, in which (1) the Company identified 17 C.F.R. § 240.15c3-3(k)(2)(ii) as the provision under which the Company claimed an exemption from 17 C.F.R. § 240.15c3-3 (the "exemption provision") and (2) the Company stated that it met the identified exemption provision throughout the year ended December 31, 2017 except as described in its Exemption Report with respect to the following exceptions: For the 152 instances listed below, customer funds and securities were not promptly transmitted to the clearing broker which carries all the accounts of such customers, or the product sponsor or settlement agent with whom the customer transacts. Nature of Exception Number of Exceptions Dates of Exceptions Checks or securities were not remitted timely due to a representative error in timely remitting of the check or securities 101 January 2017 (5 exceptions) February 2017 (11 exceptions) March 2017 (8 exceptions) April 2017 (3 exceptions) May 2017 (9 exceptions) June 2017 (4 exceptions) July 2017 (7 exceptions) August 2017 (12 exceptions) September 2017 (12 exceptions) October 2017 (7 exceptions) November 2017 (4 exceptions) December 2017 (19 exceptions) Checks were held by representatives until initial account paperwork could be processed 23 January 2017 (1 exception) February 2017 (2 exceptions) March 2017 (4 exceptions) April 2017 (3 exceptions) June 2017 (5 exception) August 2017 (1 exception) September 2017 (1 exception) November 2017 (3 exceptions) December 2017 (3 exceptions) Checks were not remitted timely due to timing of representative vacations, holidays, and office hours held 16 January 2017 (2 exception) February 2017 (1 exceptions) March 2017 (1 exceptions) April 2017 (4 exception) May 2017 (1 exception) June 2017 (2 exception) September 2017 (4 exception) November 2017 (1 exception) Checks were held at the customer’s request 3 June 2017 (2 exception) December 2017 (1 exception) Checks were held due to home office input error 9 January 2017 (1 exception) April 2017 (1 exception) June 2017 (1 exception) 2 August 2017 (4 exceptions) September 2017 (1 exceptions) October 2017 (1 exception) The Company’s management is responsible for the assertions and for compliance with the identified exemption provision throughout the year ended December 31, 2017. Our review was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and, accordingly, included inquiries and other required procedures to obtain evidence about the Company’s compliance with the exemption provision. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management's assertions. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to management's assertions referred to above for them to be fairly stated, in all material respects, based on the provisions set forth in paragraph (k)(2)(ii) of 17 C.F.R. § 240.15c3-3. February 28, 2018 M or ningstar ® Document R esear ch ℠ FORM 10-K PROTECTIVE LIFE CORP - N /A Filed: March 05, 2019 (period: December 31, 2018) Annual report w ith a comprehensive overview of the company The information c onta ine d herein ma y not be copie d, ada pte d or distributed a nd is not warranted to be a c curate, c omple te or timely . The us e r a s sumes all ris ks for any da ma ges or los s es aris ing from a ny use of this information, exc e pt to the e x te nt suc h da ma ges or los ses ca nnot be limite d or e x cluded by applicable la w. Pas t financ ia l performa nce is no guarantee of future re s ults . UNITED STATES SECURITIES AND EXCHANGE COMMISSIO N WASHINGTON, DC 2 05 49 ____________________________________________________________________________ FORM 10-K x Annual Repo rt Pursua nt to Sectio n 1 3 o r 15 (d) o f the Securities Ex cha ng e Act of 19 34 Fo r the fiscal year ended December 3 1, 2 01 8 o r ¨ Tra nsitio n Repo rt Pursuant to Secti on 13 or 15 (d) o f the Securi ties Excha nge Act of 1 93 4 For the tra nsitio n period fro m to Commission Fi le Number 00 1-11 33 9PROTECTIVE LIFE CORP ORATION (Exact n ame of regi strant as sp ecified in it s charter) DELAWARE (State or other ju risd ictio n o f inco rp oration or organ izatio n) 9 5-249 22 36 (IRS Emp lo yer Identification Numb er) 2 80 1 HIGHWAY 28 0 SOUT H BIRMINGHAM, AL ABAMA 3 52 23 (Ad dress o f p rincipal executi ve offices and zip cod e) Registrant’s teleph on e nu mber, in clu ding area cod e: (20 5) 26 8-1 00 0 Securities reg istered pu rsuan t to Section 1 2(b ) o f the Act: None Securities reg istered pu rsuan t to Section 1 2(g ) o f the Act: None Indicate b y ch eck m ark if the registrant is a well-k nown seaso n ed issu er, as d efined in Ru le 4 05 of the Secu rities Act. Yes ¨ No x Indicate b y ch eck m ark if the registrant is n ot requ ired to file reports pursuant to Sectio n 13 or Sectio n 15(d ) of the Ex change Act. Yes ¨ No x Note—Check in g th e b o x abov e will not reliev e any reg istran t required to file rep o rts pursuant to Sectio n 13 or 1 5 (d) of the Ex ch an g e Act fro m their o bligations und er those Sectio ns. Indicate by check m ark whether the registrant (1) has filed all reports req u ired to be filed by Section 13 o r 15(d) o f th e Secu rities Exchange Act of 1934 d u rin g the preceding 12 mo n th s (or for such sh o rter p eriod that the reg istran t was required to file su ch reports), an d (2) has been su b ject to such filing req u irements for the past 90 d ay s. Yes x No ¨ Indicate by check m ark wh eth er th e registrant has sub m itted electro n ically every In teractiv e Data File required to b e sub m itted p u rsu an t to Ru le 40 5 of Reg ulation S-T (§232.4 0 5 of th is chapter) durin g the preceding 1 2 m onths (or for su ch shorter period th at the registrant was req u ired to submit such files). Yes x No ¨ Indicate by ch eck m ark if d isclosu re of delinq u en t filers p ursuan t to Item 405 o f Regulation S-K is n o t contained h erein, and will n o t be con tain ed , to th e best of registrant’s knowledge, in d efinitive pro xy or info rmation statem en ts incorp orated by reference in Part III of th is Fo rm 10-K or any amend m en t to this Form 1 0-K. x Indicate b y check mark whether th e reg istrant is a larg e accelerated filer, an accelerated filer, a non-accelerated filer, a smaller rep o rtin g com p an y, or an emerg in g gro wth co mpany. See defin itions o f “large accelerated filer”, “accelerated filer”, “smaller rep o rting com p an y ”, an d “em erging growth company” in Rule 12b-2 of th e Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller rep o rting co m p an y ¨ Emerg ing Gro wth co m p an y ¨ If an emerg in g growth comp an y, indicate by ch eck m ark if th e registrant h as elected not to u se the extend ed transition p eriod for co mplyin g with an y new or rev ised finan cial accou n tin g stan d ards p rovided p u rsu an t to Section 13(a) of th e Exchange Act. ¨ Indicate by check mark whether th e registrant is a shell company (as defin ed in Rule 12 b -2 o f the Act). Yes ¨ No x Ag g regate market value of the registrant’s votin g co m mon stock held by n o n -affiliates of the registrant as o f Ju n e 3 0, 2018 : No n e ($0) Nu m ber of shares of Commo n Stock, $0 .0 1 Par Value, outstan d ing as o f Febru ary 1, 2 0 1 9: 1,00 0 Docu ments Incorp o rated by Reference: No ne Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PROTECTIVE LIFE CORPORATION ANNUAL REPORT ON FORM 10 -K FOR FISCAL YEAR ENDED DECEMBER 3 1, 20 18 TABLE OF CONTE NTS Pa g e PART I Item 1.Bu sin ess 3 Item 1A.Risk Facto rs 15 Item 1B.Un reso lv ed Staff Co mmen ts 35 Item 2.Pro perties 35 Item 3.Leg al Pro ceed i ng s 35 Item 4.Mine Safety Disclosure—Not App licabl e 35 PART II Item 5.Market for t he Registrant's Co mmon Equ ity, Rel ated Sto ckh older M att ers an d Issu er Pu rch ases o f Eq uity Secu rities 36 Item 6.Select ed Finan cial Data 37 Item 7.Manag ement's Discu ssi on an d An aly sis of Finan cial Co nd ition an d Resu lts of Operation s 39 Item 7A.Qu ant itative and Qualitative Di sclo sures Abo ut M ark et Risk 1 00 Item 8.Fin ancial Statements and Su ppl ementary Data 1 00 Item 9.Ch ang es in an d Disagreemen ts with Acco un tan ts o n Accounting and Fi nancial Disclo su re 1 87 Item 9A.Co ntro ls an d Procedu res 1 87 Item 9B.Other In fo rmation 1 88 PART III Item 10 .Direct ors, Execu tive Officers an d Corpo rate Gov ern an ce 1 89 Item 11 .Executiv e Compensation 1 93 Item 12 .Security Ownersh ip of Certain Ben efi cial Owners and M anagement and Related St ockh old er M atters 2 17 Item 13 .Certai n Relatio nships an d Related Transactio ns an d Director In dep end en ce 2 18 Item 14 .Principal Acco un tan t Fees and Services 2 19 PART IV Item 15 .Exhib its, Finan cial Statemen t Sched ules 2 20 Item 16 .Form 1 0-K Su mmary - Non e Sig natures 2 37 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART I Item 1 . Business Protecti ve Life Corp oration (the “Compan y”), is a ho ld in g co mp any headq uartered in Birmin gh am, Alabama, with su bsidiaries that prov ide finan cial serv ices primarily in t he United States throu gh th e prod uct io n, d istrib utio n, and admin istration of in surance and in vestmen t p rod ucts. Fo un ded in 19 07 , Protecti ve Life Insu ran ce Co mp any (“PLICO”) is the Compan y’s largest op eratin g subsid iary. Un l ess th e con tex t o th erwise req uires, th e “Co mp an y,” “we,” “us,” o r “o ur” refers to the con so lidated g ro up of Protective Life Corp oration and its subsidiaries. On Feb ru ary 1, 2 01 5, Th e Dai-ichi Life Insu ran ce Comp any, Limited , a ka bu shiki ka isha organ ized u nd er the laws of Japan (n ow k no wn as Dai-i ch i Life Ho ldi ng s, In c., “Dai -ichi Life”), acqu ired 1 00 % of th e Co mp any ’s ou tstan ding shares of commo n sto ck throu gh th e merg er o f DL Inv estment (Delaware), Inc., a Delaware corpo ration and wh olly owned su bsid iary of Dai-ichi Life, with and in to the Co mp any, with th e Co mp an y con tin uing as the survivin g entity (the “M erg er”). As a result o f the Merger, the Co mpan y is a direct, who lly o wn ed sub sid iary o f Dai -ichi Life. The Co mp an y op erates sev eral op eratin g segments, each having a strateg ic focu s. An o perating seg men t is distin gu ish ed by pro du cts, ch ann els of distri bu tion , and /or other strategic d istinctio ns. The Comp any ’s o perating seg men ts are Life M ark eting , Acqui siti on s, An nu iti es, Stable Value Prod uct s, and Asset Pro tectio n. The Compan y h as an add itio nal rep orting segment referred to as Corpo rate an d Oth er which co nsists of net in vestmen t inco me on assets sup po rti ng o ur eq uity capital, u nallo cated co rp orate overhead, and ex pen ses no t attrib utable to th e seg men ts ab ov e (in clu ding in terest o n certain corpo rate debt). This seg men t also includ es earn i ng s from sev eral no n-st rat eg ic or ru no ff lin es of b usiness, finan cin g an d investment-related transactio ns, an d th e op eratio ns of several small sub si diaries. Th e Comp any p eriod ical ly evaluates i ts op eratin g seg men ts and mak es ad ju stments to ou r segment rep ort in g as needed . Ad ditio nal informatio n co ncern in g the Company and its o perating segment s may b e fou nd in It em 7, Ma na gement’s Di scussio n a nd Ana lysis o f Fin an cia l Co nd itio n a nd Resu lts of Opera tions, and Note 22 , Op erati ng Segmen ts to the co nso lid ated financial statements inclu ded in th is rep ort. In the follo win g p aragraph s, th e Co mp any rep orts sales and ot her statisti cal in fo rmation . These statistics are u sed to measure th e relativ e prog ress o f its mark eting an d acqu isitio n efforts, b ut may n ot h ave an immediat e i mp act on repo rted segment o r co nso lidated adjusted o perating inco me. Sales d ata fo r tradition al l ife insurance is based on an nu alized premiums, wh ile un iv ersal life sales are b ased o n ann ualized p lan ned p remiu ms, o r “target” p remiu ms if lesser, plus 6 % o f amo un ts receiv ed in ex cess o f targ et premiums an d 10 % of sin gle p remiu ms. “Target” p remiu ms for u niversal l ife are tho se p remiu ms u po n wh ich fu ll first year co mmissio ns are paid. Sales of an nu iti es are measured b ased on th e amou nt of pu rch ase p ayment s receiv ed l ess surrenders occu rring withi n twelve mo nths o f the p urchase pay ments. Stable value con tract sales are measu red at th e time th e pu rch ase p ayments are received . Sales wi th in th e Asset Pro tectio n seg men t are b ased o n the amount of sin gle premiums and fees received . These statistics are deriv ed fro m various sales track in g an d admi nistrativ e systems an d are n ot derived from th e Co mp any ’s finan cial rep orting systems or finan cial statemen ts. These statist ics attempt to measu re o nly some o f the many fact ors that may affect fu tu re p ro fit ab i lity, and t herefore, are n ot in ten ded to b e predictive o f future profitabil ity. Life Ma rketing The Life Marketing segment markets fixed un iv ersal li fe (“UL”), in dexed u niversal life (“IUL”), v ariable uni versal life (“VUL”), b ank -o wned life in surance (“BOLI”), an d level premi um term insu ran ce (“trad itio nal”) p ro du cts on a natio nal basis, p rimarily th ro ug h n etwo rk s of ind epend ent i nsu ran ce ag ents and brok ers, brok er-dealers, fin ancial institution s, in dep end ent di stri bu tion organ izat io ns, an d affinity grou ps. The fol lo win g tabl e p resen t s th e Life Marketin g segmen t’s sales as defin ed ab ov e: Successor Compa ny For The Year Ended December 31,Sales (Dolla rs I n M i l l i o ns ) 20 18 $16 8 20 17 17 2 20 16 17 0 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 14 4 Predecesso r Co mpany Sales (Dolla rs I n M i l l i o ns ) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $1 2 Fo r the y ear end ed Decemb er 31, 20 14 13 0 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Acquisi tions The Acqu isit io ns seg men t focu ses o n acqu iring, co nv ertin g, an d servicin g p olicies and con tracts fro m o th er co mp anies. The seg ment’s primary fo cus is o n l ife insurance po licies an d ann uit y produ cts t hat were sold to i nd iv id uals. The level o f the seg men t’s acqui siti on activ ity is p redicated up on many facto rs, in cludi ng av ailable cap ital, o perati ng cap acit y, p otential ret urn on capital, an d market dy namics. Th e Co mp any ex pects acq uisitio n op po rtu nities to co nti nu e to be av ailable. Ho wever, the Compan y b elieves it may face increased competitio n and evo lv in g cap ital requ iremen ts th at may affect the en viron ment and th e fo rm of fu tu re acq uisiti on s. Mo st acq uisition s completed b y the Acq uisiti on s segment have n ot in clu ded the acqu i sition o f an active sales force, th us p oli cies acqu ired throu gh th e segment are ty pically block s o f bu siness where no n ew po licies are bei ng marketed. Therefo re, earning s an d acco un t values are ex pected to declin e as th e resu lt o f lap ses, d eath s, and o th er terminatio ns o f co verage, u nless new acquisiti on s are mad e. Th e segment’s reven ues and earn in gs may flu ctu ate from y ear to year d epen ding up on th e lev el o f acqu isitio n activ ity. In transactio ns where some mark eting activity was in clu ded , th e Co mp any may cease future mark eting effort s, red irect tho se efforts to an oth er seg ment of the Company, or elect to co ntinu e mark eting new pol icies as a co mp on ent of other segments. The Co mp any b elieves t hat its focu sed and d isciplined ap proach t o th e acqui siti on p ro cess an d its exp erience in the assimilatio n, con servatio n, and serv icing of acq uired po l ici es prov id es a sig nificant competitive adv antage. On May 1 , 2 01 8, Th e Linco ln Natio nal Life Insurance Co mp any (“Lin coln Life”) co mp leted th e acq uisition (the “Closin g”) of Libert y Mut ual Grou p In c.’s (“Liberty M utual ”) Group Benefits Busin ess an d Ind iv id ual Life an d An nu ity Bu siness (the “Life Bu sin ess”) th ro ug h th e acq uisition of all o f the issued and o utstand in g capital sto ck of Liberty Life Assurance Co mp any o f Bosto n (“Liberty ”). In co nn ection with the Clo sing and p ursuan t to th e M aster Tran saction Agreemen t, dated Jan uary 1 8, 2 01 8, PLICO and Protective Life an d An nu ity Insurance Company (“PLAIC”), a wh olly own ed su bsid iary o f PLICO, entered into reinsurance ag reemen ts (th e “Rein surance Agreemen ts”) an d related ancillary do cu men ts (in clu ding ad ministrativ e services ag reements an d tran sition servi ces ag reement s) p ro vidin g for th e rei nsu ran ce an d ad minist ratio n o f the Life Busin ess. Pursu ant to the Rein surance Ag reemen ts, Liberty ced ed t o PLICO an d PLAIC th e insurance po licies relat ed to th e Life Busin ess on a 1 00 % co insu ran ce basis. Th e agg reg ate ceding commission for the rein surance o f the Life Business was $42 2.4 million, wh i ch is the p urchase p rice. Oth er than cash receiv ed as p art of th e acq uired Liberty in vestmen t p ortfoli o as reflected in “amo unt s received from rein su ran ce tran saction ” in th e Consolid ated Statemen t o f Cash Flows an d as reflected in th e table below, thi s was a n on -cash transacti on . All po licies i ssu ed in states other than New Yo rk were ced ed to PLICO u nd er a rein surance ag reement b etween Lib erty and PLICO, an d all p olicies issued in New York were ced ed t o PLAIC un der a reinsu ran ce ag reemen t b etween Lib ert y and PLAIC. The agg reg ate statu to ry reserves of Lib erty ceded to PLICO an d PLAIC as o f the closing of t he Transactio n were ap prox imately $13 .2 b illio n, wh ich amou nt was based on i nitial estimates an d is subject to ad justmen t fo llowing the C lo sin g. Pu rsuan t to the terms of the Rein surance Agreements, each o f PLICO and PLAIC are requi red to mai ntain assets in tru st for th e ben efit of Lib erty to secu re th eir resp ecti ve o bligat io ns t o Lib erty un der the Rein surance Agreements. The trust acco un ts were in iti all y fu nd ed by each of PLICO and PLAIC pri ncipally wi th the in vestmen t assets th at were receiv ed fro m Lib erty. Additio nally, PLICO an d PLAIC h ave each ag reed to pro vide, on behalf of Liberty, ad minist ratio n an d po licyh older servicin g o f th e Life Bu siness rei nsu red b y it pu rsuant to admin istrative services ag reemen ts between Lib erty an d each o f PLICO and PLAIC. On Janu ary 2 3, 20 19, PLICO en tered in to a Master Transactio n Ag reemen t (th e “GWL&A Master Transact io n Ag reemen t”) with Great-West Life & An nu ity In surance Compan y (“GWL&A”), Great-West Life & An nui ty In surance Compan y o f New Yo rk (“GWL&A o f NY”), The Canada Life Assu ran ce Co mp any (“CLAC”) an d The Great-West Life Assu rance Co mp any (“GWL” and , to gether with GWL&A, GWL&A of NY and CLAC , th e “Sel lers”), p ursu ant to wh ich PLICO will acquire v ia rein surance (th e “Transacti on ”) su bstantiall y all of th e Sel lers’ in dividu al life in su rance and ann uity bu siness (the “Indi vidu al Life Bu siness”). Pursuan t to th e GWL&A Master Tran saction Agreemen t, PLICO an d PLAIC will enter in to rein surance ag reemen ts (the “Reinsu ran ce Agreements”) and rel ated an cillary d ocu men ts at th e clo sing of th e Tran saction. On the terms and su bject t o the con ditio ns of th e Reinsurance Ag reemen t s, the Sellers will ced e to PLICO and PLAIC, effect iv e as o f th e clo sing of the Transacti on , su bstantially all of th e insu ran ce po licies relating to th e In dividu al Life Busin ess. To sup po rt its o blig ation s un der th e Reinsu ran ce Agreements, PLICO will estab lish trust accou nts fo r the b en efit o f GWL&A, CLAC and GWL, and PLAIC will est ab l ish a trust acco un t for t he ben efit o f GWL&A o f NY. The Sellers will retain a blo ck of particip ating po licies, wh ich will be ad minist ered b y the Co mpan y. The Transactio n is su bject t o the satisfaction or waiv er o f cu sto mary closin g conditio ns, includ i ng reg ulato ry app ro vals and th e executio n of th e Reinsuran ce Agreements and related ancillary docu men ts. The GWL&A M aster Tran saction Ag reemen t an d oth er transacti on docu men ts co ntain certain cu stomary represen tat io ns an d warranties made b y each o f the p art ies, and certain customary cov enan ts regarding th e Sellers and th e In dividu al Life Bu siness, an d p ro vide for in demnification , amo ng other th in gs, for breaches o f tho se rep resen tatio ns, warran ties and cov enants. Annuiti es The Ann uities segmen t markets fi xed and v ariable ann uit y (“VA”) p ro du cts. These produ cts are p rimari ly so ld thro ug h brok er-deal ers, finan cial in stit utio ns, an d ind epen dent agen ts an d b ro kers. The Co mp an y’s variab le an nu i ties o ffer th e po licyh older the o pp ortun ity to i nv est in various i nv estment accou nts an d offer op t io nal features that gu arantee th e death and wit hd rawal b enefits of the un derly ing an nu ity. 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any ’s fix ed an nu ities includ e index ed ann uities, singl e premium d eferred ann uities, an d sing le p remiu m immed iat e ann uities. The Co mp any ’s fix ed ann uities also incl ud e mo dified gu aran teed ann uit ies whi ch g uarantee an in terest rate for a fixed p eriod . Cont ract values for these ann uities are “mark et-value adju sted ” u pon surren der p rio r t o maturity. In certain interest rate en viron ments, these pro du cts affo rd th e Co mp any with a measure of protecti on from th e effects of chan ges in interest rates. The deman d fo r ann uit y prod ucts is related to th e g eneral lev el of interest rates, p erforman ce of th e equi ty mark ets, and p erceived risk o f i nsu ran ce co mp anies. The followin g table presents fix ed ann uit y and VA sales: Successor Compa ny For The Year Ended December 31, Fix ed Annuities Va ria ble Annuities To tal Annuities (Dollars In M i l l io ns) 20 18 $2,1 40 $2 98 $2 ,43 8 20 17 1,1 31 4 26 1 ,55 7 20 16 7 27 5 93 1 ,32 0 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 5 66 1,0 96 1 ,66 2 Predecesso r Co mpany Fix ed Annuities Va ria ble Annuities To tal Annuities (Dollars In M i l l io ns) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $28 $59 $8 7 Fo r the y ear end ed Decemb er 31, 20 14 8 31 9 53 1 ,78 4 Stable Value Pro ducts The Stable Val ue Pro du cts seg men t sell s fixed and floati ng rate fu nd in g ag reemen ts direct ly to th e trustees o f mun icipal bond p ro ceed s, money mark et fun ds, b ank trust dep artments, and other in stit utio nal in vestors. The seg men t also issues fund in g agreements to the Fed eral Ho me Lo an Bank (“FHLB”) and markets g uarant eed i nv estment con tracts (“GICs”) to 4 01 (k ) and other qualified retiremen t savi ng s p lan s. GICs are con tracts which specify a ret urn on fun ds for a specified perio d and o ften pro vide flexibility fo r withd rawals at b oo k value in k eep i ng with the benefits prov i ded by th e plan. Th e deman d for GICs is related to th e relative attractiveness of th e “fixed rate” inv estment op tion i n a 40 1(k ) p lan co mp ared to th e equ ity-based in vestmen t op tion s which may be av ailabl e to pl an particip ants. Th e Co mp any also has an un reg istered fun ding agreement-b acked no tes p ro gram wh ich prov id es fo r offers o f no tes to b oth do mesti c and intern ation al in stitutio nal inv estors. M ost GICs an d fu nd ing agreements th e Compan y has written hav e maturiti es o f on e to twelv e years. The fol lo win g tabl e p resen t s Stable Value Pro du cts sales: Successor Compa ny For The Year Ended December 31,G ICs Funding Agreements Total (Dollars In M i l l io ns) 20 18 $89 $1 ,25 0 $1 ,33 9 20 17 1 16 1 ,65 0 1 ,76 6 20 16 1 90 1 ,66 7 1 ,85 7 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 1 15 69 9 81 4 Predecesso r Co mpany G ICs Funding Agreements Total (Dollars In M i l l io ns) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $— $— $— Fo r the y ear end ed Decemb er 31, 20 14 42 5 0 9 2 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Asset Pro tectio n The Asset Pro tectio n segmen t markets ex ten ded service cont racts, cred it life an d disab ility in su ran ce, and o th er specialized an cill ary pro du cts to protect co nsumers’ in vestmen ts i n au tomobiles, recreation al veh icles, wat ercraft, and p owerspo rts. In add i tion , the segmen t markets a gu aran teed asset protecti on (“GAP”) prod uct. GAP prod ucts are d esig ned to cov er th e d ifference bet ween the sched uled lo an pay-off amo unt and an asset’s actu al cash value in the case o f a to tal loss. Each ty pe of sp ecialized an cillary prod uct p ro tects ag ainst damag e or o th er lo ss to a p articu lar asp ect o f th e un derlyi ng asset. Th e segmen t ’s p ro du cts are p rimarily marketed th ro ug h a natio nal n etwork o f app ro ximately 8 ,50 0 automob ile, marine, RV, and po wersp orts d ealers. A n etwo rk of direct employ ee sales representatives an d g eneral agen ts di stri bu te these produ cts to the d ealer mark et. The follo win g table p resent s th e in surance and related prod uct sales measured b y the amo un t o f sin gle premiums and fees received : Successor Compa ny For The Year Ended December 31,Sa les (D oll ars In Millions) 20 18 $48 2 20 17 58 4 20 16 50 4 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 48 2 Predecesso r Co mpany Sa les (D oll ars In Millions) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $3 7 Fo r the y ear end ed Decemb er 31, 20 14 48 7 In 20 18 , all of th e segmen t’s sales were thro ug h the auto mo bile, RV, marin e, an d p owerspo rts d ealer distri bu tion chan nel an d ap prox imately 8 3.7 % of th e segmen t’s sales were extend ed service co ntracts. A po rtion o f th e sales and resulting premiums are rein sured with prod ucer-affiliated reinsurers. Co rpo rate and Other The Co rp orate and Other seg men t primarily co nsists of net i nv estment inco me on assets sup po rting o ur eq uity cap ital, un allocated corpo rate ov erhead , and ex pen ses n ot attri bu tab le to t he seg men ts abo ve (includ in g int erest o n corpo rate deb t). Thi s seg men t in clu des earn in gs fro m several n on - strateg ic o r run off lines o f b usiness, finan cin g and in vestment rel ated tran saction s, and th e op eratio ns o f several small sub si diaries. The results of th is segmen t may flu ctu ate fro m y ear t o year. 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Inv estments As o f Decemb er 3 1, 2 01 8 (Successo r Co mp any ), the Co mp any ’s inv estment p ortfolio was ap prox imately $6 6.1 bil lion . Th e ty pes of assets in wh ich th e Co mp any may inv est are in fluen ced by vario us stat e insurance laws which p rescribe qu alified inv estment asset s. Within the p arameters of th ese laws, the Co mp any inv ests in assets giv in g co nsid eratio n to su ch factors as l iq uidity an d cap i tal n eed s, investmen t qu ality, in vestmen t return, mat ch ing of assets and liabilities, and th e ov erall co mposition of t he inv estment po rtfo lio by asset typ e and credit ex po su re. On February 1 , 20 15 , immed iat ely before th e Merger, th e fair value of th e Compan y’s inv est ment po rtfolio was signi fican t ly ab ov e th e carry in g value p rimarily d ue to lo w mark et i nterest rat es. As a resu lt o f pu rchase accoun ting app lied as o f Feb ruary 1, 2 01 5, the carryin g v alue o f the Compan y’s in vestmen t p ortfolio was adjusted to fair value which resu lted i n a drop in the o verall y ield o f the Compan y’s inv estment po rtfo lio for th e successo r p eriod . Fo r furth er informatio n regarding th e Co mp any ’s in vestmen ts, the matu rity of and th e co ncentrati on o f risk amo ng th e Co mp any ’s in vested assets, deriv ative fin anci al in stru men ts, an d liq uidity, see Note 2 , Summary o f Sign ifica nt Accounting Po licies, Note 5, Investmen t Opera tion s, and No te 7 , Derivative Fin an cia l In struments to th e conso lidated finan cial st atemen ts in clu ded in this repo rt, and Item 7, Ma nagemen t’s Discu ssion an d Analysis of Fina ncial Condi tion an d Resu l ts o f Op eratio ns. The fol lo win g tabl e p resen t s th e in vestmen t result s from con tinu in g o peration s o f the Compan y: Successor Compa ny Realized Inv estment Ga ins (Losses) Cash, Accrued Investment Income, and Investments a s of December 31, Percentage Earned on Av erag e o f Ca sh a nd Investments Net Investment Income Deriv a tive Fina ncia l Instruments All Other Investments (D ollars In Thous ands) Fo r The Year Ended Decem ber 31, 2 0 18 $66 ,93 6,7 64 $2,4 83 ,75 0 3.9 % $6 0,9 88 $(2 53 ,37 3) Fo r The Year Ended Decem ber 31, 2 0 17 55 ,37 0,9 26 2,0 51 ,58 8 3.8 (30 5,8 28 ) 1 09 ,68 6 Fo r The Year Ended Decem ber 31, 2 0 16 51 ,52 6,7 33 1,9 42 ,45 6 3.8 (4 0,2 88 ) 72 ,91 1 Feb ruary 1 , 2015 to December 3 1 , 2015 46 ,04 0,2 20 1,6 32 ,94 8 3.5 2 9,9 97 (1 93 ,87 9) Predecesso r Co mpany Realized Investment G ains (Lo sses) For The Perio d of Net Inv estment Inco me Deriv a tiv e Financial Instruments All Other Investments (D o l l a rs I n Tho usa nds ) Jan uary 1 , 2 015 to Jan uary 3 1 , 2015 $17 5,1 80 $(1 23 ,27 4) $8 0,6 72 Predecesso r Co mpany Realized Inv estment Ga ins (Losses) Ca sh, Accrued Inv estment Inco me, a nd Inv estments as of December 3 1 , Percenta g e Ea rned o n Average of Ca sh and Investments For The Year Ended December 3 1 , Net Investment Income Deriv a tive Fina ncia l Instruments All Other Investments (Dollars In Thousands) 20 14 $46 ,53 1,371 $2 ,19 7,7 24 4.7 % $(34 6,8 78 ) $1 98 ,12 7 Mo rtg ag e Lo ans The Company in vests a po rti on o f its in vestmen t portfolio in commercial mortg age lo ans. As o f Decemb er 3 1, 20 18 (Successo r Co mp any ), the Co mp any ’s mortg age lo an ho ld in gs were app ro ximately $7.7 b illion . The Co mp any h as sp ecialized i n making lo an s on credi t-orien ted co mmercial prop erties, credit-an chored strip sho ppi ng centers, senior living facil ities, and apartments. The Co mp an y’s u nd erwrit in g procedu res relat iv e to it s co mmercial lo an po rtfo lio are b ased, in the C ompany ’s view, o n a co nserv ative and d iscipli ned approach. Th e Compan y con centrates o n a small nu mb er of commercial real estate asset typ es asso ciat ed with t he n ecessities of life (retail, mu lti -family, sen io r livin g, p ro fessio nal o ffice b uildi ng s, and wareh ou ses). Th e Company believes th ese asset typ es tend to weath er eco no mic d owntu rn s b etter th an o th er commercial asset classes in wh ich it h as ch osen n ot to p articipate. Th e Co mp any b elieves th is d iscip lined approach has h elp ed to main tai n a relat iv ely low del in qu ency and fo reclo su re rate throu gh ou t its h istory. The majo rity of th e Comp any ’s mortg age loan portfolio was u nd erwritten and fun ded by t he Compan y. From time to time, th e Compan y may acq uire loan s in con ju nctio n with an acqui siti on . For mo re informati on 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents regardin g the Co mp any ’s i nv estment in mortg age loan s, refer to Item 7, Mana gement’s Discussio n an d Ana lysis o f Fin an cia l Condi tion a nd Resu lts o f Op erati on s, and No te 9 , Mortg ag e Loa ns to th e co nsolid ated finan cial statements includ ed herein . Ra tings Variou s Nationally Reco gn ized Stat istical Rating Organization s (“rating organ izatio ns”) review th e fin anci al p erforman ce and con dit io n o f in su rers, in clu ding o ur insurance sub si diaries, an d pu blish th eir financial stren gth ratin gs as in dicato rs o f an in su rer’s ab ility to meet p olicy ho ld er and co ntract h older ob ligatio ns. Th ese rating s are impo rtant to maintain in g p ub lic co nfid ence in an insurer’s prod ucts, its abi lity to mark et its prod ucts an d i ts competitive po sition . The fo l lo win g t ab le summarizes th e curren t fin ancial stren gth ratings o f o ur si gn ifican t member companies fro m the major ind epend ent rating organizations: Ra tings A.M. Best Fitch Sta nda rd & Poo r’s Mo o dy’s In su ran ce co mp any fi nancial streng th ratin g: Pro tectiv e Life In su ran ce Co mpan y A+ A+ AA- A1 West Co ast Life In surance Compan y A+ A+ AA- A1 Pro tectiv e Life and An nu ity In surance Compan y A+ A+ AA- — Pro tectiv e Prop erty & Casualty In surance Compan y A — — — MONY Life In surance Compan y A+ A+ A+ A1 The C ompany ’s ratin gs are sub ject to revi ew and ch ang e b y the rating o rg anization s at any time and with ou t n otice. A d owngrade or ot her n egativ e actio n by a rating s o rg anizati on with resp ect to th e fin an cial stren gth ratin gs of the Co mp any ’s insu ran ce su bsidiaries co uld adv ersely affect sales, rel ati on ships with dist ribu to rs, the level o f p olicy surren ders and with drawals, the Comp any ’s acqu isitio ns strategy or co mp etitive p osit io n i n the mark etp lace, and the co st or avai lability of reinsuran ce. The ratin g ag encies may tak e vario us actions, po sitive o r negative, with resp ect to th e finan cial streng th ratin gs of th e Co mp any ’s in surance su bsidiaries, i ncl ud in g as a result o f the Compan y’s statu s as a su bsidiary of Dai-ich i Life. Ratin g o rg anization s also p ub lish credit rating s for th e issuers of deb t secu rities, includ in g the Compan y. Credit rat in gs are in dicato rs of a d ebt issuer’s ab ility t o meet t he terms of d ebt o bligat io ns i n a timely mann er. Th ese rating s are impo rtant in the deb t issuer’s o verall ab i lity to access credit mark ets and other t yp es of liq uidity. Ratin gs are n ot reco mmen dations to b uy th e Compan y’s securities or prod ucts. A downg rad e or o th er n egativ e action by a rating s o rg anizati on with respect to o ur cred it ratin g co uld limi t the Compan y’s access to cap i tal mark ets, in crease th e cost of issuing deb t, an d a do wng rad e of su fficient magn i tu de, co mb in ed with oth er negativ e facto rs, coul d req uire th e Co mpan y t o po st coll ateral. The ratin g organ izat io ns may take vario us actio ns, po sitive or neg ative, with resp ect to the Company ’s deb t rating s. 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Life Insurance In-Force The fol lo win g tabl e p resen t s life insurance sales b y face amou nt and life insuran ce in -force: Successo r Compa ny Predecessor Compa ny Fo r The Yea r Ended December 3 1 , Februa ry 1 , 2 015 to December 31, 201 5 Janua ry 1, 201 5 to Janua ry 3 1, 201 5 For The Year Ended December 31 , 20 1 8 2 0 1 7 2 0 16 2 0 14 (Dollars In Thousands) (Do lla rs I n Thousa nds ) New Bu sin ess Writ ten Life Marketin g $59 ,71 6,9 49 $52,1 54,59 0 $4 8,6 54 ,14 0 $3 7,6 77 ,35 2 $3,4 25 ,21 4 $3 5,9 67 ,40 2 Asset Protection 37 3,7 65 4 83,29 9 6 46 ,22 5 6 41 ,79 4 58 ,34 5 8 78 ,67 1 Total $60 ,09 0,7 14 $52,6 37,88 9 $4 9,3 00 ,36 5 $3 8,3 19 ,14 6 $3,4 83 ,55 9 $3 6,8 46 ,07 3 Successo r Co mpany Predecesso r Co mpany As of December 31, As o f December 31 , 2018 20 1 7 20 1 6 2 0 1 5 2 0 14 (Do l la rs I n Tho usa nds ) (D ol l ars In Tho us a nds) Business Acq uired Acqu isitio ns $31 ,12 7,4 01 $— $8 3,2 85 ,95 1 $— $— In su ran ce In-Fo rce at End of Year(1 ) Life Marketin g $6 41 ,00 4,4 17 $61 3,7 52 ,20 9 $59 0,0 21 ,21 8 $56 5,8 58 ,83 0 $54 6,9 94 ,78 6 Acqu i sitions 2 59 ,16 8,4 14 24 6,4 99 ,11 5 26 3,7 71 ,25 1 19 9,4 82 ,47 7 21 5,2 23 ,03 1 Asset Protection 1 ,22 0,8 01 1,4 66 ,33 4 1,7 21 ,64 1 1,9 10 ,69 1 2,0 55 ,87 3 Total $9 01 ,39 3,6 32 $86 1,7 17 ,65 8 $85 5,5 14 ,11 0 $76 7,2 51 ,99 8 $76 4,2 73 ,69 0 (1)Rein suran ce assu m ed has been in clu d ed , rein surance ceded (Successo r 2 0 1 8 - $3 0 2 ,149,6 1 4 ; 2 0 1 7 - $3 2 8 ,377,39 8 ; 20 1 6 - $34 8 ,9 94,650 ; 2015 - $368,1 4 2 ,294); (Predecesso r 2 0 1 4 - $3 88,890 ,0 6 0) h as not been deducted. The ratio of v olun tary termi natio ns of i nd iv id ual l ife in su ran ce to mean ind iv id ual life insu ran ce in-fo rce, wh ich is determin ed by div id in g th e amou nt of in su ran ce termin ated d ue to lapses d uring the y ear by th e mean o f the i nsu ran ce in-force at th e b eginn i ng an d en d of the year, adjusted for the timing of maj or acq uisition s is as fo l lo ws: Successor Compa ny As of December 3 1, Ra tio o f Volunta ry Termina tion 20 18 5.1 % 20 17 4.5 20 16 4.9 20 15 4.2 Predecesso r Co mpany As of December 3 1, Ra tio o f Volunta ry Termina tion 20 14 4.7 % 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Inv estment Pro ducts In-Fo rce The amo un t of in vestmen t p rod ucts in -fo rce is measu red by acco un t balan ces. The followi ng tab le includ es the stable value p ro du cts an d fixed and variable an nu ity acco un t balan ces. A majority of the VA accou nt b alan ces are rep orted in the Co mp any ’s fin ancial statements as liabil ities related to sep arate acco un ts. Successor Compa ny As of December 3 1, Stable Value Pro ducts Fixed Annuities Variable Annuities (D o l l ars In Tho us a nds) 20 18 $5,2 34 ,73 1 $1 3,7 20 ,08 1 $1 2,2 88 ,91 9 20 17 4,6 98 ,37 1 1 0,9 21 ,19 0 1 3,9 56 ,07 1 20 16 3,5 01 ,63 6 1 0,6 42 ,11 5 1 3,2 44 ,25 2 20 15 2,1 31 ,82 2 1 0,7 19 ,86 2 1 2,8 29 ,18 8 Predecesso r Co mpany As of December 3 1, Stable Value Pro ducts Fixed Annuities Variable Annuities (D o l l ars In Tho us a nds) 20 14 $1,9 59 ,48 8 $1 0,7 24 ,84 9 $1 3,3 83 ,30 9 Underwriting The un derwri ting p olicies of the Compan y’s insu ran ce su bsid iaries are est ab l ish ed by manag ement. With respect to in divid ual insuran ce, the sub si diaries use informat io n fro m the app lication , an d in so me cases, th ird p arty med ical in fo rmation prov id ers, inspectio n rep ort s, credit repo rts, mo to r vehicle reco rd s, previou s un derwriting records, atten ding physician stat ements and /o r t he resu lts of a medi cal exam, to determin e wh eth er a p olicy sho uld b e issued as ap plied fo r, other th an app lied for, o r rejected. Su bstan dard risks may be referred to reinsurers for evaluatio n. Th e Co mp any do es utilize a “simplified issu e” app ro ach for certain p olicies. In th e case of “simp l ified issue” policies, co verage is rej ected if the respon ses to certain heal th questio ns co ntain ed in the ap plicat io n, o r the app licant’s in ability to mak e an un qu alified h ealth certification , in dicate adv erse h ealth o f the app licant. The Compan y’s insurance subsidiaries g en erally req uire b loo d samples to be d rawn wit h ind iv id ual in su ran ce ap plicatio ns ab ov e certain face amou nts b ased o n th e ap pli can t’s age. Blo od samples are tested for a wid e range of ch emical values an d are screened fo r an tibo dies to certain v i ru ses. Ap plicatio ns also con tain q uestio ns permitted by l aw regarding certain v iru ses which mu st be answered b y the p ro po sed insureds. The Compan y u tilizes an ad van ced un derwriting sy stem, TeleLife®, for certain prod uct lines in its life bu siness. TeleLife® streamlines the ap pli catio n pro cess throu gh a teleph on ic in terview of th e app licant, sch edu les med ical exams, accel erates the un derwriting p ro cess an d th e u lti mate issuan ce of a po l icy mostl y th rou gh electron ic mean s. The Compan y also in tro du ced a streamlined un derwri ting ap pro ach th at uti lizes th e TeleLife® p rocess and no ninv asiv e risk selectio n t oo ls to ap prov e some app licati on s witho ut req uiring a paramedical ex am or lab testing . The Co mp an y’s max imum retention limit on d irectly issued bu siness is $5 ,00 0,0 00 fo r any one life on certain of its tradition al life an d un iv ersal life prod uct s. Reinsurance Ceded The Compan y’s insuran ce sub sidiaries cede l ife in surance to o th er insu ran ce comp anies. Th e ced in g insurance company remain s l iab le with resp ect to ced ed insu ran ce sho uld an y rein surer fail t o meet th e ob ligatio ns assumed b y it. For app ro ximately 1 0 y ears prior to mid -2 00 5, the C ompany ent ered into rein surance con tracts in which th e Co mp any ced ed app ro ximately 90 % o f its newl y-written trad itio nal life insurance bu si ness o n a first dollar q uo ta sh are basis u nd er coin surance con tracts. In mid -20 05 , the Co mp an y sub stan tially discon tinu ed co in suri ng its newly written tradition al life in su ran ce an d moved to yearly ren ewab le term (“YRT”) reinsu ran ce. The amo un t o f insurance ret ained by the Company on an y on e life on tradition al life insurance was $50 0,000 in years prio r to mid-2 00 5. In 2 005, this retentio n amo un t was in creased to $1 ,00 0,0 00 fo r certain p olicies, and du rin g 2 00 8, was increased to $2,0 00 ,00 0 for certain po l ici es. Du rin g 2 01 6, the reten tion amo un t was in creased to $5 ,000,00 0. For app ro ximately 15 years prio r to 2 01 2, th e Comp any reinsured 90 % of th e mo rtality risk on th e majo rit y of i ts n ewly written un iv ersal life in surance o n a YRT b asis. Du ring 20 12, t he Compan y mov ed t o rein sure on ly amo un ts in excess o f its $2,00 0,0 00 retenti on , wh ich was in creased to $5 ,000,00 0 d uri ng 20 16 , fo r the majori ty of its newly written un iv ersal life an d level p remiu m term in su rance. 10 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Policy Lia bilities and Accrua ls The app licable in surance laws u nd er wh ich th e Co mp any ’s in surance su bsid iaries o perate req uire th at each insu ran ce co mp any rep ort p olicy liabilities to meet future o blig ation s on the ou tstand in g po licies. Th ese liab ilities are calculat ed in accordance with app licab le law. These liabil ities alo ng with add i tion al p remiu ms to be received and the compo unded i nterest earn ed o n those p remiu ms are con sidered to b e su fficient to meet t he v ari ou s pol icy an d co ntract ob ligati on s as they matu re. Th ese laws specify th at the liab ili ties sh all no t b e less th an liab ili ties calcu lat ed u sin g certain n amed mo rtality tab les an d interest rates. The po licy liabilities and accru als carried in th e Co mp an y’s fin ancial rep orts presented on th e b asis of acco un ting prin cip les gen erally accepted in th e United States of America (“GAAP”) d iffer fro m th ose specified by t he laws o f th e vario us states and carried in th e in su ran ce subsidiaries’ stat utory finan cial statemen ts (presented on the basis of statu to ry acco un ting p rinciples mand ated b y state insurance regu latio ns). Fo r po licy liabilities fo r traditio nal life, immediate an nu ity, an d h ealth con tracts, th ese differen ces arise from the u se o f mo rtality an d mo rb id ity tab les and int erest rate assumptio ns which are deemed to b e more app ro priate fo r fin ancial rep orting pu rp oses th an th ose requ ired for statuto ry acco un ting pu rp oses. The GAAP po licy l iabilities also in clu de lapse assumptio ns i n the calculation and u se the n et lev el p remiu m meth od o n all bu siness wh ich g enerally d iffers from po licy liabilities calculated fo r statutory finan cial statemen ts. Pol icy liabilities fo r un iv ersal life p olicies, d eferred ann uity co ntracts, GICs, and fun ding agreemen ts are g enerally carried in th e Compan y’s finan cial rep ort s at th e accou nt value of the p olicy or co ntract plu s accru ed interest. Add itio nal l iab ilities are h eld as ap propriat e fo r excess benefits ab ov e the accou nt value. Federal Tax es In g eneral, existin g law gen eral ly ex emp ts p olicy ho ld ers fro m curren t taxatio n on an in crease in th e v alu e o f their life in surance and an nu ity prod uct s d uri ng these prod ucts’ accu mulat io n ph ase. Th is favo rab le tax treat ment gi ves certain o f th e Co mp any ’s p ro du cts a comp etit iv e adv antage ov er in vestmen t prod uct s. If tax laws are revised such t hat th ere is an elimin ation o r scale-back of this favo rab le tax treatment, o r co mp eting inv estment p ro du cts are granted simil ar tax treatment, th en t he relative attractiven ess of the Company ’s prod ucts may be red uced or eliminated. The Company is sub ject to co rp orate inco me, exci se, fran chise, and premium taxes. In December 20 17 , th e Tax Cuts and Jo bs Act (the “Tax Refo rm Act”) was enacted . It sig nificantly chan ged U.S. tax law. Fo r examp le, it l owered the co rp orate inco me tax rat e, beg in ning in 2 01 8. This resu lted in a decrease in the Company’s effective tax rate. The Tax Reform Act increases th e Compan y’s taxable in come, as a result o f chan ges regardi ng p olicy acq uisition co sts an d p olicy ho lder b enefit reserves. Wh ile overall th e Tax Reform Act will cause the Co mp an y to repo rt higher amou nts of tax able in come, the Compan y ex pects to pay less fu tu re inco me tax es du e to th e lo wer tax rate. In ad dition , life in su ran ce pro du cts are often used to fun d estate tax ob ligatio ns. Recent an d possib ly futu re chang es to estate tax l aw may affect th e deman d for life insurance prod ucts. The Company’s i nsu ran ce sub sid iaries are generally taxed in the same mann er as are o th er compan ies in the in du stry. Certain tax law restrictions prevent the immed iate inclu sion of recen tly-acqu ired li fe insu ran ce companies in the Co mp any ’s con soli dat ed i ncome tax return . Add iti on all y, th ese restriction s limit th e amou nt o f life in su ran ce in come that can be o ffset b y no n-life-i nsu ran ce l osses. Overall, these restrictio ns may cau se the Co mp any ’s effectiv e tax rate to in crease. The Co mp any ’s d ecreased reliance o n rein surance fo r newl y wri tten tradition al l ife p ro du cts resulted in a redu ction in the tax es wh ich the Company cu rrentl y pay s, offset by an increase in i ts d eferred taxes. Th e Co mp any allo cates the ben efits of redu ced curren t taxes to the Life M ark eting an d Acq uisition segmen t s. The profitability and competitiv e p ositio n o f certain of th e Compan y p ro du cts are d epen dent on th e co ntin uatio n o f certai n tax benefi ts which are prov id ed b y curren t tax law an d the Co mpan y’s ab ility to g enerate fut ure taxab le inco me. Co mpetition Life and h ealth in surance is a mat ure and h ig hly co mp etit iv e in du stry. In recen t years, th e ind ustry’s life in surance sales have been relatively flat, th ou gh the ag in g po pu latio n has increased the deman d fo r retiremen t savings prod ucts. The Co mp any enco un ters sig nificant co mp etition in all lin es o f bu sin ess, incl ud in g in the Acqu isitio ns segmen t. The Compan y enco un ters competiti on fo r sales of life insurance and retiremen t p ro du cts fro m o th er insurance compan ies, man y o f wh ich hav e greater finan cial reso urces than th e Co mp any and which may h ave a g reater market sh are, o ffer a b ro ader ran ge o f prod ucts, services or featu res, assume a greater level of risk, h av e lower o perating or fin ancing costs, o r h ave lower profitability ex pect ation s. Th e Co mp any also faces comp etit io n fro m ot her prov id ers o f financial services. Compet itio n co uld result in , amon g o th er thing s, l ower sales or hig her lapses of existin g pro du cts. The Co mp any ’s ab ility to co mp ete is dep end ent u po n, amon g other thing s, its ab ili ty to attract and retain distribu to rs to market its i nsu ran ce and in vestmen t prod uct s, i ts abi lity to d evelop competiti ve an d profitable pro du cts, its ab ility to maintai n low un it costs, and its maint en ance o f adeq uate ratin gs from rat in g o rg anizati on s. As techn olog y ev olves, a co mp arison of a particular prod uct of any comp any fo r a p articu lar custo mer with competin g p rod ucts fo r th at custo mer is more readily av ailable, wh ich coul d lead to in creased co mp etition as well as ag ent o r custo mer b ehavior, includin g persisten cy, which differs from p ast behav io r. 11 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any en cou nters competition in its Acqu isitio ns seg men t from o ther insu ran ce co mpan ies as well as fro m other typ es of acq uirers, in clu ding priv ate equ i ty in vestors. M any of these co mp etito rs may hav e greater fin an cial resou rces th an the Co mp any and may be willing to assume a greater level of risk , hav e lower op erat in g o r fin anci ng co sts, or hav e lo wer profi tab ility ex pect ati on s. Risk Ma na gement Risk manag ement i s a cri tical p art of th e Co mp any ’s bu siness, an d the Compan y h as ado pted risk man agement processes in mu ltip le asp ects o f its op eratio ns, in clu ding p rod uct d evelo pment an d man agemen t, bu siness acqu isitio ns, u nd erwrit in g, in vestmen t man agemen t, asset -liab ility man agement , hedg ing , and techno lo gy. Th e Company’s Ent erp rise Risk Manag ement o ffice, u nd er the directio n o f th e C hief Risk Officer, alo ng wi th other d epartmen ts, manag ement g ro up s an d commi ttees, hav e respo nsib ilities fo r man aging d ifferent risk s th ro ug ho ut the Co mp any. Risk man ag emen t in clu des th e assessment of ri sk, a decisio n p ro cess wh i ch in clu des d etermi ning wh ich risks are acceptable and the mon itorin g an d man agemen t o f i denti fied risk s on an on go ing basis. The p rimary ob jectiv es of th ese risk manag ement processes are to det ermin e the acceptable level of variat io ns the Compan y exp eriences fro m its ex pected results an d to imp lement st rat eg ies design ed to limit su ch variatio ns to th ese lev els. Reg ulatio n St ate Reg ulatio n The Company is sub ject to g ov ern ment reg ulation in each o f the states in which it con du cts b usin ess. In many in stances, th e regu latory mod els emanate fro m th e Nation al Asso ciatio n of Insurance Co mmissio ners (“NAIC”). Su ch regu lation i s v ested in state ag encies h aving b ro ad admin istrati ve an d in some instances discretion ary p ower d eali ng wi th many asp ects of th e Compan y’s bu siness, which may includ e, amon g other th in gs, premium an d cost of in surance rates an d increases t hereto, in terest crediting pol icy, un derwritin g p ract ices, reserv e req uiremen t s, marketin g p ractices, ad vertisi ng , priv acy, d ata security, cybersecu rity, p olicy forms, rein surance reserve req uirements, insurer use o f capt iv e rein surance companies, acq uisition s, mergers, cap ital adeq uacy, claims p ract ices an d the remittance o f u nclaimed p ro perty. In ad dit io n, some state in su rance d epartments may enact ru les or reg ulatio ns with extra-t erritorial ap pli catio n, effectively extend in g th eir jurisdiction to areas such as permitted in su ran ce company in vestmen ts th at are no rmally th e p ro vince of an i nsu ran ce co mp any ’s domi cil iary state regu lat or. The Company ’s in su ran ce su bsid iaries are requ ired t o fil e p eriod ic rep orts wit h th e reg ulato ry ag encies in each o f the j urisd i cti on s in wh ich th ey do bu sin ess, an d their busin ess an d accou nts are subj ect t o ex aminatio n b y such ag encies at an y time. Und er th e ru les of th e NAIC, i nsu ran ce companies are ex amined perio dically (gen erally every three to five y ears) by on e or mo re o f th e regu latory ag encies on beh alf of t he states in wh ich they d o bu sin ess. At any given time, a nu mb er of finan cial an d/or market co nd uct ex ami natio ns o f th e Co mp any ’s sub si diaries may b e o ng oing . From time to time, regu lators raise issues du ring examinatio ns o r aud i ts for the Compan y’s su bsidiaries th at cou ld , if d etermined ad versely, hav e a material adv erse impact o n the Company. To date, n o su ch in su ran ce d epartmen t ex ami nat io ns h ave prod uced an y sign ifican t ad verse find in gs regarding any o f the Compan y’s insurance company sub si diaries. Un der th e in su ran ce guaranty fu nd laws in mo st states, in su ran ce co mp anies d oing bu siness in th e state can be assessed u p to prescribed limits fo r po licyh older losses in curred b y inso lvent companies. From time to time, companies may b e asked to con tri bu te amo un ts b eyo nd p rescri bed limits. It is po ssi ble t hat t he Co mp any cou l d be assessed with respect to p ro duct lin es n ot o ffered b y th e Compan y. In add itio n, leg islat io n may b e int ro du ced in v ariou s states with respect to g uaran ty fun d assessment laws related to insurance p ro du cts, in clu ding lon g-term care insu ran ce and o th er speci alt y p rod ucts, t hat in creases th e cost o f fu tu re assessments o r alters fu tu re premi um tax o ffsets received i n co nn ection with gu aran ty fun d assessments. Th e Compan y can no t predi ct t he amo un t, n atu re o r timin g of an y futu re assessmen ts o r legislation , any of which co uld h ave a material an d ad verse impact on th e Co mp any ’s finan cial co nd iti on or resu lts o f o perati on s. In ad dition, man y states, incl ud in g t he st ates i n which t he C ompany ’s insu ran ce su bsid iaries are domi cil ed , hav e en acted legislation or ad op ted regul ati on s regarding insu ran ce ho l ding compan y systems. Th ese laws req uire reg istration o f and perio dic repo rti ng by insurance co mp ani es d omici led withi n th e ju risdictio n which con trol or are co ntrolled b y o th er corpo ratio ns o r p erso ns so as to con stitut e an insurance ho ld in g compan y sy stem. These laws also affect t he acq uisition o f con trol of insu ran ce compan ies as well as transact io ns between insurance co mp anies an d compan ies con trollin g th em. Mo st states, in clu ding Tenn essee, wh ere PLICO is d omiciled , requ ire admin istrative app ro val of the acqu i sition o f co ntro l o f an insuran ce co mp any do mi cil ed in th e state o r th e acq uisition of co ntro l o f an insuran ce h oldin g compan y who se in surance subsidiary is inco rp orated in the state. In Ten nessee, th e acq uisition of 10 % of the v otin g secu rities o f an entity is deemed to b e th e acq uisition of co ntro l fo r the p urpose o f th e in surance h olding compan y statute and req uires no t o nly th e filin g of d etai led in fo rmatio n co ncerning t he acqui ring p art ies an d th e p lan of acqu isition, bu t also admi nistrativ e app ro val p rior to th e acq uisition . Holding company l egi slatio n h as b een ado pted in certai n states wh ere the Compan y’s in surance su bsid iaries are do miciled, which sub jects the sub si diaries to i ncreased rep ort in g requ iremen ts. Ho ld in g co mp any leg islatio n h as also b een proposed in ad ditional states, which, if ad op ted , will sub ject any do mi cil ed su bsidiaries to addi tion al repo rtin g an d su pervision req uirements. The stat es i n wh ich the Compan y’s in su ran ce sub sidiaries are do miciled also imp ose certain restrictio ns on the sub sidiaries’ ab ility to p ay d ivi dends to th e Co mp any. These restri ction s are based in part o n the prior year’s statutory inco me and su rp lu s. In gen eral, d iv i dend s u p t o sp ecified levels are co nsid ered ord in ary and may be paid with ou t p rior ap prov al. Divid en ds in larger amo un t s are con sidered ex traordin ary and are su bject to affirmative prio r ap proval by th e insu ran ce commission er of the st ate o f domicile. The maximu m amoun t th at wo uld q ualify as o rd in ary d i vidends to the Compan y by its in surance su bsid iaries in 2 01 9 is ap prox imately, in th e agg regate, $4 34 .0 millio n. No assurance can b e given th at more stri ng ent restrictio ns will no t be ad op ted from t ime to time b y states in wh ich the Co mp any ’s insurance sub sidi ari es are d omici led; such restriction s co uld hav e the effect, un der certain circu mstan ces, o f sign ifi can tly redu cin g divid en ds o r o th er amo un ts p ayab le to th e Co mp an y b y su ch subsidiaries witho ut prio r app rov al by state regu latory au thorities. 12 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents St ate insu ran ce reg ulato rs and the NAIC reg ularly re-examine ex isting laws and regu latio ns app licable to insurance compan ies and th eir p ro du cts. Ch ang es in th ese laws and reg ulations, or i n interpretatio ns th ereo f, are o ften made fo r th e ben efit of the co nsumer an d may lead to ad ditio nal exp ense fo r th e in surer. Fu rthermo re, some NAIC p ron ou ncemen ts, p arti cu larl y as they affect accou nti ng issues, take effect automaticall y in v ariou s states witho ut affirmative actio n b y tho se states. The NAIC is co nsid ering rev i sio ns to the Suit ab ility i n Ann uity Transact io ns Mo del Regu latio n whi ch , if ad op t ed b y regu lators, co uld impo se a stricter stand ard o f care u po n in su rers wh o sell ann uities. Likewise, sev eral stat es are co nsid ering o r h ave ado pted leg islatio n or reg ulato ry measu res t hat wo uld implement n ew req uirements an d stan dards ap pli cab le to th e sale of an nu ities and , in so me cases, life in su rance prod ucts. Th e NAIC an d several states, in clu ding Con necticut, Nevad a, New Jersey, and New Yo rk h av e passed laws or p ro po sed regu lation s req uirin g insurers, investment ad visers, brok er-dealers, an d/or ag en t s to d isclose co nflicts o f interest to clien ts or t o meet stand ard s that th eir advi ce b e i n the cu stomer’s b est in terest. These stand ard s v ary wid ely in scop e, ap plicab ility, an d timin g o f imp lementation . The ado ptio n an d enactmen t of these or any revised stan dards as law o r regu latio n co uld h ave a material ad verse effect u po n the man ner in which t he Compan y’s prod ucts are sol d and impact th e ov erall market fo r such p rod ucts. Fed eral Reg ula tion At th e fed eral lev el, the execu tive b ran ch o r federal agen cies may issu e orders or take oth er action with resp ect to fin ancial services and life in surance matters, and bil ls are ro utin ely in tro du ced in bo th chambers of the United States Co ng ress wh ich cou ld affect t he Compan y’s b usiness. In th e past, Co ng ress h as con si dered legislati on th at wo uld impact insu ran ce companies in nu merou s ways, such as p rov id in g fo r an o ptio nal fed eral charter o r a fed eral presence for in su ran ce, preemptin g state l aw in cert ain resp ects reg ardin g the regu lati on of rein surance, increasin g federal o versigh t in areas such as con su mer protecti on and so lv ency reg ulation, settin g tax rat es, and o th er matters. The Co mp any cann ot p redict whet her or in wh at fo rm legislatio n will be en acted and , if so, the imp act of su ch l eg islatio n o n the Compan y. The Co mp any is also sub ject to vario us co nd itio ns an d req uiremen ts o f t he Patient Protection an d Affo rd able Care Act o f 20 10 (the "Healt hcare Act"). Th e Healthcare Act makes si gn ifican t chang es to the reg ulation of h ealth in su ran ce and may affect th e Co mp an y in vario us ways, includ in g by po tentially t reatin g small b lo cks o f b usin ess th e Co mp any h as offered o r acqu ired o ver the y ears as health in surance, as well as b y p otentially affecting th e benefit p lan s t he Compan y spo nso rs fo r emplo yees o r retirees and th eir d ep end ents an d the Co mp any ’s exp enses and tax liabilities related to the p ro visi on of such b enefit s. In add itio n, th e Co mp an y may b e su bject to regu latio ns, gu idance or d etermi nat io ns eman ati ng fro m th e v ariou s regul ato ry auth orities au thorized un der th e Health care Act, al l o f which co uld h ave a si gn ifican t imp act on th e Comp any . The Do dd -Fran k Wall Street Refo rm and Co nsu mer Pro tectio n Act (“th e Dod d-Frank Act”) made sweep in g chang es to th e reg ulation o f finan cial serv ices entiti es, p ro du cts an d markets. The Dod d-Frank Act directed exist in g and n ewly -created g ov ern ment agencies and b od ies to p erform st ud ies and promulgate a mu ltitu de o f regu l ati on s i mp lemen ting the law, a p ro cess that h as su bstantially ad vanced but is no t yet complete. Altho ug h th e curren t presid ential ad ministratio n has ind icated a d esi re to revise or reverse some o f its p ro vision s, th e fate of th ese p ro po sals is u nclear, and we can no t p red ict with certainty ho w the Dodd -Fran k Act will co ntin ue to affect th e fin an cial mark ets gen erally, o r impact ou r bu siness, ratin gs, results of o peration s, fin ancial co nd ition , or liqu id ity . Amon g other thing s, the Dodd-Frank Act i mposed a co mp reh en sive new regu lat ory reg ime on the ov er-th e-co un ter (“OTC”) d erivativ es mark etp lace an d granted new joint regu l atory authority to the Un ited States Secu rities an d Ex ch ang e Commissio n (the “SEC”) and the U.S. Commo dit y Fu tu res Trad ing Co mmissio n (“CFTC ”) o ver OTC deriv atives. In co llabo ratio n with U.S. federal ban king regu lators, the CFTC has ad opt ed regu lation s wh ich categ orize th e Co mp any as a “fin ancial end -u ser” which is thereb y requ ired to post and co llect marg in in a v ariety of d erivatives t ransaction s. Reco mmendati on s and reports fro m entiti es created u nd er th e Do dd -Fran k Act, su ch as th e Federal Insu ran ce Office (“FIO”) an d the Finan cial Stab ility Ov ersight Co un cil (“FSOC”), co uld also affect t he mann er in which in su ran ce and reinsu ran ce are regu lated i n th e U.S. an d, th ereb y, the Compan y’s bu siness. Th e Do dd -Fran k Act also created t he Consu mer Fin an cial Pro tectio n Bu reau (“CFPB”), an ind epen den t di vision of the Dep artment o f Treasu ry with jurisdiction o ver cred it, sav in gs, payment, and o th er co nsumer fin ancial p ro du cts and services, oth er than inv estment pro du cts alread y reg ulated by the SEC o r the CFTC. Certain o f th e Co mp any ’s su bsidiaries sell prod uct s th at may b e reg ulated by th e CFPB, an d the Co mp any is un abl e to predict at th is time the way s in which the CFPB’s regul ati on s migh t d irectly o r indi rectly affect th e Co mp any or its su bsid iaries. Sales o f li fe insu ran ce p oli cies and ann uity con tracts o ffered by th e Co mp any are sub j ect to reg ulation s relatin g t o sales practi ces ad op ted by a variety o f federal an d state reg ulato ry au th orities. Certain ann uities and life insu ran ce po licies such as v ariable ann uities and v ariable un iv ersal life i nsu ran ce are reg ulated un der th e federal secu rities l aws ad ministered by th e SEC. On April 18 , 20 18 , th e SEC v oted to pro po se ru lemaki ng s and in terpretatio ns relating to t he standard o f con du ct ap plicab le to b ro ker-d ealers, inv estment ad visers, and their rep resen tativ es wh en making certain recommen datio ns t o retail cu stomers. Sp ecifically, un der the pro po sed reg ulation s, a b ro ker-d ealer wo uld be req uired to act in t he best in terest of a retail custo mer wh en recommen ding an y secu rities transactio n or in vestmen t strategy in vo lv in g securi ties to a retail customer. Th e SEC also prop osed an in terpretatio n reaffirming an d, i n so me cases, clarifying its v iews o f th e fid uciary d uty th at investment ad visers o we to their client s. An other SEC p ro po sal wou ld requ ire bro ker-d ealers and in vestmen t ad visers to p ro vide each customer with a summary o f the natu re of th e custo mer’s relatio nsh ip with th e in vestmen t profession al, as well as a restriction on the use o f th e terms “ad viser” an d “ad viso r” by brok er-dealers. The commen t perio d on th e p ro po sals closed on Au gu st 7 , 2 01 8. Th e SEC h as in dicated that it will issu e a final versio n o f the regu latio ns an d the interp retation before th e en d o f th e third q uarter 2 019. In ad dit io n, bro ker-d ealers, in surance agen cies an d o th er fin ancial insti tu tion s sell the Compan y’s an nu ities to emp lo yee ben efit p lan s gov erned by prov isio ns of the Employ ee Retirement Income Secu rity Act (“ERISA”) an d Indi vidu al Retiremen t Acco un ts that are g ov ern ed by similar p ro vision s u nd er th e Internal Rev enue Co de (th e “Co de”). Co nseq uen tly, o ur acti vities and 13 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th ose o f t he firms t hat sell th e Co mp an y’s p rod ucts are sub j ect to restrictio ns that requi re ERISA fid uci ari es to p erform their d uties solely in the interests o f ERISA p lan p articipan ts and b eneficiaries, and th at proh ib it ERISA fid uciaries fro m causing a cov ered plan or retirement account to engage in certain proh ib ited tran saction s absent an exemptio n. There remains signi ficant u ncertainty su rro un ding th e final form that th ese regu lations may take. Our cu rrent distribu t ors may co ntinue to mov e fo rward with their plans to limit the nu mb er o f prod ucts th ey o ffer, i ncl ud in g th e t yp es o f prod ucts o ffered b y th e Compan y. The Comp any may find it necessary to ch an ge sales representative and/or brok er co mp ensatio n, to limit the assistance o r ad vice it can p ro vide to o wners of the Compan y’s an nu i ties, to replace o r eng age add itio nal d istributo rs, or otherwise change th e man ner in which i t desig ns, su pervises, an d su pp orts sales of its an nu i ties an d, where ap pli cab le, life in su ran ce p ro du cts. In additio n, the Compan y co ntin ues to in cur expen ses in co nn ecti on wit h initial an d o ng oing complian ce ob ligatio ns with resp ect to su ch ru les, and i n th e agg reg ate th ese expenses may b e sig nificant. An y of the fo reg oing regu latory, legisl ative, o r j ud icial measures or the reaction to such act iv ity b y con sumers o r o th er members o f the insu ran ce ind ustry cou ld hav e a material adv erse imp act on our abilit y to sell ann uities and other prod uct s, to retain in -force bu sin ess, an d on ou r finan cial co nd ition or resu lts of o peration s. Certain l ife insurance policies, con tracts, and ann uities offered by th e Compan y are su bject to reg ulation u nd er the fed eral secu rities laws ad ministered by t he SEC. The federal secu rities laws co ntain reg ulato ry restriction s and crimin al, admini strativ e, an d priv ate remed ial provi sio ns. From time to time, th e SEC and th e Fin ancial Ind ustry Regu latory Au th ori ty (“FINRA”) examine o r inv estig ate th e activi ties of brok er-dealers an d i nv estment ad visers, in clu ding the C ompany ’s affiliated brok er-dealers and in vestmen t adv isers. These examin ation s or inv estig ati on s o ften focus o n the activ iti es o f the registered rep resen tativ es and reg istered in vestmen t ad visers do in g b usin ess th ro ugh such en tit ies an d the entities’ su pervision of th ose p erson s. The USA PATRIOT Act of 2 00 1 in clu des an ti-mo ney lau nd ering an d financial transparen cy laws as well as v arious reg ulation s ap plicab le to brok er- dealers an d o th er fi nancial serv ices co mp ani es, in clu ding insu ran ce companies. Fin ancial institu tio ns are req uired to co llect info rmation reg ard in g th e id ent ity of their customers, watch for and repo rt susp i cious transactio ns, respo nd to req uests fo r in fo rmation b y reg ulato ry au th ori ties an d law en fo rcemen t ag encies and share informatio n with other fi nancial institu tion s. As a resu lt, th e Co mp any is requ ired to maintai n certain in ternal co mp liance practices, procedu res, an d co ntro ls. Cyb er Security Reg ulati on In resp on se t o the g ro win g threat o f cy ber attacks in th e in surance ind ustry, certain jurisdictions h ave b egun to co nsider new cy bersecurity measures, in clu ding th e ado ptio n o f cy bersecurity regu lations th at, amon g o th er thing s, wou ld req uire in surance compan ies to estab lish and main t ain a cy bersecurity prog ram and implement and maintai n cyb ersecuri ty p olicies and p ro ced ures. On Octo ber 2 4, 20 17 , the NAIC ad op ted its In surance Data Security M od el Law (the “NAIC Mo del Law”), which i s in ten ded to serv e as mod el legisl ati on fo r states to en act in order to go vern cybersecu rity and data protection practi ces o f in surers, in surance agen ts, an d o th er licen sed entities reg istered un der state i nsu ran ce laws. To date, So uth Carol in a, Michigan , an d Oh io hav e ad op ted cy bersecurity reg ulation s that are based , at least in p art, on the NAIC’s Mo del Law, an d several o th er states h av e p en din g o r are co nsiderin g ado ptin g regul ati on s based on th e NAIC Mo del Law. Add iti on ally, the New York Dep artmen t o f Fin anci al Services (“DFS”) issued regul ation s go verning cy bersecurity req uirements for fi nancial serv ices compan ies, wh ich b ecame effective in March 2 01 7. The DFS reg ulation s requ ire insurance co mp an ies, amon g o th ers, li cen sed in New York to assess th eir sp ecific cyb er risk pro files an d d esig n cy bersecurity p ro grams to ad dress su ch risks, as well as file an nually with DFS a p ro gram complian ce certification pertaining to th eir co mp liance with DFS cyb ersecu rity req uiremen ts. The Company con tinu es to mo nito r wh eth er the o th er states in wh ich it con du cts b usin ess, as well as federal g ov ern men tal ag encies, ado pt data secu rity laws. The Compan y has imp l emented informatio n secu rity po licies that are desig ned to ad dress the securi ty of th e Co mp any’s in fo rmation asset s, wh ich in clu de p erson all y id en tifiab le in fo rmation (“PII”) and p ro tected health in format io n (“PHI”), as well as oth er p rop rietary an d con fiden tial in formatio n ab ou t th e Compan y, its emp lo yees, custo mers, ag en ts, an d bu siness partn ers. Add ition ally, the Co mp an y h as an information risk management commi ttee that, amon g other thing s, reviews emerg in g risks an d mon ito rs reg ulato ry requ iremen ts and ind ustry stan dards relatin g to t he secu rity of the Co mp any ’s in fo rmation assets, mo nito rs t he Co mp any ’s cybersecu rity in itiatives, an d app ro ves th e Co mpan y’s cyb er in cid ent respo nse plans. Th is committee meets regul arl y, and th e Board of Directo rs receives rep orts reg ard in g cy bersecuri ty matters. Furthermore, as p art o f th e Compan y’s in fo rmation secu rity p ro gram, th e Co mp any has incl ud ed securi ty featu res in its sy stems th at are in ten ded to protect t he pri vacy an d integrity o f th e Co mp any ’s in fo rmation assets, in clu ding PII and PHI. Notwithstand in g these effort s, cy ber threats an d related legal an d regu lat ory stand ards ap plicab le to th e insurance in du st ry are rapidly ev olvin g, and the Co mp any ’s an d the Co mp any ’s b usin ess partn ers’ and service p ro viders’ systems may con tinu e to be vu ln erab le to secu rity breach es, viru ses, prog ramming erro rs, an d oth er si mi lar d isru ptiv e prob lems o r inciden ts. An y su ch in cid ent co uld h ave a material ad verse effect on the Compan y’s op eratio ns, repu tatio n, custo mer relation ship s, and financial co nd ition. Other Reg ulatio n Other ty pes of regul ati on that co uld affect the Comp any an d its su bsid iaries includ e insurance co mp any inv estment laws and regu lati on s, state statutory acco un tin g p ractices, tax l aws, antitru st laws, minimu m solv ency req uirements, en terprise risk req uirements, state securities laws, fed eral p rivacy laws, techn olog y an d data reg ulatio ns, in surable interest laws, federal an ti-money lau nd ering an d an ti-terro rism laws, emp lo yment and immig ratio n laws and , because the Compan y o wns an d o perates real pro perty, state, fed eral, and lo cal env ironmen tal laws. Th e Comp any may also be sub ject to regul ation s in fluen ced by or related to in ternatio nal reg ulato ry autho rities o r initiatives. The Compan y’s sol e sto ckh older, Dai-ich i Life, is su bject to regu latio n b y the Japanese Finan cial Serv ices Autho rit y (“JFSA”). Und er ap plicab le laws an d reg ulation s, Dai-ichi Life is required to pro vide no tice to o r ob tain th e co nsen t of th e JFSA p rior to taking certain action s o r en gag in g in cert ain transactio ns, either directly or ind irectly th ro ug h its su bsidiaries, includ in g th e Co mp any and its con solidat ed su bsidiaries. Domestically, the NAIC may be influ enced by 14 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e in itiativ es o r regu latory stru ctures o r schemes of int ern ati on al regu latory b od i es, and th ose in itiativ es o r regu l atory st ru ctu res o r schemes may no t translate readily into the regu latory structures o r schemes of th e leg al system (incl ud in g the interpretat io n o r ap pli catio n of standards by j uries) u nd er wh ich U.S. insurers mu st op erate. Chan ges in laws an d reg ulations or in int erp ret ati on s thereof, o r to in itiativ es o r regulat ory stru ctures or sch emes of internatio nal regul ato ry bo dies, wh i ch are appl icable to th e Comp any cou ld hav e a sig nificant ad verse impact on th e Co mp any . Ad ditio nal issues related to regu latio n o f th e Co mp any and its insu ran ce sub sidiaries are d iscussed in Item 1A, Risk Factors, and in It em 7 , Man ag emen t’s Discussio n and Ana lysis o f Fina ncial Con dition an d Results o f Op erati on s, in clu ded herein. Employ ees As of December 3 1, 2 01 8, the Co mp an y had ap prox i mately 2 ,95 7 employ ees, of which 2 ,94 8 were fu ll-time and 9 were part-time empl oy ees. In clu ded in the total were ap prox imatel y 1,5 68 emp lo yees in Birmin gh am, Alab ama, of which 1 ,562 were ful l-time and 6 were p art-time emp lo yees. None of th e Compan y’s emp lo yees are rep resen ted b y a u nio n and the Co mp any is no t a p arty to any co llective bargaini ng ag reemen ts. Th e Compan y believ es its rel ati on s wi th its emp lo yees are sati sfactory. M ost employ ees are cov ered by co ntribut ory majo r med ical, den tal, v isio n, g rou p life, an d lo ng -term d isability in surance p lan s. The co st of t hese b enefits t o the Co mp an y in 20 18 was ap proxi mately $17.8 mill io n. In ad dition , su bstantiall y al l o f the employ ees may particip ate in a d efined b en efit pen sio n plan an d 4 01 (k) plan. The Co mp an y mat ch es employ ee con trib utions t o its 40 1(k ) p lan . See No te 1 6, Emp lo yee Benefit Pla ns to ou r con so lidated fin ancial statemen t s fo r ad dition al info rmati on . Intellectual Property The Compan y relies o n a combination of in tellectual prop erty laws, con fid en tiality p ro cedu res an d p olicies, and con t ractu al prov isions to protect its brand and its in tellect ual prop erty, which in clu des co py right s, t rad emark s, p aten ts, do main n ames, an d trade secrets. The success o f th e Compan y’s bu sin ess depen ds on its con tinued ability to use and protect its intellectu al prop erty, i nclud in g its trad emark an d serv ice mark p ortfo lio wh i ch is co mp osed o f bo th Un ited States registered and commo n law trad emarks an d serv ice mark s, includ in g th e Compan y’s Protective n ame an d lo go . The Co mp any ’s intellectu al prop erty assets are valuab le to the Company in maintain in g its b ran d an d marketin g its prod ucts; thu s, t he Company maintain s and protects its in tellect ual prop erty assets fro m infring emen t an d dilutio n. Av ailable Info rmatio n The Co mp any files rep orts wi th the SEC, in clu ding Ann ual Rep orts o n Fo rm 1 0-K, Qu arterly Repo rts on Form 10-Q, Curren t Repo rts on Form 8 -K, an d o th er rep ort s as requ ired. Th e Co mp any is an electro nic filer an d the SEC main tains an internet site at http ://www.sec.g ov that con tains the Compan y’s an nu al, q uarterly , and cu rrent rep ort s and other in fo rmation filed elect ro nically b y the Compan y. The Compan y mak es availab le free of charge t hrou gh its website, h ttp://www.protective.co m, the Company’s An nu al Repo rts o n Form 1 0-K, Qu arterly Repo rts o n Fo rm 1 0-Q, Current Repo rts on Form 8-K, and amen dments to tho se repo rts as so on as reaso nab ly p racticab le aft er such materials are electron ically filed with or fu rn ished to th e SEC. Th e in fo rmation fo und on th e Co mp any ’s website is n ot part o f th is o r an y o th er repo rt filed with or fu rn ished to th e SEC. The C ompany wil l fu rn i sh su ch do cument s to an yo ne who requ est s such co pies in writing. Requ est s fo r cop ies sh ou ld be directed to : Financial Informati on , Protecti ve Li fe Corpo ration , P.O. Bo x 2 60 6, Bi rmin gh am, Alab ama 35 20 2, Teleph on e (2 05 ) 2 68 -3 91 2, Fax (20 5) 26 8-36 42 . We also mak e availab le to th e pu blic cu rrent i nformatio n, includ ing finan cial in fo rmatio n, regarding th e Compan y an d o ur affiliates on the Financial In fo rmation pag e of o ur website, www.p ro tect iv e.co m. We en cou rag e in vesto rs, th e med ia an d o th ers in terested in u s an d o ur affiliates to rev iew the in fo rmation po st ed on ou r web site. The informatio n fou nd on th e C ompany ’s web site i s no t p art of th is or any ot her repo rt filed with or fu rn ished to the SEC. The Compan y h as ad opt ed a Code o f Bu sin ess Co nd uct , wh ich applies to all directors, officers an d employ ees of th e Co mp any and its who lly o wned sub si diaries. The Co de of Bu siness Co nd uct inco rp orates a co de of eth ics that appl ies to th e p rincipal ex ecutiv e o ffi cer an d all finan cial o ffi cers of th e Co mp any and its su bsidiaries. The Co de o f C on du ct is av ailable o n th e Company ’s web site, h ttp://inv esto r.protective.co m/co rpo rat e-g ov ern an ce/co de-of- co nd uct. Item 1 A. Ri sk Fa cto rs The o perating result s o f comp anies in th e insurance ind ustry have historically b een subject to sig nificant flu ctu ation s. The facto rs which co uld affect th e Comp any ’s fu tu re results in clu de, but are no t limited to, g eneral econ omic co nd itio ns an d k no wn tren ds an d u ncertaint ies which are discussed more fu lly b elo w. Genera l Risk Fa cto rs The Compa ny is controlled by Dai-ichi Life, which has the a bility to mak e impo rta nt decisi ons affecting o ur business. As o f Feb ru ary 1, 20 15 , the date of co mp letio n of ou r merger, all of ou r commo n stock b ecame o wned b y Dai-ich i Life Insu ran ce Co mp any, Limited (n ow kn own as Dai-ichi Life Holdin gs, Inc., “Dai-ich i Life”). As th e hold er of 100 % of ou r v otin g sto ck , Dai-ich i Life is enti tled t o elect all of ou r d irecto rs, to ap prove an y actio n req uiring the ap pro val of the ho ld ers of o ur v otin g sto ck, in clu ding ad op ting amen dments to ou r certificate o f in corpo ratio n and ap provi ng merg ers or sales of substan tially all o f o ur assets, and to prevent any t ran saction that requ ires th e approv al of sto ck hol ders. Dai-ichi Life has effectiv e con trol o ver ou r affairs, po licies an d op erations, such as th e app ointmen t o f manag ement, future issuan ces of our securities, th e pay ments o f distri bu tion s by us, if an y, in resp ect of ou r co mmon sto ck, the incu rrence of deb t b y u s, and th e en terin g into of ex t raord in ary transactio ns, an d 15 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Dai-ichi Li fe’s interests may no t in all cases b e align ed with th e in terests o f in vestors, i ncl ud in g h olders of our debt securities. Ad ditionally, o ur cred it ag reement an d ind ent ures permi t us to p ay divid en ds an d mak e other restricted p ayments to Dai-ichi Life un der certain ci rcumstances, and Dai-ichi Life may have an in terest in o ur do in g so. Dai-ich i Life h as no ob lig ation to prov id e us with any ad dit io nal debt or equ ity finan cing. The Compa ny is ex po sed t o risks rela ted to natural a nd ma n-ma de disa sters and catastro phes, such as d isea ses, epidemics, p andemics, ma licio us a cts, cyb er atta cks, terro rist a cts, a nd clima te change, which co uld a dversely affect the Co mp any’s o pera tio ns a nd results. Wh ile the Co mp any h as o btain ed in su ran ce, implemented risk management an d co nting ency plans, and taken p rev en t iv e measu res and ot her precau tion s, no p redict io ns of specific scenario s can b e made an d such measures may no t adeq uately predict the imp act on the Company from su ch events. A natural or man-mad e disaster or catastro ph e, includ in g a severe weather or g eolog ical ev ent such as a sto rm, tornad o, fire, flo od , earth qu ake, d i sease, ep idemic, pand emic, malicio us act, cy ber attack , terrorist act, o r th e effects o f climate chan ge, cou ld cause the Co mp any ’s work fo rce to be un able to eng age in op eratio ns at on e o r more of its facilities o r resu lt in sho rt- or lo ng -term in terru ption s in th e C ompany ’s bu siness o peration s, any of whi ch cou ld be material to th e Co mp an y’s o perating resul ts for a p arti cu lar perio d. Certain of th ese events cou ld also adv ersely affect the mortality, mo rb id ity, or other ex perien ce of th e Co mp any o r it s reinsurers an d hav e a sig nificant neg ati ve impact on th e Co mp any. In add itio n, claims arisi ng from th e o ccurren ce o f such ev ents or co nd ition s cou l d h ave a material adverse effect on th e Compan y’s fi nancial co nd ition and results of operatio ns. Su ch ev ents o r co nd iti on s cou ld also have an ad verse effect o n lapses and surren ders o f ex isting po licies, as wel l as sales o f n ew p oli cies. In ad dition , su ch even ts or con dition s co uld result in a decrease o r halt in economi c activ ity in large g eog raphi c areas, adv ersely affectin g th e Co mp any ’s bu siness withi n su ch g eog rap hic areas an d/or th e gen eral eco nomic cli mate. Such ev ents o r con ditio ns co uld also resu lt in add itio nal reg ulation or restrictio ns on th e Co mp any in th e condu ct of its b usin ess. Th e po ssi ble macro econ omic effects o f such ev ent s o r con dition s co uld also ad versely affect the Co mp an y’s asset p ortfolio, as well as many o ther aspects o f the Co mp any ’s b usin ess, fin ancial con dition, and resu lts o f o peration s. A disruptio n o r cyber a ttack affecting the electro nic, co mmunica tion and informa tion technolo gy systems o r other technolog i es of the Co mp any or tho se on whom the Co mp any relies could ad versel y a ffect the Compa ny’s b usiness, fina ncial condition, and results o f o peratio ns. In co nd uctin g its bu sin ess, t he Company relies ex ten si vely on vario us electron ic systems, includ in g co mp uter sy st ems, networks, d ata p ro cessing an d ad ministrativ e systems, and commu nication systems. The Compan y’s bu sin ess p artners, cou nterp arties, serv ice p ro viders, and distribut ors also rely on such systems, as d o securi ties ex chan ges and finan cial mark ets that are impo rtant to th e Co mp any ’s ability to con du ct its b usiness. These sy stems or th eir fu nct io nality co uld b e disabled, d isru pted, d amaged , or destroy ed b y intentio nal or un i ntent io nal acts o r ev ents su ch as cy ber attack s, v iruses, sabo tag e, un au tho rized tamperin g, p hy sical or electroni c b reak -ins o r o ther secu rit y breaches, acts of war or terro rism, h uman erro r, system failures, failu res of po wer or water sup ply, o r th e loss or malfun ction o f other u tilities or serv ices. They may also be disabled, disrup ted, damaged, or d estro yed by n atu ral ev ent s such as sto rms, tornad oes, fires, flo od s o r earth qu akes. Disrup tion , damage, or d estructio n of any of these sy stems co uld cau se t he Compan y o r others o n whom th e Co mp any relies to b e u nab le to con du ct b usin ess for an ex ten ded perio d of time o r co uld resul t in sign ifi can t exp end itures to rep lace, repai r, or rein st ate fu nct io nality, which co uld materially adv ersely imp act the Company’s bu si ness an d its financial co nd ition an d results of op eratio ns. Wh ile th e Co mp any and ot hers on whom it dep end s try to id ent ify threats an d imp lement measures t o p ro tect th eir systems, such protective measu res may no t be sufficien t. Add itio nally, we may no t become aware o f so ph isticated cy ber attack s for so me time after they occu r, which co uld increase th e Co mp any ’s exp osure. We may h ave t o incu r sign i fican t co sts t o add ress or remediate interrup tions, threats, an d v ulnerabilities in o ur i nformatio n an d techn olog y systems and to comply with exist in g an d future reg ulato ry requ irements related thereto . These risks are h eig htened as th e frequ ency and sop histicat io n o f cyber attack s in crease. The Compan y has relationships with ven do rs, d istrib utors, and other thi rd parties th at p ro vide o peration al o r informatio n techn olog y services to us. Althoug h th e Co mp any co nd ucts du e d iligen ce, neg oti ates con tractu al pro visio ns, an d, i n man y cases, con du cts p eriod ic rev iews o f su ch thi rd p arti es to co nfi rm complian ce with o ur informatio n security stand ard s, the failu re of su ch th ird part ies’ comp uter sy stems an d/or th eir d isaster reco very plans fo r any reaso n mig ht cau se sign ifican t in terru ptions i n o ur o peration s. Wh ile we maintain cy ber liabil ity in surance that p ro vides bo th third-party liab ility and first party liability cov erag es, our i nsu ran ce may n ot be su ffi cient to pro tect u s against al l losses. Co nfidenti al i nformation ma inta i ned in the systems o f the Compa ny o r o ther p arties upo n which the Co mp any relies could be compro mised or mi sap prop ria ted a s a result o f security brea ches o r o ther rela ted la pses o r incidents, da ma ging the Co mp any’s business and reputat io n and a dversely affecting its fina ncial co nd ition and results o f o pera tio ns. In th e cou rse of co nd uctin g its b usin ess, the Co mp an y retain s co nfid ential informatio n, in clu ding informatio n about its cu stomers and prop riet ary bu sin ess informat io n. Th e Compan y retai ns con fid en t ial informati on in v ariou s electro nic sy stems, i ncl ud in g compu ter systems, n etwo rk s, data p ro cessing an d admini strative sy stems, and co mmun icat io n sy stems. The Company maint ain s physical, admin istrative, and techn ical safegu ard s to p ro t ect th e in fo rmation and it relies o n co mmercial techno lo gies to maintain th e security o f it s systems and to mai ntain th e secu rity o f its transmissio n o f such in fo rmation to other p arti es, in cludi ng its bu siness p artners, cou nterp arties an d service p ro viders. Th e Co mp an y’s b usin ess partners, co un terparties and serv ice p ro viders likewise maintain con fid en t ial in formatio n, includ ing, in so me cases, customer in fo rmation , o n b ehalf of the Co mp any. An intentio nal o r un in ten tion al b reach o r co mp ro mise of th e security measures of t he Compan y o r su ch o th er p arties co uld result in th e disclo su re, misapprop riation , misuse, alt eratio n, o r destructio n o f th e co nfid ential informatio n retain ed b y or o n behalf of the Co mp any, o r th e inab ility of the Co mp any to con du ct b usin ess fo r an in det ermin ate amoun t of time. An y of th ese events o r circumstances cou ld damag e th e Co mp any ’s bu sin ess and adv ersely affect its finan cial co nd ition an d resu lts o f o perati on s by , amon g o ther thin gs, causin g h arm to th e Co mp any ’s b usin ess op eratio ns, rep utation and cu stomers, d eterring customers an d o th ers 16 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents from d oing b usin ess wit h th e Compan y, su bjecting the Compan y to sig nificant regu latory, civil, and crimin al l iab ility, an d req uiring th e Compan y to in cur sig nificant leg al an d o th er exp enses. Desp ite o ur efforts to ensu re th e integri ty o f ou r sy st ems, it is po ssible that we may no t b e able to an ticip ate and imp lemen t effectiv e preven tativ e o r detectiv e measu res agai nst secu rity b reaches of all typ es becau se the tech niques u sed to attack techn olog ies and data sy stems ch ang e frequ ently o r are no t recog nized u ntil lau nch ed and because cy ber attack s can ori ginate from a wide variety o f so urces or parties. Those part ies may also attemp t to frau du len tly in du ce emp lo yees, customers, o r other u sers o f ou r sy st em, th ro ug h ph ishing , p ho ne calls, o r o th er efforts, to delib erately o r i nadv ertently disclo se sensit iv e in fo rmation in order to gain access t o o ur dat a o r that of ou r cu st omers o r clien ts. Ad ditio nally, cy ber threats and relat ed legal an d reg ulato ry stand ard s ap pli cab le to o ur b usin ess are rapidly evo lv ing and may sub ject the Company to hei gh ten ed leg al stand ard s, n ew theo ries of liability, an d material claims an d p enalties th at we cann ot curren tly p red ict or anticipate. As cyb er threats an d ap pli cab le legal stan dards con tinu e to evo lv e, th e Comp any may be requ ired to ex pen d sig nificant add itio nal resou rces to co ntin ue to mod i fy or enh ance ou r protecti ve measures an d compu ter systems, and to in vesti gate and remediat e any information security v ulnerabilities. If the Company ex perien ces cy ber att ack s or oth er data security ev ents or other tech no lo gical failures or lap ses, includ in g u nau th orized access to, loss of, or acqu isit io n o f informatio n co llected or main tained b y the Co mp any o r its b usiness partn ers or ven do rs, t he Co mp any may be su bject to reg ulato ry inq uiries or proceedin gs, litig ation o r reput ati on al damage, or b e requ ired to pay claims, fines, o r p en alti es. Wh ile the Compan y has ex perien ced cy ber-ev ents and ot her d ata securi ty ev ents in th e past, an d to date the Co mpan y h as no t suffered an y material harm or l oss rel ating to such attacks, ev ents, failu res or lap ses at the Co mp any or th ird p arties, th ere can b e n o assurance th at the Compan y will no t suffer such harm or l osses in th e fu tu re. The Co mp any’s results a nd financia l condition may b e nega tively a ffected should a ctual exp eri ence differ fro m ma na gement’s mo dels, a ssump tions, or estima tes. In the co nd uct o f b usiness, the Co mp any makes certain assu mp tio ns and u tilizes certain in t ernal mod els regarding mortality, morbidity, persist en cy, ex pen ses, in terest rates, equ ity mark ets, tax, bu si ness mix , casu alty, co ntin gen t liab ilities, investment perfo rmance, and o th er facto rs approp riate to th e type of bu siness it exp ects to exp erience in fu tu re p eriod s. These assumpt io ns and mo dels are used to estimat e th e amo un ts of d eferred po licy acq uisition co sts, po licy liab ilities and accru als, fu ture earn in gs, an d vario us compo nents of the Compan y’s balance sh eet. Th ese assump t io ns and mo dels are also u sed in the op eratio n o f th e Co mp any ’s b usiness in mak i ng deci sio ns cru cial to t he su ccess o f th e Co mp any, includ in g th e pricing o f acq uisi tion s an d p ro du cts. The Co mp any ’s actual exp erience, as wel l as chan ges in estimates, i s used to prep are the Compan y’s fin anci al statemen ts. To the extent th e Co mp any ’s actual ex perien ce an d ch ang es in estimates differ from orig in al estimates, the Compan y’s fin anci al con ditio n may be adversely affected. Mo rtality, morbidity, an d casu alty assumptions in corpo rate un derly i ng assumption s abo ut man y facto rs. Su ch facto rs may in clu de, for examp le, h ow a p ro du ct is distribu t ed , fo r wh at pu rpo se th e p ro duct is purchased, the mix of cu stomers p urchasing th e prod ucts, persi sten cy and lap ses, future prog ress in th e field s o f heal th and med i cine, an d th e pro jected level of u sed vehicl e values. Actu al mort ali ty, morbidit y, and /o r casual ty exp erience may d i ffer from ex pectation s deriv ed fro m the Compan y’s mod els. In ad dition , con tinu ed activity in the viatical, strang er-owned , and /o r life settlement in du st ry could cau se th e Co mp any ’s lev el o f lapses to differ from it s assu mp tion s abo ut premium persisten cy an d lapses, wh ich co uld negatively i mp act the Compan y’s perfo rman ce. Ad ditio nally, th e calculatio ns the Compan y u ses t o estimate various components o f its balan ce sheet an d stat ements o f inco me are n ecessarily co mp lex an d i nv olve anal yzing an d in terpreting large qu antities o f data. The Co mp any cu rrently emplo ys v ari ou s techn iq ues for such calculation s and rel ies, i n certain in stan ces, o n third parties to mak e o r assist in making such calculation s. From time t o t ime it d evel op s and imp l ements mo re so ph isticated ad ministrativ e systems an d proced ures cap abl e o f facilitatin g the calculatio n of more p recise estimates. The systems an d proced ures th at th e Co mp any develop s and th e Co mpan y’s reliance up on th ird p arties cou l d resu l t in errors in th e calculation s th at imp act ou r fin ancial statemen ts or affect ou r fin ancial co nd ition . Mo dels, assu mp tion s and estimates invol ve judgmen t, an d b y their n atu re are imp recise and sub j ect to chan ges an d revisio ns ov er time. Acco rd in gly, th e Compan y’s resu lts may b e affected, p ositiv ely or n egat iv ely, fro m time to time, by errors in th e design , imp lemen tation, or use of i ts models, actual resu lts di ffering from assu mp tio ns, by ch ang es in estimates, and b y chan ges resu l ting from i mp lemen ting mo re sop histicated ad ministrative systems an d p ro cedu res that facilitate th e calculation of mo re p reci se estimates. The Compa ny may no t real ize its anticip ated financia l results fro m its a cquisitio ns strategy. The Co mp any ’s Acq uisition s segment focu ses o n th e acqui siti on s o f compan ies and b usiness o peration s, an d th e co in su ran ce of b locks o f in su rance bu sin ess, all o f wh ich h av e increased the Compan y’s earning s. Ho wev er, th ere can be n o assuran ce th at th e Co mp any will have fu tu re sui tab le o pp ortu nit ies fo r, or su fficient cap ital av ailable to fu nd , su ch tran saction s. If ou r compet itors h ave access to capital o n mo re favo rab le terms or at a lower cost, o ur ab ility to co mp ete for acq uisition s may b e diminished . In ad dit io n, th ere can b e n o assuran ce th at th e Co mp any will be able to realize any p ro jected operating effici en cies o r ach iev e th e an ticip ated finan cial resu lts fro m su ch tran saction s. The Co mp an y may be un able to co mp let e an acq uisition tran saction . Completion o f an acq uisition tran saction may b e more costl y o r tak e l on ger th an exp ected, or may h ave a d ifferent or more co st ly financing structure th an in itially con templated . In add i tion , the Compan y may no t be able to co mp lete or manag e mu ltip le acq uisition transactio ns at the same time, or t he completion of su ch tran saction s may b e delay ed o r b e mo re co stly th an initially co ntemp lated. The Co mp any, its affil iates, o r other p arties t o th e t ran saction may be u nab le to o btain regu latory app rovals req uired to complete an acq uisition transactio n. If the 17 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Co mp any iden tifies and completes su itable acq uisiti on s, it may n ot be ab le to successfully in tegrat e the b usin ess in a timely or co st-effect iv e man ner, or ret ain k ey p erson nel and bu sin ess relation ship s n ecessary to achieve an tici pated fi nancial results. In ad ditio n, a n umber o f risk s may arise in co nn ection with bu sin esses or b lo cks of insu ran ce bu siness that th e Compan y acq uires or rein su res, in clu ding u nforeseen liabilities or asset imp airmen ts; rating ag ency reaction s; an d reg ulato ry requ iremen ts th at cou ld imp act ou r op eratio ns o r capi tal requ irements. Add ition ally, i n connection with its acq uisi tion tran sactions th at in vo lv e reinsurance, the Comp any assumes, or ot herwise b ecomes respo nsib le fo r, the obligatio ns of p olicies and oth er liabilities of o th er in surers. An y regul ato ry , legal, finan cial, or other ad verse dev elo pment affecti ng th e o t her insurer co uld al so h ave an ad verse effect on th e Company . The Compa ny may exp erience co mp etition i n i ts a cquisitio n seg ment. The Co mp an y also faces sign ifi can t competit io n in its acq uisition s segmen t , in clu ding with respect t o the acq uisitio n o f su itable target co mp an ies, bu sin ess o peration s, and block s of reinsurance bu siness. Other market p arti cipan ts may have co mp eti tive advantages, includ ing with respect to access to cap ital (whether on more fav orable terms o r at a lo wer cost), investment retu rn req uiremen ts, tax ati on , an d risk toleran ces. Assets allocated to the MONY Closed Block b enefit only the holders o f certa in p olicies; ad verse p erformance of Closed Block a ssets o r a dverse exp erience of Closed Blo ck lia bil ities may neg atively affect the Co mp any. On Octo ber 1, 2 01 3, the Compan y co mp leted the acqu isitio n of MONY Li fe Insu ran ce Co mp any (“MONY”) fro m AXA Fin ancial, Inc. M ONY was co nv erted from a mu tu al insurance compan y to a stock co rpo rat io n in acco rd ance with its Plan of Reorgan izatio n d ated Au gu st 14 , 19 98 , as amen ded . In co nn ection with i ts d emu tu alizati on , an acco un ting mech an ism k no wn as a closed block (the “Clo sed Block”) was estab lished fo r the b en efit o f po licyh olders who owned certain in dividu al insurance po licies o f MONY in fo rce as of the date of demutualizat io n. Please refer to No te 4 , MONY Clo sed Blo ck o f Business, to th e co nsolid ated finan cial statements for a mo re detailed d escripti on of th e Closed Blo ck. Assets al lo cated to t he Clo sed Blo ck i nu re so lel y to th e b enefit of th e Closed Block ’s po licyh olders and will no t revert to t he ben efit o f the Co mp any. Howev er, if th e Clo sed Block h as in su fficient fun ds to mak e gu aranteed po licy b enefit pay men ts, such pay men ts mu st be mad e fro m assets o utside th e Clo sed Blo ck. Adv erse finan cial o r in vestmen t performance of the Clo sed Blo ck , o r adv erse mo rtal ity or lapse exp erience on p olicies in the Closed Block , may requ ire MONY to p ay po licyh old er ben efits u sing assets o utside th e Closed Blo ck, which even ts co uld h ave a material adv erse i mp act on th e Co mp any ’s fin ancial condi tion o r resu lts of o peration s an d neg ativel y affect the Company ’s risk-b ased cap ital ratio s. In add ition , regu lat ory acti on s co uld requi re payment o f dividen ds to po licyh olders in a larg er amo un t th an is anticipated by the Co mp any, wh ich co uld hav e a material adverse imp act o n the Co mp any . The Compa ny is dep end ent on the p erformance o f o t hers. The Compan y’s resu lts may be affected b y the p erforman ce o f ot hers because th e Co mp any has en tered into vario us arran gements inv olving other parties. Fo r ex ample, variab le life and an nu ity depo sits are in vested in fund s man ag ed b y third p arties, certai n mod ified coinsu ran ce assets are man aged by th ird p arties, an d the Compan y en ters in t o d eri vat iv e transact io ns with vario us cou nterp arties an d cleari ng ho uses. The Compan y may rely upon th ird p arties to ad minister certain po rtio ns o f its b usin ess or bu si ness that it rein su res. An y o f t he other parties up on wh ich the Compan y d epend s may defau lt on th eir ob ligatio ns to th e Co mp any du e to bank ruptcy, in so lv ency, lack of liqu id ity, adv erse eco no mi c co nd ition s, op eratio nal failu re, frau d, o r o ther reasons. Such defau lts co uld h ave a material adv erse effect on th e Co mp any ’s fin ancial co nd itio n an d results of op erat io ns. Certain of th ese other p arties may act on behalf o f the C ompany or represen t th e Co mp any in v ariou s capaciti es. Co nseq uen tly, the Compan y may be held respo nsib le for ob ligations th at arise fro m the acts or omissio ns o f these o ther p arties. Mo st o f th e Co mp an y’s prod ucts are so ld th rou gh in depen den t third-party dist ribu tion chan nels. There can be n o assurance th at the terms of th ese rel ati on ships will remain accept ab l e to us o r the distribu to rs, as they are sub ject to chan ge as a result o f b usiness co mb in ation s, mergers, co nsolid ation , o r ch ang es in b usin ess models, co mp en satio n arrang ements, or new d istrib uti on ch ann els. If on e o r mo re k ey dist ribu to rs termin ated their relat io nsh i p with us, in creased the costs o f selling ou r p ro du cts, o r redu ced th e amou nt of sales they p ro du ce fo r us, o ur resul ts o f o peration s cou ld be adv ersely affect ed . If we are un successful in attractin g an d retain ing k ey asso ciates who co nd uct ou r b usiness, sales o f o ur prod ucts cou ld decline an d o ur resu lts of operations and finan cial co nd iti on co uld b e materially adversely affected. Because o ur prod ucts are distribu ted th ro ug h u naffiliated third-party distri bu to rs, we may n ot be able to fully mo nito r o r co ntro l the man ner of their distri bu tion d espite o ur trainin g an d co mp liance p ro grams. If o ur p ro du cts are d istrib uted by su ch firms in an i napp rop riate mann er, or to cu stomers fo r wh om th ey are un suit ab le, we may su ffer rep utation al and other h arm to o ur bu sin ess. In additio n, ou r d istrib utors may also sell o ur co mp etitors’ prod uct s. If o ur co mp etito rs o ffer p ro ducts that are more attractiv e t han ou rs, or p ay h ig her co mpen sat io n than we d o, these dist ribu to rs may con centrate their effo rts on sellin g o ur competitors’ prod ucts in stead of ours. The Compa ny’s risk ma na gement p olicies, practices, and p roced ures co uld leave i t exp osed t o unidentified o r unanticipated risk s, which co uld nega tively affect it s busi ness o r result in l osses. The Co mp any has dev elo ped risk management p olicies an d procedu res and ex pects to co ntinu e enh ancing them in the fu tu re. Nonetheless, th e Co mp any ’s p oli cies and p ro cedures to iden tify, monitor, and man age bo th in ternal an d extern al risk s may no t p red ict future ex po su res, which could b e differen t o r sign i fican t ly greater than exp ected. 18 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents These i dentified risk s may no t b e th e on ly risk s faci ng th e Co mp any. Ad dition al risks an d u ncertaint ies n ot curren tly k no wn to the Compan y, or th ose that it curren tly d eems to b e immaterial, may ad versely affect its bu sin ess, fin anci al con ditio n and /or resu lts o f o perati on s. The Compa ny’s stra teg ies for mitig ating risk s arising from its da y-to-da y op eratio ns may p rove ineffective resulting i n a material adverse effect on its results of op erations and financia l co nd itio n. The Company’s performance is high ly dep enden t o n its ab ility to manag e risks that arise from a larg e nu mb er o f i ts d ay-to -d ay b usiness acti vities, in clu ding , but no t limited to, po licy pricing , reserv in g and v aluati on , un derwriting, claims p ro cessing , pol icy admin istration an d serv icing , admini stratio n o f rei nsu ran ce, ex ecutio n o f its inv estment and hed ging strategy, fin anci al and tax repo rtin g, an d o th er activ ities, man y o f wh ich are v ery complex. The Co mp any also may rely o n th ird parties for such acti vities. Th e Compan y seek s to mo nitor and con t ro l its ex po sure to risks arising o ut of o r related to th ese activ ities th ro ug h a v ariety of in ternal con trols, man agement review processes, an d ot her mechan isms. Howev er, the o ccurren ce o f u nan ticip ated risk s, or the occurren ce of risks of a greater mag nitu de th an ex pected , includ in g th ose arising fro m a failure in p ro cesses, procedu res or systems i mplemen ted b y th e Co mp any or a failu re on t he part o f employ ees or th ird p arti es up on wh ich th e Company relies in th is regard, may hav e a material adv erse effect on th e Co mp any ’s fi nancial co nd itio n o r resu lts of operatio ns. Events tha t d amag e our reput atio n o r the reputat io n o f o ur ind ustry co uld a dversely impa ct o ur b usiness, results of opera tions, or fina ncial condition. There are even ts wh ich co uld harm o ur repu tatio n, i ncl ud in g, bu t n ot li mited to, regulat ory in vestigatio ns, ad verse media co mmen tary, legal proceeding s, an d cy ber o r other informatio n security events. Dep end in g on t he sev erity o f damage to ou r rep utation , our sal es o f new b usiness, and /o r ret en tio n of ex isting b usin ess co uld be neg atively impacted, an d our ab ility t o compete for acqu isition tran saction s or en gag e i n finan cial tran saction s may be diminish ed, all of which co uld ad versely affect ou r resu lts of op eratio ns or finan cial co nd ition . As with all fi nancial services companies, th e Co mp any ’s ability to co nduct bu si ness is dep end ent u po n co nsu mer con fiden ce in the industry and its prod uct s. Actions o f competitors and fin anci al difficu lties o f other co mp anies in t he in du stry coul d un dermine consumer con fiden ce and ad versely affect ret en tio n o f existin g b usin ess and fu tu re sales o f the Compan y’s in su ran ce an d inv estment prod ucts. The Compa ny may no t b e ab le to p rotect its intellect ua l p rop ert y a nd ma y be subject t o i nfringement cla ims. The Co mpan y relies on a combinatio n of con tractu al righ ts and cop yrig ht, trad emark , p atent, an d trad e secret laws to establish an d p rot ect its in tellect ual p ro perty. Altho ug h the Comp any u ses a b road ran ge of measu res to protect its in tellectual p ro perty righ ts, third parties may in fring e o r mi sapp ro priate its in tel lectual prop erty. The Co mp any may hav e to litig ate to enforce and protect it s cop yri gh ts, trademarks, pat en t s, trade secrets, and know- ho w or to determin e th eir sco pe, v alidity, o r en fo rceab ility, which represents a d iv ersio n o f reso urces th at may b e sign ifi can t in amo un t an d may not p ro ve successful. The lo ss of intellectu al prop erty protection o r t he in ab i lity to secure o r enfo rce the protection of the C ompany ’s in tellectual p ro perty assets cou ld have a material ad verse effect on its b usin ess and ability to compete. The Co mp any also may be su bject to costly litig ati on in the event that an other part y alleg es its o perati on s o r acti vities infrin ge u po n th at party ’s in tellect ual p ro perty righ t s. Third parties may h ave, or may eventually be issu ed, patents th at co uld b e infrin ged b y the Compan y’s p ro du cts, meth od s, processes, or serv ices. An y party th at ho ld s su ch a p atent cou ld make a claim o f infringemen t against th e Co mp any. The Compan y may also b e sub ject to claims by th ird parties fo r infring emen t of copyrig ht an d trad emark s, violation of trad e secret s, o r b reach o f license u sage righ t s. Any such cl aims an d any resu ltin g litigatio n co uld resu lt in sig nificant liabil ity for d amages. If the Compan y were fo un d to hav e in frin ged thi rd party p atent o r o th er in tellect ual prop erty rig hts, it co uld incu r sub stan tial li ab ility, and i n so me ci rcumstances coul d b e en jo i ned from prov id in g certain p ro du cts or serv ices to its custo mers or u tilizin g and b enefiti ng fro m certain meth od s, p ro cesses, cop yrig hts, trademarks, trad e secrets, or licen ses, or alternativ ely co uld b e requ ired to en ter into co stly l icensin g arran gements wi th th ird parties, all of which co uld hav e a material ad verse effect on the Co mp any ’s business, resul ts of o perati on s, and finan cial co nd iti on . Develop ments in techno l og y may imp act our busi ness. Techn olog ical d evelop men ts and u nfo reseen chan ges i n tech no lo gy may impact o ur b usin ess. Techn olog y chan ges are increasing customer cho ices ab ou t ho w to interact with companies g enerally. Evo l ving custo mer preferences may driv e a n eed to red esig n ou r prod uct s, and o ur d istrib utio n channels and cu stomer serv ice areas may need to chang e to beco me more au to mated and avail ab le at th e p lace an d time of th e custo mer’s ch oo sin g. Ad dition ally, ch anges in tech no lo gy may impact ou r op eratio nal effecti veness and cou ld h av e an ad verse effect on ou r u nit cost competiti veness. Su ch ch ang es hav e th e po t en tial to disru pt our bu sin ess mod el. Techn olog y may also have a sign ifi can t impact o n th e compan ies in wh ich we i nv est. Fo r examp le, con sumers may chan ge th eir p urchasing behav io r to favo r o nli ne sh op ping activity , whi ch may adv ersely affect the v alu e of ret ail prop erties in wh ich we inv est. Ad van cements in med i cal tech no lo gies may also i mpact ou r b usin ess. For examp le, g enetic testing and the availab ility of th at information un eq ually to con sumers an d in su rers can resu lt in anti-sel ectio n risks if d ata from gen etic test in g g iv es ou r pro spectiv e cu stomers a clearer view into their fu tu re heal th an d lo ng evity ex pectation s, all owin g them to select p ro du cts p ro tectin g them against likelih oo ds o f mo rtality or lo ng ev i ty wi th more p recision based o n informat io n th at is no t availab le to us. Also, advancemen ts in medical techno lo gies th at extend li ves may ch alleng e o ur actu ari al assu mp tion s, especially in the ann uity bu siness. 19 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Risks Rela ted to the Financia l Env i ro nment Interest ra te fluctua tions and sustained p eri od s o f lo w or hig h interest rates co uld neg atively affect the C ompa ny’s interest ea rnings and spread i ncome, o r otherwi se impa ct its b usiness. Si gn ifican t ch an ges in in terest rat es exp ose the Compan y to th e ri sk o f not earn ing an t ici pated int erest on prod ucts wi th ou t sig nificant acco un t balan ces, o r no t realizing an ticipated spread s between the in terest rate earned o n in vestmen ts an d th e cred ited i nterest rates p aid o n in -force p olicies and co ntracts th at have si gn ifican t acco un t balances. Bo th risin g and d ecli ning interest rates as well as sustain ed perio ds of lo w in terest rates cou ld n egativ ely affect th e Comp any ’s in terest earning s and spread inco me. Ad ditio nally, chan ges o r reforms to Lon do n Inter-Bank Offered Rate (“LIBOR”), or un certain ty reg ard in g the reliabil ity o r co ntinued use of LIBOR as a b ench mark interest rat e, may imp act interest rates i n th e markets in which th e Compan y co nd ucts bu sin ess. Altern ative referen ce rates, includ in g the Secured Ov ern ig ht Fun ding Rat e (“SOFR”), have been ann ou nced, and it is un clear ho w markets will respond to th ese n ew rates, the effect o f chang es o r reforms to LIBOR, o r d iscontinu ation of LIBOR. If LIBOR ceases to exist or if th e meth od s o f calcu latin g LIBOR ch ang e from cu rrent metho ds fo r an y reason , in terest rates o n certain deriv ati ves and floatin g rate securi ties we h old, securi ties we h av e issued , real estate len ding and related activ ities we con du ct i n ou r in vestmen t manag ement b usiness, and any o th er assets or l iab ilities who se value is tied to LIBOR, may be ad versely affect ed . Furth er, any un certain ty regardin g t he con tinu ed u se and reliab ility o f LIBOR as a b ench mark int erest rate co uld ad versely affect the v alue o f such instruments. Lower interest rates may also result in lo wer sales o f certain of th e Co mp an y’s li fe in su rance and ann uity prod uct s. Add itio nally, durin g periods of declinin g or lo w in terest rates, certain previou sly-issued life in su ran ce and ann uity prod ucts may be relatively more attractive inv estments to con sumers, resu ltin g in increased p remiu m p aymen ts on prod ucts with flex ib le p remiu m featu res, repayment of po l icy lo an s, and i ncreased persi sten cy, o r a h ig her percen tag e of insurance p olicies remaining in fo rce from year to year du ring a perio d wh en th e Compan y’s in vestmen ts earn lower retu rn s. Certain o f the Co mp any ’s life i nsu ran ce and ann uity p ro du cts gu aran tee a mini mu m credited i nterest rate, an d the Comp any co uld b ecome un able t o earn its sp read inco me or may earn less in terest on its in vestmen ts th an it is requ ired to credi t to policy ho ld ers sho uld i nterest rates decrease sig nificantl y an d/or remain lo w fo r sustained perio ds. Add ition ally, th e p ro fitab ility of certain o f th e Compan y’s life in surance prod uct s that d o n ot h ave sig nificant accou nt b alan ces cou ld b e reduced sh ou ld i nterest rates decrease sig nificantly and /o r remai n low fo r sustain ed p eriod s. The Co mp any ’s exp ectatio ns for future i nterest earni ng s an d spreads are impo rtant compo nen ts in amort ization o f deferred acq uisitio n co sts (“DAC”) and value o f b usiness acqu ired (“VOBA”), and sign ifi can tly lo wer in terest earnings o r spread s may accelerate amo rtizat io n, thereby red ucing net in come in the affected repo rting perio d. Su stain ed perio ds of lo w interest rates cou ld also resu lt in an i ncrease in the valuatio n o f the future po licy b en efit o r po licyh older acco un t b alan ce liab ili ties asso ciated with the Compan y’s pro du cts. High er in terest rat es may create a less fav orable env iro nmen t fo r th e orig inatio n o f mortgag e lo ans an d decrease th e in vestmen t in come th e Co mp any receiv es i n t he fo rm of prepay men t fees, make-who le p aymen ts, and mortgag e p articipation in co me. Hi gh er interest rates wou ld also adv ersely affect the market value o f fix ed-income securities wit hin the Co mp an y’s in vestmen t p ortfo lio. High er interest rates may also in crease t he cost o f d ebt and other ob lig ati on s o f th e C ompany h aving flo ating rate o r rat e reset p ro visi on s. During perio ds of increasin g market i nterest rates, th e C ompany may o ffer high er cred iti ng rat es on in terest-sen siti ve pro du cts, su ch as u niversal life insu ran ce an d fixed an nu ities, and it may in crease cred itin g rates o n in -force prod uct s to keep th ese pro du cts co mp etitiv e. In addi tion , rap i dly-rising interest rates may cause in creased po licy surren ders, with drawals from life i nsu ran ce po licies an d ann uity cont racts, and requ ests fo r po licy lo ans as pol icy ho ld ers and con tract ho ld ers shift assets int o h igh er y ielding inv est ments. In creases in creditin g rates, as well as surrend ers and with drawals, co uld hav e an ad verse effect o n th e Compan y’s fin anci al co nd ition an d resu lts of operations, in clu ding earning s, equ ity (includ in g accumulated other comp reh ensiv e in co me (lo ss) (“AOCI”)), and statu to ry risk -b ased capital rati os. Ad ditio nally, the Co mp any ’s asset/liabi lity management pro grams an d proced ures inco rp orate assumptio ns abo ut the relation ship between short- term and lon g-term interest rates (i .e., the slo pe o f the y ield cu rv e) an d relation ships between risk -ad ju st ed and risk -free in terest rates, market liqu id ity, and other facto rs. Th e effectiv eness o f t he Co mp any ’s asset/l iab ility man agement p ro grams an d pro ced ures may b e n egativ ely affected when ever act ual results differ from th ese assu mp tion s. In g eneral, the Co mp any ’s results of op eratio ns improve when the y ield cu rv e is po sitively slo ped (i.e., when lo ng -term interest rat es are high er than sho rt-term interest rates), an d will be adv ersely affected b y a flat o r n egativ ely -slo ped cu rve. The Co mp any’s investment s a re sub ject to ma rk et and credit risk s. These risks could b e heig htened d uring period s of ex treme vo la til ity o r d i srupt io n in fina ncial and cred it ma rkets. Si gn ifican t vo latility o r disrup tion in d omestic o r fo reign credit markets, in clu ding as a resu lt o f so cial o r po litical u nrest or in st ab i lity d omest ically or ab ro ad, cou ld hav e an ad verse impact in sev eral way s on either th e Co mp any ’s finan cial co nd itio n o r result s from op eratio ns. Th e Co mp any ’s in vested assets an d d erivati ve fin ancial instru men ts are su bject to risks o f credit defau lts an d ch an ges in market val ues wh ich co uld be heigh t en ed b y volat ility o r disru pti on . Th e factors affectin g th e fin anci al an d credit markets co uld lead to other-than -temp orary imp airmen ts of assets in the Co mp any ’s inv estment po rtfo lio. The value of th e Co mp any ’s commercial mortg age lo an p ortfoli o dep end s in part on th e finan cial co nd itio n o f the tenants o ccu py in g the p ro perties th at t he Compan y has finan ced . The v alu e o f th e Co mp any ’s inv est ment po rtfolio , in clu ding its p ortfoli o of g ov ern ment deb t o blig ations, d ebt ob ligatio ns o f th ose en tities with an ex press o r implied go vernmental g uarantee, an d debt o blig ation s o f o ther issuers ho l ding a large amou nt of su ch o bligat io ns, depen ds in p art on th e ab ili ty of th e issu ers o r g uarantors of su ch deb t to main tain thei r cred it rati ng s and meet thei r con t ractu al o blig ations. Factors that may affect th e o verall default rate 20 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents on , an d mark et v alu e o f, the Co mp an y’s in vested assets, d eri vat iv e finan cial in struments, and mo rtgag e lo ans in clude in t erest rate levels, fin anci al market perfo rman ce, g eneral econ omic con dition s, and co nd itions affectin g certain secto rs o f t he eco no my, as well as p articu lar circu mstan ces affect in g the in dividu al tenan ts, b orro wers, issu ers, an d g uarant ors. Si gn ifican t co ntin ued finan cial and cred it market vol atility, ch ang es in i nterest rates and credi t spread s, credit d efau lts, real estate v alu es, market illiqu id i ty, declin es in eq uity prices, acts o f co rp orate malfeasance, ratin gs do wng rades of the i ssu ers o r gu arantors o f th ese in vestmen ts, and declin es in general econ omic con ditio ns an d con ditio ns affectin g certain secto rs o f the econ omy, eith er al on e o r in co mbin ation , co uld h ave a material adv erse i mp act on the Co mpan y’s results of o peration s, financial con dition , o r cash fl ows th ro ug h realized lo sses, impai rment s, chan ges in u nrealized lo ss p ositio ns, and in creased d emand s on cap ital, inclu din g ob ligati on s to p ost add ition al cap i tal an d collateral. In ad dition , market v olatilit y can mak e it d ifficult for th e Co mp any to value certain of it s assets, especially if trad in g beco mes less freq uen t. Valu ation s may in clu de assu mp tion s o r estimates th at may h ave sig nificant perio d-t o-perio d ch an ges th at cou ld hav e an adv erse imp act o n t he Compan y’s resu l ts o f o peration s or fin ancial con ditio n. Cred it ma rk et vola tility o r disruption could ad versely i mp act the Co mp any’s financia l co nd iti on or resul ts fro m o pera tions. Ch ang es in interest rates an d credi t sp reads co uld cause market price and cash flow variab ility in t he fixed -inco me in stru men ts in th e Co mp any ’s in vestmen t po rtfo lio . A wid eni ng of credit sp reads will increase th e u nrealized losses in th e Compan y’s in vestmen t po rtfol io . Sig nificant v olatility an d lack of l iq uidity in th e cred it mark ets cou ld cause issuers o f th e fix ed -in come securities in the Co mp any ’s inv estment p ort fo lio to d efau lt o n either princip al or in terest p ayments on these secu rities. Ad dition ally, market price v alu ation s may no t accu rately reflect th e un derly in g ex pected cash flows of securities within th e Co mp any ’s inv est ment po rtfolio . The Company ’s statu to ry surplu s is also imp acted b y wid ening credit spreads as a resu lt of th e accounting fo r the asset s and li ab ilities on its fixed mark et v alu e adjusted (“M VA”) an nu i ties. Statu to ry sep arat e acco un t assets sup po rtin g the fi xed MVA ann uit ies are record ed at fai r v alu e. In determin in g the statutory reserve fo r th e fixed M VA ann uities, th e C ompany is requ ired to u se cu rrent cred iti ng rates b ased on U.S. Treasu ries. In man y cap ital market scenario s, curren t cred itin g rat es based o n U.S. Treasuries are h ig hly correlated with mark et rates imp licit i n the fair val ue o f statutory separate acco un t assets. As a result, t he chan ge in th e stat utory reserv e fro m p eriod to p eriod will lik ely sub stant ially offset th e ch ang e in the fair value of th e statutory sep arate acco un t assets. However, in perio ds of v olatil e cred it markets, actual cred it spread s o n in vestmen t asset s may increase sh arp ly for certain sub -sectors o f the ov erall cred it market, resu lti ng in statutory separate acco un t asset mark et value losses. Cred it spreads are no t co nsistently fu lly reflected in cred itin g rates based on U.S. Treasuries, and the calculatio n of statu tory reserves will no t su bstantially o ffset the chang e in fair v alue of th e statu to ry separate accou nt assets resu ltin g in red uct io ns in statutory surplus. This situatio n wou ld result in th e need to dev ote sig nificant addi tion al cap ital to sup po rt fix ed M VA an nu ity prod uct s. The ab ility of the Co mp an y to imp lemen t finan cin g solutions desig ned to fun d a po rtio n of statu to ry reserv es o n bo th the trad itio nal and u niversal life block s o f bu si ness is d epend ent u po n factors such as th e rating s o f t he Co mp any, the size of the block s o f bu siness affected , the mo rtality ex perien ce of th e Company, th e cred it mark ets, and other facto rs. The Comp any canno t pred i ct the con tinu ed av ailabil ity of su ch soluti on s o r th e form th at th e market may dictate. To th e ex t en t that such fi nancing solu tion s were desired bu t are no t av ailable, the Compan y’s fin ancial po sition cou ld be adv ersely affected th ro ug h impacts in clu ding , bu t n ot limited to , high er b orro win g co sts, surplus strain , lo wer sales capacity, an d p ossib le redu ced earn in gs. Disrupti on of the ca pita l and credit markets could neg atively a ffect the Co mpany’s a bility to meet i ts liquid ity and financing need s. The Compan y n eeds liqu id ity to meet its o bligatio ns to its p olicy ho ld ers and its d ebt ho ld ers, to pay i ts op eratin g ex pen ses, i nterest on o ur deb t and dividen ds o n o ur cap ital stock , to prov id e o ur su bsidiaries with cash or col lateral, main tain o ur securities lend in g activ ities an d to replace certai n maturing liabilities. Volatility or d isru ptio n in th e credit mark ets cou ld also imp act t he Compan y’s ab ility to efficiently access fin ancial solutio ns fo r p urp oses of issuing lon g-term d ebt for fin ancing pu rp oses, its ab ility t o o btain fin ancial solution s for p urpo ses o f sup po rting certain trad itio nal an d u niversal life in surance p ro du cts for capital man agemen t pu rp oses, o r resu lt in an increase in the co st o f ex isting secu ritization struct ures. With ou t sufficient l iq uidity, we co uld b e fo rced to curt ail o ur op eratio ns an d l imit ou r inv estments, and o ur bu si ness an d fin ancial resu lts may suffer. Th e Co mp any ’s sources o f liq uid ity in clu de insu ran ce premiums, ann uity co nsid erations, d epo si t fun ds, cash fl ow fro m inv est ments an d assets, an d other income fro m its op eratio ns. In n ormal credit and capi tal market con dition s, the Co mp any ’s so urces of liq uidit y also in clu de a v ariety of sh ort-term and lo ng -term b orro win g arran gements, in clu ding issuing deb t secu rities. The Company ’s bu siness is dep end ent on the capit al and credit mark ets, includ in g con fid ence in such mark ets. When th e credit an d capital markets are disrup ted an d con fid ence is erod ed th e Co mp any may n ot be able to bo rrow mon ey, incl ud in g throu gh th e issuance o f deb t secu rities, or the cost of bo rrowi ng or raisin g cap ital may be p ro hibitiv ely high . If th e Co mp any ’s i ntern al so urces of liq uidity are inad eq uate du ring su ch p eri od s, th e Company co uld suffer negativ e effects fro m not b ein g ab le to bo rro w mon ey, o r fro m h av i ng to d o so on un fav orable terms. The n egat iv e effects cou ld in clu de being fo rced to sell assets at a lo ss, a lowering of th e Comp any ’s credit rat in gs an d the fin anci al stren gth rating s of i ts insurance su bsidiaries, and th e po ssibilit y t hat cu stomers, lend ers, ratin gs agencies, o r regu lators d evelop a neg ative p ercep tion of the Co mp an y’s finan cial pro spects, which co uld lead to furth er ad verse effects o n t he Compan y. Eq uity market vo la til ity co uld nega tively imp act the Co mp any’s b usiness. Volatility i n equ ity markets may deter pro spectiv e p urchasers of v ariable life an d an nu ity products and fi xed ann uity prod ucts th at hav e retu rns link ed to th e p erforman ce of equ i ty markets an d may cause some exist in g cu stomers to with draw cash val ues or red uce in vestmen ts in tho se p ro ducts. Th e amou nt of po licy fees received from variable prod ucts is affected b y the 21 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents perfo rman ce o f the eq uity mark ets, increasin g or d ecreasing as markets rise o r fall . Decreases in p olicy fees could material ly an d adversely affect th e profitabilit y of o ur variable ann uity products. Equ ity market v olatility can also affect th e pro fitab ility of an nu ity p ro du cts with riders. The estimated co st o f prov id i ng g uaran teed min imum d eath benefits (“GMDB”) and gu aran teed living withdrawal ben efits (“GLWB”) in corpo rates v ari ou s assu mp tion s ab ou t th e ov eral l p erforman ce of equ ity markets ov er certai n ti me p eriod s. Period s o f sig nificant an d sustain ed down tu rns in equ ity market s o r increased eq uit y mark et vo lat ility cou ld result in an in crease in th e v aluati on o f th e future p oli cy benefit or p olicy ho ld er accou nt b alan ce liabil ities asso ciated with such p rod uct s. Wh ile these liabilities are hed ged , there still may be a possi ble resulting n egat iv e impact to net i ncome and to th e statu t ory cap ital and risk -based capital ratios of the Co mp any ’s insurance sub si diaries. The amortization of DAC relat in g to an nu ity products and the estimated cost o f pro viding GM DB and GLWB in corpo rate v ariou s assumption s ab ou t th e ov erall p erforman ce of equ ity mark ets ov er certain time perio ds. The rate o f amort izatio n o f DAC and t he cost o f prov id ing GMDB and GLWB co uld in crease if equ ity mark et p erforman ce is worse than assumed . The Compa ny’s use o f d erivat ive financial i nstruments wi thin its risk management stra teg y may not be effective or sufficient. Th e Compan y uses d eri vat iv e fin ancial instruments withi n its ri sk man agemen t st rategy t o mitigate risks to wh ich it is ex po sed, in clu ding ri sks rel ated t o cred it an d equ ity mark ets, in terest rate lev els, foreig n exch ange, and vo lat ility o n its fixed in dexed an nu ity an d variab le ann uity prod ucts and associated gu aran teed benefit featu res. Th e Compan y may al so u se d erivativ e finan cial in stru men ts with in its risk manag emen t strategy to mitig ate ri sks ari sin g from its ex po sure t o inv estments in in dividu al issu ers or secto rs of issu ers an d to mitig ate the ad verse effects of in terest rate lev els or vo latility on its ov erall fin ancial con dition or results o f operations. Th ese d erivativ e fi nancial i nstru men ts may no t effectively offset t he ch ang es in the carrying val ue of the exp osures due to, amo ng o th er t hing s, th e time lag b etween chan ges i n th e v alu e o f su ch exp osures an d the changes in th e v alu e o f the deriv ative fin an cial in stru ments pu rch ased b y th e Co mp any, ex treme credit an d/or equ ity mark et an d/or interest rate lev els or vo latility, con tract h older beh avior t hat differs from th e Compan y’s ex pect ati on s, and basis risk. Th e use of deriv ative finan cial in st ru ments b y th e Company g enerall y to hed ge v ariou s risks th at imp act GAAP earning s may have an adverse impact on the level o f statutory capital and risk-based capit al ratios b ecau se earn ing s are reco gn ized differen tly un der GAAP an d statu to ry accou nting meth od s. Th e Compan y may also cho ose no t to h edg e, in wh ole o r i n part, th ese o r other risks th at it has id entified , d ue to , for ex ample, the availab ility an d/or co st of a suitab le deriv ati ve financial in stru ment. In add itio n, th e Compan y may fail to iden tify risks, or t he magn itud e o f risks, to wh ich it is ex posed . The d eri vat iv e finan cial in struments u sed b y the Co mpan y in its risk man agemen t strategy may no t be properly design ed, may no t be p ro perly implemen ted as design ed and /or may b e in sufficient to hedge th e risk s in relation to th e Comp any ’s ob ligatio ns. Th e Compan y is su bject to th e risk that its d erivative co un terparties or cleari ng ho use may fail o r refuse to meet their ob ligations to the Co mp any, wh ich may resu lt in asso ciated deriv ative fin ancial instrumen ts becomin g ineffectiv e or in efficient. The ab ove facto rs, eith er alo ne or in co mb in ation , may hav e a material ad verse effect on the Company ’s finan cial co nd itio n and resu lts of op eratio ns. The Compa ny’s ab ility to g row d ep end s i n l arg e pa rt upo n the co ntinued ava ilab ility of cap ital. The Compan y d ep loys sig nificant amo un ts of cap ital to sup po rt its sales and acq uisi tion s efforts. Alth ou gh th e Co mp any believes it has su fficient cap ital to fu nd its immediate capital needs, the amo un t of cap ital av ailabl e can v ary sig nificantly from p eriod to p eriod du e to a variet y of circumstan ces, some of which are n ot p red ictabl e or within the Co mp any ’s con trol. Furth ermore, ou r sole sto ckh older i s no t ob ligated to p ro vid e us with add iti on al capital. A lack o f su fficient capital cou ld have a material ad verse impact on th e Co mp any ’s fin ancial co nd itio n an d/or resu l ts o f o peration s. The Compa ny coul d b e forced to sel l investments a t a lo ss to co ver policyholder withd rawa ls. Man y o f the p ro du cts offered b y the Co mpan y allo w po licyh olders an d co ntract ho ld ers to withdraw th eir fun ds u nd er d efined circumstances. Th e Co mp any man ages its liab ilities and co nfig ures its i nv estment po rtfolio s so as to p ro vid e and maintain su fficien t liqu id ity to su pp ort exp ected withd rawal deman ds and con tract b enefits an d matu rities. Wh ile the Co mp an y own s a sig nificant amo un t of l iq uid assets, a certain p ortion o f its assets are relativ ely illiqu id . If the C ompany ex perien ces u nex pect ed withdrawal or surren der act iv ity, it cou ld ex hau st its liq uid assets an d b e forced to liq uidate o th er assets, perhaps at a lo ss or on o ther u nfavo rab le terms. If th e Co mp an y is fo rced to disp ose of assets at a lo ss or on u nfavo rab le terms, it cou ld have an adv erse effect on th e Co mp any ’s fin ancial co nd itio n, the d egree o f wh ich wo uld v ary in relation to th e magni tu de o f the un exp ected surren der or withd rawal activ ity. Difficul t g enera l economic co nd itio ns co uld materially a dversely affect the Co mp any’s b usiness and results of op eratio ns. The Co mp any ’s b usiness and resu lts o f op eratio ns cou ld b e material ly affected b y difficu lt g eneral eco no mic co nd itio ns. Stressed eco nomic co nd ition s and vo latili ty and disruption s in capital markets, particular mark ets or finan cial asset classes can h ave an ad verse effect o n the Co mp an y due to th e size of th e Compan y’s in vestment p ortfolio an d the sensitive nature o f insu ran ce l iabilities t o ch ang in g market facto rs. Disru ptio ns in on e mark et or asset class can also spread t o o th er markets o r asset classes. 22 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Vo lat ility in finan cial markets can also affect th e Company ’s b usiness by adv ersely impacting gen eral lev els of eco no mic activity, employ men t an d cu st omer behav io r. Lik e oth er financial in stituti on s, an d parti cul arl y life in surers, the Co mp any may b e ad versely affect ed b y th ese co nd iti on s. Th e p resen ce of th ese co nd ition s cou ld have an ad verse impact o n the Compan y b y, amon g oth er th ing s, decreasing deman d for its insu ran ce an d inv est ment prod ucts, and in creasi ng th e level of lap ses and su rrend ers o f its po licies. Th e Company and its su bsid iaries co uld also ex perien ce ad ditio nal ratin gs do wn grades from rat in gs agen cies, u nreali zed lo sses, si gn ifican t realized losses, impairment s in it s in vestmen t po rtfolio , an d charges incu rred as a resu lt of mark -to-market and fai r value accou ntin g p rinciples. If gen eral eco no mi c co nd itio ns b ecome more difficu lt, th e Co mp any ’s ab ility to access sources of capital an d liq uid ity may be limit ed . The Co mp any ma y be required to esta bli sh a va luation a llowa nce a ga inst its deferred ta x assets, which coul d have a material a dverse effect o n the Co mp any’s results of op eratio ns, fina ncial condition, and ca pita l p ositio n. Deferred tax assets are attribu tab le to certain differen ces b etween the financial statement carry in g amou nts o f exi sting assets an d liabilities an d their resp ecti ve tax b ases. Deferred tax assets rep resen t fu ture sav in gs o f tax es wh ich woul d otherwise be paid in cash . In g eneral, th e realizatio n of deferred tax assets i s d epen dent up on the gen eration of su fficient fu tu re ordinary and cap ital tax able income. Realization may also be limited for ot her reason s, includ ing bu t n ot limited to chan ges in tax rules o r regu lations. If it is determin ed that a certain deferred tax asset can no t be realized, then a d eferred tax valuation all owance is establi shed , with a correspo nd in g ch arg e to eit her adjusted op eratin g in come or o th er comp reh ensiv e in come (depen ding o n th e nature o f th e deferred tax asset). Based o n the Company ’s curren t assessment of futu re tax able inco me, in clu ding av ailable tax planni ng o pp ortunities, i t is more likel y th an n ot that th e Co mp any will g enerate su fficient tax able in come to real ize i ts material deferred tax assets n et o f an y ex isting valuation allowance. Th e Comp any has recog nized valuatio n allo wances of $6 .4 milli on and $5.0 million as of Decemb er 3 1, 20 18 an d Decemb er 31 , 2017, resp ectiv ely, rel ated to certain deferred tax assets which are mo re likely than n ot to ex pire un uti lized. These assets are state in co me t ax -rel ated. If fu t ure ev en t s d i ffer fro m th e Co mp any’s cu rrent fo recast s, an add itio nal v aluation allowance may need to be estab lish ed , which cou ld hav e a material adv erse effect on the Co mp any ’s results of o peration s, finan cial co nd iti on , o r cap ital p ositio n. The Compa ny coul d b e a dversely affected b y a n ina bility to access its cred it faci lity. The Compan y relies o n it s cred it facil ity as a po ten tial sou rce of liq uidity. The av ailability of these fu nd s cou ld b e critical to th e C ompany ’s credit an d fin ancial streng th ratin gs and it s ab ility to meet o blig ation s, particularly when al ternativ e so urces o f cred it or liquid ity are either d ifficu lt to access o r co stly. The availab ility o f t he Co mp any ’s credit facility is depen den t i n part on th e ab ility o f t he len ders to p ro vide fun ds und er th e facility. The Co mp any ’s credit facilit y co ntain s vario us affirmative an d neg ati ve co ven ants an d events of d efau lt, includ in g cov enan ts req uirin g th e Compan y to main tai n a sp ecified mi nimu m co nsolid ated n et worth . Th e Compan y’s rig ht to mak e b orro win gs un der th e facilit y is su bject to the ful fillmen t of certain con ditio ns, in clu ding its co mp liance with al l co ven ants. Th e Compan y’s failu re to compl y with the co ven ant s in the credit facility co uld restrict its ab ility to access this credit facility wh en n eeded . The Co mp any ’s inab ility to access so me o r all of the li ne o f credit un der th e cred it facility cou ld lead to d own grades in ou r credit and fin ancial streng th ratin gs and h ave a material ad verse effect on its liq uidit y and /or resu lts o f o perati on s. The amount o f st atutory cap ital or ri sk-ba sed cap ita l that the Compa ny has a nd the amount o f statutory cap i ta l or risk -b ased ca pita l t ha t it must ho ld to mainta in its financial strength and credit ra tings and meet o ther requirements can va ry sig nificantly fro m time to ti me and such a mo unts a re sensitive to a number of fa cto rs out sid e of the Co mp any’s co ntro l. The Compan y p rimarily co nd ucts bu siness th ro ug h licen sed insurance company su bsid iaries. Insuran ce reg ulato rs have established reg ulation s t hat prov id e minimu m capitalizati on req uiremen t s based on risk -b ased cap ital formul as fo r life an d p ro perty and casualty compan ies. The risk-based cap ital fo rmula fo r li fe insu ran ce comp anies establishes capit al requ irements relatin g to in surance, b usiness, asset, in terest rate, an d certain o th er risks. The risk -based cap ital formu la for pro perty an d casu alty co mp ani es estab lish es cap ital requ iremen ts relating to asset, cred it, underwritin g, and certain other risks. In any p articu lar y ear, statu to ry surplus amo un ts an d risk -b ased capi tal ratios may in crease o r d ecrease d ependi ng o n a v ariety o f factors, in clu ding , bu t n ot limited to , th e amou nt of statu to ry in come or lo sses g enerated b y the Compan y’s i nsu ran ce sub sidi ari es, th e amou nt of add itional capital its i nsu ran ce sub si diaries mu st ho ld to su pp ort bu siness growth , chan ges in th e Company’s stat utory reserve requirements, the Co mp an y’s ability to secu re cap ital mark et solution s to prov ide statu to ry reserve relief, ch an ges in eq uit y market lev els, th e v alu e of certain fixed -inco me and equ ity secu rities in it s in vestmen t po rtfo lio, th e credit rat in gs o f in vestmen ts hel d in its po rtfolio , in clu ding t ho se issued by, o r ex plicitly or impli cit ly gu aran teed by, a go vernment, th e value of certain deriv ative in stru ments, chang es in interest rat es, foreig n curren cy exchan ge rates o r tax rat es, credi t market v olatility, chan ges in co nsumer behav io r, an d ch ang es to the Nation al Association of In surance Commi ssion ers (th e “NAIC”) risk-b ased capital fo rmulas. Mo st o f these facto rs are ou tside o f th e Co mp any ’s co ntro l. At its Jun e 20 18 meetin g, t he NAIC’s Cap ital Ad equacy Task Force ado pted a change to th e fo rmulas used to calcu late risk-b ased capital to reflect a lo wer federal co rpo rat e in come tax rate. The NAIC’s ri sk-based cap ital fo rmulas n ow emp lo y a t ax facto r of 2 1%, i nstead of 3 5%. This chang e h ad a on e-ti me lo werin g effect on th e risk-based capital ratio s of t he Compan y and its su bsid iaries wh en i t b ecame effectiv e at the end of 20 18 . A p ro po sed ch an ge to the NAIC’s risk -based cap ital formu la that is cu rrently un der co nsid eratio n woul d upd ate th e facto rs used to calculate requi red cap ital for bo nd s. While the extent and timing of t his prop osed chan ge is un kn own , if adopt ed , 23 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents it wo uld likel y i ncrease the Co mpan y’s requ ired capital and decrease the statu tory risk -based cap ital ratios of th e Co mp any an d it s sub sidiaries. Th e Company ’s fin ancial streng th and cred it rating s are si gn ifican tly influen ced by the stat utory surplus amo un ts and risk -b ased cap ital ratio s o f its in surance company sub sidiaries. Ratin g o rg anizati on s may imp lemen t ch an ges to thei r in t ernal mo del s th at hav e the effect of in creasing or d ecreasing th e amou nt of statut ory capi tal the Company must ho ld in o rder to maintain it s cu rrent rat in gs. In add itio n, rati ng ag en cies may do wn grade the in vestmen ts h eld in th e Co mp any ’s p ort fo lio, which co uld result in a redu ction of th e Company ’s cap ital an d surplus an d/or its risk-based cap ital ratio. In scenario s of equ ity market d eclines, the amo un t of add iti on al statutory reserves or ri sk-based cap ital th e Compan y is req uired to ho ld for its variable prod uct gu aran tees may i ncrease at a rat e g reater than th e rate o f ch ang e of th e markets. In creases in reserv es or risk -b ased cap ital co uld result in a reductio n t o t he Compan y’s capit al, su rp lu s, and /o r ri sk-based capital ratio . Also, i n envi ro nment s where there is no t a correlative relatio nship b etween in terest rates an d sp read s, the Company’s market v alu e ad ju sted an nu ity p ro du ct can have a material ad verse effect o n the Co mp any ’s statutory su rp lus po sition . A rat ings d owngra de o r other nega t ive actio n b y a ra ting orga nization could ad versely affect the Compa ny. Variou s Nationally Reco gn ized Stat istical Rating Organization s (“rating organ izatio ns”) review th e fin anci al p erforman ce and con dit io n o f in su rers, in clu ding the Co mp any ’s insu ran ce su bsid iaries, an d pu blish th eir fin anci al streng th rating s as in dicato rs of an insu rer’s ab ility to meet po licyh older an d co ntract h older o blig ation s. Wh ile fin ancial streng th rating s are n ot a recommen datio n to b uy the Co mp any ’s secu rit ies or p ro du cts, th ese rating s are impo rtant to maintain in g p ub l ic con fid en ce in th e Compan y, its prod ucts, its ab i lity to market i ts p rod ucts, and its co mpetitive p osit io n. A do wng rad e or other n egativ e action by a ratin g organ izatio n with respect to th e fi nancial stren gth ratings o f t he Co mp any ’s in surance sub sidiaries or the deb t ratin gs o f the Co mp any co uld adversely affect the Compan y i n man y ways, inclu din g, bu t n ot li mi ted to, red ucing new sales o f insu ran ce an d in vestmen t p ro du cts, ad versel y affectin g relation sh ip s with d istrib utors and sales ag ents, increasin g the n umber o r amo un t of p olicy surren ders an d wit hd rawals of fu nd s, requ iring a red uctio n in p rices for th e Compan y’s in su rance prod ucts an d services in order to remain competiti ve, n egativ ely imp acting the Co mp any ’s ab ili ty to ex ecute its acq uisition strategy, and adv ersely affecting t he Co mp an y’s ability to ob tain reinsurance at a reason able pri ce, on reason abl e terms, or at al l. A do wn grade of suffici en t magn itud e co uld result i n th e Co mp any, its in surance su bsidiaries, or bo th b ein g req uired to co llateralize reserves, balances, or ob ligatio ns u nd er certain contractual ob ligatio ns, includ ing rein su ran ce, fun ding , swap , an d secu ritization agreements. A do wng rad e o f su fficient mag nitu de co uld also resu lt in th e terminatio n o f certain fun ding and swap agreements. Ratin g o rg anization s al so p ub lish cred it ratings fo r issuers of deb t secu rities, includ in g th e Co mp any. Cred it rating s are in dicators o f a debt issu er’s ab ility to meet t he terms of d eb t obl ig ation s in a timely mann er. These rati ng s are imp ortan t to the C ompany ’s ov erall ab i lity to access credit markets an d other ty pes of liqu i dity. Cred it rating s are no t recommen datio ns to bu y th e Company ’s secu rities o r prod ucts. Down grades o f th e Company’s credit rat in gs, or an ann ou nced p otential do wn grade o r o th er neg ative actio n, cou ld hav e a material ad verse effect on th e Co mp any ’s finan cial co nd iti on s and resu lts of op eratio ns in many way s, in clu ding , bu t n ot limit ed to, limitin g the Compan y’s access to capit al markets, in creasing the cost of deb t, imp airin g its abi lity to rai se capital to refinance matu rin g debt ob ligatio ns, limitin g its cap acity to sup po rt the growth of its i nsu ran ce su bsid iaries, req uiring it t o pay hig her amou nts in co nn ecti on with certain ex isting o r future fin ancing arran gemen ts o r transactio ns, and making it more d ifficult to maintain o r i mpro ve th e curren t finan cial streng th rating s o f its insu ran ce subsidiaries. A do wng rad e of su fficient mag nit ud e, in combinatio n with o th er facto rs, cou ld req uire th e C ompany to po st co llateral p ursuan t to certain co ntractual o bli gat io ns. Ratin g o rg anization s assign rati ng s based up on sev eral facto rs. Wh ile mo st of the factors relate to th e rated co mp an y, so me of the factors relate to the views of the rating o rg anization , gen eral econ omic co nd iti on s, rating s o f paren t companies, an d ot her circumstan ces o utsi de the rated compan y’s con trol. Facto rs id entified by rating ag encies th at co uld lead to n egativ e ratin g actio ns wit h respect to th e Company o r its in surance su bsid iaries in clu de, bu t are no t limited to , weak gro wth in earn in gs, a d eterio rati on of earn in gs (includ in g deterioration du e to sp read compression in in terest-sen si tive lin es o f b usin ess), sig nificant imp airmen ts in inv estment p ortfoli os, hei gh ten ed fin ancial leverage, lo wer interest co verage ratios, risk -b ased cap ital ratio s fal ling b elo w ratin gs th resh olds, a material reinsurance l oss, underperfo rman ce of an acq uisiti on , and th e rat in g o f a p aren t co mp any. In ad dition , rating organ izatio ns u se v ariou s models an d fo rmulas to assess th e streng th o f a rated compan y, and from ti me to time rat in g organ izatio ns h ave, in their d iscretion, altered the mo dels. Ch ang es to the mo dels cou ld imp act th e rat in g organ izatio ns’ jud gment o f the rating to b e assigned to the rat ed company. Rating o rganization s may take vario us acti on s, p ositiv e or n egat iv e, with resp ect to ou r deb t ratin gs and fin ancial streng th rating s of our i nsu ran ce su bsidiaries, in cludi ng as a resu lt o f ou r status as a su bsid iary o f Dai-ich i Life. Any n egativ e acti on by a rating org an i zatio n cou ld hav e a material ad verse imp act o n th e C ompany ’s fin ancial co nd ition o r resu lts of o peration s. The Co mp any cann ot p red ict wh at actio ns the rat in g organ izatio ns may take, o r what action s th e Compan y may take in resp on se to th e acti on s of th e ratin g o rg anization s. The Compa ny o pera tes a s a hold ing compa ny a nd dep end s on the ab ility of its subsid ia ries to tra nsfer funds to it to meet its ob liga tions. The Compan y op erates as a ho ld in g compan y for its insu ran ce an d o th er su bsid iaries an d d oes n ot have an y sign ifi can t o peration s of i ts o wn. Th e Co mp any ’s p rimary so urces of fun ding are dividen ds fro m its op eratin g su bsid iaries, rev enu es from inv estment, d ata processin g, leg al, and manag ement serv ices rend ered to sub sidiaries, in vestmen t in come, an d ex ternal finan cin g. Th ese fu nd in g sou rces sup po rt th e Company ’s g eneral corpo rate need s in clu ding its deb t serv ice. If the fu nd in g th e Compan y receiv es from its sub sidiaries is in sufficient for it to fun d its debt serv ice an d other h olding co mp any ob ligatio ns, it may b e requi red to rai se fu nd s th rou gh th e incu rrence o f d ebt , o r th e sale of asset s. 24 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The states in wh ich the Co mp any ’s in surance sub sidiaries are d omicil ed impo se certai n restrict io ns on th e su bsid iaries’ ability to p ay div id ends an d make o th er pay men ts to the Compan y. State in surance reg ulators may p ro hibit th e p ayment of d ivi dends o r oth er pay men ts to the Compan y b y its insurance sub si diaries if th ey determin e that the pay ments cou ld b e ad verse to th e insuran ce su bsid iary or it s p olicy ho lders o r con tract ho ld ers. In ad dit io n, th e amo un t of surplus that o ur in surance sub sidiaries co uld p ay as d i viden ds is co nstrain ed by the amo un t of surp lu s th ey ho ld to main tai n th eir finan cial stren gth rat in gs, to p ro vide an ad ditio nal lay er of margin fo r risk protection and fo r future investment in ou r b usinesses. The Compa ny coul d b e a dversely affected b y a n ina bility to access FHLB lend ing. Certain su bsidiaries of th e Compan y are members of the Fed eral Ho me Loan Ban k (the “FHLB”) o f Cin cin nati and th e FHLB o f New Yo rk . Membership p ro vides these Co mp any sub sid i ari es with access to FHLB finan cial serv ices, includ in g ad vances that prov id e an attractiv e fu nd in g sou rce fo r sho rt-term b orro win g an d for the sale of fu nd in g ag reement s. The ex ten t to wh ich membership or th e FHLB services are av ailabl e co uld be imp acted by legislative or regu lat ory actio n at th e state o r fed eral level . Any d evelop men ts th at limit access to FHLB financial serv ices cou ld h ave a mat eri al ad verse effect on th e Co mp any . In ad dition , th e ab ility o f the Compan y’s su bsid iaries t o access liqu id ity fro m the FHLB is impacted by o th er facto rs that are dep en den t o n market co nd ition s or p olicies est ab l ish ed b y the FHLB. Fluctuatio ns in th e market val ue o f co llateral can ad versely i mp act availab le b orro win g cap acit y. Ch ang es in co llateral h aircuts establish ed b y the FHLB an d what is deemed to be eligib le collateral by th e FHLB can also imp act the amo un t an d availab ili ty of fu nd in g. The Compa ny’s securities lend ing p ro gra m may subject it to liq uidity a nd other risks. The Co mp any main tains a secu rities len ding p ro gram in wh ich secu rities are lo an ed to th ird parties, includ i ng b ro kerage firms an d commercial bank s. Th e b orro wers o f the Compan y’s securities prov id e th e Co mp any with col lateral , typ ically in cash, which it sep arat ely main tains. The Company in vests the collateral i n ot her securi ties, includ in g primarily short-term g ov ern ment repo an d money market fun ds. Securi ties loan ed under th e p ro gram may be return ed t o the Compan y b y the b orro wer at any time, req uirin g the Co mpan y to ret urn the related cash co l lat eral. In some cases, th e Company may use th e cash co llateral p ro vid ed to p urchase other securi ties t o b e held as inv ested collateral, and the matu rit y o f such secu rities may ex ceed the term o f the securities lo aned un der th e prog ram and /o r th e market val ue o f such securities may fal l b elo w th e amo un t of cash co llateral th at the Co mp any is ob ligated to return to th e borro wer o f the Co mp any ’s loan ed securities. If th e Compan y is requ ired to retu rn sig nificant amou nts o f cash collateral on sh ort n otice an d i s forced to sell th e securities h eld as in vested co llateral to meet th e ob ligatio n, the Compan y may h av e difficu lty sellin g such secu rities in a timely mann er and /or th e Co mp any may b e forced t o sel l the securities in a vo lati le or illiqui d market fo r l ess th an i t otherwise wo uld hav e been able to realize un der n ormal market co nd ition s. In add ition , th e Comp any ’s abil ity to sell securiti es held as inv ested coll ateral may be restricted un der stressfu l mark et an d economi c co nd ition s in wh ich liqu idi ty det eriorates. The Co mp any’s fina ncial co nd itio n or results o f op erations co uld be ad versely impa cted if t he Co mp any’s a ssump tions rega rd ing the fair value and future performance of its invest ments d iffer fro m a ctual ex perience. The Co mp any makes assu mp tion s reg ard in g th e fair val ue an d exp ected future perfo rman ce o f i ts i nv estments. Exp ectations th at t he Co mp any ’s in vestmen ts in mo rtgag e-b acked and asset-back ed securities wi ll co ntin ue to perfo rm in accordan ce wi th their cont ractu al terms are b ased o n assu mp tion s a mark et particip ant wo uld use in d etermining the curren t fair value an d con si der t he p erforman ce o f th e u nd erl ying assets. It is reaso nably p ossib le th at th e un derly in g co llateral o f these in vestmen ts will p erform wo rse than curren t mark et ex pectation s and that such red uced perfo rmance may l ead to adverse ch ang es in th e cash flo ws o n th e Compan y’s ho ld in gs o f th ese t yp es o f securities. In ad dition, ex pect ati on s that the Comp any ’s in vestmen ts in co rp orate securities an d/or debt ob lig ation s will con tin ue to perfo rm in acco rd ance with t heir con tractu al terms are based on ev i dence g athered throu gh its n ormal credit su rv eillan ce p ro cess. It is po ssible that issu ers o f th e Co mp any’s inv estments in co rp orate securities an d/or d ebt ob ligatio ns will p erform worse than cu rrent exp ectations. Th e o ccu rrence of any o f the fo reg oing events cou ld lead the Compan y to reco gn ize write-do wns within its p ortfo lio o f mo rtg age and asset-back ed secu rities or it s p ortfolio of co rp orate securities and /o r deb t ob lig ation s. It is also po ssible that such un anticipated events wou ld lead th e Co mp any to d ispo se of such investments and reco gn ize th e effects o f any market mov ements in its fin ancial statement s. The Compan y also mak es cert ain assumptio ns wh en utilizin g in ternal mo del s to v alu e certain of its in vestment s. It is po ssible th at actu al results will differ fro m t he Comp any ’s assu mp tion s. Su ch even ts co uld result in a material chang e in th e value of t he Compan y’s in vestmen ts. Ad verse actio ns of certa in fund s or their a dvisers co uld have a d etrimental impa ct on the Compa ny’s ab ility to sel l its va ri ab le l ife and annui ty prod ucts, or mainta in current levels o f a ssets in t ho se pro ducts. Certain o f th e Comp any ’s insuran ce su bsidiaries h ave arrangemen ts with v ariou s o pen -en d inv estment co mp an i es, or “mu tu al fu nd s”, and the in vestmen t ad visers to th ose mu tu al fu nd s, to offer the mutu al fun ds as in vestmen t op tion s in the Co mp an y’s vari ab le life and ann uit y prod uct s. It is po ssible th at th e termin ation o f o ne or more o f t ho se arran gemen ts b y a mutual fu nd o r its adv iser co uld h ave a detrimen tal impact on th e co mpan y’s ab ility t o sell its variable life and an nu i ty p rod ucts, o r main tain curren t levels of assets in tho se prod ucts, wh ich cou ld h ave a material adv erse effect o n th e Co mp any ’s finan cial co nd iti on an d/or results of op eratio ns. 25 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Industry a nd Regula to ry Rela ted Risks The b usiness of the Co mp any is highly reg ulated and is subject to routine audits, ex aminations, and act io ns by reg ulators, la w enforcement ag encies, and self-reg ula to ry org ani zatio ns. The Comp any is su bject to reg ulation by the United States Secu rities and Exch an ge Commission (the “SEC”) an d each of th e states in wh ich it co nd ucts bu siness. Pro Eq uities, th e Co mp any ’s brok er d ealer, is su bject to the Fin ancial In du stry Reg ulato ry Auth ority (“FINRA”). In many in stan ces, th e regul ato ry mo dels emanate from t he NAIC an d, at the state l ev el, from the No rth American Secu rities Ad ministrators Asso ciat io n. Such regu lat io n is vested in state ag encies hav in g b ro ad ad minist rat iv e an d, in some instan ces, d i scretio nary p ower dealing with many aspects of the Compan y’s b usin ess, which may in clu de, amo ng other th in gs, p remiu m an d cost o f insurance rates and in creases thereto , in terest credi ting po licy, u nd erwritin g p ractices, reserv e requ iremen ts, mark eting practices, ad vertising , priv acy, cy bersecurity, po licy forms, rein surance reserv e requ iremen ts, insurer use o f cap tive rein surance compan ies, acq uisition s, mergers, capital ad equ acy, claims practices, an d the remi ttance of un claimed p rop ert y. In ad dition , so me state in su ran ce d epartments may en act ru les or reg ulation s with extra-territ orial ap plicatio n, effectively extend ing their jurisdiction to areas such as permitted insuran ce co mp any inv estments t hat are no rmally the p ro vince o f an insurance compan y’s do miciliary state regu lator. At any g iv en time, a nu mb er of finan cial, market con du ct, o r other examin ation s o r au dit s of the Co mp any ’s su bsidiaries may b e on goi ng . It is po ssi ble that an y examin ation or au dit may resu lt in p ayments of fi nes and p enalties, payments to customers, o r bo th , as wel l as changes in systems o r procedu res, any of which cou ld have a material adverse effect o n th e Co mpan y’s fin ancial con dition an d/or resu lts of o peration s. The Company ’s in su rance sub si diaries are requ ired to o btain state regu latory ap prov al for rate i ncreases fo r certain h ealth insurance pro du cts. Th e Compan y’s p ro fits may be ad versely affected if the requ ested rate in creases are n ot app ro ved in fu ll by reg ulato rs in a timely fashi on . St ate insu ran ce reg ulato rs and the NAIC reg ularly re-examine ex isting laws and regu latio ns app licable to insurance compan ies and th eir p ro du cts. Ch ang es in th ese laws and reg ulations, or i n interpretatio ns th ereo f, are o ften made fo r th e ben efit of the co nsumer an d may lead to ad ditio nal exp ense fo r th e in surer an d, thu s, cou ld hav e a material ad verse effect o n the Compan y’s fin an cial con dition and resu lts o f o peration s. At th e fed eral lev el, the execu tive b ran ch o r federal agen cies may issu e orders or take oth er action with resp ect to fin ancial services and life in surance matters, and b ills are ro uti nel y intro du ced in b oth ch amb ers o f the Un ited States Con gress that cou ld affect the Co mpan y an d it s bu siness. In th e past, Co ng ress h as co nsid ered legisl ation that wo uld imp act in su ran ce compan ies in nu merou s way s, su ch as p rov id in g for an o pti on al fed eral ch arter or a federal p resence fo r in surance, preemp ting state law in certain resp ects regarding the regu latio n o f reinsu ran ce, in creasi ng fed eral ov ersigh t in areas su ch as co nsumer p ro tectio n an d solven cy regu lati on , setti ng tax rates, an d o th er matters. The Co mp any cann ot p redict whether or i n wh at form leg islatio n will b e en acted an d, i f so , wh eth er t he enacted leg islation will p ositiv ely o r n egat iv ely affect th e Co mp an y o r whether any effects will b e material. In ad dit io n, ou r brok er-dealer su bsid iary and o ur variab le ann uities an d v ariable life in surance p ro du cts are su bject t o regu latio n an d sup ervision by the SEC and FINRA. These laws an d regu latio ns generally g ran t su perviso ry agencies and self-regu latory o rganization s bro ad admin istrative p owers, includ ing the p ower to limit or restrict th e brok er-dealer sub si diary fro m carry in g on i ts bu si nesses in the ev ent that it fails to co mp ly with su ch laws and regu latio ns. Th e fo reg oing reg ulato ry or go vernment al bodies, as well as th e DOL an d o th ers, h ave the authority to review o ur produ cts and business practi ces an d tho se of ou r ag ents, registered rep resen tati ves, associated perso ns, and emp lo yees. In recen t years, t here has been increased scrutiny of the in surance in du st ry b y th ese bo dies, wh ich h as in clu ded more ex ten si ve examinatio ns, regu lar sweep in qu iries, and mo re detailed rev iew of disclo su re do cument s. Th ese reg ulato ry o r go vernmen tal b od ies may brin g regu latory or o th er legal action s ag ain st us if, in their vi ew, ou r practi ces, or tho se of o ur agen ts or emp lo yees, are improp er. Th ese acti on s can resu l t in su bstantial fines, p enalties, or proh ib ition s or restrictio ns o n o ur bu sin ess activities an d cou ld hav e a material ad verse effect on ou r b usin ess, resul ts o f o peration s, or fin ancial con ditio n. The Compa ny may be subject to reg ulations of, or regula tions i nfluenced b y, internati onal regula to ry autho rities or initia tives. The NAIC and th e Co mp any ’s st ate reg ulato rs may b e in fluen ced by the in itiatives o f intern ation al regu latory b od i es, an d those initiatives may n ot translate readily into th e legal sy stem u nd er wh ich U.S. in surers mu st operate. Th ere is in creasing p ressu re to co nform to intern ation al stan dards du e to th e glob alizati on of th e b usin ess o f insu ran ce an d the most recen t fin ancial crisis. In add iti on to develop men ts at the NAIC and in th e Un ited States, th e Finan cial Stabi lity Board (“FSB”), con sist in g o f represen tat iv es of n ation al fin ancial au th ori ties of the G2 0 n ation s, and the G2 0 h ave issu ed a series of pro po sals in ten ded to pro du ce sign ifican t ch an ges in h ow finan cial co mp ani es, p articu larly companies th at are members of large and co mp lex fi nancial g ro up s, sho uld be reg ulated . The Int ern ati on al Associ ati on of In surance Sup erv iso rs (“IAIS”), at the d irection of th e FSB, h as pu blished an evo lv ing meth od for id ent ifying “g lobal sy stemically impo rtant in su rers” (“G-SIIs”) and high -level po licy measures t hat will app l y to G-SIIs. The FSB, working with n ation al au th oriti es and th e IAIS, h as d esig nated nine insu ran ce g ro up s as G-SIIs. Th e IAIS is developi ng the po licy measu res wh ich includ e h ig her cap ital req uirements and en han ced sup erv ision . Alt ho ug h n either the Co mp any n or Dai-ich i Life h as b een d esi gn ated as a G-SII, th e list o f designated insurers may be up dated perio dicall y by the FSB. It is po ssible that d ue to t he size an d reach of th e combined Dai -ichi Life grou p, or a change in t he meth od o f i dentify in g G-SIIs, th e co mb in ed g ro up , in clu ding th e Company , cou ld be d esig nated as a G-SII. The IAIS is also in th e p ro cess o f dev elo ping a common framework fo r th e su pervision o f in t ernation all y activ e insurance g ro up s (“IAIGs”). Th e framework, wh ich is cu rrentl y u nd er d iscu ssion , may in clu de a g lo bal capital measu rement st an dard fo r insurance gro up s deemed to b e IAIGs th at co uld ex ceed th e sum o f state o r oth er lo cal capital requi remen ts. In ad dition , th e IAIS is d ev elo ping a mod el framewo rk fo r the su pervision o f IAIGs t hat co ntemp lates “grou p wide su pervisi on ” across nat io nal 26 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents bo un daries an d legal entities, which co uld req uire each IAIG to conduct its o wn ri sk an d solv en cy assessment to mon itor an d manage its o verall so lv ency. The IAIS h as also pu blished a framewo rk for assessi ng and mitig ating g lo bal sy stemic risk . Th e framewo rk p ro po ses en han ced sup erv iso ry an d correct iv e measures and disclosu res fo r an y b uild -u p o f systemic risk in liqu id i ty risk , macro economic exp osure, co un terparty exp osure an d sub stitutability. It is lik ely th at the combi ned Dai-ich i Life gro up will be d eemed an IAIG, in which case it, an d th e Compan y, may be sub ject to sup erv isio n req uiremen ts, capital measuremen t stand ard s, and enh anced d isclo sures bey on d tho se app licable to an y co mp etito rs wh o are no t d esig nated as an IAIG. The Co mp any ’s so l e stock ho ld er, Dai-ich i Life, is also su bject to regu latio n by the Japan ese Fin ancial Serv ices Au th ority (“JFSA”). Un der ap pli cab le laws and regul ation s, Dai-ichi Life is req uired to p ro vide no tice to o r ob tain t he consent o f the JFSA prio r to tak in g certain acti on s o r en gagin g in certain tran saction s, either directly or in direct ly th ro ug h i ts su bsid iaries, includ in g the Compan y and its con so lidated su bsidiaries, which coul d limit th e ab ility of th e Co mp any to eng age in certain transactio ns o r busin ess initiatives. Wh ile it is no t yet kn own h ow or the extent to wh ich th e Compan y will b e imp acted b y these reg ulation s, th e Co mp any may exp erience in creased co sts of co mp liance, in creased di sclo sure, less flex ib ility in cap ital man agemen t, an d mo re burdensome regu latio n an d capital requ i remen ts for sp ecific lines of business. In ad ditio n, such reg ulatio ns cou ld imp act the bu sin ess of the Co mp any and its reserv e and cap ital requi remen ts, fin ancial co nd itio n or resu lts o f op eratio ns. NAIC a cti ons, pro no uncements a nd initia tives ma y affect the Co mp any’s pro duct p rofi ta bility, reserve a nd cap ital requirements, financia l cond itio n, o r results of op erations. Alth ou gh so me NAIC p ro no un cements, p art icularly as th ey affect acco un ting , reservin g and risk -b ased cap ital issu es, may tak e effect au to mat ically without affirmativ e action tak en b y th e states, the NAIC is n ot a g ov ern mental ent ity an d its p ro cesses and p ro cedures d o no t co mp ort with tho se t o wh ich go vernmen tal en tities ty pically adh ere. Th erefore, it is p ossib le th at action s co uld be taken b y th e NAIC th at become effectiv e with ou t th e p ro cedural safeg uards that wou ld be p resen t if go vernmental actio n was requ ired. In ad dition , with resp ect t o so me fin ancial regu latio ns and gu id elines, stat es sometimes defer to th e in terpretatio n of the insu ran ce dep artmen t o f a no n-domiciliary state. Neith er the actio n of t he n on -d omiciliary state no r th e acti on of the NAIC is bind in g o n a do miciliary stat e. Acco rdi ng ly, a state co uld ch oo se to follow a d ifferent int erp ret ati on . The Co mp any is also su bject to th e risk that comp l iance with any p articu lar reg ulato r’s interp retation o f a leg al, accou ntin g, or actu ari al issue may resu lt in n on -co mp liance with ano th er regu lator’s in terpretatio n o f th e same issue, particularly wh en complian ce is jud ged in h in dsig ht. There is an ad dition al risk t hat an y p articu lar regul ato r’s interp retation of a legal, acco un ting o r actuarial i ssu e may change o ver time to the Compan y’s detrimen t, o r th at ch ang es to th e ov eral l legal o r mark et en viron ment may cau se the Co mp any to chan ge i ts p ractices in way s th at may, in some cases, limit it s growth o r p rofitability. Statutes, reg ulations, interp retation s, an d instruct io ns may be ap plied with retro active impact, particularly in areas such as acco un ting, reserv e and risk-based capit al requ iremen ts. Also, regu l atory action s with prosp ective imp act can p otent ially hav e a signi fican t impact o n cu rrently sold prod uct s. The NAIC has an no un ced more focused inq uiries on certain matters that coul d h ave an i mp act o n the Co mp any ’s fin ancial co nd iti on and results of op eratio ns. Su ch inq uiries co ncern, fo r examp le, in surer use of capti ve rein su ran ce comp anies, v ariable ann uit y reserves an d cap i tal treatment, certain aspects of i nsu ran ce ho l ding compan y rep orting an d disclo su re, rein su ran ce, cyb ersecurity p ract ices, li qu id ity assessment, an d ri sk-based cap ital calculation s. In ad dit io n, th e NAIC co ntin ues t o co nsid er vario us in iti atives to ch an ge and mod ernize its fin anci al an d solv en cy req uirements an d reg ulation s. It h as ad op ted prin cip les-based reserv i ng metho do logies fo r life in su rance and ann uity reserves, bu t add itio nal formu las and /o r gui dance relevant to the n ew stand ard are being d evelop ed. Th e NAIC is al so co nsiderin g ch ang es to acco un ting and risk -b ased capit al reg ulatio ns, risk-based cap ital calculation s, go vernan ce practices of insurers, an d other i tems. Ad dition ally, t he NAIC is stu dyi ng a g ro up capital calcul ati on t hat wou ld measure capital acro ss U.S.-b ased in su rance grou ps. Th e Compan y cann ot cu rrently estimate wh at impact these mo re focused in qu iri es o r p ro po sed chan ges, i f th ey occu r, will have on its prod uct mix , prod uct profitabilit y, reserv e an d capital req uirements, fin ancial con ditio n, or results o f o perations. The Compa ny’s use o f ca ptive reinsura nce co mp anies to fina nce statuto ry reserves related to its term a nd uni versal l ife pro ducts and to reduce vol atility affecting its va ri ab le annui ty prod ucts ma y be limited or ad versely a ffected b y regula t ory a cti on, pro no uncements a nd interp ret atio ns. The Compan y cu rrently uses affili ated cap tive rein su ran ce co mp anies in various st ru ctu res to finan ce certain statutory reserves b ased o n a regu lation en titled “Valuat io n of Life Insu ran ce Policies Mo del Regu lation,” commo nly kn own as “Reg ulatio n XXX,” an d a su pp ortin g gu id eline entitl ed “The Ap plicatio n of th e Val uatio n of Life In su ran ce Po licies M od el Reg ulatio n,” co mmon ly k no wn as “Guideli ne AXXX,” wh ich are asso ciated wit h term life in surance and un iv ersal life insu ran ce with secon dary g uaran tees, respectiv ely, as well as to redu ce the v olatilit y i n statu to ry risk -b ased capital asso ciated with certain gu aran teed min imum withd rawal an d d eath benefit rid ers associated with cert ain o f th e Co mp any ’s v ariable an nui ty prod ucts. The NAIC h as ad op ted Actuarial Gu id eline XLVIII (“AG4 8”) an d th e sub stan tially similar “Term an d Universal Life In su rance Reserv e Fin anci ng Mo del Regul ati on ” (th e “Reserv e Mo del ”) wh ich establish nati on al stan dards for n ew reserv e fin ancing arran gemen ts for term life in su rance and u niversal life in su ran ce with seco nd ary g uarant ees. AG4 8 and the Reserv e Mo del g ov ern co llateral req uirements fo r captive rei nsu ran ce arran gemen ts. In o rd er to ob tai n reserve credi t, AG4 8 and the Reserve Mod el req uire a minimu m level o f fu nd s, co nsistin g of p rimary an d other secu rities, to be held b y or o n behalf of ced in g insu rers as security under each cap tive life rein surance treaty. As a resu lt o f AG4 8 and the Reserv e Mo del, the implemen tatio n o f new captiv e structures in the future may be less cap ital efficient, lead t o lo wer prod uct ret urns and/or increased pro du ct pricing , o r result in reduced sales of cert ain prod uct s. In so me circumst an ces, AG48 an d th e Reserve M od el cou ld imp act t he Co mp any ’s ability to en gag e in certain reinsu ran ce tran sactions with n on - affiliates. 27 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Fin ancial Co nd ition (E) Co mmitt ee of the NAIC has ado pted a framework fo r changes to curren t ru les and regu latio ns app licable to th e determination o f v ariable an nu ity reserves and risk -b ased capital. The chan ges are intend ed to d ecrease in centiv es fo r insurers to establish v ari ab l e an nu ities cap tives and wi ll appl y to bo t h in -force and n ew bu si ness. The new rules an d reg ulation s will li kel y h ave a 20 20 effectiv e d ate an d an op tion al 3- to 7-year transitio n p eriod fro m cu rrent rul es and reg ulatio ns, beginn i ng on t he effectiv e date. The ch ang es cou ld ad versely affect o ur future fin anci al co nd itio n and resu lts o f o perati on s. The NAIC ad op ted revision s to th e Part A Laws and Reg ulation s Preamb le (the “Preamb le”) o f the NAIC Finan cial Regul ation Stan dards an d Accredi tatio n Prog ram that includ es with in the defin iti on o f “multi-st ate insurer” certain insu rer-o wned captives and sp ecial p urpo se v ehicles th at are single- state licensed b ut assu me rein su ran ce from cedants operating in multip le states. Th e rev ised d efi nition su bjects cert ain capt iv es, includin g XXX/AXXX cap tives, variab le an nu i ty and lon g-term care cap tives, to all of the accreditatio n stan dards app licable to other t rad itio nal multi-state i nsu rers, includ ing stan dards related to cap ital an d surplus requ i remen ts, risk-b ased capital req uirements, inv estment laws, an d credi t for reinsurance l aws. Altho ug h we d o n ot ex pect th e revised d efinition to affect ou r ex isti ng li fe in su ran ce capti ves (or o ur ability to eng ag e in life i nsu ran ce cap tive t ransaction s in th e futu re), such ap pli catio n will lik ely prev ent us from eng ag i ng in variable ann uity captiv e transactio ns on th e same or a si mi lar basis as i n the p ast an d, i f appl ied ret ro acti vely, wou ld likely cau se us to recap t ure b usin ess fro m and un win d o ur exist in g v ariabl e an nu ity cap tive (“VA Captive”). Wh ile th e recaptu re of b usiness from ou r ex isting VA Cap tive, caused ei th er b y actio ns o f th e VAIWG or the effect of th e Preamb le, wou ld no t have a material ad verse effect on th e Compan y gi ven curren t market co nd itio ns, i n th e future the Co mp any cou l d ex perien ce flu ctu ation s in its risk -b ased cap ital rat io du e to market v olatility if it were pro hibited from eng aging in similar tran sactions o r req uired to u nwin d its ex isti ng VA Cap tive, wh ich cou ld adv ersely affect ou r future fin an cial con dition and resu lts o f o peration s. An y regu latory action or chan ge in in terpretatio n that mat eri all y adv ersely affects th e Co mp any ’s use o r material ly in creases t he Company’s cost o f using capti ves or reinsurers fo r th e affected bu siness, either retroact iv ely or p ro sp ecti vely, cou ld hav e a material adv erse impact on the Co mp any ’s fin ancial co nd ition or resul ts o f operations. If the Co mp an y were req uired to discon tin ue i ts u se of captives for in tercompan y rein surance tran saction s o n a retroact iv e basis, ad verse impacts wo uld includ e early terminatio n fees p ayab le to th ird p arty fin ance prov id ers with resp ect to cert ain structures, diminished cap ital po sition , an d hig her co st o f cap ital. Ad dition ally, find in g alternativ e means to su pp ort policy liabil ities efficien tly is an u nk no wn factor th at wou ld be depen den t, in p art, on future market con dition s and t he Compan y’s ab ili ty to ob tain requ i red regul ato ry app ro vals. On a p ro spectiv e basis, d isco nti nu ation of th e u se of captiv es cou ld impact th e ty pes, amo un t s and pricing of prod ucts offered b y the Compan y’s insu ran ce sub si diaries. Laws, reg ula tions, a nd initi atives rela ted to unrep orted deaths and uncla imed p roperty and death benefits ma y result in o pera tional b urdens, fines, unex pected p ayments, o r escheat ments. Si nce 2 01 2, vario us states h ave en acted laws that requ ire life insurers t o search for u nrepo rted deaths. Th e Nation al Con ference o f Insu ran ce Legislators (“NCOIL”) h as ad op ted the M od el Un claimed Life In su ran ce Benefits Act (the “Unclaimed Benefits Act”) an d l eg islatio n or reg ulation s have been enact ed in n umero us states th at are si mi lar to th e Un claimed Benefits Act, altho ug h each state’s versio n differs in so me respects. Th e Unclaimed Ben efits Act, if ado pted by an y state, impo ses req uirements on insu rers to perio dicall y compare t hei r life i nsu ran ce an d ann uity co ntracts an d retai ned asset acco un ts agai nst the U.S. So cial Secu rity Ad ministratio n’s Death Master Fil e or similar d atabases (a “Deat h Dat abase”), in vestig ate an y po ten tial match es to co nfi rm the d eath an d determin e wh eth er b enefit s are du e, an d t o attemp t to l ocate the ben eficiaries o f any ben efits that are du e o r, if no b eneficiary can be lo cated, esch eat th e ben efit to the state as unclaimed prop erty. Other states in which the Compan y d oes b usiness may also co nsid er ado pti ng legislation similar to the Un claimed Benefits Act. Th e C ompany cann ot predict whether such leg islat io n will be proposed o r enacted in addi tion al states. The Un iform Laws Co mmissio n has ado pted revision s to t he Un iform Uncl aimed Pro perty Act in a mann er likel y to imp act state unclaimed p ro perty laws an d requirements, th ou gh it is no t clear at this time to wh at ext en t o r whet her requ irements will con fli ct wit h otherwise impo sed search requ iremen ts. Other life i nsu ran ce in du stry asso ciatio ns and reg ulato ry associati on s are also con siderin g th ese matters. Certain states hav e amend ed or may amen d their un claimed property laws in a mann er which creates ad dition al ob l ig ation s fo r life insu ran ce co mp anies. Th e en actment o r amen dment o f su ch un claimed prop erty laws may req uire th e Co mp any to incu r sign ifi can t expenses, includ ing b enefits with respect to terminated p olicies fo r which no reserves are cu rrentl y h eld and un anticipat ed o perati on al exp enses. Any of t he forego in g co uld h ave a material ad verse effect o n th e Co mp any ’s fin anci al con ditio n an d resu lts o f o perati on s. A n umber o f st ate treasury dep artments and ad minist rat ors o f u ncl aimed p ro perty have aud ited life i nsu ran ce compan ies for co mp liance with un claimed p ro perty laws, and state i nsu ran ce regu l ators h ave ini tiated targeted mu lti-state examin ation s o f life in su rance co mp an ies wit h respect to th e co mp anies’ claims pay in g p ract ices and use of a Death Database to i dentify unrepo rted d eath s in th eir li fe in su ran ce p olicies, annui ty co ntracts, and ret ained asset accou nts. Th ere is n o clear basis in p rev io usly ex isting law fo r treating an un rep orted death as giving rise to a po licy b enefit th at wo uld b e sub ject to un claimed p ro perty proced ures. However, a n umber of life insurers h ave entered in to reso l utio n ag reemen ts with state treasu ry departments and admin istrato rs of u nclaimed prop erty o r settlement or co nsen t agreemen ts with stat e insu ran ce regu lators. The amo un ts p ub licly rep orted to h ave been p aid to b eneficiaries, escheated to t he states, an d/or paid as ad ministrativ e an d/or ex aminat io n fees to th e insuran ce regu lators in co nn ection with the settlement or co nsen t ag reements hav e been su bstan tial. Certain o f th e Co mp any ’s su bsidiaries as wel l as certain o th er insurance compan ies from wh om the Compan y h as coinsured b lo cks of life insurance an d ann uity po licies are subject to un claimed p ro perty aud its and /o r targeted mu lti-state examin ation s by in surance reg ulato rs similar to th ose described ab ov e. It i s p ossib le that t he au dit s, ex ami nat io ns, and /o r t he en actment o f st ate laws similar to th e Unclaimed B en efit s Act co uld result in add itio nal payments t o ben eficiaries, ad ditional esch eatment of fu nd s 28 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents deemed ab an do ned u nder state laws, pay ment of ad ministrativ e p enal ties an d/or examination fees to state autho rities, and ch anges to t he Co mp any ’s procedu res for iden tifying u nrepo rted deaths and escheatment o f aban do ned p ro perty. It is po ssible an y su ch add itio nal p ayments an d any co st s related to ch ang es in Company pro ced ures cou ld materially imp act t he Company’s fin anci al con dit io n and /or resu lts o f o peration s. It is also po ssible th at life in su rers, in clu ding the C ompany, may b e su bject to claims, regu l atory actio ns, law en forcement actio ns, and civil litig ation ari sin g fro m th eir p rio r bu si ness practices, un claimed prop erty practi ces, or relat ed au dits and examin ation s. Any resulting liab ilities, pay men ts, or co sts, includin g in itial and o ng oing co sts o f ch ang es to th e Co mp any ’s pro ced ures or sy stems, co uld b e significant and cou l d h ave a material ad verse effect o n the Co mp an y’s finan cial con dition and /o r resu lts o f op eratio ns. The Co mp any h as p rev io usly b een sub ject to lit ig ation regarding co mp liance with the West Virgi nia Uniform Un claimed Pro perty Act, b ut th e Co mp any do es n ot b eli ev e t hat lo sses ari sin g from the litig ation wi ll be material. Th e C ompany cann ot, h owever, p red ict whether oth er jurisdiction s will pu rsu e similar actio ns or if th ey d o, whether such acti on s will h ave a mat erial i mp act on th e Co mp any ’s finan cial co nd iti on an d/o r results of op eratio ns. The Comp any is subject to insurance guaranty fund la ws, rul es a nd regula tions that co uld a dversely a ffect the Company’s fina ncial condition or results of op eratio ns. Un der in surance guaran ty fu nd laws in most st ates, in su ran ce co mp ani es do in g b usiness th erei n can b e assessed u p to p rescrib ed l imits fo r po licyh older losses in curred b y inso lvent companies. From time to time, companies may b e asked to con tri bu te amo un ts b eyo nd p rescri bed limits. It is po ssi ble th at the Company cou ld be assessed with resp ect to produ ct l in es no t o ffered by th e Co mp any. In 2 01 7, the NAIC ado pted revision s to the Li fe and Health In surance Guaran t y Asso ciatio n Model Act th at, if ado pted by st ates, wou ld resu lt in an increase to the percentage of liabilities attrib utable to an y fu tu re lo ng t erm care p ro vider insolven cy that can be assessed to li fe insurers. Legislation may b e intro du ced in variou s states with resp ect to g uaran ty fund assessmen t laws related to in su ran ce p ro du cts, in clu ding lo ng term care insurance and other specialty p ro du cts, th at d iffers fro m the revi sed M od el Act and wh ich in creases t he cost of fu tu re assessmen ts and/or alters future p remiu m tax offsets receiv ed in con nection with g uaranty fun d assessments. Th e Co mp any can no t p red ict the amo un t , n atu re or timing of an y future assessment s or legislation , an y o f which cou ld hav e a material an d adv erse imp act on th e Co mp any ’s fi nancial co nd itio n o r resu lts of operatio ns. The Co mp any is sub j ect to insura ble interest la ws, rules, and regula tions tha t could ad versely affect the Compa ny’s fina ncial condit io n o r results of op eratio ns. The pu rch ase o f life in surance prod ucts is li mi ted b y state in su rab le in terest laws, wh ich in most ju risd ictio ns requ ire th at the pu rch aser o f life in surance name a b en eficiary that has so me in terest in the su st ained life o f t he in su red . To so me extent, th e insurable in terest laws p resent a b arrier to th e life settlement, or “strang er-owned ” ind ustry, in wh ich a fin ancial en tit y acq uires an in terest in life insurance p ro ceed s, an d efforts h ave b een made in so me states to lib eralize th e insurable interest laws. To the extent th ese laws are relax ed, th e Co mp any’s lapse assu mp tions may p ro ve t o be in correct, wh ich co uld ad versel y affect the Compan y’s fin anci al con ditio n o r results of op eratio ns. The Hea lthca re Act a nd rela ted regula tions co uld a dversely affect the results of op eratio ns or financia l co nd ition o f the Co mp any. The Compan y is sub ject to v ariou s cond itio ns and req uirements o f th e Pat ien t Pro tectio n and Affo rd able Care Act of 2 01 0 (t he “Healthcare Act”). The Health care Act mak es sig nificant chan ges to the regu lation of h ealth in surance an d may affect th e Compan y in vario us ways. The Health care Act may affect th e small block s of bu sin ess the C ompany has o ffered o r acqu ired o ver th e y ears that are, or are deemed to co nsti tu te, health in surance. The Healthcare Act may also affect th e b en efit p lan s th e Compan y sp on sors fo r emp loy ees o r retirees and their dep end ents, th e Compan y’s exp ense t o prov id e such b enefits, th e tax liabi lities o f the Compan y in co nn ection with the p ro vision of su ch b en efit s, and th e C ompany ’s ab ility to att ract or retain emp lo yees. In ad dition , the Co mp any may be sub ject to reg ulatio ns, g uid an ce or d etermi natio ns emanatin g from th e vario us reg ulato ry auth orities autho rized u nd er th e Health care Act. The Co mp any cann ot predict th e effect th at th e Healthcare Act, an y amend men ts or mod ifi catio ns to th e Health care Act, o r any reg ulatory p ron ou ncemen t made u nd er the Healthcare Act , will hav e on its results o f o peration s o r fin anci al con dit io n. Laws, rules, and reg ulati ons pro mulg ated in connectio n with the enactment of the Do dd -Fra nk Wall Street Reform and Consumer Pro tectio n Act may ad versely affect the results of opera tions or fina ncial condition of the Compa ny. The Dodd-Fran k Wall St reet Reform an d Co nsumer Pro tectio n Act (th e “Dod d-Frank Act”) enacted in July 20 10 mad e sweepi ng chan ges to th e regul ati on o f finan cial services entities, p ro du cts and mark ets. Alth ou gh th e n ew p resid en t ial ad minist ratio n has ind i cated a desire t o rev ise o r reverse some of its p ro vision s, the fate of these p ro po sal s is un clear, and we cann ot predict with certain ty h ow t he Dod d-Frank Act will co nti nu e to affect the fin ancial mark ets generally, o r imp act o ur bu sin ess, rating s, results o f o peration s, fin ancial con ditio n or l iq uidity . Amon g other thing s, the Dodd-Frank Act i mposed a co mp reh en sive new regu lat ory reg ime on the ov er-th e-co un ter (“OTC”) d erivativ es mark etp lace an d grant ed n ew jo in t regu latory aut ho rity to the SEC and the U.S. Commod i ty Fu tu res Trad ing Commission (“CFTC”) o ver OTC deriv atives. Wh ile the SEC an d CFTC co ntin ue to promulgate rules requ ired b y th e Dod d-Frank Act, mo st ru les hav e been fin alized and, as a resu lt, certai n o f th e Compan y’s deriv atives op eratio ns are subj ect to , among other thin gs, new record keeping , reporting an d do cumentation requ iremen ts an d new clearing requi remen ts for certain swap transact io ns (cu rrently, certain in terest rat e swaps an d in dex -b ased credit default swap s; cleared swap s requ ire the p osting of marg in to a clearing ho use via a fu tu res co mmissio n merchan t an d, in so me case, to th e fu tu res co mmissio n merch ant as well). In 2015 , U.S. federal b ank in g regu lators and th e CFTC ado pted regu lat io ns that will requ ire swap dealers, secu rit y-based swap dealers, majo r swap particip an t s, and majo r secu rit y-based swap partici pants (“Swap En tities”) to po st marg in to, and collect 29 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents marg in fro m, th eir OTC swap cou nterp arties (th e “Margin R ules”). Un der the Margin Ru les, th e Compan y wo uld be co nsid ered a “fin an cial en d-user” that , wh en facin g a Swap Enti ty, i s req uired to po st and collect variat io n marg in fo r its no n-cleared swap s. In add ition , dep en din g o n its deriv atives ex po sure, the Co mp any may b e requ ired to p ost an d collect initial margin as well. The in itial marg in requ iremen ts of th e M arg in Ru les will be ph ased-in o ver a p eriod o f five years b ased o n th e av erag e ag gregat e n otio nal amou nt of the Swap Entity’s (combined with all o f its affiliates) and it s co un t erparty’s (co mb in ed with all of its affiliates) swap po sitions. It is an tici pated that the Co mp any will no t be sub ject t o the in iti al marg in requ irements un til Sep tember 1, 20 20 . Th e variatio n margin requ irement to ok effect on Sep tember 1 , 20 16 , for swaps wh ere bo th th e Swap Entity (and its affiliates) and it s co unt erp art y (an d its affiliates) have an average d aily ag gregate no tion al amou nt o f swap s for M arch , April, and M ay o f 20 16 that exceeds $3 trill io n. Otherwise, the v ariation marg in req uirement, to which we are su bject, to ok effect o n M arch 1, 201 7. Other regu latory requ iremen ts may in direct ly imp act us. For ex amp le, no n-U.S. co un t erpart ies of th e Co mp an y may also be sub ject to n on -U.S. regul ati on o f their deri vativ es tran sactio ns with the Compan y. In add ition , co un terparties regul ated b y the Prud ential Reg ulato rs (which con sist o f th e Office of th e Co mp troller of th e Cu rrency, th e Bo ard of Governors of th e Federal Reserv e Sy stem, th e Federal Depo si t Insu ran ce Co rp oration , th e Farm Cred it Ad ministratio n, an d th e Fed eral Hou sin g Finan ce Agen cy ) are su bject to liqui dity, leverage, and capital requ irements th at imp act their deriv atives transact io ns wit h the Co mp any. Collectiv ely, these new req uirements h ave increased the d irect an d in direct costs of ou r deriv atives activ iti es and may furth er in crease th em in the future. Pursu ant to th e Dod d-Frank Act, in Decemb er 20 13 , t he Federal In surance Office (“FIO”) issu ed a rep ort on h ow to mod ernize an d improv e the system o f insurance reg ulation in th e Un i ted States and , in December 20 14 , th e FIO p ub lish ed its repo rt on t he breadth an d sco pe o f the g lo bal rei nsu ran ce mark et. In this rein su ran ce repo rt, th e FIO in dicates that reinsurance collateral con tinu es t o b e at the forefron t o f its t hink in g with reg ard to po ten tial direct federal in vo lv ement i n insu ran ce reg ulation . Sp ecifically, the FIO’s rein surance repo rt arg ues th at federal o fficials are well-po sition ed t o make d etermin ations regardin g wh eth er a fo reign jurisdiction h as su ffi cientl y effectiv e regu lat io n an d, in d oing so , consider o th er prud ent ial i ssues pen ding in th e U.S. and between t he U.S. and affected fo reign jurisdiction s. The reinsu ran ce rep ort not es that work con tin ues to wards initiatin g nego tiat io ns fo r cov ered ag reemen ts with leading reinsu ran ce jurisdiction s th at may h ave th e effect of preempti ng inco nsistent stat e laws. In 20 17 , the U.S. an d E.U. en tered in t o such a cov ered ag reement. It remain s to be seen whether the U.S. will neg otiate co vered agreements with o th er major U.S. trading p artners. More g enerall y, it remain s to be seen wh ether ei th er o f th e FIO’s repo rts wi ll affect th e man ner in wh ich in su ran ce an d reinsuran ce are regul ated in t he U.S. and th erefore affect th e Compan y’s bu sin ess. The Dod d-Frank Act also established the Fin ancial Stab ility Ov ersigh t Co un cil (the “FSOC”), which is autho rized to d etermine whether an i nsu ran ce co mp any is systematically sig nificant an d to reco mmend that it sh ou ld b e su bject to en han ced p rud en tial stand ard s an d to sup erv isio n by the Bo ard o f Go verno rs of t he Fed eral Reserv e Sy stem. In Ap ril 20 12 , the Fin ancial Stability Ov ersig ht Cou nci l (th e “FSOC”) app rov ed its final ru le fo r d esign ati ng no n- bank fin an cial compan ies as systemically imp ortan t fi nancial institu tio ns (“SIFI”). Un der th e final ru le, the Co mp an y’s assets, liabilities, and o perati on s do no t cu rrently satisfy th e finan cial th resho ld s that serv e as the first step o f th e th ree-stag e process to desig nat e a no n-ban k financial co mp any as a SIFI. While recent d ev elo pments sug gest that it is u nlikel y that FSOC wi ll be design ating ad dition al no n-ban k fi nancial companies as sy stematically sig nificant, there can be n o assu ran ce o f th at un l ess and un til FSOC’s autho rity to do so has b een rescind ed. The Con sumer Fin ancial Pro tectio n Bureau (“CFPB”) h as su pervi sory au th ority o ver certain no n-ban ks wh ose activities o r p ro du cts it determines po se risks to con sumers, an d issu ed a ru le in 2 01 6 amen din g reg ulatio ns u nd er the Home Mo rtg ag e Disclosure Act th at requ ires th e Co mp any to , among ot her th in gs, collect an d disclo se ex ten sive data related to its len ding p ractices. At this ti me, the ru le rel ates to repo rtin g data relat iv e t o Co mp any loan s made on multi-family ap artmen ts, seniors l iv in g h ou sing , man ufactured ho using commu nities, an d an y mix ed-use p ro perties wh ich con tai n a resid ential compo nen t. It is u nclear at this time ho w b urden so me complian ce with th is or other ru les p ro mu lgated un der th e Ho me M ort gage Disclo su re Act will become. Certain of t he Co mp an y’s su bsid iaries sell p ro du cts th at may be regu l ated by the CFPB. Th e CFPB cont in ues to b ring en fo rcemen t action s in vo lv in g a growi ng n umber o f issu es, includ ing act io ns b ro ug ht jo in tly with state Atto rn eys General, which cou ld di rectly o r ind irectly affect t he Company or an y o f it s sub sidiaries. The Co mp an y is u nab le at this time to predict t he impact of th ese acti vities on th e C ompany . Alth ou gh th e fu ll impact o f the Dod d-Frank Act cann ot be determin ed un til all o f the vario us stu dies man dated by th e law are co nd ucted and all implementing regu latio ns are ad op ted , many o f the leg islat io n’s requ irements cou ld hav e an ad verse impact o n th e finan cial services and insurance in du stri es. In ad ditio n, the Do dd -Frank Act cou ld make it mo re expen sive fo r us to con duct bu siness, req uire us to make ch ang es t o our b usin ess mod el or satisfy i ncreased capital req uiremen t s. New a nd a mended regul atio ns rega rd ing the standa rd of ca re o r sta nd ard of conduct ap plica ble to investment p rofessionals, insurance ag enci es, and fina ncial institut io ns t ha t recommend or sell annui ties or life insura nce pro ducts may ha ve a materi al a dverse imp act o n our ab ility to sell a nnuities and other p rod ucts a nd to reta in in-force b usiness and o n o ur fina ncial condition or result s of op erations. Sales o f li fe insu ran ce p oli cies and ann uity con tracts o ffered by th e Co mp any are sub j ect to reg ulation s relatin g t o sales practi ces ad op ted by a variety o f federal an d state reg ulato ry au th orities. Certain ann uities and life insu ran ce po licies such as v ariable ann uities and v ariable un iv ersal life i nsu ran ce are reg ulated un der th e federal secu rities l aws ad ministered by th e SEC. On April 18 , 20 18 , th e SEC v oted to pro po se ru lemaki ng s and in terpretatio ns relating to t he standard o f con du ct ap plicab le to b ro ker-d ealers, inv estment ad visers, and their rep resen tativ es wh en making certain recommen datio ns t o retail cu stomers. Sp ecifically, un der the pro po sed reg ulation s, a b ro ker-d ealer wo uld be req uired to act in t he best in terest of a retail custo mer wh en recommen ding an y secu rities transactio n or in vestmen t strategy in vo lv in g securi ties to a retail customer. Th e SEC also prop osed an in terpretatio n reaffirming an d, i n so me cases, clarifyi ng its views of th e fidu ciary d uty that in vestmen t ad visers owe to th eir 30 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents cli en ts. An other SEC prop osal wo uld requ ire b ro ker-d ealers and inv est ment ad visers t o p ro vid e each cu sto mer with a su mmary of the nat ure of the cu stomer’s rel ati on ship wit h the investment p ro fessio nal, as well as a restriction o n the use o f th e terms “adv iser” and “adv isor” by bro ker-d ealers. The co mment period on the p ro po sals clo sed on Au gu st 7 , 20 18 . The SEC h as in dicated th at it will issu e a fi nal v ersio n o f the reg ulations an d the in terpretatio n b efo re the end of th e third q uarter 20 19 . In ad dit io n, bro ker-d ealers, in surance agen cies an d o th er fin ancial insti tu tion s sell the Compan y’s an nu ities to emp lo yee ben efit p lan s gov erned by prov isio ns o f th e Emp lo yee Retirement In come Security Act (“ERISA”) and Ind iv id ual Retirement Accou nts (“IRAs”) that are g ov ern ed b y similar prov isions un der th e In ternal Reven ue Cod e (th e “Co de”). Co nsequ ent ly, o ur activities an d tho se o f th e firms that sel l the Co mp any ’s pro du cts are su bject to restrictions th at req uire ERISA fid uciaries to p erform their d uties so lely in the in terest s of ERISA p lan particip ants and b eneficiaries, and that proh ib it ERISA fiduciaries from cau sing a co vered p lan o r retirement account to en gag e in cert ain p roh ib ited tran saction s absen t an exempt io n. The NAIC is co nsid ering rev i sio ns to the Suit ab ility i n Ann uity Transact io ns Mo del Regu latio n whi ch , if ad op t ed b y regu lators, co uld impo se a stricter stand ard o f care u po n in su rers wh o sell ann uities. Likewise, sev eral stat es are co nsid ering o r h ave ado pted leg islatio n or reg ulato ry measu res t hat wo uld implement n ew req uirements an d stan dards ap pli cab le to th e sale of an nu ities and , in so me cases, life in su rance prod ucts. Th e NAIC an d several states, in clu ding Con necticut, Nevad a, New Jersey, and New Yo rk h av e passed laws or p ro po sed regu lation s req uirin g insurers, investment ad visers, brok er-dealers, an d/or ag en t s to d isclose co nflicts o f interest to clien ts or t o meet stand ard s that th eir advi ce b e i n the cu stomer’s b est in terest. These stand ard s v ary wid ely in scop e, ap plicab ility, an d timin g o f imp lementation . The ado ptio n an d enactmen t of these or any revised stan dards as law o r regu latio n co uld h ave a material ad verse effect u po n the man ner in which t he Compan y’s prod ucts are sol d and impact th e ov erall market fo r such p rod ucts. There remains signi ficant u ncertainty su rro un ding th e final form that th ese regu lations may take. Our cu rrent distribu t ors may co ntinue to mov e fo rward with their plans to limit the nu mb er o f prod ucts th ey o ffer, i ncl ud in g th e t yp es o f prod ucts o ffered b y th e Compan y. The Comp any may find it necessary to ch an ge sales representative and/or brok er co mp ensatio n, to limit the assistance o r ad vice it can p ro vide to o wners of the Compan y’s an nu i ties, to replace o r eng age add itio nal d istributo rs, or otherwise change th e man ner in which i t desig ns, su pervises, an d su pp orts sales of its an nu i ties an d, where ap pli cab le, life in su ran ce p ro du cts. In additio n, the Compan y co ntin ues to in cur expen ses in co nn ecti on wit h initial an d o ng oing complian ce ob ligatio ns with resp ect to su ch ru les, and i n th e agg reg ate th ese expenses may b e sig nificant. An y of the fo reg oing regu latory, legisl ative, o r j ud icial measures or the reaction to such act iv ity b y con sumers o r o th er members o f the insu ran ce ind ustry cou ld hav e a material adv erse imp act on our abilit y to sell ann uities and other prod uct s, to retain in -force bu sin ess, an d on ou r finan cial co nd ition or resu lts of o peration s. The Compa ny ma y be subj ect to regula tion, investigat io ns, enfo rcement actio ns, fi nes and p ena lties imp osed by the SEC, FINRA a nd other federa l a nd internatio nal regula to rs in co nnecti on with its b usiness op erati ons. Certain l ife insurance policies, con tracts, and ann uities offered by th e Compan y are su bject to reg ulation u nd er the fed eral secu rities laws ad ministered by t he SEC. The federal secu rities laws co ntain reg ulato ry restriction s and crimin al, admini strativ e, an d priv ate remed ial provi sio ns. From time to time, the SEC an d th e FINRA examin e o r inv estig ate th e act iv ities o f b ro ker-d ealers, insurer’s sep arate accou nts and inv est ment adv iso rs, includ ing the Co mp any ’s affi liated brok er-dealers an d in vestmen t ad visers. These ex aminatio ns or inv estigatio ns often focus on th e activit ies o f th e reg istered represen tat iv es an d registered inv estment ad visers doi ng b usiness throu gh su ch entities and the entities’ su pervisi on o f th ose persons. It is po ssi ble t hat any ex aminatio n o r i nv estigatio n co uld lead to en fo rcemen t actio n by th e regu l ator and /o r may resu lt in pay ments o f fin es an d p enal ties, payments to customers, or b oth, as wel l as ch anges in systems o r p ro ced ures of such entities, an y of wh ich co uld hav e a material ad verse effect o n th e Co mp any’s fin ancial con dition or resu lts o f o perati on s. The Co mp any may also be su bject to reg ulatio n by g ov ern ments of the co un t ries in which it cu rrently d oes, or may in the fu ture, do , b usin ess, as well as regu l ati on by th e U.S. Gov ern ment with resp ect to its op erat io ns in fo reign cou ntries, su ch as the Foreig n Co rrupt Practices Act. Penal ties for violating th e v ariou s laws g ov ern in g t he Company ’s bu siness in o th er co un tries may in clu de restriction s up on b usin ess op eratio ns, fi nes and imprison ment, bo th withi n t he U.S. and abroad . U.S. enforcement of anti-corrup tion laws con t in ues to increase in magn itu de, and penalt ies may be su bstan tial. The Company is sub ject to co nd iti on s and requ iremen ts set fo rth in th e Telep ho ne Con sumer Pro tectio n Act (“TCPA”), which p laces restrictio ns on th e u se o f auto mated telep ho ne and facsi mi le machines. Cl ass actio n lawsuits al leg in g violatio ns of th e act h ave been filed against a n umber o f co mp an ies, in clu ding life i nsu ran ce carriers. Th ese class actio n lawsu its co ntain al leg ati on s that d efend ant carriers were v icario usly l iable for the alleged wro ng fu l co nd uct of agen ts wh o v io lated the TCPA. So me of the class acti on s hav e resu lted in sub stan tial sett lemen ts ag ain st other in su rers. Any su ch action s against th e Co mp any co uld resu lt in a material adv erse effect upon our fin ancial con ditio n or results of op eratio ns. Other ty pes of regu l ati on that co uld affect t he Co mp any an d i ts su bsid iaries in clu de, bu t are n ot limited to, i nsu ran ce co mp an y inv estment laws and regul ati on s, state st atuto ry accou ntin g and reserv in g practices, antitrust laws, min imum sol vency requ iremen ts, enterp rise risk req uiremen t s, state securities laws, fed eral privacy laws, cyb ersecu rity regu lat io n, techn olog y an d d ata regu latio ns, in surable in terest laws, federal anti-mon ey laun derin g an d an ti- terro rism laws, emp lo yment and immigratio n laws (includ in g laws in Alabama wh ere o ver half of th e Comp any ’s emp loy ees are l ocated ), an d b ecause the Co mp any o wn s an d op erates real prop erty, state, federal, and l ocal env iron men tal laws. Und er some circu mstances, severe pen alties may b e imp osed for breach of th ese laws. The Compan y can no t predi ct what form an y fu tu re ch ang es to laws and /o r regu lations affecting p articipan ts in th e fin anci al services sector and /o r in surance ind ustry, in clu ding th e Compan y an d its compet itors o r those en tities with which it d oes bu siness, may take, o r wh at effect, if an y, such chan ges may h ave. 31 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Compan y’s abilit y t o enter into certain tran saction s is in flu enced b y h ow su ch a transactio n mig ht affect Dai-i chi Life’s taxatio n in Japan. Changes to t ax la w, or interpretatio ns of existing ta x la w could ad versel y affect t he Compa ny and its abi lity to compet e with non-insurance pro ducts or reduce the d ema nd fo r certa in insurance pro ducts. In general, existin g law ex empts po licyh olders from curren t tax ation o n th e increase i n val ue o f mo st insu ran ce and an nu ity p ro du cts du ring th ese prod uct s’ accumul ation ph ase. Th is fav orabl e tax treatment prov i des some of th e Compan y’s prod uct s with a compet itiv e adv antage o ver pro du cts offered b y no n-in surance compan ies. To the ex tent t hat th e law is revised to eith er redu ce th e tax favo red status of life insurance and an nui ty prod ucts, or to est abl ish th e tax favo red statu s of competin g prod uct s, th en all life insu ran ce co mp anies, in clu ding t he Compan y’s sub sid iari es, wo uld be adv ersely affected with resp ect to th eir abilit y to sell t heir p ro du cts. Fu rthermo re, such changes wo uld g enerally cau se i ncreased su rrend ers of existin g life in surance an d an nu ity prod uct s. For example, a ch an ge in law th at fu rther restri cts th e ded uctib ility o f in terest exp ense wh en a bu siness own s a life in surance p rod uct wou ld result in in creased surren ders of th ese prod ucts. Th e Co mp any is sub ject to co rp orate inco me, excise, franch ise, and premium tax es. Fed eral tax law prov id es certain ben efi ts to the Co mp any, such as th e d iv id end s-receiv ed d edu ction , t he d eferral of cu rrent tax ation o n d erivatives’ an d secu rities’ eco no mic income and the cu rrent ded uctio n fo r fu tu re po licy ben efits an d claims. Th e Tax Cut and Job s Act (th e “Tax Refo rm Act”), en acted in December 20 17 , requ ires t he C ompany to rep ort h ig her amou nts of taxab le inco me b oth cu rrently and in th e fu tu re. Ho wev er, it also sign ifican tly redu ced the corp orate i ncome tax rate. Ov erall, the Compan y ex pect s to pay less inco me tax i n t he fu t ure u nder the Tax R eform Act. The Co mp any ’s mid -2 00 5 transitio n from rely ing on rein su ran ce fo r newly-written traditio nal l ife p ro du cts to rein su ring some of th ese pro du cts’ reserves in to its cap t iv e in su ran ce companies resu lted in a n et redu ction in its cu rrent taxes, offset b y an in crease in its d eferred taxes. The resultin g benefit o f reduced curren t tax es is attribu ted to th e app l icable life p ro du cts and is an impo rtant co mp on en t of th e p ro fitab ility o f th ese p ro du cts. Th e Tax Reform Act, with its o verall lo wer t ax rate, has d ecreased the econ omic tax b enefit associated wit h t hese pro du cts. Ul timat ely , th e p ro fitability and competit iv e position o f th ese p ro du cts is d epen den t on the Compan y’s abilit y to co nti nu e d ed ucting its p ro vision for fu tu re po licy b enefit s an d claims an d th e Co mp any’s ab ility to generate taxable in come. Fina ncial services co mp anies are frequently the t arg ets o f lega l p ro ceed ings, including cla ss action litiga tion, which coul d result in substant ia l jud gments. A n umber of ju dg ments hav e b een retu rn ed agai nst in surers, b rok er-dealers, and o ther p ro viders of finan cial serv ices i nv olving , amon g o th er t hing s, sales, u nd erwrit in g practices, prod uct design , prod uct d i sclo sure, prod uct ad ministratio n, d enial or delay o f ben efits, ch arg in g ex cessiv e or impermi ssi ble fees, recommen ding u nsuitab le prod ucts to cu st omers, breachi ng fid uciary or o th er du ties to cu stomers, refun d o r claims p ractices, all eg ed agen t misco nd uct , fai lu re to p ro perly sup erv ise rep resen tatives, relation ships with ag ents o r o th er person s wit h wh om th e compan y do es b usin ess, employmen t-related matters, payment o f sales o r other cont in gen t co mmissio ns, and other matters. Often these legal p ro ceed in gs hav e resulted in the award o f sub stantial j ud gmen ts t hat are disp ro po rti on ate to the actu al d amag es, in clu ding material amou nts o f p un itiv e no n-econ omic co mp en sat ory d amages. In some st ates, juries, ju dg es, and arbitrators have su bstantial d i scretio n in awarding p un itive an d no n-econ omic compensato ry d amages, which creates the po ten tial for u np red ictable material ad verse jud gments o r awards in any giv en legal proceed in g. Arb itratio n awards are su bject to very limited app ellate review. In ad ditio n, in some leg al proceeding s, co mp anies have mad e material settlement pay ments. In some instances, sub stantial jud gments may be th e resu lt o f a p arty’s p erceived ability to satisfy su ch jud gment s as op po sed to the facts an d circu mstances regardi ng th e claims. Grou p h ealth cov erag e issu ed throu gh associations and cred it in surance cov erag es have received some negative pu blicity in th e media as well as in creased regu latory co nsideration and review an d liti gatio n. Th e Co mpan y h as a smal l clo sed b l ock o f g ro up health in surance cov erag e th at was issued to memb ers o f an asso ciatio n. A n umber of lawsu its an d in vestigat io ns reg ard in g th e meth od o f pay in g claims hav e b een init iat ed ag ain st life insurers. The Company offers payment metho ds that may be similar to th ose that hav e been the su bject o f su ch lawsuits an d investig ation s. The Co mp an y, lik e other fin ancial serv ices co mp anies in th e ordinary cou rse of b usiness, is inv olved in legal p ro ceed i ng s and regu latory action s. The occurren ce o f su ch matters may become more freq uen t and /o r severe wh en general econ omic con dition s have deteriorated . The Co mp any may be un able to predict th e ou tco me o f such matt ers an d may be u nab le to prov id e a reason able ran ge o f po ten tial lo sses. Given the inh eren t difficu lty in p red ictin g th e ou tcome o f such matt ers, it i s p ossib le th at an adverse ou tco me in certain su ch mat ters co uld be material to the Company ’s resu lts for an y particular rep orting perio d. The financia l services and insura nce ind ustries are someti mes t he targ et o f law enforcement investiga t io ns a nd the fo cus o f increa sed regula to ry scrutiny. The fin an cial serv ices an d insu ran ce in du stri es are sometimes the targ et o f l aw enfo rcemen t an d reg ulatory i nv estigatio ns relating to th e n umero us laws an d reg ulation s th at go vern such co mp ani es. Some compan ies hav e b een the subj ect o f l aw enforcement o r o th er action s resultin g from such in vestig ation s. Resulting pu blicity abo ut o ne compan y may generate in qu i ries in to o r liti gatio n against other financial service p ro vid ers, even th ose who do no t en gag e in the b usin ess lin es o r practices at issue in th e orig i nal action . It is imp ossib le to predict th e ou t co me of su ch inv estig ati on s o r actio ns, whet her th ey will ex pand into other areas no t yet co ntemplated , whether they will result in chan ges in regu latio n, wh eth er activities cu rrently tho ug ht to be lawfu l will be ch aracterized as un lawful, or th e imp act, if an y, of su ch scrutin y o n the fin ancial services and in surance ind ustry or t he Compan y. 32 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents From time to time, the Compan y receiv es sub po enas, requ ests, o r o t her in qu iries an d respo nd s t o them in the o rd inary cou rse o f b usin ess. New accounti ng rules, changes to ex isting a ccounting rules, or the grant of permitted accounting p ractices to compet itors co uld neg ati vely imp act the Co mp any. The Co mp any i s requ ired to co mp ly with accou ntin g prin cip les g en erally accepted in the United Stat es (“GAAP”). A n umber o f organ izatio ns are in strumental in the dev elo pment and in terpretat io n of GAAP such as th e SEC, the Fi nancial Accou nting Standard s Board (“FASB”), and the American In stit ute of Certified Publ ic Accou ntants (“AICPA”). GAAP is sub ject to co nstan t review b y these o rganization s and o th ers in an effort to ad dress emerg in g acco un ting rul es and issue interp retative accoun ting gu id ance o n a co ntin ual basis. Th e Company can g ive n o assuran ce th at fu tu re ch anges to GAAP will no t have a neg ative impact on t he Co mp any. GAAP includ es the req uirement t o carry certain assets and liabilities at fair val ue. Th ese fair v alu es are sen sitive to vari ou s facto rs in clu ding , b ut n ot limited to , interest rate mo vemen ts, cred it spread s, an d vario us other facto rs. Becau se o f th is sen siti vity, ch ang es in th ese fai r v alu es may cau se in creased levels of vol atility in th e C ompany ’s finan cial statements. The FASB regu larly un dertak es p rojects th at coul d resu l t in sign ifican t chan ges t o GAAP. Fu rthermo re, t he FASB co ntin ues to mon itor th e develop men t of In ternat io nal Fin anci al Rep orting Stand ards (“IFRS”) and to co nsider the activities of the Intern ati on al Accou ntin g Stand ard s Bo ard (“IASB”) and ho w th ese activ iti es may imp act GAAP stand ard settin g an d fin anci al rep ort in g. While the SEC has i nd icated th at it d oes n ot int end to in corpo rate IFRS int o the U.S. financial repo rting system in th e near term, any chan ges to co nform or con verge t he IFRS an d GAAP frameworks wo uld imp ose speci al d eman ds on issu ers in the areas of g ov ern ance, employ ee train i ng , i ntern al co ntrols, co ntract fulfillmen t and d isclo sure. Such chan ges wou ld affect ho w we manag e o ur b usiness, as it will lik ely affect bu siness processes su ch as th e d esig n of p ro du cts and co mp en sat io n plans. The Co mp any i s u nab le to predi ct wh eth er, an d if so , when the FASB projects will b e ado pted and /o r impl emented, o r th e d eg ree to which IFRS will be in corpo rated into th e U.S. finan cial repo rti ng system. In add iti on , th e Compan y’s in su ran ce sub sidiaries are req uired to comply with statutory acco un ting p rin ciples (“SAP”). SAP and v ariou s co mp on ents o f SAP (su ch as actuarial reserv in g meth od olo gy ) are su bject to co nstan t review by the NAIC an d its task fo rces an d co mmitt ees as well as state in surance dep artmen ts in an effort to ad dress emerg in g issu es and otherwise imp ro ve o r alter finan cial rep orting . Certain NAIC pron ou ncemen ts rel ated to acco un ting and repo rtin g matters take effect automatically with ou t affirmativ e action b y th e states, an d vario us prop osals eit her are cu rrentl y o r hav e previ ou sly b een pen ding b efo re commit tees an d task fo rces o f th e NAIC, some of which, if enacted , wou ld neg atively affect the Co mpan y. The NAIC is also cu rrentl y working to refo rm mod el regu lat io n in vario us areas. Th e Co mp any cann ot predict whether o r in what form refo rms will be enact ed by state legislatu res an d, if so, wh eth er the en acted reforms will p ositiv ely or neg atively affect th e C ompany. In ad ditio n, the NAIC Acco un t in g Practices an d Procedu res man ual prov id es that state insurance d epartments may permit i nsu ran ce compan ies d omici led in th e stat e t o dep art fro m SAP b y granting them permitted acco un ting p ractices. The Co mp any cann ot pred i ct wh eth er or when the in su rance dep art ments of the states of d omici le of its competitors may permit them to utilize ad vantageo us acco un ting practices that d epart from SAP, th e use o f wh ich is no t p ermitted by t he i nsu ran ce depart ments o f the states of do mi cil e o f th e Co mp an y’s insuran ce subsid iaries. With resp ect to regu latio ns and gu id elines, st ates sometimes d efer t o th e interp retation of the in su rance department o f th e state o f do micile. Neither the actio n o f th e d omici liary state n or actio n of the NAIC is bind i ng on a state. Accordingl y, a state co uld cho ose to follo w a d ifferent interpretatio n. The Co mp any can give no assu ran ce t hat fut ure chan ges to SAP or compo nen ts o f SAP or th e grant o f permit ted acco un ting p ractices to its co mp etito rs will n ot have a n egativ e imp act on the Co mp any. Fo r add itio nal in fo rmation regarding p end in g NAIC reforms, please see It em 7, Ma na gement’s Discu ssion an d An alysi s of Fina ncial Co nd iti on an d Resu lts o f Operatio ns. If o ur b usiness does not perform well, we may be req uired to reco gnize a n imp airment of our go od will a nd indefinite lived intangible assets which co uld ad versely affect our results o f o pera tio ns o r financia l conditio n. Go od will is th e excess o f the pu rch ase price in an acqu isitio n o ver the estimated fai r value o f n et assets acq uired. Goo dwill is n ot amort ized b ut is tested for impairment at least ann ually or mo re freq uently if ev en ts or circumstan ces such as ad verse chan ges in the b usiness climat e ind icate th at the fair value o f th e op eratin g un it may b e less than th e carry in g v alu e o f th at o perating u nit. We perfo rm o ur annu al g oo dwill imp airmen t testin g du ring the fo urth qu art er of each year b ased up on d ata as o f th e close of the th ird q uarter. Imp airmen t testing is perfo rmed using the fair v alue app ro ach, wh i ch requ i res th e u se of estimates and ju dg ment, at the o perating segment lev el. The estimated fair v alu e o f the op eratin g seg ment is imp acted b y the perfo rmance of th e b usin ess, wh i ch may b e ad versely impacted by p rol on ged mark et declin es o r oth er circu mstances. If it is d etermined that the go od will has been imp aired, we mu st write do wn th e goodwill b y th e amo un t of th e impairmen t, with a corresp on din g charge to n et inco me. Such wri te do wns cou ld hav e an ad verse effect on o ur resu lts of op erat io ns o r fin ancial po siti on . See Item 7, Ma na gement’s Discu ssion a nd An alysis of Financial Co nd itio n an d Results of Op eratio ns - Critica l Accou ntin g Policies - Goo dwill , and n otes 2 and 11 of th e n otes t o the con so lidated fin ancial statemen ts fo r ad dition al informatio n. The Co mp any ’s ind efinite lived intang ibl e assets represent the value of the Co mp any ’s insurance licen ses on t he d ate of the merger with Dai-ich i Life. Th ese assets are n ot amortized bu t are test ed for impairmen t at least an nu ally or more freq uently if ev en t s o r circumstan ces ind icate that the fai r val ue o f th e ind efinit e liv ed intang ib les is less th an th e carryi ng v alu e. We p erform o ur ann ual imp airmen t testing of in defin ite lived in tan gibles du ring th e fo urth qu art er of each y ear. Imp airmen t testing i s perfo rmed u sing th e fair v alue ap proach , wh ich req uires th e use o f estimates an d judgment. If i t is determin ed that th e in defin ite liv ed intang ib les have b een imp aired, we must writ e th em d own by th e amo un t o f th e impairment, with a co rresp on ding charge to net in come. Su ch write d own s cou ld have an adv erse effect o n o ur resu l ts o f o peration s or fin ancial po sition . 33 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The use of reinsurance intro duces variab ility in the Compa ny’s statements o f inco me. The t imin g o f p remiu m p ayments to and receipt of exp ense allo wances fro m rein surers differs from th e Company ’s receipt o f cu sto mer premium payments and in curren ce o f ex penses. These t imin g d ifferences int ro du ce v ariabilit y in certain co mp on ents of the Company ’s statemen ts of in come an d may also in trod uce v ariabi lity in th e Comp any ’s qu arterly fin ancial results. The Compa ny’s reinsurers co uld fa il to meet a ssumed ob liga tions, increa se rates, termi na te agreements or b e sub ject to ad verse develo pments that could affect the Co mp any. The Co mpan y and its in surance subsid iaries cede material amo un ts of insuran ce and tran sfer related assets to oth er insurance compan ies th rough rei nsu ran ce. Ho wev er, n otwithstandi ng the tran sfer of related assets o r o th er i ssues, the Compan y remains liab le with respect to ced ed insu ran ce sho uld any rei nsu rer fail to meet the assumed ob ligation s. Th erefore, the fai lu re, in solven cy, o r in ability o r u nwillin gn ess to p ay un der the terms of the reinsurance ag reement with t he Company of one or mo re o f the Compan y’s rein surers co uld n egativ ely impact th e Co mp any ’s earning s and finan cial po siti on . The Compan y’s resu lts an d its abilit y to co mp ete are affected by th e availab ility and cost o f rein su ran ce. Premium rates charged by the Co mpan y are based, in p art, on th e assu mption th at rein surance will be availab le at a certai n cost. Certain reinsurers may attemp t to in crease th e rates they ch arg e th e Co mp any for reinsurance, i ncl ud in g rates fo r new p olicies the Co mp any is issuing an d rates related t o p oli cies that the Co mp any has already issued . Th e Co mp any may n ot be ab le t o i ncrease the p remiu m rates it ch arg es fo r p olicies it has alread y issu ed, and fo r co mp etitive reason s i t may no t b e able to rai se th e premium rates i t charges for n ew p olicies to offset th e increase in rates charged by rein surers. If the cost of reinsu ran ce were to i ncrease, i f reinsurance were to become u navailab le, if alternativ es to rein surance were n ot avail ab le to the Company, or if a rein su rer sh ou ld fail to meet it s o bligatio ns, th e Co mpan y cou ld be adv ersely affected. The n umber of life rein su rers has remained relatively co nstant in recen t years. If th e reinsurance market con tracts in th e fu tu re, the Co mp an y’s ability to co nti nu e to o ffer its prod ucts o n t erms fav orable to it co uld be adv ersely imp acted. In ad dit io n, rein surers face chal len ges regarding illiqu i d cred it and /or cap ital mark ets, inv estment d owng rad es, rating ag ency do wng rades, deterioration o f g en eral eco no mic co nd itio ns, an d other facto rs n egativ ely imp acting th e fin ancial servi ces ind ustry. If rein surers, includ in g t ho se with sig nificant exp osu re t o in ternatio nal market s an d Eu ro pean Un io n member states, are un able to meet th eir ob ligation s, th e Compan y wou l d be adv ersely impacted . The Co mp an y has implemented a reinsurance p ro gram throug h the use of captiv e rein surers. Und er these arrang ements, a cap tive own ed b y th e Co mp any serves as the rein su rer, an d th e con so lidated book s and tax returns of th e Company reflect a liabil ity con sisting o f th e ful l reserve amou nt att ribu tab le to th e rein sured bu sin ess. The success o f th e Compan y’s cap t iv e reinsurance p ro gram is d epen den t on a n umber of facto rs ou tsid e t he co ntro l of th e Compan y, includ ing , b ut not limit ed to , co ntin ued access to fin anci al solu tion s, a favo rab le reg ulato ry env iron men t, and th e o verall tax p ositio n o f the Co mp any . If th e cap tive rein su rance p ro gram is no t successful, th e Co mp any ’s finan cial co nd iti on co uld b e adv ersely imp acted. The Compa ny’s po licy cla ims fluctuate fro m p erio d to p eriod resulting i n earning s volatility. The Compan y’s results may fluctuate from perio d to p eriod d ue to flu ctu ation s in t he amo un t o f policy claims receiv ed. In ad dition , certain of the Co mp any ’s li nes of b usin ess may exp erience high er clai ms if th e econ omy is g ro win g sl owly or in recession, or if equ ity mark ets declin e. Also , inso far as the Co mp any con tin ues to retain a larg er percen tag e of the ri sk of newly written life insuran ce pro du cts th an it has in t he p ast, its fi nancial resu lts may hav e greater v ariabilit y due to fluctuation s in mo rtality results. The Co mp any op era tes in a ma ture, hig hly co mp eti tive industry, which could limit its a bility to g ain or ma inta i n it s p ositio n in the industry and neg atively affect p ro fita bil ity. The insu ran ce in du st ry is a matu re an d h ighly competitiv e in du st ry. In recen t years, th e in du st ry has ex perien ced redu ced growth in life insurance sales. Th e Co mp any en cou nters sig nificant compet itio n in all lin es of bu si ness fro m o th er insurance comp anies, man y o f which h ave greater finan cial reso urces and hi gh er rati ng s th an the Compan y and which may hav e a g reater mark et sh are, offer a broad er rang e of prod ucts, servi ces or features, assume a greater lev el o f risk, have lo wer o perati ng or fin ancing costs, o r hav e differen t profitability ex pectation s than th e Compan y. The Co mp any also faces co mp etitio n fro m other prov i ders of fin ancial serv ices. Co mpetition cou ld result in , amo ng other thing s, lower sales or h ig her lap ses o f existin g p ro du cts. Co nsolid ation and ex pansio n amon g bank s, insurance compan ies, dist ribu to rs, and other fin ancial service compan ies with wh ich th e Compan y does bu siness co uld also h ave an adv erse effect on the Co mp any ’s fin ancial conditio n an d resu lts o f op eratio ns if su ch co mp anies require mo re favo rab le terms than previ ou sly offered to the Compan y o r if such co mp anies elect no t to con t in ue to do bu siness with the Company fol lo win g con so lidatio n o r ex pan sio n. The C ompany ’s ability to co mp ete is d epen den t up on , amon g o th er thi ng s, its abi lity to attract and retain d istrib uti on ch ann els t o market its in surance and in vestmen t prod uct s, its abil ity to d evel op co mp etit iv e an d p ro fitabl e p rod ucts, its abil ity to main tain low u nit co sts, and its maintenan ce o f ad equ ate ratin gs fro m rating ag enci es. As techn olog y evo lv es, compariso n o f a p arti cu lar prod uct o f an y compan y fo r a particular custo mer with co mp eting prod uct s for th at cu stomer is more readily av ailable, wh ich cou ld lead to increased co mp etition as well as ag ent or custo mer beh avior, includ in g persistency th at differs from past b eh avior. 34 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Compa ny’s ab ility to mai ntain co mp eti tive unit co sts is dep endent upo n the level of new sa les a nd persistency o f existing b usiness. The Compan y’s ab ili ty to maintain competitiv e un it costs is depen den t u po n a n umber of factors, su ch as th e lev el o f n ew sales, p ersistency of ex isting b usiness, and exp ense management. A decrease in sales or persisten cy with ou t a corresp on din g redu ction in ex penses may result in high er un it costs. Ad ditio nal ly, a d ecrease in p ersistency o f existin g bu siness may resu lt in h i gh er or more rapid amortization o f d eferred p olicy acq uisition co st s an d thu s high er un it costs and lo wer rep orted earning s. Al th ou gh many of th e Compan y’s p ro du cts co ntain surren der ch arg es, th e ch arg es decrease o ver ti me and may no t b e sufficien t to cov er the u namo rtized deferred p olicy acq uisition costs with resp ect to th e in surance pol icy or an nu ity co ntract being surren dered. Some of t he Co mp an y’s pro du cts do not con tain surrend er ch arg e features an d such p ro du cts can be surren dered o r exch anged with ou t pen alty. A decrease in persistency may also resu lt in hig her claims. Item 1 B . Unresol ved Staff Comments No ne. Item 2 . Pro perties The Co mp any ’s h ome office is locat ed at 2 80 1 High way 2 80 Sou th, Birmin gh am, Alabama. Th e Compan y owns three bu ildin gs con sisting o f 62 0,000 squ are feet at th e ho me o ffice lo catio n. The first bu ild in g was co nstructed i n 1 97 4, the seco nd bui ld in g was co nstructed in 1982 , and th e th ird bu ilding was co nstructed in 2 00 4. The Co mp any p rev io usly leased th e thi rd b uild in g, pu rsuan t to a lease wh ich expired in Decemb er 20 18 . At th e end o f the lease term in Decemb er 2 01 8, t he Company purch ased the b uild i ng fo r approx imately $7 5.0 million . Parki ng is p ro vided fo r ap prox imately 2 ,59 4 v ehicles. The Comp any leases admin istrative and mark eting office sp ace in 17 cities (exclu din g th e h ome o ffice b uild in g), wit h mo st leases bei ng for perio ds of th ree to ten years. The ag gregate an nu alized ren t is approx imatel y $8.3 mill io n. The Compan y believ es its p ro perties are adeq uate an d su itable fo r the Compan y’s b usin ess as curren tly co nd ucted and are adeq uately maint ain ed . The abo ve p ro perties do no t in clude prop erti es th e Co mp any owns fo r inv estment on ly . Item 3 . Leg al Proceeding s To the kn owledg e an d in th e o pinio n of manag ement, th ere are no material pen ding legal proceeding s to wh ich th e Co mpan y o r any of its sub si diaries is a p arty o r o f wh ich an y o f o ur prop erti es is the su bject, o th er than as set forth in Note 15 , Commitments an d Co ntin gen cies, of the no tes to th e co nsolid ated finan cial statements, includ ed herein . Item 4 . Mine Safety Discl osure—Not Applicable 35 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART II Item 5 . Ma rket for the Registrant’s Common Equity , Rela ted Stockholder Matters and Issuer Purchases of Equity Securities As o f February 1, 2 01 5, th e Co mp any b ecame a wh olly owned sub sidiary o f Th e Dai-ichi Life In surance Compan y, Limit ed (n ow known as Dai-ichi Life Holding s, Inc., “Dai-ichi Life”), an d as a resu lt th ere is n o mark et for ou r Co mmon Stock , of wh ich all sh ares are owned by Dai-ich i Life. Prio r to February 1 , 20 15 t he Compan y’s Co mmo n St ock was li sted on th e New York Sto ck Ex chan ge, but was delisted in co nn ection with o ur beco ming a who lly owned sub sidiary of Dai-ichi Life. The Compan y p aid $14 0.0 millio n an d $1 43 .8 millio n o f d i vidends d uri ng th e years end ed Decemb er 31, 20 18 and 2 01 7, respectiv ely, to its p arent, Dai-ichi Life. In the fu tu re, t he Co mp any ex pects to p ay cash d iv id end s to its parent , Dai-ichi Life, su bject t o its earn in gs an d fin ancial co ndi tion , regu latory requi remen ts, capi tal need s, and oth er relev an t fact ors. Th e C ompany ’s ab ility to pay cash dividen ds is dep end ent in p art on cash dividen ds recei ved by the Co mp any fro m its life i nsu ran ce su bsid iaries. See Item 7, Ma na gement’s Discussio n a nd An alysis of Fi na nci al C on dition an d Results of Opera tio ns , “Liq uidity and Capit al R esou rces” in clu ded h erein. Such su bsid iary div id ends are restricted by the vari ou s in surance laws o f th e states in wh ich th e sub si diaries are domesticated. See It em 1, Bu siness, “Regu l ati on ”. 36 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 6 . Selected Fina ncial Data The follo win g selected fin an cial data has been deriv ed fro m the Co mp any ’s aud ited co nsolid ated finan cial statemen ts. The inco me stat ement d ata fo r th e y ears en ded Decemb er 31 , 2 01 8, 2017 , 20 16 (Successo r Comp any ) and the balance sheet data as of Decemb er 31 , 2 01 8 and 2 01 7 (Successo r Co mp any ) have been deriv ed from th e Compan y’s aud ited co nsol id ated finan cial statement s includ ed elsewhere herein . Th e in come statemen t data for the perio d of February 1 , 2 01 5 t o December 3 1, 20 15 (Successo r Compan y), th e p eriod o f Jan uary 1, 2 01 5 to Janu ary 31 , 2 01 5 (Predecesso r Company), an d fo r th e y ear en ded Decemb er 31 , 2 01 4 (Pred ecessor Co mp any ), and the balance sheet d ata as o f December 3 1, 20 16 an d 201 5 (Successo r Compan y) an d as o f Decemb er 3 1, 2 01 4 (Predecesso r Co mp an y), hav e been d erived from th e Co mp any ’s au dit ed con solidated fin ancial statemen ts no t incl ud ed herein . See No t e 3 , Sign ifi ca nt Tran saction s to th e consolid ated finan cial statements for a discussio n o f acq uisition s and transactio ns du ring 20 18 . The selected fin ancial d ata set forth b elo w sh ou ld b e read in co njun ction with Item 7, Ma na gement’s Discu ssion a nd An alysis of Fin an cia l Co nd iti on a nd Resu l ts of Op erati on s and the au dited co nso l id ated fin ancial statements and related n otes in clu ded elsewh ere herein . Successo r and Predecesso r p eri od s are n ot co mp arab le. Successo r Co mpany Predecesso r Co mpany Fo r The Yea r Ended December 3 1 , February 1, 2 0 1 5 to December 3 1 , 2015 Ja nua ry 1, 201 5 to Janua ry 31, 201 5 Fo r The Year Ended December 3 1, 2 0 1 8 20 1 7 201 6 201 4 (D ollars In Thousands) (Dollars In Thousands, Ex cept Per Share Am o unts ) INCOME STATEMENT DATA Premiums and policy fees $3,6 8 0 ,845 $3,4 7 7 ,419 $3 ,4 0 7,931 $3,0 0 8 ,050 $26 1 ,8 66 $3,29 7 ,7 68 Reinsu rance ceded (1,3 8 4 ,941) (1,3 6 0 ,735) (1 ,3 1 4,716) (1,1 5 4 ,978) (8 9 ,9 56) (1,37 3 ,5 97) Net o f reinsurance ced ed 2,2 9 5 ,904 2,1 1 6 ,684 2 ,0 9 3,215 1,8 5 3 ,072 17 1 ,9 10 1,92 4 ,1 71 Net in v estment income 2,4 8 3 ,750 2,0 5 1 ,588 1 ,9 4 2,456 1,6 3 2 ,948 17 5 ,1 80 2,19 7 ,7 24 Realized in v estment g ain s (lo sses): Deriv ativ e financial instruments 6 0 ,988 (3 0 5 ,828) (4 0,288) 2 9 ,997 (12 3 ,2 74) (34 6 ,8 78) All o ther inv estments (2 2 3 ,649) 1 2 1 ,428 9 0,659 (1 6 6 ,886) 8 1 ,1 53 20 5 ,4 02 Oth er-th an-tem porary impairm en t losses (5 6 ,578) (3 ,962) (3 2,075) (2 8 ,659) (6 36) (2 ,5 89) Po rtio n reco gnized in oth er co mprehensiv e in co me (befo re tax es)2 6 ,854 (7 ,780) 1 4,327 1 ,666 1 55 (4 ,6 86) Net im p airment losses reco g nized in earnings (2 9 ,724) (1 1 ,742) (1 7,748) (2 6 ,993) (4 81) (7 ,2 75) Oth er income 4 5 3 ,685 4 4 6 ,662 4 1 5,653 3 8 8 ,531 3 6 ,4 21 43 0 ,4 28 Total rev enu es 5,0 4 0 ,954 4,4 1 8 ,792 4 ,4 8 3,947 3,7 1 0 ,669 34 0 ,9 09 4,40 3 ,5 72 Total benefits and expenses 4,6 5 7 ,936 3,9 8 3 ,735 3 ,8 8 9,950 3,3 1 0 ,827 33 9 ,7 27 3,82 0 ,2 83 Income befo re income ta x 3 8 3 ,018 4 3 5 ,057 5 9 3,997 3 9 9 ,842 1 ,1 82 58 3 ,2 89 Income tax expense (ben efit)8 0 ,657 (6 7 1 ,475) 2 0 0,968 1 3 1 ,543 (3 27) 19 8 ,4 14 Net inco me $3 0 2 ,361 $1,1 0 6 ,532 $3 9 3,029 $2 6 8 ,299 $1 ,5 09 $38 4 ,8 75 PER SH ARE DATA Net in co m e fro m co n tinuing o p erations—b asic $0 .02 $4 .81 Net in co m e available to PLC’s comm o n shareowners—basic $0 .02 $4 .81 Av erag e shares o u tstandin g —b asic 80,45 2 ,8 48 80,06 5 ,2 17 Net in co m e fro m co n tinuing o p erations—d iluted $0 .02 $4 .73 Net in co m e available to PLC’s comm o n shareowners—diluted $0 .02 $4 .73 Av erag e shares o u tstandin g —d iluted 81,75 9 ,2 87 81,37 5 ,4 96 Cash d iv idends p aid $— $0 .92 Total Pro tectiv e Life Corp o ration’s Sh areo wn ers’ Equity $6 8 .49 $6 2 .58 37 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Successor Compa ny Predecessor Co mpany As o f December 31, As o f December 3 1 , 2018 2 0 1 7 2 0 1 6 2 0 15 20 1 4 (D o l l a rs I n Tho usa nds ) (D ollars In Thous ands) BALANCE SH EET DATA Total assets $89,938 ,7 54 $79,63 4 ,7 67 $7 5,003,3 7 9 $6 8 ,4 88,697 $70,48 0 ,3 06 Total stab le v alu e p roducts an d an n uity acco unt balances 18,954 ,8 12 15,61 9 ,5 61 1 4,143,7 5 1 1 2 ,8 51,684 12,91 0 ,2 17 No n -recourse fu n d ing ob lig atio ns 2,632 ,4 97 2,74 7 ,4 77 2,796,4 7 4 6 85,684 58 2 ,4 04 Debt 1,101 ,8 27 94 5 ,0 52 1,163,2 8 5 1 ,5 88,806 1,30 0 ,0 00 Su bord in ated d eb t 605 ,4 26 49 5 ,2 89 441,2 0 2 4 48,763 54 0 ,5 93 Total sh areo wn er’s eq uity 5,767 ,7 34 7,12 7 ,1 99 5,471,5 2 1 4 ,5 81,224 4,96 4 ,8 84 38 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 7 . Ma na gement’s Discussion and Analysis o f Fina ncial Conditio n and Results o f Operati ons The followi ng M anagement’s Discussio n and An aly sis of Fi nancial Con dition an d Resu l ts of Op eratio ns (“M D&A”) sh ou ld b e read in con ju nctio n with ou r co nsolid ated au dit ed fin an cial st atemen ts an d related n otes in clu ded herein. FORWARD-LOOKING STATEMENTS—CAUTIONARY LANGUAGE This repo rt reviews o ur fin ancial condi tion an d resu lts of operation s, includ in g ou r liqu id i ty and cap ital reso urces. Hist orical i nformatio n is presented and discu ssed, an d where app ro priate, facto rs th at may affect future fin ancial perfo rmance are also id ent ified and discussed. Certain st atemen ts made in th is rep ort in clu de “forward -loo king statements” with in th e mean in g of th e Private Secu rities Litig ati on Refo rm Act of 199 5. Forward -loo king statements in clu de an y statement that may p red ict, forecast, indi cate, or imp ly future result s, p erforman ce, or achievemen ts instead o f historical facts an d may co ntain words lik e “believe,” “exp ect,” “estimate,” “p ro ject ,” “b ud get ,” “forecast,” “ant ici pat e,” “plan,” “will,” “sh all,” “may,” and other words, p hrases, or ex pression s with similar meaning . Fo rward -lo ok in g statemen ts inv olv e risks and un certainti es, wh ich may cause actu al results to d iffer materially from th e resu lts con tained in th e forward -loo kin g statemen ts, an d we cannot g i ve assu ran ces that such st atemen ts will prov e to be correct. Given th ese risks and un certainti es, in vestors sho uld n ot place un du e relian ce on fo rward-lo ok in g statements as a pred i cti on of actu al result s. We un dertak e no ob l ig ation to pu blicly u pd ate any fo rward-lo ok in g stat ements, whether as a resu lt of new in fo rmation, fu ture d evelop men ts, o r o th erwise. Fo r more in fo rmation abo ut th e risks, un certainti es, an d o th er facto rs th at cou ld affect o ur fu tu re result s, please refer to Item 1 A, Risk Fa cto rs, includ ed h erei n. IMPORTANT INVESTOR INFORMATION We file repo rts with t he SEC, in clu ding Ann ual Rep orts o n Form 10 -K, Quarterly Rep orts o n Fo rm 10 -Q, Cu rrent Rep orts on Form 8 -K, an d o th er reports as requ ired. Th e p ub lic may read an d co py an y materials we file with th e SEC at th e SEC’s Pu bli c Referen ce Roo m at 1 00 F Street, NE, Washing to n, DC 2 05 49 . Th e pu blic may ob tain in fo rmation o n th e op erat io n o f th e Pub lic Referen ce Roo m b y callin g th e SEC at 1 -8 00 -SEC-0 33 0. We are an electro nic filer and t he SEC maintain s an in ternet site at www.sec.go v th at co ntain s these rep orts and other informatio n filed electro nically by us. We mak e availab le th ro ug h ou r web site, www.p ro tect iv e.co m, ou r annual rep orts o n Fo rm 10-K, qu arterly rep orts o n Fo rm 1 0-Q, curren t rep orts on Form 8-K, an d amend men ts to th ose repo rts as so on as reaso nab ly practi cab le after such materials are electron ical ly filed wit h o r furnish ed to th e SEC. We will furn ish su ch do cuments to an yo ne who req uests su ch cop ies in writin g. Requ est s fo r copi es sho uld b e directed to : Fin ancial Informatio n, Pro tectiv e Life Co rp oratio n, P. O. Box 26 06 , Birming ham, Al abama 3 52 02 , Telep ho ne (2 05) 26 8-39 12 , Fax (20 5) 268 -3 64 2. We also mak e availab le to th e pu blic cu rrent i nformatio n, includ ing finan cial in fo rmatio n, regarding th e Compan y an d o ur affiliates on the Financial In fo rmation pag e of o ur website, www.p ro tect iv e.co m. We en cou rag e in vesto rs, th e med ia an d o th ers in terested in u s an d o ur affiliates to rev iew the in fo rmation we p ost o n o ur web si te. Th e info rmati on fo un d o n o ur web si te i s no t p art of th is or any o t her repo rt filed with o r fu rn ish ed to the SEC. OVERVIEW Our Business On Feb ruary 1 , 20 15 , Pro tectiv e Life Co rp oration (th e “Compan y”) became a wh olly o wned su bsidiary o f The Dai-ichi Life In surance Co mp any, Limited, a kab ushiki kaish a org an i zed un der the l aws o f Jap an (n ow k no wn as Dai-ichi Life Ho ld i ng s, In c., “Dai-ich i Life”), wh en DL In vestmen t (Delaware), In c., a who lly own ed su bsid iary of Dai-ichi Li fe, merged with an d into the Company (the “M erg er”). Prior to Feb ru ary 1, 20 15 , ou r stock was p ub licly traded on th e New Yo rk Sto ck Exchan ge. Su bseq uen t to the Merger, we remai n an SEC registrant for fi nancial rep orting p urposes in the Un ited States. The Co mp any, which is h eadq uartered i n Bi rmin gh am, Alabama, o perates as a ho ld in g comp any for its insurance and other su bsid iaries th at p ro vide fin ancial serv ices primarily in the Un ited States thro ug h the prod uctio n, d istrib ution , and admin istration o f in surance an d in vestmen t p rod ucts. Fo unded in 19 07 , Protecti ve Life In surance Co mpan y (“PLICO”) is ou r larg est op erat in g sub sid i ary. Unless the co ntext o th erwi se req uires, th e “Company,” “we,” “us,” or “ou r” refers to the con so lidated g ro up of Protective Life Co rp oration and ou r su bsid iaries. We hav e sev eral op eratin g segments, each hav in g a strategic focu s. An o perating seg men t is distin gu ished by p rod ucts, chan nels of d istrib utio n, an d/or o th er strategic distin cti on s. We p eriod ically eval uat e o ur op eratin g seg men ts an d make adjustments to ou r seg men t repo rti ng as needed . Ou r o perating segment s are Life M arketing , Acq uisition s, An nu ities, Stab le Val ue Prod ucts, and Asset Protecti on . We h ave an add i tion al repo rtin g segmen t referred to as Corpo rate and Other. •Life Ma rketing—We mark et fixed uni versal life (“UL”), in dex ed u niversal life (“IUL”), variable u niversal life (“VUL”), ban k-owned life insurance (“BOLI”), an d level premiu m term insu ran ce (“traditio nal”) p ro du cts o n a n ation al b asi s primaril y throu gh networks o f indepen den t in surance ag ents an d b ro kers, b rok er-dealers, fin ancial in stitutio ns, in dep end ent distrib utio n organ izatio ns, an d affin ity g rou ps. •Acquisit io ns—We focu s on acqui ring , co nv ertin g, and /o r servicin g po licies and contracts from ot her compan ies. Th is seg men t’s pri mary fo cus is o n life insurance p olicies and ann uity p ro du cts th at were so ld to ind iv id uals. Th e lev el of th e seg ment’s acq uisiti on activity is p red icated u po n man y factors, in clu ding av ailable capit al, op eratin g cap acity, p otential retu rn o n capital, an d market d yn amics. Policies acq uired thro ug h th e Acq uisitions segment are ty picall y block s of b usin ess wh ere no new po licies are being marketed . Therefo re earnin gs and acco un t v alu es are 39 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents exp ected to decline as the result o f lapses, death s, and other terminatio ns of coverage u nless new acqu isitio ns are mad e. •Annuities—We mark et fix ed and variab le annu ity (“VA”) p ro du cts. These pro du cts are primarily sold th ro ug h b ro ker-d ealers, finan cial institu t io ns, an d ind epend ent agen ts an d b ro kers. •Sta ble Va lue Pro ducts—We sel l fi xed and flo ating rate fun din g ag reemen ts d irectly to the tru stees of mun icipal b on d proceeds, mo ney market fund s, ban k tru st dep art ments, an d o th er institu tion al inv estors. Th e segmen t also issues fu nd in g ag reemen ts to the Fed eral Home Loan Ban k (“FHLB”), and markets g uaranteed inv estment co ntract s (“GICs”) to 401 (k ) an d other q ualified reti remen t saving s pl an s. We also h ave an u nregistered fu nd in g agreement-b acked no tes prog ram which prov id es for o ffers of n otes to bo th d omestic an d internatio nal institu t io nal in vestors. •Asset Protection—We mark et extend ed service con tracts, gu aran teed asset protection (“GAP”) p rod ucts, cred it life an d d isability insurance, and o ther specialized anci llary prod ucts to protect co nsu mers’ i nv estments in automob iles, recreation al v ehicles, watercraft, an d p owerspo rts. GAP products are d esig ned to cov er the differen ce between the sched uled lo an p ay-off amo un t and an asset’s actu al cash value in th e case o f a total loss. Each typ e o f speci ali zed anci llary prod uct protects ag ain st d amag e o r o ther loss to a particular asp ect of t he un derlyi ng asset. •Corporate and Other—This seg men t primaril y co nsists of n et in vestmen t in come o n assets su pp ortin g ou r equity cap ital, un allocated corpo rate o verhead , an d ex pen ses no t attribu tab le to the seg ments ab ov e (incl ud in g interest on corpo rate deb t). This seg men t includ es earn in gs from several n on -strateg ic or run off l in es o f bu siness, fin an cin g and inv est ment related transactions, an d th e operations o f several small sub sid i ari es. RECENT SIGNIFICANT TRANSACTIONS The Linco ln Natio na l Life Insurance Co mpa ny On May 1 , 2 01 8, Th e Linco ln Natio nal Life Insurance Co mp any (“Lin coln Life”) co mp leted th e acq uisition (the “Closin g”) of Libert y Mut ual Grou p In c.’s (“Liberty M utual ”) Group Benefits Busin ess an d Ind iv id ual Life an d An nu ity Bu siness (the “Life Bu sin ess”) th ro ug h th e acq uisition of all o f the issued and o utstand in g capital sto ck of Liberty Life Assurance Co mp any o f Bosto n (“Liberty ”). In co nn ection with the Clo sing and p ursuan t to th e M aster Tran saction Agreemen t, dated Jan uary 1 8, 2 01 8, PLICO and Protective Life an d An nu ity Insurance Company (“PLAIC”), a wh olly own ed su bsid iary o f PLICO, entered into reinsurance ag reemen ts (th e “Rein surance Agreemen ts”) an d related ancillary do cu men ts (in clu ding ad ministrativ e services ag reements an d tran sition servi ces ag reement s) p ro vidin g for th e rei nsu ran ce an d ad minist ratio n o f the Life Busin ess. Pursu ant to the Rein surance Ag reemen ts, Liberty ced ed t o PLICO an d PLAIC th e insurance po licies relat ed to th e Life Busin ess on a 1 00 % co insu ran ce b asis. Th e aggreg ate ceding co mmissio n fo r the reinsu ran ce o f t he Life Bu si ness was $4 22 .4 millio n. All pol icies issu ed in states other than New York were ceded to PLICO u nd er a reinsurance agreement between Lib erty an d PLICO, and all po licies issu ed in New York were ceded to PLAIC u nder a rei nsu ran ce agreemen t between Lib erty and PLAIC. Th e ag gregate statu to ry reserves of Lib erty ceded to PLICO an d PLAIC as o f th e closin g of th e Tran saction were app ro ximately $13.2 billion , wh ich amount was based o n in iti al estimates an d is sub ject to adjustmen t follo win g th e Closing. Pu rsu ant to th e terms o f th e Reinsurance Ag reemen ts, each of PLICO an d PLAIC are req uired to maintai n assets in trust for t he b en efit of Liberty to secu re their resp ective ob ligatio ns to Libert y un der th e Reinsurance Agreements. Th e trust acco un ts were initially fu nd ed by each of PLICO an d PLAIC principal ly with the in vestmen t assets that were received fro m Liberty. Ad dit io nally, PLICO and PLAIC hav e each agreed to p ro vid e, o n behalf of Li berty, admin istration and po licyh older serv icing of th e Life Business reinsu red by it pu rsuan t to ad mi nistrativ e serv ices agreemen ts b etween Liberty and each of PLICO and PLAIC. Great-West Life & Annuity Insura nce Company On Jan uary 2 3, 20 19 , PLICO entered i nto a Master Tran saction Ag reement (the “ GWL&A Master Tran saction Ag reemen t”) with Great-West Life & An nu ity In surance Compan y (“GWL&A”), Great-West Life & An nui ty In surance Compan y o f New Yo rk (“GWL&A o f NY”), The Canada Life Assu ran ce Co mp any (“CLAC”) an d The Great-West Life Assu rance Co mp any (“GWL” and , to gether with GWL&A, GWL&A of NY and CLAC , th e “Sel lers”), p ursu ant to wh ich PLICO will acquire v ia rein surance (th e “Transacti on ”) su bstantiall y all of th e Sel lers’ in dividu al life in su rance and ann uity bu siness (the “Indi vidu al Li fe B usiness”). Pu rsuant to th e GWL&A Master Tran sactio n Agreemen t, PLICO an d PLAIC, will enter i nto reinsurance agreements (the “Reinsu ran ce Agreements”) and rel ated an cillary d ocu men ts at th e clo sing of th e Tran saction. On the terms and su bject t o the con ditio ns of th e Reinsurance Ag reemen t s, the Sellers will ced e to PLICO and PLAIC, effect iv e as o f th e clo sing of the Transacti on , su bstantially all of th e insu ran ce po licies relating to th e In dividu al Life Busin ess. To sup po rt its o blig ation s un der th e Reinsu ran ce Agreements, PLICO will estab lish trust accou nts fo r the b en efit o f GWL&A, CLAC and GWL, and PLAIC will est ab l ish a trust acco un t for t he ben efit o f GWL&A o f NY. The Sellers will retain a blo ck of particip ating po licies, wh ich will be ad minist ered b y the Co mpan y. The Transactio n is su bject t o the satisfaction or waiv er o f cu sto mary closin g conditio ns, includ i ng reg ulato ry app ro vals and th e executio n of th e Reinsuran ce Agreements and related ancillary docu men ts. The GWL&A M aster Tran saction Ag reemen t an d oth er transacti on docu men ts co ntain certain cu stomary represen tat io ns an d warranties made b y each o f the p art ies, and certain customary cov enan ts regarding th e Sellers and th e In dividu al Life Bu siness, an d p ro vide for in demnification , amo ng other th in gs, for breaches o f tho se rep resen tatio ns, warran ties and cov enants. 40 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents RISKS AND UNCERTAINTIES The facto rs which cou ld affect o ur futu re resu lts in clu de, b ut are n ot li mi ted t o, general econ omic co nd iti on s an d th e foll owin g risk s and un certainti es: Gen eral •we are con trolled by Dai-ich i Life, which h as the ability to mak e impo rtant decisio ns affectin g o ur bu siness; •exp osure to risk s rel ated t o natural and man-mad e d isasters an d catastrop hes, su ch as d iseases, ep id emi cs, p and emi cs, malicio us acts, cy ber attacks, terrori st acts, and cli mate ch ang e, wh ich co uld ad versely affect o ur op erat io ns an d result s; •a d isru ptio n or cyb er attack affectin g th e electro nic, commu nication an d in fo rmation techn olog y systems o r other t ech no lo gies of t he Co mp any or t ho se on wh om th e Co mp any relies co uld ad versely affect o ur bu sin ess, fin anci al con dit io n, and results o f o peration s; •con fiden tial info rmation maint ain ed in th e systems of th e Comp any or other parties up on which we rely coul d b e co mp ro mised o r misap prop riated as a resu lt o f security breaches o r other related lapses o r in cid en ts, damaging o ur b usiness and repu tatio n and adv ersely affecting ou r financial co nd itio n an d results of op eratio ns; •ou r resu lts and finan cial co nd ition may b e negatively affected sho uld act ual ex perien ce d i ffer fro m man agement’s mo dels, assu mption s, or est imates; •we may n ot realize our an ticipated finan cial resu lts fro m o ur acquisitio ns strategy ; •we may ex perien ce co mp etition in ou r acq uisition segment ; •assets allocated t o t he M ONY Clo sed Block benefi t o nly the hol ders of cert ain policies; adv erse p erforman ce o f Closed Blo ck assets o r adverse exp erience of Clo sed Block liabilities may neg atively affect u s; •we are dep end en t on th e p erforman ce o f ot hers; •ou r risk management p olicies, p ractices, an d procedures cou l d leave us exp osed to un id entified o r un anticipated risks, which cou ld n egativ ely affect o ur bu si ness o r resu lt in lo sses; •ou r strat eg ies fo r mi tigatin g ri sks arisi ng from our day -to-day op eratio ns may prov e ineffective resu ltin g in a material ad verse effect on ou r results o f o perations an d fin ancial con dition; •even ts that d amag e o ur repu t ati on o r the rep utation of o ur in du stry co uld adv ersely imp act ou r business, result s of o peration s, or finan cial con ditio n; •we may n ot be ab le to pro tect o ur int ellectual prop erty an d may be sub ject to infrin gemen t claims; •dev elo pments in tech no lo gy may impact o ur bu siness; Fin an cia l En viron men t •int erest rat e flu ctu ation s and sustai ned p eriod s of lo w or h i gh interest rates cou ld neg atively affect o ur in terest earning s and spread in come, o r oth erwise imp act o ur bu si ness; •ou r inv estments are sub ject to market an d credit risks, which could b e h eig htened durin g perio ds o f extreme v olatility or d isru ptio n in finan cial and cred it market s; •cred it market vo latility o r di sru pti on co uld ad versely impact th e Co mp any ’s finan cial co nd ition or resu lts fro m o perati on s; •disrup tio n of t he capital and credit mark ets co uld n egativ ely affect t he Company’s ability to meet its l iq uidity and finan cial needs; •equ ity mark et v olatilit y cou ld neg atively imp act o ur bu sin ess; •ou r use o f d eri vat iv e fi nancial instruments within o ur risk man ag emen t strategy may no t b e effectiv e or suffici ent ; •ou r ab ili ty to grow dep end s in l arge p art up on th e con tinu ed availab ili ty of cap ital; •we co uld b e fo rced to sell in vestmen t s at a lo ss to co ver po licyh older withd rawals; •difficult g eneral econ omic con ditio ns co uld materially adv ersely affect o ur business an d resu lts of op eratio ns; •we may be requ ired to estab lish a valuatio n allowance ag ain st ou r d eferred tax assets, wh ich cou ld h av e a material adv erse effect on o ur results of operatio ns, finan cial co nd iti on , an d cap ital p osit io n; •we co uld b e adv ersely affect ed by an inab ility to access o ur cred it facility ; •the amo un t o f statut ory capital or risk -b ased cap ital that we h ave and th e amou nt of statu to ry capital or risk -b ased capital th at we mu st ho ld to maintain ou r financial strength an d credit rating s and meet other req uiremen ts can vary sig nificantly from time to time an d is sen si tive t o a nu mb er o f facto rs outside o f o ur con trol; •we co uld b e adv ersely affect ed by a ratin gs d own grade o r o th er n eg ative actio n b y a rati ng organization ; •we op erate as a h olding company and dep end on th e ab ility of our su bsid iaries to tran sfer fun ds to u s t o meet ou r o blig ation s; •we co uld b e adv ersely affect ed by an inab ility to access FHLB lend i ng ; •ou r secu rities lend in g p ro gram may su bject u s to liqu i dity and ot her risks; •ou r finan cial con dit io n o r resu l ts of op eratio ns cou ld b e adv ersely impacted if ou r assumptio ns reg ard in g th e fair value an d fu tu re p erforman ce of our in vestmen ts d iffer fro m actu al ex perien ce; •adv erse action s o f certain fun ds o r th eir ad visers co uld have a d etrimental impact on o ur ab ility to sell ou r variab le life and annuity prod ucts, o r maintain curren t levels of asset s in th ose p rod ucts; In du stry a nd Regu lat io n •the b usin ess o f ou r compan y is high ly regu lated and is sub ject to rout in e aud its, examinatio ns, and actio ns by regu lators, law en fo rcemen t agen cies, and sel f-reg ulato ry organ izatio ns; •we may b e sub ject to reg ulation s of, or reg ulatio ns influenced by , in ternat io nal regul ato ry au tho rities or ini tiatives; •NAIC action s, pron ou ncement s and in itiativ es may affect ou r p ro du ct p ro fit abi lity, reserv e an d capit al req uirements, fin an cial con dition or results o f o perations; 41 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents •ou r u se of cap t iv e rein su ran ce compan ies to fin ance statu to ry reserves related to ou r term an d u niversal life prod ucts and to red uce vo latility affecting ou r v ariable ann uity prod ucts, may be limited or adv ersely affected b y regu lat ory actio n, pro no un cements and in terpretatio ns; •laws, reg ulation s and i nitiatives related to un rep orted d eath s an d un claimed p ro perty an d death b enefits may result in o peration al bu rdens, fin es, un ex pected p aymen ts or escheatments; •we are su bject to insu ran ce g uaranty fun d laws, ru les an d regu latio ns that cou ld adv ersely affect ou r fin anci al con dit io n o r results of op erat io ns; •we are su bject to insu rab le interest laws, rules and reg ulation s that co uld ad versely affect o ur finan cial co nd iti on or resu lts o f o peration s; •the Healt hcare Act an d related reg ulatio ns co uld ad versely affect ou r resu lts of op eratio ns or finan cial co nd ition ; •laws, ru les an d regul ati on s p ro mu lg ated in con nectio n with the en actmen t of th e Dod d-Frank Wal l Street Reform an d Co nsumer Pro tectio n Act may adv ersely affect o ur results of op erations o r fin ancial conditio n; •new an d amen ded reg ulations regarding the stand ard of care o r stan dard o f co nd uct app licable to i nv estment profession als, in surance ag encies, and finan cial institu tion s th at reco mmend o r sell an nu ities o r l ife insurance prod ucts may h ave a material ad verse impact o n o ur ab ili ty to sell ann uities and oth er pro du cts an d t o retain in-fo rce bu siness an d o n o ur fin an cial con dition or results o f o peration s; •we may b e sub ject to regu l ati on , i nv estigatio ns, enfo rcemen t action s, fines an d pen alties imp osed b y th e SEC, FINRA an d o th er fed eral and int ern ati on al reg ulators in con nectio n with o ur business op eratio ns; •chan ges to tax law, o r interp retation s o f ex isting tax law coul d adversely affect o ur ability to co mp ete with n on -in surance p ro du cts or red uce the demand fo r certai n i nsu ran ce p rod uct s; •fin ancial serv ices compan ies are freq uentl y th e targ ets o f legal p ro ceed i ng s, in cludi ng class action li tigatio n, which cou ld resu lt in sub st an tial jud gmen ts; •the fin anci al services and insuran ce in du stries are sometimes th e target of law en forcement i nv estigatio ns and the focu s o f increased regu latory scrutin y; •new acco un ting rules, ch ang es to existin g acco unt in g ru les, or the grant o f permitted accou ntin g practices to competitors could n egativ ely impact us; •if o ur b usin ess d oes no t perfo rm well, we may be req uired to recog nize an impairmen t of o ur g oo dwi ll and ind efinit e lived intang ib le assets which co uld adv ersely affect ou r resu lts of op eratio ns or finan cial co nd iti on ; •use of rei nsu ran ce introd uces v ariabi lity in ou r stat ements o f income; •ou r rein surers co uld fail to meet assumed obl ig ation s, in crease rates, termin ate agreements or be su bject to ad verse develop men ts that co uld affect u s; •ou r policy claims fluct uat e from p eriod to period resu ltin g in earning s vo l ati lity ; •we o perate in a matu re, hig hly competitive in du st ry, which cou ld limit o ur ab ility to g ain or maint ain o ur po si tion in the ind ustry and neg atively affect profitabilit y; an d •ou r ab ili ty to mai ntain co mp etitiv e u nit co sts is depen den t u po n the level o f new sales an d p ersistency o f ex isting bu si ness. For more i nformatio n ab ou t th e risk s, u ncertainties, and other facto rs th at co uld affect o ur future results, please see It em 1 A, Risk Factors, of th is report. CRITICAL ACCOUNTING POLICIES Ou r accoun ting po licies requ i re the u se of judgmen ts relating to a variety o f assumpti on s and estimates, incl ud in g, b ut no t limited to exp ectat io ns o f cu rrent and fu tu re mortality, morbid ity, p ersistency, exp enses, an d i nterest rates, as well as exp ectatio ns arou nd th e valuat io ns o f inv est ments, securities, and certain intang ib le assets. Becau se of th e inh eren t u ncertaint y when u sing th e assumptio ns an d estimates, the effect o f certain acco un tin g pol ici es un der differen t cond itio ns or assumptio ns cou ld be materially d ifferent fro m tho se rep orted in th e con soli dat ed fin an cial statemen ts. A d iscu ssion of ou r v arious cri tical accou ntin g p olicies is presented b elo w. Fa ir va lue of fina ncial instruments—th e Fin ancial Acco un ting Stand ard s B oard (“FASB”) gu id ance defin es fair v alu e fo r accou nting p rin cip les generally accep ted i n the Un ited States of America (“GAAP”) and establish es a framework fo r measuring fair value as well as a fair val ue h ierarch y based on th e qu ality o f in pu ts used to measu re fair value an d en han ces d isclosure req uirements fo r fai r value measurements. The term “fair v alu e” in this do cu men t is defin ed in acco rd ance with GAAP. Th e standard describ es th ree l ev els o f inp uts t hat may be u sed t o measu re fair v alu e. For mo re i nformatio n, see Note 2 , Su mma ry o f Sig nifican t Accou ntin g Po licies an d No te 6 , Fair Va lu e o f Fina ncial Instruments , to th e co nso lid ated financial statements in clu ded in th is report. Avai lab le-fo r-sale securities and trading accou nt secu rities are reco rd ed at fair value, wh ich is primarily based on actively traded markets wh ere prices are based o n eith er direct mark et qu otes or o bserv ed transactio ns. Liqui dity is a sig nificant factor in the determin ation o f the fair v alu e for th ese securities. Market p rice qu otes may no t be readily av ail ab l e fo r so me p ositio ns or for some po sition s withi n a market sect or where t rad in g activ i ty h as slowed sig nificantly o r ceased. These situ ati on s are g en erally trig gered b y th e mark et’s percep t io n of cred i t un certainty reg ard ing a sin gle compan y or a sp ecific mark et secto r. In these in stances, fair v alu e is determin ed based on limited avai lable mark et in fo rmation and o th er fact ors, p rincipally fro m rev iewi ng the issuer’s fin ancial po sition , ch ang es in credit ratings, an d cash flo ws o n t he in vestmen ts. As o f Decemb er 3 1, 2 01 8, $1 .2 billion of av ailable-for-sale and trading acco un t assets, exclud i ng ot her lo ng -term in vestmen ts, were classified as Lev el 3 fair v alu e assets. For securities th at are priced v ia n on -b ind in g ind epend ent brok er q uo tations, we assess whet her p rices received from in dep enden t b rok ers represent a reaso nable estimate o f fair v alu e th ro ug h an analysis u sin g intern al and extern al cash flo w mod els d evelop ed based o n sp read s and , wh en avai lab le, market in dices. We u se a market-b ased cash flow an aly sis to valid ate th e reason ableness of p rices receiv ed from ind ependent b rok ers. These analytics, which are up dated d aily, i ncorp orate v ariou s metri cs (yield curv es, cred it spread s, prep ayment rates, etc.) to d etermine th e valuatio n of su ch ho ld in gs. As a result of this an aly sis, if we 42 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents determine th at th ere is a mo re ap prop riate fair val ue b ased up on the an aly tics, the price receiv ed from the indepen den t brok er is adjusted acco rdi ng ly. As o f Decemb er 3 1, 2 01 8, we did n ot adjust any prices receiv ed fro m i nd epend ent brok ers. Derivatives —We u tilize a risk man agemen t strategy that inco rp orates th e u se o f deriv ative finan cial instruments to reduce exp osu re to certain risk s, in clu ding b ut no t limited to, in terest rate risk , infl ati on risk, curren cy exch ang e risk, vo latili ty ri sk, and equ ity market risk. Assessing th e effectiv eness o f the hedg ing prog rams an d ev alu ating t he carry in g v alu es o f th e related deriv atives often inv olve a variet y o f assumpti on s and estimates. Deriv ative finan cial in struments are valued u sin g exchan ge p rices, ind epen den t b ro ker q uo tatio ns, or p ricin g valuatio n mod els, wh i ch u tilize market d ata inp uts. Th e fair values of most of ou r d erivat iv es are determin ed usin g exch ang e p rices or in dep en den t b ro ker qu otes, but certain deriv ati ves, includin g emb edd ed deriv atives, are valued based u po n in du stry stand ard models wh ich cal cu late the present-v alu e o f th e pro jected cash flo ws o f th e d erivativ es u sing current and imp lied fut ure mark et co nd i tion s. Th ese mo dels includ e market-o bservab le estimates of v olatilit y an d interest rates in the d eterminat io n o f fair value. Th e use of differen t assumptio ns may h ave a material effect o n the estimated fai r v alue amou nts, as well as th e amou nt of rep orted net inco me. In add ition , measuremen ts o f in effecti veness of hed ging relation ship s are su bject to interp retation s and est imation s, and any d i fferen ces may result in material chan ges to o ur results o f op eratio ns. Th e fair v alu es of deriv ative assets and l iabilities in clude adjustment s fo r mark et liq uid ity, co un terparty cred it qualit y, an d o th er d eal sp ecific facto rs, where app ro priate. Th e fair val ues o f deriv ative assets and liabil ities traded in the o ver-th e-cou nter market are d etermined usin g qu an t itative mod els th at requ ire the u se o f multip le mark et in pu ts in clu ding interest rates, prices, an d in dices t o g enerate co ntin uo us yield o r pricing curv es and v olatilit y facto rs. The p red omin ance of market input s are act iv ely qu oted an d can be v alidat ed throu gh extern al sou rces. Estimatio n risk is g reater for d eri vativ e finan cial in struments that are either o ptio n-based o r h ave lo ng er matu rity d ates where ob serv able market inp uts are l ess readi ly availab le or are un ob serv able, in wh ich case qu antitative based extrap olations of rate, p rice, or in dex scenario s are u sed in d etermi ning fair v alu es. As of Decemb er 3 1, 20 18 , th e fair value o f deriv ati ves rep ort ed on o ur balance sheet in “other lo ng -term in vestmen ts” and “o ther liab ilities” was $3 75 .8 million an d $75 5.5 millio n, respectively. Of th ose d erivativ e assets an d liab ili ties, $1 12 .3 million and $6 29 .9 million , resp ectively, were Lev el 3 fair v alu es det ermin ed by qu antitativ e mod els. Eva luatio n o f Other-Tha n-Tempo ra ry Imp airments —On e of the sig nificant estimates related to av ailable-for-sale and h eld -to-maturity securities is th e ev alu ation of inv estments for other-th an -temp orary imp airments. If a decline in th e fair v alu e of an av ailable-for-sale o r h eld -to -matu rity securi ty is ju dg ed to b e oth er-th an-tempo rary, the secu rity’s basis is adjusted , and an o ther-t han-temporary imp airment is reco gn ized throu gh a charge in the statemen t of i ncome. Th e po rtion o f th is other-th an -temp orary imp airmen t related t o credit lo sses on a secu rity is reco gn ized in earning s, wh ile t he n on -credit po rti on , represen ting the d ifference b etween fair v alu e and the d isco un ted exp ected fu ture cash flows o f th e security, i s reco gn ized within other comprehen sive in come (loss). The fair v alu e of the other-than -temp orarily imp aired in vestmen t b ecomes its new co st basis o n th e d ate an other-th an-temporary imp airmen t is recog nized. Fo r fix ed matu rities, we accrete the new co st b asis to par o r to th e estimat ed fu tu re value ov er th e ex pect ed remainin g life of th e secu rity by ad justin g the secu rity ’s fu tu re y ields, assumin g that fu tu re ex pected cash flo ws on th e securities can be pro perly estimated. Determin in g wh eth er a d ecline in th e curren t fair v alu e of inv ested asset s is oth er-th an-tempo rary is b oth ob jectiv e an d sub jectiv e, and can involv e a variety of assumptio ns an d estimates, particularly for in vestmen ts that are n ot acti vely traded in established mark ets. For ex amp le, assessing th e v alu e o f certain inv estments req uires that we p erform an analysis o f expected fu tu re cash flo ws, in clu ding rates of p rep ayments. Oth er in vestmen ts, such as co llateralized mortg age or bo nd ob ligation s, rep resen t selected tran ches o f a stru ctu red transactio n, sup po rted in the agg reg ate b y und erl ying in vestmen ts in a wide variety o f issuers. M an agement con siders a nu mb er of factors wh en d etermining the imp airmen t status of i nd iv id ual securities. Th ese inclu de th e eco no mic co nd iti on o f v ariou s in du stry seg men ts an d geo graph ic location s and other areas of iden tified risks. Alth ou gh it is p ossib le for the imp airment of on e inv estment t o affect o th er inv est ments, we eng ag e in on go in g risk management to safeg uard against and l imit any fu rther risk to our i nv estment po rtfo lio . Sp ecial atten tion is gi ven to co rrelativ e risk s within specifi c ind ustries, related p arties, an d b usiness markets. For certain securitized fin anci al assets with contractual cash flows, includ in g o ther asset-back ed securities, th e ASC Investments-Oth er Top ic requi res u s t o p eriod ical ly up dat e our b est estimate o f cash flo ws ov er the life of t he security. If the fair value o f a secu rit ized fi nancial asset is less t han its co st o r amortized cost an d there h as b een a d ecrease in th e p resen t val ue o f th e estimated cash flows since the last revised estimate, co nsiderin g bo th timing an d amou nt, an o th er-t han-t empo rary impai rmen t ch arg e is reco gn ized. Estimatin g fu tu re cash flows is a q uan titative and qualit ative p ro cess t hat in corpo rates in formatio n received fro m third p arty sources alon g with certain in ternal assu mp tions an d ju dg ments regarding the future performance o f th e un derly in g collateral. Projection s of ex pected fu ture cash flows may ch ang e b ased u po n n ew informatio n regardi ng the p erforman ce o f the un derly ing co llateral. In ad dition , we co nsid er o ur in ten t and ability to retai n a tempo rarily d epressed secu rity u ntil reco very. Each q uarter we review in vestmen ts with un realized lo sses and t est fo r other-than -temp orary imp airmen ts. We analyze v ariou s facto rs to determine if an y specific other-than -temp orary asset impai rment s exist. These includ e, bu t are no t limited to : 1) action s taken by ratin g ag enci es, 2) default b y th e issuer, 3) th e sign ifi can ce of the d ecline, 4 ) an assessmen t of ou r in ten t to sell the security (incl ud in g a more lik ely than no t assessment o f wh eth er we will b e requi red to sell the security ) b efo re reco verin g t he security’s amortized cost, 5) th e du ratio n o f the declin e, 6 ) an eco no mic an aly si s of th e issu er’s ind ustry, an d 7 ) th e finan cial stren gth, liq uidit y, and recoverab ili ty o f the issuer. M an agement p erforms a security b y security review each q uarter in ev aluati ng the need for any ot her-than -temp orary impairmen ts. Altho ug h n o set fo rmula is u sed in this p ro cess, th e in vestmen t p erforman ce, co llateral p osit io n, and co nti nu ed v iab ility of th e issuer are sig nificant measu res con sid ered , and in so me cases, an analysis regarding our exp ectations for recovery of th e security ’s en tire amortized cost basis th ro ug h the receipt o f future cash flows i s perfo rmed . On ce a determin ation has been made th at a specific o ther-t han-temporary impairmen t ex ists, the securi ty ’s basis i s adjusted, and an o th er-th an-tempo rary imp airmen t is reco gn ized. Equ ity secu rities that are other-than -temp orarily impaired are written d own to fair value with a realized loss recogni zed in earning s. Other-than -temp orary i mp airments to deb t securities that we do n ot i ntend to sel l an d do not exp ect to be req uired to sell before reco vering th e secu rity ’s amortized co st are wri tten d own to di scou nted ex pected fu tu re cash flo ws (“post impai rmen t co st”), and credit l osses are recorded in earning s. The d ifference bet ween the secu rities’ discou nted ex pected fu tu re cash flows and th e fair value of th e securities on th e imp airmen t d ate is reco gn ized in o t her 43 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents co mp reh ensive income (lo ss) as a n on -credit p ortion imp airmen t. When calcu latin g th e p ost impairment co st for resid ential mort gage-back ed securities (“RMBS”), co mmercial mo rtgag e-b acked securities (“CMBS”), an d o th er asset-backed securities (co llecti vel y referred to as asset-b acked secu rities o r “ABS”), we co nsid er all k no wn mark et data related to cash fl ows to estimate future cash flows. When calcu lat in g the p ost imp airmen t co st for corp orate d eb t securities, we co nsid er all con tractu al cash flo ws to estimat e exp ected fu tu re cash flo ws. To calculate the p ost impai rment cost, the ex pected fu tu re cash flo ws are d iscount ed at the orig inal pu rch ase y ield. Deb t securities that we in ten d to sell or ex pect to be req uired to sell befo re reco very are written down to fair value with the chan ge recogni zed in earn in gs. Ou r specific acco un ting p olicies related to o ur in vested assets are discu ssed in Note 2, S ummary o f S ig nifican t Acco un ting Policies, and No te 5, Investment Op eratio ns, to th e co nso lid ated fin ancial statements. As of Decemb er 31 , 2 01 8, we h eld $50 .3 billi on o f availab le-fo r-sal e inv estments, in clu ding $40 .0 b illio n in inv estments with a g ro ss un realized lo ss of $2.8 b illion, an d $2 .6 bi llio n of h eld -to-maturi ty i nv estments with a gross un recog nized h olding lo ss o f $86 .3 million. Reinsura nce—For each of ou r reinsu ran ce con tracts, we must d etermine if the con tract prov id es ind emn ificatio n against lo ss o r l iab ility relating to in surance risk, i n acco rd ance with ap pli cab le acco un tin g stan dards. We mu st rev iew all co ntractual featu res, particularly tho se that may limit the amo un t of in surance risk to which we are su bject or features that delay th e timely reimbu rsement of claims. If we d etermine that the po ssibilit y of a sign i fican t loss from in surance risk wi ll o ccur o nly u nd er remote circu mstances, we reco rd th e co ntract u nd er a d epo si t metho d of acco un ting with th e n et amo un t payab le/recei vable reflected in other rein surance assets o r liabilities on o ur con so lidated balance sh eets. Fees earn ed o n the co ntracts are reflected as ot her reven ues, as o pp osed t o premiums, i n o ur co nsolid ated statemen ts o f inco me. Ou r reinsu ran ce is ced ed to a diverse group of reinsurers. The co llectability o f reinsuran ce is largely a fu nct io n o f th e solven cy o f th e in divid ual rei nsu rers. We p erform perio dic credit rev iews on o ur rei nsu rers, fo cusing o n, amo ng o th er thi ng s, financial capacity, stability, tren ds, and co mmitmen t to th e rei nsu ran ce business. We also requ ire assets i n trust, let ters o f cred it, o r o th er accep tab le col lateral to sup po rt balances du e fro m reinsu rers no t autho rized to transact b usiness in the ap plicab le ju risd ictio ns. Despit e t hese measures, a rein surer’s inso lvency, in ability, or unwilling ness to mak e pay men ts u nd er th e terms of a reinsu ran ce co ntract cou ld have a material adv erse effect on o ur resu lts of o peration s an d fin an cial co nd ition . As of Decemb er 31 , 2 01 8, our third party rei nsu ran ce receiv ables amoun ted to $4.8 bil lion . These amo unt s in clu de ceded reserve b alances an d ceded ben efit p aymen ts. We account for reinsu ran ce as requi red b y FASB g uidan ce under the ASC Finan cial Serv i ces Topi c as ap plicab le. In accordan ce with thi s gu id ance, co sts fo r reinsurance are amort ized as a level percen tag e o f premiums fo r trad itio nal life products and a l ev el p ercentage of estimated gross profits fo r un iv ersal life p rod ucts. According ly, ceded reserv e an d d eferred acqu isit io n co st b alan ces are established using metho do lo gies co nsistent with tho se used in estab lishin g direct pol icy ho ld er reserves and d eferred acqu isitio n costs. Estab lish in g th ese b alan ces requ ires the use of v ariou s assumpti on s includ ing in vestmen t retu rn s, mo rtality, p ersistency, and expen ses. Th e assumptions made for est ab l ish in g ced ed reserv es and ced ed d eferred acq uisition co sts are co nsistent with tho se used for estab lish in g d irect p olicy ho ld er reserv es and deferred acqu isit io n costs. Assumptio ns are also mad e reg ard ing fu ture reinsuran ce premium rates and allowan ce rates. Assumptio ns mad e fo r mo rtalit y, persisten cy, and ex pen ses are co nsistent with those used fo r establishi ng di rect p oli cy ho l der reserves and deferred acqu i sition co sts. Assu mp tion s mad e fo r futu re reinsurance premium and allowance rates are co nsistent with rates prov id ed fo r in ou r v arious rein su ran ce ag reements. For certain of o ur reinsurance agreemen ts, premi um an d allo wance rates may be chan ged b y rein su rers on a prospective b asis, assumin g certain con t ractu al co nd itions are met (p rimarily th at rates are ch ang ed fo r all co mp anies with wh ich th e reinsurer h as si milar agreements). To th e ext en t th at future rates are mod ified , th ese assu mp tion s woul d b e rev ised and bo th cu rrent and future results wo uld be affected . For trad i tion al life pro du cts, assu mp tion ch ang es g enerally do n ot affect cu rrent resu lts. Fo r u niversal life prod uct s, assumptio ns are peri od ically u pd ated when ever actual exp erience and /o r exp ectatio ns fo r the fu tu re differ fro m th at assu med . When assumptio ns are up dated for un iv ersal life p ro du cts, ch ang es are reflected in the inco me statemen t as p art of an “u nlockin g” process. Du rin g t he year ended December 31 , 20 18 , we adjusted o ur estimates of future reinsuran ce co sts in both the Acq uisition s and Life Marketin g segments, resul ting in an app ro ximate $31 .5 million un favorab l e imp act. Deferred Acquisitio n Co sts a nd Va l ue o f Business Acq uired —In con ju nction wi th the M erg er, a p ort io n of th e p urchase price was allo cated to the righ t to receive fu tu re gross p ro fits fro m cash flows and earn in gs o f th e Compan y’s in su rance po licies and inv estment co ntract s as of the date of the M erger. This intang ib le asset, called v alu e of business acqu ired (“VOBA”), is based o n the actuarially estimated p resen t valu e o f fu tu re cash flo ws fro m th e Co mp any ’s insu ran ce po l ici es and inv estment con tracts in-fo rce o n th e date o f th e Merger. The esti mated p resen t val ue o f fu tu re cash fl ows u sed in the calculation of t he VOBA is based on cert ain assumpti on s, in clu ding mortality, persisten cy, ex pen ses, and i nterest rates that th e C ompany exp ects to ex perien ce in future y ears. The Co mp any amo rtizes VOBA in propo rtio n to gro ss p remiu ms fo r traditio nal life prod ucts, o r estimated gross margins (“EGMs”) fo r p art ici pat in g t raditio nal life pro du cts with in th e MONY b lock. For in terest sen sitive p ro du cts, the Compan y u ses vario us amortization bases includ ing ex pected gross pro fits (“EGPs”), rev enu es, o r in su ran ce in -fo rce. VOBA amortization includ ed accrued interest credited to acco un t balances of u p to ap proxi mately 7 .1%. VOBA is su bject to an nu al reco verabilit y t esting . We incur sign ificant costs in co nn ection with acq uiring new insurance bu sin ess. Po rtion s of these costs, which are determin ed to be in cremen tal direct co sts associated wi th successfully acq uired po licies an d coinsurance of b locks o f p olicies, are deferred and amortized o ver future perio ds. Some ex amp les o f acq uisition costs t hat are sub ject to deferral includ e co mmissio ns, un derwriting testin g fees, certain direct underwriti ng co sts, and premium taxes. The d eterminatio n of which costs are d eferrab le must be made o n a con tract-lev el basis. (All o th er acq uisition -related costs, includi ng market research , ad ministratio n, manag emen t o f distribu tion an d u nd erwriting fu nctio ns, and pro du ct d evelop men t, are con si dered n on -d eferrab le acq uisition costs and mu st be exp ensed in the p eriod in curred .) Th e recov ery o f the d eferred co st s is d epen dent on th e fu tu re pro fitab ility o f the relat ed po licies. Th e amou nt of fut ure profit i s dep end ent prin cip ally o n in vestmen t retu rns, mortality, mo rb idi ty, p ersist ency, and exp enses to admin ister th e bu sin ess an d certain eco no mic variables, su ch as inflatio n. Th ese costs are amortized o ver th e ex pected l iv es of 44 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e con tracts, b ased on the lev el an d t imin g of eith er gross p rofits or g ro ss premiums, d epen ding o n th e typ e o f con tract. Rev i sio ns to estimates resu lt in ch ang es to th e amounts ex pen sed in t he repo rtin g perio d in which the rev ision s are mad e and co uld resu lt in th e impairment of the asset and a charge to in come if estimated fu tu re pro fits are less th an th e u namortized deferred amou nts. As of Decemb er 31 , 2 01 8, we h ad a d eferred acqu isitio n costs (“DAC”) and VOBA asset o f $3.0 billion . We p eriodi cally rev iew an d u pd ate as app ro priate ou r key assumptio ns on cert ain life and ann uit y p ro du cts includ in g fu tu re mortality, exp enses, lapses, p remiu m p ersistency, inv estment y ields, and int erest sp read s. Chan ges to these assumptions result in ad ju stments wh ich increase or d ecrease DAC and VOBA amortizat io n and /or benefits an d exp enses. Go od will—Acco un ting fo r go od will req uires an estimate o f th e future p ro fitabi lity o f the associated l in es o f bu siness with in o ur o perating seg men ts to assess the recov erabil ity of t he cap italized g oo dwill. We ev alu ate th e carrying v alu e of good will at the segment (or repo rtin g un it) lev el at least ann ually an d b etween ann ual ev alu ation s if even ts o ccu r o r ci rcu mstances chan ge th at wou ld mo re l ik ely than no t redu ce the fair v alu e o f the reportin g u nit b elo w its carry ing amo un t. Su ch circumstan ces coul d in clu de, b ut are n ot limited to : 1) a sign ifican t adv erse chang e in leg al factors or in bu siness climate, 2) un anticipated co mp etition , or 3 ) an adv erse actio n or assessment b y a regu lator. Wh en ev alu ating whether go od will is impaired, we fi rst d etermi ne throu gh qu ali tat iv e analysis wh eth er rel ev ant ev en t s and circu mstances in dicate that it is mo re likely than n ot t hat segment g oo dwill b alances are imp aired as o f th e testin g date. If the qu alitativ e an aly sis d oes no t ind icat e that an imp airment of seg men t goodwill is more likely th an no t t hen n o other specific quanti tat iv e impairmen t testin g is req uired . If it is d etermined that it is more likely th an n ot that imp airment ex ists, we p erform a qu antitative assessment and co mpare o ur estimate o f th e fair value of t he rep ort in g u nit to wh ich th e go od will is assig ned to th e rep ortin g u nit’s carry ing amou nt, i ncl ud in g g oo dwill. We utilize a fair v alu e measuremen t (which includ es a d isco un t ed cash flo ws an aly si s) to assess th e carry in g v alu e o f the rep ort in g units in co nsideration of th e recov erab ility o f the go odwill balan ce assig ned to each rep orting un it as of the measu remen t d ate. Our material g oo dwill balances are at trib utable to certain o f o ur op eratin g seg men ts (which are each con si dered to b e repo rting u nit s). Th e cash fl ows used to determine the fair v alu e o f our repo rting u nits are d epen den t on a n umber o f sig nificant assumpti on s. Ou r estimates, which con sider a market particip an t v iew of fai r value, are su bject to ch ang e g i ven the inh erent un certain ty in predi cti ng fu tu re results and cash flo ws, wh ich are i mp acted b y such thin gs as p oli cy ho l der behav io r, competitor pricing , capital limitatio ns, new prod uct in trod uctio ns, an d specific ind ustry an d market con ditions. The b alan ce reco gn ized as go od will is no t amo rti zed , b ut is reviewed fo r impairment o n an an nu al basis, or more freq uen tly as ev ents o r circu mstan ces may warran t, includ in g th ose circu mstances wh ich wou ld mo re lik ely t han no t redu ce th e fai r v alu e of our rep orting u nits bel ow i ts carry ing amou nt. Du ring the fo urth q uarter o f 20 18 , we performed ou r ann ual q ual itative ev alu ation o f go od will based o n th e circumst an ces that ex isted as o f Octo ber 1, 20 18 an d determin ed th at there was no in dicati on that o ur segment g oo dwill was more likely th an no t imp aired and n o adjustment to imp air g oo dwill was necessary. We h ave assessed wh eth er ev ents hav e o ccu rred su bseq uen t to Octob er 1, 20 18 th at would imp act ou r con clu sion and no su ch even ts were id ent ified . As of December 31 , 2 01 8, we increased ou r g oodwill b alan ce by app roximately $32 .0 mi llio n. Refer to Note 1, Ba sis o f Presen ta tion fo r ad dit io nal in fo rmation . As of December 3 1, 2 01 8, we had go od will o f $82 5.5 millio n. Insura nce Liab iliti es and Reserves—Estab lish in g an adeq uate liab ili ty for ou r ob l ig ation s to p olicy ho lders requ ires th e u se of assumptio ns. Estimati ng liab ili ties fo r fu ture p olicy b enefits on life and h ealth insu ran ce p ro du cts requ ires th e u se of assumpti on s rel ati ve to fu tu re investment y ields, mortality, mo rb id i ty, persisten cy, p remiu m pay ment patterns, an d oth er assu mp tion s based on o ur hist orical ex perien ce, mod ified as n ecessary to reflect an ticipated trend s and to in clu de p ro vision s for po ssible ad verse d ev iation . Determin in g liab ili ties fo r o ur p ro perty and casualty in surance p ro du cts also requi res the use of assumptions, includ ing the frequ ency an d sev erity o f claims, an d t he effecti veness of intern al p ro cesses design ed t o red uce th e level o f claims. Our results depen d sig nificantly up on t he extent to which o ur actu al claims exp erience is con sisten t with the assu mp tio ns that we used in determin ing ou r reserves and p ricin g ou r prod ucts. Ou r reserve assu mption s an d estimates requ ire sig nificant jud gment an d, th erefore, are in herently u ncertain. We cann ot determine with precision the ultimate amo un ts th at we will p ay for actu al claims or th e timing of th ose payments. As o f Decemb er 3 1, 2 01 8, we had to tal po licy l iab ilities an d accruals of $4 2.8 billio n. Guaranteed Minimum Death Benefits—We establish liab ilities for gu aranteed minimum d eath b enefit s (“GMDB”) o n ou r VA p rod uct s. The meth od s used to estimate the liabilities employ assumptio ns abo ut mortality and the perfo rmance o f equ ity markets. We assu me ag e-b ased mo rtality from the Ru ark 20 15 ALB ad ju sted tab le for co mp any ex perien ce. Future decl in es in th e eq uity market wo uld increase o ur GMDB liability. Differen ces b etween the actual experience an d th e assu mp tion s u sed result in v ari an ces in profit an d cou ld result in losses. A po rtion o f o ur GMDB ben efits are sub ject to a do llar-for- do llar redu ction u po n withd rawal of related an nu ity dep osit s o n co ntracts issued prior t o Janu ary 1, 20 03 . As of Decemb er 31 , 20 18 , the GMDB reserv e was $4 4.3 millio n. Guaranteed Living Wi thdra wal Benefits—We estab lish reserves for gu aran teed living withd rawal benefi ts (“GLWB”) o n o ur VA p rod uct s. The GLWB is v alu ed in accordan ce with FASB gu id ance u nd er th e ASC Deriv atives and Hedg ing Top ic wh ich u t ilizes th e v alu ation techn iq ue prescribed b y t he ASC Fair Val ue M easurements and Disclosures To pic, wh i ch req uires th e embed ded deriv ati ve to be recorded at fair valu e usin g current in terest rates an d implied vo latilities for t he eq uity i nd ices. Th e fair value of th e GLWB is imp acted by equ ity market con dition s an d can result in th e GLWB emb edd ed deriv ati ve bei ng in an o verall n et asset o r net liability po siti on . In t imes o f favo rab le equ ity market co nd i tion s th e lik elihood and sev erity of claims is reduced an d exp ected fee in come increases. Since cl aims are gen erally exp ected later th an fees, th ese favorab l e eq uity market con dition s can result in th e present v alu e o f fees b ein g greater than the present value of claims, wh ich resu lts in a net GLWB emb edd ed deriv ative asset. In times o f un fav orable eq uity mark et con dition s the likelih oo d an d severity of claims is in creased and ex pected fee in come decreases and can resu lt i n the present value of claims ex ceedi ng the presen t value of fees resulting in a n et GLWB embed ded d erivativ e li ab i lity. The meth od s used to estimate t he emb ed ded deriv ative emp lo y assumptio ns ab ou t mo rtality, lap ses, po licyh older b ehav io r, equ i ty mark et returns, int erest rates, and mark et vo latility. We assu me age-b ased mo rtal ity from th e 45 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Ru ark 20 15 ALB table adjusted for compan y experience. Differences b etween the actu al ex perien ce an d the assu mp tions u sed result in variances in p ro fit and co uld resu lt in lo sses. As o f Decemb er 31, 20 18 , ou r n et GLWB liability held was $18 4.1 millio n. Pension a nd Other Po st retirement Benefits—Det ermin in g ou r o bligatio ns to emp lo yees u nd er ou r p ension plans an d o th er po stretiremen t b en efit plans req uires the use of assumptions. Th e calculation o f t he liability an d exp ense related to o ur b enefit plans incorporates th e foll owing sign i fican t assumptio ns: •app rop riate weig hted av erage d isco un t rate; •estimated rat e o f increase in th e comp ensati on of employees; an d •exp ected lo ng -term rate of ret urn o n the plan’s assets. See No t e 1 6, Emp lo yee Ben efit Pla ns, to the co nso lidated fin ancial statements in clu ded in th is report for fu rther in format io n o n t his plan. Deferred Tax es and Uncerta in Tax Posit io ns —Deferred federal in come t axes arise fro m t he recog nitio n of temp orary d ifferences between th e b asis of assets an d liabilities determined for fi nancial rep orting p urp oses and the basis d etermined for inco me tax pu rp oses. Such tempo rary differen ces are prin cip ally related to net u nrealized gains (lo sses), d eferred p olicy acq uisi tion co sts an d value of b usin ess acq uired , an d fut ure p olicy b enefits an d claims. Deferred tax assets an d liab ilities are measured u sin g the enact ed tax rates ex pect ed to be in effect when such d ifferences reverse. On Decemb er 2 2, 20 17 , th e Presid ent of th e Un i ted St ates sign ed into law th e Tax Cu ts an d Jo bs Act (th e “Tax Reform Act ”). Th e legislation sign ifican tly ch ang es U.S. tax law by, amon g o th er th in gs, lowerin g the co rpo rat e inco me tax rate. The Tax Reform Act permanen tly redu ces the U.S. corpo rate inco me tax rat e fro m a maximu m o f 35 % to a flat 2 1% rate, effect iv e Janu ary 1, 2 01 8. Also on December 22, 2017, th e SEC staff issued Staff Accou nti ng Bu l let in No. 1 18 (“SAB 1 18 ”) to ad dress th e app licati on of GAAP in situatio ns when a reg istrant do es n ot hav e th e necessary in fo rmation avail ab le, prep ared , or an alyzed (in clu ding compu tatio ns) in reaso nable d etail to co mp lete the acco un ting for certain in come t ax effects o f t he Tax Refo rm Act. We recog nized th e p ro vision al tax imp acts related t o th e revaluatio n o f deferred tax assets an d incl ud ed th ese amou nts in ou r conso lidated fin ancial statemen ts for th e y ear end ed December 31, 2 01 7 and disclo sed such items whi ch may h ave been reco rd ed on a p ro vision al basis. Th e fin al accou ntin g was compl eted o n December 2 2, 2 01 8 and an y adju stments to th ese prov isio nal amou nts are includ ed in o ur con solidated finan cial statemen ts for the year en ded December 31 , 2 018. We ev alu ate deferred tax assets fo r impairment qu arterly at the taxp ayi ng co mp on ent level within each tax j urisdi cti on . Deferred tax assets are reduced b y a v alu ation allo wan ce if, based on t he weig ht o f av ailabl e ev idence, it is more likely th an n ot th at some or all of su ch assets wil l n ot b e realized as fu tu re redu ction s o f curren t taxes. In d etermi ning t he n eed for a valu ation allo wance we con sider the reversal of existin g tempo rary di fferen ces, fu tu re tax able in come, and tax plann in g strategies. Th e d eterminatio n of an y valuatio n allo wan ce req uires management to mak e certai n ju dg men ts and assumptio ns regardin g future op eratio ns that are based on ou r h isto rical ex perience an d our ex pectation s of future perfo rmance. The ASC In come Taxes Topi c prescribes a recog nition t hresho ld and measu rement attrib ute fo r the fi nancial statement reco gn i tion and measu rement of an ex pected or actu al un certain in come tax return p ositio n an d prov i des gu i dance on discl osu re. Ad dition ally, in order for us to recog nize an y d egree o f benefit i n o ur finan cial statemen ts from such a p ositio n, there mu st be a greater th an 5 0 p ercent chan ce o f success with th e relevan t taxing autho rity with regard to th at p osit io n. In making th is anal ysis, we assu me that th e tax in g au th ority is fu lly info rmed o f all o f th e facts reg ard in g an y issu e. Our ju dg men ts an d assu mp tion s reg ard in g un certain tax po sition s are sub ject to chan ge ov er time du e to the en actment o f new leg islation, th e issu an ce o f rev ised or n ew regul ati on s or ru lin gs b y the v ariou s tax autho rities, and th e issuan ce o f n ew d ecisio ns b y the courts. Co ntingent Lia bilities—The assessment of p otenti al ob ligati on s fo r t ax , reg ulato ry, and li tigatio n matt ers i nh erentl y in vo l ves a variety of estimates of po ten tial fu tu re ou tco mes. We make such est imates after co nsu ltation with our adv isors an d a review of av ailable facts. Howev er, th ere can be n o assu rance th at future ou tco mes will not d iffer from man ag emen t’s assessments. 46 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. RESULTS OF OPERATIONS Ou r man agemen t and Board of Directors an aly zes an d assesses th e o perating p erforman ce o f each seg men t usin g “pre-tax ad justed op eratin g in come (loss)” an d “after-tax adjusted op eratin g in come (loss)”. Co nsistent with GAAP accou ntin g gu id ance for seg men t rep orting , p re-tax adjusted operating in come (loss) is ou r measu re o f segment performance. Pre-tax ad ju sted o perating i ncome (lo ss) is calcul ated by adju sting “inco me (loss) b efo re in come tax ,” by ex clu ding th e fo llo wing items: •realized gai ns an d losses on in vestmen ts an d d erivativ es, •chan ges in the GLWB embed ded deriv atives ex clu siv e of th e po rtio n attri bu table to the econ omic cost o f the GLWB, •actu al GLWB in curred claims, and •the amo rtizatio n o f DAC, VOBA, and certain p olicy liabilit ies that is imp acted by th e ex clu si on of th ese items. After-tax ad j usted o perating income (lo ss) is deriv ed from pre-tax ad ju st ed o perati ng in come (loss) wit h the inclusio n o f in come tax exp ense o r benefits associated with pre-tax ad justed op erating inco me. Inco me tax exp ense o r ben efits is allocated to th e items excluded from p re-tax adjusted operating in come (loss) at th e st atu to ry federal inco me tax rate for the associated p eriod . Fo r perio ds en ding o n and prio r to December 3 1, 20 17 a rate o f 3 5% was used . Beg in ning in 20 18 , a statu t ory fed eral in come tax rate of 21 % was u sed to allo cate in come tax ex pen se or b enefits t o items ex clu ded from pre-t ax adjusted op eratin g in come (loss). Income tax exp en se or b enefits allo cated to after-tax ad ju st ed o perating in co me (loss) can vary perio d to p eriod based o n ch ang es in ou r effective inco me t ax rate. The items exclud ed fro m adjusted o perating in co me (lo ss) are imp ort an t to u nd erstand in g the ov erall results o f o peration s. Pre-tax adjusted op eratin g i ncome (loss) an d after-tax adjusted op erat in g inco me (lo ss) are no t sub stit utes fo r inco me b efo re i ncome tax es or net in come (l oss), respect iv ely. These measures may n ot be co mp arab le to simi larly tit led measu res rep orted by o th er co mp ani es. Our belief is that pre-tax and after-tax adju sted operating in come (lo ss) enh ances man agemen t ’s an d the Board o f Di rectors’ u nd erstandi ng of th e o ngoin g o perati on s, th e un derly in g p ro fit ab ility of each segment, and helps facilitate t he allocatio n o f reso urces. In determining t he compo nen ts o f the p re-tax ad j usted o perating in come (loss) for each segment , p remiu ms an d p olicy fees, o th er inco me, ben efits an d settlement exp enses, and amo rti zatio n of DAC and VOBA are att ribu ted directl y to each o perating seg ment. Net in vestmen t in come is allo cated based on directly related assets requ ired fo r transactin g th e bu siness of that seg ment. Realized in vestmen t gai ns (losses) and o th er o perating ex pen ses are allocated to th e segments i n a mann er that mo st app ro priately refl ects the o peration s o f th at seg men t. Investments an d other asset s are allocated based o n p olicy l iab ilities net o f associated policy assets, while DAC/VOBA an d g oo dwill are sh own in the seg men ts to wh ich th ey are attribu table. We perio dicall y review an d up dat e as app ro priate ou r key assumptions used to measure certain balances related to in surance p ro du cts, in clu ding fu tu re mo rtalit y, exp enses, lapses, p remiu m persisten cy, b enefit u tilizat io n, in vestmen t y ields, interest rates, an d sep arate accou nt fu nd ret urns. Chan ges to th ese assu mp tion s resu lt i n ad ju stmen ts wh i ch increase or d ecrease DAC and VOBA amortization and /or ben efits and ex pen ses. Assumptio ns may b e up dated as p art of o ur an nu al assu mp tion rev iew process, as well as d urin g o ur q uarterly up date o f h istori cal bu sin ess activit y. Th is p eriod ic rev iew and updatin g of assumptio ns is co llectively referred to as “un lo cking .” When referring to un lo cking the referen ce is t o ch ang es in all b alan ce sh eet co mp on ents associated with th ese chan ges. The adjustmen ts asso ciated wit h un lo cking can creat e sign ifican t variab ility fro m perio d to p eriod in th e p ro fitab ili ty o f certain of th e Co mp any ’s o perating segments. 47 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fo llowi ng tabl e presents a su mmary o f resu lts and reco nciles pre-tax adjusted o perati ng inco me (loss) to con so lidated in come before inco me tax an d n et inco me: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Adjusted Opera ting Inco me (Lo ss) Life Marketin g $(1 9,3 76 ) $50,77 8 $39 ,74 5 Acqu i sitions 28 2,7 15 249,74 9 2 60 ,51 1 An nu ities 16 7,1 86 213,08 0 2 13 ,29 3 Stab le Valu e Prod ucts 10 2,3 28 105,26 1 61 ,29 4 Asset Protection 2 9,9 11 24,35 6 16 ,48 7 Co rp orate and Oth er (8 4,2 29 ) (136,33 2) (87 ,96 1) Pre-tax adjusted op eratin g inco me 47 8,5 35 506,89 2 5 03 ,36 9 Realized (lo sses) gains on in vestmen ts an d d erivativ es (9 5,5 17 ) (71,83 5) 90 ,62 8 In come b efo re inco me tax 38 3,0 18 435,05 7 5 93 ,99 7 Inco me t ax exp ense (ben efit)8 0,6 57 (671,47 5) 2 00 ,96 8 Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Pre-tax ad ju sted op eratin g inco me $47 8,5 35 $506,89 2 $5 03 ,36 9 Ad ju sted op eratin g inco me t ax (ex pen se) b enefit (10 0,7 16 ) 646,33 3 (1 69 ,24 8) After-tax adjusted o perating in come 37 7,8 19 1 ,153,22 5 3 34 ,12 1 Realized (losses) g ain s o n i nv estments and deriv atives (9 5,5 17 ) (71,83 5) 90 ,62 8 In come tax b enefit (ex pen se) o n ad ju st ments 2 0,0 59 25,14 2 (31 ,72 0) Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Realized in vestmen t (lo sses) g ains: Deriv ative fin ancial in stru men ts $6 0,9 88 $(305,82 8) $(40 ,28 8) All o th er inv estments (22 3,6 49 ) 121,42 8 90 ,65 9 Net imp airmen t losses reco gn ized in earnings (2 9,7 24 ) (11,74 2) (17 ,74 8) Less: related amo rti zation(1)(1 1,8 56 ) (39,48 0) 24 ,36 0 Less: VA GLWB econ omic co st (8 5,0 12 ) (84,82 7) (82 ,36 5) Realized (losses) g ain s o n i nv estments and deriv atives $(9 5,5 17 ) $(71,83 5) $90 ,62 8 (1)Includes amortizatio n of DAC/VOBA an d benefits an d settlement exp enses that are imp acted by realized g ain s (lo sses). Fo r The Year Ended Decemb er 31 , 20 18 , as co mp ared to The Yea r End ed December 3 1, 2 01 7 Net inco me fo r the year en ded Decemb er 31 , 2 01 8 was $3 02 .4 milli on wh ich was a d ecrease of $8 04 .2 millio n. Th e d ecrease in net inco me was primarily driv en by an unfavorable change in in come taxes o f $75 2.1 millio n which was driven b y the chan ge in the corpo rate tax rate in 2 01 7. Pre-tax ad justed o perating inco me was $47 8.5 million which was a decrease of $28 .4 millio n. The d ecrease in pre-tax ad ju sted o perating inco me consisted o f a decrease of $7 0.2 million in the Life M arketi ng seg men t, a d ecrease of $45.9 million in the An nu ities seg men t, and a decrease o f $2.9 million in the Stable Valu e Prod ucts segment. These d ecreases were partially offset by an increase o f $33 .0 millio n i n t he Acqu isitions segment, an in crease o f $5.6 mi llio n in the Asset Pro tectio n seg men t, and an increase of $5 2.0 millio n in the Corporate and Oth er seg ment. Net realized losses on inv est ments an d deriv atives fo r th e year end ed Decemb er 31 , 2018 was $9 5.5 million . Th ese losses were p rimarily du e to net impairmen ts of $2 9.7 mill io n, equ ity secu rit ies losses of $4 9.0 millio n, and net lo sses on VA GLWB d eri vat iv es (after ad j ustin g for econ omic cost and amortization) of $1 6.6 millio n. Ou r n et imp airmen ts o f $2 9.7 mi llio n were d riv en by i mp airments in the u tility sector. Th e equ ity secu rities losses of $4 9.0 mi llio n were p rimarily d riven b y th e ov erall declin e in market prices d urin g th e p eriod . Th e n et lo sses on VA GLWB deriv atives in clu ded a $2 5.8 million lo ss rel ated to v ariations in act ual su b-acco un t fun d perfo rmance fro m th e ind ices in clu ded in ou r hed ging p ro gram and a $8 .5 millio n loss fro m ch ang es to po licyh older assumpti on s whi ch was partially o ffset by a $17 .2 millio n g ain related to an in crease in ou r n on -perfo rmance risk du ring th e perio d. 48 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •Life Marketin g segment pre-tax adjusted op eratin g lo ss was $1 9.4 millio n for th e year end ed Decemb er 31 , 2 01 8, representing a d ecrease o f $70 .2 millio n fro m th e year en ded December 31 , 20 17 . The d ecrease was pri marily d ue to the imp act o f u nlock in g, hi gh er rein surance co sts, an d h ig her li fe claims for th e y ear ended Decemb er 31 , 20 18 , as co mp ared to the p rior year. The seg ment reco rd ed an u nfavo rab le $2 8.9 mill io n o f un lo cking for the y ear ended Decemb er 31 , 20 18 , as co mp ared to an un favorab l e $4 .0 millio n o f un lo cking for t he y ear en ded Decemb er 3 1, 2 01 7. •Acqu isit io ns segmen t pre-tax adju sted op eratin g inco me was $28 2.7 milli on fo r the y ear en ded Decemb er 3 1, 2 018, an i ncrease o f $3 3.0 million as compared to th e year en ded Decemb er 31 , 2 01 7, primarily du e t o th e favo rab le impact o f $5 1.3 millio n from th e Liberty rei nsu ran ce tran sactio n completed on May 1, 2 01 8, p art ly offset by th e exp ected run off o f th e in-force b locks of bu sin ess. •Ann uities segmen t pre-tax ad justed op erating inco me was $1 67 .2 millio n fo r th e year end ed December 31 , 2 01 8, as compared to $2 13 .1 million for th e year en ded December 3 1, 20 17 , a decrease of $45 .9 millio n, or 2 1.5 %. This v ariance was primarily th e result o f un fav orable u nlo ck ing, an u nfavo rab le chan ge in gu aranteed ben efit reserv es, an d lower VA fee in come, p artially offset by a fav orable ch ang e in sin gle p remiu m i mmed iate an nu ities (“SPIA”) mortal ity. Segmen t results were neg atively impacted by $25 .0 mil lion o f unfavorable un lo cki ng for the y ear end ed Decemb er 3 1, 20 18 , as compared t o $16 .5 million of fav orable unlo ck i ng fo r the y ear end ed December 31 , 20 17 . •Stable Valu e Prod uct s pre-tax adjusted op eratin g in come was $10 2.3 millio n an d decreased $2.9 millio n, or 2.8 %, fo r the y ear end ed December 3 1, 20 18 , as co mp ared to th e year end ed December 31 , 2 01 7. The d ecrease in adjusted op eratin g earn in gs pri marily resu lted from lower interest spreads dri ven by h i gh er credited rates on n ewly issu ed co ntracts. Parti cip ati ng mortg age inco me fo r th e y ear en ded Decemb er 31 , 2 01 8, was $26 .3 millio n as co mp ared to $33.5 millio n for t he year end ed December 31 , 20 17 . The ad ju sted o perating spread, wh ich ex clu des p articipatin g i ncome, decreased b y 2 0 basis p oints fo r the year en ded December 3 1, 20 18 , from th e p rio r year, du e primarily to an increase in cred ited interest. •Asset Pro tectio n segment p re-tax ad ju st ed o perating in co me was $29 .9 millio n, rep resen tin g an in crease o f $5.6 million , o r 22 .8%, for the year en ded December 3 1, 2 018, as co mp ared to the year end ed Decemb er 31 , 20 17. Service co ntract earni ng s increased $4 .8 mil lion p rimarily d ue to favo rab le loss ratio s and hig her in vestmen t inco me. Earning s fro m GAP and cred it i nsu ran ce prod uct lines increased $0.1 million an d $0.7 millio n, respectiv ely , primarily du e to lo wer exp enses, somewh at o ffset by lo wer vo lu me and hig her lo ss ratios. •Th e Co rp orate and Other segment ’s pre-tax adjusted o perating lo ss was $84 .2 million fo r the year en ded Decemb er 3 1, 20 18, as comp ared to an ad ju sted p re-tax o perati ng lo ss of $13 6.3 milli on fo r th e year ended December 31 , 2 01 7. The d ecrease in op eratin g loss is p rimarily attri bu tab le t o a decrease in co rp orate o verhead ex pen ses and an increase in investment i ncome. Fo r The Year Ended Decemb er 31 , 20 17 , as co mp ared to The Yea r End ed December 3 1, 2 01 6 Net i ncome for the y ear en ded December 31 , 201 7 was $1,1 06 .5 millio n whi ch was an i ncrease of $7 13 .5 millio n. The increase in n et in come was primarily driv en b y a fav orable ch ang e in in come taxes o f $87 2.4 millio n which was d riven by th e ch ang e in the co rp orate tax rate. Pre-t ax adjusted op eratin g in come was $50 6.9 million wh ich was an in crease o f $3.5 million . Th e increase in pre-tax adjusted operating income co nsisted of an $11 .0 million in crease in t he Life M ark eting seg ment, a $4 4.0 milli on in crease i n the Stab le Value Pro du cts segmen t, an d an increase o f $7.9 mil lion in t he Asset Pro tectio n segmen t . These increases were partially offset by a $10.8 mil lion decrease in th e Acqu isitio ns segmen t an d a $48 .4 mill io n d ecrease in the Corporate and Other segment. In co me tax (ben efit) exp ense decreased $8 72 .4 millio n for the year end ed Decemb er 3 1, 2 01 7, compared to 20 16 , du e to th e impact of the Tax Reform Act en acted on December 22, 2 01 7. We recog nized a prov isio nal $7 97 .6 mi llio n tax ben efit as a result of rev alu in g th e end in g net deferred tax liabilities from 35 % to th e newly en acted corpo rate inco me tax rate of 2 1%, p arti all y o ffset b y tax exp ense related to t he write-o ff o f cert ain deferred tax assets to reflect chang es in tax law which will p roh ib it the dedu ction o f th ose i tems in fu tu re perio ds. The effective tax rate was (1 54 .3%) an d 33.8 % fo r th e years end ed Decemb er 31 , 2 01 7 an d 20 16 , respectiv ely. The d ecrease in th e effect iv e tax rate was du e to th e impact o f th e Tax Reform Act. Further in fo rmation on th e co mp on ents o f the effective tax rates for th e year en ded December 3 1, 2 01 7 an d 2 01 6, i s presented in No te 18 , In come Taxes. Net realized losses on inv est ments an d deriv atives fo r th e year end ed Decemb er 31 , 2017 was $7 1.8 million . Th ese losses were p rimarily du e to net lo sses o n VA GLWB deriv atives (after ad ju stin g for econ omic co st an d amortization ) of $6 7.6 million an d net lo sses o n FIA deriv atives o f $6.6 mil lion . The net lo sses on VA GLWB d erivativ es includ ed a $3 5.9 milli on loss related to v ariation s in actu al sub -accou nt fun d perfo rmance from th e ind ices in clu ded in ou r hed ging prog ram, a $2 5.7 millio n loss related t o a d ecrease in ou r non -p erforman ce risk du ring th e p eriod , an d a $1 2.0 mi llio n loss from ch ang es to po licyh older assumpti on s. The n et l osses on FIA d erivativ es were p rimarily d riven by lo sses o f $5.9 millio n from ch ang es to po licyh older assu mp tion s. •Life Marketin g seg men t p re-t ax adju sted op eratin g in come was $5 0.8 million fo r th e year end ed Decemb er 3 1, 20 17 , rep resen ting an in crease o f $11 .0 mill io n fro m the y ear end ed Decemb er 3 1, 20 16. Th e increase was primarily du e to th e impact of un lo cking fo r the y ear en ded Decemb er 31 , 20 17 , as co mp ared t o the prio r year. Th e seg men t recorded an un fav orable $4.0 million o f un lo cking for the y ear ended Decemb er 3 1, 2 01 7, as compared to an u nfavo rab le $13 .3 million of un l ockin g for th e year en ded Decemb er 3 1, 2 01 6. •Acqu isit io ns seg men t pre-tax adju sted operating in come was $2 49 .7 million fo r t he year en ded Decemb er 31 , 2 01 7, a decrease o f $10 .8 million as co mp ared to th e y ear en ded Decemb er 3 1, 2 01 6, primarily d ue t o t he exp ected ru no ff of th e in -force block s of bu si ness. 49 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •Ann uities segmen t pre-tax ad justed op erating inco me was $2 13 .1 millio n fo r th e year end ed December 31 , 2 01 7, as compared to $2 13 .3 million for the year en ded Decemb er 3 1, 2016, a decrease o f $0.2 millio n, or 0.1 %. This varian ce was p rimarily the result o f an un fav orable ch ang e in SPIA mort ali ty an d high er no n-d eferred exp enses, p artially o ffset b y in creased interest spreads, g ro wth in VA fee inco me, an d favo rable u nlo ck ing. Segment resu lts were p ositiv ely impacted b y $16 .5 million of fav orable un lo cking for th e year en ded Decemb er 3 1, 2 01 7, as co mp ared to $8 .1 mil lion of fav orable un lo cki ng fo r the y ear end ed December 31 , 20 16 . •Stable Value Pro du cts pre-tax ad ju st ed o perating in come was $1 05 .3 mi llio n an d in creased $4 4.0 million, or 71 .7%, fo r the year ended Decemb er 31 , 2 01 7, as compared to the year end ed December 31 , 2 01 6. The in crease in ad ju st ed o perating earning s primarily result ed from an i ncrease in partici patin g mortg age in co me an d high er av erag e acco un t values. Particip ati ng mo rtgag e i ncome for t he y ear en ded Decemb er 31 , 2 01 7, was $33 .5 milli on as compared to $11 .0 million for the year en ded December 3 1, 20 16. The adj usted op eratin g sp read , wh ich exclu des parti cip ati ng in come, d ecreased b y 8 basis points fo r th e y ear ended Decemb er 3 1, 201 7, fro m the prior year, du e primarily to an in crease in cred ited interest. •Asset Pro tectio n segment p re-tax ad ju st ed o perating in co me was $24 .4 millio n, rep resen tin g an in crease o f $7.9 million , o r 47 .7%, for the year en ded December 3 1, 2 01 7, as compared to th e year end ed Decemb er 31 , 20 16 . Service cont ract earn i ng s in creased $13 .7 milli on p rimarily d ue to favo rab le loss rati os an d $4.8 millio n of on e-time transactio n co sts asso ciated with the US Warranty acq uisition in 20 16 . Cred it insurance earning s decreased $0.3 millio n primarily d ue to lower v olume. Earn in gs from the GAP prod uct lin e decreased $5.5 million p rimari ly resu lting from hi gh er l oss ratio s, somewhat o ffset by add itio nal in come p rov id ed by US Warranty. •Th e Co rp orate an d Oth er seg men t’s p re-tax ad ju sted o perati ng lo ss was $1 36 .3 million for th e y ear en ded Decemb er 3 1, 2 01 7, as compared to an ad ju sted p re-tax op eratin g loss of $88 .0 million for th e year end ed December 31 , 2016. Th e decrease is p rimarily attribu tab le to a $4 9.5 mill io n increase in co rp orate o verhead ex pen ses. The increase in o verhead ex pen ses was primaril y due to certain accrued ex pen ses t hat increased as a result o f th e favo rab le after-tax adj usted op eratin g inco me resu lts whi ch in creased d ue to th e ch an ge i n th e co rp orate t ax rate d uri ng th e p eriod. 50 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Life Ma rketing Segment R esults of Op erati ons Segment resu lts were as follo ws: Fo r The Yea r Ended December 3 1 , 20 1 8 2 0 17 2 0 16 (D o l l ars In Tho us a nds) REVENUES Gross premiums and po licy fees $1,9 17 ,19 0 $1,8 55 ,07 5 $1,7 72 ,52 3 Reinsu ran ce ced ed (8 73 ,96 2) (8 43 ,16 4) (8 00 ,27 6) Net premi ums and po licy fees 1,0 43 ,22 8 1,0 11 ,91 1 9 72 ,24 7 Net in vestmen t inco me 5 51 ,78 1 5 53 ,99 9 5 25 ,49 5 Other in come 1 26 ,01 2 1 12 ,85 5 1 11 ,29 2 Total o perating rev enu es 1,7 21 ,02 1 1,6 78 ,76 5 1,6 09 ,03 4 Real ized g ain s (lo sses)—inv estments (34 ,21 2) (6 ,29 1) 5 ,67 9 Real ized g ain s (lo sses)—d erivat iv es 2 ,98 6 (5 ,35 6) 13 ,13 5 Total reven ues 1,6 89 ,79 5 1,6 67 ,11 8 1,6 27 ,84 8 BENEFITS AND EXPE NSES Ben efits an d settlemen t ex penses 1,4 24 ,63 2 1,3 30 ,03 1 1,2 61 ,23 1 Amortization of DAC/VOBA 1 18 ,41 9 1 19 ,16 4 1 30 ,56 0 Other op erat in g ex penses 1 97 ,34 6 1 78 ,79 2 1 77 ,49 8 Operating benefits and exp enses 1,7 40 ,39 7 1,6 27 ,98 7 1,5 69 ,28 9 Amortization related to benefits an d settlemen t expenses (12 ,63 1) (10 ,89 3) 6 ,61 3 Amortization of DAC/VOBA related to realized g ain s (lo sses)— investments (1 ,50 2) 1 ,58 9 14 8 Total b enefits and exp enses 1,7 26 ,26 4 1,6 18 ,68 3 1,5 76 ,05 0 INCOME (LOSS) BE FORE INCOME TAX (36 ,46 9) 48 ,43 5 51 ,79 8 Less: realized g ain s (losses)(31 ,22 6) (11 ,64 7) 18 ,81 4 Less: amortization related to ben efi ts an d settlemen t ex penses 12 ,63 1 10 ,89 3 (6 ,61 3) Less: related amortization of DAC/VOBA 1 ,50 2 (1 ,58 9) (14 8) PRE-TAX ADJ USTE D OPERATING INCOME (LOSS)$(19 ,37 6) $50 ,77 8 $39 ,74 5 51 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fol lo win g tabl e summarizes key data fo r the Life M ark eting segment: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Sa les By Product(1 ) Tradit io nal $5 1,5 05 $8,06 5 $1 ,03 5 Un iv ersal life 11 6,7 46 164,07 4 1 68 ,67 1 BOLI — — — $16 8,2 51 $172,13 9 $1 69 ,70 6 Sa les By Distribution Channel Tradit io nal brok erage $14 5,2 80 $147,02 3 $1 46 ,06 2 Institu tional 1 4,0 64 16,29 1 16 ,29 4 Direct 8,9 07 8,82 5 7 ,35 0 $16 8,2 51 $172,13 9 $1 69 ,70 6 Averag e Life Insurance In-fo rce(2) Tradit io nal $3 50 ,39 8,0 22 $346 ,134,07 6 $36 1,9 76 ,53 9 Un iv ersal life 2 78 ,19 1,4 68 253 ,282,09 8 21 5,3 33 ,06 9 $6 28 ,58 9,4 90 $599 ,416,17 4 $57 7,3 09 ,60 8 Averag e Acco unt Va lues Un iv ersal life $7 ,75 2,0 76 $7 ,626,86 8 $7,4 49 ,47 0 Variable un iv ersal l ife 76 2,8 12 718,89 0 6 24 ,02 2 $8 ,51 4,8 88 $8 ,345,75 8 $8,0 73 ,49 2 (1)Sales d ata for traditional life in suran ce is based on an n u alized p remiums. Un iversal life sales are b ased on annualized planned prem iums, o r “targ et” prem iu ms if lesser, plu s 6% o f amo u n ts received in excess of target premiu m s and 1 0 % of single prem iu ms. “Target” premiu m s fo r u n iv ersal life are those p rem iums upon which full first y ear co m missions are p aid . (2)Amo u n ts are n o t ad justed for rein suran ce ceded. Op erati ng Expenses Detail Other op eratin g ex penses fo r the seg men t were as follows: Fo r The Yea r Ended December 3 1 , 20 1 8 2 0 17 2 0 16 (D o l l ars In Tho us a nds) Insura nce companies: First year co mmissio ns $1 92 ,43 5 $1 97 ,81 5 $1 96 ,37 5 Renewal co mmissio ns 41 ,31 4 39 ,93 1 38 ,08 9 First year ced in g allo wan ces (70 9) (2 ,24 4) (3 ,55 6) Renewal ced in g allo wances (1 75 ,26 1) (1 85 ,25 5) (1 65 ,61 4) General & admin istrati ve 2 23 ,66 3 2 28 ,96 0 2 13 ,87 9 Tax es, licenses, an d fees 39 ,04 4 36 ,04 5 33 ,06 8 Other op eratin g ex pen ses in curred 3 20 ,48 6 3 15 ,25 2 3 12 ,24 1 Less: co mmissio ns, allo wan ces and exp en ses capitalized (2 50 ,72 8) (2 54 ,37 5) (2 46 ,73 8) Other in surance compan y o perating expen ses 69 ,75 8 60 ,87 7 65 ,50 3 Distribution co mpanies: Co mmissio ns 88 ,97 7 84 ,45 8 79 ,29 9 Other op eratin g exp enses 38 ,61 1 33 ,45 7 32 ,69 6 Other distribu tio n compan y o perating exp en ses 1 27 ,58 8 1 17 ,91 5 1 11 ,99 5 Other o perating ex penses $1 97 ,34 6 $1 78 ,79 2 $1 77 ,49 8 52 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Pre-t ax adjusted o perating lo ss was $19.4 million fo r the year en ded December 3 1, 2018, rep resen ting a d ecrease of $7 0.2 mill io n fro m the year en ded December 31 , 20 17 . The d ecrease was primarily du e to th e impact of un locking , hig her rei nsu ran ce co sts, and high er li fe cl aims fo r the y ear en ded Decemb er 31 , 2018, as compared to th e prior y ear. The segmen t reco rd ed an u nfavo rab le $2 8.9 mil lion o f un lo cking for the year end ed Decemb er 31 , 20 18 , as co mp ared to an unfav orable $4 .0 million of unl ockin g for th e year en ded Decemb er 3 1, 2 01 7. Op erati ng reven ues Total o perating reven ues for the year en ded Decemb er 31 , 2 01 8, i ncreased $4 2.3 million , or 2 .5%, as compared to the year en ded Decemb er 31 , 20 17 . This in crease was driven by h i gh er premiums and po licy fees and dist ribu tion compan y revenu e. Net premiums a nd po licy fees Net premiums and po licy fees in creased b y $31 .3 million , or 3.1 %, fo r the y ear end ed Decemb er 31 , 20 18 , as compared to th e year en ded December 31 , 2 01 7, d ue to an in crease in po licy fees asso ciat ed with co ntin ued growth in u niversal life bu siness, as wel l as increases in traditional li fe premiums. Net in vestment i ncome Net inv estment in come in th e segmen t d ecreased $2 .2 million , o r 0 .4%, fo r the year en ded December 31 , 2 01 8, as co mp ared to the year en ded Decemb er 31 , 2 01 7 driv en b y lo wer tradition al life and d istrib utio n company investmen t in come of $5.7 million an d $4 .2 millio n, resp ectively, o ffset in p art by hi gh er uni versal life in vestmen t inco me o f $8.8 millio n. Other inco me Other i ncome i ncreased $13 .2 millio n for the y ear en ded December 31 , 2 01 8, as compared to th e year end ed Decemb er 3 1, 20 17 , primaril y d ue to high er rev enu e in th e segment ’s n on -in surance op eratio ns. Benefit s an d settlement exp enses Ben efits and settlement expenses increased by $94 .6 million , o r 7.1 %, fo r th e y ear end ed Decemb er 31, 20 18 , as compared to the year en ded Decemb er 31, 20 17 , driv en b y un lo cking and an increase in cl aims. Fo r th e year end ed Decemb er 3 1, 2 01 8, un iv ersal life un lo cking i ncreased p olicy ben efits an d sett lemen t ex pen ses $2 3.6 milli on , as co mp ared to an i ncrease o f $8.6 millio n for t he year end ed December 31 , 20 17 . Amo rtizatio n o f DAC/VOBA DAC/VOBA amo rti zatio n d ecreased $0 .7 million , or 0.6 %, fo r the y ear end ed December 31 , 20 18 , as compared t o the y ear end ed December 31 , 20 17 , du e to lower VOBA amortizatio n in th e traditio nal life block s, p artially o ffset by hig her VOBA amort izatio n in th e un iv ersal life b lo ck. For the y ear en ded Decemb er 31, 20 18 , u niversal life u nlo ck i ng increased amo rtizatio n $5.3 million, as co mp ared to a decrease o f $4 .6 million fo r t he year en ded Decemb er 3 1, 2 01 7. Other o perat in g expen ses Other o perating exp enses in creased $1 8.6 milli on fo r th e year end ed Decemb er 3 1, 20 18 , as compared to th e year end ed Decemb er 31 , 20 17 . Th is in crease was driv en b y lower ced in g allo wan ces and high er n ew b usin ess costs after cap italization . S ales Sales fo r th e seg men t decreased $3.9 milli on for the y ear en ded December 3 1, 2 01 8, as co mp ared to the year end ed Decemb er 31 , 20 17 , p rimarily du e t o lo wer sales in th e uni versal life blo ck , o ffset b y higher t rad itio nal life sales. The chan ge between p ro du cts was du e i n part to a sh ift in sales focu s from a p ro du ct with in th e un iv ersal life b l ock to a n ew term life p ro du ct. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Pre-t ax adjusted o perating in come was $50 .8 million fo r the y ear end ed December 31 , 20 17 , representing an in crease o f $11 .0 million from th e year en ded Decemb er 31 , 2 01 6. The in crease was p rimarily due to the impact of un lo cking for th e year en ded Decemb er 31 , 2 01 7, as co mp ared to th e p rio r year. The segment reco rd ed an u nfavo rable $4 .0 million of un lo cking fo r t he year en ded December 3 1, 2 01 7, as compared t o an u nfavo rab le $1 3.3 milli on o f un lo cki ng fo r the y ear end ed December 31 , 20 16 . Op erati ng reven ues Total o perating reven ues for the year en ded Decemb er 31 , 2 01 7, i ncreased $6 9.7 million , or 4 .3%, as compared to the year en ded Decemb er 31 , 20 16 . Th is increase was driv en by h ig her p olicy fees and h ig her u niversal life inv est ment in come du e to increases in net in -force reserv es, p artly offset by lo wer traditio nal life p remiums. 53 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net premiums a nd po licy fees Net premiums and po licy fees in creased b y $39 .7 million , or 4.1 %, fo r the y ear end ed Decemb er 31 , 20 17 , as compared to th e year en ded December 31 , 2 01 6, d ue to an in crease in po licy fees asso ciat ed with co ntin ued growth in u niversal life bu siness, as wel l as increases in traditional li fe premiums. Net in vestment i ncome Net in vestmen t in come in th e segment in creased $2 8.5 millio n, o r 5.4 %, fo r the y ear en ded December 31 , 20 17 , as compared to the y ear en ded Decemb er 31 , 2 01 6. Of th e increase in net i nv estment inco me, $22 .3 milli on resulted fro m growth in th e un iversal life block o f bu siness. Tradition al life in vestmen t inco me in creased $2 .0 million . Other inco me Other in come in creased $1 .6 million for th e year en ded December 31 , 20 17 , as compared t o the y ear end ed Decemb er 3 1, 2 01 6, p rimarily d ue to high er rev enu e in th e segment ’s n on -in surance op eratio ns. Benefit s an d settlement exp enses Ben efits and settlement expenses increased by $68 .8 million , o r 5.5 %, fo r th e y ear end ed Decemb er 31, 20 17 , as compared to the year en ded Decemb er 31, 20 16 , d ue primarily to an increase in u niversal life claims and reserv es, partially offset by lo wer traditional life claims and the impact o f un lo cki ng . For th e year ended Decemb er 31 , 20 17 , u niv ersal life un l ocking in creased po licy ben efits an d settlemen t ex penses $8 .6 mil lion , as co mp ared to an in crease o f $16 .3 million fo r the y ear end ed Decemb er 3 1, 20 16 . Amo rtizatio n o f DAC/VOBA DAC/VOBA amo rtizati on decreased $1 1.4 mil lion , or 8.7 %, for th e year end ed December 31 , 20 17, as co mpared to th e year en ded December 31 , 20 16 , du e to lo wer VOBA amo rtizatio n in th e traditional block s resulting fro m d ecreased lapses. Fo r th e year en ded December 31 , 20 17 , un iversal life un lo cki ng decreased amortizat io n $4.6 millio n, as co mpared to a d ecrease of $3 .0 million fo r th e y ear ended Decemb er 3 1, 2016. Other o perat in g expen ses Other op eratin g ex pen ses i ncreased $1 .3 millio n for t he year end ed Decemb er 3 1, 2 01 7, as co mp ared to th e year end ed December 31 , 201 6. Th is in crease was d riven b y hig her co mmissio ns and general and admin istrati ve exp en se, partially offset by lo wer new bu sin ess acqu isitio n costs after cap italization and high er rein surance allo wan ces. S ales Sales for t he segment in creased $2.4 milli on fo r the year end ed December 31 , 20 17 , as co mp ared to th e year en ded Decemb er 3 1, 2 01 6. Th e in creased in t rad itio nal l ife sales of $7.0 million was p rimarily du e to the introd uctio n of new term p ro du cts du ring 2 01 7 wh ich al so led to the decrease in un iv ersal life sales of $4 .6 mill io n for th e year en ded Decemb er 3 1, 2 01 7. Reinsura nce Cu rrently, t he Life Market in g segment rei nsu res sign i fican t amou nts of it s life in su ran ce in-fo rce. Pu rsuant to th e u nd erlying reinsu ran ce co ntracts, rei nsu rers pay allowances to th e segmen t as a percen tag e of b oth first year an d ren ewal premiums. Reinsurance all owances represent th e amou nt th e rein surer is willin g to p ay for reimb ursemen t o f acq uisiti on co sts in curred by th e direct writer o f th e b usin ess. A p ortio n o f rein surance allowan ces receiv ed is deferred as part o f DAC an d a p ortio n i s reco gn ized immediately as a redu ction of other op eratin g ex pen ses. As the n on -d eferred po rti on of allowances redu ces op eratin g exp enses in th e p eriod received , th ese amou nts represent a n et increase to op eratin g i ncome du ring that p eriod . Reinsu ran ce allo wan ces do n ot affect t he meth od olog y used to amortize DAC or the perio d ov er wh ich su ch DAC is amortized. Ho wev er, t hey do affect the amo un ts reco gn i zed as DAC amo rtizatio n. DAC on u niv ersal life-type, limi ted-p ay men t long du ratio n, and inv estment co ntracts bu sin ess is generally amortized b ased o n t he estimated g ross p rofits of t he pol ici es in -force. Reinsurance allowan ces are con si dered in t he determin ation of estimated gross profits, and therefo re, i mp act DAC amortization on t hese lin es of b usiness. Deferred reinsu ran ce allowances o n level term b usin ess are recorded as ceded DAC, which is amo rtized ov er estimated ced ed p remiu ms o f the p olicies in-fo rce. Th us, d eferred reinsu ran ce all owances may imp act DAC amortization . A more detailed d iscu ssion of th e compo nents o f rein su rance can b e fo un d in the Rein su ran ce sectio n o f No te 2 , Summa ry of Sign ifi ca nt Accou nti ng Policies to ou r con so lidated fin ancial statemen t s in clu ded in th is repo rt. 54 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Imp act of Reinsura nce Reinsu ran ce impacted th e Life Marketing segmen t li ne items as sho wn in the follo win g tabl e: Life Marketing Seg ment Line Item Impa ct of Reinsura nce Fo r The Yea r Ended December 3 1 , 20 1 8 2 0 17 2 0 16 (D o l l ars In Tho us a nds) REVENUES Reinsu ran ce ced ed $(8 73 ,96 2) $(8 43 ,16 4) $(8 00 ,27 6) BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses (8 05 ,95 1) (7 10 ,95 9) (7 76 ,50 7) Amortization of DAC/VOBA (5 ,60 9) (5 ,53 3) (6 ,04 8) Ot her o perating exp enses(1 )(1 68 ,58 3) (1 80 ,43 5) (1 61 ,35 2) Total b enefits and exp en ses (9 80 ,14 3) (8 96 ,92 7) (9 43 ,90 7) NET IMPACT OF REINSURANCE $1 06 ,18 1 $53 ,76 3 $1 43 ,63 1 Allowances receiv ed $(1 75 ,97 0) $(1 87 ,49 9) $(1 69 ,17 0) Less: Amou nt deferred 7 ,38 7 7 ,06 4 7 ,81 8 Allowances recog nized (ced ed o th er o perati ng ex pen ses)(1 )$(1 68 ,58 3) $(1 80 ,43 5) $(1 61 ,35 2) (1)Oth er o perating exp enses ced ed p er the income statem en t are eq u al to reinsu rance allo wan ces reco g nized after capitalizatio n. The table ab ov e do es not reflect th e imp act of rein surance o n ou r net inv est ment inco me. By cedin g bu sin ess to the assumin g compan ies, we fo rgo in vestmen t inco me o n the reserv es ceded . Con versely, the assumin g co mp anies will receiv e in vestmen t in come on th e reserves assu med, wh ich will in crease th e assu mi ng compan ies’ profitabilit y o n th e bu siness th at we ced e. Th e net inv estment inco me imp act to us and the assumin g co mp anies h as n ot b een qu an tified . Th e impact o f in clu ding forego ne in vestmen t in come wou ld be to su bstantially redu ce the favorab l e net imp act of rein surance reflected ab ov e. We est imate that the impact of fo reg on e investment i ncome wo uld be to red uce th e net imp act of rein surance presented in the table ab ov e b y 26 5% to 4 80 %. The Life M ark eting segment’s rei nsu ran ce p rog rams do no t materially impact the “o th er income” line o f o ur in come statement. As sho wn abo ve, reinsurance generally h as a favo rab le imp act on th e Life Marketin g seg men t’s o perating in come resu lts. The imp act of reinsurance is larg ely du e to ou r q uo ta share co in surance p ro gram in p lace pri or to mid-20 05 . Und er that prog ram, generally 90 % of th e segment’s traditio nal new bu sin ess was ced ed to rei nsu rers. Since mid-20 05 , a mu ch smaller percentage of overall term bu siness h as been ceded d ue to a ch ang e in rein surance st rategy on tradit io nal business. In ad dition, sin ce 20 12 , a much smaller percen tag e of th e segment’s n ew un iv ersal life b usin ess has b een ced ed. As a resu lt o f th at ch ang e, th e relativ e impact of rein surance o n th e Life M ark eting seg ment’s o verall results i s exp ected to d ecrease over time. Wh ile th e sign ifi can ce of rei nsu ran ce is ex pected to decline o ver time, th e ov eral l imp act o f rei nsu ran ce fo r a g iven perio d may flu ctu ate d ue to variatio ns in mo rtality an d u nlo ck ing of balan ces. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 The h ig her ceded premium and p olicy fees fo r th e y ear end ed Decemb er 31 , 20 18 , as co mp ared to the y ear en ded December 3 1, 2 01 7, was cau sed primarily by high er u niversal life po licy fees of $6 6.0 milli on , p arti all y o ffset b y lower ced ed trad itio nal life p remiu ms o f $35.3 mill io n. Ced ed b en efit s and settlement exp enses were high er fo r the y ear en ded Decemb er 31 , 20 18 , as compared to the y ear en ded Decemb er 31 , 20 17 , du e to high er ceded claims, p artl y o ffset by lo wer ceded tradition al life reserv es. Uni versal life and traditio nal life ceded claims were $9 9.4 millio n an d $1 1.5 mi llio n h ig her, respect iv ely, as compared to the y ear end ed December 31 , 20 17 . Trad iti on al l ife ced ed reserv es decreased $28 .4 million as compared to the year en ded Decemb er 3 1, 2 01 7. Ced ed amo rti zatio n o f DAC and VOBA in creased sligh t ly fo r the y ear end ed December 31 , 20 18 , as comp ared to th e year en ded Decemb er 3 1, 2 01 7. Ced ed oth er op eratin g ex pen ses refl ect th e impact of rei nsu ran ce allo wances n et of amo un ts deferred . 55 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 The h ig her ceded premium and p olicy fees fo r th e y ear end ed Decemb er 31 , 20 17 , as co mp ared to the y ear en ded December 3 1, 2 01 6, was cau sed primarily b y high er un iv ersal life p olicy fees o f $4 8.5 million , o ffset b y lo wer ced ed trad ition al life premiums o f $5 .1 mi llio n. Ced ed traditional life premiums fo r the y ear end ed December 31 , 20 17 , decreased from th e year en ded December 3 1, 2 01 6, p rimarily d ue to p ost l evel term activity . Ced ed b en efit s and settl ement exp enses were lo wer for th e year en ded December 31 , 20 17 , as compared to the y ear en ded Decemb er 3 1, 2 01 6, due to lo wer ceded claims and reserves. Trad ition al ceded b en efits decreased $30 .2 millio n fo r th e year end ed Decemb er 3 1, 20 17 , as co mp ared to t he y ear en ded Decemb er 31 , 20 16 , pri marily d ue to lo wer ced ed reserv es. Universal life ced ed benefits decreased $3 4.5 million for the y ear en ded December 31, 2 01 7, as co mp ared to th e year en ded December 3 1, 2 016, du e to a decrease i n ced ed claims, partially offset b y an in crease in ceded reserv es. Ceded u niversal life claims were $40 .0 million lower for the y ear end ed Decemb er 3 1, 2 01 7, as compared to th e year en ded December 31 , 20 16 , driv en b y fewer h ig h d ollar claims du ring th e cu rrent year. Ced ed amo rti zatio n o f DAC and VOBA decreased slig htly fo r th e y ear ended Decemb er 3 1, 20 17, as compared t o t he year end ed December 31 , 20 16 . Ced ed oth er op eratin g ex pen ses refl ect th e impact of rei nsu ran ce allo wances n et of amo un ts deferred . 56 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Acquisi tions Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $1 ,27 0,0 45 $1 ,113,35 5 $1,1 80 ,37 6 Reinsu ran ce ced ed (31 7,7 30 ) (328,16 7) (3 48 ,29 3) Net p remiu ms an d p oli cy fees 95 2,3 15 785,18 8 8 32 ,08 3 Net in vestmen t inco me 1 ,10 8,2 18 752,52 0 7 64 ,57 1 Other in come 1 4,3 13 11,42 3 10 ,80 5 Total o perating rev enues 2 ,07 4,8 46 1 ,549,13 1 1,6 07 ,45 9 Realized g ain s (losses)—inv estments (21 5,1 99 ) 121,03 6 69 ,01 8 Realized g ain s (losses)—derivativ es 16 7,5 48 (101,08 4) (46 0) Total reven ues 2 ,02 7,1 95 1 ,569,08 3 1,6 76 ,01 7 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 1 ,62 9,5 90 1 ,195,10 5 1,2 20 ,67 4 Amortization of VOBA 1 8,8 43 (6,33 0) 8 ,21 8 Other op eratin g exp enses 14 3,6 98 110,60 7 1 18 ,05 6 Op eratin g b enefits and exp enses 1 ,79 2,1 31 1 ,299,38 2 1,3 46 ,94 8 Amortization related to b enefits and set tlement exp enses 7,1 07 8,97 9 11 ,46 7 Amortization of VOBA related to realized g ain s (lo sses)—inv estments (1 53 ) (60 9) (4 0) Total b enefits and exp en ses 1 ,79 9,0 85 1 ,307,75 2 1,3 58 ,37 5 INCOME BEFORE INCOME TAX 22 8,1 10 261,33 1 3 17 ,64 2 Less: realized gains (losses)(4 7,6 51 ) 19,95 2 68 ,55 8 Less: amortization related to benefits and settlement exp enses (7,1 07 ) (8,97 9) (11 ,46 7) Less: related amo rti zation o f VOBA 1 53 60 9 4 0 PRE-TAX ADJ USTE D OPERATING INCOME $28 2,7 15 $249,74 9 $2 60 ,51 1 57 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fol lo win g tabl e summarizes key data fo r the Acqu isitio ns segmen t: For The Yea r Ended December 31 , 2018 2 0 1 7 2 0 16 (D ollars In Thous ands) Averag e Life Insurance In-Force(1) Tradit io nal $2 26 ,69 5,2 52 $22 7,4 87 ,17 5 $23 3,3 03 ,79 4 Un iv ersal life 30 ,15 3,1 43 2 7,4 73 ,47 7 2 9,5 98 ,01 4 $2 56 ,84 8,3 95 $25 4,9 60 ,65 2 $26 2,9 01 ,80 8 Averag e Acco unt Va lues Un iv ersal life $6 ,64 3,4 69 $4,1 99 ,56 8 $4,2 67 ,69 7 Fix ed annuity(2)8 ,73 6,3 31 3,5 38 ,20 4 3,5 60 ,38 9 Variable ann uity 1 ,17 6,0 23 1,1 89 ,69 5 1,1 81 ,33 2 $16 ,55 5,8 23 $8,9 27 ,46 7 $9,0 09 ,41 8 Interest Sprea d— Fix ed Annuities Net in vestmen t inco me yield 4 .18 % 4.0 7% 3.9 7% Interest cred ited to p olicy ho lders 3 .55 3.2 8 3.2 7 Interest sp read (3)0 .63 % 0.7 9% 0.7 0% (1)Amo u n ts are n o t ad justed for rein suran ce ceded. (2)Includes g eneral account b alances held with in variable annuity p rodu cts an d is n et o f coinsu rance ceded. (3)Earned rates ex clu d e p o rtfolios supp o rting m o dified coin suran ce and creditin g rates exclude 10 0 % cession s. Fo r t he Year Ended December 3 1, 2 01 8 as compa red to The Year Ended Decemb er 31 , 20 17 Pre-tax a djusted o peratin g inco me Pre-t ax ad j usted op eratin g income was $282.7 million fo r the year end ed December 3 1, 2 01 8, an in crease of $3 3.0 million as co mp ared to the year en ded Decemb er 31 , 2 01 7, primarily d ue to the fav orable imp act of $51 .3 millio n fro m th e Liberty rein su ran ce transactio n completed o n M ay 1 , 2 01 8, partly offset by th e exp ected run off o f the in-force b lo cks o f busin ess. Op erati ng reven ues Net p remiums an d po licy fees increased $1 67 .1 mill io n, o r 21 .3%, fo r th e year end ed Decemb er 31 , 20 18, as compared to th e year ended December 31 , 20 17 , p rimarily du e to th e premiums associated with the Liberty rein su ran ce transactio n mo re th an offsetting the exp ected ru no ff o f the in-force block s o f bu sin ess. Net investment in come increased $35 5.7 milli on , 47 .3%, fo r th e year end ed Decemb er 3 1, 20 18 , as co mp ared to the y ear en ded December 3 1, 20 17 , du e to the $37 4.4 millio n imp act o f the Liberty reinsurance transactio n, p artly offset b y the exp ected ru no ff of th e in -force block s of bu siness. Tota l b enefit s an d expen ses Total ben efi ts an d ex pen ses increased $49 1.3 mil lion , or 3 7.6%, fo r th e year end ed December 3 1, 2 01 8, as compared to the y ear en ded December 31 , 20 17 . The in crease was primaril y due to th e Lib erty rein surance tran saction , wh ich in creased benefits and exp enses $52 8.3 milli on . This was partly o ffset by th e ex pected run off o f the in-fo rce b lo cks o f b usin ess. Fo r t he Year Ended December 3 1, 2 01 7 as compa red to The Year Ended Decemb er 31 , 20 16 Pre-tax a djusted o peratin g inco me Pre-t ax ad ju sted o perati ng in come was $2 49 .7 mi llio n fo r th e year end ed Decemb er 3 1, 20 17 , a decrease of $10 .8 mill io n as compared to th e year en ded December 31, 2 01 6, p rimarily d ue to the ex pected ru no ff of t he in -fo rce block s o f b usiness. Op erati ng reven ues Net p remiu ms an d po licy fees decreased $46 .9 millio n, or 5 .6 %, for th e year end ed December 31 , 2 01 7, as compared to the year end ed Decemb er 31 , 20 16 , p rimarily d ue to the exp ected run off o f the in -force b locks o f b usiness. Net inv est ment in come d ecreased $12 .1 milli on , o r 1.6 %, fo r the year en ded Decemb er 3 1, 2 01 7, as compared to the y ear end ed December 31 , 20 16 . Tota l b enefit s an d expen ses Total b en efit s an d exp enses decreased $5 0.6 million , o r 3 .7 %, fo r th e y ear end ed Decemb er 31 , 2 01 7, as co mp ared to th e y ear end ed Decemb er 31 , 20 16 . The decrease was p rimarily du e to favo rab le amortization of VOBA, as well as th e ex pect ed run off o f the in-fo rce b lo cks o f b usin ess. Reinsura nce 58 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Acqui siti on s segment curren tly rein su res p ortions o f b oth its life an d annu ity in-fo rce. Th e cost of reinsurance to th e segment is reflected in the ch art sh own b elo w. A more det ail ed discu ssion of th e co mp on ents of reinsurance can b e found i n the Rein surance sectio n o f No te 2 , S ummary of S ig nifican t Acco un t in g Po licies to o ur con so lidated fin ancial statemen ts in clu ded in th is repo rt. Imp act of Reinsura nce Reinsu ran ce impacted th e Acq uisition s seg ment l in e items as sh own in th e fo llowing tab le: Acquisitio ns Segment Line Item Impa ct of Reinsura nce For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Reinsu ran ce ced ed $(31 7,7 30 ) $(328,16 7) $(3 48 ,29 3) BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses (26 7,9 98 ) (275,69 8) (2 76 ,94 7) Amortization of VOBA (6 35 ) (58 0) (43 8) Other op eratin g exp enses (3 5,9 40 ) (40,00 5) (43 ,46 3) Total b enefits and exp en ses (30 4,5 73 ) (316,28 3) (3 20 ,84 8) NET IMPACT OF REINSURANCE(1)$(1 3,1 57 ) $(11,88 4) $(27 ,44 5) (1)Assumes n o investm en t income on rein suran ce. Fo reg one investm en t income would substantially reduce the favorab le im p act o f rein surance. The seg men t’s reinsu ran ce programs d o no t materially imp act the o t her in come line of th e inco me statement. In addi tion , net inv estment inco me generally h as n o d irect imp act o n rein surance cost. Ho wev er, by ced ing bu sin ess to th e assumin g co mp anies, we fo rg o investment inco me o n the reserv es ced ed to th e assuming companies. Conversely, th e assumi ng companies will receive inv estment inco me o n the reserves assumed which wil l increase the assumin g co mp anies’ profi tability o n b usin ess assu med from the Compan y. For b usiness ceded un der mo dified co in surance arran gemen ts, th e amount o f in vestmen t in co me attribu tab le to the assu ming co mp any is i nclud ed as part o f th e o verall chan ge in po licy reserves an d, as su ch, is reflected in ben efit and settlement ex penses. Th e n et in vestmen t inco me imp act to u s and the assuming compan ies h as n ot b een qu antified as it is not fully reflected in ou r co nsolid ated finan cial statements. The n et i mp act of reinsurance was less fav orable by $1 .3 million for th e year end ed December 31 , 20 18 , as compared to th e year en ded December 31 , 20 17 , primarily d ue to lo wer ced ed b enefits an d ex pen ses partl y o ffset b y lo wer ceded revenu e. For the y ear en ded December 3 1, 2 01 8, ced ed rev en ues decreased by $1 0.4 mi llio n, while ced ed ben efits and ex pen ses d ecreased b y $11 .7 mil lion primarily du e to lo wer b en efit an d sett lemen t ex pen ses. The net imp act of reinsu ran ce was mo re fav orable by $15 .6 mil lion fo r th e year end ed December 31 , 2 01 7, as compared to th e y ear end ed December 31 , 20 16 , pri maril y d ue to lo wer ceded revenu es. For the y ear en ded December 31 , 2 01 7, ced ed reven ues d ecreased by $20 .1 mill io n, wh ile ceded ben efits an d ex pen ses decreased by $4 .6 mill io n p rimarily d ue to lower o perating exp enses. 59 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Annuiti es Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $14 8,0 33 $152,70 1 $1 46 ,45 8 Reinsu ran ce ced ed — — — Net p remiu ms an d p oli cy fees 14 8,0 33 152,70 1 1 46 ,45 8 Net in vestmen t inco me 34 0,6 85 321,84 4 3 22 ,60 8 Realized g ain s (losses)—derivativ es (8 5,0 12 ) (84,82 7) (82 ,36 5) Other in come 17 0,1 89 173,24 7 1 63 ,89 8 Total o perating rev enues 57 3,8 95 562,96 5 5 50 ,59 9 Realized g ain s (losses)—inv estments (4,2 94 ) 2 8 (4 ,24 1) Realized g ain s (losses)—derivativ es, net o f eco no mic co st (2 3,6 79 ) (112,68 7) 28 ,57 6 Total reven ues 54 5,9 22 450,30 6 5 74 ,93 4 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 22 7,2 29 212,53 3 2 13 ,18 1 Amortization of DAC and VOBA 2 8,4 26 (11,82 9) (16 ,28 4) Other op eratin g exp enses 15 1,0 54 149,18 1 1 40 ,40 9 Op eratin g b enefits and exp en ses 40 6,7 09 349,88 5 3 37 ,30 6 Amortization related to b enefits and set tlement exp enses (5 25 ) 4,09 6 91 9 Amortization of DAC/VOBA related to realized g ain s (lo sses)—inv estments (4,1 52 ) (42,64 2) 5 ,25 3 Total b enefits and exp en ses 40 2,0 32 311,33 9 3 43 ,47 8 INCOME BEFORE INCOME TAX 14 3,8 90 138,96 7 2 31 ,45 6 Less: realized gains (losses)—in vestmen ts (4,2 94 ) 2 8 (4 ,24 1) Less: realized gains (losses)—deriv atives, n et o f econ omic co st (2 3,6 79 ) (112,68 7) 28 ,57 6 Less: amortization related to benefits and settlement exp enses 5 25 (4,09 6) (91 9) Less: related amo rti zation o f DAC/VOBA 4,1 52 42,64 2 (5 ,25 3) PRE-TAX ADJ USTE D OPERATING INCOME $16 7,1 86 $213,08 0 $2 13 ,29 3 60 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fol lo win g tabl e summarizes key data fo r the Ann uit ies seg men t: For The Year Ended December 31, 20 1 8 2 017 20 1 6 (Dollars I n Thousands) Sa les(1) Fix ed an nu ity $2,1 39 ,61 6 $1 ,13 0,8 43 $7 26 ,64 0 Variable ann uity 2 98 ,31 4 42 6,3 53 5 93 ,40 9 $2,4 37 ,93 0 $1 ,55 7,1 96 $1,3 20 ,04 9 Averag e Acco unt Va lues Fixed an nui ty (2 )$9,0 18 ,53 9 $8 ,24 5,3 82 $8,1 91 ,84 1 Variable ann uity 1 2,8 20 ,42 0 13 ,05 0,4 11 1 2,3 28 ,05 7 $2 1,8 38 ,95 9 $21 ,29 5,7 93 $2 0,5 19 ,89 8 Interest Sprea d—Fix ed Annuities(2) Net in vestmen t inco me yield 3.6 4% 3 .67 % 3.6 9% Interest cred ited to p olicy ho lders 2.5 0 2 .54 2.6 5 Interest sp read (3)1.1 4% 1 .13 % 1.0 4% (1)Sales are measured b ased o n the amount o f purch ase pay ments receiv ed less su rren d ers occurring with in twelv e m o nths o f the pu rch ase payments. (2)Includes g eneral account b alances held with in VA p rodu cts. (3)Interest spread on av erag e g en eral account v alu es. For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Deriva tiv es related to VA contra cts: Interest rate fu tures $(2 5,4 73 ) $26,01 5 $(3 ,45 0) Eq uit y futures (8 8,2 08 ) (91,77 6) (1 06 ,43 1) Cu rrency futu res 1 0,2 75 (23,17 6) 33 ,83 6 Eq uit y o ptio ns 3 8,0 83 (94,79 1) (60 ,96 2) Interest rate swaptio ns (14 ) (2,49 0) (1 ,16 1) Interest rate swaps (4 5,1 85 ) 27,98 1 20 ,42 0 To tal return swap s 7 7,2 25 (32,24 0) — Emb edd ed derivativ e - GLWB(1)(7 2,3 13 ) 3,61 4 68 ,05 6 Total d erivatives relat ed to VA co ntracts (10 5,6 10 ) (186,86 3) (49 ,69 2) Deriva tiv es related to FIA co ntracts: Embed ded deriv ative 3 5,3 97 (55,87 8) (16 ,49 4) Eq uit y futures 3 30 64 2 4 ,24 8 Vo lat ility futu res — — — Eq uit y o ptio ns (3 8,8 85 ) 44,58 5 8 ,14 9 Total d erivatives relat ed to FIA con tracts (3,1 58 ) (10,65 1) (4 ,09 7) Oth er 77 — — Econ omic cost - VA GLWB(2 )8 5,0 12 84,82 7 82 ,36 5 Realized gains (losses) - deriv atives, n et of econ omic cost $(2 3,6 79 ) $(112,68 7) $28 ,57 6 (1)Includes im p act o f nonp erforman ce risk o f $46 .3 million , $(41 .6 ) millio n, and $9.7 million for th e y ears ended Decemb er 31, 2 0 1 8 , 2017 , an d 2 016, respectively. (2)Eco nomic cost is th e lo ng-term expected av erag e co st o f pro v iding th e p rod u ct b en efit over the life o f the policy b ased on product pricin g assu mption s. Th ese include assump tio ns abou t th e econ o m ic/market enviro nment, and elective an d non-electiv e p o licy o wn er behavior (e.g. lapses, withdrawal timin g , mortality , etc.). 61 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As o f December 31 , 201 8 2017 (D ol l ars In Tho us a nds) GMDB—Net a mount at risk(1)$27 4,3 99 $72 ,82 5 GMDB Reserv es 3 9,2 40 30 ,94 4 GLWB a nd GMAB Reserves 18 4,0 71 1 11 ,76 0 Acco unt v alue subject to GLWB rider 8 ,39 9,3 00 9,7 18 ,26 3 GLWB Benefit Base 10 ,26 5,5 45 1 0,5 60 ,89 3 GMAB Benefit Ba se 1,2 38 3 ,29 8 S&P 50 0® Index 2,5 07 2 ,67 4 (1)Guaran teed benefits in excess of con tract h older acco unt balance. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Pre-t ax adj usted op eratin g inco me was $16 7.2 millio n fo r t he year ended December 31 , 2 01 8, as co mp ared to $21 3.1 million fo r the year en ded Decemb er 31 , 2 01 7, a decrease of $4 5.9 million , o r 21 .5%. This varian ce was p rimarily the result o f un fav orable u nlock in g, an u nfavo rab le chan ge in gu aranteed ben efit reserv es, and lower VA fee income, p artiall y offset by a favo rab le chan ge in SPIA mortality. Seg ment resu lts were n eg atively imp acted b y $2 5.0 mi llio n o f un fav orable un lo cking fo r th e year en ded December 31 , 20 18 , as compared to $16 .5 millio n o f favo rab le u nlock in g fo r the y ear en ded Decemb er 3 1, 2 01 7. Op erati ng reven ues Segment o perating reven ues in creased $10.9 millio n, or 1 .9%, fo r t he y ear end ed Decemb er 31 , 2 01 8, as co mp ared to th e y ear en ded Decemb er 31 , 20 17 , p rimarily d ue to h i gh er in vestmen t income, p arti all y offset by lo wer po licy fees an d other in come fro m the VA l in e o f b usiness. Average fixed acco un t balan ces increased 9.4 % and av erag e variab le acco un t balances decreased 1 .8% fo r t he y ear end ed Decemb er 31 , 2 01 8 as co mp ared t o th e year en ded Decemb er 3 1, 2 01 7. Benefit s an d settlement exp enses Ben efits an d set tlement exp enses increased $1 4.7 mi llio n, or 6.9 %, fo r t he year en ded Decemb er 31 , 20 18 , as co mp ared to the year end ed December 31 , 2 01 7. This in crease was primarily th e result o f high er cred ited in t erest, an u nfavo rab le ch ang e in gu aran teed b enefit reserv es, an d unfav orable unlo cki ng , partially offset by a fav orable ch ang e i n SPIA mortality. Includ ed in benefits and settlemen t ex penses was $3 .4 million of u nfavo rab le un lo cking fo r th e y ear en ded December 31, 2 01 8, as co mp ared to $0.2 million of fav orable u nlo ck ing fo r the year end ed December 31 , 20 17 . Amo rtizatio n o f DAC an d VOBA DAC an d VOBA amo rtizat io n un fav orably chang ed by $40 .3 million for the year end ed December 31, 2 018, as co mp ared to th e y ear ended Decemb er 3 1, 20 17 . The un fav orable ch ang es in DAC an d VOBA amortization were p rimarily d ue t o an unfav orable chang e in u nlock in g wh ich was $2 1.6 mi llio n u nfavo rab le for th e year en ded Decemb er 3 1, 2 01 8, as co mpared to $16 .3 million fav orable fo r the y ear end ed Decemb er 31 , 20 17 . Other o perat in g expen ses Other op eratin g expen ses increased $1.9 mil lion , or 1 .3%, for t he y ear ended Decemb er 31 , 20 18 , as co mpared to th e year end ed Decemb er 3 1, 20 17 . This increase was the result o f h ig her no n-deferred acqu isition co sts, partially o ffset by lo wer no n-deferred main ten ance and ov erh ead , and commission ex pen ses. S ales Total sales in creased $8 80 .7 million , o r 56.6%, for the year en ded Decemb er 31 , 2 01 8, as co mp ared to th e y ear end ed December 3 1, 20 17 . Sales of variable ann uities decreased $1 28 .0 millio n, or 30 .0% for th e year en ded Decemb er 3 1, 2 01 8, as compared t o t he year en ded December 31 , 2 01 7, p rimarily du e to th e relativ e compet itiv eness of ou r p ro du ct wi th in th e market . Sales of fixed ann uities i ncreased by $1 .0 b ill io n, o r 8 9.2 %, fo r th e y ear en ded Decemb er 3 1, 2 01 8, as compared to the y ear end ed December 31 , 20 17 , primarily du e to an i ncrease in sin gle premi um d eferred ann uities (“SPDA”) sales. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Pre-t ax adj usted op eratin g inco me was $21 3.1 millio n fo r t he year ended December 31 , 2 01 7, as co mp ared to $21 3.3 million fo r the year en ded Decemb er 3 1, 2016, a decrease of $0 .2 million, or 0.1 %. This varian ce was p rimarily the result o f an u nfavo rab le chan ge i n SPIA mort ality an d h ig her no n- deferred exp enses, partially offset b y increased interest spread s, g ro wth i n VA fee in come, an d fav orable un lo cking . Seg men t resu lts were po sitively imp acted by $1 6.5 million o f fav orable un locking for the year end ed Decemb er 31 , 20 17 , as comp ared to $8 .1 millio n of favorable u nlock in g fo r th e y ear en ded Decemb er 3 1, 2 01 6. 62 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Op erati ng reven ues Segment o perating reven ues in creased $12.4 millio n, or 2 .2%, fo r t he y ear end ed Decemb er 31 , 2 01 7, as co mp ared to th e y ear en ded Decemb er 31 , 20 16 , primarily du e t o high er po licy fees an d oth er in co me from the VA line of b usin ess. Tho se increases were partially offset by h ig her GLWB econ omic co st in th e VA line o f b usin ess. Av erag e fixed acco un t balan ces in creased 0.7 % and averag e variab le accou nt balances increased 5 .9% for the y ear end ed Decemb er 3 1, 2 01 7 as co mpared to the y ear end ed Decemb er 31 , 20 16 . Benefit s an d settlement exp enses Ben efits and settlemen t ex pen ses decreased $0.6 million , o r 0.3%, fo r the y ear en ded December 3 1, 20 17 , as co mp ared t o th e year end ed December 31 , 20 16 . Th is decrease was p rimarily th e result of lower cred ited in terest partially offset b y an u nfavo rab le change in SPIA mo rtalit y. In clu ded in benefits an d settlemen t exp enses was $0 .2 million of favo rab le unl ockin g fo r the year en ded Decemb er 3 1, 20 17 , as co mp ared to $0.4 mill io n of fav orable u nlo ck ing fo r the y ear end ed December 31 , 20 16 . Amo rtizatio n o f DAC an d VOBA DAC and VOBA amortization un fav orably ch ang ed b y $4.5 milli on , or 27 .4%, for t he y ear end ed Decemb er 3 1, 2 01 7, as co mp ared to th e year ended Decemb er 31 , 20 16 . Th e un fav orable chan ges in DAC an d VOBA amortization were primarily d ue to high er fee i ncome in th e VA line of bu siness and t he ru no ff of n egativ e VOBA in th e fix ed annuity l in es of b usin ess. These ch an ges were p artially offset by a fav orable ch ang e in u nlock in g. DAC an d VOBA un lo cki ng fo r the y ear end ed December 31 , 20 17 , was $16 .3 mill io n favo rable as compared t o $7.8 millio n favo rab le for th e year en ded Decemb er 3 1, 2 01 6. Other o perat in g expen ses Other op eratin g expen ses increased $8.8 mil lion , or 6 .2%, for t he y ear ended Decemb er 31 , 20 17 , as co mpared to th e year end ed Decemb er 3 1, 20 16 . This increase was the result o f h ig her no n-deferred acqu isition co sts, mai ntenance and ov erh ead, and commission exp enses. S ales Total sales in creased $2 37 .1 million , o r 18.0%, for the year en ded Decemb er 31 , 2 01 7, as co mp ared to th e y ear end ed December 3 1, 20 16 . Sales of variable ann uities decreased $1 67 .1 millio n, or 28 .2% for th e year en ded Decemb er 3 1, 2 01 7, as compared t o t he year en ded December 31 , 2 01 6, p rimarily du e to d i sru ption s in th e b ro ader market d riv en b y reg ulato ry ru le ch ang es an d th e relat iv e competiti veness o f ou r produ ct with i n th e market. Sales of fixed an nu ities in creased b y $40 4.2 millio n, o r 5 5.6 %, fo r the y ear end ed December 31 , 2017 , as co mp ared to the y ear end ed December 31 , 20 16 , primarily du e to an in crease in SPDA sales. 63 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Stable Value Pro ducts Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Net in vestmen t inco me $21 7,7 78 $186,57 6 $1 07 ,01 0 Other in come 2 96 2 4 22 9 Total o perating rev enues 21 8,0 74 186,60 0 1 07 ,23 9 Realized g ain s (losses)1,4 27 3,40 6 7 ,34 1 Total reven ues 21 9,5 01 190,00 6 1 14 ,58 0 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 10 9,7 47 74,57 8 41 ,73 6 Amortization of DAC 3,2 01 2,35 4 1 ,17 6 Other op eratin g exp enses 2,7 98 4,40 7 3 ,03 3 Total b enefits and exp en ses 11 5,7 46 81,33 9 45 ,94 5 INCOME BEFORE INCOME TAX 10 3,7 55 108,66 7 68 ,63 5 Less: realized gains (losses)1,4 27 3,40 6 7 ,34 1 PRE-TAX ADJ USTE D OPERATING INCOME $10 2,3 28 $105,26 1 $61 ,29 4 The fol lo win g tabl e summarizes key data fo r the Stable Valu e Prod ucts segment: For The Year Ended December 31, 20 1 8 2 017 20 1 6 (Dollars I n Thousands) Sa les(1) GIC $88 ,50 0 $11 5,5 00 $1 89 ,80 0 GFA 1,2 50 ,00 0 1 ,65 0,0 00 1,6 67 ,17 8 $1,3 38 ,50 0 $1 ,76 5,5 00 $1,8 56 ,97 8 Averag e Acco unt Va lues $4,9 46 ,95 3 $4 ,14 3,5 68 $2,7 53 ,63 6 Ending Account Values $5,2 34 ,73 1 $4 ,69 8,3 71 $3,5 01 ,63 6 Operating Spread Net in vestmen t inco me yield 4.4 0% 4 .50 % 3.9 6% Other in come y ield — — 0.0 1 Interest cred ited 2.2 1 1 .79 1.5 3 Op eratin g exp enses 0.1 2 0 .16 0.1 5 Op eratin g spread 2.0 7% 2 .55 % 2.2 9% Adju sted op eratin g sp read (2 )1.5 4% 1 .74 % 1.8 2% (1)Sales are measured at th e tim e th e p u rchase payments are receiv ed . (2)Excludes p articip atin g mortgage loan income. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Pre-t ax adjusted o perati ng inco me was $10 2.3 millio n and decreased $2 .9 milli on , o r 2 .8%, for the y ear ended December 3 1, 20 18 , as co mp ared to th e y ear en ded Decemb er 31 , 20 17 . Th e d ecrease in ad ju sted op erat in g earn in gs p rimarily resulted from lower interest spreads d riven b y h ig her credited rates on newly issu ed co ntract s. Particip ating mortg age inco me for th e year end ed Decemb er 3 1, 2 01 8, was $2 6.3 millio n as compared to $3 3.5 million fo r th e year en ded December 31 , 20 17 . The ad ju sted o perati ng spread, wh ich exclu des particip ating in come, decreased by 2 0 b asis po in ts fo r the y ear en ded December 31 , 2 01 8, from the p rior year, du e primarily to an i ncrease in credited in terest. 64 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Pre-t ax ad ju sted o perating income was $10 5.3 million and increased $44 .0 millio n, or 7 1.7 %, for the y ear en ded December 31, 2 01 7, as compared to th e year en ded December 31 , 20 16 . The increase in adjusted op eratin g earning s p rimarily resu lted fro m an in crease in parti cip ati ng mo rtgag e in come and high er av erag e acco un t values. Parti cipati ng mo rtgag e i ncome for t he y ear en ded December 31 , 2 01 7, was $3 3.5 milli on as co mp ared to $11 .0 millio n fo r th e year en ded Decemb er 31 , 20 16 . The adjusted o perating sp read, which ex clu des p articipatin g inco me, decreased by 8 b asis p oints for th e year en ded Decemb er 3 1, 2 01 7, fro m the p rior year, d ue p rimarily to an in crease in cred ited interest. 65 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Asset Pro tectio n Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $33 2,8 64 $343,48 9 $2 94 ,58 8 Reinsu ran ce ced ed (19 2,7 34 ) (189,32 3) (1 65 ,90 1) Net p remiu ms an d p oli cy fees 14 0,1 30 154,16 6 1 28 ,68 7 Net in vestmen t inco me 3 0,4 57 27,32 5 22 ,08 2 Other in come 13 9,6 56 146,08 3 1 18 ,37 6 Realized g ain s (losses)— (1) — Total o perating rev enues 31 0,2 43 327,57 3 2 69 ,14 5 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 11 3,0 73 126,45 9 1 06 ,66 8 Amortization of DAC/VOBA 6 2,7 26 16,52 4 20 ,03 3 Other op eratin g exp enses 10 4,5 33 160,23 5 1 25 ,95 7 Total b enefits and exp en ses 28 0,3 32 303,21 8 2 52 ,65 8 INCOME BEFORE INCOME TAX 2 9,9 11 24,35 5 16 ,48 7 Less: realized g ain s (lo sses) - inv est ments — (1) — PRE-TAX ADJ USTE D OPERATING INCOME $2 9,9 11 $24,35 6 $16 ,48 7 The fol lo win g tabl e summarizes key data fo r the Asset Protection segment: For The Year Ended December 31, 20 1 8 2 017 20 1 6 (Dollars I n Thousands) Sa les(1) Credi t insu ran ce $11 ,78 2 $1 5,2 92 $21 ,31 0 Serv ice con tracts 4 03 ,66 1 41 4,2 90 3 78 ,18 3 GAP 66 ,74 8 10 9,5 33 1 04 ,10 4 $4 82 ,19 1 $53 9,1 15 $5 03 ,59 7 Loss Ra tios(2 ) Credi t insu ran ce 27 .2% 2 0.5 % 32 .1% Serv ice con tracts 58 .1 6 2.6 76 .2 GAP 1 34 .7 12 1.9 1 09 .0 (1)Sales are b ased on th e amo u n t of single prem iu ms an d fees received (2)Incu rred claim s as a percentage of earn ed p remium s Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Asset Pro tect io n seg men t p re-tax ad justed o perati ng in come was $29 .9 million , rep resen ting an increase o f $5.6 million , or 22 .8%, for th e year en ded Decemb er 3 1, 2 01 8, as co mp ared to th e year end ed December 31 , 20 17 . Service con tract earning s increased $4 .8 mill io n p rimarily du e to fav orable lo ss ratios an d high er inv estment inco me. Earning s fro m th e GAP and cred it insurance pro du ct lin es increased $0.1 million and $0 .7 mi llio n, resp ecti vely, primarily due to lo wer exp enses, somewh at o ffset b y lower vo lu me and high er loss ratio s. 66 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net premiums a nd po licy fees Net p remiu ms an d po licy fees decreased $14 .0 millio n, or 9 .1 %, for th e year end ed December 31 , 2 01 8, as compared to the year end ed Decemb er 31 , 20 17 . GAP premi ums decreased $1 3.6 milli on an d credit insurance premiums decreased $2.7 mi llio n as a result of lo wer sal es. The d ecrease was partly o ffset by an in crease in service co ntract premiums of $2.3 mill io n. Other inco me Other inco me decreased $6.4 millio n, or 4 .4%, fo r th e y ear end ed Decemb er 31 , 2 01 8, as co mp ared to th e y ear end ed Decemb er 31 , 2 01 7. Th e ch ang e was p rimari ly du e to lo wer vo lu me and the impact of an accou ntin g ch an ge imp lemented i n con juncti on with the ado ptio n o f ASU No . 20 14 -0 9. Benefit s an d settlement exp enses Ben efits an d settlemen t exp enses d ecreased $13 .4 million, or 10 .6%, for th e year en ded Decemb er 3 1, 20 18 , as compared to th e year en ded Decemb er 3 1, 2 01 7. GAP claims decreased $1 0.8 mi llio n d ue to lower v olu me. Service co ntract claims d ecreased $2.6 million primarily du e to lo wer l oss rat io s. C redit in surance claims were co nsistent with the p rior year. Amo rtizatio n o f DAC an d VOBA an d Oth er opera ting exp enses Amortization of DAC and VOBA i ncreased $4 6.2 mi llio n and other op eratin g exp enses decreased $5 5.7 mill io n for th e y ear ended Decemb er 31 , 20 18 , as comp ared to the year end ed December 31 , 20 17 . Th e ch ang e was primarily du e to t he i mpact of an acco un ting chan ge i mp lemen ted in con ju nction with the ado ptio n o f ASU No . 20 14 -0 9. S ales Total segmen t sales decreased $56.9 milli on , o r 1 0.6 %, fo r the y ear end ed December 31 , 20 18 , as co mp ared to th e y ear ended Decemb er 3 1, 20 17 . GAP sales decreased $4 2.8 millio n d ue to discon tin uing the relat io nsh i p with a si gn ifican t distribut io n part ner. Service co ntract sales decreased $1 0.6 mi llio n d ue to lower volu me resulting from th e impact of previou s pri ce increases. Cred it in su rance sales decreased $3.5 millio n d ue to d ecreasing demand fo r the p ro du ct. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Asset Pro tect io n seg men t p re-tax ad justed o perati ng in come was $24 .4 million , rep resen ting an increase o f $7.9 million , or 47 .7%, for th e year en ded Decemb er 31, 20 17 , as compared to th e year end ed December 3 1, 2 01 6. Serv ice co ntract earn in gs in creased $1 3.7 million p rimarily du e to fav orable l oss rat io s an d $4 .8 millio n of o ne-time transactio n costs associated with t he US Warran ty acqui siti on i n 20 16 . Cred it insurance earning s decreased $0.3 million primarily du e to lower v olume. Earn in gs fro m the GAP product line d ecreased $5.5 millio n p rimarily resultin g fro m high er loss rat io s, somewhat o ffset by ad dit io nal in come p ro vided by US Warranty. Net premiums a nd po licy fees Net premiums and p olicy fees increased $25 .5 millio n, o r 19 .8%, for t he y ear end ed Decemb er 3 1, 2 01 7, as compared to the y ear en ded December 31 , 2 01 6. Service con tract premiums in creased $12 .1 milli on p rimarily d ue to the add itio n o f US Warranty bu siness, so mewhat o ffset b y h ig her ceded premiums in ex isting distribu tion chann els. GAP p remiu ms increased $1 5.0 million p rimarily d ue to h ig her p remiu m rates o n existin g b usin ess and th e ad dit io n o f US Warran ty bu sin ess. Cred it insu ran ce p remiu ms decreased $1 .6 million as a resu lt of lo wer sales. Other inco me Other i ncome i ncreased $27 .7 million , o r 2 3.4 %, for th e year end ed Decemb er 3 1, 20 17 , as compared to th e year end ed Decemb er 3 1, 20 16 , primarily du e to th e ad ditio n o f US Warranty busin ess in the service co ntract and GAP lines. Benefit s an d settlement exp enses Ben efits an d settlemen t ex pen ses in creased $1 9.8 mi llio n, o r 1 8.6 %, fo r the y ear end ed December 31 , 20 17 , as compared to th e year en ded December 31 , 20 16 . GAP claims i ncreased $23 .9 millio n d ue to high er lo ss ratios and t he acqui siti on of US Warranty. Service con tract claims d ecreased $2 .3 millio n primarily d ue t o lo wer lo ss rati os, so mewhat o ffset b y the add itio n o f claims fro m the US Warranty lin e. Credit insu ran ce cl aims d ecreased $1.8 millio n due primarily to lo wer l oss ratio s and lo wer vo lu me. Amo rtizatio n o f DAC an d VOBA an d Oth er opera ting exp enses Amortization of DAC an d VOBA was $3.5 mill io n, or 1 7.5 %, lo wer for year ended December 3 1, 20 17, as co mp ared t o th e y ear end ed Decemb er 31 , 20 16 , primarily du e to decreased amo rtizatio n o f in-force VOBA in t he GAP pro du ct lin e and lo wer vo lume in the credit p rod uct line. Oth er o perating ex pen ses were $34 .3 million h ig her for th e y ear en ded Decemb er 31 , 2 01 7, as co mp ared t o th e y ear en ded Decemb er 31 , 2 01 6, primarily due to th e acq uisition of US Warranty. S ales Total segmen t sales i ncreased $3 5.5 million, o r 7 .1%, for th e year en ded Decemb er 3 1, 2 01 7, as compared to the y ear end ed Decemb er 31, 20 16 . Servi ce co ntract sales increased $36 .1 mil lion du e to ad dit io nal vo lu me pro vided by US Warran ty . 67 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. GAP sales increased $5.4 million d ue to add iti on al v olu me p ro vided b y US Warran ty. Credit in surance sales decreased $6.0 mil lion d ue to decreasin g deman d for th e prod uct. Reinsura nce The majo rity o f th e Asset Pro tect io n segmen t’s reinsurance act iv ity relates to th e cession o f sin gle p remiu m credit life and cred it accid ent and h ealth in surance, v ehicle serv ice co ntracts, an d gu aran teed asset p ro tect io n in surance to p ro du cer affiliated reinsu ran ce compan ies (“PARCs”). These arran gements are coinsu ran ce co ntracts ceding th e bu si ness o n a first dollar q uo ta sh are b asis g enerally at 10 0% to limit t he seg ment’s exp osure and allow th e PARCs to share in the un derwriting i ncome o f th e prod uct. Rein su ran ce con tracts do not reliev e the Asset Protection seg men t from obl ig ation s to po licyh olders. The Asset Pro tectio n segment also carries a catastro ph ic reinsurance policy fo r the GAP prog ram. Losses in curred as a result o f t he recent hu rri can es are cov ered un der th is p olicy. The Asset Protective segmen t believ es losses fro m th ese cat astrop hes, net o f rei nsu ran ce, will hav e an immat eri al imp act on the segmen t’s resu lts o f o perati on s. A more detailed d iscu ssion of th e components o f rein surance can b e fo un d in the Rein su rance sectio n o f No te 2, S ummary of S ig nifican t Acco un t in g Po licies to o ur con so lidated fin ancial statemen ts in clu ded in th is repo rt. Reinsu ran ce impacted th e Asset Pro tectio n seg men t lin e items as sho wn in the fo llo wing tab le: Asset Pro tectio n Segment Line Item Impa ct of Reinsura nce For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Reinsu ran ce ced ed $(19 2,7 34 ) $(189,32 3) $(1 65 ,90 1) BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses (8 3,0 05 ) (80,43 9) (72 ,74 2) Amortization of DAC/VOBA (4,1 60 ) (3,21 6) (1 ,87 0) Other op eratin g exp enses (6 99 ) (3,68 5) (4 ,74 5) Total b enefits and exp en ses (8 7,8 64 ) (87,34 0) (79 ,35 7) NET IMPACT OF REINSURANCE(1)$(10 4,8 70 ) $(101,98 3) $(86 ,54 4) (1)Assumes n o investm en t income on rein suran ce. Fo reg one investm en t income would substantially ch an g e th e im p act o f rein suran ce. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Reinsu ran ce p remiu ms ceded in creased $3.4 mill io n, or 1.8 %, for th e y ear end ed December 31 , 2 01 8, as compared to th e y ear end ed December 31 , 20 17 . Service co ntract ceded p remiu ms i ncreased $6.4 mill io n, or 4 .2%. GAP ced ed premi ums d ecreased $1.7 million , o r 7.1 %. Ced ed premiums in t he credit line decreased $1.3 mi llio n, o r 9 .8%. Ben efits and settlement ex penses ceded in creased $2.6 million, or 3 .2%, for the year ended Decemb er 3 1, 2018 , as compared to the y ear en ded Decemb er 31 , 2 01 7. The in crease was p rimarily du e to high er ceded losses in th e service co ntract p ro du ct line so mewhat o ffset b y lo wer ced ed lo sses in th e GAP prod uct line as a result o f Hurricane Harvey claims in curred in 20 17 . Amortization o f DAC and VOBA ceded was $0 .9 millio n, or 2 9.4 %, h ig her for the year end ed December 3 1, 20 18 , as co mp ared to th e y ear ended Decemb er 31 , 20 17 , d ue to in creases in al l p rod uct lines. Oth er op eratin g ex pen ses were $3 .0 millio n lo wer fo r th e year end ed December 31 , 2 01 8, as co mp ared to th e year en ded Decemb er 3 1, 2 01 7, d ue to decreases in all prod uct lines. Net in vestmen t in come has n o direct impact on reinsurance cost. Ho wev er, by ceding bu siness to t he assu ming co mp an ies, th e Asset Pro tectio n segmen t forg oes i nv estment in co me o n the reserves ceded . Co nv ersely, th e assumin g co mpan ies will receive in vestmen t inco me on th e reserves assumed wh ich gen erally will in crease the assumin g co mp anies’ profitab ility on bu siness ced ed. The n et inv estment inco me imp act to th e Asset Protection seg men t an d the assumin g compan ies h as no t b een q uan tified as it is n ot reflected in ou r co nsol id ated fi nancial stat ements. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Reinsu ran ce premiums ceded in creased $23.4 mi llio n, o r 1 4.1 %, for th e year end ed December 31 , 20 17 , as compared to th e year en ded December 31 , 20 16 . Service co ntract ceded p remiu ms in creased $21 .1 millio n, or 1 6.1 %. GAP ced ed premiums in creased $4 .7 millio n, or 2 4.0 %. Ced ed p remiu ms i n th e credit li ne decreased $2.4 mill io n, o r 1 5.6 %. 68 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Ben efits and settlemen t exp en ses ced ed in creased $7.7 million , o r 10 .6%, for th e year ended December 3 1, 2 01 7, as co mp ared t o th e year en ded Decemb er 31, 20 16 . GAP ceded claims in creased $8.7 million part ly du e ceded claims related to Hu rri can e Harv ey. The increase was partially offset b y a $1.0 mi llio n d ecrease in ceded claims in t he cred it prod uct line. Amortization o f DAC and VOBA ceded was $1 .3 millio n, or 7 2.0 %, h ig her for the year end ed December 3 1, 20 17 , as co mp ared to th e y ear ended Decemb er 31 , 20 16 , d ue to in creases in al l p rod uct lines. Oth er op eratin g ex pen ses were $1 .1 millio n lo wer fo r th e year end ed December 31 , 2 01 7, as co mp ared to th e year en ded Decemb er 3 1, 2 01 6, d ue to decreases in all prod uct lines. Net in vestmen t in come has n o direct impact on reinsurance cost. Ho wev er, by ceding bu siness to t he assu ming co mp an ies, th e Asset Pro tectio n segmen t forg oes i nv estment in co me o n the reserves ceded . Co nv ersely, th e assumin g co mpan ies will receive in vestmen t inco me on th e reserves assumed wh ich gen erally will in crease the assumin g co mp anies’ profitab ility on bu siness ced ed. The n et inv estment inco me imp act to th e Asset Protection seg men t an d the assumin g compan ies h as no t b een q uan tified as it is n ot reflected in ou r co nsol id ated fi nancial stat ements. 69 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Co rpo rate and Other Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $1 2,7 13 $12,79 9 $13 ,98 6 Reinsu ran ce ced ed (5 15 ) (8 1) (24 6) Net p remiu ms an d p oli cy fees 1 2,1 98 12,71 8 13 ,74 0 Net in vestmen t inco me 23 4,8 31 209,32 4 2 00 ,69 0 Other in come 3,2 19 3,03 0 11 ,05 3 Total o perating rev enues 25 0,2 48 225,07 2 2 25 ,48 3 Realized g ain s (losses)—inv estments (1,0 95 ) (8,49 2) (4 ,88 6) Realized g ain s (losses)—derivativ es (8 55 ) (1,87 4) 82 6 Total reven ues 24 8,2 98 214,70 6 2 21 ,42 3 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 1 7,6 47 16,38 2 17 ,94 6 Amortization of DAC/VOBA — — — Other op eratin g exp enses 31 6,8 30 345,02 2 2 95 ,49 8 Total b enefits and exp en ses 33 4,4 77 361,40 4 3 13 ,44 4 INCOME (LOSS) BE FORE INCOME TAX (8 6,1 79 ) (146,69 8) (92 ,02 1) Less: realized gains (losses)—in vestmen ts (1,0 95 ) (8,49 2) (4 ,88 6) Less: realized gains (losses)—deriv atives (8 55 ) (1,87 4) 82 6 PRE-TAX ADJ USTE D OPERATING INCOME (LOSS)$(8 4,2 29 ) $(136,33 2) $(87 ,96 1) Fo r The Year Ended Decemb er 31 , 20 18 , as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me (lo ss) Pre-t ax adjusted op erat in g loss was $8 4.2 million fo r the y ear en ded Decemb er 3 1, 2 01 8, as comp ared to an ad ju sted p re-tax op eratin g loss of $13 6.3 mi llio n for th e year en ded December 3 1, 2 01 7. Th e decrease in o perating lo ss is primaril y attrib utable to a d ecrease in corpo rate ov erh ead exp enses an d an in crease in in vestmen t in co me. Op erati ng reven ues Net in vestmen t i ncome fo r t he segment in creased $25 .5 mil lion , or 1 2.2 %, fo r the year end ed December 3 1, 2 01 8, as compared to th e year en ded Decemb er 3 1, 2 01 7. Th e in crease in net in vestmen t inco me was primarily d ue to an increase in in vested assets and i nv estment yield s. Other inco me Other in come in creased $0 .2 million or 6.2 % for th e year en ded December 31 , 20 18 , as compared to the y ear en ded December 31, 20 17 . The increase in other in come is con sidered i mmaterial an d can flu ctu ate y ear ov er y ear. Tota l b enefit s an d expen ses Total b enefits and exp enses d ecreased $26 .9 million or 7.5 %, fo r the y ear end ed December 31 , 2 01 8, as co mp ared to the y ear end ed Decemb er 31 , 20 17 . Ot her o perating ex pen ses were high er du rin g th e year end ed December 31 , 2 01 7, as certain co mp ensati on ex pen ses were elevated du e to th e p osit iv e impact on p erforman ce metrics as a resu lt o f tax refo rm. Th is decrease was p artially o ffset by increased in terest exp ense du ring the year end ed Decemb er 31 , 20 18 . Fo r The Year Ended Decemb er 31 , 20 17 , as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me (lo ss) Pre-t ax adjusted op erat in g loss was $1 36 .3 million for th e year end ed December 31 , 20 17 , as compared to an adjusted pre-tax o perating lo ss o f $8 8.0 mi llio n for the year en ded December 3 1, 201 6. The decrease is primarily attri bu tab le to a $4 9.5 millio n increase in corpo rate o verhead exp ense. Th e increase in o verhead exp en ses was primarily du e to certain accrued expenses that increased as a result of th e fav orable after-tax adj usted op eratin g in come results wh ich in creased du e to the ch ang e in the co rp orate tax rate du rin g t he perio d. 70 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Op erati ng reven ues Net inv estment inco me for th e segment increased $8.6 mill io n, or 4.3 %, for th e year ended December 3 1, 2017 , as co mp ared to th e year en ded Decemb er 3 1, 2 01 6. Th e in crease in net in vestmen t inco me was primarily d ue to an increase in in vested assets and i nv estment yield s. Other inco me Other inco me d ecreased $8.0 milli on o r 72 .6 % fo r th e year ended December 3 1, 2 01 7, as co mp ared t o th e year en ded December 3 1, 20 16 . Th e decrease in inco me was primarily du e to a decrease in the g ain o n ex ting uish men t o f d ebt. Tota l b enefit s an d expen ses Total ben efits and exp enses increased $48 .0 mill io n o r 15 .3%, fo r th e year end ed Decemb er 31 , 201 7, as compared to th e year en ded December 31 , 20 16 , p rimari ly du e to in creases i n corporate ov erh ead exp enses. 71 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents CONSOLIDATED INVESTMENTS As o f December 3 1, 2 01 8, o ur investment po rtfolio was approx imately $6 6.1 bi llio n. Th e typ es of assets in wh ich we may inv est are infl uenced by vario us state i nsu ran ce laws wh ich p rescrib e qu alified in vestmen t asset s. With in the p arameters o f th ese laws, we in vest in assets givin g co nsid eratio n to such facto rs as liq uidity an d capital n eeds, in vestmen t quality, i nv estment retu rn , match in g of assets and li ab i lities, an d th e o verall co mp ositio n of th e inv estment po rtfo lio b y asset typ e an d credit ex po sure. Within o ur fix ed matu rity i nv estments, we mai ntain po rtfol io s classified as “availab le-fo r-sale”, “trad ing”, an d “h eld -to-maturi ty ”. We pu rch ase ou r av ailable-for-sale inv estments with th e in ten t to ho ld to maturi ty by pu rch asing in vestmen ts th at match fu tu re cash flo w n eeds. Ho wev er, we may sell any of ou r av ailable-for-sale an d trading i nv estments to maint ain prop er matchi ng of assets an d liabilities. Acco rding ly, we classified $4 9.5 billion , or 9 0.8 %, o f ou r fixed matu rities as “av ailable-for-sale” as of December 31 , 20 18 . These secu rities are carried at fair v alu e o n o ur con so lidated b alan ce sheets. Ch ang es in fair value fo r o ur availab le-fo r-sal e p ort fo lio, n et o f tax and th e related impact o n certain insu ran ce assets an d li ab ilities, are reco rded d irectly to shareo wner’s eq uit y. Declines in fai r v alue that are oth er-th an-tempo rary are recorded as real ized losses in the con solidat ed statemen ts of in come, n et o f an y appl icable no n-credit co mp on ent of th e lo ss, which is reco rded as an adjustmen t to o th er co mp reh en sive inco me (loss). Trad in g secu rities are carried at fai r v alu e an d ch ang es in fair v alu e are reco rd ed o n the inco me statement as th ey o ccu r. Our trading po rtfolio acco un ted for $2 .4 billion , o r 4 .4%, of ou r fix ed maturities an d $3 0.9 mi llio n o f sh ort-term inv estments as of Decemb er 3 1, 2 01 8. The ch ange in fair value o f th e trad in g po rtfolio is passed to the reinsu rers th ro ugh the con tractu al terms of th e rein su rance arrang ements. Partially o ffsetti ng these amo un ts are co rresp on ding changes in the fair valu e of th e emb ed ded deriv ative asso ciated wi th th e u nderly in g rein surance arrang emen t. Fi xed maturiti es with respect to which we hav e bo th the po si tive in ten t an d abilit y to ho l d to maturity are classified as “h eld -to-maturity ”. We classified $2 .6 b illion , o r 4 .8%, o f ou r fix ed matu rities as “hel d-to -matu rity ” as o f Decemb er 3 1, 20 18 . Th ese secu rit ies are carried at amortized co st o n ou r co nsolid ated bal an ce sheets. Fair values for p rivate, n on -traded secu rit ies are d etermined as fo llows: 1) we ob tain estimates fro m ind epen den t p ricin g services and 2) we estimate fai r valu e b ased up on a co mp ari son to qu oted issues of t he same issu er or i ssues of o ther issuers with similar terms an d risk characteristics. We an aly ze the in depen den t pricing services v alu ation meth od olog ies and related inp uts, includ ing an assessment of the ob serv ability of market inp uts. Up on o btain in g th is in fo rmation related t o fair v alu e, manag ement makes a d eterminatio n as t o the ap prop riat e val uatio n amou nt. Fo r more i nformatio n ab ou t th e fair values o f ou r inv estments please refer to Note 6, Fa ir Value o f Finan cial Instru men ts, to th e fi nancial stat ements. The fol lo win g tabl e p resen t s th e rep orted values o f o ur in vested assets: As of December 3 1, 2 0 1 8 2 017 (Dolla rs I n Thousands) Pu blicly issu ed b on ds (amo rti zed cost: 2018 - $40 ,4 96,61 7; 201 7 - $3 0,8 80 ,19 6)$3 8,3 46 ,70 8 5 8.1 % $30 ,86 0,5 41 56 .5% Privately issu ed b on ds (amo rti zed cost: 2 01 8 - $1 6,4 97 ,52 3; 20 17 - $1 2,8 94 ,56 9)1 6,0 97 ,38 6 2 4.3 12 ,93 9,9 97 23 .7 Redeemab le preferred stock (amo rti zed cost: 2018 - $105,639; 2 01 7 - $9 7,6 90 )94 ,07 9 0.1 9 4,4 18 0 .1 Fix ed matu rities 5 4,5 38 ,17 3 8 2.5 % 43 ,89 4,9 56 80 .3% Equi ty securities (cost: 20 18 - $62 7,0 87 ; 2 01 7 - $7 40 ,81 3)5 95 ,88 4 0.9 75 4,3 60 1 .4 M ortg age loans 7,7 24 ,73 3 1 1.7 6 ,81 7,7 23 12 .5 In vestmen t real estate 6 ,81 6 — 8,3 55 — Po licy loan s 1,6 95 ,88 6 2.6 1 ,61 5,6 15 3 .0 Oth er lon g-term inv estments 7 59 ,35 4 1.1 91 5,5 95 1 .7 Sh ort-term in vestmen ts 8 07 ,28 3 1.2 61 5,2 10 1 .1 To tal in vestment s $6 6,1 28 ,12 9 10 0.0 % $54 ,62 1,8 14 1 00 .0% In cluded in the preced in g table are $2.4 b i llio n and $2 .7 bil lion of fixed matu rities and $30 .9 million and $56 .3 million of sho rt-term in vestmen ts classified as trad i ng securities as of Decemb er 3 1, 2 01 8 an d 2 01 7, resp ectiv ely. All o f th e fix ed matu rities in the trad in g po rtfo l io are in vested assets t hat are held pu rsuan t to M od co arran gemen ts un der wh ich th e eco no mic risk s and benefi ts o f the inv estments are p assed to th ird p arty rein surers. 72 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Fix ed Maturity Investments As o f Decemb er 3 1, 2 01 8, o ur fix ed matu rity in vestmen t h oldin gs were app ro ximately $54 .5 billio n. The ap prox i mate percen tag e distribut io n of ou r fixed matu rity inv estments by qu alit y rati ng is as foll ows: As o f December 31 , Ra ting 2 018 2 0 17 (Dollars i n Thousa nds ) AAA $6 ,82 2,1 18 1 2.5 % $5,7 40 ,115 13 .1% AA 6 ,21 9,5 79 1 1.4 3,5 77 ,512 8 .2 A 17 ,69 4,6 97 3 2.4 1 3,9 69 ,721 31 .8 BBB 19 ,45 5,6 34 3 5.7 1 5,7 52 ,970 35 .9 Belo w inv est ment grade 1 ,71 2,6 71 3.2 2,1 35 ,734 4 .8 Not rated(1 ) 2 ,63 3,4 74 4.8 2,7 18 ,904 6 .2 $54 ,53 8,1 73 10 0.0 % $4 3,8 94 ,956 1 00 .0% (1) Ou r “not rated” securities are $2 .6 billion , o r 4.8 % of o u r fix ed maturity investments, of h eld -to-maturity secu rities issu ed b y affiliates of th e Comp an y wh ich are co n sidered v ariable interest en tities (“VIE’s”) and are discu ssed in No te 5 , In vestment Opera tions, to the conso lid ated financial statements. We are no t th e p rimary beneficiary o f these entities an d th us th ese secu rities are n ot eliminated in con solidation . These securities are collateralized by n o n -recourse fu n ding o b lig ations issu ed b y cap tiv e in suran ce comp an ies that are wholly o wn ed subsidiaries o f the Co mpany. We use vario us Natio nal ly Reco gn ized St ati stical Ratin g Org anization s’ (“NR SRO”) rating s when classify in g secu rities b y q uality rating s. When th e vario us NRSRO rating s are no t co nsistent for a securi ty, we use th e secon d-hig hest con ven tion i n assig ning the rating . When th ere are no su ch p ub lished rat in gs, we assign a rat in g b ased on t he statu to ry acco un tin g rati ng system if such ratin gs are av ailable. The distribut io n o f o ur fixed mat urity inv est ments b y typ e is as follows: As of December 31, Type 2018 2017 (Dollars In Thousands) Corpo rate securities $37 ,786,66 1 $3 1,4 00 ,19 3 Resid ential mo rtgag e-b ack ed secu rities 3 ,853,42 6 2,5 86 ,90 6 Commercial mortg age-backed securities 2 ,484,00 9 2,0 36 ,62 6 Oth er asset-b acked secu rities 1 ,551,80 0 1,3 87 ,64 6 U.S. go vernment-related secu rities 1 ,699,29 9 1,2 50 ,48 6 Oth er g ov ern ment-rel ated secu rit ies 560,17 1 3 51 ,20 7 States, mun icipals, and po litical sub division s 3 ,875,25 4 2,0 68 ,57 0 Redeemab le preferred stock 94,07 9 94 ,41 8 Secu rities issued by affiliates 2 ,633,47 4 2,7 18 ,90 4 To tal fix ed in come po rtfo lio $54 ,538,17 3 $4 3,8 94 ,95 6 73 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents We perio dically up date ou r in du stry seg men tatio n based on an ind ustry accepted in dex . Updates to th is in dex can resu lt in a ch ange in segmen t ati on fo r certain securi ties between perio ds. The ind ustry segment compo sition of ou r fix ed matu rity securiti es is p resen ted in th e fo llowing tab le: As of December 31, 2 0 1 8 % Fair Value As of December 3 1, 201 7 % Fa ir Value (Dollars In Thousands) (Dolla rs I n Thousands) Bankin g $5 ,26 0,7 25 9.6 % $4,301,8 21 9 .8% Oth er fin ance 25 5,4 45 0.5 60,6 97 0 .1 El ectric utility 4 ,55 0,9 17 8.3 3,977,0 35 9 .1 Energy 4 ,06 4,3 40 7.5 4,009,9 26 9 .1 Natu ral gas 82 9,6 85 1.5 736,6 26 1 .7 In su ran ce 3 ,91 6,9 05 7.2 3,689,5 72 8 .4 Commu nication s 2 ,08 6,5 92 3.8 1,691,3 91 3 .9 Basic ind ustrial 1 ,74 4,8 53 3.2 1,629,3 49 3 .7 Con sumer n on cycl ical 5 ,21 7,1 11 9.6 3,816,0 11 8 .7 Con sumer cy cli cal 1 ,85 0,8 68 3.4 1,232,9 91 2 .8 Finan ce co mp anies 19 2,0 74 0.4 162,6 73 0 .4 Capi tal go od s 2 ,71 1,7 28 5.0 1,910,9 50 4 .4 Tran sp ortatio n 1 ,66 9,6 27 3.1 1,210,2 72 2 .8 Oth er ind ustrial 38 2,1 38 0.7 239,3 68 0 .5 Bro kerage 99 9,5 54 1.8 921,2 95 2 .1 Techn olog y 1 ,90 8,8 23 3.5 1,756,7 46 4 .0 Real est ate 20 6,7 95 0.4 82,1 25 0 .2 Oth er u tility 3 2,5 60 0.1 65,7 63 0 .1 Commercial mortg age-backed securities 2 ,48 4,0 09 4.6 2,036,6 26 4 .6 Oth er asset-b acked secu rities 1 ,55 1,8 00 2.8 1,387,6 46 3 .2 Resid ential mo rtgag e-b ack ed n on -ag ency secu rities 3 ,01 7,0 64 5.5 1,861,8 83 4 .2 Resid ential mo rtgag e-b ack ed ag ency secu rit ies 83 6,3 62 1.5 725,0 23 1 .7 U.S. go vernment-related secu rities 1 ,69 9,2 99 3.1 1,250,4 86 2 .8 Oth er g ov ern ment-rel ated secu rit ies 56 0,1 71 1.0 351,2 07 0 .8 State, mun ici pal s, and p olitical d iv isio ns 3 ,87 5,2 54 7.1 2,068,5 70 4 .7 Secu rities issued by affiliates 2 ,63 3,4 74 4.8 2,718,9 04 6 .2 Total $54 ,53 8,1 73 10 0.0 % $4 3,894,9 56 1 00 .0% The tot al M od co trad in g p ortfoli o fix ed maturi ties by ratin g is as follo ws: As of December 31, Ra ting 2018 2017 (Dollars In Thousands) AAA $301,15 5 $3 55 ,71 9 AA 299,43 8 2 77 ,98 4 A 798,69 1 9 11 ,49 0 BBB 872,61 3 8 90 ,10 1 Belo w inv est ment grade 144,29 5 2 28 ,89 5 To tal M od co t radin g fix ed maturi ties $2 ,416,19 2 $2,6 64 ,18 9 74 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents A po rti on of o ur bo nd p ortfolio is inv ested in RM BS, CM BS, an d ABS. ABS are secu rit ies th at are backed b y a p oo l of assets. Th ese h olding s as of Decemb er 3 1, 2 01 8, were approx imatel y $7.9 b i llio n. Mortgage-back ed secu rities (“MBS”) are constru cted from po ols o f mortg ages an d may hav e cash flo w vo lat ility as a result of ch ang es in th e rate at wh ich p rep ayments o f princi pal o ccu r with respect t o th e u nd erlying loan s. Exclud in g limit ati on s o n access to lendi ng and other extrao rdi nary econ omic co nd ition s, prepay men ts of pri ncipal on th e un derly i ng lo ans can b e exp ected to accelerate with d ecreases in mark et interest rates and dimin ish with increases in in terest rates. The followin g tab les in clu de the percen tag e of o ur coll ateral g ro up ed b y ratin g catego ry and cat eg orize th e estimated fair valu e b y y ear o f security orig in ation fo r o ur Pri me, Non -Prime, Commercial , an d Other asset-back ed securities as of December 31 , 2018 an d 2 01 7. As of December 3 1 , 2018 Prime(1 ) Non-Prime(1) Co mmercia l O ther asset-ba cked Tota l Fair Amortized Fa ir Amo rtized Fa ir Amortized Fair Amortized Fair Amo rtized Va lue Co st Value Cost Value Co st Value Co st Va lue Cost (D ollars In M i llio ns) Ra ting $ AAA $2,900 .5 $2,930 .7 $— $— $1 ,3 9 8.8 $1,427.2 $53 3 .3 $5 36.3 $4,832.6 $4,8 9 4 .2 AA 2 .9 2 .9 0 .2 0 .2 5 4 3.1 562.7 20 9 .8 2 07.2 756.0 7 7 3 .0 A 837 .9 846 .6 1 9 .0 1 9 .0 5 0 3.5 509.9 67 1 .1 6 87.5 2,031.5 2,0 6 3 .0 BBB 3 .7 3 .7 3 .1 3 .1 3 8.6 38.5 9 9 .5 1 00.4 144.9 1 4 5 .7 Below 22 .4 22 .4 6 3 .7 6 3 .7 — — 3 8 .1 38.6 124.2 1 2 4 .7 $3,767 .4 $3,806 .3 $8 6 .0 $8 6 .0 $2 ,4 8 4.0 $2,538.3 $1,55 1 .8 $1 ,5 70.0 $7,889.2 $8,0 0 0 .6 Ra ting % AAA 77 .0 % 77 .0 % —% —% 5 6.2% 56.2 % 3 4 .4% 34.1% 61.3 % 6 1 .1% AA 0 .1 0 .1 0 .3 0 .3 2 1.9 22.2 1 3 .5 13.2 9.6 9 .7 A 22 .2 22 .2 2 2 .1 2 2 .1 2 0.3 20.1 4 3 .2 43.8 25.7 2 5 .8 BBB 0 .1 0 .1 3 .6 3 .6 1.6 1.5 6 .4 6.4 1.8 1 .8 Below 0 .6 0 .6 7 4 .0 7 4 .0 — — 2 .5 2.5 1.6 1 .6 100 .0 % 100 .0 % 1 0 0 .0% 1 0 0 .0% 1 0 0.0% 100.0 % 10 0 .0% 1 00.0% 100.0 % 1 0 0 .0% Estima ted Fa ir Va lue o f Security by Yea r o f Security O rig inatio n 2 0 14 and prior $1,114 .3 $1,121 .7 $8 6 .0 $8 6 .0 $1 ,5 1 0.6 $1,538.9 $72 9 .0 $7 30.7 $3,439.9 $3,4 7 7 .3 2 0 15 579 .1 586 .5 — — 2 9 8.7 303.1 6 4 .4 66.2 942.2 9 5 5 .8 2 0 16 340 .6 348 .2 — — 4 4 1.0 460.1 22 7 .5 2 30.0 1,009.1 1,0 3 8 .3 2 0 17 666 .6 689 .1 — — 1 2 3.0 126.4 40 6 .1 4 15.5 1,195.7 1,2 3 1 .0 2 0 18 1,066 .8 1,060 .8 — — 1 1 0.7 109.8 12 4 .8 1 27.6 1,302.3 1,2 9 8 .2 Total $3,767 .4 $3,806 .3 $8 6 .0 $8 6 .0 $2 ,4 8 4.0 $2,538.3 $1,55 1 .8 $1 ,5 70.0 $7,889.2 $8,0 0 0 .6 (1)Included in Residential Mortg ag e-Back ed securities. 75 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents As of December 3 1 , 2017 Prime(1) No n-Prime(1 ) Co mmercia l O ther asset-ba cked Tota l Fair Amo rtized Fair Amo rtized Fa ir Amortized Fair Amortized Fair Amo rtized Va lue Cost Va lue Cost Value Co st Value Co st Va lue Cost (D ollars In M i llio ns) Ra ting $ AAA $2,264 .2 $2,2 6 8 .0 $— $— $1 ,2 5 8.2 $1,271.1 $59 1 .5 $5 90.5 $4,113.9 $4,1 2 9 .6 AA 1 .4 1 .4 — — 5 2 2.9 533.6 15 8 .5 1 50.1 682.8 6 8 5 .1 A 1 .1 1 .1 1 5 .9 15 .9 2 5 2.2 253.9 51 2 .9 5 08.6 782.1 7 7 9 .5 BBB 1 .5 1 .5 1 .5 1 .5 3.3 3.3 5 0 .2 49.6 56.5 5 5 .9 Below 92 .5 9 2 .1 2 0 8 .8 209 .0 — — 7 4 .5 73.7 375.8 3 7 4 .8 $2,360 .7 $2,3 6 4 .1 $2 2 6 .2 $226 .4 $2 ,0 3 6.6 $2,061.9 $1,38 7 .6 $1 ,3 72.5 $6,011.1 $6,0 2 4 .9 Ra ting % AAA 95 .9 % 9 5 .9% —% —% 6 1.7% 61.6 % 4 2 .6% 43.0% 68.4 % 6 8 .5% AA 0 .1 0 .1 — — 2 5.7 25.9 1 1 .4 10.9 11.4 1 1 .4 A — — 7 .0 7 .0 1 2.4 12.3 3 7 .0 37.1 13.0 1 2 .9 BBB 0 .1 0 .1 0 .6 0 .6 0.2 0.2 3 .6 3.6 0.9 0 .9 Below 3 .9 3 .9 9 2 .4 92 .4 — — 5 .4 5.4 6.3 6 .3 100 .0 % 1 0 0 .0% 1 0 0 .0% 100 .0 % 1 0 0.0% 100.0 % 10 0 .0% 1 00.0% 100.0 % 1 0 0 .0% Estima ted Fa ir Va lue o f Security by Yea r o f Security O rig inatio n 2 0 13 and prior $897 .4 $8 9 8 .8 $2 2 6 .2 $226 .4 $1 ,0 2 5.2 $1,039.4 $76 1 .2 $7 52.4 $2,910.0 $2,9 1 7 .0 2 0 14 203 .8 2 0 2 .8 — — 2 3 9.0 243.8 3 1 .2 31.6 474.0 4 7 8 .2 2 0 15 456 .4 4 5 8 .4 — — 2 1 3.7 211.9 2 9 .4 28.7 699.5 6 9 9 .0 2 0 16 237 .0 2 4 0 .0 — — 4 5 6.2 463.8 23 2 .9 2 30.3 926.1 9 3 4 .1 2 0 17 566 .1 5 6 4 .1 — — 1 0 2.5 103.0 33 2 .9 3 29.5 1,001.5 9 9 6 .6 Total $2,360 .7 $2,3 6 4 .1 $2 2 6 .2 $226 .4 $2 ,0 3 6.6 $2,061.9 $1,38 7 .6 $1 ,3 72.5 $6,011.1 $6,0 2 4 .9 (1) Included in Residential Mortg ag e-Backed securities The majo rity o f o ur RM BS h oldin gs as of December 31 , 2 01 8 were su per sen io r o r senior b on ds in the capital structure. Our tot al n on -ag ency po rtfo lio h as a wei gh ted -average l ife o f 1 4.7 9 y ears. Th e foll owin g table catego rizes th e weigh ted -av erag e life fo r o ur no n-agency po rtfol io , b y cat egory o f material ho ld ing s, as of December 3 1, 2 01 8: Non-a g ency portfo lio Weighted-Avera ge Life Prime 14 .84 Alt-A 3 .05 Sub -p rime 3 .47 Mo rtg ag e Lo ans We in vest a p ortio n o f ou r in vestmen t portfo lio in commercial mo rtgag e loans. As of December 3 1, 20 18 , o ur mortg age loan h olding s were ap proxi mately $7 .7 b illio n. We hav e sp ecialized in mak in g lo ans on either cred it-orien ted commercial properti es or credit-anch ored strip sh op pin g cen ters an d apartments. Ou r un derwri ting p ro cedu res relative to o ur co mmercial loan p ortfoli o are b ased, in o ur v iew, on a con serv ative an d disciplin ed app ro ach . We co ncentrate on a small n umber o f co mmerci al real estate asset typ es asso ciated with the necessities o f life (retail, multi-family, sen i or living , profession al office b uild i ng s, an d wareh ou ses). We b elieve th at t hese asset typ es ten d t o weather eco no mic do wn t urns b etter than o th er commercial asset classes in wh ich we hav e cho sen not to particip ate. We b eli ev e this discipl in ed ap pro ach h as helped to main t ain a rel ati vely lo w d eli nq uency an d fo reclosure rate th ro ug ho ut ou r h isto ry. Th e majority of ou r mo rtgag e lo ans p ort fo lio was un derwritten an d fun ded by u s. From t ime to time, we may acqu i re loan s i n co njun ction with an acq uisition . Ou r commercial mo rtgag e loan s are stated at un paid princip al balance, ad ju st ed for an y un amo rtized p remiu m or d isco un t, and n et of an allo wan ce fo r lo an l osses. Interest in come is accrued o n t he prin cip al amo un t o f the lo an based o n the lo an’s co ntractual interest rate. Amortization of p remiu ms an d discou nts is reco rd ed using the effecti ve y i eld metho d. In terest i ncome, amo rtizati on o f premi ums an d discou nts, an d prepay men t fees are repo rted i n net in vestmen t inco me. 76 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Certain o f the mortg age loans have call o ptio ns that occu r with in th e next 10 years. However, if i nterest rates were to sign ifican tly increase, we may be u nab le to exercise the call op tion s o n ou r ex isting mortg age loan s co mmen su rat e with the sig nificantly increased mark et rates. As of Decemb er 3 1, 20 18 , assumin g t he lo ans are call ed at th eir n ext call dates, ap prox imately $1 09 .8 mil lion will b e d ue in 20 19 , $81 9.4 millio n in 20 20 th rou gh 20 24 , and $6 1.2 mi llio n in 2 02 5 throu gh 20 29 . We offer a ty pe o f co mmerci al mortg age loan un der which we will permit a loan -to-value ratio of up to 85% in ex change for a particip ating interest in th e cash flows from th e un derly in g real estate. As o f December 31 , 20 18 an d Decemb er 31, 20 17 , app rox imately $70 0.6 mil lion and $66 9.3 milli on , resp ecti vel y, o f ou r t otal mo rtgag e loan s prin cip al balance hav e this particip ation featu re. Cash flo ws received as a resul t of th is p articipatio n feature are recorded as in terest inco me when receiv ed. Durin g the y ears en ded Decemb er 31 , 2 01 8, 20 17 , an d 20 16 , we reco gn ized, $2 9.4 millio n, $3 7.2 millio n, and $1 6.7 millio n, respect iv ely , of particip ating mo rtgag e loan in come. The fol lo win g tabl e includ es a breakd own o f o ur commercial mortgage loan po rtfol io : Commercial Mortg ag e Loa n Po rtfolio Profi le As o f December 31, 201 8 2 0 1 7 (D ollars In Thous ands) To tal nu mb er of loans 1 ,73 2 1 ,66 8 To tal amort ized co st 7,7 24 ,73 3 6,8 17 ,72 3 To tal un pai d princi pal balan ce 7,6 02 ,38 9 6,6 16 ,18 1 Curren t allo wance fo r loan lo sses (1 ,29 6) — Average lo an size 4 ,38 9 3 ,96 7 Weig hted-averag e amortizat io n 22 .5 y ears 22 .5 years Weig hted-averag e cou po n 4.6 0% 4.7 6% Weig hted-averag e LTV 5 5.3 9% 5 6.1 0% Weig hted-averag e deb t cov erag e ratio 1.5 5 1.5 5% Wh ile ou r mortg age lo ans d o n ot hav e qu oted market values, as o f December 31 , 20 18 , we estimat ed t he fair val ue of o ur mo rtgag e lo ans to be $7.4 billio n (usin g an intern al fair value mo del wh ich calculates the v alu e o f most l oans by using th e lo an’s d isco un ted cash flo ws to th e loan ’s call or maturity date), which was app ro ximately 3.5 9% less t han th e amortized cost, less any related lo an l oss reserve. At th e ti me of orig in ation , ou r mo rtg ag e len ding criteria targets th at the loan-t o-val ue ratio on each mortgag e is 75 % or less. We targ et pro jected rental pay men ts fro m credit anch ors (i .e., excl ud in g ren tal p ay men ts fro m smaller local tenants) o f 70 % o f the p ro perty’s projected operatin g exp enses and debt service. As of Decemb er 3 1, 20 18 , app rox imately $3.0 million o f in vested asset s consist ed o f no np erforming mortg age lo ans, restru ctu red mortg age loan s, o r mortgag e l oans that were foreclo sed and were co nv ert ed to real estate p ropert ies. We d o not ex pect t hese in vestmen ts to adv ersely affect our liq uidity or ab ility to main tain p ro per match in g o f assets and liabilit ies. During the y ear end ed December 31 , 2 01 8, certai n mo rtg age lo an tran saction s occu rred t hat wo uld have b een accou nted fo r as trou bled d ebt restructurin gs. Fo r all mo rtgag e lo ans, th e impact of tro ub led deb t rest ru ctu ring s is reflected in ou r in vestmen t balan ce and in th e allowan ce fo r mo rtgag e loan cred it losses. During th e y ear en ded December 3 1, 2 01 8, we reco gn ized on e tro ub led d eb t restru ctu ring as a resu lt o f grant in g a co ncessio n to a bo rro wer which in clu ded lo an terms un av ailable fro m o t her len ders. Th is con cession was t he result of an ag reement bet ween th e creditor and th e deb to r. We did n ot identi fy any lo ans wh ose p rin cip al was perman ently impaired du rin g the y ear end ed Decemb er 3 1, 20 18 . It is ou r po licy to cease to carry accrued i nterest on loan s that are o ver 9 0 d ays delin qu ent. Fo r lo ans less th an 90 day s d elinq uen t, interest is accrued un less it is determin ed that the accru ed in terest is n ot co llecti ble. If a l oan becomes o ver 90 day s d elinq uen t, it is ou r g eneral p oli cy to in itiate fo reclosure proceeding s unl ess a wo rko ut arrang ement to brin g the loan curren t is in place. 77 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Unrealized Gains and Losses—Av aila ble-for-Sa l e Securi ties The informatio n presented b elo w relates to in vestmen ts at a certai n p oint in time and is no t necessarily in dicative o f the status of th e po rtfolio at any time after Decemb er 31, 20 18 . Info rmation ab ou t un realized g ain s an d lo sses i s sub ject to rap id ly ch ang in g con ditions, in clu ding volat ility of finan cial mark ets an d ch ang es in interest rates. M anag ement co nsid ers a n umber o f factors in d etermining if an u nrealized lo ss is o th er-th an-tempo rary, includ in g the ex pected cash to b e co llected an d the intent, likel ih oo d, and /o r ab ility to h old the secu rity un til recov ery. C on sisten t with o ur lo ng-stan ding practice, we do no t u tilize a “brig ht lin e test” to determin e other-than -temp orary impairments. On a q uarterly basis, we p erform an anal ysis o n ev ery security wit h an un realized loss to d etermine if an o th er-t han-t empo rary imp airmen t h as occurred . This analysis includ es rev iewin g sev eral met rics in clu ding collateral , ex pected cash fl ows, rating s, and liqu id ity. Furt hermore, si nce th e timing of reco gn izing real ized g ain s and lo sses is larg ely based o n manag ement’s decisio ns as to the ti mi ng and selecti on of inv estments to be sold, the tables an d in fo rmation p ro vided below sho uld be co nsidered wit hin the con tex t o f th e o verall un realized gain/(lo ss) p osit io n of th e portfolio . We had an o verall net u nrealized loss o f $2.6 b illio n, prio r to in come tax an d t he related impact o f certain in surance assets and liabilit ies o ffset s, as of December 3 1, 2 01 8, an d an o verall net un realized g ain of $3 6.0 million as of Decemb er 3 1, 2 01 7. For fixed matu rity hel d th at are in an u nrealized lo ss po sition as o f December 31 , 20 18 , th e fair valu e, amortized cost, un realized loss, an d total time perio d t hat th e secu rit y h as been in an un real ized loss po si tion are presen ted in th e table below: Fa ir Value % Fa ir Va lue Amortized Co st % Amo rtized Co st Unrealized Loss % Unrealized Lo ss (D ollars In Thous ands) <= 90 day s $6 ,39 7,0 56 1 6.0 % $6,5 80 ,32 3 15 .3% $(1 83 ,26 7) 6 .6% >9 0 d ays b ut <= 18 0 d ays 4 ,28 4,9 44 1 0.7 4,4 67 ,48 2 10 .5 (1 82 ,53 8) 6 .6 >1 80 day s bu t <= 2 70 day s 3 ,80 0,5 56 9.5 4,0 05 ,66 9 9 .4 (2 05 ,11 3) 7 .5 >2 70 day s bu t <= 1 year 7 ,84 0,3 93 1 9.6 8,3 61 ,31 7 19 .6 (5 20 ,92 4) 18 .9 >1 year bu t <= 2 years 5 ,18 9,3 63 1 3.0 5,4 05 ,60 7 12 .7 (2 16 ,24 4) 7 .9 >2 years bu t <= 3 years 5 ,82 4,5 58 1 4.6 6,2 80 ,68 6 14 .7 (4 56 ,12 8) 16 .6 >3 years bu t <= 4 years 6 ,61 6,4 60 1 6.6 7,6 03 ,02 7 17 .8 (9 86 ,56 7) 35 .9 >4 years bu t <= 5 years — — — — — — >5 years — — — — — — To tal $39 ,95 3,3 30 10 0.0 % $4 2,7 04 ,11 1 1 00 .0% $(2,7 50 ,78 1) 1 00 .0% The rang e of maturity dates for securiti es in an un real ized lo ss p ositio n as of December 31 , 2 01 8 varies, with 21 .4% maturing in less than 5 years, 17 .3% matu ring b etween 5 an d 10 y ears, an d 61 .3% maturin g after 10 years. The followin g tab le sho ws the credit rati ng of secu rit ies in an un realized l oss po sition as of Decemb er 3 1, 2 01 8: S&P o r Equiva lent Designa tion Fa ir Value % Fa ir Va lue Amortized Cost % Amortized Co st Unrealized Loss % Unrealized Lo ss (D ollars In Thous ands) AAA/AA/A $22 ,21 9,3 15 5 5.6 % $23 ,36 5,7 33 5 4.7 % $(1,1 46 ,41 8) 41 .7% BBB 16 ,44 6,7 22 4 1.2 17 ,84 3,2 34 4 1.8 (1,3 96 ,51 2) 50 .8 In vestmen t g rad e 38 ,66 6,0 37 9 6.8 41 ,20 8,9 67 9 6.5 (2,5 42 ,93 0) 92 .5 BB 95 9,7 41 2.4 1 ,07 1,5 96 2.5 (1 11 ,85 5) 4 .0 B 18 9,1 61 0.5 24 4,6 55 0.6 (55 ,49 4) 2 .0 CCC o r lower 13 8,3 91 0.3 17 8,8 93 0.4 (40 ,50 2) 1 .5 Belo w inv est ment grade 1 ,28 7,2 93 3.2 1 ,49 5,1 44 3.5 (2 07 ,85 1) 7 .5 To tal $39 ,95 3,3 30 10 0.0 % $42 ,70 4,1 11 10 0.0 % $(2,7 50 ,78 1) 1 00 .0% As of December 3 1, 2 01 8, the Barclays Inv est ment Grad e Index was p riced at 1 43 .3 b asis p oin ts v ersu s a 10 year av erag e of 154.3 b asi s po in ts. Similarly, the Barclay s High Yield Ind ex was pri ced at 541 .0 b asi s p oints v ersus a 10 y ear averag e o f 58 6.4 basis po in ts. As of December 31 , 20 18, th e fiv e, ten, and thirty -y ear U.S. Treasu ry o blig ation s were trad in g at l ev els o f 2.5 %, 2 .7%, and 3 .0%, as co mp ared to 10 y ear av erag es o f 1 .7%, 2.5%, and 3.3%, resp ecti vel y. As o f Decemb er 3 1, 2018, 9 2.5 % of the unrealized lo ss was asso ciated with securities t hat were rated in vestmen t grade. We hav e ex amined the perfo rman ce of th e un derly in g co llateral an d cash flows an d ex pect th at o ur in vestmen ts will co ntin ue to p erform in acco rd ance with their co ntractual terms. Facto rs such as cred it enh ancemen ts wit hin the d eal stru ctu res and th e un derly in g co llateral p erforman ce/characteristics su pp ort the recov erability o f th e in vestmen ts. Based on th e facto rs discussed, we do no t co nsider th ese un realized lo ss p ositio ns to b e other-th an -temp orary. Ho wev er, from time to time, we may sel l securiti es in th e o rdi nary cou rse of manag in g ou r p ortfolio to meet diversifi cation, cred it qu ality, yield en hancement, asset/liability manag ement, an d liqu id ity requ iremen ts. 78 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exp ectations th at in vestmen ts in mort gage-back ed an d asset-b ack ed securities will con tinu e to perfo rm in acco rd ance with th eir con tractu al terms are based o n assumptio ns th at a mark et p articipan t wo uld u se in d etermining the cu rrent fair value. It is reason ably possi ble th at the un derly in g co llateral o f th ese inv est ments will p erform worse th an current mark et exp ectatio ns an d that su ch an ev en t may l ead to ad verse changes in th e cash flows o n o ur ho ld in gs of th ese ty pes of securities. This coul d lead t o p otential fu ture write-down s with in ou r p ort fo lio o f mortgag e-b ack ed an d asset-backed securities. Exp ectatio ns th at o ur inv estments in corpo rate securities and /or deb t ob ligatio ns will con tinu e to p erform in accordan ce with th eir con t ractu al terms are b ased on eviden ce gathered t hrou gh ou r no rmal credi t survei llance pro cess. Al th ou gh we do no t an tici pate such events, it is reaso nab ly po ssible that issuers of o ur i nv estments in co rpo rat e secu rit ies wi ll perfo rm wo rse th an curren t ex pectation s. Su ch even ts may lead u s to reco gn ize po t en tial fu tu re writ e-d owns withi n o ur po rtfo lio o f co rporat e securities. It is also possi ble th at such un anticipated ev ents wo uld lead us to disp ose of t ho se certain h olding s an d recog nize th e effects of an y such mark et mov ements in o ur finan cial statemen ts. As o f Decemb er 3 1, 2 01 8, we h eld a total of 4,0 05 p ositio ns th at were in an un realized lo ss po sition . In clu ded in that amo un t were 2 35 po sition s o f below in vestmen t grade securi ties with a fair value o f $1.3 billion th at were in an u nrealized loss po si tion . To tal un realized lo sses related to bel ow in vestmen t g rad e secu rities were $207.9 mil lion , $1 55 .0 million of which h ad b een in an u nrealized loss p ositio n fo r more th an t welve mon th s. Belo w in vestmen t g rad e secu rities in an un realized loss po si tion were 1.9 % of in vested assets. As o f Decemb er 3 1, 2 01 8, securi ties in an un realized loss po si tion th at were rated as b elo w inv est ment grade represented 3.2 % of th e to tal fair v alu e an d 7.5 % o f t he total unrealized loss. We have th e ab ility and in tent to h old th ese secu rities to matu rit y. After a review o f each secu rity and its exp ected cash flows, we believ e the d ecline i n market value to b e temp orary . The follo win g table in clu des the fair value, amortized co st, u nrealized loss, an d to tal time p eriod th at the secu rit y h as been in an u nrealized l oss po sition fo r all b elow inv estment grade secu rities as of December 31 , 20 18 : Fa ir Value % Fa ir Va lue Amortized Co st % Amo rtized Co st Unrea lized Lo ss % Unrea lized Loss (D ollars In Thous ands) <= 90 day s $43 4,8 81 3 3.8 % $4 56 ,01 1 30 .5% $(2 1,1 30 ) 10 .1% >9 0 d ays b ut <= 18 0 d ays 4 5,4 16 3.5 50 ,31 7 3 .4 (4,9 01 ) 2 .4 >1 80 day s bu t <= 2 70 day s 14 5,2 66 1 1.3 1 61 ,43 5 10 .8 (1 6,1 69 ) 7 .8 >2 70 day s bu t <= 1 year 9 7,6 74 7.6 1 08 ,28 1 7 .2 (1 0,6 07 ) 5 .1 >1 year bu t <= 2 years 17 0,0 23 1 3.2 1 99 ,91 2 13 .4 (2 9,8 89 ) 14 .4 >2 years bu t <= 3 years 3 4,9 44 2.7 41 ,99 2 2 .8 (7,0 48 ) 3 .4 >3 years bu t <= 4 years 35 9,0 89 2 7.9 4 77 ,19 6 31 .9 (11 8,1 07 ) 56 .8 >4 years bu t <= 5 years — — — — — — >5 years — — — — — — To tal $1 ,28 7,2 93 10 0.0 % $1,4 95 ,14 4 1 00 .0% $(20 7,8 51 ) 1 00 .0% 79 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents We h ave n o material co ncen tration s of i ssuers o r g uarant ors of fix ed maturity securities. Th e in du stry segment compo sition of all securities in an un realized loss po sition hel d as o f December 31 , 20 18 is p resent ed in the fo llo wing tab le: Fair Va lue % Fa ir Va lue Amortized Co st % Amo rtized Co st Unrealized Lo ss % Unrealized Lo ss (Do l la rs I n Tho usa nds ) Bankin g $4 ,4 46,65 8 10 .9% $4 ,65 3,3 09 10.8% $(20 6,6 51 ) 7 .5% Oth er fin ance 1 06,04 1 0 .3 11 1,2 60 0.3 (5,2 19 ) 0 .2 El ectric utility 4 ,0 70,11 5 10 .2 4 ,42 6,6 09 10.4 (35 6,4 94 ) 13 .0 Energy 3 ,3 80,55 2 8 .5 3 ,67 9,0 48 8.6 (29 8,4 96 ) 10 .9 Natu ral gas 7 23,33 0 1 .8 78 2,4 18 1.8 (5 9,0 88 ) 2 .1 In su ran ce 3 ,4 20,32 1 8 .6 3 ,69 9,7 93 8.7 (27 9,4 72 ) 10 .2 Commu nication s 1 ,8 34,02 9 4 .6 2 ,03 0,5 90 4.8 (19 6,5 61 ) 7 .1 Basic ind ustrial 1 ,3 93,95 3 3 .5 1 ,50 9,0 59 3.5 (11 5,1 06 ) 4 .2 Con sumer n on cycl ical 4 ,2 56,25 8 10 .7 4 ,62 9,8 77 10.8 (37 3,6 19 ) 13 .6 Con sumer cy cli cal 1 ,3 91,70 5 3 .5 1 ,49 6,4 25 3.5 (10 4,7 20 ) 3 .8 Finan ce co mp anies 1 43,67 9 0 .4 15 4,9 74 0.4 (1 1,2 95 ) 0 .4 Capi tal go od s 2 ,2 58,80 7 5 .7 2 ,40 6,7 22 5.6 (14 7,9 15 ) 5 .4 Tran sp ortatio n 1 ,3 94,13 7 3 .5 1 ,48 9,6 70 3.5 (9 5,5 33 ) 3 .5 Oth er ind ustrial 1 91,05 5 0 .5 20 3,2 21 0.5 (1 2,1 66 ) 0 .4 Bro kerage 8 07,66 7 2 .0 84 8,2 31 2.0 (4 0,5 64 ) 1 .5 Techn olog y 1 ,3 59,02 0 3 .4 1 ,44 9,9 03 3.4 (9 0,8 83 ) 3 .3 Real est ate 73,09 8 0 .2 7 4,3 23 0.2 (1,2 25 ) — Oth er u tility 18,44 2 — 2 0,0 47 — (1,6 05 ) — Commercial mortg age-backed securities 1 ,8 51,82 1 4 .6 1 ,90 9,9 22 4.5 (5 8,1 01 ) 2 .1 Oth er asset-b acked secu rities 8 36,14 1 2 .1 87 1,5 39 2.0 (3 5,3 98 ) 1 .3 Resid ential mo rtgag e-b ack ed n on -ag ency securiti es 1 ,7 49,47 8 4 .4 1 ,79 8,8 17 4.2 (4 9,3 39 ) 1 .8 Resid ential mo rtgag e-b ack ed ag ency securiti es 5 39,89 6 1 .4 55 2,7 53 1.3 (1 2,8 57 ) 0 .5 U.S. go vernment-related secu rities 1 ,2 15,94 4 3 .0 1 ,26 1,6 66 3.0 (4 5,7 22 ) 1 .7 Oth er g ov ern ment-rel ated secu rit ies 3 57,77 0 0 .9 39 1,6 20 0.9 (3 3,8 50 ) 1 .2 States, mun icipals, and po litical d iv isio ns 2 ,1 33,41 3 5 .3 2 ,25 2,3 15 5.3 (11 8,9 02 ) 4 .3 Total $39 ,9 53,33 0 1 00 .0% $42 ,70 4,1 11 100.0% $(2 ,75 0,7 81 ) 1 00 .0% 80 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents We h ave n o material co ncen tration s of i ssuers o r g uarant ors of fix ed maturity securities. Th e in du stry segment compo sition of all securities in an un realized loss po sition hel d as o f December 31 , 20 17 is p resent ed in the fo llo wing tab le: Fa ir Value % Fair Value Amo rtized Cost % Amortized Cost Unrea lized Lo ss % Unrealized Lo ss (D o l l ars In Tho us a nds) Bankin g $1,7 33 ,30 9 8.0 % $1,7 58 ,54 9 7 .9% $(2 5,2 40 ) 3 .7% Oth er fin ance 54 ,45 4 0.3 58 ,19 8 0 .3 (3,7 44 ) 0 .5 El ectric utility 3,1 11 ,71 9 14.3 3,2 42 ,95 2 14 .5 (13 1,2 33 ) 19 .2 Energy 1,3 97 ,31 2 6.4 1,4 58 ,69 0 6 .5 (6 1,3 78 ) 9 .0 Natu ral gas 6 04 ,43 1 2.8 6 24 ,20 3 2 .8 (1 9,7 72 ) 2 .9 In su ran ce 1,6 97 ,23 3 7.8 1,7 43 ,14 0 7 .8 (4 5,9 07 ) 6 .7 Commu nication s 1,2 38 ,08 2 5.7 1,3 03 ,26 4 5 .8 (6 5,1 82 ) 9 .6 Basic ind ustrial 5 81 ,24 9 2.7 6 03 ,24 8 2 .7 (2 1,9 99 ) 3 .2 Con sumer n on cycl ical 2,0 16 ,11 2 9.3 2,0 77 ,55 2 9 .3 (6 1,4 40 ) 9 .0 Con sumer cy cli cal 6 30 ,91 5 2.9 6 51 ,41 5 2 .9 (2 0,5 00 ) 3 .0 Finan ce co mp anies 39 ,71 0 0.2 40 ,58 1 0 .2 (8 71 ) 0 .1 Capi tal go od s 1,1 21 ,91 9 5.2 1,1 46 ,54 5 5 .1 (2 4,6 26 ) 3 .6 Tran sp ortatio n 7 91 ,77 6 3.6 8 12 ,35 8 3 .6 (2 0,5 82 ) 3 .0 Oth er ind ustrial 1 74 ,79 7 0.8 1 85 ,70 1 0 .8 (1 0,9 04 ) 1 .6 Bro kerage 3 80 ,33 1 1.8 3 84 ,86 0 1 .7 (4,5 29 ) 0 .7 Techn olog y 5 76 ,85 5 2.7 5 98 ,11 2 2 .7 (2 1,2 57 ) 3 .1 Real est ate 43 ,09 6 0.2 43 ,61 0 0 .2 (5 14 ) 0 .1 46 ,73 1 0.1 47 ,51 4 0 .2 (7 83 ) 0 .3 Commercial mortg age-backed securities 1,5 53 ,92 8 7.2 1,5 84 ,11 4 7 .1 (3 0,1 86 ) 4 .4 Oth er asset-b acked secu rities 2 20 ,82 2 1.0 2 26 ,58 6 1 .0 (5,7 64 ) 0 .8 Resid ential mo rtgag e-b ack ed n on -ag ency securiti es 8 22 ,79 4 3.8 8 38 ,84 6 3 .7 (1 6,0 52 ) 2 .4 Resid ential mo rtgag e-b ack ed ag ency securiti es 3 60 ,02 5 1.7 3 67 ,00 6 1 .6 (6,9 81 ) 1 .0 U.S. go vernment-related secu rities 1,1 66 ,34 2 5.4 1,1 98 ,51 9 5 .4 (3 2,1 77 ) 4 .7 Oth er g ov ern ment-rel ated secu rit ies 1 40 ,12 4 0.6 1 45 ,07 1 0 .6 (4,9 47 ) 0 .7 States, mun icipals, and po litical d iv isio ns 1,1 98 ,01 5 5.5 1,2 43 ,62 8 5 .6 (4 5,6 13 ) 6 .7 Total $2 1,7 02 ,08 1 100.0 % $2 2,3 84 ,26 2 1 00 .0% $(68 2,1 81 ) 1 00 .0% 81 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Risk Ma na gement a nd Impai rment Rev iew We moni to r the o verall cred it q ual ity o f our p ortfoli o wi th in est ab lish ed g uidelin es. Th e fo llowing t abl e in clu des o ur availab le-for-sale fixed matu rities b y credit rating as of December 31 , 2 01 8: Ra ting Fair Value Percent of Fair Value (D o l l a rs I n Tho us a nds ) AAA $6,5 20 ,96 3 13 .2% AA 5,9 20 ,14 1 12 .0 A 1 6,8 96 ,00 6 34 .1 BBB 1 8,5 83 ,02 1 37 .5 In vestmen t g rad e 4 7,9 20 ,13 1 96 .8 BB 1,1 70 ,49 1 2 .4 B 2 45 ,30 9 0 .5 CCC o r lower 1 52 ,57 6 0 .3 Belo w inv est ment grade 1,5 68 ,37 6 3 .2 To tal $4 9,4 88 ,50 7 1 00 .0% No t includ ed in th e table abo ve are $2 .3 b illion o f inv estment grade an d $14 4.3 million of below inv est ment g rade fixed maturities classified as trading securities an d $2.6 billion o f fixed matu rit ies classi fied as h eld-to-maturity. Limitin g bo nd exp osu re to any cred itor gro up is ano th er way we manag e credit risk . We held n o credit default swap s o n the p ositio ns listed b elo w as of Decemb er 3 1, 2 01 8. Th e fo llowing tab le su mmarizes ou r ten l arg est matu rity exp osu res to an in div id ual creditor grou p as o f December 31 , 20 18 : Fair Value of Credito r Funded Securities Unfunded Exposures To tal Fair Value (D o l l a rs I n Millions) Fed eral Ho me Lo an Bank $332 .5 $— $3 32 .5 AT&T, Inc. 270 .5 — 2 70 .5 Well s Fargo & Co 249 .6 3 .2 2 52 .8 Berk shire Hathaway Inc. 252 .5 — 2 52 .5 Duk e Energy Co rp 245 .9 — 2 45 .9 M organ St an ley 233 .0 — 2 33 .0 Comcast Corp 228 .0 — 2 28 .0 The Go ld man Sachs Grou p Inc. 218 .1 — 2 18 .1 Exelon Corp 216 .7 — 2 16 .7 United Health Gro up In c. 215 .9 — 2 15 .9 To tal $2,462 .7 $3 .2 $2,4 65 .9 Determin in g wh eth er a d ecli ne i n the cu rrent fair val ue o f inv est ed assets is an other-than -temp orary declin e in value is b oth ob ject iv e and sub jectiv e, and can inv olve a v ariety o f assumptio ns and estimates, p articu larly for in vestmen ts that are n ot actively traded in estab lish ed mark ets. We rev iew ou r p ositio ns o n a mo nth ly basis for po ssi ble credit co ncerns an d review o ur curren t ex po sure, credit en han cement, and delin qu ency ex perien ce. Man ag emen t co nsid ers a nu mb er o f factors wh en d etermining t he imp airmen t status of ind iv id ual secu rities. Th ese i ncl ud e th e econ omic co nd ition of v ariou s in du stry segmen ts an d geo graph ic lo cation s and o th er areas o f identified risk s. Since it is p ossib le fo r the impairment of o ne i nv estment to affect other in vestmen ts, we en gage in ongo in g risk man agement to safeg uard ag ain st and limit an y further risk to ou r in vestmen t p ortfolio. Speci al attention is given to co rrelative risk s within specifi c ind ustries, related p arties, an d b usiness market s. For certain securitized finan cial assets with co ntractual cash flo ws, in clu ding RMBS, CM B S, and other asset-back ed securi ties (co llectively referred to as asset-back ed securities or “ABS”), GAAP req uires us to p eriod ically up date ou r b est estimate o f cash flows o ver th e life o f the security . If th e fair v alu e o f a securitized fin anci al asset is less th an it s cost or amo rtized cost an d th ere h as b een a decrease in the p resen t val ue o f th e exp ected cash flows sin ce t he last revised est imate, con siderin g b oth timing an d amou nt, an o th er-t han-tempo rary impairment charge is recog nized . Esti matin g future cash flows is a qu an titative and qu alitative 82 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents process that inco rp orates information receiv ed from th ird part y sources alon g with certai n in ternal assumption s and jud gments reg ard in g the fut ure perfo rman ce of the un derlyi ng collateral . Projection s of expected fu tu re cash flo ws may ch ang e based up on new informatio n regardin g the p erforman ce o f th e un derly in g collateral. In add iti on , we con sider ou r intent and ab i lity to retain a temp oraril y dep ressed secu rity un til recov ery . Securiti es in an un realized loss p ositio n are reviewed at least quarterly to d etermine i f an o th er-th an-tempo rary imp airmen t i s present based on certain quanti tat iv e and qu alitativ e facto rs. We co nsid er a n umber o f factors in d etermining wh eth er the impairmen t is other-than -temp orary. These in clu de, bu t are no t l imited to : 1 ) action s taken by rating ag encies, 2 ) d efault b y th e issuer, 3 ) the significance of th e d ecli ne, 4) an assessmen t of ou r i ntent to sell the security (in clu ding a mo re lik ely than no t assessment of wh eth er we will be req uired to sell the secu rity ) b efo re reco verin g the security’s amortized cost, 5) th e time period du ring whi ch t he declin e has o ccurred , 6) an econ omic an aly sis of th e issuer’s in du stry, an d 7 ) the fin ancial stren gth, li qu id ity, and recov erab ility o f th e issu er. M anagement p erforms a secu rit y-by -secu rity review each qu arter in ev alu ating the need for an y other-than -temp orary impairmen ts. Alth ou gh n o set fo rmula is u sed in this p ro cess, the in vestmen t perfo rmance, co llateral p ositio n, and con tin ued viabilit y o f th e issu er are sig nificant measures co nsidered, alo ng with an anal ysis reg ardin g ou r ex pectation s fo r recov ery o f the secu rity’s ent ire amo rti zed co st basis th ro ug h the receip t o f future cash flows. Based o n ou r an aly sis, for th e year en ded Decemb er 3 1, 2 01 8, we reco gn ized app rox imately $2 9.7 million o f cred i t related impairmen ts on in vestmen t secu rities in an u nrealized loss po siti on th at were oth er-th an-tempo rarily imp aired resultin g i n a charge t o earn in gs. There are certai n risks and un certain ties associated wit h d etermining whether d eclin es in fair values are other-th an-temp orary. These in clude sig nificant chan ges in g en eral econ omic co nd ition s an d b usin ess mark ets, trend s in certain in du stry segments, interest rate fl uctuatio ns, ratin g ag ency actio ns, chan ges in sign ifican t acco unt in g estimates and assumptio ns, commission o f fraud , and legislativ e actio ns. We con tinuously mo nito r th ese facto rs as th ey relate to the inv estment po rtfol io in det ermin in g the statu s of each i nv estment. We h ave dep osits with cert ain financial institu tion s which exceed federally in su red limits. We hav e reviewed th e creditwo rthiness of th ese fin ancial in stit utio ns an d b elieve t hat th ere is mi nimal risk o f a material lo ss. Certain Europ ean cou ntries h ave exp erienced varying deg rees o f fi nancial stress, wh ich co uld hav e a detrimental impact on reg io nal or glo bal eco no mic co nd itio ns and on so vereig n and n on -sov ereig n obl ig ation s. The ch art sho wn belo w includ es our no n-sov ereign fair value ex po su res in th ese co un tries as of Decemb er 31 , 20 18 . As of Decemb er 31 , 20 18 , we had no material un fu nd ed ex po sure and h ad n o material direct so vereig n fair v alu e ex po su re. 83 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Tota l Gross Non-sov ereign Debt Funded Financia l Instrument a nd Country Financial Non-fina ncia l Expo sure (D ollars In M i llio ns) Securities: Un ited Kin gd om $77 5.7 $1 ,00 6.6 $1,7 82 .3 Fran ce 32 2.0 40 2.9 7 24 .9 Netherland s 29 0.7 28 2.2 5 72 .9 Switzerland 31 5.0 22 5.9 5 40 .9 Germany 11 0.0 42 2.7 5 32 .7 Spain 6 4.5 27 4.5 3 39 .0 Belgi um — 19 9.7 1 99 .7 No rway 4.0 13 9.6 1 43 .6 Ireland 3 8.8 8 4.6 1 23 .4 Italy 9.9 10 8.1 1 18 .0 Fin lan d 11 4.4 — 1 14 .4 Lu xembo urg — 6 7.5 67 .5 Swed en 3 9.8 1 9.3 59 .1 Denmark 3 0.5 — 30 .5 Portu gal — 2 2.6 22 .6 Slo ven ia — 0.5 0 .5 Total secu rities 2 ,11 5.3 3 ,25 6.7 5,3 72 .0 Deriva tiv es: Un ited Kin gd om 2 4.6 — 24 .6 Germany 2 1.3 — 21 .3 Fran ce 1.3 — 1 .3 Switzerland 1.1 — 1 .1 Total d erivativ es 4 8.3 — 48 .3 Total secu rities an d d erivat iv es $2 ,16 3.6 $3 ,25 6.7 $5,4 20 .3 84 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Rea lized Gai ns a nd L osses The fol lo win g tabl e sets forth realized in vestmen t g ain s and lo sses for th e perio ds sho wn: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturity g ain s - sales $2 8,0 95 $18,79 0 $41 ,69 8 Fixed maturity losses - sales (1 8,1 83 ) (5,84 9) (9 ,48 8) Equi ty gai ns an d losses (4 8,9 64 ) (2,33 0) 9 2 Impairments on fix ed maturity secu rities (2 9,7 24 ) (11,74 2) (17 ,74 8) M od co trading portfolio (18 5,9 00 ) 119,20 6 67 ,58 3 Oth er 1,3 03 (8,38 9) (9 ,22 6) To tal realized gains (lo sses) - investments $(25 3,3 73 ) $109,68 6 $72 ,91 1 Derivat iv es related to VA con t racts: Interest rate fu tures $(2 5,4 73 ) $26,01 5 $(3 ,45 0) Eq uit y futures (8 8,2 08 ) (91,77 6) (1 06 ,43 1) Cu rrency futu res 1 0,2 75 (23,17 6) 33 ,83 6 Eq uit y o ptio ns 3 8,0 83 (94,79 1) (60 ,96 2) Interest rate swaptio ns (14 ) (2,49 0) (1 ,16 1) Interest rate swaps (4 5,1 85 ) 27,98 1 20 ,42 0 To tal return swap s 7 7,2 25 (32,24 0) — Embed ded deriv ative - GLWB (7 2,3 13 ) 3,61 4 68 ,05 6 Total d erivativ es related to VA co ntract s (10 5,6 10 ) (186,86 3) (49 ,69 2) Derivat iv es related to FIA co ntracts: Embed ded deriv ative 3 5,3 97 (55,87 8) (16 ,49 4) Eq uit y futures 3 30 64 2 4 ,24 8 Vo lat ility futu res — — — Eq uit y o ptio ns (3 8,8 85 ) 44,58 5 8 ,14 9 Total d erivativ es related to FIA co ntracts (3,1 58 ) (10,65 1) (4 ,09 7) Derivat iv es related to IUL con tracts: Embed ded deriv ative 9,0 62 (14,11 7) 9 ,52 9 Eq uit y futures 2 61 (81 8) 12 9 Eq uit y o ptio ns (6,3 38 ) 9,58 0 3 ,47 7 Total d erivativ es related to IUL cont racts 2,9 85 (5,35 5) 13 ,13 5 Emb edd ed d erivativ e - M od co rein surance t reaties 16 6,7 57 (103,00 9) 39 0 Oth er d erivat iv es 14 5 0 (2 4) To tal realized gains (lo sses) - d erivatives $6 0,9 88 $(305,82 8) $(40 ,28 8) Real ized g ain s an d losses on in vestmen t s reflect po rtfolio man agemen t activ ities design ed to main tain p roper matching of assets and liab ilities and to en hance lo ng -term in vestmen t po rtfolio p erforman ce. Th e n et realized inv estment g ain s (losses), exclud ing imp airmen ts, equ ities, and Mo dco trad ing po rtfo lio activ ity du ring th e year end ed December 3 1, 2 01 8, primarily reflects th e n ormal operation of o ur asset/liability p rog ram within th e co ntext o f th e ch ang in g interest rate and spread en viro nment, as well as tax p lan ning st rategi es design ed to u tilize cap ital lo ss carryforward s. 85 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Real ized lo sses includ e other-th an -temp orary imp airments an d actual sal es of inv estments. Th ese other-th an -temp orary imp airmen ts resu lted from ou r an aly si s o f circu mstances and ou r belief t hat cred it even ts, loss severity, chan ges in cred i t en han cement, and/or oth er ad verse con ditio ns of the resp ective issuers h ave cau sed, or wil l lead to, a d eficien cy in the con tractu al cash flo ws related to these i nv estments. These other-than -temp orary imp airmen ts are presented i n t he chart b elo w: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Oth er M BS $(1 69 ) $(8 1) $(17 8) Corpo rate securities (2 9,5 55 ) (8,03 1) (16 ,83 0) Equi ties — (2,63 0) — Oth er — (1,00 0) (74 0) To tal $(2 9,7 24 ) $(11,74 2) $(17 ,74 8) As previo usly discu ssed, man agemen t con sid ers sev eral factors when determin ing o th er-th an-tempo rary impairments. Altho ug h we pu rch ase securities with th e intent to ho ld th em unt il maturity, we may chang e ou r p osit io n as a resu l t of a change in circumstan ces. Any such decisio n is con sisten t with ou r classificatio n of al l bu t a sp ecific po rti on o f ou r in vestmen t portfolio as availab le-fo r-sale. For the year en ded Decemb er 3 1, 2 01 8, we so ld securities in an un realized l oss p ositio n with a fair v alu e o f $47 2.4 millio n. Fo r such secu rities, th e p roceeds, reali zed lo ss, and to tal ti me perio d t hat the secu rity had been in an un realized loss po si tion are presented in the table bel ow: Proceeds % Pro ceeds Realized Loss % Rea lized Loss (D o l l a rs I n Tho us a nds ) <= 90 day s $29 3,1 56 62 .1% $(6,8 86 ) 37 .9% >9 0 d ays b ut <= 18 0 d ays 8 1,6 39 17 .3 (7,4 88 ) 41 .2 >1 80 day s bu t <= 2 70 day s 3 6,2 39 7 .7 (1,4 81 ) 8 .1 >2 70 day s bu t <= 1 year 1 7,7 11 3 .7 (2 33 ) 1 .3 >1 year 4 3,6 26 9 .2 (2,0 95 ) 11 .5 To tal $47 2,3 71 1 00 .0% $(1 8,1 83 ) 1 00 .0% For the year end ed December 31, 2 01 8, we so ld securities in an u nrealized lo ss p ositio n with a fair v alue (proceeds) o f $4 72 .4 million . The l oss realized o n the sal e o f these secu rities was $1 8.2 millio n. We mad e th e decisio n to exit th ese h oldin gs in co njun ction wit h our overall asset liability manag ement pro cess. For th e y ear en ded December 31 , 2 01 8, we so ld securities in an u nrealized gain position with a fair val ue of $1.3 billio n. The g ain real ized o n th e sale of t hese securities was $2 8.1 mi llio n. For th e y ear end ed Decemb er 3 1, 2 018, net losses of $18 5.9 million related to ch ang es i n fair v alu e on o ur M od co trad ing po rtfolio s were in clu ded in real ized g ain s an d losses. Of this amo un t, ap prox i mately $8.7 mil lion of l osses were realized th ro ug h th e sale o f certain secu rities, which will b e rei mbursed b y o ur rei nsu ran ce p artners o ver ti me th ro ugh the rein su rance settlemen t p ro cess fo r this b lo ck o f b usiness. The M od co emb edd ed d eri vat iv e associated with the trading po rtfolio s had realized p re-tax gains o f $166 .8 mil lion du ring th e year en ded December 3 1, 20 18 . The g ain s o n the embed ded deriv ati ve were due to treasury yi eld s in creasing and credit spreads wi denin g. Real ized inv estment gains an d losses related to equ ity secu rities is primaril y d riven by ch ang es in fair v alu e du e to mark et flu ctu ation s as chan ges in fai r v alu e o f eq uit y secu rities are recorded in n et in come. Du rin g 2 01 8, bo th co mmo n and p referred eq uity mark ets exp erienced sig nificant v olatil ity and declinin g prices du ring th e fo urth qu arter. Th e real ized losses du rin g t he perio d o n o ur equ ity secu rit ies were p rimarily the result of th ese market d eclines. Real ized in vestmen t gai ns an d lo sses related to d eri vat iv es rep resent chan ges in th eir fair v alu e du ring the p eriod an d termin ation g ain s/(l osses) on th ose d erivativ es th at were closed du ring the perio d. We u se vario us derivativ e instrumen t s to manage risks related to certain life insurance an d ann uity products. We can use th ese deriv atives as eco no mic h edg es ag ain st risks inherent in the prod ucts. These risk s have a direct imp act on the cost of th ese p ro du cts an d are correlated wi th the equ ity mark ets, interest rat es, foreig n curren cy lev els, and o verall vo lat ility. The hedg ed risk s are record ed th ro ug h the recog nitio n of embed ded d erivativ es associated wit h the p ro du cts. These p ro du cts in clu de t he GLWB rid er asso ciated with th e variab le an nu ity, fixed in dex ed an nu ity p ro du cts as well as in dex ed un iv ersal life p ro du cts. Du ring th e year en ded December 3 1, 2 01 8, we ex perien ced net realized losses on deriv atives related to VA con tracts o f app ro ximately $1 05 .6 million . These net lo sses o n d erivativ es related to VA con tracts were affected b y cap ital mark et imp acts, ch ang es i n the Co mpan y’s no n-perfo rmance risk, variatio ns in actual sub -accou nt fund performance from the in dices includ ed in o ur h edg in g program, as well as up dates to certain p oli cy hol der assumptio ns du ring th e year en ded December 3 1, 2 01 8. We also u se vario us swaps and o th er ty pes of d erivativ es to mitig ate risk related t o other exp osures. Th ese co ntracts g enerated immaterial gains fo r th e y ear en ded Decemb er 3 1, 2 01 8. 86 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents LIQUIDITY AND CAPITAL RESOURCES The Ho lding Co mpa ny Overview Ou r p rimary so urces of fu nd ing are dividen ds fro m o ur op eratin g su bsid iaries; rev enu es from in vestmen t management, d ata p ro cessing , legal, and manag ement servi ces rend ered to sub sidi aries; inv estment in come; and ex t ernal finan cin g. Th ese sou rces o f cash sup po rt ou r g eneral corpo rate needs in clu ding ou r co mmo n sto ck d iv id end s and debt service. We exp ect to use a po rtion of o ur p ositiv e cash flo w fro m o peration s to p ay d iv i dend s to o ur p arent, Dai-ichi Li fe. We p aid a $1 40 .0 million dividen d d uring th e y ear ended Decemb er 3 1, 20 18. The states in whi ch o ur insurance sub sid i ari es are do miciled impo se certain restrict io ns on the in su ran ce sub sidiaries’ ab ility to pay us d iv id end s. These restrictions are b ased in p art o n th e pri or y ear’s statutory in come and /or su rp lu s. Gen erally, th ese restrictio ns p ose no sh ort-term liq uidity co ncerns. We plan to retain po rtion s of th e earn in gs o f o ur insu ran ce sub sid iari es in th ose co mp an ies primarily to sup port their future growth. Deb t a nd other ca pita l resources Ou r p rimary sou rces o f capital are throu gh retain ed inco me from ou r o perating su bsidiaries, capital in fu sion s fro m our paren t, Dai -ichi Life, as well as ou r abil ity to access d eb t finan cing markets. Add itio nally, we have access to the Cred it Facility discu ssed b elo w. On May 3 , 2018 , we amend ed th e Credit Facil ity (as amend ed th e “Cred it Facility ”). We hav e the ability to bo rrow un der a Cred it Facility arran gement on an u nsecu red basis up to an ag gregat e prin cip al amou nt of $1.0 billio n. We have the ri gh t in certain circumstan ces to req uest that the co mmitmen t under th e Credit Facility be increased u p to a max imum prin cip al amou nt of $1.5 billi on . We are n ot aware o f an y n on -co mp liance with the finan cial d ebt cov enants o f the Cred it Facilit y as o f December 31 , 20 18 . There was n o o utstand in g b alance as o f Decemb er 31, 20 18 . Ou r agg reg ate prin cip al balance with ou r deb t, subord in ated d ebt secu rities, an d a Credit Facility in creased $31 7.1 million du ring the year en ded Decemb er 3 1, 2 01 8, as compared to a d ecrease of $1 21 .5 million du ring t he year ended December 31 , 2 017. Ch ang es in prin cip al d urin g 2 01 8 an d 2 01 7 are d etailed below: Description Cha nge in Principa l (D ollars In Thous ands) 20 18 8 .45 % Sen io r No tes (20 09 ), d ue 2 03 9 (Par value: $19 0,0 44 )$(42 ,88 4) 6 .40 % Sen io r No tes (20 07 ), d ue 2 01 8 (Par value: $15 0,0 00 )(1 50 ,00 0) 4 .30 % Su bo rd inated Deb t, d ue 2 02 8 (Par value: $4 00 ,00 0)4 00 ,00 0 3 .55 % Su bo rd inated Fu nd in g Ob ligatio n, d ue 2 03 8 (Par value: $55 ,00 0)55 ,00 0 3 .55 % Su bo rd inated Fu nd in g Ob ligatio n, d ue 2 03 8 (Par value: $55 ,00 0)55 ,00 0 20 17 8 .45 % Sen io r Notes (20 09 ), d ue 2 03 9 (Par valu e: $23 2,9 28 )$(13 ,99 8) 6 .25 % Su bo rd in ated Deb t, d ue 2 04 2 (Par val ue: $287,5 00)(2 87 ,50 0) 6 .00 % Su bo rd in ated Deb t, d ue 2 04 2 (Par val ue: $150,0 00)(1 50 ,00 0) 5 .35 % Su bo rd in ated Deb t, d ue 2 05 2 (Par val ue: $500,0 00)5 00 ,00 0 Net chang e in th e Credit Facility balan ce du ring 20 18 and 2017 are detailed b elow: Description Cha ng e in Principa l Interest Rate (D ollars In Thousands) 20 18 Credi t Facility $— o ne-mo nth LIBOR + 1.0 0% 20 17 Credi t Facility $(170,00 0) o ne-mo nth LIBOR + 1.0 0% 87 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Liquidi ty Liq uidity refers to a compan y’s abil ity to generate adeq uate amo un ts o f cash t o meet i ts need s. We meet o ur liqu id ity requ iremen ts primarily th ro ug h po siti ve cash flo ws fro m ou r op eratin g sub sidiaries. Primary sou rces of cash fro m th e o perati ng su bsid iaries are p remiu ms, dep osits for p oli cy hol der acco un ts, inv estment sales and maturities, an d inv estment income. Primary uses of cash includ e benefit p ay men ts, with drawals from po licyh older acco un ts, in vestmen t p urchases, p oli cy acqu isitio n co sts, in terest pay ments, an d o th er o perating exp enses. We b elieve that we have sufficien t li qu id ity to fu nd ou r cash needs u nd er n ormal op eratin g scen arios. In th e even t of sign ifican t un anticipat ed cash req uirements b eyo nd o ur n ormal liqui dity n eed s, we h ave ad dition al sou rces of liq uidity av ailable depen ding o n market con ditions and the amou nt and timing of the liqu idi ty n eed . Th ese ad dition al sou rces of liq uid ity in clu de cash flo ws from op eratio ns, th e sale o f liq uid assets, accessin g ou r credi t facility, and other sources describ ed herein . Ou r d ecision to sell inv estment assets coul d be impacted by acco un ting ru les, includ ing ru les relat in g to the l ik eliho od of a requ iremen t to sell secu rit ies b efo re reco very o f o ur cost basis. Un der stressful market and eco no mic con ditio ns, li qu id ity may broad ly deteriorate, wh ich cou ld n eg atively impact ou r ab ility to sell in vestmen t assets. If we req uire on sh ort no tice sig nificant amo un ts of cash in excess o f no rmal requ irements, we may hav e difficul ty selli ng in vestmen t assets in a timely mann er, be forced to sell th em for less than we o th erwise wou ld hav e b een able to realize, or bot h. The liq uidity requ iremen ts of o ur reg ulated i nsu ran ce subsidiaries p rimarily relate to th e liabilit ies associated with th eir vario us in su ran ce and in vestmen t p ro du cts, op erat in g ex penses, and in come tax es. Li ab ilities arising fro m insu ran ce and in vestmen t prod ucts includ e th e pay ment o f p oli cy hol der benefits, as well as cash p ayments in con nect io n with policy su rrend ers an d wi th drawals, pol icy lo an s, and ob lig ati on s to red eem fu ndi ng ag reements. Ou r insurance su bsidiaries main tai n inv estment strategi es in ten ded to prov id e adeq uat e fu nd s to pay ben efits and ex pected su rrenders, withd rawals, lo ans, and redemp t io n ob ligations with ou t forced sales of in vestmen ts. In add itio n, o ur insurance sub sid iari es h old hig hly liqu i d, high -q uality sh ort-term in vestmen t securiti es an d other li qu id inv est ment grade fixed matu rity secu rit ies to fu nd o ur ex pected op erat in g exp enses, su rrend ers, and with drawals. As of Decemb er 3 1, 2 01 8, o ur to tal cash and in vested assets were $66 .3 b illio n. Th e li fe insu ran ce sub sid iaries were co mmitt ed as of December 31 , 2018 , to fund mortgag e loan s i n t he amo un t o f $68 5.3 million. Ou r cash flo ws are used to fun d an in vestmen t po rtfo lio th at prov id es for fu t ure ben efit p ayments. We employ a formal asset/l iab ility prog ram to manag e t he cash flo ws o f ou r in vestmen t po rtfolio relativ e t o o ur lo ng -term b en efit ob lig ation s. Th e h olding co mp an y held $1 21 .6 millio n of cash an d sho rt- term inv estment s, and ou r su bsid iaries h eld app ro ximately $8 59 .4 mil lion in cash and sh ort-term inv estments as o f Decemb er 31, 20 18 . The fol lo win g chart includ es t he cash flo ws provi ded b y o r u sed in operating, in vesting , and financing activities for th e fo llowing perio ds: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net cash (used i n) prov id ed b y o perating activi ties $(14 4,1 29 ) $195,27 2 $2 49 ,63 8 Net cash u sed in in vestin g act iv ities (1 ,94 7,8 94 ) (2 ,624,77 0) (4,3 66 ,98 5) Net cash p rovid ed by fin an cin g activ ities 2 ,01 3,4 27 2 ,333,62 6 4,0 69 ,45 7 To tal $(7 8,5 96 ) $(95,87 2) $(47 ,89 0) Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Net Ca sh (Used in) Provided b y Op erating Act ivi ties - Cash flo ws fro m o perating activ ities are affect ed b y th e timing o f premiums received , in vestmen t in come, and benefits and ex pen ses paid. Prin cip al so urces o f cash inflo ws from o perating activ ities includ e sales of o ur prod ucts an d services as well as in co me from investments. Due to the nature of ou r bu siness and the fact that many o f th e p ro du cts we sell produ ce finan cin g and inv estin g cash flows it is imp ort an t to co nsid er cash flows g enerated b y inv estin g and finan cin g act iv ities in co njun ction with tho se gen erated b y o perati ng activ ities. Net Ca sh Used i n Investing Activities - Changes i n cash from in vestin g activ ities primarily related to our i nv estment po rtfo lio . Net Cash Pro vid ed by Fina ncing A cti vit ies - Ch ang es in cash fro m fin anci ng activ ities in clu ded $522.4 milli on of outflo ws from secured fin ancing liabilities for th e year en ded December 31 , 20 18 , as compared t o the $22 0.0 mi llio n o f in flows for the y ear end ed Decemb er 3 1, 2 01 7 an d $2.5 billion in flows of in vestmen t prod uct an d u niversal life net activity as co mp ared t o $2.4 b illion in th e prio r year. Net activi ty related to the credit facility an d d ebt resulted in i nflo ws o f $3 17 .1 mill io n fo r th e year end ed December 31 , 2 01 8, as compared to $12 1.5 mil lion o f ou tflo ws for y ear end ed Decemb er 31 , 20 17 . Net repay men t of no n-reco urse fun ding o blig ation s eq ual ed $11 9.0 million du rin g the y ear en ded December 31, 2 01 8, as comp ared t o n et repay men t o f $4 7.0 b ill io n du rin g the year en ded Decemb er 31 , 20 17 . The Comp any paid a dividen d du rin g the year en ded Decemb er 3 1, 20 18 of $1 40 .0 million , as co mp ared to a d i viden d of $14 3.8 millio n d urin g the y ear end ed Decemb er 31 , 20 17 . 88 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Net Ca sh Provi ded b y Op erating Activi ties - Cash flows from op eratin g activ ities are affected b y th e timing of premiums received , in vestmen t in come, an d benefits an d ex pen ses p aid . Pri ncipal sou rces of cash in flows from op eratin g activ i ties i ncl ud e sales of ou r prod ucts and services as well as in come from in vestmen ts. Due to the natu re of ou r bu sin ess an d th e fact th at many of the p rod ucts we sell p ro du ce fin an cin g an d in vesti ng cash fl ows it is impo rtant to con sid er cash flows g enerated b y inv estin g an d fin ancing activ iti es in con ju nct io n with th ose g enerated b y o perating acti vities. Net Ca sh Pro vided By (Used in) Investing A cti vit ies - C hang es i n cash from in vestin g act iv ities p rimari ly related to o ur i nv estment po rtfo lio. Net Cash (Used in) Provi ded by Fina nci ng Activities - Chan ges in cash from finan cin g activ iti es in clu ded $2 20 .0 mi llio n of in flo ws from secu red finan cin g liab ilities fo r the y ear end ed Decemb er 3 1, 2 01 7, as compared to the $35 9.5 milli on of in flows for the y ear end ed Decemb er 3 1, 2 01 6 and $2.4 billio n in flows of inv estment prod uct and u niversal life net activity as co mp ared to $2.1 billi on in the p rio r y ear. Net act iv ity related to the credit facility and debt resul ted in o utflo ws o f $12 1.5 million for th e year en ded Decemb er 3 1, 20 17 , as co mp ared to $3 68 .1 million of o utflo ws fo r y ear end ed December 31 , 20 16 . Net repayment of n on -recou rse fun ding ob ligatio ns eq ualed $4 7.0 mi llio n d urin g the year en ded Decemb er 31 20 17 , as co mp ared to n et issuan ces o f $2 .1 billio n durin g th e y ear end ed Decemb er 31 , 2 01 6. Th e Compan y paid a d iv id end d uri ng the year end ed December 3 1, 20 17 o f $14 3.8 million , as co mp ared to a d i viden d of $89 .3 mil lion du ring th e year en ded December 3 1, 2 01 6. Throu gh o ur su bsidiaries, we are members o f th e FHLB o f C in cin nat i an d th e FHLB o f New York. FHLB ad van ces prov i de an attractiv e fun ding sou rce for sh ort-t erm bo rrowing and fo r th e sale o f fu nd in g ag reemen t s. M embersh ip in t he FHLB requ i res that we pu rch ase FHLB cap ital sto ck b ased o n a mi nimu m requ iremen t an d a percentage o f th e do llar amo un t of adv ances ou tstand in g. Our bo rro wing cap acity is determined b y cri teria establi shed b y each resp ecti ve b ank . In add ition , ou r ob ligatio ns un der t he advances must be collaterali zed . We maintai n co ntro l ov er an y such pledg ed assets, in clu ding the righ t of substitution . As o f December 31 , 20 18 , we had $65 0.9 millio n of fun ding agreement-rel ated adv an ces and accru ed in terest ou tstand in g un der the FHLB prog ram. Wh ile we an ticip ate that th e cash flo ws of ou r o perati ng sub si diaries will b e suffici en t to meet o ur i nv estment commitmen ts and op eratin g cash needs in a n ormal cred it market env iron men t, we reco gn ize that in vestmen t co mmitmen ts sch edu led to be fun ded may, fro m t ime to time, exceed th e fu nd s th en av ailable. Therefore, we hav e establish ed rep urchase agreement prog rams fo r certain o f ou r insu ran ce su bsid iaries to prov id e li qu id ity when n eeded. We ex pect that th e rate recei ved o n its in vestmen ts will eq ual or ex ceed its bo rrowing rate. Und er th is p rog ram, we may, fro m time to time, sell an inv estment security at a sp ecific p rice an d ag ree to repurch ase t hat security at ano ther specified p rice at a later d ate. Th ese bo rrowing s are ty pically for a term less th an 90 days. The mark et val ue o f secu rities to be repu rch ased is moni to red and collateral l evels are ad ju sted wh ere approp riate to protect th e cou nterp arty ag ain st credit exp osu re. Cash receiv ed is inv ested in fixed maturi ty securi ties, and the ag reement s p ro vided for net settlemen t in t he ev ent of d efau lt o r on termi nat io n of th e ag reemen ts. As of Decemb er 31, 20 18 , th e fair val ue of securities p led ged u nd er the rep urchase pro gram was $45 1.9 millio n an d the repurch ase o blig ation o f $4 18 .1 millio n was in clu ded i n o ur co nso lid ated balance sh eets (at an averag e b orro win g rat e of 2 45 b asis po in ts). Du rin g the year en ded December 31 , 20 18 , th e max imum balance ou tstan ding at an y o ne p oint in time related to th ese pro grams was $88 5.0 milli on . The av erage daily balan ce was $5 11 .4 million (at an average bo rrowing rat e o f 18 4 b asis p oints) d uri ng the year en ded Decemb er 31 , 2 01 8. As o f December 3 1, 201 7, th e fair value of secu rit ies pledg ed u nd er th e repu rch ase prog ram was $1 ,00 6.6 mi llio n and th e repu rch ase ob ligatio n o f $8 85.0 million was includ ed in ou r co nsolid ated balance sheets (at an averag e b orro win g rate of 1 42 basis po in ts). Du ring the y ear en ded Decemb er 3 1, 20 17 , th e max imum b alan ce ou tstand ing at an y o ne po in t in time rel ated to t hese p ro grams was $9 88 .5 millio n. The av erag e daily b alan ce was $6 24 .7 millio n (at an averag e b orro win g rate of 101 basis po in t s) d uring th e y ear ended Decemb er 3 1, 20 17. We particip ate in securities l en din g, p rimarily as an i nv estment yield en han cement, whereby securi ties that are hel d as in vestmen ts are lo aned ou t to th ird parties fo r sh ort p eri od s o f time. We req uire in itial collateral o f 102 % o f t he market v alu e o f th e lo an ed securities to b e sep arately main tained . The lo aned secu rities’ market valu e is mon i to red on a d aily b asis. As of Decemb er 3 1, 2 01 8, secu rities with a mark et value o f $72 .2 million were loaned un der th is prog ram. As collateral for th e l oaned secu rit ies, we receive sho rt-term in vestmen ts, which are recorded in “sh ort-term in vestmen ts” with a co rresp on ding liability reco rd ed in “secu red finan cing l iab ilities” to acco un t for its o blig ation t o retu rn th e collateral . As of December 31 , 20 18 , th e fair v alu e of the co llateral related to this pro gram was $7 7.2 millio n an d we had an obl ig ation to return $77 .2 million of collateral to th e securities b orrowers. Pendin g Tran sa cti on with Great-West Life & An nu ity In su ran ce Co mpa ny As d iscussed in Note 24 , S ub seq uent Events, to th e co nso lidated fin ancial statemen ts incl ud ed herein , o n Jan uary 23 , 2019 , PLICO entered into an ag reement to acq uire v ia reinsu ran ce su bstanti all y all o f GWL&A’s in dividual life insu ran ce and an nu ity b usiness. En t ry into th e rein su ran ce agreements at closin g will represent an estimated cap i tal inv estment by the Compan y of app ro ximately $1.2 bi llio n, su bject to adj ustmen t. Th e tran saction is expected to close in the first h alf o f 20 19 , su bject to th e receipt o f reg ulato ry approv als and satisfaction o f cu stomary closing co nd itio ns. We intend t o fu nd the acq uisition th ro ug h a combin ati on of a n ew term lo an facil ity, a capit al con tribu tion from Dai-ichi Life and avai lab le cash o n h and . The timin g of the bo rrowi ng s an d th e amo un ts to be drawn fro m a n ew term lo an facility an d ou r existin g facility are to be determin ed an d will dep end o n th e timin g of th e ex pected closing of th e transactio n an d mark et con ditio ns at such time. Statutory Ca pital A li fe in su ran ce compan y’s stat utory capital is co mp uted according to ru les p rescrib ed b y t he NAIC, as mod ified by st ate law. Generally sp eaking , other states in which a co mp any do es b usin ess d efer to the interp retation o f th e do miciliary state with resp ect to NAIC rules, un less inco nsistent with th e other state’s regu latio ns. Statu to ry acco un tin g rules are different from GAAP 89 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents an d are intend ed to reflect a mo re co nservativ e view, for example, req uiring immed i ate exp ensin g o f po licy acq uisition costs. The NAIC’s risk -b ased cap ital requi remen ts requ ire insurance co mp anies to calcu late an d rep ort i nformatio n un der a risk -b ased capital formula. Th e achievement o f lon g-term growth will requi re growt h in the st atu to ry cap ital of o ur in surance sub sidiaries. The sub sidi ari es may secure addi tion al st atuto ry capital th ro ug h v ari ou s sou rces, such as ret ained statutory earni ng s or o ur equity con tribu tion s. In g eneral, dividen ds u p to sp ecified level s are co nsid ered o rd in ary an d may be paid witho ut prio r ap proval of the insurance commissioner of the stat e of d omicile. Dividen ds in larg er amou nts are con sidered ex traordinary and are sub ject t o affirmativ e prio r ap proval by such commission er. The maximu m amou nt that wo uld qu alify as an ordinary di viden d to us from ou r in surance su bsid iaries in 20 19 is ap proxi mately $43 4.0 milli on . St ate insurance regu lators an d th e NAIC have ado pted risk-based cap ital (“RBC”) requ iremen ts for l ife insu ran ce compan ies to ev alu ate th e ad equ acy o f statutory capital and su rpl us in relatio n to in vestmen t and insu ran ce risk s. Th e req uirements p rovid e a mean s o f measuring t he min imum amo un t of statu to ry surplus app ro pri ate for an insu ran ce compan y to su pp ort its ov eral l bu sin ess op eratio ns based o n its size an d risk profi le. A co mp any ’s risk-based statutory surp lu s is cal cu l ated by app ly i ng factors an d perfo rmin g calculation s relatin g to v ariou s asset, p remiu m, claim, ex pense, and reserv e items. Reg ulato rs can then measure the adeq uacy o f a co mp any ’s statutory surplus b y comparin g i t to RBC. We manag e o ur cap ital consu mp tion by u sing th e ratio of o ur total adj usted cap i tal , as d efined b y th e insuran ce regu lators, to ou r compan y actio n lev el RBC (k no wn as t he RBC ratio), also as defin ed by i nsu ran ce regul ato rs. As o f December 31 , 2 01 8, ou r total adju sted cap ital and company acti on level RBC were ap pro ximat ely $4.7 billio n an d $1 .0 b illion , resp ecti vel y, pro viding an RBC ratio o f ap prox imately 4 59 %. St atuto ry reserv es estab lish ed fo r VA con t racts are sen si tive to ch ang es in the equ ity markets and are affect ed by the lev el of acco un t values relativ e to the lev el of an y gu aran tees and p ro du ct desig n. As a result, t he relati on ship between reserve chang es an d equ i ty mark et perfo rmance may be no n-lin ear du ring any g iv en repo rtin g perio d. Market con dition s g reatly influ ence the cap ital requ ired du e to t heir imp act o n th e valuatio n of reserv es and d eri vat iv e in vestmen ts mitig ating the risk in th ese reserv es. Ri sk mitig ati on activities may result in mat eri al an d so met imes co un terin tu iti ve impacts o n statutory surplus and RBC ratio . No t ab ly, as changes in th ese market and no n-market factors o ccur, b oth ou r p otential o blig ation and the related statutory reserves an d/or req uired capital can vary at a no n-linear rat e. Ou r stat utory su rpl us is i mp acted b y credi t sp read s as a resu lt of accou ntin g for th e asset s and liabilities o n o ur fixed M VA an nu ities. Statutory separate acco un t assets su pportin g the fix ed M VA an nu ities are recorded at fair valu e. In det ermin in g t he statu to ry reserve for th e fixed MVA ann uities, we are req uired t o u se curren t crediting rates b ased o n U.S. Treasu ries. In many cap ital mark et scen arios, curren t crediting rates b ased o n U.S. Treasu ries are high ly correlated with market rates imp licit in the fai r v alu e of statut ory separate accou nt assets. As a resul t, the chang e i n the statutory reserve from period to perio d will l ik ely sub stan tially o ffset the chan ge in th e fair value of th e stat utory sep arate accou nt assets. Howev er, in period s of v olatil e cred i t markets, actual cred it spread s o n in vestmen t assets may in crease or decrease sharply fo r certain su b-secto rs of the o verall cred it mark et, resu ltin g in statu to ry sep arate acco un t asset mark et v alu e gains or lo sses. As actu al credit spreads are not fu lly reflect ed in cu rrent cred iting rates based o n U.S. Treasu ries, the cal cu l ati on of statutory reserves will no t sub stantially o ffset th e chan ge in fair v alu e of the statutory sep arate acco un t asset s resultin g in a ch an ge in statu t ory surplus. Th e resu lt of this mismatch had a neg ative impact to o ur stat utory su rp lu s of ap prox i mately $67 million on a pre-tax basis for the year en ded Decemb er 31 , 20 18 , as co mp ared to a positiv e impact to ou r statu tory su rp lu s o f approx imatel y $12 millio n o n a pre-tax b asi s fo r the y ear end ed Decemb er 31 , 20 17 . We cede material amo un ts o f in surance an d transfer related assets to o th er in surance co mp anies thro ug h reinsu ran ce. However, notwith stan ding the transfer of related assets, we remain li ab l e with respect to ceded insurance sho uld any rein su rer fail to meet th e o blig ations th at it assu med. We evalu ate the finan cial co nd i tion of our reinsurers an d mon itor the associ ated co ncen tration o f credit risk. For t he y ear end ed Decemb er 3 1, 2018 , we ced ed p remiu ms to th ird p arty rein surers amoun ting to $1 .4 b illion . In add ition , we h ad receivab les fro m rein surers amounting to $4 .8 b illio n as o f Decemb er 31, 20 18. We review reinsurance receivab le amou nts for co llectab ility an d estab lish bad d eb t reserves if d eemed ap prop riat e. Fo r ad dit io nal informat io n related to ou r rei nsu ran ce ex po su re, see Note 13, Reinsura nce, to the con so lidated fin anci al statemen ts in clu ded in th is repo rt. Ca ptive Reinsura nce Companies Ou r life in surance su bsid iaries are su bject to a reg ulation entitl ed “Valu ation of Life In su ran ce Policies Mo del Regulat io n,” commo nly k no wn as “Reg ulation XXX,” and a su pp orting gu i delin e en titled “The Ap plicatio n o f th e Valu ation of Life Insu ran ce Po licies Mo del R eg ulatio n,” commo nly k no wn as “Gu id eline AXXX.” Th e regu latio n and su pp orting gu id eline req uire insurers to establish st atuto ry reserves for term and u niv ersal li fe in su ran ce p olicies with lon g-t erm premium g uaran tees th at are co nsistent with th e statu to ry reserv es requ ired fo r other ind iv id ual life insurance p olicies wi th similar g uarantees. Man y mark et p articipan ts b elieve that th ese l ev els of reserves are non -econ omic. We u se captiv e reinsurance compan ies to impl ement reinsurance and capital manag ement action s t o satisfy th ese reserve req uirements b y fin anci ng th e no n-eco no mic reserves either thro ug h the i ssu an ce of no n-reco urse fu nd ing ob ligatio ns b y the cap tives o r o btain in g Lett ers o f Cred it fro m third -p arty fi nancial institu tions. Ou r cap tive rein su ran ce co mp anies assu me b usin ess fro m affiliates o nly. Ou r cap tiv es are cap italized to a lev el we b eli ev e i s su fficient t o sup po rt the co ntractual ri sks and ot her g eneral o bligat io ns of th e respect iv e capti ve en tity. All of ou r captiv e rein surance companies are wh oll y owned sub si diaries an d are lo cated domestical ly . The captiv e in surance co mpan ies are sub j ect to reg ulation s in the state o f d omici le. The Nation al Asso ciatio n of In su ran ce Commission ers (“NAIC”), th ro ugh v ariou s commi ttees, sub grou ps an d ded icat ed task fo rces, is reviewin g the use o f captiv es and special p urpo se veh icles used to transfer in surance risk in relation to existin g state laws an d regu latio ns, an d several committees hav e ad op ted or exp osed for comment whit e p apers and rep ort s th at, if or when imp l emented, co uld imp ose ad ditional requ i remen ts on th e use o f cap tives and other reinsu rers. Th e Finan cial Con dition (E) Co mmittee o f the NAIC established a Variable Annu ity Issu es Wo rk in g Grou p to examine co mp any use of variable ann uity 90 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents cap tives. Th e Co mmitt ee h as prop osed ch ang es in th e regu latio n o f v ariable an nu ities an d v ari abl e an nu ity capti ves, which cou l d adv ersely affect o ur fut ure finan cial co nd iti on an d results of op eratio ns if ado pted. The NAIC h as ad op ted Actuarial Gu id eline XLVIII (“AG4 8”) an d th e sub stan tially similar “Term an d Universal Life In su rance Reserv e Fin anci ng Mo del Regul ati on ” (th e “Reserv e Mo del ”) wh ich establish nati on al stan dards for n ew reserv e fin ancing arran gemen ts for term life in su rance and u niversal life in su ran ce with seco nd ary g uarant ees. AG4 8 and the Reserv e Mo del g ov ern co llateral req uirements fo r captive rei nsu ran ce arran gemen ts. In o rd er to ob tai n reserve credi t, AG4 8 and the Reserve Mod el req uire a minimu m level o f fu nd s, co nsistin g of p rimary an d other secu rities, to be held b y or o n behalf of ced in g insu rers as security under each cap tive life rein surance treaty. As a resu lt o f AG4 8 and the Reserv e Mo del, the implemen tatio n o f new captiv e structures i n the future may b e less cap ital effici en t, lead to lower prod uct returns and /o r increased p ro du ct p ricin g o r resu lt in reduced sales of cert ain prod uct s. In so me circumst an ces, AG48 an d th e Reserve M od el cou ld imp act t he Co mp any ’s ability to en gag e in certain reinsu ran ce tran sactions with n on - affiliates. We also use a cap tive reinsu ran ce co mp any t o rein sure risk s associ ated with GLWB and GM DB riders which h elp s u s t o manage th ose ri sks on an eco no mic basis. In an effo rt to mitig ate th e equ ity mark et risk s relat iv e to our RBC ratio, in the fou rth q uarter of 20 12 , we established an i nsu ran ce sub si diary , Sh ad es Creek Captiv e In su ran ce Co mp any (“Shad es Creek ”), to wh ich PLICO has reinsu red GLWB an d GM DB riders relat ed to it s VA con tracts. The p urpo se of Sh ad es Creek is to redu ce th e v olatil ity in RBC du e to n on -eco no mic variables includ ed within th e RBC calculatio n. We maintain an in terco mp any cap ital supp ort agreement with Shad es Creek th at prov ides th ro ug h a g uarantee that we will co ntrib ute assets or pu rchase surp lu s n otes (or cause an affiliate or third p arty to con t ribu te assets or p urchase surplus no tes) in amo un ts necessary fo r Sh ades Creek’s reg ulato ry cap ital level s to eq ual or exceed minimum thresh olds as d efined b y the agreemen t. As o f Decemb er 31 , 20 18 , Sh ad es Creek main tained cap ital levels in ex cess o f the req uired minimum thresh olds. The max imum po ten tial future pay men t amount wh ich cou ld be requ ired u nd er the capit al su pp ort ag reemen t will b e d ependent o n nu merou s facto rs, in clu ding the perfo rmance o f equ ity markets, the lev el of interest rates, perfo rmance o f asso ciated hedg es, an d related po licyh older behav io r. For add itio nal in fo rmation reg ardin g risk s, un certainti es, an d oth er fact ors th at cou ld affect ou r u se of cap tive reinsurers, p lease see Part I, Item 1 A, Risk Fa cto rs, o f this repo rt. Ratin gs Variou s Nationally Reco gn ized Stat istical Rating Organization s (“rating organ izatio ns”) review th e fin anci al p erforman ce and con dit io n o f in su rers, in clu ding o ur insurance sub si diaries, an d pu blish th eir financial stren gth ratin gs as in dicato rs o f an in su rer’s ab ility to meet p olicy ho ld er and co ntract h older ob ligatio ns. Th ese rating s are impo rtant to maintain in g p ub lic co nfid ence in an insurer’s prod ucts, its abi lity to mark et its prod ucts an d i ts competitive po sition . The fo l lo win g t ab le summarizes th e curren t fin ancial stren gth ratings o f o ur si gn ifican t member companies fro m the major ind epend ent rating organizations: Ra tings A.M. Best Fitch Sta ndard & Po o r’s Moody’s In su ran ce co mp any fi nancial streng th ratin g: Pro tectiv e Life In su ran ce Co mpan y A+ A+ AA- A1 West Co ast Life In surance Compan y A+ A+ AA- A1 Pro tectiv e Life and An nu ity In surance Compan y A+ A+ AA- — Pro tectiv e Prop erty & Casualty In surance Compan y A — — — MONY Life In surance Compan y A+ A+ A+ A1 Ou r rating s are sub ject to rev iew and chang e by th e ratin g o rg anization s at an y ti me and witho ut no tice. A d own grade or o th er n egativ e actio n b y a rat in gs organ izatio n wi th respect to th e fin ancial stren gth ratin gs of our in su ran ce sub sidi aries cou ld ad versely affect sales, relatio nships with d i stributo rs, th e level of p olicy surren ders an d with drawals, co mp etit iv e p osit io n in th e marketplace, an d th e co st o r availab ili ty o f rein surance. The rating ag en cies may tak e vario us actio ns, po siti ve o r n egat iv e, wit h respect to the fin ancial stren gth rat in gs o f ou r insurance su bsid iaries, includ in g as a resul t o f ou r stat us as a sub si diary of Dai-ichi Life. Ratin g o rg anization s also p ub lish credit rating s for th e issuers of deb t secu rities, includ in g the Compan y. Credit rat in gs are in dicato rs of a d ebt issuer’s ab ility t o meet t he terms of d ebt o bligat io ns i n a timely mann er. Th ese rating s are impo rtant in the deb t issuer’s o verall ab i lity to access credit mark ets an d o th er typ es o f liq uid ity. Rat in gs are n ot reco mmen datio ns to b uy ou r securities or prod ucts. A do wng rad e o r o ther n egativ e actio n b y a ratin gs organization with respect to ou r cred i t rating co uld li mi t o ur access to cap ital mark ets, i ncrease the cost o f issu in g d ebt, an d a d owng rad e of suffici en t magn itu de, co mb in ed with other n egat iv e factors, cou ld requ ire u s to p ost co llateral. The rating agen cies may take vario us action s, po sitive or n egat iv e, with resp ect t o our debt rati ng s, in clu ding as a resu lt of ou r status as a su bsid iary o f Dai-ichi Life. 91 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents LIABILITIES Man y o f ou r p ro ducts con tain surren der charges an d other features that are design ed to reward p ersistency and pen alize th e early withdrawal o f fu nd s. Certain stable v alu e an d ann uity con tracts hav e mark et-value adjustment s th at protect us ag ain st inv estment lo sses i f in terest rates are h ig her at th e time of su rrend er than at the time o f issu e. As o f Decemb er 3 1, 2 01 8, we h ad p olicy liabil ities and accruals o f ap prox i mately $4 2.8 billi on . Our in terest -sen si tive life insu ran ce po licies hav e a weigh ted averag e minimu m credi ted in terest rate o f app rox imately 3.4 7%. Co ntractua l Oblig ati ons We en ter into v ariou s ob ligation s to third parties in th e o rd inary cou rse o f ou r o peration s. Ho wever, we d o no t b elieve th at o ur cash flow requi remen ts can be assessed so lely based u po n an anal ysis of these ob ligatio ns. Th e most sig nificant facto rs affecting o ur futu re cash flows are ou r ability to earn an d collect cash from ou r custo mers, and the cash fl ows arising from ou r inv estment prog ram. Future cash o utflows, whether th ey are co ntract ual ob ligatio ns or no t, will also vary b ased u po n o ur future need s. Alth ou gh so me o utflows are fix ed, o th ers depen d on fu tu re ev ents. Ex amp les of fixed ob ligatio ns include ou r o bligatio ns to p ay p rincipal an d interest o n fix ed-rate bo rrowi ng s. Examples of ob lig ati on s th at will vary includ e ob ligatio ns to pay in terest on v ariable-rate b orrowings an d in surance liabi lities th at d epen d on future interest rat es, market p erforman ce, or surren der p ro vision s. Many o f ou r ob ligatio ns are link ed t o cash-gen eratin g co ntracts. In additio n, o ur op eratio ns inv olve sign ifican t ex pen ditu res that are no t b ased u po n co ntract ual ob ligatio ns. These inclu de ex pen ditu res for i ncome tax es and payroll. As o f Decemb er 3 1, 2018, we carried a $7.4 million liab ility fo r un certain t ax p ositio ns, in clu ding interest o n un recognized tax ben efits. Th ese amou nts are n ot inclu ded in th e lo ng -term co ntract ual ob ligation s tabl e because of the di fficu lty in mak in g reaso nab ly reliable est imates o f th e o ccu rrence o r timing of cash settlemen ts with th e resp ective taxi ng au tho rities. The tab le b elo w sets fort h future maturities o f o ur con tractu al o blig ation s. Pa y ments due by period To tal Less tha n 1 y ea r 1 - 3 years 3 - 5 years More than 5 years (Dolla rs I n Thousands) Debt (1)$1 ,51 4,9 86 $45 6,6 13 $6 6,517 $66 ,51 7 $9 25 ,33 9 Non -recou rse fun ding ob ligati on s(2 )4 ,32 4,2 25 28 8,5 92 65 8,159 6 12 ,66 8 2,7 64 ,80 6 Su bo rd i nated deb t(3)1 ,58 4,5 94 3 0,6 55 6 1,310 61 ,31 0 1,4 31 ,31 9 Stable value pro du cts(4)5 ,52 8,1 62 1 ,35 7,4 12 3 ,18 3,833 8 49 ,74 3 1 37 ,17 4 Operati ng leases(5)2 4,2 72 5,4 54 7,100 6 ,30 0 5 ,41 8 M ortg age loan an d inv estment commitment s 79 0,2 35 65 1,1 59 13 9,076 — — Secu red financing liabilities(6)49 5,6 73 49 5,6 73 — — — Po licyh older ob lig ati on s(7 )56 ,49 4,2 27 3 ,49 5,6 83 7 ,51 4,091 5,7 64 ,25 7 3 9,7 20 ,19 6 Tota l(8)$70 ,75 6,3 74 $6 ,78 1,2 41 $11 ,63 0,086 $7,3 60 ,79 5 $4 4,9 84 ,25 2 (1)Debt in clu d es all prin cip al amo u n ts o wed o n n ote ag reemen ts and exp ected interest payments d u e o ver the term of th e n o tes. (2)Non -recourse fun d ing oblig atio n s in clu d e all u n d iscoun ted p rincipal amoun ts owed and expected future in terest p ay m en ts due ov er the term of the notes. Of the total u n d iscoun ted cash flows, $1.7 billio n relates to the Gold en Gate V tran saction. Th ese cash o u tflo ws are match ed and p redomin an tly offset by the cash inflo ws Go ld en Gate V receives from no tes issu ed by a nonconso lidated v ariab le in terest en tity. Additio n ally, $2 .6 b illion relates to the Go ld en Gate transaction . These cash o u tflows are matched an d p red ominantly offset by the cash inflo ws Go ld en Gate receives fro m n o tes issu ed by a no n co n solid ated variable in terest en tity. Th e remainin g amou n ts are asso ciated with th e Gold en Gate II notes h eld by third parties as well as certain oblig atio n s assumed with th e acquisition of MONY Life Insurance Co m p an y. (3)Su b ord in ated d eb t secu rities in clu des all principal am ounts an d interest p ay men ts d u e o v er the term o f the ob lig atio ns. (4)Anticip ated stab le v alu e p rodu ct cash flows in clu d ing interest. (5)Includes all lease payments required under o p erating lease agreements. (6)Rep resents secured b o rro win g s and accrued interest as part of o u r rep u rchase pro g ram as well as liab ilities associated with securities len ding tran sactions. (7)Estim ated contractual policyho ld er o b ligations are based on mortality, m o rbid ity, and lap se assum p tions comp arab le to our historical ex perience, m o d ified fo r recen t ob served tren ds. These o bligations are b ased on cu rrent b alan ce sheet values an d include expected in terest creditin g , bu t do n o t incorp o rate an expectation o f future m arket growth, o r future deposits. Due to th e sig nificance o f the assump tions used , th e amou n ts presen ted could materially differ from actual results. As v ariab le sep arate acco u n t o bligations are legally in sulated fro m g en eral account o b lig ations, th e variab le sep arate acco u nt obligation s will b e fully fu n ded by cash flo ws fro m v ariable separate account assets. We ex pect to fully fu nd the general acco unt ob lig atio ns from cash flows fro m general acco u n t investm en ts. (8)Excluded from th is table are certain pensio n oblig atio n s. Employ ee Benefit Plans We sponso r a tax -q ualifi ed defin ed b en efit p ensio n plan (“Qu alified Pensio n Plan”) coveri ng sub stan tially all o f o ur emplo yees. In add itio n, we spo nsor an unfu nd ed, n on qu alified excess benefit p ension p lan (“No nq ualifi ed Ex cess Pensio n Plan ”) an d prov id e o th er postretirement b en efit s to eligi ble employ ees. We rep ort th e n et fu nd ed status of o ur p ension an d other p ostreti remen t plans in the con solidated b alan ce sheet. Th e net fun ded status rep resen ts the differen ces between th e fair value o f p lan assets an d the p ro jected b en efit obligatio n. 92 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Ou r fu nd ing po l icy i s to con trib ute amou nts to t he Qu alified Pen sio n Plan su fficient to meet t he min imum fun din g requi remen ts o f th e Employ ee Retiremen t Inco me Secu rity Act (“ERISA”) p lu s su ch add i tion al amo unt s as we may d etermine to b e ap prop riat e from time to time. Co ntrib utio ns are in ten ded to p ro vide n ot o nly fo r ben efi ts attribu ted to serv ice to date, bu t also for tho se exp ected to b e earn ed in th e future. We may also mak e add itio nal co ntrib utio ns in future p eriod s to main tain an adjusted fun ding target attainment p ercentage (“AFTAP”) of at least 8 0% an d to av oid certain Pen sio n Benefit Gu aran ty Corpo ratio n (“PBGC ”) rep ort in g trigg ers. We h av e n ot yet d etermined the to t al amount we will fun d d urin g 20 19 , bu t may co ntribu te an amo un t that wo uld eliminate th e PBGC variab le-rate premiums payab le in 2 01 9. Th e Comp any curren tly esti mates th at amo un t will be b etween $10 mi llio n an d $20 mi llio n. For a complete discussion o f ou r ben efit plans, add i tion al in fo rmation rel ated to th e fun ded statu s of o ur b enefit pl an s, and o ur fun ding po licy, see No te 1 6, Emp lo yee Ben efit Pla ns, to the con so lidated fin ancial statemen t s in clu ded in th is repo rt. OFF-BALANCE SHEET ARRANGEMENTS We have en tered into in demnity agreements with each o f o ur d irecto rs as well as o perati ng leases th at d o n ot result in an obligatio n b ein g recorded on th e b alan ce sheet. Refer to Note 15 , Co mmitmen ts an d Con tin gencies, of th e con soli dated finan cial statemen ts for mo re informati on . MARKET RISK EXPOSURES Ou r fin ancial p ositio n and earning s are sub ject to vari ou s mark et risk s in cludi ng ch an ges in in terest rates, the yi eld curv e, sp read s b etween risk - ad justed an d risk -free in terest rates, foreig n curren cy rates, used v ehicle prices, eq uit y price risks and issu er d efau lts. We analyze an d manag e the risks arising from market expo sures o f finan cial i nstru men ts, as well as other risks, th ro ug h an integrated asset/li ab i lity man agement pro cess. Th e primary focu s o f ou r asset/liabil ity p ro gram is the management of int erest rate risk within the insurance operations. Our asset /liab ility manag ement p ro grams an d procedu res in vo lv e th e mon i to ring of asset an d li ab ility du ratio ns fo r v ariou s pro du ct l in es; cash flow testin g u nd er v ari ou s in terest rate scenario s; an d the co ntin uo us rebalancing of assets an d liab ili ties with resp ect to yi eld, credit and market risk , and cash flow ch aracteristics to main tain an app ropriate b alance b etween risk an d p ro fitability fo r each prod uct catego ry , and fo r u s as a wh ole. It is ou r policy to main tain asset an d liabi lity duration s within on e year of one ano ther, althou gh , from t ime to time, a broad er interv al may be all owed. We are exposed to credit risk with in o ur in vestmen t po rtfo lio and th ro ug h deriv ative co unt erp art ies. Credit risk relates to the uncertainty of an ob ligo r’s co ntin ued ab i lity to make timely payments in acco rdance with the cont ractu al terms of th e in st ru ment or con tract. We man age cred it risk th ro ug h estab lished inv estment p olicies wh ich at temp t to ad dress qu ality o f ob ligo rs and co un terparties, credit con cen tration li mi ts, diversification requ irements, and acceptable risk lev els u nd er ex pected and stressed scenario s. Derivativ e count erp art y cred it risk is measu red as th e amou nt owed to us, n et o f co llateral h eld , based up on cu rrent market co nd itio ns. In ad ditio n, we p eriod i cally assess ex po sure related to p otential p ay men t ob ligations b etween us and ou r co un terparties. We min imize th e cred it risk in deriv ati ve finan cial i nstru men ts b y ent ering into transacti on s with h ig h qu alit y cou nterp arties (A-rated or high er at the time we en ter in to th e con tract), an d we maintain cred it sup port ann exes with certain of th ose co un terparties. We utilize a risk man agemen t strategy that inco rp orates the use of d erivati ve financial i nstru men ts to red uce ex po su re to certain risk s, in clu ding b ut no t limited to, interest rate risk , curren cy ex chan ge risk, v olatility risk , and equ ity market risk. These strateg ies are d evelop ed thro ug h ou r an aly sis o f data from finan cial simu latio n mo dels and o th er internal and in du stry so urces, and are th en in co rpo rat ed into ou r risk manag emen t p ro gram. See Note 7 , Derivati ve Fina ncial Instru men ts, to th e co nsol id ated fi nancial stat ements i nclud ed in th i s rep ort for add ition al informat io n o n o ur finan cial in struments. Deriv ative i nstru men ts ex po se us to cred it and mark et risk an d co uld result in material chan ges fro m p eriod to p eriod. We attempt to minimize o ur credit ri sk b y en terin g into tran saction s with high ly rated cou nterp arti es. We man age the market risk by estab lishin g and mo nitorin g limits as to the t yp es and degrees o f risk that may be un dertaken . We mo nito r ou r u se o f deriv atives i n co nnection with o ur ov erall asset/liability man agemen t prog rams an d risk manag ement strategies. In add itio n, all d erivativ e prog rams are mo nitored b y our risk manag ement dep artmen t. Deriv ative in stru men ts th at are used as part o f ou r in terest rate risk man agemen t strategy includ e interest rate swaps, interest rate futures, interest rate cap s, and in terest rate swap tion s. Deriv ative instruments that are u sed as part of the Compan y’s fo reign curren cy ex change risk man agement strategy in clu de fo rei gn curren cy swap s, fo reign cu rrency fu tures, fo reign equ ity futures, and fo reign equ ity o ptio ns. We may use t he fo llowing ty pes of deriv ative con tracts to mitig ate ou r ex po sure to certain gu aran teed b enefits related to VA contracts, fix ed in dexed ann uities, and in dex ed u niversal life: •Fo reign Cu rrency Fu tu res •Varian ce Swaps •In terest Rat e Futu res •Equ ity Op tion s •Equ ity Futu res •Credit Deriv atives 93 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents •In terest Rat e Swaps •In terest Rat e Swaptio ns •Vo l ati lity Fu tu res •Vo l ati lity Optio ns •Total Return Swap s We believ e that o ur asset/liabilit y manag emen t prog rams an d proced ures an d certain p ro du ct feat ures p ro vide protection ag ain st the effects of ch ang es in in terest rates un der vario us scen arios. Ad ditio nal ly, we b elieve ou r asset/liabi lity manag emen t pro grams and procedures prov id e sufficien t liqu id ity to en able us to fulfill o ur ob lig ati on to pay b enefits u nd er o ur vario us insurance and dep osit co ntracts. However, o ur asset/liab ility manag ement prog rams an d procedu res incorporate assumptio ns abo ut the relation sh ip b etween sho rt-term an d long-term in terest rates (i.e., th e slop e o f th e y ield curve), rel ati on ships between risk-ad j usted an d risk-free interest rates, mark et liqu id ity, sp read mo vemen t s, impli ed v olatilit y, po licyh older beh avior, an d other facto rs, and the effectiv eness of o ur asset/liability management pro grams an d proced ures may b e n egativ ely affected when ever actu al resu lts d iffer from th ose assumptio ns. The fol lo win g tabl e sets forth the estimated mark et v alu es of ou r fix ed matu rity investment s and mo rtgag e lo an s resultin g fro m a h yp othetical immediate 1 00 b asi s po in t i ncrease in i nterest rat es from levels prevailing as of December 3 1, 2 01 8 and 2017, an d the percen t ch ang e in fair value th e fo llowing estimated fair val ues wou l d rep resent : As o f December 31 , Amo unt Percent Chang e (Do l l a rs I n Milli ons ) 2 01 8 Fixed matu rities $5 0,142 .4 (8.1 )% Mo rtg ag e lo ans 7,035 .1 (5.5 ) 2 01 7 Fixed matu rities $4 0,286 .8 (8.2 )% Mo rtg ag e lo ans 6,369 .5 (5.5 ) Estimated fair values from the hy po th etical in crease in rates were d erived fro m th e d uration s o f our fix ed matu rities and mortg age lo an s. Du ration measures the ch an ge in fair v alu e resu ltin g from a ch ang e in in t erest rates. While these estimated fair v alu es p ro vide an in dication of ho w sensitiv e th e fair values o f ou r fixed maturities an d mort gage lo ans are to chan ges in i nterest rates, th ey d o no t rep resen t manag ement’s view of future fair v alu e chan ges or the po tential imp act of flu ctuation s in cred it spreads. Act ual resu lts may differ from these estimates. In the ordin ary co urse o f o ur co mmercial mo rtgag e lend in g o peration s, we may co mmit to p rov id e a mo rtgag e lo an before the pro perty to b e mortgag ed h as b een b uilt o r acq uired . Th e mo rtgag e loan commitmen t is a con tractu al ob ligatio n to fund a mort gage lo an wh en cal led up on b y the bo rrower. The co mmitmen t is no t recog nized in ou r finan cial statemen ts un til t he co mmitment is actually fun ded . Th e mo rtgag e l oan commitment con tains terms, in clu ding th e rat e o f interest, which may be d ifferent than p rev ailin g interest rates. As of December 31, 2 01 8 and 2 017, we had o utstan ding mo rtgag e loan co mmitmen ts o f $6 85 .3 million at an averag e rat e o f 4.4 % and $5 72 .3 milli on at an averag e rat e o f 4 .1%, resp ectively, with estimated fair v alu es of $67 1.3 million an d $58 3.0 millio n, respectively (usin g disco un ted cash flows fro m th e first call d ate). Th e foll owing table sets fo rth the est imated fair v alu e o f o ur mortgage loan co mmitments resulting from a h yp othetical immediate 1 00 basis poi nt in crease in int erest rate levels p rev ailin g as o f Decemb er 3 1, 20 18 and 20 17 , and the p ercent change in fair value that th e fo llowing estimated fair val ues wou l d rep resent : As o f December 31 , Amo unt Percent Chang e (Do l l a rs I n Milli ons ) 2 01 8 $638 .8 (4.8 )% 2 01 7 $557 .0 (4.5 )% The estimated fair v alu es from the hyp othet ical increase in rates were deriv ed from th e d uration s of ou r o utstan ding mo rtgag e loan co mmitmen ts. Wh ile these estimated fair v alu es p ro vide an ind i catio n of h ow sensitiv e th e fair v alu e of o ur o utstand in g commitmen ts are to ch anges i n in terest rates, they do not rep resent manag ement’s view o f fu tu re market chan ges, and actu al market results may d iffer from th ese estimates. As previou sly di scussed, we u til ize a risk manag ement strateg y th at involv es the u se o f deriv ative finan cial instru men ts. Derivat iv e instru men ts ex po se us to credit and mark et risk and co uld result i n mat eri al ch ang es from p eriod to perio d. We mini mize ou r cred it risk b y ent ering into t ransacti on s with high ly rated co un terparties. We manage the market risk by estab lishin g and mon itori ng limits as to th e typ es an d d egrees o f risk th at may b e u nd ertaken . We moni to r o ur use o f d erivativ es in con nectio n wi th ou r o verall asset/liabil ity management prog rams and procedures. As o f December 3 1, 2 01 8, to tal d erivativ e cont racts with a n otio nal amou nt o f $33.2 billion were in a $61 8.7 million n et lo ss po si tion . Incl ud ed in th e $3 3.2 billion is a n otion al amou nt of $2.4 b illion in a $2 5.8 million n et loss p ositio n th at relates to ou r Mo dco tradin g p ort fo lio. Also includ ed in the to tal, is $1 2.5 bi llio n in a $184 .1 million n et loss p ositio n t hat relates to our GLWB embed ded d erivativ es, $2 .6 billion in a $21 7.3 millio n net lo ss po sition th at relates to ou r FIA emb edd ed deriv atives, 94 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents $2 33 .5 million in a $90 .2 million net lo ss position th at relates to ou r IUL embed ded deriv ati ves, and $3 .3 million in a $0 .3 million net lo ss p ositio n t hat rel ated to o th er d erivativ es. As o f December 3 1, 2 01 7 to tal deriv ative con tracts with a no tion al amo un t o f $26 .3 billi on were in a $644 .8 millio n n et lo ss p osit io n. In clu ded in th e $26 .3 billion is a no t io nal amount o f $2 .5 bil lion in a $2 14 .2 millio n net lo ss po sition that relates to o ur Mo dco trad in g p ortfolio . Also in clu ded in the to tal, i s $9.6 b illion in a $11 1.8 millio n net l oss position th at relates to o ur GLWB embed ded deri vativ es, $2.0 b illion in a $21 8.7 million n et lo ss po sition th at relates to ou r FIA emb edd ed deriv atives, an d $16 8.3 million in a $80 .2 million net lo ss p ositio n that relates to o ur IUL embedd ed d erivativ es. We recog nized gains o f $61 .0 millio n and lo sses o f $30 5.8 millio n an d $40 .3 mil lion related to d erivativ e finan cial in stru ments for th e years ended Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively. The fo llo wing tab le sets fo rth the n otio nal amo un t and fair v alu e o f o ur in terest rate risk related deriv ative fin anci al instru men ts an d the estimated fai r v alu e resultin g fro m a h yp othetical immediate p lu s and minu s 100 b asis po in ts chang e in in terest rates from lev els p rev ailin g as o f Decemb er 31: Fair Value Resulting Fro m an Immediate +/– 1 0 0 bps Cha nge in the Underlying Reference Interest Rates (1)(2 ) Notional Amo unt Fa ir Va lue as o f December 31, +100 bps –100 bps (D o l l ars In Millions) 20 18 Fu tu res $1,14 9.9 $(9.8 ) $1 3.1 $(3 3.3 ) Rec flo ating pay fixed swaps 40 0.0 — 1 2.9 (1 4.5 ) Rec fix ed p ay flo ating swaps 2,24 0.5 1 7.1 (22 3.0 ) 30 2.0 GLWB embedd ed d erivativ e 12,45 0.1 (18 4.1 ) 7 7.6 (52 2.0 ) Total $16,24 0.5 $(17 6.8 ) $(11 9.4 ) $(26 7.8 ) 20 17 Fu tu res $1,30 2.3 $2.3 $(4 1.2 ) $5 7.8 Swaption s 22 5.0 — 2.3 — Rec flo ating pay fixed swaps — — — — Rec fix ed p ay flo ating swaps 1,86 2.5 5 2.5 (14 5.9 ) 29 0.8 GLWB embedd ed d erivativ e 9,61 5.4 (11 1.8 ) 17 5.1 (49 1.3 ) Total $13,00 5.2 $(5 7.0 ) $(9.7 ) $(14 2.7 ) (1)Interest rate ch an g e scen ario su b ject to floo r, based o n treasury rates as o f Decem b er 31, 2 0 1 8 and 201 7 . (2)Includes an effect for in flation . 95 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing table sets forth th e n otion al amoun t and fair value of ou r equ ity risk related d erivativ e financial instrumen ts an d t he estimated fair value resu l ting from a hy po th etical i mmed iate plus an d min us ten p ercen tage p oint chan ge i n equ ity level fro m lev els prev aili ng as of Decemb er 3 1: Fa ir Va lue Resulting Fro m an Immedia te +/– 10% Chang e in the Underlying Reference Index Equity Lev el Notional Amo unt Fa ir Va lue as o f December 31, +1 0 % –1 0 % (D o l l ars In Millions) 20 18 Futures $67 2.0 $(3 3.3 ) $2 7.0 $(9 3.5 ) Op tion s 9,82 3.9 18 6.0 17 9.2 24 0.3 Rec floatin g p ay asset swaps 76 8.2 (2 3.1 ) (10 2.3 ) 5 6.2 Rec asset p ay flo ating swaps 13 8.1 4.0 1 8.2 (1 0.2 ) GLWB embed ded deriv ative 12,45 0.1 (18 4.1 ) (12 3.9 ) (25 2.1 ) FIA emb edd ed d erivativ e 2,57 6.1 (21 7.3 ) (26 1.2 ) (21 2.7 ) IUL emb ed ded deriv ative 23 3.6 (9 0.2 ) (9 6.4 ) (8 7.4 ) Total $26,66 2.0 $(35 8.0 ) $(35 9.4 ) $(35 9.4 ) 20 17 Futures $38 1.1 $(2.4 ) $(3 2.2 ) $2 7.3 Op tion s 7,54 9.4 16 6.4 15 7.7 17 7.0 Rec floatin g p ay asset swaps 43 4.3 (0.2 ) (4 3.6 ) 4 3.2 GLWB embed ded deriv ative 9,61 5.4 (11 1.8 ) (1 2.4 ) (23 4.6 ) FIA emb edd ed d erivativ e 1,95 1.7 (21 8.7 ) (23 2.9 ) (18 6.7 ) IUL emb ed ded deriv ative 16 8.3 (8 0.2 ) (8 2.7 ) (7 0.4 ) Total $20,10 0.2 $(24 6.9 ) $(24 6.1 ) $(24 4.2 ) 96 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The followin g tab le sets fo rth th e no tion al amount an d fair v alu e of o ur cu rrency risk related derivativ e finan cial instru men ts and the estimated fair value resu l ting from a hy po th etical i mmed iate plus an d min us ten p ercen tage p oint chan ge i n curren cy level from lev els p rev ailin g as o f Decemb er 3 1: Fair Value Resulting From a n Immediate +/– 10 % Cha ng e in the Underlying Reference in Currency Lev el Notio nal Amount Fair Value as o f December 31, +1 0 % –10% (D oll ars In Millions) 20 18 Futures $2 02 .7 $(2 .2) $(22 .6) $1 8.2 Rec fixed pay fixed swap s 1 17 .2 (0 .9) 11 .6 (1 3.4 ) $3 19 .9 $(3 .1) $(11 .0) $4.8 20 17 Futures $2 56 .4 $(2 .1) $(27 .9) $2 3.7 Rec fixed pay fixed swap s 1 17 .2 6 .0 19 .7 (7.7 ) $3 73 .6 $3 .9 $(8 .2) $1 6.0 Estimated gains an d l osses were d erived u si ng p ricin g mod els sp ecific to deriv ative finan cial in struments. Wh i le th ese estimated gains an d losses prov id e an indi cation o f h ow sensit iv e o ur deriv ati ve finan cial instruments are to chang es in in terest rates, vol atility, equ ity levels, an d credi t sp reads, they do not rep resent manag ement’s view o f fu tu re market chan ges, and actu al market results may d iffer from th ese estimates. Ou r stable v alu e co ntract an d ann uity p ro du cts tend to b e more sen sitive to mark et risk s th an ou r no n-ann uity prod ucts. As such , man y o f th ese prod uct s co ntain surren der ch arg es and o th er features th at reward p ersist en cy and pen ali ze t he earl y withd rawal o f fun ds. Certain stab le value and an nu ity co ntracts h av e market-v alu e ad justmen ts that pro tect u s against inv estment lo sses if in terest rates are higher at the time o f surren der th an at th e time o f issu e. Ad ditio nal ly , ap proxi mately $0.7 billion of ou r stable value con tracts have n o early termi natio n rig hts. As of December 3 1, 20 18 , we had $5 .2 b illio n o f stab le v alu e prod uct accou nt balances with an estimated fair v alu e of $5 .2 billio n (u sing discou nted cash flo ws) and $1 3.7 b illio n o f ann uity accou nt b alances with an estimated fair v alue of $13 .3 b illio n (u sin g discounted cash flows). As of Decemb er 31 , 20 17 , we had $4.7 b illion of stable value prod uct accou nt bal an ces with an estimated fair v alue of $4 .7 billion (usin g disco un ted cash flo ws) an d $10 .9 b illio n o f ann uity accou nt balances with an estimated fair value of $10 .5 bil lion (u si ng discou nted cash flows) The fo llowing tab le sets fort h th e estimat ed fair values o f o ur stable value and an nu ity accou nt balan ces resu ltin g fro m a hy po th etical immed iate plus an d minu s 1 00 b asi s po in ts ch ang e in interest rates fro m lev els p rev ailin g an d t he percen t ch ang e in fair value that the follo win g estimated fair values wo uld represent: Fa ir Va lue Resulting Fro m an Immedia te +/– 1 0 0 bps Cha nge in the Underlying Reference Interest Rates Fa ir Value a s of December 3 1 , +100 bps –100 bps (Dollars In M i l lio ns) 20 18 Stab le v alu e p roduct accoun t b alances $5 ,20 0.7 $5 ,10 6.1 $5 ,29 5.4 An nu ity accou nt balances 13 ,27 2.2 13 ,01 8.3 13 ,41 9.2 20 17 Stab le v alu e p roduct accoun t b alances $4 ,69 8.9 $4 ,59 2.7 $4 ,80 5.1 An nu ity accou nt balances 10 ,49 7.1 10 ,34 1.3 10 ,61 2.7 Estimated fair v alu es from th e h yp othetical ch ang es in interest rates were d erived from the d uration s of our stabl e v alu e an d ann uit y acco un t balan ces. While these estimat ed fair values prov id e an ind icatio n o f ho w sensit iv e th e fair v alu es o f o ur stable value an d an nu ity acco un t balan ces are to ch ang es in in terest rat es, th ey do no t represent man agemen t’s v iew of fut ure mark et ch ang es, an d actual mark et resu lts may differ fro m these esti mates. 97 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Certain of o ur liab ilities relate to p rod ucts whose profitabilit y co uld be si gn ifican tly affected by ch ang es in in terest rates. In addi tion to traditio nal wh ole li fe an d term insu ran ce, many u niversal l ife p olicies wit h secon dary gu aran tees th at i nsu ran ce co verag e will remain in fo rce (sub ject to the payment o f speci fied p remiu ms) h ave su ch ch aracteristics. Th ese prod ucts d o n ot allo w us to adjust p olicy ho ld er premi ums after a po licy is issu ed, an d most o f th ese prod uct s do no t h ave sign ifican t accou nt values u po n wh ich we credit interest. If int erest rates fall, these p ro du cts co uld h ave bot h d ecreased interest earn in gs an d increased amortization of deferred acqu isitio n co sts an d VOBA, an d the conv erse cou ld occu r if interest rates rise. Impa ct o f Co ntinued Lo w Interest Ra te Env iro nment Si gn ifican t ch ang es in interest rates exp ose us to t he risk o f no t realizing anticipated spread s b etween th e i nterest rate earned on inv estments an d th e in terest rate cred i ted t o in -force p olicies an d con tracts. In ad dition , certain of o ur insurance an d in vestmen t pro du cts gu aran tee a minimu m gu aran teed in terest rate (“M GIR”). In perio ds o f prolon ged low int erest rates, t he interest sp read earned may be negativ ely imp acted to th e extent ou r ability to redu ce po licyh older crediting rates is limited b y th e g uaranteed minimu m cred ited in terest rates. Add iti on ally, t ho se p olicies wit ho ut accou nt values may exhi bit lo wer profi tability in p eriod s o f p ro lo ng ed low int erest rates du e to reduced inv estment in come. The tables below p resen t acco un t v alu es b y rang e of curren t minimu m g uaranteed interest rates an d cu rrent cred iting rates for ou r u niv ersal life and deferred fixed ann uity prod ucts as o f December 31 , 20 18 and 20 17 : Credited Rate Summary As o f December 31 , 2 018 Minimum Gua ranteed Interest Ra te Account Va lue At MG IR 1 - 50 bps a bo ve MG IR More tha n 50 bps a bove MG IR Total (Do l l a rs I n Milli ons ) Life Insurance >2% - 3% $2,3 92 $1,3 22 $2,0 31 $5,745 >3% - 4% 4,5 12 9 24 4 99 5,935 >4% - 5% 2,4 45 4 35 1 2,881 >5% - 6% 1 88 — — 188 Su btotal 9,5 37 2,6 81 2,5 31 14,749 Fi xed Annuities 1 % $3 41 $5 84 $2,2 78 $3,203 >1% - 2% 3 70 1 65 1,1 45 1,680 >2% - 3% 1,6 86 1 02 3 1,791 >3% - 4% 2 61 4 — 265 >4% - 5% 2 60 — — 260 >5% - 6% 2 — — 2 Su btotal 2,9 20 8 55 3,4 26 7,201 Total $1 2,4 57 $3,5 36 $5,9 57 $21,950 Percent ag e of Total 57 % 16 % 27 % 100% 98 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Credited Rate Summary As o f December 31 , 2 017 Minimum Gua ranteed Interest Ra te Account Va lue At MG IR 1 - 50 bps a bo ve MG IR More tha n 50 bps a bove MG IR Total (Do l l a rs I n Milli ons ) Universa l Li fe Insura nce >2% - 3% $2 06 $1,2 52 $2,0 06 $3,464 >3% - 4% 4,1 46 9 93 8 5,147 >4% - 5% 1,9 87 13 1 2,001 >5% - 6% 1 99 — — 199 Su btotal 6,5 38 2,2 58 2,0 15 10,811 Fi xed Annuities 1 % $5 71 $2 39 $5 40 $1,350 >1% - 2% 4 73 3 31 70 874 >2% - 3% 1,8 97 63 4 1,964 >3% - 4% 2 54 — — 254 >4% - 5% 2 71 — — 271 >5% - 6% 2 — — 2 Su btotal 3,4 68 6 33 6 14 4,715 Total $1 0,0 06 $2,8 91 $2,6 29 $15,526 Percent ag e of Total 64 % 19 % 17 % 100% We are active in mitigatin g t he impact o f a co ntin ued lo w interest rat e envi ro nment throu gh prod uct d esi gn , as well as ad ju st in g cred itin g rates on cu rrent i n-fo rce pol ici es and co ntracts. We also manag e in terest rate and reinvestment risk s throu gh ou r asset/liability man agemen t p ro cess. Our asset /liab ility manag ement prog rams an d p ro cedu res in vol ve th e mon itori ng o f asset an d liab ility d uration s; cash fl ow testin g u nd er vario us interest rate scen arios; and th e regul ar rebalan cin g o f assets an d liab ilities with resp ect t o y ield, credi t an d mark et risk, and cash flow characteristi cs. These p ro grams also in corpo rate the use of d erivative finan cial in struments pri marily t o red uce ou r ex po sure to in terest rate risk , in flation risk , cu rrency exchan ge risk , vo latili ty risk, an d equ ity mark et risk. Employ ee Benefit Plans Pursu ant to t he acco un ting g uidan ce relat ed to o ur o bligatio ns to employ ees un der o ur p ension plan and o th er po st retirement ben efi t plans, we are requi red to mak e a nu mb er o f assumptio ns to est imate related l iab ilities and exp en ses. Ou r most sig nificant assu mption s are th ose for the d isco un t rate and ex pected lon g-term rate of retu rn . Discou nt Ra te Assumption The assumed d isco un t rates u sed to determin e th e b en efit ob ligati on s were b ased on an anal ysis o f fu tu re ben efi ts exp ected to be paid u nd er th e plans. The assu med d isco un t rate reflect s th e interest rate at which an amo unt that is inv ested in a po rtfo lio o f hig h-qu ality d ebt in stru ments on th e measuremen t d ate wou ld prov i de th e fu tu re cash flows n ecessary to pay ben efi ts wh en t hey co me due. 99 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo l lo win g presents o ur estimates of th e hy po th etical impact to th e Decemb er 31 , 2 01 8 ben efit ob l ig ation an d to the 20 18 b enefit co st , associated with sen siti vities related to th e di scou nt rate assumpti on : Defined Benefit Pension Pla n Other Po stretirement Benefit Pla ns(1) (Do l l a rs in Thous ands) Increa se (Decrease) in Benefit Obli ga tion: 1 00 basis p oint in crease $(2 5,6 95 ) $(3 ,86 1) 1 00 basis p oint decrease 3 0,7 40 4 ,54 0 Increa se (Decrease) in Benefit Co st: 1 00 basis p oint in crease $3 46 $(4 3) 1 00 basis p oint decrease (4 51 ) 8 5 (1)Includes excess p en sion p lan , retiree medical plan, and p o stretirem en t life in surance plan. Long-Term Rate of Retu rn Assump tion To d etermin e an ap prop riate lo ng -term rate of return assumpti on for o ur d efined b enefit pensio n plan, we received ev alu ati on s o f market perfo rman ce based on th e Co mp any ’s asset allo catio n as p rov id ed by extern al co nsu ltants. For o ur p ostretirement l ife insu ran ce plan, we utilized 25 y ear av erag e and an nu ali zed retu rn result s o n th e Barcl ay’s sho rt treasu ry index to determine an ap pro priate lo ng -term rate o f return assu mp tion. The followin g presents o ur estimates of the h yp othetical imp act to th e 20 18 b enefit cost, associated with sensitiv iti es related to th e lo ng -term rate o f ret urn assu mp tio n: Defined Benefit Pension Plan Po stretirement Life Insurance Plan (Dolla rs in Tho us a nds ) Increa se (Decrease) in Benefit Co st: 10 0 b asis po in t increase $(2,5 32 ) $(49 ) 10 0 b asis po in t d ecrease 2,5 31 49 IMPACT OF INFLATION In flation in creases the n eed fo r life i nsu ran ce. Man y p olicy ho ld ers wh o o nce had adeq uat e insurance pro grams may i ncrease their li fe i nsu ran ce co verage to p ro vide the same relativ e finan cial benefit and protection . Hig her in terest rates may result in h igh er sal es of cert ain o f o ur i nv estment prod ucts. The hig her in terest rates that hav e tradition ally accompan ied in flatio n cou l d al so affect ou r o peration s. Po l icy lo an s increase as po licy loan in terest rat es b ecome relativ ely more at tractive. As in terest rates in crease, disintermedi ation o f stable v alu e an d ann uity acco un t b alances and in dividu al life p olicy cash v alu es may in crease. Th e market value o f ou r fi xed-rate, l on g-term inv est ments may d ecrease, we may be u nab le to implement fully the interest rate reset an d call p rov isions o f ou r mortg age loan s, and ou r abi lity to mak e attractiv e mo rtg ag e lo ans, in clu ding particip ating mortg age loan s, may decrease. In ad dit io n, p articipatin g mortg age loan in come may decrease. Th e differen ce between th e in t erest rate earn ed o n inv estments and the interest rate cred ited to life insu ran ce an d in vestmen t p ro du cts may al so b e adv ersely affected by rising in terest rat es. Du rin g t he periods cov ered b y this repo rt, we b elieve inflation has n ot had a material impact o n o ur bu siness. RECENTLY ISSUED ACCOUNTING STANDARDS See No te 2, S ummary of Sign i fican t Acco un tin g Pol ici es, to th e co nsolid ated financial stat ements i ncl ud ed in th i s rep ort for in formatio n reg ard ing recently issued acco un ting stand ard s. Item 7 A. Qua ntitati ve and Qua litativ e Disclosures Abo ut Ma rket Risk The in fo rmation requ ired b y th is item is in clu ded in Item 7 , Manag emen t’s Discu ssion a nd An alysis of Fin an cia l Co nd iti on an d Results o f Op erati on s. Item 8 . Financia l Sta tements a nd Supplementa ry Da ta In dex to Co nso l id ated Financial Statements The fol lo win g fin anci al statemen ts are lo cated in th is repo rt on t he pag es in dicated . 10 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents Page Con soli dated Statements of In come Fo r Th e Year End ed December 31 , 20 18 , Fo r Th e Year End ed Decemb er 31, 20 17 , and Fo r Th e Year End ed December 31 , 2 016 10 2 Con soli dated Statements of Comprehensiv e In come (Loss) For Th e Year End ed December 31 , 20 18 , Fo r Th e Year End ed Decemb er 31 , 20 17 , and Fo r The Year En ded Decemb er 3 1, 2 01 6 10 3 Con soli dated Balance Sheets as of December 3 1, 2 01 8 an d as o f Decemb er 31 , 20 17 10 4 Con soli dated Statements of Sh areo wn er’s Eq uity Fo r The Year En ded Decemb er 3 1, 2 01 8, For The Year En ded December 3 1, 2 01 7, an d For The Year En ded Decemb er 3 1, 201 6 10 6 Con soli dated Statements of Cash Flo ws Fo r Th e Year End ed Decemb er 3 1, 20 18 , Fo r The Year En ded Decemb er 3 1, 2 01 7, and Fo r The Year Ended Decemb er 3 1, 20 16 10 7 Notes to C on solidated Finan cial Statemen ts: 1. Basis of Presentation 10 9 2. Su mmary of Sign ifican t Accou nting Po licies 10 9 3. Sig nificant Tran saction s 12 0 4. M ONY Clo sed Block of Business 12 2 5. Inv estment Op eratio ns 12 4 6. Fair Value of Fin ancial In stru men ts 13 2 7. Derivativ e Finan cial In struments 14 4 8. Offset ting of Assets an d Liab ilities 14 8 9. M ortg age Lo ans 15 0 10 . DAC and VOBA 15 4 11 . Go od will 15 4 12 . Certain Nont rad itio nal Lon g-Duration Con tracts 15 5 13 . Reinsu ran ce 15 6 14 . Deb t an d Oth er Ob ligatio ns 15 9 15 . Co mmitmen ts an d Co ntin gen cies 16 4 16 . Emp lo yee Benefit Plans 16 6 17 . Accumulated Oth er Comprehen sive In come (Lo ss)17 2 18 . In co me Tax es 17 3 19 . Supplemen tal C ash Flo w 17 6 20 . Related Party Tran saction s 17 6 21 . St atuto ry Rep ortin g Practices 17 7 22 . Op eratin g Segmen ts 17 8 23 . Co nsol id ated Qu arterly Information 18 2 24 . Subseq uent Ev ents 18 3 Report of In dep enden t Reg istered Pu blic Accou ntin g Firm 18 5 For sup plemen tal q uarterly fi nancial in format io n, please see No te 23 , Con soli da ted Qua rterly Resu lts—Una ud ited of t he n otes to co nsol id ated finan cial statements includ ed herein . 10 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF INCOME For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Premiu ms an d p olicy fees $3 ,68 0,8 45 $3 ,477,41 9 $3,4 07 ,93 1 Reinsu ran ce ced ed (1 ,38 4,9 41 ) (1 ,360,73 5) (1,3 14 ,71 6) Net o f reinsu ran ce ced ed 2 ,29 5,9 04 2 ,116,68 4 2,0 93 ,21 5 Net in vestmen t inco me 2 ,48 3,7 50 2 ,051,58 8 1,9 42 ,45 6 Realized inv estment gains (l osses): Deriv ative fin ancial instrumen t s 6 0,9 88 (305,82 8) (40 ,28 8) All o t her in vestmen ts (22 3,6 49 ) 121,42 8 90 ,65 9 Other-than -temp orary impai rment lo sses (5 6,5 78 ) (3,96 2) (32 ,07 5) Po rtio n recog nized in oth er comprehen siv e in come (b efore tax es)2 6,8 54 (7,78 0) 14 ,32 7 Net imp airmen t losses reco gn ized in earnings (2 9,7 24 ) (11,74 2) (17 ,74 8) Other in come 45 3,6 85 446,66 2 4 15 ,65 3 To tal rev enu es 5 ,04 0,9 54 4 ,418,79 2 4,4 83 ,94 7 Benefits and ex penses Benefits an d settlemen t exp enses, net o f reinsu ran ce ced ed: (2 01 8 - $1 ,19 1,978 ; 2 01 7 - $1 ,24 2,7 97 ; 2 01 6 - $1 ,18 1,9 60 )3 ,51 5,8 69 2 ,957,27 0 2,8 80 ,43 5 Amortization of deferred po l icy acq uisi tion costs and value o f b usiness acquired 22 5,8 08 78,22 1 1 49 ,06 4 Other op eratin g exp enses, n et o f rein su ran ce ced ed : (201 8 - $2 05 ,352; 20 17 - $22 2,9 63 ; 2 01 6 - $2 07 ,19 7)91 6,2 59 948,24 4 8 60 ,45 1 Total b enefits and exp enses 4 ,65 7,9 36 3 ,983,73 5 3,8 89 ,95 0 Inco me before i ncome tax 38 3,0 18 435,05 7 5 93 ,99 7 In come tax (ben efit) exp ense Cu rrent 9 5,5 61 26,25 2 (46 ,71 9) Deferred (1 4,9 04 ) (697,72 7) 2 47 ,68 7 Total inco me tax exp ense (ben efit)8 0,6 57 (671,47 5) 2 00 ,96 8 Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 See No tes to Conso lidated Fin anci al Statements 10 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF COMPRE HENSIVE INCOME (LOSS) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Oth er comprehen si ve in come (loss): Ch an ge in n et u nrealized gains (losses) o n inv estments, net of in come tax : (20 18 - $(3 77 ,41 2); 2 017 - $3 32,89 6; 201 6 - $324 ,267)(1 ,42 0,4 99 ) 707,29 8 6 02 ,21 1 Reclassificatio n ad ju st ment for in vestmen t amo un t s in clu ded in net in come, n et o f inco me t ax : (2 01 8 - $4 ,161; 20 17 - $48 9; 20 16 - $(5 ,09 4))1 5,6 51 64 2 (9 ,46 0) Ch an ge in n et u nrealized (lo sses) relating to other-than -temp orary impaired inv est ments for whi ch a po rtion h as been recogn ized in earning s, net of in come tax: (20 18 - $(5 ,51 6); 20 17 - $76 1; 20 16 - $(1 ,08 1))(2 0,7 51 ) 39 1 (2 ,00 8) Ch an ge in accumulated (loss) g ain —d erivativ es, net of in come tax: (2 018 - $(5 01 ); 2 01 7 - $(30 3); 2016 - $370)(1,8 84 ) (56 3) 68 8 Reclassificatio n ad ju st ment for deriv ati ve amo un ts in clu ded in n et inco me, net of inco me t ax : (2 01 8 - $3 01 ; 2 01 7 - $2 43 ; 2 01 6 - $2 1)1,1 30 45 1 3 9 Ch an ge in p ostretirement benefits liab ility ad ju stmen t, n et of i ncome tax : (20 18 - $(4 14 ); 2017 - $(4,0 47 ); 20 16 - $(2 ,61 6))(1,5 57 ) (15,22 5) (4 ,85 9) To tal other comprehen siv e in come (l oss)(1 ,42 7,9 10 ) 692,99 4 5 86 ,61 1 Total comprehensiv e inco me (loss)$(1 ,12 5,5 49 ) $1 ,799,52 6 $9 79 ,64 0 See No tes to Conso lidated Fin anci al Statements 10 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATE D BALANCE SHEETS As of December 31, 2018 2017 (Dollars In Thousands) Assets Fix ed matu rities, at fair value (amortized co st : 2 01 8 - $5 4,4 66 ,30 5; 20 17 - $41 ,15 3,5 51 )$51 ,904,69 9 $4 1,1 76 ,05 2 Fix ed matu rities, at amortized cost (fair v alu e: 2 01 8 - $2 ,54 7,2 10 ; 2 01 7 - $2 ,77 6,327 )2 ,633,47 4 2,7 18 ,90 4 Eq uit y securities, at fair value (co st: 2 01 8 - $6 27 ,08 7; 20 17 - $74 0,8 13 )595,88 4 7 54 ,36 0 Mortgag e loan s (rel ated to secu rit izatio ns: 20 18 - $13 4; 20 17 - $22 6,4 09 )7 ,724,73 3 6,8 17 ,72 3 Inv est ment real estate, net o f accu mu lat ed dep reciation (2 01 8 - $2 51 ; 2 01 7 - $1 32 )6,81 6 8 ,35 5 Policy lo ans 1 ,695,88 6 1,6 15 ,61 5 Other lo ng -term in vestmen ts 759,35 4 9 15 ,59 5 Sho rt-term inv estments 807,28 3 6 15 ,21 0 To tal in vestmen ts 66 ,128,12 9 5 4,6 21 ,81 4 Cash 173,71 4 2 52 ,31 0 Accru ed inv estment in come 634,92 1 4 91 ,80 2 Accou nts and premiums receivab le 113,50 7 1 24 ,93 4 Reinsu ran ce receiv ables 4 ,764,74 3 5,0 75 ,69 8 Deferred po licy acq uisition costs and value o f b usiness acq uired 3 ,023,15 4 2,1 99 ,57 7 Go od wil l 825,51 1 7 93 ,47 0 Other in tan gibles, net of accu mu lated amo rtizati on (2 01 8 - $1 97 ,58 3; 20 17 - $14 0,3 68 )613,43 1 6 63 ,57 2 Pro perty and equ ip ment, net of accu mu lated d epreciatio n (20 18 - $33 ,19 9; 20 17 - $22 ,92 6)184,95 7 1 11 ,41 7 Other assets 250,03 6 2 27 ,35 7 Inco me t ax receivab le — 76 ,54 3 Assets relat ed to sep arate accou nts Variab le an nu ity 12 ,288,91 9 1 3,9 56 ,07 1 Variab le u niversal life 937,73 2 1,0 35 ,20 2 Total assets $89 ,938,75 4 $7 9,6 29 ,76 7 See No tes to Conso lidated Fin anci al Statements 10 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATE D BALANCE SHEETS (continued) As of December 31, 2018 2017 (Dollars In Thousands) Lia bilities Future po licy b enefits and claims $41 ,901,55 2 $3 0,9 57 ,59 2 Un earned premiums 872,59 4 8 75 ,40 5 Total p olicy liabilit ies an d accru als 42 ,774,14 6 3 1,8 32 ,99 7 Stab le v alu e p roduct accoun t b alances 5 ,234,73 1 4,6 98 ,37 1 An nu ity accou nt balances 13 ,720,08 1 1 0,9 21 ,19 0 Other po licyh olders’ funds 1 ,128,37 9 1,2 67 ,19 8 Other liabilities 2 ,374,11 2 2,3 53 ,56 5 Inco me t ax pay able 38,54 7 — Deferred in come tax es 839,31 6 1,2 32 ,40 7 No n-recourse fu nd in g o blig ations 2 ,632,49 7 2,7 47 ,47 7 Secured fin an cin g li ab ilities 495,30 7 1,0 17 ,74 9 Debt 1 ,101,82 7 9 45 ,05 2 Sub ordinated d ebt 605,42 6 4 95 ,28 9 Liabil ities related to sep arat e acco un ts Variab le an nu ity 12 ,288,91 9 1 3,9 56 ,07 1 Variab le u niversal life 937,73 2 1,0 35 ,20 2 To tal liabilities 84 ,171,02 0 7 2,5 02 ,56 8 Commitments and co ntingencies—No te 1 5 Shareo wner’s equity Co mmo n Stock, 2 01 8 an d 2 01 7 - $.0 1 par value; shares autho rized: 5,0 00 ; shares issued: 1,0 00 — — Ad dition al p aid -in-capital 5 ,554,05 9 5,5 54 ,05 9 Retained earn in gs 1 ,639,44 1 1,5 60 ,44 4 Accumulated other co mp reh ensiv e inco me (lo ss): Net un realized g ain s (lo sses) on in vestmen ts, net o f in co me tax: (2 01 8 - $(36 8,8 30 ); 20 17 - $7,4 16 )(1 ,387,50 4) 27 ,89 6 Net un realized lo sses relatin g t o o th er-th an-tempo rary imp aired i nv estments fo r wh ich a p ortio n h as been recog nized in earning s, net of in come tax: (2 01 8 - $(6 ,054); 2 01 7 - $(53 8))(22,77 3) (2 ,02 2) Accu mu lat ed (lo ss) gain - deriv ati ves, n et of i ncome tax : (20 18 - $(2 ); 20 17 - $19 8)(7) 74 7 Po stretirement ben efits li abi lity adjustmen t, n et o f inco me t ax : (201 8 - $(4,1 12 ); 20 17 - $(3 ,46 9))(15,48 2) (13 ,92 5) To tal shareowner’s eq uity 5 ,767,73 4 7,1 27 ,19 9 To ta l lia bilities a nd shareowner’s equity $89 ,938,75 4 $7 9,6 29 ,76 7 See No tes to Conso lidated Fin anci al Statements 10 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF SHARE OWNER’S EQUITY Commo n Sto ck Additiona l Pa id-In- Ca pita l Trea sury Sto ck Retained Ea rnings Accumulated O ther Co mprehensive Income (Loss) To tal Sha reo wner’s equity (Do l la rs I n Tho usa nds ) Balan ce, December 31 , 2 015 $— $5,55 4 ,0 59 $— $2 6 8 ,299 $(1,2 4 1 ,134) $4,58 1 ,2 24 Net income fo r 201 6 3 9 3 ,029 39 3 ,0 29 Other com p rehensiv e in co m e 5 8 6 ,611 58 6 ,6 11 Co mprehensive income fo r 2016 97 9 ,6 40 Dividends to parent (8 9 ,343) (8 9 ,3 43) Balan ce, December 31 , 2 016 $— $5,55 4 ,0 59 $— $5 7 1 ,985 $(6 5 4 ,523) $5,47 1 ,5 21 Net income fo r 201 7 1,1 0 6 ,532 1,10 6 ,5 32 Other com p rehensiv e in co m e 6 9 2 ,994 69 2 ,9 94 Co mprehensive income fo r 2017 1,79 9 ,5 26 Cu mulative effect adju stments 2 5 ,775 (2 5 ,775) — Dividends to parent (1 4 3 ,848) (14 3 ,8 48) Balan ce, December 31 , 2 017 $— $5,55 4 ,0 59 $— $1,5 6 0 ,444 $1 2 ,696 $7,12 7 ,1 99 Net income fo r 201 8 3 0 2 ,361 30 2 ,3 61 Other com p rehensiv e in co m e (1,4 2 7 ,910) (1,42 7 ,9 10) Co mprehensive income fo r 2018 (1,12 5 ,5 49) Cu mulative effect adju stments (8 3 ,364) (1 0 ,552) (9 3 ,9 16) Dividends to parent (1 4 0 ,000) (14 0 ,0 00) Balan ce, December 31 , 2 018 $— $5,55 4 ,0 59 $— $1,6 3 9 ,441 $(1,4 2 5 ,766) $5,76 7 ,7 34 See No tes to Conso lidated Fin anci al Statements 10 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For The Year Ended December 3 1, 2 018 2 0 17 20 1 6 (Do l la rs I n Tho usa nds ) Cash flows from o pera ting activ iti es Net i ncome $30 2,3 61 $1 ,10 6,5 32 $3 93 ,02 9 Adjustmen ts to recon cile net in come to n et cash prov id ed b y o perating acti vities: Realized inv estment (g ain s) lo sses 19 2,3 85 19 6,1 42 (32 ,62 3) Amortization of deferred po l icy acq uisi tion costs and value o f b usiness acqui red 22 5,8 08 7 8,2 21 1 49 ,06 4 Capit alization of deferred po licy acq uisiti on co sts (44 6,4 69 ) (33 3,2 52 ) (3 27 ,93 8) Depreciatio n an d amo rtizati on ex pen se 6 7,9 02 6 2,6 09 37 ,50 4 Deferred in come tax (1 4,9 04 ) (69 7,7 27 ) 2 47 ,68 7 Accru ed inco me tax 11 5,0 90 4 0,2 80 (1 62 ,61 9) Interest cred ited to u niversal life and in vestmen t p rod uct s 88 2,9 04 69 2,9 93 6 99 ,22 7 Policy fees assessed o n u niversal life and in vestmen t p ro du cts (1,55 8,8 68 ) (1 ,35 4,6 85 ) (1,2 62 ,16 6) Ch an ge in rein su ran ce receivab les 31 1,2 27 24 8,1 48 2 22 ,30 2 Ch an ge in accrued inv est ment income and ot her receiv ables 5,7 31 (6,6 43 ) (36 ,36 0) Ch an ge in p olicy liabilities an d o th er p olicy ho ld ers’ fun ds o f trad ition al life an d h ealth p ro du cts (61 8,5 50 ) (29 4,2 05 ) (2 08 ,07 5) Trading securi ties: Mat urities an d p rincipal red uctio ns of in vestmen ts 15 5,6 92 16 5,5 75 1 54 ,63 3 Sale o f inv estments 49 3,1 41 28 1,4 41 4 59 ,80 2 Co st o f in vestmen ts acq uired (58 9,3 79 ) (35 5,4 10 ) (5 32 ,42 9) Other net ch ang e in trading securiti es 3 8,3 46 9,1 51 22 ,42 7 Amortization of premiums and accretion of discou nts o n inv estments and mo rtgag e loan s 30 7,9 18 31 9,5 82 3 75 ,04 4 Ch an ge in o th er liab ili ties 3 3,9 80 13 8,3 04 1 32 ,22 0 Other, n et (4 8,4 44 ) (10 1,7 84 ) (81 ,09 1) Net cash (used in) prov ided by o perating a ctivities (14 4,1 29 ) 19 5,2 72 2 49 ,63 8 See No tes to Conso lidated Fin anci al Statements 10 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Fo r The Yea r Ended December 3 1 , 2018 2 0 1 7 2016 (D o l l a rs In Tho us a nds ) Cash flows from investing a ctivities M aturities and prin cip al redu ction s of investment s, available-fo r-sale 1,8 68 ,24 5 696,57 4 1,2 99 ,75 3 Sale of in vestmen ts, av ailable-for-sale 2,5 76 ,11 9 1 ,802,21 5 1,9 56 ,30 2 Cost of in vestment s acq uired, availab le-fo r-sale (5,5 77 ,92 1) (4 ,029,23 3) (4,9 82 ,90 7) Change in in vestmen t s, hel d-to -matu rity 81 ,00 0 47,00 0 (2,1 81 ,00 0) M ortg age loans: New len ding s (1,5 89 ,45 9) (1 ,671,92 9) (1,3 96 ,28 3) Repay men ts 1,0 68 ,55 2 923,34 7 8 63 ,87 3 Change in in vestmen t real estate, n et 97 8 (10 4) 2 ,85 1 Change in po licy loan s, net 51 ,21 8 34,62 5 49 ,26 8 Change in other lo ng -term inv estments, net (1 68 ,89 7) (91,51 8) (2 50 ,55 7) Change in sh ort-term inv estments, n et (2 17 ,30 0) (279,19 1) (72 ,81 0) Net unsettled secu rity transactions 13 ,38 4 (19,02 3) 28 ,85 3 Pu rch ase of prop erty an d equi pmen t (92 ,26 9) (37,53 3) (5 ,29 5) Cash received from or paid for acqu isit io ns, n et o f cash acq uired 38 ,45 6 — 3 20 ,96 7 Net cash used in inv esting activi ties (1,9 47 ,89 4) (2 ,624,77 0) (4,3 66 ,98 5) Cash flows from fi na nci ng activ ities Borro win gs u nd er lin e of cred it arrang ements and deb t 1,0 75 ,00 0 1 ,035,00 0 2 65 ,00 0 Princip al p ayments on line o f credit arran gemen t an d d ebt (7 57 ,88 4) (1 ,156,49 8) (6 33 ,07 4) Issuan ce (rep ayment) o f n on -recou rse fun din g obl ig ation s (1 19 ,00 0) (47,00 0) 2,0 94 ,70 0 Secu red financing liabilities (5 22 ,44 2) 220,02 8 3 59 ,53 6 Div id end s to sh areown er (1 40 ,00 0) (143,84 8) (89 ,34 3) In vestmen t p rod uct an d u niversal li fe dep osits 5,6 22 ,41 4 4 ,683,12 1 4,3 93 ,59 6 In vestmen t p rod uct an d u niversal li fe withd rawals (3,1 44 ,27 3) (2 ,256,98 1) (2,3 20 ,95 8) Oth er fin anci ng activ i ties, net (38 8) (19 6) — Net cash pro vided by financing activ i ties 2,0 13 ,42 7 2 ,333,62 6 4,0 69 ,45 7 Cha ng e in ca sh (78 ,59 6) (95,87 2) (47 ,89 0) Cash at beg inning of period 2 52 ,31 0 348,18 2 3 96 ,07 2 Cash at end of period $1 73 ,71 4 $252,31 0 $3 48 ,18 2 See No tes to Conso lidated Fin anci al Statements 10 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Ba sis of Presentati on On Feb ruary 1 , 20 15 , Pro tectiv e Life Co rp oration (th e “Compan y”) became a wh olly o wned su bsidiary o f The Dai-ichi Life In surance Co mp any, Limited, a kab ush iki kaisha organ ized un der th e laws of Japan (n ow kn own as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”), wh en DL In vestmen t (Delaware), Inc. a who lly owned su bsid iary o f Dai-ichi Life, merg ed wi th and in to the Co mp an y. Pri or to Feb ruary 1 , 20 15 , t he Compan y’s sto ck was pu blicly traded o n the New York Sto ck Ex chan ge. Su bsequ en t to th e Merger d ate, the Compan y remain s as an SEC reg istrant wit hin the United States. Th e Company is a h olding co mp any with su bsidiaries th at prov id e fin ancial serv ices th rough t he p rod uctio n, di stri bu tion , an d ad ministratio n of in surance an d in vestmen t prod uct s. The Co mp any mark ets in dividu al li fe insu ran ce, credit life an d d isab ili ty in surance, g uaran t eed in vestmen t co ntracts, g uaran t eed fu nd ing ag reements, fix ed and v ariable an nu ities, and ex ten ded service con t racts throu gh ou t t he Un ited States. Th e Compan y also main tains a separate segmen t devo ted to the acq uisition of insurance p oli cies from o th er compan ies. Fo un ded in 1 90 7, Protective Life In surance Co mp any (“PLICO”) is t he Co mp any ’s largest op erat in g su bsid iary. These fin ancial stat ements h ave b een prepared in acco rd ance with acco un ting p rinciples g en erally accept ed in the Un ited St ates o f America (“GAAP”). Such accou ntin g p rinciples differ fro m statu to ry rep orting practices u sed b y i nsu ran ce co mp ani es in repo rting to state reg ulatory autho rit ies (see also No t e 2 1, S ta tu tory Rep orting Practices a nd Oth er Regu la to ry Matters). The op eratin g resu lts of comp anies in the i nsu ran ce ind ustry hav e h isto rically been su bject t o significant fluctuatio ns d ue to ch ang in g competiti on , eco no mic condi tion s, in t erest rates, in vestmen t p erforman ce, insurance ratin gs, claims, persisten cy, and other factors. Entities Included The co nsolid ated fin anci al statements in clu de th e accou nts o f Pro tectiv e Life Co rp oratio n an d su bsidiaries and i ts affili ate co mp anies in which th e Co mp any ho ld s a maj ority v oting o r eco no mic in terest. Interco mp any balan ces and transactio ns h ave b een eliminated. Du ring the fo urth quarter of 2 01 8, the Co mp any reco rd ed an ad ju stment related to prio r perio ds to correct an erro r p ertain ing to the tax ded uct ib ility of certain deferred co mp ensation fo llowing the Dai -ichi acqu isitio n an d app licati on of p urchase accoun ting i n 2 01 5. The ad ju stment resu lted in a $3 2.0 mi llio n increase to g oo dwill, with a co rrespo nd in g increase in the deferred tax liability for $2 1.3 mi llio n an d a decrease in d eferred in come t ax ex pense fo r $1 0.7 millio n. Th e Co mpan y co ncluded th at t he adjustmen t was no t q uan titativ ely or q ualitativ ely material to p rev io usly repo rted an nu al or in terim perio ds or the curren t in t eri m perio d. As a result, this ad j ustmen t was recorded b y t he Co mp any with in th e p resen ted an nu al con solidated finan cial statements fo r the year en ded Decemb er 3 1, 2 01 8. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use o f Esti mates The preparation of fin anci al statemen t s in con fo rmity with GAAP req uires man ag emen t to make estimates an d assumptio ns th at affect th e reported amou nts o f assets and liabil ities an d d isclosure of co nting ent assets an d liab ili ties at the d ate of th e finan cial statemen ts an d the rep orted amo un ts of rev en ues an d exp enses du rin g th e rep ortin g perio d. Actu al resu lts co uld differ fro m th ose estimates. The most sig nificant estimat es includ e t ho se u sed in d etermining deferred p olicy acqu isitio n co sts (“DAC”) and related amo rti zatio n perio ds, go od will recov erab ility, v alu e of b usiness acqu ired (“VOB A”), i nv estment and certain d erivativ es fair v alu es, other-than -temp orary impairments, fu ture p oli cy ben efits, p ensio n and other po st retirement ben efits, prov isio ns for in come taxes, reserves for con ting ent liabilit ies, rein surance risk transfer assessment s, and reserves for lo sses in co nn ection wit h unresolved leg al matters. Significa nt Acco unting Po licies Va luati on of Inv estment Securities The Compan y d etermines th e appro priate classificatio n o f investment secu rities at th e time o f pu rch ase and perio dically re-ev alu ates such design ation s. In vestmen t secu rities are classified as eith er trad in g, availab le-fo r-sale, o r h eld -to-maturity secu rities. In vestmen t secu rities classified as trad ing are recorded at fair val ue with ch ang es in fair valu e recorded in realized gains (losses). Inv estment securities p urchased for lo ng term inv est ment pu rp oses are classified as avail ab le-for-sale and are reco rd ed at fair v alu e with chang es in un realized gains and losses, n et of t ax es, repo rted as a co mp on ent o f ot her co mp reh ensive in come (loss). Inv est ment secu rities are classified as h eld -to-maturity when th e Company h as t he intent and ability to ho ld the secu rit ies to matu rity and are reported at amortized cost. In t erest inco me on avai lab le-fo r-sale and held-to -matu rit y securities in clu des the amort izatio n of premiums and accretion of discou nts an d are recorded in in vestmen t inco me. The fair v alu e of fix ed matu rity, sho rt-term, an d eq uity secu rities is determin ed b y manag ement after co nsiderin g one o f three pri mary sou rces o f in fo rmation : th ird party p ricin g serv ices, no n-bind in g in dep end en t broker qu otations, or pricin g matrices. Security p ricin g is app lied using a “wat erfall” ap proach whereb y p ub licly availab le p rices are first sou gh t from th ird p arty p ricin g serv ices, the remain i ng un priced securities are submitted to in dep end en t brok ers fo r n on -b in din g p rices, or lastly, securi ties are p riced u sing a pri cing matrix . Ty pical inp uts u sed by th ese three pricing metho ds in clu de, b ut are no t limited to : b enchmark yield s, 10 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents reported trad es, b rok er/dealer qu otes, issu er sp read s, two-sided mark ets, ben chmark secu rit ies, bids, o ffers, an d referen ce d ata in clu ding market research pu blicat io ns. Based on t he typ ical trading v olumes and the lack o f q uot ed mark et p rices for availab le-fo r-sal e and trading fix ed matu rities, third p arty p ricing serv ices d erive the majo rity o f secu rity p rices from o bservab le mark et inp uts such as recent repo rted trad es for id entical or similar secu rities mak ing ad justmen ts th ro ug h th e rep ort in g d ate based up on availab le market ob servable informatio n as o utlined abo ve. If there are n o recent repo rted trades, th e th ird party p ricin g services an d brok ers may u se matrix or mod el pro cesses to d ev elo p a secu rity price where fut ure cash flo w ex pectations are d evel op ed based up on collateral perfo rmance an d d isco un t ed at an estimated market rate. Certain securi ties are priced via in dep end ent no n-bin ding bro ker qu otation s, wh ich are co nsid ered to hav e n o signi ficant u no bservab le i np uts. Wh en usin g no n-b in ding in depen den t b ro ker q uo tatio ns, the Compan y ob tains o ne qu ote per security, ty pically fro m t he brok er from wh ich th e Co mp any purchased th e security. A p ricin g matrix is u sed to p rice securities for which the Compan y is un ab le to ob tain o r effectiv ely rely on either a price fro m a third p art y service or an indepen den t b ro ker quotat io n. Includ ed in th e pricing of o th er asset- backed securiti es, collateral ized mort gage o bligat io ns (“CMOs”), and mo rtg ag e-b acked securities (“M BS”) are estimates of th e rate of future prepay ments o f prin cip al and u nd erlying co l lat eral su pp ort o ver the remain in g l ife o f t he securities. Such estimates are deri ved b ased on th e characteristics o f the un derly ing structure an d rates o f prepay men ts previou sly exp erienced at th e interest rate l ev els p ro jected fo r th e u nd erlying co llateral. The basis fo r th e co st o f securities sold was determin ed at the Co mmittee o n Unifo rm Secu rit ies Id ent ificatio n Procedu res (“CUSIP”) level on a first in first ou t basis. The co mmittee sup plies a un iq ue ni ne-ch aracter id entificatio n, call ed a CUSIP nu mber, fo r each class of secu rity app ro ved for trad in g in th e U.S., to facil itate clearing an d settlement. These n umbers are used when any b uy and sell ord ers are recorded . Each qu arter th e Co mp any reviews in vestmen ts wi th u nrealized lo sses an d tests for o th er-t han-tempo rary imp airmen ts. Th e Co mp any an aly zes vario us factors to d etermine if any sp ecific other-than -temp orary asset i mp airments ex ist. These includ e, b ut are no t limited t o: 1) actio ns tak en by rating ag encies, 2 ) default b y th e issu er, 3 ) th e sig nificance o f the declin e, 4) an assessment o f th e Co mp any ’s intent to sell t he security (includi ng a mo re likely th an n ot assessment of whether t he Compan y will be requ i red to sell the secu rity ) before recoverin g the secu rity’s amortized co st, 5) th e du ration of the decline, 6) an eco no mic analysis of the issu er’s in du stry, an d 7 ) th e fin anci al streng th , l iq uidity, an d reco verab ility o f th e issuer. Manag emen t p erforms a security b y security review each q uarter in evaluatin g the need fo r an y o th er-t han-tempo rary impairments. Alth ou gh n o set formu la is u sed in thi s p ro cess, the in vestmen t p erforman ce, co llateral p ositio n, an d cont in ued viability of the issu er are sig nificant measu res co nsid ered , an d in some cases, an an alysis regardin g the Co mp any ’s exp ectatio ns fo r recov ery of the secu rity ’s en tire amortized co st basis th ro ug h th e receip t of future cash flows is perfo rmed . Once a determination h as been made th at a sp ecific other-than -temp orary impai rment ex ists, the security ’s basis is ad ju sted and an oth er-th an-tempo rary impairment is recog nized . Equi ty securities that are o th er-th an-tempo rarily imp aired are written do wn to fair value with a realized loss recog nized i n earn in gs. Other-th an - temp orary impairments t o deb t secu rities that th e Co mp an y d oes n ot in t en d to sell an d d oes n ot exp ect to be required to sel l b efore reco verin g the security ’s amortized co st are wri tten d own t o d iscount ed ex pected future cash flows (“p ost imp airmen t co st ”) an d credit lo sses are recorded in earn ings. Th e differen ce between th e secu rit ies’ discou nted ex pect ed fut ure cash flo ws an d the fair value o f the securi ties on th e impai rment date is reco gn ized in other compreh ensiv e in come (lo ss) as a no n-cred it po rti on impairmen t. Wh en calcu latin g the p ost impairment cost for residen tial mortgage-back ed securi ties (“RM BS”), co mmercial mo rtg age-backed secu rities (“CMBS”), and other asset-back ed securities (co llectivel y referred to as asset-backed securities o r “ABS”), th e Co mp any co nsiders all k no wn market data related to cash fl ows to esti mate fu t ure cash flo ws. When calculating the po st imp airmen t cost for corpo rate d eb t securities, th e Comp any con siders al l co ntractual cash flows to estimate exp ected fu tu re cash flows. To calculate the post impai rmen t cost, the ex pected fu tu re cash flows are d isco un ted at the o riginal p urchase yield . Debt secu rities that the Co mp any intend s to sell or exp ects to b e requ ired to sell before recov ery are writ ten d own to fair v alu e with t he chan ge reco gn ized in earnings. Ca sh Cash in clu des all demand d epo si ts redu ced by the amo un t o f o utst an din g checks an d d rafts. As a result o f t he C ompany ’s cash management system, ch ecks issued from a p articu lar ban k bu t n ot y et p resent ed for p aymen t may creat e neg ative b oo k cash b alan ces with th e ban k at certai n repo rti ng dates. Such negativ e b alances are incl ud ed in ot her liabilit ies an d were $1 53 .3 millio n as of December 31 , 2 01 8 an d $13 2.7 millio n as of December 31 , 20 17 , resp ecti vel y. Th e Comp any has d epo sits wi th certain fi nancial institu tions which ex ceed fed erally in su red li mi ts. Th e C ompany has reviewed the creditwo rthin ess of th ese finan cial in stitutio ns and b elieves there is mini mal ri sk o f a material loss. Deferred Policy Acquisitio n Costs The incremental di rect costs associated with su ccessful ly acqu ired insurance p olicies, are d eferred to the ex ten t such costs are deemed reco verable from fu tu re p ro fits. Su ch co st s in clu de co mmissio ns an d other costs o f acq uiring t raditio nal life an d h ealth in surance, cred it insu ran ce, un iv ersal life in surance, an d i nv estment p ro du cts. DAC are su bject to recov erability testing at the end o f each acco un tin g perio d. Trad ition al life and h ealth i nsu ran ce acq uisition co sts are amortized ov er t he premi um-p aymen t p eriod o f the related p olicies in p roportion to the ratio of an nu al premium in come t o th e p resen t value o f th e total anticipated premium in come. Cred it insurance acq uisition costs are being amo rtized in prop ortio n to earned premium. Acq uisition co sts for un iv ersal life and in vestmen t produ cts are amo rti zed ov er th e lives of th e po licies i n relation to th e p resen t v alu e o f estimated g ross p ro fit s before amortization. The Compan y makes certain assumpti on s reg ard ing th e mo rtalit y, persistency, ex pen ses, and interest rates (eq ual to t he rate u sed to compu te liabilities fo r future p olicy b enefits, curren tly 1 .0% to 7.1 %) th e Compan y exp ects to ex perien ce i n fu tu re perio ds when d etermining the present value o f estimated g ro ss p ro fits. Th ese assumpti on s are b est estimates and are p eriodi cally u pd ated wh enev er act ual ex perien ce and /o r ex pectation s for th e fut ure ch ang e from that assumed. Add i tion ally, these costs h ave been ad ju sted by an amou nt eq ual to th e amortization th at wou ld h ave been recorded if unrealized gains or lo sses o n in vestmen ts associated with o ur un iv ersal life and in vestmen t p ro du cts h ad been realized. Acqu isitio n co sts for st ab le v alu e co ntract s are amortized o ver th e term of t he con tracts u sing th e effective yield metho d. 11 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Va lue of Businesses Acquired In con ju nction with th e Merg er and the acq uisition o f in su ran ce po licies or inv estment co ntracts, a po rtio n of the pu rch ase p rice is allo cated t o th e righ t to receiv e fu ture gross p rofits from cash flo ws and earning s of associated in su ran ce po licies and inv estment co ntracts. This in tan gible asset, cal led VOBA, is based o n the actuarially estimated present v alu e of fut ure cash fl ows from associated insu ran ce po licies and in vestmen t con tracts acq uired . Th e estimated present v alu e o f future cash flows used in the calcu latio n of th e VOBA is b ased on certain assu mp tion s, in clu ding mo rtality, persi sten cy, exp enses, an d interest rates th at th e Co mp any ex pects to ex perien ce i n fu ture y ears. Th e Compan y amo rtizes VOBA in prop ortion to gross p remiu ms for traditio nal life prod uct s, o r estimated g ro ss margins (“EGMs”) fo r particip ating trad ition al life produ cts within the MONY Life Insu ran ce Compan y (“MONY”) b lock. Fo r in terest sensitive prod uct s, th e Compan y u ses v ariou s amo rtizati on bases in clu ding exp ected gross profits (“EGPs”), revenues, accou nt v alu es, or i nsu ran ce in -force. VOBA is sub ject to an nu al recov erabil ity testing. Intangible Assets In tangi ble assets wit h d efinite liv es are amortized o ver th e est imated u seful life o f th e asset an d reviewed for impairment whenev er ev ents or ch an ges in circumst an ces ind icate th at th eir carryin g amou nt may n ot b e reco verable. Amo rtizab le in tan gible assets p rimari ly con sist of d istrib utio n relation sh ip s, trade names, tech no lo gy, an d so ftware. Intang ib le assets with indefi nite liv es, pri marily insuran ce licenses, are no t amortized, b ut are reviewed for impairment on an ann ual basis or when ever ev ents or chan ges in circu mstances ind icat e that their carrying amo un t may n ot be reco verable. So ftware is gen erally amortized o ver a th ree year useful life. In tangi ble assets recog nized b y t he Compan y i ncl ud ed th e fo llo wing (ex clu ding go od will): As o f December 3 1 , Estimated 201 8 2017 Useful Life (Do l l a rs I n Tho usa nds ) (In Y ears) Distribu tion relatio nsh ip s $37 7,4 41 $4 02 ,97 5 14 -22 Trad e n ames 7 8,6 29 85 ,34 0 13 -17 Tech no logy 9 3,4 33 1 07 ,34 3 7 -1 4 Other 3 1,9 28 35 ,91 4 To tal in tan gible assets sub ject to amort izatio n 58 1,4 31 6 31 ,57 2 In surance licenses 3 2,0 00 32 ,00 0 Ind efinite To tal in tan gible assets $61 3,4 31 $6 63 ,57 2 Id en tified in tan gible assets were val ued u sing th e ex cess earn in gs metho d, reli ef fro m roy alt y metho d o r co st ap pro ach , as app ro priate. Amortizable int an gib le assets will b e amo rtized straigh t line ov er their assi gn ed u seful liv es. Th e fo llowing is a schedu le of future estimated ag gregate amort izatio n exp ense: Yea r Amo unt (D o l l ars In Tho us a nds ) 2 01 9 $5 5,2 99 2 02 0 5 2,2 98 2 02 1 4 9,6 93 2 02 2 4 6,4 35 2 02 3 4 5,1 35 Property a nd E quipment In co njun ction with th e Merger, prop erty and eq uipment was recorded at fair value as of th e M erg er d ate and will be dep reci ated fro m t his basis in fu tu re p eriod s based on t he respectiv e estimated u sefu l liv es. Real estate assets were recorded at ap praised values as of th e acqu isit io n d ate. Th e Comp any has estimated t he remain in g u sefu l life o f the ho me o ffice b uild in g to b e 25 years. Land is n ot dep reciated. The Co mp any dep reciates its assets using the straig ht-line meth od o ver the estimated u sefu l lives of the assets. The Comp any ’s furn iture is depreciated o ver a ten year usefu l life, office eq uipment an d mach in es are depreciated ov er a five year u seful life, an d co mp uters are d ep reciated o ver a fou r year useful life. Majo r rep airs o r impro vemen ts are cap italized and dep reciated ov er th e estimated u sefu l lives of the assets. Oth er rep airs are ex pensed as in curred . Th e co st an d related accumulated d epreciat io n of prop erty and eq uipment sold or retired are remov ed from th e accou nts, and resu ltin g g ains o r lo sses are includ ed in inco me. 11 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Prop ert y and equ ip men t co nsisted o f the follo win g: As of December 31, 2018 2017 (Dollars In Thousands) Home o ffice b uildi ng $144,66 9 $68 ,12 3 Data processin g eq uipment 28,79 3 24 ,10 2 Oth er, p rincipal ly fu rn iture and equ ip ment 19,77 4 17 ,19 8 To tal property an d eq uipment sub ject to dep reci ati on 193,23 6 1 09 ,42 3 Accu mu lated d epreciation (33,19 9) (22 ,92 6) Land 24,92 0 24 ,92 0 To tal property an d eq uipment $184,95 7 $1 11 ,41 7 Sepa rate Acco unts The sep arate accou nt asset s rep resen t fun ds fo r which the Compan y d oes n ot bear th e in vestmen t risk . These assets are carried at fair v alu e an d are eq ual to t he sep arate acco un t liab ilities, which represent th e po licyh older’s equ i ty in th ose assets. The inv estment income and in vestmen t g ain s an d losses on th e separate acco un t assets accru e directly to th e p olicy ho ld er. Th ese amo un ts are rep orted sep arately as assets and liab iliti es related to separate acco un ts in th e acco mp anyin g co nso lidated financial statements. Amou nts assessed ag ainst p oli cy accou nt balances for the costs of in su ran ce, p oli cy admin istration , and other serv ices are includ ed in p remiu ms an d p olicy fees in the accompan ying con solid ated statemen ts o f inco me. Stable Value Pro duct Account Bal ances The Stab le Valu e Pro du cts segment sell s fix ed and flo ating rate fu nd in g agreements di rectly t o qu ali fied in stitutio nal inv est ors. Th e seg men t also issues fu nd in g agreements to t he Federal Ho me Loan Bank (“FHLB”), and mark ets gu aran teed inv estment con t racts (“GICs”) to 4 01 (k) and o ther qu alified ret irement saving s plans. GICs are con t racts wh ich specify a return o n dep osits fo r a speci fied perio d and often p rovid e flex ib ili ty for withd rawals at book value in keep in g with th e b enefits p ro vided by th e p l an . The Co mp any reco rd s its stable v alu e con tract liabi lities in th e conso lidated bal an ce sh eets in “stable value prod uct accou nt b alances” at th e depo sit amou nt pl us accru ed interest, adjusted for any un amo rtized p remiu m o r d isco un t. Interest on the con tracts is accru ed based up on con tract terms. Any premium o r d iscou nt is amortized u sin g the effectiv e yield meth od . The seg ment’s p ro du cts co mp lemen t the Co mpan y’s ov erall asset/liab ili ty manag emen t in that th e terms may be tailored to the n eeds o f PLICO as th e seller o f the co ntracts. Stable value p ro du ct acco un t b alan ces in clu de GICs an d fundin g ag reemen ts th e Co mp any has issued. As of Decemb er 31 , 2018 an d Decemb er 3 1, 20 17 , the Compan y had $4 ,08 3.8 mi llio n and $3 ,33 7.9 millio n, resp ectively, of stable v alue prod uct accou nt b alances marketed throu gh structured p ro grams. Mo st GIC s and fu nd in g ag reemen ts th e Co mp any h as written h ave maturities of on e to twel ve years. As o f Decemb er 3 1, 2 01 8, future maturities o f stab le value p ro du cts were as fo llows: Year of Ma turity Amount (Do lla rs I n M il l i o ns ) 20 19 $1 ,25 3.9 20 20 - 2 02 1 3 ,04 2.5 20 22 - 2 02 3 81 8.7 Thereafter 11 8.7 Deri va tive Fina ncial Instruments The Compan y reco rd s its deriv ati ve fin an cial in stru men ts in th e co nsol id ated balan ce sheet in “ot her lo ng -term in vestmen ts” an d “o th er liab iliti es” in accordan ce with GAAP, which requi res th at all d erivative instruments be recog nized in the balance sheet at fair v alu e. Th e chan ge in the fair value of deriv ati ve fin ancial in stru ments is rep orted either in th e statemen t of inco me o r in the statemen t of oth er co mp reh ensive in come (loss), dep endin g upon wh eth er th e deriv ati ve in stru ment qu alified for an d also has b een p rop erl y id entifi ed as b ein g p art o f a hedgi ng relatio nship, and also o n t he ty pe of hedg ing rel ati on ship that exists. Fo r cash flow h edg es, th e effective po rti on of th eir gain o r loss i s rep orted as a compo nent o f o th er co mp reh en sive inco me (lo ss) and reclassified into earn in gs i n th e perio d du rin g wh ich the hedg ed item impacts earn i ng s. An y remain in g gai n or loss, t he ineffectiv e p ortion , is recog nized in cu rrent earning s. For fair v alue hed ge d erivativ es, their gai n o r lo ss as well as th e offsettin g lo ss or gain on t he h edg ed it em at trib utable to th e hed ged risk are recog nized in curren t earn in gs. Effectiven ess o f th e Compan y’s hed ge relatio nships is assessed o n a qu arterly basis. The Co mp any rep orts chan ges in fair values o f d erivatives that are n ot p art of a q ual ifying hed ge relatio nship in earn in gs. Ch ang es i n the fair v alu e of deriv atives th at are reco gn ized in curren t earning s are 11 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents reported in “Realized inv estment gains (losses)—Derivativ e financial instruments”. Fo r addi tion al informatio n, see Note 7, Derivative Fina ncial In st ruments. Insurance Liabilities and Reserves Estab lish in g an ad equ ate li ab i lity for the Co mp any ’s o blig ations to p olicy ho ld ers req uires the u se o f certain assumptio ns. Estimating liab ili ties for fu tu re po licy benefits on l ife and h ealth in surance prod ucts requ ires th e use of assumptio ns relativ e to futu re in vestmen t yield s, mortality, morbidity, persistency, an d other assumptio ns b ased o n the Co mp any ’s h isto rical ex perien ce, mo dified as necessary to reflect an ticip ated tren ds and to in clu de prov isio ns fo r p ossib le ad verse d ev i ati on . Determin i ng liabilit ies for the Co mp any ’s pro perty and casualty insurance pro du cts also req uires th e use of assumptio ns, in clu ding the p ro jected levels o f u sed veh icle prices, the frequ ency an d severity of claims, and th e effectiven ess o f in ternal processes desig ned to red uce the level o f claims. Th e Compan y’s resu lts d epend sig nificantly up on the ex ten t to which its actu al claims ex perien ce is co nsistent wi th the assumptio ns th e Co mp any used in d etermin i ng its reserv es and pricing its p ro du cts. Th e Company ’s reserv e assumpti on s and estimates req uire sig nificant ju dg ment and , therefore, are inh eren tly u ncertain. Th e C ompany cann ot determin e with p recision th e ultimate amounts that i t wi ll pay fo r actual claims o r th e timing of th ose p ayments. Gua ranteed Living Withdra wal Benefits The Compan y also est ab lish es reserv es for gu aran teed living with drawal ben efits (“GLWB”) on i ts variable an nu ity (“VA”) products. The GLWB is valued i n acco rd ance with FASB g uid an ce u nd er the ASC Deriv atives an d Hed gin g To pic wh ich u til izes th e v alu ation techn i qu e p rescrib ed by th e ASC Fair Valu e Measu remen ts and Discl osu res Top i c, wh ich requi res the emb edd ed d erivativ e to be reco rd ed at fair v alu e using curren t interest rates an d imp lied vo lat ilities for th e eq uit y indices. The fair valu e of th e GLWB is impacted by eq uity market co nd itio ns an d can result in the GLWB emb edd ed deriv ative being in an ov erall net asset o r net liabilit y p ositio n. In times o f favorabl e equ ity market con ditions th e likeliho od and sev erity o f claims is red uced and ex pected fee inco me in creases. Since claims are g enerally exp ected l ater t han fees, these favo rab le equ ity market co nd itio ns can result in th e present val ue o f fees b ein g greater than th e p resen t value o f clai ms, wh ich result s in a net GLWB embed ded d eri vativ e asset. In ti mes of unfav orable eq uity mark et co nd ition s th e likelih oo d an d severity o f clai ms is increased an d ex pect ed fee in come d ecreases an d can result in th e present value of claims ex ceed ing th e present v alu e of fees result in g in a n et GLWB embedd ed d erivativ e liabil ity. The meth od s used to esti mate the embed ded deriv ative empl oy assu mption s abo ut mortality, lapses, p olicyhol der b ehav io r, eq uity mark et retu rn s, in terest rates, and mark et vo l ati lity. The Compan y assu mes age-based mo rtality from th e Ruark 2 01 5 ALB table ad justed for company exp erience. Differences b etween the actu al experience and the assu mp tion s used result in v ariances in p ro fit an d co uld result in lo sses. As of December 31 , 20 18 and 2017 , o ur net GLWB liab ili ty hel d was $1 84 .1 million and $1 11 .8 million, respectively. Goo dwill The b alan ce reco gn ized as go od will is no t amo rti zed , b ut is reviewed fo r impairment o n an an nu al basis, or more freq uen tly as ev ents o r circu mstan ces may warran t, in clu ding th ose circumstan ces which wo uld more l ik ely th an not redu ce th e fair val ue o f the Co mp any ’s reportin g u nits b elow its carry ing amo un t. Acco un ting for go od will req uires an estimate o f th e fu tu re profitabilit y o f th e asso ciated lin es o f b usin ess wi th in t he Compan y’s op eratin g segmen t s to assess the recoverability o f the capitalized go od will. Th e Co mp any ’s material g oo dwill balances are attribu tab le t o certain of i ts o perating segmen t s (which are each co nsid ered to be rep orting un its). Th e Compan y evaluates th e carrying val ue of g oo dwill at th e seg ment (o r rep ortin g un it) level at least an nu ally and b etween ann ual ev alu ation s if ev ents o ccur o r circumstances chang e that wo uld more lik ely than n ot reduce the fair v alu e o f th e repo rting un it b elow its carry in g amou nt. Such circumstances co uld in clu de, b ut are not l imited to : 1) a signi fican t adv erse chang e in leg al facto rs or in bu siness cli mate, 2 ) u nan ticip ated compet itio n, o r 3) an adv erse actio n or assessment by a reg ulato r. Wh en ev alu ating whether go od will is imp aired, the Compan y first determines th rou gh qu alit ati ve an aly sis whether relevan t events an d circumstan ces i nd icate th at it i s more likely th an no t that seg men t go od will balan ces are impaired as o f th e testin g d ate. If the q ual itative an alysis do es no t ind icate th at an impairmen t o f segmen t go od wil l is mo re lik ely than n ot t hen n o ot her speci fic qu an titative i mp airment testing is requ ired. If it is d etermined th at it is mo re lik ely th an n ot th at imp airmen t ex ists, the Compan y p erforms a q uantitativ e assessment an d co mp ares its estimate o f th e fair value o f the rep orting u nit to which the go od wil l is assig ned t o the rep orting u nit’s carrying amo un t, in clu ding g oo dwill. The Co mp any u tilizes a fair value measurement (which in clu des a disco un ted cash flo ws analysis) to assess the carry in g value of the repo rting u nits i n co nsid erat io n of the recov erab ility of the g oo dwi ll balan ce assig ned to each repo rtin g u nit as o f t he measu rement d ate. Th e cash flows u sed t o determin e th e fair value of th e Co mp any ’s reporting u nits are dep end ent o n a numb er of sig nificant assumptio ns. Th e Compan y’s est imates, wh ich co nsid er a market p articipan t view o f fair value, are sub ject to chan ge giv en t he i nh erent u ncertain ty in p red ictin g futu re results and cash flo ws, which are impact ed by su ch thing s as p olicyhol der beh av ior, co mp etito r prici ng , cap ital limitatio ns, n ew p ro du ct introd uct io ns, an d sp ecific ind ustry and market con dition s. Inco me Ta xes The Compan y an d its sub sidiaries file a co nsolid ated fed eral in come tax retu rn that in clu des b oth life insu ran ce companies an d n on -life i nsu ran ce co mp anies. Th e Co mp any has o ne life in surance su bsidiary th at is no t el ig ib le to be includ ed in th e consolid ated fed eral inco me tax return an d files a separate corpo rate tax ret urn. On Decemb er 22 , 20 17 , the Presi dent of th e Unit ed States sign ed in t o law th e Tax Cuts and Jo bs Act (the "Tax Reform Act"). Furth er i nformatio n on th e tax imp acts o f the Tax Reform Act is includ ed in No te 18, In come Ta xes. The Compan y u ses the asset an d li ab i lity metho d o f accou nting fo r inco me tax es. Generally, most i tems in pretax bo ok in come are also in clu ded in taxab le in come in the same year. Howev er, some i tems are recog nized for b oo k pu rp oses and for tax p urpo ses in differen t years or are nev er recog nized fo r eit her b oo k o r tax p urpo ses. Th ose d ifferences that will n ever be reco gn ized 11 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents fo r either b oo k or t ax p urposes are permanen t differen ces (e.g., the dividen ds-received d edu cti on ). As a resu lt, the effective tax rate reflected i n th e fin ancial statements may d iffer from th e statu tory rate reflected in the tax retu rn . Tho se differen ces that are reported in d ifferent y ears for bo ok an d tax pu rp oses are temp orary and will reverse over time (e.g ., th e valuatio n o f fu tu re p olicy ben efits). Th ese tempo rary d ifferences are acco unt ed for in the int erv en ing perio ds as deferred tax assets and liabilities. Deferred tax asset s generally represent reven ue that is tax able b efo re i t is recog nized in finan cial inco me and exp en ses t hat are ded uctib le after th ey are recog nized in financial inco me. Deferred tax liabilities g enerall y represent rev enues th at are taxab le after th ey are reco gn ized in finan cial in come o r expen ses o r lo sses that are d edu ctible before t hey are reco gn ized in fin anci al inco me. Compo nen ts of accu mu lated ot her compreh ensiv e in come (lo ss) (“AOCI”) are presented net o f tax , an d it is th e Co mp any’s p olicy to u se the agg reg ate portfo lio app ro ach to clear th e d isprop ortionate tax effects that remain in AOCI as a result o f tax rate ch ang es and cert ain other events. Under th e ag gregate po rtfo l io app ro ach , disp ro po rti on ate t ax effects are cleared on ly wh en the p ortfoli o o f inv estments that g ave rise to the d eferred tax it em is sold o r o th erwise disp osed of in its enti ret y. The applicati on o f GAAP requ ires th e Co mpan y t o eval uate t he recov erab ility o f t he Co mp any ’s deferred tax assets and establish a v alu ation all owance, if necessary, to redu ce th e Compan y’s deferred tax assets t o an amou nt t hat is more likely th an no t to b e realized. Con sid erab le ju dg ment is requi red in d etermining wh ether a valu ation allo wance is n ecessary, an d if so, the amo un t of su ch val uatio n allowance. In eval uat in g th e need for a v alu ation all owance the Company may con sid er many facto rs, in clu ding : (1) the nature of th e deferred tax asset s and liabilities; (2 ) whether th ey are ordinary o r capital; (3 ) in wh ich tax ju risd ictio ns they were gen erated and the timing of their rev ersal; (4) taxab le in come in prior carry back years as well as p ro jected tax able earning s excl usive of rev ersing temp orary di fferen ces an d carryforwards; (5) the len gth of time th at carryo vers can be utilized in t he vario us t ax ing ju risdict io ns; (6 ) an y u niqu e tax ru les that wou ld impact th e u til izatio n o f the deferred tax assets; and (7 ) any tax plann in g strateg ies that th e Co mp any wo uld employ to av oid a tax b enefit from expiring unused . Alt ho ug h realizat io n is n ot assured, man agemen t b elieves it is more lik ely th an no t t hat the deferred tax assets, n et o f v alu ation allowances, will be reali zed . GAAP p rescri bes a comprehen si ve mo del fo r ho w a co mp an y sho uld recog nize, measure, present, and disclose in it s fin an cial statemen ts un cert ain tax po sition s th at a compan y has taken o r exp ects to take o n tax retu rn s. The ap pli catio n of th is gu id ance is a two-step p ro cess, th e first step being recog nit io n. The Co mp any d etermi nes wheth er it is mo re likely th an no t, based o n th e techn ical merits, th at th e tax po sition wi ll b e su stain ed upon ex aminatio n. If a tax p ositio n d oes n ot meet th e mo re lik ely th an n ot reco gn itio n thresh old, the b enefit of th at p ositio n is n ot reco gn ized in th e finan cial statements. The second step is measuremen t. Th e Compan y measu res the tax po sition as t he largest amou nt of b enefit th at is g reater th an 50 percen t lik ely o f being realized up on ultimate reso lu tion with a tax in g auth ority that h as fu l l kn owledg e o f all relev an t info rmati on . This measu remen t co nsid ers the amo un ts an d p ro bab ili ties of th e ou tco mes that co uld be realized up on ultimate settlement using th e facts, circumstan ces, and in fo rmation avai lab le at the repo rting date. The Co mp any ’s liabi lity fo r in come taxes in clu des the liabi lity for un recogn ized tax benefits, in terest and penalties which rel ate to tax years still sub ject to rev iew by the In ternal Reven ue Service (“IRS”) o r o th er tax in g ju risd ictio ns. Au dit period s remain op en fo r rev iew un til the statute o f limit ation s ex pires. Gen erally, for tax years which p ro du ce n et o perating lo sses, cap ital losses or t ax cred it carryforward s, t he statu te o f limitations d oes n ot clo se u ntil th e exp iration o f t he statute o f limitatio ns for the tax year in which th ey are fully u til ized. The completion o f rev iew o r th e ex piratio n of the st atute o f limitatio ns for a g iv en au dit perio d cou ld result in an adjustment t o th e liabilit y fo r in co me tax es. Th e Company classifies all in terest and p enal ties related to tax u ncertainties as in co me tax expense. See No te 1 8, Inco me Taxes, for add itio nal in fo rmation reg ard in g inco me taxes. Va ria ble Interest Entities The Co mp any h olds certain in vestmen ts in entities in which its own ersh ip in terests co uld po ssibly be con sidered variab le in terests u nd er To pic 8 10 of th e FASB ASC (exclu din g d eb t an d eq uity securities held as trading , available for sale, o r h eld to maturi ty ). Th e Company rev iews th e ch aract eristics o f each o f th ese app licable entities an d co mp ares th ose characteristics t o ap pli cab le criteria to d etermi ne wh eth er th e entity i s a Variable Interest En tit y (“VIE”). If the entity is determin ed to be a VIE, the Co mp any th en perfo rms a d etailed rev iew to determine wh eth er th e in terest wou ld b e con sid ered a v ariabl e in terest un der th e gu i dance. The Compan y th en p erforms a qu alit ati ve review of al l v ariable interests with the en tity an d d etermines whet her th e Compan y is th e primary ben eficiary. ASC 81 0 prov id es th at an entity is the primary b eneficiary of a VIE if t he en tity h as 1 ) th e p ower to d irect th e activ ities of the VIE th at most sig nificantly imp act t he VIE’s econ omic p erforman ce, an d 2) th e ob lig ati on to absorb losses o f the VIE that cou ld pot en t ial ly be sig nificant to the VIE or the righ t t o receiv e b enefits from the entity that cou ld po tentially be significant to the VIE. Fo r mo re i nformatio n on th e Compan y’s inv estment in a VIE refer to Note 5, Investmen t Op eratio ns, to th e co nsolid ated finan cial statements. 11 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Policy ho lder Liabilities, Rev enues, and Benefits Ex pense Future Po licy Benefits and Claims Futu re pol icy b enefit liabil ities for t he year in dicated are as fo llows: As of December 31, 2018 2017 2018 2017 Total Policy Liabilities and Accruals Reinsurance Receivable (D o l l a rs I n Tho usa nds ) (Do l la rs I n Tho usa nds ) Life and annuity benefit reserves $40,883,229 $29,972,938 $3,582,850 $3,898,079 Unpaid life claim liabilities 654,077 595,188 383,376 362,827 Life and annuity future policy benefits 41,537,306 30,568,126 3,966,226 4,260,906 Other policy benefits reserves 142,855 157,101 80,688 92,330 Other policy benefits unpaid claim liabilities 221,391 232,365 176,155 185,826 Future policy benefits and claims and associated reinsurance receivable $41,901,552 $30,957,592 $4,223,069 $4,539,062 Unearned premiums 872,594 875,405 541,674 536,636 Total policy liabilities and accruals and associated reinsurance receivable $42,774,146 $31,832,997 $4,764,743 $5,075,698 Liab ilities fo r life an d an nu ity ben efit reserves co nsist of liab ili ties for tradit io nal life in surance, cash values asso ciated with un iv ersal life insu ran ce, immediate an nu ity b enefit reserves, an d oth er ben efits associated with life and an nui ty benefi ts. Th e un paid life claim liab ilities co nsist of curren t pend ing claims as well as an estimate o f incu rred b ut no t repo rted life in surance cl aims. Other pol icy ben efit reserves co nsist of certai n h ealth insurance p olicies t hat are in ru no ff. Th e un paid claim l iabilities associated with other pol icy benefits includ es curren t p end in g claims, th e present value of estimated fu tu re claim p ayments fo r p olicies currently receiv ing benefits an d an estimat e o f claims i ncurred but no t y et rep ort ed . Tra ditional Life, Health, a nd Credit Insurance Products Trad itio nal life in su ran ce p ro du cts con sist p rincipally of th ose p ro du cts with fixed and gu aran teed p remiu ms and ben efits, an d th ey incl ud e wh ole life insurance po licies, term and term-lik e life in surance p olicies, limited p aymen t life insurance pol ici es, and certain ann uities with life co ntin gen cies. In acco rd ance with ASC 80 5, the l iabilities fo r future po licy b enefits on traditio nal life insu ran ce prod ucts, when co mb in ed wi th th e associated VOBA, were recorded at fair value o n the d ate of t he M erg er. These values were computed u sin g assumptions th at in clu de interest rates, mortality, l ap se rates, ex pen se estimates, and o th er assumption s b ased on the Co mpan y’s exp erience, mod ified as necessary to refl ect an ticip ated trend s an d to includ e p ro visi on s for po ssi ble ad verse dev iatio n. Liab ilities fo r futu re p olicy ben efi ts o n tradition al life i nsu ran ce prod ucts hav e been co mp uted u sing a net lev el meth od in clu ding assu mp tion s as to in vestmen t y ields, mort ality, p ersist ency, and other assu mp tion s based o n the Compan y’s ex perien ce, modi fied as n ecessary to reflect anti cipated tren ds and to in clu de pro vision s fo r p ossib le ad verse dev iatio n. Reserve investment yield assumpti on s on December 31 , 2 01 8, ran ge fro m ap proxi mately 2.0 0% to 5.50%. The liab ility for future p olicy b enefits an d claims on t raditio nal life, h ealt h, an d cred it insu ran ce p ro du cts in clu des est imated un paid claims th at hav e been repo rted to u s and clai ms incu rred b ut no t y et repo rted. Pol icy claims are ch arg ed to exp ense in the p eriod in wh i ch th e claims are in curred . Trad itio nal li fe in surance premiums are recog nized as rev en ue when d ue. Health and credit insu ran ce p remiu ms are reco gn ized as revenu e o ver th e terms of the po lici es. Benefits and expenses are asso ciated with earn ed premiums so th at profits are recog nized ov er th e life of the con tracts. This is acco mp lished b y means o f th e p ro vision for liab ili ties for futu re p olicy b enefits and t he amortization o f DAC and VOBA. Gro ss premiums in excess of net premiums related to immediate annu ities are deferred and recogn ized o ver th e life o f the p olicy . Univ ersal Life and Investment Pro ducts Un iv ersal life and inv estment pro du cts in clu de u niversal life insurance, g uaran t eed inv estment con tracts, gu aran teed fu nd in g agreements, d eferred an nu ities, and an nu ities witho ut life co ntin gen cies. Premiums and p olicy fees for u niversal life and in vestmen t produ cts co nsist o f fees th at have been assessed ag ain st po licy acco un t b alan ces fo r the co sts of insu ran ce, p olicy admin i stration, and su rrend ers. Such fees are reco gn ized wh en assessed an d earned . Ben efit reserv es for univ ersal life and inv estment p rod uct s represent po licy acco un t b alances b efo re app licab l e su rrend er charges plu s certain deferred pol icy in itiatio n fees that are reco gn ized in in co me o ver th e term o f the p olicies. Pol icy benefits an d claims th at are charged to ex pen se i nclud e b enefit claims in curred in th e p eriod in excess o f related p oli cy acco un t balances and interest credit ed to p olicy accou nt bal an ces. Interest rates credited to u niversal life prod uct s ran ged from 1.0 % to 8.7 5% and inv estment prod ucts ran ged from 0.1 9% to 1 1.2 5% in 2 01 8. 11 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any est ab lish es liab ili ties for fix ed in dex ed an nu ity (“FIA”) prod ucts. These prod uct s are deferred fixed annuities with a gu aran teed mi nimu m interest rate plu s a con ting ent return based on equ ity mark et p erforman ce. The FIA prod uct is con sid ered a hy bri d fin ancial instrument un der the Financial Accou ntin g Stand ard s Board (“FASB”) Accou nti ng Stand ard s Co dification (“ASC” o r “Co dification ”) To pic 8 15 - Deriva tives an d Hed ging wh ich all ows t he Company to mak e the election to valu e th e liabilities o f these FIA p ro du cts at fair v alu e. This electio n was mad e fo r the FIA p roducts issued prio r to 20 10 as th e po lici es were issu ed. These p rod ucts are no l on ger being marketed. The futu re ch ang es i n the fair value o f th e liabil ity fo r th ese FIA prod ucts are record ed in Benefit an d settlement exp enses with the liability being recorded in Ann uity a cco un t b alan ces. For more i nformatio n reg ard in g th e determination o f fair v alu e o f ann uit y acco un t b alan ces p lease refer to Note 6 , Fair Valu e of Fina ncial Instru men t s . Premiums a nd p olicy fees fo r t hese FIA prod uct s con sist o f fees th at h ave been assessed ag ain st th e policy accou nt bal an ces fo r surren ders. Su ch fees are reco gn ized wh en assessed and earn ed. The Company curren tly mark ets a deferred fixed ann uity wit h a gu aranteed min imum in terest rate plus a co ntin gen t retu rn based o n eq uity market perfo rman ce and t he p ro du cts are co nsidered h ybrid fin an cial instrumen ts un der the FASB’s ASC Topi c 81 5 - Derivati ves a nd Hedg ing . Th e Compan y did no t elect to valu e t hese FIA prod ucts at fair value. As a result, the Co mp any accou nts for t he p ro vision th at prov id es for a cont in gen t retu rn b ased o n equ ity mark et performance as an embed ded d erivativ e. Th e embed ded d erivativ e is bifurcated fro m th e h ost con tract and recorded at fai r value in Oth er li ab ilities. Ch ang es i n the fair value o f th e emb edd ed d erivat iv e are recorded in Realized in vestment ga in s (lo sses) - Deriva tive fin an cia l instru ments. Fo r more in fo rmation reg ardin g the determin ation of fair value of th e FIA embed ded deriv ative refer to Note 6, Fair Va lu e o f Fina ncial In struments . The ho st co ntract is acco un ted for as a UL - Type insurance co ntract i n acco rd ance with ASC Top ic 9 44 -Fina ncial S ervices—Insu ra nce and is recorded in An nu ity a cco un t ba la nces with an y d isco unt to th e min i mum accou nt value being accreted using t he effective y ield method. The Co mp any mark ets u niversal life p ro du cts with a gu aranteed minimu m int erest rate plus a con ting ent retu rn based o n equ ity market p erforman ce an d the products are con sidered hy brid finan cial in struments un der th e FASB’s ASC To pic 8 15 - Deriva tives a nd Hed ging . The Compan y d id not elect to value th ese ind exed u niv ersal life (“IUL”) prod ucts at fair v alu e p rio r to th e Merger d ate. As a resu lt, th e Co mp an y accou nts fo r the pro vision that prov id es fo r a con ting ent return b ased o n eq uity market perfo rman ce as an emb edd ed d erivat iv e. The emb edd ed derivativ e is b ifurcated from th e ho st co ntract and recorded at fair value i n Oth er lia bilities. Ch ang es i n th e fair value o f t he embedded deriv ative are recorded i n Rea lized in vestmen t ga in s (losses) - Deriva tive fina ncial in st ruments. For mo re informatio n regarding th e det ermin ati on of fai r v alu e o f the IUL emb ed ded deriv ative refer to No t e 6 , Fair Va lu e of Fin ancia l In struments. Th e ho st con tract is accou nted for as a d ebt in stru men t in acco rd ance with ASC Top ic 9 44 - Fi na nci al S ervices - Insura nce and is recorded in Future pol icy benefits an d cla ims with an y d isco unt to the min imum account value b eing accreted using th e effective yield metho d. Benefits and settlemen t ex pen ses incl ud e accrued interest an d ben efit claims incurred du rin g t he perio d. The Compan y’s accou ntin g p olicies with resp ect to variab le u niversal life (“VUL”) an d VA are i dentical excep t that po licy accou nt bal ances (exclud i ng acco un t b alances that earn a fi xed rate) are v alu ed at fair value and rep orted as compo nen ts o f assets an d liab iliti es rel ated to separate acco un ts. The Co mp any establishes liab iliti es for gu aranteed minimum d eath b en efit s (“GMDB”) o n its VA p ro du cts. Th e meth od s u sed to est imate th e liabilities employ assu mp tio ns ab out mo rtalit y an d th e perfo rmance o f equ ity market s. Th e Compan y assumes ag e-b ased mortali ty fro m th e R uark 2 01 5 ALB table ad ju st ed for co mp any exp erience. Future d eclines in the eq uit y mark et wou ld i ncrease th e Compan y’s GMDB liab ili ty. Differen ces b etween th e actu al ex perien ce and th e assu mp tion s used resu lt in varian ces in profit and co uld resu lt in losses. A p ortio n of the C ompany ’s GMDB b enefits are sub ject to a do llar-fo r-dol lar red uct io n u po n wi th drawal of related ann uity dep osits on con tracts issued prio r to Janu ary 1, 2 00 3. As of Decemb er 3 1, 20 18 an d 20 17 , th e GMDB reserve was $4 4.3 milli on an d $34 .1 millio n, respectively. Property a nd Casualty Insura nce Products Pro perty and casu alty in surance pro du cts includ e serv ice con tract b usin ess, su rety b on ds, an d g uarant eed asset protecti on (“GAP”). Premiums and fees asso ciat ed with service co ntracts and GAP p rod uct s are reco gn ized b ased o n exp ected claim pat terns. For all o t her p ro du cts, p remiu ms are gen erally recog nized o ver the terms of the co ntract on a pro-rata b asis. Co mmissio ns and fee inco me asso ciated with oth er p ro du cts are recog nized as earned when th e rel ated services are prov id ed to th e cu stomer. Unearned p remiu m reserves are main tained fo r th e po rtio n o f the premi ums th at is related to th e u nex pired perio d o f th e po licy. Benefit reserv es are record ed when insu red ev en ts occu r. Benefit reserv es inclu de case basis reserv es for k no wn b ut u np aid claims as o f th e b alance sheet d ate as well as in curred b ut n ot rep orted (“IBNR”) reserves for claims wh ere th e in sured even t has o ccu rred b ut h as no t been repo rted to th e Co mp any as of the balance sh eet date. Th e case b asis reserv es an d IBNR are calcu lated b ased on h i sto rical exp erience an d on assumptio ns relatin g to claim severity an d freq uency , th e lev el of used veh icle prices, an d o th er factors. Th ese assumption s are mod ified as necessary to reflect anticipated tren ds. Effective Jan uary 1 , 20 18, the Compan y ad op ted Accou nti ng Stand ard s Upd ate ("ASU") No . 20 14 -0 9, Revenu e f rom C on tra cts with Custo mers. In co nsid eratio n o f the amen dments in th is Up date, th e Co mp any rev ised its reco gn iti on p attern fo r ad ministrativ e fees asso ciated wi th certain v ehicle service an d GAP p roducts. Prev io usly, these fees were recogni zed b ased on the wo rk effo rt in vo lv ed in satisfy in g th e Compan y’s con tract ob ligatio ns. Th e Compan y will recogn ize th ese fees o n a claims occurrence b asi s in future perio ds. To reflect this chan ge in accoun ting p rin ciple, th e Compan y reco rd ed a cu mu lative effect adjustment as o f Jan uary 1, 2 01 8 th at resulted in a d ecrease in retained earn in gs of $9 3.9 milli on . Th e p re-tax imp act to each affected lin e i tem on th e Co mp any ’s fi nancial stat ements i s reflected i n t he tab le b elo w: 11 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents As of December 31, 2 0 1 8 As Reported Previous Accounting Metho d (D o l l a rs In Millions) Fi na nci al Statement Line Item: Balance Sheet Deferred po licy acq uisition costs and value o f b usiness acq uired $3 ,02 3.2 $2,8 81 .6 Other liabilities $2 ,37 4.1 $2,1 10 .5 For The Year Ended December 31, 2 0 1 8 As Reported Prev io us Accounting Method (D o l l ars In Millions) Fi na nci al Statement Line Item: Statements o f Income Other in come $45 3.7 $4 54 .4 Amortization of deferred po l icy acq uisi tion costs and value o f b usiness acquired $22 5.8 $1 77 .0 Other op eratin g exp enses, n et o f rein su ran ce ced ed $91 6.3 $9 68 .1 Reinsurance The Co mp any u ses rein su rance extensively in certai n of i ts segments an d acco unt s for rein su ran ce and the recog nitio n of the impact of rei nsu ran ce co sts in acco rdance wit h th e ASC Finan cial Services - Insurance Top ic. The fo llowing su mmarizes so me of the key asp ects of the Co mp any ’s accou nti ng po licies for reinsurance. Reinsurance Acco unting Methodolog y —Ced ed p remiu ms of the Co mp any ’s trad itio nal life insu ran ce p ro du cts are treated as an offset to direct premium and po licy fee revenu e and are recogn ized wh en due to the assu ming co mpan y. Ceded clai ms are t reated as an offset to direct b en efit s and settlement exp enses and are reco gni zed wh en the claim is in curred o n a direct b asi s. Ceded p olicy reserv e chan ges are also treated as an o ffset to b enefits and settlement ex pen ses an d are recogni zed du ring th e appl icable finan cial repo rtin g p eriod . Ex pen se allowances p aid b y the assumin g co mpan ies wh ich are all ocable to the curren t perio d are t reated as an o ffset to oth er op erat in g exp enses. Sin ce rein surance treaties ty pically prov ide fo r allowan ce p ercentages t hat decrease ov er the lifetime of a p olicy, allowan ces in excess o f the “ult imate” or fi nal level all owance are capitalized . Amort izatio n of capi talized rein su rance ex pen se allo wances represen ting recov ery of acq uisition co sts is treated as an o ffset t o direct amo rti zation of DAC o r VOBA. Amo rtizatio n of deferred ex pen se allo wances is calculated as a lev el percen tag e of ex pected p remiu ms i n all du rati on s g iv en ex pected fu tu re lapses an d mort ality and accretion d ue to in terest. The Company utilizes rein surance on certain sh ort d uration in su rance con tracts (pri marily issued th ro ug h the Asset Protection segmen t). As part o f th ese rein su ran ce tran saction s the Compan y receives rein surance allo wan ces wh ich reimb urse th e Co mp any fo r acqu isitio n co sts such as co mmissio ns and premium taxes. A ced i ng fee is also co llected to cov er other ad minist rativ e co sts an d profits fo r the C ompany. As a co mp on ent o f rein surance costs, rei nsu ran ce all owances are acco un ted fo r in acco rd ance with the relev ant prov isio ns of ASC Fin ancial Serv ices—In surance Top ic, which state th at rei nsu ran ce costs sho uld be amortized ov er th e con tract perio d o f th e rein surance if the co ntract is sho rt-d uration. Acco rd in gly, rein surance all owances receiv ed related to sho rt-du rat io n co ntracts are cap italized an d ch arg ed to exp en se in p rop ortion t o p remiu ms earned . Ceded un amortized acq uisition costs are netted wit h d irect un amo rti zed acq uisitio n costs in the b alan ce sheet. Ced ed p remiu ms and po licy fees on th e Compan y’s fixed uni versal life (“UL”), VUL, b ank -o wned life in su ran ce (“BOLI”), and an nu ity prod ucts reduce premiums an d p olicy fees reco gn ized by the Co mp any. Ceded claims are treated as an o ffset to d irect b enefits an d sett lemen t exp en ses an d are recog nized wh en th e cl aim is incu rred on a d irect basis. Ced ed po licy reserve ch ang es are also treated as an o ffset to ben efi ts and settlemen t exp enses and are recog nized d urin g the ap plicable valuatio n p eriod . Si nce reinsurance treaties typ ically p ro vide for allo wan ce percen tag es that decrease ov er the lifetime o f a po licy, allowances in excess of the “u ltimat e” o r fin al lev el allowan ce are capitalized . Amo rtizatio n o f capitalized rein su ran ce ex pense allo wances are amo rtized b ased o n future ex pected gross profits. Assumption s reg ard ing mo rtality, lap ses, and interest rates are co ntin uo usly rev iewed and may be perio dically ch ang ed. Th ese chan ges will resu lt in “u nlock in g” that changes t he balance in th e ceded d eferred acq uisition cost and can affect the amortization of DAC an d VOBA. Ceded un earned rev enu e liabilities are also amo rtized b ased on expected g ro ss profits. Assu mp tion s are b ased on the best cu rrent estimate of ex pected mortality, lapses and in terest spread. The Compan y h as also assu med certain p olicy risks wri tten b y o th er i nsu ran ce co mp anies th ro ugh reinsu ran ce ag reemen ts. Premiu ms an d p olicy f ees as well as Ben efits an d settlement exp enses includ e amo un ts assumed un der reinsurance agreements 11 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents an d are net of rei nsu ran ce ced ed. Assu med reinsu ran ce is accou nted for in acco rd ance with ASC Fi nancial Serv ices—In surance To pic. Reinsurance Al lo wances—Long-Duration Contra cts —Reinsu ran ce allowan ces are intend ed to reimb urse the ced in g company for so me p ort io n o f th e ceding co mp any ’s co mmissio ns, exp enses, and tax es. Th e amou nt an d timing o f rein surance allowances (both first y ear and renewal allowances) are co ntractually determin ed b y the app licable reinsu ran ce co ntract and do no t n ecessarily bear a relatio nship to the amo unt an d inciden ce of ex pen ses actually paid by th e cedi ng co mp any in any given year. Ultimate reinsurance al lo wan ces are defin ed as th e lo west allowance p ercentage p aid b y the rein su rer in an y p oli cy d uration o ver th e l ifetime o f a un iv ersal li fe po licy (o r throu gh the end o f the lev el term perio d for a traditio nal life p oli cy ). Ulti mate reinsurance all owances are determin ed du ring th e nego tiat io n o f each rein surance agreemen t and will d iffer b etween agreements. The Company determin es its “cost of reinsu ran ce” to includ e amou nts paid to the rein surer (ceded p remiu ms) net of amou nts reimbu rsed by th e rei nsu rer (i n th e form of allowances). As n oted within ASC Fin anci al Services—Insu ran ce Top ic, “The differen ce, if any, between amou nts paid fo r a rei nsu ran ce co ntract and th e amou nt of th e liabilities for po licy ben efits relating to th e u nd erlyin g rein sured co ntracts is p art of th e estimated cost to b e amortized.” Th e Co mp any ’s po licy is to amo rtize the cost of reinsurance ov er t he life o f the u nd erlying reinsu red con tracts (for lo ng -d uration po licies) i n a mann er co nsistent with th e way in wh ich ben efi ts an d ex pen ses o n th e un derly in g co ntracts are recog nized. For t he Compan y’s lo ng -d uration con tracts, it is th e Co mp any ’s practice to d efer rei nsu ran ce allowances as a co mp on ent of the co st of reinsu ran ce and reco gn ize t he p ortion related t o the recov ery of acq uisition co sts as a reductio n o f app licable un amo rtized acqu isitio n costs in su ch a manner th at net acqu isitio n costs are capitalized and ch arg ed to ex pen se in proportio n to n et rev enu e reco gn ized . Th e remain in g balance o f reinsurance allo wances are includ ed as a co mp on ent o f th e co st of rei nsu ran ce an d tho se allo wances which are allocable to the curren t p eri od are recorded as an o ffset to op eratin g expenses in the curren t peri od co nsistent with th e recog nit io n of b enefits an d exp enses on the un derly ing rein sured con tracts. This practice is co nsistent with the C ompany ’s practi ce of cap italizin g direct ex pen ses (e.g. commission s), an d resu lts in the reco gn i tion of reinsurance allowan ces on a systematic b asi s ov er the life of the rein sured p oli cies o n a b asis co nsistent wit h th e way in which acqu isitio n costs o n th e u nd erlyin g reinsured con tracts wou ld be recog nized. In some cases rein surance allowan ces all ocable to the curren t perio d may ex ceed n on -deferred di rect costs, which may cau se n et oth er op erat in g exp enses (related to sp ecific co ntracts) to b e negativ e. Amo rtizatio n o f Reinsurance Allo wances—Rein su ran ce allowances do n ot affect the met ho do lo gy u sed to amortize DAC and VOBA, or th e period ov er which su ch DAC an d VOBA are amo rtized . Rein surance allowan ces offset th e direct exp enses cap italized , red ucing th e net amou nt t hat is capitalized . DAC an d VOBA on trad itio nal life p olicies are amortized b ased on the pat tern of estimated g ro ss premiums o f th e pol icies in fo rce. Reinsurance allo wan ces do no t affect the gross p remiu ms, so th erefore th ey do n ot i mp act trad itional life amortization p attern s. DAC and VOBA on u niversal l ife produ cts are amortized based on the p att ern o f estimated g ro ss p ro fits o f the po licies in force. Rein surance allowan ces are co nsidered in th e determination o f estimated gross profits, and th erefore do impact amortization patterns. Reinsurance Assets a nd Li abilities —Claim liabilities and policy ben efits are calcul ated co nsistently fo r all po licies, regard l ess of wh eth er o r no t th e p oli cy is reinsu red . Once th e clai m liabil ities an d p olicy ben efits for t he un derly ing p olicies are estimated , th e amounts recov erable from th e reinsurers are estimated based on a numb er o f factors i ncl ud in g the terms o f t he reinsu ran ce co ntracts, hist orical p ayment p attern s of reinsurance partn ers, and th e finan cial streng th and credit wo rthiness of reinsu ran ce p artners and reco rd ed as Reinsu ra nce receivab les on th e balance sh eet. Th e reinsu ran ce receiv ables as o f th e Merger date, were recorded in t he balance sh eet u sing cu rrent accou ntin g po licies an d the most current assumpti on s. As o f the Merger dat e, th e Co mp any also calculated th e ceded VOBA asso ciated with t he rein sured p olicies. Th e reinsurance receivab les co mb in ed with t he asso ciated ced ed VOBA rep resen t th e fair value of th e reinsuran ce assets as of th e Merger dat e. Liab ilities fo r unpaid rein surance claims are p ro du ced from clai ms an d rein su ran ce system records, which co ntain th e relevan t terms o f th e in dividu al rein su ran ce co ntracts. Th e Compan y mon itors claims d ue fro m rein su rers to en sure that balances are set tled o n a timely b asi s. Incurred b ut no t reported claims are reviewed to ensu re that app ro priate amounts are ced ed. The Compan y analyzes an d mo nit ors th e credit wo rth in ess of each of its rein surance p art ners to minimize co llection issues. For newly execu ted rei nsu ran ce co ntracts with reinsurance companies that d o n ot meet p red etermined stand ard s, the Comp any req uires co llateral su ch as asset s held i n tru sts o r let ters of cred it. Co mpo nents of Reinsurance Co st—Th e fo llowing in come statement lin es are affected by rein su ran ce co st : Premiu ms an d po licy fees (“rein su ran ce ceded ” o n th e Compa ny’s fin an cia l sta temen ts) rep resen t con sideration p aid to t he assumin g compan y fo r accepting th e ced in g co mp any ’s risks. Ceded premiums and po licy fees in crease reinsurance cost. Benefit s an d settlement expen ses in clu de incu rred claim amounts ceded and ch anges in ced ed po licy reserves. Ceded ben efits and settlemen t ex pen ses d ecrease reinsu ran ce co st. Amo rtizatio n o f d eferred p olicy a cquisitio n co st a nd VOBA reflect s t he amortization of cap italized rein su rance allowances representi ng reco very o f acq uisition costs. Ceded amort izatio n decreases reinsurance cost. Other expen ses in clu de rei nsu ran ce allo wan ces p aid b y assu ming co mp anies to t he Co mp any less amo un ts rep resen tin g recovery of acqu i sition co sts. Rein surance allowan ces decrease rein surance cost. The Compan y’s rein su ran ce p ro grams do no t materially impact the o th er inco me lin e of th e Company’s inco me statemen t . In add itio n, n et in vestmen t in come gen erally h as n o direct i mp act o n th e Compan y’s reinsurance co st. However, it sh ou ld b e n oted th at by ceding b usin ess to the assumin g co mp anies, th e Comp any fo rg oes in vestmen t inco me on th e reserves ced ed to the assu ming 11 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents co mp anies. Con versel y, th e assu mi ng compan ies will receive in vestmen t in co me on th e reserv es assu med which will i ncrease th e assu ming compan ies’ profitabilit y on business assumed fro m the Compan y. Acco unting Pronouncements Recently Ado pted ASU No. 20 14 -0 9 - Rev enue from Co ntracts with Customers (To pic 6 06 ). Th i s Update prov id es fo r sig nificant revision s to t he recog nition o f reven ue from con tracts with custo mers acro ss vario us in dustries. Un der t he n ew gu i dance, en tit ies are requ ired to ap ply a prescrib ed 5 -step pro cess to depict th e tran sfer of promised good s o r services to cu stomers in an amo un t that reflects th e co nsideration to wh ich th e en tity exp ects to be entitl ed in ex chan ge fo r th ose go od s o r serv ices. The acco un ting for revenu es associated with in surance p rod uct s is n ot wi th in the scop e of this Up date. Th e Upd ate was orig inally effectiv e fo r ann ual and interim p eriod s beg in nin g after Decemb er 15 , 20 16 . Ho wev er, in Aug ust 20 15 , th e FASB issu ed ASU No . 2 01 5-14 - Revenu es fro m Co ntra cts with C ustomers: Deferral of th e Effective Da t e, to d efer the effecti ve d ate of ASU No. 20 14 -09 b y on e year to ann ual and in terim p eriod s beginni ng aft er December 15 , 2017 . The Company ado pted this Upd ate usin g the mod ified ret ro spectiv e appro ach via a cu mu lativ e effect adjustmen t to ret ained earn in gs as o f Jan uary 1 , 2 01 8. Th e amend men ts in the Upd ate, alo ng with clarify in g u pd ates i ssued sub seq uent to ASU 2 01 4-09 , impact ed so me of th e Compan y’s smaller lines o f bu si ness, sp ecifically revenues at th e Co mp any ’s affil iat ed brok er deal ers and insurance ag ency, and certain rev enues associated with the Co mp an y’s Asset Protecti on pro du cts. The lines of b usin ess to which th e rev ised g uid an ce appl ies are n ot material to th e Co mp an y’s finan cial statemen ts. In co nsid eratio n of t he amen dments in t his Up dat e, th e Compan y rev ised its reco gn ition pattern fo r admin istrative fees associated with certain veh icle service and GAP produ cts. Previou sly, th ese fees were reco gn ized based o n th e wo rk effo rt inv olved in satisfyin g th e Compan y’s con tract ob ligatio ns. Th e Company will recog nize these fees on a claims o ccurren ce basis in futu re perio ds. To reflect th is chan ge in accou ntin g pri nci ple, the Co mp any reco rd ed a cumulative effect adjustmen t as of Janu ary 1, 2 01 8 th at resulted in a decrease in retain ed earni ng s of $9 3.9 milli on . Th e Co mp any also implemented mino r chan ges to its accou ntin g and d isclosures with respect to th e lin es o f bu siness referen ced ab ove to ensu re complian ce with the revised gu id ance. See abo ve for additio nal discussio n. ASU No . 2 01 6-01 - Financia l Instruments - Reco gnitio n and Measurement o f Fina ncial Assets and Fina ncial Liabiliti es. The amen dments in th is Up date ad dress certai n asp ects o f reco gn ition , measuremen t, p resen tatio n, and disclosu re o f fin ancial instrumen t s. Mo st no tab ly, th e Update req uires that eq uit y i nv estments (ex cep t those accou nted for un der the eq uity met ho d of accou ntin g o r tho se th at result in co nso lid ation of th e in vestee) be measured at fai r v alu e with chan ges in fair value recog nized in net inco me. Th e Upd ate also in tro du ces a sing l e-step impairmen t mo del for equi ty i nv estments with ou t a readily d eterminab le fair value. Add itio nally, th e Upd ate requ i res chang es in i nstru men t-sp ecific credit risk for fair value o ption l iab ilities t o be recorded in other comprehensiv e in come. The amend men ts in th i s Upd ate were effecti ve the interim perio ds beg in ning after December 15 , 20 17 an d were app lied o n a modi fied retro sp ectiv e b asi s. The Co mp any recorded a cumulative-effect adjustmen t at t he date of ad opt io n, Janu ary 1 , 2 01 8, t ransferring un realized gains an d lo sses o n av ail abl e-for-sale equ ity secu rities to ret ained earn in gs from accu mu lated o th er co mp reh ensive inco me. Th e impact of th is adjustmen t, n et o f in come tax , resu lted in a $1 0.6 milli on in crease to retained earn in gs and a correspo nd in g d ecrease to accu mu lat ed o th er co mp reh ensive inco me, resultin g in no net impact to con soli dat ed sh areo wn er’s equ ity. The Co mp an y has u pd ated its d isclo sures in No te 5 , In vestmen t Opera tion s an d Note 6 , Fair Va lue of Fin an cia l Instru ments in acco rdance with th e ASU. ASU No. 2 01 6-1 5 - Sta tement of Cash Flo ws: Classifica tio n o f Certain Cash Receipts and Ca sh Payments. Th e amendmen ts in thi s Upd ate are in ten ded to redu ce d iv ersit y in p ractice in ho w certain tran sactio ns are classified in the statemen t of cash flo ws. Specific tran saction s add ressed in th e n ew gu id ance in clu de: Debt p rep ayment /ex ting uish ment co st s, con t in gen t co nsid eratio n payments, proceeds from the settl ement o f corpo rate-o wned life in surance p olicies, an d d istrib uti on s received fro m eq uity meth od i nv estments. Th e Upd ate d oes no t in trod uce an y new accou ntin g or fin anci al repo rting requi remen ts, an d was effectiv e for t he int eri m peri od s beg in ning after December 15 , 20 17 usin g the retrosp ective metho d. There was n o fin anci al impact. ASU No. 2 01 6-1 8 - Sta tement of Cash Flo ws (Topic 23 0): Restri cted Cash (a co nsensus o f the FASB Emerging Ta sk Fo rce). The amend ments in th is u pd ate p rov id e g uidan ce on th e p resen tatio n of restricted cash or restricted cash eq uivalents in the statemen t o f cash flo ws, thereby redu cin g diversity in practice related to the presentation o f th ese amo un ts. Th e amend men ts req uire th at a statemen t of cash flo ws exp l ain th e ch an ge du ring the perio d in the total of cash , cash eq uivalents, an d amo un ts g enerall y describ ed as restricted cash o r restricted cash equ ivalen ts. The Up dat e is effecti ve for p ub lic bu siness en tities for fiscal years b eginn i ng aft er December 15 , 20 17 , an d interim p eriod s with in th ose fiscal years. There was no impact to the Compan y o n ad op tion . ASU No. 2 01 7-01 - Business Combina tions (To pic 80 5): Cla rifying the Definitio n of a B usiness. Th e purpo se of this u pd ate is to clarify th e defin itio n o f a bu siness with th e ob jectiv e o f ad ding gu id ance to assist en tities wi th ev alu ating whet her tran sactio ns sh oul d b e accou nted for as acqu isitio ns (o r dispo sals) of assets or b usin esses. The amend ments in the Up date p ro vide a sp ecific test b y which an en tit y may determin e whether an acqu i sition in vo lv es a set o f assets o r a bu si ness. Th e amen dments in the Up date are to be ap plied prospectiv ely fo r perio ds begin ning after Decemb er 15 , 20 17 . Th e Co mp any has rev iewed the revised req uirements, and d oes n ot an ticip ate that the chan ges wil l imp act its po lici es or recen t con clusio ns related to its acq uisition activities. ASU No. 2 01 7-07 - Co mpensation - Retirement Benefits (Topi c 7 15 ): Impro ving the Presentati on o f Net Perio dic Pension Co st and Net Perio dic Postretirement Benefit Co st. The amend ments in th is up date req uire en t ities to disag gregate th e curren t-service-cost co mp on ent fro m o th er comp onents o f net b en efit cost and p resen t it with other cu rrent co mp ensati on co sts in th e inco me st atemen t. The other co mp on ents of n et ben efit cost mu st b e presen ted ou tside o f inco me fro m o perati on s if th at sub to tal is p resen ted . In add itio n, the Update requ ires entiti es to disclo se t he in come statement l in es th at co ntain th e other compo nen ts if th ey are n ot p resen ted o n ap prop riat ely descri bed separate lines. The amend men ts in th is up date are effective fo r in terim an d ann ual perio ds b eginn in g after December 15 , 20 17 . As p ro vid ed for in th e ASU, the Co mp any applied the p ro vision s of the statement retro sp ectiv ely for compo nents of net p eriodi c p ensio n costs an d p ro sp ectiv ely fo r cap italization of th e serv ice 11 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents co sts compo nent of net perio dic co sts and n et p eriod ic p ostreti remen t b enefits. The Update d id no t imp act th e Co mp any ’s finan cial po siti on , resu lts of op eratio ns, o r cu rrent disclo su res. Acco unting Pronouncements No t Yet Adopted ASU No. 2 01 6-02 - Leases. The amen dment s in th i s Upd ate add ress cert ain aspects of recogn itio n, measurement, presentatio n, and disclosu re o f leases. Th e most sig nificant chang e will relate to th e acco un ting mo del used by l essees. The Up dat e will req uire all leases wi th terms g reater than 12 mo nths to b e reco rd ed on th e balan ce sheet in the form o f a lease asset and li ab ility. Th e lease asset an d liabil ity will be measu red at th e present value of the mi nimu m lease pay men ts less any up fro nt pay men ts or fees. Th e amend men ts in the Up date are effectiv e for ann ual and interim perio ds beg in ning after Decemb er 15, 20 18 o n a mo dified retro sp ecti ve basis. The Compan y exp ects to reco rd a cumulative effect adjustment as o f the date o f ado ption , Jan uary 1 , 20 19 , estab lish in g a righ t o f use asset an d lease liab ility of $2 1.5 million on it s co nso lid ated balance sheet t o be reflected in th e pro perty an d eq uipment and other lia bilities lin e items, respectiv ely . The Compan y will mak e u pd ates to it s disclosu res in the first qu arter in o rd er to co mp ly wit h t he new g uidance. ASU No . 20 17 -0 8 - Receiva bles - Nonrefunda ble Fees and Other Costs (Subtopic 3 10 -2 0): Premium Amorti za tio n o n Purcha sed Callable Debt Securities. The amend men ts in th is Upd ate req uire th at p remiu ms on callable deb t secu rities b e amo rtized to the first call date. This is a ch ang e from curren t gu id ance, un der wh ich premiums are amo rti zed to th e mat urity d ate of t he security.The amendments are effective fo r an nual and int eri m p eriod s b eginn ing aft er December 15 , 20 18 . The Compan y recorded a cu mu lativ e effect adjustment as of th e ado ptio n d ate, Jan uary 1 , 2019 , resu ltin g in a $5 1.2 million reductio n t o retained earning s, net of in come tax. ASU No . 20 17 -1 2 - Deriva tiv es and Hedging (To pic 81 5): Ta rgeted Improv ements to Acco unting for Hedging Activi ties. The amen dments in th is Up date are design ed to permit hed ge acco un ting to be ap plied to a broad er rang e o f hedgi ng strategies as well as to mo re closely align h edg e accou ntin g and risk man agemen t ob jectiv es. Specific p ro vision s includ e requ iring chan ges in the fair value of a hed ging instrument b e reco rd ed in the same in come statement l in e as th e h edg ed item wh en it affect s earn in gs. Th ere was no i mpact to th e Co mp any on ado ptio n. ASU No . 2 01 6-1 3 - Financia l Instruments-Credit Losses: Measurement of Credit Lo sses o n Fina ncial Instruments. The amend ments in th is Up date int ro du ce a new cu rrent exp ected cred it loss (“CECL”) mo del for certain fin ancial assets, in clu ding mo rtg age loan s and rein surance receiv ables. Th e new mod el will n ot ap ply to deb t securiti es classifi ed as avai lable-fo r-sale. Fo r assets within the sco pe of the new mod el, an entity wi ll reco gn ize as an all owance against earni ng s its estimate o f the co ntractual cash flo ws no t ex pected to b e collect ed o n d ay o ne o f the asset’s acqu isition. The al lo wan ce may be reversed th ro ug h earn ings if a secu rity reco vers in v alu e. Thi s differs from th e curren t imp airment mo del, which requires reco gn itio n o f credit losses when th ey have been incu rred and recogni zes a secu rity’s su bseq uen t reco very in v alu e in o th er compreh ensiv e inco me. The Up date also mak es target ed ch ang es to the curren t imp airmen t mo del fo r availab le-fo r-sal e d ebt secu rit ies, which comprise the majority o f the Co mp any ’s in vested assets. Similar to the CECL model, credit loss impairments wi ll be record ed in an allo wan ce against earning s that may b e rev ersed for su bseq uen t reco veries in value. The amen dments in th is Up date are effective for annu al and interim p eriod s b eginn in g after December 15 , 20 19 o n a mod ified retro sp ecti ve b asis. The Compan y is reviewin g its po licies and processes to en su re co mp liance with the req uiremen t s in th is Upd ate, u po n ado ptio n, and assessin g th e i mpact this stan dard wil l have on its op eratio ns an d fin anci al results. ASU No . 20 18-12 - Financial Serv ices - Insura nce (Topi c 94 4): Ta rgeted Improv ements to Acco unting for Long-Dura tion Contra cts. Th e amend men ts in this Upd ate are d esi gn ed to mak e improv ements to the existin g recog nition, measu rement, presentation , an d d isclo sure req uirements fo r certain lon g-du rati on co ntracts issued by an in surance compan y. Th e new amend men ts requ ire in surance enti ties to prov id e a more cu rrent measu re of the liability fo r futu re po licy b enefits for tradition al an d l imited-pay ment con tracts b y regu larly refin i ng th e liab ili ty fo r actual p ast ex perien ce an d u pd ated fu tu re assumptions. Th is differs fro m curren t req uirements wh ere assumptio ns are lo cked -in at con tract issu ance fo r th ese cont ract typ es. In ad dit io n, th e up dated liability will be disco un ted using an u pp er-mediu m grade (lo w-credit-risk ) fix ed inco me i nstru men t y ield that reflects the characteristics of th e liability which d iffers fro m cu rrently u sed rates b ased on th e in vested assets sup po rtin g th e li abi lity. In ad dition , t he amen dment s in t ro du ce n ew req uirements to assess mark et-based insurance co ntract option s an d guaran tees for Mark et Risk Ben efits an d measu re th em at fair v alu e. Th is Up date also req uires in surance entities to amortize d eferred acq uisition co sts on a co nstant-level basis ov er the exp ected life of the co ntract . Fin ally this Upd ate req uires n ew disclo su res in clu ding liability ro llfo rwards and in fo rmation ab ou t sign ifican t in pu ts, jud gements, assumptio ns, and meth ods used in the measu remen t. Th e amend men ts in th i s Up date are effectiv e for ann ual an d i nterim perio ds b eginn ing after Decemb er 1 5, 20 20 wit h early ado ption p ermitted . The Company is cu rrentl y revi ewing its p olicies, processes, an d ap plicab le sy stems t o determin e th e impact this stand ard will h ave o n i ts o peration s and finan cial resu lts. 3. SIGNIFICANT TRANSACTIONS On May 1 , 2 01 8, Th e Linco ln Natio nal Life Insurance Co mp any (“Lin coln Life”) co mp leted th e acq uisition (the “Closin g”) of Libert y Mut ual Grou p In c.’s (“Liberty M utual ”) Group Benefits Busin ess an d Ind iv id ual Life an d An nu ity Bu siness (the “Life Bu sin ess”) th ro ug h th e acq uisition of all o f the issued and o utstand in g capital sto ck of Liberty Life Assurance Co mp any o f Bosto n (“Liberty ”). In co nn ection with the Clo sing and p ursuan t to th e M aster Tran saction Ag reement, d ated January 18, 20 18 (the “Master Tran saction Agreement”) PLICO and Protecti ve Life and Ann uity Insurance Co mp any (“PLAIC”), a who lly owned su bsid iary of PLICO, en tered in to rein surance ag reemen t s (th e “Rein surance Agreements”) and related an cillary do cuments (includ in g ad mi nistrat iv e serv ices agreemen ts an d tran sition serv ices ag reemen ts) p ro viding fo r th e rein su ran ce an d admini stratio n of t he Life Busin ess. 12 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Pursu ant to t he Rein surance Ag reement s, Li berty ced ed to PLICO an d PLAIC the in surance p olicies related to t he Life Bu sin ess o n a 10 0% co insu ran ce basis. Th e agg reg ate ceding commission for th e reinsurance o f the Life B usiness was $4 22 .4 million , which is th e pu rch ase p rice. Oth er than cash receiv ed as part o f the acqu ired Liberty in vestmen t p ort fo lio as reflected in “amo un ts receiv ed fro m rein surance t ran saction ” in the Co nso lidated Cond en sed Statemen t o f Cash Flows an d as reflected in the table below, th is was a n on -cash transactio n. All po licies i ssu ed in states other than New Yo rk were ced ed to PLICO u nd er a rein surance ag reement b etween Lib erty and PLICO, an d all p olicies issued in New York were ced ed t o PLAIC un der a reinsu ran ce ag reemen t b etween Lib ert y and PLAIC. The agg reg ate statu to ry reserves of Lib erty ceded to PLICO and PLAIC as o f th e clo si ng of the Tran saction were ap prox imately $13 .2 billion , which amou nt was b ased o n in iti al estimates and is su bject to ad justmen t fo llowing the C lo sin g. Pu rsuan t to the terms of the Rein surance Agreements, each o f PLICO and PLAIC are requi red to mai ntain assets in tru st for th e ben efit of Lib erty to secu re th eir resp ecti ve o bligat io ns t o Lib erty un der the Rein surance Agreements. The trust acco un ts were in iti all y fu nd ed by each of PLICO and PLAIC pri ncipally wi th the in vestmen t assets th at were receiv ed fro m Lib erty. Additio nally, PLICO an d PLAIC h ave each ag reed to pro vide, on behalf of Liberty, ad minist ratio n an d po licyh older servicin g o f th e Life Bu siness rei nsu red b y it pu rsuant to admin istrative services ag reemen ts between Lib erty an d each o f PLICO and PLAIC. The terms o f t he Reinsurance Agreements resulted in an acq uisition o f the Li fe Business b y the Compan y in acco rdance with ASC Top ic 8 05 , Business C ombinat io ns. The fo llowing table d etails the pu rch ase co nsideration an d prel imin ary allo cation o f assets acq uired an d l iab ilities assu med from the Life Bu siness rei nsu ran ce transact io n as o f the tran saction date. These estimates remain p relimin ary and are su bject to ad ju stment. Whi le t hey are no t ex pected t o b e materially different th an those sho wn, any material adju stments t o t he est imates will be reflected, retroactively, as o f the d ate o f the acqu isitio n. Fa ir Va lue As o f Ma y 1 , 2018 (D o l l ars in Thousands) Assets Fix ed matu rities $1 2,5 88 ,51 2 Mortgag e loan s 4 35 ,40 5 Policy lo ans 1 31 ,48 9 Total inv estments 1 3,1 55 ,40 6 Cash 38 ,45 6 Accru ed inv estment in come 1 52 ,03 0 Reinsu ran ce receiv ables 27 2 Value of bu siness acq uired 3 36 ,86 2 Other assets 91 6 Total assets 1 3,6 83 ,94 2 Lia bilities Future po licy b enefits and claims $1 1,7 47 ,50 1 Un earned premiums — Total p olicy liabilities and accru als 1 1,7 47 ,50 1 An nu ity accou nt balances 1,8 23 ,44 4 Other po licyh olders’ funds 41 ,93 6 Other liabilities 71 ,06 1 Total liab ilities 1 3,6 83 ,94 2 Net assets acqui red $— The followin g un aud ited p ro forma co nd ensed co nso lidated resu lts o f op eratio ns assu mes that the aforemen tion ed tran sactio ns of the Life Bu siness were co mp leted as o f Jan uary 1 , 20 17 . The un aud ited p ro fo rma con densed results o f o peration s are p resen ted so lely for in fo rmation pu rpo ses and are no t necessarily in dicative of th e con so lidated con den sed resu lts of op erat io ns that mig ht have been achieved had t he transactio n been co mp leted as o f the date in dicated: 12 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Una udited For The Year Ended December 3 1 , 2018 For The Year Ended December 31, 201 7 (Dollars In Thousands) Revenu e $5 ,36 4,6 93 $5,6 54 ,25 7 Net i ncome $34 8,5 05 $1,2 33 ,99 1 The amo un t o f rev enu e an d inco me before inco me tax of th e Life Bu sin ess since t he transactio n d ate, M ay 1, 2 01 8, inclu ded in th e co nsol id ated statements o f inco me fo r the y ear end ed December 31 , 20 18 , amou nted to $57 8.0 milli on an d $49 .8 million. Also , in clu ded in th e in come before in come tax fo r the y ear end ed December 31 , 20 18 , is ap prox imately $5.5 mi llio n o f n on -recurring t ransacti on co sts. 4. MONY CLOSED B LOCK OF BUSINESS In 199 8, MONY Life In surance Co mp any (“MONY”) con verted fro m a mu tu al in su ran ce company to a sto ck corpo ratio n (“d emu tu alizati on ”). In co nn ection with its demu t ualization, an acco un ting mechan ism kn own as a closed b l ock (th e “Closed Block”) was established for certain i nd iv id uals’ particip ating po licies in force as of the d ate o f demu tu alization . Assets, li abi lities, and earning s o f the Closed Block are specifi cally iden tified to su pp ort its particip ating po licyh olders. The Co mp an y acq uired th e Closed Blo ck in co njun ction with the acqu isitio n o f MONY in 2 01 3. Assets allo cated to the Cl osed Block in ure solely to th e ben efi t o f each Clo sed Block ’s po licyh olders and will n ot rev ert to th e b enefit of MONY or th e Compan y. No reallo cation , tran sfer, bo rro win g or lend in g of assets can b e mad e b etween t he Closed Block an d oth er po rtio ns o f M ONY’s gen eral acco un t, an y of MONY’s sep arat e acco un t s o r any affi liate o f M ONY with ou t t he ap prov al of the Su perin ten den t of Th e New Yo rk State Department o f Financial Serv ices (th e “Superi ntend en t”). Closed Blo ck asset s an d liab iliti es are carried on th e same basis as similar assets and liabilities held in t he gen eral acco un t. The excess o f Cl osed Block liabilities o ver Closed Blo ck asset s (ad ju sted to exclu de the i mp act of related amou nts in AOCI) at t he acqu isit io n d ate of Octo ber 1 , 2 01 3, rep resen ted the estimated max imum future p ost-tax earni ng s from the Closed Block th at wo uld be reco gn ized in in come fro m con tinu ing op eratio ns o ver the peri od th e po licies an d co ntracts in the Closed Blo ck remain in fo rce. In co nn ecti on with the acq uisition of M ONY, t he Compan y develop ed an actuarial calculatio n o f the exp ected timing of MONY’s Clo sed Block ’s earn in gs as o f Octob er 1 , 20 13 . Pu rsu ant to the acqu isit io n o f the Co mp any b y Dai-ich i Life, th is actuarial calcul ation o f the exp ected timin g of MONY’s Closed Block earning s was recalcu lat ed and reset as Feb ru ary 1 , 20 15 , alon g with th e estab lish ment of a po licyh older divid en d o bli gatio n as o f su ch d ate. If the actu al cu mu lative earning s from the Clo sed Blo ck are greater than the exp ected cumulativ e earn ings, o nly t he ex pected earn in gs will b e recog nized in th e Compan y’s n et in come. Actual cu mu lativ e earning s in ex cess of ex pected cu mu lative earning s at any p oin t in time are recorded as a po licyh older dividen d obligatio n b ecause they will ultimately be p aid to Closed Blo ck p olicyh olders as an add itio nal p olicy ho ld er d iv i dend u nless o ffset by future p erformance th at is l ess favo rab le th an orig in ally exp ected. If a po licyh older d iv idend o bli gatio n has been previou sly estab lish ed an d th e act ual Closed Blo ck earni ng s in a sub sequ ent perio d are less than th e exp ected earning s fo r th at perio d, the p olicy ho ld er d iv idend ob lig ati on wo uld b e red uced (bu t no t b elo w zero ). If, ov er the perio d the po licies an d con tracts in th e Clo sed Blo ck remain in fo rce, the actual cumulative earning s o f th e C lo sed Block are less th an the exp ected cumulative earnings, on ly actual earn in gs wou ld b e reco gn i zed in in come fro m co nti nu in g op erat io ns. If the C lo sed B lo ck has in suffici en t fu nd s to mak e g uaranteed p olicy benefit pay men ts, such p ayments will b e made from assets o utside t he Clo sed Block . Man y exp enses related to Cl osed Blo ck op eratio ns, in cludi ng amort ization of VOBA, are ch arg ed to op eratio ns ou tsid e o f the Closed Blo ck ; acco rd in gly, n et rev enu es of the Clo sed Blo ck do no t rep resen t the actual profitabilit y of th e Cl osed Block o peration s. Operatin g co sts an d exp enses o utside of th e Closed Blo ck are, therefo re, d isp roportion ate to the business ou tside o f the Cl osed Block . 12 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Summarized finan cial in fo rmation fo r the Cl osed Block as of December 31 , 20 18 an d Decemb er 3 1, 2017 and is as fo llows: As of December 31, 2018 2017 (Dollars In Thousands) Clo sed blo ck lia bilities Future po licy b enefits, po licyh old ers’ acco un t b alan ces and o t her p oli cyhol der liabi lities $5 ,679,73 2 $5,7 91 ,86 7 Policy ho ld er d iv idend ob lig ati on — 1 60 ,71 2 Other liabilities 22,50 5 30 ,76 4 Total closed block liabilities 5 ,702,23 7 5,9 83 ,34 3 Clo sed blo ck a ssets Fix ed matu rities, availab le-fo r-sal e, at fair v alu e 4 ,257,43 7 4,6 69 ,85 6 Mortgag e loan s on real estate 75,83 8 1 08 ,93 4 Policy lo ans 672,21 3 7 00 ,76 9 Cash an d o ther invested assets 116,22 5 31 ,18 2 Other assets 136,38 8 1 22 ,63 7 Total closed block assets 5 ,258,10 1 5,6 33 ,37 8 Excess of rep orted clo sed b lo ck l iab ilities o ver clo sed b lo ck assets 444,13 6 3 49 ,96 5 Po rti on of ab ov e rep resen ting accumu l ated o th er co mp reh ensive inco me: Net u nrealized inv estments gains (losses) n et o f p olicy ho ld er d iv idend ob ligati on : $(1 41 ,12 8) and $(1 3,4 29 ); and net of in come tax: $6 1,6 76 and $2 ,82 0 (120,52 8) — Fu tu re earning s to be recog nized fro m clo sed b lock assets an d cl osed block liabilities $323,60 8 $3 49 ,96 5 Reconciliation of th e po licyh older dividen d o blig ation is as fo llows: For The Year Ended December 31, 2018 2017 (Dollars In Thousands) Po licyh older divid en d o bli gat io n, b eg innin g b alance $160,71 2 $31 ,93 2 Ap plicable to net rev enu e (l osses)(33,01 4) (55 ,24 1) Ch an ge in n et u nrealized in vestmen t gain s (lo sses) allocated t o p olicy ho ld er d iv id end ob ligatio n (127,69 8) 1 84 ,02 1 Po licyh older divid en d o bli gat io n, end ing b alan ce $— $1 60 ,71 2 12 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Closed Blo ck revenu es and exp enses were as follows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Premiu ms an d o th er inco me $17 1,1 17 $180,09 7 $1 89 ,70 0 Net in vestmen t inco me 20 2,2 82 203,96 4 2 11 ,17 5 Net in vestmen t g ain s (1,9 70 ) 91 0 1 ,52 4 Total reven ues 37 1,4 29 384,97 1 4 02 ,39 9 Benefits and o ther deductions Benefits an d settlemen t exp enses 33 7,3 52 335,20 0 3 53 ,48 8 Other op eratin g exp enses 7 14 1,94 0 2 ,80 4 Total b enefits and other ded uct io ns 33 8,0 66 337,14 0 3 56 ,29 2 Net revenues befo re inco me ta xes 3 3,3 63 47,83 1 46 ,10 7 In come tax ex pen se 7,0 06 27,71 8 16 ,13 7 Net revenues $2 6,3 57 $20,11 3 $29 ,97 0 5. INVE STMENT OPERATIONS Major catego ries o f n et i nv estment in come are summarized as fo llows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturities $2 ,05 1,5 05 $1 ,631,56 5 $1,5 52 ,99 9 Equi ty securities 3 5,2 99 39,80 6 38 ,83 8 M ortg age loans 32 2,2 07 298,38 7 2 70 ,74 9 In vestmen t real estate 1,8 88 2,48 1 2 ,15 3 Sh ort-term in vestmen ts 10 2,8 57 108,47 6 1 06 ,82 8 2 ,51 3,7 56 2 ,080,71 5 1,9 71 ,56 7 In vestmen t ex pen ses 3 0,0 06 29,12 7 29 ,11 1 Net in vestmen t inco me $2 ,48 3,7 50 $2 ,051,58 8 $1,9 42 ,45 6 Net real ized inv est ment gains (losses) for all other in vestmen ts are su mmari zed as fo llo ws: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturities $9,9 12 $12,94 1 $32 ,21 0 Equi ty gai ns an d losses(1 )(4 8,9 64 ) (2,33 0) 9 2 Impairments (2 9,7 24 ) (11,74 2) (17 ,74 8) M od co trading portfolio (18 5,9 00 ) 119,20 6 67 ,58 3 Oth er inv estments 1,3 03 (8,38 9) (9 ,22 6) To tal realized gains (lo sses) - investments $(25 3,3 73 ) $109,68 6 $72 ,91 1 (1 ) Beg in ning Jan u ary 1, 2 0 1 8, all chan ges in th e fair mark et valu e o f equity secu rities are reco rded as a realized g ain (loss) as a result o f the adoptio n of ASU No. 2 0 1 6-0 1 . 12 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Gross realized g ain s and gross realized lo sses o n i nv estments availab le-fo r-sal e (fix ed maturi ties and sho rt-term inv estments) are as fo llows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Gro ss reali zed gains $2 8,0 95 $18,86 8 $42 ,08 5 Gro ss reali zed lo sses: Imp airmen ts losses $(2 9,7 24 ) $(11,74 2) $(17 ,74 8) Other realized losses $(1 8,1 83 ) $(8,25 7) $(9 ,78 3) The chart b elo w summarizes the fair val ue (proceeds) and th e gains/losses realized o n secu rit ies the Compan y sold that were in an u nrealized g ain po sition an d an un real ized loss po si tion . For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Securities in a n unrealized ga in po sition: Fair v alu e (p ro ceed s)$1 ,30 0,8 66 $879,18 1 $1,1 98 ,33 3 Gain s realized $2 8,0 95 $18,86 8 $42 ,08 5 Securities in a n unrealized lo ss positio n(1): Fair v alu e (p ro ceed s)$47 2,3 71 $185,15 7 $85 ,83 5 Losses realized $(1 8,1 83 ) $(8,25 7) $(9 ,78 3) (1 ) The Co m pan y made the decision to ex it these hold in gs in co n junction with its overall asset liability m an ag em en t p rocess. The chart below su mmarizes th e realized gains (lo sses) on equ ity secu rities so ld du ring th e p eriod and eq uity securities still held at th e repo rting date. For The Year Ended December 3 1, 2018 (Do l l a rs I n Tho usa nds ) Net gains (losses) recog nized durin g the peri od on eq uity securi ties $(48 ,96 4) Less: net gains (losses) reco gn ized on equity secu rities so ld du ring th e perio d $(6 ,16 5) Gain s (losses) recog nized d urin g the p eriod on eq uity secu rities still h eld $(42 ,79 9) 12 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The amo rtized cost and fair v alu e o f th e Co mp any ’s inv est ments cl assified as availab le-fo r-sale are as fo llo ws: As of December 31, 2 01 8 Amortized Co st G ro ss Unrealized G a ins G ro ss Unrealized Losses Fair Va lue Total OTTI Recognized in OCI(1 ) (Dolla rs I n Thousands) Fixed maturities: Residen tial mortg age-backed securities $3 ,65 0,5 39 $2 3,2 47 $(6 2,196 ) $3,6 11 ,59 0 $(1 8) Co mmercial mo rtgag e-b ack ed secu rities 2 ,34 9,2 74 3,9 11 (5 8,101 ) 2,2 95 ,08 4 — Other asset-back ed securi ties 1 ,41 0,0 59 1 7,2 32 (3 5,398 ) 1,3 91 ,89 3 — U.S. g ov ern men t-related securities 1 ,68 3,4 32 1,7 95 (4 5,722 ) 1,6 39 ,50 5 — Other go vernmen t-related securiti es 54 5,5 22 4,2 92 (3 3,850 ) 5 15 ,96 4 — States, mu nicip als, an d p olitical sub div isions 3 ,68 2,0 37 2 5,7 06 (11 8,902 ) 3,5 88 ,84 1 87 6 Co rp orate securities 38 ,63 4,8 88 11 2,9 92 (2 ,38 5,052 ) 36,3 62 ,82 8 (29 ,68 5) Redeemabl e p referred sto ck 9 4,3 62 — (1 1,560 ) 82 ,80 2 — 52 ,05 0,1 13 18 9,1 75 (2 ,75 0,781 ) 49,4 88 ,50 7 (28 ,82 7) Sh ort-term in vestmen ts 77 6,3 57 — — 7 76 ,35 7 — $52 ,82 6,4 70 $18 9,1 75 $(2 ,75 0,781 ) $50,2 64 ,86 4 $(28 ,82 7) As of December 31, 2 01 7 Fixed maturities: Residen tial mortg age-backed securities $2 ,33 0,8 32 $1 9,4 13 $(2 3,033 ) $2,3 27 ,21 2 $4 1 Co mmercial mo rtgag e-b ack ed secu rities 1 ,91 4,9 98 5,0 10 (3 0,186 ) 1,8 89 ,82 2 — Other asset-back ed securi ties 1 ,23 4,3 76 2 0,9 36 (5,763 ) 1,2 49 ,54 9 — U.S. g ov ern men t-related securities 1 ,25 5,2 44 1 85 (3 2,177 ) 1,2 23 ,25 2 — Other go vernmen t-related securiti es 28 2,7 67 9,4 63 (4,948 ) 2 87 ,28 2 — States, mu nicip als, an d p olitical sub div isions 1 ,77 0,2 99 1 6,9 59 (4 5,613 ) 1,7 41 ,64 5 (3 7) Co rp orate securities 29 ,60 6,4 84 62 3,7 13 (52 8,187 ) 29,7 02 ,01 0 (2 ,56 4) Redeemabl e p referred sto ck 9 4,3 62 2 32 (3,503 ) 91 ,09 1 — 38 ,48 9,3 62 69 5,9 11 (67 3,410 ) 38,5 11 ,86 3 (2 ,56 0) Equi ty securities 73 5,5 69 2 2,3 18 (8,771 ) 7 49 ,11 6 — Sh ort-term in vestmen ts 55 8,9 49 — — 5 58 ,94 9 — $39 ,78 3,8 80 $71 8,2 29 $(68 2,181 ) $39,8 19 ,92 8 $(2 ,56 0) (1)These amounts are included in th e g ross un realized g ains an d gro ss u n realized losses column s ab ove. 12 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Compan y ho ld s certain inv estments p ursu an t to certain modified coinsurance (“Mo dco”) arran gemen ts. The fi xed mat urities held as part o f th ese arran gements are cl assifi ed as t radin g securities. The fair value o f the i nv estments held p ursu an t to th ese Mo dco arran gements are as follo ws: As of December 31, 2018 2017 (Dollars In Thousands) Fixed maturities: Residen tial mortg age-backed securities $241,83 6 $2 59 ,69 4 Co mmercial mo rtgag e-b ack ed secu rities 188,92 5 1 46 ,80 4 Other asset-back ed securi ties 159,90 7 1 38 ,09 7 U.S. g ov ern men t-related securities 59,79 4 27 ,23 4 Other go vernmen t-related securiti es 44,20 7 63 ,92 5 States, mu nicip als, an d p olitical sub div isions 286,41 3 3 26 ,92 5 Co rp orate securities 1 ,423,83 3 1,6 98 ,18 3 Redeemabl e p referred sto ck 11,27 7 3 ,32 7 2 ,416,19 2 2,6 64 ,18 9 Equi ty securities 9,89 2 5 ,24 4 Sh ort-term in vestmen ts 30,92 6 56 ,26 1 $2 ,457,01 0 $2,7 25 ,69 4 The amo rti zed cost and fair v alu e of availab le-fo r-sal e an d h eld -to-maturity fixed maturiti es as of December 31 , 2 01 8, b y ex pected mat urity, are sho wn b elo w. Ex pected maturiti es of securities withou t a sin gle mat urity date are allocated b ased on estimated rates of prepay ment that may differ from actual rates of prepay ment. Av a ilable-for-sa le H eld-to -ma turity Amo rtized Cost Fair Value Amo rtized Cost Fa ir Value (D ollars In Thous ands) (Dollars In Thousands) Due in on e year or less $1 ,14 6,7 30 $1 ,14 2,1 40 $— $— Due after o ne y ear throu gh five y ears 9 ,27 2,7 31 9 ,12 0,0 56 — — Due after five years th ro ugh ten y ears 9 ,20 0,7 24 8 ,94 7,5 46 — — Due after ten y ears 32 ,42 9,9 28 30 ,27 8,7 65 2 ,633,47 4 2,5 47 ,21 0 $52 ,05 0,1 13 $49 ,48 8,5 07 $2 ,633,47 4 $2,5 47 ,21 0 12 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The ch art b elo w summarizes th e Compan y’s other-than -temp orary i mp airments of inv estment s. All of the impairmen ts were rel ated to fix ed matu rities o r eq uity securiti es. Fixed Ma turities Equity Securities Tota l Securities (Dollars In Thousands) For The Year Ended December 31, 2018 Oth er-th an-tempo rary imp airmen ts $(5 6,5 78 ) $— $(56 ,57 8) Non -credit imp airmen t losses record ed in other comprehen siv e in come 2 6,8 54 — 26 ,85 4 Net i mp airment losses recog nized in earn ing s $(2 9,7 24 ) $— $(29 ,72 4) For The Year Ended December 31, 2017 Oth er-th an-tempo rary imp airmen ts $(1,3 32 ) $(2,63 0) $(3 ,96 2) Non -credit imp airmen t losses record ed in other comprehen siv e in come (7,7 80 ) — (7 ,78 0) Net i mp airment losses recog nized in earn ing s $(9,1 12 ) $(2,63 0) $(11 ,74 2) For The Year Ended December 31, 2016 Oth er-th an-tempo rary imp airmen ts $(3 2,0 75 ) $— $(32 ,07 5) Non -credit imp airmen t losses record ed in other comprehen siv e in come 1 4,3 27 — 14 ,32 7 Net i mp airment losses recog nized in earn ing s $(1 7,7 48 ) $— $(17 ,74 8) There were n o o th er-t han-t empo rary imp airmen ts related to fix ed maturities or equ ity secu rities that th e Co mp any in ten ded to sell or expected to b e requi red to sell fo r the y ears en ded Decemb er 3 1, 2 01 8, 20 17, and 20 16 . The fo llowing chart is a ro llforward o f availab le-fo r-sale credit losses o n fix ed maturities held by th e Co mp an y for wh i ch a p ortio n of an other-th an - temp orary impairment was recognized in o th er co mp reh en sive inco me (loss): For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Begi nn in g b alance $3,2 68 $12,68 5 $22 ,76 1 Add itio ns fo r n ewly imp aired secu rities 2 4,8 58 73 4 14 ,87 6 Add itio ns fo r p rev io usly impaired secu rit ies 12 3,17 5 2 ,06 3 Reducti on s fo r p rev io usly impaired securities d ue to a chan ge in expected cash flo ws — (12,72 6) (24 ,39 6) Reducti on s fo r p rev io usly impaired securities that were so ld in th e cu rrent period (3,2 70 ) (60 0) (2 ,61 9) Oth er — — — Endi ng balan ce $2 4,8 68 $3,26 8 $12 ,68 5 12 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing tab le in clu des the gross un realized l osses an d fair v alu e o f the Compan y’s i nv estments th at are n ot d eemed to b e o th er-th an- temp orarily imp aired, aggreg ated by inv estment catego ry and l en gth of time that in divid ual securities have b een in a co ntinuou s un realized lo ss p ositio n as of Decemb er 3 1, 2 01 8: Less Tha n 12 Mo nths 12 Months o r More To tal Fair Va lue Unrealized Loss Fa ir Value Unrea lized Lo ss Fair Value Unrealized Loss (D ollars In Thous ands) Resid ential mo rtgag e-b ack ed secu rities $1 ,48 5,0 09 $(3 1,3 02 ) $804 ,364 $(30 ,89 4) $2,2 89 ,37 3 $(62 ,19 6) Commercial mortg age-backed securities 42 2,4 38 (7,4 42 ) 1,429 ,384 (50 ,65 9) 1,8 51 ,82 2 (58 ,10 1) Oth er asset-b acked secu rities 68 7,2 71 (3 0,9 63 ) 148 ,871 (4 ,43 5) 8 36 ,14 2 (35 ,39 8) U.S. go vernment-related secu rities 13 0,2 90 (4,6 68 ) 1,085 ,654 (41 ,05 4) 1,2 15 ,94 4 (45 ,72 2) Oth er g ov ern ment-rel ated secu rit ies 22 6,2 01 (1 5,2 67 ) 131 ,569 (18 ,58 3) 3 57 ,77 0 (33 ,85 0) States, mun icipalities, an d p olitical su bd iv isio ns 1 ,00 4,2 62 (2 7,1 80 ) 1,129 ,152 (91 ,72 2) 2,1 33 ,41 4 (1 18 ,90 2) Corpo rate securities 18 ,32 6,3 31 (97 0,5 53 ) 1 2,859 ,732 (1,4 14 ,49 9) 3 1,1 86 ,06 3 (2,3 85 ,05 2) Redeemab le preferred stock 4 1,1 47 (4,4 67 ) 41 ,655 (7 ,09 3) 82 ,80 2 (11 ,56 0) $22 ,32 2,9 49 $(1 ,09 1,8 42 ) $1 7,630 ,381 $(1,6 58 ,93 9) $3 9,9 53 ,33 0 $(2,7 50 ,78 1) RMBS an d CMBS had gross un realized lo sses greater th an twelv e mo nths of $3 0.9 mi llio n an d $50 .7 million as of December 31 , 2018 , respect iv ely. Facto rs such as th e cred it enh ancemen t with in th e deal structure, th e average life of th e securities, an d the p erforman ce o f th e u nderlyin g co llateral su pp ort th e recov erab ility o f these inv estments. The other asset-back ed securities have a gross un realized loss g reater than twelv e mon th s of $4 .4 mil lion as of December 3 1, 20 18 . Th is cat eg ory predomi nately in clu des stu dent-lo an b ack ed au ction rate securities (“ARS”), the u nd erlying collateral, of which is at least 97% g uaranteed b y th e Fed eral Family Ed ucatio n Loan Pro gram (“FFELP”). At this time, t he Compan y has n o reaso n to believ e t hat th e U.S. Dep artment o f Edu cation wou ld n ot h on or the FFELP g uarantee, if it were necessary. The U.S. g ov ern ment-related securi ties an d th e o th er go vernmen t-relat ed secu rities had g ro ss un realized l osses g reat er th an twelv e mon th s of $4 1.1 mi llio n an d $18 .6 mil lion as of December 31 , 2 01 8, respectiv ely . These d eclines were related to chan ges in in terest rates. The states, mun icipalities, and po lit ical sub division s categ ories had gross un realized lo sses g reater than t welve mon th s o f $91 .7 millio n as o f Decemb er 3 1, 2 01 8. Th e agg reg ate d eclin e in market value o f these secu rities was d eemed temp orary du e to po sitive factors sup po rtin g the recov erab ility o f th e resp ective inv estments. Positiv e factors co nsid ered in clu de credit ratin gs, th e finan cial health of the issu er, th e con tin ued access of the issuer to capital mark ets, an d o th er p ertin ent in formatio n. The co rp orate securiti es categ ory has gross u nrealized lo sses greater t han t welve mo nths of $1.4 b illion as o f Decemb er 3 1, 2 01 8. Th e ag gregate decline in mark et value o f th ese secu rit ies was deemed temp orary d ue to p osit iv e factors sup po rting the recov erab ility of th e respective in vestmen t s. Posit iv e facto rs con sidered includ e cred it rating s, the fi nancial health of the issu er, th e con t in ued access o f the issuer to cap ital mark ets, and oth er p ertin ent in fo rmation . As o f December 3 1, 2 01 8, the Comp any had a to tal of 4,0 05 positions th at were in an unrealized lo ss po sition , b ut the Co mp any d oes no t con si der th ese un realized l oss po sition s to be ot her-than -temp orary. Th is is b ased on th e aggreg ate factors d iscu ssed previo usly and becau se the Co mp any has the ab ility and in ten t to h old th ese in vestmen ts un til the fair values recov er, an d th e Co mp any do es no t intend t o sell o r ex pect to be requ ired to sell the securities b efo re recov eri ng th e Co mp any ’s amortized cost o f the secu rities. 12 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing tab le in clu des the gross un realized l osses an d fair v alu e o f the Compan y’s i nv estments th at are n ot d eemed to b e o th er-th an- temp orarily imp aired, aggreg ated by inv estment catego ry and l en gth of time that in divid ual securities have b een in a co ntinuou s un realized lo ss p ositio n as of Decemb er 3 1, 2 01 7: Less Tha n 12 Mo nths 12 Months o r More To tal Fair Va lue Unrealized Loss Fa ir Value Unrea lized Lo ss Fair Value Unrealized Loss (Do lla rs In Thousands) Resid ential mo rtgag e-b ack ed secu rities $76 6,5 99 $(9,6 71 ) $416 ,221 $(13 ,36 2) $1,1 82 ,82 0 $(23 ,03 3) Commercial mortg age-backed securities 75 7,4 71 (8,5 92 ) 796 ,456 (21 ,59 4) 1,5 53 ,92 7 (30 ,18 6) Oth er asset-b acked secu rities 8 6,5 06 (3 22 ) 134 ,316 (5 ,44 1) 2 20 ,82 2 (5 ,76 3) U.S. go vernment-related secu rities 9 4,1 10 (6 88 ) 1,072 ,232 (31 ,48 9) 1,1 66 ,34 2 (32 ,17 7) Oth er g ov ern ment-rel ated secu rit ies 2 4,8 30 (1 69 ) 115 ,294 (4 ,77 8) 1 40 ,12 4 (4 ,94 7) States, mun icipalities, an d p olitical su bd iv isio ns 17 0,2 68 (1,7 38 ) 1,027 ,747 (43 ,87 4) 1,1 98 ,01 5 (45 ,61 2) Corpo rate securities 5 ,05 4,3 16 (5 5,7 95 ) 1 0,962 ,689 (4 72 ,39 4) 1 6,0 17 ,00 5 (5 28 ,18 9) Redeemab le preferred Stock 2 2,0 48 (1,1 20 ) 23 ,197 (2 ,38 3) 45 ,24 5 (3 ,50 3) Equi ties 8 6,5 86 (1,4 01 ) 91 ,195 (7 ,37 0) 1 77 ,78 1 (8 ,77 1) $7 ,06 2,7 34 $(7 9,4 96 ) $1 4,639 ,347 $(6 02 ,68 5) $2 1,7 02 ,08 1 $(6 82 ,18 1) RMBS an d CMBS had gro ss u nrealized losses g reat er than twelve mont hs of $1 3.4 million and $2 1.6 million, respectiv ely, as of December 31 , 20 17 . Facto rs su ch as the credit enh an cement with in t he d eal stru ctu re, th e av erag e life of th e securi ties, and t he p erforman ce o f th e un derly in g col lateral sup po rt th e reco verab i lity of th ese in vestmen ts. The other asset-back ed securities have a gross un realized loss g reater than twelv e mon th s of $5 .4 mil lion as of December 3 1, 20 17 . Th is cat eg ory predomi nately in clu des stu dent-lo an b ack ed au ction rate securiti es, th e un derly in g co l lat eral, of which is at least 97 % gu aran teed by the Fed eral Family Edu cati on Lo an Pro gram (“FFELP”). At th is time, th e Compan y has no reason t o b elieve th at th e U.S. Dep artment o f Ed ucation wo uld no t ho no r th e FFELP gu arantee, if it were necessary. The U.S. g ov ern ment-related securi ties an d th e o th er go vernmen t-relat ed secu rities had g ro ss un realized l osses g reat er th an twelv e mon th s of $3 1.5 mi llio n an d $4.8 millio n as o f Decemb er 31, 20 17 , respectively. Th ese declin es were related to chang es in int erest rates. The states, mun icipalities, and po lit ical sub division s categ ories had gross un realized lo sses g reater than t welve mon th s o f $43 .9 millio n as o f Decemb er 3 1, 2 01 7. Th ese declin es were related to ch ang es in in terest rat es. The co rp orate secu rit ies catego ry h as gro ss u nrealized losses g reat er than t welve mon ths of $4 72 .4 mil lion as of Decemb er 31, 20 17 . The ag gregate decline in mark et value o f th ese secu rit ies was deemed temp orary d ue to p osit iv e factors sup po rting the recov erab ility of th e respective in vestmen t s. Posit iv e facto rs con sidered includ e cred it rating s, the fi nancial health of the issu er, th e con t in ued access o f the issuer to cap ital mark ets, and oth er p ertin ent in fo rmation . As of December 31 , 20 18 , the Compan y h ad secu rities in its av ailable-for-sale p ortfoli o wh ich were rated bel ow i nv estment grade with a fair value o f $1 .6 billio n an d had an amo rti zed cost o f $1.8 billion . In ad dition , in cluded in th e Co mp any ’s trading portfo lio, the C ompany hel d $1 44 .3 mill io n o f securities which were rated below in vestmen t grade. App ro ximately $26 2.8 milli on o f t he bel ow in vestmen t grade securities hel d by th e Co mpan y were no t pu blicly trad ed. The ch ang e in un realized g ain s (l osses), net o f in come tax, on fix ed maturity an d equ ity securiti es, classi fied as av ailable-for-sale is su mmari zed as fo llows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturities $(2 ,04 1,4 45 ) $1 ,086,72 7 $8 02 ,36 8 13 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The amortized co st and fair value of th e Co mp an y’s inv est ments classified as h eld -to-maturi ty as o f December 31 , 20 18 an d Decemb er 3 1, 20 17 , are as fo llows: Amortized Cost Gross Unreco g nized H o lding Gains Gro ss Unrecog nized Ho lding Losses Fair Va lue Tota l O TTI Reco g nized in OCIAs of December 3 1, 201 8 (Do l l a rs I n Tho usa nds ) Fixed maturities: Securities issu ed b y affiliates: Red Mo un tain LLC $75 0,4 74 $— $(81 ,65 7) $66 8,8 17 $— Steel C ity LLC 1 ,88 3,0 00 — (4 ,60 7) 1 ,87 8,3 93 — $2 ,63 3,4 74 $— $(86 ,26 4) $2 ,54 7,2 10 $— Amortized Co st G ro ss Unrecognized Holding G ains Gross Unreco g nized H o lding Losses Fa ir Value To tal OTTI Recognized in OCIAs of December 3 1, 201 7 (D oll ars In Tho us ands) Fixed maturities: Securities issu ed b y affiliates: Red Mo un tain LLC $7 04 ,904 $— $(19 ,16 3) $6 85 ,74 1 $— Steel C ity LLC 2,0 14 ,000 76 ,58 6 — 2,0 90 ,58 6 — $2,7 18 ,904 $76 ,58 6 $(19 ,16 3) $2,7 76 ,32 7 $— Du ring the years end ed December 31 , 20 18 , 20 17 , an d 2 01 6, the Compan y d id no t record an y oth er-th an-tempo rary imp airments o n h eld -to-maturity securities. The Co mp any ’s h eld -to -matu rity secu rit ies had $86 .3 millio n of gross u nreco gn ized hol ding losses by maturi ty as o f Decemb er 31 , 20 18 . Th e Co mp any d oes no t con sid er th ese u nrecogni zed h olding losses to be other-than -temp orary b ased on certain p ositiv e factors asso ciated with the securities wh ich include credit ratin gs of th e guaran to r, fin an cial health o f the issu er an d gu arantor, co nti nu ed access o f th e issuer to capital markets an d o ther pertinen t in fo rmation . Th ese held -to -matu rity secu rities are issued b y affi liates of th e Compan y which are con sid ered VIE’s. The Company is not the primary beneficiary o f th ese en tities an d th us the secu rities are n ot elimin ated in con solidatio n. These secu rities are co l lat eralized by n on -recou rse fu nd ing ob ligatio ns issu ed b y captive i nsu ran ce co mp anies th at are affiliates of th e Co mp any . The Compan y’s held-to-matu rity secu rities had $7 6.6 million of g ro ss un reco gn ized ho ld i ng gains and $1 9.2 milli on o f gross unrecog nized ho ld ing lo sses by mat urity as of December 3 1, 2 01 7. Th e Compan y d oes not co nsid er th ese un recog nized h olding lo sses t o be o th er-th an-tempo rary b ased on cert ain po sitive factors associated with th e secu rities which in clu de cred it ratin gs o f the gu aran to r, fi nancial h ealth of th e issu er and gu aran to r, co ntin ued access o f th e issu er to cap ital mark ets an d oth er pertin ent in fo rmation . The Compan y h eld $140.5 million of no n-in come prod uci ng securities for the year en ded December 31 , 2 01 8. In cluded in the Compan y’s invested assets are $1 .7 billion of p olicy lo ans as of December 31 , 20 18 . The interest rates o n stan dard p olicy lo ans range from 3.0 % to 8.0 %. The co llateral loan s on life insurance po licies h ave an interest rate of 13 .64 %. Va ria ble Interest Entities The Co mp any h olds certain in vestmen ts in entities in which its own ersh ip in terests co uld po ssibly be con sidered variab le in terests u nd er To pic 8 10 of the Finan cial Acco un ting Stand ard s Bo ard (“FASB”) Accou ntin g Standard Co dificatio n (“ASC” or “Co dification ”) (exclu din g deb t and eq uit y securities held as t radin g, availab le for sale, o r h eld to mat urity). The Co mp an y reviews th e characteristics o f each o f th ese ap plicab le en tities and compares th ose ch aracteristics to ap plicab le criteria to determin e wh eth er the en tit y is a VIE. If th e entity is d etermined to be a VIE, t he Compan y then perfo rms a d etai led review t o d etermine wh eth er th e in terest wou ld b e con sidered a v ariable i nterest u nd er the gu id ance. Th e Compan y th en p erforms a q ualitative review o f all variable in terests with th e en tity an d d etermi nes whether the Compan y is th e p rimary ben eficiary. ASC 81 0 provi des t hat an en tity is the p rimary ben eficiary of a VIE if the en tity has 1) the po wer to d irect th e activities of the VIE t hat mo st sig nificantly imp act th e VIE’s eco no mic performance, and 2 ) th e o blig ation to absorb lo sses of the VIE th at co uld po ten tially be si gn ifican t to the VIE or t he ri gh t to receive ben efi ts from the entity th at cou ld p otentially b e sign i fican t to th e VIE. Based on th is an aly si s, th e Co mp any had an in terest in two sub sidi ari es as of December 3 1, 2 01 8 and Decemb er 31 , 2 01 7, Red Mou ntain LLC (“Red Mo un tain”) and Steel City LLC (“Steel City ”), that were d etermined to be VIEs. The activ i ty most sig nificant to Red M ou ntain is th e issu ance o f a no te in co nn ection with a finan cin g transacti on inv olving Go lden Gate V Vermon t Captiv e In surance Compan y (“Go lden Gate V”) in wh ich Go ld en Gate V issued no n-reco urse fu nd in g o bligatio ns to Red Mou ntain and Red Mo un tain issu ed a no t e (the “Red M ou ntain No te”) to Gol den Gate V. For details of th i s 13 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents transact io n, see Note 14 , Deb t a nd Oth er Ob l ig atio ns. Th e Co mp any h as th e p ower, v i a its 1 00 % o wnership throu gh an affili ate, to d irect the acti vities of th e VIE, bu t did n ot h ave th e o bligatio n to ab sorb losses related t o th e p rimary risk s or sou rces of variability t o th e VIE. The variability of lo ss wou ld be bo rn e primarily by the third p arty in i ts fu nctio n as prov i der of cred it en han cement o n the Red M ou ntain Note. Accord in gly, it was d etermined t hat th e Compan y is no t th e p rimary ben eficiary of the VIE. The Company’s risk o f lo ss related to th e VIE is limit ed to its i nv estment, throu gh an affil iat e, of $1 0,0 00 . Ad ditio nal ly, th e Compan y has guaran teed Red Mo un tain’s pay men t ob ligation for the cred it en han cement fee to the un related third p arty p ro vider. As of Decemb er 3 1, 2 01 8, n o p ay men ts have b een mad e or requi red rel ated to this g uarant ee. St eel City, a newly formed wh olly own ed subsidiary of th e Co mp any, entered into a fin ancing ag reemen t o n Jan uary 1 5, 20 16 in vo lv i ng Go ld en Gate Captiv e Insurance Co mp an y, in which Go ld en Gate issued no n-reco urse fu nd in g ob ligations to Steel C ity and Steel City i ssu ed th ree n otes (the “St eel City No tes”) to Go ld en Gate. Cred it en han cement o n th e Steel Cit y No tes is pro vided by u nrelated th ird parties. For d etails of the finan cin g transactio n, see No te 1 4, Debt an d Oth er Oblig ation s. The activit y mo st sig nificant to Steel Ci ty is the issu an ce of th e Steel City Notes. Th e Co mp an y h ad the p ower, via its 10 0% o wnership, to direct th e activities o f the VIE, bu t did n ot hav e the obl ig ation to absorb lo sses related to th e primary risk s o r sou rces o f v ariability to th e VIE. The v ari abi lity of lo ss wou ld b e bo rn e p rimari ly by the third parties in th eir fu nct io n as provi ders of credit en han cement on the Steel City No tes. Acco rd in gly, it was d etermined th at th e Co mp an y is n ot the primary b enefici ary o f th e VIE. Th e Compan y’s risk o f lo ss related to th e VIE is limited to its in vestmen t o f $10 ,00 0. Ad dition ally, th e Co mp any has g uaran teed Steel City’s payment ob ligatio n for the cred it enh an cement fee to the u nrelat ed th ird party prov id ers. As o f Decemb er 31, 20 18 , no pay ments h ave been made o r requ ired related t o t his gu aran tee. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Compan y d etermined the fair value o f its fin ancial instruments b ased o n th e fair v alu e hierarchy establish ed in FASB gu i dance referenced in the Fair Val ue M easurements and Disclosures To pic wh i ch req uires an entity to maximize th e use o f o bservab le inp uts and minimize th e use o f u no bservab le in pu ts when measu ring fair v alue. The Co mp any has ado pted th e prov isio ns from the FASB gu id ance that is referenced in the Fair Value Measu rements an d Discl osu res Top ic fo r n on -financial assets and liab ili ties (su ch as prop erty an d equ ip men t, go od will, and other in tan gible assets) th at are req uired to be measured at fair v alu e on a p eriod ic b asis. The effect o n the Co mpan y’s perio dic fair v alue measuremen ts for non -fin anci al assets and liabil ities was n ot material. The Company has cat egorized its fin ancial in stru men ts, b ased on th e prio rity of th e in pu ts to th e v alu ation tech niqu e, into a three level hierarchy. The fair value hierarch y giv es the high est p riority t o qu oted prices in activ e mark ets fo r identical assets o r liabilities (Lev el 1) an d th e lowest p rio rity to un ob serv able inpu ts (Level 3). If the inp uts u sed t o measu re fair value fall with in differen t levels of th e hierarchy, th e catego ry lev el is based on th e lowest prio rity lev el inp ut th at is sign ifican t to the fair value measurement of th e in stru men t. Fi nancial assets an d l iab ilities recorded at fair val ue on th e con soli dated balance sh eets are categorized as fo l lo ws: •Lev el 1 : Unad ju sted q uo ted prices for id entical assets or liabilities i n an act iv e mark et. •Lev el 2: Qu oted p rices in markets that are n ot active o r sig nificant in put s th at are ob servab le ei th er d irectly o r in directly. Lev el 2 i np uts includ e th e fo llowing : a) Qu oted p rices fo r similar assets o r liab ilities in acti ve markets b ) Qu oted prices fo r iden tical o r similar asset s or liabilities in n on -activ e markets c) In pu ts o t her th an qu oted mark et p rices th at are o bserv ab le d )Inp uts that are derived p rincipally fro m or corrob orated b y o bserv ab l e mark et d ata throu gh co rrel ati on or other means. •Lev el 3: Pri ces or valuatio n t ech niqu es t hat requ ire in put s th at are b oth unob serv able an d sig nificant to th e ov erall fair value measu rement . They reflect management’s own estimates ab ou t the assumpt io ns a mark et participant wou ld use in p ricin g the asset or l iab ility. 13 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The foll owing tab le presents the Co mp any ’s h ierarch y for it s assets an d liabilities measured at fair v alu e o n a recurrin g basis as of Decemb er 31 , 20 18 : Measurement Categ o ry Lev el 1 Lev el 2 Lev el 3 To tal (Dolla rs In Thousands) Assets: Fixed maturity secu rit ies—av ailable-for-sale Residen tial mortg age-backed securities 4 $— $3,6 11 ,59 0 $— $3,6 11 ,59 0 Co mmercial mo rtgag e-b ack ed secu rities 4 — 2,2 95 ,08 4 — 2,2 95 ,08 4 Other asset-back ed securi ties 4 — 9 70 ,25 1 4 21 ,64 2 1,3 91 ,89 3 U.S. g ov ern men t-related securities 4 1,010 ,485 6 29 ,02 0 — 1,6 39 ,50 5 State, muni cip ali ties, and po litical su bd iv i sio ns 4 — 3,5 88 ,84 1 — 3,5 88 ,84 1 Other go vernmen t-related securiti es 4 — 5 15 ,96 4 — 5 15 ,96 4 Co rp orate securities 4 — 3 5,7 24 ,55 2 6 38 ,27 6 3 6,3 62 ,82 8 Redeemabl e p referred sto ck 4 65 ,536 17 ,26 6 — 82 ,80 2 To tal fix ed maturity secu rities—avai lable-fo r-sale 1,076 ,021 4 7,3 52 ,56 8 1,0 59 ,91 8 4 9,4 88 ,50 7 Fixed maturity secu rit ies—trading Residen tial mortg age-backed securities 3 — 2 41 ,83 6 — 2 41 ,83 6 Co mmercial mo rtgag e-b ack ed secu rities 3 — 1 88 ,92 5 — 1 88 ,92 5 Other asset-back ed securi ties 3 — 1 33 ,85 1 26 ,05 6 1 59 ,90 7 U.S. g ov ern men t-related securities 3 27 ,453 32 ,34 1 — 59 ,79 4 State, muni cip ali ties, and po litical su bd iv i sio ns 3 — 2 86 ,41 3 — 2 86 ,41 3 Other go vernmen t-related securiti es 3 — 44 ,20 7 — 44 ,20 7 Co rp orate securities 3 — 1,4 17 ,59 1 6 ,24 2 1,4 23 ,83 3 Redeemabl e p referred sto ck 3 11 ,277 — — 11 ,27 7 To tal fix ed maturity secu rities—trading 38 ,730 2,3 45 ,16 4 32 ,29 8 2,4 16 ,19 2 Total fi xed matu rit y securities 1,114 ,751 4 9,6 97 ,73 2 1,0 92 ,21 6 5 1,9 04 ,69 9 Equi ty securities 3 531 ,523 3 6 64 ,32 5 5 95 ,88 4 Oth er lon g-term inv estments(1)3 &4 83 ,047 1 80 ,43 8 1 12 ,34 4 3 75 ,82 9 Sh ort-term in vestmen ts 3 730 ,067 77 ,21 6 — 8 07 ,28 3 Total in vestmen ts 2,459 ,388 4 9,9 55 ,42 2 1,2 68 ,88 5 5 3,6 83 ,69 5 Cash 3 173 ,714 — — 1 73 ,71 4 Oth er assets 3 29 ,257 — — 29 ,25 7 Assets related to separate acco un ts Variable ann uity 3 1 2,288 ,919 — — 1 2,2 88 ,91 9 Variable un iv ersal l ife 3 937 ,732 — — 9 37 ,73 2 Total assets measured at fai r v alu e o n a recu rring basis $1 5,889 ,010 $4 9,9 55 ,42 2 $1,2 68 ,88 5 $6 7,1 13 ,31 7 Lia bilities: Ann uity acco un t b alan ces(2 )3 $— $— $76 ,11 9 $76 ,11 9 Oth er liab ilities(1)3 &4 56 ,018 69 ,50 1 6 29 ,94 2 7 55 ,46 1 Total li ab i lities measu red at fair val ue on a recurrin g b asis $56 ,018 $69 ,50 1 $7 06 ,06 1 $8 31 ,58 0 (1)Includes certain freestandin g an d em bed ded deriv ativ es. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. (3)Fair Valu e th roug h Net Income. (4)Fair Valu e th roug h Oth er Co m prehensiv e Income. 13 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The foll owing tab le presents the Co mp any ’s h ierarch y for it s assets an d liabilities measured at fair v alu e o n a recurrin g basis as of Decemb er 31 , 20 17 : Level 1 Level 2 Level 3 Total (Do llars In Tho usands) Assets: Fixed maturity secu rit ies—av ailable-for-sale Residen tial mortg age-backed securities $— $2,3 27 ,21 2 $— $2,3 27 ,21 2 Co mmercial mo rtgag e-b ack ed secu rities — 1,8 89 ,82 2 — 1,8 89 ,82 2 Other asset-back ed securi ties — 7 45 ,18 4 5 04 ,36 5 1,2 49 ,54 9 U.S. g ov ern men t-related securities 958,77 5 2 64 ,47 7 — 1,2 23 ,25 2 State, muni cip ali ties, and po litical su bd iv i sio ns — 1,7 41 ,64 5 — 1,7 41 ,64 5 Other go vernmen t-related securiti es — 2 87 ,28 2 — 2 87 ,28 2 Co rp orate securities — 2 9,0 75 ,10 9 6 26 ,90 1 2 9,7 02 ,01 0 Redeemabl e p referred sto ck 72,47 1 18 ,62 0 — 91 ,09 1 To tal fix ed maturity secu rities—avai lable-fo r-sale 1 ,031,24 6 3 6,3 49 ,35 1 1,1 31 ,26 6 3 8,5 11 ,86 3 Fixed maturity secu rit ies—trading Residen tial mortg age-backed securities — 2 59 ,69 4 — 2 59 ,69 4 Co mmercial mo rtgag e-b ack ed secu rities — 1 46 ,80 4 — 1 46 ,80 4 Other asset-back ed securi ties — 1 02 ,87 5 35 ,22 2 1 38 ,09 7 U.S. g ov ern men t-related securities 21,18 3 6 ,05 1 — 27 ,23 4 State, muni cip ali ties, and po litical su bd iv i sio ns — 3 26 ,92 5 — 3 26 ,92 5 Other go vernmen t-related securiti es — 63 ,92 5 — 63 ,92 5 Co rp orate securities — 1,6 92 ,74 1 5 ,44 2 1,6 98 ,18 3 Redeemabl e p referred sto ck 3,32 7 — — 3 ,32 7 To tal fix ed maturity secu rities—trading 24,51 0 2,5 99 ,01 5 40 ,66 4 2,6 64 ,18 9 Total fi xed matu rit y securities 1 ,055,75 6 3 8,9 48 ,36 6 1,1 71 ,93 0 4 1,1 76 ,05 2 Equi ty securities 688,21 4 3 6 66 ,11 0 7 54 ,36 0 Oth er lon g-term inv estments(1)51,10 2 4 17 ,96 9 1 36 ,00 4 6 05 ,07 5 Sh ort-term in vestmen ts 482,46 1 1 32 ,74 9 — 6 15 ,21 0 Total in vestmen ts 2 ,277,53 3 3 9,4 99 ,12 0 1,3 74 ,04 4 4 3,1 50 ,69 7 Cash 252,31 0 — — 2 52 ,31 0 Oth er assets 28,77 1 — — 28 ,77 1 Assets related to separate acco un ts Variable ann uity 13 ,956,07 1 — — 1 3,9 56 ,07 1 Variable un iv ersal l ife 1 ,035,20 2 — — 1,0 35 ,20 2 Total assets measured at fai r v alu e o n a recu rring basis $17 ,549,88 7 $3 9,4 99 ,12 0 $1,3 74 ,04 4 $5 8,4 23 ,05 1 Lia bilities: Ann uity acco un t b alan ces(2 )$— $— $83 ,47 2 $83 ,47 2 Oth er liab ilities(1)5,75 5 2 40 ,92 7 7 60 ,89 0 1,0 07 ,57 2 Total li ab i lities measu red at fair val ue on a recurrin g b asis $5,75 5 $2 40 ,92 7 $8 44 ,36 2 $1,0 91 ,04 4 (1)Includes certain freestandin g an d em bed ded deriv ativ es. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. Determinatio n o f Fai r Va lues The valuatio n meth od olog ies used to determine the fair values o f assets an d liab iliti es reflect mark et p articipan t assumptio ns an d are based on th e ap pli catio n o f the fair v alu e hi erarch y that prio ritizes ob servable market inp uts over u no bservab le inp uts. The Compan y d etermines the fair v alu es of cert ain finan cial assets and fin ancial liab ilities based on q uo ted market prices, where av ailable. Th e Comp any also d etermines cert ain fair val ues b ased on fut ure cash flo ws discou nted at th e ap prop riat e cu rrent 13 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents mark et rate. Fair val ues reflect ad ju stments for co un terparty credit qualit y, the Comp any ’s cred it stan ding , liq uid ity, an d where app rop riate, risk marg in s on un ob serv able parameters. The fo llowing is a discussio n of the methodo lo gies u sed to d etermine fair v alu es for the finan cial instrumen ts as list ed in th e ab ov e table. The fair v alu e of fix ed matu rity, sho rt-term, an d eq uity secu rities is determin ed b y manag ement after co nsiderin g one o f three pri mary sou rces o f in fo rmation : th ird party p ricin g serv ices, no n-bind in g in dep end en t broker qu otations, or pricin g matrices. Security p ricin g is app lied using a “wat erfall” ap proach whereb y p ub licly availab le p rices are first sou gh t from th ird p arty p ricin g serv ices, the remain i ng un priced securities are submitted to in dep end en t brok ers fo r n on -b i nd in g p rices, o r last ly, secu rities are priced usin g a p ricin g mat rix. Typ ical inp uts u sed b y th ese th ree pricing metho ds in clu de, but are no t limited to: bench mark yield s, reported trad es, b ro ker/d ealer q uo tes, i ssu er spreads, two -sid ed markets, b enchmark secu rities, bids, o ffers, and reference data in clu ding market research pu blicatio ns. Thi rd party pricing serv ices p rice 93 .6% of the Compan y’s availab le-fo r-sal e and tradi ng fix ed maturity secu rities. Based o n th e typ i cal trad ing v olumes an d th e lack of q uo ted mark et prices fo r availab le-fo r-sale and tradi ng fix ed maturiti es, third p arty p ricin g servi ces deriv e th e majori ty of secu rity p rices from ob servable mark et inpu ts such as recent repo rted trades fo r id entical or similar securities mak in g adj ustmen ts th ro ug h th e rep ortin g date based u po n av ailable mark et o bserv ab l e in fo rmatio n o utl in ed ab ov e. If th ere are n o recent repo rted trades, th e th ird party p ricing serv ices an d brok ers may u se matrix or mod el p ro cesses to dev elo p a secu rit y p rice where fu tu re cash flo w exp ectatio ns are d evel op ed b ased u po n col lateral perfo rman ce an d d isco un ted at an estimated market rate. Certain securities are p riced v ia in dep end ent n on -bi nd in g bro ker q uo tatio ns, wh ich are co nsid ered to h ave n o sign ifi can t u no bservab le inp uts. When u sing no n-bind ing indepen den t b ro ker qu otation s, th e Co mp any ob tains o ne qu ote per security, typ ically from th e b ro ker from wh ich we p urchased th e secu rity. A pricing mat rix is used to price secu rities fo r wh ich th e Co mp any is u nable to ob tain o r effect iv ely rel y on either a price fro m a th i rd party pricing serv ice o r an indepen den t b ro ker qu otation . The pricing matri x used by the Compan y beg in s wit h curren t sp read levels to determine t he market p rice for th e secu rity. Th e credit sp read s, assig ned by bro kers, in corpo rate th e issuer’s cred it rati ng , liqu id ity discou nts, weig hted- average o f co ntracted cash flows, ri sk p remiu m, if warran ted , du e to th e issu er’s ind ustry, and th e security’s time to mat urity. Th e Co mp any uses credit ratin gs p ro vided by natio nally reco gn ized rating agen cies. For secu rities th at are p riced vi a no n-bin ding ind epend ent b ro ker q uo tatio ns, t he Co mp any assesses whether p rices received fro m in dep end en t brok ers represent a reaso nab le estimate of fai r value t hrou gh an an aly sis using in ternal an d ex ternal cash flow mo dels dev eloped b ased on spreads an d, when av ailable, mark et in dices. The Comp any uses a mark et-based cash flow anal ysis to valid ate th e reason ableness o f pri ces received from ind epen den t brok ers. These an aly tics, which are u pdated daily, inco rp orate v ariou s metrics (yield curves, credit spreads, p rep ayment rates, etc.) to determin e the valuatio n of such ho ld in gs. As a resu lt of this analysis, if th e Co mp an y d etermi nes th ere is a mo re app ro priate fair value based up on the analytics, the price recei ved fro m the in depen den t brok er is adjusted according ly. The Comp any d id n ot ad ju st an y qu otes o r prices recei ved fro m brok ers du ring the years en ded Decemb er 31 , 20 18 an d 2 01 7. The Company has an aly zed th e third party pricing serv ices’ v alu ation meth od olo gies an d related in put s an d h as also evaluat ed th e vario us typ es of securities in its inv estment p ortfoli o to determin e an app ro pri ate fair v alu e h ierarchy level b ased up on trad in g activity an d th e ob servab ility of mark et in pu ts th at is in accordan ce with th e Fair Valu e M easurements and Disclo sures Top ic of the ASC. Based on this eval uatio n an d in vestmen t class analysis, each p rice was classified in t o Lev el 1, 2 , o r 3 . M ost prices p rovid ed b y th ird party pricin g serv ices are classified into Level 2 because th e sign ifi can t in pu ts used in pricing th e securities are market ob serv able and the o bservab le in pu ts are corrob orated by the Co mpan y. Since the mat rix p rici ng of certain d ebt securities in clu des sign ifican t n on -ob serv able in pu ts, they are classified as Level 3. Asset-B acked Securities This catego ry mainly con si sts of residen tial mortgag e-back ed securities, commercial mo rtgag e-b ack ed securiti es, and o th er asset-b ack ed securities (collecti vely referred to as asset-backed securities o r “ABS”). As o f December 31 , 2 01 8 , th e C ompany held $7.4 billion o f ABS classified as Lev el 2. Th ese securities are p riced from in fo rmation prov id ed by a third party pricing serv ice and ind epen den t broker q uo tes. Th e third party pricing serv ices and brok ers main ly v alu e securities using b oth a mark et an d in co me ap proach to v aluation . As p art of this v alu ation pro cess t hey con sid er th e fo llowing characteristics of th e item bei ng measured to b e relev ant in pu ts: 1) weig hted-averag e co upon rate, 2) weigh ted -av erage y ears to maturi ty, 3) ty pes o f u nd erlyin g assets, 4) weig hted-average co up on rate of the un derly in g assets, 5 ) weigh t ed -av erag e y ears to maturity o f th e u nd erlying assets, 6) sen io rity lev el o f the tranches owned , an d 7 ) credit ratings o f the secu rities. After rev iewing these ch aracteristics of th e ABS, th e th ird p arty p ricin g service an d b ro kers use certai n input s to det ermin e the v alu e o f the secu rity. Fo r ABS classified as Level 2, th e v alu ati on woul d con sist of p red ominantly market o bservab le in pu ts su ch as, bu t no t limited to : 1) monthly princip al and in terest payments o n th e un derly in g assets, 2) av erage life o f th e security, 3 ) prep ayment sp eed s, 4 ) credit sp reads, 5) treasu ry an d swap yield cu rv es, and 6) d isco un t margin. The Co mp any reviews the methodo lo gies an d val uat io n techn i qu es (in clu ding the ability to o bserve in pu ts) in assessin g th e information receiv ed fro m ex ternal p rici ng serv ices an d i n con sideration of th e fair v alu e p resent ati on . As of December 3 1, 2 01 8, the Compan y h eld $4 47 .7 millio n of Lev el 3 ABS, which in clu ded $42 1.6 million o f o th er asset-back ed securities classified as availab le-fo r-sal e an d $26 .1 mil lion o f ot her asset-b acked securities classified as trading . Th ese securities with in the av ailable-for-sale po rtfo lio are p red omin an t ly ARS wh ose un derly in g col lat eral is at least 9 7% gu aran teed b y t he FFELP. As a result o f the ARS market co llapse durin g 20 08 , th e Co mp any p rices its ARS u sin g an inco me app ro ach val uat io n mo del. As part of th e valu ation process the Compan y rev iews the fo llo wing characteristics o f th e ARS in d etermin i ng th e rel ev ant in put s: 1 ) weigh ted -av erage co up on rate, 2) weigh ted -av erag e years to mat urity, 3) ty pes of un derly in g assets, 4) weig hted-average co up on rate of the un derly in g assets, 5 ) weigh t ed -av erag e y ears to maturity o f th e u nd erlying assets, 6) sen io rity lev el o f the tranches owned , 7 ) cred it ratin gs of th e securi ties, 8 ) l iq uidity premium, and 9 ) p ay do wn rate. In perio ds where mark et activity in creases and there are tran saction s at a price th at is n ot th e resu lt of a distressed or fo rced sale we con sid er tho se pri ces as part of 13 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents ou r v aluation . If the mark et activit y du rin g a perio d is so lely the result o f the i ssuer red eemi ng positio ns we co nsider th ose tran saction s in o ur valuatio n, bu t still con sider th em to be level th ree measu rements du e to th e nat ure of th e tran sactio n. Co rpora te Securities, Redeema ble Preferred Sto ck, U.S. Go vernment -Rela ted Securities, States, Municip als, a nd Politica l Subd i visions, and Other Go vernment Related Securities As o f Decemb er 3 1, 2 01 8, th e Co mpan y classified ap prox i mately $42 .3 b illio n o f corp orate securities, red eemable preferred sto ck, U.S. g ov ern ment- rel ated secu rities, states, mu nicip als, and po lit ical su bd i visio ns, an d o th er go vernment-related securi ties as Lev el 2 . The fair v alu e o f the Level 2 securities is predomi nantl y p riced b y brok er q uo tes and a th ird party pricin g service. Th e C ompany h as rev iewed th e valuatio n techni qu es of the b rokers an d th ird party pricing service an d has determin ed th at su ch techn iq ues u sed Level 2 mark et ob servable inputs. The fol lo win g characterist ics of th e secu rities are co nsid ered to be th e primary relevan t in pu ts to the valu ation: 1) weig hted- av erage cou po n rate, 2 ) weig hted-av erag e years to maturity, 3) sen io rit y, and 4) credi t ratin gs. The Company rev iews t he metho do lo gies and valuatio n tech niqu es (includ in g the abil ity to ob serve in pu t s) in assessin g the in format io n received from ex ternal pricing services an d in co nsid eratio n o f the fair value presentation. The brok ers and third p arty pri cing serv ice ut ilize val uatio n mo del s that co nsist o f a h yb rid i ncome an d market app roach to v alu ation . The p ricing models utilize the follo win g inp uts: 1) princip al an d interest pay men ts, 2 ) treasury y ield cu rv e, 3) credit spreads fro m n ew issue and secon dary trad ing mark ets, 4 ) d ealer q uo tes with adjustmen ts fo r i ssues with earl y red emp tion features, 5) liqu id ity p remiu ms p resen t o n p rivate p lacemen ts, an d 6 ) d isco un t marg ins fro m d ealers in th e new issue market. As of December 3 1, 20 18 , the C ompany classified app ro ximately $6 44 .5 million of securities as Lev el 3 val uat io ns. Lev el 3 secu rities p rimarily represen t inv estments in illiqu id b on ds fo r wh ich no price is readily availab le. To d etermine a p rice, th e Company u ses a d isco un ted cash flow mod el with bo th o bservab le and u no bserv ab l e i np uts. These in pu ts are en tered in to an indu stry stand ard p ricing mod el to d etermine th e final p rice o f t he security. Th ese in pu ts in clu de: 1) prin cip al an d in terest p ayments, 2 ) co up on rate, 3) sector and issuer lev el spread o ver treasury, 4) u nd erl ying collateral, 5) cred it rating s, 6) matu rity, 7 ) emb edd ed o ptio ns, 8 ) recent new issuan ce, 9 ) co mp arat iv e bond an aly si s, and 10 ) an il liqu id ity p remiu m. Eq uities As o f Decemb er 3 1, 2 01 8, the Co mp any held app ro ximately $6 4.4 millio n of equ i ty securi ties classified as Level 2 and Lev el 3. Of this to tal, $6 3.4 mi llio n represents FHLB stock . The Co mpan y b elieves that th e cost of th e FHLB stock ap proxi mates fai r v alu e. Other Long-Term Invest ments a nd Other Lia bilit ies Other lon g-term in vestmen ts and o t her liabil ities con si st entirely o f free-stand ing and embedded deriv ative finan cial instrumen t s. Refer to Note 7 , Derivati ve Fi na nci al Instru ment s for add ition al in fo rmation related to deriv ati ves. Deriv ative financial in st ru ments are v alu ed u sing exch ang e prices, in depen den t b ro ker q uo t ati on s, or p ricin g v alu ation mod els, wh ich u til ize market d ata in pu ts. Exclud in g emb edd ed deriv atives, as of December 31 , 20 18 , 10 0% o f d erivativ es b ased u po n n otional v alu es were pri ced usin g ex chan ge p rices or ind ep end ent broker qu otation s. Inp uts used to v alu e deriv atives in clu de, b ut are n ot l imited to, interest swap rates, cred it sp read s, interest rate and equ i ty market vo latili ty in dices, equi ty in dex l ev els, and treasury rates. Th e Co mp any perfo rms mo nthly an aly si s on deriv ative v alu ati on s th at includ es bo th qu antitativ e an d q ualitative an aly ses. Deriv ative instrumen t s classified as Level 1 gen erally in clu de futures and op tion s, which are traded o n act iv e ex chan ge markets. Deriv ative in stru men ts classified as Lev el 2 primarily includ e swap s, o ption s, an d swaptio ns, which are traded o ver-the-cou nter. Lev el 2 also in clu des certain cen trally cleared d erivatives. These d erivativ e v alu ation s are determin ed using ind epen dent b roker q uo tatio ns, which are co rrob orated with ob serv able mark et inp uts. Deriv ative i nstru men ts classified as Level 3 were emb edd ed deriv atives and in clu de at least o ne sign ifican t n on -o bservab le i np ut. A deriv ative in strument con taining Level 1 an d Lev el 2 in pu t s will b e classified as a Level 3 fin anci al i nstru men t in its entirety if it h as at least on e sig nificant Level 3 in pu t. The Co mp any utilizes d erivativ e instrumen ts to manag e the risk asso ciated with certai n assets and liab ili ties. Ho wev er, the d erivativ e instruments may n ot b e classified within the same fair value h ierarchy level as th e asso ciated assets an d liab ili ties. Th erefo re, th e chang es in fair v alu e on deriv atives reported in Level 3 may no t reflect t he offsettin g imp act o f the chan ges in fair value o f the asso ciated assets and liabilities. The embedd ed d erivatives are carried at fair v alu e in “other lon g-term inv est ments” an d “o th er liab ili ties” on the Co mpan y’s con soli dated co nd ensed balance sh eet. The ch anges in fai r v alu e are recorded in earn in gs as “Realized inv estment gains (losses) - Derivat iv e finan cial in struments”. Refer to No te 7 , Derivative Fin an cia l Instru men ts fo r more in fo rmation related to each embed ded deriv atives g ain s and lo sses. The fair value o f the GLWB embed ded deriv ative is derived th ro ug h the inco me meth od of valuatio n using a v aluati on mo del th at p roj ects future cash fl ows u sing multiple risk neutral sto chastic eq uit y scen arios and p oli cy hol der beh avior assumpt io ns. The risk neu tral scenario s are g enerated usin g th e cu rrent swap cu rv e an d projected equ ity vol ati lities an d correlation s. The projected equ ity v olatilities are b ased on a blend o f historical v olatil ity and n ear- term eq uity mark et implied v olatilities. The eq uity co rrelatio ns are based o n h i sto rical price ob serv ation s. For p olicyh older b eh avior assumptio ns, exp ected lapse and utilizatio n assumptio ns are used an d u pd ated fo r act ual ex perien ce, as necessary. The Co mp an y assumes age-based mo rtalit y fro m the Ru ark 20 15 ALB table with attain ed ag e facto rs varying from 87 .0% - 10 0.0 %. The p resen t v alu e o f th e cash flows is d etermi ned u sing th e discou nt rate 13 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents cu rve, wh ich is based u po n LIBOR p lu s a credit sp read (to represent th e Co mp an y’s n on -perfo rman ce risk). As a resu lt of usin g sign ifican t u no bservab le in pu ts, the GLWB embed ded deriv ative is categorized as Lev el 3 . Po licyh older assu mp tion s are reviewed on an ann ual basis. The b alan ce of th e FIA embed ded deriv ative is impacted by p olicy ho ld er cash flo ws associated with the FIA produ ct that are all ocated t o the embed ded d erivative in ad dit io n t o chan ges i n th e fair v alue o f t he emb ed ded deriv ative du rin g the rep orting perio d. Th e fair value of the FIA emb edded deriv ati ve is deriv ed t hrou gh th e in come meth od of val uat io n u sin g a v alu ation mo del th at pro jects fu tu re cash flows u sing curren t ind ex v alu es and vo lat ility, th e hed ge b ud get used to price th e prod uct , an d policyh older assumption s (bo th electiv e an d no n-elective). For po licyh older beh avior assumptio ns, exp ected lapse and withd rawal assumptio ns are u sed an d up dated for actu al ex perience, as necessary. The Compan y assumes age-based mortality fro m th e 2 01 5 Ruark ALB mortality tab le mo dified with compan y exp erience, with attained ag e factors varying fro m 87% - 100%. Th e p resen t value o f th e cash flo ws i s d etermined usin g th e d isco un t rate curv e, which is based u po n LIBOR up to o ne year and con stant maturity treasu ry rates p l us a credit sp read (to represent th e Compan y’s n on -p erforman ce risk ) thereafter. Po licyh older assumptio ns are reviewed o n an ann ual b asis. As a resu lt of u si ng sig nificant un ob servable in pu t s, th e FIA embed ded d erivative is catego rized as Lev el 3 . The balance of th e ind exed un iv ersal life (“IUL”) embedd ed d erivat iv e is i mpacted by po licyh older cash flo ws associated with th e IUL p ro du ct t hat are allocated to th e embed ded deriv ative in add itio n to changes in th e fai r v alu e of t he emb edd ed d erivativ e du rin g the repo rting perio d. The fair value o f th e IUL embed ded deriv ative is deriv ed throu gh the in come method o f valuat io n using a v alu ation mod el that p ro jects future cash flo ws u sin g curren t in dex values and vo lati lity, the hed ge b ud get used to price the p ro du ct, an d p olicy ho ld er assumptio ns (b oth electi ve and no n-electiv e). For po licyh older beh avior assumptio ns, exp ected lapse and withd rawal assumptio ns are u sed an d up dated for actu al ex perience, as necessary. The Compan y assumes age-based mortality fro m the SOA 2 01 5 VBT Primary Tab les modi fied with co mpan y exp eri en ce, with attain ed ag e factors v ary in g from 37 % - 577%. Th e p resen t v alu e of th e cash flows is determined u sin g th e discou nt rate cu rv e, which is b ased up on LIBOR up to on e year an d co nstan t matu rity treasury rates p lu s a credit spread (to represent t he Compan y’s no n-perfo rmance risk) th ereafter. Policy ho ld er assumpti on s are reviewed o n an annu al b asis. As a resu lt of u si ng sig nificant un ob servable in pu t s, th e IUL emb edd ed d eri vat iv e is categ ori zed as Level 3. The Co mp any h as assumed and ceded certain block s of p olicies u nder mo dified co in surance agreements in which t he in vestmen t resu l ts of th e un derly in g p ortfo lios in ure directly to t he rein surers. As a result, these ag reement s con tain embed ded deriv atives that are reported at fair value. Ch ang es in th eir fair v alu e are repo rted in earning s. The in vestmen ts suppo rtin g th ese ag reement s are d esignated as “tradi ng secu rities”; therefo re chang es in their fair value are also reported in earn in gs. As of Decemb er 3 1, 2 01 8, th e fair value of the embedd ed deriv ative is based up on the relation ship between the statutory po licy liabil ities (net of p olicy lo ans) of $2.3 b illio n and th e stat utory un realized g ain (loss) o f th e securities o f $25 .8 million . As a result , ch ang es in the fair value of t he emb edd ed d erivat iv es are larg ely offset by t he chan ges in fai r v alu e of th e rel ated in vestmen ts an d each are rep ort ed i n earn i ng s. The fair v alue o f th e embed ded d erivati ve is co nsid ered a Lev el 3 valuatio n d ue t o the un observab le nature of th e po licy liab ilities. Annuity Acco unt Ba la nces The Co mp any reco rd s a certain legacy block o f FIA reserves at fair v alu e. Based on the characterist ics of these reserves, th e Co mpan y believ es that th e fu nd value app ro ximates fair v alu e. The fair value measurement of these reserv es is co nsid ered a Lev el 3 valuatio n due to th e u nobserv able nature o f th e fu nd val ues. Th e Level 3 fair v alu e as of December 3 1, 2 01 8 is $76 .1 mil lion . Sepa ra te Accounts Separate accou nt assets are in vested in op en -en ded mu tu al fun ds an d are in clu ded in Lev el 1 . 13 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Va luati on of Level 3 Fina ncial Instruments The fo llowing table presents th e v alu ati on meth od for mat eri al finan cial instrument s in clu ded in Level 3, as well as th e u no bserv ab le inp uts used in th e v alu ation of those finan cial instruments: Fair Value As of December 31, 20 1 8 Valua tion Technique Uno bserv a ble Input Range (Weig hted Average) (D oll ars In Tho us a nds) Assets: Other asset-backed securities $42 1 ,4 58 Liq uidation Liquid atio n valu e $85.75 - $99.9 9 ($95 .3 6 ) Discounted cash flow Liquid ity premiu m 0 .02% - 1.25% (0.64 %) Payd o wn rate 1 0 .96% - 13.11 % (12.0 3 %) Co rporate secu rities 63 1 ,0 68 Discounted cash flow Spread o v er treasu ry 0.84% - 3.0% (1.84 %) Lia bilities:(1) Em b ed d ed derivatives—GLWB(2)$18 4 ,0 71 Actu arial cash flo w m o del Mo rtality 87 % to 100 % o f Ruark 2 0 1 5 ALB tab le Lapse Ruark Predictive Mo d el Utilizatio n 9 9%. 10 % of p o licies have a o ne-time o ver-u tilizatio n of 4 00% Nonperform an ce risk 0 .2 1% - 1 .16% Em b ed d ed derivative—FIA 21 7 ,2 88 Actu arial cash flo w m o del Ex p en ses $145 p er policy Withd rawal rate 1.5 % prio r to age 70, 1 0 0 % of the RMD for ag es 70+ Mo rtality 87 % to 100 % o f Ruark 2 0 1 5 ALB tab le Lapse 1.0 % - 30 .0 %, depending o n du ration/su rren d er ch arge perio d Nonperform an ce risk 0 .2 1% - 1 .16% Em b ed d ed derivative—IUL 9 0 ,2 31 Actu arial cash flo w m o del Mo rtality 3 7 % - 5 7 7% of 2015 VBT Primary Tables Lapse 0.5 % - 10 .0 %, depending o n d u ration/d istrib u tion channel and sm oking class Nonperform an ce risk 0 .2 1% - 1 .16% (1)Excludes m o d ified coin surance arran g em en ts. (2)The fair v alu e for th e GLWB embedded deriv ativ e is presen ted as a net liability . The chart ab ov e ex clu des Lev el 3 finan cial in stru ments that are valued using bro ker q uot es an d those which b oo k v alu e ap proxi mates fai r v alu e. The Compan y has co nsid ered all reaso nab ly availab le q uan tit ati ve inp uts as of December 3 1, 2 01 8, bu t th e valuat io n techn iq ues and inp uts u sed by some brok ers in p ricin g certain fin ancial instrument s are n ot shared with th e C ompany. Th is resu lted in $40 .4 millio n o f finan cial in st ru men ts being classified as Lev el 3 as of December 31 , 2 01 8. Of th e $4 0.4 millio n, $26 .2 million are o th er asset-b acked secu rities, $13 .5 million are corp orate securities, and $0 .7 mil lion are equ ity secu rit ies. In certain cases the Compan y h as determin ed that bo ok value materially ap prox imates fair value. As of December 31 , 20 18 , the Compan y h eld $6 3.6 mi llio n o f fin ancial instrumen t s where b oo k v alu e ap proxi mates fai r v alu e wh ich was p red omin antly FHLB stock . 13 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing table presents th e v alu ati on meth od for mat eri al finan cial instrument s in clu ded in Level 3, as well as th e u no bserv ab le inp uts used in th e v alu ation of those finan cial instruments: Fa ir Va lue As o f December 31 , 2 017 Valuation Technique Unobserv a ble Input Ra nge (Weig hted Average) (Do lla rs I n Tho usa nds ) Assets: Other asset-backed securities $504,2 2 8 Disco u nted cash flo w Liquidation v alu e $90 - $97 ($94.91) Disco u nted cash flo w Liquidity p remium 0 .06% - 1.17% (0.75 %) Paydo wn rate 1 1 .31% - 11.97% (11.5 4 %) Co rporate secu rities 617,7 7 0 Disco u nted cash flo w Spread ov er treasury 0 .81% - 3.95% (1.06 %) Lia bilities:(1) Em b ed d ed derivatives—GLWB(2)$111,7 6 0 Actuarial cash flow mo d el Mortality 91.1% to 106.6 % of Ruark 2 0 1 5 ALB table Lapse 1.0% - 30.0 %, depen ding o n product/duration/fu n ded status of g u aran tee Utilization 9 9%. 10 % o f p o licies have a o n e-time ov er- u tilizatio n of 4 0 0% No nperfo rmance risk 0 .1 1% - 0 .79% Em b ed d ed derivative—FIA 218,6 7 6 Actuarial cash flow mo d el Exp enses $146 p er p olicy Withdrawal rate 1 .5% prior to ag e 7 0 , 100% o f the RMD fo r ages 70 + Mortality 1 9 94 MGDB table with company experien ce Lapse 1.0% - 30.0 %, depen ding o n du ration/su rrend er ch arge period No nperfo rmance risk 0 .1 1% - 0 .79% Em b ed d ed derivative - IUL 80,2 1 2 Actuarial cash flow mo d el Mortality 3 4 % - 1 5 2 % of 2 015 VBT Primary Tables Lapse 0.5% - 10.0 %, depen ding o n d u ration/distrib u tion channel and sm oking class No nperfo rmance risk 0 .1 1% - 0 .79% (1)Excludes m o d ified coin surance arran g em en ts. (2)The fair v alu e for th e GLWB embedded deriv ativ e is presen ted as a net liability . The chart ab ov e ex clu des Lev el 3 finan cial in stru ments that are valued using bro ker q uot es an d those which b oo k v alu e ap proxi mates fai r v alu e. The Compan y has co nsid ered all reaso nab ly availab le q uan tit ati ve inp uts as of December 3 1, 2 01 7, bu t th e valuat io n techn iq ues and inp uts u sed by some brok ers in p ricin g certain fin ancial instrument s are n ot shared with th e C ompany. Th is resu lted in $50 .4 millio n o f finan cial in st ru men ts being classified as Lev el 3 as of December 31 , 2 01 7. Of th e $5 0.4 millio n, $35 .4 million are o th er asset-b acked secu rities, $14 .6 million are corp orate securities, and $0 .4 mil lion are equ ity secu rit ies. In certain cases th e Co mp any d etermined that bo ok value mat eri ally app ro ximates fair v alu e. As o f December 3 1, 201 7, the Co mp any h eld $6 5.7 mi llio n o f fin ancial instrumen t s where b oo k v alu e ap proxi mates fai r v alu e, wh ich was p red omin antly FHLB stock . The asset -b ack ed secu rities classified as Level 3 are predo minan tly ARS. A chan ge in th e pay do wn rate (the projected annual rate o f principal reductio n) o f th e ARS can sign ifi can tly i mp act the fair value of th ese securities. A d ecrease in the pay do wn rat e wou ld in crease the projected wei gh ted av erag e life o f the ARS an d increase th e sensitiv ity o f th e ARS’ fair v alu e to chang es in interest rates. An in crease in the liqui dity premium wou ld resu lt i n a decrease in th e fair value of th e secu rities, while a d ecrease in th e li qu id ity p remiu m wou ld in crease th e fair value of th ese secu rities. Th e liq uid ati on v alu e fo r these securities are sen sitive to th e i ssu er’s av ailable cash flows an d ability to redeem t he secu rities, as well as the cu rrent h olders’ will in gn ess to liqu id ate at the sp ecified p rice. The fair value o f co rpo rat e bo nd s classified as Lev el 3 is sensitiv e to chan ges in th e int erest rate sp read ov er the co rresp on ding U.S. Treasury rate. This sp read represents a risk p remiu m th at is impacted b y co mp any sp ecific an d mark et facto rs. An in crease in the sp read can be caused b y a perceived in crease in cred it risk o f a sp ecific issu er and /o r an in crease in the ov erall mark et risk premium associated with similar securities. Th e fair v alu es of corpo rate bo nd s are sensit iv e to chan ges in sp read . When ho ld in g th e t reasu ry rate constant, t he fair v alu e of corp orate b on ds in creases when spreads decrease, and decreases wh en sp read s in crease. 13 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fair value o f the GLWB embedd ed d erivativ e is sensitiv e to chan ges in th e discou nt rate which includ es the Compan y’s no np erforman ce ri sk, vo lat ility, lapse, an d mo rtal ity assump t io ns. Th e vo latility assumption is an observ able in pu t as it is based on market in pu ts. The Compan y’s no np erforman ce risk, lapse, and mo rtalit y are u no bservab le. An in crease in th e th ree uno bservab le assu mp tion s wou ld resul t in a decrease in the fair val ue of th e liabilit y and co nv ersely, if th ere is a decrease in the assumption s the fair v alu e wou ld increase. Th e fair value is also d epend ent o n th e assu med p olicy ho ld er utilizatio n of th e GLWB wh ere an increase in assu med u t ilizat io n wo uld result in an i ncrease in the fair value o f the li ab ility and con versely, if there is a d ecrease in the assumptio n, the fair value wou ld decrease. The fair v alu e of the FIA emb edd ed d erivative is p red omin antly imp acted by o bservab le in pu ts such as discou nt rates and equ ity returns. However, th e fair v alue o f the FIA embed ded deriv ative i s sensitiv e to no n-perfo rmance risk , which is un ob servable. The v alu e of th e liability i ncreases with decreases in the d isco un t rate and n on -p erforman ce risk and d ecreases with increases i n the discou nt rate an d no np erforman ce risk . Th e value of the liab ility increases with increases in eq uit y return s and th e liabi lity decreases wit h a decrease in eq uity return s. The fair value of th e IUL embed ded deriv ative is pred ominantl y imp acted by ob servable inp uts such as disco un t rates and equ ity returns. Ho wever, th e fair value of the IUL emb edd ed d eri vat iv e is sen siti ve to no n-perfo rmance risk , wh ich is u no bserv ab le. Th e value of th e liability in creases with decreases in th e d isco unt rate an d no n-performance risk and decreases with in creases i n the discou nt rate and n on -p erforman ce risk. Th e val ue of th e liabilit y increases with increases in eq uit y return s and th e liabi lity decreases wit h a decrease in eq uity return s. 14 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The follo win g table presents a recon ciliatio n of th e beg in ning and end ing balances for fair value measurements for the y ear en ded Decemb er 31 , 20 18 , fo r which the Compan y h as used sign ifican t u no bservab le inp uts (Level 3): Total Gains (lo sses) included in Ea rning s rela ted to Instruments still held a t the Reporting Date Total Rea lized a nd Unrealized Gains Total Rea lized a nd Unrealized Losses Beginning Balance Included in Earnings Included in Other Comprehensiv e Inco me Included in Ea rning s Included in Other Comprehensive Income Purcha ses Sa les Issuances Settlements Tra nsfers in/out o f Level 3 Other Ending Balance (Dollars In Tho usa nds) Assets: Fix ed matu rity secu rities available-for-sale Residential mortgage-b acked secu rities $— $— $— $— $(99 5) $22,225 $— $— $— $(21 ,2 81 ) $5 1 $— $— Commercial mortgage-b acked secu rities — — 50 — (2,49 6) 48,621 (293 ) — — (45 ,8 32 ) (5 0) — — Oth er asset-backed secu rities 50 4,36 5 3,716 16,503 (15 9) (2 5,57 7) — (80 ,051 ) — — 2 22 2,62 3 42 1,64 2 — U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals, and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 62 6,90 1 — 12,537 — (2 9,01 7) 1 08,491 (97 ,676 ) — — 20 ,7 21 (3,68 1) 63 8,27 6 — Total fixed maturity securities— available-fo r- sale 1,13 1,26 6 3,716 29,090 (15 9) (5 8,08 5) 1 79,337 (178 ,020 ) — — (46 ,1 70 ) (1,05 7) 1,05 9,91 8 — Fix ed matu rity secu rities—trading Residential mortgage-b acked secu rities — — — — — — — — — — — — — Commercial mortgage-b acked secu rities — — — — — — — — — — — — — Oth er asset-backed secu rities 3 5,22 2 464 — (3,79 8) — 8,728 (14 ,511 ) — — 1 64 (21 3) 2 6,05 6 (3 ,1 79 ) U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 5,44 2 45 — (14 5) — 999 — — — — (9 9) 6,24 2 (1 01 ) Total fixed maturity securities— tradin g 4 0,66 4 509 — (3,94 3) — 9,727 (14 ,511 ) — — 1 64 (31 2) 3 2,29 8 (3 ,2 80 ) To tal fix ed maturity secu rities 1,17 1,93 0 4,225 29,090 (4,10 2) (5 8,08 5) 1 89,064 (192 ,531 ) — — (46 ,0 06 ) (1,36 9) 1,09 2,21 6 (3 ,2 80 ) Eq uity securities 6 6,11 0 375 — (9 3) — 36 (2 ,103 ) — — — — 6 4,32 5 2 82 Oth er long-term inv estmen ts(1)13 6,00 4 5 1,161 — (7 4,82 1) — — — — — — — 11 2,34 4 (23 ,6 60 ) Sh ort-term inv estmen ts — — — — — — — — — — — — — To tal inv estmen ts 1,37 4,04 4 5 5,761 29,090 (7 9,01 6) (5 8,08 5) 1 89,100 (194 ,634 ) — — (46 ,0 06 ) (1,36 9) 1,26 8,88 5 (26 ,6 58 ) To tal assets measured at fair valu e o n a recurrin g basis $1,37 4,04 4 $5 5,761 $29,090 $(7 9,01 6) $(5 8,08 5) $1 89,100 $(194 ,634 ) $— $— $(46 ,0 06 ) $(1,36 9) $1,26 8,88 5 $(26 ,6 58 ) Lia bilities: Ann uity accou nt balan ces(2)$8 3,47 2 $— $— $(3,50 5) $— $— $— $62 3 $1 1,48 1 $— $— $7 6,11 9 $— Oth er liabilities(1)76 0,89 0 40 1,350 — (27 0,40 2) — — — — — — — 62 9,94 2 1 30 ,9 48 To tal liabilities measured at fair valu e o n a recurrin g basis $84 4,36 2 $40 1,350 $— $(27 3,90 7) $— $— $— $62 3 $1 1,48 1 $— $— $70 6,06 1 $1 30 ,9 48 (1)Rep resents certain freestan ding and emb edd ed d erivatives. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. For t he year end ed December 31 , 20 18 , th ere were $3 9.7 million of secu rities tran sferred i nto Lev el 3 . For th e y ear en ded December 3 1, 20 18 , $85 .7 million o f securi ties were tran sferred into Lev el 2. This amo un t was tran sferred from Lev el 3. Th ese transfers resulted from securities that were priced internally u sing sig nificant un ob servable in pu ts wh ere market o bserv able inp uts were not av ailable in previ ou s perio ds but were p riced by in dep end ent pricing serv ices o r b rok ers as o f Decemb er 31 , 20 18 . For t he year end ed December 31 , 20 18 , th ere were no transfers from Level 2 to Lev el 1 . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. For t he year end ed December 31 , 20 18 , th ere were no transfers from Level 1 into Lev el 2 . 14 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The follo win g table presents a recon ciliatio n of th e beg in ning and end ing balances for fair value measurements for the y ear en ded Decemb er 31 , 20 17 , fo r which the Compan y h as used sign ifican t u no bservab le inp uts (Level 3): Total Gains (lo sses) included in Ea rning s rela ted to Instruments still held a t the Reporting Date Total Rea lized a nd Unrealized Gains Total Realized and Unrealized Lo sses Beginning Balance Included in Earnings Included in Other Comprehensiv e Inco me Included in Earnings Included in Other Comprehensiv e Inco me Purchases Sales Issuances Settlements Tra nsfers in/out o f Level 3 Other Ending Balance (Dollars In Tho usa nds) Assets: Fix ed matu rity secu rities available-for-sale Residential mortgage-b acked secu rities $3 $— $83 $— $— $1 1,86 2 $(3) $— $— $(11 ,9 44 ) $(1) $— $— Commercial mortgage-b acked secu rities — — — — — — — — — — — — — Oth er asset-backed secu rities 56 2,60 4 1,409 15,136 — (10 ,931 ) 10 0 (59,1 75) — — (6 ,6 43 ) 1,86 5 50 4,36 5 — U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals, and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 66 4,04 6 — 27,637 — (13 ,089 ) 13 1,82 2 (1 69,0 02) — — (10 ,3 53 ) (4,16 0) 62 6,90 1 — Total fixed maturity securities— available-fo r- sale 1,22 6,65 3 1,409 42,856 — (24 ,020 ) 14 3,78 4 (2 28,1 80) — — (28 ,9 40 ) (2,29 6) 1,13 1,26 6 — Fix ed matu rity secu rities—trading Residential mortgage-b acked secu rities — — — — — — — — — — — — — Commercial mortgage-b acked secu rities — — — — — — — — — — — — — Oth er asset-backed secu rities 8 4,56 3 3,768 — (1,15 7) — — (52,8 35) — — — 88 3 3 5,22 2 3 ,4 83 U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 5,49 2 101 — (5 8) — — — — — — (9 3) 5,44 2 44 Total fixed maturity securities— tradin g 9 0,05 5 3,869 — (1,21 5) — — (52,8 35) — — — 79 0 4 0,66 4 3 ,5 27 To tal fix ed maturity secu rities 1,31 6,70 8 5,278 42,856 (1,21 5) (24 ,020 ) 14 3,78 4 (2 81,0 15) — — (28 ,9 40 ) (1,50 6) 1,17 1,93 0 3 ,5 27 Eq uity securities 6 9,01 0 2 52 (2,63 0) (53 ) — (2 74) — — 3 — 6 6,11 0 3 Oth er long-term inv estmen ts(1)12 4,32 5 2 7,158 — (1 5,47 9) — — — — — — — 13 6,00 4 11 ,6 79 Sh ort-term inv estmen ts — — — — — — — — — — — — — To tal inv estmen ts 1,51 0,04 3 3 2,438 42,908 (1 9,32 4) (24 ,073 ) 14 3,78 4 (2 81,2 89) — — (28 ,9 37 ) (1,50 6) 1,37 4,04 4 15 ,2 09 To tal assets measured at fair valu e o n a recurrin g basis $1,51 0,04 3 $3 2,438 $42,908 $(1 9,32 4) $(24 ,073 ) $14 3,78 4 $(2 81,2 89) $— $— $(28 ,9 37 ) $(1,50 6) $1,37 4,04 4 $15 ,2 09 Lia bilities: Ann uity accou nt balan ces(2)$8 7,61 6 $— $— $(4,00 1) $— $— $— $6 23 $8,76 8 $— $— $8 3,47 2 $— Oth er liabilities(1)57 1,84 3 9 3,071 — (28 2,11 8) — — — — — — — 76 0,89 0 (1 89 ,0 47 ) To tal liabilities measured at fair valu e o n a recurrin g basis $65 9,45 9 $9 3,071 $— $(28 6,11 9) $— $— $— $6 23 $8,76 8 $— $— $84 4,36 2 $(1 89 ,0 47 ) (1)Rep resents certain freestan ding and emb edd ed d erivatives. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. For t he year end ed December 31 , 20 17 , th ere were an immaterial amou nt of transfers of securities in to Level 3. For th e y ear en ded December 3 1, 20 17 , $28 .9 million o f securi ties were tran sferred into Lev el 2. This amo un t was tran sferred from Lev el 3. Th ese transfers resulted from securities that were priced internally u sing sig nificant un ob servable in pu ts wh ere market o bserv able inp uts were not av ailable in previ ou s perio ds but were p riced by in dep end ent pricing serv ices o r b rok ers as o f Decemb er 31 , 20 17 . For t he year end ed December 31 , 20 17 , th ere were no transfers from Level 2 to Lev el 1 . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. For t he year end ed December 31 , 20 17 , th ere were no transfers from Level 1 into Lev el 2 . Total realized an d u nrealized gai ns (lo sses) o n Lev el 3 assets and liab ilities are p rimari ly repo rted i n either realized i nv estment g ain s (losses) with in th e co nso lidated con den sed statements of in come (lo ss) or o th er comprehen si ve in come (lo ss) within sh areo wn er’s eq uity based o n the app ro pri ate acco un ting treatment fo r the item. 14 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Purchases, sales, issu ances, an d settlements, net, represent the acti vity that o ccurred d urin g th e p eriod that resu lts in a ch ang e o f th e asset or liab ility bu t do es n ot represent chang es in fair v alu e for the instru men ts h eld at the begin ning o f the p eriod. Su ch activ ity p rimarily relates to pu rch ases an d sales o f fixed matu rity secu rities and issuan ces an d settlemen ts of fixed in dex ed ann uities. The Compan y reviews t he fair value h ierarch y classi ficati on s each repo rtin g perio d. Chan ges in the o bservab ility of th e valuation attribu tes may resu lt in a reclassi fication o f certain finan cial assets o r liabil ities. Su ch reclassificatio ns are rep orted as transfers in an d ou t of Lev el 3 at the b eginn ing fair value for the repo rting period in wh ich the ch anges occu r. Th e asset transfers in th e t abl e(s) ab ov e primarily related to p ositions mo ved from Lev el 3 to Level 2 as t he Compan y determin ed that certain in pu ts were o bserv abl e. The amou nt o f to tal gains (lo sses) for assets an d liabilities still h eld as of the repo rting d ate p rimarily rep resen ts chan ges in fair v alu e of trad ing securities an d certain derivativ es th at exist as of th e rep orting date and th e ch ang e in fair value o f fix ed ind exed an nu i ties. Estima ted Fa ir Va lue of Financia l Instruments The carrying amo un ts an d esti mated fair v alu es of th e C ompany ’s finan cial in struments as o f the peri od s sho wn b elo w are as fo llows: As of December 31, 201 8 2 0 1 7 Fair Value Lev el Carry ing Amo unts Fair Values Carry ing Amo unts Fair Values (Dollars In Thousands) (D ollars In Thousands) Assets: Mortgag e loan s on real estate 3 $7 ,72 4,7 33 $7 ,44 7,702 $6,8 17 ,72 3 $6,7 40 ,17 7 Policy lo ans 3 1 ,69 5,8 86 1 ,69 5,886 1,6 15 ,61 5 1,6 15 ,61 5 Fix ed matu rities, held-to-maturity(1)3 2 ,63 3,4 74 2 ,54 7,210 2,7 18 ,90 4 2,7 76 ,32 7 Lia bilities: Stab le v alu e p roduct accoun t b alances 3 $5 ,23 4,7 31 $5 ,20 0,723 $4,6 98 ,37 1 $4,6 98 ,86 8 Future po licy b enefits and claims(2)3 1 ,67 1,4 14 1 ,67 1,434 2 20 ,49 8 2 20 ,49 8 Other po licyh olders’ funds(3 )3 13 1,1 50 13 1,782 1 33 ,50 8 1 34 ,25 3 Debt:(4) Bank bo rro wings 3 $— $— $— $— Senior Notes 2 1 ,10 0,5 08 1 ,06 5,338 9 43 ,37 0 9 33 ,92 6 Sub ordinated d eben tu res 2 49 5,4 26 49 4,265 4 95 ,28 9 5 01 ,21 5 Sub ordinated fun ding ob lig ation s 3 11 0,0 00 9 5,476 — — No n-recourse fu nd in g o blig ations(5)3 2 ,63 2,4 97 2 ,55 0,237 2,7 47 ,47 7 2,8 04 ,98 3 Excep t as noted b elo w, fair values were estimated usin g quoted mark et p rices. (1)Securities purch ased fro m unconsolidated su b sidiaries, Red Mountain LLC and Steel City LLC. (2)Sin g le premiu m immediate an nuity with o u t life contin g en cies. (3)Su p plementary contracts without life co ntingencies. (4)Excludes capital lease oblig atio n s of $1.3 million and $1 .7 million as of Decem ber 31 , 2 0 18 and 20 1 7 , resp ectiv ely . (5)As o f Decem b er 31, 2 0 18, carry ing amoun t o f $2 .6 b illion and a fair value of $2.5 billio n related to non -recourse fundin g ob lig atio ns issued b y Go ld en Gate and Golden Gate V. As o f Decem b er 31, 2 0 17, carry ing amoun t o f $2 .7 b illion and a fair value of $2.8 billio n related to n o n -recourse fu n ding ob lig atio ns issu ed b y Go lden Gate and Go ld en Gate V. Fair Va lue Mea surements Mo rtga ge lo ans o n rea l estate The Comp any estimates th e fair v alu e o f mortg age lo ans u sin g an intern ally d ev elo ped mod el. Th is mod el in clu des inp uts deriv ed by th e Co mp any based o n assu med d iscou nt rates relativ e to the Company ’s curren t mortg age lo an len ding rate an d an exp ected cash flow analysis based on a review o f the mortgag e loan terms. Th e mo del also con tains the Co mpan y’s d etermi ned representativ e risk ad ju stment assu mp tion s related to cred it and liqu id ity risks. Policy l oa ns The Compan y b elieves the fair value o f p oli cy l oans app ro ximates bo ok value. Policy l oans are fun ds prov id ed to p olicy ho ld ers in return fo r a claim on th e po licy. The fun ds p ro vided are limited to th e cash su rrend er v alu e of th e un derly in g p olicy. Th e nature of po licy loan s i s to hav e a negligible default risk as the loan s are fully collaterali zed b y the value o f th e pol icy. Policy l oans d o n ot h ave a stated matu rit y an d th e balances an d accrued interest are rep aid eit her by t he p olicy ho ld er or with proceeds from the p olicy. Du e to the collateral ized nature of p olicy loan s and u np red ictable timin g o f rep aymen ts, the Co mp any bel iev es th e carry in g v alu e of po licy loan s app ro ximates fair v alu e. 14 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Fixed ma turi ties, hel d-to -maturity The Co mp any estimates th e fair value of its fix ed matu rity, held-to-matu rity securities usin g in ternal d isco un ted cash flo w mod els. The discou nt rat es used in th e model are based on a cu rrent market yield fo r simil ar fin ancial in stru men ts. St ab le value p roduct and o ther i nvestment contract ba la nces The Compan y estimates the fair value o f stable value p ro du ct accou nt b alances an d o th er inv est ment con tract b alan ces (includ ed in Fu tu re po licy benefits a nd cla ims as well as Oth er po licyho ld er f un ds lin e items o n o ur balance sh eet) u sing mo del s based on discou nted ex pected cash flo ws. The d isco un t rat es used in th e models are based on a cu rrent market rate fo r similar fin ancial in stru men ts. Deb t Ba nk bo rro w ings The C ompany bel iev es the carryin g value of its ban k bo rro wing s app ro ximates fair value as t he bo rrowing s pay a flo ating in terest rate plus a sp read based o n the rating of th e Company ’s senior deb t wh ich th e Co mp any believes ap prox i mates a mark et interest rate. Senior no tes a nd sub ordina ted deb t securiti es The Co mp any esti mates the fair value of it s Senior No tes an d Su bo rd in ated d ebt secu rities usin g qu oted market p rices from third party p ricing serv ices, where available. The Co mp an y also determines certain fair values b ased o n future cash flo ws discou nted at th e app ro priate cu rrent market rate. Fund ing o bli ga tions The Compan y estimat es th e fair value o f its sub ord in ated and no n-reco urse fundi ng ob ligation s usin g internal discou nted cash flo w mo dels. Th e discou nt rates used in th e mo del are based on a cu rrent market yield fo r similar fin ancial instrumen ts. 7. DERIVATIVE FINANCIAL INSTRUME NTS Ty pes o f Deriva tive Instruments a nd Deriva tive Stra teg ies The Co mp an y utili zes a risk management strategy t hat in corpo rates the use of derivativ e finan cial i nstrumen ts t o redu ce exp osure to certain risks, in clu ding b ut no t limited to, i nterest rat e risk, curren cy exch ang e risk, vo latili ty ri sk, and equ ity market risk . Th ese strat eg ies are d evelop ed t hrou gh th e Co mp any ’s an aly si s o f d ata from fin anci al simulation mo dels an d other internal and in du stry so urces, an d are th en incorporated i nto th e Co mp any ’s risk manag ement pro gram. Deriv ative in stru men ts exp ose the Co mp any to cred it an d market ri sk and co uld result in material ch ang es from p eriod to p eriod . Th e Co mp any att empts to minimize its credit in con nectio n with its o verall asset/liability man agemen t p ro grams and risk management strateg ies. In add iti on , all d eri vat iv e prog rams are mo nit ored by ou r risk management dep artment. Derivatives Related t o Interest Rate Risk M anag ement Deriv ative i nstrumen ts th at are used as part o f the Comp any ’s in terest rate risk man agemen t strategy in clu de i nterest rat e swap s, in terest rate futures, in terest rate caps, an d interest rate swaptio ns. Derivatives Related t o Foreig n Currency Exchange Risk M anag ement Deriv ative instruments that are u sed as part of the Compan y’s fo reign curren cy ex change risk man agement strategy in clu de fo rei gn curren cy swap s, fo reign cu rrency fu tures, fo reign equ ity futures, and fo reign equ ity o ptio ns. Derivatives Related t o Risk M iti ga tion of C erta in Annuity Contracts The Co mp an y may use th e fol lo win g typ es o f deriv ative co ntracts to mitigate its exp osu re to certain g uaranteed b enefits related to VA con tracts and fixed in dexed ann uities: •Fo reign Curren cy Futures •Variance Swaps •Int erest Rate Fu tu res •Eq uity Optio ns •Eq uity Fu tu res •Cred it Derivat iv es •Int erest Rate Swaps •Int erest Rate Swapti on s •Volatilit y Futures •Volatilit y Option s •To tal Return Swaps 14 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Acco unting fo r Deriva tive Instruments The Compan y reco rd s its deriv ati ve fin an cial in stru men ts in th e co nsol id ated balan ce sheet in “ot her lo ng -term in vestmen ts” an d “o th er liab iliti es” in accordan ce with GAAP, which requi res th at all d erivative instruments be recog nized in the balance sheet at fair v alu e. Th e chan ge in the fair value of deriv ati ve finan cial in struments is reported eith er in t he statemen t o f inco me or in other co mp reh ensive inco me (loss), d epen ding upon wh eth er it qu alified fo r and also h as been p ro perly identi fied as b eing part o f a h edg in g relatio nshi p, and also on th e ty pe o f h edg in g relatio nsh i p t hat ex ists. It is the Compan y's p olicy no t to o ffset assets and liab iliti es asso ciated with open deriv ative co ntracts. Howev er, th e Chicago Mercantile Ex change (“CME”) rules characterize variation margi n tran sfers as settlement pay ments, as o pposed to ad ju stments to col lat eral. As a result, d erivativ e assets and liabilities asso ciated with centrally cleared d erivat iv es fo r which the CM E serv es as th e cen t ral clearing party are presented as if these d erivativ es had been settled as of th e rep orting date. For a deriv ative finan cial instrumen t to b e accou nted fo r as an accou nti ng h ed ge, it must be iden tified and d ocu men ted as such o n th e d ate o f design ation . For cash flow h edg es, t he effect iv e po rtion of their realized gain o r lo ss is repo rted as a co mpon en t of o th er co mp reh ensive in come and reclassified i nto earning s in the same perio d du ring which the h edg ed item i mp acts earning s. An y remaining gain or lo ss, th e in effective p ortion , is recog nized i n curren t earni ng s. Fo r fair v alu e hedg e deriv atives, t heir gain o r loss as well as th e offsettin g lo ss o r g ain attribu table to th e h edg ed risk of th e hedg ed item is recog nized i n curren t earning s. Effectiv eness o f the Co mp an y’s h edg e relatio nships is assessed o n a qu arterly b asi s. The Co mp any repo rts chan ges in fai r values of deriv atives that are n ot p art o f a qu alify in g hed ge relation sh ip throug h earnin gs in th e p eriod o f ch ang e. Ch ang es in t he fair val ue of d eri vat iv es th at are recog nized in cu rrent earn in gs are rep ort ed in “Realized inv estment gains (l osses)-Deri vat iv e finan cial instruments”. Deriva tive Instruments Designated a nd Qualifying as Hedg ing Instruments Ca sh-Flow Hedges •To hed ge a fixed rate no te den omin ated in a foreign cu rrency, the Company entered in to a fi xed-t o-fixed fo reign curren cy swap in o rd er to hed ge the foreig n currency ex chang e risk associated wit h t he no te. Th e cash flo ws receiv ed o n the swap are id entical to th e cash flow p aid on the no te. •To hed ge a flo ating rate no te, the Co mpan y en tered into an in terest rate swap to exch ang e th e floatin g rate o n the n ote fo r a fixed rat e in order to hed ge the i nterest rate risk associated with th e no te. Th e cash flo ws receiv ed o n the swap are id entical to th e cash flo w v ariability p aid on th e no t e. Deriva tive Instruments No t Desi gnated and No t Qua lifyi ng as Hedg ing Instruments The Compan y u ses v ariou s oth er d eri vat iv e in stru ments for risk man agemen t p urp oses that d o n ot qu alify for hed ge accou ntin g treatmen t. Ch an ges in th e fair value o f these d erivativ es are reco gni zed in earn in gs d uri ng th e p eriod of chan ge. Deri va tives Rel ated to Variable Annuity Contra cts •Th e Compan y uses eq uity futu res, equ ity op tio ns, to tal ret urn swaps, in t erest rate fu tu res, interest rate swaps, interest rate swaptio ns, cu rrency fut ures, v olatility fu tu res, v olatility o ption s, an d varian ce swaps to mitig ate the risk related to certain gu aran teed min imum b enefit s, includ ing GLWB, with in it s VA prod ucts. In g eneral, th e cost of such b enefits v aries wit h th e level o f equ ity and in terest rate mark ets, foreig n curren cy lev els, an d o verall vo latility . •Th e Co mp any markets certain VA prod ucts with a GLWB rid er. The GLWB co mp on ent is co nsid ered an emb edd ed d erivativ e, no t co nsid ered to be clearl y and clo sely related to th e ho st co ntract. Deri va tives Rel ated to Fixed Annuity Co ntracts •Th e Co mp any uses equ ity fu tu res an d op tion s to mitigat e th e risk within its fix ed ind exed ann uity p ro du cts. In gen eral , th e cost o f such ben efits varies with the lev el o f eq uity and ov erall vo l ati lity . •Th e Co mpan y mark ets certain fixed in dexed an nu i ty p roducts. The FIA compo nent is co nsid ered an embedded d erivativ e, n ot con sid ered to be clearly and closely related to th e h ost cont ract. Deri va tives Rel ated to Index ed Universa l Life Contra cts •Th e Compan y u ses equ ity fu tu res and o ptio ns t o miti gat e th e risk with in it s ind exed un i versal life prod ucts. In gen eral, th e cost of such ben efits varies with the lev el o f eq uity market s. •Th e Co mpan y mark ets certain IUL pro du cts. Th e IUL co mp on ent is co nsidered an emb edd ed derivativ e as it is no t con sidered to be clearly and clo sel y related to th e ho st co ntract. Other Deriva tives •Th e Co mp any uses v ariou s swaps an d o ther types o f d eri vat iv es to manag e risk rel ated to o th er ex po sures. •Th e Co mp any is in vo lved in vario us mo dified co in su ran ce arran gement s which co ntain emb edd ed d erivativ es. Chan ges in th eir fair value are reco rd ed in cu rrent perio d earn i ng s. The inv estment po rtfol io s th at sup po rt th e rel ated 14 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents mo dified co in su ran ce reserv es had fair v alu e chang es which su bstan tially o ffset th e g ain s or l osses on th ese embed ded deriv atives. The fol lo win g tabl e sets forth realized in vestmen t g ain s and lo sses for th e perio ds sho wn: Rea lized investment g ains (l osses)—deriv ative financia l instruments For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Deriva tiv es related to VA contra cts: Interest rate fu tures $(2 5,4 73 ) $26,01 5 $(3 ,45 0) Eq uit y futures (8 8,2 08 ) (91,77 6) (1 06 ,43 1) Cu rrency futu res 1 0,2 75 (23,17 6) 33 ,83 6 Eq uit y o ptio ns 3 8,0 83 (94,79 1) (60 ,96 2) Interest rate swaptio ns (14 ) (2,49 0) (1 ,16 1) Interest rate swaps (4 5,1 85 ) 27,98 1 20 ,42 0 To tal return swap s 7 7,2 25 (32,24 0) — Embed ded deriv ative - GLWB (7 2,3 13 ) 3,61 4 68 ,05 6 Total d erivativ es related to VA co ntract s (10 5,6 10 ) (186,86 3) (49 ,69 2) Deriva tiv es related to FIA co ntracts: Embed ded deriv ative 3 5,3 97 (55,87 8) (16 ,49 4) Eq uit y futures 3 30 64 2 4 ,24 8 Eq uit y o ptio ns (3 8,8 85 ) 44,58 5 8 ,14 9 Total d erivativ es related to FIA co ntracts (3,1 58 ) (10,65 1) (4 ,09 7) Deriva tiv es related to IUL co ntracts: Embed ded deriv ative 9,0 62 (14,11 7) 9 ,52 9 Eq uit y futures 2 61 (81 8) 12 9 Eq uit y o ptio ns (6,3 38 ) 9,58 0 3 ,47 7 Total d erivativ es related to IUL cont racts 2,9 85 (5,35 5) 13 ,13 5 Emb edd ed d erivativ e - M od co rein surance t reaties 16 6,7 57 (103,00 9) 39 0 Oth er d erivat iv es 14 5 0 (2 4) Total realized g ain s (losses)—deriv atives $6 0,9 88 $(305,82 8) $(40 ,28 8) 14 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fol lo win g tabl es present th e co mp on ents o f the gain o r loss on deriv atives th at qu alify as a cash flo w hed ging relation ship: Ga in (Lo ss) on Deriva tives in Ca sh Flo w Relatio nship Amo unt of Gains (Losses) Deferred in Accumulated O ther Co mprehensive Income (Loss) o n Deriv a tives Amount a nd Lo ca tion o f G ains (Lo sses) Recla ssified fro m Accumulated O ther Co mprehensive Income (Loss) into Inco me (Lo ss) Amount a nd Lo ca tion o f (Losses) Recog nized in Income (Loss) o n Deriv a tiv es (Effectiv e Portio n) (Effectiv e Portio n) (Ineffective Po rtion) Benefits and settlement ex penses Realized investment g a ins (losses) (D oll ars In Thous ands) For The Yea r Ended December 3 1, 2 01 8 Foreig n cu rrency swap s $(81 2) $(7 98 ) $— Interest rate swaps (1 ,57 4) (6 33 ) — Total $(2 ,38 6) $(1,4 31 ) $— For The Yea r Ended December 3 1, 2 01 7 Foreig n cu rrency swap s $(86 7) $(6 94 ) $— Total $(86 7) $(6 94 ) $— For The Yea r Ended December 3 1, 2 01 6 Foreig n cu rrency swap s $1 ,05 8 $(60 ) $— Total $1 ,05 8 $(60 ) $— Based on ex pected cash flows o f the un derly in g h edg ed items, the Compan y exp ects to reclassify $0 .1 million ou t o f accumulated ot her co mp reh ensive inco me into earni ng s du ring the nex t twelv e mon th s. 14 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The tab les b elo w present in fo rmation abo ut th e n atu re an d accou ntin g treatmen t o f the Compan y’s p rimary d erivativ e finan cial in stru ments and the lo cation in an d effect on th e co nsolid ated finan cial statements for th e perio ds p resen ted below: As o f December 31, 2 0 18 2 0 1 7 Notio nal Amount Fa ir Va lue Notio na l Amount Fa ir Value (D oll ars In Thous ands) Oth er lon g-term inv estments Cash flow hed ges: Fo reign cu rrency swaps $— $— $1 17 ,17 8 $6 ,01 6 Deriv atives n ot design ated as hed ging in st ru ments: In terest rate swap s 1 ,515,50 0 28 ,50 1 1,2 65 ,00 0 55 ,41 1 Total retu rn swaps 138,07 0 3 ,97 1 1 90 ,93 8 13 5 Emb edd ed deriv ative - M od co reinsurance treaties 585,29 4 7 ,07 2 64 ,47 2 1 ,00 9 Emb edd ed deriv ative - GLWB 3 ,984,07 0 1 05 ,27 2 4,8 97 ,06 9 1 34 ,99 5 In terest rate futures 286,20 8 10 ,30 2 1,0 71 ,87 0 3 ,17 8 Equ ity futu res 12,63 3 48 3 62 ,26 6 15 4 Cu rrency fu tu res — — 1 ,11 7 2 Equ ity o pti on s 5 ,624,08 1 2 20 ,09 2 4,4 36 ,46 7 4 03 ,96 1 In terest rate swap tion s — — 2 25 ,00 0 1 4 Other 15 7 13 6 15 7 20 0 $12 ,146,01 3 $3 75 ,82 9 $1 2,3 31 ,53 4 $6 05 ,07 5 Oth er liab ilities Cash flow hed ges: In terest rate swap s $350,00 0 $— $— $— Fo reign cu rrency swaps 117,17 8 90 4 — — Deriv atives n ot design ated as hed ging in st ru ments: In terest rate swap s 775,00 0 11 ,36 7 5 97 ,50 0 2 ,96 0 Total retu rn swaps 768,17 7 23 ,05 4 2 43 ,38 8 31 8 Emb edd ed deriv ative - M od co reinsurance treaties 1 ,795,28 7 32 ,82 8 2,3 90 ,53 9 2 15 ,24 7 Emb edd ed deriv ative - GLWB 8 ,466,01 9 2 89 ,34 3 4,7 18 ,31 1 2 46 ,75 5 Emb edd ed deriv ative - FIA 2 ,576,03 3 2 17 ,28 8 1,9 51 ,65 0 2 18 ,67 6 Emb edd ed deriv ative - IUL 233,55 0 90 ,23 1 1 68 ,34 9 80 ,21 2 In terest rate futures 863,70 6 20 ,10 0 2 30 ,40 4 91 7 Equ ity futu res 659,35 7 33 ,75 3 3 18 ,79 5 2 ,59 3 Cu rrency fu tu res 202,74 7 2 ,16 3 2 55 ,24 8 2 ,08 7 Equ ity o pti on s 4 ,199,68 7 34 ,17 8 3,1 12 ,81 2 2 37 ,80 7 Other 3,28 8 25 2 — — $21 ,010,02 9 $7 55 ,46 1 $1 3,9 86 ,99 6 $1,0 07 ,57 2 8. OFFSETTING OF ASSETS AND L IABILITIES Certain of the Co mp any ’s d erivat iv e instru men ts are sub ject to en forceab le master n etti ng arrang emen ts th at prov id e for the net settlement o f all deriv ati ve co ntracts b etween th e Compan y and a co un terparty in th e even t of d efau lt o r up on the occurren ce o f certain terminatio n even ts. Collateral su pp ort ag reements asso ciated with each master n etting arrangement prov i de t hat th e Comp any will receiv e or pledg e fin an cial collateral in the even t eit her mi nimu m t hresho ld s, or in certain cases rat in gs levels, hav e b een reach ed. Ad ditionally, cert ain of th e Co mp any’s repurchase agreements p ro vide for net settlement on termi nat io n o f the agreement. Refer to No te 1 4, Debt an d Other Ob liga tion s for details of the Company ’s rep urchase agreemen t p ro grams. Co llateral received includ es bo th cash and n on -cash co l lat eral. Cash co llateral recei ved b y th e Co mp any is reco rd ed o n th e co nsolid ated b alan ce sheet as “cash ”, wi th a correspo nd in g amou nt recorded in “o th er liab iliti es” to represent th e Co mp any ’s ob ligatio n to retu rn th e co llateral. Non -cash co llateral receiv ed by th e Company is no t recogni zed on th e con solid ated balance 14 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents sheet u nless t he C ompany exercises i ts rig ht to sell or re-p led ge the un derly in g asset. As of December 3 1, 2 01 8, the fair v alu e o f n on -cash co llat eral received was $45 .0 millio n. As of December 31 , 20 17 , th e Co mp any had n ot recei ved an y n on -cash collateral. The tab les belo w present th e deriv ative instrumen ts by assets an d liab ilities fo r the Co mp an y as o f Decemb er 3 1, 2 01 8: Net Amounts o f Assets Presented in the Sta tement o f Fina ncia l Position Gro ss Amounts Not Offset in the Statement o f Fina ncia l Po sitio n Gross Amounts O ffset in the Statement of Fina ncia l Po sitio n Gross Amo unts of Recognized Assets Financial Instruments Co llateral Received Net Amount (Dollars In Thousands) O ffsetting of Derivative Assets Deriv ativ es: Free-Stan d ing deriv ativ es $2 63,349 $— $2 6 3 ,349 $70 ,3 2 2 $9 9,199 $9 3 ,8 28 To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 2 63,349 — 2 6 3 ,349 70 ,3 2 2 9 9,199 9 3 ,8 28 Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 7,072 — 7 ,072 — — 7 ,0 72 Em b ed d ed derivative - GLWB 1 05,272 — 1 0 5 ,272 — — 10 5 ,2 72 Other 136 — 136 — — 1 36 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 1 12,480 — 1 1 2 ,480 — — 11 2 ,4 80 To tal d erivatives 3 75,829 — 3 7 5 ,829 70 ,3 2 2 9 9,199 20 6 ,3 08 Tota l Assets $3 75,829 $— $3 7 5 ,829 $70 ,3 2 2 $9 9,199 $20 6 ,3 08 Net Amounts o f Lia bilities Presented in the Sta tement o f Fina ncia l Position Gro ss Amounts Not Offset in the Statement o f Fina ncia l Po sitio n Gross Amounts O ffset in the Statement of Fina ncia l Po sitio n G ro ss Amo unts o f Reco g nized Liabilities Financial Instruments Co llateral Po sted Net Amount (Do l l a rs I n Tho usa nds ) O ffsetting of Derivative Lia bilities Deriv ativ es: Free-Stan d ing deriv ativ es $1 25,519 $— $1 2 5 ,519 $70 ,3 2 2 $4 7,856 $7 ,3 41 To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 1 25,519 — 1 2 5 ,519 70 ,3 2 2 4 7,856 7 ,3 41 Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 32,828 — 3 2 ,828 — — 3 2 ,8 28 Em b ed d ed derivative - GLWB 2 89,343 — 2 8 9 ,343 — — 28 9 ,3 43 Em b ed d ed derivative - FIA 2 17,288 — 2 1 7 ,288 — — 21 7 ,2 88 Em b ed d ed derivative - IUL 90,231 — 9 0 ,231 — — 9 0 ,2 31 Other 252 — 252 — — 2 52 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 6 29,942 — 6 2 9 ,942 — — 62 9 ,9 42 To tal d erivatives 7 55,461 — 7 5 5 ,461 70 ,3 2 2 4 7,856 63 7 ,2 83 Rep u rchase agreements(1 )4 18,090 — 4 1 8 ,090 — — 41 8 ,0 90 Tota l Lia bilities $1 ,1 73,551 $— $1,1 7 3 ,551 $70 ,3 2 2 $4 7,856 $1,05 5 ,3 73 (1)Borrowings u nder rep u rchase agreements are for a term less than 90 d ays. 14 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Th e tab les b elo w p resen t th e d erivativ e in stru men ts b y assets an d l iab ilities fo r the Compan y as o f December 31 , 20 17 : Net Amounts o f Assets Presented in the Sta tement o f Fina ncia l Positio n Gross Amounts Not Offset in the Statement o f Fina ncial Po sitio n Gro ss Amo unts Offset in the Statement of Financial Position G ro ss Amo unts o f Reco gnized Assets Fina ncia l Instruments Collateral Receiv ed Net Amount (D oll ars In Thous ands) O ffsetting of Derivative Assets Deriv ativ es: Free-Stan d ing deriv ativ es $4 6 8 ,871 $— $4 6 8 ,871 $242,10 5 $1 0 8,830 $11 7 ,9 36 To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 4 6 8 ,871 — 4 6 8 ,871 242,10 5 1 0 8,830 11 7 ,9 36 Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 1 ,009 — 1 ,009 — — 1 ,0 09 Em b ed d ed derivative - GLWB 1 3 4 ,995 — 1 3 4 ,995 — — 13 4 ,9 95 Other 200 — 200 — — 2 00 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 1 3 6 ,204 — 1 3 6 ,204 — — 13 6 ,2 04 To tal d erivatives 6 0 5 ,075 — 6 0 5 ,075 242,10 5 1 0 8,830 25 4 ,1 40 Tota l Assets $6 0 5 ,075 $— $6 0 5 ,075 $242,10 5 $1 0 8,830 $25 4 ,1 40 Net Amounts o f Lia bilities Presented in the Sta tement o f Fina ncia l Position Gro ss Amounts Not Offset in the Statement o f Fina ncia l Po sitio n Gross Amounts O ffset in the Statement of Fina ncia l Po sitio n G ro ss Amo unts o f Reco g nized Liabilities Fina ncia l Instruments Collateral Posted Net Amount (Do l l a rs I n Tho usa nds ) O ffsetting of Derivative Lia bilities Deriv ativ es: Free-Stan d ing deriv ativ es $2 46,682 $— $2 4 6 ,682 $2 42,10 5 $4,577 $— To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 2 46,682 — 2 4 6 ,682 2 42,10 5 4,577 — Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 2 15,247 — 2 1 5 ,247 — — 21 5 ,2 47 Em b ed d ed derivative - GLWB 2 46,755 — 2 4 6 ,755 — — 24 6 ,7 55 Em b ed d ed derivative - FIA 2 18,676 — 2 1 8 ,676 — — 21 8 ,6 76 Em b ed d ed derivative - IUL 80,212 — 8 0 ,212 — — 8 0 ,2 12 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 7 60,890 — 7 6 0 ,890 — — 76 0 ,8 90 To tal d erivatives 1 ,0 07,572 — 1,0 0 7 ,572 2 42,10 5 4,577 76 0 ,8 90 Rep u rchase agreements(1 )8 85,000 — 8 8 5 ,000 — — 88 5 ,0 00 Tota l Lia bilities $1 ,8 92,572 $— $1,8 9 2 ,572 $2 42,10 5 $4,577 $1,64 5 ,8 90 (1)Borrowings u nder rep u rchase agreements are for a term less than 90 d ays. 9. MORTGAGE LOANS Mo rtg ag e Lo ans The Co mp an y in vests a po rtio n of i ts in vestmen t po rtfo lio in commercial mo rtg ag e loan s. As of Decemb er 3 1, 20 18 , th e Co mp any ’s mo rtgag e loan ho ld in gs were app rox imately $7 .7 billion . Th e Co mp any h as sp ecialized in makin g loan s o n credit-orient ed co mmercial p ro perties, cred it-an cho red strip sho pp in g cen ters, sen i or liv in g facilities, and apartments. Th e Compan y’s un derwri ting p ro ced ures relativ e t o it s commercial lo an po rtfo lio are b ased, in the Co mp any ’s v iew, on a con servat iv e and di scip lined ap proach . Th e Compan y con centrates o n a small nu mb er of co mmercial real est ate asset ty pes asso ciated with the 15 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents necessities of life (retail, multi-family, sen io r liv in g, p ro fessio nal o ffice b uild in gs, an d wareh ou ses). The Co mp any bel ieves that th ese asset typ es tend to weather econ omic do wnt urns better than o th er commercial asset classes in which it h as ch osen n ot to particip ate. The Co mp any b elieves th is d isciplined ap proach has helped to maint ain a rel ativel y low d elinq uen cy and foreclosure rate th ro ug hout its history. The majority of t he Compan y’s mortgag e lo ans po rtfo lio was u nd erwritten by th e Co mp any . From time to t ime, the Compan y may acqu ire lo ans in co njun ction with an acq uisition . The Co mp any ’s co mmercial mortg age lo ans are stated at u np aid p rincipal b alan ce, adjusted fo r any u namortized premium or d iscou nt, and net of an all owance for loan lo sses. In terest in come is accrued on the p rin cipal amount of the loan b ased o n th e lo an’s co ntractual interest rate. Amortization o f premiums and d iscou nts is recorded u si ng t he effectiv e y ield met ho d. In terest in come, amo rtizatio n of p remiu ms and d isco un t s an d prepayment fees are reported in net investment i ncome. The fol lo win g tabl e includ es a breakd own o f the Co mp an y’s co mmercial mo rtgag e lo an portfolio by prop erty type as of December 31 , 20 18 : Type Percentage of Mo rtgage Lo a ns o n Rea l Estate Retai l 4 5.0 % Office Buil ding s 1 3.2 Apartment s 1 0.2 Wareho uses 1 1.3 Sen io r h ou sing 1 5.8 Oth er 4.5 10 0.0 % The Co mpan y specializes in o riginatin g mo rtgag e lo ans on ei th er credit-ori en ted o r credit-anch ored co mmercial p rop ert ies. No sing le ten ant’s ex po su re represents mo re than 1.2% of mortgag e loan s. App ro ximately 62 .5% o f the mortg age l oans are on prop erti es lo cated in the follo win g stat es: State Percentage of Mo rtgage Lo a ns o n Rea l Estate Florida 8.8 % Alab ama 8.6 Texas 7.5 Georgia 7.3 Califo rn ia 7.2 M ich ig an 4.8 Tenn essee 4.7 Utah 4.7 Ohio 4.5 North Caro lina 4.4 6 2.5 % Du ring the year en ded December 31 , 2 01 8, t he Co mp any fun ded ap prox imately $1.5 billion o f n ew loan s, wit h an average l oan size of $9 .1 milli on . The average size mo rtgag e lo an in the p ort fo lio as of Decemb er 31, 20 18 , was $4.4 million an d th e weig hted-averag e interest rate was 4 .6%. The larg est sin gle mo rtgag e lo an at Decemb er 3 1, 2018 was $4 8.8 million. Certain o f t he mo rtgag e loan s hav e call o ptio ns that occu r within the n ext 10 years. However, if in terest rates were to sign i fican t ly in crease, we may be un able to ex ercise th e call op tion s on ou r ex isting mo rtgag e lo ans co mmen su rate with the sign ifican tly increased market rates. Assumin g t he loans are called at th eir nex t call d ates, ap pro ximately $10 9.8 milli on wo uld become d ue in 20 19 , $8 19 .4 million in 20 20 throu gh 20 24 , and $6 1.2 millio n in 2025 th ro ug h 2 02 9. The Co mp any o ffers a typ e o f commercial mo rtgag e loan und er wh ich the Co mp any will p ermit a lo an-to -v alu e ratio of u p to 85 % in ex chang e for a particip ating int erest i n the cash flo ws fro m th e un derly in g real est ate. As of Decemb er 3 1, 20 18 an d December 3 1, 2 01 7, app ro ximately $7 00 .6 millio n and $6 69 .3 mil lion , respectiv ely, of the Company ’s mo rtgag e loan s h ave th is p articipatio n feature. Cash flo ws receiv ed as a resu lt of this particip ation featu re are recorded as in terest in co me when recei ved. Du ring th e years end ed December 31 , 2 01 8, 20 17 , and 2016, the Co mp any reco gn ized $29 .4 millio n, $3 7.2 mi llio n, an d $16 .7 mil lion of particip ating mo rtgag e lo an i ncome, resp ectively. 15 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents As o f Decemb er 3 1, 2 01 8, app roximately $3 .0 millio n of inv ested assets co nsisted of n on perfo rmi ng mortg age lo ans, restructured mo rtgag e loan s, o r mortgag e loan s th at were fo reclosed and were co nv erted to real estat e p ro perties. The Compan y does no t ex pect these inv estments to adv ersely affect its liqu id ity o r ab ili ty to mai ntain prop er matching of assets and liabil ities. Du ring th e year en ded December 31 , 20 18 , certain mortg age loan transactio ns occurred that were acco un ted for as troubl ed d ebt restructuri ng s. For all mortgage lo ans, th e impact o f trou bled d ebt restru ctu ring s is generally reflected in ou r inv estment balance and in th e allowance for mo rtgag e lo an cred it l osses. Du rin g the year end ed December 31 , 20 18 , th e C ompany reco gn ized on e trou bled debt restru ctu ring tran saction as a result of th e Company g ran tin g a con cessio n to a bo rrower which in clu ded loan terms u nav ailabl e fro m ot her lenders. This co ncessio n was th e result o f an ag reemen t between t he credito r an d th e deb to r. Th e Company d id n ot identi fy any l oans who se p rincipal was permanen tly imp aired d urin g the y ear end ed Decemb er 31 , 20 18 . As o f December 31 , 2 01 7, approx imatel y $6.5 millio n of i nv ested assets con sist ed o f no np erforming , restructured, o r mo rtgag e lo ans th at were fo reclosed and were con verted to real estate prop erties. The Compan y d oes n ot expect these in vestmen ts to ad versel y affect its l iq uidity or ab ility to maint ain prop er matching of assets an d liab iliti es. Du ring th e year en ded Decemb er 31, 20 17 , cert ain mort gage loan transactio ns o ccurred th at were accou nted fo r as trou bled d ebt restructurin gs. Fo r all mo rtgag e lo ans, th e impact of tro ub led deb t restru ctu ring s is g enerally reflected in o ur i nv estment balance an d in th e all owance fo r mo rtgag e l oan cred it lo sses. Du rin g th e y ear en ded Decemb er 31, 2017, th e Compan y recog nized two tro ub led d ebt restru ctu ring s as a resu lt o f th e Compan y g ran ting co ncessio ns to bo rro wers which in clu ded lo an s terms u nav ailable fro m o th er len ders. These con cession s were th e result o f ag reemen ts between th e creditor and th e debtor. The Compan y d id no t id entify an y loan s who se p rincipal was permanen tly impaired du ring th e year end ed December 31 , 20 17 . As o f December 31 , 2 01 6, approx imatel y $1.5 millio n of i nv ested assets con sist ed o f no np erforming , restructured, o r mo rtgag e lo ans th at were fo reclosed and were con verted to real estate prop erties. The Compan y d oes n ot expect these in vestmen ts to ad versel y affect its l iq uidity or ab ility to maint ain prop er matching of assets an d liab iliti es. Du ring th e year en ded Decemb er 31, 20 16 , cert ain mort gage loan transactio ns o ccurred th at were accou nted fo r as trou bled d ebt restructurin gs. Fo r all mo rtgag e lo ans, th e impact of tro ub led deb t restru ctu ring s is g enerally reflected in o ur i nv estment balance an d in th e all owance for mortg age lo an credit lo sses. Du rin g th e year end ed December 31 , 2 01 6, th e Compan y recog nized a troub led deb t restruct urin g as a resu lt o f th e Co mp any g ranting a co ncession to a bo rro wer which in clu ded l oan terms un availab le from other lend ers and redu ced the ex pected cash flows o n th e loan . This co ncessio n was the resu lt o f an agreement b etween t he credito r and th e d eb tor. The Co mp any d id n ot id en t ify any loan s wh ose pri ncipal was permanen tly imp aired d urin g the y ear end ed Decemb er 31 , 20 16 . As of December 3 1, 2 01 8, t here was an allowan ce for mortgag e loan credit losses of $1 .3 millio n and as of December 3 1, 2 01 7 there were no all owances for mo rtgag e lo an cred it losses. Du e to th e Company ’s l oss ex perien ce an d n atu re o f the loan po rtfo l io , th e Co mp any bel iev es th at a collectiv ely ev alu ated allowance woul d b e in app ro priate. The Co mp an y believes an allo wan ce calculated th ro ug h an analysis o f specific lo ans that are b elieved to hav e a high er risk o f cred it impai rmen t p ro vides a mo re accu rate p resen t ati on o f exp ected losses in the portfolio an d is consistent with the ap pli cab le gu i dance fo r lo an impairments in ASC Sub to pic 31 0. Sin ce the Co mpan y u ses the sp ecific i dentification met ho d for calculating th e allowance, it is necessary to review th e eco no mic situ ation of each bo rro wer to determin e th ose that hav e high er risk o f credit imp airmen t. Th e Comp any has a team o f p ro fessio nals t hat mo nito rs bo rrower con dition s su ch as pay ment p ract ices, b orro wer credit, o perating p erforman ce, an d prop erty co nd itio ns, as well as en su ring t he timely pay men t o f prop erty tax es an d insu ran ce. Th rough this mo nito rin g process, the Compan y assesses the risk o f each loan . When issues are id entified, th e sev erit y of th e issues are assessed and revi ewed fo r po ssible cred it i mpairment. If a loss is p ro bab le, an exp ected loss calcu latio n is perfo rmed an d an allo wan ce is estab lished for that loan b ased on the exp ected lo ss. The exp ected lo ss is calcu lated as the excess carrying v alu e o f a loan o ver eith er th e present val ue o f ex pected fu tu re cash flo ws discou nted at the lo an’s o riginal effectiv e in terest rate, or the curren t estimated fair value of th e loan ’s un derly in g collateral. A lo an may be su bseq uen tly ch arg ed off at such po in t that th e Comp any no lo ng er ex pects to receiv e cash pay men ts, the p resen t v alu e o f futu re exp ected payments of th e reneg otiated l oan is less than th e cu rrent prin cip al balance, or at such time th at the Compan y is p arty to foreclo sure or bank rup tcy proceeding s asso ciated with th e b orrower an d d oes n ot exp ect to reco ver th e p rin cip al balance of t he lo an. A ch arg e off is recorded b y elimin ating the allowan ce against th e mortg age lo an and recording the ren ego tiated loan or the collateral p ro perty rel ated to the lo an as in vestmen t real estate o n th e b alance sheet , which is carried at th e l ower of the apprai sed fai r value o f th e p ro perty o r th e u np aid prin cip al b alance o f the l oan, less estimated sellin g co st s asso ciated with the p ro perty . As o f December 31 , 2018 2 017 (D o l l ars In Tho us a nds) Begi nn in g b alance $— $72 4 Ch arg e o ffs — (6 ,70 8) Recov eries (2 09 ) (73 1) Pro vision 1,5 05 6 ,71 5 Endi ng balan ce $1,2 96 $— It i s the Co mp any ’s p olicy to cease accruing interest on loans t hat are ov er 90 d ays d elinqu en t. Fo r loan s less than 90 d ays delin qu ent, interest is accrued u nless i t is determined th at th e accrued interest is no t collectib le. If a lo an becomes ov er 9 0 d ays delin qu en t, it is the Co mp any ’s gen eral pol icy to in itiate fo reclosu re p ro ceeding s un less a worko ut arrang ement to bring th e lo an current is in pl ace. For lo ans sub ject to a po olin g an d servicin g ag reement , th ere are certain add itio nal restrictio ns an d/or req uirements related to wo rko ut proceeding s, and as such , th ese lo ans may hav e differen t attrib utes and /o r circu mstan ces affectin g 15 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e status o f d elinq uen cy o r categ ori zatio n o f those in n on perfo rmin g status. An an aly sis of th e delin qu ent lo ans is sh own in the foll owin g ch art: 30 - 5 9 Days Delinquent 60 - 89 Days Delinquent G reater than 9 0 Da y s Delinquent Tota l Delinquent (D o l l a rs In Tho us a nds ) As of December 31, 2 01 8 Co mmercial mo rtgag e lo ans $1 ,04 4 $— $1 ,2 34 $2 ,27 8 Nu mb er of delinquent commercial mort gage loan s 4 — 1 5 As of December 31, 2 01 7 Commercial mortg age loan s $1 ,81 7 $— $— $1 ,81 7 Number o f delin qu en t co mmercial mo rtg age lo ans 2 — — 2 The Compan y’s commercial mortgage lo an p ortfolio co nsists o f mortgag e lo ans th at are collateral ized by real estate. Due to th e coll ateralized nature of the loan s, an y assessmen t of impairment an d u ltimate l oss g iv en a defau l t on th e lo ans i s based u po n a con sideration o f the estimated fair value of th e real estate. Th e Co mp any limits accru ed in terest inco me on impai red loan s to ni net y day s of in terest. Once accrued in terest o n th e impaired loan is received , in terest inco me i s reco gn ized o n a cash basis. Fo r informati on regarding i mpaired lo ans, p lease refer to th e fo llowing chart: Recorded Inv estment Unpaid Principa l Ba lance Rela ted Allowance Av erag e Reco rded Investment Interest Income Reco gnized Cash Ba sis Interest Inco me (D ollars In Thous ands) As of December 31, 2 01 8 Co mmercial mo rtgag e lo ans: With no related all owance reco rd ed $— $— $— $— $— $— With an allo wan ce recorded 5 ,68 4 5 ,30 9 1 ,29 6 1,8 95 26 7 29 3 As of December 31, 2 01 7 Commercial mortg age loan s: Wi th no rel ated allo wance reco rd ed $— $— $— $— $— $— Wi th an allowan ce recorded — — — — — — Mo rtgag e lo ans that were mo dified in a tro ub led deb t restructuri ng as of Decemb er 3 1, 2 01 8 an d December 31 , 20 17 were as fo llows: Number o f Contra cts Pre-Mo difica tion Outstanding Recorded Inv estment Post-Modifica tion Outsta nding Reco rded Investment (Do lla rs I n Thousands ) As of December 31, 2 01 8 Troub led d ebt restructurin g: Co mmercial mo rtg ag e lo ans 1 $2,6 88 $1 ,74 2 As of December 31, 2 01 7 Troub led d ebt restructurin g: Co mmercial mo rtg ag e lo ans 1 $4 18 $41 8 15 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 10 . DEFERRED POL ICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED Deferred Policy Acquisitio n Costs The balances an d chan ges in DAC are as follo ws: As of December 31, 2018 2017 (Dollars In Thousands) Balance, b eg inn in g o f p eriod $837,78 5 $5 72 ,32 8 Capi tal izatio n o f commission s, sales, and issue exp enses 446,46 8 3 33 ,25 0 Amo rtizatio n (133,33 7) (52 ,55 9) Change du e to un real ized inv estment gains and lo sses 56,15 3 (15 ,23 4) Implemen tatio n o f ASU 2 01 4-09 138,43 4 — Balance, end of perio d $1 ,345,50 3 $8 37 ,78 5 Va lue of B usiness Acquired The balances an d chan ges in VOBA are as fo llows: As of December 31, 2018 2017 (Dollars In Thousands) Balance, b eg inn in g o f p eriod $1 ,361,79 2 $1,4 47 ,50 1 Acquisitio ns 336,86 2 — Amo rtizatio n (92,47 1) (25 ,66 2) Change du e to un real ized inv estment gains and lo sses 71,46 8 (60 ,04 7) Balance, end of perio d $1 ,677,65 1 $1,3 61 ,79 2 Based on th e balan ce recorded as of December 31 , 2018 , the ex pected amo rtizatio n o f VOBA for t he nex t fiv e years is as fo llows: Ex pected Years Amortization (Do l l a rs I n Tho usa nds ) 20 19 $13 9,6 62 20 20 12 8,4 65 20 21 11 4,0 81 20 22 10 4,1 47 20 23 9 4,7 40 11 . GOODWILL Du ring the fou rth qu arter o f 20 18 , th e Compan y p erformed its an nu al qu ali tat iv e eval uat io n o f go od will based on the ci rcumstances that existed as of Octob er 1, 2 01 8 and determin ed th at there was no in dication th at i ts seg men t go odwill was mo re lik ely th an no t imp aired and no ad justmen t to i mpair go od wil l was n ecessary. Th e Co mp any has assessed wh eth er ev ents h av e occu rred su bsequ ent to Octo ber 1, 2 01 8 that wou ld impact th e Compan y’s co nclusio n and n o such even ts were id entifi ed . After co nsid eratio n of ap plicab le facto rs an d circu mstan ces n oted as p art o f th e ann ual assessmen t, the Co mp any d etermined that n o trigg ering ev ents h ad occu rred and it was more likel y th an no t that t he in crease in the fair value of th e reportin g un it wo uld ex ceed t he in crease in the carryin g v alue o f the repo rtin g u nit s. As o f Decemb er 3 1, 2 01 8, the Company increased its goo dwill balan ce by ap prox imately $32 .0 million. Refer to No te 1, Ba sis of Present atio n fo r ad dit io nal in fo rmation . As of December 3 1, 2 01 8, the b alance o f g oo dwi ll fo r the Compan y was $82 5.5 mi llio n. 15 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 12 . CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS The C ompany issues v ari abl e u niversal life and VA prod ucts th rou gh it s separate acco un ts fo r which i nv estment in co me and in vestmen t g ain s and lo sses accrue directl y to , an d inv estment risk is b orne by, the co ntract ho ld er. Th e Co mp any also o ffers, for o ur VA p ro du cts, certain GMDB. Th e most sig nificant of th ese g uarantees in vo lv e 1 ) retu rn of th e h ig hest ann iv ersary d ate acco unt v alu e, o r 2 ) retu rn of th e g reater of th e high est an niversary date acco un t value o r t he last ann iv ersary d ate acco un t v alu e co mp ou nd ed at 5 % i nterest or 3) return o f p remiu m. Th e GLWB rider prov id es t he con tract h older with pro tectio n against certai n adv erse mark et imp acts o n the amou nt th ey can withd raw and is classified as an embedd ed d erivativ e and is carried at fair value on t he Compan y’s b alan ce sheet . The VA separate accou nt b alances sub ject to GLWB were $8.4 billio n an d $9.7 billio n as of December 31 , 201 8 and 20 17 , respectively. For mo re in fo rmation regarding the val uatio n of and inco me imp act of GLWB, p lease refer to Note 2 , Su mma ry of Sign ifi ca nt Accou nting Policies, Note 6 , Fair Va lue of Fi na nci al In struments, and Note 7, Deriva tive Fin an cia l Instruments. The GM DB reserve is calcu lat ed b y app ly in g a ben efit ratio , eq ual to the present v alu e of to tal exp ected GMDB claims d ivi ded by the present v alu e of total expected co ntract assessmen t s, to cu mu lat iv e co ntract assessmen ts. Th is amou nt is t hen ad ju sted by the amo un t o f cumulative GMDB claims p aid an d accrued interest. Assumptions u sed in t he calculation o f th e GMDB reserve were as foll ows: mean inv estment p erforman ce of 6 .51 %, ag e-b ased mortality from the Ru ark 2 01 5 ALB table ad ju st ed for co mp any an d in du st ry experience, lapse rates determin ed b y a d yn amic formu la, and an average discou nt rate of 4.8%. Ch ang es in th e GMDB reserve are includ ed in b enefits and settl ement exp enses in the accompan ying con soli dated st atemen ts of in come. The VA sep arate acco unt balances sub ject to GM DB were $1 1.8 bi llio n an d $13 .7 billion as of December 31 , 2018 an d 2 01 7, resp ectiv ely. Th e to tal GMDB amou nt pay able based on VA accou nt balances as of December 31 , 20 18 , was $34 0.6 milli on (includ in g $27 4.4 millio n in th e Ann uities seg ment and $6 6.2 millio n i n the Acqu isitio ns seg men t) with a GMDB reserve o f $3 9.2 millio n an d $5.1 mi llio n in the Ann uit ies and Acq uisition s seg men t, resp ectively. The average attained ag e of co ntract ho ld ers as of Decemb er 3 1, 2 01 8 for th e Company was 71 years. These amounts exclud e certain VA bu siness which has b een 10 0% rein su red to Common wealth An nu ity and Life In su ran ce Co mp any (formerly kn own as Allmerica Fin ancial Life In su ran ce and An nu ity Co mp any ) (“CALIC”), u nd er a Mo dco agreemen t. The g uaranteed amou nt p ayable associ ated with th e an nu ities reinsu red to CALIC was $12 .3 mi llio n and is includ ed in th e Acq uisition s segment. The average att ain ed age of co ntract hold ers as of Decemb er 3 1, 2 01 8, was 68 years. Activ ity relatin g to GMDB reserves (excl ud in g tho se 10 0% rein su red un der th e Mo dco ag reemen t) i s as fo llo ws: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Begi nn in g b alance $3 4,0 83 $34,79 6 $36 ,42 7 In curred gu aran tee ben efits 1 3,6 19 90 2 67 8 Less: Paid g uarantee b enefits 3,3 81 1,61 5 2 ,30 9 Endi ng balan ce $4 4,3 21 $34,08 3 $34 ,79 6 Accoun t b alances o f v ariable annui ties with g uarantees in vested in VA separate accou nts are as follo ws: As of December 31, 201 8 201 7 (D ollars In Thous ands) Equi ty mu tu al fun ds $5,3 00 ,02 4 $8,9 14 ,63 7 Fixed in come mutual fu nds 6,5 68 ,57 5 4,8 20 ,34 9 To tal $1 1,8 68 ,59 9 $1 3,7 34 ,98 6 Certain of the Co mp any ’s fixed ann uities an d un iv ersal li fe p rod uct s h ave a sales in du cement in t he form of a retro active in terest cred it (“R IC”). In ad dit io n, certain ann uit y con t racts prov id e a sales inducement in th e fo rm of a b on us interest credit. Th e Company maintain s a reserv e fo r all in terest credits earned to date. Th e Co mp any d efers the exp ense associated with the RIC and b on us int erest credits each perio d and amortizes th ese costs in a mann er similar to th at u sed for DAC. 15 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Activ ity in th e Co mp any’s d eferred sales ind ucemen t asset was as follo ws: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Deferred asset, b eg inn in g o f p eriod $3 0,9 56 $22,49 7 $11 ,75 6 Amo un ts d eferred 1 3,3 36 14,24 6 16 ,21 2 Amo rtizatio n (4,7 15 ) (5,78 7) (5 ,47 1) Deferred asset, end of perio d $3 9,5 77 $30,95 6 $22 ,49 7 13 . REINSURANCE The Compan y rein su res certain of its risks with (ced es), and assumes risks from, other insu rers u nd er y early renewable t erm, coi nsu ran ce, and modi fied coinsu ran ce ag reemen ts. Und er yearly renewab le term agreements, th e Co mp an y rein sures on ly th e mortal ity risk , wh ile u nd er coinsurance th e Co mp any reinsu res a prop ort io nate share o f all risk s ari sin g u nd er t he reinsu red po licy. Un der co in su rance, t he reinsurer recei ves a prop ortio nate sh are o f the premiums less commission s an d is liabl e for a corresp ondin g share o f al l ben efit pay men ts. M od ified co in su ran ce is accou nted for in a mann er similar to co insu ran ce ex cept th at t he liabil ity for fu tu re p oli cy ben efits is h eld by th e ced in g co mp any, an d settlemen ts are mad e o n a n et b asis b etween the co mp an ies. Reinsu ran ce ceded arrang emen ts do n ot d isch arg e the Co mp any as th e pri mary insurer. Ceded balances wo uld rep resen t a l iab ility of the Company in the event th e rein surers were un able to meet thei r ob ligations to us u nd er th e terms of the reinsurance ag reemen ts. Th e Co mp an y monitors th e co ncen tration of credit risk th e Co mp any has with an y reinsurer, as well as th e financial co nd itio n o f its rein surers. As of December 3 1, 2 01 8, th e Co mp any had reinsu red ap prox imatel y 3 4% of the face v alu e of its life insurance in-force. The C ompany h as rein su red approx imatel y 15% of th e face val ue of its life in surance i n-fo rce with the foll owin g three reinsurers: •Security Life of Den ver In surance Co. (curren tly ad ministered b y Han no ver Re) •Swiss R e Life & Healt h America Inc. •The Linco ln Natio nal Li fe Insu ran ce Co . (cu rrently admin istered by Swiss Re Life & Health America Inc.) The Co mp any has no t exp erienced any credit lo sses fo r th e y ears end ed December 31 , 20 18 , 2 017, o r 2 01 6 related to th ese reinsu rers. Th e Co mp any has set limits on the amo un t of insu ran ce retain ed on the life of an y o ne p erso n. The amou nt o f in surance retained by the Co mp any on an y o ne life on tradition al life in su ran ce was $50 0,0 00 in years prio r to mid -2 00 5. In 2 00 5, this retenti on amou nt was in creased to $1 ,00 0,0 00 fo r certain po lici es, an d d uring 20 08 it was increased to $2,0 00 ,00 0 for certain po licies. During 20 16 , th e reten tion amo un t was increased to $5,00 0,0 00 . Reinsu ran ce premiums, co mmissio ns, ex pen se reimb ursemen ts, b enefits, and reserves related to reinsured l on g-du ratio n co ntract s are account ed fo r ov er th e life of the un derly i ng rein sured cont racts u sing assumptio ns co nsistent with th ose used to acco un t fo r the un derly ing co ntract s. The co st o f rei nsu ran ce related to sh ort-du rati on con tracts is acco un ted fo r ov er the rein su ran ce co ntract p eriod . Amo un ts reco verable from rein surers, fo r bo th sh ort-and lo ng -d uration reinsurance arrang ements, are estimated in a mann er co nsistent with the claim liab ilities and po licy b en efits associated with rein sured p olicies. The fol lo win g tabl e p resen t s th e net life i nsu ran ce in -force: As o f December 31, 2 018 2 0 17 (D oll ars In Thous ands) Direct l ife in surance i n-fo rce $76 5,9 86 ,22 3 $75 1,5 12 ,46 8 Amo un ts assumed fro m oth er compan ies 13 5,4 07 ,40 8 11 0,2 05 ,19 0 Amo un ts ced ed to oth er compan ies (30 2,1 49 ,61 4) (32 8,3 77 ,39 8) Net l ife in surance i n-fo rce $59 9,2 44 ,01 7 $53 3,3 40 ,26 0 Percent ag e of amo un t assumed to net 2 3% 2 1% 15 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fol lo win g tabl e reflects th e effect of reinsu ran ce on life, accid ent/h ealth, and prop erty an d liab ili ty in surance p remiu ms written an d earned : Gross Amo unt Ceded to Other Co mpanies Assumed fro m Other Co mpanies Net Amo unt (D o l l ars In Tho us a nds ) For The Yea r Ended December 31 , 20 18 : Premi ums and po licy fees: Life i nsu ran ce $2 ,681,19 1 $(1,1 73 ,19 4) $6 26 ,28 3 $2,1 34 ,28 0 (1 ) Acciden t/h ealth insu ran ce 47,02 8 (30 ,12 6) 12 ,82 6 29 ,72 8 Property an d liab ili ty in surance 308,63 4 (1 81 ,62 1) 4 ,88 3 1 31 ,89 6 To tal $3 ,036,85 3 $(1,3 84 ,94 1) $6 43 ,99 2 $2,2 95 ,90 4 December 31 , 20 17 : Premi ums and po licy fees: Life i nsu ran ce $2 ,655,84 6 $(1,1 51 ,17 5) $4 35 ,11 3 $1,9 39 ,78 4 (1 ) Acciden t/h ealth insu ran ce 51,99 1 (33 ,05 1) 14 ,94 5 33 ,88 5 Property an d liab ili ty in surance 309,84 8 (1 76 ,50 9) 9 ,67 6 1 43 ,01 5 To tal $3 ,017,68 5 $(1,3 60 ,73 5) $4 59 ,73 4 $2,1 16 ,68 4 December 31 , 20 16 : Premi ums and po licy fees: Life i nsu ran ce $2 ,610,68 2 $(1,1 26 ,91 5) $4 54 ,99 9 $1,9 38 ,76 6 (1 ) Acciden t/h ealth insu ran ce 58,07 6 (36 ,93 5) 17 ,43 9 38 ,58 0 Property an d liab ili ty in surance 261,00 9 (1 50 ,86 6) 5 ,72 6 1 15 ,86 9 To tal $2 ,929,76 7 $(1,3 14 ,71 6) $4 78 ,16 4 $2,0 93 ,21 5 (1)Includes annu ity policy fees o f $1 7 7 .1 millio n , $173 .5 million , an d $160.4 m illion, for th e y ears ended Decemb er 31, 201 8 , 2017, and 2 0 16, respectiv ely . As o f Decemb er 3 1, 2 01 8 and 20 17 , p oli cy an d claim reserves relatin g to insuran ce ceded o f $4.7 bil lion and $5.1 bil lion , resp ectiv ely, are included in rein su rance receivab les. Sh ou ld any o f t he rei nsu rers be un able to meet its ob ligatio n at the time of th e claim, the Compan y wou ld be ob ligated to pay such claims. As o f December 31 , 2 01 8 an d 2 01 7, the Compan y h ad paid $11 5.8 million an d $96 .6 mill io n, respect iv ely, of ceded benefits wh ich are recov erab le from reinsu rers. In ad ditio n, as of December 31 , 201 8 and 2 017, the Co mp any h ad receiv ables o f $64 .8 millio n an d $65 .1 million , respect iv ely, rel ated to insurance assu med. 15 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Company’s t hird party rei nsu ran ce receiv abl es amou nted to $4 .8 bil lion and $5.1 bi llio n as o f Decemb er 3 1, 2 01 8 and 20 17 , respect iv ely. These amo un ts includ e ced ed reserve balances and ced ed ben efit p aymen ts. The ced ed ben efit p aymen ts are recov erab le from reinsu rers. Th e follo win g table sets fort h the receivab les attrib utable to ou r more sig nificant rein surance partn ers: As of December 3 1 , 201 8 2 017 Reinsurance Receivable A.M. Best Rating Reinsura nce Receiv a ble A.M. Best Rating (Dolla rs I n M il l i o ns ) Secu rity Life of Denv er Insu ran ce Co mp any $72 2.2 A $7 40 .8 A Swiss Re Life & Health Ameri ca, Inc.60 3.8 A+ 6 14 .8 A+ Li ncoln Natio nal Life In su ran ce Co .46 1.1 A+ 4 89 .1 A+ SCOR Glo bal Life(1)31 7.2 A+ 3 31 .8 A+ Tran samerica Life Insurance C o.30 1.0 A+ 3 35 .6 A+ RGA Rein su ran ce Co mp an y 26 0.5 A+ 2 78 .3 A+ American Un ited Life Insuran ce Co mp any 24 2.8 A+ 2 66 .7 A+ Cent re Rein surance (Bermu da) Ltd 19 7.4 NR 2 12 .2 NR The Canad a Life Assu rance Compan y 18 8.2 A+ 1 86 .1 A+ Emp loy ers Reassu ran ce Co rp oration 17 8.4 B+ 1 93 .9 A- (1)Includes SCOR Glob al Life Americas Reinsu rance Comp any , SCOR Glo b al Life USA Reinsu ran ce Co, and SCOR Glob al Life Rein suran ce Co of Delaware The Compan y’s reinsu ran ce con tracts typi cally d o n ot h av e a fix ed term. In gen eral, th e reinsurers’ ab ility to termin ate co verag e for existin g cessio ns i s limited to such circumst an ces as material breach o f con tract or n on -payment o f premiums by the ced in g compan y. The reinsurance co ntracts generally con tain provi sio ns intend ed to p ro vide th e ced in g company with th e abil ity to ced e future b usiness o n a b asi s co nsistent with h i sto rical terms. Ho wever, eith er p arty may t ermin ate any of th e co ntracts with resp ect to future bu sin ess u po n approp riate not ice to th e other party . Gen eral ly, th e rein surance con tracts d o no t limit th e o verall amou nt of the loss that can be in curred b y the reinsurer. Th e amou nt of liab ilities ced ed un der co ntracts t hat p rov id e fo r the pay men t o f ex perience refu nd s is immat eri al. 15 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 14 . DEBT AND OTHER OBLIGATIONS Debt a nd Subo rdina ted Debt Securi ties Deb t an d su bo rd in ated deb t secu rities are su mmarized as follo ws: As o f December 31, 2 0 1 8 20 1 7 Outsta nding P rinci pal Carry i ng A mounts Outsta nding P rincipal C arrying A m ounts (D ollars In Thous ands) Debt (y ear of issue): Credi t Facility $— $— $— $— Capit al l ease o bligatio n 1,3 19 1,3 19 1,68 2 1 ,68 2 6 .40 % Sen io r No tes (20 07 ), d ue 2 01 8 — — 150,00 0 1 50 ,51 8 7 .37 5% Senior Notes (2 00 9), du e 20 19 40 0,0 00 41 6,4 69 400,00 0 4 35 ,80 6 8 .45 % Sen io r No tes (20 09 ), d ue 2 03 9 19 0,0 44 28 8,5 47 232,92 8 3 57 ,04 6 4 .30 % Sen io r No tes (20 18 ), d ue 2 02 8 40 0,0 00 39 5,4 92 — — $99 1,3 63 $1 ,10 1,8 27 $784,61 0 $9 45 ,05 2 Su bo rd i nated deb t (year of issue): 5 .35 % Su bo rd inated Deb entures (20 17 ), d ue 20 52 $50 0,0 00 $49 5,4 26 $500,00 0 $4 95 ,28 9 3 .55 % Su bo rd inated Fu nd in g Ob ligatio ns (2 01 8), du e 2 038 5 5,0 00 5 5,0 00 — — 3 .55 % Su bo rd inated Fu nd in g Ob ligatio ns (2 01 8), du e 2 038 5 5,0 00 5 5,0 00 — — $61 0,0 00 $60 5,4 26 $500,00 0 $4 95 ,28 9 The Co mp any ’s fu tu re maturities o f d ebt , ex cludi ng n otes payab le t o ban ks, t he cap ital lease o blig ations, and sub ordinated deb t secu rities, are $4 16 .5 mil lion in 20 19 and $6 84 .0 mil lion th ereafter. Du ring th e y ear en ded December 3 1, 20 18 , th e Co mp any rep urchased and sub sequentl y exting uished $6 5.6 mill io n (p ar val ue - $4 2.9 millio n) o f th e Co mp any’s 8 .45 % Seni or Notes d ue 20 39 . Th ese rep urchases resulted in a $1.8 million pre-tax gain fo r th e Compan y. Th e g ain is recorded in other in come in the co nso lidated statements of income. Du ring 20 18 , PLICO issued $110.0 million of Sub ordin ated Fu nd in g Ob lig ati on s at a rate o f 3 .55 % d ue 20 38 . These ob lig ation s are no n-reco urse to th e Co mp any . Du ring 20 18 , the Comp any issued $40 0.0 million o f its Sen io r No tes at a rate o f 4 .30 %, du e 2 02 8. Th ese no tes were issu ed n et of a discount o f $1.0 mi llio n. At issu ance, these n otes were carried o n the Co mp any ’s balance sh eet n et o f th e discoun t an d the associated deferred issu ance exp enses of $3.7 mi llio n. Th e Co mp any u sed the n et pro ceed s from th e o fferin g for general corp orate pu rp oses, in clu ding th e repay ment of amo un ts o utstand in g u nd er ou r Credit Facility. Du ring 20 17 , the Co mp any issu ed $50 0.0 milli on of its Su bo rd inated Deb entures du e 20 52 . At issu ance, th ese Su bo rd in ated Deb entures were carried o n t he Company ’s balance sh eet net o f the asso ciated d eferred issu ance exp enses o f $4 .8 million . The Compan y used t he net proceeds from th e offerin g to call and red eem, at par, the en t ire $15 0.0 million o f 6 .00 % Su bo rd in ated Deb en t ures du e 2 04 2 an d $287.5 millio n of 6 .25% Subord in ated Deb entures du e 20 42 . Un der a revo lv in g line o f credit arrang ement that was in effect until M ay 3 , 2 01 8 (the “20 15 Credi t Facility”), the Co mp an y had th e abil ity to bo rrow o n an un secured b asis up to an ag gregat e prin cip al amo unt of $1 .0 billi on .The Company had th e rig ht in certain circu mstances to requ est that th e co mmitmen t un der the Cred it Facility be in creased u p to a max imum p rincipal amou nt o f $1.2 5 b illio n. Balances o utst an din g un der the 2 01 5 Cred it Facility accrued in terest at a rate equ al to, at th e op tion of th e Borro wers, (i) LIB OR p lu s a sp read b ased on th e ratin gs o f th e Co mp any ’s Sen io r Deb t, o r (ii) th e sum of (A) a rate eq ual to th e h ig hest o f (x ) the Ad ministrative Ag ent’s prime rate, (y ) 0 .50 % above th e Fu nds rat e, or (z) th e o ne-mo nth LIBOR p lus 1 .00 % an d (B) a spread based o n t he ratin gs o f th e Co mp any ’s Senior Deb t. Th e 2 01 5 Cred it Facility also p ro vided for a facility fee at a rate that varies with t he ratin gs o f the Co mp any ’s Sen io r Deb t and that is cal cu lated o n the ag gregate amou nt of commitments un der th e 20 15 C redit Facili ty, whether used or un used . The an nu al facili ty fee rate was 0 .12 5% of th e agg reg ate p rincipal amo un t. The Cred it Facility p ro vided t hat th e Company was liab le for the full amo un t o f any ob ligatio ns fo r bo rrowing s o r let ters o f credit, in clu ding t ho se of PLICO, u nd er th e 20 15 Cred it Facility. Th e mat urity dat e of t he 2 01 5 Credit Facility was February 2 , 20 20 . On M ay 3 , 20 18 , th e Company amen ded th e 20 15 Cred it Facility (as amend ed, the “Credi t Facility”). Und er the Credit Facility, the Compan y h as th e ab ility to borro w on an u nsecu red basis u p to an agg reg ate p rincipal amo un t of $1 .0 billio n. The Co mp any h as t he rig ht in certain ci rcumstances to request th at the co mmitmen t u nd er th e Credit Facili ty be increased u p to a maximu m p rin cip al amo un t of $1 .5 b illion . Bal an ces o utstand in g un der the Credit Facility accrue interest at a rate equ al to, at th e op t io n o f the Bo rrowers, (i) LIBOR p lu s a sp read based on th e ratings of the Co mpan y’s Sen io r Deb t, o r (ii) the sum of (A) a rate 15 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents eq ual to th e h igh est o f (x) th e Admin istrati ve Agen t’s Prime rate, (y) 0.5 0% ab ov e th e Fu nd s rate, or (z) th e on e-mon th LIB OR p lu s 1.0 0% an d (B) a sp read based on th e ratin gs of th e Comp any ’s Sen i or Deb t. The Cred it Facilit y al so p ro vid ed for a faci lity fee at a rate th at v aries with th e ratin gs of th e Compan y’s Senior Debt and that is calculated on the ag gregat e amou nt of co mmitmen ts un der the Credi t Facility, wh eth er used or un used. Th e an nu al facility fee rate is 0.125% o f th e ag gregate p rincipal amou nt. Th e Credit Facility prov id es th at th e Compan y is liab le fo r the fu ll amou nt of an y ob ligatio ns for bo rrowi ng s o r let ters of credit, includ in g tho se of PLICO, u nd er the Credit Facility. The maturity d ate of th e Credit Facility is May 3, 20 23 . The Compan y i s no t aware of an y no n-complian ce with th e fin ancial d ebt co venan ts o f th e Cred it Facil ity as o f December 31 , 20 18 . Th e Co mp an y did n ot h ave an o utstand in g balance on th e Credit Facility as o f Decemb er 3 1, 2018. The fol lo win g is a summary o f the Compan y’s est imated d ebt cov enant calcu latio ns as of Decemb er 3 1, 2 01 8: Requirement Actua l Results Con soli dated net worth margi n greater th an o r equal to $0 g reater t han $1 b illio n Debt to to tal cap ital ratio less than 40 % less th an 2 3% No n-Reco urse Funding Obliga tions Go ld en Gate Cap tive In suran ce Co mp an y On Janu ary 15 , 2 01 6, Golden Gate Cap tive Insuran ce Co mp any (“Golden Gate”), a Vermon t sp ecial p urpose fin ancial in su ran ce co mpan y an d a wh olly o wned su bsidiary o f PLICO, and Steel City, LLC (“St eel Ci ty ”), a wh oll y o wned su bsid iary o f th e Compan y, entered into an 1 8-year tran saction to finan ce $2.1 88 billion of “XXX” reserv es related to th e acqu ired GLAIC Block and the other term life insurance b usiness rein su red to Go ld en Gate b y PLICO an d WCL, a d irect who lly own ed sub sidi ary o f PLICO. Steel City issued n otes with an ag gregate ini tial prin cip al amo un t of $2 .18 8 b illio n to Go ld en Gate in ex chan ge fo r a surplu s no te issued b y Golden Gate with an in itial prin cip al amo un t o f $2.1 88 b ill io n. Th ro ug h the stru ctu re, Hann ov er Life Reassu ran ce Co mp any of America (Bermu da) Lt d., Th e Canada Life Assurance Compan y (Barb ado s Bran ch) and Nomura Americas Re Lt d. (collectiv ely, the “Risk- Takers”) prov id e credit en han cement to t he Steel City Notes fo r th e 1 8-year term in ex chan ge for cred it enh ancemen t fees. Th e transaction is “no n-recourse” to PLICO, WCL and the Co mp any, meaning t hat no ne of these co mp anies, o th er th an Go ld en Gate, are liable t o reimbu rse t he Risk-Tak ers for any credit en han cement pay ments req uired to b e made. As o f December 31 , 2 01 8, t he agg reg ate prin cip al b alance of th e Steel Cit y Notes was $1.8 83 billi on . In co nn ection with th i s tran saction , t he Compan y has en tered in to certain su pp ort agreements un der which it gu aran tees o r otherwise sup po rts cert ain ob ligatio ns of Go ld en Gate o r Steel City, in clu ding a gu arantee o f th e fees to th e Risk-Takers. The sup po rt ag reemen ts p ro vide th at amounts wou ld b eco me payab le by the Co mp any if Go l den Gate’s an nu al gen eral corp orate ex pen ses were h ig her than mo deled amo un ts, certain rein surance rat es ap plicable to the sub ject b usin ess in crease bey on d mod eled amou nts or in th e ev en t write-d own s du e to o th er-th an-tempo rary imp airmen ts o n assets held in certain acco un ts ex ceed defined thresh old level s. Ad ditio nally , th e Co mp any has en tered int o a separate agreemen t to g uarant ee p ayment of certain fee amou nts in co nn ection with the cred it enh ancemen t o f the Steel City Notes. As of Decemb er 3 1, 2 01 8, n o p aymen ts have b een mad e un der th ese ag reements. In co nn ection with th e tran sactio n ou tlined ab ov e, Go ld en Gate had a $1.8 83 billi on ou tstan ding no n-reco urse fun ding o blig ation as o f December 31 , 2 01 8. Thi s no n-reco urse fu nd ing o bligat io n matu res in 2 03 9 an d accru es in terest at a fixed annual rate o f 4 .75 %. Go ld en Gate II Cap tive In suran ce Co mpa ny Go ld en Gate II Captive In surance C ompany (“Golden Gat e II”), a So uth Caro lina special pu rpose fin ancial capt iv e insu ran ce co mp an y and a who lly owned by PLICO, h ad $57 5 millio n o f o utstandin g non-reco urse fun ding ob ligatio ns as o f Decemb er 3 1, 20 18 . These ou tstand ing n on -recou rse fu nd ing ob ligatio ns were issued to sp ecial pu rp ose trusts, which in tu rn issued securi ties to third parties. Certain o f o ur affi liates o wn a p ortion o f these securities. As of Decemb er 31 , 20 18 , secu rities related to $20.6 mi llio n of th e o utstan ding bal an ce o f the n on-recou rse fun ding o bligat io ns were held by ex ternal p arties an d secu rities related to $5 54 .4 million o f th e n on -recourse fu nd in g ob ligatio ns were held b y th e Compan y and its affiliates. The Co mp any h as entered into certain su pp ort ag reement s wit h Golden Gate II ob ligatin g the Compan y to mak e cap ital co ntribu tions o r p ro vide su pp ort related to certain of Golden Gate II’s exp en ses and in certain circu mstances, to collaterali ze certain of th e Co mp any ’s ob ligatio ns to Go ld en Gate II. These sup po rt ag reements prov id e th at amou nts wo uld b ecome payab le b y th e Comp any t o Gold en Gate II if i ts an nu al g eneral co rp orate ex pen ses were h i gh er than mo deled amou nts o r if Golden Gate II’s inv estment inco me on certai n in vestmen ts o r premium inco me was b elow certain act uarial ly d etermined amo un t s. Th e Co mp any mad e a pay men t of $0 .6 mi llio n un der th e In terest Su pp ort Agreement d urin g th e secon d q uarter of 2 01 8. In ad dit io n, certain Interest Sup po rt Ag reement ob lig ati on s t o the Co mp any of $4 .9 mil lion hav e b een co llateralized by PLC u nd er the terms of th at ag reemen t. As of Decemb er 3 1, 2 01 8, n o p aymen ts hav e b een received un der th e YRT Premiu m Su pp ort Ag reement . Re-eval uatio n and , if necessary, ad ju st ments o f an y su pp ort ag reemen t co llateralization amo un ts o ccur an nually du ring th e first q uarter p ursu ant to th e terms o f the su pp ort ag reements. Du ring th e year en ded Decemb er 31 , 20 18 , th e Co mp any and its affiliates repu rch ased $38 .0 millio n o f its o utstan ding no n-reco urse fu nd ing ob ligatio ns, at a discou nt. During th e y ear December 3 1, 20 17 , th e Compan y an d its affil iates d id no t rep urchase any of its o utstand in g no n-reco urse fu nd ing ob ligatio ns. Go ld en Gate V Vermo nt Ca pti ve Insura nce Comp an y On Octo ber 10 , 2 01 2, Go ld en Gat e V Vermon t Cap tive In surance Co mp an y (“Gold en Gate V”), a Vermo nt sp ecial pu rp ose finan cial in su rance co mp any, and Red M ou ntain , LLC (“Red M ou ntain ”), bo th wh oll y owned sub sidi ari es o f PLICO, en tered in to a 20 -year tran sactio n to fi nance u p to $945 mi llio n o f “AXXX” reserv es related to a b lock o f u niversal life insu ran ce po licies wi th 16 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents secondary gu aran tees issu ed b y o ur direct wh olly own ed su bsid iary PLICO and in direct who lly o wned sub sid iary, West Co ast Life In surance Compan y (“WCL”). Go ld en Gate V issued n on -recou rse fu nd in g obligatio ns to Red Mo un tain, and Red Mo un tai n issu ed a no te with an initial prin cip al amoun t o f $2 75 mi llio n, increasin g to a maximu m o f $94 5 million in 2027, t o Golden Gate V fo r depo sit to a rein su rance tru st su pp orting Golden Gate V’s ob lig ation s un der a rein su ran ce ag reemen t with WCL, pu rsu ant to which WCL cedes liab ili ties relating to t he po l ici es of WCL an d retroced es liabilities relatin g to th e po licies o f PLICO. Thro ug h the structure, Hann ov er Life Reassurance Compan y of America (“Hann ov er Re”), th e ultimate risk taker in the tran saction , prov id es credit en hancement to the Red Mo un tain n ote for th e 20 -y ear term in exch ang e for a fee. The transact io n is “no n-reco urse” to Golden Gate V, Red Mo un tain, WCL, PLICO an d the Comp any, mean in g that n one of th ese co mp anies are liable fo r the reimbu rsement of an y credit enh ancemen t p ayments requi red to be made. As of Decemb er 3 1, 20 18 , t he p rincipal b alan ce of the Red Mou ntain n ote was $67 0 million . Future schedu l ed cap ital con trib ution s to prefu nd credit enhancemen t fees amou nt to app ro ximately $1 14 .6 million and will be p aid in ann ual installmen ts th rough 20 31 . In co nn ecti on with th e transact io n, th e Compan y has en tered in to certain sup po rt ag reement s u nd er whi ch it g uaran tees or ot herwise sup po rts certain ob lig ation s o f Golden Gate V or Red Mo un tain. The sup po rt ag reemen ts pro vide that amou nts wo uld become pay able by the Comp any if Gol den Gate V’s annual gen eral corporate ex pen ses were high er than mo deled amou nts o r in th e even t write-d own s d ue to other-than -temp orary i mpairments o n assets held in certain acco unt s exceed defin ed th resh old levels. Add itio nally, the Co mp any h as entered into sep arat e agreemen ts to indemnify Gol den Gate V with resp ect to mat erial adv erse ch ang es in no n-gu aran teed element s o f in surance po licies reinsu red b y Gol den Gate V, an d to gu aran tee p ayment o f certain fee amou nts in con nectio n with th e credit en han cement of th e Red Mo unt ain note. As of December 31 , 2 018, n o p ayments hav e been made un der th ese agreements. In co nn ection with th e tran sactio n ou tli ned ab ov e, Go ld en Gate V had a $670 million ou tstan ding non-reco urse fun ding o blig ation as o f Decemb er 3 1, 2 01 8. Th is no n-reco urse fun ding ob lig ati on mat ures in 2 03 7, h as sched uled increases in p rincipal to a max imum of $945 mil lion , an d accrues in terest at a fi xed an nu al rate o f 6 .25 %. No n-reco urse fu nd ing obligatio ns o utstand in g as o f Decemb er 3 1, 20 18 , on a co nsolid ated basis, are sh own in th e fo llowing tab le: Issuer O utstanding Principal Carry ing Value(1) Maturity Year Year-to-Da te Weighted-Avg Interest Rate (Dollars In Thousands) Golden Gate Cap tive Insurance Comp any (2 )(3 ) $1 ,88 3,0 00 $1 ,88 3,000 20 39 4 .75 % Golden Gate II Cap tiv e Insurance Company 2 0,6 00 1 7,703 20 52 4 .99 % Golden Gate V Vermo nt Cap tive Insurance Comp any (2 )(3 ) 67 0,0 00 72 9,454 20 37 5 .12 % M ONY Life Insu ran ce Co mp any (3) 1,0 91 2,340 20 24 6 .19 % Total $2 ,57 4,6 91 $2 ,63 2,497 (1) Carrying v alues inclu de premiu m s and d iscounts an d do not rep resent u n paid prin cip al b alan ces. (2) Ob lig ations are issu ed to n o n-consolidated subsid iaries of the Company. These o b ligations collateralize certain h eld -to -maturity securities issu ed by wh o lly o wn ed su b sidiaries of PLICO. (3) Fixed rate oblig atio n s No n-reco urse fu nd ing obligatio ns o utstand in g as o f Decemb er 3 1, 20 17 , on a co nsolid ated basis, are sh own in th e fo llowing tab le: Issuer Outstanding Principa l Carry ing Value(1) Maturity Year Year-to-Da te Weighted-Avg Interest Rate Golden Gate Cap tive Insurance Comp any (2 )(3 ) $2 ,01 4,0 00 $2 ,01 4,000 20 39 4 .75 % Golden Gate II Cap tiv e Insurance Company 5 8,6 00 4 9,787 20 52 3 .88 % Golden Gate V Vermo nt Cap tive Insurance Comp any (2 )(3 ) 62 0,0 00 68 1,285 20 37 5 .12 % M ONY Life Insu ran ce Co mp any (3 ) 1,0 91 2,405 20 24 6 .19 % Total $2 ,69 3,6 91 $2 ,74 7,477 (1)Carry in g values in clu d e p remiums an d disco u n ts and d o not rep resent un p aid p rincipal balances. (2)Oblig atio n s are issued to non-co n solid ated su bsid iaries of th e Co mpany. These ob lig atio ns collateralize certain h eld -to-matu rity secu rities issued by wholly o wn ed su bsid iaries of PLICO. (3)Fix ed rate obligation s 16 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Letters o f Credit Go ld en Gate III Vermon t Cap t ive In su ran ce Co mpa ny On Ap ril 2 3, 20 10 , Golden Gate III Vermo nt Captive Insurance Co mp an y (“Go ld en Gate III”), a Vermo nt special p urpose finan cial insu ran ce co mp any an d whol ly o wned sub sidi ary o f PLICO, entered into a Reimbu rsement Agreement (the “Reimbu rsement Agreement”) with UBS AG, Stamford Branch (“UBS”), as issu in g len der. Und er th e Reimb ursemen t Agreement, UBS issued a letter of credit (t he “LOC”) to a tru st fo r th e ben efit of WCL. The Reimb ursemen t Ag reemen t has u nd erg on e t hree sep arate amen dment s an d restat ements. The Reimb ursemen t Ag reemen t’s cu rrent effect iv e d ate is Ju ne 25 , 20 14 . Th e LOC bal an ce reach ed its sched uled peak o f $93 5 millio n i n 201 5. As o f December 31 , 2 01 8, the LOC bal an ce was $86 0 mill io n. The term of th e LOC is ex pected to be ap pro ximat ely 1 5 years from the original issuance date. This transactio n is “non-recou rse” to WCL, PLIC O, and th e Co mp any, meaning that n on e o f th ese co mpan ies oth er th an Go ld en Gate III are liab le fo r reimb ursemen t on a draw of th e LOC. Th e Compan y has entered i nto cert ain sup po rt ag reemen ts with Go lden Gate III o blig ating the Co mp any to make capit al co ntribu t io ns or p ro vide sup po rt related to certain o f Go ld en Gate III’s ex pen ses an d in certain circu mstances, to coll ateralize certain of the Co mp any ’s o blig ation s to Golden Gate III. Fu tu re sched uled cap ital con trib ution s amou nt to ap pro ximat ely $70 .0 mill io n and will be paid in two installments with th e last pay ment o ccu rring in 20 21 . Th ese con trib utio ns may be su bject to po tential offset against dividen d pay men ts as permitted u nd er th e terms of th e Rei mb ursemen t Agreemen t. The su pp ort ag reemen ts p ro vide t hat amou nts wo uld become p ayable b y th e C ompany to Gol den Gate III if its ann ual gen eral corpo rate ex penses were high er th an mod eled amo un ts or if sp ecified catastro ph ic lo sses o ccur d uri ng d efined time perio ds with resp ect to th e po licies rein sured b y Golden Gate III. Pu rsuant to th e terms o f an amen ded and restated letter agreement with UBS, the Co mp any has co ntin ued to gu aran tee the p ay men t o f fees to UBS as specified in th e Reimb ursemen t Agreement. As o f Decemb er 3 1, 2 01 8, n o p ay men ts have b een mad e un der th ese ag reemen t s. Go ld en Gate IV Vermon t Cap t ive In su ran ce Co mpa ny Go ld en Gate IV Vermon t Capt iv e Insuran ce Co mp any (“Go lden Gate IV”), a Vermon t sp ecial p urpo se finan cial insu ran ce co mp any an d who lly owned su bsidiary of PLICO, i s party to a Reimbu rsement Ag reemen t with UBS AG, Stamford Branch , as issuin g lend er. Un der th e Reimb ursemen t Agreement, dated December 10 , 20 10 , UBS issued an LOC in th e in iti al amo un t o f $27 0 millio n to a tru st for the ben efit of WCL. Pu rsuant to the terms of th e Reimb ursemen t Agreement, th e LOC reached its sch edu led peak amou nt of $7 90 million in 2 01 6. As of Decemb er 3 1, 2018, the LOC b alance was $770 mi llio n. Th e term o f th e LOC is ex pected to be 1 2 years from th e o riginal issuan ce d ate (stated maturity of December 3 0, 2 02 2). The LOC was issued to sup po rt certain obl ig ation s of Gold en Gate IV to WCL u nd er an in demnity rein su ran ce agreement, pu rsu ant to which WCL cedes liab iliti es relatin g to th e po licies of WC L and retroced es liab ilities relat in g to the p oli cies of PLICO. Th is t ransaction is “n on -recou rse” to WCL, PLICO, and the C ompany, meaning th at n on e o f th ese co mp anies other th an Go ld en Gate IV are liable fo r reimbu rsement on a draw o f the LOC. Th e Co mp any has en tered into certai n su pp ort ag reements with Go ld en Gat e IV o blig ating th e Compan y to make capital con tribu tion s o r p ro vid e sup po rt relat ed to certain o f Go ld en Gate IV’s ex pen ses an d in certain circumstan ces, to co llateralize certain o f t he C ompany ’s ob lig ation s to Go l den Gate IV. Th e sup po rt agreements provi de th at amount s would become p ayable b y t he Co mp any to Golden Gate IV if it s an nu al gen eral corp orate ex pen ses were h ig her than mod eled amou nts or if sp ecified catastrop hic lo sses o ccu r du ring defin ed time perio ds with respect to th e po licies rein su red by Gol den Gate IV. The Co mp any has also en tered into a separate agreement to gu arantee the payments o f LOC fees u nd er th e t erms o f th e Reimbu rsement Agreement. As of Decemb er 3 1, 20 18 , no p aymen t s h ave been made un der th ese ag reements. Secured Financing Transa cti ons Repurcha se Pro gra m Borrowi ng s Wh ile the Compan y anticipates th at th e cash flows of its op eratin g su bsid iaries will b e sufficien t to meet its inv estment commitmen ts an d operating cash needs in a n ormal credit market en viro nment, the Compan y recog nizes th at in vestmen t commitments sched uled to b e fun ded may, fro m time to time, ex ceed the fu nd s then av ailable. Therefo re, the Company has established rep urchase agreement pro grams for certain of its in su ran ce subsid iaries to p rov id e liqu id ity when n eeded . Th e Co mp any ex pects that th e rate receiv ed on its in vestmen ts will eq ual o r exceed its b orro win g rate. Un der this pro gram, th e Co mp any may, fro m time to time, sell an inv estment security at a sp ecific price and ag ree to rep urchase th at securi ty at an oth er specified p rice at a later d ate. These b orro win gs are ty pically for a term less th an 9 0 day s. Th e mark et v alue o f secu rities t o be repu rch ased i s mo nito red and co llateral level s are adjusted wh ere app ro pri ate to protect the cou nterp arty against cred it exp osu re. Cash received is inv est ed in fixed matu rity secu rities, and th e ag reemen ts p rov id ed fo r net settlemen t in th e ev ent o f d efault o r o n terminatio n o f the ag reements. As of Decemb er 3 1, 2018, the fair value o f secu rities p led ged un der the repu rch ase prog ram was $4 51 .9 millio n and th e repu rch ase o bligat io n of $4 18.1 million was includ ed in th e Compan y’s co nsolid ated balance sheets (at an average bo rrowi ng rate of 24 5 b asi s po int s). Du ring the y ear en ded Decemb er 31, 20 18 , th e maximu m b alan ce o utstand in g at any one p oint i n time rel ated to th ese prog rams was $88 5.0 millio n. The average d aily b alance was $5 11 .4 mil lion (at an av erage borro win g rate o f 1 84 basis po in ts, respectiv ely ) d urin g t he year en ded December 31 , 2 01 8. Du ring the y ear en ded December 3 1, 2 01 7, th e max imum b alance outstand in g at an y on e poi nt i n time related to these p ro grams wa s $98 8.5 million . Th e av erag e daily balance was $6 24 .7 mil lion (at an av erage b orrowin g rate o f 1 01 basis po in ts) du ring the year en ded Decemb er 31 , 20 17 . S ecurit ies Lend in g The Compan y participates in secu rit ies lend in g, p rimarily as an inv estment yield enh ancemen t, whereby securities that are held as investments are lo aned o ut to third parties fo r sh ort perio ds o f time. Th e Co mp any requ ires in itial collateral o f 1 02 % of th e mark et value of th e loan ed securities to b e separately maintained. The l oaned securities’ market value is mon itored on a daily basis. As of December 31, 2 01 8, secu rities wi th a market value o f $7 2.2 mi llio n were lo aned u nd er th is p rog ram. As collateral fo r th e lo aned securities, th e Co mp any recei ves sh ort-term in vestmen ts, whi ch are recorded in “sh ort- term inv estment s” wit h a correspond in g liab ility recorded in “secu red fin an cin g liab ili ties” to acco un t for its o blig ation to return th e co llateral. As o f 16 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Decemb er 3 1, 2 01 8, the fair val ue of t he collateral related to th is prog ram was $77 .2 millio n an d th e Comp any h as an ob ligatio n to return $7 7.2 million o f co llateral to the secu rities b orro wers. The follo win g table prov id es th e fair v alu e of collateral pledg ed for rep urchase ag reemen ts, grou ped by asset class, as o f Decemb er 31 , 2 01 8 and Decemb er 3 1, 2 01 7: Repurcha se Ag reements, Securities Lending Transa ctions, and Repurcha se-to -Maturity Transactio ns Acco unted fo r a s Secured Borro wings Rema ining Contra ctual Ma turity of the Ag reements As o f December 3 1 , 2018 (Dolla rs I n Thousands) Overnight and Greater Tha n Co ntinuo us Up to 3 0 days 30 - 90 da y s 9 0 days To tal Repurchase a g reements and repurchase-to-maturity tra nsactio ns U.S. Treasury an d agen cy securities $4 3 3,182 $18,7 1 3 $— $— $45 1 ,8 95 Mo rtg age loans — — — — — Total rep u rchase agreements an d repurch ase-to-m atu rity tran sactions 4 3 3,182 18,7 1 3 — — 45 1 ,8 95 Securities lending tra nsa ctions Fix ed m atu rity secu rities 7 1,285 — — — 7 1 ,2 85 Eq uity securities 891 — — — 8 91 Red eemable preferred stock — — — — — Total securities lendin g transactions 7 2,176 — — — 7 2 ,1 76 Tota l securities $5 0 5,358 $18,7 1 3 $— $— $52 4 ,0 71 Repurcha se Ag reements, Securities Lending Transa ctions, and Repurcha se-to -Maturity Transactio ns Acco unted fo r a s Secured Borro wings Rema ining Contra ctual Maturity of the Agreements As of December 3 1, 201 7 (D ollars In Thousands) Overnight and Greater Tha n Co ntinuo us Up to 30 days 30 - 90 da y s 9 0 days To tal Repurchase a g reements and repurchase-to-maturity tra nsactio ns U.S. Treasury an d agen cy securities $307,63 3 $— $— $— $30 7 ,6 33 Mo rtg age loans 698,97 4 — — — 69 8 ,9 74 Total rep u rchase agreements an d repurch ase-to-m atu rity tran sactions 1 ,006,60 7 — — — 1,00 6 ,6 07 Securities lending tra nsa ctions Co rpo rate secu rities 118,81 7 — — — 11 8 ,8 17 Eq uity securities 5,69 9 — — — 5 ,6 99 Red eemable preferred stock 75 5 — — — 7 55 Total securities lendin g transactions 125,27 1 — — — 12 5 ,2 71 Tota l securities $1 ,131,87 8 $— $— $— $1,13 1 ,8 78 16 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Interest Expense In terest ex pense is su mmarized as follo ws: For The Year Ended December 31, 201 8 2017 2 016 (D ollars In M i llio ns) Debt, subordinated debt, and su bord in ated fund in g obligation s $6 6.5 $61.3 $6 2 .1 No n -recourse fu n d ing ob lig atio ns, o th er oblig atio n s, and rep urchase agreements 1 7 2.6 1 71.9 1 6 3 .7 Total interest expense $2 3 9.1 $2 33.2 $2 2 5 .8 15 . COMMITMENTS AND CONTINGENCIES The Compan y has en tered into ind emn ity ag reemen ts with each of its cu rrent direct ors other th an tho se th at are employ ees of Dai-ichi Life t hat prov id e, amon g other thin gs and sub ject to certain limitatio ns, a con tractu al righ t to in demnification to the fullest ex ten t p ermissib le un der th e law. The Co mp any h as agreemen ts with certain o f its o fficers prov id in g up to $10 millio n in ind emn ificatio n. These ob ligatio ns are in ad ditio n to t he cu st omary ob ligatio n to ind emn ify o fficers and directors con t ained in th e C ompany ’s go vernance d ocu ments. The Compan y leases ad ministrativ e an d mark eting office space in app ro ximately 17 cities (exclud ing the ho me office b uild in g), with most leases being for p eriod s less than on e year to nine years. The Company had rental ex pense o f $8.3 millio n, $7 .8 milli on , an d $6.7 mil lion , for th e years en ded Decemb er 3 1, 2 01 8, 2 01 7, an d 20 16 , resp ectively. The ag gregate ann ualized ren t was app ro ximately $8.3 mi llio n for the year en ded December 31 , 2 01 8. Th e fo llowing is a sch edu le b y year of fu tu re min imum ren tal pay ments requ ired u nd er these leases: Year Amo unt (Do lla rs In Tho usands) 2 01 9 $5,454 2 02 0 3,707 2 02 1 3,393 2 02 2 3,129 2 02 3 3,171 Th ereafter 5,418 Ad ditio nally, th e Compan y p rev io usly leased a b uild i ng co ntig uo us to i ts h ome o ffice. The lease was ren ewed in December 20 13 an d was ext ended to Decemb er 20 18 . At th e en d o f the lease term in December 2 01 8, th e Co mp any p urchased th e b uild in g for ap proxi mately $75 million . Th e b uild in g is recorded in prop erty a nd eq uipmen t o n the con so lidated b alance sh eet. As o f December 3 1, 2 01 8 and 20 17 , th e Co mp any had ou tstand in g mortg age loan co mmitmen ts of $6 85 .3 mil lion at an av erag e rate o f 4.42 % and $5 72 .3 mil lion at an av erag e rate o f 4 .14 %, resp ectively. Un der th e in surance g uaran ty fun d laws in mo st stat es, in surance compan ies d oin g b usiness th erein can b e assessed up to prescrib ed limits fo r po licyh older losses in curred b y inso lvent companies. From time to time, companies may b e asked to con tri bu te amo un ts b eyo nd p rescri bed limits. It is po ssi ble t hat t he Co mp any cou l d be assessed with respect to p ro duct lin es n ot o ffered b y th e Compan y. In add itio n, leg islat io n may b e int ro du ced in v ariou s states with resp ect to gu aran ty fu nd assessmen t laws related to in surance p ro du cts, in clu ding lon g term care in surance an d o ther specialty prod uct s, t hat in creases th e cost o f fu tu re assessments o r alters fu tu re premi um tax o ffsets received i n co nn ection with gu aran ty fun d assessments. Th e Compan y can no t predi ct t he amo un t, n atu re o r timin g of an y futu re assessmen ts o r legislation , any of which co uld h ave a material an d ad verse impact on th e Co mp any ’s finan cial co nd iti on or resu lts o f o perati on s. A number of civil ju ry v erd icts h ave been returned against in surers, b ro ker-d ealers, and o th er prov id ers of fi nancial servi ces i nv olving sales, refu nd or claims p ractices, alleged ag ent misco nduct, fai lu re to p rop erl y superv i se representatives, relat io nsh ips with agen ts o r p erso ns wi th wh om the in su rer d oes bu sin ess, an d oth er matters. Often th ese lawsuits h ave resu lted in the award of substan tial ju dg men ts that are disp ro po rti on ate to the actual d amages, in clu ding materi al amo un ts of pu nitive and non-econ omic co mp en sat ory d amages. In some stat es, ju ries, ju dg es, and arb itrators h av e sub stantial discretion in awarding p un itive and n on -economi c compen sato ry damag es wh ich creates t he po ten tial fo r u np red ictable material ad verse jud gments or awards in any given lawsuit o r arbitration. Arbi tration awards are sub ject to v ery limited app ellate rev iew. In ad dition , in some class actio n and other lawsu its, compan ies have made material settlement payments. Th e finan cial servi ces and in surance ind ustries in particular are also so met imes th e target of l aw en fo rcemen t and regul ato ry inv estig ati on s relating to th e n umero us laws and reg ulation s th at go vern su ch co mp anies. Some co mp anies h ave been the su bject of law en forcement o r regu latory action s or other actio ns resultin g fro m su ch in vesti gat io ns. Th e Co mp any, in the o rd in ary co urse of bu siness, i s in vo lv ed in such matters. 16 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any establi shes l iab ilities for li tigatio n and regu latory action s when it is p ro bab le th at a loss has been incu rred and the amo un t of the l oss can b e reason ably est imated. Fo r matters where a loss is believ ed to b e reason ably po ssible, b ut n ot prob able, n o liability is established. For su ch matters, th e Co mp any may p ro vid e an estimate o f th e p ossib le lo ss or rang e o f lo ss or a statement th at such an est imate can no t be made. The Co mp any reviews relev an t in fo rmation with resp ect to litigatio n an d reg ulato ry matters o n a qu art erl y an d an nu al b asis and u pd ates its established liabilities, d isclo sures an d esti mates of reaso nably po ssi ble lo sses o r rang e o f loss based on such rev iews. Certain o f the Compan y’s insurance subsidiaries, as well as certain other in surance compan ies fo r which the Co mpan y h as coinsured b lo cks o f life in surance an d ann uity p oli cies, are u nd er aud it for co mp liance with the un claimed pro perty laws of a nu mb er of states. Th e au dits are being co nd ucted on behalf o f the treasu ry dep artmen ts or un claimed p ro perty admin istrato rs in such states. The focu s of the aud its is on whether th ere hav e been unreported death s, matu rit ies, or p olicies that h av e ex ceed ed limiting ag e with resp ect to which deat h benefits or o th er payments u nder life in su ran ce or an nu ity po licies sho uld b e treated as u nclaimed p ro perty th at sh ou ld be esch eated to the state. Th e Co mp any is p resen tly un ab le to esti mate the reason ably p ossib le l oss o r range of loss th at may resu lt from th e au dits d ue to a n umber of facto rs, includ in g u ncertainty as to th e legal th eory or th eories that may g iv e rise to liab ility, th e earl y stag es of the au dits being conducted , and u ncertaint y as to whether t he Compan y or other co mpan ies are respon sib le fo r the liabilities, if any, ari sin g in co nn ection with certain co-in su red p olicies. Th e Co mp an y will con t in ue to mon itor the matter for an y d ev elo pments th at wou ld make th e l oss co nti ng en cy associ ated with th e aud its reaso nab ly estimab le. Certain o f the Co mp any’s sub sidiaries are u nd er a targ eted multi-st ate examin ation with respect to th eir claims payin g p ractices and t heir u se of the U.S. So cial Secu rity Ad ministratio n’s Death Master File or simil ar d atabases (a “Death Datab ase”) to id ent ify u nrepo rted death s in th eir life in su rance po licies, ann uity co ntracts and retained asset account s. There is no clear basis in previou sly exist in g law fo r requ iring a life insu rer to search for unreported death s in order to determine whether a b enefit is o wed , and sub stan tial legal au th ori ty ex ists to su pp ort the p ositio n that th e p rev ailin g ind ustry p ractice was lawfu l. A nu mb er o f life in surers, h owever, h ave en tered in to settlemen t o r con sent ag reemen ts with st ate insurance regu lat ors u nd er wh ich the life in surers ag reed to imp lement procedu res for perio dically comparin g their life in surance and an nu i ty co ntracts and ret ained asset accou nts against a Death Datab ase, treati ng con firmed death s as giving rise to a death b enefit u nd er their po licies, locatin g ben efi ciaries an d p aying them th e b en efit s and interest, esch eating th e b enefits and in terest to the state if the ben eficiary co uld n ot be fo un d, an d p ay ing p enalties to th e state, if req uired . It has b een pu blicly repo rted that th e life insu rers hav e p aid admin istrati ve and /o r ex amin ation fees to the in su ran ce regu lators in con nectio n with the settlemen t or con sent agreements. Th e Co mp any believ es th at insurance reg ulato rs cou ld deman d from th e Co mp any admin istrative an d/or examin ation fees relatin g to th e targeted multi-state ex aminatio n. Based o n p ub licl y rep orted pay men ts b y o th er life in su rers, th e Company do es no t b elieve su ch fees, if assessed , wo uld h ave a material effect on its finan cial statemen ts. Advance Trust & Life Escrow S ervices, LTA, as Securities In termediary of Life Partners Positio n Ho ld er Tru st v. Pro tective Lif e In suran ce Co mpa ny, Case No . 2 :1 8-CV-0 12 90 , is a pu tat iv e class action that was fi led on Au gu st 1 3, 2 01 8 in the Un ited States District Cou rt for the No rthern District of Alabama. Plain tiff alleg es that PLICO requ ired policyh olders to pay un lawful and ex cessive co st of insurance charges. Plain tiff seeks to represent al l owners o f un iv ersal li fe and v ariable u niversal life p olicies issued o r admin i stered by PLICO o r its predecessors th at prov id e th at cost of insurance rat es are to b e determined b ased o n ex pectation s o f fu tu re mort ali ty exp erience. Th e plain tiff seek s class certification , compen sato ry d amages, pre-jud gment and p ost- ju dg ment in terest, costs, and o th er un sp ecified relief. The Company is vigorou sly defen ding th is matter an d cann ot pred i ct th e o utcome o f or reaso nably estimate th e p ossib le loss or ran ge o f loss th at mig ht resu lt fro m t his litig ation . 16 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 16 . EMPLOYEE BENEFIT PLANS Qual ified Pension Plan and Nonqualified Excess Pension Pl an The Compan y spo nso rs a Qualified Pen sio n Pl an cov ering su bstan tially all of its employ ees. Ben efits are b ased o n years of service an d th e employ ee’s co mp ensatio n. Effective Janu ary 1, 20 08 , th e Compan y mad e th e follo win g chan ges to its Qualified Pensio n Plan. Th ese ch ang es have b een reflect ed in th e co mp utations wi th in th is note. •Emp lo yees h ired after Decemb er 3 1, 2 00 7 and any fo rmer employ ee h ired after th at d ate, will receiv e a cash balance ben efit. •Emp lo yees active o n Decemb er 31, 20 07 , with ag e p lus y ears o f v esting service less than 55 years will receive a fin al pay -b ased p ensio n ben efit for serv ice throu gh Decemb er 3 1, 2 00 7, p lu s a cash b alance b enefit fo r service aft er December 31 , 20 07 . •Emp lo yees active o n Decemb er 31, 20 07 , with ag e p lus y ears o f v esting service eq ualin g o r ex ceed in g 5 5 y ears, wi ll receiv e a final pay-b ased p ensio n b enefit fo r service bo th before an d after December 31, 2 00 7, with a mod est red uctio n in the formu la for benefits earned after December 31 , 2 007. •All p articipan ts termi nat in g emp loy ment on or after Decemb er o f 2 00 7 may elect to receiv e a lump sum benefit. The Company also sp on sors a Non qu alified Ex cess Pen sio n Plan , wh ich is an un fu nd ed no nq ualified plan that prov id es defin ed p ension ben efits in ex cess o f limits i mposed on th e Qu alified Pension Plan b y federal tax law. The fo llowi ng table presents th e b enefit o blig ation , fair v alu e o f plan assets, fun ded statu s, an d amounts no t yet recog nized as compo nen ts of net perio dic p ensio n costs fo r the Compan y’s defin ed b enefit pen sio n p lan and un fu nd ed excess benefit plan as o f Decemb er 3 1, 2 01 8 and 20 17 : December 3 1 , 2018 December 3 1 , 2017 Qua lified Pensio n Pla n Nonqua lified Ex cess Pension Plan Qua lified Pensio n Plan Nonqualified Ex cess Benefit Pla n (D o l l ars In Tho us a nds ) Accumula ted benefit oblig atio n, end of yea r $26 9,8 02 $46 ,29 9 $2 78 ,08 4 $50 ,14 9 Cha ng e in projected benefit o blig atio n: Pro jected b en efit ob ligatio n at begin ning of year $30 0,4 23 $54 ,59 0 $2 65 ,84 8 $47 ,80 2 Serv ice cost 1 3,1 85 1 ,41 5 12 ,01 1 1 ,35 0 Interest cost 9,8 30 1 ,43 6 9 ,84 6 1 ,48 0 Amen dments — — — — Actuarial (gain)/lo ss (1 5,6 08 ) (2 ,00 1) 26 ,53 9 7 ,86 1 Benefits p aid (1 9,7 01 ) (8 ,09 5) (13 ,82 1) (3 ,90 3) Pro jected b en efit ob ligatio n at en d o f y ear 28 8,1 29 47 ,34 5 3 00 ,42 3 54 ,59 0 Cha ng e in pl an assets: Fair value of p lan assets at beg in ning of year 26 0,9 26 — 2 01 ,84 3 — Actual retu rn on plan assets (6,0 70 ) — 29 ,40 4 — Employ er co ntribut io ns(1)1 8,8 00 8 ,09 5 43 ,50 0 3 ,90 3 Benefits p aid (1 9,7 01 ) (8 ,09 5) (13 ,82 1) (3 ,90 3) Fair value of p lan assets at end of year 25 3,9 55 — 2 60 ,92 6 — After reflecting FASB g uidance: Fun ded status (3 4,1 74 ) (47 ,34 5) (39 ,49 7) (54 ,59 0) Amounts recog nized in the ba la nce sheet: Other liabilities (3 4,1 74 ) (47 ,34 5) (39 ,49 7) (54 ,59 0) Amounts recog nized in accumulated o ther co mprehensive inco me: Net actuarial (g ain )/lo ss 1 0,3 70 9 ,02 5 2 ,85 0 13 ,52 1 Prior service co st /(cred it)— — — — To tal amo un ts recog nized in AOC I $1 0,3 70 $9 ,02 5 $2 ,85 0 $13 ,52 1 (1)Employ er co n trib u tions are shown b ased o n the calen d ar year in which contributio n s were made to each p lan . 16 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Weigh ted -av erage assumpt io ns u sed to d etermine b enefit ob ligatio ns as of Decemb er 3 1 are as fo llows: Qualified Pensio n Pla n No nqualified Excess Pensio n Pla n 2018 2 0 1 7 2 018 2 0 17 Disco un t rate 4 .21 % 3.55 % 3.9 3% 3.2 6% Rate of compen sation in crease 4.75% p rior to age 40 / 3 .75 % fo r ag e 40 and ab ov e 4.7 5% p rio r to ag e 4 0/ 3.7 5% for age 4 0 and abo ve 4 .75% prio r to ag e 4 0/ 3.7 5% for age 4 0 an d abo ve 4 .75 % prio r to ag e 40 / 3.7 5% fo r age 4 0 an d abo ve Weight ed-av erag e assumpt io ns u sed to determine t he net p eriod ic ben efit cost fo r the years en ded Decemb er 3 1, 2 01 8, 20 17 , an d 2 01 6 are as fo llows: Qua lified Pension Plan No nqualified Excess Pensio n Pla n For The Yea r Ended December 31, 2018 2 0 1 7 2 0 16 2 018 20 1 7 2 0 16 Discount rate 3.55% 4.04% 4.29% 3.25% 3.60% 3.63% Rate of compensation increase 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above Expected long-term return on plan assets 7.00% 7.00% 7.25% N /A N/A N/A The assumed d isco un t rates u sed to determin e th e b en efit ob ligati on s were b ased on an anal ysis o f fu tu re ben efi ts exp ected to be paid u nd er th e plans. The assu med d isco un t rate reflect s th e interest rate at which an amo unt that is inv ested in a po rtfo lio o f hig h-qu ality d ebt in stru ments on th e measuremen t d ate wou ld prov i de th e fu tu re cash flows n ecessary to pay ben efi ts wh en t hey co me due. To determin e an ap prop riate long-term rate of retu rn assu mp tion, the Co mp any received evalu ations o f market perfo rmance b ased on th e Compan y’s asset allo cation as prov id ed b y external co nsultan ts. Co mp on ents of the net perio dic ben efi t cost for th e years end ed December 31 , 20 18 , 2 017, an d 2 01 6 are as fo llows: Q ualified Pensio n Pla n No nqualified Excess Pensio n Pla n For The Year Ended December 3 1, 2 0 1 8 2 0 17 2 016 2 0 1 8 2017 2 016 (Do l la rs I n Tho usa nds ) Service cost—benefits earned during the period $13,185 $12,011 $12,791 $1,415 $1,350 $1,413 Interest cost on projected benefit obligation 9,830 9,846 9,751 1,436 1,480 1,353 Expected return on plan assets (17,058) (13,570) (13,780) — — — Amortization of prior service cost/(credit)— — — — — — Amortization of actuarial loss/(gain)(1)— — — 969 634 178 Preliminary net periodic benefit cost 5,957 8,287 8,762 3,820 3,464 2,944 Settlement/curtailment expense(2)(3)(4)— — (964) 1,526 — 2,135 Total net periodic benefit cost $5,957 $8,287 $7,798 $5,346 $3,464 $5,079 (1)2 0 1 8 av erag e remainin g service p erio d u sed is 9.1 7 years and for the u nfu n d ed excess benefit p lan was 7 .7 3 years fro m Janu ary 1, 2 0 1 8 to June 30, 2 0 18 and 7 .8 7 from July 1 , 2 0 1 8 to Decem b er 31, 2 0 1 8. (2)In 2016, th e Co mpany amen ded its Qualified Pension Plan to offer a lim ited-tim e op p o rtun ity o f benefit payou ts to elig ible, terminated-v ested p articipants (“lu mp su m win d o w”). The lump sum win d o w p rov id ed elig ible, termin ated-vested particip an ts with an o p tio n to elect to receive a lump sum settlem en t o f his or h er pensio n benefit in December 2 0 1 6 o r to elect receip t o f month ly pen sio n b en efits comm en cin g in December 2 0 1 6. Th is even t trig g ered settlement acco u n ting fo r the Co m pan y an d resu lted in the reco g nition o f $1 .0 millio n o f settlem en t inco me fo r the twelv e months en ded December 3 1, 2016 . (3)The Nonqualified Excess Pensio n Plan trig gered settlem en t accountin g fo r the year ended Decem ber 31 , 2 018 since th e to tal lump sum p aym en ts exceeded th e settlemen t th resho ld of service co st plu s interest co st. (4)In 2016, th e Board of Directo rs o f Pro tectiv e Life Co rpo ration appro v ed th e con v ersio n o f the accrued b en efit payable under th e Nonq u alified Ex cess Pensio n Plan as of March 3 1 , 2016 to John D. Johns, the Co m p an y's Ch airman and Chief Ex ecu tiv e Officer at th e tim e, in to a lump sum amou n t. Th e lu m p su m am o unt is allo cated to a b o ok entry that will b e treated as thou g h it were a p ay deferral acco u n t un d er th e Com p an y ’s d eferred compensatio n plan for officers. Mr. Jo hns will con tin ue to accru e benefits as though he were accruin g benefits und er the Non q u alified Excess Pensio n Plan with resp ect to this contin u ed serv ice as an emp lo yee of the Co mpany after March 31 , 2016 . Th e co n v ersio n even t req u ired the Co mpany to re-measure the No n q u alified Excess Pensio n Plan as of May 3 1, 2 0 16 and resu lted in the recog n ition o f $2 .1 million in settlemen t ex pen se durin g the twelve mo n th s ended Decem b er 31, 2 0 1 6. 16 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents For th e Quali fied Pen sio n Plan, the Co mp any d oes no t expect to amort ize an y net actuarial loss/(g ain) from o th er comprehen sive in co me in to net perio dic ben efit cost d urin g 20 19 since the net actu arial lo ss/(g ain ) sub ject t o amortization is less th an 1 0% of the greater of the smo oth value o f asset s o r th e projected benefit o blig ation . For the u nfun ded excess benefi t p lan , the Compan y ex pects to amortize app ro ximately $0 .6 milli on o f net actuarial loss from other co mp reh ensive inco me i nto n et p eri od ic ben efit co st du ring 20 19 . Estimated future ben efit p aymen ts un der th e Qu alified Pension Plan an d Nonq ualified Excess Pensio n Plan are as fo llows: Years Qua lified Pensio n Plan No nqualified Ex cess Pension Pla n (Dolla rs I n Thousands) 2 01 9 $19 ,54 4 $6 ,78 8 2 02 0 20 ,72 3 5 ,19 6 2 02 1 21 ,15 3 5 ,28 6 2 02 2 22 ,53 8 5 ,58 3 2 02 3 22 ,76 5 4 ,75 4 20 24 - 2 02 8 1 20 ,35 5 19 ,58 6 Qual ified Pension Plan Assets Allo cation of plan assets o f the Qualifi ed Pen si on Plan by categ ory as o f Decemb er 31 , 20 17 are as follo ws: Asset Ca teg ory Ta rg et Allo ca tion fo r 2 0 1 7 2017 (1 ) Cash an d cash eq uivalents 2 % 1 5% Equi ty securities 60 5 5 Fixed in come 38 3 0 Total 1 00 % 10 0% (1) Du rin g 2 0 17, the Co mpany made a $43.5 million con tributio n to the defin ed b enefit pen sion p lan an d allo cated the contrib ution to cash and cash eq u iv alen ts pending furth er an aly sis of its inv estment strategy. The p lan ’s in v estment p olicy was amended to allow for an actual asset allocation outsid e of the cu rrent target allo cation until the inv estmen t strategy an aly sis was co mplete. Prio r to th e amend ment fo r the $4 3.5 mi llio n con tri bu tion made in 20 17 , the defined b enefit p ension plan had a t arg et asset allo cation o f 6 0% do mestic equ ities, 38 % fixed in come, an d 2 % cash. Du ring 2 01 8, th e Co mp an y completed an asset an d liabilit y stu dy o f its defined ben efit pen si on p lan and th e asso ciated in vestmen t po rtfol io . As a resu lt, th e Plan’s in vestmen t p olicy statemen t an d inv estment po rtfolio were up dated. Th ese ch ang es are reflected in the d isclo sures below. Allo cation of plan assets o f the d efi ned b enefit pen si on plan by categ ory, as o f December 31 , 20 18 are as follo ws: Asset Ca teg ory Ta rg et Allo ca tion fo r 2 0 1 8 2 0 1 8 Retu rn -Seeki ng 60 % 6 1% Li ab ility -Hedgi ng Fixed In co me 40 3 9 Total 1 00 % 10 0% The Compan y’s targ et asset allocatio n is d esig ned to prov id e an acceptabl e level of risk and balance between return-seekin g assets and liability- hedg ing fix ed in come assets. The weigh ting towards return -seek in g securiti es is d esign ed to h elp p ro vide for an increased level o f asset g rowth potential and liqu id ity. The Compan y’s inv est ment po l icy in cludes v ariou s gu id elines an d p rocedu res d esign ed to en sure assets are inv ested in a manner necessary t o meet ex pected fu tu re benefi ts earn ed b y participants. The in vestmen t gu id elines con sider a b ro ad ran ge of econ omic con dition s. Cen tral to the po licy are target all ocation rang es (sho wn ab ove) by majo r asset catego ries. Th e o bjectives of t he targ et allocatio ns are to mai ntain i nv estment portfolio s th at d iv ersify risk th ro ug h pru dent asset allo cati on p arameters, ach iev e asset ret urns that meet or ex ceed th e pl an s’ actu arial assu mp tion s, and ach iev e asset returns that are co mp etitiv e with like institu tions emp l oy in g simil ar investment strateg ies. The Qu alified Pen sio n Plan’s return-seekin g assets are in a Ru ssel l 30 00 i nd ex fu nd t hat i nv ests in a do mestic equ ity in dex collecti ve trust managed by No rth ern Tru st Corpo ratio n, a Spartan 50 0 ind ex fund manag ed b y Fidelity, an d a Co llective All C ou ntry Worl d ex -US in dex fu nd man aged by No rth ern Tru st . The Plan’s cash is inv est ed in a collect iv e trust man aged b y 16 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents No rthern Tru st Corpo ratio n. The Plan ’s liab ility-h ed gin g fix ed in co me assets are inv ested in a g ro up d epo sit ad mi nistratio n an nu ity contract wi th PLICO and a Lo ng Go vernment Credit Bon d ind ex fun d man aged b y Black Ro ck. Th e No rthern Trust Col lectiv e All Co un try Wo rld ex-US ind ex fu nd and the BlackRock Lon g Go vernment Credit Bo nd in dex fu nd were add ed to the Plan’s inv estment po rtfo lio du ring 20 18 . Pl an assets of th e Qualified Pensio n Plan by catego ry as of December 31 , 2018 an d Decemb er 3 1, 20 17, are as follo ws: As of December 31, 2018 2017 (Dollars In Thousands) Asset Ca teg ory Cash an d cash eq uivalents $1,22 5 $39 ,89 7 Equi ty securities: Co llective Russell 30 00 equ ity ind ex fun d 70,59 9 74 ,51 1 Fid elity Sp artan 5 00 in dex fu nd 46,30 0 71 ,63 2 No rthern Trust ACWI ex-US Fun d 41,92 4 — Li ab ility -h edg in g fix ed inco me: Grou p Depo si t Admin i stration Ann uity Con tract 78,70 7 74 ,88 6 Black Rock Lon g Gov ern men t Credit Bon d Index Fun d 15,20 0 — To tal in vestment s 253,95 5 2 60 ,92 6 Emp loy er con tri bu tion receiv able — — To tal $253,95 5 $2 60 ,92 6 The valuatio n metho do lo gies used to determine t he fair values reflect market p arti cipan t assu mp tio ns and are based o n the app lication o f the fair value h ierarchy that p rioritizes ob servable mark et inp uts ov er u no bserv ab l e in pu ts. Th e fo llo wing is a descrip tion o f th e valuation metho do lo gies u sed fo r assets measu red at fair value. The Qualified Pension Plan ’s gro up dep osit admin istration ann uity cont ract with PLICO is recorded at co ntract value, wh ich the Co mp any b elieves app ro ximates fair val ue. Co ntract v alu e represents co ntrib utio ns mad e u nd er the co ntract, p lu s in terest at the co ntract rat e, l ess fu nd s u sed to p urchase an nu ities. For th e remai ning in vestmen ts, the Compan y determin es th e fair v alu es based o n q uo ted mark et p rices. Wh ile th e Co mp any believes its valuatio n metho d is app ro priate and co nsistent wit h other market p arti cip an ts, th e u se of differen t meth od olog ies o r assu mp tio ns to d etermi ne fair v alu e co uld resu lt in a differen t fair value measu rement at the rep ort in g d ate. The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the Qualified Pen sion Pl an ’s assets at fair value as of December 31 , 2018 : Level 1 Level 2 Level 3 Total (D ollars In Thous ands) Cash $1 ,22 5 $— $— $1 ,22 5 Equi ty securities 1 58 ,82 3 — — 1 58 ,82 3 Fixed in come 15 ,20 0 — — 15 ,20 0 Gro up dep osit ad ministratio n an nu ity co ntract — — 78 ,70 7 78 ,70 7 To tal in vestment s $1 75 ,24 8 $— $78 ,70 7 $2 53 ,95 5 The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the Qualified Pen sion Pl an ’s assets at fair value as of December 31 , 2017 : Level 1 Level 2 Level 3 Total (Do lla rs In Tho usands) Cash $39 ,89 7 $— $— $39 ,89 7 Equi ty securities 1 46 ,14 3 — — 1 46 ,14 3 Gro up dep osit ad ministratio n an nu ity co ntract — — 74 ,88 6 74 ,88 6 To tal in vestment s $1 86 ,04 0 $— $74 ,88 6 $2 60 ,92 6 For t he year end ed December 31 , 20 18 an d Decemb er 3 1, 2017, there were n o tran sfers b etween level s. 16 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowi ng tabl e presents a reco nciliation of the beginn i ng and en ding b alan ces for the fair value measu remen ts for the year end ed Decemb er 31 , 20 18 an d for the year en ded December 31 , 2 017, for which the Compan y h as used si gn ifican t u no bservab le inp uts (Level 3 ): December 31, 2 0 18 December 31 , 2 017 (Dollars In Thousands) Balance, b eg inn in g o f y ear $7 4,8 86 $71 ,22 6 Interest i ncome 3,8 21 3 ,66 0 Transfers from collectiv e sho rt-term i nv estments fu nd — — Transfers to collectiv e sho rt-term i nv estments fu nd — — Balance, end of year $7 8,7 07 $74 ,88 6 The fo llowing table represents th e Plan ’s Level 3 fin ancial in stru men t, th e v alu ation techn iq ue used , an d the sig nificant unob serv able inp ut an d the ranges o f v alues fo r that in pu t as o f Decemb er 3 1, 20 18: Instrument Fair Value Principa l Va lua tion Technique Significa nt Uno bserv a ble Inputs Rang e o f Significant Input Va lues (D ollars In Thous ands) Gro up dep osit ad ministratio n an nu ity co ntract $7 8,7 07 Co ntract Value Co ntract Rate 5 .06 % - 5 .14 % In vestmen t securities are ex po sed t o v arious risks, su ch as interest rate, mark et, and cred it risks. Due to the level o f risk associated with cert ain in vestmen t securities and the lev el of u ncertai nty related to ch ang es in th e v alu e o f in vestmen t securities, i t is at least reaso nably p ossib le th at ch ang es in risks in th e near term cou ld materiall y affect the amo unt s rep orted . Qual ified Pension Plan Funding Po licy The Co mp any ’s fun ding p olicy is to con tribu te amou nts to the Qu alified Pen sion Plan su ffi cient to meet the minimu m fu nd in g req uirements o f the Emp lo yee Retiremen t Inco me Security Act (“ERISA”) plu s such ad dition al amo un t s as the Compan y may d etermine to be app ro pri ate from ti me to time. Co ntrib utio ns are in ten ded to prov id e no t o nly for ben efits attribu ted to serv ice to d ate, bu t also for t ho se exp ected to b e earned in th e fu tu re. Un der the Pensio n Protection Act o f 20 06 (“PPA”), a p lan co uld be sub ject to cert ain ben efit restrictio ns if th e p lan ’s ad ju st ed fund in g target att ainment p ercentage (“AFTAP”) drop s b elo w 8 0%. Therefo re, the Comp any may make ad ditio nal con tribution s in fu tu re perio ds to main tain an AFTAP o f at least 80 %. In g en eral, th e AFTAP is a measu re o f h ow well a plan i s fu nd ed an d is ob tained by dividin g a plan’s assets b y it s fu nd ing liabilities. AFTAP is based o n particip ant d ata, plan prov isio ns, p lan meth od s an d assu mp tion s, fu nd in g cred it balan ces, an d plan assets as o f th e p lan v alu ation dat e. So me of th e assumptio ns an d meth od s used to d etermine a pl an ’s AFTAP may be differen t fro m the assu mp tion s and metho ds u sed t o measu re a plan’s fun ded status o n a GAAP b asi s. In Ju ly of 2 01 2, th e M ov in g Ahead fo r Prog ress in th e 21 st Century Act (“M AP-21 ”), wh ich i ncl ud es p en sion fun ding stabilization p ro vision s, was sig ned into law. These pro visio ns establish an in terest rate co rrid or wh ich is design ed to stabil ize the segment rates used to d etermine fu nd in g req uirements from th e effects o f interest rate vol atility. In Au gu st of 2014, t he Hig hway and Tran spo rtat io n Fun ding Act of 20 14 (“HATFA”) was sig ned in to l aw. HAFTA ex ten ds the fun ding relief p ro vided by MAP-21 by delay ing the i nterest rat e co rrid or exp an sion . The fu nd in g stabil izatio n prov i sio ns o f MAP-21 and HATFA red uced the Compan y’s mini mu m req uired Qualified Pen sion Pl an con tri bu tion s. Since the fun ding st abi lization prov isio ns o f MAP-2 1 and HATFA do no t ap ply fo r Pensio n Ben efit Gu aran ty Corpo ratio n (“PBGC”) reporting purpo ses, the Compan y may also mak e add iti on al co ntribu tio ns in fu t ure perio ds to av oid certain PBGC repo rtin g trig gers. Du ring the twelv e mo nths end ed Decemb er 31 , 20 18 , t he Co mpan y con trib uted $18 .8 million to th e Qualified Pen si on Plan fo r th e 20 17 p lan year. The Co mp an y has no t y et det ermin ed what amount it will fun d du ring 2 01 9, b ut may co ntribu t e an amou nt that wou ld el imin ate the PBGC variab le-rate premium p ayab le in 2 01 9. Th e Co mp any cu rrently estimates that amo un t will be between $1 0 millio n and $2 0 mill io n. Other Postretirement Benefits In add itio n to p en sion ben efits, th e Compan y prov id es limited h ealthcare ben efits to elig ib le retired empl oy ees un til age 65. Th is p ostretiremen t benefit is p ro vided b y an un fu nd ed plan. As of Decemb er 3 1, 2 01 8 an d December 31 , 20 17 , the accu mu lat ed p ostretirement b enefit o blig ation an d projected benefit ob l ig ation were immat erial. For a closed grou p of retirees over age 65 , the Compan y p ro vides a prescriptio n drug ben efit. As of Decemb er 3 1, 2 01 8 and December 31 , 201 7, th e Co mp any ’s li ab i lity related to th is b enefit was immat eri al. 17 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any also offers life insurance b enefits for retirees fro m $10 ,00 0 up to a max imum o f $75,000 wh ich are prov id ed throu gh th e p ayment o f premiums u nd er a grou p life insurance p oli cy. Th is p lan is partially fun ded at a max imum of $50 ,00 0 face amou nt o f in su ran ce. The ben efit ob ligation associated with t hese ben efits is as follows: As of December 31, Postretirement Life Insurance Pla n 2018 2017 (Dollars In Thousands) Cha ng e in Benefit Oblig ation Benefit ob ligatio n, b eginn in g o f y ear $10,97 8 $9 ,63 4 Service co st 15 3 12 2 In terest co st 36 6 35 4 Actu ari al (gain)/loss (1,04 5) 1 ,34 7 Benefit s paid (44 0) (47 9) Benefit ob ligatio n, en d of year $10,01 2 $10 ,97 8 For t he po stretiremen t life in su rance p lan , th e Co mp any ’s discou nt rate assu mp tion used t o d etermine the ben efit o bligatio n and t he net perio dic benefit cost as o f December 31 , 20 18 , is 4 .38 % and 3.7 4%, respectiv ely . The Company’s exp ected lo ng -term rate o f retu rn assumpti on used to d etermine the net perio dic ben efit cost as o f December 31 , 2018 , is 2.7 5%. To determine an ap propriate long-term rate o f retu rn assu mp tion , th e Co mp any utilized 25 y ear av erage an d ann ualized ret urn results on th e Barclay’s sho rt treasury ind ex. In vestmen ts o f the Co mpan y’s g ro up life insurance plan are h eld by Wells Fargo Ban k, N.A. an d are in vested in a money market fu nd . In vestmen ts are stated at fair value and are b ased o n th e ap pli catio n o f t he fair value h ierarchy th at pri oritizes o bservab le market inpu ts o ver un ob serv able in pu ts. The mon ey market fu nd s are val ued b ased on histo rical co st, wh ich rep resen ts fair v alu e, at y ear end . Th is meth od of v alu ati on may prod uce a fair v alu e calcu latio n t hat may no t be reflectiv e o f future fair val ues. Fu rthermo re, while th e Co mp any b elieves its valuatio n metho d is ap pro priate an d con sisten t with oth er mark et participants, th e u se o f different meth od olog ies or assumpti on s to determin e fair valu e co uld result in a differen t fair v alu e measuremen t at th e repo rting date. The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the l ife in surance plan’s assets at fai r v alue as o f Decemb er 3 1, 2 01 8: Lev el 1 Level 2 Lev el 3 Total (Do l l a rs I n Tho usa nds ) M on ey market fu nd $4,8 54 $— $— $4 ,85 4 The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the l ife in surance plan’s assets at fai r v alue as o f Decemb er 3 1, 2 01 7: Lev el 1 Level 2 Lev el 3 Total (Dollars In Tho usa nds) M on ey market fu nd $5,1 04 $— $— $5 ,10 4 For t he year end ed December 31 , 20 18 an d Decemb er 3 1, 2017, there were n o tran sfers b etween level s. In vestmen ts are ex po sed to v arious risks, su ch as interest rate and credit risks. Du e to th e lev el o f risk asso ciated with investmen ts an d the level o f un certainty related to credit risks, it is at least reason ably p ossib l e that chan ges in risk i n t he near term cou ld materially affect th e amou nts repo rted. 17 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 40 1(k) Pla n The Compan y sp onso rs a tax-q ualified 40 1(k) Plan (“40 1 (k ) Plan ”) which co vers su bstan tially all employ ees. Emp lo yee co ntribu tio ns are mad e on a b efo re-tax basis as p rovid ed by Sectio n 4 01(k) of th e In ternal Revenu e Cod e or as after-tax “Ro th” con tribution s. Empl oy ees may co ntrib ute up to 25 % o f th eir elig ib le an nu al compensation to th e 40 1(k ) Plan, limi ted to a max imum ann ual co ntribu tio n amou nt as set p eri od ically by th e In ternal Rev en ue Service ($18 ,50 0 for 20 18 ). Th e Plan also p ro vides a “catch -u p” co ntribu tion pro vision wh ich permits eligi ble particip ant s (ag e 50 o r over at the en d of t he calen dar year), to make ad ditional con trib utions t hat exceed th e reg ular an nu al con trib utio n limit s u p to a limit perio dically set by the Intern al Rev enu e Service ($6,0 00 fo r 2 01 8). Th e Company match es the sum of all emplo yee co ntribu tions do llar fo r do llar up to a maximu m of 4% of an emp lo yee’s pay p er year per person . All matching co ntribut io ns vest immed iat ely. For the y ear end ed December 3 1, 2 01 8 and Decemb er 3 1, 20 17 , th e Compan y reco rded an ex pen se o f $9 .2 mil lion and $8.2 million associated wit h 4 01 (k ) Plan match in g co ntrib utio ns, resp ectiv ely . The Company also has a sup plemen tal match in g co ntribu tio n program, wh i ch is a n on qu alified plan that prov id es supplemen tal mat ch ing co ntrib utio ns in ex cess o f the l imits imposed on qu ali fied d efi ned co ntrib utio n p lan s by fed eral tax law. Th e ex pen se reco rd ed b y the Compan y for t his employ ee benefi t was $1 .3 millio n, $1 .1 mill io n, and $0 .6 millio n, respectively, in 2 01 8, 2 01 7, an d 2 01 6. 17 . ACCUMULATED OTHER COMPREHENSIVE INCOME (L OSS) The follo win g tables su mmarize th e ch ang es in the accumulated balances for each compo nen t o f AOCI as o f December 3 1, 2 01 8, Decemb er 31 , 20 17 , an d Decemb er 3 1, 20 16 . Cha ng es in Accumula ted Other Comprehensiv e Income (Loss) by Compo nent Unrea lized Gains and Losses on Investments(2) Accumula ted G a in and Loss on Deriv a tiv es Minimum Pension Benefits Liability Adjustment Tota l Accumula ted O ther Comprehensiv e Income (Loss) (Dollars In Thousands, Net of Ta x ) Balance, December 3 1, 20 15 $(1,2 47 ,06 5) $— $5,93 1 $(1,2 41 ,13 4) Other co mp reh ensiv e inco me (lo ss) before reclassificatio ns 6 02 ,21 1 68 8 (5,65 9) 5 97 ,24 0 Other co mp reh ensiv e inco me (lo ss) relating to other-than - temp orary impaired in vestmen ts for which a portion has b een reco gn ized in earnings (2 ,00 8) — — (2 ,00 8) Amo un t s recl assified fro m accumulated o t her comprehensiv e in come (loss)(1 )(9 ,46 0) 3 9 80 0 (8 ,62 1) Balance, December 3 1, 20 16 $(6 56 ,32 2) $72 7 $1,07 2 $(6 54 ,52 3) Other co mp reh ensiv e inco me (lo ss) before reclassificatio ns 7 07 ,29 8 (56 3) (15,72 6) 6 91 ,00 9 Other co mp reh ensiv e inco me (lo ss) relating to other-than - temp orary impaired in vestmen ts for which a portion has b een reco gn ized in earnings 39 1 — — 39 1 Amo un t s recl assified fro m accumulated o t her comprehensiv e in come (loss)(1 )64 2 45 1 50 1 1 ,59 4 Cu mu lat iv e effect adjustmen ts (26 ,13 5) 13 2 22 8 (25 ,77 5) Balance, December 3 1, 20 17 $25 ,87 4 $74 7 $(13,92 5) $12 ,69 6 Other co mp reh ensiv e inco me (lo ss) before reclassificatio ns (1,4 20 ,49 9) (1 ,88 4) (3,54 6) (1,4 25 ,92 9) Other co mp reh ensiv e inco me (lo ss) relating to other-than - temp orary impaired in vestmen ts for which a portion has b een reco gn ized in earnings (20 ,75 1) — — (20 ,75 1) Amo un t s recl assified fro m accumulated o t her comprehensiv e in come (loss)(1 )15 ,65 1 1 ,13 0 1,98 9 18 ,77 0 Cu mu lat iv e effect adjustmen ts (10 ,55 2) — — (10 ,55 2) Balance, December 3 1, 20 18 $(1,4 10 ,27 7) $(7) $(15,48 2) $(1,4 25 ,76 6) (1)See Reclassification table b elow for d etails. (2)As of Decemb er 31, 2 015, 2 016, 2 0 1 7 an d 2 018, n et unrealized losses reported in AOCI were o ffset by $623.0 millio n , $4 2 4 .1 million, $(6.3) millio n and $6 13.4 millio n , respectively, d ue to the imp act tho se net unrealized losses would h av e h ad o n certain of th e Comp any ’s insu rance assets an d liab ilities if the net unrealized losses had b een reco g n ized in net income. 17 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fol lo win g tabl es summarize the reclassification s amo un ts o ut of AOCI for th e y ears en ded December 3 1, 2 01 8, 2 01 7, and 20 16. G ains/(losses) in net inco me: Affected Line Item in the Conso lidated Sta tements of Income Fo r The Yea r Ended December 3 1 , 2 018 2017 2 016 (D o l l a rs In Tho us a nds ) Deriv ativ e instruments Benefits an d settlement expenses, net of reinsu rance ceded(1) $(1,43 1 ) $(694) $(60) Tax (exp en se) benefit 30 1 243 21 $(1,13 0 ) $(451) $(39) Un realized g ain s and losses o n av ailab le- for-sale securities Realized in v estment g ain s (lo sses): All oth er investm en ts $9,91 2 $1 0,611 $3 2 ,3 02 Net im p airment lo sses reco g nized in earning s (29,72 4 ) (1 1,742) (1 7 ,7 48) Tax (exp en se) or ben efit 4,16 1 489 (5 ,0 94) $(15,65 1 ) $(642) $9 ,4 60 Pen sion b en efits liability ad justm en t Oth er operating ex p en ses: Amortizatio n of n et actuarial g ain /(loss) $(2,51 8 ) $(634) $(1 ,2 31) Tax (exp en se) or ben efit 52 9 133 4 31 $(1,98 9 ) $(501) $(8 00) (1) See Note 7, Deriva tive Financial Instrumen ts fo r additio n al info rmation 18 . INCOME TAXES The Compan y’s effective inco me tax rate rel ated to co ntin uing operatio ns varied from th e maximu m federal i ncome tax rate as fo llows: For The Yea r Ended December 31, 2 0 1 8 2017 2 0 16 Statu to ry fed eral in come tax rate ap plied to pre-tax income 21 .0 % 35.0 % 35 .0 % State inco me tax es 4 .9 0.6 0 .8 In vestmen t inco me n ot sub ject to tax (2 .9) (5.0) (2 .7) Prior perio d adjustments (2 .8) — — Fed eral Tax l aw ch an ges — (183.3) — Oth er 0 .9 (1.6) 0 .7 21 .1 % (154.3)% 33 .8 % The an nu al prov isio n fo r fed eral income tax in t hese fi nancial st atemen ts differs fro m th e an nu al amou nts of inco me tax exp ense rep orted i n th e Co mp any ’s i ncome t ax retu rn s. Certain sign ifican t rev enues and exp enses are approp riately repo rted in differen t years with resp ect to th e fin ancial statements an d the tax retu rn s. 17 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The compo nen ts o f th e Co mp any’s inco me t ax are as follo ws: Fo r The Yea r Ended December 3 1 , 20 1 8 2017 2016 (D o l l ars In Tho us a nds ) Current income tax expense: Federal $87 ,27 6 $21,85 3 $(50 ,63 8) State 8 ,28 5 4,39 9 3 ,91 9 To tal curren t $95 ,56 1 $26,25 2 $(46 ,71 9) Deferred i ncome tax expense: Federal $(30 ,62 9) $(693,86 0) $2 40 ,12 7 State 15 ,72 5 (3,86 7) 7 ,56 0 To tal deferred $(14 ,90 4) $(697,72 7) $2 47 ,68 7 The compo nen ts o f th e Co mp any’s n et d eferred in co me tax liab ility are as fo llows: As of December 31, 2018 2017 (Dollars In Thousands) Deferred i ncome tax assets: Lo ss an d cred i t carryfo rward s $46,23 6 $2 09 ,40 1 Deferred compen sation 126,39 8 1 38 ,94 5 Deferred po licy acq uisition costs 116,04 4 23 ,87 6 Premiu m o n corp orate deb t 46,15 4 57 ,40 2 Net u nrealized loss on in vestmen ts 374,90 5 — Other 25,69 1 28 ,17 9 Valuatio n allo wan ce (5,07 9) (3 ,95 1) 730,34 9 4 53 ,85 2 Deferred i ncome tax lia bilities: Premiu m receivab les an d p olicy liabilit ies 408,50 2 5 73 ,46 9 VOBA an d o th er intang ib les 478,52 6 4 33 ,32 1 Inv est ed asset s (o th er than un realized g ain s (lo sses))682,63 7 6 72 ,54 9 Net u nrealized g ain s on in vestmen ts — 6 ,92 0 1 ,569,66 5 1,6 86 ,25 9 Net deferred inco me tax liabilit y $(839,31 6) $(1,2 32 ,40 7) The deferred tax assets rep orted abo ve inclu de certai n deferred tax assets relat ed to no nq ualifi ed deferred co mp en sat io n and oth er emp lo yee b en efit liabilities t hat were assumed b y AXA and th ey were n ot acqu ired by the Company in con nectio n wi th th e acq uisi tion of MONY. The fu ture tax d edu ction s stemming from these liabilit ies will b e cl aimed b y the Company on MONY’s tax return s in its p ost-acq uisition perio ds. Th ese d eferred tax assets hav e b een estimated as of the M ONY Acqu isitio n d ate (an d th rough the December 31 , 2 01 8 rep ort in g d ate) b ased o n all availab le i nformatio n. Howev er, it is po ssible th at t hese est imates may be adjusted in fu tu re rep ortin g p eriod s based on actuarial chan ges t o t he projected fu tu re p aymen ts associated with these liab ilities. An y such ad ju st ments wi ll be reco gn ized by th e Co mp any as an adjustment to in come tax expense d uring th e perio d i n which they are realized . On December 2 2, 20 17 , the Presiden t of the Un ited States sign ed into l aw th e Tax Reform Act. The legislation sign ifican tly chan ges U.S. tax law b y, amon g o th er th in gs, lowerin g the co rpo rat e inco me tax rate. The Tax Reform Act permanen tly redu ces the U.S. corpo rate inco me tax rat e fro m a maximu m o f 35 % to a fl at 21 % rate, effective Jan uary 1, 2 01 8. As a resu lt of the red uctio n in th e U.S. corporate i ncome tax rate from 3 5% to 2 1% an d ch ang es t o tax law rel ated to th e ded uctib ility of cert ain deferred tax asset s un der th e Tax Reform Act, we revalued ou r en ding net deferred t ax liabil ities at December 31 , 2017 , an d recog nized a prov i sio nal $79 7.6 mi llio n tax ben efit in o ur co nso lidated statemen t of income for the y ear en ded December 3 1, 20 17 . As a result of the prio r perio d adj ustmen t to d eferred tax liabilities, as discu ssed in No te 1 , Basis o f Present atio n, the Compan y recorded an add itio nal $1 0.7 millio n for t he year end ed December 31 , 20 18 . 17 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Also o n December 2 2, 20 17 , th e SEC staff issued Staff Acco un ting Bu lletin No. 118 (“SAB 1 18”) to add ress the app lication of GAAP i n situ ation s wh en a reg istrant d oes no t have th e necessary in formatio n av ailable, prepared, or analyzed (in clu ding comput ati on s) in reason able d etail to complete th e acco un ting fo r cert ain inco me tax effects o f the Tax Refo rm Act. The Company recog nized the prov isional tax impact s b ased on reaso nab le estimates made by th e Compan y as to the effects o f tax reform on deferred assets du e to the ap plicatio n and in terpretation of Secti on 16 2(m) an d includ ed th ose amou nts in its con so lidated fin anci al statemen t s fo r th e year en ded December 31 , 20 17 . The accou nti ng was co mp leted b y Decemb er 2 2, 2 01 8 an d there were n o material ad justmen ts to the p ro vision al tax b en efit . In management’s ju dg men t, t he gross deferred in come tax asset as of Decemb er 3 1, 2 018 will more likely than n ot be fully realized. Th e Co mp any has reco gn i zed a val uat io n al lo wan ce of $6 .4 million an d $5.0 millio n as o f December 3 1, 2 01 8 and December 31 , 2 01 7, resp ectively, relat ed to state-based fu tu re ded uct ib le tempo rary differen ces that it h as determined are more li kel y th an no t to exp ire u nu til ized. Th is resultin g un fav orable ch ange o f $1.4 mi llio n, b efo re federal in come taxes, in creased stat e inco me tax exp ense in 2 01 8 b y the same amou nt. A t Decemb er 3 1, 201 8, the Co mp any has no n-life net o perati ng lo ss carryforwards for fed eral inco me tax p urposes of $1 35 .4 milli on , whi ch are av ailable to offset future no n-life grou p federal taxab le inco me (an d li fe g ro up tax able in come with limitation s) an d b egin to ex pire in 20 36 . In add iti on , in clu ded i n th e d eferred income tax assets ab ov e are app ro ximately $1 9.7 mi llio n in state n et o perating lo ss carryfo rward s at trib utable to cert ain ju risdict io ns, wh ich are available to offset future tax in th e resp ective state j urisd i cti on s, exp irin g b etween 2 01 9 an d 2 03 8. As of December 3 1, 20 18 and December 3 1, 20 17 , some o f the Compan y’s fix ed maturi ties were rep orted at an un realized lo ss, altho ug h the net amou nt is an un realized g ain at December 3 1, 2 01 8. If the Compan y were to realize a tax -b asis n et capital loss for a year, th en su ch lo ss co uld n ot be dedu cted against that year’s o th er taxab le inco me. Howev er, such a loss cou ld b e carried back and fo rward ag ain st any pri or year or future y ear tax-basis n et cap ital gains. Therefo re, th e Compan y has relied u po n a prud ent an d feasible t ax -plann in g strateg y reg ard in g its fixed maturi ties that were rep orted at an un realized lo ss. The Company has th e abil ity and the in ten t to eith er ho ld such fix ed mat urities t o mat urity, thereby avoi ding a real ized loss, or to g enerate an offsettin g realized gain from u nrealized g ain fixed matu rities if such u nrealized loss fixed matu rities are sold at a lo ss pri or to mat urity. A recon cil iat io n o f the b eg i nn in g and end in g amou nt of un reco gn ized tax b enefits is as fo llows: As of December 31, 2 018 2017 2016 (Dollars In Thousands) Balance, b eg inn in g o f p eriod $1 1,3 53 $9,85 6 $13 ,13 8 Add itio ns fo r tax p ositio ns o f the cu rrent year — 1,85 7 2 ,12 2 Add itio ns fo r tax p ositio ns o f p rior years — 7 0 1 ,31 8 Reducti on s of tax po sition s of prior years: Ch an ges in ju dg ment (4,2 19 ) (43 0) (97 5) Settlements du ring t he perio d — — (5 ,74 7) Lap ses o f app l icable st atute of limitation s — — — Balance, end of perio d $7,1 34 $11,35 3 $9 ,85 6 In cluded in th e end o f p eri od b alance abo ve, As o f December 31 , 20 18 , th ere were no unreco gn ized tax benefits for which the ultimate ded uct ib ility is certain bu t for which t here is un certain ty abo ut th e timing o f such d edu ction s. As of December 31 , 2 01 7 an d 2 01 6, t here were ap prox imately $0 .7 milli on , an d $0.7 million of such un recog nized tax b enefit s. Oth er t han interest and pen alties, the d isall owance of t he sh orter ded uct ib ility p eriod wou ld no t affect th e an nu al effectiv e in come tax rate bu t wo uld accel erate to an earlier p eri od th e pay ment o f cash to the taxing autho rity. The total amou nt of u nreco gn i zed tax benefits, if reco gni zed , th at wou ld affect the effective inco me tax rate is ap prox imately $7.1 million , $10.7 million , and $9.2 mi llio n fo r the years en ded Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively. An y accru ed in terest related to th e u nrecog nized tax b enefits and o th er accru ed in come taxes h ave been includ ed in in come tax exp ense. Th ese amou nts were a $0.0 4 millio n detrimen t, a $2.4 milli on b enefit, an d a $3.1 millio n b enefit fo r the y ears end ed Decemb er 31 , 2 01 8, 20 17 , and 20 16 , resp ecti vel y. Th e Compan y has app rox imately $0 .3 mil lion , $(1.1 ) million, and $2 .8 million o f accrued interest associated with un reco gn ized tax b enefits as of Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively (before tak in g into co nsideration t he related in come tax b enefit th at is asso ciated with such an exp ense). In Ju ne 20 12 , the IRS prop osed favorab l e and u nfavo rab le adj ustmen ts t o th e Compan y’s 20 03 through 20 07 repo rted tax ab le in comes. The Co mp any pro tested certain un fav orable adjustmen t s and sou gh t reso lu tion at the IRS’ App eals Division . In Octob er 20 15 , Ap peals accept ed the Co mp any ’s earlier prop osed settlement offer. In Septemb er 2 01 5, the IRS p roposed fav orable and un fav orable ad justmen ts to th e Comp any ’s 2 00 8 throu gh 2 01 1 repo rted taxab le in come. Th e Compan y agreed to these adjustmen ts. In April 20 17 , a ro utin e review by Co ng ress’ Joi nt Co mmittee on Tax ation was fin alized without ch ang e an d the Co mp an y receiv ed an ap prox imate $6.2 mi llio n n et refu nd in th e fo urth qu arter o f 2 01 7. The resulting net ad justmen t to the Compan y’s current in co me taxes for th e y ears 2 00 3 throug h 20 11 did n ot materially affect th e Co mp any or its effectiv e tax rate. 17 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents In Jul y 20 16 , th e IR S prop osed fav orable an d un fav orable ad ju stmen ts to th e Co mp any ’s 20 12 an d 20 13 rep orted taxab le i ncome. The Company ag reed to th ese adjustmen ts. The resulting settlement paid in Septemb er 2016 did not materially imp act the Compan y o r its effectiv e tax rate. These ag reemen ts wit h the IRS are th e primary cause for the redu ction s o f u nrecog nized t ax b en efit s sh own in th e abo ve ch art . The Co mp any believes th at in the n ext 1 2 mo nths, n on e of th e un recognized tax b enefits will b e red uced. In g eneral, the Compan y is n o lon ger sub ject to in come tax ex aminatio ns b y tax in g autho rit ies fo r tax years that b egan b efo re 20 14 . Du e t o th e aforemention ed IRS ad ju stments to the Compan y’s pre-2 01 4 taxable in come, t he Co mp any has amen ded certain of its 20 03 th ro ug h 2 01 3 state i ncome tax retu rn s. Su ch amen dment s wil l cause su ch years to remain o pen , pend ing th e stat es’ acceptances o f the return s. 19 . SUPPLEMENTAL CASH FLOW INFORMATION The fol lo win g tabl e sets forth su pp lemen t al cash flow in fo rmation: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Cash pa id / (received) during the yea r: Interest on deb t $26 0,2 41 $253,70 8 $2 34 ,92 8 Inco me t ax es (2 6,8 56 ) (14,16 3) 1 12 ,88 6 Total cash in terest p aid o n d ebt for t he y ear en ded December 31 , 20 18 , was $2 60 .2 mil lion . Of th is amou nt, $5 6.7 millio n related to interest o n d ebt , $2 9.3 million related t o interest o n sub ordinated d ebt and su bo rd inated fun ding ob l ig ation s, $9 .3 milli on on repu rchase agreements, an d $16 4.9 million rel ated to n on -recou rse fundin g o blig ation s and other ob ligation s. 20 . RELATED PART Y TRANSACTIONS Certain corpo ratio ns with wh ich the Co mp any ’s direct ors were affiliated p aid u s premiums an d po licy fees o r other amou nts fo r v ariou s ty pes of in surance and in vestmen t prod uct s, in terest on bond s we o wn an d commissions o n secu rities u nd erwritin g in wh ich ou r affiliates particip ated. Such amo un ts to taled $6 .8 mill io n, $6.8 mill io n, and $7 .2 mil lion fo r the y ears ended Decemb er 3 1, 20 18 , 20 17 , an d 2 01 6, respectiv ely. Th e Co mp any p aid commission s, in terest on deb t an d in vestmen t prod uct s, and fees to these same corp oration s totaling $2 .3 millio n, $2.4 million , an d $2.7 million for th e years en ded Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively. Prio r t o th e Merger, th e Co mp any h ad n o related p arty tran saction s with Dai-i ch i Life. During th e p eriod s end in g December 31 , 20 18 an d December 31 , 2 01 7, th e Compan y paid a manag ement fee to Dai-ich i Life of $1 2.2 million an d $10 .9 million for certain services p ro vided to the Co mp any, resp ecti vel y. The Compan y p aid $140.0 million and $14 3.8 million of dividen ds d uri ng th e y ear en ded Decemb er 3 1, 2 01 8 an d December 3 1, 20 17 , respect iv ely, to its parent, Dai-ichi Life. The Compan y h as guaran teed PLICO’s ob lig ati on s for bo rrowing s o r letters of cred it un der th e rev olvin g lin e of cred it arrang emen t to wh ich the Co mp any is also a p art y. Th e Compan y h as also issu ed gu aran tees, entered into su pp ort ag reemen ts an d/or assumed a d uty to in demnify its in direct wh olly owned cap tiv e insurance compan ies in certai n respects. The Compan y guaranteed the o bligat io ns of PLICO un der a sy nthetic lease entered i nto b y PLICO, as lessee, wit h a n on -affiliated third p arty, as lesso r. Un der the terms of the sy nthetic lease, finan cing of $75 million was avai lab le to PLICO for co nstruct io n of an office b uildi ng an d parkin g deck wh ich was completed o n Feb ru ary 1 , 2 00 0. The synt het ic lease was amen ded and restated as of Decemb er 19 , 2 01 3 and was extend ed to Decemb er 20 18 . At th e end of th e lease term, the Compan y p urchased th e b uil ding fo r ap prox imately $75 millio n. The Co mp any has agreements with certai n o f its sub si diaries u nd er wh ich it sup plies investment , leg al an d data pro cessin g serv ices on a fee b asis an d prov id es o th er man ag erial and admin istrative serv ices on a sh ared cost basis. Such o th er manag erial an d admin istrative serv ices in clu de b ut are no t limited to acco un ting , finan cial rep orting , complian ce serv ices, reinsurance admin istration , tax reporting , reserve compu tati on , an d p ro jectio ns. The Co mp any h as an i ntercompan y capi tal su pp ort agreement with Shad es Creek Cap tive In surance Co mp any (“Sh ades Creek”), a direct who lly owned subsidiary. Th e agreement provi des throu gh a gu aran tee that th e C ompany will co ntrib ute asset s or purchase su rp lu s n otes (or cause an affiliate or th ird party to co ntrib ute assets or pu rchase su rp l us no t es) in amou nts necessary for Shad es Creek’s reg ulatory capi tal levels to eq ual o r ex ceed min imum th resh olds as d efined b y the agreement. As of Decemb er 3 1, 2 01 8, Sh ades Creek main tained cap ital l ev els in ex cess of the requ ired minimu m thresho l ds. Th e maximu m pot en t ial future p ayment amou nt wh ich co uld be req uired un der the capital sup po rt ag reement will be depen den t on nu merou s facto rs, includ ing th e p erforman ce of eq uity markets, t he lev el o f interest rates, performance o f asso ciated h edg es, an d related p olicy ho ld er b ehavio r. 17 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 21 . STATUTORY RE PORTING PRACTICES AND OTHER REGULATORY MATTE RS The Compan y’s in surance sub sid iaries prepare statuto ry finan cial statemen ts fo r reg ulato ry pu rpo ses in accordan ce with acco un ting practices prescribed b y th e NAIC an d th e appl icable stat e insu ran ce dep artmen t laws and regulat io ns. These fin an cial stat ements vary materially from GAAP. Statu to ry acco un ting p ract ices includ e p ub lication s o f th e NAIC, state laws, regu latio ns, gen eral admini strative ru les as well as certain p ermit ted accou ntin g practi ces grant ed b y th e respective state i nsu ran ce dep artmen t. Generally, the most sig nificant d ifferences are that statu to ry fin ancial statemen ts do n ot refl ect 1) deferred acq uisition costs an d VOBA, 2) ben efit liabilities that are calculated usin g Co mp any estimates o f ex pected mortality, i nterest, and withdrawals, 3) deferred in come tax es that are no t sub ject to statut ory limits, 4) reco gni tion o f realized gain s an d lo sses on t he sale o f secu rities in the p eriod they are sold , an d 5 ) fi xed matu rities reco rded at fair v alu es, bu t instead at amo rtized co st. St atuto ry net income (loss) fo r PLIC O was $32 1.1 milli on , $73 1.2 million , and $(39 1.6 ) million fo r th e years en ded Decemb er 31 , 2 01 8, 201 7 and 20 16 , resp ectively. Statutory cap ital and su rp lu s for PLICO was $4 .3 b ill io n and $4 .3 b ill io n as of December 31 , 2 01 8 and 20 17 , resp ectively. Th e Statutory net loss in curred by PLICO fo r the y ear end ed December 31 , 20 16 was cau sed b y the requ ired Statutory accou nti ng treatmen t o f the initial gain reco gn ized on th e retrocession o f th e t erm bu siness assu med fro m Gen worth Life and An nu i ty Insu ran ce Compan y to Gold en Gate Captiv e Insu ran ce Compan y, which resu lted in ap proxi mately a $1 .2 b illio n gai n being includ ed as a compo nen t of surplus, rath er th an reflected in Statutory n et in come as of the January 15 , 20 16 cessio n d ate. The Company ’s in su ran ce su bsid iaries are su bject to vario us stat e statu t ory and regul ato ry restriction s on th e insurance sub sidiaries’ ab ility to p ay dividen ds to Protective Life Corpo ratio n. In gen eral, dividen ds up to sp ecified lev els are co nsidered ordinary an d may be p aid witho ut p rior approv al o f th e in surance commissions o f th e state of do micile. Div id end s i n larg er amou nts are co nsid ered ex traordin ary and are su bject to affirmativ e prio r ap prov al by such co mmissio ner. The max imum amou nt th at wou ld q ualify as ord in ary d iv id end s to th e Compan y fro m ou r insuran ce sub sid i ari es, an d which wou ld co nsequ en tly be free from restrict io n and availab le for th e payment of divid en ds to th e Co mp any ’s shareowner in 20 19 is ap prox i mately $43 4.0 million . Th is resu lts in ap prox imately $5.3 b illio n o f the Co mp an y’s net assets being restricted fro m tran sfer to PLC witho ut p rior app ro val fro m the respectiv e st ate in surance dep artmen t. St ate insu ran ce reg ulato rs and the Nat io nal Association of Insuran ce Commission ers (“NAIC”) hav e ado pted risk -b ased cap ital (“RBC”) requi remen ts fo r life in su ran ce co mp anies to eval uat e the ad equ acy of statu to ry capi tal an d surplus in relation to in vestmen t an d insurance risk s. Th e requi remen ts pro vide a means of measurin g th e minimum amo un t of statu to ry su rplus app ro priate for an in su rance co mp any to sup po rt its o verall bu siness op eratio ns b ased o n its size and risk profile. Ad ditio nally, the Compan y has certain assets th at are on dep osit with state reg ulato ry auth orities and restricted fro m use. As of Decemb er 3 1, 20 18 , th e Co mp any ’s insu ran ce sub si diaries had on dep osit with regu latory au th orities, fixed maturity an d sho rt-term inv estments with a fair v alu e of ap proxi mately $40 .8 millio n. The st ates of do micile o f the Company’s insu ran ce su bsid iaries h ave ado pted prescribed acco un ting practices th at differ fro m the req uired acco un ting ou tlin ed in NAIC Statuto ry Acco un ting Prin cip les (“SAP”). The in su ran ce su bsid iaries al so h av e certain accou ntin g p ract ices permitted b y the states of do micile th at d iffer from th ose fo un d in NAIC SAP. Certain prescribed p ract ices impact th e statu t ory surplus o f PLICO, th e Compan y’s primary op erating sub si diary. These p ractices in clu de th e n on - ad mission of go odwill as an asset fo r statu to ry rep ortin g. The favo rable (un fav orable) effects of PLICO’s statu to ry su rp lu s, compared to NAIC statutory surplus, from th e use of th is prescribed practices was as fo llows: As of December 31, 2018 2017 (D ollars In M illio ns) Non -ad mission of go od will $(18 1) $(21 9) To ta l (net)$(18 1) $(21 9) The Compan y also has certain p rescribed and permitted p ractices wh ich are ap plied at the sub sidi ary lev el an d d o n ot h ave a d irect imp act o n th e statutory su rp lu s o f PLICO. Th ese p ract ices in clu de p ermissio n to foll ow the actuarial g uidelin es of t he d omiciliary state of th e ceding insurer fo r cert ain cap tive reinsu rers, accou nting for t he face amo un t of all issu ed, an d ou tstand i ng letters of cred it an d n otes issued by an affiliate as assets in the statutory finan cial statemen ts o f certain who lly owned sub sid iaries that are con sid ered “Special Purpo se Fi nancial Capt iv es”, and a reserve differen ce related to a cap tive insurance company . 17 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The favo rab le (u nfavo rab le) effects o n th e stat utory surplu s o f th e Co mp an y’s insu ran ce su bsid iaries, compared to NAIC stat utory surp lu s, fro m the use o f these p rescrib ed and permitted p ractices were as foll ows: As of December 31, 2018 2017 (D ollars In M illio ns) Acco un tin g for Letters o f Credit as ad mitted assets $1,63 0 $1 ,67 0 Acco un tin g for certain n otes as admitted assets $2,55 3 $2 ,63 4 Reserv in g b ased o n state sp ecific actu arial p ractices $12 1 $12 2 Reserv in g d ifference related to a cap tive insurance company $(5 0) $(3 7) 22 . OPERATING SEGMENT S Th e Co mp any has sev eral op erating seg ments, each h avi ng a strateg ic focus. An o perati ng segmen t is d isting uished by prod ucts, chan nels of distri bu tion , and /o r other strategic d istinctio ns. The Co mp an y perio dically ev alu ates its o perating seg ments an d makes adjustmen t s t o it s seg ment repo rting as needed . A b rief d escription of each segment fo llows. •The Life Market in g seg men t mark ets fixed UL, IUL, VUL, BOLI, and l ev el premi um term insurance (“tradi tion al”) prod ucts o n a natio nal b asi s p rimarily th ro ug h netwo rks of i nd ep end ent insuran ce agen ts and b ro kers, b ro ker-d ealers, fin ancial in stitut io ns, in dep end en t d istrib ution organ izatio ns, an d affinity grou ps. •The Acqu isitio ns segment fo cu ses o n acqu iri ng , co nv ertin g, an d servicin g p olicies and co ntracts acqu ired fro m o th er compan ies. The segmen t’s primary focu s is on life insuran ce p olicies an d an nu i ty p ro du cts th at were sol d to ind iv id uals. The level o f th e seg ment’s acq uisi tion activity is predicated up on man y facto rs, in cludi ng avai lable capital, op eratin g cap acity, po ten tial retu rn o n capit al, and market d yn amics. Po licies acqu ired throu gh the Acqu i sition s segmen t are typ ically bl ocks o f b usin ess wh ere no new po licies are b eing market ed . Therefore earning s an d acco un t values are exp ected to d ecline as t he resu lt o f lap ses, d eath s, an d other t ermin ati on s o f cov erag e un l ess n ew acq uisi tion s are mad e. •The An nu iti es seg ment mark ets fixed and VA prod ucts. Th ese p ro du cts are p rimarily sold th rou gh brok er-dealers, finan cial in stituti on s, and indepen den t ag en t s and brok ers. •The Stab le Value Pro du cts segment sells fixed an d floatin g rate fun din g ag reemen ts directly t o the trustees of mun icipal bo nd pro ceed s, mon ey mark et fun ds, ban k tru st dep artmen ts, an d other in st itutio nal i nv esto rs. This seg men t also issues fu nd in g ag reemen t s to the FHLB, an d markets GICs to 4 01 (k ) and o th er qu ali fied retirement sav i ng s p lan s. Th e Compan y also h as an unregi stered fu nd in g agreement-b acked n otes p ro gram which p ro vides fo r o ffers o f n otes t o bot h d omestic an d internatio nal in stitut io nal in vestors. •The Asset Pro tection segmen t markets ex ten ded service co ntract s, GAP products, credit life an d disability in surance, an d oth er speci alized an cillary prod ucts to protect co nsumers’ in vestmen ts in au to mo biles, recreational v ehicles, watercraft, and p owerspo rts. GAP cov ers the d ifference between the lo an pay-off amo un t and an asset’s actual cash v alu e i n th e case o f a total lo ss. Each ty pe of sp ecial ized ancillary p rod uct p rot ects against d amage o r o th er loss to a parti cul ar asp ect of th e un derly in g asset. •The Corpo rate an d Other segmen t p rimarily co nsists o f net in vestmen t inco me o n assets su pp orting ou r eq uity cap ital, u nallo cated co rp orate o verhead and ex pen ses n ot attrib utable to th e segments abo ve (i nclud in g interest o n corp orate d ebt ). Th is segment in clu des earning s fro m sev eral non-strategic or run off li nes o f b usin ess, v ariou s fin ancing and in vestmen t related transact io ns, an d th e op eratio ns o f several small sub si diaries. The Co mpan y’s man agemen t an d Bo ard o f Directors an aly zes and assesses th e operating perfo rmance o f each segment u sin g “pre-tax ad ju sted op eratin g inco me (lo ss)” and “after-tax ad ju sted o perating inco me (lo ss)”. Con sisten t with GAAP accounting gu i dance for seg men t rep orting , p re-tax ad justed op eratin g in come (lo ss) is th e Compan y’s measu re of segmen t performance. Pre-tax adj usted op eratin g in come (lo ss) is calculated b y adjusting “inco me (lo ss) before in come tax,” b y exclud in g the followin g it ems: •realized g ain s and lo sses o n inv estments and deriv atives, •ch ang es in th e GLWB emb edd ed d erivat iv es excl usive o f the p ortion attribut abl e to the eco no mi c co st of th e GLWB, •actual GLWB incu rred claims, an d •the amortization of DAC, VOBA, and certain po licy liab ilities th at is impacted b y t he exclusio n o f these i tems. The items exclud ed fro m adjusted o perating in co me (lo ss) are imp ort an t to u nd erstand in g the ov erall results o f o peration s. Pre-tax adjusted op eratin g i ncome (loss) an d after-tax adjusted op erat in g inco me (lo ss) are no t sub stit utes fo r inco me b efo re i ncome tax es or net in come (l oss), respect iv ely. These measu res may no t b e co mp arab le to similarly titled measures rep orted b y o th er co mp an ies. The C ompany believ es th at pre-tax an d after-tax adjusted op eratin g in come (lo ss) en han ces man agement ’s an d th e Bo ard o f Directo rs’ un derstand in g of th e o ng oing o peration s, th e u nd erlying p ro fitability o f each segmen t , an d h elp s facilitate th e allocatio n o f resou rces. 17 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents After-tax ad j usted o perating income (lo ss) is deriv ed from pre-tax ad ju st ed o perati ng in come (loss) wit h the inclusio n o f in come tax exp ense o r benefits associated with pre-tax ad justed op erating inco me. Inco me tax exp ense o r ben efits is allocated to th e items excluded from p re-tax adjusted operating in come (l oss) at th e statu to ry federal inco me t ax rate for t he associated p eriod. Fo r perio ds end in g on and p rior to Decemb er 31 , 20 17 , a rate o f 35 % was used . Beg in ning in 20 18 , a statu t ory fed eral in come tax rate of 21 % was u sed to allo cate in come tax ex pen se or b enefits t o items ex clu ded from pre-t ax adjusted op eratin g in come (loss). Income tax exp en se or b enefits allo cated to after-tax ad ju st ed o perating in co me (loss) can vary perio d to p eriod based o n ch ang es in th e Co mp any ’s effectiv e in come tax rate. In determining t he compo nen ts o f the p re-tax ad j usted o perating in come (loss) for each segment , p remiu ms an d p olicy fees, o th er inco me, ben efits an d settlement exp enses, and amo rti zatio n of DAC and VOBA are att ribu ted directl y to each o perating seg ment. Net in vestmen t in come is allo cated based on directly related assets requ ired fo r transactin g th e bu siness of that seg ment. Realized in vestmen t gai ns (losses) and o th er o perating ex pen ses are allocated to th e seg ments in a man ner th at mo st app ro pri ately reflect s the o peration s o f that seg men t. In vestment s an d oth er assets are allo cated b ased on statutory pol icy liabilities net of asso ciated statu to ry po licy assets, while DAC/VOBA an d g oo dwill are sh own in th e segment s to which t hey are attribu tab le. There were n o sig nificant in tersegment transactio ns du ring th e year en ded December 3 1, 2 01 8, 2 01 7, and 20 16. 17 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowi ng tabl es p resen t a su mmary o f resu lts and reco nciles pre-tax adjusted o perati ng inco me (loss) to con so lidated in come before inco me tax an d n et inco me: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Life Marketin g $1 ,68 9,7 95 $1 ,667,11 8 $1,6 27 ,84 8 Acqu i sitions 2 ,02 7,1 95 1 ,569,08 3 1,6 76 ,01 7 An nu ities 54 5,9 22 450,30 6 5 74 ,93 4 Stab le Valu e Prod ucts 21 9,5 01 190,00 6 1 14 ,58 0 Asset Protection 31 0,2 43 327,57 3 2 69 ,14 5 Co rp orate and Oth er 24 8,2 98 214,70 6 2 21 ,42 3 Total revenu es $5 ,04 0,9 54 $4 ,418,79 2 $4,4 83 ,94 7 Pre-tax Adjusted Opera ting Inco me (Lo ss) Life Marketin g $(1 9,3 76 ) $50,77 8 $39 ,74 5 Acqu i sitions 28 2,7 15 249,74 9 2 60 ,51 1 An nu ities 16 7,1 86 213,08 0 2 13 ,29 3 Stab le Valu e Prod ucts 10 2,3 28 105,26 1 61 ,29 4 Asset Protection 2 9,9 11 24,35 6 16 ,48 7 Co rp orate and Oth er (8 4,2 29 ) (136,33 2) (87 ,96 1) Pre-t ax adjusted o perating income 47 8,5 35 506,89 2 5 03 ,36 9 Realized g ain s (losses) on in vestmen ts an d d erivativ es (9 5,5 17 ) (71,83 5) 90 ,62 8 Inco me before in come tax 38 3,0 18 435,05 7 5 93 ,99 7 Inco me t ax exp ense (ben efit)8 0,6 57 (671,47 5) 2 00 ,96 8 Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Pre-tax ad ju sted op eratin g inco me $47 8,5 35 $506,89 2 $5 03 ,36 9 Ad ju sted op eratin g inco me t ax (ex pen se) b enefit (10 0,7 16 ) 646,33 3 (1 69 ,24 7) After-tax adjusted o perating in come 37 7,8 19 1 ,153,22 5 3 34 ,12 2 Realized g ain s (losses) on in vestmen ts an d d erivativ es (9 5,5 17 ) (71,83 5) 90 ,62 8 Inco me t ax ben efit (exp ense) on adjustmen ts 2 0,0 59 25,14 2 (31 ,72 1) Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Realized in vestmen t (lo sses) g ains: Deriv ative fin ancial in stru men ts $6 0,9 88 $(305,82 8) $(40 ,28 8) All o th er inv estments (22 3,6 49 ) 121,42 8 90 ,65 9 Net imp airmen t losses reco gn ized in earnings (2 9,7 24 ) (11,74 2) (17 ,74 8) Less: related amo rti zation(1)(1 1,8 56 ) (39,48 0) 24 ,36 0 Less: VA GLWB econ omic co st (8 5,0 12 ) (84,82 7) (82 ,36 5) Realized (losses) g ain s o n i nv estments and deriv atives $(9 5,5 17 ) $(71,83 5) $90 ,62 8 (1) In clu d es am ortization o f DAC/VOBA and b en efits and settlemen t ex pen ses th at are impacted b y realized gains (losses). 18 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net i nv estment inco me Life Marketin g $55 1,7 81 $553,99 9 $5 25 ,49 5 Acqu i sitions 1 ,10 8,2 18 752,52 0 7 64 ,57 1 An nu ities 34 0,6 85 321,84 4 3 22 ,60 8 Stab le Valu e Prod ucts 21 7,7 78 186,57 6 1 07 ,01 0 Asset Protection 3 0,4 57 27,32 5 22 ,08 2 Co rp orate and Oth er 23 4,8 31 209,32 4 2 00 ,69 0 Total n et inv estment in come $2 ,48 3,7 50 $2 ,051,58 8 $1,9 42 ,45 6 Amortiza tion of DAC a nd VOBA Life Marketin g $11 6,9 17 $120,75 3 $1 30 ,70 8 Acqu i sitions 1 8,6 90 (6,93 9) 8 ,17 8 An nu ities 2 4,2 74 (54,47 1) (11 ,03 1) Stab le Valu e Prod ucts 3,2 01 2,35 4 1 ,17 6 Asset Protection 6 2,7 26 16,52 4 20 ,03 3 Co rp orate and Oth er — — — Total amo rti zation o f DAC and VOBA $22 5,8 08 $78,22 1 $1 49 ,06 4 O perating Segment Assets As of December 31, 20 1 8 (D oll ars In Thous ands) Life Ma rketing Acquisitions Annuities Sta ble Va lue Pro ducts In vestmen ts and ot her assets $14 ,575,70 2 $3 1,8 59 ,52 0 $2 0,1 99 ,59 7 $5,1 07 ,33 4 DAC an d VOBA 1 ,499,38 6 4 58 ,97 7 8 89 ,69 7 6 ,12 1 Oth er intang ib les 262,75 8 31 ,97 5 1 56 ,78 5 7 ,38 9 Goo dwi ll 215,25 4 23 ,86 2 3 43 ,24 7 1 13 ,92 4 To tal assets $16 ,553,10 0 $3 2,3 74 ,33 4 $2 1,5 89 ,32 6 $5,2 34 ,76 8 Asset Pro tection Corporate and O ther To tal Conso lidated In vestmen ts and ot her assets $1 ,01 9,2 97 $12 ,71 5,2 08 $85 ,47 6,6 58 DAC an d VOBA 16 8,9 73 — 3 ,02 3,1 54 Oth er intang ib les 12 2,5 90 3 1,9 34 61 3,4 31 Goo dwi ll 12 9,2 24 — 82 5,5 11 To tal assets $1 ,44 0,0 84 $12 ,74 7,1 42 $89 ,93 8,7 54 18 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents O perating Segment Assets As of December 31, 20 1 7 (D oll ars In Thous ands) Life Ma rketing Acquisitions Annuities Sta ble Va lue Pro ducts In vestmen ts and ot her assets $14 ,914,41 8 $1 9,5 88 ,13 3 $2 0,9 38 ,40 9 $4,5 69 ,63 9 DAC an d VOBA 1 ,320,77 6 74 ,86 2 7 72 ,63 4 6 ,86 4 Oth er intang ib les 282,36 1 34 ,54 8 1 70 ,11 7 8 ,05 6 Goo dwi ll 200,27 4 14 ,52 4 3 36 ,67 7 1 13 ,81 3 To tal assets $16 ,717,82 9 $1 9,7 12 ,06 7 $2 2,2 17 ,83 7 $4,6 98 ,37 2 Asset Pro tection Corporate and O ther To tal Conso lidated In vestmen ts and ot her assets $91 8,9 52 $15 ,04 3,5 97 $75 ,97 3,1 48 DAC an d VOBA 2 4,4 41 — 2 ,19 9,5 77 Oth er intang ib les 13 3,2 34 3 5,2 56 66 3,5 72 Goo dwi ll 12 8,1 82 — 79 3,4 70 To tal assets $1 ,20 4,8 09 $15 ,07 8,8 53 $79 ,62 9,7 67 23 . CONSOLIDATED QUARTERLY RESULTS—UNAUDITED The Co mp an y’s un aud ited co nsolid ated qu arterly op eratin g data fo r th e y ears en ded Decemb er 3 1, 2 01 8 and 20 17 is p resen ted bel ow. In the op in io n of man ag emen t, all adj ustmen ts (con sisting on ly o f n ormal recurrin g items) necessary for a fair statement of qu arterly results h ave been reflected in th e follo win g data. It is also manag ement’s op ini on , h owever, that q uarterly o perating data for in surance enterp rises are not n ecessarily in dicative of resu lts th at may b e ex pected in succeeding qu arters or years. In o rd er to ob tai n a more accu rate in dication o f p erforman ce, th ere sh ou ld be a review of operating resu lts, chan ges in shareo wner’s eq uity , and cash flo ws fo r a p eri od of several quarters. 18 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents First Q uarter Second Q ua rter Third Qua rter Fourth Qua rter (D oll ars In Thous ands) For The Yea r Ended December 3 1, 2 01 8 Premiums and po licy fees $889,16 6 $9 41 ,86 8 $8 78 ,18 2 $9 71 ,62 9 Rein surance ceded (345,42 3) (3 90 ,94 1) (2 69 ,33 5) (3 79 ,24 2) Net of rein surance ceded 543,74 3 5 50 ,92 7 6 08 ,84 7 5 92 ,38 7 Net i nv estment in come 520,86 3 6 16 ,46 2 6 72 ,13 9 6 74 ,28 6 Realized in vestmen t g ain s (lo sses)(9,54 0) (37 ,33 7) (47 ,33 4) (68 ,45 0) Net i mp airment losses recog nized in earn ing s (3,64 5) (5) (1 4) (26 ,06 0) Oth er inco me 114,41 1 1 13 ,86 1 1 13 ,53 0 1 11 ,88 3 Total reven ues 1 ,165,83 2 1,2 43 ,90 8 1,3 47 ,16 8 1,2 84 ,04 6 Total b enefits and exp enses 1 ,074,03 4 1,1 45 ,13 6 1,2 10 ,44 9 1,2 28 ,31 7 In come before inco me tax 91,79 8 98 ,77 2 1 36 ,71 9 55 ,72 9 In come tax ex pen se 17,68 6 17 ,27 7 26 ,61 9 19 ,07 5 Net i ncome $74,11 2 $81 ,49 5 $1 10 ,10 0 $36 ,65 4 First Q uarter Second Q ua rter Third Qua rter Fourth Qua rter (D oll ars In Thous ands) For The Yea r Ended December 3 1, 2 01 7 Premiums and po licy fees $860,58 6 $8 68 ,13 9 $8 55 ,08 8 $8 93 ,60 6 Rein surance ceded (316,07 6) (3 42 ,89 8) (3 25 ,12 0) (3 76 ,64 1) Net of rein surance ceded 544,51 0 5 25 ,24 1 5 29 ,96 8 5 16 ,96 5 Net i nv estment in come 506,41 3 5 07 ,77 1 5 07 ,91 4 5 29 ,49 0 Realized in vestmen t g ain s (lo sses)(47,03 7) (54 ,47 1) (64 ,19 1) (18 ,70 1) Net i mp airment losses recog nized in earn ing s (7,83 1) (2 ,78 5) (27 3) (85 3) Oth er inco me 109,24 2 1 11 ,31 1 1 10 ,97 0 1 15 ,13 9 Total reven ues 1 ,105,29 7 1,0 87 ,06 7 1,0 84 ,38 8 1,1 42 ,04 0 Total b enefits and exp enses 992,94 8 9 61 ,29 9 9 73 ,53 8 1,0 55 ,95 0 In come before inco me tax 112,34 9 1 25 ,76 8 1 10 ,85 0 86 ,09 0 In come tax ex pen se (b enefit)36,93 5 41 ,50 0 28 ,30 8 (7 78 ,21 8) Net i ncome $75,41 4 $84 ,26 8 $82 ,54 2 $8 64 ,30 8 24 . SUB SEQUENT EVENTS The Company has ev alu ated the effects o f ev en t s sub sequ ent to December 31 , 201 8, an d throu gh the dat e we filed ou r con so lidated finan cial statements wi th th e Un ited States Secu rities and Ex chang e Commi ssion . All accou ntin g an d d isclosure req uiremen ts related to sub seq uent even ts are in clu ded in o ur con so lidated fin anci al statemen ts. On Janu ary 2 3, 20 19, PLICO en tered in to a Master Transactio n Ag reemen t (th e “GWL&A Master Transact io n Ag reemen t”) with Great-West Life & An nu ity In surance Compan y (“GWL&A”), Great-West Life & An nui ty In surance Compan y o f New Yo rk (“GWL&A o f NY”), The Canada Life Assu ran ce Co mp any (“CLAC”) an d The Great-West Life Assu rance Co mp any (“GWL” and , to gether with GWL&A, GWL&A of NY and CLAC , th e “Sel lers”), p ursu ant to wh ich PLICO will acquire v ia rein surance (th e “Transacti on ”) su bstantiall y all of th e Sel lers’ in dividu al life in su rance and ann uity bu siness (the “Indi vidu al Life Busin ess”). Pursu ant to th e GWL&A Master Transaction Ag reemen t, PLICO an d Pro tectiv e Life an d An nu ity Insurance C ompany (“PLAIC”), a who lly owned su bsid iary of PLICO, will en ter into reinsu ran ce agreements (the “Reinsu ran ce Ag reemen ts”) an d related ancillary d ocu men ts at th e cl osing of the Tran saction . On th e terms an d su bject to t he co nd ition s o f th e Rein su ran ce Ag reemen ts, th e Sellers will cede to PLICO an d PLAIC, effective as o f the closin g of th e Transactio n, sub st an t ial ly all o f th e in surance p olicies relatin g to the Ind iv i du al Life Business. To su pp ort its o bli gat io ns un der the Reinsuran ce Agreemen ts, PLICO will establish tru st acco un ts fo r th e ben efi t o f GWL&A, CLAC an d GWL, and PLAIC will estab lish a trust accou nt for the benefit of GWL&A of NY. The Sellers will retain a b lo ck o f p articipatin g p olicies, which will b e admin istered by th e Comp any . 18 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Transactio n is su bject t o the satisfaction or waiv er o f cu sto mary closin g conditio ns, includ i ng reg ulato ry app ro vals and th e executio n of th e Reinsuran ce Agreements and related ancillary docu men ts. The GWL&A M aster Tran saction Ag reemen t an d oth er transacti on docu men ts co ntain certain cu stomary represen tat io ns an d warranties made b y each o f the p art ies, and certain customary cov enan ts regarding th e Sellers and th e In dividu al Life Bu siness, an d p ro vide for in demnification , amo ng other th in gs, for breaches o f tho se rep resen tatio ns, warran ties and cov enants. 18 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Report of Independent Registered Public Acco unting Firm To the Board o f Direct ors and Sh areown er o f Pro tectiv e Life Corpo ratio n Op inions on the Fina ncial Sta tements and Internal Control over Financia l Rep orting We h ave aud ited th e acco mp any in g con so lidated balance sheets of Protective Li fe Corpo ratio n an d its su bsid iaries (th e “Compan y”) as o f Decemb er 31 , 20 18 an d 20 17 , an d th e related con so lidated statemen ts o f inco me, co mp reh ensive inco me (loss), sh areown er’s equi ty an d cash flo ws fo r each of th e th ree years in th e perio d en ded December 31 , 201 8, includ in g the related n otes an d fin ancial stat ement sch edules listed in t he ind ex ap pearing u nd er item 15 (2 ) (collecti vely referred to as t he “con solid ated finan cial statements”). We also hav e aud ited the Co mp any 's in ternal con trol o ver finan cial rep ortin g as of Decemb er 3 1, 20 18 , based on criteria estab lish ed in Int erna l Co ntro l - Integrated Framework (20 13 ) issu ed by th e Committee o f Sponso ring Organ izatio ns of th e Treadway Co mmissio n (COSO). In ou r op in io n, th e con soli dat ed finan cial statemen ts referred t o ab ov e p resen t fairly, in all material respect s, the finan cial p osition of the Co mp any as of Decemb er 3 1, 2 01 8 and 20 17 , an d th e resu lts of its o peration s and its cash flo ws fo r each of th e th ree y ears in th e perio d ended Decemb er 3 1, 2 01 8 in co nformity with accou ntin g p rinciples generally accepted in th e Un ited States o f Ameri ca. Also in ou r o pinion, th e Co mp any main tained , in al l material resp ects, effectiv e in ternal con trol o ver finan cial rep orting as o f Decemb er 3 1, 2 01 8, based on criteria established in In terna l Con tro l - Integrat ed Framework (2 01 3) issued by th e COSO. Change in Accounting Princip le As d escrib ed in Note 2 t o t he con so lidated fin ancial statemen ts, th e Co mp any ch ang ed the man ner in which it accou nts for admin istrati ve fees associated with certain prop erty an d casu alty insu ran ce prod ucts in 20 18 . Ba sis fo r Opinio ns The Compan y's manag ement i s resp on sible fo r these co nso lid ated financial statements, fo r main taining effective intern al co ntro l o ver finan cial reporting , and fo r its assessmen t of the effectiv eness of intern al con trol o ver fin anci al repo rti ng , in clu ded in Man agemen t's Repo rt o n In ternal Co ntro l ov er Finan cial Rep orting appearing u nd er Item 9A. Our respo nsib ility is to exp ress op in i on s on the Co mpan y’s con solidated fin anci al statemen ts and on the Company's in ternal con tro l ov er finan cial rep ort in g based o n ou r au dits. We are a pu blic acco un tin g firm regist ered with th e Pub lic Co mp an y Accou nti ng Oversigh t Bo ard (United States) (PCAOB) an d are requ ired to be ind epen dent with respect to the Compan y i n acco rdance with the U.S. federal securiti es laws and th e ap pli cab le rules and reg ulation s of t he Secu rities and Exch ang e Co mmissio n an d the PCAOB. We co nd ucted ou r aud its in acco rd ance with th e standard s of th e PCAOB. Tho se st an dards requ ire th at we p lan an d perform th e au dits to o btain reaso nable assurance ab ou t wh eth er th e con soli dated finan cial statements are free o f material misstatemen t, whet her due to error o r fraud , an d wh eth er effective in ternal co ntrol ov er fin ancial rep ortin g was maintain ed in all material resp ects. Ou r aud its o f th e con soli dated finan cial statemen t s incl ud ed p erforming p ro cedu res to assess th e risk s o f mat eri al misstatement o f th e con solidated finan cial statements, whether d ue to error o r frau d, and p erformin g proced ures th at respo nd to tho se risks. Such p rocedu res includ ed examin in g, on a test b asis, ev idence reg ard in g th e amou nts and d isclosures in the con solid ated finan cial statements. Our au dits also includ ed evaluatin g the acco un tin g princip l es u sed an d si gn ifican t estimates mad e b y manag ement, as well as ev alu ating t he o verall p resen tatio n of the co nsolid ated finan cial statements. Ou r au dit o f in ternal co ntrol o ver fin an cial repo rtin g in clu ded o btain in g an understan ding o f in ternal con t ro l ov er financial rep orting, assessi ng t he risk th at a material weak ness ex ists, an d testi ng an d evaluatin g t he design and o perating effectiv eness o f intern al con t ro l based on th e assessed risk . Ou r au dits also includ ed perfo rming such other procedu res as we co nsidered n ecessary in th e circu mstan ces. We believ e th at o ur aud its prov i de a reaso nab le basis for ou r opin io ns. As describ ed in M anagement’s Repo rt o n In ternal Con trol o ver Finan cial Repo rting, man ag emen t h as ex clu ded certain elements o f th e in ternal con tro l o ver finan cial repo rting of the in div id ual life an d an nu ity o peration s o f Lib ert y Life Assu ran ce Co mp any of B oston (“Lib erty Life”) fro m its assessment of the Co mp any ’s in ternal co ntrol ov er fin an cial rep orting as of Decemb er 3 1, 2 01 8 becau se it was acq uired by th e Co mp an y in a p urchase bu siness co mb in ation du ring 20 18 . Su bsequen t to th e acq uisitio n, certain elements of the intern al co ntro l ov er fin ancial repo rting of in divid ual life an d an nu ity op eratio ns o f Lib erty Life were integrated in to the Co mp an y’s existin g systems an d in ternal con trol o ver fin an cial repo rtin g. Tho se con trols th at were no t in tegrated h ave been ex clu ded from man agemen t’s assessment of t he effectiven ess o f internal co ntrol ov er fi nancial repo rting as o f Decemb er 3 1, 2 01 8. We h ave also ex clu ded th ese elemen ts of th e internal co ntro l o ver finan cial rep orting of th e in dividu al life and annui ty op erat io ns o f Libert y Life fro m o ur au dit of th e Co mp any ’s int ern al con tro l o ver finan cial rep orting. Th e exclu ded elements rep resen t co ntrols over ap proxi mately $1 54 millio n of con solidated assets, $1 3,580 millio n o f co nso lidated liab ili ties, $2 08 millio n o f co nsolid ated reven ues an d $47 9 million of con so lidated ben efits and ex pen ses. Definiti on and Limita tio ns o f Int erna l Cont rol over Fina ncial Rep orting A co mp an y’s intern al con trol ov er finan cial repo rtin g i s a process d esig ned to p ro vide reaso nab le assurance reg ard in g th e reliabil ity of finan cial rep ortin g an d th e preparation of fin ancial statements for extern al pu rp oses in accordan ce with g enerally accepted accou nti ng pri ncipl es. A co mp any ’s intern al co ntrol ov er finan cial repo rti ng includ es th ose p olicies an d p ro ced ures th at (i) pertain to th e main ten ance of records th at, in reaso nable det ail, accurately an d fairly reflect the transactions an d d isp ositio ns o f the asset s of the compan y; (ii) prov id e reaso nable assurance that tran saction s are reco rd ed as necessary to permit preparatio n o f fi nancial stat ements i n accordan ce with gen erally accepted accoun ting prin cip les, an d that receip ts and ex pen ditu res of th e co mp any are 18 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents being mad e o nly in accordan ce with aut ho rization s o f man agemen t and d irecto rs of the company ; and (iii) prov id e reason able assu ran ce reg ard ing preventi on o r ti mely detection of un autho rized acqu isitio n, u se, or dispo sition of th e company ’s assets th at co uld h ave a mat eri al effect o n the fin ancial statements. Because o f i ts i nh erent limitations, intern al con t ro l ov er fin anci al rep orting may n ot prevent or detect misst atemen ts. Also , p ro jectio ns o f any evaluatio n of effectiv eness to future p eriod s are su bject to th e risk t hat con trols may become in adeq uate because of chan ges in conditio ns, or that th e d eg ree of complian ce with the po licies or procedu res may d eterio rate. Birming ham, Al abama March 5 , 2 01 9 We h av e serv ed as the Compan y’s aud i to r since 1 97 4. 18 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 9 . Changes in a nd Disa greements wi th Acco unta nts o n Accounting a nd Financia l Disclosure No ne. Item 9 A. Control s and Pro cedures (a ) Disclo sure Contro ls and Procedures In order t o en sure that th e informatio n th e Company must d isclose in its filin gs wit h the Securiti es and Ex change Commission is recorded , processed , su mmarized , an d rep orted o n a timely basis, th e Compan y’s man ag emen t, wit h th e particip ation o f i ts Chief Executive Officer and Chief Fin ancial Officer, evaluated th e effectiven ess o f th e d esig n and op eratio n of its d isclosure con trols and proced ures (as such term is defined in Ru les 13 a-1 5(e) un der the Securiti es Exchan ge Act o f 1 93 4, as amended (th e “Ex chan ge Act”)), ex cep t as o th erwise n oted b elo w. Based on their ev alu ation as o f Decemb er 31 , 20 18 , th e en d of th e p eriod co vered by th is Form 10 -K, th e Co mp any ’s Ch ief Executive Officer an d Chief Fin an cial Officer h av e co nclud ed t hat the Compan y’s disclo su re con tro ls an d p ro cedu res were effectiv e. It sh ou ld be n oted that any sy stem of con trols, n o matter h ow well d esig ned and op erat ed , can p ro vide o nly reaso nable, n ot ab solu te, assurance that the con trol system’s ob jectiv es will b e met. Fu rther, the desig n of any co ntrol sy stem is based in part up on certain ju dg ments, includ in g the costs an d b enefits of con tro ls an d the l ik eliho od of fu tu re ev ents. Becau se of th ese and ot her in heren t li mitatio ns o f co ntrol systems, no ev alu ation of con trols can p ro vid e ab solu te assu ran ce that all con trol issues, if an y, with in th e Co mp any hav e b een d etected . (b) Manag ement’s Report on Interna l Contro ls Ov er Financial Repo rting Man ag emen t o f th e Compan y is resp on sibl e fo r estab lish in g an d maint ain in g ad equ ate intern al co ntrol over finan cial rep ort in g as defin ed in Ru le 1 3a-15 (f) u nd er the Exch ang e Act. The Compan y’s intern al con t ro l over fin ancial reportin g is a process d esig ned to prov id e reasonable assu rance regardin g th e reliab ility o f fin ancial rep ort in g and th e prep aratio n o f fin ancial statemen ts fo r extern al p urpo ses in accordan ce wi th acco un ting prin cip les generally accepted in the Unit ed States of America. The Compan y’s in ternal con trol ov er fin ancial repo rtin g includ es those po licies an d p ro ced ures t hat : •p ertain to th e mai ntenance o f reco rd s that in reason able detail accurately and fairly reflect the tran saction s an d di spo sition s o f th e assets o f th e co mp any ; •p rov id e reaso nab le assurance th at tran sactio ns are recorded as necessary to permit preparation o f finan cial statemen t s in acco rd ance with accou nting p rin cip les g enerall y accept ed in the United States o f America, and that receip ts an d ex pendi tu res o f the Co mpan y are bei ng made o nly in accordan ce with autho rization s o f man agement an d d irecto rs of th e Co mp any ; an d •p rov id e reaso nab le assurance regarding p reven tio n o r timely detectio n of unautho rized acq uisition , u se o r d ispo sition of the Co mp any ’s assets that co uld h ave a material effect o n the financial statements. Because o f its in herent limitatio ns, intern al con trol ov er finan cial repo rting may no t preven t or detect misstatemen ts. Also , p ro jectio ns o f any ev alu ation o f effectiv eness to future p eriod s are su bject to th e risk s that con tro ls may become inad eq uate becau se of ch ang es i n co nd itions, or that the d egree of co mp liance with th e p oli cies o r p ro ced ures may deteriorate. Man ag emen t assessed th e effectiven ess of th e Compan y’s in ternal cont ro l ov er financial rep orting as of December 3 1, 2018 . In making t his assessmen t , man ag emen t u sed th e crit eria set fo rth by t he Commit tee o f Spon sorin g Org ani zatio ns of the Treadway Commission (“COSO”) in Interna l Co ntro l—Integra ted Fra mewo rk (2 01 3). The Company entered in to reinsu ran ce ag reemen ts with Li berty Life Assu ran ce Compan y o f Bosto n (“Lib erty Life”) to acquire it s in dividu al life an d ann uity o peration s effect iv e M ay 1 , 201 8 in a t ran saction accou nted fo r as a p urchase bu sin ess co mb in ation. Sub sequ ent to th e acqu isitio n, cert ain elemen ts of the in ternal co ntro l ov er finan cial rep ortin g of the in dividu al life and ann uit y o peration s of Liberty Life were in teg rated in to the Co mp any ’s ex isting sy stems and in ternal con trol ov er fin ancial reportin g. In co nd uctin g o ur evaluatio n o f the effectiv en ess o f intern al co ntro l o ver finan cial rep orting as of December 31 , 20 18 , th e Co mp any has ex clu ded th ose co ntrols at Liberty Life th at relate t o systems and pro cesses for assets an d liabilities o f th e acqu ired bu sin ess th at were no t int eg rated in to o ur ex isting systems and in t ernal co ntro l over fin ancial repo rting. The p ort io n o f th e bu si ness no t integrated into o ur ex isti ng sy stems and co ntro ls rep resen ts ap proxi mately $1 54 mil lion of co nso lid ated assets, app ro ximately $2 08 million o f co nsolid ated rev enu e, app ro ximately $4 79 million o f co nsol id ated benefits an d exp enses, an d ap prox imately $13 ,58 0 million of liabil ities o n the related con so lidated fin ancial statemen ts. Based on th e Company ’s assessmen t o f intern al co ntrol ov er fin anci al repo rtin g, management has co nclud ed that, as of December 31 , 20 18 , the Co mp any ’s i ntern al co ntro l o ver fin anci al repo rtin g was effectiv e to p ro vide reason able assu ran ce regarding the reliabilit y o f finan cial rep orting and preparatio n o f fi nancial stat ements for ext ern al pu rpo ses in acco rdance with generally accepted accou nting p rin cip les. The effecti veness o f the C ompany ’s in ternal co ntro l o ver fin ancial rep ortin g as of Decemb er 31 , 2 01 8, h as b een aud ited by Pricewaterho useCo op ers LLP, an ind epen dent reg i stered p ub lic acco un ting firm, as stated in th eir att estatio n repo rt in clu ded in Item 8 . March 5 , 2 01 9 18 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents (c) Changes in Internal Contro l Over Fina ncial Reporting Other th an t he con sid eratio ns no ted in management’s rep ort, there h ave b een no ch ang es in th e Co mp any ’s in ternal con trol ov er fin ancial rep ortin g du ring th e ann ual perio d en ded December 31 , 20 18 , that have materially affected , or are reason ably likel y to materially affect, the Co mp any ’s in ternal co ntrol ov er financial rep orting . Th e Co mp any ’s intern al co ntro ls exist within a dy namic env iro nmen t and th e Compan y co ntin ually striv es t o imp ro ve its in ternal co ntrols and procedures to enh an ce th e qu ali ty of its fin an cial rep orting. Item 9 B . Other Informa tion No ne. 18 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART III Item 1 0. Directors, Executive Officers and Co rpo rate Gov erna nce The curren t ex ecut iv e officers an d d irecto rs o f the Compan y are as fo llows: Name Ag e (as of 2/1/20 19 )Title Jo hn D. Jo hn s 66 Ex ecu tiv e Ch airman of th e Co mp any an d a Di recto r Rich ard J. Bielen 58 Presiden t, Chief Executiv e Officer an d a Di rector D. Scott Ad ams 54 Ex ecu tiv e Vice Presid ent, Ch ief Dig ital an d Inn ov ation Officer M ark L. Drew 57 Ex ecu tiv e Vice Presid ent, Gen eral Co un sel an d Secretary M ichael G. Temple 56 Vice Chairman, Fin ance and Risk Carl S. Th ig pen 62 Ex ecu tiv e Vice Presid ent and Ch ief In vestmen t Officer Steven G. Walk er 59 Ex ecu tiv e Vice Presid ent and Ch ief Finan cial Officer Norimitsu Kawahara 54 Directo r Tetsuy a Kiku ta 54 Directo r Vanessa Leo nard 58 Directo r Jo hn J. McMaho n, Jr.76 Directo r Ung yo ng Sh u 56 Directo r Jesse J. Spikes 68 Directo r Toshiaki Su mino 49 Directo r William A. Terry 61 Directo r W. Michael Warren, Jr.71 Directo r All executiv e o fficers are elected ann ually an d serve at the p l easure of t he Bo ard of Directo rs. Non e of the ex ecu tiv e officers are related to any director of th e Co mp any or to any o t her ex ecutiv e officer. Mr. Joh ns has b een Executiv e Chairman of th e Compan y sin ce Ju ly 2017. He p rev io usly served as Chairman of the Board of the Co mp an y from Janu ary 20 03 to Ju ly 20 17 and Ch ief Ex ecu tiv e Officer o f th e Co mp any from December 20 01 to July 20 17 . He h as b een a director of the Compan y sin ce May 19 97 . From Aug ust 199 6 to Jan uary 2 01 6, Mr. Jo hn s also served as Presi dent o f the Compan y. Mr. Jo hn s h as been emplo yed b y th e Co mp any and its sub si diaries since 19 93 . Mr. Bi elen has b een Ch ief Execu tive Officer o f th e Co mp any since Ju ly 2 01 7 an d Presid ent of the Co mp an y since January 2 01 6. Fro m Janu ary 20 16 to Ju ly 2 01 7, Mr. Bielen also served as Chi ef Op eratin g Officer o f th e Compan y. Fro m Jun e 2 00 7 to Jan uary 20 16 , M r. Bi elen served as Vice Ch airman and Ch ief Fin anci al Officer o f th e Company. From August 20 06 to Jun e 20 07 , M r. Bielen served as Executi ve Vice Presiden t, Ch ief Inv estment Offi cer, an d Treasu rer o f th e Co mp an y. M r. Bielen became a d irecto r of the Company o n Feb ru ary 1 , 2 01 5. Mr. Bielen has been emp lo yed b y th e Compan y and its sub si diaries since 19 91 . Mr. Adams h as b een Executi ve Vice Presid ent an d Ch ief Digital an d In no vation Offi cer sin ce M arch 201 8. From Jan uary 20 16 to March 20 18 , Mr. Ad ams serv ed as Executive Vice Presi dent an d Ch ief Administrativ e Officer of t he Compan y. From Ap ril 20 06 t o Jan uary 20 16 , Mr. Adams served as Seni or Vice Presid ent and Ch ief Human Resou rces Officer o f the Compan y. Mr. Drew has b een Ex ecu tive Vice Presid en t , Gen eral Co un sel an d Secretary o f the Co mp an y sin ce Au gu st 2 018. From Au gu st 2 016 to Au gu st 20 18 , Mr. Drew serv ed as Executive Vice Presid ent and General Co un sel o f th e C ompany. Fro m 20 06 to Au gu st 20 16 , M r. Drew served as M an aging Shareh old er o f May nard, Coo per & Gale, P.C., a Birming ham, Alabama based law firm, where Mr. Drew wo rk ed fro m 1 98 8 u ntil Ju ly 20 16 . Mr. Temple has b een Vice Chairman, Finan ce an d Risk since M arch 20 18 . Fro m No vemb er 2 01 6 to M arch 20 18 , h e serv ed as Ex ecutiv e Vice Presid ent, Finan ce an d Risk of th e Company. From Janu ary 20 16 to Nov emb er 2 01 6, Mr. Temple served as Execu tive Vice Presi dent, Fin ance and Risk, and Ch ief Risk Officer o f th e Compan y. Fro m Decemb er 20 12 to Janu ary 2 01 6, Mr. Temple served as Execu tive Vice Presid ent an d Ch ief Risk Offi cer o f t he Co mp any. Prio r to jo in i ng the Company, M r. Temple serv ed as Senio r Vice Presiden t and Ch ief Risk Offi cer at Un um Grou p, an insu ran ce co mp any in Ch attano og a, Tenn essee. Mr. Thigp en h as b een Executive Vice Presiden t an d Chief In vestmen t Officer of the Co mp any since June 20 07 . Fro m Janu ary 20 02 to June 2 00 7, Mr. Th ig pen serv ed as Sen io r Vice Presid en t an d Chief M ort gage and Real Estate Officer of the Compan y. Mr. Th ig pen h as been employ ed b y t he Company an d its sub sidiaries since 19 84 . Mr. Walker has b een Ex ecu tiv e Vice Presiden t an d Chief Financial Officer o f the Co mpan y sin ce Janu ary 20 16 . From Janu ary 20 16 to M arch 20 17 , Mr. Walker also served as Co ntro ller o f th e Co mp any . From March 20 04 to January 20 16 , M r. Walk er 18 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents serv ed as Sen io r Vice President, Chief Accou nti ng Officer, an d Co ntro ller o f the Co mp an y. Mr. Walker has b een emp lo yed by th e Co mp any an d its sub si diaries since 20 02 . Certain o f these ex ecu tive o ffi cers also serve as ex ecu tive o fficers and /o r di recto rs of vario us o f th e Co mp any ’s sub sid iaries. Qual ifica tion of Directo rs The Co mp any ’s Board con si sts of 11 directors. The fo llowing su mmarizes so me of the key exp eriences, qu ali fication s, ed ucatio n, an d other att ribu tes o f the cu rrent directors: Richa rd J . Bielen. Mr. Bielen jo ined th e Compan y in Ju ly 19 91 as Vice Presid ent. In Jun e 19 96 , M r. Bielen became Senior Vice Presiden t of t he Co mp any ; in Janu ary 2002, h e became Ch ief In vestmen t Officer and Treasurer o f th e C ompany ; in Au gu st 20 06 , he became Ex ecutiv e Vi ce Presid ent of the Co mp any ; in Ju ne 20 07 h e b ecame Vice Chai rman an d Chi ef Fi nancial Officer o f th e Compan y; in Janu ary 2 01 6, he b ecame Presiden t and Ch ief Operating Officer o f the Co mp an y; and in Ju ly 20 17 , he became Ch ief Executi ve Officer and Presid ent of th e Company. Befo re join in g Pro tectiv e, Mr. Bi elen was Senior Vice Presid ent of Opp enh eimer & Comp any. Prior t o joining Opp enh eimer, Mr. Bielen was a Senior Accou ntant with Arthu r And ersen and Compan y. Mr. Bielen serv es on the Bo ard of Directo rs of th e United Way of Central Alabama an d as a trustee o f Ch ildren’s of Alabama. Mr. Bi elen is a fo rmer Direct or of the McWan e Science Cen ter and p rev iously served o n th e Board of Directors of Infin ity Pro perty and Casu alty Corpo ratio n un til Ju ly 2 01 8. M r. Bielen receiv ed his un dergradu ate deg ree and Masters o f Busin ess Admin istration from New York Universi ty. Mr. Bielen became a Directo r fo r the Compan y in 20 15 . We b elieve that M r. Bielen’s back grou nd in bu sin ess; h is sk ills and exp erience as a sen io r executi ve o f th e Compan y an d Opp enh eimer an d as a leader in other b usin ess, ci vic, edu cation al an d ch aritab le organizations; h is kn owledge and exp erience as a lead er in th e life i nsu ran ce in du stry, alon g with his lo ng -stand ing k nowled ge o f the Compan y and his seaso ned bu si ness jud gment, are valuab le to u s and ou r Bo ard o f Directors. J ohn D. Jo hns. Mr. Joh ns join ed Protective in Octob er 19 93 as Executiv e Vice Presid ent an d Chief Fin anci al Officer. In Au gu st 1 99 6, M r. Joh ns became Presi dent and Ch ief Operating Officer; in Janu ary 2 002, h e became President and Ch ief Execu tive Officer; in Jan uary 2 00 3, he b ecame Ch airman , Presid ent and Ch ief Execu tive Officer; in Janu ary 2 01 6, h e became t he Chai rman and Chi ef Ex ecu tiv e Officer; and as of July 2 01 7, h e became Ex ecut iv e Ch airman of the Co mp an y. Befo re joinin g Pro tectiv e, M r. Joh ns was Ex ecu tive Vice Presiden t and Gen eral Cou nsel o f So nat In c. Pri or to joining Son at, Mr. Joh ns was an attorney i n p riv ate p ract ice, focu sin g on commercial and fin ancing t ransaction s an d the finan cial services i nd ustry. Mr. Joh ns is o n th e B oards of Directors of Reg io ns Fi nancial Corp oration , Gen uine Parts Co mp any an d Th e Sou th ern Company. He is a Tru stee o f the Altamon t Sch oo l . He is o n the ex ecutiv e commi ttee of th e American Co un cil of Life Insurers an d serv ed as Chairman from 20 13 -2 01 4. He is a member of th e Finan cial Services Round table. He is a director o f t he Econ omic Dev elo pment Partnersh ip o f Alabama and th e Coaliti on for Reg io nal Tran spo rtation. He has p rev io usly served o n t he Bo ard of Tru stees of Th e Un iv ersity o f Alabama Sy st em and in a l ead ersh i p role fo r the Birmin gham Civil Righ ts In stitute, other fin ancial services in dustry association s, and civic and ed ucat io nal o rganization s. He was ind ucted in t o the Alab ama Academy of Hon or in 20 13 . Mr. John s receiv ed an u nd erg rad uate degree from t he University of Alabama an d a Master o f Bu si ness Admin istration and a Juri s Doctorate fro m Harvard Univ ersity. Mr. Jo hn s b ecame a Director fo r th e Compan y in 1 997. We b elieve th at M r. Jo hn s’s backg ro un d i n th e p ractice o f law; h is sk ill s an d exp eri ence as a sen io r execu tive of th e Compan y and So nat; h is ex perien ce as a lead er in o th er b usin ess, civ i c, ed ucatio nal and charitable organ izatio ns; his k no wled ge and exp erience as a leader in th e life in surance i nd ustry; hi s lo ng -stan ding kn owl edge o f the Co mpan y; and his seaso ned bu sin ess jud gment are valuab le to o ur Bo ard of Directo rs. No rimitsu Ka wahara. M r. Kawahara is th e Executiv e Officer, Ch ief of Intern ational Life Insu ran ce Bu si ness Unit , o f Dai-ich i Life. M r. Kawahara cu rrentl y serves as a Director of DLI North America, In c. an d Co mmissio ner o f PT Pan in Dai-ichi Life. Mr. Kawah ara h as held vario us positio ns with Dai-ich i Life sin ce 1 99 7, in clu ding Execu tive Officer, Chief General Man ager, Asia Pacific and Gen eral Manag er, Intern ational Busin ess M anagement Dep art ment. Mr. Kawahara has also served as M anagin g Direct or of b oth DLI Asia Pacific Pte. Ltd . and Dai-ichi Li fe Intern ational (Asia Pacific) Limited. Mr. Kawahara has also served as a Di recto r of Star Un io n Dai-ich i Life Insurance Co mp any Limited , Directo r of TAL Dai-ichi Life Au st ral ia PTY Limited, Director of TAL Life Limited , and a M ember of the Memb er’s C ou nci l o f Dai-ichi Insuran ce Compan y o f Vietnam Li mi ted . Mr. Kawahara received a Bach elo r of Arts deg ree in Eco no mics from Hitotsu bash i University in Tok yo , Japan . Mr. Kawah ara became a Director of th e Co mp an y in 2 01 8. We bel iev e that Mr. Kawah ara’s kn owled ge an d exp erience as a lead er in the in ternat io nal life insu ran ce ind ustry, alo ng wi th h is lo ng-stan ding k no wled ge an d serv ice with Dai-ichi Life and his season ed b usin ess ju dgmen t, are valuable to us an d o ur Board o f Directo rs. Tetsuy a Kikuta . Mr. Kiku ta is th e M an aging Ex ecutiv e Offi cer o f Dai-ichi Life and the Manag in g Execu tive Officer of Th e Dai-i ch i Li fe Insurance Co mp any, Limited. Mr. Kik uta curren tly serves as a Director fo r each of th e fo llowing co mp anies: Th e Dai-ich i B uild in g Co ., Ltd., The Dai-ichi Life In surance Co mp an y Limited, Mizuh o-DL Fin anci al Techn olog y Co ., Ltd., an d Soh go Ho using Co., Ltd . M r. Kik uta has held vario us po sition s with Dai-ich i Life since 20 08 , inclu din g Man ag i ng Ex ecu tiv e Officer, Ch ief General Man ager, Inv estment; Execu tive Officer, Ch ief General Man ager, Inv estment; General Man ager, Inv est ment Pl an nin g Dep artmen t; an d Gen eral Manag er, Eq uity Inv est ment Dep artmen t and Intern ation al Business Manag ement Dep artmen t with The Dai -ichi Life In surance Co mp any, Limited an d Man ag i ng Directo r of Dai-ich i Life Intern ation al (AsiaPaci fic) Limited. Mr. Kiku ta has also served as a memb er of the Member’s Co un cil o f Dai-ich i Li fe In surance Co mp any o f Vi etnam, Limited, an d as a Directo r fo r the following compan ies: TAL Dai-ichi Life Au stralia Pty Limited; TAL Life Limited ; an d TAL Limited. Mr. Kikuta earn ed a Bachelor of Commerce d egree from Hitotsu bash i Un iv ersity in Tok yo , Jap an an d receiv ed a Master of Bu sin ess Admin istration d eg ree from Columbia University. Mr. Ki ku ta b ecame a Direct or for t he Co mp an y in Au gu st 2 01 8. We believe th at M r. Ki ku ta’s kn owledg e and ex perien ce as a leader i n th e intern ation al life insu ran ce ind ustry, alon g with his lo ng -stan ding k no wled ge and serv ice with Dai -ichi Life and his seaso ned b usin ess j ud gmen t, are val uable to us an d o ur Board o f Di recto rs. Va nessa Leonard. M s. Leo nard i s a practicin g attorney an d is a Prin cip al at Leon ard Mitch ell Co nsu l ting . She prov id es co nsulting serv ices fo r no t-fo r-pro fit o rg anization s, primaril y i n t he areas o f management, leg al, and organ izat io nal behav io r. She 19 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents was p rev io usly a sen io r co nsu l tant and manag er wi th KPMG, Higher Education C on sultin g, So utheast M ark et in Wash in gton , D.C. and Atlanta, Geo rgi a an d a fin anci al anal yst fo r Emory Universi ty in Atlan ta, Georgia. In h er con sultin g and an aly st roles, Ms. Leo nard focused on manag ement acco un ting matters (p rimarily governmental complian ce an d in direct co st accou nti ng ) fo r h ig her ed ucat io n in stitution s. Ms. Leon ard is a memb er of th e Bo ard o f Trustees of th e Un iv ersity of Alabama, where sh e is Chairman of its Au dit Committee and serves on its Phy sical Propert ies, Co mp ensation, Finan ce, Nomin ating , Leg al Affairs and Publ ic Review Co mmittees. M s. Leon ard is also a memb er o f the Health Care Aut ho rity fo r Bap tist Health Board , UAB Ed ucatio n Fou nd ation Bo ard , and t he UAB Health System Bo ard . Ms. Leon ard p revio usly serv ed o n th e Gov ern or’s Task Force t o Streng th en Alab ama’s Families and the Bo ard of th e Un ited Way for t he Lak e Martin Area in Alab ama. M s. Leo nard received an un dergradu ate deg ree in Health Care Manag ement fro m th e Un iversity of Alabama, a Master of Bu siness Admi nistratio n from the University o f Mississip pi, an d a Ju ris Docto rate from the Un iv ersity of Alab ama Scho ol o f Law. Ms. Leon ard became a Director fo r th e Co mp any in 2 00 4. We b elieve that M s. Leo nard’s ex perien ce as an atto rn ey; her man agemen t acco un ting experience an d skills i n th e field o f accou nti ng an d compli an ce with comp l icated reg ulation s fo r larg e, co mp lex o rg anization s; an d h er lead ersh ip ro les in civic an d n ot-for- profit organ izatio ns are valuab le to ou r Bo ard of Directors. J ohn J. McMahon, J r. Mr. McM aho n is Ch airman of Ligo n In du stries, LLC. Prev io usly, M r. M cMah on was a lawy er in private practi ce in Birming ham, Alabama, b efo re sp end in g twenty-five y ears with McWan e, In c., a p rivately -h eld manu facturing co mp any wit h i ntern ation al o perati on s hav in g ov er twenty plants an d ov er on e b illio n do llars i n sales. Durin g his career at McWan e, Inc., Mr. McM aho n held nu merou s manag ement p ositio ns, incl ud in g Presid ent and Chairman of th e Board, an d nego t iat ed o ver twen ty -fiv e acqu isitio ns ran ging fro m p ubl icl y-held co mp anies t o small p rivately -h eld co mp an ies. Mr. McM ah on serves on th e B oard o f Directors o f ProAssu ran ce Co rpo rat io n, an d h e serves o r has serv ed o n the Bo ard s o f Directors o f o th er pu blicly- and priv atel y-held compan ies, includ in g Nat io nal Ban k o f Commerce, Alabama Natio nal Ban corpo ratio n, John H. Harlan d Compan y, an d Co op er/T. Smith Co mp any. He was on the Board of Trustees of Birmin gh am-So uthern Co llege. He has also been a Directo r or Tru stee of the B irming ham Airp ort Au th ority an d the Un iv ersit y o f Alabama System. Mr. M cMah on receiv ed h is un dergradu ate deg ree fro m Birmin gh am-So uthern Co llege and a Ju ris Doctorate fro m the Un iv ersity o f Alab ama Sch oo l of Law. M r. M cMah on became a Director fo r th e C ompany in 1 98 7. We believe th at Mr. M cMah on ’s b ack grou nd as a lawyer in priv ate practice; h is sk ills and his lo ng exp erience as a seni or executiv e of McWan e an d Lig on In du stri es; h is ex perien ce as a lead er in o th er b usin ess, civic, ed ucatio nal, an d no t-fo r-p ro fit organ izatio ns; his lo ng -standi ng k no wledg e o f t he finan cial services ind ustry; an d his season ed bu siness jud gment are valuable to ou r Bo ard of Directors. Ungy ong Shu. Mr. Shu is the Presid ent and Ch ief Ex ecu tiv e Officer of Co re Valu e Man agemen t Company, Limited, an ad visory firm that h e estab lished i n 2 01 3. Mr. Shu worked in various po sition s for J.P. M org an Secu rit ies Japan, Limited from 19 86 t o 2 00 7. These p ositio ns in clu ded M ergers an d Acq uisi tion s Anal yst, Corp orate Finance Asso ciat e, Vi ce Presid ent o f In vestmen t Bank in g, head of Jap an Finan cial Institu tion s Grou p, Man aging Direct or, Co -Ch ief Op eratin g Officer of Jap an Inv estment Ban king , an d Sen io r Inv estor Clien t M anagement. Mr. Sh u worked in v ariou s po sition s fo r M errill Lyn ch Japan Secu rit ies Limited fro m 20 07 to 2013. These po si tion s in clu ded Chairman of Japan Fin ancial In stitut io ns Gro up , Co -Head of Asi a Fin ancial In stit utio ns Grou p, Co -Head o f Japan In vestmen t Bankin g, and Vice Ch airman . Mr. Shu serv es as a director of Dai-ichi Life an d DESCENTE, LTD. M r. Shu graduated fro m Hito tsub ashi Uni versity in Japan, wh ere he majo red in laws. M r. Shu became a Directo r fo r the Compan y in 2 01 5, an d h e serv ed as a director of Dai-ichi Life In su rance Compan y, Limited fro m 20 15 to 20 16 . We b elieve t hat Mr. Sh u’s b ackg ro un d in b usiness, in clu ding his exp erience and serv ice in in vestmen t b ank in g, h is legal train in g, an d strategic and fi nancial p lan ning kn owledg e, are val uable to us an d o ur Board o f Di recto rs. J esse J . Spikes. M r. Spik es practiced law fo r almo st 4 0 y ears. Until M ay 31 , 20 17 , Mr. Sp ikes was Sen io r Cou nsel in th e Atlanta office of Den to ns US, LLP. After serving as Leg al Advi sor to the Al Bahrain Arab African Bank in Man ama, Bahrai n and the Arab Afri can In ternat io nal Bank in Cairo , Egy pt wh ere he liv ed from 19 81 to 1 98 5, h e joined Atlanta-b ased Lo ng , Ald ridg e & No rman LLP (“LAN”) in 19 86 where h e b ecame a p artner in 1 98 9. LAN later merg ed with McKenn a & Cuneo LLP to b ecome M cken na Lo ng & Ald rid ge LLP, and , sub sequ ently, the leg acy firm o f Denton s’ At lanta office. He al so serv ed as Gen eral Cou nsel t o Atl an ta Life Insu ran ce Co mp any, Law Clerk to Ju dge Damo n J. Keith o f th e United States C ou rt of Ap peals, Six th Circuit , and an asso ciate with the p red ecessor firm o f Atlanta-b ased Alston & Bird . M r. Sp ik es’s l aw p ractice focu sed o n bu sin ess law, i nclud in g co rp orate an d b ank in g transact io ns, g ov ernan ce an d complian ce, intern al in vestigat io ns, aud its and speci al committee representation s, an d marketing an d sp orts law matt ers. He also rep resen ted bu sinesses, in divid uals and go vernmental en tities in th e pu blic p ro curemen t arena. M r. Sp ik es h as also served as a d irecto r o f pu blicly- and priv atel y-held co mpan ies, an d in leadersh ip ro les with th e At lan ta Area Co un cil of the Boy Sco uts o f America. C urren tly, Mr. Spikes is p resid ent of Rib s On The Ru n, In c., an Atlanta-b ased co mp any that dev elo ps recipes fo r, and then p rep ares and sells, ru bs, sauces and smok ed-meat pro du cts. He also serves on the Bo ard o f Tru stees fo r HSOC, In c., a sub sidiary o f Ch ildren’s Health care o f Atlanta, In c. t hat man ag es Hu gh es Sp ald ing Child ren ’s Hospital. M r. Sp ik es receiv ed his BA d egree i n Eng lish fro m Dartmo uth Colleg e, h is BA deg ree in Philo so ph y and Politics fro m University College at Ox fo rd Un iv ersity and a Juris Doctorate fro m Harvard Law Sch oo l. Mr. Spikes became a Director for the Co mp an y in 201 1. We b elieve th at Mr. Spikes’s sk ill and exp erience as an att orney , en trepreneu r an d l ead er in o th er b usin ess and civ ic org an i zatio ns are valuab le to o ur Board of Directo rs. To shia ki Sumino. Mr. Su mino is the Ex ecu tiv e Officer, Ch ief Gen eral Manag er, No rth America o f Dai-ichi Life and the Presiden t, Ch ief Executi ve Office of DLI No rth America Inc. Mr. Sumin o also serv es as a Directo r of DLI No rth America Inc. M r. Sumin o h as h eld vario us po sition s with Dai-i ch i Life, in clu ding Ex ecu tive Officer, Chief o f Co rporat e Plann in g Un it for Dai-ich i Life Holding s, Inc. from 20 16 to 2 01 8 an d th e fo llo wing p osit io ns wit h Th e Dai- ichi Life In surance Company, Limited fro m 1 99 7 to 20 16 : General Man ager, Gro up Manag emen t Head qu arters; Staff Gen eral Man ager, Co rp orate Planni ng Dep artmen t; Co rpo rat e Plan ning Departmen t ; and Secu rities Plann i ng Dep artmen t. M r. Su mi no earned a Bach elor o f Law deg ree fro m the University of To ky o i n Tok yo , Japan an d M CJ and LLM deg ree from New Yo rk University Sch oo l o f Law. Mr. Su mino became a Di rector fo r the Compan y in Ap ril 20 18 . We believ e th at Mr. Sumi no ’s knowledg e and experience as a lead er in t he intern ation al life in surance in du stry, alon g with h is lo ng -stan ding k no wledg e and serv ice with Dai -ichi Life and his seaso ned b usin ess j ud gmen t, are val uable to us an d o ur Board o f Di recto rs. 19 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Will ia m A. Terry. Mr. Terry is Chairman an d on e of th e fo un ders o f High lan d Asso ciates, In c., an inv estment adv isory firm th at has ad vised on ap proxi mately twenty-sev en b illion dol lars of assets (as of December 2 01 8) fo r no t-fo r-p ro fit health care organ izatio ns, fo un datio ns, endowmen ts, an d select in dividu als. He serv es as a memb er and director o f Alabama Capit al Network, LLC. He p rev io usly served as a man aging memb er and d irecto r o f Hig hland Strategi es, LLC u nti l M arch 2 01 8. Befo re starti ng High lan d Associates i n 19 87 , Mr. Terry worked in th e Investment M anagement Co nsulting Gro up of In terstate/Joh nso n Lan e Co rp oration . Mr. Terry previously served as a member of th e Ex ecutiv e Co mmitt ee an d Presiden t for th e Mo un tain Bro ok C ity Scho ols Fou nd ation an d Ch airman o f the Ex ecu tiv e Bo ard o f the Greater Alabama Co un cil of Bo y Scou ts o f America. Mr. Terry received an un dergradu ate degree from Dav idso n Co llege and is a CFA ch arter h older. M r. Terry became a Directo r for the Company i n 2 00 4. We b eli ev e th at Mr. Terry’s sk ill s and ex perien ce at High lan d Associates in th e field o f inv est ments an d as a lead er o f th e firm; hi s exp erience as a leader in civic, edu cational, and n ot-for-profit organizations; and his seasoned b usin ess jud gmen t are val uable to ou r Bo ard of Directors. W. Michael Wa rren, Jr. Mr. Warren is Presiden t and Chief Execu tive Officer of Children ’s o f Alabama, an ind ependent, n ot-for-profit, freestan ding p ediatric h ealth care center. Prior to joinin g Child ren ’s in Jan uary 2 00 8, Mr. Warren was Chai rman and Ch ief Executiv e Officer o f En erg en Co rp oratio n and its two p rimary su bsid iaries, Alagasco an d En erg en Resou rces. M r. Warren became Presiden t o f Alagasco in 1 98 4 and held a nu mb er of in creasi ng ly important p ositio ns with Energen b efo re b ein g named Presiden t and Ch ief Execu tive Offi cer in Febru ary 1 99 7 and Chai rman in Janu ary 19 98 . Mr. Warren was a lawyer in priv ate p ractice in Birming ham, Alabama, b efo re j oining Alab ama Gas in 1 98 3. M r. Warren served o n the Board o f Directo rs of Energen Co rp oration un til hi s term exp i red in April 20 10 . Mr. Warren h as served as Ch airman o f the Board o f Direct ors of th e Bu siness Co un cil of Alab ama, th e Un ited Way, an d Children ’s of Alabama. He al so h as been Ch airman of th e Metro po lit an Develop ment Board, t he Alab ama Sy mp ho ny Board of Directo rs, an d the Ameri can Heart Association Bo ard of Directors. He h as chaired the gen eral campaign of th e United Way for Cen tral Alabama an d the United Neg ro Co llege Fu nd . M r. Warren received an und ergradu ate deg ree from Au bu rn Un iv ersit y an d a Juris Doctorate from Duk e Un iv ersit y. M r. Warren became a Director for th e Co mp any in 20 01 . We believ e th at Mr. Warren’s backg ro un d as an attorn ey ; his sk ills and lo ng exp erience as Chairman an d CEO o f a h ig hly- regul ated pu bli cly -h eld u tilit y; h is con tin uing ex perience as Presid en t and CEO of Ch ildren’s o f Alab ama; h is exp erience as a leader in o th er bu si ness, civ ic, an d n ot-fo r-profi t o rg anization s; an d h is season ed bu siness ju dg ment are v alu able to o ur Board o f Di rectors. Audit Co mmittee The Board h as a sep arately design ated stand in g au dit co mmittee. Its members are Van essa Leo nard, Ch airperson , Wi lliam A. Terry, an d W. Michael Warren, Jr. Th e Aud it Co mmittee is governed b y a written charter that was app ro ved b y th e Bo ard . Th e Au dit Co mmit tee an nu ally revi ews its p erformance of its resp on sibilities un der th e ch arter. On No vember 6 , 2 018, the Au dit Committee d etermined th at it had satisfied its resp on sibi lities un der th e ch arter d urin g 20 18 . Ou r Board h as det ermin ed th at William A. Terry, a member of ou r Au dit Committee, is an au dit commit tee finan cial ex pert u nd er the ru les o f the SEC an d is ind epen den t u nd er ap pli cab le SEC stand ard s. While Mr. Terry po ssesses th e attrib utes o f an aud it co mmittee fin ancial ex pert (as defin ed u nd er th e SEC rules), he is n ot an d has n ev er been an accou ntant or au dito r, an d th is fin ancial exp ert d esi gn ati on d oes no t imp ose any d uti es, o blig ation s or liabilities t hat are greater th an the dut ies, o blig ation s, and l iabilities impo sed b y b ein g a member of th e Audit Commit tee or t he Board. See It em 10 , Qu alificatio n o f Di recto rs, for fu rther discussio n o f Mr. Terry’s exp erience and qu alification s. Co de o f Ethics The Compan y h as ado pted a Co de o f Bu siness Co nd uct, which ap plies to all directors, o fficers, and emp lo yees o f th e Company. Th e Cod e of Bu siness Co nd uct in corpo rates a co de o f eth i cs th at app lies t o the prin cip al ex ecu tiv e o ffi cer and all fi nancial o ffi cers (in clu ding th e Ch ief Finan cial Officer an d the C hief Accou ntin g Officer) o f t he Co mp any. The Cod e o f Bu sin ess Con du ct i s av ailable on the Compan y’s websit e at http ://in vestor.protective.com/co rpo rat e-gov ernan ce/co de-of-co nd uct . In t he ev ent the Co mp any amen ds o r waives any o f the p ro vision s of the Co de of Busin ess Co nd uct ap plicab le to o ur p rincipal ex ecut iv e o fficer, prin cip al financial officer, or pri nci pal acco un tin g o fficer that relate to any elemen t of the d efinitio n o f “co de o f eth ics” en umerated in Item 4 06 (b) of Reg ulation S-K un der th e 1 93 4 Act, th e Co mp any in ten ds to d isclo se th ese actio ns on th e Co mp any ’s web site. 19 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 1 1. Executive Compensatio n Un less th e co ntext otherwise requ ires, the “Comp any ,” “we,” “us,” o r “o ur” refers to Pro tectiv e Life Corpo ratio n. Co mpensa tion Discussion and Ana l ysis In thi s sectio n, we describ e t he material compo nen ts of o ur ex ecu tiv e compensation p ro gram in 20 18 for o ur n amed execu tive officers, wh ose co mp ensation is set fo rth in th e Summary Co mpen sat io n Tab le and other compen sation tab les co ntain ed h erein: Na med Executive Officers for 2 01 8 •Richard J. Bielen, ou r Presid ent and Ch ief Execu tive Officer; •Steven G. Wa lker, ou r Ex ecutiv e Vice Presid ent and Ch ief Finan cial Officer; •Jo hn D. Jo hns, ou r Ex ecutiv e Ch airman of th e Co mp any ; •Michael G. Temple, o ur Vice Chairman, Fin ance and Risk ; and •Carl S. Thigpen, o ur Execu tive Vice Presiden t an d Chief Investment Offi cer. Our Co mpensatio n Philo sophy The ob jectiv es of our executive compensation prog ram are to: 1) attract an d retain th e most q ualified ex ecutiv es; 2 ) reward them for achievi ng h igh levels o f p erforman ce; and 3) align executiv e and Dai-ichi Life i nterests. Principles o f Our Compensa tio n Pro gra m To meet ou r ex ecut iv e compensation ob j ectiv es, we d esig n our p ro gram to : 1 ) align compen sation wi th bu siness go als an d resu lts; 2 ) co mp ete for ex ecutiv e tal en t; 3) su pp ort risk man agemen t p ract ices; 4) take into accou nt market an d ind ustry p ay and practices; and 5) be commu nicated effectiv ely so th at o ur officers un derstan d h ow co mpen sat io n is lin ked to perfo rmance. Th e key co mp on ents o f o ur execu tive co mp en satio n p ro gram are: 1 ) base salaries; 2 ) an nu al cash in centiv e awards; 3) lon g-term cash in cen tives; and 4) retiremen t an d d eferred co mp ensatio n p lan s. Ba ckg round of Co mpensa tion Prog ram In 2015, as a result of the Company ’s merg er with Dai-ich i Life (th e “M erg er”), t he Co mp any ’s stock ceased t o be p ub licly trad ed. The Co mp ensatio n Discussion an d Anal ysis an d the related tabl es and disclo su res that follo w prov id e details reg ard ing ou r 2 01 8 co mp ensatio n p rograms, wh ich were ori ginal ly restructured u pon th e M erg er in 20 15 to reflect th e fact that we n o lon ger h ave a p ub licl y trad ed class of stock t o u se in ou r co mp ensation prog rams. In 2 01 5, we ad op ted lon g-t erm incen tive and an nu al incentiv e prog rams. In Nov emb er 20 17 , th e Bo ard ad op ted the Pro tectiv e Life Corpo ration An nu al Incen tive Plan (“AIP”) and th e Protective Life Co rp oration Lo ng -Term In centiv e Plan (“LTIP”), which b ecame effective Jan uary 1 , 20 18 , un der which an nu al and lon g-term cash in centiv es h ave been mad e availab le to o ur n amed executive o fficers and certain o th er emp lo yees since 2 01 8. On No vember 6 , 20 18 , th e Board app ro ved an amend men t and restat ement o f th e AIP and the LTIP. Fo r mo re in fo rmation about th ese plans, please see “Ad op tion o f Annual In cen tiv e Plan and Lon g-Term In centiv e Plan” in t his Item 1 1. Except fo r M r. Jo hn s, no ne of o ur n amed ex ecu tiv e officers are cu rrently employ ed pu rsuan t to an employ men t agreement. The emplo ymen t p eriod s an d terms of employ ment u nd er th e 2 01 5 employ men t agreements with the o t her named ex ecutiv e o fficers (th e “Employ men t Agreements”) exp ired in February 2017 or Feb ru ary 20 18 , as app licable. In November 20 17 , M r. Joh ns en t ered into a letter agreement (th e “Letter Ag reemen t”) with th e Co mp any th at estab lished h is compen sation arran gements d uri ng t he p eriod h e is serv in g as Executiv e Ch airman of the Company. Fo r mo re in fo rmation ab ou t th e Letter Ag reemen t , p lease see “Potent ial Payments u po n Terminat io n o r Chan ge o f Contro l” in this Item 1 1. Co mpensation Co mmittee The Co mp ensatio n and M anagement Succession Committee o f ou r Bo ard o f Directo rs (“Compen satio n Co mmittee”), which co nsists of three in depen den t d irecto rs, o versees the compen sation program fo r o ur officers. In 20 18 , th e Co mp ensatio n Co mmittee met two times. Amon g its du ties, t he Compen sation Committee is resp on sible fo r formul ating compensation and related recommen datio ns fo r ap prov al b y th e Bo ard , in cludi ng : po l ici es an d pro grams app licable to the Compan y’s officers an d k ey emplo yees; the AIP, includi ng the total amo un t o f bon uses to be p aid each y ear un der the AIP and the metho do logy used to d etermine in dividual b on uses; th e ad ministratio n of th e LTIP and the achievemen t o f any ap pli cab le perfo rman ce ob jectiv es; corp orate go als an d obj ectives relevan t to the compen sation of th e Ch ief Executive Officer (“CEO”) an d evaluatio n o f the CEO’s perfo rman ce in ligh t o f these g oals and ob jectiv es; b ase sal ary, AIP b on us, LTIP ob ject iv e, an d o th er co mp en satio n o f the CEO and th e ot her senior officers o f th e Co mp any ; and t he perfo rmance o f sen io r o ffi cers and sen io r management successio n p lan s. The Co mpen sat io n Committee’s charter, which sets o ut its du ties and resp on si bilities, can b e fo un d on our web site at h ttp://inv esto r.protecti ve.com/co rp orate-go vernan ce/compen sation . The Co mp ensatio n Committee h as retained Willis Towers Watson , an ind epen den t compensation co nsu ltant, to revi ew, assess an d prov id e inp ut with respect to certain asp ects o f o ur compen sation prog ram fo r ex ecu tiv e o fficers. Th e co nsultan t repo rts 19 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents directly to th e Compen sation Committee with respect to these services, and t he Compen sation Committee may rep lace t he consu ltant at an y time. Th e co nsultan t gives th e Compen satio n Co mmittee adv ice ab ou t: 1 ) th e co mp ensatio n prov id ed to o ffi cers at ot her compan ies in the in su ran ce in du stry, using prox y st atemen t data, p ub lish ed survey sou rces, and the con sultant ’s p roprietary data; 2) th e amo un t an d ty pe of co mp ensation to provi de to o ur officers and key emplo yees; 3) the v alu e of lon g-term in cen tive grants; 4) t he allo cation of total comp ensation amo ng t he v ariou s elements; and 5 ) in ternal pay equ ity amon g k ey ex ecu tiv es. Rep resen tativ es o f the co mpen sat io n co nsu ltant attend reg ular Co mp ensatio n Co mmittee meetin gs and co nsult with t he Chairp erson of th e Co mp ensatio n Co mmittee (wit h o r wi th ou t management present) u pon requ est. The compen satio n consu ltant also adv i ses th e Corpo rate Go vernan ce an d No minatin g Commit tee on director compensation . Co mpensation Co mmittee Interlo cks a nd Insider Partici pa tion Du ring 20 18 , the members o f o ur Co mp ensatio n Committee were M r. McM aho n (Ch airperson ), M r. Spik es, an d M r. Terry. No relatio nsh i p th at wo uld creat e a “compen sation co mmittee in terlo ck” (as d efined in th e SEC reg ulations) ex isted du ring 2 01 8 between an y o f t hese indi vidu als and any o f ou r ex ecutiv e officers. Co mpensation Peer Group For 2 01 8, th e comp ensati on con sultant fo cused o n the pay practi ces of a p eer g ro up o f 15 life in su rance an d finan cial servi ces companies that are similar to u s in size and bu sin ess mix and th at represent a po ssible so urce o f officer and k ey emp lo yee talen t. Th e Co mp ensati on Co mmitt ee selects th e co mp anies in this compen sation peer g ro up taking in to acco un t the recommen datio ns o f the co nsultan t and ou r man agemen t. Th e co nsu ltant also prov id es a summary o f compen satio n su rv ey d ata for ot her co mp anies to give the Compen satio n Committee add itio nal in fo rmation fo r co mp ariso n p urpo ses. The compen sation peer grou p for th e 20 18 compensation cycle includ ed: •Lin coln Nat io nal Co rp oratio n •Prin cip al Fin anci al Gro up , In c. •Ameripri se Finan cial, Inc. •Afl ac Inco rp orated •Gen worth Finan cial, In c. •Un um Gro up •Reinsurance Gro up of America, In c. •CNO Fin an cial Gro up , In c. •Assurant, In c. •Torchmark Co rpo rat io n •Primerica, Inc. •FBL Fin ancial Gro up , In c. •Vo ya Fin ancial Gro up, In c. •Ath en e Hol ding •American Eq uity In vestment Life In surance Ou r compen sation con sultan t, alo ng wit h ou r Compen sation Co mmitt ee and ou r man agemen t, con sider the compo si tion o f the peer g ro up ann ually. We rev ised o ur p eer g rou p for 2 018 by remo ving XL an d StanCo rp d ue to transactio n activity that eith er to ok tho se co mp an i es private or materially ch anged th e nature o f t he co mp any. We add ed Vo ya Financial Gro up , Inc., Ath ene Ho ld i ng , and American Equ ity Inv estment Life Insu ran ce due to thei r size and co mp arab ility to the Company, and in o rder to k eep a critical mass within the peer g rou p after t he omissio n o f th e two co mp an i es referenced ab ov e. We believe that t he p eer g ro up has th e ap pro priate mix o f co mp anies and that it p ro vides th e ap pro priate means of comparin g o ur co mpen sat io n p ro grams and perfo rman ce to th at o f k ey competitors. Pay fo r Performa nce The Compen sation Commi ttee is co mmitted to ty in g ex ecu tiv e co mp ensatio n to Co mp any perfo rmance. To evaluate its implementatio n o f this pay fo r p erforman ce ph ilosophy, the Compen sation Committee members con sider a wide rang e of i nformatio n (i nclud in g information th ey receiv e bo th as Co mp ensatio n Commit tee memb ers an d as Bo ard memb ers), in clu ding: 1 ) o ur d eploy men t o f capital fo r acqu isit io ns and prod ucts; 2 ) o ur ad j usted operating earning s, th e rate of growth of ou r adjusted o perating earning s, and the deg ree of difficu lty in achieving o ur earn in gs g oal s; 3 ) ou r fin ancial st ren gth (as measured by o ur statu to ry capit al, risk-based capital (“RBC”), and rati ng agen cy rating s); 4) o ur budgets, exp ense manag ement, an d bu dg et v ariances; an d 5 ) pay for performance analyses prepared by th e compensation con sultan t. 19 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp ensatio n Committee do es n ot p lace a particular weigh ting o n any o f th ese facto rs, bu t in stead co nsid ers th e informatio n as a wh ole. Based on this on go in g rev iew, the Co mp ensatio n Committee b elieves th at ou r compen satio n prog ram p ro vides a strong lin k between Co mp any p erforman ce and th e co mp ensatio n o f o ur officers. Co mpo nents of Our 2 01 8 Co mpensati on Prog ra m The key co mp on ents of o ur executiv e co mp ensation p ro gram are: 1) b ase salaries; 2) an nu al cash incentive awards; 3) lo ng -term cash in centiv es; an d 4 ) retirement and deferred compen sation plans. The Co mp en sat io n Co mmittee co nsid ers each compo nen t (sep arately and with th e o th ers) for o ur sen io r officers. The Co mp ensation Committee targets the to tal an nu al comp ensati on p ack age to b e at t he median of the compensation p eer grou p. As p art of this rev iew, th e Compen sation Co mmittee co nsid ers th e to tal “mix” o f the base salary, annu al cash in cent iv e and lo ng -term compen sation d elivered to o ur sen io r o fficers, an d co mp ares that co mp ensation mix to t he co mp ensati on mix o f comparable o fficers at other co mp anies. The ann ual incentive and lon g-t erm incenti ve comp on ents of th e prog ram are desig ned so ab ov e-av erage co mp any perfo rmance will resu lt in ab ov e-medi an total co mp ensatio n, an d b elo w-av erage co mp any perfo rmance will resu lt in b elo w-med ian total compen satio n. The C ompensation Co mmittee do es n ot have formal p olicies regardin g th ese facto rs, b ut tries to make ou r practices g enerally co nsistent wit h t he practices of th e peer grou p. The compensation co nsultan t reco mmend s a compen sat io n pack age fo r o ur CEO. Our Hu man Reso urces Dep artmen t prov i des the Co mp ensation Co mmittee with ad dit io nal in fo rmation abo ut ou r o fficers and ou r compen sation arrang emen ts. Our CEO, wit h adv ice fro m the compen sation con sultant , recommen ds co mp ensatio n p ackages for our senior officers; h owever, he do es no t prov id e recommen dat io ns ab ou t h is own co mp en satio n. As previo usly disclosed , ex cep t for M r. Jo hn s, no ne of o ur n amed execu tive officers are emp lo yed p ursu an t to an emplo ymen t agreement. Pu rsu ant to the Letter Agreemen t wit h Mr. Joh ns, d urin g 20 18 an d th ereafter so long as he remains Ex ecutiv e Chairman un der the terms o f th e Letter Agreement, Mr. Joh ns’s an nual b ase salary is $1.2 millio n, p ayable semi-mon t hly consistent with t he Compan y’s n ormal pay ro ll po licy. Un der th is agreement, Mr. Jo hn s is en titled to th e same p erqui sites an d ben efits as were cu rrently in effect on the date o f th e Letter Ag reement in 20 17 , b ut h e is n ot en titled to any n ew or ad dit io nal an nu al incen tive b on uses o r lon g-t erm incen tive g ran ts. Any cu rrent or fut ure amou nts p ay able un der lo ng -term in centiv e awards that were ou tstand in g as o f No vember 2 017 are to be p aid in acco rd ance with the t erms of such awards an d h is Emp lo yment Ag reement. Fo r more in fo rmation abo ut th e Letter Agreemen t, see “Po ten tial Payment s up on Termin ation or Chan ge of Con trol” in th is Item 1 1. Ba se Sa la ries Base salary is the primary fix ed po rti on o f ex ecut iv e p ay. It co mp ensates in divid uals fo r p erforming th eir day -to-day du ties and resp on si bilities and prov id es th em with a level of in come certainty. Salary adju stments hav e historically been made in late Feb ru ary /early March and hav e been effectiv e March 1 of that year. In makin g it s b ase salary reco mmen dations to th e Board, the C ompensation Committee con siders the resp on sibilities of the job , ind iv id ual perfo rman ce, the relative v alu e o f a positio n, experience, compariso ns to salaries fo r similar po siti on s in o th er compan ies, and in ternal p ay equ i ty. Fo r the CEO, the Compen sation Committee also con sid ers Co mp any perfo rmance. No particular wei gh ting is g i ven to an y o f these facto rs. The Co mp ensatio n Committee reviewed the performance and b ase salaries of the named ex ecutiv e o fficers ex cept for Mr. Joh ns at its February 20 18 meeting . At the recommen dat io n of the Co mpen sat io n Co mmittee, th e B oard ap prov ed th e fol lo win g an nu al base salaries (and the related percentage in creases from t he p rev io usly -effectiv e base salari es), effectiv e March 1 , 2018: 1) Bielen , $780,000 (4 %); 2) Walker, $43 0,0 00 (3.6 %); 3 ) Temple, $51 5,0 00 (8 .4%); and 4) Thigp en, $5 30 ,00 0 (2 .9%). As previou sly described, effective Jan uary 1, 20 18, Mr. Jo hn s’s ann ual base salary b ecame $1,2 00 ,00 0 per th e terms o f the Letter Ag reement. Annual Incentive Pla n Awards Officers and k ey employ ees are eligible for an nu al cash in cen tive op po rtun i ties u nd er th e AIP. The AIP’s purp ose is to attract, retain, mo tivate, and reward qu alified officers an d k ey employ ees by pro viding them with t he o pp ortu nity to earn co mp etitive co mp ensatio n d irectly link ed to th e Co mp any ’s perfo rman ce. On Nov ember 6, 2 01 8, the Board o f Directors o f the Compan y ap prov ed an amend ment and restatement of the AIP to simplify the p rocess for determinin g th e co mp osition of the committee o f officers which is au th ori zed to admin i ster the AIP in resp ect of all particip ants in the AIP, oth er th an th e Executi ve Chairman, Presiden t and Chief Ex ecutiv e Officer, an d all members of the Compan y’s Perfo rmance & Accou ntabil ity Committee. The Co mp en sat io n Co mmittee recommends to the Board fo r its ap prov al th e target annu al incen tive o pp ortun ities and performance o bjectives fo r ou r n amed ex ecu t iv e officers for the curren t y ear, ex clu ding M r. Joh ns. Historically, in recommend in g th ese target op po rtun iti es, th e Co mp ensati on Co mmittee has co nsid ered th e respo nsibilities of the job , ind iv id ual p erforman ce, th e relative value o f a po si tion , comparison s to an nu al in cent iv e op po rtun ities for similar p ositio ns in o th er co mp anies, and internal pay equ i ty. No part icular weig ht is g iv en to any o f th ese facto rs. In February 20 18 , the Bo ard app ro ved th e terms of th e 20 18 ann ual in centiv e op po rtuni ties for named execu tive o ffi cers. Th ere are no gu aran teed mi nimu m p aymen ts fo r any officer u nd er ou r AIP. 19 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Payment of an nu al incentives is b ased on achi ev emen t o f on e or more perfo rmance goals. Fo r 20 18 , th e Board establi shed , at th e recommen datio n o f th e Co mp ensatio n Co mmittee, th ese perfo rmance go als (weig hted as sho wn in th e tab le) fo r the n amed ex ecu t iv e o fficers: G oal (in millio ns, excep t percentages) Thresho ld (50% payo ut) Target (100% pay o ut) Max imum (200% pay o ut) After-tax Adj usted Op erating Income (6 0%)$357 $4 17 $4 77 Valu e o f New Business (3 0%)$40 $55 $70 Expense Manag emen t (10 %)(1)$494 $4 80 $4 66 RBC b elo w 3 75 % (Neg ative modifier (2 0%))375% 3 75 % 3 75 % (1) Do es not in clud e exp enses related to th e Liberty Mutu al acquisition After-tax adjusted operating i ncome, measured from Jan uary 1 th ro ug h December 3 1, 2018 , i s d erived fro m pre-tax adj usted op eratin g in come with th e i nclusion o f in come tax ex pen se o r ben efits associated with pre-tax adj usted op eratin g in come. Pre-tax adju sted o perating inco me is calcu lat ed by ad justin g “inco me before in come tax” b y ex clu ding th e fo llowing items: •realized g ain s and lo sses o n inv estments and deriv atives, •ch ang es in th e GLWB emb edd ed d erivat iv es excl usive o f the p ortion attribut abl e to the eco no mi c co st of th e GLWB, •actual GLWB incu rred claims, an d •the amortization of DAC, VOBA, and certain po licy liab ilities th at is impacted b y t he exclusio n o f these i tems. In co me tax ex pen se o r b enefits is allo cated to the items exclud ed from pre-tax ad ju sted o perating inco me at th e statu to ry federal inco me tax rate o f twenty-on e percen t. Income tax ex pense o r b enefits allocated to after-tax adju sted op erating in come can v ary perio d to perio d b ased on ch ang es in th e Co mp any ’s effectiv e in come tax rate. Valu e o f n ew b usiness is measured as th e ex pect ed value of new po licies written from Jan uary 1 th ro ug h December 31 , 2 018. Th e val ue of new bu sin ess includ es in come exp ected to be realized in bo th the current year an d fu tu re y ears. For pu rpo ses of the v alu e of new bu siness go al, the v ariable an nu ity bu sin ess measurement is based on a mark et co nsistent embed ded value analysis. All other bu siness is measured as p resen t v alu e of exp ected future earning s fro m n ew sales abo ve the 6 .75 % assumed co st o f cap ital. The ex pen se manag ement p erforman ce g oal p ro vides man agemen t with an in centiv e to prudentl y manag e o perating ex pen ses an d to maint ain effici en t op eratio ns. Th e exp ense man agemen t perfo rmance goal is measu red fro m Janu ary 1 throu gh Decemb er 31 , 20 18 an d is d efi ned as ot her operating ex pen ses b efo re t he effect o f p oli cy acqu isitio n co st d eferrals, exclud in g in terest ex pen se, th e effects o f rein surance, certain perfo rmance incenti ves, ag en t co mmissio ns, certain n on -d eferred sellin g co sts, certain exp enses associated with acqu isit io n-related activ ity, exp enses incu rred as p art of lo ng -term ex pen se reductio n initiativ es, certain legal costs, cert ain reg ulato ry fees o r other exp enses impo sed on the Co mp any, an d manag ement fees p aid to Dai-ichi Life. In ad dit io n, certain exp ense items are con sidered vari ab le an d are therefo re ad ju sted based on variatio ns in new bu sin ess v olumes. RBC is th e co mp any actio n level “ri sk b ased capital” percen tag e of Protecti ve Li fe Insu ran ce Co mp any (“PLICO”) as o f December 31 , 20 18 , determined as set forth in the app licable in st ru ction s est ab l ish ed b y the Nation al Association o f In surance Commission ers (“NAIC”) an d filed with th e state o f Tenn essee, and b ased on statutory accou nting p rinciples. RBC is intend ed to be a limit on th e amou nt of ri sk t he Comp any can take, and it requi res a co mp any with a h igh er amo un t of risk to h old a h ig her amo un t o f cap ital. The Board det ermined that th e ov erall resu lts achieved i n ad ju sted operating earning s, exp ense man agemen t , an d capital deplo ymen t g oals wou ld b e red uced b y 20 % if RBC was less than 37 5% o n December 31 , 2 01 8. For a furt her discussio n o f RBC, see Note 21, Statu to ry Rep orting Practices an d Oth er Regu la to ry Mat ters, t o th e au dited fin ancial st atemen ts incl ud ed in this Ann ual Rep ort o n Form 1 0-K. The amou nt p ayable b ased on each of the abo ve-describ ed perfo rman ce o bjectives can rang e fro m 50 % (fo r performance at th resh old lev els) to 20 0% (fo r p erforman ce at or abo ve max imum) o f the p ortio n of t arg et award related to such p erforman ce objective. At th e th resh old level of perfo rmance, fifty percen t (50 %) of th e allocable po rtion of th e target award will b e payab le, wi th 10 0% p ayab le for perfo rmance at target. Fo r ach ievement between th e stated perfo rman ce level s (i.e., b etween th resho ld and targ et, and b etween targ et and maxi mu m), the amou nt p ayable will b e d etermined by math ematical in terpo latio n. No amo un t is payab le b elo w the thresho ld level of p erformance. The Compen satio n Co mmittee recommend s to th e Board o f Directors for its determination th e ach iev ement o f the p erforman ce ob jectiv es fo r th e in cen tive o pp ortun ities grant ed t o the n amed ex ecutiv e officers in th e previou s y ear. For other officers an d man agers, th e Comp ensati on Co mmittee reviews th e to tal in cen tive o pp ortun ities an d the metho ds used to determin e in dividu al p aymen ts. At its Feb ru ary 25 , 2019 meeting , th e Bo ard d etermined th at, in respect to 2 01 8 p erforman ce: 1) ou r after-tax adju sted op erat in g income was $378 mi llio n; 2) ou r v alu e of new bu siness was $68 millio n; 3) o ur ex pen se man agemen t amou nt was $481 millio n; and 4) ou r RBC was ab ov e 45 0%. 19 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Lo ng -Term Incentiv e Awa rds In co nn ection wi th the M erg er in 2 01 5, t he Bo ard ap proved a lo ng -term incen tive program th at estab lish ed a formu l a equi ty v alu e for th e Co mp any un der wh i ch o ur named execu tive o fficers receiv e awards, payab le in cash, that will in crease or d ecrease i n v alu e as the v alu e determin ed u nd er this fo rmula ch ang es b ased o n the op eratio n o f ou r b usin ess. Sin ce 20 15 , t he Compen satio n Co mmittee h as ann ually g ran ted th ree forms of lon g-term in cen tiv e awards (Performan ce Unit Awards, Restricted Un it Award s, and Paren t Based Awards, as d efi ned b elo w) to th e n amed ex ecu tive o fficers un der the p ro gram, th e details o f which were disclo sed in the Co mp any ’s Ann ual Repo rts on Fo rms 10 -K fo r th e y ears ended December 3 1, 2 01 5, 20 16 , an d 20 17 . Certain of th ose awards h ave vested an d were earned in 20 18 . Effective Janu ary 1 , 2 01 7, th e Co mp an y ado pted a n ew Lo ng -Term Incen tive Plan (“LTIP”) pu rsuan t to wh ich the afo remen t io ned lon g-term in cen tiv e award s wou l d be g ran ted go in g forward . Effective Jan uary 1, 2 01 8, the Co mp any app ro ved an amend men t to th e LTIP chan ging t he d efinition o f PL Tang ib le Bo ok Value to excl ud e any cu mu lativ e effect adju stments fro m new accou ntin g p ro no uncemen ts. On Nov ember 6, 2 01 8, the Bo ard of Directors o f the Co mpan y ap prov ed an amend men t an d restatement o f the LTIP. Th e amend men t an d restatemen t o f the LTIP, amon g o th er thing s, (i) clarifies that th e Co mp ensati on Co mmittee can ad ju st th e calculation of perfo rmance criteria, in cludi ng PL Tang ibl e Boo k Valu e (as d efined i n th e LTIP), with resp ect to awards o f Perfo rmance Un its u nd er th e LTIP in order to reco gn ize certain sp ecial or no nrecu rring situatio ns o r circu mstances for the Compan y, (i i) all ows th e Co mp ensation Co mmittee to adjust th e defin itio n and calculat io n of PL Tang ib le Bo ok Value with resp ect to award s of Restricted Unit s u nd er th e LTIP in ord er to reco gn ize cert ain sp ecial o r no nrecurring situatio ns or circumstan ces for the Co mp any, (iii) co nfirms th at th e exercise by th e Co mp ensatio n Co mmit tee of its autho rit y to adjust t he calculatio n of perfo rmance criteria wi th resp ect to Perfo rman ce Un its and Rest ricted Units d oes n ot co nstitu te an amendmen t o f an award, and (iv) simplifies the process for det erminin g th e co mp osit io n of th e co mmitt ee o f o fficers of t he Compan y which is autho rized to ad minist er t he LTIP in respect of cert ain p arti cip an ts in th e LTIP. In February 20 18 , the Compensation Co mmittee an d t he Bo ard d etermined a to tal target v alue of th e lon g-term incentiv e awards to b e g ran ted to each executive officer in 20 18 , exclud in g Mr. Jo hn s. Such awards again co nsisted o f Performan ce Un i t Award s, Restricted Un it Awards, an d Paren t-Based Awards, which wil l vest and may be earned on v ariou s dates i n 2 02 0 or 2 02 1. In d etermining the to tal targ et val ue o f lon g-term in cen tive awards in a given year, the Compensation Co mmittee con sid ers a named ex ecutiv e o fficer’s resp on sibilit ies, perfo rmance, previou s lo ng -term incen tive award s, the amo un t o f lo ng -term cash incen tives p ro vided to officers in similar po si tion s at o ur p eer compan ies, an d intern al co mp en satio n eq uity. No p arti cu lar weig ht is given to an y o f these facto rs. In 2 018, n on e of ou r n amed ex ecutiv e officers h ad a gu aran teed mi nimu m t arget amo un t for awards to be granted u nd er the LTIP. The Compensation Co mmitt ee co nsidered a nu mb er o f factors when it grant ed lo ng -term in centiv e awards in 2 01 8, includ in g the d esire to maint ain th e app ro priate balance b etween perfo rmance-b ased and retentio n-based incen tives an d in fo rmation p ro vided b y the comp ensati on con sultant comparin g th e value of ou r lon g-term in cen tive award s g ran ted to n amed executiv e officers to th e v alu e prov id ed b y o ur compensation peer g ro up . The 20 18 lon g-term i ncenti ve op po rtu nities fo r th e n amed ex ecutiv e officers are co mp rised of th ree sep arate award s: 1 .Perfo rmance un its are gen eral ly d esi gn ed to vest b ased o n the ach iev emen t of two o bjectives - cumul ative after-tax ad j usted operating in come (“Op erat in g In come Objective”) and av erage return on eq uity (“ROE Objective”) - o ver the perio d from Jan uary 1, 20 18 to December 31 , 20 20 and generally sub ject to th e named ex ecu tive o fficer’s co ntin ued emplo ymen t un til th e ap pli cab le p ayment date of the earned award (the “Perfo rmance Unit Award s”); 2 .Restricted u nits are gen erally desig ned to vest in two equ al installments on each o f Decemb er 3 1, 2 02 0 an d Decemb er 3 1, 2 02 1, are valued based o n the tan gible bo ok v alu e o f the Company on th e appl icable vestin g d ate and are g enerally su bject to th e n amed ex ecut iv e officer’s con tinued employ men t u ntil su ch respective d ates (th e “Restricted Unit Award s”); and 3 .A do llar den omin ated award th at is gen eral ly d esi gn ed to vest in Decemb er 2 02 0 based on th e n amed ex ecu tiv e o fficer’s con tinu ed emplo ymen t, the v alu e o f wh ich wil l b e ad ju sted t o reflect the chan ge in t he value o f Dai-ichi Life’s commo n stock ov er the three-y ear measu remen t p eriod stated b elo w (the “Parent-Based Awards”). Long-Term Incentive Awards Vesting in 2 01 8 The followin g lo ng -term incentive award s were earn ed in 20 18 : (i) th e second tranch e of the Restricted Unit Awards th at were granted in 20 15 (with a fo ur-year vesting p eriod ); (ii) the first tranche of the Restricted Un it Award s th at were g ran ted i n 20 16 (with a three-y ear v est in g perio d); (iii) the Parent- Based Awards t hat were g ran ted in 20 16 (with a th ree-year vesting perio d); and (iv ) th e Performan ce Un i t Award s that were granted in 201 6 (with a three-y ear perfo rman ce perio d). The p erforman ce measures related to such awards h ad the follo win g levels of achievemen t. 19 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Restricted Unit Award s: Awa rd Perfo rmance Measure Beg inning Ta ngible Bo ok Va lue ($ in millions) Ending Ta ngible Boo k Va lue ($ in millions) Tangible Book Value Per Unit Perfo rma nce 201 5 Restricted Un it Awards (4-y ear v est) Tangib le Book Value per Un it $4 ,3 7 8 $6 ,1 17 $1 3 9 .72 201 6 Restricted Un it Awards (3-y ear v est) Tangib le Book Value per Un it $4 ,6 7 1 $6 ,0 72 $1 2 9 .99 Parent-Based A wa rd s: Awa rd Perfo rmance Measure Initial Da i-ichi Stock Value Fina l Dai-ichi Stock Value Dai-ichi Stock Percenta g e 2 0 16 Parent-Based Award s Dai-ichi stock perform an ce 1 ,341 y en 1,832 y en 1 3 7 % Perfo rmance Unit Awa rds: Award Performance Measure Beginning Tang ible Bo o k Value ($ in millio ns) Ending Ta ngible Book Va lue ($ in millions) Tangible Bo o k Value Per Unit Perfo rmance Actua l Result for RO E o r COE Performance Measure Percenta ge of Award Earned 20 1 6 Parent- Based Awards 50% b ased on Tan g ib le Boo k Valu e p er Un it x ROE Performan ce (%) $4,671 $6,0 7 2 $1 29.99 9.47 % 200% 50 % of awards based on Tangible Bo ok Value per Un it x Cu m ulative Op erating Earnings (“COE”) Perfo rmance ($) $4,671 $6,0 7 2 $1 29.99 $1,8 6 5 200% The amounts p aid to the n amed ex ecutiv e officers based up on the ap plicab le levels o f ach iev ement o f th ese awards are set forth in th e “No n-equ ity in cen tiv e p lan compensation - 2 01 8” column o f th e Summary Compen satio n Tab le and th e app licab l e foo tno te thereto. Perfo rmance Unit Awa rds The p urpo se of the Performan ce Un it Awards is to enco urage o ur named execu tive o fficers to fo cus o n earning s g ro wth and return s on equ i ty. Th e nu mber of un its su bject t o each Perfo rmance Unit Award is determin ed b y d iv id in g 6 0% o f each n amed execu tive o fficer’s target lo ng -term in centiv e op po rtun ity b y an amo un t equ al to 90 % o f the Company’s app licable tang ib le bo ok val ue per u nit as of Janu ary 1, 20 18 . On e-h alf o f the un its su bject to each Performan ce Unit Award will be sub ject to achi ev i ng the ROE Objective an d on e-h alf will be sub ject to ach iev in g t he Op eratin g In come Objective. The amou nt p ay able in respect of each u nit can ran ge from 0% (for perfo rmance ag ainst the ap pli cab le o bjective b elo w th e t hresho ld level) to 2 00% (fo r perfo rman ce at or abo ve max imum). One h un dred percent (1 00 %) o f the award will be p ay able fo r p erforman ce at target. For achi evemen t b etween the stated perfo rman ce lev els (i.e., between thresho ld and target , an d b etween targ et and max imum), the amo un t will be d etermined by math ematical in terpo latio n. Specifically, p aymen t with respect to the ROE Objective will be based on th e fo llowing sched ule: Average Return on Equity Percenta ge of Performance Units Ea rned Less than 5.5% —% 5.8% 1 0 0 % 6 .0% o r more 2 0 0 % 19 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents There wi ll b e straig ht-line in terpo latio n b etween average return on equ ity between 5.5 % an d 5 .8% to determin e the exact p ercen tage to be p aid between 0 % and 10 0%; and between 5.8 % and 6.0 % to det ermin e the ex act percentage to be p aid bet ween 10 0% and 20 0%. Payment with respect to th e Op eratin g Inco me Objective will be based on th e fo llowing sched ule: Cumulative After-tax Adjusted O pera ting Income (Do lla rs I n M il l i ons ) Percenta ge of Performance Units Ea rned Less than $1,25 1 —% $1,322 1 0 0 % $1,393 o r more 2 0 0 % There will b e straig ht-line interp olatio n b etween cu mu lativ e after-tax adjusted op erat in g inco me b etween $1,2 51 ,00 0,0 00 and $1 ,32 2,0 00 ,00 0 to determine the exact p ercentage to be p aid b etween 0 % an d 1 00 %; and between $1,3 22,00 0,0 00 and $1,3 93 ,00 0,0 00 to determine the exact p ercen tag e to b e paid between 10 0% an d 2 00 %. The Performan ce Un it Awards g enerally will b e fo rfeited if th e named executive o fficer’s emp lo yment terminates p rior t o the d ate o f p ayment. Ho wever, a named ex ecu tiv e officer who se employ men t terminat es earli er du e to d eath , d isab ility o r retiremen t on o r after early retiremen t or n ormal ret irement eligibilit y un der the t erms o f the Qual ified Pension Plan will receive a payment wit h resp ect t o a p ro -rata p ortion , based o n service throu gh th e date o f termin ation , of th e Perfo rmance Unit Award s t hat wo uld o th erwise be p ay able (o r such g reater amount as th e Co mp ensatio n Co mmittee may determin e in its discretion ), and t he remain in g p ortion will b e fo rfeited. Restricted Unit Award s and Parent-Based Awa rd s The pu rpo se of th e Restricted Unit Awards is to en cou rag e o ur named execu tive o fficers to fo cus o n reten tion and value creatio n. Th e nu mb er o f restricted u nits su bject to each Restricted Un it Award is d etermin ed by d iv id in g 30 % o f each n amed execu tive officer’s target lon g-term in centiv e op po rtun ity by an amou nt eq ual to the Company ’s applicab le t an gible bo ok v alu e p er un it as o f Janu ary 1 , 2 01 8. Th e Rest ricted Unit Awards v est i n two eq ual i nstallmen ts on December 31 , 20 20 and December 31 , 20 21 and are v alu ed at pay ou t based on th e tan gible b oo k v alu e of t he Compan y o n th e ap pli cab le v estin g d ate. Th e in itial cash valu e of the Parent-Based Awards is eq ual to 10 % o f the targ et lon g-term in cen tiv e award o pp ort un ity for each named ex ecu tiv e officer. At vestin g, th e amou nt p ayab le in respect o f su ch Paren t-Based Awards sh all b e su ch in iti al value mult ip lied by the percentage ch ang e in th e value o f the co mmon st ock of Dai-ichi Life, wh ether su ch v alu e has increased o r d ecreased, o ver t he period from Janu ary 1, 2 01 8 to December 31 , 2 02 0, as measured b ased o n the average value o f such co mmon sto ck in Jan uary 2 01 8 an d December 20 20 , resp ectively. Payment of th e Restricted Un it Awards an d Parent-Based Award s will g enerally be con t in gen t upon the officer’s b ein g emp l oy ed on th e date o f vestin g, ex cept th at a named execu tive officer wh ose employ men t terminates du e to d eath, disability, or reti remen t on or after no rmal retiremen t ag e un der th e terms o f t he Qu alified Pen sion Plan will fu lly vest in such award . A n amed execu tive officer who se employ men t terminates o n o r after early retiremen t eli gibility but before n ormal retirement ag e un der th e t erms o f th e Qu alified Pen sion Plan will receive a p ro -rated p ort io n of the Parent-Based Award, which will immed iately vest, based o n a fraction, th e nu merator of which is th e n umber of co mp lete an d p artial calend ar mon th s between Janu ary 1, 20 18 and th e ret irement date, an d t he den omin ato r of which is 36. A named ex ecutiv e o fficer who se employ men t termin ates on or after early retiremen t elig ib i lity bu t before normal retiremen t ag e un der th e terms of th e Qu alified Pensio n Plan will receiv e a pro-rated p ortion of the restricted u nits, which will immed iat ely vest, based on mu ltip ly ing 1) th e nu mb er of u nv ested restricted un its that wou ld become vested at th e app licable dated by 2) a fraction , t he nu merato r o f wh ich is the nu mb er of complete and p art ial calen dar mon th s b etween Janu ary 1 , 2 01 8 and t he retirement d ate, an d th e d eno mi nat or o f wh ich is (x ) 36 , in th e case of t he p ortio n o f th e restricted un its that wou ld b ecome vested at Decemb er 3 1, 20 20 , and (y) 48, in th e case o f th e po rti on of the restrict ed u nits t hat wo uld b ecome v est ed at Decemb er 3 1, 20 21 . In the case o f a sp ecial termin ation o f t he named ex ecu t iv e o fficer, wh ich co nsists of a t erminati on o f emp lo yment d ue to (i) a d iv est iture o f a bu sin ess segmen t or a sig nificant p ortion o f th e assets o f th e Compan y or (ii) a sign ifi can t red uctio n by the Co mp any of it s work force, th e d eterminatio n o f wh eth er, to wh at ex ten t, and on wh at co nd ition s any p ayment sh all b e mad e with resp ect to any u nv ested p ortion o f yo ur lon g-t erm in centiv e award s shal l be at th e discretion o f t he Co mp ensatio n Committee. In th e case of any other termin ation , the named ex ecutiv e o fficer’s Restrict ed Un it Award s and Parent- Based Awards will be forfeited . The Gran ts o f Pl an -Based Awards Tabl e h as mo re information ab ou t these award s. 19 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Retirement a nd Deferred Co mpensa tion Pl ans We believe it is imp ortant to prov ide ou r employees, i nclud in g o ur named execu tive o ffi cers, with th e op po rtun ity to accumu l ate reti remen t saving s. All simil arly-situ ated emp l oy ees earn ben efits u nd er ou r tax-qu alified p en sion p l an (“Qualifi ed Pen sio n Plan ”) usin g th e same fo rmula. Ben efits u nd er ou r Qu alified Pen si on Plan are l imited by the In ternal Reven ue Code. We b elieve th at we sh ou ld p rovid e retiremen t sav in gs withou t impo sing the restrictio ns on benefits co ntain ed i n t he Int ern al Revenue Cod e th at wou ld otherwise li mi t o ur emp lo yees’ retiremen t security. Therefo re, l ik e many large co mp an i es, we have implemented a n on qu ali fied ex cess b enefit p ension p lan (“Nonqu ali fied Excess Pen sio n Plan”) that mak es u p th e difference b etween: 1 ) th e b en efit determined u nd er the Qualified Pen sion Plan fo rmula, with ou t ap plyin g th ese limit s; and 2) the ben efi t actually p ayable u nd er th e Qualified Pen sion Plan , takin g these limits i nto acco un t. All o f th e named ex ecu tiv e officers, except for M r. Jo hn s, p articipate in th e Non qu alified Excess Pen sio n Plan. In stead , M r. Joh ns wi ll co ntin ue t o accrue ben efits as tho ug h he were particip ating in the Non qu alified Ex cess Pen sio n Plan , an d th ose amo unt s will be cred ited to a ret irement pay deferral accou nt. Fo r more in fo rmation abo ut th is arran gement, see “Ret irement Pay Deferral Accoun t for Joh n D. Jo hn s” in th is Item 1 1. In ad ditio n, we prov id e a n on qu alified d eferred co mp ensatio n p lan (“DCP”) fo r n amed ex ecutiv e officers an d o th er k ey officers. Throu gh December 31 , 20 18 , eligible officers cou ld defer: 1 ) u p to 75 % of their b ase sal ary ; 2 ) up to 85 % o f an y an nu al incen tive award; and /o r 3) up to 9 4% of th e amo un ts payab le wh en Performan ce Un i t Award s, Restri cted Un it Awards, or Parent-Based Awards are earned (for the Restricted Unit Awards an d Paren t-Based Awards, percentages are su bject to red uctio n if the employ ee is elig ib le for early retiremen t). Officers were al so en t itled t o d efer u p to 85 % o f th eir reten tion bo nu s in stallments p ayable un der th eir Emp l oy ment Agreements. Emp lo yees that con trib ute a po rti on of th eir salary, o vertime and cash in cen t iv es to our tax -q ualified 40 1(k ) p lan (“4 01 (k ) Pl an ”) receiv e a do llar- fo r-do llar co mp an y match in g con tri bu tion , wh ich may b e at th e maximu m 4 % of th e employ ee’s eligible pay (which is sub j ect to limits impo sed b y the In ternal Rev enu e Co de). For mo re in format io n abo ut th ese p lan s, see the “All Other Co mp ensatio n Table”, “Po st-Employmen t Benefits”, and “Non qu alified Deferred Co mp ensatio n” in this Item 11 . Perquisites a nd Other Benefits The Compan y has o t her p ro grams th at help u s attract and retain k ey talen t and enh ance th eir prod uctiv ity. In 20 18 , we p ro vided mo dest perqu isites to ou r named execu tive o fficers, includ ing a finan cial and tax p lan ning p ro gram for certain senior officers and d in in g clu b memb ersh ip s for Mr. Jo hn s. We rei mburse the o fficers fo r bu si ness-related meals in accordan ce with ou r reg ular po licies. They p ay fo r all p erso nal meals. From t ime to ti me, o ur n amed ex ecutiv e officers also may u se th e Co mp any 's tick ets for sp ortin g, cultu ral or oth er even ts for p erso nal use rath er than busin ess p urpo ses. Co mpa ny Aircraft Policy We d o bu si ness in every state in the Unit ed States and h ave offices in ten states. Our emp lo yees and o fficers ro uti nel y use commercial air service for bu sin ess trav el, an d we g enerally rei mb urse them on ly fo r th e coach fare fo r do mestic air travel. We also main tain a company aircraft program in order to prov id e fo r timely and co st-effect iv e travel to these wide-spread locatio ns. Un der th is p ro gram, we do n ot op erate an y aircraft, own a han gar, or emp lo y p ilots. In stead , we h ave pu rch ased a fraction al interest in each of fo ur aircraft. We p ay a fixed fee p er aircraft, p lu s a v ariable charge for h ou rs actually flo wn, in exchan ge for the ri gh t to use th e fo ur aircraft fo r an ag gregate of ap proxi mately 40 0 ho urs p er y ear. Our directors, o ffi cers, an d employ ees u se t hese aircraft for selected bu sin ess trip s, an d, in certain circumstan ces, a sp ou se or g uest o f a di rector o r officer may accompan y him or her o n bu siness-relat ed travel . All t rav el un der the prog ram must be app ro ved b y th e Executive Ch airman . Wh eth er a particular trip wil l b e made o n a Company aircraft o r o n a commercial flig ht dep end s, in gen eral, upon th e av ailability of commercial air serv ice at th e d estin ation , the sched ule an d cost of th e commercial air t rav el, th e n umber o f emp lo yees who are making th e trip, t he expected travel time, and th e n eed for flexible travel arrang ements. Based on in fo rmation prov id ed b y t he compen sation con sult an t, the Compen satio n Committee has ado pted a p olicy th at allo ws each of th e Executi ve Chairman an d the CEO (and th eir respect iv e gu ests) to u se the Compan y aircraft for perso nal trip s for up to 2 5 h ou rs per year to redu ce their person al trav el time an d thereby increase th e time th ey can effectivel y co nd uct Compan y b usin ess. Th e Compan y d oes no t p rov id e tax reimb ursemen t payments with resp ect to th is air travel. S pousal Travel Po licy If an employ ee’s sp ou se trav els with the employ ee on Compan y b usin ess, we reimbu rse th e emp lo yee for t he associated travel exp enses if the spo use’s presence o n the trip is deemed necessary o r appro priate fo r th e pu rp ose o f th e trip . In 2 01 7, the Co mp any beg an p ro vidin g the n amed executive officers with tax reimb ursemen t pay men ts with resp ect to these reimb ursed exp enses. However, no ne o f ou r named ex ecutiv e o fficers were pro vided t his perquisite d urin g 2 01 8. For mo re info rmati on ab ou t p erq uisites an d o th er b enefits, see th e “All Other Co mp ensati on Table” in this Item 11 . Accounting and Tax Issues Prio r to the enactment o f th e Tax Cut s an d Job s Act (the “Tax Refo rm Act”), whi ch was sign ed in to law on Decemb er 22 , 2 01 7, and g en erally became effecti ve fo r the Co mp any o n Jan uary 1, 2 01 8, we were no t su bject to th e ex ecutiv e co mp ensatio n d eduction limitatio ns of Sectio n 16 2(m) of th e In ternal Rev enue Code since th e d ate of the Merger because the Compan y h as no t h ad any pu blicly trad ed equ ity secu rit ies. However, as a resu l t of the en actment of th e Tax Refo rm Act, Section 1 62 (m) no w app lies to all co mp anies that file repo rts pu rsu ant to Sect io n 15 (d ) of the Securi ties Ex chan ge Act of 19 34 , includ in g compan ies that have i ssued pu blicly t raded debt securiti es. Acco rd in gly, effective Janu ary 1 , 20 18 , the Compan y became su bject t o Sectio n 16 2(m). 20 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Section 16 2(m) g en erally i mposes a $1 million l imit on th e amo un t o f co mp en sat io n that a pu blic co mpan y can deduct in an y on e y ear for any “cov ered employ ee”. Under Secti on 16 2(m), as amen ded b y the Tax Reform Act, the foll owin g in dividuals are co nsid ered ou r co vered employ ees who se co mp en satio n by us is gen erally sub j ect to Sectio n 1 62 (m)’s d ed uction li mitatio ns for t he tax year begin ning Janu ary 1, 201 8: •An y ind iv id ual who serv ed as the Compan y’s princi pal ex ecutiv e officer o r p rincipal finan cial officer at an y time du ring th e tax abl e y ear; •The th ree most high ly compen sated ex ecutiv e officers o f the Compan y (as id entified in th e Summary Compen sat io n Tab le o f this An nu al Rep ort o n Form 1 0-K) for th e tax ab le y ear; and •An y ind iv id ual who has b een a cov ered employ ee for any prior tax y ears, b eginn in g January 1 , 20 18 . As a resul t of th e Tax Refo rm Act, compensation paid to ou r cov ered employ ees in ex cess of $1 mill io n will n ot be ded uct ib le un less it qu ali fies fo r transitio n relief ap plicab le to certai n written bind in g arrangemen ts that were in place as of Novemb er 2, 20 17 , an d that h av e n ot been materially mo dified aft er su ch d ate. Further, th e Compen sation Committee reserves th e right to mo dify co mp en satio n arran gement s t hat were in effect as of No vemb er 2, 2 01 7 if it determines th at su ch mo dificat io ns are co nsistent with the Co mp an y’s b usiness needs. Wh ile the Compen sation Co mmittee may co nsid er th e d edu ctibilit y of awards as on e facto r in determin in g execu tive compen sation , th e Co mp ensatio n Committee also lo ok s at o th er factors in mak ing i ts decisio ns, as no ted abov e, and retains th e flex ib ility to award compen sation that it determines to be con si sten t wi th th e go als o f o ur executive compen sation prog ram even if th e awards are n ot ded uctib le b y Co mp an y for t ax pu rp oses. Because ou r sto ck is not p ub licly trad ed, we are no l on ger usin g o ur stock as a cu rrency for ou r lo ng -term incenti ve award s, wh ich limits ou r flexibility in stru ctu ring ou r co mp ensatio n to av ail ou rselv es of th e benefit of fix ed equ ity acco un ting . We still structure ou r p ro grams taking int o accou nt th e prov isio ns o f Section 40 9A of t he In t ernal Revenu e C od e. Clawback Policy Un der the federal securities laws, if we have t o prepare an accou nting restatemen t d ue to o ur material no nco mp liance du e to misco nd uct with th e Un ited States Securities and Exch ang e Commissi on (the “SEC”) fi nancial repo rting req uirements, then ou r CEO an d Ch i ef Fin ancial Officer wo uld h ave to rei mburse us fo r: 1 ) an y b on us or o th er incen tive-based or equ ity -b ased co mp ensatio n th ey received d urin g the twelv e-mon th p eriod after we first issu e or file th e fi nancial d ocu men t that reflects th e restatemen t; and 2) any profits they realized fro m the sale of ou r secu rities d urin g the twelve-mo nth p eriod . The Compan y’s lon g-term incen tive award agreements in clu de a pro vision requ iring th e ex ecutiv e to rep ay, as liquid ated d amag es, amou nts receiv ed un der t he awards if the Compensation Commit tee reason ably determin es in go od faith that the ex ecu t iv e vio lat ed certain prov isio ns of th e award ag reement related to sol ici ting cu st omers or employ ees, v io lating trad e secret protection s, o r failin g to co op erate wi th the Company in co nn ectio n with claims, l awsu its, arbitration s, p ro ceed in gs, ex aminatio ns, inquiries o r inv est ig ation s in vo l ving th e Co mp any . Risk Assessment Based on its revi ew o f the Compan y’s co mp ensatio n policies as d escribed in the Compen sation Discu ssion and Analysis, the Co mp en satio n Co mmittee con clu ded th at ou r co mp ensatio n p ro gram i n 20 18 : 1 ) p ro vided th e ap prop riat e level of co mp ensation to o ur senior officers; 2 ) was properly design ed to link compen sation and performance; and 3) d id no t encou rag e ou r officers or emp lo yees to tak e un necessary an d excessive risks or to mani pu late earning s o r o th er fin ancial measu res. COMPENSATION COMMITTE E REPORT The Co mp ensatio n Commi ttee rev iewed and d iscussed the Co mp ensati on Discussio n an d Analysis with man agemen t. Based o n thi s review and discussio n, th e Co mp ensatio n Committee recommend ed to th e Board of Directors th at th e Co mp ensatio n Discu ssion an d An aly sis b e includ ed in th is ann ual report. COM PENSATION AND M ANAGEMENT SUC CESSION COMM ITTEE Jo hn J. McMah on , Jr., Ch airperson Jesse J. S pikes William A. Terry 20 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Summary Co mpensa tion Table The follo win g table sets fo rth th e to tal compensation earn ed by each o f the Co mp any ’s named execu tive o fficers for th e fiscal years end ed December 31 , 2 01 8, Decemb er 3 1, 2017 and December 31 , 2 01 6. Summary Compensa tion Table Na me a nd principal po sitio n with the Co mpany (a) Year (b) Salary ($) (c) Bo nus ($) (d) No n-equity incentiv e plan compensa tion(1 ) ($) (g) Cha nge in pension value & no nqualified deferred compensatio n earnings ($) (h) All other compensatio n ($) (i) Tota l Compensatio n ($) (j) Richa rd J . Bielen 2 0 1 8 $77 5 ,000 $— $4 ,376,9 6 4 $1 ,2 62,385 $200 ,4 9 6 $6 ,614,84 5 Presiden t and Chief Executive Officer (prin cip a l executive officer) 2 0 1 7 $68 1 ,667 $1,62 7 ,3 80 $4 ,270,3 9 4 $1 ,2 24,334 $198 ,5 8 6 $8 ,002,36 1 2 0 1 6 $59 1 ,667 $2,54 0 ,8 81 $— $8 68,418 $179 ,5 1 0 $4 ,180,47 6 Steven G. Walker 2 0 1 8 $42 7 ,500 $— $1 ,388,5 2 1 $61,911 $70 ,1 1 7 $1 ,948,04 9 Execu tive Vice Presid en t and Chief Fin a n cia l Officer (prin cip al fina n cia l o fficer) 2 0 1 7 $41 0 ,000 $— $1 ,477,6 8 0 $1 19,931 $57 ,9 1 3 $2 ,065,52 4 2 0 1 6 $37 9 ,167 $91 9 ,7 25 $— $85,164 $85 ,0 6 7 $1 ,469,12 3 J o hn D. Johns 2 0 1 8 $1,20 0 ,000 $— $9 ,561,6 8 8 $(50,239 ) $489 ,6 5 2 $1 1 ,201,10 1 Execu tive Chairma n o f the Co mp a n y 2 0 1 7 $1,00 0 ,000 $— $1 1 ,148,9 5 1 $82,343 $896 ,1 0 9 $1 3 ,127,40 3 2 0 1 6 $1,00 0 ,000 $2,22 3 ,0 00 $— $2 ,2 64,908 $896 ,6 6 8 $6 ,384,57 6 Michael G. Temple 2 0 1 8 $50 8 ,333 $— $1 ,780,3 7 3 $55,602 $78 ,8 2 4 $2 ,423,13 2 Vice Cha irman, Finance and Risk 2 0 1 7 $46 6 ,667 $67 9 ,7 70 $1 ,766,1 3 2 $54,877 $38 ,7 2 8 $3 ,006,17 4 2 0 1 6 $42 0 ,833 $1,10 3 ,8 70 $— $34,542 $39 ,1 1 6 $1 ,598,36 1 Ca rl S. Thig pen 2 0 1 8 $52 7 ,500 $— $2 ,234,4 7 6 $5 97,962 $103 ,5 7 1 $3 ,463,50 9 Execu tive Vice Presid en t and Chief Investment Officer 2 0 1 7 $51 3 ,333 $1,32 2 ,7 99 $2 ,463,0 1 4 $1 ,1 42,024 $107 ,4 0 7 $5 ,548,57 7 2 0 1 6 $50 2 ,500 $2,02 5 ,3 00 $— $1 ,1 26,676 $146 ,1 2 5 $3 ,800,60 1 (1)Fo r 2 0 18, th ese nu m b ers include: (i) the fo llowing am o unts of cash in cen tiv es th at will b e p aid on or prio r to March 1 5 , 201 9 , fo r 2 0 18 p erformance under our AIP: Mr. Bielen, $1 ,0 33,50 0 ; Mr. Walk er, $319,10 0 ; Mr. Tem ple, $4 3 6,700 ; and Mr. Th igpen, $477,5 0 0 ; (ii) the followin g amoun ts o f Perfo rmance Unit Awards earn ed with respect to th e 2 0 1 6-2 0 1 8 p erform an ce period (g ran ted in 2016 ), th at will b e paid in cash on o r p rior to March 15, 2019: Mr. Bielen, $2,599 ,8 0 0; Mr. Walk er, $8 22,837 ; Mr. Jo h ns, $7 ,3 22,33 7 ; Mr. Tem p le, $1,039 ,9 20; and Mr. Th igpen, $1 ,3 4 2,797; (iii) the follo win g amounts with resp ect to the first in stallment o f the Restricted Unit Award s th at v ested on Decem ber 3 1, 2 018 (gran ted in 201 6 ) th at will be p aid in cash on o r prio r to March 1 5, 2 019: Mr. Bielen , $29 2 ,4 78; Mr. Walker, $92 ,6 1 8; Mr. Joh n s, $823,81 2 ; Mr. Tem p le, $1 1 6,991; and Mr. Th igpen, $151 ,1 1 3; (iv ) the follo win g am ounts with respect to the second in stallment of th e Restricted Unit Award s that vested on Decem ber 31, 20 1 8 (granted in 2015 ) that will b e paid in cash on o r p rior to March 15, 2 019: Mr. Bielen , $24 6 ,2 57; Mr. Walk er, $89,0 7 2 ; Mr. Jo h ns, $838,32 0 ; Mr. Temple, $1 0 4 ,790; and Mr. Thigpen, $157 ,1 8 5; an d (v ) the following amoun ts o f Parent-Based Awards that vested o n December 31, 2 018 (gran ted in 201 6 ), an d th at will b e paid in cash on or prior to March 15, 2 0 19: Mr. Bielen , $204,9 3 0 ; Mr. Walk er, $64,89 5 ; Mr. Jo h n s, $5 7 7 ,220; Mr. Temple, $81 ,9 7 2; and Mr. Thigpen, $1 0 5 ,881. Discussi on of Summary Co mpensa tion Table Co lu mn (c)-Sa la ry. These amo un ts in clu de b ase salary for 2 01 8 th at the named execu tive officer co ntrib uted to ou r 40 1(k) Plan and to ou r DCP. The No nq ualifi ed Deferred Co mp ensatio n Tab le h as mo re informatio n ab ou t 2 01 8 p articipatio n in the DCP. Co lu mn (d)-Bon us. Bon us amo un ts paid fo r 20 18 were mad e un der o ur AIP and LTIP an d are repo rted in t he “Non-eq uity in cen tive plan co mp ensation” co lu mn of th e Su mmary Co mp ensatio n Tab le. For 20 17 , th ese amou nts includ e th e fo llowi ng amou nts o f reten tion bo nu ses und er the terms o f th e named executi ve o fficer's Employ men t Agreement, which was p aid on or prior to M arch 15 , 20 18 fo r 20 17 serv i ce: M r. Bielen , $1 ,62 7,3 80 ; Mr. Temp le, $6 79 ,77 0; an d Mr. Th ig pen , $1,3 22,79 9. For 20 16 , th ese amo un ts includ e: (i) for all of th e named execu tive o fficers, ann ual cash incenti ves g uaranteed un der th e Emp lo yment Ag reemen ts pay able in 20 17 for 20 16 p erforman ce an d (ii) for M r. Bielen , M r. Walk er, and Mr. Thigp en, reten tion b on uses pay ab le in 20 17 un der the terms of t he Empl oy ment Agreements for 20 16 serv ice. Co lu mn (g )-Non -equi ty incen tive plan co mp ensa t io n. For 2 01 8, th ese amo un ts refl ect (i) th e cash in centiv es p ayab le o n or p rio r to M arch 1 5, 2019 fo r 20 18 perfo rman ce u nd er ou r AIP, (ii) the Performance Unit Awards earn ed with respect to the 20 17 -2 01 8 p erforman ce perio d (granted in 20 16 ), and that are pay able on or prior to M arch 15 , 20 19 , (ii i) th e first installment of t he Rest ricted Un it Awards th at v est ed on December 3 1, 2 01 8 (granted in 20 16 ) an d th at are p ayab le o n o r b efo re M arch 15 , 20 19 , (iv) the seco nd in stallmen t o f th e Restricted Un it Awards th at v ested on December 31, 2 01 8 (granted in 20 15 ) an d th at are p ayab le o n or b efo re March 1 5, 2 01 9, and (v ) th e Parent-Based Awards t hat vested on December 3 1, 20 18 (granted in 20 16 ), and t hat are payab le on or prio r to March 15 , 20 19 . Fo r 2 01 7, these amou nts refl ect (i) th e cash incentiv es pay able on or prio r to March 1 5, 2018 for 20 17 perfo rmance un der ou r an nu al incen tive p lan , (ii) th e Perfo rmance Unit Award s earn ed with resp ect to t he 20 15 -20 17 perfo rmance perio d (granted in 2 01 5), and th at are payab le o n or pri or t o March 1 5, 2018 , (iii) for all o f th e named ex ecutiv e officers, the first i nstallmen t of t he Restricted Unit Awards th at v ested o n December 31 , 2 01 7 (g ran ted i n 2015) an d that are pay ab l e on o r before March 1 5, 20 18 , an d (iv) the Parent-Based Awards that vested on Decemb er 31 , 2 01 7 (g ran ted in 20 15 ), an d that are p ay able on or prio r to March 15 , 20 18 . These amou nts are b ased o n the achievemen t o f the Co mp an y’s g oals as determin ed b y 20 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e Compensation Committee and the Bo ard . All amo un ts reflected in clu de an y portio n of the in cen tives that th e n amed executi ve o ffi cer elected to co ntrib ute to ou r 4 01 (k ) Plan or to ou r DCP. The grants of Perfo rman ce Un it Award s, Restricted Unit Awards, an d Parent-Based Awards are no t reflected in th e Summary Compen sation Tab le. The awards will be reflected in the Su mmary Co mp ensati on Table in th e y ear in which they are earn ed . The Gran ts of Pl an -Based Award s Tab le an d t he discussio n th at follows p ro vides in formatio n ab ou t th e Perfo rmance Unit Awards, Restrict ed Un it Awards, and Parent-Based Awards th at were granted in 20 18 . Co lu mn (h)-Ch an ge in pen sio n val ue a nd no nq ua lified deferred co mpen sati on earn ings. These amou nts represent the increase or d ecrease in th e actuarial p resen t value of th e named executiv e o ffi cer’s benefits un der o ur tax Qualified Pensio n Plan and o ur No nq ualified Ex cess Pen sio n Plan. Chan ges in in terest rates can sign ifican tly affect th ese numb ers fro m year to y ear. Fo r 20 18 , the to tal ch an ge in the present v alu e o f pen sio n ben efits for each named ex ecutiv e officer was div id ed between the plans as fo llows: Na me Qua lified Pensio n Pla n No nqualified Excess Pensio n Pla n To tal Bielen $(2,5 16 ) $1 ,264,90 1 $1 ,26 2,3 85 Walker $1 2,6 48 $49,26 3 $6 1,9 11 Jo hn s $(5 0,2 39 ) $— $(5 0,2 39 ) Temp le $1 2,5 93 $43,00 9 $5 5,6 02 Thig pen $(5,0 04 ) $602,96 6 $59 7,9 62 The Pen sion Ben efits Table h as mo re info rmati on ab ou t each officer’s particip ation in these plans. All o f t he named executive officers h ave acco un t b alances in o ur DCP. The earn in gs o n a named executive officer’s b alan ce reflect the earnin gs o f no tion al in vestmen ts selected b y th at named ex ecu tive officer. These earn in gs are th e same as for any o th er in vesto r in t hese investments, an d we do n ot prov id e an y ab ov e-mark et or p referenti al earn in gs rat es. Co lu mn (i)—All other co mpen satio n. For 20 18 , th ese amo un ts includ e th e fo llowing : All Other Compensatio n Ta ble Na me 40 1 (k) ma tching No nqualified deferred compensa tio n plan contributio ns Fina ncia l planning program O ther perquisites Tota l Bielen $11 ,00 0 $118,10 2 $— $7 1,3 94 $20 0,4 96 Walker $11 ,00 0 $42,38 9 $1 5,6 39 $1,0 89 $7 0,1 17 Jo hn s $11 ,00 0 $340,00 2 $1 5,5 26 $12 3,1 24 $48 9,6 52 Temp le $11 ,00 0 $52,02 1 $1 5,3 12 $4 91 $7 8,8 24 Thig pen $11 ,00 0 $90,74 5 $— $1,8 26 $10 3,5 71 4 01(k) Ma tching Ou r emp lo yees can cont ribu te a p ortio n of th eir salary, o vertime and cash in cen tiv es to o ur 40 1(k) Pl an and receiv e a do llar-for-d ollar company match in g con trib uti on . The max imum match is 4% of t he employ ee’s eligib le p ay (which is su bject to limits imp osed b y th e Intern al Rev enue C od e). The table sh ows the matching recei ved b y the n amed ex ecut iv e officers. No nq ua lified Deferred Co mp ensa tion Pl an Co ntributions The tab le includ es, with respect to each o f t he executives, su pp lemental matching con trib utio ns th at we made under ou r DCP to each n amed ex ecutiv e o fficer’s acco un t in 2 01 8 with respect to t he officer’s p art icipat io n in ou r DCP du ring 20 17 (“DC P Su pp lemental M atchin g Con trib uti on ”). The No nq ualifi ed Deferred Compen satio n Table p ro vides mo re info rmati on abo ut this plan. Th is colu mn also includ es p ayments made to Mr. Joh ns’s retirement pay deferral accou nt in lieu of the Non qu alified Excess Pensio n Plan . Fo r more i nformatio n o n th is retirement pay deferral acco un t, see “Discussio n o f No nq ualifi ed Deferred Co mp ensatio n Tab le - Reti remen t Pay Deferral Acco un t fo r Jo hn D. Joh ns” in this Item 11. Fina ncial Pl anning Pro gra m These amo un ts in clu de t he amo un ts we p ay for th e fees and travel expen ses o f the third party prov id er o f o ur fin an cial and tax pl annin g p ro gram. 20 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Other Perquisites These amo un ts includ e: (i) the amo un t we pai d fo r club memb ersh ips for Mr. Jo hn s ($3,9 81 ); (ii) th e amou nt we paid for a fishing trip fo r M r. Joh ns, $2 ,975; (iii) the amou nt we p aid for sp ort in g ev ents for o ur ex ecut iv e and their family memb ers to : M r. Biel en , $1,4 74 ; Mr. Walk er, $8 90 ; M r. Temple, $24 5; an d M r. Th i gp en , $1 ,320; (iv ) the amo un t we p aid for th eatre t ick ets fo r o ur ex ecut iv e an d th eir famil y memb ers to: Mr. Bielen, $5 80 ; M r. Walker, $1 99 ; M r. Joh ns, $2 89 ; Mr. Temple, $24 6; and M r. Thigp en, $506; an d (v) the estimated i ncremental co st th at we in cu rred in 20 18 for M r. Jo hn s o r h is gu est s to u se Co mp any aircraft fo r perso nal trip s, $115 ,8 79 and Mr. Bielen an d h is g uests t o use Compan y ai rcraft for personal trips, $69 ,34 0. Th e esti mated in cremen tal co st is b ased o n incremen tal ho urly charges an d fuel allocable to the perso nal travel time o n the aircraft, as well as an y intern ational flat fees related to th e flig ht. From time-to -time, family memb ers o f the n amed ex ecutiv e officers are acco mmod ated as add itio nal passeng ers o n flig hts on Compan y ai rcraft . There is n o incremental co st to th e Co mp any fo r this perqu i site. Grants of Pla n-Based Awa rds During 2 01 8 We ad op ted a lo ng -term in cen t iv e p rog ram in 2 01 5 that est ab lish ed a formu la equ i ty val ue for th e Co mp any un der whi ch ou r named executive officers will receive awards, payab le in cash , th at will in crease or decrease in v alu e as th e val ue determin ed u nd er this formu la chan ges b ased o n the operation of o ur b usiness. Effectiv e Jan uary 1, 20 17 , the Co mp any adop ted a n ew LTIP p ursuan t to wh ich these in centiv e award s wo uld be granted. The 20 18 lon g- term incen tive oppo rtun ities fo r th e n amed executiv e o fficers are comprised o f th ree sep arate award s: 1) Performan ce Un i t Award s; 2) Restricted Unit Awards; an d 3 ) Paren t-Based Award s. Ou r an nu al incen tive award s are g ran ted pu rsuant t o o ur AIP, b ased o n targ et amou nts for (i) after-tax ad ju st ed operatin g in co me, (ii) value of n ew bu sin ess, (iii) exp ense management, an d (iv) risk-b ased capital. This table h as informatio n abo ut: 1) the awards granted in 2 01 8 p ursu ant to th e LTIP which will vest in 2020 o r 2021 an d 2) the awards granted in 20 18 p ursu an t to th e AIP, wh i ch wil l be pay able in M arch 2 01 9. Becau se we no lo ng er hav e p ub licly traded stock , no ne of the i ncentiv e awards g ranted in 20 18 were eq uit y incenti ve awards. 20 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Grants of Plan-Ba sed Awa rds Ta ble Estima ted Po ssible Payo uts Under Non-Equity Incentive Pla n Awa rds Na me (a) Grant Date (b) Compensa tion Co mmittee Meeting Da te Type of Award Number of Units (c) Threshold ($) (d) Targ et ($) (e) Ma ximum ($) (f) Bielen 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $4 87,500 (1) $9 7 5 ,000 (1) $1,950 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 14,9 6 5 (2) —(2) 1,4 9 6 ,500 (2) 2,993 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 6,7 3 5 (3) — 6 7 3 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 2,2 4 5 (4) — 2 2 4 ,500 (4) — Wa lker 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $1 50,500 (1) $3 0 1 ,000 (1) $602 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 3,8 3 5 (2) —(2) 3 8 3 ,500 (2) 767 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 1,7 2 5 (3) — 1 7 2 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 5 7 5 (4) — 5 7 ,500 (4) — J o hns(5 ) — $— $— $— Temple 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $2 06,000 (1) $4 1 2 ,000 (1) $824 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 5,5 0 0 (2) —(2) 5 5 0 ,000 (2) 1,100 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 2,4 7 5 (3) — 2 4 7 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 8 2 5 (4) — 8 2 ,500 (4) — Thigpen 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $2 25,250 (1) $4 5 0 ,500 (1) $901 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 5,5 0 0 (2) —(2) 5 5 0 ,000 (2) 1,100 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 2,4 7 5 (3) — 2 4 7 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 8 2 5 (4) — 8 2 ,500 (4) — (1)These numbers reflect thresh o ld, target, an d max imum payou ts to th e n amed execu tive o fficers u n der the AIP. Th e level o f payout is tied to the Comp any ’s after-tax adjusted o p erating income, value of new b usin ess, expense m an ag ement, an d RBC. Th e am o unt in th e “Thresh o ld” co lumn reflects the amoun t th at wo u ld be payab le to the named executive officers u n der th e AIP if each perfo rmance goal were ach iev ed at th e th resh o ld lev el. There is no m in imum p ayo u t. (2)These nu m b ers reflect the Perform an ce Un it Awards g ranted to each n am ed ex ecutiv e o fficer alo n g with th e estimated payouts at the threshold , target, and m ax im um amou n ts. The numb er of Perfo rmance Un it Awards determin ed to be granted reflect a discoun t to the boo k value to reflect th e risk of forfeiture associated with perfo rmance conditio n s. The level o f payou t is tied to the Co mpany’s ROE and cum u lativ e after-tax adjusted operatin g income. These v alues reflect a reasonable estimate based o n a value of each unit at $1 0 0 at the date of g ran t usin g the grant-date tan g ible book v alu e o f the Co mpany. (3)These numb ers reflect the Restricted Un it Awards and target value of Restricted Un it Award s gran ted to each n am ed ex ecutive officer. (4)These numb ers reflect the Parent-Based Awards an d target value of th e Parent-Based Awards g ranted to each named ex ecu tiv e o fficer. (5)Mr. Johns did no t receiv e g ran ts o f any awards u n der the AIP o r LTIP in 20 1 8 . Discussi on of Grants of Pla n-Based Awa rds Ta ble Co lu mn (b) - Gra nt da te. At its Feb ruary 21 , 20 18 meetin g, t he Board granted lon g-term incen tive award s valued in th e amou nts reflected in the table wit h a grant date o f March 1 5, 20 18 . Co lu mn (c) - Nu mber o f u nits. These amounts reflect the nu mb er of each o f th e Performan ce Unit Awards, Restricted Unit Award s, an d Parent-Based Awards g ran ted to the n amed ex ecutiv e officers in 2 01 8. Th e target value of each award is reflected in col umn (e). Co lu mns (d), (e), an d (f) - Estimated p ossib le p ayo uts un der n on -eq uity incen tive pl an awards. For a d iscussio n of th e p erforman ce targ ets an d th e estimated po ssible p ayo uts un der no n-equ ity i ncentive plan awards, see “Ann ual Cash In cent iv e Awards” and “Long Term Incen tive Award s” in th e C ompensation Disclosu re an d Analysis ab ov e. Termina tion of Emp lo yment; Change o f Co ntrol Special vesting an d pay men t pro visio ns ap ply t o Perfo rmance Un it Awards, Restri cted Unit Award s, an d Parent-Based Award s if th e o ffi cer’s employ men t en ds. See “Potential Pay men ts u po n Termination o r Ch ang e of Co ntrol ” in this Item 11 fo r more in fo rmation . Outstanding Equity Awards a t December 31 , 20 18 The named execu tive o fficers had no ou tstandi ng eq uit y award s as of December 31 , 20 18 . 20 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Option Ex ercises a nd Stock Vested During 2 01 8 In 2 01 8, no ne of th e n amed executive officers h eld an y awards that were exercisabl e for, con vertible into o r that may be settled fo r stock o f the Co mp any . Adoptio n of Annua l Incentive Pl an and Long-Term Incentive Plan On No vember 6, 20 17 , th e Bo ard adopt ed th e Protective Life Corpo ration Ann ual Incen tive Plan (“AIP”) and the Protective Life Corp oration Lon g- Term In centiv e Plan (“LTIP”). Th e Co mp any intend s to mak e g ran ts o f an nu al and lo ng -term cash incentiv es un der th e AIP an d the LTIP, respectively, to officers an d key emp lo yees o f th e Company an d its su bsidiaries b eginn in g in 20 18 . On Nov emb er 6, 2 01 8, th e Bo ard of th e Co mp any ap prov ed an amend men t and restat ement of each of the AIP and th e LTIP. A summary of these plans fo llows. Annual Incentive Pla n Un der the AIP, officers and k ey emplo yees of the Co mp any an d its sub sidiaries are elig ib le fo r ann ual cash incen tive op po rtun ities b ased up on the ach iev ement of key ann ual go als that wil l enh ance Compan y p erformance. Th e Co mp ensation Co mmittee will design ate the officers an d k ey emp l oy ees to particip ate in th e AIP (“Part ici pants”). For each calen dar year, th e Compensation Committee wi ll reco mmend for ap prov al by the Bo ard the p erforman ce ob jectiv e o r ob ject iv es that must be satisfied in o rder for Part ici pants to b e elig ib le to receiv e an in centiv e p ay men t fo r t hat year. The perfo rmance o bjectives est ab l ish ed un der the AIP shall be rel ated to on e o f the fo llo wing criteria, which may b e d etermined solely b y referen ce to the perfo rmance of th e Co mp an y o r a sub si diary o r a division o r bu sin ess un it or based o n comparative perfo rmance relative to other co mp anies: n et in come; op eratin g inco me; b oo k value; embed ded v alu e or eco no mic value add ed; return on equ ity, assets or in vested capital; assets, sales or rev enu es or growth in asset s, sales o r reven ues; efficiency or ex pen se man agemen t; cap ital ad equ acy (in clu ding risk-based capital); i nv estment returns or asset q ual ity; completion o f acq uisi tion s, fin anci ng s, or simil ar tran saction s; custo mer serv ice metrics; th e value o f n ew bu sin ess o r sales; or su ch oth er reason abl e cri teria as the Compen satio n Committee may recommen d an d the Bo ard may ap prove. With respect to an y Participan t, the Compen satio n Committee may establish multiple perfo rmance o bjecti ves. The AIP p rov id es th at th e Co mp ensatio n Co mmitt ee will establish a targ et amou nt fo r each Participant and that Particip ants’ targ eted amou nts may be ag gregated to create a pool to b e allo cated in the discretio n o f th e Co mp ensatio n Commit tee. The C ompensation Co mmittee may establish t he po ol in resp ect of any p erforman ce objective b ased on th e ext ent to wh ich th e o bjective is met or ex ceed ed, o r the extent to wh ich ob jectiv es are on ly partially ach iev ed. The Compensation Co mmittee may pro vide th at amo un ts b elo w or in ex cess of the agg reg ate of al l Particip ant targ ets for such p erforman ce ob jectiv e will be fun ded fo r p erformance in ex cess of, or at stated lev els b elo w, targeted p erforman ce. Th e Comp ensati on Co mmittee may also establish a th resh old level of ach iev ement fo r an y p erformance o bjecti ve below which n o amo un t shall be fun ded in resp ect of such perfo rmance ob jectiv e. Ad ditio nal ly, the C ompensation Committee may, in its d iscretion , allo cate th e po ol amon g division s o r bu siness un i ts, in wh ich case the autho rized manag er of each division or b usiness un it will th en (i) mak e in div id ual determin ation s reg ard ing th e con trib ution of each Part ici pant in h is or her respectiv e di vision or bu sin ess u nit to the achievement of th e ov erall stated perfo rmance ob jectiv es, and (ii) reco mmend , fo r ap prov al b y the Compen sation Committee, th e amou nt pay able, if an y, from such d i visio n o r b usin ess uni t al lo cati on to each such Particip ant. The Comp ensati on Co mmittee may d elegate an y and all o f its d uties an d responsibilities (in clu ding th e selection o f Participan ts) in resp ect of any Particip an t s (oth er th an th e Ex ecutiv e Ch airman, Presiden t and Ch ief Ex ecutiv e Officer and all members o f the Company ’s Perfo rmance an d Accou ntabil ity Co mmittee) to a co mmitt ee o f o fficers comprised o f the Presiden t and Chief Ex ecutiv e Officer an d an y two or mo re o f h is or her d i rect repo rti ng officers. Un less the Co mp ensation Committee o th erwi se d etermi nes to p ay th e Participant a greater amo un t, if a Particip ant’s employ men t terminates d ue to death , disability o r n ormal or early retirement un der th e terms o f the Qualified Pen sion Plan, the Part ici pant sh all receive an an nu al i ncenti ve pay men t eq ual to th e amou nt th e Particip ant wo uld h ave received if th e Particip ant had remained emp lo yed th ro ug h the end of t he year, pro -rated based on th e n umber of days th at elap sed d urin g the y ear in wh i ch th e terminatio n o ccu rs. Except as prov id ed in the pri or sentence, un less th e Co mp ensatio n Commit tee shall determine to auth orize a payment, no amou nt shall b e payab le to a Particip ant as an ann ual in cen tiv e award un less th e Participan t is still an employ ee of th e Co mp any or on e of its su bsidiaries o n t he date pay ment is made o r such earlier d ate as t he Compensation Committee may sp ecify. The amen ded an d restated AIP will co nti nu e in effect un til o therwise amen ded o r terminated by th e Bo ard . Lo ng T erm Incentiv e Plan Un der th e LTIP, emp lo yees o f the Compan y an d i ts sub sid iaries are eligible to recei ve three typ es of incentiv e awards (collectively, “Awards”): 1 . “Perfo rmance Unit,” an Award wh ich becomes vested an d n on -forfeitabl e u po n the attainment , in wh ole or in part, o f p erforman ce o bjectives, determin ed b y the Compen satio n Committee, du ring an award perio d, and which is p ay able in cash b ased amou nts set by th e Co mp ensation Committee. 2 .“Restricted Un it,” an Award which b eco mes vested an d n on -forfeitable, in who le o r in part, u po n th e satisfaction of su ch cond itio ns as sh all be determin ed by the Comp ensati on Committee, an d wh ich is payab le in cash b ased on the Company ’s “Tang ib le Boo k Valu e Per Uni t,” as defined in the LTIP. 20 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 3 . “Parent-Based Award,” a cash -d eno minated Award based on the v alu e of the co mmo n sto ck of th e Compan y’s sole stock ho ld er, Dai-ichi Life or its successo r o ver th e li fe of the Award. Un der t he LTIP, th e Compensation Committee sh all select the eligible p articipan ts (“LTIP Participan ts”), the n umber o f Award s each LTIP Particip an t will be granted, and th e perfo rman ce cri teria (if an y) fo r each Award. In the case o f Performan ce Un its, th e perfo rmance ob jectiv es shall b e related to at least o ne of th e followi ng criteria, wh ich may be d etermined so lely b y referen ce to t he perfo rmance of the Compan y or a d iv i sio n o r su bsidiary or based on comparative p erformance relativ e t o o th er co mp anies: (i) pre-t ax and/or after-tax adjusted op eratin g in come, o perating earn i ng s, net inco me, operating in come, b oo k v alu e, embed ded v alu e or eco no mic value add ed o f the Compan y o r a su bsid iary, d iv i sio n o r b usin ess un it (in clu ding measu res o n a per sh are basis) o r the accumulated earning s of any of th e forego ing , (ii) ret urn o n equ ity, assets or in vested capital, (iii) assets, sales or rev enu es, or growt h i n assets, sales o r reven ues, o f the Compan y o r a su bsidiary, division or bu siness u nit, (iv) efficiency o r ex pen se man ag emen t (such as un it cost), (v ) risk man agemen t o r th ird-party ratin gs, (v i ) cap ital adeq uacy (in clu ding risk-b ased cap ital), (v ii) inv estment retu rn s or asset qu ality, (v iii) premium inco me or earned premium, (ix) v alu e o f new b usin ess o r sal es, (x) n ego tiation o r completion o f acquisitio ns, finan cin gs or similar transactio ns, (xi) customer serv i ce metrics, an d (x ii) such oth er reason able crit eri a as the Co mp ensatio n Co mmitt ee may determin e. The Co mp ensati on Committee may chan ge th e perfo rmance o bjectives ap pli cab le with respect to any Performance Un its to reflect such factors, includ in g ch ang es in a LTIP Parti cipan t’s du ties o r resp on si bilities o r ch ang es in bu sin ess o bjecti ves, as the Compen sation Committee shall d eem necessary o r ap prop riate. The Compen sation Committee may delegate an y an d all o f its auth ority (i ncl ud in g the selection o f LTIP Participan ts) with resp ect to an y LTIP Particip an t s (other th an the Ex ecu tive Chairman, Presid ent an d Ch i ef Executi ve Officer and Performan ce and Acco un tab ility Committee memb ers) to a co mmitt ee co mp rised o f the Presiden t an d Chief Executive Officer and an y two o r more o f hi s or her direct rep orting officers. The LTIP prov ides for special p ayo uts o f award s upon certain chan ge o f co ntro l transact io ns o f th e Co mp any as defined in th e LTIP. In add ition, in th e case o f Paren t-Based Awards, th e p ayo uts will occur up on a chang e of con trol of Dai-ich i Life. The LTIP p ro vides that u po n a terminatio n o f a LTIP Particip ant’s emp lo yment d ue to deat h, disabil ity, o r n ormal retirement, all Restricted Un its an d Parent-Based Awards will b eco me fu lly vested and , u nless th e Co mpen sat io n Co mmitt ee determin es to pro vide fo r treatment that is more favo rab le to a Particip an t , all Performan ce Unit s will v est pro rata b ased on the LTIP Part ici pant’s perio d of employ men t du ring the award period relativ e t o th e total len gth of th e award perio d. Th e LTIP has speci al v esting p ro vision s fo r th e Awards u po n a termi nat io n o f employmen t du e to early retirement and sp ecial vesti ng an d p aymen t p ro vision s fo r t ermin ati on after a majo r divestitu re or red uctio n in force b y the Co mp any. In th e case o f a termi nat io n “fo r cause” (as defin ed in th e LTIP), all v ested and un vested award s are forfeited . Oth erwise, u nv est ed amo un ts g enerally are fo rfeited u po n termin ation of emplo ymen t. 20 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Post-Empl oy ment Benefits This tab le co ntain s in formatio n abo ut ben efits payab le to the n amed ex ecu tiv e o fficers u po n their retirement. Pension Benefits Table Na me (a) Plan Name (b) Number of y ea rs credited service (#) (c)(1 ) Present value o f accumula ted benefit ($) (d)(2 ) Payments during the last fisca l year ($) (e) Bielen Pen si on 28 $1,0 11 ,52 5 $— Ex cess Pen sio n 28 7,0 74 ,33 2 — To tal $8,0 85 ,85 7 $— Walker Pen si on 17 $3 88 ,57 3 $— Ex cess Pen sio n 17 4 88 ,70 6 — To tal $8 77 ,27 9 $— Jo hn s Pen si on 25 $1,1 80 ,50 4 $— Ex cess Pen sio n — — To tal $1,1 80 ,50 4 $— Temp le Pen si on 6 $69 ,77 1 $— Ex cess Pen sio n 6 1 55 ,00 7 — To tal $2 24 ,77 8 $— Thig pen Pen si on 35 $1,5 30 ,82 2 $— Ex cess Pen sio n 35 7,0 74 ,07 2 — To tal $8,6 04 ,89 4 $— (1)The nu mb er o f y ears o f serv ice th at are used to calculate the named execu tive o fficer’s benefit under each plan, as o f Decemb er 3 1, 201 8. (2)The actu arial present value o f the n amed executiv e officer’s ben efit u nd er each plan as o f Decemb er 3 1, 20 18 . The v alu ation metho d an d material assumptio ns that we used to calcu late these amo un ts are set forth in Note 16 , Emp lo yee Ben efit Pl an s, o f the No tes to ou r Con so lidated Finan cial St atemen ts in th is An nu al Repo rt on Fo rm 10 -K. Discussi on of Pension Benefits Table We hav e “defin ed ben efit” p ension plans, as fu rther describ ed b elo w, to h elp prov id e ou r elig ib le employ ees with reti remen t secu rit y. Qua lified Pension Pl an Almo st all of our full-time employ ees particip ate in ou r Qu alified Pension Plan. Th e Qu alified Pensio n Plan p rov id es differen t b enefit fo rmulas fo r th ree d ifferent g ro up s: 1) the “g ran dfath ered group” (an y employ ee emp lo yed on Decemb er 3 1, 2007 who se age pl us years of v estin g service total 5 5 of more as of th at d ate); 2) t he “no n-grand fathered g ro up ” (an y emp lo yee emp loy ed on December 31 , 2 007 wh ose ag e pl us y ears o f v estin g service was less than 55 as of th at d ate); and 3) th e “po st-2007 gro up ” (any emp lo yee first h ired after December 31 , 2 00 7 o r an y former emp lo yee who is rehired after that date). Mr. Bielen, Mr. Jo hn s, and Mr. Thi gp en are in th e g ran dfath ered grou p; M r. Walk er is in the n on -g ran dfath ered grou p; and M r. Temple is in th e po st- 20 07 grou p. For employ ees in the g ran dfath ered grou p an d no n-grand fathered g ro up , t he mon th ly l ife ann uity ben efit pay ab l e un der th e Qualified Pension Plan at no rmal retirement age (usu ally ag e 6 5) for serv ice before 20 08 equ als: •1 .1% o f th e employ ee’s fin al avera ge p ay times y ears o f serv ice th rough 2007 (u p t o 3 5 years), pl us •0 .5% o f th e employ ee’s fin al av erag e p ay o ver th e employ ee’s S ocial Secu rity covered pay times years of serv ice t hrou gh 20 07 (u p to 3 5 y ears), plus •0 .55 % of t he emp lo yee’s final average pay times years of service thro ug h 2 00 7 (in excess o f 3 5 y ears). For serv ice after 2 00 7, emp lo yees in th e gran dfathered grou p con tin ue to earn a mo nthly life an nui ty b enefit pay able at no rmal retiremen t age (usually ag e 65 ), calcu lated as follows: •1 .0% o f th e employ ee’s fin al avera ge p ay times y ears o f serv ice after 2 00 7 (up to 35 years minu s service b efo re 2 00 8), plus 20 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents •0 .45 % of th e employ ee’s final av erag e p ay o ver th e employ ee’s So cia l S ecu rity covered pa y ti mes years o f serv ice after 2 00 7 (u p to 35 years min us serv ice before 20 08 ), p lu s •0 .50 % of t he emp lo yee’s final average pay times t he lesser o f y ears o f service after 200 7 and to tal years of service min us 35 years. The total ben efit pay ab le to empl oy ees in the grand fathered g ro up will n ot b e less than t he b enefit the employ ee wou ld h ave receiv ed h ad he been a no n-grand fathered emp lo yee. For service after 20 07 , emp lo yees in th e no n-grand fathered g roup an d p ost-20 07 gro up earn a hy po th etical acco un t b alan ce th at is credited with pay credits and interest credits. In terest is cred ited to a p articipan t’s acco un t effective as of Decemb er 3 1 of each year, b ased o n th e v alue of the p articipan t’s acco un t on Janu ary 1 o f th at y ear. The in terest rate is b ased on the 30 -y ear Treasuries’ con stan t maturities rate pu blished b y the IRS. Th e rate fo r a calend ar year is t he rate pu blished fo r Octo ber of th e previou s year. Pay credits fo r a year are based on a percen tag e of eligible pa y fo r that year, as foll ows: Credited Service % o f Pay Credit 1 - 4 y ears 4% 5 - 8 y ears 5% 9 - 12 years 6% 13 - 1 6 y ears 7% 17 or mo re y ears 8% Fin al avera ge pay fo r g ran dfath ered emp lo yees i s th e averag e of th e employee’s eligible pay fo r the 6 0 co nsecu tive mon th s th at p ro du ces the high est average. (However, if the emp lo yee’s av erag e el ig ib le pay for an y 36 co nsecu tive mo nths as of Decemb er 31 , 2 00 7 is greater than the 60 -co nsecu tive mont h averag e, the 36 -mon th nu mb er wil l be used .) For n on -g ran dfath ered employ ees, final average pay is th e av erag e o f th e employ ee’s elig ibl e p ay fo r the 36 co nsecu tive mon th s b efore January 1, 2 00 8 that prod uces the h ig hest average. Eligible p ay includ es compo nen ts of p ay such as base salary, ov ertime and ann ual incentive award s. Pay d oes no t in clu de p aymen t of certain co mmissio ns, perfo rman ce shares, gains o n SAR ex ercises, vesting of restricted stock u nits, severance pay , or other ex t raord in ary items. S ocial Secu ri ty covered pa y is o ne-twelft h o f the average of t he So cial Security wag e bases for the 35 -y ear p eriod end in g when th e emplo yee reaches So cial Security retirement ag e. Fo r n on -g ran dfath ered parti cip an ts, So cial Security co vered pay is d etermined as of Decemb er 3 1, 2 00 7. Th e wag e b ase is th e maximu m amo un t o f p ay fo r a year fo r which Soci al Secu rity taxes are paid. So cial Security retirement ag e is b etween age 6 5 and 67 , depen ding on th e employ ee’s d ate o f b irth . Un less special IRS ru l es ap ply , b enefits are n ot paid b efo re emp l oy ment end s. An emp l oy ee may elect to receive: •a life ann uity (mon th ly pay men ts for t he emp lo yee’s life o nly), or •a 50 %, 7 5%, o r 10 0% jo int an d survivor an nu ity (the emp lo yee receiv es a smaller ben efit for life, an d th e employ ee’s d esig nated su rv iv or receiv es a benefit of 50%, 75%, or 100% of th e redu ced amo un t fo r life), o r •a fiv e, ten , o r 15 y ear p eriod cert ain an d life ann uity ben efit (th e emp lo yee receives a smaller b en efit fo r life and , if th e employ ee di es before the selected perio d, the emp lo yee’s desig nated su rv iv or receives the red uced amou nt unt il th e en d o f the p eriod ), o r •a lump su m b enefit. If an emplo yee cho oses o ne o f th ese b en efit op tions, th e ben efit is adj usted using the in terest rate assu mp tion s an d mo rtality tables sp ecified in th e Qu alified Pensio n Plan, so i t h as th e same actu arial v alu e as the b enefit determin ed by t he Qual ified Pen sio n Plan fo rmulas. An employ ee who se emplo ymen t end s before ag e 6 5 may b eg i n benefi t pay ments after terminatio n o f emp lo yment . Th e b enefit for serv ice before 20 08 is redu ced for co mmencemen t b efo re age 6 5, so th e ben efit remains the actu arial eq uivalent of a b enefit beg in ning at ag e 65 . If an emp lo yee retires on o r after age 55 with at least 1 0 years o f vesti ng service, th e employ ee may take an “early retiremen t” ben efi t wit h resp ect to benefits earn ed throu gh 20 07 , b eginn in g immediatel y after empl oy ment end s. Mr. Bielen, M r. Walker, and Mr. Th ig pen are eligible fo r early ret irement. The early retiremen t b enefit fo r p re-20 08 serv ice is based o n the Quali fied Pen sion Plan formu la. Th e b enefit is redu ced b elo w the level of th e ag e 65 b enefit; ho wev er, th e redu ction for an early retirement ben efit is n ot as great as the redu ction fo r early commencement of a vested b enefit. (For example, th e early ret irement red uctio n at ag e 55 is 5 0%; th e actuarial red uctio n (usin g the Qualified Pen sio n Plan in terest rates an d mortality tables) is 6 2%. At age 6 2, the early retiremen t redu ction is 2 0%, an d the actuarial redu ction is 27 %). No nqua lified Ex cess Pensio n Plan Ben efits u nd er o ur Qual ified Pensio n Plan are limited by the In ternal Revenu e Cod e. We b elieve we sho uld p ay o ur emp lo yees the total p ension benefit t hey h ave earn ed, with ou t imp osing t hese Cod e limits. Therefore, like many large compan ies, 20 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents we h ave a Non qu alified Ex cess Pension Plan that mak es up t he difference between : 1 ) th e benefit d etermin ed u nd er the Qu alified Pension Plan fo rmula, without ap plyin g these limits; an d 2 ) the b enefit actu all y p ay able un der th e Qu alified Pension Plan, taking th ese limit s in to acco un t . Pursu ant to the Non qu alified Ex cess Pensio n Plan’s ch an ge of con trol prov isio n, an emp lo yee will receive a lump su m p ay men t o f his or her p re- 20 05 ex cess p ension ben efit in Janu ary immediately foll owin g th e employ ee’s date of terminatio n. Prior t o the M erg er in 2 01 5, b enefits un der the No nq ualifi ed Excess Pensio n Plan wit h respect to serv ice before 20 05 were paid at the same ti me and in th e same fo rm as th e related b enefits u nd er ou r Qu alified Pen si on Plan. Fo r an emp lo yee’s po st-20 04 b enefit, an empl oy ee will recei ve p ayment p ursu an t t o th e emp lo yee’s orig i nal pay men t elect io n (lump sum or an nu ity) three or six mo nths after terminatio n, as ap plicab le based on whether t he employ ee is a “specified employ ee” un der Sectio n 40 9A of the In ternal Rev en ue Cod e. Fo r any dist ribu tion s to an emp lo yee who was a participant in th e No n-qu alified Ex cess Pen si on Plan and employ ed o n t he date o f th e M erg er in 2 01 5, th e more fav orable lump su m fact ors will b e u sed to calculate th e b en efit . Th ese more favorable lu mp su m fact ors includ e the use of (a) th e mo rtalit y table u sed fo r determin in g lu mp su m pay ment amou nts u nd er th e Qualifi ed Pensio n Plan , an d (b ) an interest rate equ al to th e lesser of (i ) th e sum o f 0.7 5% and the yield o n U.S. 10 -y ear treasury no tes at con stant maturity as mo st recen tly p ub lished b y the Federal Reserve Bank o f New Yo rk , and (ii) th e in terest rate u sed fo r d etermining lump sum payment amo un ts un der t he Qualifi ed Pension Plan. Pay men t is made from ou r general assets (an d is th erefore sub ject to th e claims o f o ur credit ors), an d n ot from th e assets of th e Qu alified Pension Plan. No nqua lified Deferred Compensa tion Arra ng ements This tab le h as in fo rmation abo ut th e named execu tive o fficers’ p articipatio n in n on qu alified d eferred compensation arrang ements in 2 01 8. No nqua lified Deferred Co mpensati on Ta ble Na me (a) Executiv e contributions in last FY ($) (b)(1) Registra nt contributio ns in last FY ($) (c)(2) Aggregate earnings in la st FY ($) (d) Aggreg ate withdrawals/ distributio ns ($) (e) Ag greg a te ba lance at last FYE ($) (f)(3) Bielen $7 2,3 40 $1 18 ,10 2 $1 97 ,05 8 $3 ,07 6,7 41 $13 ,67 8,7 38 Walker $1 2,7 64 $42 ,38 9 $(70 ,00 0) $— $2 ,09 5,2 59 Jo hn s $— $3 40 ,00 2 $8 58 ,24 4 $— $42 ,35 0,4 85 Temp le $3 7,8 01 $52 ,02 1 $1 ,71 2 $— $21 1,6 39 Thig pen $40 3,9 02 $90 ,74 5 $11 ,87 9 $— $2 ,09 5,1 89 (1)These amo un ts in clu de: a.the follo win g amo un ts that are also includ ed in co lu mn (c) (Salary ) of th e Summary Compen sation Table as co mp ensatio n earn ed and d eferred by th e officer in 2 01 8 u nd er t he DCP: Mr. Biel en , $3 1,0 00 ; Mr. Temple, $2 0,3 33 ; an d M r. Thi gp en, $2 6,3 75 . b.the foll owin g amou nts t hat are also in clu ded in column (g) (No n-equ ity incen tive p lan co mp ensatio n) of t he Su mmary Comp ensati on Table for 2 01 8 as co mp en satio n earned u nd er the AIP wit h respect to 20 18 perfo rmance and deferred b y the o fficer in 20 19 un der th e DCP: Mr. Bielen , $41,340; M r. Walk er, $12 ,76 4; Mr. Temp le, $17 ,46 8; and Mr. Thigpen, $23 8,7 50 . c.the foll owin g amou nts t hat are also in clu ded in column (g) (No n-equ ity incen tive p lan co mp ensatio n) of t he Su mmary Comp ensati on Table as co mp ensatio n earn ed u nd er th e LTIP wi th resp ect to awards v estin g December 31 , 2018 an d d eferred b y the officer in 2 01 9 u nd er the DCP: M r. Th igpen , $1 38 ,77 7. (2)For Mr. Bielen, Mr. Walker, Mr. Temple, and Mr. Th ig pen , th ese amo unt s are th e DCP Sup plemental Matching Con tribu tion s allo cated to the o fficer’s accou nt in 2 01 8 wi th resp ect to th e o ffi cer’s particip ation du ring 20 17 in o ur DCP, t he terms o f which p ro vide that th e o fficer wil l not receiv e th e match in g co ntrib utio n u nless the o ffi cer is emp lo yed on th e date of th e allocatio n o r termi nated du e to d eath, d isability, o r wh ile eligible fo r no rmal or early retiremen t un der the Compan y’s Qualified Pensio n Plan. Th e Compan y will incu r t he expen se at th e ti me of allo cation . For Mr. Joh ns, this amou nt in clu des 1) th e DCP Suppl emental Mat ch i ng Co ntrib utio n all ocated to his accoun t in 2 01 8 with respect to his p articipatio n in o ur DCP d uri ng 2 01 7 ($11 8,1 20 ) and 2) the lu mp sum amo un t that was determin ed as if h e accru ed a b en efit in th e No nq ualified Excess Pen sion Pl an and which is credited t o h is bo ok -en try retirement p ay d eferral acco un t in 20 18 ($2 21 ,88 2). Fo r Mr. Bielen , M r. Walk er, Mr. Joh ns, Mr. Temp le, an d Mr. Thig pen, these DCP Sup plemen tal Matching Contrib utio ns an d, for M r. Joh ns, the amount of co mp ensation credited to his reti remen t p ay d eferral acco un t , are rep orted in th e Su mmary Co mp ensatio n Tab le as co mpen sat io n for 20 18 . (3)These amou nts reflect th e fo l lo win g amou nts that h ave b een repo rted as co mp en sat io n to the o fficer in previ ou s p ro xy statements (with resp ect to p eriods prior to th e Merger) and An nu al Repo rts on Forms 10-K (fo r perio ds after the Merger): Mr. Bielen, $1 6,3 67 ,97 9; M r. Walker, $2 ,11 0,1 06 ; Mr. Joh ns, $4 1,152,2 39; Mr. Temp le, $12 0,104; and M r. Th ig pen , $1 ,58 8,663 . 21 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Discussi on of No nqua lified Deferred Compensa tion Table Deferra ls by Our Officers In g eneral, t he named executive officers an d o th er k ey officers can elect to p articipate in o ur un fu nded, u nsecu red DCP. An o fficer who defers co mp ensation u nd er th e DCP do es no t pay inco me tax es o n the co mp ensatio n at that time. Instead, th e o fficer pays inco me tax es o n the co mp ensatio n (and an y earning s on the compensation ) o nly wh en t he officer receiv es th e co mp ensati on an d earning s fro m t he DCP. Throu gh December 31 , 20 18, elig ib le o fficers co uld d efer: 1 ) up to 7 5% o f th eir base salary; 2) u p to 85 % of an y an nu al incen tive award ; and /o r 3 ) up to 94 % of th e amou nts p ay able when Performan ce Un it Awards, Restricted Unit Award s, and Parent-Based Awards are earned . An elect io n to d efer base salary for a calend ar y ear must b e made b y Decemb er 3 1 of th e previou s y ear. Generally, an election to defer an y an nu al in cen tiv e pay ou t fo r a calend ar y ear mu st be mad e b y Jun e 3 0 of that y ear. Generally, an electio n to d efer earned p erformance un its mu st be mad e b y Jun e 3 0 of t he last year in th e award ’s p erforman ce perio d. An electio n to d efer earn ed Restricted Un it Award s o r Parent-Based Awards mu st b e mad e with in 3 0 days aft er the d ate of the award . Deferred co mp ensatio n accrues earning s based on t he p art ici pant’s electi on among no tion al inv est ment cho i ces av ailable un der th e DCP. For 201 8, the in vestmen t retu rns for each of the no tional investment cho ices were: Investment Cho ice Return BlackRo ck To tal Return Fund (0 .82 )% Columbia Mid Cap In dex Fun d R5 (11 .35 )% DFA Emerging M ark ets I (13 .62 )% DFA US Small Cap (13 .13 )% Dod ge & Co x Intern ation al Sto ck (17 .98 )% Dod ge and Cox Stock (7 .07 )% Fidelity 5 00 Ind ex Fu nd (4 .40 )% Well s Fargo Go vernment Mon ey M ark et Institution al 1 .69 % JP Mo rg an M id -Cap Gro wth R5 (5 .02 )% M etrop olitan West Low Duration Bon d I 1 .41 % T Rowe Price Growth Stock (1 .03 )% Pimco Real Return In stit utio nal (1 .97 )% Temp leton Fo reign A (15 .00 )% Vanguard To tal Bo nd M arket Index - Ad miral (0 .03 )% Protective Life LIBOR Fun d 2 .73 % An o fficer may elect to receive pay ments in a lump su m o r i n u p to ten ann ual installmen ts, which electio n can b e chan ged u nd er cert ain circu mstan ces. An o fficer may elect to receiv e a deferred amo un t (and earn in gs) u po n termin ation o f empl oy ment and if such election is mad e, the o fficer may no t chang e this electio n. An o fficer may in stead elect to receiv e a deferred amou nt (and earning s) o n a fixed date (which mu st b e a Febru ary 1 5, and must begin no later than the officer’s 70 t h birthd ay), which electio n can b e ch ang ed u nd er certain circu mstances. An officer may al so req uest a distribu tio n if the officer h as an extreme an d u nex pect ed fin an cial hardshi p, as determin ed u nd er IR S rules. Supplementa l Matching We mak e sup plemental matchin g con trib ution s to the accou nt o f elig ib le officers u nder the DCP. Th ese co ntribu tio ns pro vide matchi ng that we wo uld o th erwise co ntribu te to ou r 40 1(k) Plan, bu t which we cann ot co ntrib ute b ecau se of Intern al Reven ue Co de limit s o n 4 01 (k ) plan matching . For a calend ar y ear, th e sup plemen tal mat ch that an officer receives is: •th e lesser of •4% o f elig ib le co mp en satio n p ayable du rin g t he year, wh eth er received in cash o r d eferred , an d •th e to tal amou nt t he officer d eferred du ring th e year under the 4 01 (k ) Pl an and deferrals o f b ase salary an d cash bo nu ses un der th e DCP; min us •th e actu al matching co ntrib utio n the officer received u nd er t he 40 1(k) Plan fo r that y ear, as d etermin ed whil e appl ying the restricti on s impo sed by th e Internal Rev en ue Co de. An officer’s sup plemen tal matching con trib ution s may be allo cated in on e percent in crement s amo ng the same no tion al inv estment fun ds available fo r d eferral s un der th e DCP. Su pp lemen tal matching is p aid on ly after termin ation of emp lo yment. The officer can elect p ayment in a lump sum or in up to ten an nu al installments, and such election cann ot be chan ged . 21 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Other Prov isio ns No tion al inv estment ch oices un der th e DCP must be in on e p ercen t increments. An o fficer may tran sfer mo ney b etween t he no tion al inv estment ch oices o n any b usiness d ay. We d o no t prov id e an y ab ov e-mark et or p referential earning s rates an d d o no t gu aran tee th at an o fficer’s no tion al in vestmen ts will mak e mo ney. Up on an o fficer’s d eath or disability, the officer's plan b alan ce is p aid in a lump sum. Accou nt balances are p aid in cash. Retirement Pa y Deferral Account fo r Jo hn D. J ohns In 20 16 , the Bo ard app ro ved t he co nv ersion o f th e accrued b en efit pay able un der the No nq ual ified Ex cess Pension Plan as o f March 3 1, 20 16 to Mr. Joh ns into a lump sum amou nt. The lump su m amou nt is allo cated to a book en try th at will b e treated as th ou gh it were a pay deferral accou nt un der th e Co mp any ’s DCP. Mr. Jo hn s will co ntin ue to accru e benefi ts as tho ug h h e were accruing ben efits u nd er the Non qualified Excess Pension Plan wi th resp ect t o t his co nti nu ed serv ice as an employ ee o f Compan y after March 31 , 20 16 . At th e en d of each calen dar year (or the date Mr. Joh ns’ employ ment terminates, if earlier), the ad ditio nal ben efit accrued durin g such year (or portion thereof) will b e con verted into its then p resen t val ue, u sing th e mortality tab les and ap pli cab le in terest rate on such date an d cred ited to Mr. Joh ns’ retiremen t p ay deferral acco un t. Treatin g t he accrued b enefit as a p ay deferral acco unt as th ou gh i t were un der the DCP will all ow the amou nt o f such ben efit to b e treated in th e same mann er as if it were payab le cu rrently to M r. Jo hn s an d then deferred un der th e DCP. This will allow th e accrued b enefit to be d eemed i nv ested , at Mr. Jo hn s’ electio n, among the vario us n oti on al investment op po rtun ities av ailable to particip ants (in clu ding Mr. John s) for th eir deferred co mp en satio n u nd er the DCP u ntil it is payab le to Mr. Joh ns. Potentia l Payments upon Termina tio n o r Change o f Contro l The info rmation b elo w describ es an d qu antifies the co mp ensatio n that wou ld h ave accrued to th e named executiv e o ffi cers up on a termin ation o f th e execu tives’ emp lo yment o r a ch an ge-in-co ntrol o f Company on December 3 1, 20 18 , u nd er (i) the AIP an d th e LTIP an d (ii) fo r M r. Jo hn s, th e terms o f t he Letter Agreement. Howev er, th e actu al benefit to a named ex ecutiv e o fficer can on ly b e determin ed at the time o f th e chan ge-in -co ntrol even t or su ch ex ecutiv e’s separation from the Company. Ad dition ally, th e b enefits describ ed below are in ad ditio n t o ben efits av ailable g enerally to salaried employees up on a termi natio n of employ men t, such as distribut io ns of th eir remai ning p aid time o ff balan ce o r distribu tions un der the 40 1(k) Plan and the Co mp any ’s disabilit y ben efits. As descri bed in the C ompensation Discussio n an d An alysis, with th e ex cep tion o f M r. Jo hn s, n on e o f th e n amed executiv e o fficers are p arty to an y written emp lo yment arrang ements that prov id e fo r p aymen ts in th e ev ent of a chang e in con trol or terminatio n o f employ men t. Letter Agreement with J ohn D. Jo hns On Nov emb er 2 8, 2 01 7, Mr. Jo hn s entered in to the Letter Ag reemen t with t he Compan y d ated Nov ember 6, 20 17 th at establishes his d uties, co mmitmen ts and co mpen sat io n with resp ect to his ro le as Execu tive Chairman . Upo n a termin ation o f Mr. Joh ns’s service as Executi ve Ch airman, th e o nly co mp ensation p ayable to Mr. Joh ns are (i) accrued b ut u np aid comp ensati on u nd er the Letter Ag reemen t for an y reaso n; (ii) any v ested amou nts or benefits owin g to him un der th e Compan y’s o th erwise ap plicable comp ensati on p ro grams o r emp lo yee ben efi t plans an d prog rams, in clu ding an y compen sation previ ou sly d eferred by Mr. Jo hn s (tog eth er with an y accrued earn in gs thereo n) an d no t yet paid by the Co mp any ; an d (iii) any o th er amoun ts or b enefits payab le d ue t o M r. Jo hn s’ retiremen t, termin ation , death or disab ility u nd er the Compan y’s plans, po licies, p ro grams o r arran gemen t s. Annual Incentive Pa yments Except as pro vided in th e following sentence, un less th e Co mp ensatio n Co mmittee determin es to autho rize a payment, no amou nt will b e pay able to th e named ex ecutiv e officers as an an nu al in centiv e award u nless th e named ex ecutiv e o fficer is still an emp lo yee of the Co mp any o r on e of its subsid iaries on the date p aymen t i s made or such earlier date as th e Co mp en sat io n Committee may specify. Un l ess th e Compen sation Co mmitt ee sh all o th erwise determine to p ay t he named execu tive officer a g reat er amo un t, if a named execu tive o fficer’s emp lo ymen t terminates d ue to d eath , di sability (as determined in accordan ce wi th g enerally app licable Co mpan y p olicies) or no rmal or early retirement un der the t erms o f an y retiremen t plan maintain ed b y th e Co mp any or a sub sid iary, su ch named ex ecut iv e o fficer sh all receiv e an ann ual incenti ve p ayment eq ual to th e amo un t the n amed execu tive officer wou ld h ave receiv ed if th e named ex ecut iv e officer had remain ed empl oy ed throu gh the en d o f th e year, multiplied b y a fraction , t he n umerat or of wh ich is th e n umber of days th at el ap sed du ring th e year in wh ich th e terminatio n o ccurs before and in clu ding th e dat e o f the n amed ex ecutiv e officer’s termin ation of emp lo yment an d the d eno minator of whi ch is 36 5. Lo ng -Term Incentiv e Awa rds The n amed executi ve o fficers receiv e ann ually three ty pes of lon g-term in cent iv e award s: Perfo rmance Unit Awards, Restricted Un it Award s, and Paren t-Based Awards. These awards are describ ed in more detail in th e Co mp en satio n Discu ssion an d Analysis - Lon g-Term In centiv e Awards an d Grants of Plan-Based Awards. Up on a termi nat io n o f emp loy ment, th e awards prov id e fo r d ifferin g v estin g and pay men t terms dep end in g u po n the t yp e o f termin ation. In th e case o f a chan ge in con t ro l o f the Compan y, •A named ex ecu tiv e officer will b e deemed to have earned the g reater o f (i) 10 0% of the p erforman ce un its an d (ii) the p ercentage o f such p erforman ce un its th at wo uld d erive fro m appl ying th e schedules at Compen sation 21 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Discussio n and An aly sis - Lon g-Term In cen t iv e Awards t hrou gh the date o f th e chan ge in co ntro l even t, and wi ll b e settled in cash with in 4 5 day s fo llowing the dat e of th e chan ge in con tro l event, b ased up on the Company Co ntro l Boo k Valu e Per Unit, (as defined in th e LTIP), if av ailable wit hin 1 0 d ay s b efo re su ch pay men t d ate; o r, if th e Comp any C hang e in C on trol Boo k Value Per Unit is n ot th en availab le, then 9 0% o f th e v alu e o f su ch perfo rman ce u nits, b ased on the PL Tan gible Bo ok Value Per Un it, (as defin ed in th e LTIP), determin ed as of the most recen t ly rep orted qu arterly b alan ce sheet preced in g such Comp any chan ge in co ntro l shall b e paid with in 45 day s o f the Co mp any ch ang e in con trol, fo llowed by an ad dit io nal p aymen t in resp ect of such p erforman ce un its within 7 5 day s o f su ch Compan y chang e in co ntro l eq ual to the ex cess, if an y, o f (i) th e Ch ang e in Co ntro l Bo ok Value Per Unit o ver (ii) 90 % of th e PL Tan gible Bo ok Valu e Per Un it d etermined as of th e mo st recent ly rep orted qu arterly b alance sh eet p receding su ch Compan y chan ge in cont ro l; •The restricted u nits wil l immedi ately vest in full an d b e set tled in cash , within 4 5 d ays fo llowing th e date of th e change in con t ro l ev ent , b ased up on the Comp any Ch an ge in Co ntro l Boo k Valu e Per Un it, if avai lab le with in 1 0 day s b efo re such p aymen t date; or, if the Co mp any Ch ang e in Con trol Boo k Value Per Unit is no t then available, then 9 0% of th e value o f such p erforman ce un its, b ased o n the PL Tang ib le Bo ok Valu e Per Un it determin ed as o f the most recen tly repo rted q uarterly balance sh eet preceding such Company chan ge in co ntro l shall b e paid wi th in 45 day s of the Compan y ch an ge in co ntrol , fo llowed by an add iti on al p ay men t in resp ect o f su ch p erforman ce u nit s with in 75 d ay s of such Compan y chan ge in cont ro l equ al to the excess, if any, o f (i) the Compan y C hang e in Con tro l B oo k Valu e Per Un it ov er (ii) 9 0% o f the PL Tang ib le Boo k Value Per Unit d etermined as of th e most recen tly repo rted q uarterly balan ce sheet p reced in g such Co mp any ch ang e in con trol; an d •The Parent-Based Award s wil l vest immed iately an d b e settled in cash within 6 0 d ay s follo win g t he date o f the chan ge in con tro l even t, b ased on th e Parent Stock Percentage, (as d efi ned in th e LTIP), b ut the Final Paren t Sto ck Valu e, (as defin ed in the LTIP), sh all b e d etermined b ased on th e av erage of th e closin g prices of Dai-ichi Life co mmon sto ck on all trad in g d ays du rin g th e 3 0-calen dar d ay period en ded on th e date o n which the Co mp an y ch ang e in co ntrol occurs. In th e case o f a ch ang e in co ntro l of Dai-ich i Life, that resu lts in the co mmo n st ock of Dai-i ch i Life n o lo ng er b ein g acti vely trad ed on a public securities ex change (“Paren t Chan ge in Con t ro l”), •The Paren t-Based Award s will b e co nv erted to restricted un its as of th e date o f th e Parent Ch ang e in Co ntrol. Su ch con versio n will result from the fo llowing : First, t he do llar value of th e Parent-Based Award s wil l be determin ed as of the Parent Ch ang e in Con trol, with th e Fin al Paren t Sto ck Value, (as defin ed in the LTIP), u sed to d etermine the Parent Sto ck Percentage determin ed u sin g the av erag e o f th e closin g p rices o f the Parent commo n sto ck o n al l trad in g d ays during th e 30 -calend ar d ay p eri od end ed on the d ate on which the Paren t Ch ange in Co ntro l occurs. The resultin g do llar v alu e of the Paren t-Based Award s shall then b e con verted in to restricted un its b y dividing su ch do llar v alu e by th e PL Tang ib le Boo k Value Per Un it determin ed as of the mo st recently rep ort ed qu arterly balan ce sheet preced in g the Paren t Ch ang e in Co ntro l. After su ch con version, the conv ert ed un its will co nti nu e to b e sub ject to th e terms of th e Parent -Based Award Ag reemen t, includ in g b ut not limited to , th e v estin g sch edu le and timin g pro vision s of such agreement. In th e case o f an early retiremen t o f the n amed ex ecu tiv e o fficer un der th e terms o f the Co mp an y’s Qualified Pen sion Plan, •A pro-rated po rtio n of the p erforman ce un its will b e settl ed in cash b ased on a fraction , the n umerator o f wh ich is the n umber o f days the o fficer was emp lo yed during th e award p eriod , an d the d eno minator of whi ch is th e to tal nu mb er of day s i n the award perio d; •A pro-rated p ortion of the restricted u nits will immediatel y v est b ased o n the p ro du ct o f th e n umber of unv ested restricted un its that wou ld b ecome vested at the ap plicab le d ate ti mes a fractio n, th e nu merato r of which is the nu mber o f co mp lete and p art ial calen dar mo nths b etween Janu ary 1 , 20 18 an d the executive’s retirement d ate, an d th e den omin ato r of which is (i) 36 in th e case o f th e un i ts th at are schedu led to vest at Decemb er 3 1, 2020, or (ii) 4 8 in the case of th e un its that are sched uled to v est at December 3 1, 2 02 1; and •A p ro -rated po rtio n o f the Paren t-Based Award s will immediatel y vest b ased o n a fraction , th e nu merator o f which is t he nu mb er o f co mp lete an d p artial calend ar mon th s b etween Jan uary 1 , 2 01 8 an d the o fficer’s retirement date, an d the d eno minat or of wh i ch is 36 . In the case o f th e d eath , d isab ili ty, or retirement o f the n amed ex ecu tiv e officer o n or after n ormal ret irement ag e u nd er t he terms of th e Qualified Pensio n Plan , •A pro-rated po rtio n of the p erforman ce un its will b e settl ed in cash b ased on a fraction , the n umerator o f wh ich is the n umber o f days the o fficer was emp lo yed during th e award p eriod , an d the d eno minator of whi ch is th e to tal nu mb er of day s i n the award perio d; •The restricted u nits will vest i n full; and •The Parent-Based Awards will vest in ful l. 21 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents In the case o f a sp ecial termin ation o f t he named ex ecu t iv e o fficer, wh ich co nsists of a t erminati on o f emp lo yment d ue to (i) a d iv est iture o f a bu sin ess segment o r a sig nificant p ortio n of th e assets of the Company or (ii) a sig nificant reductio n by the Company of its work force, the Co mp ensation Co mmittee d etermi nes to what extent, and o n wh at terms, th e Perfo rmance Uni t Award s, R estricted Unit Awards, an d Parent-Based Awards will be p aid . Un less the Co mp ensation Committee d etermi nes to p ro vide fo r t reatment that is mo re fav orable, i f a n amed executi ve officer’s emp lo yment is termi nat ed other than for death , disabilit y, normal o r early retiremen t, sp ecial termin ation , o r cause, any un vested Perfo rmance Unit Awards, Restricted Unit Awards, an d Parent-Based Awards will be forfeited as of th e date of th e o fficer’s terminatio n o f employ men t. Un less th e Co mp ensatio n Commit tee determin es to prov id e fo r treat ment th at is mo re favo rab le, terminatio n o f a n amed execu tive o fficer’s employ men t for “cau se”, will resu lt in a forfeiture o f each typ e o f award . "Cau se" mean s an y n amed ex ecu tiv e o fficer's convict io n or plea of no lo co ntend ere to a felo ny , an act o r acts of extreme disho nesty or gross mi scon du ct, or v io latio n o f the Compan y’s Cod e of Business Co nd uct. Un less otherwise n oted abo ve, any Restri cted Un it Awards o r Paren t-Based Awards th at beco me v ested wil l b e p ayab le in accordan ce with t he no rmal v esting sched ule as if t he named ex ecu tive o ffi cer had remain ed emp lo yed th rou gh th e last vesti ng dat e, an d an y Performan ce Un it Awards that are earned will b e p ayab le as if the n amed ex ecu tiv e o fficer had remain ed emp lo yed fo r the d uration of th e award p eriod . In No vember 20 17 , th e Compensation Committee ap pro ved th at, u po n Mr. Jo hn s’ reti remen t from th e Company, all of Mr. Joh ns’ o utstand in g Perfo rman ce Un it Award s will fu lly vest on the date o f his retiremen t and will b e p ayab le at th e same time an d in the same man ner as t hey wou ld had M r. Joh ns remained emplo yed thro ug h t he end of each app licable award p eri od . No nqua lified Deferred Co mpensa tion Each n amed executive o fficer is cu rrently fully v ested in th e amo un ts rep orted in th e “Agg reg ate Bal an ce at FYE” co lumn o f th e Non qu alified Deferred Co mp ensatio n Table, and t herefore these amou nts wo uld b e pay able to n amed ex ecutiv e officers up on t ermin ati on of emp loyment for any reason . In ad dit io n, a named executi ve officer whose emp lo yment terminated du e to no rmal or early retirement , d eath , or d i sability wou ld receiv e th e DCP Su pp lemen tal M atch in g Co ntrib utio n th at wo uld hav e been allocated u nd er ou r DCP to each named ex ecutiv e officer’s accou nt with respect to the officer’s serv ice du rin g 2 01 8. Pension Benefits All of th e Compan y’s elig ib le emplo yees particip ate in the Qualified Pension Pl an . Ben efits u nd er th e Qualified Pen sio n Plan are ful ly v ested after th ree years of service. Up on termination of emplo ymen t fo r an y reason , employees are en titled to receiv e th eir vested b enefits. Each named executi ve officer wo uld be enti tled to receiv e th e amou nts d esign ated as pen sio n b enefits represented in th e “Presen t Valu e of Accumulated Benefit” column o f the Pensio n Ben efits Tab le. The Pen sio n Benefits Table al so shows th e amo un ts pay able to each n amed execu tive officer up on sep aratio n from serv ice u nd er Sectio n 40 9A of th e In ternal R ev enu e Co de u nd er the Non qu alified Excess Pension Plan. Termina tion Payments The fo llowing tab les and fo otno tes d escribe th e potential pay men ts to the named ex ecutiv e officers u po n terminatio n o f emp lo yment as o f Decemb er 3 1, 2 01 8. The tab les do n ot i ncl ud e: •co mp ensatio n o r b enefits p revio usly earned by th e n amed ex ecutiv e officers o r incen tive award s t hat were alread y fully vested; •the v alu e o f p ension ben efits that are disclo sed in the 2 01 8 Pen sion Ben efits Table, ex cept fo r any pen sion en han cement trig gered b y the ev ent, if app licabl e; •the amou nts pay able un der th e DCP that are d isclosed i n t he 20 18 Non qu alified Deferred Compensation Table; o r •the v alu e of any b enefits (such as retiree health co verage, life in surance and disabil ity co verag e) p ro vided on th e same b asis to sub stan tially all o th er employ ees. 21 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Change o f Cont rol The tab le set fo rth below sho ws the cash p aymen ts and o t her benefits that wo uld have b een pay able to each of th e named execu tive o fficers had a ch ang e of control of th e Co mp any occurred on December 31 , 20 18 . Na me Perfo rmance Units Restricted Units Parent-Ba sed Awa rds To tal Bielen $7 ,22 7,8 98 $2,2 14 ,35 6 $5 56 ,81 8 $9,9 99 ,07 2 Walker $2 ,05 9,9 29 $6 40 ,18 1 $1 57 ,74 5 $2,8 57 ,85 5 Jo hn s $14 ,36 7,8 87 $4,0 71 ,59 6 $9 49 ,03 4 $1 9,3 88 ,51 7 Temp le $2 ,72 8,2 20 $8 44 ,36 5 $2 10 ,65 4 $3,7 83 ,23 9 Thig pen $3 ,19 3,3 97 $1,0 01 ,34 8 $2 43 ,08 4 $4,4 37 ,82 9 Dea th, Disa bilit y, o r Normal Retirement The tab le set fo rth b elo w sho ws th e cash pay men ts an d o th er b en efit s th at wou ld hav e been p ayable to each of th e named executiv e officers h ad h is employ men t b een t ermin ated d ue to d eath, d isability or no rmal retirement (o n o r after no rmal retiremen t ag e) o n Decemb er 31, 20 18 . Na me 201 9 DCP Supplemental Ma tching Contributio n Performance Units Restricted Units Parent-Based Awards Annua l Incentiv e Pa y ments To tal Bielen $15 4,2 15 $5 ,34 0,6 15 $2 ,37 1,9 76 $55 6,818 $1,0 33 ,50 0 $9,4 57 ,12 4 Walker $2 8,4 12 $1 ,56 1,0 71 $68 2,3 94 $15 7,745 $3 19 ,10 0 $2,7 48 ,72 2 Jo hn s(1 )$1 3,5 00 $12 ,26 9,1 14 $4 ,23 8,5 67 $94 9,034 $— $1 7,4 70 ,21 5 Temp le $6 1,1 93 $2 ,03 8,3 61 $90 2,5 83 $21 0,654 $4 36 ,70 0 $3,6 49 ,49 1 Thig pen $9 6,6 32 $2 ,45 5,1 90 $1 ,06 4,2 02 $24 3,084 $4 77 ,50 0 $4,3 36 ,60 8 (1) Mr. John s is th e o nly named execu tive officer who would b e elig ib le for n orm al retirement on December 3 1 , 2018. Ea rl y Retirement The tab le set fo rth b elo w sho ws th e cash pay men ts an d o th er b en efit s th at wou ld hav e been p ayable to each of th e named executiv e officers h ad h is employ men t b een t ermin ated d ue to early ret irement on December 31 , 20 18 . Na me 2 0 1 9 DCP Supplemental Ma tching Co ntribution Performa nce Units Restricted Units Parent-Based Awards Annual Incentive Payments Tota l Bielen $1 54 ,21 5 $5 ,34 0,6 15 $1 ,43 2,3 35 $3 76 ,90 8 $1,0 33 ,50 0 $8 ,33 7,5 73 Walker $28 ,41 2 $1 ,56 1,0 71 $43 1,8 28 $1 10 ,75 9 $3 19 ,10 0 $2 ,45 1,1 70 Jo hn s(1 )$— $— $— $— $— $— Temp le(2)$— $— $— $— $— $— Thig pen $96 ,63 2 $2 ,45 5,1 90 $69 2,2 33 $1 74 ,34 0 $4 77 ,50 0 $3 ,89 5,8 95 (1) Becau se Mr. Jo h n s is elig ible fo r norm al retirement, n o amounts are sh o wn u nder th e Early Retirement scenario . (2) Mr. Temple would n o t be eligible fo r early retirement on Decem ber 31 , 2 018. 21 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Other Termina tion (o ther t ha n for “cause”) The tab le set fo rth b elo w sho ws th e cash pay ments and other ben efits that wou ld hav e b een pay able to Mr. Temple had his emp lo yment been termi nat ed (other than for “cause” or for o ne o f th e reason s specifi ed in th e tables abov e) o n December 31 , 2 01 8. Mr. Temp le is ou r on ly n amed execu tive officer who wou ld no t b e eligi ble fo r n ormal or early retiremen t o n Decemb er 31, 20 18 . Na me Restricted Units Parent-Based Awards To tal Bielen $— $— $— Walker $— $— $— Jo hn s $— $— $— Temp le $34 5,000 $81 ,97 2 $4 26 ,97 2 Thig pen $— $— $— Co mpensa tion Policies and Practices as Related to Risk Ma na gement The Compen sation Committee meets at least on ce a year with the Co mp any ’s Chief Risk Officer to rev iew incenti ve compen satio n arran gemen ts in order to iden tify any features that mig ht enco urage u nn ecessary o r ex cessive risk taking . In co nd uct in g this review, we con sidered n umero us fact ors pertaini ng to each su ch prog ram, includ i ng the follo win g: th e p urpo se of th e p ro gram; th e d esig n o f t he plan, in clu ding risk ad ju stments; th e n umber o f particip an t s, as well as key empl oy ees or employ ee grou ps; th e to tal amou nt t hat cou ld b e paid un der t he p ro gram; the ab ili ty of the particip ants to tak e actio ns th at co uld influ ence the calcu latio n o f th e co mp ensatio n p ayab le; th e scop e of t he risk s that cou ld be created b y actio ns tak en ; ali gn ment with th e Co mp any ’s risk ap petite; and th e manner in whi ch o ur risk manag ement p oli cies an d practices serve to red uce th ese risk s. Based on this rev iew, we have co nclud ed that no ne o f o ur prog rams create risks that are reason ably lik ely to hav e a material ad verse effect o n the Compan y. Pay Ra tio As req uired b y Section 9 53 (b) of the Dod d-Frank Wall St reet Refo rm and Co nsu mer Pro tectio n Act, and Item 40 2(u) o f Regu latio n S-K, we are prov id in g th e follo win g in formatio n ab ou t t he relatio nship of the ann ual t otal co mp ensation of ou r employ ees an d th e an nu al to tal co mp en sat io n of Mr. Bielen , ou r CEO and Presid ent. For 201 8: •the median o f the ann ual to tal compensation of all emp lo yees o f the Compan y (other th an o ur CEO) was $7 5,3 89 ; an d •the an nu alized tot al compen sation of ou r CEO was $6,614,8 45 . Based o n this in fo rmation , for 2 01 8 o ur estimate of t he ratio of t he total compensation of Mr. Bielen, ou r curren t CEO and President, to th e med ian of th e an nu al total co mp ensatio n o f all empl oy ees was 8 8 to 1 . To id entify th e median of th e ann ual to tal compen satio n o f all ou r employ ees, as well as to d etermine the an nu al to tal compen sation o f o ur med ian employ ee and o ur CEO, th e Co mp any to ok th e fo llowing step s: 1 . We iden tified our emp lo yee p op ulation , con sisting of fu ll-time, part-time, an d temp orary employees, as of December 31 , 20 18 . 2 . To id entify th e “med ian employ ee” from o ur emp l oy ee po pu latio n, we compared the amoun t of Box 5 earn ing s (B ox 5 is M edicare taxab le wag es an d includ es all fo rms of compen sation ) o f o ur emp lo yees as reflected in o ur pay ro ll reco rd s as rep orted to th e In ternal Rev enu e Servi ce o n Form W-2 for 20 18 . 3 . We iden tified our med ian usin g t his compen sation measu re, which was con sist en tly ap pli ed to all ou r employ ees in clu ded in th e calculation . 4 . Once we iden tified o ur medi an emp l oy ee, we co mb in ed all o f th e elemen t s of such employee’s compen satio n for 2 01 8 in acco rd ance with the requi remen ts of Item 4 02 (c)(2 )(x) of Regu lat io n S-K, resulting in ann ual to tal compensation of $7 5,3 89 . 5 . Wi th resp ect to the an nu al total co mp ensation of ou r CEO, we in clu ded th e amo un ts rep orted in th e 20 18 Summary Compen sation Tab le includ ed in th is An nu al Repo rt on Fo rm 10 -K. Given th e d ifferent metho do lo gies th at v ariou s pu bli c co mp ani es will use to d etermine an estimate of th eir pay ratio , the estimated rat io reported ab ov e sho uld no t b e u sed as a b asis fo r co mp ari son between companies. 21 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Directo r Co mpensati on This tab le co ntain s in formatio n abo ut the 20 18 compen sation of ou r n on -employ ee di rectors. Director Compensa tion Table Na me (a) Fees earned o r pa id in cash ($) (b) All other compensatio n ($) (c) Tota l ($) (d) Sh in ich i Aizawa $— $382 $3 82 Tomoh i ko Asan o $— $382 $3 82 Norimitsu Kawahara $— $— $— Tetsuy a Kiku ta $— $— $— Vanessa Leo nard $1 10,00 0 $— $11 0,0 00 Jo hn J. McMaho n, Jr.$1 06,00 0 $— $10 6,0 00 Ung yo ng Sh u $1 00,00 0 $— $10 0,0 00 Jesse J. Spikes $1 00,00 0 $— $10 0,0 00 Toshiaki Su mino $— $1,446 $1,4 46 William A. Terry $1 00,00 0 $4,125 $10 4,1 25 W. Michael Warren, Jr.$1 03,00 0 $— $10 3,0 00 Discussi on of Directo r Co mpensati on Ta ble Co lumn (b ) - Fees ea rned o r pa id in cash The 20 18 cash co mp ensatio n co mp on ent s were - •Bo ard membership - $2 5,0 00 per qu arter •Ad ditio nal retain er for Au dit Co mmittee Chairp erson - $2,5 00 per q uarter •Ad ditional retainer fo r Co mp ensatio n an d M anag ement Su ccessio n Co mmittee Chairp erson - $1,50 0 p er q uarter •Ad ditio nal retain er for Co rporat e Go vernance an d Nomin ating Committee Ch airperson - $750 p er q uarter Cash retain ers are pai d in Feb ruary, M ay, Aug ust, and Nov ember. Co lumn (c)—Al l Other Compensati on The amo un t in this co lu mn reflects: •Gifts g iv en t o the director i n con nectio n with th e direct or’s retirement valued at $3 82 to each M r. Asan o and M r. Aizawa. •The amo un t we paid for sp orting even ts for M r. Terry ($1,1 50 ) an d M r. Sumin o ($1 ,44 6). •The amo un t we paid for a fish in g trip to Mr. Terry ($2 ,97 5). •Person al use of th e co rp orate jet to Mr. Terry (no in cremen tal cost). Item 1 2. Security Ownership o f Certain Beneficial Owners a nd Manag ement and Rela ted Stockho lder Ma tters On February 1, 2 01 5, th e Co mpan y con summated th e M erg er, and o ur stock ceased to b e p ub licly trad ed. By reason o f th is tran saction , o ur ex ecutiv e officers and directors n o lon ger h old shares of commo n sto ck o f the Co mp any. Dai-ich i Life no w own s 1 00 % of the o utstand in g co mmon stock of th e Co mp any . 21 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 1 3. Certa in Relationships and Rela ted Tra nsactio ns Revi ew a nd Ap prova l o f Rela ted Party Tra nsactio ns We rev iew all relat io nsh ip s and t ran saction s in which we and “related p arties” (o ur directors, d irecto r no minees, executive o ffi cers, th eir immedi ate famil y memb ers, and certai n affiliated en t ities) p articipate to determin e if any related p arty has a d irect or ind irect material in terest. Our General Cou nsel’s Office is p rimarily resp on sible for d ev elo ping an d implementi ng processes to ob tai n th e necessary in fo rmation an d for d etermining , b ased on th e facts and circu mstan ces, wh eth er a d irect o r indi rect material i nterest exist s, and we have written po licies in place regardin g relat io nsh ips an d tran saction s wi th “related parties”. Pursu ant to ou r po licies, if the General Co un sel’s Office det ermin es that a tran sactio n may req uire disclo su re un der SEC rul es, the Gen eral Cou nsel’s Office will n otify: •the Co rp orate Gov ern ance and Nomin ati ng Co mmittee, if the tran saction in vo lv es on e of ou r d irecto rs or direct or no minees; otherwise •th e Au dit Co mmittee. The relevant Bo ard co mmitt ee will app rov e o r ratify the transaction o nly i f it det ermin es that th e tran saction is i n ou r b est in t erests. In co nsidering th e tran sactio n, t he committee will con sider all rel ev ant factors, i ncludin g (as app licab l e): •ou r b usiness ratio nale fo r en terin g into the tran saction ; •th e alt ernati ves to enterin g into the tran saction s; •wh eth er the t erms of th e transact io n are co mp arab le to t ho se th at cou l d be o btain ed in arms-len gth d ealing s with an un related th ird p arty; •the po ten tial fo r the tran saction to l ead to an actu al or app aren t con flict o f interest, and an y safeg uards imp osed to preven t actual o r ap parent con flicts; an d •th e ov erall fairness o f the tran saction to us. Based on the informatio n available t o the Co mp any ’s General Cou nsel’s Office and t o the Bo ard , except as describ ed b elo w, there hav e been no transact io ns b etween th e Co mp any an d any related party since Janu ary 1 , 2 01 8, n or are an y curren tly p ro po sed, for wh ich di sclo sure is requ ired un der th e SEC rul es. Related Pa rt y Transa cti ons E ntered into b y the Co mp any Dai-ichi Life is t he sole shareho ld er of th e Co mp an y an d provi des certain serv ices t o th e Co mp any pu rsu ant to a Glo bal Services Agreement dated Septemb er 8, 2 01 6. Th e services in clu de pl an nin g, mon itori ng and adv isin g with respect to the followi ng matters regarding the Dai -ichi Life g roup as a wh ole: Develop men t and admin istration of th e management plan; d evelop men t and admin istration o f the capit al man agemen t strategy ; o rg anization and co mp any rules; b ud get co ntrol an d set tlement of acco un ts; pu blic relation s; h uman resou rces sy stems; IT strateg y; risk management; complian ce manag ement, man ag emen t o f int ern al transactio ns an d co nflict o f i nterest, an d informatio n management; intern al aud it, in ternal con trol, and legal risk co ntrol; sharin g informat io n on life insuran ce b usiness; and p ro vide adv iso ry serv ices to h elp increase the Co mp any 's profits. Du ring the fiscal year en ded Decemb er 3 1, 2 01 8 the Compan y p aid a fee to Dai-ichi Life o f $12 .2 mil lion fo r the services provi ded to the Co mp an y. Directo r Independence No ne of th e Co mp any ’s securiti es are listed on , an d the Compan y is not su bject to th e listin g stand ard s or ru les o f, any natio nal securities ex change or au to mated in ter-d ealer q uo tation sy stem of a n ation al securi ties association . However, for pu rp oses o f disclo sing the in dep end en ce o f ou r d irecto rs un der ap pli cab le SEC ru les, we hav e ch osen t o app l y t he indep end ence stand ards of th e New Yo rk Sto ck Ex ch ang e (“NYSE”). The Co rp orate Gov ern ance and No minatin g Committee and th e Board ev alu ated t he ind epen dence o f ou r directors u nd er such stand ard s after a review and discussi on of information regardin g each d irecto r’s relatio nshi p with u s and ou r senior man ag emen t an d thei r affiliates. After su ch review an d d iscu ssion, the Board affirmatively determined that the fo llo wing n on -employee d irecto rs are in dep end ent u nd er NYSE ind epen den ce st an dards: Ms. Leo nard, Mr. McMaho n, M r. Shu , M r. Sp ik es, Mr. Terry an d M r. Warren . The Bo ard also determined th at all memb ers o f t he Aud it C ommi ttee, the Compensation an d M anag ement Su ccessio n Co mmittee, an d the Co rp orate Go vernance an d No mi nat in g Co mmittee are in dep en den t un der NYSE ind ependence standard s relatin g to membership on such co mmitt ees. 21 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 1 4. Principal Accountant Fees a nd Services The fo llowing table sh ows the ag gregate fees b illed by Pricewaterh ou seCoo pers LLP fo r 2 01 8 and 2 01 7 with resp ect to vario us services p ro vided to th e Co mp any an d its sub sidiaries: For The Year Ended December 31, 2 0 1 8 201 7 (Do l la rs I n Mill i ons ) Aud it fees $7 .2 $7 .5 Aud it related fees 0 .5 0 .6 Tax fees 0 .1 0 .7 All other fees — — $7 .8 $8 .8 Audit Fees were fo r p ro fessio nal serv ices rend ered fo r the au dits o f ou r co nso lidated fin ancial statements, inclu din g integrated au dit s of ou r co nsolid ated finan cial statemen ts an d th e effectiv eness of i ntern al cont ro ls ov er fin ancial repo rtin g, au dit s (GAAP an d statutory basis) of certain of ou r sub si diaries, issuan ce of comfo rt letters and con sents, assistance wi th rev iew o f d ocu men ts filed with th e SEC an d other reg ulato ry au th oriti es, and exp enses rel ated to the ab ov e serv ices. Audit-Rela ted Fees were fo r assu ran ce an d related serv ices relat ed to emp lo yee b enefit plan au dits, d ue d iligence an d accou ntin g co nsul tat io ns in co nn ection with acqu isitio ns, attest services th at are n ot req uired by statute or regul ation , an d co nsu ltatio ns co ncern in g fi nancial accou nti ng an d repo rting stan dards. Tax Fees were for services related to tax co mp liance, includi ng t he p rep aratio n and rev iew of tax retu rns and claims fo r refund and tax plann in g and tax ad vice, includi ng assistan ce wi th tax au dits and ap peals, con sultation s on tax regu lation s and legislative chan ges, ad vice related to acqu isitions, tax serv ices for emp lo yee ben efit p lan s, and req uests for ru ling s o r tech nical ad vice from tax au th orities. All Other Fees i nclud e fees th at are ap pro priately no t includ ed i n t he Aud it, Aud it-Rel ated, an d Tax catego ries. The Au dit Co mmitt ee’s po licy is to pre-app rov e th e aud it, aud it-related, tax an d other servi ces prov id ed by th e in dep end ent accou ntant s t o the Co mp any and its su bsidiaries. Un der t he p re-app ro val p ro cess, the Audit Committee rev iews and app ro ves sp ecific services an d catego ries o f serv ices and the maximu m ag gregate fee for each serv ice o r serv ice categ ory. Perfo rmance o f an y add itio nal services or cat eg ori es of services, o r o f serv ices th at wo uld resu lt in fees in excess of the est ab lish ed max imum, req uires the separate pre-app rov al of the Aud it Co mmittee or o ne of it s memb ers who h as b een del eg ated p re- ap proval autho rit y. The Aud i t Co mmittee or its Chairp erson p re-ap pro ved all Aud it, Au dit-Related, Tax and Ot her services p erformed for the Co mp any b y Pricewaterho useCo op ers LLP with resp ect to fiscal y ear 2 01 8. 21 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART IV Item 1 5. Exhibits, Fina ncial Statement Schedules The fol lo win g d ocuments are filed as p art of th is rep ort: 1 . Fi nancial Statements (See Item 8 , Fi na nci al Statemen ts an d Sup plemen ta ry Data) 2 . Fi nancial Statement Sch edu les: The follo win g sch edu les are lo cated in th i s rep ort on th e pag es in dicated . All o th er sch edu les to th e con solidated fin an cial statemen ts req uired by Article 7 of Reg ulatio n S-X are n ot req uired un der th e related instructio ns o r are in app licable an d therefo re h ave been omitted . Pa g e Sch edu le II—Co nd ensed Finan cial In fo rmation of Regi strant Fo r The Year En ded Decemb er 3 1, 2 01 8, For The Year En ded Decemb er 31 , 20 17 , Fo r Th e Year End ed Decemb er 31 , 20 16 , and As of Decemb er 3 1, 2 01 8 an d 2 01 7 22 1 Sch edu le III—Sup plementary Insu ran ce Info rmati on Fo r Th e Year End ed December 31 , 20 18 , Fo r Th e Year End ed Decemb er 31, 20 17 , and Fo r Th e Year End ed Decemb er 31 , 20 16 22 9 Sch edu le IV—R einsurance Fo r The Year En ded Decemb er 3 1, 2 01 8, For The Year En ded Decemb er 3 1, 2 01 7, and Fo r The Year En ded December 31 , 2 016 23 0 Sch edu le V—Valu ation and Qualifying Acco un ts As of Decemb er 3 1, 2 01 8 and December 31 , 20 17 23 1 The Repo rt of In dep end ent Reg istered Pu bli c Accou nti ng Firm wh ich cov ers the fin ancial statement sched ules app ears o n pag e 18 8 o f this rep ort. 3 . Exh ib its: For a list of exh ib its, refer to the “Ex hibit In dex” filed as p art of thi s rep ort b eginn in g o n p age 236 b elo w, an d inco rporat ed herein by th is reference. The agreements in clu ded as exh ib its to this rep ort are includ ed to p rov id e y ou with info rmation regarding th e terms o f tho se ag reement s an d are no t in ten ded to p ro vide an y other factual o r d isclo sure in fo rmation abo ut th e Co mp any o r the o th er part ies to or in any of th e ag reemen ts in cluded as ex hibits. Su ch ag reemen ts may co ntain representation s an d warran ties by the p arties to such agreements th at hav e been mad e so l ely for the b enefit o f the p arties speci fied in th e agreements. These representation s an d warran ties (i) sh ou ld n ot in all in st an ces b e treated as catego rical statements o f fact , bu t rather as a way of allocatin g th e risk to on e of the parties if th ose st atemen ts prov e to be inaccu rat e, (ii) may have been qu alified by d isclosures that were made to the ot her party i n co nn ection wi th t he n ego tiation o f th e ap plicable ag reemen t, which disclo su res are n ot n ecessarily reflected in th e ag reemen t in clu ded as an ex hibit , (iii) may appl y stand ard s of materiality in a way th at is d ifferent from what may b e viewed as material to y ou , and (iv) were mad e only as of th e dat e o r dates speci fied in th e ag reemen t s an d are subject to more recen t d evel op ments. Accordin gly, the rep resent ation s and warran ties con tai ned in the agreements in clu ded as ex hibit s may not d escribe t he actu al state o f affairs as o f the d ate they were made o r at an y o ther ti me. 22 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT S OF INCOME PROTECTIVE LIFE CORPORATION (Parent Company) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Dividen ds fro m sub sid iaries*$3 1,6 00 $261,09 0 $5 41 ,76 2 Serv ice fees from sub si diaries*25 0,2 41 285,97 9 2 50 ,66 8 Net in vestmen t inco me 8,4 17 9,45 7 8 ,60 7 Realized inv estment gains (l osses)4 68 (45,09 1) (29 ,28 9) Other in come 2,2 11 2,04 9 9 ,82 8 Total reven ues 29 2,9 37 513,48 4 7 81 ,57 6 Expenses Op eratin g and admin istrative 12 3,0 04 182,52 5 1 43 ,94 1 Interest 6 3,8 78 61,26 3 60 ,13 7 Total ex penses 18 6,8 82 243,78 8 2 04 ,07 8 In come before inco me tax and other items b elo w 10 6,0 55 269,69 6 5 77 ,49 8 In come tax (ben efit) exp ense Cu rrent (3 0,8 54 ) (9,44 1) 33 4 Deferred 4 5,0 82 46,02 0 20 ,71 5 To tal in come tax ex pen se (b enefit)1 4,2 28 36,57 9 21 ,04 9 In come before eq uity in un distribut ed income from sub sidiaries*9 1,8 27 233,11 7 5 56 ,44 9 Equi ty (loss) in u nd istrib uted inco me of su bsid iaries 21 0,5 34 873,41 5 (1 63 ,42 0) Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 * Eliminated in Co nso lid atio n See No tes to Conso lidated Fin anci al Statements 22 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDUL E II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF COMPREHENSIVE INCOME (L OSS) PROTECTIVE LIFE CORPORATION (Parent Company) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Total other comprehensiv e income (lo ss)$(1 ,42 7,9 10 ) $692,99 4 $5 86 ,61 1 Total comprehensiv e inco me (loss)$(1 ,12 5,5 49 ) $1 ,799,52 6 $9 79 ,64 0 * Eliminated in Co nso lid atio n See No tes to Conso lidated Fin anci al Statements 22 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDUL E II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS PROTECTIVE LIFE CORPORATION (Parent Company) As of December 31, 2018 2017 (Dollars In Thousands) Assets Fix ed matu rities $241,86 2 $1 40 ,10 2 Eq uit y securities 38,17 6 38 ,86 1 Other lo ng -term in vestmen ts 1 0 1 0 Sho rt-term inv estments 115,62 5 79 ,81 8 Inv est ments in su bsid iaries (equ ity meth od )*7 ,289,81 2 8,5 63 ,20 1 Total inv estments 7 ,685,48 5 8,8 21 ,99 2 Cash 5,98 2 3 ,76 0 Receiv ables from su bsidiaries*24,90 9 38 ,39 4 Pro perty and equ ip ment, net 1,10 5 1 ,69 2 Inco me t ax receivab le — 51 3 Deferred in come tax 30,05 0 1 03 ,71 6 Other assets 38,13 4 38 ,48 7 Total assets $7 ,785,66 5 $9,0 08 ,55 4 Lia bilities Accru ed ex penses and other liabilities $411,96 3 $4 42 ,69 6 Inco me t ax pay able 10,03 4 — Debt 1 ,100,50 8 9 43 ,37 0 Sub ordinated d ebt securities 495,42 6 4 95 ,28 9 Total liab ilities 2 ,017,93 1 1,8 81 ,35 5 Commitments and co ntingencies—No te 3 Shareo wner’s equity Co mmo n sto ck — — Ad dition al p aid -in-capital 5 ,554,05 9 5,5 54 ,05 9 Retained earn in gs, includ in g u nd i stributed inco me o f su bsid iaries: (20 18 - $1,102,3 94 ; 2017 - $89 1,860)1 ,639,44 1 1,5 60 ,44 4 Accumulated other co mp reh ensiv e inco me (lo ss): Net un realized g ain s o n i nv estments, all from su bsidiaries, net of in come tax : (20 18 - $(3 68 ,83 0); 2 01 7 - $7 ,41 6)(1 ,387,50 4) 27 ,89 6 Net un realized lo sses relatin g t o o th er-th an-tempo rary imp aired i nv estments fo r wh ich a p ortio n h as been recog nized in earning s, net of in come tax: (2 01 8 - $(6 ,054); 2 01 7 - $(53 8))(22,77 3) (2 ,02 2) Accu mu lat ed gain (loss)—d erivatives, net of in come tax : (20 18 - $(2 );20 17 - $19 8)(7) 74 7 Po stretirement ben efits li abi lity adjustmen t, n et o f inco me t ax : (201 8 - $(4,1 12 ); 20 17 - $(3 ,46 9))(15,48 2) (13 ,92 5) Total shareo wner’s eq uity 5 ,767,73 4 7,1 27 ,19 9 Total liabilities and sha reo wner’s equity $7 ,785,66 5 $9,0 08 ,55 4 * Eliminated in Co nso lid atio n See No tes to Conso lidated Fin anci al Statements 22 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT S OF CASH FLOWS PROTECTIVE LIFE CORPORATION (Parent Company) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Cash flows from o pera ting activ iti es Net in co me $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Ad ju stments t o reco ncile n et inco me to net cash p ro vided by op erat in g activities: Real ized inv est ment (gain s) lo sses (4 68 ) 45,09 1 29 ,28 9 Equ ity in u nd istrib uted n et inco me of su bsidiaries*(21 0,5 34 ) (873,41 5) 1 63 ,42 0 Dep reciation ex pen se 5 87 73 9 50 6 Receiv ables fro m su bsidiaries*1 3,4 85 (28,79 4) 15 ,18 1 Inco me tax receivab le 5 13 10,54 8 2 ,10 9 Deferred i ncome tax es 4 5,0 82 46,02 0 20 ,71 5 Accrued inco me taxes 1 0,0 34 — — Accrued ex pen ses and other liabilit ies (2 8,2 09 ) (52,84 6) (33 ,63 9) Other, net (5 7,5 95 ) 4,22 6 (16 ,42 6) Net cash pro vided by operating a ctivities 7 5,2 56 258,10 1 5 74 ,18 4 Cash flows from investing a ctivities Sale o f inv estments, availab le-fo r-sal e 67 5,0 00 — — Co st o f inv est ments acqu ired, av ailable-for-sale (77 6,7 43 ) (26,42 3) (59 ,02 5) Return o f and /or (ad dition al) capi tal in vestmen ts in sub sidi ari es (2,6 00 ) 38,41 0 (45 ,76 2) Ch an ge in o th er lon g-t erm investments — — (1 0) Ch an ge in sho rt-term in vestmen ts (3 5,8 07 ) (79,81 8) — Purchase o f p ro perty and eq uip ment — — (1 ,64 9) Sales o f p ro perty and equ ip ment — (10 0) — Net cash used in inv esting activi ties (14 0,1 50 ) (67,93 1) (1 06 ,44 6) Cash flows from fi na nci ng activ ities Bo rrowing s un der line o f credit arran gemen ts an d d ebt 96 5,0 00 1 ,035,00 0 2 65 ,00 0 Principal pay ments o n lin e of cred it arrang ements and deb t (75 7,8 84 ) (1 ,156,49 8) (6 33 ,07 4) Dividen ds to shareo wner (14 0,0 00 ) (143,84 8) (89 ,34 3) Net cash pro vided by (used in) financing a ctivities 6 7,1 16 (265,34 6) (4 57 ,41 7) Cha ng e in ca sh 2,2 22 (75,17 6) 10 ,32 1 Cash at beg inning of yea r 3,7 60 78,93 6 68 ,61 5 Cash at end of yea r $5,9 82 $3,76 0 $78 ,93 6 *Elimin ated in Consolid ation See No tes to Conso lidated Fin anci al Statements 22 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT PROTECTIVE LIFE CORPORATION (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION The Compan y pu blishes co nsol id ated fi nancial statements th at are its primary finan cial statements. Th erefore, this p aren t compan y cond en sed finan cial in fo rmation is n ot i ntend ed to be the p rimary finan cial st atemen ts of the Co mpan y, and sh ou ld b e read in conj un ction with th e con soli dated finan cial statements and no tes, in clu ding th e di scussio n o f signi ficant acco un ting po licies, thereto of Protective Life Co rp oration and sub sidiaries. 1. BASIS OF PRESENTATION Na ture of Opera tions On Feb ruary 1 , 20 15 , Pro tectiv e Life Co rp oration (th e “Compan y”) became a wh olly o wned su bsidiary o f The Dai-ichi Life In surance Co mp any, Limited, a kab ushiki kaish a org an ized under the laws o f Japan (n ow kn own as Dai-ich i Life Holdin gs, Inc., “Dai-ichi Life”), when Dai-ichi Life p urchased all ou tstand in g shares of th e C ompany ’s stock . Prio r to Febru ary 1, 2 01 5, and for th e perio ds th is repo rt p resen ts, th e Co mp any ’s stock was pu blicly trad ed o n th e New Yo rk St ock Ex chang e. The Co mp any is a h olding co mp any wi th su bsid iaries that p ro vide finan cial serv ices th ro ug h t he prod uct io n, dist ribu tion , an d ad ministration of insu ran ce an d in vestmen t prod uct s. Th e Co mp any markets ind iv id ual life in su ran ce, credit life an d d i sability insuran ce, gu aran teed in vestmen t co ntracts, g uaranteed fun ding agreemen ts, fixed and v ari ab l e ann uities, and ex ten ded serv ice co ntracts throu ghout th e Unit ed States. Th e Co mp any also main tai ns a separate seg ment d ev oted to th e acqu isitio n o f in surance p olicies fro m o t her companies. Fou nd ed in 19 07 , Protective Life In surance Compan y (“PLICO”) is th e Co mp any ’s larg est o perating su bsidiary. The acco mpan ying co nd ensed fin ancial statements of the Co mp any sh ou l d b e read in conj un ction with t he co nsolid ated fin anci al statements and no tes th ereto of Pro tect iv e Life Co rpo rat io n and su bsid iaries in clu ded in th is An nu al R ep ort o n Fo rm 1 0-K filed with th e United States Securities and Exch an ge Co mmissio n. 2. DEBT AND OTHER OBLIGATIONS Debt a nd Subo rdina ted Debt Securi ties Deb t an d su bo rd in ated deb t secu rities are su mmarized as follo ws: As o f December 31, 2018 2017 O utstanding Principal Ca rrying Amo unts Outstanding Principal Ca rrying Amounts (D oll ars In Thous ands) Debt (y ear of issue): Credi t Facility $— $— $— $— 6 .40 % Sen io r No tes (20 07 ), d ue 2 01 8 — — 1 50 ,00 0 1 50 ,51 8 7 .37 5% Senior Notes (2 00 9), du e 20 19 400,00 0 41 6,4 69 4 00 ,00 0 4 35 ,80 6 8 .45 % Sen io r No tes (20 09 ), d ue 2 03 9 190,04 4 28 8,5 47 2 32 ,92 8 3 57 ,04 6 4 .30 % Sen io r No tes (20 18 ), d ue 2 02 8 400,00 0 39 5,4 92 — — $990,04 4 $1 ,10 0,5 08 $7 82 ,92 8 $9 43 ,37 0 Su bo rd i nated deb t (year of issue): 5 .35 % Su bo rd inated Deb entures (20 17 ), d ue 20 52 500,00 0 49 5,4 26 5 00 ,00 0 4 95 ,28 9 $500,00 0 $49 5,4 26 $5 00 ,00 0 $4 95 ,28 9 The Co mp any ’s fu tu re maturities of deb t, exclu din g no tes pay able to ban ks and sub ordin ated deb t secu rities, are $41 6.5 million in 2 01 9, and $6 84 .0 mil lion th ereafter. Du ring th e y ear en ded Decemb er 31 , 2 01 8, th e Co mp any repu rch ased and su bseq uen tly exting uished $6 5.6 mill io n (p ar val ue - $4 2.9 millio n) o f th e Co mp any’s 8 .45 % Seni or Notes d ue 20 39 . Th ese rep urchases resulted in a $1.8 million pre-tax gain fo r th e Compan y. Th e g ain is recorded in other in come in the co nso lidated statements of income. Du ring 20 18 , the Comp any issued $40 0.0 million o f its Sen io r No tes at a rate o f 4 .30 %, du e 2 02 8. Th ese no tes were issu ed n et of a discount o f $1.0 mi llio n. At issu ance, these no tes are carried o n the Co mp any ’s b alance sheet net of the d iscount and the asso ciated d eferred issu an ce exp enses of $3.7 mi llio n. Th e Co mp any u sed the n et pro ceed s from th e o fferin g for general corp orate pu rp oses, in clu ding th e repay ment of amo un ts o utstand in g u nd er ou r Credit Facility. 22 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Du ring 2 01 7, th e Comp any issu ed $500.0 mill io n o f its Sub ordinated Deben tu res du e 20 52 . At issuan ce, th ese Su bo rd inated Deben tu res are carried on th e C ompany ’s b alan ce sheet net of th e asso ciated d eferred issuan ce ex pen ses o f $4.8 mill io n. The Company used the net p ro ceeds fro m th e o ffering to call and red eem, at par, the en t ire $15 0.0 mi llio n of i ts 6 .00 % Sub ordin ated Debentu res du e 2 04 2 and $2 87 .5 million o f its 6 .25 % Su bo rd in ated Deben tu res du e 2 04 2. Un der a revo lv in g line o f credit arrang ement that was in effect until M ay 3 , 2 01 8 (the “20 15 Credi t Facility”), the Co mp an y had th e abil ity to bo rrow on an u nsecu red b asis u p to an ag gregate p rincipal amou nt o f $1.0 billion . Th e Co mp an y h ad th e rig ht in certain circu mstances to req uest th at th e co mmitmen t un der the Cred it Facility be in creased u p to a max imum p rincipal amou nt o f $1.2 5 b illio n. Balances o utst an din g un der the 2 01 5 Cred it Facility accrued in terest at a rate equ al to, at th e op tion of th e Borro wers, (i) LIB OR p lu s a sp read b ased on th e ratin gs o f th e Co mp any ’s Sen io r Deb t, o r (ii) th e sum of (A) a rate eq ual to the hi gh est of (x) the Ad ministrativ e Ag ent’s p rime rat e, (y ) 0 .50 % ab ov e the Fun ds rate, o r (z) th e on e-mon th LIBOR p lu s 1.0 0% an d (B) a spread based o n t he ratin gs o f th e Co mp any ’s Senior Deb t. Th e 2 01 5 Cred it Facility also p ro vided for a facility fee at a rate that varies with t he ratin gs o f the Co mp any ’s Sen io r Deb t and that is cal cu lated o n the ag gregate amou nt of commitments un der th e 20 15 C redit Facili ty, whether used or un used . The an nu al facili ty fee rate was 0 .12 5% of th e agg reg ate p rincipal amo un t. The Cred it Facility p ro vided t hat th e Company was liab le for the full amo un t o f any ob ligatio ns fo r bo rrowing s o r let ters o f credit, in clu ding t ho se of PLICO, u nd er th e 20 15 Cred it Facility. Th e mat urity dat e of t he 2 01 5 Credit Facility was February 2 , 20 20 . On M ay 3 , 20 18 , th e Company amen ded th e 20 15 Cred it Facility (as amend ed, the “Credi t Facility”). Und er the Credit Facility, the Compan y h as th e ab ility to borro w on an u nsecu red basis u p to an agg reg ate p rincipal amo un t of $1 .0 billio n. The Co mp any h as t he rig ht in certain ci rcumstances to request th at the co mmitmen t u nd er th e Credit Facili ty be increased u p to a maximu m p rin cip al amo un t of $1 .5 b illion . Bal an ces o utstand in g un der the Credit Facility accrue interest at a rate equ al to, at th e op t io n o f the Bo rrowers, (i) LIBOR p lu s a sp read based on th e ratings of the Co mpan y’s Sen io r Deb t, o r (ii) the sum o f (A) a rate eq ual to the high est of (x ) the Admin istrative Agen t’s Prime rat e, (y) 0.50% abov e th e Funds rate, or (z) th e on e-mon th LIBOR p lu s 1.0 0% an d (B) a sp read based on the rat in gs of th e Compan y’s Sen ior Debt. The Credit Facilit y also p ro vid ed fo r a facil ity fee at a rate th at varies with th e ratings of th e Comp any ’s Senior Debt and that is calculat ed o n the aggregate amo un t of commitments u nd er th e Cred it Facilit y, wh eth er used or u nu sed. The an nu al facili ty fee rate i s 0.1 25 % o f t he ag gregate p rincipal amou nt. Th e Credit Facility p rov id es that th e Compan y is liab le fo r t he fu ll amou nt o f any ob ligatio ns fo r bo rrowi ng s o r let ters o f credit , in clu ding tho se o f PLICO, un der the Credit Facility. The matu rit y d ate of the Credit Facility is May 3, 2023 . The Company is n ot aware of an y n on -co mp liance with the fin ancial deb t co ven ant s of th e Credit Facility as o f Decemb er 3 1, 2018 . Th e Co mp an y d id n ot hav e an ou tstand in g b alan ce o n the Credi t Facility as o f December 31 , 20 18 Interest Expense In terest ex pen se o n d ebt an d sub ordinated d ebt secu rities totaled $6 3.9 mi llio n, $61 .3 million , an d $60 .1 million fo r th e y ears end ed Decemb er 31 , 20 18 , 2 01 7, an d 2 01 6, respect iv ely . 3. COMMITMENTS AND CONTINGENCIES The Company previou sl y leased a b uild in g co ntig uo us to its h ome o ffice. Th e lease was renewed i n December 20 13 an d was extend ed to December 20 18 . At th e en d of th e lease term in December 20 18, PLICO purch ased th e bu ilding for app ro ximately $75 million . The bu ild in g is reco rd ed in p rop ert y and eq uipmen t o n the con so lidated b alance sh eet. Go ld en Gate Cap tive In suran ce Co mp an y On Janu ary 15 , 2 01 6, Golden Gate Cap tive Insuran ce Co mp any (“Golden Gate”), a Vermon t sp ecial p urpose fin ancial in su ran ce co mpan y an d a wh olly o wned su bsidiary o f Protective Life In su ran ce Comp any (“PLICO”), and Steel City, LLC (“Steel City”), a wh olly o wn ed sub sidiary o f th e Company, en tered in t o an 18 -year tran sactio n to fi nance $2.1 88 b illio n o f “XXX” reserv es related t o the acq uired GLAIC Block and t he o th er term life i nsu ran ce bu sin ess reinsured to Go ld en Gate by PLICO and West Coast Life (“WCL”), a d irect who lly o wn ed su bsid iary of PLICO. Steel Ci ty issu ed no t es with an ag gregate init ial p rincipal amou nt o f $2.1 88 billion to Golden Gat e in exch an ge for a su rp lu s no te issued b y Golden Gat e with an initial p rincipal amou nt o f $2 .188 billio n. Th ro ug h th e structu re, Hann ov er Life Reassu ran ce Company of America (Bermu da) Ltd ., Th e Canad a Life Assu ran ce Compan y (Barbados Branch ) and No mu ra Americas Re Ltd . (collectiv ely, th e “Ri sk-Tak ers”) prov id e credit enh ancemen t to th e St eel City Not es for th e 18 -y ear term in exch ang e fo r credit en han cement fees. The tran saction is “no n-reco urse” t o PLICO, WCL and t he Compan y, meaning that no ne o f th ese companies, o th er th an Golden Gate, are liab le to reimbu rse t he Risk -Takers for any cred i t enh an cemen t pay ments req uired to b e mad e. As o f December 3 1, 20 18 , the agg reg ate prin cip al balan ce o f the Steel City No tes was $1.883 b illion . In co nn ection wi th thi s tran saction , t he Compan y has en tered in to certain su pp ort agreements un der wh ich it g uarantees or oth erwise sup po rts certain o bli gat io ns of Golden Gate or Steel City, in clu ding a gu aran tee o f th e fees to th e Risk -Takers. Th e su pp ort ag reements p ro vid e that amo un ts wou ld become p ay able b y th e Co mpan y if Go ld en Gate’s annual gen eral co rp orate exp enses were hi gh er th an mo deled amou nts, cert ain rein surance rates ap plicab le to th e su bject bu si ness increase b ey on d mod eled amo un ts o r in th e ev ent write-d own s du e to other-th an - temp orary imp airments o n assets held in certain accounts ex ceed d efined th resh old lev els. Add itio nally, the Co mp any has en tered into a separate agreemen t to g uarant ee pay men t of certain fee amoun ts in co nn ection with th e cred it en han cement o f the Steel Cit y No t es. As o f December 3 1, 20 18 , n o pay men ts h ave been made un der th ese agreements. In co nn ection with th e tran sactio n ou tlined ab ov e, Go ld en Gate had a $1.8 83 billi on ou tstan ding no n-reco urse fun ding o blig ation as o f December 31 , 2 01 8. Thi s no n-reco urse fu nd ing o bligat io n matu res in 2 03 9 an d accru es in terest at a fixed annual rate o f 4 .75 %. 22 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Go ld en Gate II Cap tive In suran ce Co mpa ny Go ld en Gate II Cap tive In surance Co mp any (“Go ld en Gate II”), a Sou th Carolin a sp ecial pu rp ose fin ancial cap tive in surance co mp any who lly owned by PLICO, h ad $57 5 millio n o f o utstandin g non-reco urse fun ding ob ligatio ns as o f Decemb er 3 1, 20 18 . These ou tstand ing n on -recou rse fu nd ing ob ligatio ns were issued to sp ecial pu rp ose trusts, which in tu rn issued securi ties to third parties. Certain o f o ur affi liates o wn a p ortion o f these securities. As of Decemb er 31 , 20 18 , secu rit ies related to $20 .6 million o f th e o utst andin g balan ce of the no n-reco urse fun ding o bli gatio ns were h eld b y ex t ernal p arties, an d secu rities related to $5 54 .4 million of the no n-reco urse fu nd in g obl ig ation s were h eld by the Compan y and o ur affiliates. The C ompany has entered into certain su pp ort ag reement s wit h Golden Gate II ob ligatin g the Compan y to mak e cap ital co ntribu tions o r p ro vide su pp ort related to certain of Golden Gate II’s exp en ses and in certain circu mstances, to collaterali ze certain of th e Co mp any ’s ob ligatio ns to Go ld en Gate II. These sup po rt ag reements prov id e th at amou nts wo uld b ecome payab le b y th e Comp any t o Gold en Gate II if i ts an nu al g eneral co rp orate ex pen ses were h i gh er than mo deled amou nts o r if Golden Gate II’s inv est ment in come o n certain inv estments or premium inco me was b elo w certain actuarially determin ed amo un ts. As o f Decemb er 31 , 2 01 8, th e Co mp any made a pay men t of $0 .6 million un der th e In terest Su pp ort Agreement du rin g the seco nd qu arter o f 20 18 . In add itio n, certain Interest Sup po rt Ag reemen t obl ig ation s to t he Co mp any o f $4.9 mi llio n h ave b een collateralized by th e PLC u nd er the terms of that agreement. As of December 31 , 20 18 , no payments h ave b een received und er the YRT Premi um Su pp ort Agreement. Re-ev alu ation and , if n ecessary, ad ju stments of any su pp ort ag reement co llateralization amo un ts o ccur ann ual ly du ring th e first q uarter pu rsu ant to th e terms o f the su pport ag reements. Du ring th e year en ded Decemb er 31 , 20 18 , th e Co mp any and its affiliates repu rch ased $38 .0 millio n o f its o utstan ding no n-reco urse fu nd ing ob ligatio ns, at a disco un t. During th e year end ed December 3 1, 2 01 7, the Compan y an d it s affliliates did no t repu rch ase any of its o utstand in g n on -recou rse fu nd in g o blig ation s. Go ld en Gate III Vermon t Cap t ive In su ran ce Co mpa ny On Ap ril 2 3, 20 10 , Golden Gate III Vermo nt Captive Insurance Co mp an y (“Go ld en Gate III”), a Vermo nt special p urpose finan cial insu ran ce co mp any an d whol ly o wned sub sidi ary o f PLICO, entered into a Reimbu rsement Agreement (the “Reimbu rsement Agreement”) with UBS AG, Stamford Branch (“UBS”), as issu in g len der. Und er th e Reimb ursemen t Agreement, UBS issued a letter of credit (t he “LOC”) to a tru st fo r th e ben efit of WCL. The Reimb ursemen t Ag reemen t has u nd erg on e t hree sep arate amen dment s an d restat ements. The Reimb ursemen t Ag reemen t’s cu rrent effect iv e d ate is Ju ne 25 , 20 14 . In acco rd ance wi th the terms of the Reimb ursemen t Agreement, the LOC balance reached its sched uled peak amo un t of $9 35 million in 2 01 5. As of Decemb er 3 1, 20 18 , th e LOC b alance was $8 60 milli on . The term o f th e LOC is exp ected to b e app ro ximately 15 years from the orig i nal issu ance dat e. Th is transact io n i s “no n-recou rse” to WCL, PLICO, an d t he Company, mean in g that no ne of th ese co mp anies other th an Golden Gate III are liab le for rei mbursement o n a draw of th e LOC. The Co mp any has entered in to certain su pp ort agreements wi th Golden Gate III o blig ating the Compan y to mak e cap ital con t ribu tion s or prov id e sup po rt related to certain of Go lden Gate III’s expen ses and in certain circumstances, to co llat eralize certain o f the Co mp any ’s o bligat io ns t o Gol den Gate III. Future sch edu led cap ital con trib uti on s amou nt to approx imately $7 0 million an d will be paid in two i nstallmen ts with the last p ayment occu rrin g in 20 21 . Th ese contrib utio ns may be subject to po ten tial o ffset against d iv id end pay men ts as permitted u nd er th e terms o f th e Reimb ursemen t Agreemen t. Th e su pp ort agreements p ro vide th at amou nts woul d b ecome pay ab le by th e Compan y to Golden Gate III if it s ann ual general corpo rate exp enses were h ig her than mo deled amoun ts or if specified catast ro ph ic lo sses o ccur d urin g defin ed time p eriod s with respect to th e po licies rein sured b y Go ld en Gate III. Pu rsu ant to th e terms o f an amend ed an d restated letter agreemen t with UBS, th e Co mp an y h as con tinued to g uarantee th e p ayment of fees to UBS as specified in th e Reimb ursemen t Ag reemen t. As o f Decemb er 3 1, 2018, no pay men ts h ave been mad e u nd er these ag reemen ts. Go ld en Gate IV Vermon t Cap t ive In su ran ce Co mpa ny Go ld en Gate IV Vermon t Capt iv e Insuran ce Co mp any (“Go lden Gate IV”), a Vermon t sp ecial p urpo se finan cial insu ran ce co mp any an d who lly owned su bsidiary of PLICO, i s party to a Reimbu rsement Ag reemen t with UBS AG, Stamford Branch , as issuin g lend er. Un der th e Reimb ursemen t Agreement, dated Decemb er 10 , 2 01 0, UB S issued an LOC in the in itial amou nt of $2 70 million to a trust fo r t he benefit of WCL. In accordan ce with the terms of th e terms of the Reimb ursemen t Agreement, the LOC balance reach ed its schedu led p eak amou nt o f $7 90 milli on in 2 01 6. As o f December 3 1, 20 18 , the LOC balan ce was $77 0 mill io n. The term o f th e LOC is ex pected to b e 1 2 y ears fro m th e o riginal issu ance date (stated mat urity of Decemb er 30 , 2022 ). The LOC was issued to su pp ort certain ob ligatio ns of Golden Gate IV to WCL un der an in demni ty reinsurance agreemen t, p ursu ant to which WCL ced es l iab ilities rel ati ng to the po licies o f WCL and retroced es liabilities relating to th e p olicies of PLICO. Th is tran sactio n is “n on -recou rse” to WCL, PLICO, and th e Co mp any, mean in g that no ne o f th ese comp anies o th er than Go l den Gate IV are li ab l e fo r reimbu rsement on a draw of th e LOC. The Compan y h as entered in to certain support agreements with Golden Gate IV ob lig ati ng the Company to make cap ital co ntribu tions or prov id e suppo rt related to certain o f Golden Gate IV’s exp enses and in certain circu mstances, to co llateralize certain o f th e Compan y’s ob l ig ation s to Golden Gate IV. Th e su pp ort agreemen ts provi de th at amo un ts wou ld become p ayab le by th e Compan y to Gol den Gate IV if its ann ual general corp orate exp en ses were high er t han mod eled amou nts or if speci fied catastrop hic lo sses o ccu r d uri ng defin ed time p eriod s with resp ect to th e po licies rein su red by Go ld en Gat e IV. The Compan y h as also entered in to a separate agreement to g uarantee th e pay ments o f LOC fees u nd er the terms o f the Rei mb ursemen t Ag reement. As o f Decemb er 31 , 2018 , n o pay ments hav e been made un der th ese agreements. Go ld en Gate V Vermo nt Ca pti ve Insura nce Comp an y On Octo ber 10 , 2 01 2, Go ld en Gat e V Vermon t Cap tive In surance Co mp an y (“Gold en Gate V”), a Vermo nt sp ecial pu rp ose finan cial in su rance co mp any, and Red M ou ntain , LLC (“Red M ou ntain ”), bo th wh oll y owned sub sidi ari es o f PLICO, en tered in to a 20 -year tran sactio n to fi nance u p to $945 mi llio n of “AXXX” reserv es related t o a b lo ck of un iv ersal life insu ran ce po licies with seco nd ary g uaran tees issued by o ur direct wh olly own ed sub sidi ary PLICO and in direct wh olly owned sub sid i ary, WCL. Golden Gate V issued n on -recou rse fun ding ob ligatio ns to Red M ou ntain , an d Red M ou ntain issu ed a no te with an in itial p rincipal amo un t of $2 75 millio n, increasin g to a maximu m o f $94 5 millio n in 2 02 7, to Golden Gat e V for d epo sit to a rei nsu ran ce tru st sup po rti ng Go ld en Gate V’s ob ligati on s un der a rein su ran ce ag reemen t with WCL, p ursu ant to wh ich WCL ced es liabilit ies relatin g to the 22 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents po licies of WCL and retro ced es liabilit ies relating to th e p olicies o f PLICO. Throu gh th e structure, Hann ov er Life Reassurance Company of America (“Hann ov er Re”), the ultimate risk tak er in the transactio n, prov id es credit enh ancemen t t o th e Red M ou ntain n ote for the 2 0-year term in exchan ge for a fee. The transactio n is “n on -recou rse” to Go ld en Gate V, Red Mo un tain, WCL, PLICO an d the Co mp any, meaning that no ne of these compan ies are liable for th e rei mbursement o f any cred it enh ancemen t p aymen ts req uired to be mad e. As o f Decemb er 3 1, 2 01 8, t he pri nci pal b alan ce o f th e Red Mo un tain n ote was $670 mi llio n. Future sch edu led cap ital co ntribu tio ns t o prefu nd cred it en han cement fees amo un t to ap prox imately $11 4.6 million an d will b e paid in ann ual in stallments th ro ugh 2 03 1. In con nectio n with the transactio n, the Compan y has en tered in to cert ain sup po rt ag reement s un der wh ich it g uarantees o r otherwise su pp ort s certain ob ligations of Golden Gate V or Red Mo un tai n. Th e su pp ort ag reemen ts prov ide t hat amou nts wo uld b ecome payab le b y th e Co mp any if Gol den Gate V’s an nu al g eneral corpo rate exp en ses were h ig her th an mod eled amou nts or i n the even t write-d own s du e to other-than -temp orary impairmen ts on assets h eld in cert ain accounts ex ceed defin ed th resho ld lev els. Ad dition ally, th e Co mp any has entered in to separate agreements to in demn i fy Gold en Gate V with resp ect to material adv erse chan ges in non-gu aranteed elemen t s o f insu ran ce pol ici es rein sured b y Go lden Gate V, and to gu arantee pay men t o f certain fee amo un ts in connectio n wit h the credit en han cement o f the Red M ou ntain no te. As of December 3 1, 20 18 , no pay men ts have b een mad e un der th ese ag reemen t s. In co nn ection with t he transaction o utl in ed abo ve, Golden Gate V had a $67 0 million o utstand in g no n-reco urse fun ding o bli gat io n as o f December 31 , 2 01 8. Thi s no n-reco urse fu nd ing o bligat io n matu res in 2 03 7, h as sched uled increases in prin cip al to a max imum of $9 45 millio n, and accru es in terest at a fixed an nu al rate o f 6 .25 %. The Compan y is party to an interco mp any cap ital sup po rt agreement with Shad es Creek Cap tive Insu ran ce Co mp any (“Shad es Creek”), a direct wh olly owned insurance sub sid i ary. The ag reemen t p ro vides t hrou gh a gu arantee that th e Compan y will con trib ute assets o r pu rch ase su rplus not es (or cau se an affiliate o r th ird p arty to con trib ute assets o r p urchase surplus no tes) in amou nts n ecessary fo r Sh ades Creek ’s regu latory cap ital levels to eq ual o r ex ceed mi nimu m th resh olds as defin ed by th e agreemen t. As of Decemb er 31, 20 18 , Shad es Creek main tained capit al levels in ex cess o f t he requ ired min imum th resh olds. The maximu m po ten tial fu tu re p ayment amo un t wh ich cou l d b e req uired u nd er the cap ital sup po rt ag reemen t will be d epend ent o n n umero us facto rs, in clu ding th e perfo rmance of equ ity mark ets, the level o f in terest rates, p erforman ce o f associ ated h edg es, and rel ated p oli cy ho lder b ehav io r. 4. SHAREOWNER’S EQUITY On Febru ary 1, 2 01 5, Dai-ichi Life acqu ired 1 00 % o f th e Compan y’s ou tstan ding sh ares of co mmon stock throu gh the Merger o f DL Inv estment (Delaware), In c., a wh olly own ed su bsidiaries o f Dai-i ch i Life, with and in to th e C ompany , with the Compan y co ntin uing as th e surv iv in g en tity . 5. SUPPLEMENTAL CASH FLOW INFORMATION Fo r The Yea r Ended December 3 1 , 2018 2 0 1 7 2016 (D o l l a rs In Tho us a nds ) Cash pa id (received) during the y ear for: Interest paid o n d ebt $83 ,43 9 $78,94 4 $95 ,09 5 Inco me t ax es (ad justed for amo un ts receiv ed fro m affi liates u nd er a tax sh ari ng ag reemen t)(40 ,98 6) (23,11 0) (2 ,59 6) 6. DERIVATIVE FINANCIAL INSTRUME NTS In con nect io n with the issuance o f no n-reco urse fun ding o blig ations by Golden Gate II, th e Compan y has ent ered in to certai n sup po rt ag reemen ts with Go ld en Gate II obl ig ating it to p rov id e su pp ort pay men ts to Go ld en Gate II under certain adv erse in terest rate co nd itio ns an d to the ex t en t o f any reductio n in the reinsurance premiums receiv ed by Gold en Gate II d ue to an in crease in the premium rates ch arged to PLICO un der it s th ird party yearly renewab le term rein su ran ce ag reemen ts. Each of th ese agreements exp ires o n Ju ly 10 , 20 52 . In con nect io n with the Go ld en Gate V fin ancing t ransaction , the Compan y entered in to sep arate Portfolio Main t en ance Agreements with Golden Gate V an d WCL. The agreemen ts o bligate the Compan y to reimbu rse Go ld en Gate V and West Co ast Life fo r o th er-th an-tempo rary imp airmen t losses on certain asset portfolio s above a sp ecified amount. Each o f these ag reemen ts ex pires on Octob er 1 0, 2 03 2. In con nectio n with th e Gold en Gate fin anci ng tran saction , the C ompany en tered in to certain supp ort agreements un der which it gu arantees o r otherwise suppo rts certain o blig ation s o f Golden Gate. Th e agreements o bligate th e C ompany to reimbu rse Golden Gate for o th er-th an-tempo rary impai rmen t lo sses o n certain asset p ortfolio s ab ov e a specifi ed amou nt and to th e extent o f any reducti on in the reinsu ran ce premiums receiv ed by Golden Gate d ue to an in crease in the premium rat es ch arg ed to PLICO un der its th ird part y yearly renewable term rei nsu ran ce agreemen ts. Each o f th ese agreements exp ires on Janu ary 15 , 2 03 4. As of December 3 1, 20 18 and 20 17 , th e Company includ ed in its balance sh eets a co mb in ed liab ility fo r th ese ag reements o f $90 .0 millio n and $9 1.6 millio n, resp ectively. Durin g th e y ears end ed December 3 1, 2 01 8, 2 01 7, and 2 01 6, the Company in clu ded in its statements of in come u nrealized gains of $1 .5 mil lion and un realized losses of $4 2.7 millio n an d $29 .3 million , respectively. 22 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES Segme nt Defe rred Polic y Ac quisition Costs and Value of Businesse s Ac quir ed Future Policy Be nefits and Claims Unearned Pre miums Stable Value Pr oducts, Annuity Contracts and Othe r Polic yholde rs’ Funds Net Premiums and Policy Fees Net Investment Income(1 ) Bene fits and Se ttlement Expe nse s Amor tization of Deferr ed Policy Acquisitions Costs and Value of Businesse s Acquired Othe r Operating Expenses(1 ) Pr emiums Wr itten(2 ) (Dollar s In Thousands) For The Year Ended Dece mbe r 31, 2018: Life Ma rke ting $1,499,386 $15,318,019 $98 $422,037 $1,043,228 $551,781 $1,412,001 $116,917 $197,346 $92 Ac quisitions 458,976 25,427,730 2,206 6,018,954 952,315 1,108,218 1,636,697 18,690 143,698 13,750 Annuities 889,697 1,050,161 — 8,324,931 148,033 340,685 226,704 24,274 151,054 — Sta ble Value Products 6,121 — — 5,234,731 — 217,778 109,747 3,201 2,798 — Asse t Protec tion 168,974 52,636 869,615 — 140,130 30,457 113,073 62,726 104,533 135,596 Corpora te and Other — 53,006 675 82,538 12,198 234,831 17,647 — 316,829 12,186 Total $3,023,154 $41,901,552 $872,594 $20,083,191 $2,295,904 $2,483,750 $3,515,869 $225,808 $916,258 $161,624 For The Year Ended Dece mbe r 31, 2017: Life Ma rke ting $1,320,776 $15,438,739 $107 $424,204 $1,011,911 $553,999 $1,319,138 $120,753 $178,792 $111 Ac quisitions 74,862 14,323,713 2,423 4,377,020 785,188 752,520 1,204,084 (6,939) 110,607 15,964 Annuities 772,633 1,080,629 — 7,308,354 152,701 321,844 216,629 (54,471) 149,181 — Sta ble Value Products 6,864 — — 4,698,371 — 186,576 74,578 2,354 4,407 — Asse t Protec tion 24,442 55,847 872,600 — 154,166 27,325 126,459 16,524 160,235 148,093 Corpora te and Other — 58,664 275 78,810 12,718 209,324 16,382 — 345,022 12,732 Total $2,199,577 $30,957,592 $875,405 $16,886,759 $2,116,684 $2,051,588 $2,957,270 $78,221 $948,244 $176,900 For The Year Ended Dece mbe r 31, 2016: Life Ma rke ting $1,218,944 $14,595,370 $119 $426,422 $972,247 $525,495 $1,267,844 $130,708 $177,498 $122 Ac quisitions 106,532 14,693,744 2,734 4,247,081 832,083 764,571 1,232,141 8,178 118,056 18,818 Annuities 655,618 1,097,973 — 7,059,060 146,458 322,608 214,100 (11,031) 140,409 — Sta ble Value Products 5,455 — — 3,501,636 — 107,010 41,736 1,176 3,033 — Asse t Protec tion 33,280 60,790 844,919 — 128,687 22,082 106,668 20,033 125,957 121,821 Corpora te and Other — 63,208 723 75,301 13,740 200,690 17,946 — 295,498 13,689 Total $2,019,829 $30,511,085 $848,495 $15,309,500 $2,093,215 $1,942,456 $2,880,435 $149,064 $860,451 $154,450 (1)Allo cation s o f Net Investment In co me and Other Operating Expenses are based on a n u mber of assump tio ns and estimates and resu lts would ch an ge if d ifferen t m eth o ds were app lied . (2)Excludes Life In suran ce 22 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHE DULE IV—REINSURANCE PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES G ro ss Amount Ceded to Other Co mpanies Assumed fro m Other Co mpanies Net Amount Percenta g e o f Amo unt Assumed to Net (D oll ars In Tho us a nds) Fo r The Year En ded Decemb er 3 1, 2 01 8: Life in surance i n-fo rce $76 5,9 86 ,22 3 $(30 2,1 49 ,61 4) $13 5,4 07 ,40 8 $59 9,2 44 ,01 7 2 3.0 % Premiu ms an d p oli cy fees: Life in surance 2,6 81 ,19 1 (1,1 73 ,19 4) 6 26 ,28 3 2,1 34 ,28 0 (1 ) 2 9.3 % Acciden t/heal th in surance 47 ,02 8 (30 ,12 6) 12 ,82 6 29 ,72 8 4 3.1 Prop erty an d l iab ility insurance 3 08 ,63 4 (1 81 ,62 1) 4 ,88 3 1 31 ,89 6 3.7 To tal $3,0 36 ,85 3 $(1,3 84 ,94 1) $6 43 ,99 2 $2,2 95 ,90 4 Fo r The Year En ded Decemb er 3 1, 2 01 7: Life in surance i n-fo rce $75 1,5 12 ,46 8 $(32 8,3 77 ,39 8) $11 0,2 05 ,19 0 $53 3,3 40 ,26 0 2 1.0 % Premiu ms an d p oli cy fees: Life in surance 2,6 55 ,84 6 (1,1 51 ,17 5) 4 35 ,11 3 1,9 39 ,78 4 (1 ) 2 2.5 % Acciden t/heal th in surance 51 ,99 1 (33 ,05 1) 14 ,94 5 33 ,88 5 4 4.1 Prop erty an d l iab ility insurance 3 09 ,84 8 (1 76 ,50 9) 9 ,67 6 1 43 ,01 5 6.8 To tal $3,0 17 ,68 5 $(1,3 60 ,73 5) $4 59 ,73 4 $2,1 16 ,68 4 Fo r The Year En ded Decemb er 3 1, 2 01 6: Life in surance i n-fo rce $73 9,2 48 ,68 0 $(34 8,9 94 ,65 0) $11 6,2 65 ,43 0 $50 6,5 19 ,46 0 2 3.0 % Premiu ms an d p oli cy fees: Life in surance 2,6 10 ,68 2 (1,1 26 ,91 5) 4 54 ,99 9 1,9 38 ,76 6 (1 ) 2 3.5 % Acciden t/heal th in surance 58 ,07 6 (36 ,93 5) 17 ,43 9 38 ,58 0 4 5.2 Prop erty an d l iab ility insurance 2 61 ,00 9 (1 50 ,86 6) 5 ,72 6 1 15 ,86 9 4.9 To tal $2,9 29 ,76 7 $(1,3 14 ,71 6) $4 78 ,16 4 $2,0 93 ,21 5 (1)Includes annu ity policy fees o f $1 7 7 .1 millio n , $173 .5 million , an d $160.4 m illion fo r th e y ears en ded Decemb er 3 1, 201 8 , 2017, and 2 0 16, respectiv ely . 23 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES Additions Description Balance a t beginning o f period Charged to costs a nd expenses Charges to o ther acco unts Deductions Balance at end of period (Dollars In Thousands) As of December 31, 2 01 8 Allo wan ce fo r losses on commercial mortg age loan s $— $(20 9) $— $1,5 05 $1 ,29 6 As of December 31, 2 01 7 Allo wan ce fo r losses on commercial mortg age loan s $7 24 $(7 ,43 9) $— $6,7 15 $— 23 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents EXHIBIT INDEX Exhibit Number *2.1 Master Agreement, d ated as o f April 1 0, 20 13 , by an d amon g AXA Eq uit ab l e Finan cial Services, LLC, AXA Fin ancial, Inc. an d Protecti ve Life In su ran ce Co mp any, filed as Exh ib it 2 (b ) to the Co mp any ’s Quarterly Report on Fo rm 1 0-Q filed Aug ust 2 , 2 01 3 (No. 0 01 -1 13 39 ). *2.2 Ag reemen t an d Plan of Merger, dated as o f Ju ne 3 , 2014 , b y an d amo ng The Dai -ichi Life In surance Compan y, Limited, DL In vestmen t (Delaware), In c. and Protective Life Co rp oration, filed as Exh ib it 2.1 t o the Co mp any’s Curren t Rep ort o n Fo rm 8-K fi led February 3 , 20 15 (No . 00 1-11 33 9). *2.3 Master Tran sactio n Agreement, dated as o f Janu ary 1 8, 20 18 , b y and amon g Protective Life In surance Comp any, Protective Life Co rp oration, Th e Linco ln Nation al Life Insu ran ce Company, Lin coln Natio nal Corp oration , Liberty M utual Insu ran ce Co mp any, Lib erty Mu t ual Fire Insu ran ce Compan y and Liberty Mu tu al Gro up , Inc., filed as Ex hibit 2.1 to the Co mp any ’s Cu rrent Report on Fo rm 8-K fi led Janu ary 2 2, 2 01 8 (No. 0 01 -1 13 39 ). *2.4 Master Transactio n Agreement, dat ed as of Janu ary 23 , 20 19 , by an d amon g Pro tect iv e Life In surance Compan y, Great-West Life & Ann uity Insurance Co mp any, Great-West Life & An nu ity Insu ran ce Co mp an y o f New Yo rk , The Can ada Life Assu ran ce Co mp any an d The Great -West Life Assurance Compan y, filed as Ex hibit 2 .1 to the Co mp an y’s Current Rep ort o n Form 8 -K filed Janu ary 2 5, 2 01 9 (No. 0 01 -1 13 39 ). *3.1 Amend ed and R estated Bylaws of th e Co mp any , effecti ve as of Feb ru ary 25 , 20 19 , filed as Exh ibi t 3 .1 t o t he Compan y’s Curren t Rep ort o n Form 8 -K filed M arch 1, 20 19 (No . 00 1-11 33 9). *3.2 Amend ed and Restated By laws o f the Co mp an y, effective as o f Aug ust 8, 2 01 8, fi led as Exh ibi t 3 .1 to the Co mp any ’s Curren t Rep ort o n Form 8 -K filed Aug ust 8 , 20 18 (No. 0 01 -1 13 39 ). *4.1 Referen ce is mad e to Exh ib it 3.1 abo ve (No . 00 1-11 339). *4.2 Referen ce is mad e to Exh ib it 3.2 abo ve (No . 00 1-11 339). *4 .3(a) Senior Ind enture, dated as of June 1 , 19 94 , between the Compan y an d The Bank o f New Yo rk , as Tru stee, filed as Exh i bit 4 (c)(1) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded Decemb er 3 1, 2 01 7, filed M arch 2, 2 01 8 (No . 00 1-11 33 9). *4.3 (b ) Supplemen tal In den tu re No . 11 , dated as o f Decemb er 1 1, 2 00 7, b etween the Co mp any and The Bank of New York Tru st Co mp any, N.A., as Tru stee, fil ed as Ex hibit 4.1 to th e Compan y’s Curren t Rep ort on Form 8-K filed December 7 , 200 7 (No. 00 1- 1 1339). *4 .3(c) Supplemen tal Ind enture No. 12 , d ated as of Octo ber 9 , 2 00 9, bet ween the Co mp any and The Ban k of New Yo rk Mello n Tru st Co mp any, N.A., as Trustee, filed as Ex hibit 4 .1 to the Compan y’s Curren t Report on Fo rm 8-K filed Octob er 9, 2 00 9 (No. 00 1- 1 1339). *4.3 (d ) Supplemen tal Ind enture No. 13 , d ated as of Octo ber 9 , 2 00 9, bet ween the Co mp any and The Ban k of New Yo rk Mello n Tru st Co mp any, N.A., as Trustee, filed as Ex hibit 4 .3 to the Compan y’s Curren t Report on Fo rm 8-K filed Octob er 9, 2 00 9 (No. 00 1- 1 1339). *4 .3(e) Supplemen tal In den tu re No. 1 5, d ated as o f Au gu st 23 , 2 01 8, b etween Pro tectiv e Life Co rp oratio n and The Bank of New Yo rk Mello n Tru st Co mp any, N.A., as successor Tru stee, sup plemen ting th e Sen io r In dentu re d ated Jun e 1, 1994, filed as Ex hibit 4.2 to Co mp any ’s Cu rrent R ep ort on Fo rm 8-K filed Au gu st 2 4, 2 01 8 (No. 0 11 -1 13 39 ). *4.3 (f) Form o f 4 .30 0% Senior Note du e 20 28 (incl ud ed in Ex hibit 4 .3(e), ab ov e). *4 .4(a) Subord in ated In den tu re, d ated as of Ju ne 1, 1994, between th e Co mp any and AmSou th Bank , as Trustee, fil ed , as Ex hibit 4(d)(1) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded Decemb er 3 1, 2 01 7, filed M arch 2, 2 01 8 (No . 00 1-11 33 9). *4.4 (b ) Supplemen tal In den tu re No . 11 , dated as o f Aug ust 10 , 20 17 , between t he Compan y an d Th e Ban k o f New Yo rk M ellon Trust Co mp any, N.A., as Tru stee, fil ed as Ex hibit 4.2 to th e Compan y’s Curren t R ep ort o n Fo rm 8 -K fi led Au gu st 10 , 2 01 7 (No . 0 01 - 1 1339). 23 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number *10 .1(a)† The Compan y’s Excess Ben efit Plan , Amend ed and Restated as o f Decemb er 31, 20 08 and Refl ectin g the Terms of th e Decemb er 3 1, 20 10 Amend men t, filed as Exh ib it 10 (c) t o th e Compan y’s Ann ual Rep ort on Form 10 -K fo r th e y ear en ded December 3 1, 2 012 fi led February 2 8, 2 01 3 (No. 0 01 -1 13 39 ). *1 0.1 (b )† Amend ment to th e Compan y’s Excess Ben efit Plan, d ated as of Ap ril 17 , 20 14 , filed as Ex hibit 10 (a) to th e Compan y’s Qu arterly Repo rt o n Form 10-Q filed May 8 , 20 14 (No . 00 1-11 33 9). *10 .1(c)† 2 016 Amen dment to th e Company ’s Excess Ben efit Plan, dated as of December 1 9, 20 16 , fil ed as Exh ibi t 10(a)(3 ) to t he Co mp any ’s An nu al Repo rt on Fo rm 10 -K filed February 2 4, 2017 (No . 00 1-11 33 9). *1 0.1 (d )† Excess Benefit Plan Settlement Agreement, dat ed as of Sep tember 30 , 20 16 , b etween the Co mp an y an d Jo hn D. Joh ns, fi led as Exh ib it 10 to th e Comp any ’s Qu arterly Rep ort o n Form 1 0-Q filed No vember 7, 2016 (No . 00 1-11 33 9). *10 .2(a)† Protecti ve Life Corpo ratio n An nu al Incen tive Plan, effectiv e Janu ary 1 , 20 18 , filed as Exh ib i t 1 0.1 to the Co mp an y’s Cu rrent Rep ort o n Form 8 -K filed Nov emb er 1 3, 201 7 (No . 00 1-11 33 9). 1 0.2 (b )† Amend ed and Restated Pro tectiv e Life Corpo ratio n Ann ual In cen tiv e Pl an , amen ded an d restated as of Nov ember 6, 2 01 8, filed h erewith . *10 .2(c)† Protecti ve Li fe Corpo ration 2 017 Ann ual In cen tiv e Pl an , fil ed as Ex hibit 1 0(a) to th e Co mp any ’s Qu arterly Rep ort o n Form 1 0- Q filed Au gu st 3 , 20 17 (No . 0 01-11 33 9). *1 0.2 (d )† Protecti ve Li fe Corpo ration 2 016 Ann ual In cen tiv e Pl an , fil ed as Ex hibit 1 0(a) to th e Co mp any ’s Qu arterly Rep ort o n Form 1 0- Q filed May 6 , 20 16 (No . 0 01 -11 33 9). *10 .3(a)† Protecti ve Li fe Corpo ratio n Lo ng -Term In centiv e Plan, effective Jan uary 1, 2 01 8, filed as Ex hibit 1 0.2 to th e Co mp any ’s Cu rrent Report on Fo rm 8-K fi led No vember 13, 2 01 7 (No. 0 01 -1 13 39 ). *1 0.3 (b )† Amend ment One to th e Prot ective Life Co rpo rat io n Lo ng -Term In cen tive Plan , filed as Ex hibit 1 0 to the Compan y’s Quarterly Rep ort o n Form 1 0-Q filed May 11 , 20 18 (No. 0 01 -1 13 39 ). *10 .3(c)† Amend ed and Restated Pro tective Life Co rp oration Lo ng -Term In cen tive Plan , filed as Exh ib it 10.1 to the Co mp an y’s Cu rrent Rep ort o n Form 8 -K filed Nov emb er 1 3, 201 8 (No . 00 1-11 33 9). 1 0.3 (d )† 2 018 Lon g-Term In centiv e Pl an Awards Accep tance Form, filed h erewith. 1 0.4 (a)† 2 018 Paren t-Based Award Letter o f the Compan y, filed h erewith. 1 0.4 (b )† 2 018 Paren t-Based Award Prov isio ns o f the Co mpan y, filed h erewi th . *10 .4(c)† 2 017 Parent-Based Award Pro vision s of the Co mp any, filed as Ex hibit 10 (b) to th e Co mp an y’s Quarterl y Rep ort on Fo rm 1 0-Q fi led Au gu st 3, 2017 (No . 00 1-11 33 9). *1 0.4 (d )† 2 016 Parent-Based Award Pro vision s of the Co mp any, filed as Ex hibit 10 (b) to th e Co mp an y’s Quarterl y Rep ort on Fo rm 1 0-Q fi led May 6, 20 16 (No . 00 1-11 33 9). 1 0.5 (a)† 2 018 Performan ce Un its Award Letter (fo r k ey o fficers) of th e Co mp any , filed herewith . 1 0.5 (b )† 2 018 Performan ce Un its Pro vision s (fo r k ey officers) o f the Compan y, filed h erewith. *10 .5(c)† 2 017 Perfo rmance Units Prov isio ns (for key officers) o f th e Co mp any, filed as Exh ib it 1 0(c) to th e Co mp any ’s Quarterly Repo rt o n Form 1 0-Q filed Aug ust 3, 2 01 7 (No. 001 -1 13 39 ). *1 0.5 (d )† 2 016 Perfo rmance Units Prov isio ns (for key officers) o f th e Co mp any, filed as Exh ib it 1 0(c) to th e Co mp any ’s Quarterly Repo rt o n Form 1 0-Q filed M ay 6, 2 01 6 (No. 001-1 13 39 ). 1 0.6 (a)† 2 018 Performan ce Un its Award Letter o f the Compan y, filed h erewith . 1 0.6 (b )† 2 018 Performan ce Un its Pro vision s of the Company , fil ed herewith. *10 .6(c)† 2 017 Perfo rman ce Uni ts Pro vision s o f the Compan y, filed as Ex hibit 1 0(d) to the Co mpan y’s Qu arterly Rep ort o n Form 10 -Q fi led Au gu st 3, 2017 (No . 00 1-11 33 9). 23 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number *1 0.6 (d )† 2 016 Perfo rman ce Uni ts Pro vision s o f the Compan y, filed as Ex hibit 1 0(d) to the Co mpan y’s Qu arterly Rep ort o n Form 10 -Q fi led May 6, 20 16 (No . 00 1-11 33 9). 1 0.7 (a)† 2 018 Restricted Units Award Let ter (for key officers) of th e C ompany , fil ed herewith. 1 0.7 (b )† 2 018 Restricted Units Award Let ter of th e Co mp any , filed herewith . 1 0.7 (c)† 2 018 Restricted Units Prov isions o f the Compan y, filed h erewith. *1 0.7 (d )† 2 017 Restricted Un its Pro visio ns o f the Compan y, filed as Ex hibit 1 0(e) t o th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q fil ed Au gu st 3, 20 17 (No . 00 1-11 33 9). *10 .7(e)† 2 016 Restricted Un its Pro visio ns o f the Compan y, filed as Ex hibit 1 0(e) t o th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q fil ed May 6, 20 16 (No . 00 1-11 33 9). *1 0.8 † Form of th e C ompany ’s Ind emn ity Ag reement fo r Officers, filed as Exhibit 1 0(h) to the Co mp any’s Ann ual Repo rt on Form 1 0-K fo r the year end ed December 31 , 20 17 , filed March 2 , 2 01 8 (No. 0 01 -1 13 39 ). *1 0.9 † Form o f th e Co mp any ’s Director Ind emnit y Ag reemen t, fi led as Exh ib it 10 (c) to t he Compan y’s Qu art erl y Repo rt on Fo rm 10 -Q fi led Au gu st 5, 2010 (No . 00 1-11 33 9). *1 0.1 0(a)† Emp lo yment Ag reemen t, dated as o f Ju ne 3 , 2 01 4, between the Comp any an d Joh n D. Jo hn s, filed as Ex hibit 10 (b ) t o th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q filed Au gu st 8 , 20 14 (No . 00 1-11 33 9). *1 0.1 0(b)† Letter Agreement, dat ed as o f Nov ember 6, 20 17 an d ent ered i nto on No vember 2 8, 20 17 , b etween th e Co mp an y and Joh n D. Joh ns, filed as Exh ib it 10 .1 to the Compan y’s Curren t Rep ort o n Form 8 -K filed December 4, 2 01 7 (No . 00 1-11339 ). *1 0.1 0(c)† Co nfid entiality and Non -Co mp etition Ag reemen t, dated as of Nov emb er 2 8, 2 017, between t he Compan y an d Joh n D. Joh ns, fi led as Exh ib it 10 .2 to the Co mpan y’s Current Rep ort o n Form 8 -K filed December 4, 2 01 7 (No. 001 -1 13 39 ). *10 .11 † Tran siti on Letter Agreement, dated as o f Decemb er 3 0, 20 16 , between th e Comp any and Deb orah J. Lo ng, fil ed as Ex hibit 1 0(j) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K filed February 24, 20 17 (No . 00 1-11 33 9). *1 0.1 2(a)† Form o f Emp lo yment Ag reement between th e Co mp any an d Ex ecutiv e Vice President, fil ed as Ex hibit 1 0(c) to the Compan y’s Qu arterly Repo rt o n Form 10-Q filed Au gu st 8, 20 14 (No . 00 1-11 33 9). *1 0.1 2(b)† Form o f Emp lo yment Ag reement between th e Co mp any an d Senior Vice Presi dent, filed as Ex hibit 1 0(d) t o t he Compan y’s Qu arterly Repo rt o n Form 10-Q filed Au gu st 8, 20 14 (No . 00 1-11 33 9). *10 .13 † The Compan y’s Deferred Co mp ensatio n Plan fo r Officers, as Amen ded and Restated as of Aug ust 1, 2 01 6, filed as Ex hib it 10 to th e Co mp any’s Qu art erly Repo rt on Fo rm 10 -Q filed Augu st 5 , 20 16 (No .0 01-11 33 9). *1 0.1 4 Amend ed and R estated Cred it Agreement, dated as o f Feb ruary 2, 2 01 5, amon g Pro tect iv e Life Co rp oratio n and Protective Life In surance Compan y, as borro wers, t he several lend ers from time to time a p arty thereto , Reg io ns Ban k, as Admin istrative Agen t, an d Wells Farg o Bank , Nation al Asso ciat io n, as Syn dicati on Ag ent, filed as Exh i bit 1 0.1 to th e Co mp any ’s Cu rrent R ep ort on Form 8 -K filed February 3 , 20 15 (No. 0 01 -1 1339). *10 .14 (a) Fi rst Amendmen t to Amended and Restat ed Cred it Agreement, dat ed as of M ay 3 , 2 01 8, amon g Pro tectiv e Life Co rpo rat io n and Protecti ve Li fe Insu ran ce Co mp any , as Bo rrowers, th e several lend ers fro m time to time thereto , an d Regio ns Bank , as Ad ministrativ e Ag ent fo r Len ders, filed as Ex hibit 1 0.1 to th e Company ’s Curren t Repo rt on Fo rm 8-K filed May 9, 2 01 8 (No. 0 01-11 33 9). *1 0.1 5 Secon d Amen ded and Restated Lease Ag reement, dated as of December 19 , 2013 , b etween Pro t ectiv e Life In su ran ce Co mp any an d Wacho via Dev elo pment Corpo ratio n, filed as Ex hibit 10 (j) to the Compan y’s Ann ual Rep ort on Fo rm 10 -K fo r th e y ear en ded December 3 1, 2 01 3 filed February 2 8, 2 01 4 (No. 00 1-11339 ). 23 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number *1 0.1 6 Secon d Amen ded and Restated In vestmen t an d Participatio n Agreemen t, d ated as o f Decemb er 1 9, 2 01 3, between Pro tectiv e Life In surance Compan y and Wach ov i a Dev elopmen t Co rp oration , filed as Exhi bit 1 0(k) to th e Company ’s Annual Rep ort o n Form 1 0-K fo r the y ear end ed Decemb er 31, 20 13 filed Feb ru ary 28 , 20 14 (No . 0 01-11 33 9). *1 0.1 7 Secon d Amen ded and Restated Guaran ty , dated as o f December 19 , 20 13 by th e Co mp any in fav or of Wach ov ia Develop men t Co rp oration, fil ed as Ex hibit 1 0(l) t o the Compan y’s Ann ual Rep ort o n Form 1 0-K fo r the y ear end ed December 31 , 20 13 filed February 2 8, 2 01 4 (No. 001-1 13 39 ). *1 0.1 8 Amend ment and Clarificatio n o f the Tax All ocation Agreement, dated as o f Jan uary 1 , 19 88 , b y an d amon g Pro tect iv e Life Co rp oration and its su bsid iaries, filed as Ex hib it 10 (h ) to Pro tectiv e Life In su ran ce Co mp an y’s Annu al Repo rt on Fo rm 10 -K for th e y ear ended Decemb er 3 1, 2004, filed M arch 3 1, 2 00 5 (No. 0 01 -3 19 01 ). *1 0.1 9 Third Amend ed an d Restated Reimbu rsement Agreement, dated as o f Ju ne 2 5, 2 01 4 b etween Golden Gate III Vermo nt Cap t iv e In surance Compan y and UBS AG, Stamfo rd Bran ch, filed as Ex hibit 1 0(a) to the Co mp an y’s Quarterl y Repo rt on Fo rm 10 -Q fi led Au gu st 8, 2014 (No . 00 1-11 33 9).± *1 0.2 0 Secon d Amen ded and Restated Guaran tee Agreemen t, dated as o f Au gu st 7 , 20 13 , between th e Co mp any and UBS AG, Stamford Branch , filed as Exh ib it 10 (q) to th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q filed No vemb er 4 , 20 13 (No . 001-11 33 9). *1 0.2 1 St ock Purchase Ag reemen t, d ated as o f Octob er 2 2, 2 01 0, by and amo ng RBC In su ran ce Ho ld in gs (USA) In c., Athen e Ho ld i ng Ltd ., Protecti ve Life Insu ran ce Co mp any an d RBC USA Holdco Co rp oratio n (solely fo r p urposes o f Section s 5.1 4-5.1 7 an d Articles 7 , 8 an d 1 0), filed as Exh ib i t 1 0.01 t o t he Compan y’s Curren t Repo rt on Fo rm 8-K filed Octo ber 2 8, 2 01 0 (No. 0 01 - 1 1339). *1 0.2 2 Reimb ursemen t Agreemen t, d ated as o f Decemb er 1 0, 2 01 0, between Golden Gate IV Vermon t Capti ve Insu ran ce Co mp any an d UBS AG, Stamford Branch , filed as Exh ib it 10(u) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded December 3 1, 2 01 0 filed February 2 8, 2 01 1 (No. 00 1-1 13 39 ).± *1 0.2 3 Letter o f Guaranty, d ated as o f Decemb er 1 0, 2 01 0, b etween Pro tectiv e Life Co rp oratio n and UBS AG, Stamfo rd Bran ch, fil ed as Exh ib it 10 (v ) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded Decemb er 3 1, 2 01 0 filed February 2 8, 201 1 (No. 0 01 -1 13 39 ). *1 0.2 4 Co in su ran ce Ag reemen t, d ated as o f Septemb er 3 0, 2 01 5, by and between Lib erty Life In surance Compan y and Pro tective Life In surance Compan y, filed as Ex hibit 1 0 to the Co mp an y’s Current Rep ort o n Form 8 -K/A filed Au gu st 5, 201 1 (No . 00 1-11 33 9). *1 0.2 5 Master Agreement, dated as of Sep tember 30 , 20 15 , by and amo ng Pro tectiv e Life Insu ran ce Co mp any and Genworth Life and An nu ity In su ran ce Comp any, filed as Exh ib it 1 0 to t he Co mp an y’s Quarterly Repo rt o n Fo rm 1 0-Q filed No vember 6, 20 15 (No. 0 01-11 33 9). *1 0.2 6 Termin ation an d Release Ag reemen t amon g Pro tectiv e Life Corpo ratio n, Pro tect iv e Life In surance Compan y, Wacho via Dev elo pmen t Co rp oration, Wells Fargo Ban k, Natio nal Association , Su nTrust Bank and Cit ib ank , N.A., filed as Ex hibit 1 0.1 to th e Co mp any’s Cu rrent Rep ort o n Form 8 -K filed Decemb er 17, 20 18 . 1 4.1 Co de o f Busin ess Con du ct for Protective Life Co rp oration and all of its su bsidiaries, revised Ju ne 1 1, 2 01 8, filed h erewith. *1 4.2 Supplemen tal Po licy on Co nflict o f Interest fo r the Compan y and all of its sub sidiaries, rev ised Jun e 12, 2 01 7, filed as Exhi bit 1 4(b ) to the Compan y’s Annual Rep ort on Fo rm 1 0-K for the year en ded Decemb er 31 , 2 01 7, filed March 2, 20 18 (No. 00 1- 1 1339). 2 1 Subsidiaries of t he Registrant. 2 4 Powers of Attorney . 3 1.1 Certification Pu rsuan t to Secti on 30 2 of t he Sarban es-Ox ley Act of 20 02 . 3 1.2 Certification Pu rsuan t to Secti on 30 2 of t he Sarban es-Ox ley Act of 20 02 . 3 2.1 Certification Pu rsuan t to 1 8 U.S.C Sectio n 1 35 0, as Ad op ted Pu rsu ant to Sectio n 9 06 of th e Sarbanes-Oxley Act of 20 02 . 23 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number 3 2.2 Certification Pu rsuan t to 1 8 U.S.C Sectio n 1 35 0, as Ad op ted Pu rsu ant to Sectio n 9 06 of th e Sarbanes-Oxley Act of 20 02 . 1 01 Fi nancial st atemen ts fro m th e ann ual repo rt on Form 10-K o f Pro tectiv e Life Co rporat io n fo r th e y ear end ed Decemb er 31 , 2 01 8, fi led o n March 5, 2 01 9 formatted in XBRL: (i) th e Co nso lid ated Statemen ts o f Inco me, (ii) the Conso lidated Statements o f Co mp reh ensive Inco me (Lo ss), (iii), the Con so lidated Balan ce Sheets, (i v) Co nsolid ated Statemen ts o f Shareowner’s Equi ty, (v ) the Con solidated Statement of C ash Flo ws, an d (vi) th e No tes to Co nso l id ated Financial Statements. *Inco rp orated by Referen ce †Man ag emen t cont ract o r co mp ensatory p lan or arrang ement ±Certain p ortion s o f this Ex hibit h ave been omitted pu rsuant to a req uest fo r co nfidenti al treatment. The n on -p ub lic in fo rmatio n has been fi led separately with the Secu rities an d Ex chan ge Commission pu rsu ant to Rule 24 b-2 u nd er the Ex chang e Act. Th e Co mp any hereb y ag rees to furnish a co py of an y instrument th at d efines the rig hts of ho ld ers of lo ng -term debt t o t he Secu rities and Exch ang e Co mmissio n, u po n requ est. 23 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SIGNATURES Pursu ant t o the requ i remen ts of Secti on 13 o r 1 5(d) o f th e Secu rities Ex chan ge Act o f 1 93 4, th e reg istrant has du ly caused this repo rt to be sig ned on its beh alf by th e un dersig ned , th ereu nto d uly auth orized. PROTECTIVE LIFE CORPORATION By : /s/ PAUL R. WELLS Pau l R. Wells Sen io r Vice Presid ent, Ch i ef Acco unt in g Officer and Con troller M arch 5, 20 19 Pursu ant to th e requ irements of the Securities Exchan ge Act of 1 93 4, th is rep ort h as b een sig ned b elow by the fo llo wing p erson s o n beh alf o f the registran t an d in the capacities and on th e dates in dicated. Sig nature Capa city in Which Sig ned Date * Ex ecu tiv e Ch airman of th e Bo ard and Director March 5, 2 01 9 JOHN D. JOHNS /s/ RICHARD J. BIELEN Presiden t, Chief Executiv e Officer (Principal Execu tive Offi cer) an d Di rector March 5, 2 01 9 RICHARD J. BIELEN /s/ STEVEN G. WALKER Ex ecu tiv e Vice Presid ent and Ch ief Finan cial Officer (Prin cip al Fin anci al Officer) March 5, 2 01 9 STEVEN G. WALKER /s/ PAUL R. WELLS Sen ior Vice Presid ent, Ch i ef Account in g Officer and Con troller (Ch ief Acco un t in g Officer/Co ntrol ler) March 5, 2 01 9 PAUL R. WELLS * Directo r March 5, 2 01 9 NOR IM ITSU KAWAHARA * Directo r March 5, 2 01 9 TETSUYA KIKUTA * Directo r March 5, 2 01 9 VANESSA LEONARD * Directo r March 5, 2 01 9 JOHN J. MCM AHON, JR. * Directo r March 5, 2 01 9 UNGYONG SHU * Directo r March 5, 2 01 9 JESSE J. SPIKES * Directo r March 5, 2 01 9 TOSHIAKI SUMINO * Directo r March 5, 2 01 9 WILLIAM A. TERRY * Directo r March 5, 2 01 9 W. MICHAEL WARREN, JR. *Rich ard J. B iel en , by si gn in g h is n ame h ereto , do es sign th is d ocu men t o n b ehalf of each o f the perso ns ind i cated ab ov e p ursu ant to po wers o f att orney d uly ex ecuted b y su ch p erso ns an d filed with th e Securi ties and Exch an ge Co mmissio n. 23 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents By : /s/ RICHARD J. BIELEN RICHARD J. BIELEN Atto rney-i n-fact 23 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION ANNUAL INCENTIVE PLAN (Originally effectiv e Janua ry 1, 20 1 8 ) (Am ended a nd Resta ted as o f Novem ber 6 , 201 8 ) 1 .Purpo se. The purp o se of the Plan is to en able the Compan y an d its Su b sidiaries to attract, retain, mo tivate an d re ward q u alified officers and k ey emplo y ees by p rovidin g them with the oppo rtun ity to earn c o mp etitiv e comp en sation d irectly lin k ed to th e Co mp an y 's p erfo rmance. 2 .Definitions. Un less th e co n text require s oth erwise, th e following terms as u sed in th e Plan sh all hav e th e m ean ing s ascrib ed to ea ch b elow. "Bo ard " shall mean th e Board of Directo rs of th e Co mp any. "Co mmittee" sh all m ean the Co mp ensatio n and Manag eme n t Succession Committee of th e Bo ard (or such o ther committee of the Bo ard as the Bo ard ma y desig n ate from time to time ) or an y su b co mmittee thereof. "Co mp any " shall mean Protective Life Co rporation. "Particip ant" shall mean each officer o r k ey employee o f the Co mp any or a Subsid iary whom the Co mmittee d esig nates as a p articip ant in th e Plan. "Plan " sh all m ean th e Protective Life Co rporation Ann u al Ince n tiv e Plan, as set forth h erein an d as may b e amen d ed from time to time. "Su b sidiary " sh all m ean (a) an y co rporation o f wh ich th e Comp an y possesses d irectly or in d irectly fifty percent (50%) or m o re o f th e total combined votin g p ower of all classes of stock of such co rporation and (b) any other busine ss o rg an izatio n , regardless of fo rm, in which th e Compan y p o ssesses d irec tly or in directly fifty percent (50 %) o r more o f the total co m b ined equity in terests in su ch o rga n izatio n . 3 .Adm inistra tio n. The Co mmittee sha ll admin ister and inte rp ret the Plan. Any d eterminatio n mad e by the Co mmittee under the Plan shall be fin al and conclu sive. The Co mmittee shall estab lish pe rforman ce objectives in accord ance with Sectio n 4 and sh all certify wh eth er su ch p erfo rmance ob jectiv es h av e been achiev ed, su b jec t to the Board's ap p roval. No twith stan din g any thing else contained h erein to the contrary, th e Co mmittee may deleg ate any an d all o f its d uties and resp onsib ilities (inc luding th e selectio n o f Participants) in resp ect o f all Participants o ther th an the Execu tiv e Chairma n , Presid ent an d Chief Ex ec u tive Officer and all members of th e Co mp an y 's Perfo rmance and Accou n tability Committee to a committee of o fficers comp rised o f the President an d Ch ief Executiv e Officer, an d any two or mo re of h is or h er d irect rep orts, as d etermined from time to time in h is or her sole discretion . In the ev ent th at, at any time any o f th e aforementio n ed o ffices sh all b e v acant (or th e title asso ciated with such position shall be ch ang ed), the p erso n performin g the d u ties of su ch position sha ll be eligible to serv e on su ch officer's co mmittee. The Co mmittee m ay emp loy su ch leg al coun sel, co nsultan ts and ag en ts (including counsel o r ag ents who are emp lo y ees o f the Compa n y o r a Su b sid iary) as it may d eem desirable for th e admin istratio n o f the Plan and m ay re ly upon an y o p in ion receiv ed from any su ch coun sel, consultant or ag ent an d any computa tio n receiv ed fro m any su ch c o n su lta n t o r agen t. All expen ses incu rred in the admin istratio n of th e Plan , includ ing (without limitatio n) ex pen ses for the en g agem ent of an y c o u nsel, consultant o r ag en t, sh all b e paid b y th e Compa n y. No memb er o r fo rm er mem b er o f the Bo ard o r the Committee, o r an y other person invo lved in the admin istration o f the Plan , shall b e liab le for an y act, o m issio n , in terpretatio n , c o n stru ctio n o r d eterminatio n m ade in c o n ne ction with the Plan o th er th an as a result of suc h indiv id u al's willful misco n d u ct. 4 . Ince ntiv e Pa y ments. (a)Establishing the Perfo rm ance Criteria. On or b efo re April 1 o f each calendar year d u rin g which the Plan is in effect, the Co mmittee shall reco mmen d fo r appro v al by th e Boa rd the pe rforman ce obje ctive or objectives th at must b e satisfied in ord er for Particip ants to b e eligib le to re ceive an incentiv e paymen t fo r th at y ear. The Co mmittee may estab lish differe n t p erfo rman ce objectives fo r differen t Participants to qualify. The p erfo rm ance o bjectiv e(s) may state, in terms o f an ob jectiv e fo rmula o r stand ard , the method fo r comp uting th e amo u nt of the inc entive fu n din g eligib le fo r pay ment to the Participan ts if th e o b jectiv e(s) are achiev ed. With respect to any Participant, th e Committee may estab lish multiple performan ce o b jectiv es. If th e Committee establish es multiple p erfo rmance o b jectiv es, the Comm ittee shall make clear wh eth er (i) a sp ecified perc entage of th e annual incen tiv e o p portunity will be elig ib le for fu ndin g b ased on th e achievem ent (in whole or in part) of a specified o bjectiv e, (ii) funding o f any a mou n t is con tin gen t upon ac h iev emen t (in wh o le or in part) of more th an o n e such c riteria, o r (iii) th e am o u nt fu nded upon the achievement of o n e ob jectiv e may Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. b e red u ced o r increased based eith er on th e lev el o f ach ieve men t of a differen t objective or at th e discretion o f th e Committee or auth orized d iv isio n o r b u siness unit man ager. (b )Av ailab le Performan ce Criteria. Any p erfo rmance ob jectiv es estab lish ed u n d er Section 4(a) shall be related to o n e o f the following criteria, wh ich m ay be d ete rmined so lely b y reference to th e performance of the Compan y or a Su bsid iary or a div ision or b u siness u nit o r ba sed on comparativ e perfo rm ance relativ e to othe r co mpanies: n et in co me; o p erating in come; boo k value; embe d d ed v alu e or econ o m ic valu e a d d ed; re turn o n equity, assets or invested cap ital; assets, sales or reven u es or gro wth in asse ts, sales o r revenues; efficiency or ex pe n se manage men t; c apital adeq u acy (in cluding risk -based capital); investmen t return s o r asset qu ality ; completion o f acqu isitio ns, fin ancin g s, or similar transactio n s; custo mer service metrics; the va lue of n ew bu siness o r sa les; or su ch o ther reasonab le criteria as the Committee may recommen d an d the Board may appro v e. (c)Amoun t Pay able. The Committee shall establish a targ et amo unt fo r each Participant. Each Particip an t’s targ eted amo u n t ma y b e ag g reg ated to create a pool to b e allocated in the so le discretion o f th e Co mmittee. The Co mmittee m ay estab lish the po o l in respect o f any p erfo rmance objective based o n the extent to wh ich su ch o bjective (or such o b jectiv e and an y other lin k ed performanc e o b jectiv e) is met or exceede d , or the ex ten t to which su ch ob jectiv e(s) are o nly p artially ach ieved . Th e Co mmittee may p ro vid e th at amoun ts below o r in excess o f the ag g reg ate of all Partic ipan t targets for suc h performance o b jec tiv e will be fu n de d fo r perfo rm ance in ex cess of, o r at state d levels be low, targeted p erfo rmance. The Co mmittee may estab lish a thresh old level of achievem ent fo r an y p erfo rmance o b jectiv e below which no amoun t sh all be fu n d ed in respect o f such p erforman ce ob jective. The Co m mittee may, in its discretion , allocate the poo l amo ng d ivisio n s or b u siness units. The auth orized m anag er o f each d ivisio n o r b usin ess u nit, sh all th en (i) mak e in d iv idual d etermin atio n s regarding th e co ntrib u tion of each Participan t in his o r h er respectiv e div ision or b u siness u n it to the achievem ent o f th e overall stated performan ce objectives, an d (ii) rec o mmen d, fo r a p p roval b y the Co m mitte e, th e amou n t pay able , if an y , fro m suc h division or busin ess u nit allo cation to e ach such Particip an t. An y other p ro vision in th e Plan to the contrary n o twith stan din g , (i) the Co m mittee sh all h av e the right, in its so le d iscretio n , to p ay to an y Partic ipan t an an nual incentiv e payment for su ch y ear in an amo unt ba sed on individ ual perfo rmance or any o th er criteria or the occ u rren ce o f any su ch e v ent that th e Committee shall d eem ap p ropria te, and (ii) the Co mmittee may, in its so le d isc retio n , prov ide fo r a min imum in centive pay ment to an y o r all, o r any class of, Particip ants in resp ect of any calendar year, reg ard less o f wh eth er a n y applica b le perfo rm ance objectives are attain ed. (d )Effect o f Termin ation of Emp lo y ment. Except as prov ided in the follo wing sente n ce, u n less th e Committee sh all d etermin e to a u tho rize a p ay ment, no am o u nt sh all be p ay able to a Particip ant a s an an n u al in cen tive award unle ss th e Particip ant is still an em p loy ee o f th e Compan y or o n e o f its Sub sidiaries o n th e d ate payment is made o r such earlier d ate as th e Co mmittee may sp ecify. Un less th e Co mmittee shall o therwise determin e to p ay the Particip ant a greater amoun t, if a Participan t's emp lo y m ent termin ate s d u e to d eath, disability (as determined in accord ance with g enera lly app licab le Company policies) or n o rmal o r early retiremen t und er the term s of the q u alified Protective Life Corpo ratio n Pen sion Plan, su ch Particip ant sh all rec eiv e an annu al incen tiv e payment eq u al to the amo unt the Particip ant wo uld h ave received if th e Participant h ad remain ed emp loyed th ro ugh th e en d o f th e ye ar, mu ltip lied by a fraction, th e n u m erato r of wh ich is the number of d ays that elapse d during the y ear in which th e termina tio n occu rs b efo re and includ ing th e date of the Participant's termin atio n o f em p loy ment an d the d enomin ator of which is 365. 5 . Pay m e nt. Payme n t of any inc entiv e pay m ent d etermined u nder Section 4 sh all be m ade to each Partic ipan t (su b jec t to any v alid d eferral electio n made by th e Particip ant) a s soo n as practicab le after th e Co mmittee certifies that th e applicab le p erfo rman ce o b jectiv es have b een achiev ed (or, in the case of any in cen tive payment p ayab le u n d er th e fin al parag raph of Section 4(c), after the Co mmittee d etermin es th e amount o f any su ch pay ment o r that any co ndition to such paymen t h as b een satisfied ), but in n o event later than the March 15 immed iately fo llo win g the cale n d ar year du rin g wh ich su ch in cen tive paymen t was earned. The p rovision s of th is Section 5 sh all be ad m inistere d so th at th e Plan is n o t a pla n of d eferred co mp ensation as prov ided in Sectio n 409A of the Intern al Reven u e Code o f 1 9 8 6, as amended . 6 . General Pro v isions. (a)Effectiv en ess of the Plan. Th e Plan wa s o rig inally effectiv e with resp ec t to th e ca len d ar y ear begin nin g Jan u ary 1 , 2 0 1 8, an d sh all co n tinue in effect u ntil o therwise amen d ed or termin ated in accord ance with Section 6(b ). (b )Amend ment and Te rmination. Up o n th e reco mmendation of th e Co m mittee, the Bo ard may at any time amen d , su sp end, disco n tinue or termin ate the Plan; pro vid ed that no su ch amend ment, su sp ensio n, discontin u an ce or termination sh all adversely affect th e rig h ts of an y Particip ant with respect to any c alendar y ear that has alread y commenced . (c)Desig n atio n o f Bene ficiary. Each Participan t may design ate a b en eficia ry o r b eneficiaries (which bene ficiary m ay be an en tity o th er than a natu ral person) to receiv e an y pay ments that may be made afte r th e Participant's d eath. Such designation may be chan ge d o r canc eled at an y time with o u t the consen t of any such be n efic iary. Any such designation, ch ange o r cancellation must b e mad e o n a form o r in a manner appro v ed b y or acceptable to the Co mmittee an d shall no t b e effectiv e un til received by the Co mmittee. If no beneficiary h as been n amed, or the d esignated ben eficiary or b eneficiaries sh all h ave pred eceased the Pa rticipan t, th e b eneficiary sh all b e th e Participan t's sp ouse or, if n o spo u se su rviv es th e Participan t, the Particip ant's estate. If a Particip ant d esig nates more than o n e ben eficiary, th e pay m ent shall b e made to su ch ben eficiaries in eq u al shares, u n less the Particip ant has d esig n ated otherwise. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (d )No Rig h t o f Co n tinued Emplo y ment. No th ing in th e Pla n sh all b e con strued as co n ferrin g upon an y Participan t any righ t to co n tinue in th e emplo y ment o f the Co mp any or its Subsid iaries. (e)No Limitatio n to Co rporate Actio n . Nothin g in the Plan shall preclude th e Co mp any from au thorizing the pay ment to the eligible emp loyees of o ther co mp ensatio n, includ ing (without limitatio n ) base salaries, awards und er an y oth er p lan o f th e Co m p any o r its Subsidiaries, a n y oth er incentiv e p aymen ts or b o nuse s (wh ether or n o t based o n th e attainmen t of p erforman ce o bjectiv es) and retentio n o r o ther sp ecial pay m ents. (g )Nonalien atio n of Benefits. Ex cep t as expressly p rovid ed h erein , no Particip ant o r ben eficiary shall h av e th e power or righ t to tran sfer, anticipate, o r othe rwise en cumber th e Participant's interest u n der th e Plan . The Co mpany's ob lig atio n s u nder th e Plan are n o t assignable or tran sferable ex cept to (i) a corpo ratio n wh ich a cquires all or substantially all o f th e Co m p any 's assets, or (ii) any corp o ratio n in to which the Compan y m ay be merged o r c o n so lidated . The p rovisio n s o f th e Plan shall inu re to th e ben efit o f each Particip ant and th e Pa rticipan t's b en eficia ries, he irs, executo rs, ad ministrato rs o r su cc esso rs in in tere st. (h )Withho lding. Any amo u n t payab le to a Particip ant o r a ben eficiary und er th e Plan shall b e subje ct to an y applicab le federal, state and local inco me and emp lo y m ent taxes an d an y o ther amo unts th at th e Compan y o r a Subsidiary is req u ired b y law to d educt an d with hold from su ch p ay ment. (i)Severab ility. If any pro vision of the Plan is held unenforceable, th e remain d er o f the Plan sh all continu e in fu ll force and effect without reg ard to such unen forceable pro vision and shall b e applied as thoug h the unen forceable pro vision were n o t contained in the Plan . (j)Go v ern ing La w. The Plan shall be con strued in acco rd an ce with an d gov erned by the laws of the State o f Delaware, with out referen ce to the p rin cip les o f conflict of laws. (k )Headings. Headin g s are inserted in th e Plan for con v enien ce of referen ce only an d are to b e ignored in the construction o f the p rovision s of th e Plan. (sig n ature p age fo llows) IN WITNESS WHEREOF, Protective Life Co rp oration h as execu ted this document as o f __ day o f _________________, 2 0 1 8. PROTECTIVE LIFE CORPORATION Rich ard J. Bielen Presid ent and Chie f Executiv e Offic er 1 o f 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2 0 1 8 Long -Term Incentive Plan Awards Acceptance For m As of March 15, 2 0 1 8, y o u were g ra n ted lon g -term incen tiv e award s un d er the Protectiv e Life Co rp oration Lo ng-Term Incentiv e Plan (the “Pla n ”). In co n jun ction with these awa rd s, y ou h ave been p rovided with Awa rd Letters and th e applicab le pro vision d ocu m ents (“Provisio n s”). The Award Letters, Provisio n s, and th e Plan g o vern y o ur respectiv e 2 018 Awards. Th e 2 0 18 Awards c o n tain terms and con d itio n s re g ard ing the vestin g an d pay m ent of the Award s, termin atio n o f emp lo y m ent, tax withho lding, confiden tiality, non -so licitation of Co m p any emp loy ee s an d custo m ers, regulatory comp lian ce, a n d o ther importan t matters. If you ag ree to a n d accep t th e terms of th e 2018 Awards, please sig n wh ere indicated b elow b y [Da te], 2018 . [Employee’s e lectronic sig n atu re] [Rich’s electronic sig n ature] Rich Bielen Preside n t and Ch ief Ex ecu tive Officer o f Protectiv e Life Corp o ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 PARENT-BASED AWARD LETTER The Compe n sation an d Man agement Su ccessio n Co mmittee o f the Compan y 's Bo ard o f Directo rs h as awarded y o u: Paren t-Based Award Valu ed a t _______ Date o f Gran t: March 1 5 , 201 8 This Paren t-Based Award was awarded pu rsu an t to the Protective Life Co rporatio n Lo ng-Term In cen tive Plan (th e “Plan”), and is subject to the terms an d co n d itio n s c o n tain ed in the 2 018 Parent-Based Award Provision s (“Pro visions”), as set fo rth in Ap p end ix A to th is Award Letter, and the Plan . The Plan and the Pro visions co n tain terms and co n ditions reg ard ing the v esting o f this Parent-Based Awa rd , termin atio n of e mploymen t, tax withh o ld ing, n o n -solicita tio n o f Co mp any employees and c u stome rs, reg u lato ry complian ce and oth er matters, an d I enco urag e you to read the Pro v isions carefu lly. Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 20 1 8 PARENT-BASED AWARD PROVISIONS As of March 15, 2 0 18, the Bo ard of Directo rs o f Pro tectiv e Life Corp o ratio n (the “Co mp any”) g ra n ted y o u a cash denomin ated award (“Paren t-Based Award ”) und er th e Protective Life Co rpo ratio n Lon g -Te rm In cen tive Plan (the “Plan”) th at, su bject to the satisfaction o f th e applicab le terms an d co n d itio n s related to such Parent-Based Award , in cluding, but not limite d to , th e satisfactio n of the ap plicable serv ice vestin g condition s sp ecified b elow, will en title you to receiv e a cash amount d etermin ed in the ma n n er described b elo w. Yo u ha v e also receiv ed a Parent-Based Award Le tter (“Award Letter”), which together with these 201 8 Parent-Based Award Provision s (“Provisio n s”) an d the Plan , con stitutes your fu ll award . 1 . Awa rd. (a)General Pro v isions. The In itial Value and th e Date of Grant o f the Parent-Based Award are set forth in y o u r Award Letter. (b )Defin ition s. Capitalized terms th at are u sed b u t n o t defined h erein sh all ha v e the mean in g ascrib ed to th em in the Plan . 2 . Vesting a nd Pa y ment o f Pa rent-Ba sed Award. (a)General Vestin g Rule . Un less v ested o n an earlier d ate as pro v id ed in these Pro visions o r th e Plan , y our Parent-Based Awa rd will v est o n Decemb er 31 , 202 0 (c o llectively, the “Regular Vesting Sched u le”), sub ject to y o u r co n tinued employmen t throu g h su ch d ate . (b )Payment o f Parent-Based Award. (i) Reg u lar Vesting . If y our Pa rent-Base d Award b eco mes vested in accord ance with Section 2(a), it will be settled in ca sh following (but not later th an the March 15 immediately fo llowin g) the date as o f wh ich such Paren t-Based Awa rd becomes ve sted . Su ch amou n t pay able will b e calculated in acco rdanc e with Section 2(b)(iii) b elo w. (ii) Early Vesting . An y Paren t-Based Award that b ecomes v ested u nder Sectio n 4 by reason o f y o u r termination of emp lo y m ent p rior to the d ate su ch Paren t-Based Award wou ld oth erwise hav e become vested p u rsuan t to Sectio n 2 (a) (“Early Vestin g ”) sh all n o netheless be se ttled in ca sh follo wing (bu t n o t later than the March 15 immed iately fo llo win g ) the date as of which suc h Pare n t- Based Award wo u ld h av e b ec o me vested (b u t for su ch Early Vestin g ) if y o u had remained in th e Compan y's emp loymen t th ro ugh the applica b le date sp ecified in Section 2(a). Su ch amount p ayable will be calcu lated in acc o rdan ce with Sectio n 2 (b)(iii) below. (iii) Th e aggregate amo u n t p ay able in re sp ect o f an y v ested Parent-Based Award under Section 2 (b)(i) o r (ii) sh all b e equal to the percentage of su ch Parent-Based Award th at h as b eco me v ested multiplied by th e pro d uct o f th e In itial Value and Parent Stock Percen tag e. 3 .Cha ng e in Co ntro l. (i)In the ev en t o f a Co mp an y Ch ang e in Control, a ll of your Paren t-Ba sed Award will immed iately v est an d sh all be settled in cash, b ase d on the Paren t Sto ck Percentag e, bu t th e Fin al Paren t Stoc k Value sh all be determin ed based on the av erage o f the closin g p rices of th e Parent co mmo n sto ck on all trad ing day s du ring th e 30-ca len d ar day p eriod en d ed on th e d ate o n which th e Comp an y Chan ge in Co ntrol o ccu rs. Payment of th e amo unt so d etermine d will be paid within 60 day s follo win g th e d ate o n wh ich the Co mp any Ch ang e in Co n tro l occurs. (ii)In the even t of a Parent Change in Co n tro l th at re su lts in th e co mmon sto ck of Parent n o lon g er b ein g activ ely trad ed o n a pu b lic sec u rities exc h ang e, all of y our Parent-Base d Award s shall be co n verted to Restricted Units as of th e d ate o f the Parent Ch ang e in Co n tro l. Su ch conv ersio n to Restricted Units shall be effected in th e man ner describ ed b elow. First, the d o llar v alue o f your Parent-Based Awards shall b e determin ed as o f th e Paren t Chan g e in Co n tro l, with the Fin al Parent Sto ck Value u sed to d etermine the Parent Stock Percentage d etermined u sing the averag e of th e closing pric es o f th e Pare n t co m mon stock o n all trad in g day s d urin g th e 3 0 -c alendar day perio d en d ed o n th e date on wh ich th e Parent Chan ge in Control occurs. Th e resultin g do llar v alu e of the Parent-Based Award s sh all th en b e co n v erted into Restricted Units by div id ing such dollar value by th e PL Tangible Bo o k Valu e Per Un it determin ed as o f th e mo st recently rep o rted q uarterly balance sh eet p reced ing th e Parent Ch ange in Co ntrol. No twith stan din g th e foregoing, all terms an d p rovisio n s o f the Parent-Based Award Ag reement sh all o therwise be maintained, includ ing , b ut not lim ited to , th e v estin g sch edu le an d p ay men t timin g p rovisions of su ch ag reemen t. 4 .Term ina tio n o f Employm ent. (a)Death, Disability or No rmal Retirement. If you r em p loy men t is termin ated by death , Disability or Normal Retirement, y o u r Parent-Based Award will im mediately v est in fu ll. (b )Early Retiremen t. Un less th e Committee determin es to prov ide fo r treatment that is mo re fav orable to you on su ch term s and conditions as the Co mmittee may d etermin e, if your emplo y ment with the Compan y an d its Sub sidiarie s term inates due to Early Retire men t, a pro-ra ted p o rtion of your Pare n t-Based Award will immediately v est based on a fractio n , th e numerato r o f wh ich is the n u mb er o f complete and partial calend ar months be tween Jan u ary 1 , 2 0 1 8 an d y o ur Early Retireme n t date, and th e denomin ator of wh ich is 3 6 . Any portio n o f y o ur Parent-Based Award th at d o es n ot vest upon you r Early Retirement p u rsuan t to the prec edin g sentence will be fo rfeited. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (c)Sp ecial Termin atio n . If y our emp lo y m ent is te rm inated by reaso n of (1 ) th e d ivestitu re o f a b u siness segmen t o r a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Parent-Based Award sh all b e at th e d iscretio n of th e Comm ittee. An y po rtion o f y o u r Paren t-Based Award that th e Comm ittee d etermin es is not eligible for pa y ment un d er th is Section 4(c) sh all be fo rfeited as of th e d ate you r em p loy ment termina tes. (d )Oth er Terminatio n. Unless th e Co m mitte e determin es to p rov ide for treatment th at is more fav orab le to you o n su ch term s an d cond itio n s as the Co m mittee m ay determine, if y our emp loymen t is terminated for a n y reaso n n ot set forth in Sections 4 (a), (b ) or (c) p rio r to th e ap plicable vesting dates specified in Section 2(a), the u n v ested po rtion of yo u r Parent-Based Award will b e fo rfeite d . (e)Termin atio n for Cau se . Unless the Co mmittee d etermin es to prov ide fo r treatm ent tha t is more favo rable to yo u on su ch term s and co n d itio n s as th e Co mmittee may determin e, if y o u r emp lo y ment is termin ated for Cau se p rio r to the date you r Pare n t- Based Award is paid pu rsu ant to Section 2(b ), all o f the vested and unvested p o rtion s of your Paren t-Based Award will b e forfeited. 5 . Federal Income Tax Consequences. (a)General. Th e fo llowin g descriptio n of the fed eral in come tax conseq u en ces o f the Parent-Based Award is b ase d on currently app licab le pro v isio ns of the Cod e, and is on ly a gen eral su m mary. The su m mary do es not discuss state and local tax laws, wh ich may d iffer fro m th e fe d eral tax law, o r federal estate, g ift and e mploymen t tax laws. Yo u are u rg ed to consult with you r own tax adviso r reg ard ing th e app lication of th e tax laws to y o u r p articula r situ ation . (b )Grant of Pare n t-Based Award . Th is Parent-Based Award gran t will n o t subject you to federal inco me tax. (c)Paymen t o f Paren t-Based Award . You will recognize ord inary income fo r federal inco me ta x purp o ses o n th e p aymen t da te. Th e amoun t o f income recogn ized will b e equal to the ag greg ate amo u n t of cash p aid . Notwithstand ing th e fo re g o in g , if y o u hav e mad e an effective e lection u n der th e Co m p any 's Deferred Co mpensatio n Plan fo r Officers (“Defe rred Compen satio n Plan”), the tax ation of such d eferred amo unt will b e han dled as d iscussed in Sec tio n 5 (d). (d)Deferred Co mp ensatio n Plan. Yo u may elect to defer p ay ment in respect of y o ur v ested Paren t-Based Award, and the reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u mak e effectiv e d eferral electio n s, y o u will recognize ord in ary in come when the amoun t d erived fro m th e d eferred p o rtion of y our Parent-Based Award p aymen t is paid fro m th e Deferred Compen satio n Plan , in an amo unt equal to th e amou n t of cash p aid . Yo u will be pro v id ed with mo re in forma tio n abou t this d eferral opp o rtu n ity and th e De ferred Co mpensa tio n Plan . (e)ERISA. Neith er th e Plan n or this Parent-Based Award is q u alified under Sectio n 401(a) of the Co d e an d neithe r is su b ject to any of th e prov isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 6 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax withho lding oblig atio n s attributable to your Parent-Based Award, wh ether u nder th is Plan or u n de r the Deferred Co m p ensation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Parent-Based Award. 7 .Non-tra nsferability o f Parent-Based Award. Yo ur Paren t-Ba sed Award may not be assign ed, p ledged, o r oth erwise tran sferre d , ex ce p t upon you r d ea th by the laws of in testacy or descen t a n d d istrib u tion. 8 .Beneficia ry Desig na tio ns. Yo u may nam e a b eneficiary o r ben eficiaries (who must b e memb ers of y o ur family a n d wh o may b e named contin g ently o r successively ) with respect to y our rig h ts un d er the Plan and this Parent-Based Award (in clu d in g th e righ t to receive any p aymen t in resp ect o f y our Paren t-Based Award a fter you r d eath ) by submittin g a written ben eficiary designation in a form acceptab le to the Comp an y. Any such d esignation will be effectiv e only when filed with th e Co mp an y 's Ch ief Finan cial Officer and Controller (o r such othe r perso n as th e Co mp an y may d esig nate) before you r date of d eath, an d will (u n less spe cifically set fo rth therein) revoke all prior desig n atio n s. If th ere is no beneficiary design ation in effect on the date of your d eath, y our beneficiary will be y o u r su rviv in g spo u se o r, if y o u h ave n o su rv iv ing spouse, your estate. 9 .Adm inistra tio n of the Plan. The Co m mittee h as fu ll p o wer to ad minister and in terpret the Plan an d these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 10.Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, termina tio n or d isco n tinuance of these Pro v isions or the Plan will un fav o rab ly affect a n y Parent-Based Award p re v iou sly g ran ted . 11.Effect on Employm ent a nd Other Benefits. Receip t o f a Paren t-Based Award un d er th e Plan do es n o t g iv e any Particip ant any righ t to receiv e awards in the future or to con tin ue in th e emp lo y of th e Co mp an y a n d its su b sidiaries, and Parent-Based Awa rd recipients are subject to d isciplin e and disch arg e in th e sam e man n er as an y othe r employee. Subje ct to the terms of the applica b le plan s, inco me recognized as a result o f any pa y ment in respect of Paren t-Based Awards will not be includ ed in th e formula fo r calcu lating ben efits un d er th e Company's Pension Plan, 40 1 (k), and disability pla n s. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 12.Co o peration in Litiga tio n. By acceptin g a Pa rent-Base d Award su bject to the Plan , yo u agree th at afte r y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . 13.No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Co m p a n y. Acco rd in g ly, b y ac cep ting a Parent-Based Award subject to th e Plan and th ese Provision s, you agree th at for o n e year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 14.No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y acceptin g a Paren t-Based Award su bject to th e Plan and th ese prov isio n s, you agree th at, during th e Restricted Perio d, you will no t — wh eth er on y o ur o wn b ehalf o r o n beha lf o f or in co n ju n ctio n with an y perso n o r en tity — directly o r indire ctly so licit or accep t any b u siness o f the type co n ducted by the Company as o f yo u r termin atio n date from an y person or entity that was eith er (1) a cu stomer, d istrib u to r, or ag ent o f the Co mp any as o f that date or (2) a pro sp ective cu stomer, distribu tor, or agent co ntacted , called u p o n, or serviced by th e Comp an y during th e twe lve month s before yo u r termina tio n date, or ind u ce, p romote, facilitate, or oth erwise co n tribute to the solicitatio n of su ch cu stomers, distribu tors, or a g ents or p rospectiv e custo m ers, distributors, or agents. You fu rth er agree that, d u rin g the Restric ted Perio d , y ou will n ot co mmunicate fo r b u siness purp o ses with an y person o r entity that was either (1 ) a cu stomer, d istrib u to r, or ag en t o f the Compan y as o f y o u r termin ation date o r (2) a pro sp ectiv e cu stomer, d istrib u tor, or ag en t con tacted, called u p o n, o r serviced b y the Compan y d u rin g the twelv e mo n ths before y o ur termin atio n d ate. This Sec tio n 1 4 sh all not apply if you wo rked in, or were a resid ent o f, th e state o f Califo rnia when y o u r emplo yment terminated. 15.Co nfidential Info rm a tio n. The Compan y has expen ded an d co n tinues to exp end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m p a n y. A c c o rd in g ly, by accep ting a Pa rent-Base d Award su b ject to th e Plan and these pro v isions, y o u ag ree to perm anen tly maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in clu d es, but is n o t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, a lgorith ms, tech nical d ata, research p lan s, systems, etc.), prod u cts (in cludin g with o u t lim itation , p ro duct d esig n , p ricin g , and d evelop ment info rmatio n ), transactions o r potential transaction s, serv ices, trad e se crets, know-h ow, fo rmu las, pro cesses, ideas, invention s (whether o r not patentable), train ing materials, p erso n n el information, attorney-clie n t commu nicatio ns, an d th ird -pa rty re latio nsh ip s. The above list is not exh austive and Co n fid en tial In formation in cludes an y o th er in formation th at sho u ld be reaso nab ly u n d erstood as th e confiden tial or p roprietary in formatio n of the Co mpany. Confidential In forma tio n in cludes n o t o n ly info rm ation d isclosed b y th e Company to you, b u t also information dev elo ped or learned by you during th e course o f y o u r emp lo y m ent with the Compa n y . Info rmatio n is no t con fid ential, h o we v er, if it is availab le in the p u blic do main th roug h n o fault of your own . 16.Reco v ery o f Dama g es by the Co mpa ny. Yo u ag ree th at if yo u we re to v iolate any o f Sectio ns 12, 13 , 1 4 , and 1 5 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to recover liquid ate d damages fro m you e q u al to the amo unt of in co me that y ou realize u n der this Paren t-Based Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 2 , 13, 14, o r 1 5 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 2 , 13, 1 4 , or 15. 17.Parent-Based Awa rd Subject to the Plan. Th ese Pro visions are su bject to the Plan as appro v ed b y the Bo ard . The term s an d pro v isions o f the Plan as it may b e amen d ed fro m time to time are h ereby in corp o rated h erein by reference. In the ev ent o f a conflict b etween an y term or p rovision co ntain ed h erein and a term or pro v ision of th e Plan , th e ap p licable terms and pro visions of the Plan will govern an d prevail. 18.Acceptance of Awar d. If yo u wish to accep t your Paren t-Based Award , you must ex ecute a 201 8 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 19.Co m munica tio ns with Go v ernment Ag encies. Noth in g in th ese Prov isio n s, inclu d ing , with o ut limita tio n, Se ction 1 2 , 1 5 or 1 6 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Qu estion s regardin g a Paren t-Based Award su b ject to the Plan a n d req u ests fo r ad d itio n al in fo rmatio n abo u t th ese Provisio n s, the Plan or the Comm ittee shou ld be directed to Rachel Go o d so n, Protective Life Corp o ratio n , P.O. Box 260 6 , Birmingham , Alab ama 3 5 2 02 (teleph o n e (20 5 ) 2 6 8 -57 2 4 , e-mail Rachel.Good so n @Protective.com). Th e Plan , these Pro v isions and yo u r Award Letter contain the formal terms and co n d itio n s of y o ur Award, an d yo u should retain th em fo r fu ture referen ce. You m ay o b tain a copy of the Plan b y written o r ema il request to Rach el Go o dson. Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 PERFORMANCE UNITS AWARD LETTER The Compe n sation an d Man agement Su ccessio n Co mmittee o f the Compan y 's Bo ard o f Directo rs h as awarded y o u: _______ Performance Un its Award Perio d: Ja n u ary 1, 2 0 18 – December 3 1 , 2020 Gran t Da te: March 15, 2 0 18 These Pe rforman ce Un its were award ed pursuant to the Pro tec tiv e Life Corp o ratio n Lon g -Term In cen tive Plan (the “Plan”), a n d are subje ct to the terms and co n d itio ns contained in the 20 1 8 Perfo rmance Units Award Pro v isions (“Pro visions”), as set fo rth in Ap p en d ix A to th is Award Letter, and th e Plan. The Plan and th e Prov isio n s contain terms an d con d itio n s regardin g the p ayme n t of these Perfo rmance Units, termin atio n of employmen t, tax withholdin g, non -so licitation of Compan y emp lo y ees an d cu sto mers, regu latory comp lian ce and o th er matters, an d I enc o u rag e y ou to read th e Pro v isio ns ca refu lly . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2018 PERFORMANCE UNITS PROVISIONS As o f March 15 , 2 0 1 8, th e Bo ard of Direc tors o f Pro tectiv e Life Corp o ratio n (the “Compa n y ”) g ran ted yo u performan ce units (“Perfo rmance Un its”) under the Pro tective Life Co rp oration Lo n g -Term In cen tive Plan (th e “Plan ”) that, sub ject to the satisfactio n o f the applica b le term s an d con d itio n s related to su ch Perfo rmance Units, inclu d ing , but n ot limited to , th e satisfaction of th e ap plicable p erfo rmance vestin g co n d itio n s specified belo w, will en title you to receive a cash am o u nt b ased on the PL Tangible Bo o k Valu e of th e Compa n y. You hav e a lso re ce ived a Performan ce Un it Award Letter (“Award Letter”), wh ich tog eth er with th ese 2 0 1 8 Perfo rman ce Un its Pro visions (“Provision s”) and th e Plan, constitutes y our “Perfo rmance Unit Award.” 1 .Genera l Pro visions. The nu mber o f Perfo rm ance Un its tha t y o u h ave been awarded, th e Award Perio d of th e Perfo rmance Units, and th e Date of Gran t of th e Pe rforman ce Un its are set fo rth in y our Award Letter. 2 .Ea rn-Out of Performa nce Units. (a)General. Whether y o u will rece ive an y cash pay m ent in respect of your Performance Un it Award will be determin ed b ase d u p o n the exten t to wh ich the applicab le p erfo rm ance objectives have bee n satisfied an d , e x cep t as otherwise p rovided in Se ction 5 belo w, yo u r contin u ed employme n t u ntil the date the Perfo rmance Units are p aid. Your right to ve st in, and th e amount p ayable in respect of, o ne -h alf (1/2 ) o f yo u r Perfo rmance Units is d epen de n t o n the Co mp any's Cumulativ e After-tax Adju sted Op erating Inco me d u rin g th e Award Perio d, and o n Ave rage Retu rn on Eq u ity over the Award Period with reg ard to the rem ain ing o ne-h alf (1 /2) of the Perfo rmance Units, in each c ase a s spe cified b elow. (b)Cu mulativ e After-tax Ad ju sted Opera tin g In come . Paymen t with respect to o ne-h alf of y o ur Perfo rm ance Un its will b e based on th e Co mp any 's Cu mu lative After-tax Adjusted Operatin g Income during the Award Perio d , as d etermine d in acco rdan ce with the fo llowin g sched u le: Cum ula tiv e After-ta x Adjusted Operating Incom e (d o lla rs in millio n s) Percentage o f Perfo rm a nce Units Earned Le ss th an $[____]0% $[____]100% $[____] or more 200% There will b e straig h t-lin e in terp olatio n betwee n Cu mu lative After-tax Ad justed Operatin g In come between $[________] and $[________] to de term ine the exact percentage to be p aid between 0 % an d 1 0 0%; an d b etween $[________] and $[________] to d etermin e th e ex act p ercen tage to b e p aid b etwe en 1 00% an d 2 0 0%. (c ) Avera g e Return on Eq u ity . Paymen t with respect to o ne -h alf of y our Perfo rmance Un its will b e b ased o n th e Co mp an y 's Av erage Retu rn on Eq u ity d uring th e Award Perio d, as determin ed in acco rdance with the fo llowin g sched ule: Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Average Return o n Equity Percenta ge of Performance Units Ea rned Less than [__]%0 % [__]%1 0 0% [__]% o r mo re 2 0 0% There will b e straig ht-line in terpo lation b etween Averag e Re turn on Equity betwee n [__]% an d [__]% to d etermin e th e exac t p ercen tage to be p aid b etween 0% an d 1 00%; a n d b etwe en [__]% an d [__]% to determine the exac t pe rcen tage to be p aid b etween 100% and 2 0 0 %. 3 . Definitions. Cap italized terms th at are u sed but n o t defin ed herein shall h ave the mean ing ascribed to th em in the Plan . For p u rposes of th ese Pro visions, the fo llo win g term s sha ll have th e follo win g me anin gs: “Av erag e Return on Eq u ity” shall mean annualiz ed Cumulative After-tax Ad justed Operatin g In come during the Award Period d ivided b y the averag e o f th e GAAP Bo ok Valu e of Equity, ex cluding accu mu lated o ther co mp rehensiv e in come as o f the end of each fiscal q u arter du rin g the Award Period (o r, if ap plicable, the n u m b er of quarters co mple ted throu g h the date o f a Change in Control) and exclud ing the cu m u lative after-tax adju stmen ts that are ex clu ded fro m Cumu lative After-tax Adjusted Op erating Inco m e du rin g th e Award Perio d . “Cu mula tiv e After-tax Ad ju ste d Op erating Income” is d efined as th e Compan y's total income e arned after tax es during th e Awa rd Perio d , ex cluding the imp act o f realized g ain s o r lo sses on investme n ts an d deriv atives, any imp airmen t lo sses record ed o n g o o dwill an d other in tangible assets crea ted by the Merger, an y ex pen se b o rne by the Co mp any that was the resu lt of actions o r requ irem ents of th e Compan y's Paren t an d were not includ ed in th e b u sin ess plan , and unplan n ed ch ang es to income resu lting fro m n ew acco u n ting pron o u ncemen ts. Any lo st in come due to d iv idends p aid in e x cess of plann ed amoun ts will be ad de d back to d etermine after tax opera tin g income. 4.Time a nd Form of Pa y ment. As soon as practicab le, b u t not later than 60 day s, after the end of the Award Pe riod , the Committee will de term ine the exten t to wh ich an y Perfo rmance Unit Award has b een earne d . Except as oth erwise set fo rth h erein , the valu e of each earned Performan ce Unit shall equal th e PL Tan gib le Book Value Per Unit d ete rm ined as o f the most recently rep orted q u arterly b alance sheet d ate last preceding th e date o f p ay ment and sh all b e pa id not later th an th e March 1 5 follo wing the end of the Award Perio d . 5.Term ina tio n o f Employm ent. (a)Death, Disability or Retirement. Un less th e Co mmittee d etermin es to pro vid e fo r treatment th at is mo re favo rable to y o u on su ch terms an d co nditions as th e Committee may d ete rm ine, if your employmen t is terminated by death , Disability o r b y Ea rly Retiremen t or Normal Retirement, yo u (o r, as app licab le, yo u r leg al rep resen tative o r b eneficiary ) will rec eiv e a paymen t with resp ect to a pro -ra ta p o rtion o f you r Performan ce Un its, d etermine d b ased on a fractio n , the n u m erato r o f whic h is yo u r perio d o f emp loy men t d u rin g the Award Perio d and th e d eno min ator of wh ich is the total number o f days in the Award Period. The amo unt in respect o f yo u r p ro-rated Performan ce Un its will b e de term ined b y applyin g the perfo rm ance achieved thro u g h the end of th e Award Period (or th e d ate o f a Ch an g e in Con tro l, if applicable) again st th e sch edu les set fo rth in Sectio n s 2 (b) and 2(c) above. The remain ing p o rtion o f y our Perfo rmance Units (i.e., the exc ess ov er th e p ro-rated portio n) sh all be fo rfeited as of th e date yo u r emp lo y m ent te rminates. Page 2 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (b )Special Termination . If you r em p loy ment is termin ated by reason of (1) th e d iv estitu re of a bu siness seg men t or a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Performance Unit Award shall b e at the d iscretio n of the Committee. An y p ortio n o f you r Performa n ce Un its which the Committee d etermin es is not eligible for pa y ment un d er th is Section 5(b ) shall b e forfeited as o f the d ate y our e mployme n t termin ates. (c)Other Term ination. Un less the Committee determines to pro v ide for treatmen t th at is mo re favorable to y o u o n su ch term s and conditions as the Co mmittee m ay determin e, if y our emp lo y m ent is terminated for any reaso n not set forth in Sec tio ns 5(a) or (b ), an y u nvested p o rtion of your Performance Un it Award will b e forfeited. (d )Termination for Ca u se . Unless th e Co m mittee de term ines to pro v id e for treatm ent that is mo re favorable to y ou on su ch terms and co nditions as th e Co mmittee may d eterm ine, if y our emp loymen t is te rminated for Cause p rio r to th e date y our Perfo rmance Units are p aid p ursuan t to Sectio n 4 , all of you r v ested and un v ested Pe rforman ce Un its will b e forfeited. 6 . Co mpany Change in Co ntro l. In the even t of a Comp an y Chan g e in Control, the Award Period shall b e deeme d to ha v e ended o n the d ate o f the Compa n y Chan g e in Co ntrol an d y ou sh all be d eemed to hav e earn ed th e g reater of (i) 1 00% of the Perfo rmance Un its, or (ii) the p ercen tag e o f su ch Perfo rmance Un its that wo u ld d erive from ap ply in g the schedule in Sectio n 2(b) to Cumulative After-tax Ad ju sted Operating In co me throu g h the date of th e Compan y Chan ge in Co n tro l (in stead of over the Awa rd Period). Any earned Performance Un its shall be paid shall be paid with in 4 5 d ays fo llowing the date o n wh ich the Co mpany Change in Control o ccurs, b ased o n th e Co mp any Ch an g e in Con tro l Bo o k Valu e Per Unit, if availa b le within 1 0 day s before su ch p ay ment date; o r, if th e Co mpany Ch ange in Co n tro l Bo o k Valu e Per Un it is not then availa b le, th en 90% o f the v alue of each Performan ce Un it, b ase d on the PL Tangible Book Valu e Per Un it determin ed as of the mo st recently rep orted q uarterly balan ce sheet precedin g such Compa n y Ch ange in Co n tro l, shall be paid within 45 d ays o f th e Compan y Ch ang e in Co ntrol, fo llowed by an additional p ay men t in respect of each such Perfo rm ance Un it within 75 day s of su ch Co mp any Change in Control eq u al to the excess, if an y, of (i) the Chan g e in Con trol Bo ok Valu e Per Un it ov er (ii) 9 0 % o f th e PL Tangible Book Valu e Per Un it d etermin ed as o f th e mo st recently repo rted q u arterly balance sh eet precedin g su ch Company Change in Control. 7 . Federal Income Tax Consequences. (a)Gen eral. The fo llo win g d escrip tio n o f th e fed eral inc o me tax consequen ces o f the Perfo rmance Units is based on currently ap p licable p rovision s o f the Co d e and reg ulation s, and is on ly a g eneral su mmary. The summ ary d oes not discuss sta te a n d local tax laws, wh ich m ay differ fro m the federa l tax law, or federal estate, gift and emp lo y ment tax laws. You are u rge d to co nsult with y o u r o wn tax advisor reg ard ing th e ap p lication of th e tax laws to y o ur p articu lar situ ation . (b )Gran t of Performan ce Un its. Th is gran t of Performan ce Un its will n ot cause y o u to b e subject to federal inco me tax. (c)Payment o f Perfo rmance Units. Yo u will recogn ize o rdina ry inco me for fed eral in co me ta x pu rp ose s on th e p ay men t d ate. Th e amo unt of inco me reco g n ized will b e equal to the agg regate amo u n t o f cash paid . Notwithstanding the foreg oin g , if y o u have mad e a n effectiv e election u nder the Comp an y 's Deferred Co m p ensation Plan for Officers (“Deferred Compe n sation Plan ”), the tax ation o f such d eferred amoun t will be h andled as discussed in Section 7(d). Page 3 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (d )Deferred Compensatio n Plan . Yo u may elect to d efer p ay men t in re sp ect o f you r earn ed Perfo rmance Un its, and th e reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u make e ffective de ferral elections, you will reco g nize o rdina ry in come wh en the deferred p o rtion o f th e am o u nt p ay able o n y our Perfo rmance Units is paid from th e Deferred Compen satio n Pla n , in an amo u nt eq ual to th e amoun t o f cash p aid . You will be pro v ided with more info rm ation ab o u t th is d eferral oppo rtu n ity, and the Deferred Co mp ensation Plan, before y o ur Perfo rmance Units be come pay ab le. (e)ERISA. Neith er the Plan nor this Performance Un it Award is qualified und er Section 40 1 (a) of the Co d e an d n either is su b ject to any of th e pro v isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 8 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax with holdin g o b ligations attribu tab le to yo u r Perfo rman ce Un its, whether under th is Plan or un d er th e Deferre d Comp en sation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Perfo rmance Units. 9.Non-tra nsferability o f Performa nce Units. Yo u r Performan ce Units may n o t be assig n ed , pled g ed, or otherwise tran sferre d , ex ce p t upon you r d ea th by the laws of in testacy or descen t a n d d istrib u tion. 10.Beneficia ry Designations. You may name a b en eficiary o r b eneficiaries (wh o must b e memb ers of you r family a n d wh o m ay be n ame d contin g en tly o r suc ce ssive ly) with resp ec t to y our rights u nder th e Plan and th is Perfo rmance Unit Award (inclu d in g the right to receive payment in resp ect o f y our Performan ce Un its after your death) by su bmitting a written b eneficiary d esig n atio n in a fo rm a cceptable to the Co mpany. An y such design ation will b e effectiv e o n ly wh en filed with the Co mpany's Ch ief Financial Officer o r Co ntroller (o r such o ther p erso n as th e Compan y may desig n ate) before yo u r d ate o f d eath, and will (u n less sp ec ifically set fo rth therein) rev o ke all p rio r desig n atio n s. If th ere is n o beneficiary designation in effect o n the date o f y o u r d eath , y our b eneficiary will b e your surv iving sp o use or, if you hav e no su rvivin g spo u se, yo u r estate. 11.Adm inistratio n o f the Pla n. The Co mmittee has full p o wer to admin ister and in terpret the Plan and these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 12.Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, termin atio n or disco n tinuan ce of the se Prov isio n s o r th e Plan will u nfav orab ly affect an y Performanc e Unit Award p rev iously g ra n ted . 13.Effect on Em plo y ment a nd Othe r Benefits. Receipt o f a Perfo rm ance Unit Award und er th e Plan d oe s no t giv e any Particip ant any right to receive awards in th e future o r to co n tin ue in the emplo y o f the Compan y and its su b sidiaries, an d Perfo rmance Un it Award re cip ients are su bject to discip line and d isch arg e in th e sam e man n er as an y oth er emp lo y ee. Su bject to th e term s o f th e applica b le p lan , in come reco g n ize d as a result of an y p aymen t in resp ect of Performanc e Un its will not b e in clu ded in th e formula for ca lcu lating ben efits und er th e Compan y's Pensio n Plan, 401 (k), and d isability plan s. Page 4 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 14.Co o peration in Litig a tio n. By accep ting a Perfo rman ce Un it Award su b ject to the Plan, y o u ag ree that after y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . 15.No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Compa n y . Accord ing ly, by accep tin g a Perfo rmance Un it Award sub ject to the Plan an d these Pro v isions, y o u ag ree th at for o n e year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 16.No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y accep ting a Pe rforman ce Un it Award su b ject to th e Plan and th ese p rovisio n s, yo u agree that, during the Restricted Period, you will n o t — wh eth er on you r o wn b ehalf or on beh alf o f or in co nju nc tio n with any person or en tity — d irectly o r indirectly solicit o r accep t any b usin ess o f the ty p e co n d uc ted by th e Compan y as o f yo u r term ination d ate fro m any person o r entity that wa s eith er (1) a custo m er, distributo r, o r ag ent o f the Compan y as o f th at d ate or (2 ) a p rospectiv e cu stomer, distribu tor, or agen t co n tacted , called u p o n, o r serviced b y the Comp an y d u rin g the twe lve months b efo re yo u r termination date, or in duce, p romo te, facilitate, o r o th erwise contrib ute to the so licitation o f su ch cu sto mers, distribu tors, or ag ents o r pro sp ectiv e custo mers, d istrib u tors, or ag en ts. Yo u further agree th at, d u rin g the Restricted Period, y o u will n o t c o mmunicate for b u siness pu rpose s with any perso n or en tity that wa s eithe r (1 ) a custo m er, distributor, or agen t of the Compan y as of y o u r termin atio n d ate o r (2) a p rospectiv e c u stome r, d istrib u to r, o r a g ent contacted, called up o n , o r serviced by th e Co m p any d u rin g the twelv e months b efo re y o u r termin atio n d ate. Th is Sectio n 16 sh all n o t apply if you work ed in , or were a residen t of, the state of Californ ia wh en your em p loy ment termin ate d . 17.Co nfidential Info rm a tio n. The Compan y has exp ended an d co ntinu es to ex p end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m pan y. Acco rdingly, by acceptin g a Performance Un it Award su b jec t to the Plan and these p rovisio n s, y ou agree to perman ently maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in cludes, but is no t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, alg o rithms, tech nical data, re search plans, Page 5 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. sy stems, etc.), pro d u cts (includ ing without limitation, pro d u ct design , p ricin g , and d evelo p m ent in formatio n), tran sac tio ns or p otential tran sactions, services, trade secrets, k n o w-ho w, formu las, p rocesses, ideas, inven tions (whether o r n o t patentable), train ing mate rials, p erson n el info rmatio n , a tto rney -client communications, and th ird -party relatio n sh ip s. Th e abov e list is n o t ex h austiv e and Con fid ential In formation includ es an y other in formation that sho u ld b e reaso nab ly u nderstoo d a s the co n fid en tial or p roprietary information o f the Compa n y . Co n fid ential Information includ es not only in formation disclose d b y th e Compa n y to y ou, but also in formatio n dev eloped or learned b y you d u rin g the co u rse o f yo u r emp loymen t with the Co mpany. In formation is no t confiden tial, however, if it is availa b le in the pu b lic domain th rough no fau lt o f y o ur own. 18.Recovery of Da m ages by the Com pany. You agree that if y ou were to vio late an y o f Section s 1 4, 15, 16 and 1 7 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to recover liq u id ated d amag es from yo u eq ual to the amo u nt of in come th at yo u realize under this Perfo rmance Un it Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 4 , 15, 16, o r 1 7 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 4 , 15, 1 6 , or 17. 19.Perform ance Units Subject to the Pla n. Th ese Pro v isio ns a re sub ject to the Plan as ap prov ed b y th e Bo ard . The term s an d pro v isions o f the Plan as it may b e amen d ed fro m time to time are h ereby in corp o rated h erein by reference. In the ev ent o f a conflict b etween an y term or p rovision co ntain ed h erein and a term or pro v ision of th e Plan , th e ap p licable terms and pro visions of the Plan will govern an d prevail. 20.Acceptance o f Awa rd. If y o u wish to accept you r Performan ce Unit Award , y o u must execu te a 2 0 18 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 21.Comm unications with Gover nm ent Ag encies. Nothin g in these Prov isio n s, in clu d in g , withou t limitatio n , Se ction 1 4 , 1 7 or 1 8 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Qu estion s reg ard ing a Perfo rmance Unit Award su b ject to the Plan and req u ests for a d d itio n al information abo u t these Provision s, th e Plan o r th e Co m mittee should be directed to Rach el Go odson, Pro tective Life Co rporation , P.O. Bo x 260 6 , Birmingham, Alab ama 3 5202 (telephon e (2 0 5 ) 268 -5724, e-m ail Rach el.Go odson@Pro tec tiv e.co m). The Plan, th ese Provisio n s and y o ur Award Letter co n tain th e formal terms a n d co nditions o f yo u r Award, an d y o u shou ld re tain th em fo r fu ture referen ce. Yo u may o b tain a co p y o f the Pla n by written o r email req u est to Rachel Goo d so n . Page 6 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 PERFORMANCE UNITS AWARD LETTER Protectiv e Life Corp o ratio n h as awarded y o u : _______ Performance Un its Award Perio d: Ja n u ary 1, 2 0 18 – December 3 1 , 2020 Date o f Gran t: March 1 5 , 201 8 These Pe rforman ce Un its were award ed pursuant to the Pro tec tiv e Life Corp o ratio n Lon g -Term In cen tive Plan (the “Plan”), a n d are subje ct to the terms and co n d itio ns contained in the 20 1 8 Perfo rmance Units Award Pro v isions (“Pro visions”), as set fo rth in Ap p en d ix A to th is Award Letter, and th e Plan. The Plan and th e Prov isio n s contain terms an d con d itio n s regardin g the p ayme n t of these Perfo rmance Units, termin atio n of employmen t, tax withholdin g, non -so licitation of Compan y emp lo y ees an d cu sto mers, regu latory comp lian ce and o th er matters, an d I enc o u rag e y ou to read th e Pro v isio ns ca refu lly . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2018 PERFORMANCE UNITS PROVISIONS As o f March 15 , 2 0 1 8, th e Bo ard of Direc tors o f Pro tectiv e Life Corp o ratio n (the “Compa n y ”) g ran ted yo u performan ce units (“Perfo rmance Un its”) under the Pro tective Life Co rp oration Lo n g -Term In cen tive Plan (th e “Plan ”) that, sub ject to the satisfactio n o f the applica b le term s an d con d itio n s related to su ch Perfo rmance Units, inclu d ing , but n ot limited to , th e satisfaction of th e ap plicable p erfo rmance vestin g co n d itio n s specified belo w, will en title you to receive a cash am o u nt b ased on the PL Tangible Bo o k Valu e of th e Compa n y. You hav e a lso re ce ived a Performan ce Un it Award Letter (“Award Letter”), wh ich tog eth er with th ese 2 0 1 8 Perfo rman ce Un its Pro visions (“Provision s”) and th e Plan, constitutes y our “Perfo rmance Unit Award.” 1 .Genera l Pro visions. The nu mber o f Perfo rm ance Un its tha t y o u h ave been awarded, th e Award Perio d of th e Perfo rmance Units, and th e Date of Gran t of th e Pe rforman ce Un its are set fo rth in y our Award Letter. 2 .Ea rn-Out of Performa nce Units. (a)General. Whether y o u will rece ive an y cash pay m ent in respect of your Performance Un it Award will be determin ed b ase d u pon the exten t to which the app licab le performan ce objective h as bee n satisfied and, e x cep t as oth erwise p rovided in Section 5 b elo w, you r contin u ed employme n t until the date the Perfo rmance Units are p aid. (b)Cu mulativ e After-tax Adjusted Opera tin g Inco me . Pay ment with respect to you r Perfo rmance Units will b e based on the Co mpany's Cu m u lative After-tax Adju sted Operatin g In come d uring the Award Period , as determined in acco rdan ce with the fo llowing sched ule: Cum ula tiv e After-ta x Adjusted Operating Incom e (d o lla rs in millio n s) Percentage o f Perfo rm a nce Units Earned Le ss th an $[____]0% $[____]100% $[____] or more 200% There will be straig h t-line interp o lation b etween Cumulativ e After-tax Adju sted Operatin g Inco me between $[_________] and $[_________] to d etermin e th e ex act p ercen tage to b e paid between 0% and 100%; an d b etween $[[_________] and $[_________] to d etermin e th e ex act p ercen tage to b e p aid b etwe en 1 00% an d 2 0 0%. 3 . Definitions. Cap italized terms th at are u sed but n o t defin ed herein shall h ave the mean ing ascribed to th em in the Plan . For p u rposes of th ese Pro visions, the fo llo win g term s sha ll have th e follo win g me anin gs: “Cu mula tiv e After-tax Ad ju ste d Op erating Income” is d efined as th e Compan y's total income e arned after tax es during th e Awa rd Perio d , ex cluding the imp act o f realized g ain s o r lo sses on investme n ts an d deriv atives, any imp airmen t lo sses record ed o n g o o dwill an d other in tangible assets crea ted by the Merger, an y ex pen se b o rne by the Co mp any that was the resu lt of actions o r requ irem ents of th e Compan y's Paren t an d were not includ ed in th e b u sin ess plan , and unplan n ed ch ang es to income resu lting fro m n ew acco u n ting Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. p ronou n cements. An y lost in come du e to d iv idends paid in ex cess of p lanned amoun ts will b e ad ded b ack to d etermine after tax o p erating in co me. 4.Time a nd Form of Pa y ment. As soon as practicab le, b u t not later than 60 day s, after the end of the Award Pe riod , the Committee will de term ine the exten t to wh ich an y Perfo rmance Unit Award has b een earne d . Except as oth erwise set fo rth h erein , the valu e of each earned Performan ce Unit shall equal th e PL Tan gib le Book Value Per Unit d ete rm ined as o f the most recently rep orted q u arterly b alance sheet d ate last preceding th e date o f p ay ment and sh all b e pa id not later th an th e March 1 5 follo wing the end of the Award Perio d . 5.Term ina tio n o f Employm ent. (a)Death, Disability or Retirement. Un less th e Co mmittee d etermin es to pro vid e fo r treatment th at is mo re favo rable to y o u on su ch terms an d co nditions as th e Committee may d ete rm ine, if your employmen t is terminated by death , Disability o r b y Ea rly Retiremen t or Normal Retirement, yo u (o r, as app licab le, yo u r leg al rep resen tative o r b eneficiary ) will rec eiv e a paymen t with resp ect to a pro -ra ta p o rtion o f you r Performan ce Un its, d etermine d b ased on a fractio n , the n u m erato r o f whic h is yo u r perio d o f emp loy men t d u rin g the Award Perio d and th e d eno min ator of wh ich is the total number o f days in the Award Period. The amo unt in respect o f yo u r p ro-rated Performan ce Un its will b e de term ined b y applyin g the perfo rm ance achieved thro u g h the end of th e Award Period (or th e d ate o f a Co mp any Ch ang e in Control, if applicable) ag ainst th e schedule set fo rth in Sectio n 2 (b) abo v e. The remainin g p o rtion of y our Perfo rmance Units (i.e., the exc ess ov er th e p ro-rated portio n) sh all be fo rfeited as of th e date yo u r emp lo y m ent te rminates. (b )Special Termination . If you r em p loy ment is termin ated by reason of (1) th e d iv estitu re of a bu siness seg men t or a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Performance Unit Award shall b e at the d iscretio n of the Committee. An y p ortio n o f you r Performa n ce Un its which the Committee d etermin es is not eligible for pa y ment un d er th is Section 5(b ) shall b e forfeited as o f the d ate y our e mployme n t termin ates. (c)Other Term ination. Un less the Committee determines to pro v ide for treatmen t th at is mo re favorable to y o u o n su ch term s and conditions as the Co mmittee m ay determin e, if y our emp lo y m ent is terminated for any reaso n not set forth in Sec tio ns 5(a) or (b ), an y u nvested p o rtion of your Performance Un it Award will b e forfeited. (d )Termination for Ca u se . Unless th e Co m mittee de term ines to pro v id e for treatm ent that is mo re favorable to y ou on su ch terms and co nditions as th e Co mmittee may d eterm ine, if y our emp loymen t is te rminated for Cause p rio r to th e date y our Perfo rmance Units are p aid p ursuan t to Sectio n 4 , all of you r v ested and un v ested Pe rforman ce Un its will b e forfeited. 6 . Co mpany Change in Co ntro l. In the even t of a Comp an y Chan g e in Control, the Award Period shall b e deeme d to ha v e ended o n the d ate o f the Compa n y Chan g e in Co ntrol an d y ou sh all be d eemed to hav e earn ed th e g reater of (i) 1 00% of the Perfo rmance Un its, or (ii) the p ercen tag e o f su ch Perfo rmance Un its that wo u ld d erive from ap ply in g the schedule in Sectio n 2(b) to Cumulative After-tax Ad ju sted Operating In co me throu g h the date of th e Compan y Chan ge in Co n tro l (in stead of over the Awa rd Period). Any earned Performance Un its shall be paid shall be paid with in 4 5 d ays fo llowing the date o n wh ich the Co mpany Change in Control o ccurs, b ased o n th e Co mp any Ch an g e in Con tro l Bo o k Valu e Per Unit, if availa b le within 1 0 day s before su ch p ay ment date; o r, if th e Co mpany Ch ange in Co n tro l Bo o k Valu e Per Un it is not then availa b le, th en 90% o f the v alue of each Performan ce Un it, b ase d on th e PL Tangib le Book Page 2 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Valu e Per Unit determin ed as of th e mo st recen tly rep o rted quarterly balan ce sh eet preced in g su ch Company Change in Co n tro l, sh all b e paid within 45 d ays of the Co mp any Cha n g e in Co ntrol, fo llo wed b y an ad d itio n al pay ment in resp ect o f each su ch Perfo rmance Un it within 7 5 d ay s of su ch Co mp any Ch ang e in Control equ al to th e ex cess, if any, o f (i) the Chan ge in Co n tro l Bo o k Value Per Unit o v er (ii) 9 0 % o f the PL Tangible Boo k Value Per Unit determined as o f the most recently reported q u arte rly balanc e sh eet precedin g su ch Compan y Chan ge in Control. 7 . Federal Income Tax Consequences. (a)Gen eral. The fo llo win g d escrip tio n o f th e fed eral inc o me tax consequen ces o f the Perfo rmance Units is based on currently ap p licable p rovision s o f the Co d e and reg ulation s, and is on ly a g eneral su mmary. The summ ary d oes not discuss sta te a n d local tax laws, wh ich m ay differ fro m the federa l tax law, or federal estate, gift and emp lo y ment tax laws. You are u rge d to co nsult with y o u r o wn tax advisor reg ard ing th e ap p lication of th e tax laws to y o ur p articu lar situ ation . (b )Gran t of Performan ce Un its. Th is gran t of Performan ce Un its will n ot cause y o u to b e subject to federal inco me tax. (c)Payment o f Perfo rmance Units. Yo u will recogn ize o rdina ry inco me for fed eral in co me ta x pu rp ose s on th e p ay men t d ate. Th e amo unt of inco me reco g n ized will b e equal to the agg regate amo u n t o f cash paid . Notwithstanding the foreg oin g , if y o u have mad e a n effectiv e election u nder the Comp an y 's Deferred Co m p ensation Plan for Officers (“Deferred Compe n sation Plan ”), the tax ation o f such d eferred amoun t will be h andled as discussed in Section 7(d). (d )Deferred Compensatio n Plan . Yo u may elect to d efer p ay men t in re sp ect o f you r earn ed Perfo rmance Un its, and th e reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u make e ffective de ferral elections, you will reco g nize o rdina ry in come wh en the deferred p o rtion o f th e am o u nt p ay able o n y our Perfo rmance Units is paid from th e Deferred Compen satio n Pla n , in an amo u nt eq ual to th e amoun t o f cash p aid . You will be pro v ided with more info rm ation ab o u t th is d eferral oppo rtu n ity, and the Deferred Co mp ensation Plan, before y o ur Perfo rmance Units be come pay ab le. (e)ERISA. Neith er the Plan nor this Performance Un it Award is qualified und er Section 40 1 (a) of the Co d e an d n either is su b ject to any of th e pro v isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 8 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax with holdin g o b ligations attribu tab le to yo u r Perfo rman ce Un its, whether under th is Plan or un d er th e Deferre d Comp en sation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Perfo rmance Units. 9.Non-tra nsferability o f Performa nce Units. Yo u r Performan ce Units may n o t be assig n ed , pled g ed, or otherwise tran sferre d , ex ce p t upon you r d ea th by the laws of in testacy or descen t a n d d istrib u tion. 10.Beneficia ry Designations. You may name a b en eficiary o r b eneficiaries (wh o must b e memb ers of you r family a n d wh o m ay be n ame d contin g en tly o r suc ce ssive ly) with resp ec t to y our rights u nder th e Plan and th is Perfo rmance Unit Award (inclu d in g the right to receive payment in resp ect o f y our Performan ce Un its after your death) by su bmitting a written b eneficiary d esig n atio n in a fo rm a cceptable to the Co mpany. An y such design ation will b e effectiv e o n ly wh en filed with the Co mpany's Ch ief Financial Page 3 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Officer o r Controller (or such o th er perso n as th e Company may design ate) before y o ur date o f d eath , an d will (unless specifically set fo rth th erein ) revo k e all p rio r desig n atio n s. If the re is n o ben eficiary d esig n atio n in effect on th e d ate o f y o u r d eath, yo u r b eneficiary will be you r surv iv ing spouse o r, if yo u have no surv iving sp o use, y o ur estate. 11.Adm inistratio n o f the Pla n. The Co mmittee has full p o wer to admin ister and in terpret the Plan and these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 12.Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, termin atio n or disco n tinuan ce of the se Prov isio n s o r th e Plan will u nfav orab ly affect an y Performanc e Unit Award p rev iously g ra n ted . 13.Effect on Em plo y ment a nd Othe r Benefits. Receipt o f a Perfo rm ance Unit Award und er th e Plan d oe s no t giv e any Particip ant any right to receive awards in th e future o r to co n tin ue in the emplo y o f the Compan y and its su b sidiaries, an d Perfo rmance Un it Award re cip ients are su bject to discip line and d isch arg e in th e sam e man n er as an y oth er emp lo y ee. Su bject to th e term s o f th e applica b le p lan , in come reco g n ize d as a result of an y p aymen t in resp ect of Performanc e Un its will not b e in clu ded in th e formula for ca lcu lating ben efits und er th e Compan y's Pensio n Plan, 401 (k), and d isability plan s. 14.Co o peration in Litig a tio n. By accep ting a Perfo rman ce Un it Award su b ject to the Plan, y o u ag ree that after y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . 15.No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Compa n y . Accord ing ly, by accep tin g a Perfo rmance Un it Award sub ject to the Plan an d these Pro v isions, y o u ag ree th at for o n e year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 16.No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y accep tin g a Performan ce Un it Award su bject to th e Plan an d these p rovision s, y o u agree th at, du ring th e Restricted Period, Page 4 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. y o u will no t — wh eth er on y o ur o wn beha lf o r on b eh alf of or in conjunction with an y person o r entity — directly o r indire ctly so licit o r accep t an y b u siness of the ty pe co nducted by th e Compan y as of your terminatio n d ate fro m any pe rso n o r entity th at was either (1) a cu stomer, distributo r, or agen t o f th e Comp an y as o f th at d ate o r (2) a p ro sp ective cu stomer, d istrib uto r, or agen t con tacted, called u p o n, o r serviced b y the Comp an y d u rin g the twe lve months b efo re yo u r termination date, or in duce, p romo te, facilitate, o r o th erwise contrib ute to the so licitation o f su ch cu sto mers, distribu tors, or ag ents o r pro sp ectiv e custo mers, d istrib u tors, or ag en ts. Yo u further agree th at, d u rin g the Restricted Period, y o u will n o t c o mmunicate for b u siness pu rpose s with any perso n or en tity that wa s eithe r (1 ) a custo m er, distributor, or agen t of the Compan y as of y o u r termin atio n d ate o r (2) a p rospectiv e c u stome r, d istrib u to r, o r a g ent contacted, called up o n , o r serviced by th e Co m p any d u rin g the twelv e months b efo re y o u r termin atio n d ate. Th is Sectio n 16 sh all n o t apply if you work ed in , or were a residen t of, the state of Californ ia wh en your em p loy ment termin ate d . 17.Co nfidential Info rm a tio n. The Compan y has exp ended an d co ntinu es to ex p end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m pan y. Acco rdingly, by acceptin g a Performance Un it Award su b jec t to the Plan and these p rovisio n s, y ou agree to perman ently maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in cludes, but is no t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, a lgorith ms, tech nical d ata, research p lan s, systems, etc.), prod u cts (in cludin g with o u t lim itation , p ro duct d esig n , p ricin g , and d evelop ment info rmatio n ), transactions o r potential transaction s, serv ices, trad e se crets, know-h ow, fo rmu las, pro cesses, ideas, invention s (whether o r not patentable), train ing materials, p erso n n el information, attorney-clie n t commu nicatio ns, an d th ird -pa rty re latio nsh ip s. The above list is not exh austive and Co n fid en tial In formation in cludes an y o th er in formation th at sho u ld be reaso nab ly u n d erstood as th e co n fid ential o r prop rietary information o f the Company. Co nfiden tial In formatio n inclu d es n o t only info rm ation d isclosed b y th e Company to you, b u t also information dev elo ped or learned by you during th e course o f y o u r emp lo y m ent with the Compa n y . Info rmatio n is no t con fid ential, h o we v er, if it is availab le in the p u blic do main th roug h n o fault of your own . 18.Recovery of Da m ages by the Com pany. You agree that if y ou were to vio late an y o f Section s 1 4, 15, 16 and 1 7 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to recover liq u id ated d amag es from yo u eq ual to the amo u nt of in come th at yo u realize under this Perfo rmance Un it Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 4 , 15, 16, o r 1 7 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 4 , 15, 1 6 , or 17. 19.Perform ance Units Subject to the Pla n. Th ese Pro v isio ns a re sub ject to the Plan as ap prov ed b y th e Bo ard . The term s an d pro v isions o f the Plan as it may b e amen d ed fro m time to time are h ereby in corp o rated h erein by reference. In the ev ent o f a conflict b etween any term o r p rovision co n tain ed Page 5 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. h erein an d a term o r pro vision of th e Plan, the ap p licable terms and prov isio n s of the Plan will g o ve rn and prev ail. 20.Acceptance o f Awa rd. If y o u wish to accept you r Performan ce Unit Award , y o u must execu te a 2 0 18 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 21.Comm unications with Gover nm ent Ag encies. Nothin g in these Prov isio n s, in clu d in g , withou t limitatio n , Se ction 1 4 , 1 7 or 1 8 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Qu estion s reg ard ing a Perfo rmance Unit Award su b ject to the Plan and req u ests for a d d itio n al information abo u t these Provision s, th e Plan o r th e Co m mittee should be directed to Rach el Go odson, Pro tective Life Co rporation , P.O. Bo x 260 6 , Birmingham, Alab ama 3 5202 (telephon e (2 0 5 ) 268 -5724, e-m ail Rach el.Go odson@Pro tec tiv e.co m). The Plan, th ese Provisio n s and y o ur Award Letter co n tain th e formal terms a n d co nditions o f yo u r Award, an d y o u shou ld re tain th em fo r fu ture referen ce. Yo u may o b tain a co p y o f the Pla n by written o r email req u est to Rachel Goo d so n . Page 6 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 RESTRICTED UNITS AWARD LETTER The Compe n sation an d Man agement Su ccessio n Co mmittee o f the Compan y 's Bo ard o f Directo rs h as awarded y o u: ______ Restricted Units Date o f Gran t: March 1 5 , 201 8 These Restricted Un its were award ed pursu ant to the Protectiv e Life Corp o ratio n Lo n g -Term Incen tiv e Plan (th e “Plan ”), an d are su b ject to th e terms and conditions c o n tain ed in the 2 0 18 Restricted Units Award Pro visions (“Prov isio n s”), as set forth in Ap pen d ix A to this Award Letter, and the Plan. The Plan an d th e Pro visions contain terms an d co n ditions rega rd in g th e vesting o f th ese Re stricted Un its, termin atio n o f emplo y ment, tax with h o ld ing, n on-solicitation of Co mp any emp loyees a n d custo m ers, regu latory complian ce and o ther matters, an d I en cou rage y o u to read th e Provisio n s carefully . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 RESTRICTED UNITS AWARD LETTER Protectiv e Life Corp o ratio n h as awarded y o u : ______ Restricted Units Date o f Gran t: March 1 5 , 201 8 These Restricted Un its were award ed pursu ant to the Protectiv e Life Corp o ratio n Lo n g -Term Incen tiv e Plan (th e “Plan ”), an d are su b ject to th e terms and conditions c o n tain ed in the 2 0 18 Restricted Units Award Pro visions (“Prov isio n s”), as set forth in Ap pen d ix A to this Award Letter, and the Plan. The Plan an d th e Pro visions contain terms an d co n ditions rega rd in g th e vesting o f th ese Re stricted Un its, termin atio n o f emplo y ment, tax with h o ld ing, n on-solicitation of Co mp any emp loyees a n d custo m ers, regu latory complian ce and o ther matters, an d I en cou rage y o u to read th e Provisio n s carefully . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2 0 18 RESTRICTED UNITS PROVISIONS As of March 1 5 , 2018, y o u were g ran ted restricted units (“Restricted Units”) u nder the Protectiv e Life Corp o ratio n Lo n g-Term In centive Plan (the “Plan”) th at, sub ject to the satisfaction of th e ap p licable term s and condition s related to su ch Restricted Un its, includ ing , b u t not limited to, the satisfaction o f the ap plicable serv ice v estin g co nditions sp ecified belo w, will entitle y o u to re ceive a ca sh amo u n t based on th e Ta n g ib le Bo ok Valu e of Pro tectiv e Life Corp o ratio n (th e “Co mp any ”). Yo u h ave also receiv ed a Restricted Un it Award Letter (“Award Le tter”), which together with these 20 1 8 Restricted Units Pro visions (“Pro v isio ns”) and the Plan, c o n stitu tes y o u r “Restricted Unit Awa rd .” 1 . Awa rd. (a)General Provision s. Th e number o f Restric ted Un its that you have b een award ed (su b ject to ad ju stment as prov ided in these Provisio n s an d the Plan ), an d the Date o f Gra n t of th e Restricted Units, are set forth in yo u r Award Letter. (b )Defin ition s. Capitalized terms th at are u sed b u t n o t defined h erein sh all ha v e the mean in g ascrib ed to th em in the Plan . 2 . Vesting a nd Pa y ment o f Restricted Units. (a)General Vesting Ru le . Unless v ested o n an earlier da te as p rovided in th ese Pro v isio ns or th e Plan, 50% of y our Restricted Un its will vest on Dec emb er 3 1, 2 020, an d th e remainin g 50 % of y o ur Restricted Un its will v est on Decembe r 31, 2021 (collectiv ely, the “Regular Vesting Sch edule”), subject in ea ch case to your co n tinued employmen t thro u gh such date (except as o therwise p rovided in Section 4 b elow). (b )Pay m ent o f Restricted Units. (i) Reg u lar Vesting . Restricted Units th at become v ested in accord ance with Section 2(a) shall b e settled in cash fo llowing (but n o t later th an th e March 15 imme d iately fo llo win g ) the d ate as of which such Restricted Units b ecome vested b ased on the PL Tan g ib le Book Value Per Un it d ete rmined as of th e most recently rep o rted qu arterly balance sheet da te last precedin g th e d ate of p aymen t. (ii) Early Vesting . Any Restric ted Units that b ecome v ested u nder Sectio n 4 b y reaso n of your termin atio n of emp lo y m ent p rio r to the d ate such Re stricted Un its wo u ld o therwise hav e beco me v ested pu rsu ant to Sectio n 2(a) (“Early Vesting”) sh all n onetheless be settled in cash fo llowin g (b ut not later than the March 1 5 immediately fo llowing) th e d ate as of which su ch Restricted Units wo uld have become vested (b ut for such Early Ve stin g ) if you had remained in the Co m p any 's emplo ymen t thro u gh ea ch of th e ap p licable dates specified in Sectio n 2(a), based on th e PL Tan gib le Book Value Per Unit determin ed as of the most rec ently repo rted q u arterly balance sh eet date last p reced ing th e da te of payment. 3 .Com pany Cha nge in Control. In th e ev en t of a Compan y Ch ange in Control, all o f your Re stricted Un its will imm ediately v est and sh all b e settled in c ash within 45 day s following th e date on which the Compan y Change in Co ntro l o ccu rs, based o n th e Co m p any Chan g e in Co ntrol Book Valu e Per Unit, if av ailable with in 1 0 d ay s b efo re such payment date; o r, if th e Co m p any Chan g e in Con tro l Book Valu e Per Unit is no t then av ailable, the n 90% of th e v alu e o f each Restricted Unit b ased on th e PL Tan gib le Book Value Pe r Un it determin ed as o f th e mo st recently repo rted quarterly balance sheet p reced in g su ch Co mp an y Chan ge in Co ntrol, sh all b e paid within 4 5 day s o f the Co mpany Chan ge in Con tro l, follo wed b y an ad ditio nal p aymen t within 75 d ays o f such Co m p any Chan g e in Co n tro l eq u al to the exc ess, if an y, o f (i) the Chan g e in Co n tro l Bo o k Value Per Unit o v er (ii) 90 % o f the PL Tan gib le Bo ok Valu e Per Un it d etermin ed as of th e m o st re ce n tly repo rted q ua rterly b alance sh eet prec edin g su ch Co mpany Change in Control. 4 .Term ina tio n o f Employm ent. (a)Death, Disability or No rmal Retirement. If you r em p loy men t is termin ated by death , Disability or Normal Retirement, y o u r Restricted Un its will immediately v est in full. (b )Early Retiremen t. Un less th e Committee determin es to prov ide fo r treatment that is mo re fav orable to you on su ch term s and conditions as the Co mmittee may d etermin e, if your emplo y ment with the Compan y an d its Sub sidiarie s term inates due to Early Retiremen t, a p ro -ra ted po rtion of y o ur Restricted Units will immed iately v est. The p o rtion o f your Restricted Un its that wo u ld o therwise have b ecome vested based o n emplo yment th roug h each o f Decemb er 3 1 , 2 0 2 0 an d Decemb er 3 1 , 2 0 2 1 will be separately ca lcu lated by mu ltip ly ing (1 ) the number o f u nvested Restricted Un its that wo u ld beco me v ested at th e ap plicable d ate by (2 ) a fractio n , the nu merator of which is th e number o f co mp lete and partia l calen dar months b etween January 1 , 201 8 an d y o ur Early Retire men t d ate, an d the de n o m inato r of which is (x ) 36 , in the case of the p o rtion o f the Restricted Un its th at wou ld b ecome v ested at Decem b er 3 1 , 2 0 2 0, and (y ) 48, in the case of the portio n of the Restricte d Un its th at would become v ested at December 31, 2021. An y Restricted Un its that d o n o t vest upon you r Early Retirement p u rsuan t to the prec edin g sentence will b e forfeited . (c)Sp ecial Termin atio n . If y our emp lo y m ent is te rm inated by reaso n of (1 ) th e d ivestitu re o f a b u siness segmen t o r a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Restricted Unit Award shall be at th e d iscretio n o f th e Committee. Any portio n o f yo u r Restricted Units that th e Committee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. d etermin es is not eligible for pa y ment un d er th is Section 4(c) sh all be fo rfeited as of th e d ate you r em p loy ment termina tes. (d )Oth er Terminatio n. Unless th e Co m mitte e determin es to p rov ide for treatment th at is more fav orab le to you o n su ch term s an d cond itio n s as the Co m mittee m ay determine, if y our emp loymen t is terminated for a n y reaso n n ot set forth in Sections 4 (a), (b ) o r (c) prior to the ap plicable vestin g d ates sp ecified in Se ction 2(a), y o u r u nvested Restricted Units will be fo rfeited . (e)Termin atio n for Cau se . Unless the Co mmittee d etermin es to prov ide fo r treatm ent tha t is more favo rable to yo u on su ch terms and co nditions as th e Co mmittee may d eterm ine, if y our emp loymen t is te rminated for Cause p rio r to th e date y our Restricted Units are p aid p ursuan t to Sectio n 2 (b), all of y our vested and unvested Restricted Units will be fo rfeited . 5 . Federal Income Tax Consequences. (a)General. The follo win g d escrip tion of the fed eral income tax conseq ue n ces o f th e Restricted Units is based on currently app licab le pro v isio ns of the Cod e, and is on ly a gen eral su m mary. The su m mary do es not discuss state and local tax laws, wh ich may d iffer fro m th e fe d eral tax law, o r federal estate, g ift and e mploymen t tax laws. Yo u are u rg ed to consult with you r own tax adviso r reg ard ing th e app lication of th e tax laws to y o u r p articula r situ ation . (b )Grant of Restricted Un its. This grant of Restricted Units will not su b ject y o u to fed eral in co me tax . (c)Paymen t of Restricte d Units. Yo u will recognize ord inary inco me for fed eral inco m e tax p u rposes o n th e p aymen t d ate. Th e amo unt of inco me reco g n ized will b e equal to the agg regate amo u n t o f cash paid . Notwithstanding the foreg oin g , if y o u have mad e a n effectiv e election u nder the Comp an y 's Deferred Co m p ensation Plan for Officers (“Deferred Compe n sation Plan ”), the tax ation o f such d eferred amoun t will be h andled as discussed in Section 5(d). (d )Deferred Co mpensa tio n Plan . You may elect to de fer payment in resp ect of yo u r v ested Restricted Units, and th e reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u mak e effectiv e d eferral electio n s, y o u will recognize ord in ary in come when the amoun t d erived fro m th e d eferred p o rtion of y our Restricted Un its p aymen t is p aid fro m the Deferred Compensatio n Plan, in an a mou n t eq ual to th e amou n t of cash p aid. Yo u will b e p rovid ed with more information a b o ut th is deferral o p p ortunity an d the Deferred Co mp en sation Plan. (e)ERISA. Neith er the Plan nor this Restricted Unit Award is q u alified un d er Section 4 0 1(a) of th e Co de and n eith er is su b ject to any of th e prov isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 6 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax withho lding o b ligations attributable to you r Restricted Un its, whether u n d er th is Plan o r un d er th e Deferred Comp en sation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Restricted Units. 7 . No n-transfera bility of Restricted Units. You r Restricted Units ma y n ot b e assign ed, pledg ed, or otherwise tran sferred, except u p on y our death b y the laws of in testacy or d escen t and distributio n . 8 . Beneficia ry Desig na tio ns. Yo u may n ame a b eneficiary o r b eneficiaries (who must be membe rs of y o u r family and wh o may b e named con tin gen tly o r suc ce ssive ly) with respect to your righ ts u nder th e Plan an d this Restricted Unit Award (in cluding th e righ t to receiv e any p aymen t in respect of your Restric ted Units after y our d eath ) by su b mittin g a written ben eficiary d esig n atio n in a fo rm accep tab le to the Co m p any. An y such d esig n atio n will b e effective on ly when filed with the Compa n y 's Ch ief Financial Officer and Controller (o r such othe r perso n as th e Co mp an y may d esig nate) before you r date of d eath, an d will (u n less spe cifically set fo rth therein) revoke all prior desig n atio n s. If th ere is no beneficiary design ation in effect on the date of your d eath, y our beneficiary will be y o u r su rviv in g spo u se o r, if y o u h ave n o su rv iv ing spouse, your estate. 9 .Adm inistra tio n of the Plan. The Co m mittee h as fu ll p o wer to ad minister and in terpret the Plan an d these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 1 0 .Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, terminatio n or discontin u ance o f the se Pro v isions or th e Plan will unfavorably affe ct any Restricted Unit Award p re v iou sly g ran ted . 1 1 .Effect on Employm ent and Other Be nefits. Receip t of a Restricted Un it Award u n d er th e Plan d o es n o t g iv e any Particip ant any right to receiv e awards in th e future o r to co ntinu e in th e emp loy of the Co mp any and its su b sidiaries, an d Restricted Un it Award re cip ients are su bject to discip line and d isch arg e in th e sam e man n er as an y oth er emp lo y ee. Su bject to th e term s o f th e applica b le p lans, inco me recog n ized as a resu lt of any pay ment in respect o f Restricted Units will not be inclu d ed in th e fo rmu la for ca lcu lating ben efits und er th e Compan y's Pensio n Plan, 401 (k), and d isability plan s. 1 2 .Co o peration in Litig a tio n. By acceptin g a Restricted Unit Award sub ject to the Plan , you ag ree that after y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 1 3 .No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Co m pan y. Acco rdingly, by ac ce p ting a Restricted Unit Award su b ject to th e Plan an d th ese Prov isio n s, y o u ag ree tha t fo r one year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 1 4 .No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y accepting a Restricted Unit Award sub ject to the Plan and the se pro v isio ns, y o u ag ree th at, d u rin g th e Restricted Period, you will no t — wh eth er on y o ur o wn b ehalf o r o n beha lf o f or in co n ju n ctio n with an y perso n o r en tity — directly o r indire ctly so licit or accep t any b u siness o f the type co n ducted by the Company as o f yo u r termin atio n date from an y person or entity that was eith er (1) a cu stomer, d istrib u to r, or ag ent o f the Co mp any as o f that date or (2) a pro sp ective cu stomer, distribu tor, or agent co ntacted , called u p o n, or serviced by th e Comp an y during th e twe lve month s before yo u r termina tio n date, or ind u ce, p romote, facilitate, or oth erwise co n tribute to the solicitatio n of su ch cu stomers, distribu tors, or a g ents or p rospectiv e custo m ers, distributors, or agents. You fu rth er agree that, d u rin g the Restric ted Perio d , y ou will n ot co mmunicate fo r b u siness purp o ses with an y person o r entity that was either (1 ) a cu stomer, d istrib u to r, or ag en t o f the Compan y as o f y o u r termin ation date o r (2) a pro sp ectiv e cu stomer, d istrib u tor, or ag en t con tacted, called u p o n, o r serviced b y the Compan y d u rin g the twelv e mo n ths before y o ur termin atio n d ate. This Sec tio n 1 4 sh all not apply if you wo rked in, or were a resid ent o f, th e state o f Califo rnia when y o u r emplo yment terminated. 1 5 .Co nfidential Info rm a tio n. The Compan y has expen ded an d co n tinues to exp end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m p a n y. Ac c o rd in g ly, by accep tin g a Re stricted Un it Award su bject to th e Pla n and these pro v isions, y ou ag ree to perm anen tly maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in clu d es, but is n o t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, a lgorith ms, tech nical d ata, research p lan s, systems, etc.), prod u cts (in cludin g with o u t lim itation , p ro duct d esig n , p ricin g , and d evelop ment info rmatio n ), transactions o r potential transaction s, serv ices, trad e se crets, know-h ow, fo rmu las, pro cesses, ideas, invention s (whether o r not patentable), train ing materials, p erso n n el information, attorney-clie n t commu nicatio ns, an d th ird -pa rty re latio nsh ip s. The above list is not exh austive and Co n fid en tial In formation in cludes an y o th er in formation th at sho u ld be reaso nab ly u n d erstood as th e confiden tial or p roprietary in formatio n of the Co mpany. Confidential In forma tio n in cludes n o t o n ly info rm ation d isclosed b y th e Company to you, b u t also information dev elo ped or learned by you during th e course o f y o u r emp lo y m ent with the Compa n y . Info rmatio n is no t con fid ential, h o we v er, if it is availab le in the p u blic do main th roug h n o fault of your own . 1 6 .Reco v ery o f Dama g es by the Co mpa ny. Yo u ag ree th at if yo u we re to v iolate any o f Sectio ns 12, 13 , 1 4 , and 1 5 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to reco v er liqu idated d amag es from you e q u al to th e amoun t of in come th at y o u re alize under th is Restricted Un it Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 2 , 13, 14, o r 1 5 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 2 , 13, 1 4 , or 15. 1 7 .Restricted Units Subject to Pla n. These Pro v isio ns are subje ct to the Plan as appro v ed b y th e Bo ard . Th e term s and p rovision s o f th e Plan as it may be amen d ed from time to time are hereb y in corp o rated herein b y reference. In th e event of a co nflict b etween an y term o r prov isio n co n tain ed here in an d a term or p rovision o f th e Plan, th e ap p licable terms an d prov isio n s o f th e Plan will g o v ern and prev ail. 1 8 .Acceptance of Award. If yo u wish to a cc ept y o u r Restricte d Un it Award, yo u must execute a 201 8 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 1 9 .Co m munica tio ns with Go v ernment Ag encies. Noth in g in th ese Prov isio n s, inclu d ing , with o ut limita tio n, Se ction 1 2 , 1 5 or 1 6 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Qu estion s regardin g a Restricted Un it Award su b ject to the Plan an d requests for additional info rm ation abou t th ese Provisio n s, the Plan or the Comm ittee shou ld be directed to Rachel Go o d so n, Protective Life Corp o ratio n , P.O. Box 260 6 , Birmingham , Alab ama 3 5 2 02 (teleph o n e (20 5 ) 2 6 8 -57 2 4 , e-mail Rachel.Good so n @Protective.com). Th e Plan , these Pro v isions and yo u r Award Letter contain the formal terms and co n d itio n s of y o ur Award, an d yo u should retain th em fo r fu ture referen ce. You m ay o b tain a copy of the Plan b y written o r ema il request to Rach el Go o dson. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Cod e of Business Cond uct for Protective Life Corporation and all of its subsidiaries and affiliates (collectively r eferr ed to in this Code as “the Company”), including Protective Life Ins urance Company Wes t Coast Life Insuranc e Company Protec tiv e Life & Annuity Ins urance Company Protective Property & Cas ualty Insuranc e Company MONY Life Ins urance Company ProEquities, Inc. Firs t Protective Insuranc e Group Revised June 11, 2018 You have a responsibility to report any suspected violations of this Code. A suspected violation could be a situation that you observe or a situation that is brought to your attention by someone else. Suspected violations m ust be reported promptly to at least one of the following: •The Human Res ourc es Complianc e Off icer, Sandy Littleford (in the Human Resources Department), at (205) 268-6429 or s andy .littleford@prot ec tiv e.com •The Chief Compliance Officer, Steve Callaway (in the Legal Department), at (205) 268- 3804 or s t ev e.callaway @protective.com •The General Counsel, Mark Drew, (in the Legal Department) at (205) 268-4941 or mark .drew@protectiv e.com •The Chief Human Resources Officer, Wendy Evesque, (in the Human Resourc es Department) at (205) 268-5697 or wendy .evesque@protective.com •The Code of Busines s Conduct telephone hotline at (205) 268-CODE (2633) or (800) 421-3564 (You may communic ate to the telephone hotlines anonymously.) •The Code of Busines s Conduct report form (You may c ommunicate using the f orm anony mously .) Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of C ontents Our Valu es 1 A St atement of Our Eth ical Prin cip les 2 A St atement of Our Princip les o f Ethical Market Co nd uct 2 Obt ainin g Gu idance Ab ou t Ethical Con cerns 2 Except ion s 2 Complian ce an d Speaking Up 3 Comp lian ce with th e Cod e 3 Individ ual Jud gmen t and Qu estion s to Ask Yo urself 3 Sp eak Up and Repo rt Su spected Vio lations 3 Penalty fo r Violat ion s 4 Waivers of the Code of Busin ess Con du ct 4 Con du ctin g t he Co mpany’s Bu sin ess 4 Busin ess Relatio nsh ips 4 Dealin g with Each Other 5 Dealin g with Customers 5 Dealin g with Producers and Ag ent s 5 Dealin g with Sup pliers 5 Dealin g with Reg ulators 6 Dealin g with Pub lic Officials an d Emp loyees 6 Doing Business with Any Government 6 Inter acting with Public Officials and Employees 6 Political Contributions, Political F undr aising and Political Activity at Work 7 Dealin g with Aud ito rs 8 En gagin g in Busin ess Ou tsid e th e Unit ed Stat es 8 Dealin g with News Med ia, In vestors or th e Pu blic 8 Dealin g with Adverse Part ies 8 Avoiding Con flicts o f In terest 8 Yo ur Private Int erest s 8 Gifts, Meals and En tertain men t 9 Corpo rate Opp ortun ity 9 Disparag emen t 10 Industrial Esp ion ag e 10 Preven tio n o f F rau d 11 App ro priate Use and Saf egu ard ing of Compan y Prop ert y 11 Con fid ent ial In fo rmat ion 11 Use o f Soft ware 12 Use o f Compan y Systems and Devices 12 Accu rate Records, Rep ortin g and Disclosu re 13 Acco unt ing an d Au diting Matt ers 13 Th ird Party Wo rkers 14 Complyin g with L aws 14 In General 14 Antitrust Laws 14 Securities Laws 15 Proh ibit ion s o n Emplo ymen t in th e In surance Ind ustry 15 Charitab le Co ntribu tio ns 15 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our Values Throughout our Company ’s his tory , our mis sion has remained boldly alive in our name. We are Prot ec tiv e. We are c ommitted to tearing down the barriers that prev ent so many people from enjoying the peac e of mind and s atisfaction that come from taking care of t heir future financial needs and the needs of thos e who depend on them. This is our purpose. This will be our legac y. Four core values guide us in all that we do: Do the Right Thing, Serv e People, Build Trus t, and S implif y Ev ery thing. We serv e with integrity and honesty, treating each of our c us tomers t he way we would lik e to be treated. Each of us is responsible for the integrity of the Company , and eac h of us must be willing to raise ethical c oncerns . People in management posit ions have a s pecial res ponsibility to demonstrate high ethic al standards and to creat e an env ironment that requires ethic al behavior. This Code is intended to ass ist us in mak ing the right c hoices. These s ame rules apply to every one in the Company : employees , senior management and our B oard of Directors. Howev er, these guidelines do not cover every s ituation. You s hould be guided by the spirit of the guidelines as well as the language, and y ou should get help whenever you are in doubt. Remember, the accomplishment of t he Company 's mis sion and the fulfillment of the Company ’s commitment to all thos e we serv e are dependent on eac h of us applying high ethic al standards t o whatever we do for the Company. 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. A Statem ent of Our Ethical Principles •We will deal fairly and honestly with all people and treat each as we would ex pect each to treat us if t he s ituation were rev ers ed. •We will trust and respec t each ot her and maintain an environment where people may question a Company prac tic e without fear. •We will res pect the dignit y of eac h individual. •We will not pursue any bus iness opportunity in v iolation of the law or these principles . •We will undertake only thos e busines s ac tiv ities that will withstand public ethical s crutiny and our own s tandards of integrity. •We will disc lose any conflict of interest we may have (including, but not limited to, thos e res ulting from outs ide bus iness activities and/or v olunteer work) regarding our responsibilities to the Company and remov e the c onflic t where required. A Statem ent of Our Principles of Ethical Market Conduct In addition to the Company’s ethical principles , we fully support the following principles of ethic al mark et c onduct: •We will conduc t busines s ac cording to high s tandards of hones ty and fairnes s and will render that serv ice to our c us tomers whic h, in the same c irc ums tanc es , we would apply to or demand f or ourselves. •We will prov ide c ompetent and c us tomer-focused sales and serv ice. •We will engage in active and fair competition. •We will prov ide adv ertis ing and s ales materials that are clear as to purpos e and hones t and fair as to c ontent. •We will prov ide for fair and ex peditious handling of c us tomer c omplaints and dis putes. •We will maintain a sy stem of superv ision and rev iew that is reasonably des igned to achiev e complianc e with these princ iples of ethical mark et c onduct. Obtaini ng Guidance About Ethical Concerns We all s hare a responsibility for the Company’s integrity and reputation. It may take courage to rais e an ethic al iss ue; howev er, our Company ex pects this of you, c onsiders it an important res pons ibility of y ours , and our management will s upport you in carry ing out y our res pons ibility. When y ou have an ethic al conc ern, the best thing to do is to disc us s it with y our manager or any ot her appropriate pers on in the Company. The doors of the Legal Department and the Human Resources Department are always open to y ou. Except ion s No s et of guidelines , inc luding this Code, can c ov er all the s ituations y ou may encounter, and there may be s ituations in whic h exc eptions are appropriate. If you encounter a s ituation where the application of a rule or principle contained in this Code s eems inappropriate, t alk to your manager about it. Your manager c an c onsult with the appropriate approval authority to determine if an ex ception is in order. In c as e of doubt as to approv al authority , the Legal Department should be c onsulted. 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Compli ance and Speaking Up Complian ce with th e Cod e Complianc e with this Code is ess ent ial to being true to our Company ’s vis ion and v alues . The Company will insist on c ompliance. You are responsible for understanding and comply ing with thes e requirements. Your manager is responsible for as sis ting you. Individ ual Jud gmen t and Qu estion s to Ask Yo urself Ev en though this Code provides y ou with general guidanc e and your manager and the Legal Department are available to help y ou, you ultimately mus t depend on y our own indiv idual judgment in dec iding on the correc t cours e of action. As y ou c onsider a part icular s ituation, as k y ours elf these ques tions : •Is my action c onsis tent with approved Company prac tic es ? •Is my action c onsis tent with the Company 's preeminent values? •Does my action av oid any appearanc e of conflict of interest or impropriety? •Am I c onsidering any outs ide employment or v olunteer work t hat would interfere with my role with and responsibilities for t he Company ? •Can my ac tions withs tand the light of day? •Can I in good c onsc ience defend my action to my s upervis or, to other employees , and t o the general public? •Does my action meet my pers onal code of behav ior? •Does my action c onform to the s pirit of these guidelines ? •Is my ac tion the “right thing” to do? If the ans wer to any of these questions is “no,” y ou s hould rec onsider your c ours e of ac tion or seek guidance from your manager, the Legal Department or t he Human Resources Department before y ou act. Be c areful about s ubstitut ing c ollective judgment for y our individual judgment. As k yours elf: “What s pecifically am I being as ked to do? Does it seem unethic al or improper?” Us e your good judgment and c ommon sens e. If s omething would s eem unethic al or improper to a reasonable person, it probably is. Sp eak Up and Repo rt Su spected Vio lations You have a responsibility to speak up and report any suspec ted violations of this Code. A suspec ted violation could be a situation that you observ e or a sit uation that is brought to y our attention by someone else. If you aren’t sure whether a s ituation ris es to the level of a Code violation, talk to y our manager or to one of t he people lis ted below. If you report an ac tion to y our manager and suspect that it may be a Code v iolation, you should mak e sure that y ou or y our manager report it to one of t he appropriate contacts for Code violations. 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Suspec ted v iolations must be reported promptly to at least one of the following: •The Human Res ourc es Complianc e Offic er, Sandy Lit tleford (in the Human Res ources Department) at (205) 268-6489 or sandy.littleford@protective.c om •The Chief Compliance Officer, Stev e Callaway (in the Legal Department ) at (205) 268- 3804 or stev e.callaway@protec tiv e.com •The General Counsel, Mark Drew (in t he Legal Department) at (205) 268-4941 or mark.drew@protec tiv e.com •The Chief Human Res ourc es Officer, Wendy Evesque (in t he Human Resources Department) at (205) 268-5697 or wendy .evesque@protective.c om •The Code of Busines s Conduct telephone hot line at (205) 268-CODE (2633) or (800) 421-3564 (You may communicate to the telephone hotlines anony mously .) •The Code of Busines s Conduct report form (You may c ommunic ate using the form anony mously .) No employee will s uffer any adv erse action, retribution or c areer dis advantage for questioning a Company prac tic e or for making a good faith report of a s us pected violat ion of this Code or ot her irregularity. The Company will inves tigate poss ible v iolations . In doing s o, we will respec t the int eres ts of all parties conc erned. If requested, the identity of employ ees reporting suspec ted violations will be kept conf idential unles s we are required to reveal it to c onduct an adequate inv es tigation, to enforce these guidelines or t o comply wit h applic able law or judic ial proc es s. After reporting a s us pected v iolation, an employee is ex pected to c ooperate with the persons investigating t he s ituation (the “Investigativ e Team” or “Team”). In most c as es , t hat means that the reporting employee will res pond promptly to request s of the Investigativ e Team, if the Team has any reques ts . I n mos t cases , an employee’s role in relation to the s us pected v iolation will hav e been fulfilled by reporting it and res ponding to the Team’s reques t s. The report ing employee should not expec t or c onsider hims elf or herself to be a part of the Investigativ e Team. The Team will determine the appropriate met hod for carry ing out the investigation, and the appropriate communic ations about the investigation, including any communic ations with the employee who reported the s us pected violation. Penalty fo r Violat ions Those who violate the standards in this Code will be s ubjec t to disc iplinary act ion up to and including t ermination of employ ment. Waivers of the Code of Busin ess Con du ct Any waiv er of t he Code for execut iv e officers or directors may be made only by t he Company ’s Board of Directors or a committee of the Board and will be promptly disc los ed as required by law or s tock exc hange regulation. Conducting the Company’s Business Business Relatio nsh ips In c onducting the Company’s bus iness , we deal with a v ariety of people and organiz ations, inc luding other employees , c us tomers, suppliers, competitors, community repres entativ es , and t he investment c ommunity. •Our relations hips are bus iness relations hips and should be based on our Company's long-term bus iness interests. While we may develop friends hips or other relationships with those with whom we deal, our dealings wit h others s hould reflect our Company 's bes t interest. 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •All of our bus iness relations hips should be based on hones ty and fairnes s. •We want long-term, mutually beneficial bus iness relations hips, and trus tworthines s is es sential to es tablis h and keep them. •We will be truthful. If there is a mistak e or misunderstanding, we will correc t it immediately. From time to time, we may enter into relationships with other busines ses to pursue opportunities . It is import ant t hat t he bus iness es with whom we work will conduc t their ac tiv ities ethic ally and in c ompliance with all applic able legal and regulatory requirements . Dealin g with Each Other Basic to our relations hip with each other is the recognit ion of the value and worth of each indiv idual and t he nec es sity to prov ide a work ing c limate that is protectiv e and supportiv e of the well-being of all employ ees. •We are c ommitted t o prov iding opportunity to our employees; we will employ and promote those employees who are best qualified for the job. See the Equal Employ ment Opportunit y Policy in the Employee Handbook. •We will listen carefully and value the opinions and experience of employees and respec t their diverse bac kgrounds , cult ures , religions , ex perienc es and beliefs. •We will provide protec tion to all employ ees or applicants for employment against s ex ual or other harass ment. The full text of the Company's Harass ment Prev ention Policy is inc luded in the Employ ee Handbook . •Applicants f or employment and employ ees will be ev aluated for employ ment and promotion on a non-disc riminatory bas is. Dealin g with Customers Serv ing c ust omers is the focal point of our busines s. Satis fy ing c us tomers is the only way to ensure bus iness s uc cess. •We must work with customers to understand and anticipate their needs and to identify and remove obst ac les c us tomers may see in doing busines s with us. •We must acc urately repres ent our products and services in our marketing, adv ertis ing and sales efforts . •We need to res pond promptly and c ourteously to our customers and inv es t igate and res olv e customer c omplaints . •We seek to provide high quality products and services. We should ev aluate customer s atisfac tion and continuous ly improv e our quality . Dealin g with Producers and Ag ent s Our produc ers and agents are an es sential link in providing quality products and s ervic es to our c us tomers . •We must s elect and retain agents that s hare our values and our commit ment to qualit y. •We desire t o form last ing relations hips with our agents – relations hips based not just on product ion, but als o on compatible philos ophies and attitudes. Dealin g with Sup pliers Pros pective suppliers will have a chance to compete fairly for our busines s. •We will s elect s uppliers based on high quality produc t, s ervic e and v alue. 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •We want long-term relat ionships with our suppliers. Dealin g with Reg ulators Our busines s is highly regulated. Our regulators hav e a responsibility to t he public; to the extent our regulators perf orm their jobs well, we and other good c ompanies benefit. •We will alway s respond to and cooperate with regulatory aut horities . If a regulator c ont ac ts y ou and y ou are not t he des ignated employee responsible for dealing with that regulator, y ou should courteously ass ist the regulator in reac hing the appropriate employ ee. •To av oid c onfusion, only certain employees are designated to repres ent t he Company when c ommunic ating with regulators . If y ou are not a designated employ ee, y ou s hould refer any inquiry from a regulator t o one of the employ ees in your divis ion that is s o designated. If y ou have questions about who is s o des ignated, you should call Gov ernment Affairs about the types of c ommunic ation you engage in wit h regulat ors. •Regulators are public offic ials . All of the rules regarding our int erac tions with public officials apply to regulators . Dealin g with Pub lic Officials an d Emp loyees Federal, s tat e, local and foreign gov ernments hav e vary ing and c omplicated res trictions on int erac ting with public offic ials and employ ees, fundraising ac tiv ities, and giving gifts to public off icials and employ ees. There are even more res trictiv e rules for certain people – brok ers, dealers, investment adv isers and anyone who “lobbies .” Becaus e of the complexity of thes e laws , and the fac t that they frequent ly change, the following sections will inform you about sev eral situations y ou may fac e: Doing Busines s with Any Government To protec t the public interes t, the federal and some state and local gov ernments hav e enac ted laws and regulations that mus t be met by private c ontrac tors. Thes e laws and regulations are oft en harsh and impose s trict requirements on contrac tors that are s ignific antly different and more ex tens ive than those we enc ounter in our commerc ial contracts. In many instances, violation c an res ult in criminal s anctions , meaning the employee can be indiv idually liable. Since these laws inv olv e the public trus t and t heir violation often involves c riminal sanc tions , it is ess ential that there be stric t c ompliance with all laws and regulations – in both s pirit and letter – in transacting bus iness with the government. In c onducting gov ernment busines s, it is es sential that the terms of the c ontract with the government be stric tly complied with and no deviations or subs titutions be made without the writt en approval of t he c ontrac ting officer or ot her authorized representative. Additionally , there are laws and regulations governing ethic s and campaign contributions for s ome indiv iduals who conduc t regular business with government entities—for example, brok ers , dealers and investment adv isers . Thes e people als o must c omply with any et hics rules which apply to these int erac tions . Interacting with Public Of fic ials and Employ ees Federal, s tat e, local and foreign gov ernments have vary ing and c omplicated laws gov erning interactions with public offic ials , public employ ees, and their families, s ome of whic h prohibit or s ev erely restric t the provis ion of gifts , s uc h as meals , gratuities or entertainment to s uc h individuals. While there are ex ceptions to some of thes e laws , they are generally narrowly c onstrued. It i s therefore the policy of the Company that no employee is allowed to provide any gift or thing of value to public official s, public employees, or their families unl ess an exception under the law clearly applies. Please refer to the Government Affairs Guidelines in t he Employ ee Handbook for further 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. guidance regarding Alabama and Federal law. If y ou are contemplating activity that might involve laws in ot her states or territories, please c ont ac t Government Affairs for s pecific guidance. You should not directly or indirec t ly offer, mak e, or solicit inappropriate payments or contributions t o try to influenc e any public official or ot her public employee to take action, f ail to tak e ac t ion, or give an advantage over another person or busines s. If a gift is meant to corruptly influence or bribe a public official or employee, it is always prohibited and there is no exception. This inc ludes domes tic or foreign off ic ials and employ ees, political parties, party off icials , c andidates , legislators , and regulators . It is important to be aware that c ertain ac tiv ity is defined by the f ederal and state gov ernments as “lobbying.” If you are lobby ing, or you are a lobby ist, there are many requirements and restric tions which apply to both y ou and the Company. Definitions v ary among juris dic tions , but “lobby ing” generally is the practice of promoting, oppos ing, or influencing legislation, regulation, or of fic ial ac tion at any level of gov ernment. It is the policy of the Company that only certain people, working through Government Affairs, m ay engage in lobbyi ng on behalf of the Company. If you are conc erned that your ac tiv ity might be lobbying, please c ontact Government Affairs. These laws frequently change, s o you should periodic ally update the adv ice, suc h as legal or ethic s opinions, that you hav e received on a prev ious oc casion. In many instances, v iolators of these laws are s ubjec t to c riminal penalties. If y ou antic ipate interacting with a public of fic ial or employee, governmental body (including regulators ) government-related entity (e.g. water authority, public hos pital) or a lobbyist, it is your res pons ibility to learn the applicable law. For more inf ormation, pleas e rev iew the Government Affairs Guidelines loc ated on PRISM. Politic al Contributions , Political Fundraising and Political Ac tiv ity at Work Certain employ ees and the direct ors of the Company may part icipat e in the Protective Life Corporation State Political Ac tion Committ ee and/or the Protec tiv e Life Corporation Federal Politic al Action Committee. Exc ept in c as es rev iewed by the Legal Depart ment and approv ed by the Executiv e Chairman, Company resources shall not be us ed to s upport political parties, political caus es or candidates. •Individual employ ees are welc ome to support any political party, political c ommittee, politic al caus e, or candidat e that they wish, but they must do s o on their own time and may not use Company res ources. Employ ees should take st eps to ens ure that there is no s uggestion in their volunteer ac tiv ities that the Company is supporting a partic ular candidate, political c ause, or party (e.g. if appearing in a c andidate’s brochure, do not wear a Protective golf s hirt). •Likewise, employ ees are welc ome to s erve as public offic ials . Howev er, if y ou s erve in such a role, it is imperative that y ou report that fac t to Government Affairs, become familiar with all relev ant ethics law res trictions, and recuse y ours elf from any activit y that may overlap with Protec tiv e or its bus iness interests. •Employ ees seek ing public office by election or appointment, inc luding incumbents , should notify their department management and Government Affairs of their intention prior to qualifying as a candidate for elect ive office or acc epting an appointment. Prior management approval mus t be obtained to determine whether running for or holding public office will interfere with the employee’s job, be c ontrary t o the Company’s interests , caus e a conflict of interest or the perc eption thereof, or v iolate any laws or regulat ions. 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •No employee may seek elec tion for or ac cept appointment to any regulatory board, commiss ion, or other body (including, but not limited to, the Alabama Department of Insurance) that direc tly regulates the Company . •If a planned contribution, whet her traditional or in-k ind, could in any way be look ed upon as inv olv ing Company funds , property or s erv ic es, Gov ernment Affairs should be c onsulted. •If y ou work in an area (e.g. brokers , dealers and inv es tment adv isers) that has res trictions on political c ont ributions, make sure y ou unders tand y our department rules for c ont ributions, and c all Government Affairs if y ou have any questions. For more inf ormation, pleas e rev iew the Government Affairs Guidelines loc ated on PRISM. En gagin g in Busin ess Ou tsid e th e Unit ed Stat es The bus iness activities of the Company and its s ubsidiaries are foc used on c onsumers in the United States, and our dealings with foreign persons and entities are currently v ery limited, Nevertheless , as members of the Dai-ic hi Life Group, the Company and its subs idiaries are part of a global busines s organiz ation, and we are c ommitted t o complianc e with both domestic and foreign laws and regulations des igned to prevent, deter, and detect bribery and c orruption. Before y ou engage in any bus iness activities on behalf of the Company that inv olv e pers ons or entities outside the U.S., y ou should seek guidance from the Company’s Legal Department. Dealin g with Aud ito rs Our busines s is heav ily dependent on the ac curacy of our financial and acc ounting informat ion. The public relies on the role of our independent public acc ountants in auditing t his information. You may not take any ac tion to influence, c oerc e or manipulate the Company’s or it s subs idiaries’ independent public ac countants for the purpos e of rendering the financ ial statements of t he Company mis leading. Dealin g with News Med ia, In vestors or th e Pu blic Contac t with news media and the inv es tment community, and any public dis cuss ion of Company bus iness and products , should only be made through one of the Company's authorized spok es persons . If y ou are ques tioned by news report ers or investment analys ts y ou should refer t hem to the appropriate Company Media Contac t Person. For details about the appropriate pers on to c ontact regarding media or other Company -related c ommunic ations, see the Company’s Policy on Communicat ions with News Media in the Employ ee Handbook . Failure to observ e this policy c an caus e tremendous harm to t he Company and spread mis information. We must exerc ise particular c are when cons idering releas e of informat ion of a sens itiv e or material nature, the disc los ure of whic h c ould influenc e the judgment of investors to buy, s ell or hold Company securities . Dealin g with Adverse Part ies We are committed to c onducting our business with hones ty and integrity. That commitment also ex tends to s ituations in whic h we find ourselves in an adv ersarial relations hip with another party , s uc h as a lawsuit or other dis pute. It is important that communicat ions in thes e situat ions be handled by the appropriate people who are authorized to c ommunicate on behalf of the Company. For example, if an attorney who does not repres ent the Company c ontacts you about s omething other than an ordinary , non-adv ersarial matter, y ou s hould immediately – before communicating with that attorney – contact the Company ’s Legal Department for instruc tions . Avoiding Conflicts of Interest 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Yo ur Private Int erests You are expec ted to av oid s ituations where y our privat e interes ts or the priv ate interests of your loved ones c onf lic t with the Company’s interests. •You mus t dis close any potent ial conflict of interest to your manager s o it c an be resolved. "P otential c onflic ts of interest" inc lude busines s or pers onal relationships wit h customers, s uppliers , agents, employees or c ompetitors or any other pers on or entity with whom the Company does busines s. ◦“Suppliers ” inc lude any person or entit y which furnishes goods or s ervic es to t he Company . For ex ample, "suppliers" would include re-insurers , printers , bank ers, law firms, marketers , lobby ing firms and entities from or through which the Company purc hases advertising. •You s hould not have any business or financ ial relationship with c us tomers , suppliers or competitors t hat could influence or appear to influenc e you in carry ing out y our res pons ibilit ies. This would include the owners hip of s tock in these companies. However, ownership of a nominal amount of s tock in a public ly owned c ompany would not be c onsidered a conflict unless the amount was large enough to influenc e you. •You may not market produc ts or s ervic es that c ompete with ours. Nor may you work for a c ompetitor, customer or supplier as an employ ee, consultant or member of its board of direc t ors without written approv al of the Chief Executiv e Offic er or the Board of Direc tors. •The Company recognizes that some employees maintain a law lic ense and that they may wis h to engage in priv ate practice, cons ulting, and/or expert witnes sing in their free time. The actual conf lict s of interest and the appearanc e of c onflic ts of interest that may res ult from this outs ide work are a s pecial c oncern to the Company . Acc ordingly , the Company prohibits employ ees from doing outs ide legal work for c ompensat ion. Employees s eeking to do pro bono legal work may do s o only after c ontacting Stev e Callaway or Melinda Peev y in the Legal Department and receiving ex press permiss ion to partic ipate in the work . •Similarly, the Company recognizes that there are employees wit h particular prof es sional expertis e who may wish to engage in cons ulting and/or expert witnes sing serv ices f or legal matters in their free time. Employees s eeking t o do this work may do so only after contac ting Stev e Callaway or Melinda Peev y in the Legal Department and rec eiv ing expres s permis sion to participate in the work. If y ou are not sure if your s ituation or relations hip with another organization might conflict with your job performance or our Company's interes t s, you should dis cuss it with your manager. Most potential c onflic t situations are readily res olved and it is alway s best for you to raise y our conc ern before engaging in the ac tiv ity . Gift s, Meals and En tertain men t Except when dealing with public officials, public employees, or their fam ilies (see “Deal ing with Public Officials and Employees”), y ou may rec eiv e or give customary business amenities s uc h as meals, provided they are ass oc iated with a bus iness purpose, reasonable in c os t, appropriate as t o time and plac e and would not give the appearance of improperly influencing the recipient. Ex cess ive gif ts and entert ainment (given or rec eiv ed) are inherently compromising and do not belong in our busines s relations hips. You may not giv e or receive gifts, meals or entert ainment to or from anyone in relation to Company busines s unles s: •They are of limited v alue, do not influence or giv e t he appearanc e of influenc ing the rec ipient and cannot be viewed as a bribe, k ick back or pay off . •They do not v iolate any law or generally ac cepted ethic al standards including the standards of the recipient's organiz ation. 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •They c an withs tand public ethical rev iew. Under no circumstances may you giv e money to, or receive money from, a customer or a s upplier. You are to courteously dec line or return any kind of gift, f av or or offer of exces sive entertainment whic h violates thes e guidelines and inform the pers on mak ing the offer of our polic y. The above rules on gifts , meals and entertainment apply to ev ery one in the Company. You should be aware that some employees may be subject to additional limitations and/or recordkeeping requirements due to s pecific laws and regulations – for ex ample, laws and regulations gov erning the ac tiv ities of broker-dealers and inv es tment advis ors. You should consult your manager for information on any rules spec ific to your area of the Company . Corpo rate Opp ortunity You are prohibited from taking for y ours elf pers onally opportunities that are dis covered through the use of Company property, information or posit ion without the cons ent of the Chief Execut ive Offic er or the Board of Direc tors . You may not us e Company property, inf ormation or pos ition for improper pers onal gain, and y ou may not c ompete with the Company direc tly or indirectly. You owe a dut y to the Company to adv ance its legitimate interests when the opportunity t o do s o arises. Your work produc t belongs s olely to the Company. Disparagement No one should ev er make false, misleading or dis paraging remark s about indiv iduals or organiz ations or their products and s ervic es . •Do not disparage our competitors or their produc ts or employees . We should sell our produc ts and serv ices on their merits. •If you make c omparisons between our products and those of a competitor, they s hould be relev ant , ac curate, fac tual and up-to-date. Industrial Espionage You may not engage in indus trial espionage or ac quire information about other c ompanies through improper means. You have a responsibility not to s teal or misuse the intellec tual property of any supplier, customer, busines s partner or compet itor. We regularly ac quire information about other companies in conduc ting our bus iness . This is ac ceptable when this information is properly ac quired. Proper sources would inc lude information that is published or in the public domain or that is lawfully rec eiv ed from the owner or an authorized third party. Ex amples of improper means of acquiring information are: •Rec eiv ing from a third party information that was illegally or improperly acquired by the t hird party. •Rec eiv ing c onfident ial inf ormation of a c ompany from present or former employ ees who are unauthorized to disc los e it. If y ou are offered proprietary information under suspicious c irc umstances, y ou should immediately c onsult our Legal Department. If you come into poss es sion of information from another company that is marked confidential, or t hat you believ e is confidential, you should cons ult our Legal Department if y ou have any questions regarding the proper authorization of your pos sess ion. 10 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Prevention of Fraud Ev ery employee has an obligation to ac t to detec t, deter and prevent fraud. If you disc ov er facts that may indic ate fraudulent ac tiv ity, you must report the discovery immediately. For example, if y ou disc ov er a document that appears to be a fak e, you should report it immediately . Appropriate Use and Safeguarding of Company Property Each of us is responsible for protecting Company property . The Company’s property includes your work product, the Company ’s trade s ec rets , technology and propriet ary information as well as phys ical property. The property and s ervic es of the Company – including third party services and technologies that you may ac cess due to y our job role – are to be used solely for the benefit of the Company and s hould be used only as authorized by the Company. Managers are responsible for s etting up and keeping good controls t o protec t t he Company from los s or unauthorized or unlawful use of its property or s ervic es . Eac h of us is res pons ible for ass isting in prev enting was te and thef t and as suring t he integrity of the controls. Confidential Information The Company regularly develops confidential or proprietary informat ion that is very valuable to the Company. This type of information includes, but is not limited to, all information that is not generally known to the public and relates to the Company ’s: •business plans , strategies, and pricing; •administration and produc t development; •technologies ; •c ust omers (inc luding pros pective c us tomers); •agents (inc luding prospec tiv e agents) ; •distributors (inc luding prospect ive distributors); and any other information that giv es the Company a competitive adv antage. The Company also regularly receives non-public , confidential information from those with whom we do busines s. Ex amples of these types of inf ormation are the information we receive from our customers , agents, administrators, s uppliers and busines s partners. Any of this information should be c onsidered the Company’s property, which we hav e a duty to prot ec t. We may als o be subject to laws and regulations that require us to safeguard this information, s uc h as the laws and regulations that require us to protect customer information. Additionally , we may have agreements that s pell out our obligations for using and protecting the information, s uc h as our c ust omers ’ authoriz ations for medical information or confidentiality agreements we hav e with our agents and s uppliers . In c onnection with your activ ities on behalf of t he Company , you may have acc es s to and become knowledgeable about inf ormation that is confidential, priv ate or proprietary . Through t he c ours e of your employment with t he Company , you may als o develop or create information that should be c onsidered the Company’s c onfidential, private or propriety information. You mus t protect the confidentiality and privacy of that inf ormation. •You may only use or dis close confidential, priv ate or proprietary inf ormation for Company purpos es ; you may not use or dis close it for pers onal benefit or for the benefit of c ompeting interests . 11 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •To preserve c onfidentiality , you should only disc los e confidential information to Company employees who have a “need to know” t hat information for busines s purposes. If you s hare c onfidential information wit h an employee, you should tell the employee that the information is confidential. If you need to s hare information outs ide the Company , you s hould exerc ise additional c aution. Generally, confidential information should not be disclos ed to a third party unless the disclosure is c ov ered by an ex pres s written agreement between the Company and the third party. •You mus t limit your use of c onfidential, privat e or proprietary informat ion to what is authorized by any agreement relating to t he information or, if there is no ex pres s agreement, to what is impliedly authorized. Your responsibility to keep information c onfidential c ontinues after y ou leav e employment with the Company. For furt her information on the appropriate handling of c onf idential inf ormation, pleas e c onsult the Company I nformation, Company Work Product, and Company Property Polic y. None of the above s t atements about k eeping information confidential are intended to prec lude or dissuade employ ees from engaging in legally protec ted ac tiv ities, such as dis cuss ing the terms and conditions of employ ment or reporting any suspec ted v iolations of this Code. Use of Software One form of int ellect ual property we ac quire is computer sof tware. In addition t o being c opyrighted, computer sof tware programs are us ually subject to licens e agreements . Thes e agreements res trict the Company’s use (and, therefore, your use) of the software. For example, a lic ense may prohibit copy ing of the programs and restrict its us e to a spec ified computer. •You should understand t he limitations on the us e and c opying of any software. If you have questions, y ou s hould contact t he I nformation Security Officer (Tim Searcy , ex t. 5289). •You should not copy software, us e it on a different computer or give it t o a third party unless y ou hav e confirmed that the lic ense agreement permits such copy ing or us e. •Any authorized copies shall contain the proper c opyright and other required notic es of the v endor. •Downloading software us ing the Company’s elec tronic communicat ions sy stems is disc ouraged. If y ou need to ins tall a spec ific applic ation on your work station or another Company sy stem, pleas e submit a reques t through the IT Self-Servic e Portal. Use of Company Systems and Devices (use is not private) The Company ’s sy stems and devic es s uc h as telephones, v oic e mail, email, smartphones, Intranet and Internet acc es s (both wired and wireles s), and desk top and lapt op c omputers are intended to be us ed for the Company’s bus iness . The Company recognizes that it is sometimes ac ceptable for employ ees t o us e thes e systems or devices for lawful personal purposes. You s hould, howev er, keep s uc h use to a minimum and remember that s uc h us e is not priv ate. We will respec t the priv ac y of eac h of our employ ees. Our work on behalf of the Company , howev er, is not priv ate; it belongs to the Company . The Company reserv es the right to ac cess communications within its sy stems or on its devic es . The Company may monitor, interc ept or record communications s uc h as telephone c alls , electronic communications including email, ins tant mes sages, text mess ages and Intranet or Internet ac cess as it deems necess ary or 12 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. appropriate to ens ure customer s atisfac tion, to improve quality , to guard against inappropriate us es and, in rare cas es , to guard against unlawful us es . An employee s hould not attempt to acces s another employee’s c ommunic ations without the other employee’s permis sion or other appropriate authorization. The Legal Department should be c onsulted for guidance on the appropriate authorizat ion for acc es sing employee communications . If communications are monitored, s t eps should be tak en to disc ontinue monitoring if the communic ations are determined to be personal, lawf ul and appropriate under this Code. Accurate Records, Reporting and Disclosure Company records mus t reflec t an ac curate and v erif iable record of all t rans ac tions and dispos ition of as sets . We have internal acc ounting c ontrols , including controls to limit trans ac tions to t hose whic h are properly authorized and to promote both acc ountability for assets and report ing acc urac y. It is our responsibility to ensure that doc uments filed with or s ubmitted to the Securities and Ex change Commiss ion and other regulators or other public c ommunic ations by the Company and its s ubsidiaries c ont ain full, fair, acc urate, timely and unders tandable dis closure. •Information that y ou record and s ubmit to another party , whether inside or outs ide our Company , must be accurate, timely and complete. It s hould honestly reflect the transaction or material. •Like all Company employees , financial officers and employ ees must understand and apply the rules and regulations applic able to their job duties. In c as e of financ ial employees , this inc ludes all laws, rules, regulat ions and ac counting princ iples inv olv ed in ac counting for transactions of the Company. Accounting and Auditing Matters The integrity of our financ ial reports is ess ential, and we intend to comply with all financial reporting and acc ounting regulations applic able to the Company . If you hav e conc erns or c omplaints regarding questionable ac counting or audit ing matters of the Company, you mus t submit thos e conc erns or complaints to the General Counsel. The term “ques tionable acc ounting or auditing matt ers” includes: •fraud or deliberate error in the preparation, evaluation, review or audit of Company financial s t atements; •fraud or deliberate error in the recording and maintenanc e of the Company’s financ ial records ; •defic iencies in or noncompliance with the Company’s internal ac counting c ontrols ; •misrepresentation or fals e statement t o or by a senior officer or ac countant regarding a matter contained in the Company’s financ ial records, financial reports or audit reports ; or •deviation from full and fair reporting of the Company’s financ ial condition. If a report of suspec t ed v iolation of the Code relat es to ac counting, internal acc ounting c ont rols or auditing matters, the report will be transmit ted to the Chairman of the Audit Commit tee by the General Couns el. You may elect to remain anonymous by making your c oncerns k nown via the Code of Business Conduc t Hotline (205-268-2633 or 800-421-3564) or electronic ally at hot line@protective.c om. If y ou c hoos e t o mak e an anonymous submis sion, y ou are encouraged to giv e as muc h detail as pos sible so that we will have the information necess ary to carry out an 13 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. investigation. We will treat any non-anony mous c omplaint received confidentially in ac cordance with our policies for reporting other v iolations under the Code. In the event that, as a manager, you receive a report of a c oncern regarding questionable ac counting or auditing matters , it is your responsibility to submit that c oncern to the General Couns el. Third Party Workers Cons ultants, agents, and other third party workers retained by our Company are ex pected to adhere to this Code and other Company policies in the course of their work on behalf of t he Company . •In retaining a consultant, you should ens ure that no c onflic t of interes t ex ists, that the c onsultant is genuinely qualified in the business for which retained, that the c ompensat ion is reasonable for the serv ices being performed, and that there is a written agreement outlining the statement of work and requiring the cons ultant to comply with all applic able laws and appropriate Company policies. •Consultants , agents , and other third party work ers may not be retained to do anything illegal or improper. You may not do anything indirectly that you may not do directly, and you may not do through a third party what y ou may not do y ours elf. Complying with Laws In General The Company intends t o conduc t its business in a way that not only c onforms to the letter of the law, but also promotes the spirit of f airness and honesty behind the laws . •Every employ ee has the res pons ibility to bec ome familiar with and c omply with the laws and regulations t hat govern his or her area of responsibility . Ignorance of applic able laws is not acc eptable. •If you have ques tions about the meaning or application of any law or regulation, you should cons ult with and be guided by the adv ice of the Legal Department. Dec isions regarding the applic ation of the v arious laws s hould not be made without that adv ice. •You may not tak e any action that y ou k now or that our Legal Department has adv ised would violat e any law or regulation. Ant itrust Laws The antitrust laws are intended to pres erve c ompetit ion by prohibiting actions t hat could unreasonably restrain the f unctioning of a f ree and competitive marketplac e. •Any agreement that c ould limit competition in a spec ific mark et may be a violation of these laws and mus t be reviewed by the Legal Department. •Bec ause verbal ex changes can be viewed as an agreement, you need to exerc ise c aution whenever you meet with competitors . •Keep your dis cuss ions to the busines s purpos e of the meeting. •Avoid dis cuss ions with c ompetit ors related to mark et share, projec ted s ales for any s pecif ic produc t or serv ice, revenues and ex pens es , produc tion sc hedules, inventories , unannounc ed products and s ervic es , pricing strategies , market ing and, of course, any confidential, private or proprietary Company information. •You s hould not dis cuss with a compet itor whether the Company or the c ompetit or intends to enter or withdraw from a spec ific market. 14 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. These guidelines also apply to inf ormal contac t s you may hav e with competitors, including those at trade s hows or meetings of profes sional organiz ations. Each of the following may be a violation of the antitrus t laws . In many instanc es , violators are s ubjec t to criminal penalties . Before engaging in any discuss ions with a c ompetitor concerning the following, you must rev iew the matt er with the Legal Department : •Prices or rates •Alloc ation of mark ets or customers •Limitations on production or quality •Boyc ott of suppliers •Intent ions or motiv ations c oncerning entering or withdrawing from a market. The Company has an Antitrust Complianc e Manual, loc ated on PRISM that prov ides more comprehens ive informat ion and guidance about the antitrust laws than this Code. You s hould mak e sure that y ou understand and c omply with the Antitrus t Compliance Manual. Securities Laws: Transact ions in Comp any Secu rit ies, Dai-ichi Secu rities, an d Other Comp anies’ Securit ies Federal Law prohibits buy ing or s elling securities bas ed on "inside information," which is informat ion not publicly available that c ould affec t the price of the sec urities. Penalties for violations of thes e laws c an be severe, and c ould inc lude significant fines and impris onment . As the Company is now a wholly owned s ubsidiary of The Dai-ic hi Life Insuranc e Company, Ltd., c ommon stoc k in the Company is no longer publicly t raded. Howev er, certain Company securities , inc luding debt s ec urities, c ontinue to be public ly traded. •If you have material ins ide informat ion about the Company , Dai-ichi, or any other c ompany, y ou may not buy or s ell, or advis e others to buy or sell, thos e securities . Note t hat this would inc lude "giv ing tips" to friends or family. •Ins ide information t hat might be material inc ludes earnings es timates, s ignific ant bus iness dev elopments, ex pans ion or curtailment of operations, sale or purchas e of subs tantial as sets or any other ac tiv ity of significanc e. •You have an obligation to prot ec t any confidential or material non-public inf ormation y ou obtain from t he Company or its subs idiaries , or from Dai-ichi or its subs idiaries. For furt her guidanc e on trading in s ec urities and inside inf ormation, pleas e c onsult the Company’s polic y on Trading in the Sec urities of Protective, Dai-ic hi, and Ot her Companies , loc ated on PRISM. Proh ibit ion s o n Emplo ymen t in th e In surance Ind ustry It is a federal c rime for a pers on who has ev er been c onvic ted of a felony inv olv ing dishones ty or breac h of trus t to work in the busines s of insurance unless that person obtains the cons ent of the appropriate state department of ins uranc e, and it is a federal c rime for a pers on who works in the busines s of insurance to willfully permit a person who has been c onvic ted of a felony inv olv ing dishones ty or breac h of trus t to work in the busines s of insuranc e. If y ou hav e ever been c onvic ted of a felony and hav e not obtained the required cons ent, or if y ou k now that a f ellow employ ee, cons ultant or agent has been conv icted of a felony , you must immediately report the situat ion to the Legal Department. Charitable Contributions All of the Company’s c haritable contributions, inc luding in-k ind c ontributions , must be managed through t he Protec tiv e Life Foundation. You may not us e Company monies to make c haritable c ontributions . I n addition, any purchas e of goods or s ervic es from a charitable organizat ion for a 15 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. marketing purpose must be coordinated through the Protec tiv e Life Foundation's Ex ec utive Direc tor. A ll other purchas es of goods or s ervic es from a charitable organization must be done on an arm’s-length bas is. For example, purc hases of tic kets to the s ymphony or adv ertis ing through a charitable organization must be coordinated through the Prot ec tiv e Life Foundation's Ex ec utive Direc tor, but purc hases of flu v ac cine through a non-profit hospital, if done on an arm’s -length bas is for fair v alue, may be done through the Company. All reques ts for charitable contributions are to be submitted to the Executiv e Director of the Protec tiv e Life Foundation. ******************* By faithfully adhering to the Code, we ass ure thos e who s hare an interest in our Company – notably our customers , s hareowners and employ ees – that Protec tiv e is committed to the vis ion and v alues that s erve as our foundation. This will help to ensure the Company ’s continued succ es s, growth and viabilit y. Since it s inc eption, Protec tiv e has c onsis tently required those who ac t on its behalf to do so with int egrity. Our c ommitment to this fundamental principle remains central in all that we do. You have a responsibility to report any suspec t ed v iolations of this Code. A suspec ted v iolation could be a situation that you observe or a situat ion that is brought to y our attention by s omeone else. Suspec ted v iolations must be reported promptly to at least one of the following: •The Human Res ourc es Complianc e Offic er, Sandy Lit tleford (in the Human Res ources Department) at (205) 268-6429 or sandy.littleford@protective.c om •The Chief Compliance Officer, Stev e Callaway (in the Legal Department ) at (205) 268- 3804 or stev e.callaway@protec tiv e.com •The General Counsel, Mark Drew (in t he Legal Department) at (205) 268-4941 or mark.drew@protec tiv e.com •The Chief Human Res ourc es Officer, Wendy Evesque (in t he Human Resources Department) at (205) 268-5697 or wendy .evesque@protective.c om •The Code of Busines s Conduct telephone hot line at (205) 268-CODE (2633) or (800) 421-3564 (You may communicate to the telephone hotlines anony mously .) •The Code of Busines s Conduct report form (You may c ommunic ate using the form anony mously .) 16 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Ex hibit 21 to Fo rm 10 -K of Protecti ve Life Corpo ratio n for Fisca l Yea r Ended December 31, 20 18 Principa l Subsidiaries of the Reg istra nt The follo win g who lly owned sub sidiary of Protective Life Co rp oration is o rganized u nd er the l aws o f th e State of Tenn essee and do es bu sin ess u nd er its co rp orate n ame: Pro tectiv e Life In surance Compan y Th e fo llowing who lly o wned sub sid iary o f Prot ective Li fe Insu ran ce Co mp any is inco rp orated un der th e laws of th e State o f Nebraska an d d oes b usin ess u nd er its co rpo rat e n ame: West Co ast Life Insurance Company The foll owin g wh olly own ed su bsid iary o f Pro tect iv e Life In surance Compan y is in corpo rated u nd er the laws of th e State of Alab ama and do es bu sin ess u nd er its co rpo rat e n ame: Pro tect iv e Life an d An nu ity Insurance Company The foll owin g wh olly own ed su bsid iary o f Pro tect iv e Life In surance Compan y is in corpo rated u nd er the laws of th e State of M issou ri and do es bu sin ess u nd er its co rpo rat e n ame: Protective Pro perty & Casualty In su ran ce Co mp an y Th e following wh olly own ed su bsid iary o f Pro tectiv e Life In surance Compan y is incorporated u nd er the laws of th e St ate of New Yo rk and d oes busin ess u nd er its co rpo rat e n ame: M ONY Life Insurance Company Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Ex hibit 24 PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ NORIM ITSU KAWAHARA Norimitsu Kawahara Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ TETSUYA KIKUTA Tetsuy a Kiku ta Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ VANESSA LEONARD Vanessa Leo nard Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ JOHN J. MCMAHON, JR. Jo hn J. McMaho n, Jr. Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by his/her execu tion hereof o r upon an iden tical co unt erp art hereof, do es h ereb y co nstitu te an d ap poi nt Jo hn D. Jo hn s, Rich ard J. Bielen , M ark L. Drew o r Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ UNGYONG SHU Ung yo ng Sh u Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ JESSE J. SPIKES Jesse J. Spikes Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ TOSHIAKI SUMINO Toshiaki Su mino Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by his/her execu tion hereof o r upon an iden tical co unt erp art hereof, do es h ereb y co nstitu te an d ap poi nt Jo hn D. Jo hn s, Rich ard J. Bielen , M ark L. Drew o r Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ WILLIAM A. TERRY William A. Terry Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ W. MICHAEL WARREN, JR. W. Michael Warren, Jr. Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ JOHN D. JOHNS Jo hn D. Jo hn s Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Le Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 1.1 Certificatio n Pursuant to Secti on 302 of the Sa rba nes-Ox l ey Act o f 2 00 2 I, Rich ard J. Biel en , certify that: 1.I have reviewed th e An nu al Rep ort o n Form 1 0-K for t he year end ed December 31 , 20 18 , o f Protecti ve Li fe Corpo ration ; 2.Based o n my k no wledg e, th is an nu al repo rt do es no t co ntain any un true statement of a material fact or omit to state a material fact necessary to mak e th e statemen ts made, in lig ht of t he circumst an ces un der which su ch statemen ts were mad e, n ot mislead ing with respect to the p eriod cov ered b y this repo rt; 3.Based o n my k no wledg e, th e finan cial statements, and other finan cial in fo rmation in clu ded in th is annual repo rt, fairly present in all materi al respects th e fin ancial con ditio n, results o f o peration s and cash flows of t he reg istrant as of, and fo r, the period s presented in this rep ort; 4.Th e registran t’s o th er certi fy in g o fficer and I are respo nsib le for estab lish in g an d maintaini ng disclo su re con tro ls an d p ro ced ures (as defin ed in Ex change Act Rules 1 3a-15 (e) an d 1 5d -15 (e)) and int ern al con trol over fi nancial repo rting (as d efi ned in Exchan ge Act Ru les 1 3a-15 (f) an d 1 5d -1 5(f)) fo r the reg i strant and hav e: a)Desig ned such discl osu re co ntro ls an d p ro cedu res, o r caused su ch d isclosure co ntrols and procedures to be desig ned u nder o ur su pervision , to ensure th at material informatio n relatin g to th e registran t, includ in g its co nsolid ated sub sidiaries, is made k no wn to us by ot hers within tho se entities, particularly d urin g the p eriod in whi ch thi s rep ort is b eing prepared; b )Desig ned such in ternal con trol ov er fin ancial repo rtin g, o r cau sed su ch intern al co ntro l o ver finan cial reporting to be d esig ned un der our su pervisi on , to p rov id e reasonable assu ran ce regarding th e reliab ility o f fi nancial repo rtin g an d the p rep aratio n o f fin anci al statemen ts fo r extern al p urpo ses in accordan ce with gen eral ly accep ted acco un ting prin cip les; c)Ev alu ated the effect iv eness o f the regist rant’s discl osu re co ntro ls an d p ro cedu res an d p resen ted in th is repo rt o ur co nclusio ns ab ou t the effectiven ess of t he disclosu re co ntro ls and p rocedu res, as o f the en d o f the p eri od co vered b y this rep ort based on such ev alu ation ; an d d )Disclosed in this rep ort an y ch ang e in the registran t’s int ern al con trol over fi nancial repo rting th at occu rred d urin g the regist rant’s mo st recent fiscal qu arter (th e registran t’s fou rth fiscal qu arter in the case o f an an nu al repo rt) that has materially affected, o r is reason abl y lik ely to materially affect, th e registran t’s intern al con t ro l o ver finan cial repo rting ; an d 5.Th e registran t’s o th er certi fy in g o fficer and I h av e disclosed , b ased o n o ur mo st recent eval uat io n o f intern al co ntro l o ver finan cial reporting , to th e reg i strant’s auditors and th e aud it committee o f the regist ran t’s bo ard of directors (or person s performing th e eq uivalent fu nctio ns): a)All sign ifican t d eficien cies and material weakn esses in the desig n o r o peration of in ternal control ov er fin anci al rep ortin g which are reaso nab ly lik ely to ad versel y affect the registrant’s ability to reco rd , process, summarize and report fin anci al i nformatio n; and b )Any fraud , wh eth er o r n ot material, that in vo lv es man agemen t o r o th er employ ees wh o h ave a si gn ifican t role in th e registran t’s intern al co ntro l ov er financial repo rtin g. Date: M arch 5, 2 01 9 /s/ Rich ard J. Bielen Presi dent and Chief Ex ecut iv e Officer Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 1.2 Certificatio n Pursuant to Secti on 302 of the Sa rba nes-Ox l ey Act o f 2 00 2 I, Steven G. Wal ker, certify that: 1.I have reviewed th e An nu al Rep ort o n Form 1 0-K for t he year end ed December 31 , 20 18 , o f Protecti ve Li fe Corpo ration ; 2.Based o n my k no wledg e, th is an nu al repo rt do es no t co ntain any un true statement of a material fact or omit to state a material fact necessary to mak e th e statemen ts made, in lig ht of t he circumst an ces un der which su ch statemen ts were mad e, n ot mislead ing with respect to the p eriod cov ered b y this repo rt; 3.Based o n my k no wledg e, th e finan cial statements, and other finan cial in fo rmation in clu ded in th is annual repo rt, fairly present in all materi al respects th e fin ancial con ditio n, results o f o peration s and cash flows of t he reg istrant as of, and fo r, the period s presented in this rep ort; 4.Th e registran t’s o th er certi fy in g o fficer and I are respo nsib le for estab lish in g an d maintaini ng disclo su re con tro ls an d p ro ced ures (as defin ed in Ex change Act Rules 1 3a-15 (e) an d 1 5d -15 (e)) and int ern al con trol over fi nancial repo rting (as d efi ned in Exchan ge Act Ru les 1 3a-15 (f) an d 1 5d -1 5(f)) fo r the reg i strant and hav e: a)Desig ned such discl osu re co ntro ls an d p ro cedu res, o r caused su ch d isclosure co ntrols and procedures to be desig ned u nder o ur su pervision , to ensure th at material informatio n relatin g to th e registran t, includ in g its co nsolid ated sub sidiaries, is made k no wn to us by ot hers within tho se entities, particularly d urin g the p eriod in whi ch thi s rep ort is b eing prepared; b )Desig ned such in ternal con trol ov er fin ancial repo rtin g, o r cau sed su ch intern al co ntro l o ver finan cial reporting to be d esig ned un der our su pervisi on , to p rov id e reasonable assu ran ce regarding th e reliab ility o f fi nancial repo rtin g an d the p rep aratio n o f fin anci al statemen ts fo r extern al p urpo ses in accordan ce with gen eral ly accep ted acco un ting prin cip les; c)Ev alu ated the effect iv eness o f the regist rant’s discl osu re co ntro ls an d p ro cedu res an d p resen ted in th is repo rt o ur co nclusio ns ab ou t the effectiven ess of t he disclosu re co ntro ls and p rocedu res, as o f the en d o f the p eri od co vered b y this rep ort based on such ev alu ation ; an d d )Disclosed in this rep ort an y ch ang e in the registran t’s int ern al con trol over fi nancial repo rting th at occu rred d urin g the regist rant’s mo st recent fiscal qu arter (th e registran t’s fou rth fiscal qu arter in the case o f an an nu al repo rt) that has materially affected, o r is reason abl y lik ely to materially affect, th e registran t’s intern al con t ro l o ver finan cial repo rting ; an d 5.Th e registran t’s o th er certi fy in g o fficer and I h av e disclosed , b ased o n o ur mo st recent eval uat io n o f intern al co ntro l o ver finan cial reporting , to th e reg i strant’s auditors and th e aud it committee o f the regist ran t’s bo ard of directors (or person s performing th e eq uivalent fu nctio ns): a)All sign ifican t d eficien cies and material weakn esses in the desig n o r o peration of in ternal control ov er fin anci al rep ortin g which are reaso nab ly lik ely to ad versel y affect the registrant’s ability to reco rd , process, summarize and report fin anci al i nformatio n; and b )Any fraud , wh eth er o r n ot material, that in vo lv es man agemen t o r o th er employ ees wh o h ave a si gn ifican t role in th e registran t’s intern al co ntro l ov er financial repo rtin g. Date: M arch 5, 2 01 9 /s/ Stev en G. Walker Execu tive Vi ce Presid en t an d Chief Fin ancial Officer Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 2.1 CERTIFICATION PURSUANT TO 1 8 U.S.C. SECTION 13 50 , AS ADOPTED PURSUANT TO SECTION 9 06 OF THE SARBANE S-OXLEY ACT OF 2 00 2 In co nn ection with the Ann ual Repo rt of Protective Life Corp oration (the “Compan y”) on Form 10-K fo r the y ear end ed Decemb er 3 1, 20 18, as filed with the Securiti es and Exchan ge Commissio n on the date hereo f (t he “Rep ort”), I, Richard J. Bi elen, Presiden t an d Ch ief Executi ve Officer of th e Co mp any , cert ify, pu rsu ant to 18 U.S.C. § 1 35 0, as ado pted p ursu ant to § 906 of th e Sarb anes-Oxley Act o f 2 00 2, that to th e best of my kn owl edge: (1 )Th e Rep ort fully complies with th e req uirements of Sectio n 1 3(a) o r 1 5(d) of th e Securities Exch ang e Act of 19 34 ; an d (2 )Th e info rmation contai ned in the Repo rt fairly presents, in all material respects, th e finan cial co ndi tion and resu lts o f o perati on s of th e Compan y. /s/ Rich ard J. Bielen Presi dent and Ch i ef Ex ecu tive Officer March 5 , 2 01 9 This certifi catio n acco mpan ies th e Rep ort p ursuan t to §90 6 o f th e Sarb anes-Oxley Act o f 2 00 2 an d sh all no t, ex cep t to the ex ten t requ ired b y the Sarban es- Ox ley Act of 20 02, be d eemed filed b y the Compan y for pu rp oses of §1 8 o f the Secu rit ies Ex chan ge Act o f 1 93 4, as amen ded . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 2.2 CERTIFICATION PURSUANT TO 1 8 U.S.C. SECTION 13 50 , AS ADOPTED PURSUANT TO SECTION 9 06 OF THE SARBANE S-OXLEY ACT OF 2 00 2 In co nn ection with the Ann ual Repo rt of Protective Life Corp oration (the “Compan y”) on Form 10-K fo r the y ear end ed Decemb er 3 1, 20 18, as filed with the Securiti es and Exchan ge Commissio n on the date hereo f (t he “Rep ort”), I, Stev en G. Walk er, Ex ecu tive Vice Presid en t an d Ch ief Finan cial Officer o f the Co mp any , certify, pursuan t to 1 8 U.S.C. § 13 50 , as ad op ted pu rsuant t o § 906 of t he Sarban es-Ox ley Act of 20 02 , th at to the b est o f my k no wledg e: (1 )Th e Rep ort fully complies with th e req uirements of Sectio n 1 3(a) o r 1 5(d) of th e Securities Exch ang e Act of 19 34 ; an d (2 )Th e info rmation contai ned in the Repo rt fairly presents, in all material respects, th e finan cial co ndi tion and resu lts o f o perati on s of th e Compan y. /s/ Stev en G. Walker Execu tive Vi ce Presid en t an d Chief Fin ancial Officer March 5 , 2 01 9 This certifi catio n acco mpan ies th e Rep ort p ursuan t to §90 6 o f th e Sarb anes-Oxley Act o f 2 00 2 an d sh all no t, ex cep t to the ex ten t requ ired b y the Sarban es- Ox ley Act of 20 02, be d eemed filed b y the Compan y for pu rp oses of §1 8 o f the Secu rit ies Ex chan ge Act o f 1 93 4, as amen ded . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 15 FINRA BROKER CHECK REPORT (INDIVIDUALS) - Broker/Dealer Request For Information BrokerCheck ReportPAUL VICTOR JARVISSection TitleReport SummaryBroker QualificationsRegistration and Employment HistoryCRD# 145753212 - 45 - 6Page(s) www.finra.org/brokercheckUser GuidanceBroker QualificationsRegistrationsThis section provides the self-regulatory organizations (SROs) and U.S. states/territories the broker is currentlyregistered and licensed with, the category of each license, and the date on which it became effective. This section alsoprovides, for every brokerage firm with which the broker is currently employed, the address of each branch where thebroker works.This individual is currently registered with 1 SRO and is licensed in 15 U.S. states and territories through his orher employer.Employment 1 of 1Firm Name:Main Office Address:Firm CRD#:PROEQUITIES, INC.157082801 HIGHWAY 280 SOUTHBIRMINGHAM, AL 35223SRO Category Status DateFINRAGeneral Securities RepresentativeAPPROVED07/29/2010U.S. State/TerritoryCategory Status DateAlaska AgentAPPROVED07/29/2010Arizona AgentAPPROVED07/29/2010California AgentAPPROVED07/29/2010Colorado AgentAPPROVED07/29/2010Florida AgentAPPROVED04/09/2015Idaho AgentAPPROVED07/29/2010Montana AgentAPPROVED07/29/2010Nebraska AgentAPPROVED04/28/2017Nevada AgentAPPROVED03/28/2017New Mexico AgentAPPROVED07/29/2010Oregon AgentAPPROVED07/29/2010Texas AgentAPPROVED04/28/2017Utah AgentAPPROVED07/29/2010U.S. State/TerritoryCategory Status DateWashington AgentAPPROVED07/29/2010Wyoming AgentAPPROVED07/29/20102©2019 FINRA. All rights reserved. Report about PAUL V. JARVIS. BrokerCheck ReportPETER SAMUEL BECKERSection TitleReport SummaryBroker QualificationsRegistration and Employment HistoryCRD# 580673312 - 45 - 6Page(s) www.finra.org/brokercheckUser GuidanceBroker QualificationsRegistrationsThis section provides the self-regulatory organizations (SROs) and U.S. states/territories the broker is currentlyregistered and licensed with, the category of each license, and the date on which it became effective. This section alsoprovides, for every brokerage firm with which the broker is currently employed, the address of each branch where thebroker works.This individual is currently registered with 1 SRO and is licensed in 9 U.S. states and territories through his orher employer.Employment 1 of 1Firm Name:Main Office Address:Firm CRD#:PROEQUITIES, INC.157082801 HIGHWAY 280 SOUTHBIRMINGHAM, AL 35223SRO Category Status DateFINRAGeneral Securities RepresentativeAPPROVED07/27/2011U.S. State/TerritoryCategory Status DateAlaska AgentAPPROVED08/01/2011Arizona AgentAPPROVED11/05/2013California AgentAPPROVED08/01/2011Idaho AgentAPPROVED08/01/2011Nevada AgentAPPROVED03/28/2017Oregon AgentAPPROVED08/01/2011Texas AgentAPPROVED05/04/2018Utah AgentAPPROVED08/01/2011Washington AgentAPPROVED08/01/2011Branch Office LocationsPROEQUITIES, INC.9725 3RD AVE NESUITE 6102©2019 FINRA. All rights reserved. Report about PETER S. BECKER. BrokerCheck ReportCHRISTOPHER ROBERT BATEMANSection TitleReport SummaryBroker QualificationsRegistration and Employment HistoryCRD# 650122112 - 45 - 6Page(s) www.finra.org/brokercheckUser GuidanceBroker QualificationsRegistrationsThis section provides the self-regulatory organizations (SROs) and U.S. states/territories the broker is currentlyregistered and licensed with, the category of each license, and the date on which it became effective. This section alsoprovides, for every brokerage firm with which the broker is currently employed, the address of each branch where thebroker works.This individual is currently registered with 1 SRO and is licensed in 12 U.S. states and territories through his orher employer.Employment 1 of 1Firm Name:Main Office Address:Firm CRD#:PROEQUITIES, INC.157082801 HIGHWAY 280 SOUTHBIRMINGHAM, AL 35223SRO Category Status DateFINRAGeneral Securities RepresentativeAPPROVED04/13/2017U.S. State/TerritoryCategory Status DateAlaska AgentAPPROVED04/13/2017Arizona AgentAPPROVED04/13/2017California AgentAPPROVED04/13/2017Colorado AgentAPPROVED04/13/2017Idaho AgentAPPROVED04/13/2017Montana AgentAPPROVED04/13/2017Nevada AgentAPPROVED04/13/2017New Mexico AgentAPPROVED04/13/2017Oregon AgentAPPROVED04/13/2017Texas AgentAPPROVED04/13/2017Washington AgentAPPROVED04/13/2017Wyoming AgentAPPROVED04/13/20172©2019 FINRA. All rights reserved. Report about CHRISTOPHER R. BATEMAN. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 16 FINRA BROKER CHECK REPORTS (COMPANY) - Broker/Dealer Request For Information BrokerCheck Report PROEQUITIES, INC. Section Title Report Summary Firm History CRD# 15708 1 9 Firm Profile 2 - 8 Page(s) Firm Operations 10 - 19 Disclosure Events 20 About BrokerCheck® BrokerCheck offers information on all current, and many former, registered securities brokers, and all current and former registered securities firms. FINRA strongly encourages investors to use BrokerCheck to check the background of securities brokers and brokerage firms before deciding to conduct, or continue to conduct, business with them. ·What is included in a BrokerCheck report? ·BrokerCheck reports for individual brokers include information such as employment history, professional qualifications, disciplinary actions, criminal convictions, civil judgments and arbitration awards. BrokerCheck reports for brokerage firms include information on a firm’s profile, history, and operations, as well as many of the same disclosure events mentioned above. ·Please note that the information contained in a BrokerCheck report may include pending actions or allegations that may be contested, unresolved or unproven. In the end, these actions or allegations may be resolved in favor of the broker or brokerage firm, or concluded through a negotiated settlement with no admission or finding of wrongdoing. ·Where did this information come from? ·The information contained in BrokerCheck comes from FINRA’s Central Registration Depository, or CRD® and is a combination of: o information FINRA and/or the Securities and Exchange Commission (SEC) require brokers and brokerage firms to submit as part of the registration and licensing process, and o information that regulators report regarding disciplinary actions or allegations against firms or brokers. ·How current is this information? ·Generally, active brokerage firms and brokers are required to update their professional and disciplinary information in CRD within 30 days. Under most circumstances, information reported by brokerage firms, brokers and regulators is available in BrokerCheck the next business day. ·What if I want to check the background of an investment adviser firm or investment adviser representative? ·To check the background of an investment adviser firm or representative, you can search for the firm or individual in BrokerCheck. If your search is successful, click on the link provided to view the available licensing and registration information in the SEC's Investment Adviser Public Disclosure (IAPD) website at https://www.adviserinfo.sec.gov. In the alternative, you may search the IAPD website directly or contact your state securities regulator at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/P455414. ·Are there other resources I can use to check the background of investment professionals? ·FINRA recommends that you learn as much as possible about an investment professional before deciding to work with them. Your state securities regulator can help you research brokers and investment adviser representatives doing business in your state. · Thank you for using FINRA BrokerCheck. For more information about FINRA, visit www.finra.org. Using this site/information means that you accept the FINRA BrokerCheck Terms and Conditions. A complete list of Terms and Conditions can be found at For additional information about the contents of this report, please refer to the User Guidance or www.finra.org/brokercheck. It provides a glossary of terms and a list of frequently asked questions, as well as additional resources. brokercheck.finra.org PROEQUITIES, INC. CRD# 15708 SEC# 8-32590 Main Office Location 2801 HIGHWAY 280 SOUTH BIRMINGHAM, AL 35223 Regulated by FINRA New Orleans Office Mailing Address P.O. BOX 518 BIRMINGHAM, AL 35201-0518 This firm is a brokerage firm and an investment adviser firm. For more information about investment adviser firms, visit the SEC's Investment Adviser Public Disclosure website at: Business Telephone Number 800-288-3035 https://www.adviserinfo.sec.gov Report Summary for this Firm This report summary provides an overview of the brokerage firm. Additional information for this firm can be found in the detailed report. Disclosure Events Brokerage firms are required to disclose certain criminal matters, regulatory actions, civil judicial proceedings and financial matters in which the firm or one of its control affiliates has been involved. Are there events disclosed about this firm?Yes The following types of disclosures have been reported: Type Count Regulatory Event 63 Arbitration 4 Firm Profile This firm is classified as a corporation. This firm was formed in Alabama on 07/11/1984. Its fiscal year ends in December. Firm History Information relating to the brokerage firm's history such as other business names and successions (e.g., mergers, acquisitions) can be found in the detailed report. Firm Operations Is this brokerage firm currently suspended with any regulator?No This firm conducts 23 types of businesses. This firm is affiliated with financial or investment institutions. This firm has referral or financial arrangements with other brokers or dealers. This firm is registered with: • the SEC • 1 Self-Regulatory Organization • 52 U.S. states and territories www.finra.org/brokercheck User Guidance 1©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance This firm is classified as a corporation. This firm was formed in Alabama on 07/11/1984. CRD# This section provides the brokerage firm's full legal name, "Doing Business As" name, business and mailing addresses, telephone number, and any alternate name by which the firm conducts business and where such name is used. Firm Profile Firm Names and Locations Its fiscal year ends in December. PROEQUITIES, INC. SEC# 15708 8-32590 Main Office Location Mailing Address Business Telephone Number Doing business as PROEQUITIES, INC. 800-288-3035 Regulated by FINRA New Orleans Office 2801 HIGHWAY 280 SOUTH BIRMINGHAM, AL 35223 P.O. BOX 518 BIRMINGHAM, AL 35201-0518 2©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance This section provides information relating to all direct owners and executive officers of the brokerage firm. Direct Owners and Executive Officers Firm Profile Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? PROTECTIVE LIFE CORPORATION PARENT 75% or more Yes Domestic Entity 08/1984 Yes Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? ANDERSON, ELIZABETH GILTZ VICE PRESIDENT, ADVISORY AND PLANNING Less than 5% No Individual 07/2016 Yes 2209248 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): Position Percentage of Ownership Position Start Date CYPHERT, MARK JOSEPH DIRECTOR/BOARD MEMBER Less than 5% Individual 07/2013 6233118 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): 3©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Direct Owners and Executive Officers (continued) Firm Profile Percentage of Ownership Is this a public reporting company? Does this owner direct the management or policies of the firm? Less than 5% No No Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? FLINT, CHRISTOPHER WADE PRESIDENT/CEO Less than 5% No Individual 07/2015 Yes 2804477 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? GUERRERA, DARREN CYRIL CFO Less than 5% No Individual 04/2015 Yes 2541120 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): HARTLEY, RORY MARSHALL 1464251 Legal Name & CRD# (if any): 4©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Direct Owners and Executive Officers (continued) Firm Profile Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? MANAGING DIRECTOR, PROTECTIVE SECURITIES Less than 5% No Individual 12/2004 No 1464251 Is this a domestic or foreign entity or an individual? Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? MEYERS, CRISTI L INTERIM DIRECTOR OF OPERATIONS Less than 5% No Individual 03/2018 Yes 1493867 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): Position Percentage of Ownership Position Start Date Does this owner direct the management or policies of the firm? MILLER, HAROLD BLAINE CHIEF SUPERVISION OFFICER Less than 5% Individual 12/2015 Yes 4214267 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): 5©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Direct Owners and Executive Officers (continued) Firm Profile Is this a public reporting company? Does this owner direct the management or policies of the firm? No Yes Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? SEURKAMP, AARON CHRISTOPHER SVP, LIFE AND ANNUITY DIVISION Less than 5% Individual 06/2018 Yes 4751862 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? WELLS, PAUL RICHARD DIRECTOR/BOARD MEMBER Less than 5% No Individual 04/2013 No 6188199 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): YOUHN, STEPHEN MICHAEL Individual 1414691 Is this a domestic or foreign entity or an individual? Legal Name & CRD# (if any): 6©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Direct Owners and Executive Officers (continued) Firm Profile Position Percentage of Ownership Is this a public reporting company? Position Start Date Does this owner direct the management or policies of the firm? CHIEF COMPLIANCE OFFICER Less than 5% No Individual 04/2016 Yes Is this a domestic or foreign entity or an individual? 7©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance This section provides information relating to any indirect owners of the brokerage firm. Indirect Owners Firm Profile THE DAI-ICHI LIFE INSURANCE COMPANY, LIMITED SHAREHOLDER PROTECTIVE LIFE CORPORATION 75% or more No Foreign Entity 02/2015 Yes Legal Name & CRD# (if any): Is this a domestic or foreign entity or an individual? Company through which indirect ownership is established Relationship to Direct Owner Relationship Established Percentage of Ownership Does this owner direct the management or policies of the firm? Is this a public reporting company? 8©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm History This section provides information relating to any successions (e.g., mergers, acquisitions) involving the firm. No information reported. 9©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Registrations This section provides information about the regulators (Securities and Exchange Commission (SEC), self-regulatory organizations (SROs), and U.S. states and territories) with which the brokerage firm is currently registered and licensed, the date the license became effective, and certain information about the firm's SEC registration. This firm is currently registered with the SEC, 1 SRO and 52 U.S. states and territories. SEC Registration Questions This firm is registered with the SEC as: A broker-dealer: A broker-dealer and government securities broker or dealer: A government securities broker or dealer only: This firm has ceased activity as a government securities broker or dealer: Yes Yes No No Federal Regulator Status Date Effective SEC Approved 10/11/1984 Self-Regulatory Organization Status Date Effective FINRA Approved 03/01/1985 10©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Registrations (continued) U.S. States & Territories Status Date Effective Alabama Approved 01/10/1985 Alaska Approved 04/09/1990 Arizona Approved 09/20/1985 Arkansas Approved 09/18/1985 California Approved 06/20/1985 Colorado Approved 04/02/1985 Connecticut Approved 08/18/1988 Delaware Approved 11/02/1988 District of Columbia Approved 02/25/1990 Florida Approved 04/29/1985 Georgia Approved 04/22/1985 Hawaii Approved 05/21/1990 Idaho Approved 02/11/1986 Illinois Approved 03/21/1985 Indiana Approved 05/12/1987 Iowa Approved 03/10/1986 Kansas Approved 04/23/1985 Kentucky Approved 01/23/1986 Louisiana Approved 03/03/1986 Maine Approved 09/09/1988 Maryland Approved 07/31/1985 Massachusetts Approved 08/07/1990 Michigan Approved 11/14/1986 Minnesota Approved 04/30/1990 Mississippi Approved 08/05/1985 Missouri Approved 06/24/1985 Montana Approved 01/29/1990 Nebraska Approved 05/07/1990 Nevada Approved 09/03/1985 New Hampshire Approved 04/17/1990 New Jersey Approved 08/25/1988 New Mexico Approved 02/26/1986 New York Approved 09/20/1993 U.S. States & Territories Status Date Effective North Carolina Approved 03/27/1985 North Dakota Approved 05/08/1990 Ohio Approved 01/16/1998 Oklahoma Approved 09/03/1985 Oregon Approved 03/26/1990 Pennsylvania Approved 02/20/1987 Rhode Island Approved 02/05/1990 South Carolina Approved 04/03/1985 South Dakota Approved 02/15/1990 Tennessee Approved 08/19/1985 Texas Approved 03/05/1985 Utah Approved 03/05/1990 Vermont Approved 05/31/1990 Virgin Islands Approved 08/05/2005 Virginia Approved 12/16/1986 Washington Approved 03/13/1990 West Virginia Approved 12/12/1988 Wisconsin Approved 01/02/1986 Wyoming Approved 01/21/1986 11©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Types of Business This section provides the types of business, including non-securities business, the brokerage firm is engaged in or expects to be engaged in. Other Types of Business This firm currently conducts 23 types of businesses. Types of Business Broker or dealer making inter-dealer markets in corporation securities over-the-counter Broker or dealer retailing corporate equity securities over-the-counter Broker or dealer selling corporate debt securities Underwriter or selling group participant (corporate securities other than mutual funds) Mutual fund retailer U S. government securities dealer U S. government securities broker Municipal securities dealer Municipal securities broker Broker or dealer selling variable life insurance or annuities Solicitor of time deposits in a financial institution Broker or dealer selling oil and gas interests Put and call broker or dealer or option writer Broker or dealer selling securities of non-profit organizations (e.g., churches, hospitals) Investment advisory services Broker or dealer selling tax shelters or limited partnerships in primary distributions Broker or dealer selling tax shelters or limited partnerships in the secondary market Trading securities for own account Private placements of securities Broker or dealer selling interests in mortgages or other receivables Broker or dealer involved in a networking, kiosk or similar arrangment with a: bank, savings bank or association, or credit union Broker or dealer involved in a networking, kiosk or similar arrangment with a: insurance company or agency Other - PURSUANT TO AMENDED MEMBERSHIP AGREEMENT, FIRM IS APPROVED TO PARTICIPATE IN A RE- INTRODUCING CLEARING AGREEMENT AND A BROKER-TO-BROKER SERVICE ARRANGEMENT. ADDITIONALLY, THE FIRM IS APPROVED TO PARTICIPATE IN SECONDARY MARKET TRADING ACTIVITIES. 12©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Types of Business This firm does not effect transactions in commodities, commodity futures, or commodity options. This firm does not engage in other non-securities business. Non-Securities Business Description: 13©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Clearing Arrangements This firm does not hold or maintain funds or securities or provide clearing services for other broker-dealer(s). Introducing Arrangements This firm does refer or introduce customers to other brokers and dealers. Name:PERSHING LLC Business Address:ONE PERSHING PLAZA JERSEY CITY, NJ 07399 CRD #:7560 Effective Date:02/16/2017 Description:THE FIRM'S CUSTOMER ACCOUNTS ARE MAINTAINED WITH PERSHING, LLC, PURSUANT TO OUR CLEARING AGREEMENT. 14©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Industry Arrangements This firm does have books or records maintained by a third party. Name:LASERFICHE Business Address:3545 LONG BEACH BLVD. LONG BEACH, CA 90807 Effective Date:12/30/2016 Description:LASERFICHE MAINTAINS ELECTRONIC DOCUMENT ORGANIZATION STORAGE FOR CLIENT RECORDS AND OTHER REQUIRED BOOKS AND RECORDS. Name:BROADRIDGE Business Address:5 DAKOTA DRIVE SUITE 300 LAKE SUCCESS, NY 11042 Effective Date:01/01/2016 Description:BROADRIDGE (EMERALD PUBLICATIONS) MAINTAINS AND STORES PROXY VOTING, WEBSITE TEMPLATES, AND PRE-APPROVED ARTICLE STORAGE Name:SUNGARD EXPERT SOLUTIONS (AKA FIS) Business Address:90 SOUTH 400 WEST SUITE 400 SALT LAKE CITY, UT 84101 Effective Date:09/30/2017 Description:SES MAINTAINS AND STORES ELECTRONIC RECORDS OF TRADE SURVEILLANCE AND SUPERVISION. Name:REGED Business Address:2100 GATEWAR CENTRE BLVD SUITE 200 MORRISVILLE, NC 27560 Effective Date:12/14/2016 Description:REGED MAINTAINS AND STORES BOOKS AND RECORDS RELATING TO ADVERTISING, POLITICAL CONTRIBUTIONS, CONTINUING EDUCATION, AND OBA SUBMISSIONS AND APPROVAL. Name:SMARSH Business Address:851 SW 6TH AVENUE SUITE 800 PORTLAND, OR 97204 15©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Industry Arrangements (continued) This firm does have accounts, funds, or securities maintained by a third party. Business Address:851 SW 6TH AVENUE SUITE 800 PORTLAND, OR 97204 Effective Date:05/16/2017 Description:SMARSH PROVIDES STORAGE OF ELECTRONIC COMMUNICATIONS Name:IRON MOUNTAIN Business Address:3100 1ST AVENUE SOUTH, BIRMINGHAM, AL 35233 Effective Date:12/15/2016 Description:IRON MOUNTAIN PROVIDES OFFSITE STORAGE OF COPIES OF PAPERWORK AND REPORTS. Name:NATIONAL REGULATORY SERVICES Business Address:29 BROOK STREET LAKEVILLE, CT 35244 Effective Date:04/01/2018 Description:NRS MAINTAINS AND STORES THE FIRM'S WRITTEN SUPERVISORY PROCEDURES, COMPLIANCE MANUALS AND FORM ADV PART 2 B BROCHURE SUPPLEMENT. Name:PROTECTIVE LIFE CORPORATION Business Address:ONE PERSHING PLAZA JERSEY CITY, NJ 07399 Effective Date:05/21/1997 Description:PROTECTIVE LIFE CORPORATION, PROEQUITIES, INC.'S PARENT COMPANY MAINTAINS CERTAIN ACCOUNTING AND REGULATORY RECORDS ON BEHALF OF PROEQUITIES, INC., SUCH AS TAX RETURNS, CORPORATE MINUTES AND PAYROLL RECORDS. Name:PERSHING LLC Business Address:ONE PERSHING PLAZA JERSEY CITY, NJ 07399 CRD #:7560 Effective Date:02/16/2017 Description:THE FIRM'S PROPRIETARY ACCOUNTS ARE MAINTAINED WITH PERSHING, LLC, PURSUANT TO OUR CLEARING AGREEMENT. 16©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Industry Arrangements (continued) This firm does have customer accounts, funds, or securities maintained by a third party. This firm does not have individuals who control its management or policies through agreement. This firm does not have individuals who wholly or partly finance the firm's business. Control Persons/Financing Name:PERSHING LLC Business Address:ONE PERSHING PLAZA JERSEY CITY, NJ 07399 CRD #:7560 Effective Date:02/16/2017 Description:THE FIRM'S CUSTOMER ACCOUNTS ARE MAINTAINED WITH PERSHING, LLC, PURSUANT TO OUR CLEARING AGREEMENT. 17©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Organization Affiliates This section provides information on control relationships the firm has with other firms in the securities, investment advisory, or banking business. This firm is, directly or indirectly: ·in control of ·controlled by ·or under common control with the following partnerships, corporations, or other organizations engaged in the securities or investment advisory business. Yes No No 04/08/2015 2801 U.S. HIGHWAY 280 SOUTH BIRMINGHAM, AL 35223 107542 PROTECTIVE INVESTMENT ADVISORS INC. is under common control with the firm. PROTECTIVE INVESTMENT ADVISORS IS UNDER COMMON CONTROL WITH PROEQUITIES, INC. BOTH ARE SUBSIDIARIES OF PROTECTIVE LIFE CORPORATION. Description: Investment Advisory Activities: Securities Activities: Country: Foreign Entity: Effective Date: Business Address: CRD #: No Yes No 07/30/1999 2801 HIGHWAY 280 SOUTH BIRMINGHAM, AL 35223 35490 INVESTMENT DISTRIBUTORS, INC. is under common control with the firm. INVESTMENT DISTRIBUTIONS, INC. IS UNDER COMMON CONTROL WITH PROEQUITIES, INC. BOTH ARE SUBSIDIARIES OF PROTECTIVE LIFE CORPORATION. Description: Investment Advisory Activities: Securities Activities: Country: Foreign Entity: Effective Date: Business Address: CRD #: 18©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Operations Organization Affiliates (continued) INVESTMENT DISTRIBUTIONS, INC. IS UNDER COMMON CONTROL WITH PROEQUITIES, INC. BOTH ARE SUBSIDIARIES OF PROTECTIVE LIFE CORPORATION. Description: This firm is not directly or indirectly, controlled by the following: ·bank holding company ·national bank ·state member bank of the Federal Reserve System ·state non-member bank ·savings bank or association ·credit union ·or foreign bank 19©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Disclosure Events All firms registered to sell securities or provide investment advice are required to disclose regulatory actions, criminal or civil judicial proceedings, and certain financial matters in which the firm or one of its control affiliates has been involved. For your convenience, below is a matrix of the number and status of disclosure events involving this brokerage firm or one of its control affiliates. Further information regarding these events can be found in the subsequent pages of this report. Final On AppealPending Regulatory Event 0 63 0 Arbitration N/A 4 N/A 20©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Disclosure Event Details What you should know about reported disclosure events: 1.BrokerCheck provides details for any disclosure event that was reported in CRD. It also includes summary information regarding FINRA arbitration awards in cases where the brokerage firm was named as a respondent. 2.Certain thresholds must be met before an event is reported to CRD, for example: o A law enforcement agency must file formal charges before a brokerage firm is required to disclose a particular criminal event. 3.Disclosure events in BrokerCheck reports come from different sources: o Disclosure events for this brokerage firm were reported by the firm and/or regulators. When the firm and a regulator report information for the same event, both versions of the event will appear in the BrokerCheck report. The different versions will be separated by a solid line with the reporting source labeled. 4.There are different statuses and dispositions for disclosure events: o A disclosure event may have a status of pending, on appeal,or final. §A "pending" event involves allegations that have not been proven or formally adjudicated. §An event that is "on appeal" involves allegations that have been adjudicated but are currently being appealed. §A "final" event has been concluded and its resolution is not subject to change. o A final event generally has a disposition of adjudicated, settled or otherwise resolved. §An "adjudicated" matter includes a disposition by (1) a court of law in a criminal or civil matter, or (2) an administrative panel in an action brought by a regulator that is contested by the party charged with some alleged wrongdoing. §A "settled" matter generally involves an agreement by the parties to resolve the matter. Please note that firms may choose to settle customer disputes or regulatory matters for business or other reasons. §A "resolved" matter usually involves no payment to the customer and no finding of wrongdoing on the part of the individual broker. Such matters generally involve customer disputes. 5.You may wish to contact the brokerage firm to obtain further information regarding any of the disclosure events contained in this BrokerCheck report. Regulatory - Final This type of disclosure event involves (1) a final, formal proceeding initiated by a regulatory authority (e.g., a state securities agency, self-regulatory organization, federal regulator such as the U.S. Securities and Exchange Commission, foreign financial regulatory body) for a violation of investment-related rules or regulations; or (2) a revocation or suspension of the authority of a brokerage firm or its control affiliate to act as an attorney, accountant or federal contractor. Disclosure 1 of 63 Reporting Source:Regulator Allegations:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT DISADVANTAGED CERTAIN RETIREMENT PLAN AND CHARITABLE ORGANIZATION CUSTOMERS THAT WERE ELIGIBLE TO PURCHASE CLASS A SHARES IN CERTAIN MUTUAL FUNDS WITHOUT A FRONT-END SALES CHARGE (ELIGIBLE CUSTOMERS). THE FINDINGS STATED THAT THESE ELIGIBLE CUSTOMERS WERE INSTEAD SOLD CLASS A SHARES WITH A FRONT-END SALES CHARGE OR CLASS B OR C SHARES WITH BACK-END SALES CHARGES AND HIGHER ONGOING FEES AND EXPENSES. THE FINDINGS ALSO STATED THAT THE FIRM FAILED TO ESTABLISH AND MAINTAIN A SUPERVISORY SYSTEM AND PROCEDURES REASONABLY DESIGNED TO ENSURE THAT ELIGIBLE CUSTOMERS WHO PURCHASED MUTUAL FUND SHARES RECEIVED THE BENEFIT OF APPLICABLE SALES CHARGE WAIVERS. Current Status:Final 21©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:FINRA Principal Sanction(s)/Relief Sought: Other Sanction(s)/Relief Sought: Date Initiated:03/07/2019 Docket/Case Number:2016052179401 Principal Product Type:Mutual Fund(s) Other Product Type(s): Allegations:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT DISADVANTAGED CERTAIN RETIREMENT PLAN AND CHARITABLE ORGANIZATION CUSTOMERS THAT WERE ELIGIBLE TO PURCHASE CLASS A SHARES IN CERTAIN MUTUAL FUNDS WITHOUT A FRONT-END SALES CHARGE (ELIGIBLE CUSTOMERS). THE FINDINGS STATED THAT THESE ELIGIBLE CUSTOMERS WERE INSTEAD SOLD CLASS A SHARES WITH A FRONT-END SALES CHARGE OR CLASS B OR C SHARES WITH BACK-END SALES CHARGES AND HIGHER ONGOING FEES AND EXPENSES. THE FINDINGS ALSO STATED THAT THE FIRM FAILED TO ESTABLISH AND MAINTAIN A SUPERVISORY SYSTEM AND PROCEDURES REASONABLY DESIGNED TO ENSURE THAT ELIGIBLE CUSTOMERS WHO PURCHASED MUTUAL FUND SHARES RECEIVED THE BENEFIT OF APPLICABLE SALES CHARGE WAIVERS. Resolution Date:03/07/2019 Resolution: Other Sanctions Ordered:REMEDIATION Sanction Details:THE FIRM WAS CENSURED AND REQUIRED TO PROVIDE REMEDIATION TO ELIGIBLE CUSTOMERS WHO QUALIFIED FOR, BUT DID NOT RECEIVE, THE APPLICABLE MUTUAL FUND SALES CHARGE WAIVERS, AND WITHIN 30 DAYS OF THE DATE THIS AWC IS ACCEPTED, THE FIRM WILL PROVIDE TO FINRA A DETAILED PLAN TO REMEDIATE ELIGIBLE CUSTOMERS BASED ON SPECIFIC CRITERIA THAT IS NOT UNACCEPTABLE TO FINRA. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Censure Acceptance, Waiver & Consent(AWC) 22©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceTHE FIRM WAS CENSURED AND REQUIRED TO PROVIDE REMEDIATION TO ELIGIBLE CUSTOMERS WHO QUALIFIED FOR, BUT DID NOT RECEIVE, THE APPLICABLE MUTUAL FUND SALES CHARGE WAIVERS, AND WITHIN 30 DAYS OF THE DATE THIS AWC IS ACCEPTED, THE FIRM WILL PROVIDE TO FINRA A DETAILED PLAN TO REMEDIATE ELIGIBLE CUSTOMERS BASED ON SPECIFIC CRITERIA THAT IS NOT UNACCEPTABLE TO FINRA. Regulator Statement THE FIRM ADVISED FINRA IT WAS UNDERTAKING A REVIEW TO DETERMINE WHETHER IT PROVIDED AVAILABLE SALES CHARGE WAIVERS TO ELIGIBLE CUSTOMERS. AFTER IDENTIFYING ELIGIBLE CUSTOMER ACCOUNTS, FINRA STAFF REQUESTED THAT THE FIRM REVIEW THE APPLICABLE SALES, DATING BACK TO JANUARY 1, 2011. THE FIRM ESTIMATES THAT, SINCE JANUARY 1, 2011, APPROXIMATELY 350 CUSTOMER ACCOUNTS PURCHASED MUTUAL FUND SHARES FOR WHICH AN AVAILABLE SALES CHARGE WAIVER WAS NOT APPLIED. AS A RESULT, THE FIRM ESTIMATES THAT ELIGIBLE CUSTOMERS WERE OVERCHARGED BY APPROXIMATELY $136,660 FOR MUTUAL FUND PURCHASES MADE SINCE JANUARY 1, 2011. AS PART OF THIS SETTLEMENT, THE FIRM AGREES TO PAY RESTITUTION TO ELIGIBLE CUSTOMERS ON THE TERMS SPECIFIED BELOW, WHICH IS ESTIMATED TO TOTAL $152,880 (I.E., THE AMOUNT ELIGIBLE CUSTOMERS WERE OVERCHARGED, INCLUSIVE OF INTEREST). THE FIRM HAS REPRESENTED IT WILL ALSO ENSURE THAT RETIREMENT AND CHARITABLE WAIVERS ARE APPROPRIATELY APPLIED TO ALL FUTURE TRANSACTIONS. Disclosure 2 of 63 i Reporting Source:Regulator Allegations:IA RELEASE 40-5125, MARCH 11, 2019: THE SECURITIES AND EXCHANGE COMMISSION DEEMS IT APPROPRIATE AND IN THE PUBLIC INTEREST THAT PUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS BE INSTITUTED AGAINST PROEQUITIES, INC. ("RESPONDENT"). ON THE BASIS OF THIS ORDER AND RESPONDENT'S OFFER, THE COMMISSION FINDS THAT THESE PROCEEDINGS ARISE OUT OF BREACHES OF FIDUCIARY DUTY AND INADEQUATE DISCLOSURES BY THE RESPONDENT IN CONNECTION WITH ITS MUTUAL FUND SHARE CLASS SELECTION PRACTICES AND THE FEES IT RECEIVED. AT TIMES DURING THE RELEVANT PERIOD, RESPONDENT PURCHASED, RECOMMENDED, OR HELD FOR ADVISORY CLIENTS MUTUAL FUND SHARE CLASSES THAT CHARGED 12B-1 FEES INSTEAD OF LOWER-COST SHARE CLASSES OF THE SAME FUNDS FOR WHICH THE CLIENTS WERE ELIGIBLE. RESPONDENT RECEIVED 12B-1 FEES IN CONNECTION WITH THESE INVESTMENTS. RESPONDENT FAILED TO DISCLOSE IN ITS FORM ADV OR OTHERWISE THE CONFLICTS OF INTEREST RELATED TO (A) ITS RECEIPT OF 12B-1 FEES, AND/OR (B) ITS SELECTION OF MUTUAL FUND SHARE CLASSES THAT PAY SUCH FEES. DURING THE RELEVANT PERIOD, RESPONDENT RECEIVED 12B-1 FEES FOR ADVISING CLIENTS TO INVEST IN OR HOLD SUCH MUTUAL FUND SHARE CLASSES. AS A RESULT OF THE CONDUCT, RESPONDENT WILLFULLY VIOLATED SECTIONS 206(2) AND 207 OF THE ADVISERS ACT. Current Status:Final 23©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:UNITED STATES SECURITIES AND EXCHANGE COMMISSION Principal Sanction(s)/Relief Sought: Other Other Sanction(s)/Relief Sought: N/A Date Initiated:03/11/2019 Docket/Case Number:3-19028 Principal Product Type:Mutual Fund(s) Other Product Type(s): IA RELEASE 40-5125, MARCH 11, 2019: THE SECURITIES AND EXCHANGECOMMISSION DEEMS IT APPROPRIATE AND IN THE PUBLIC INTEREST THATPUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS BEINSTITUTED AGAINST PROEQUITIES, INC. ("RESPONDENT"). ON THE BASISOF THIS ORDER AND RESPONDENT'S OFFER, THE COMMISSION FINDSTHAT THESE PROCEEDINGS ARISE OUT OF BREACHES OF FIDUCIARYDUTY AND INADEQUATE DISCLOSURES BY THE RESPONDENT INCONNECTION WITH ITS MUTUAL FUND SHARE CLASS SELECTIONPRACTICES AND THE FEES IT RECEIVED. AT TIMES DURING THE RELEVANTPERIOD, RESPONDENT PURCHASED, RECOMMENDED, OR HELD FORADVISORY CLIENTS MUTUAL FUND SHARE CLASSES THAT CHARGED 12B-1FEES INSTEAD OF LOWER-COST SHARE CLASSES OF THE SAME FUNDSFOR WHICH THE CLIENTS WERE ELIGIBLE. RESPONDENT RECEIVED 12B-1FEES IN CONNECTION WITH THESE INVESTMENTS. RESPONDENT FAILEDTO DISCLOSE IN ITS FORM ADV OR OTHERWISE THE CONFLICTS OFINTEREST RELATED TO (A) ITS RECEIPT OF 12B-1 FEES, AND/OR (B) ITS SELECTION OF MUTUAL FUND SHARE CLASSES THAT PAY SUCH FEES. DURING THE RELEVANT PERIOD, RESPONDENT RECEIVED 12B-1 FEES FOR ADVISING CLIENTS TO INVEST IN OR HOLD SUCH MUTUAL FUND SHARE CLASSES. AS A RESULT OF THE CONDUCT, RESPONDENT WILLFULLY VIOLATED SECTIONS 206(2) AND 207 OF THE ADVISERS ACT. Resolution Date:03/11/2019 Resolution: Other Sanctions Ordered:UNDERTAKINGS AND PREJUDGMENT INTEREST Sanction Details:THE RESPONDENT SHALL CEASE AND DESIST FROM COMMITTING OR CAUSING ANY VIOLATIONS AND ANY FUTURE VIOLATIONS OF SECTIONS 206(2) AND 207 OF THE ADVISERS ACT. RESPONDENT IS CENSURED, SHALL PAY DISGORGEMENT OF $1,638,191.06 AND PREJUDGMENT INTEREST OF $214,192.04, AND SHALL COMPLY WITH THE UNDERTAKINGS ENUMERATED IN THE OFFER OF SETTLEMENT. Regulator Statement RESPONDENT HAS SUBMITTED AN OFFER OF SETTLEMENT WHICH THE COMMISSION HAS DETERMINED TO ACCEPT. IN VIEW OF THE FOREGOING, THE COMMISSION DEEMS IT APPROPRIATE IN THE PUBLIC INTEREST TO IMPOSE THE SANCTIONS AGREED TO IN THE RESPONDENT'S OFFER. RESPONDENT SELF-REPORTED TO THE COMMISSION THE VIOLATIONS DISCUSSED IN THIS ORDER PURSUANT TO THE DIVISION OF ENFORCEMENT'S SHARE CLASS SELECTION DISCLOSURE INITIATIVE ("SCSD INITIATIVE"). ACCORDINGLY, THIS ORDER AND RESPONDENT'S OFFER ARE BASED ON THE INFORMATION SELF-REPORTED BY RESPONDENT. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? Yes Sanctions Ordered:Censure Disgorgement/Restitution Cease and Desist/Injunction Order 24©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceRESPONDENT HAS SUBMITTED AN OFFER OF SETTLEMENT WHICH THECOMMISSION HAS DETERMINED TO ACCEPT. IN VIEW OF THE FOREGOING,THE COMMISSION DEEMS IT APPROPRIATE IN THE PUBLIC INTEREST TOIMPOSE THE SANCTIONS AGREED TO IN THE RESPONDENT'S OFFER.RESPONDENT SELF-REPORTED TO THE COMMISSION THE VIOLATIONS DISCUSSED IN THIS ORDER PURSUANT TO THE DIVISION OF ENFORCEMENT'S SHARE CLASS SELECTION DISCLOSURE INITIATIVE ("SCSD INITIATIVE"). ACCORDINGLY, THIS ORDER AND RESPONDENT'S OFFER ARE BASED ON THE INFORMATION SELF-REPORTED BY RESPONDENT. Disclosure 3 of 63 i Reporting Source:Regulator Initiated By:CONNECTICUT Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/20/2018 Docket/Case Number:CO-18-8400-S URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Allegations:ON JULY 20, 2018, THE BANKING COMMISSIONER ENTERED A CONSENT ORDER (NO. CO-18-8400-S) WITH RESPECT TO PROEQUITIES, INC. THE CONSENT ORDER ALLEGED THAT THE FIRM VIOLATED SECTION 36B-31- 6F(B) OF THE REGULATIONS UNDER THE CONNECTICUT UNIFORM SECURITIES ACT BY FAILING TO ESTABLISH, ENFORCE AND MAINTAIN AN ADEQUATE SUPERVISORY SYSTEM IN CONNECTION WITH THE ACTIVITIES OF FORMER AGENT MATTHEW CHARLES WOODARD (CRD NO. 5699485). DURING HIS ASSOCIATION WITH THE FIRM, WOODARD WAS ALSO THE FOUNDING MEMBER, CONTROL PERSON AND TREASURER OF TOPPIKGINK 539, LLC D/B/A TITAN BROKERAGE SERVICES, AN ACTIVITY THAT WOODARD DID NOT DISCLOSE TO PROEQUITIES, INC. WOODARD ALLEGEDLY PERSUADED ONE OF HIS PROEQUITIES CLIENTS TO AUTHORIZE A $10,000 WIRE TRANSFER FROM THE INVESTOR'S PROEQUITIES ACCOUNT TO TOPPIKGINK 539, LLC'S ACCOUNT, AND THAT WOODARD USED AT LEAST A PORTION OF THE WIRED FUNDS NOT FOR INVESTMENT BUT TO PAY HIS PERSONAL EXPENSES. THE CONSENT ORDER ALLEGED THAT PROEQUITIES, INC. SHOULD HAVE TAKEN ADDITIONAL STEPS TO REVIEW THE TRANSACTION IN QUESTION. Current Status:Final Resolution Date:07/20/2018 Resolution: Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Consent 25©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:THE CONSENT ORDER FINED PROEQUITIES, INC. $7,500 AND DIRECTED IT TO CEASE AND DESIST FROM REGULATORY VIOLATIONS. IN ADDITION, THE CONSENT ORDER REQUIRED THAT THE FIRM REIMBURSE THE AFFECTED INVESTOR $90 TO COVER WIRE TRANSFER FEES. (PURSUANT TO A SEPARATE MARCH 23, 2018 CONSENT ORDER WITH WOODARD (NO. CO-17-8279-S), PROVISIONS HAD BEEN MADE FOR THE AFFECTED INVESTOR TO RECEIVE $325,000 IN RESTITUTION.) Sanction Details:SEE RESPONSE TO ITEM 13.B. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $7,500.00 Cease and Desist/Injunction i Reporting Source:Firm Initiated By:STATE OF CONNECTICUT DEPARTMENT OF BANKING, SECURITIES AND BUSINESS INVESTMENTS DIVISION Date Initiated:07/20/2018 Allegations:THE DEPARTMENT ALLEGED THAT THE FIRM VIOLATED CERTAIN PROVISIONS OF THE SECTION 36B-31-6F(B) OF THE CONNECTICUT UNIFORM SECURITIES ACT, WHICH REQUIRES BROKER DEALERS TO ESTABLISH, ENFORCE AND MAINTAIN A SYSTEM FOR SUPERVISING THE ACTIVITIES OF ITS AGENTS THAT IS REASONABLY DESIGNED TO ACHIEVE COMPLIANCE WITH APPLICABLE SECURITIES LAWS AND REGULATIONS. SPECIFICALLY, THE DEPARTMENT ALLEGED THAT PROEQUITIES DID NOT HAVE PROCEDURES IN PLACE TO CONFIRM THE PURPOSE AND NATURE OF A WRITTEN, THIRD-PARTY WIRE REQUEST, EVEN THOUGH THE WIRE REQUEST WAS SIGNED BY THE CLIENT. FURTHERMORE, THE DEPARTMENT ALLEGED THAT PROEQUITIES FAILED TO SEEK FURTHER INFORMATION REGARDING THE FACT THAT THE THIRD PARTY WAS AN UNDISCLOSED OUTSIDE BUSINESS ACTIVITY OF THE CLIENT'S REGISTERED REPRESENTATIVE, EVEN THOUGH THE REGISTERED REPRESENTATIVE HAD BEEN ASKED TO DISCLOSE (AND FAILED TO DISCLOSE) ALL OUTSIDE BUSINESS ACTIVITIES TO PROEQUITIES. WITHOUT ADMITTING OR DENYING THE FINDINGS OF FACT OR CONCLUSIONS OF LAW, THE FIRM AGREED TO THE CONSENT ORDER, A $7,500 MONETARY FINE, AND $90 AS REIMBURSEMENT TO THE CLIENT. Current Status:Final 26©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/20/2018 Docket/Case Number:CO-18-8400-S Principal Product Type:No Product Other Product Type(s): Resolution Date:07/20/2018 Resolution: Other Sanctions Ordered: Sanction Details:CEASE AND DESIST VIOLATION OF CERTAIN PROVISIONS OF THE SECTION 36B-31-6F(B) OF THE CONNECTICUT UNIFORM SECURITIES ACT; A $7,500 FINE WAS LEVIED AGAINST THE FIRM, WHICH THE FIRM PAID ON 7/17/2018. THE FIRM WAS ALSO REQUIRED TO REIMBURSE THE FORMER CLIENT $90 FOR WIRE TRANSFER FEES. Sanctions Ordered:Monetary/Fine $7,590.00 Cease and Desist/Injunction Consent Disclosure 4 of 63 i Reporting Source:Firm Initiated By:STATE OF HAWAII DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Date Initiated:06/29/2017 Docket/Case Number:SEU-2012-044 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF HAWAII DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS ALLEGED THAT PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER HRS 485A-604, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN HAWAII. Current Status:Final 27©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Resolution Date:06/29/2017 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER HRS 485A-604. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO HAWAII. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING HAWAII. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 5 of 63 i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, NORTH CAROLINA ALLEGED THAT PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER N.C.G.S. 78A-47(B) AND 78C-28(B), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NORTH CAROLINA. Current Status:Final 28©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:STATE OF NORTH CAROLINA DEPARTMENT OF THE SECRETARY OF STATE SECURITIES DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:05/25/2017 Docket/Case Number:NC FILE NO: 14 SEC 086 Principal Product Type:No Product Other Product Type(s): Resolution Date:05/25/2017 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER N.C.G.S. 78A-47(B) AND 78C-28(B). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO NORTH CAROLINA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING NORTH CAROLINA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 6 of 63 i Reporting Source:Regulator 29©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:ARKANSAS SECURITIES DEPARTMENT Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/03/2016 Docket/Case Number:S-16-0108-OR01 URL for Regulatory Action:HTTP://WWW.SECURITIES.ARKANSAS.GOV/!USERFILES/PROEQUITIES,% 20INC_%20CONSENT%20ORDER%20S-16-0108-17-OR01.PDF Principal Product Type:Other Other Product Type(s):REAL ESTATE SECURITY Allegations:THE FIRM EMPLOYED AN AGENT OF THE FIRM TO SELL SECURITIES TO AN ARKANSAS RESIDENT WHILE THE AGENT WAS NOT REGISTERED WITH THE ARKANSAS SECURITIES DEPARTMENT. Current Status:Final Resolution Date:03/13/2017 Resolution: Other Sanctions Ordered: Sanction Details:THE FIRM WAS FINED $1000.00. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $1,000.00 Consent i Reporting Source:Firm Allegations:THE DEPARTMENT ALLEGED THAT THE FIRM VIOLATED ARK. CODE ANN. SS 23-42-301(B)(1), WHICH STATES THAT IT IS UNLAWFUL FOR A REGISTERED BROKER-DEALER TO EMPLOY AN UNREGISTERED AGENT EXCEPT A NONRESIDENT AGENT WHO IS REGISTERED BY ANY OTHER STATE SECURITIES ADMINISTRATOR AND WHO EFFECTS TRANSACTIONS IN THIS STATE EXCLUSIVELY WITH REGISTERED BROKER-DEALERS. Current Status:Final 30©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:ARKANSAS SECURITIES DEPARTMENT Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/03/2016 Docket/Case Number:S-16-0108-17-OR01 Principal Product Type:No Product Other Product Type(s): Resolution Date:03/13/2017 Resolution: Other Sanctions Ordered: Sanction Details:A $1,000 MONETARY FINE WAS LEVIED AGAINST THE FIRM. THE FIRM PAID THE FINE ON 3/17/2017. Firm Statement THE DEPARTMENT ALLEGED THAT THE FIRM VIOLATED ARK. CODE ANN. SS 23-42-301(B)(1) WHEN ITS REGISTERED REPRESENTATIVE, WHO WAS NOT REGISTERED WITH THE DEPARTMENT, SOLD A SECURITY ISSUED BY FT. COLLINS MULTIFAMILY III DST TO ONE ARKANSAS RESIDENT. WITHOUT ADMITTING OR DENYING THE FINDINGS OF FACT OR CONCLUSIONS OF LAW, THE FIRM AGREED TO THE CONSENT ORDER AND A $1,000 MONETARY FINE. Sanctions Ordered:Monetary/Fine $1,000.00 Consent Disclosure 7 of 63 i Reporting Source:Regulator Allegations:1.SECTION 401(1) OF THE SECURITIES ACT, MCL 451.2401(1), PROHIBITS A PERSON FROM ACTING AS A BROKER-DEALER IN MICHIGAN UNLESS THE PERSON IS REGISTERED OR PROPERLY EXEMPT FROM REGISTRATION. 2. SECTIONS 402(4) AND 402(5) OF THE SECURITIES ACT, MCL 451.2402(4) AND MCL 451.2402(5), PROHIBIT A BROKER-DEALER FROM EMPLOYING OR ASSOCIATING WITH AN AGENT UNLESS THE AGENT IS REGISTERED WITH THE BROKER-DEALER. 3. SECTION 403(1) OF THE SECURITIES ACT, MCL 451.2403(1), PROHIBITS A PERSON FROM ACTING AS AN INVESTMENT ADVISER IN MICHIGAN UNLESS THE PERSON IS REGISTERED OR PROPERLY EXEMPT FROM REGISTRATION. 4. SECTION 403(4) OF THE SECURITIES ACT, MCL 451.2403(4), PROHIBITS AN INVESTMENT ADVISER FROM EMPLOYING OR ASSOCIATING WITH AN INVESTMENT ADVISER REPRESENTATIVE THAT TRANSACTS BUSINESS IN THE STATE ON BEHALF OF THE INVESTMENT ADVISER UNLESS THE INDIVIDUAL IS REGISTERED AS AN INVESTMENT ADVISER REPRESENTATIVE. 5. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, XXXXX ACTED AS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISER IN MICHIGAN, IN VIOLATION OF SECTIONS 401(1) AND 403(1) OF THE SECURITIES ACT, MCL 451.2401(1) AND MLC 451.2403(1). 6. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 604 OF THE SECURITIES ACT, MCL 451.2604. 7. AS A RESULT OF THIS CONSENT ORDER, THE FOLLOWING RELIEF IS APPROPRIATE AND IN THE PUBLIC INTEREST. Current Status:Final 31©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:MICHIGAN Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: CONSENT ORDER Date Initiated:01/03/2017 Docket/Case Number:331191 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): 1.SECTION 401(1) OF THE SECURITIES ACT, MCL 451.2401(1), PROHIBITS APERSON FROM ACTING AS A BROKER-DEALER IN MICHIGAN UNLESS THEPERSON IS REGISTERED OR PROPERLY EXEMPT FROM REGISTRATION.2. SECTIONS 402(4) AND 402(5) OF THE SECURITIES ACT, MCL 451.2402(4)AND MCL 451.2402(5), PROHIBIT A BROKER-DEALER FROM EMPLOYING OR ASSOCIATING WITH AN AGENT UNLESS THE AGENT IS REGISTERED WITH THE BROKER-DEALER. 3. SECTION 403(1) OF THE SECURITIES ACT, MCL 451.2403(1), PROHIBITS A PERSON FROM ACTING AS AN INVESTMENT ADVISER IN MICHIGAN UNLESS THE PERSON IS REGISTERED OR PROPERLY EXEMPT FROM REGISTRATION. 4. SECTION 403(4) OF THE SECURITIES ACT, MCL 451.2403(4), PROHIBITS AN INVESTMENT ADVISER FROM EMPLOYING OR ASSOCIATING WITH AN INVESTMENT ADVISER REPRESENTATIVE THAT TRANSACTS BUSINESS IN THE STATE ON BEHALF OF THE INVESTMENT ADVISER UNLESS THE INDIVIDUAL IS REGISTERED AS AN INVESTMENT ADVISER REPRESENTATIVE. 5. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, XXXXX ACTED AS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISER IN MICHIGAN, IN VIOLATION OF SECTIONS 401(1) AND 403(1) OF THE SECURITIES ACT, MCL 451.2401(1) AND MLC 451.2403(1). 6. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 604 OF THE SECURITIES ACT, MCL 451.2604. 7. AS A RESULT OF THIS CONSENT ORDER, THE FOLLOWING RELIEF IS APPROPRIATE AND IN THE PUBLIC INTEREST. Resolution Date:01/03/2017 Resolution: Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Consent 32©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered: Sanction Details:IN ACCORDANCE WITH THE TERMS OF THE MULTISTATE SETTLEMENT, $435,000 PAYABLE TO MULTIPLE STATES. $8,207.55 PAYABLE TO THE BUREAU'S SECURITIES INVESTOR EDUCATION AND TRAINING FUND AS ITS PORTION OF THE TOTAL AMOUNT, WHICH PORTION SHALL BE CONSIDERED A CIVIL FINE. Sanctions Ordered:Monetary/Fine $8,207.55 i Reporting Source:Firm Initiated By:MICHIGAN DEPARTMENT OF LICENSING AND REGULATORY AFFAIRS, CORPORATIONS, SECURITIES, AND COMMERCIAL LICENSING BUREAU Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:01/03/2017 Docket/Case Number:331191 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE MICHIGAN DEPARTMENT OF LICENSING AND REGULATORY AFFAIRS, CORPORATIONS, SECURITIES, AND COMMERCIAL LICENSING BUREAU ALLEGED THAT PROEQUITIES VIOLATED SECTION 604 OF THE SECURITIES ACT, MCL 451.2604, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MICHIGAN. Current Status:Final Resolution Date:01/03/2017 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 604 OF THE SECURITIES ACT, MCL 451.2604. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MICHIGAN. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 33©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MICHIGAN. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MICHIGAN. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 8 of 63 i Reporting Source:Firm Initiated By:LOUISIANA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:09/26/2016 Docket/Case Number:OFI-2016-005 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, LOUISIANA ALLEGED THAT PROEQUITIES VIOLATED THE LOUISIANA LSA-R.S. 51:703, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN LOUISIANA. Current Status:Final Resolution Date:09/26/2016 Resolution:Consent 34©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Resolution Date:09/26/2016 Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER R.S. 51:713. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO LOUISIANA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING LOUISIANA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Disclosure 9 of 63 i Reporting Source:Regulator Allegations:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT FAILED TO ESTABLISH, MAINTAIN, AND ENFORCE ADEQUATE WRITTEN PROCEDURES TO SUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS (ETFS) AND THE CREATION AND DISSEMINATION OF CONSOLIDATED REPORTS. THE FINDINGS STATED THAT THE FIRM PERMITTED ITS REGISTERED REPRESENTATIVES TO SOLICIT TRANSACTIONS IN NON- TRADITIONAL ETFS, THOUGH THE FIRM DID NOT HAVE IN PLACE WRITTEN PROCEDURES RELATING TO SUITABILITY AND SUPERVISION OF RECOMMENDATIONS INVOLVING NON-TRADITIONAL ETFS. THE FIRM ALSO FAILED TO HAVE IN PLACE A PROCEDURE OR SYSTEM TO IDENTIFY INSTANCES IN WHICH A CUSTOMER MIGHT BE HOLDING A POSITION IN A NON-TRADITIONAL ETF FOR AN EXTENDED PERIOD OF TIME. IN ADDITION, THE FIRM DID NOT PROVIDE ADEQUATE TRAINING AND GUIDANCE TO ITS REGISTERED REPRESENTATIVES REGARDING THE UNIQUE CHARACTERISTICS AND RISKS OF NON-TRADITIONAL ETFS. THE FINDINGS ALSO STATED THAT THE FIRM PERMITTED ITS REGISTERED REPRESENTATIVES TO PREPARE AND DISSEMINATE CONSOLIDATED REPORTS USING FIRM-APPROVED SOFTWARE APPLICATIONS. SOME OF THOSE APPLICATIONS PROVIDED THE ABILITY TO MANUALLY ENTER SECURITIES POSITIONS AND VALUES. THE FIRM DID NOT HAVE WRITTEN PROCEDURES ADDRESSING THE USE AND SUPERVISION OF CONSOLIDATED REPORTS. THE FINDINGS ALSO INCLUDED THAT PERMITTED ITS REGISTERED REPRESENTATIVES, WHO WERE ALSO INVESTMENT ADVISERS (RR/IAS) TO OFFER INVESTMENT-ADVISORY SERVICES THROUGH INDEPENDENT REGISTERED INVESTMENT ADVISERS (RIAS). THE FIRM HAD IN PLACE WRITTEN PROCEDURES FOR SUPERVISION AND RECORDKEEPING OF SUCH ACTIVITIES BUT FAILED TO ENFORCE ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF REGISTERED PERSONS CONDUCTING INVESTMENT-ADVISORY BUSINESS THROUGH AN INDEPENDENT RIA. SPECIFICALLY, THE FIRM FAILED TO ENSURE THAT CERTAIN RR/IAS COMPLIED WITH THE FIRM'S REQUIREMENT THAT THEY PROVIDE WRITTEN NOTICE TO THE FIRM'S COMPLIANCE DEPARTMENT OF ANY CHANGES IN THEIR RIA BUSINESS OR CLIENTELE. IN ADDITION, THE FIRM'S WRITTEN PROCEDURES REQUIRED THAT SUPERVISING PRINCIPALS UTILIZE A "SECTION 40 BLOTTER" TO REVIEW RR/IA SECURITIES TRANSACTIONS EXECUTED AWAY FROM THE FIRM, BUT IN CERTAIN CIRCUMSTANCES THE FIRM DID NOT ENFORCE THAT REQUIREMENT, AND INDIVIDUAL SUPERVISING PRINCIPALS WERE PERMITTED TO UTILIZE THEIR OWN METHODS TO REVIEW THESE TRANSACTIONS AND OFTEN DID NOT DOCUMENT THE REVIEWS. FINALLY, THE FIRM'S WRITTEN PROCEDURES REQUIRED THAT COMPLIANCE DEPARTMENT PERSONNEL CONDUCT AND DOCUMENT AN ANNUAL REVIEW OF EACH RR/IA'S BUSINESS AND RECORDKEEPING PRACTICES, BUT SUCH REVIEWS WERE NOT CONSISTENTLY PERFORMED OR DOCUMENTED. FINRA FOUND THAT THE FIRM FAILED TO ADEQUATELY ENFORCE CERTAIN PROVISIONS OF ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND 1035-EXCHANGE TRANSACTIONS. THE FIRM MAINTAINED WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES THAT IDENTIFIED, BUT DID NOT SUFFICIENTLY ADDRESS, PARTICULAR FACTORS TO BE CONSIDERED IN ASSESSING THE SUITABILITY OF A RECOMMENDATION TO BUY OR SELL, IN WHOLE OR IN PART, A VARIABLE ANNUITY. THE FIRM FAILED TO ENSURE THAT SUCH REVIEWS WERE ALWAYS PERFORMED AND DOCUMENTED AND FAILED TO ENSURE THAT REVIEWS OF A WEEKLY 1035-EXCHANGE REPORT WERE ALWAYS CONDUCTED TIMELY AND CONSISTENTLY. THE FIRM'S WRITTEN PROCEDURES ADDRESSING SUITABILITY OF VARIABLE-ANNUITY RECOMMENDATIONS IDENTIFIED, BUT DID NOT ADEQUATELY DISCUSS, ANNUITY SHARE CLASS AS A FACTOR TO BE CONSIDERED IN ASSESSING SUITABILITY. Current Status:Final 35©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceWITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTEDTO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT FAILED TOESTABLISH, MAINTAIN, AND ENFORCE ADEQUATE WRITTEN PROCEDURESTO SUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS(ETFS) AND THE CREATION AND DISSEMINATION OF CONSOLIDATEDREPORTS. THE FINDINGS STATED THAT THE FIRM PERMITTED ITSREGISTERED REPRESENTATIVES TO SOLICIT TRANSACTIONS IN NON-TRADITIONAL ETFS, THOUGH THE FIRM DID NOT HAVE IN PLACE WRITTENPROCEDURES RELATING TO SUITABILITY AND SUPERVISION OFRECOMMENDATIONS INVOLVING NON-TRADITIONAL ETFS. THE FIRM ALSO FAILED TO HAVE IN PLACE A PROCEDURE OR SYSTEM TO IDENTIFY INSTANCES IN WHICH A CUSTOMER MIGHT BE HOLDING A POSITION IN A NON-TRADITIONAL ETF FOR AN EXTENDED PERIOD OF TIME. IN ADDITION, THE FIRM DID NOT PROVIDE ADEQUATE TRAINING AND GUIDANCE TO ITS REGISTERED REPRESENTATIVES REGARDING THE UNIQUE CHARACTERISTICS AND RISKS OF NON-TRADITIONAL ETFS. THE FINDINGS ALSO STATED THAT THE FIRM PERMITTED ITS REGISTERED REPRESENTATIVES TO PREPARE AND DISSEMINATE CONSOLIDATED REPORTS USING FIRM-APPROVED SOFTWARE APPLICATIONS. SOME OF THOSE APPLICATIONS PROVIDED THE ABILITY TO MANUALLY ENTER SECURITIES POSITIONS AND VALUES. THE FIRM DID NOT HAVE WRITTEN PROCEDURES ADDRESSING THE USE AND SUPERVISION OF CONSOLIDATED REPORTS. THE FINDINGS ALSO INCLUDED THAT PERMITTED ITS REGISTERED REPRESENTATIVES, WHO WERE ALSO INVESTMENT ADVISERS (RR/IAS) TO OFFER INVESTMENT-ADVISORY SERVICES THROUGH INDEPENDENT REGISTERED INVESTMENT ADVISERS (RIAS). THE FIRM HAD IN PLACE WRITTEN PROCEDURES FOR SUPERVISION AND RECORDKEEPING OF SUCH ACTIVITIES BUT FAILED TO ENFORCE ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF REGISTERED PERSONS CONDUCTING INVESTMENT-ADVISORY BUSINESS THROUGH AN INDEPENDENT RIA. SPECIFICALLY, THE FIRM FAILED TO ENSURE THAT CERTAIN RR/IAS COMPLIED WITH THE FIRM'S REQUIREMENT THAT THEY PROVIDE WRITTEN NOTICE TO THE FIRM'S COMPLIANCE DEPARTMENT OF ANY CHANGES IN THEIR RIA BUSINESS OR CLIENTELE. IN ADDITION, THE FIRM'S WRITTEN PROCEDURES REQUIRED THAT SUPERVISING PRINCIPALS UTILIZE A "SECTION 40 BLOTTER" TO REVIEW RR/IA SECURITIES TRANSACTIONS EXECUTED AWAY FROM THE FIRM, BUT IN CERTAIN CIRCUMSTANCES THE FIRM DID NOT ENFORCE THAT REQUIREMENT, AND INDIVIDUAL SUPERVISING PRINCIPALS WERE PERMITTED TO UTILIZE THEIR OWN METHODS TO REVIEW THESE TRANSACTIONS AND OFTEN DID NOT DOCUMENT THE REVIEWS. FINALLY, THE FIRM'S WRITTEN PROCEDURES REQUIRED THAT COMPLIANCE DEPARTMENT PERSONNEL CONDUCT AND DOCUMENT AN ANNUAL REVIEW OF EACH RR/IA'S BUSINESS AND RECORDKEEPING PRACTICES, BUT SUCH REVIEWS WERE NOT CONSISTENTLY PERFORMED OR DOCUMENTED. FINRA FOUND THAT THE FIRM FAILED TO ADEQUATELY ENFORCE CERTAIN PROVISIONS OF ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND 1035-EXCHANGE TRANSACTIONS. THE FIRM MAINTAINED WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES THAT IDENTIFIED, BUT DID NOT SUFFICIENTLY ADDRESS, PARTICULAR FACTORS TO BE CONSIDERED IN ASSESSING THE SUITABILITY OF A RECOMMENDATION TO BUY OR SELL, IN WHOLE OR IN PART, A VARIABLE ANNUITY. THE FIRM FAILED TO ENSURE THAT SUCH REVIEWS WERE ALWAYS PERFORMED AND DOCUMENTED AND FAILED TO ENSURE THAT REVIEWS OF A WEEKLY 1035-EXCHANGE REPORT WERE ALWAYS CONDUCTED TIMELY AND CONSISTENTLY. THE FIRM'S WRITTEN PROCEDURES ADDRESSING SUITABILITY OF VARIABLE-ANNUITY RECOMMENDATIONS IDENTIFIED, BUT DID NOT ADEQUATELY DISCUSS, ANNUITY SHARE CLASS AS A FACTOR TO BE CONSIDERED IN ASSESSING SUITABILITY.36©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:FINRA Principal Sanction(s)/Relief Sought: Other Sanction(s)/Relief Sought: Date Initiated:08/08/2016 Docket/Case Number:2014039418801 Principal Product Type:No Product Other Product Type(s): WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTEDTO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT FAILED TOESTABLISH, MAINTAIN, AND ENFORCE ADEQUATE WRITTEN PROCEDURESTO SUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS(ETFS) AND THE CREATION AND DISSEMINATION OF CONSOLIDATEDREPORTS. THE FINDINGS STATED THAT THE FIRM PERMITTED ITSREGISTERED REPRESENTATIVES TO SOLICIT TRANSACTIONS IN NON-TRADITIONAL ETFS, THOUGH THE FIRM DID NOT HAVE IN PLACE WRITTENPROCEDURES RELATING TO SUITABILITY AND SUPERVISION OFRECOMMENDATIONS INVOLVING NON-TRADITIONAL ETFS. THE FIRM ALSOFAILED TO HAVE IN PLACE A PROCEDURE OR SYSTEM TO IDENTIFYINSTANCES IN WHICH A CUSTOMER MIGHT BE HOLDING A POSITION IN ANON-TRADITIONAL ETF FOR AN EXTENDED PERIOD OF TIME. IN ADDITION,THE FIRM DID NOT PROVIDE ADEQUATE TRAINING AND GUIDANCE TO ITSREGISTERED REPRESENTATIVES REGARDING THE UNIQUECHARACTERISTICS AND RISKS OF NON-TRADITIONAL ETFS. THE FINDINGSALSO STATED THAT THE FIRM PERMITTED ITS REGISTEREDREPRESENTATIVES TO PREPARE AND DISSEMINATE CONSOLIDATEDREPORTS USING FIRM-APPROVED SOFTWARE APPLICATIONS. SOME OFTHOSE APPLICATIONS PROVIDED THE ABILITY TO MANUALLY ENTERSECURITIES POSITIONS AND VALUES. THE FIRM DID NOT HAVE WRITTENPROCEDURES ADDRESSING THE USE AND SUPERVISION OFCONSOLIDATED REPORTS. THE FINDINGS ALSO INCLUDED THATPERMITTED ITS REGISTERED REPRESENTATIVES, WHO WERE ALSOINVESTMENT ADVISERS (RR/IAS) TO OFFER INVESTMENT-ADVISORYSERVICES THROUGH INDEPENDENT REGISTERED INVESTMENT ADVISERS(RIAS). THE FIRM HAD IN PLACE WRITTEN PROCEDURES FORSUPERVISION AND RECORDKEEPING OF SUCH ACTIVITIES BUT FAILED TOENFORCE ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISIONOF REGISTERED PERSONS CONDUCTING INVESTMENT-ADVISORYBUSINESS THROUGH AN INDEPENDENT RIA. SPECIFICALLY, THE FIRMFAILED TO ENSURE THAT CERTAIN RR/IAS COMPLIED WITH THE FIRM'SREQUIREMENT THAT THEY PROVIDE WRITTEN NOTICE TO THE FIRM'SCOMPLIANCE DEPARTMENT OF ANY CHANGES IN THEIR RIA BUSINESS ORCLIENTELE. IN ADDITION, THE FIRM'S WRITTEN PROCEDURES REQUIREDTHAT SUPERVISING PRINCIPALS UTILIZE A "SECTION 40 BLOTTER" TOREVIEW RR/IA SECURITIES TRANSACTIONS EXECUTED AWAY FROM THEFIRM, BUT IN CERTAIN CIRCUMSTANCES THE FIRM DID NOT ENFORCETHAT REQUIREMENT, AND INDIVIDUAL SUPERVISING PRINCIPALS WEREPERMITTED TO UTILIZE THEIR OWN METHODS TO REVIEW THESETRANSACTIONS AND OFTEN DID NOT DOCUMENT THE REVIEWS. FINALLY,THE FIRM'S WRITTEN PROCEDURES REQUIRED THAT COMPLIANCEDEPARTMENT PERSONNEL CONDUCT AND DOCUMENT AN ANNUALREVIEW OF EACH RR/IA'S BUSINESS AND RECORDKEEPING PRACTICES,BUT SUCH REVIEWS WERE NOT CONSISTENTLY PERFORMED ORDOCUMENTED. FINRA FOUND THAT THE FIRM FAILED TO ADEQUATELYENFORCE CERTAIN PROVISIONS OF ITS WRITTEN PROCEDURESRELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND1035-EXCHANGE TRANSACTIONS. THE FIRM MAINTAINED WRITTENPROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLEANNUITIES THAT IDENTIFIED, BUT DID NOT SUFFICIENTLY ADDRESS,PARTICULAR FACTORS TO BE CONSIDERED IN ASSESSING THESUITABILITY OF A RECOMMENDATION TO BUY OR SELL, IN WHOLE OR INPART, A VARIABLE ANNUITY. THE FIRM FAILED TO ENSURE THAT SUCHREVIEWS WERE ALWAYS PERFORMED AND DOCUMENTED AND FAILED TO ENSURE THAT REVIEWS OF A WEEKLY 1035-EXCHANGE REPORT WERE ALWAYS CONDUCTED TIMELY AND CONSISTENTLY. THE FIRM'S WRITTEN PROCEDURES ADDRESSING SUITABILITY OF VARIABLE-ANNUITY RECOMMENDATIONS IDENTIFIED, BUT DID NOT ADEQUATELY DISCUSS, ANNUITY SHARE CLASS AS A FACTOR TO BE CONSIDERED IN ASSESSING SUITABILITY. Resolution Date:08/08/2016 Resolution: Other Sanctions Ordered: Sanction Details:THE FIRM WAS CENSURED AND FINED $200,000. FINE PAID IN FULL ON AUGUST 16, 2016. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Censure Monetary/Fine $200,000.00 Acceptance, Waiver & Consent(AWC) i Reporting Source:Firm Allegations:FINRA ALLEGED THAT DURING THE TIME PERIOD JANUARY 1, 2008 THROUGH APRIL 30, 2012, PROEQUITIES FAILED TO ESTABLISH, MAINTAIN, AND ENFORCE ADEQUATE WRITTEN PROCEDURES TO SUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS, IN VIOLATION OF NASD CONDUCT RULES 3010(B), 2110 AND FINRA RULE 2010. IN ADDITION DURING THE TIME PERIOD APRIL 2006 THROUGH JULY 2013, PROEQUITIES FAILED TO ESTABLISH, MAINTAIN, AND ENFORCE WRITTEN PROCEDURES TO SUPERVISE THE CREATION AND DISSEMINATION OF CONSOLIDATED REPORTS, IN VIOLATION OF NASD CONDUCT RULES 3010, SUBPARTS (B) AND (D)(2), 2110 AND FINRA RULE 2010. ALSO DURING THE TIME PERIOD JANUARY 1, 2014 THROUGH MARCH 30, 2014, PROEQUITIES FAILED TO ENFORCE ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF REGISTERED PERSONS CONDUCTING INVESTMENT-ADVISORY BUSINESS THROUGH AN INDEPENDENT REGISTERED INVESTMENT ADVISER, IN VIOLATION OF NASD CONDUCT RULES 3010(D) AND 3040(C) AND FINRA RULE 2010. IN ADDITION, DURING THE TIME PERIOD JUNE 3, 2013 THROUGH MARCH 28, 2014, PROEQUITIES FAILED TO ENFORCE CERTAIN PROVISIONS OF ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND 1035-EXCHANGE TRANSACTIONS, IN VIOLATION OF NASD CONDUCT RULE 3010(B) AND FINRA RULES 2330(D) AND 2010 BY MAINTAINING WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES THAT IDENTIFIED, BUT DID NOT SUFFICIENTLY ADDRESS, PARTICULAR FACTORS TO BE CONSIDERED IN ASSESSING THE SUITABILITY OF A RECOMMENDATION TO BUY OR SELL, IN WHOLE OR IN PART, A VARIABLE ANNUITY. Current Status:Final 37©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:FINRA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:08/08/2016 Docket/Case Number:2014039418801 Principal Product Type:Other Other Product Type(s):ETF (EXCHANGE TRADED FUNDS) AND VA (VARIABLE ANNUITIES) FINRA ALLEGED THAT DURING THE TIME PERIOD JANUARY 1, 2008THROUGH APRIL 30, 2012, PROEQUITIES FAILED TO ESTABLISH, MAINTAIN,AND ENFORCE ADEQUATE WRITTEN PROCEDURES TO SUPERVISE SALESOF NON-TRADITIONAL EXCHANGE-TRADED FUNDS, IN VIOLATION OF NASDCONDUCT RULES 3010(B), 2110 AND FINRA RULE 2010. IN ADDITION DURING THE TIME PERIOD APRIL 2006 THROUGH JULY 2013, PROEQUITIES FAILED TO ESTABLISH, MAINTAIN, AND ENFORCE WRITTEN PROCEDURES TO SUPERVISE THE CREATION AND DISSEMINATION OF CONSOLIDATED REPORTS, IN VIOLATION OF NASD CONDUCT RULES 3010, SUBPARTS (B) AND (D)(2), 2110 AND FINRA RULE 2010. ALSO DURING THE TIME PERIOD JANUARY 1, 2014 THROUGH MARCH 30, 2014, PROEQUITIES FAILED TO ENFORCE ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF REGISTERED PERSONS CONDUCTING INVESTMENT-ADVISORY BUSINESS THROUGH AN INDEPENDENT REGISTERED INVESTMENT ADVISER, IN VIOLATION OF NASD CONDUCT RULES 3010(D) AND 3040(C) AND FINRA RULE 2010. IN ADDITION, DURING THE TIME PERIOD JUNE 3, 2013 THROUGH MARCH 28, 2014, PROEQUITIES FAILED TO ENFORCE CERTAIN PROVISIONS OF ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND 1035-EXCHANGE TRANSACTIONS, IN VIOLATION OF NASD CONDUCT RULE 3010(B) AND FINRA RULES 2330(D) AND 2010 BY MAINTAINING WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES THAT IDENTIFIED, BUT DID NOT SUFFICIENTLY ADDRESS, PARTICULAR FACTORS TO BE CONSIDERED IN ASSESSING THE SUITABILITY OF A RECOMMENDATION TO BUY OR SELL, IN WHOLE OR IN PART, A VARIABLE ANNUITY. Resolution Date:08/08/2016 Resolution: Other Sanctions Ordered: Sanction Details:CENSURE AND PAYMENT OF A MONETARY SANCTION IN THE AMOUNT OF $200,000.00 UPON NOTICE THAT THIS AWC HAS BEEN ACCEPTED. Firm Statement WITHOUT ADMITTING OR DENYING LIABILITY, THE FIRM RECENTLY SETTLED A MATTER WITH FINRA RELATED TO FAILURE TO PROPERLY SUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS; FAILURE TO ESTABLISH, MAINTAIN AND ENFORCE PROCEDURES RELATED TO THE SUPERVISION OF CONSOLIDATED REPORTS; FAILURE TO ENFORCE WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF PERSON CONDUCTING BUSINESS THROUGH AN INDEPENDENT REGISTERED ADVISER; FAILURE TO ENFORCE VARIOUS PROVISIONS OF THE WRITTEN PROCEDURES RELATED TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND 1035-EXCHANGES. THE FIRM SIGNED A LETTER OF ACCEPTANCE, WAIVER AND CONSENT AGREEING TO A CENSURE AND TO PAY FINRA A FINE OF $200,000.00. Sanctions Ordered:Censure Monetary/Fine $200,000.00 Acceptance, Waiver & Consent(AWC) 38©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceWITHOUT ADMITTING OR DENYING LIABILITY, THE FIRM RECENTLY SETTLED A MATTER WITH FINRA RELATED TO FAILURE TO PROPERLY SUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS; FAILURE TO ESTABLISH, MAINTAIN AND ENFORCE PROCEDURES RELATED TO THE SUPERVISION OF CONSOLIDATED REPORTS; FAILURE TO ENFORCE WRITTEN PROCEDURES RELATING TO THE SUPERVISION OF PERSON CONDUCTING BUSINESS THROUGH AN INDEPENDENT REGISTERED ADVISER; FAILURE TO ENFORCE VARIOUS PROVISIONS OF THE WRITTEN PROCEDURES RELATED TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND 1035-EXCHANGES. THE FIRM SIGNED A LETTER OF ACCEPTANCE, WAIVER AND CONSENT AGREEING TO A CENSURE AND TO PAY FINRA A FINE OF $200,000.00. Disclosure 10 of 63 i Reporting Source:Regulator Initiated By:FINRA Principal Sanction(s)/Relief Sought: Other Date Initiated:11/11/2015 Docket/Case Number:2014041841001 Principal Product Type:Unit Investment Trust(s) Other Product Type(s): Allegations:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT FAILED TO IDENTIFY AND APPLY SALES CHARGE DISCOUNTS TO CERTAIN CUSTOMERS' ELIGIBLE PURCHASES OF UNIT INVESTMENT TRUSTS (UITS). THE FINDINGS STATED THAT THE FIRM FAILED TO APPLY SALES CHARGE DISCOUNTS TO ELIGIBLE UIT PURCHASES RESULTING IN CUSTOMERS PAYING EXCESSIVE SALES CHARGES OF APPROXIMATELY $109,709. THE FIRM HAS PAID RESTITUTION TO ALL AFFECTED CUSTOMERS. THE FINDINGS ALSO STATED THAT THE FIRM FAILED TO ESTABLISH, MAINTAIN AND ENFORCE A SUPERVISORY SYSTEM AND WSPS REASONABLY DESIGNED TO ENSURE THAT CUSTOMERS RECEIVED SALES CHARGE DISCOUNTS ON ALL ELIGIBLE UIT PURCHASES. THE FIRM LACKED WSPS TO IDENTIFY TRANSACTIONS ELIGIBLE FOR SALES CHARGE DISCOUNTS, AND LACKED A PROCESS TO ASSURE THAT SUCH DISCOUNTS WERE PROPERLY APPLIED. IN ADDITION, THE FIRM FAILED TO CONDUCT QUARTERLY CLIENT FILE REVIEWS AS REQUIRED BY ITS OWN PROCEDURES AS A MEANS TO IDENTIFY SITUATIONS IN WHICH APPROPRIATE PRICE BREAK INFORMATION HAD NOT BEEN DISCLOSED. AS A RESULT OF THESE FAILURES, THE FIRM DID NOT DETECT AND CORRECT FAILURES BY ITS REGISTERED REPRESENTATIVES TO APPROPRIATELY IDENTIFY TRANSACTIONS THAT WERE ELIGIBLE FOR SALES CHARGE DISCOUNTS. Current Status:Final 39©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanction(s)/Relief Sought: N/A Resolution Date:11/11/2015 Resolution: Other Sanctions Ordered: Sanction Details:THE FIRM WAS CENSURED, FINED $165,000, AND IS ORDERED TO PAY $109,709 TO CUSTOMERS. FINE PAID IN FULL ON NOVEMBER 24, 2015. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Censure Monetary/Fine $165,000.00 Disgorgement/Restitution Acceptance, Waiver & Consent(AWC) i Reporting Source:Firm Initiated By:FINRA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Date Initiated:10/22/2015 Docket/Case Number:2014041841001 Principal Product Type:Unit Investment Trust(s) Other Product Type(s): Allegations:FINRA ALLEGED THAT FROM MAY 1, 2009 TO APRIL 30, 2014 PROEQUITIES FAILED TO APPLY SALES CHARGE DISCOUNTS TO 713 ELIGIBLE UNIT INVESTMENT TRUST (UIT) PURCHASES RESULTING IN CUSTOMERS PAYING EXCESSIVE SALES CHARGES OF APPROXIMATELY $109,709 IN VIOLATION OF FINRA RULE 2010. IN ADDITION, FINRA ALLEGED THAT PROEQUITIES FAILED TO ESTABLISH, MAINTAIN AND ENFORCE A SUPERVISORY SYSTEM AND WRITTEN SUPERVISORY PROCEDURES REASONABLY DESIGNED TO ENSURE THAT CUSTOMERS RECEIVED SALES CHARGE DISCOUNTS ON ALL ELIGIBLE UIT PURCHASES IN VIOLATION OF NASD CONDUCT RULE 3010 AND FINRA RULE 2010. Current Status:Final 40©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Resolution Date:10/22/2015 Resolution: Other Sanctions Ordered: Sanction Details:PAYMENT OF MONETARY SANCTION IN THE AMOUNT OF $165,000.00 UPON NOTICE THAT THIS AWC HAS BEEN ACCEPTED AND THAT SUCH PAYMENT IS DUE AND PAYABLE. PAYMENT OF RESTITUTION TO AFFECTED CUSTOMERS IN THE AMOUNT OF $111,249.33 (MISSED DISCOUNTS PLUS INTEREST). Firm Statement WITHOUT ADMITTING OR DENYING LIABILITY, THE FIRM RECENTLY SETTLED A MATTER WITH FINRA RELATED THE SUPERVISORY PROCEDURES RELATED TO UNIT INVESTMENT TRUSTS. THE FIRM SIGNED A LETTER OF ACCEPTANCE, WAIVER AND CONSENT AGREEING TO PAY FINRA A $160,000 FINE RELATED TO THIS MATTER. IT SHOULD BE NOTED THAT THE FIRM PAID RESTITUTION TO ALL AFFECTED CUSTOMERS IN THE AMOUNT OF $111,249.33 (MISSED DISCOUNTS PLUS INTEREST). Sanctions Ordered:Censure Monetary/Fine $165,000.00 Disgorgement/Restitution Acceptance, Waiver & Consent(AWC) Disclosure 11 of 63 i Reporting Source:Regulator Initiated By:MISSOURI Principal Sanction(s)/Relief Sought: Restitution Date Initiated:06/09/2015 Docket/Case Number:AP-15-21 URL for Regulatory Action:HTTP://S1.SOS.MO.GOV/CMSIMAGES/SECURITIES/ORDERS/AP-15- 21PROEQUITIESINCCONSENTORDER.PDF Principal Product Type:Other Other Product Type(s):UNIVERSAL LIFE POLICIES; COVERED CALLS Allegations:RESPONDENT FAILED TO REASONABLY SUPERVISE AN AGENT. Current Status:Final 41©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Restitution Other Sanction(s)/Relief Sought: MONETARY PENALTIES TO THE MISSOURI INVESTOR EDUCATION AND PROTECTION FUND AND COSTS Resolution Date:06/09/2015 Resolution: Other Sanctions Ordered:COSTS Sanction Details:RESPONDENT IS ORDERED TO PAY RESTITUTION TO INVESTORS IN THE AMOUNT OF $66,488 AND PAY INTEREST AT THE RATE OF 8% PER ANNUM IN THE AMOUNT OF $17,040. RESPONDENT SHALL PAY THE MISSOURI SECRETARY OF STATE'S INVESTOR EDUCATION AND PROTECTION $40,000. RESPONDENT SHALL PAY $5,000 AS THE COSTS OF THIS INVESTIGATION. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $40,000.00 Disgorgement/Restitution Consent i Reporting Source:Firm Initiated By:MISSOURI SECURITIES DIVISION Principal Sanction(s)/Relief Sought: Other Other Sanction(s)/Relief Sought: CONSENT ORDER Date Initiated:06/09/2015 Docket/Case Number:AP-15-21 Principal Product Type:Options Other Product Type(s):UNIVERSAL LIFE POLICIES AND OPTIONS Allegations:THE MISSOURI SECURITIES DIVISION HAS ALLEGED THAT PROEQUITIES FAILED TO REASONABLY SUPERVISE HARRY ALLEN WARD, WHO MADE UNSUITABLE SECURITIES RECOMMENDATIONS TO A MISSOURI COUPLE DURING THE APPROXIMATE PERIOD AUGUST 2011 TO JULY 2012. Current Status:Final 42©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanction(s)/Relief Sought: CONSENT ORDER Resolution Date:06/09/2015 Resolution: Other Sanctions Ordered:PAYMENT OF RESTITUTION, MADE THROUGH THE MISSOURI SECRETARY OF STATE'S INVESTOR RESTITUTION FUND, OF $66,488, PLUS 17,040 IN INTEREST. PAYMENT OF $40,000 TO THE MISSOURI SECRETARY OF STATE'S INVESTOR PROTECTION FUND, AND $5,000 AS COST OF THIS INVESTIGATION. Sanction Details:PAYMENT OF RESTITUTION, MADE THROUGH THE MISSOURI SECRETARY OF STATE'S INVESTOR RESTITUTION FUND, OF $66,488, PLUS 17,040 IN INTEREST. PAYMENT OF $40,000 TO THE MISSOURI SECRETARY OF STATE'S INVESTOR PROTECTION FUND, AND $5,000 AS COST OF THIS INVESTIGATION. Firm Statement WITHOUT ADMITTING OR DENYING LIABILITY, THE FIRM RECENTLY SETTLED A MATTER WITH THE STATE OF MISSOURI'S DIVISION OF SECURITIES RELATING TO CERTAIN SECURITIES TRANSACTIONS IN THE ACCOUNT OF A MISSOURI COUPLE IN 2011 AND 2012. THE ALLEGATIONS RELATE TO THE FIRM'S SUPERVISION OF ONE OF THE COUPLE'S ACCOUNTS WHICH, OVER THE COURSE OF 8 MONTHS, INCURRED LOSSES AS A RESULT OF CERTAIN ALLEGEDLY UNSUITABLE OPTIONS TRANSACTIONS. THE FIRM AGREED, THROUGH THE STATE, TO REPAY THE CLIENTS FOR THEIR LOSSES WITH INTEREST, PAY MONEY TO THE STATE'S INVESTOR EDUCATION AND PROTECTION FUND AND PAY FOR THE STATE'S COSTS OF INVESTIGATION. IN AGREEING TO SETTLE THIS MATTER, THE STATE RECOGNIZED THAT THE FIRM HAS TAKEN SEVERAL REMEDIAL STEPS TO ADDRESS THE ISSUES THAT WERE RAISED IN THE CASE AND TO ENSURE THAT THE ISSUES REFERENCED IN THE ORDER DO NOT RECUR. THE FIRM IS GLAD TO HAVE BEEN ABLE TO RESOLVE THIS MATTER QUICKLY AND AMICABLY WITH THE STATE. Sanctions Ordered:Monetary/Fine $40,000.00 Disgorgement/Restitution Consent Disclosure 12 of 63 i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, OKLAHOMA ALLEGED THAT PROEQUITIES VIOLATED SECTION 1-604 OF THE OKLAHOMA UNIFORM SECURITIES ACT ("ACT") OF 2004, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN OKLAHOMA. Current Status:Final 43©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:OKLAHOMA DEPARTMENT OF SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:06/16/2014 Docket/Case Number:ODS 13-030 Principal Product Type:No Product Other Product Type(s): IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, OKLAHOMA ALLEGED THAT PROEQUITIES VIOLATED SECTION 1-604 OF THE OKLAHOMA UNIFORM SECURITIES ACT ("ACT") OF 2004, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN OKLAHOMA. Resolution Date:06/23/2014 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 1-604 OF THE ACT. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO OKLAHOMA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING OKLAHOMA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Consent Disclosure 13 of 63 i 44©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Reporting Source:Regulator Initiated By:CONNECTICUT Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:06/03/2013 Docket/Case Number:CO-13-8024-S URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Allegations:ON JUNE 3, 2013, THE BANKING COMMISSIONER ENTERED A CONSENT ORDER (NO. CO-13-8024-S) WITH RESPECT TO PROEQUITIES, INC., A CONNECTICUT-REGISTERED BROKER-DEALER LOCATED AT 2801 HIGHWAY 280 SOUTH, BIRMINGHAM, ALABAMA. THE CONSENT ORDER FOLLOWED A RELATED MULTISTATE INVESTIGATION, CAPPED BY A GLOBAL SETTLEMENT, INTO UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISORY ACTIVITY BY BANKERS LIFE AND CASUALTY COMPANY AND BLC FINANCIAL SERVICES, INC. AND THEIR AGENTS. THE COMMISSIONER HAD ENTERED A CONSENT ORDER REGARDING THOSE ENTITIES ON JUNE 29, 2012 (NO. CO-12-8018-S). STATE REGULATORS ALSO NEGOTIATED AN ANCILLARY GLOBAL SETTLEMENT WITH PROEQUITIES, INC. PROEQUITIES, INC. HAD PURPORTEDLY ENTERED INTO AN AGREEMENT WITH THE BANKERS LIFE ENTITIES PURSUANT TO WHICH CERTAIN SECURITIES-RELATED ROLES WERE ASSIGNED TO THE BANKERS LIFE ENTITIES. THE INVOLVEMENT OF THE BANKERS LIFE ENTITIES IN SECURITIES-RELATED ROLES ALLEGEDLY LED TO CONFUSION IN THE REPORTING AND RESPONSIBILITY HIERARCHIES BETWEEN BANKERS LIFE AND PROEQUITIES, INC. Current Status:Final Resolution Date:06/03/2013 Resolution: Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 45©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:THE JUNE 3, 2013 CONSENT ORDER DIRECTED PROEQUITIES, INC. TO CEASE AND DESIST FROM MATERIALLY AIDING ANY PERSON IN A VIOLATION OF THE CONNECTICUT UNIFORM SECURITIES ACT AND ITS REGULATIONS. IN ADDITION, THE CONSENT ORDER DIRECTED THE FIRM TO PAY A FINE OF $8,207.55 WITHIN TEN BUSINESS DAYS FOLLOWING THE COMMISSIONER'S ENTRY OF THE CONSENT ORDER. THE FINE AMOUNT REPRESENTED CONNECTICUT'S PROPORTIONATE SHARE OF THE TOTAL STATE SETTLEMENT AMOUNT OF $435,000 AGAINST PROEQUITIES, INC. Sanction Details:SEE RESPONSE TO ITEM 13.B. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction i Reporting Source:Firm Initiated By:STATE OF CONNECTICUT DEPARTMENT OF BANKING Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:05/31/2013 Docket/Case Number:CO-13-8024-S Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, CONNECTICUT ALLEGED THAT PROEQUITIES VIOLATED THE CONNECTICUT UNIFORM SECURITIES ACT ("ACT") AND SECTIONS 36B-31-2 TO 36B-31-33, INCLUSIVE, OF THE REGULATIONS OF CONNECTICUT STATE AGENCIES PROMULGATED UNDER THE ACT ("REGULATIONS"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN CONNECTICUT. Current Status:Final Resolution Date:06/03/2013 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM MATERIALLY AIDING ANY PERSON, INCLUDING BANKERS, IN A VIOLATION OF THE ACT AND THE REGULATIONS THEREUNDER. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 46©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:CEASE AND DESIST FROM MATERIALLY AIDING ANY PERSON, INCLUDING BANKERS, IN A VIOLATION OF THE ACT AND THE REGULATIONS THEREUNDER. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO CONNECTICUT. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING CONNECTICUT. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 14 of 63 i Reporting Source:Firm Initiated By:STATE OF WEST VIRGINIA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Date Initiated:04/22/2013 Docket/Case Number:12-0057 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE ALABAMA SECURITIES COMMISSION ALLEGED THAT PROEQUITIES VIOLATED WEST VIRGINIA CODE 32-2-201(A). WEST VIRGINIA CODE 32-2-201(C), AND WEST VIRGINIA CODE 32-2- 201(E)(1), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN WEST VIRGINIA Current Status:Final 47©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Resolution Date:04/22/2013 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER WEST VIRGINIA CODE 32-4-407A(B). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO WEST VIRGINIA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING WEST VIRGINIA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 15 of 63 i Reporting Source:Firm Initiated By:STATE OF INDIANA SECURITIES DIVISION Date Initiated:03/13/2013 Allegations:THROUGH CONSENT ORDER, PROEQUITIES AGREED TO THE FINDINGS THAT PROEQUITIES' BRANCH OFFICE HAD FAILED TO CONTRACT FOR A BRANCH AUDIT AS REQUIRED BY INDIANA CODE 23-19-4-11(I) AND SUBMIT THE AUDIT REPORT BY AN ESTABLISHED DEADLINE OF APRIL 17, 2012. Current Status:Final 48©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Other Other Sanction(s)/Relief Sought: PAYMENT OF COSTS OF INVESTIGATION Docket/Case Number:13-0063CA Principal Product Type:No Product Other Product Type(s): Resolution Date:04/01/2013 Resolution: Other Sanctions Ordered:NONE. Sanction Details:PAYMENT OF INVESTIGATIVE COSTS. Firm Statement PROEQUITIES WAS NOTIFIED THAT, DESPITE NOTICE FROM THE INDIANA SECURITIES DIVISION, THE FIRM'S BRANCH OFFICE IN INDIANAPOLIS FAILED TO COMPLETE THE REQUIRED AUDIT AND SUBMIT THE COMPLETED AUDIT REPORT BY THE APRIL 17, 2012 DEADLINE. THE FIRM'S HOME OFFICE WAS NOT NOTIFIED OF THE AUDIT REQUIREMENT, AND WAS NOT AWARE THAT THE BRANCH OFFICE HAD FAILED TO COMPLY WITH THE AUDIT REQUIREMENT UNTIL NOTICE BY THE INDIANA SECURITIES DIVISION IN MARCH, 2013. THE FIRM HAS SINCE ESTABLISHED PROCEDURES WHEREBY WE WILL CONTACT THE DIVISION ANNUALLY IN MARCH TO DETERMINE WHICH, IF ANY, OF ITS BRANCHES HAVE BEEN SELECTED FOR REVIEW. Sanctions Ordered:Monetary/Fine $2,000.00 Consent Disclosure 16 of 63 i Reporting Source:Firm Initiated By:STATE OF VERMONT DEPARTMENT OF FIANCIAL REGULATION Date Initiated:02/28/2013 Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF VERMONT DEPARTMENT OF FINANCIAL REGULATION ALLEGED THAT PROEQUITIES VIOLATED VERMONT UNIFORM SECURITIES ACT (2002), CODIFIED IN PERTINENT PART AT V.S.A. 5401-04 ET SEQ, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN VERMONT. Current Status:Final 49©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:02/28/2013 Docket/Case Number:13-001-S Principal Product Type:No Product Other Product Type(s): Resolution Date:03/08/2013 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER 9 V.S.A. 5604. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO VERMONT. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING VERMONT. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 17 of 63 i Reporting Source:Regulator Allegations:UNDER THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, A PERSON MAY NOT ACT AS A BROKER-DEALER IN THE STATE OF FLORIDA UNLESS REGISTERED OR EXEMPT FROM REGISTRATION. SEE SECTION 517.12, FLORIDA STATUTES. SIMILARLY, A PERSON MAY NOT ACT AS AN INVESTMENT ADVISER IN THE STATE OF FLORIDA UNLESS REGISTERED, EXEMPT FROM REGISTRATION, OR A FEDERAL COVERED INVESTMENT ADVISER. SEE SECTION517.12, FLORIDA STATUTES. A BROKER-DEALER MAY NOT EMPLOY OR ASSOCIATE WITH AN AGENT, UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS .AN AGENT OF THE BROKER-DEALER. AN INVESTMENT ADVISER MAY NOT EMPLOY OR ASSOCIATE WITH AN INVESTMENT ADVISER REPRESENTATIVE UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS AN INVESTMENT ADVISER REPRESENTATIVE OF THE INVESTMENT ADVISOR. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, BANKERS ACTED AS AN UNREGISTERED BROKER DEALER AND INVESTMENT ADVISER IN THE STATE OF FLORIDA IN VIOLATION OF SECTION 517.12, FLORIDA STATUTES. FURTHERMORE, BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTS WHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISER REPRESENTATIVES OF BANKERS, BANKERS VIOLATED SECTION 517.12, FLORIDA STATUTES. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, UVEST HAS SUBJECTED ITSELF TO CONDUCT THAT IS GROUNDS FOR AN ORDER IMPOSING SANCTIONS UNDER SECTION 517.221, FLORIDA STATUTES. AS A RESULT, THE EXECUTION OF THIS STIPULATION AND CONSENT AGREEMENT AND THE FOLLOWING RELIEF ARE APPROPRIATE AND IN THE PUBLIC INTEREST. Current Status:Final 50©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:FLORIDA OFFICE OF FINANCIAL REGULATION ("OFR") Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:02/28/2013 Docket/Case Number:0668-S-9/12 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Allegations:UNDER THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, A PERSON MAY NOT ACT AS A BROKER-DEALER IN THE STATE OF FLORIDA UNLESS REGISTERED OR EXEMPT FROM REGISTRATION. SEE SECTION 517.12, FLORIDA STATUTES. SIMILARLY, A PERSON MAY NOT ACT AS AN INVESTMENT ADVISER IN THE STATE OF FLORIDA UNLESS REGISTERED, EXEMPT FROM REGISTRATION, OR A FEDERAL COVERED INVESTMENT ADVISER. SEE SECTION517.12, FLORIDA STATUTES. A BROKER-DEALER MAY NOT EMPLOY OR ASSOCIATE WITH AN AGENT, UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS .AN AGENT OF THE BROKER-DEALER. AN INVESTMENT ADVISER MAY NOT EMPLOY OR ASSOCIATE WITH AN INVESTMENT ADVISER REPRESENTATIVE UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS AN INVESTMENT ADVISER REPRESENTATIVE OF THE INVESTMENT ADVISOR. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, BANKERS ACTED AS AN UNREGISTERED BROKER DEALER AND INVESTMENT ADVISER IN THE STATE OF FLORIDA IN VIOLATION OF SECTION 517.12, FLORIDA STATUTES. FURTHERMORE, BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTS WHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISER REPRESENTATIVES OF BANKERS, BANKERS VIOLATED SECTION 517.12, FLORIDA STATUTES. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, UVEST HAS SUBJECTED ITSELF TO CONDUCT THAT IS GROUNDS FOR AN ORDER IMPOSING SANCTIONS UNDER SECTION 517.221, FLORIDA STATUTES. AS A RESULT, THE EXECUTION OF THIS STIPULATION AND CONSENT AGREEMENT AND THE FOLLOWING RELIEF ARE APPROPRIATE AND IN THE PUBLIC INTEREST. Resolution Date:02/28/2013 Resolution: Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Order 51©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered: Sanction Details:ON 2/28/2013, THE OFFICE OF FINANCIAL REGULATION ("OFFICE") ENTERED A FINAL ORDER ADOPTING THE STIPULATION AND CONSENT AGREEMENT IN THE MATTER OF PROEQUITIES, INC. ("RESPONDENT"). RESPONDENT NEITHER ADMITTED NOR DENIED THE FINDINGS BUT CONSENTED TO THE ENTRY OF FINDINGS BY THE OFFICE. RESPONDENT AGREES TO CEASE AND DESIST FROM ANY AND ALL FUTURE VIOLATIONS OF CHAPTER 517, F.S. AND THE ADMINISTRATIVE RULES THEREUNDER AND AGREES TO PAY AN ADMINISTRATIVE FINE OF $8,207.55. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 i Reporting Source:Firm Initiated By:STATE OF FLORIDA OFFICE OF FINANCIAL REGULATION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:01/22/2013 Docket/Case Number:0668-S-9/12 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF FLORIDA OFFICE OF FINANCIAL REGULATION ALLEGED THAT PROEQUITIES VIOLATED SECTION 517.12, FLORIDA STATUTES, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN FLORIDA. Current Status:Final Resolution Date:01/27/2013 Resolution:Consent 52©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Resolution Date:01/27/2013 Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 517.221, FLORIDA STATUTES. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO FLORIDA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING FLORIDA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Disclosure 18 of 63 i Reporting Source:Firm Initiated By:SECURITIES COMMISSIONER OF STATE OF COLORADO. Date Initiated:08/06/2012 Docket/Case Number:13-L-10 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OF STATE OF COLORADO ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 11-51- 401(1)(1.5)(2)AND(2.5),C.R.S., IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN COLORADO. Current Status:Final 53©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Other Product Type(s): Resolution Date:09/17/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 11-51-606(1.5),C.R.S. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO COLORADO. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING COLORADO. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 19 of 63 i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF NEW MEXICO REGULATION AND LICENSING DEPARTMENT SECURITIES DIVISION, ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 58-13B-3 AND 58-13B-5 OF THE NEW MEXICO SECURITIES ACT OF 1986 (1986, AS AMENDED THROUGH 2004) AND SECTIONS 58-13C-401 THROUGH 404 OF THE NEW MEXICO UNIFORM SECURITIES ACT, NMSA 1978 58-13C-101 TO 58-13C-701 (2009)(THE"ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NEW MEXICO. Current Status:Final 54©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:STATE OF NEW MEXICO REGULATION AND LICENSING DEPARTMENT SECURITIES DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:01/22/2013 Docket/Case Number:13-13-996-002 Principal Product Type:No Product Other Product Type(s): IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF NEW MEXICO REGULATION AND LICENSING DEPARTMENT SECURITIES DIVISION, ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 58-13B-3 AND 58-13B-5 OF THE NEW MEXICO SECURITIES ACT OF 1986 (1986, AS AMENDED THROUGH 2004) AND SECTIONS 58-13C-401 THROUGH 404 OF THE NEW MEXICO UNIFORM SECURITIES ACT, NMSA 1978 58-13C-101 TO 58-13C-701 (2009)(THE"ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NEW MEXICO. Resolution Date:01/28/2013 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER NMSA 1978 58-13C-604(A)(2009). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO NEW MEXICO. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING NEW MEXICO. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 55©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Disclosure 20 of 63 i Reporting Source:Firm Initiated By:GOVERNMENT OF THE U.S. VIRGIN ISLANDS Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:01/07/2013 Docket/Case Number:03-2013 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE GOVERNMENT OF THE U.S. VIRGIN ISLANDS, ALLEGED THAT PROEQUITIES VIOLATED CHAPTER 23, 9 VIC, SECTIONS 631, 632, 633 AND 634, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN THE U.S. VIRGIN ISLANDS. Current Status:Final Resolution Date:01/16/2013 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER CHAPTER 23, 9 VIC, SECTION 664(A)(1). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO THE U.S. VIRGIN ISLANDS. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING THE U.S. VIRGIN ISLANDS. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 56©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING THE U.S. VIRGIN ISLANDS. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 21 of 63 i Reporting Source:Firm Initiated By:SECURITIES COMMISSIONER OF THE STATE OF KANSAS Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:01/07/2013 Docket/Case Number:K.S.C. NO. 2013-6061 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OF THE STATE OF KANSAS, ALLEGED THAT PROEQUITIES VIOLATED K.S.A. 17- 12A401, K.S.A. 17-12A402, K.S.A. 17-12A403,AND K.S.A. 17-12A404, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN KANSAS. Current Status:Final Resolution Date:01/10/2013 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER K.S.A. 17-12A604. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO KANSAS. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 57©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO KANSAS. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING KANSAS. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 22 of 63 i Reporting Source:Firm Initiated By:STATE OF OHIO DIVISION OF SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:12/04/2012 Docket/Case Number:12-028 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF OHIO DIVISION OF SECURITIES, ALLEGED THAT PROEQUITIES VIOLATED OHIO REVISED CODE ("ORC") 1707.14, 1707.141, 1707.16 AND 1707.161, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN OHIO. Current Status:Final Resolution:Consent 58©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Resolution Date:12/11/2012 Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT IN VIOLATION OF THE ACT, PURSUANT TO ORC 1707.23(G). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO OHIO. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING OHIO. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Disclosure 23 of 63 i Reporting Source:Firm Initiated By:COMMONWEALTH OF KENTUCKY PUBLIC PROTECTION CABINET DEPARTMENT OF FINANCIAL INSTITUTIONS Date Initiated:12/04/2012 Docket/Case Number:2012-AH-0266 Principal Product Type:No Product Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE COMMONWEALTH OF KENTUCKY PUBLIC PROTECTION CABINET DEPARTMENT OF FINANCIAL INSTITUTIONS, ALLEGED THAT PROEQUITIES VIOLATED KRS 292.330, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN KENTUCKY. Current Status:Final 59©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Principal Product Type:No Product Other Product Type(s): Resolution Date:12/10/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER KRS 292.470. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO KENTUCKY. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING KENTUCKY. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 24 of 63 i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF ALASKA DEPARTMENT OF COMMERCE, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION OF BANKING AND SECURITIES, ALLEGED THAT PROEQUITIES VIOLATED ALASKA STATUTES ("AS") 45.55.030, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN ALASKA. Current Status:Final 60©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:STATE OF ALASKA DEPARTMENT OF COMMERCE, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION OF BANKING AND SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:12/04/2012 Docket/Case Number:12-900-S Principal Product Type:No Product Other Product Type(s): IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF ALASKA DEPARTMENT OF COMMERCE, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION OF BANKING AND SECURITIES, ALLEGED THAT PROEQUITIES VIOLATED ALASKA STATUTES ("AS") 45.55.030, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN ALASKA. Resolution Date:12/04/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER AS 45.55.920. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO ALASKA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING ALASKA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 61©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Disclosure 25 of 63 i Reporting Source:Firm Initiated By:COMMISSIONER OF SECURITIES AND INSURANCE MONTANA STATE AUDITOR STATE OF MONTANA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:10/31/2012 Docket/Case Number:SEC-2010-220 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE COMMISSIONER OF SECURITIES AND INSURANCE MONTANA STATE AUDITOR STATE OF MONTANA, ALLEGED THAT PROEQUITIES VIOLATED MONT. CODE ANN. 30-10-201, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MONTANA. Current Status:Final Resolution Date:10/31/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER MONT. ANN. CODE 30-10-305. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MONTANA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MONTANA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 62©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MONTANA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 26 of 63 i Reporting Source:Firm Initiated By:IOWA INSURANCE DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/12/2012 Docket/Case Number:77065 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, IOWA INSURANCE DIVISION ALLEGED THAT PROEQUITIES VIOLATED IOWA CODE SECTIONS 502.401(1), 402(1), 403(1) AND 404(1)(2011), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN IOWA. Current Status:Final Resolution Date:11/16/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER IOWA CODE SECTION 502.604(1)(2011). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO IOWA. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 63©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO IOWA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING IOWA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 27 of 63 i Reporting Source:Regulator Allegations:THE ARKANSAS SECURITIES COMMISSIONER ENTERED INTO A CONSENT ORDER (ORDER NO. S-12-0135-12-OR01) WITH PROEQUITIES, INC., ON NOVEMBER 19, 2012. THE CONSENT ORDER WAS BASED ON A GLOBAL SETTLEMENT BETWEEN PROEQUITIES AND A NUMBER OF STATES, LED BY A MEMBER TASK FORCE OF THE NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION ("NASAA"), REGARDING PROEQUITIES' AGREEMENT ("AGREEMENT") WITH BANKERS LIFE AND CASUALTY COMPANY ("BANKERS") AND BLC FINANCIAL SERVICES, INC. ("BLCFS"), NEITHER OF WHICH HAVE BEEN REGISTERED WITH THE DEPARTMENT IN ANY CAPACITY. PURSUANT TO THE AGREEMENT, PROEQUITIES EXERCISED EXCLUSIVE CONTROL OVER THE BROKER-DEALER AND INVESTMENT ADVISORY ACTIVITIES OF PROEQUITIES AGENTS WHO WERE ALSO INSURANCE AGENTS FOR BANKERS (THE "DUAL AGENTS"), AND CERTAIN SECURITIES-RELATED ROLES WERE ASSIGNED TO BLCFS OR TO BLCFS AND BANKERS. EVIDENCE SHOWED THAT THE INVOLVEMENT OF BANKERS AND BLCFS IN CERTAIN SECURITIES-RELATED ROLES LED TO CONFUSION IN THE REPORTING AND RESPONSIBILITY HIERARCHIES AS BETWEEN BANKERS, BLCFS, AND PROEQUITIES. AS A RESULT, PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER ARK. CODE ANN. § 23-42-308 OF THE ARKANSAS SECURITIES ACT. PROEQUITIES PAID $435,000 TO BE DISTRIBUTED AMONG THE STATES WHERE DUAL AGENTS WERE LOCATED. THE CONSENT ORDER IMPOSED A FINE OF $8,207.55 AS ARKANSAS'S PORTION OF TOTAL AMOUNT. Current Status:Final 64©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:ARKANSAS SECURITIES DEPARTMENT Principal Sanction(s)/Relief Sought: Cease and Desist Other Sanction(s)/Relief Sought: FINE OF $8,207.55 Date Initiated:11/19/2012 Docket/Case Number:S-12-0135 URL for Regulatory Action: Principal Product Type:Insurance Other Product Type(s): THE ARKANSAS SECURITIES COMMISSIONER ENTERED INTO A CONSENTORDER (ORDER NO. S-12-0135-12-OR01) WITH PROEQUITIES, INC., ONNOVEMBER 19, 2012. THE CONSENT ORDER WAS BASED ON A GLOBALSETTLEMENT BETWEEN PROEQUITIES AND A NUMBER OF STATES, LED BYA MEMBER TASK FORCE OF THE NORTH AMERICAN SECURITIESADMINISTRATORS ASSOCIATION ("NASAA"), REGARDING PROEQUITIES'AGREEMENT ("AGREEMENT") WITH BANKERS LIFE AND CASUALTYCOMPANY ("BANKERS") AND BLC FINANCIAL SERVICES, INC. ("BLCFS"),NEITHER OF WHICH HAVE BEEN REGISTERED WITH THE DEPARTMENT INANY CAPACITY. PURSUANT TO THE AGREEMENT, PROEQUITIESEXERCISED EXCLUSIVE CONTROL OVER THE BROKER-DEALER ANDINVESTMENT ADVISORY ACTIVITIES OF PROEQUITIES AGENTS WHO WEREALSO INSURANCE AGENTS FOR BANKERS (THE "DUAL AGENTS"), ANDCERTAIN SECURITIES-RELATED ROLES WERE ASSIGNED TO BLCFS OR TOBLCFS AND BANKERS. EVIDENCE SHOWED THAT THE INVOLVEMENT OFBANKERS AND BLCFS IN CERTAIN SECURITIES-RELATED ROLES LED TOCONFUSION IN THE REPORTING AND RESPONSIBILITY HIERARCHIES ASBETWEEN BANKERS, BLCFS, AND PROEQUITIES. AS A RESULT, PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER ARK. CODE ANN. § 23-42-308 OF THE ARKANSAS SECURITIES ACT. PROEQUITIES PAID $435,000 TO BE DISTRIBUTED AMONG THE STATES WHERE DUAL AGENTS WERE LOCATED. THE CONSENT ORDER IMPOSED A FINE OF $8,207.55 AS ARKANSAS'S PORTION OF TOTAL AMOUNT. Resolution Date:11/19/2012 Resolution: Other Sanctions Ordered: Sanction Details:FINE OF $8,207.55 PAYABLE TO NASAA AS CONSIDERATION FOR THE COSTS ASSOCIATED WITH NASAA'S COORDINATION OF THE COLLABORATIVE INVESTIGATORY EFFORTS OF THE MULTI-STATE TASK FORCE AND TO FURTHER ADVANCE THE INVESTOR PROTECTION EFFORTS OF NASAA, AS ARKANSAS'S PORTION OF THE TOTAL AMOUNT, WHICH WAS PAID BY PROEQUITIES ON NOVEMBER 21, 2012. Regulator Statement THE CONSENT ORDER WAS BASED ON A GLOBAL SETTLEMENT BETWEEN PROEQUITIES AND A NUMBER OF STATES, WHICH RESULTED FROM AN INVESTIGATION AND SETTLEMENT NEGOTIATION LED BY A MEMBER TASK FORCE OF NASAA. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Consent i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, ARKANSAS SECURITIES COMMISSIONER ALLEGED THAT PROEQUITIES VIOLATED ARK. CODE ANN. 23-42-301 OF THE ARKANSAS SECURITIES ACT, CODIFIED AT ARK. CODE ANN. 23-42-101 THROUGH 23-42-509 ("ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN ARKANSAS. Current Status:Final 65©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:ARKANSAS SECURITIES COMMISSIONER Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/12/2012 Docket/Case Number:S-12-0135 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, ARKANSAS SECURITIES COMMISSIONER ALLEGED THAT PROEQUITIES VIOLATED ARK. CODE ANN. 23-42-301 OF THE ARKANSAS SECURITIES ACT, CODIFIED AT ARK. CODE ANN. 23-42-101 THROUGH 23-42-509 ("ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN ARKANSAS. Resolution Date:11/19/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER ARK. CODE ANN. 23-42-308 OF THE ACT. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO ARKANSAS. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING ARKANSAS. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 66©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING ARKANSAS. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 28 of 63 i Reporting Source:Firm Initiated By:SECURITIES COMMISSIONER FOR THE STATE OF DELAWARE Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/12/2012 Docket/Case Number:12-5-8 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, SECURITIES COMMISSIONER FOR THE STATE OF DELAWARE ALLEGED THAT PROEQUITIES VIOLATED 6 DEL. C. 73-301(A) AND 6 DEL. C. 73-301(C), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN DELAWARE. Current Status:Final Resolution Date:11/12/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER 6 DEL. C. 73-601. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO DELAWARE. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING DELAWARE. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 67©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING DELAWARE. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 29 of 63 i Reporting Source:Firm Initiated By:STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE SECURITIES DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/12/2012 Docket/Case Number:12-0253 CO Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE SECURITIES DIVISION ALLEGED THAT PROEQUITIES VIOLATED IND. CODE 23-19-4-1, IND. CODE 23-19-4-2, IND. CODE 23-19-4-3, AND IND. CODE 23-19-4-4, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN INDIANA. Current Status:Final Resolution Date:11/15/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER IND. CODE 23-19-6-4(A). Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 68©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER IND. CODE 23-19-6-4(A). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO INDIANA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING INDIANA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 30 of 63 i Reporting Source:Regulator Initiated By:DISTRICT OF COLUMBIA Date Initiated:11/27/2012 Docket/Case Number:SB-CO-16-12 URL for Regulatory Action: Allegations:PROEQUITIES HAS BEEN A BROKER-DEALER REGISTERED IN THE DISTRICT OF COLUMBIA AND A FEDERAL COVER INVESTMENT ADVISER. BANKERS LIFE & BLCF ENTERED INTO AN AGREEMENT WITH PROEQUITIES EFFECTIVE APRIL 30, 2010. THE PROEQUITIES AGREEMENT SPECIFIES THAT PROEQUITIES WOULD "EXERICES EXCLUSIVE CONTROL" OVER THE BROKER-DEALER AND INVESTMENT ADVISOR ACTIVITIES. BANKERS ACTED AS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISER IN THE DISTRICT OF COLUMBIA IN VIOLATION OF DC OFFICIAL CODE §31-5601.01(3) (A),31-5602.02(A), BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTS WHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISER REPRESENTATIVES OF BANKER, BANKERS VIOLATED D.C. OFFICIAL CODE §31-5602.01(B) & §31-5602.02(F). Current Status:Final 69©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Other Other Sanction(s)/Relief Sought: ADMINISTRATIVE CONSENT ORDER Principal Product Type:No Product Other Product Type(s): Resolution Date:11/27/2012 Resolution: Other Sanctions Ordered:PROEQUITIES SHALL PAY AN AMOUNT OF $8,027.55 TO THE DISTRICT OF COLUMBIA MADE PAYABLE TO THE D.C. TREASURER PURSUANT TO D.C. OFFICIAL CODE § 1-204.50 AS ITS PORTION OF THE TOTAL AMOUNT, WHICH PORTION SHALL BE CONSIDERED A CIVIL PENALTY IN ACCORDANCE WITH DC OFFICIAL CODE §31-5606.02(B)(4). PROEQUITIES SHALL PAY AN AMOUNT OF $435,000.00 TO THE STATES WHERE DUAL AGENTS WERE LOCATED DURING THE PERIOD FROM APRIL 30, 2010 THROUGH DECEMBER 2, 2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION WORKING GROUP. SUCH PAYMENT SHALL BE MADE WITHIN (10) DAYS FROM THE DATE THIS CONSENT ORDER IS SIGNED BY THE DEPARTMENT. PROEQUITIES SHALL NOT ATTEMPT TO RECOVER ANY PART OF THE PAYMENTS ADDRESSED IN THIS CONSENT ORDER FROM DUAL AGENTS, BANKERS LIFE, OR CUSTOMERS OF PROEQUITIES. FROM THE DATE OF THIS CONSENT ORDER THROUGH MARCH 31, 2015, AND WHILE BANKERS HAS DUAL AGENTS THAT ARE REGISTERED REPRESENTATIVE OR INVESTMENT ADVISER REPRESENTATIVES OF PROEQUITIES, ANY AGREEMENT BETWEEN BANKERS AND PROEQUITIES SHALL BE CONSISTENT WITH PROVISION SET FORTH IN A SEPARATE CONSENT ORDER EXECUTED BY BANKERS AND THE DEPARTMENT IN CONSENT ORDER SB-CO-14-12. Sanction Details:SANCTION DETAILS OF THE ADMINISTRATIVE CONSENT ORDER CAN BE VIEWED ONLINE AT: WWW.DISB.DC.GOV UNDER SECURITIES RELATED ORDERS. Regulator Statement IN ACCORDANCE WITH TERMS OF A MULTI-STATE SETTLEMENT, PROEQUITIES, INC. SHALL PAY $435,000 AMONG STATES WHERE DUAL AGENTS WERE LOCATED DURING THE PERIOD OF APRIL 30,2010 THROUGH DECEMBER 2, 2011. THE MULTI-STATE INVESTIGATION WORKING GROUP ALLOCATED DISTRICT $8,207.55 OF THE AMOUNT, TO BE CONSIDERED A PENALTY. PROEQUITIES, INC. SHALL ALSO REFRAIN FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE DISTRICT SECURITIES ACT. PROEQUITIES, INC. PAID DISTRICT OF COLUMBIA $8,207.55 WITHIN 10 DAYS OF ENTRY OF THE CONSENT ORDER. CONTACT MAURICE GOFF AT 202-442-4934 FOR FURTHER INFORMATION. "PROEQUITIES NEITHER ADMITTED OR DENIED THE FINDINGS OF FACT AND CONCLUSIONS OF LAW, BUT SETTLED THE MATTER PURSUANT TO THE SETTLEMENT TERMS". ON 11/30/2012 WIRE PAYMENT RECEIVED $8,207.55 TRN#121130060403 Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Order 70©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Regulator Statement IN ACCORDANCE WITH TERMS OF A MULTI-STATE SETTLEMENT, PROEQUITIES, INC. SHALL PAY $435,000 AMONG STATES WHERE DUAL AGENTS WERE LOCATED DURING THE PERIOD OF APRIL 30,2010 THROUGH DECEMBER 2, 2011. THE MULTI-STATE INVESTIGATION WORKING GROUP ALLOCATED DISTRICT $8,207.55 OF THE AMOUNT, TO BE CONSIDERED A PENALTY. PROEQUITIES, INC. SHALL ALSO REFRAIN FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE DISTRICT SECURITIES ACT. PROEQUITIES, INC. PAID DISTRICT OF COLUMBIA $8,207.55 WITHIN 10 DAYS OF ENTRY OF THE CONSENT ORDER. CONTACT MAURICE GOFF AT 202-442-4934 FOR FURTHER INFORMATION. "PROEQUITIES NEITHER ADMITTED OR DENIED THE FINDINGS OF FACT AND CONCLUSIONS OF LAW, BUT SETTLED THE MATTER PURSUANT TO THE SETTLEMENT TERMS". ON 11/30/2012 WIRE PAYMENT RECEIVED $8,207.55 TRN#121130060403 i Reporting Source:Firm Initiated By:DISTRICT OF COLUMBIA DEPARTMENT OF INSURANCE, SECURITIES AND BANKING Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/12/2012 Docket/Case Number:SB-CO-16-12 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE DISTRICT OF COLUMBIA DEPARTMENT OF INSURANCE, SECURITIES AND BANKING ALLEGED THAT PROEQUITIES VIOLATED D.C. OFFICIAL CODE 31-5602.01(A) AND 31-5602.02(A), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN THE DISTRICT OF COLUMBIA. Current Status:Final Resolution Date:11/12/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER D.C. OFFICIAL CODE 31-5606.02(A). Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 71©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER D.C. OFFICIAL CODE 31-5606.02(A). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO THE DISTRICT OF COLUMBIA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING THE DISTRICT OF COLUMBIA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 31 of 63 i Reporting Source:Regulator Initiated By:NEW HAMPSHIRE BUREAU OF SECURITIES REGULATION Principal Sanction(s)/Relief Sought: Cease and Desist Other Sanction(s)/Relief Sought: FINE Date Initiated:08/10/2010 Docket/Case Number:C-2010-0012 URL for Regulatory Action: Principal Product Type:Other Other Product Type(s): Allegations:RESPONDENT HAD A CONTRACT WITH BANKERS LIFE AND CASUALTY, AN INSURNACE COMPANY THAT WAS NOT LICENSED TO SELL SECURITIES, TO PROVIDE BOKERAGE SERVICES IN THE SALE OF SECURITIES AND AIDED AND ABETTED BANKERS IN UNLICENSED SECURITIES BUSINESS. Current Status:Final 72©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanction(s)/Relief Sought: FINE Resolution Date:11/01/2012 Resolution: Other Sanctions Ordered: Sanction Details:THIS WAS PART OF A GLOBAL SETTLEMENT WITH BANKERS AND UVEST INCLUDING ALL 50 STATES. Regulator Statement SAME AS 7 ABOVE. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent i Reporting Source:Firm Initiated By:STATE OF NEW HAMPSHIRE BUREAU OF SECURITIES REGULATION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:10/25/2012 Docket/Case Number:C-2012-0012 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF NEW HAMPSHIRE BUREAU OF SECURITIES REGULATION ALLEGED THAT PROEQUITIES VIOLATED RSA 421-B:6 AND 421-B:26-A, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NEW HAMPSHIRE. Current Status:Final 73©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Resolution Date:11/01/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER RSA 421-B:23. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO NEW HAMPSHIRE. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING NEW HAMPSHIRE. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 32 of 63 i Reporting Source:Firm Initiated By:COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE SECRETARY OF THE COMMONWEALTH SECURITIES DIVISION Date Initiated:10/16/2012 Docket/Case Number:E-2011-0025 Principal Product Type:No Product Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, COMMONWEALTH OF MASSACHUSETTS SECURITIES DIVISION ALLEGED THAT PROEQUITIES VIOLATED MASS. GEN. LAWS CH. 110A, 201, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MASSACHUSETTS. Current Status:Final 74©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Principal Product Type:No Product Other Product Type(s): Resolution Date:10/18/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER MASS. GEN. LAWS CH. 110A, 407A. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MASSACHUSETTS. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MASSACHUSETTS. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 33 of 63 i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, OFFICE OF THE SECRETARY OF STATE COMMISSIONER OF SECURITIES STATE OF GEORGIA ALLEGED THAT PROEQUITIES VIOLATED ARTICLE 4 OF THE GEORGIA UNIFORM SECURITIES ACT OF 2008 ("2008 ACT") AND ITS PREDECESSOR, SECTION 10-5-3 OF THE GEORGIA SECURITIES ACT OF 1973 ("1973 ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN GEORGIA. Current Status:Final 75©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:OFFICE OF THE SECRETARY OF STATE COMMISSIONER OF SECURITIES STATE OF GEORGIA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:10/16/2012 Docket/Case Number:ENSC-120188 Principal Product Type:No Product Other Product Type(s): IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, OFFICE OF THE SECRETARY OF STATE COMMISSIONER OF SECURITIES STATE OF GEORGIA ALLEGED THAT PROEQUITIES VIOLATED ARTICLE 4 OF THE GEORGIA UNIFORM SECURITIES ACT OF 2008 ("2008 ACT") AND ITS PREDECESSOR, SECTION 10-5-3 OF THE GEORGIA SECURITIES ACT OF 1973 ("1973 ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN GEORGIA. Resolution Date:10/19/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER 1973 ACT AND THE 2008 ACT. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO GEORGIA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING GEORGIA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 76©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING GEORGIA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 34 of 63 i Reporting Source:Regulator Initiated By:PENNSYLVANIA CONTACT: COUNSEL JACK CHIAPPETTA (412)-565-5083 Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/08/2012 Docket/Case Number:2012-07-03/120095 URL for Regulatory Action: Principal Product Type:Other Other Product Type(s):VARIABLE ANNUITY AND SECURITIES TRANSACTIONS Allegations:PROEQUITIES, INC. (RESPONDENT) VIOLATED CERTAIN PROVISIONS OF THE PA SECURITIES ACT OF 1972 IN CONNECTION WITH THE OFFER AND SALE OF SECURITIES IN PA IN THAT RESPONDENT SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER-DEALER WHILE THAT BROKER- DEALER WAS NOT REGISTERED AS A BROKER-DEALER IN PA. Current Status:Final Resolution Date:11/08/2012 Resolution: Other Sanctions Ordered: Sanction Details:RESPONDENT PAID THE SUM OF $8207.50 CONTEMPORANEOUSLY WITH THE SUBMISSION OF AN EXECUTED OFFER OF SETTLEMENT, WHICH AMOUNT REPRESENTS AN ADMINISTRATIVE ASSESSMENT. THE SUM CONSTITUTES THE COMMONWEALTH OF PA'S PROPORTIONATE SHARE OF THE STATE SECURITIES COMMISSIONS' GLOBAL SETTLEMENT IN THE AMOUNT OF $435,000. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.50 Settled 77©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Regulator Statement FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER ISSUED TO RESPONDENT. i Reporting Source:Firm Initiated By:COMMONWEALTH OF PENNSYLVANIA BEFORE THE PENNSYLVANIA DEPARTMENT OF BANKING AND SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:10/16/2012 Docket/Case Number:2012-07-03 & 120095 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, PENNSYLVANIA DEPARTMENT OF BANKING AND SECURITIES ALLEGED THAT PROEQUITIES VIOLATED CERTAIN PROVISIONS OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (1972 ACT) IN CONNECTION WITH THE OFFER AND SALE OF SECURITIES IN THE COMMONWEALTH OF PENNSYLVANIA, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN PENNSYLVANIA. Current Status:Final Resolution Date:11/08/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER PENNSYLVANIA SECURITIES ACT OF 1972. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO PENNSYLVANIA. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 78©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING PENNSYLVANIA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 35 of 63 i Reporting Source:Firm Initiated By:STATE OF NORTH DAKOTA SECURITIES DEPARTMENT Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:10/16/2012 Docket/Case Number:NONE ASSIGNED Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, STATE OF NORTH DAKOTA SECURITIES DEPARTMENT ALLEGED THAT PROEQUITIES VIOLATED N.D.C.C. 10-04-10, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NORTH DAKOTA. Current Status:Final Resolution Date:10/19/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER N.D.C.C 10-04-16(1). Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 79©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER N.D.C.C 10-04-16(1). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO NORTH DAKOTA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING NORTH DAKOTA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 36 of 63 i Reporting Source:Firm Initiated By:COMMISSIONER OF COMMERCE AND INSURANCE FOR THE STATE OF TENNESSEE, AT NASHVILLE Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:10/16/2012 Docket/Case Number:12-005 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE COMMISSIONER OF COMMERCE AND INSURANCE FOR THE STATE OF TENNESSEE, AT NASHVILLE ALLEGED THAT PROEQUITIES VIOLATED TENN. CODE ANN. 48-2-109, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN TENNESSEE. Current Status:Final 80©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanction(s)/Relief Sought: Resolution Date:01/30/2013 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER TENN. CODE ANN. 48-2-116. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO TENNESSEE. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING TENNESSEE. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 37 of 63 i Reporting Source:Regulator Initiated By:WASHINGTON Allegations:ON SEPTEMBER 20, 2012, THE SECURITIES DIVISION ENTERED INTO A CONSENT ORDER WITH PROEQUITIES AS PART OF A MULTI-STATE SETTLEMENT. THE CONSENT ORDER ALLEGES THAT PROEQUITIES VIOLATED THE WASHINGTON STATE SECURITIES ACT'S (THE "ACT") PROVISION REQUIRING REGISTRATION OF SECURITIES BROKER-DEALERS AND SALESPERSONS. WITHOUT ADMITTING OR DENYING THE DIVISION'S ALLEGATIONS, PROEQUITIES AGREED TO CEASE AND DESIST FROM VIOLATING THE ACT AND TO PAY A FINE OF $8,207.55. PROEQUITIES WAIVED ITS RIGHT TO A HEARING AND JUDICIAL REVIEW OF THE MATTER. Current Status:Final 81©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:WASHINGTON Principal Sanction(s)/Relief Sought: Cease and Desist Other Sanction(s)/Relief Sought: PAYMENT OF FINE Date Initiated:09/20/2012 Docket/Case Number:S-12-0987-12-CO01 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Resolution Date:09/20/2012 Resolution: Other Sanctions Ordered: Sanction Details:PROEQUITIES SHALL PAY $8,207.55 TO THE SECURITIES DIVISION OF THE WA STATE DEPARTMENT OF FINANCIAL INSTITUTIONS AS ITS PORTION OF THE TOTAL AMOUNT, WHICH PORTION SHALL BE CONSIDERED A FINE. THIS FULL AMOUNT WAS RECEIVED BY THE SECURITIES DIVISION ON 10-3- 2012. Regulator Statement EDWARD THUNEN 3609028770 Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Consent i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS SECURITIES DIVISION ALLEGED THAT PROEQUITIES VIOLATED RCW 21.20.040, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN WASHINGTON. Current Status:Final 82©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:STATE OF WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS SECURITIES DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:09/17/2012 Docket/Case Number:S-12-0987-12-CO01 Principal Product Type:No Product Other Product Type(s): IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONS SECURITIES DIVISION ALLEGED THAT PROEQUITIES VIOLATED RCW 21.20.040, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN WASHINGTON. Resolution Date:09/17/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM VIOLATING RCW 21.20.040. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO WASHINGTON. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING WASHINGTON. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 38 of 63 i Reporting Source:Firm 83©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:OFFICE OF THE MISSISSIPPI SECRETARY OF STATE SECURITIES AND CHARITIES DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:09/17/2012 Docket/Case Number:LS-12-0467 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE OFFICE OF THE MISSISSIPPI SECRETARY OF STATE SECURITIES AND CHARITIES DIVISION ALLEGED THAT PROEQUITIES VIOLATED MISS. CODE ANN. SECTIONS 75-71-401 THROUGH 75-71-404, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MISSISSIPPI. Current Status:Final Resolution Date:09/17/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER MISS. CODE ANN. SECTION 75-71-604. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MISSISSIPPI. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MISSISSIPPI. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 84©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MISSISSIPPI. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 39 of 63 i Reporting Source:Firm Initiated By:DEPARTMENT OF FINANCE OF THE STATE OF IDAHO Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:09/17/2012 Docket/Case Number:NONE ASSIGNED Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE DIRECTOR OF THE DEPARTMENT OF FINANCE OF THE STATE OF IDAHO ALLEGED THAT PROEQUITIES VIOLATED IDAHO CODE SECTIONS 30-14-401 THROUGH 404, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN IDAHO. Current Status:Final Resolution Date:09/17/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER IDAHO CODE SECTION 30-14-604(A). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO IDAHO. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 85©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO IDAHO. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING IDAHO. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 40 of 63 i Reporting Source:Firm Initiated By:SECURITIES COMMISSIONER OF MARYLAND Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:09/17/2012 Docket/Case Number:2012-0247 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OF MARYLAND ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 11-401 AND 11-402 OF THE MARYLAND SECURITIES ACT, TITLE 11, CORPS. & ASS'NS, MD. CODE ANN. (2007 REPL.VOL. & SUPP. 2012)("ACT" OR "SECURITIES ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MARYLAND. Current Status:Final Resolution Date:09/17/2012 Resolution: Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 86©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER 11-701.1 OF THE SECURITIES ACT. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MARYLAND. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MARYLAND. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Disclosure 41 of 63 i Reporting Source:Firm Initiated By:STATE OF NEBRASKA DEPARTMENT OF BANKING & FINANCE Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Date Initiated:09/17/2012 Docket/Case Number:NONE ASSIGNED Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF NEBRASKA DEPARTMENT OF BANKING AND FINANCE ALLEGED THAT PROEQUITIES VIOLATED THE SECURITIES ACT OF NEBRASKA, NEB.REV.STAT. 8-1101 THROUGH 8-1123 (REISSUE 2007; CUM. SUPP. 2010; SUPP. 2011)("THE ACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NEBRASKA. Current Status:Final 87©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Resolution Date:09/17/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER NEB.REV.STAT. 8-1108.01 (REISSUE 2007) AND NEB.REV.STAT. 8-1118(3) (REISSUE 2007). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO NEBRASKA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING NEBRASKA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 42 of 63 i Reporting Source:Regulator Initiated By:MISSOURI Allegations:ACTED AS BROKER-DEALER AND INVESTMENT ADVISER WITHOUT BEING REGISTERED, EXEMPT FROM REGISTRATION, OR A FEDERAL COVERED INVESTMENT ADVISER; HAS EMPLOYED OR ASSOCIATED WITH AGENTS AND INVESTMENT ADVISER REPRESENTATIVES WHO WERE NOT REGISTERED Current Status:Final 88©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:MISSOURI Principal Sanction(s)/Relief Sought: Cease and Desist Other Sanction(s)/Relief Sought: MONETARY PENALTY Date Initiated:09/24/2012 Docket/Case Number:AP-12-21 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Resolution Date:09/24/2012 Resolution: Other Sanctions Ordered: Sanction Details:$8207.55 Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent i Reporting Source:Firm Initiated By:STATE OF MISSOURI OFFICE OF SECRETARY OF STATE Date Initiated:09/18/2012 Docket/Case Number:AP-12-21 Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF MISSOURI OFFICE OF SECRETARY OF STATE ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 409.4-401, 409.4-402, AND 409.4-403, RSMO. (CUM.SUPP. 2011), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MISSOURI. Current Status:Final 89©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Docket/Case Number:AP-12-21 Principal Product Type:No Product Other Product Type(s): Resolution Date:09/24/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 409.6-604, RSMO. (CUM. SUPP. 2011). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MISSOURI. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MISSOURI. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 43 of 63 i Reporting Source:Regulator Allegations:A BANK AND IT'S SUBSIDIARY ENTERED INTO AN AGREEMENT WITH PROEQUITIES (THE "PRO EQUITIES AGREEMENT"). THE PROEQUITIES AGREEMENT SPECIFIES THAT PROEQUITIES WOULD "EXERCISE EXCLUSIVE CONTROL" OVER THE BROKER-DEALER AND INVESTMENT ADVISORY ACTIVITIES OFPROEQUITIES AGENTS WHO WERE ALSO INSURANCE AGENTS FOR THE BANK (THE "DUAL AGENTS"). IN ADDITION, THE PROEQUITIES AGREEMENT ASSIGNED SECURITIES- RELATED ROLES TO THE BANK AND ITS SUBSIDIARY WHICH ROLES THEY PERFORMED WHILE UNDREGISTERED IN NEW JERSEY. Current Status:Final 90©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:NEW JERSEY BUREAU OF SECURITIES Principal Sanction(s)/Relief Sought: Cease and Desist Other Sanction(s)/Relief Sought: CIVIL ADMINISTRATIVE PENALTIES Date Initiated:09/12/2012 Docket/Case Number:2012-015 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): A BANK AND IT'S SUBSIDIARY ENTERED INTO AN AGREEMENT WITH PROEQUITIES (THE "PRO EQUITIES AGREEMENT"). THE PROEQUITIES AGREEMENT SPECIFIES THAT PROEQUITIES WOULD "EXERCISE EXCLUSIVE CONTROL" OVER THE BROKER-DEALER AND INVESTMENT ADVISORY ACTIVITIES OFPROEQUITIES AGENTS WHO WERE ALSO INSURANCE AGENTS FOR THE BANK (THE "DUAL AGENTS"). IN ADDITION, THE PROEQUITIES AGREEMENT ASSIGNED SECURITIES- RELATED ROLES TO THE BANK AND ITS SUBSIDIARY WHICH ROLES THEY PERFORMED WHILE UNDREGISTERED IN NEW JERSEY. Resolution Date:09/21/2012 Resolution: Other Sanctions Ordered: Sanction Details:1. UNDER THE SECURITIES LAW, A PERSON MAY NOT ACT AS A BROKER- DEALER IN NEW JERSEY UNLESS REGISTERED OR EXEMPT FROM REGISTRATION. N.J.S.A. 49:3-56(A). 2. SIMILARLY, A PERSON MAY NOT ACT AS AN INVESTMENT ADVISER IN NEW JERSEY UNLESS REGISTERED, EXEMPT FROM REGISTRATION, OR A FEDERAL COVERED INVESTMENT ADVISER. N.J.S.A. 49:3-56(A). 3. A BROKER-DEALER MAY NOT EMPLOY OR ASSOCIATE WITH AN AGENT, AS DEFINED IN N.J.S.A. 49:3-49(B), UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS AN AGENT OF THE BROKER- DEALER. N.J.S.A. 49:3-56(H). 4. AN INVESTMENT ADVISER MAY NOT EMPLOY OR ASSOCIATE WITH AN INVESTMENT ADVISER REPRESENTATIVE UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS AN INVESTMENT ADVISER REPRESENTATIVE OFTHE INVESTMENT ADVISER. N.J.S.A. 49:3-56 (J). 5. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, BANKERS ACTED AS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISER IN NEW JERSEY IN VIOLATION OFN.J.S.A. 49:3-56(A). 6. FURTHERMORE, BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTS WHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISER REPRESENTATIVES OF BANKERS, BANKERS VIOLATED N.J.S.A. 49:3-56(H) AND N.J.S.A. 49:3-560). 7. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER N.J.S.A. 49:3- 69(A)(1). 8. AS A RESULT, THIS CONSENT ORDER AND THE FOLLOWING RELIEF ARE APPROPRIATE AND IN THE PUBLIC INTEREST. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 91©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance1. UNDER THE SECURITIES LAW, A PERSON MAY NOT ACT AS A BROKER-DEALER IN NEW JERSEY UNLESS REGISTERED OR EXEMPT FROMREGISTRATION. N.J.S.A. 49:3-56(A).2. SIMILARLY, A PERSON MAY NOT ACT AS AN INVESTMENT ADVISER INNEW JERSEY UNLESS REGISTERED, EXEMPT FROM REGISTRATION, OR AFEDERAL COVERED INVESTMENT ADVISER. N.J.S.A. 49:3-56(A). 3. A BROKER-DEALER MAY NOT EMPLOY OR ASSOCIATE WITH AN AGENT, AS DEFINED IN N.J.S.A. 49:3-49(B), UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS AN AGENT OF THE BROKER- DEALER. N.J.S.A. 49:3-56(H). 4. AN INVESTMENT ADVISER MAY NOT EMPLOY OR ASSOCIATE WITH AN INVESTMENT ADVISER REPRESENTATIVE UNLESS THE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS AN INVESTMENT ADVISER REPRESENTATIVE OFTHE INVESTMENT ADVISER. N.J.S.A. 49:3-56 (J). 5. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, BANKERS ACTED AS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISER IN NEW JERSEY IN VIOLATION OFN.J.S.A. 49:3-56(A). 6. FURTHERMORE, BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTS WHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISER REPRESENTATIVES OF BANKERS, BANKERS VIOLATED N.J.S.A. 49:3-56(H) AND N.J.S.A. 49:3-560). 7. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER N.J.S.A. 49:3- 69(A)(1). 8. AS A RESULT, THIS CONSENT ORDER AND THE FOLLOWING RELIEF ARE APPROPRIATE AND IN THE PUBLIC INTEREST. Regulator Statement THE CONDUCT ADDRESSED HEREIN HAS RESULTED IN NO KNOWN DIRECT CONSUMER HARM, AND THE PARTIES UNDERSTAND THAT REGISTERED AGENTS OR REPRESENTATIVES OFPROEQUITIES PARTICIPATED IN ALL SECURITIES TRANSACTIONS AND AT LOCATIONS THAT WERE REGISTERED WITH THE APPROPRIATE SECURITIES AUTHORITIES AS BROKER-DEALER LOCATIONS OF PROEQUITIES; AND PROEQUITIES HAS COOPERATED WITH STATE REGULATORS CONDUCTING THE INVESTIGATIONS BY RESPONDING TO INQUIRIES, PROVIDING DOCUMENTARY EVIDENCE, AND HALTING FURTHER PAYMENT TO ANOTHER ENTITY OF BROKER-DEALER AND INVESTMENT ADVISER RELATED COMPENSATION WHILE THE INVESTIGATIONS WERE PENDING; AND PROEQUITIES, AS PART OF THIS SETTLEMENT, AGREES TO COMPLY WITH ALL STATE AND FEDERAL LICENSING, REGISTRATION, AND OTHER SECURITIES LAWS. i Reporting Source:Firm Initiated By:STATE OF NEW JERSEY BUREAU OF SECURITIES Date Initiated:09/17/2012 Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE STATE OF NEW JERSEY BUREAU OF SECURITIES ALLEGED THAT PROEQUITIES VIOLATED N.J.S.A 49:3-47 ET SEQ. ("SECURITIES LAW"), SPECIFICALLY N.J.S.A. 49:3-56(A), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NEW JERSEY. Current Status:Final 92©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:09/17/2012 Docket/Case Number:2012-015 Principal Product Type:No Product Other Product Type(s): Resolution Date:09/21/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER N.J.S.A. 49:3-69(A)(1). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO NEW JERSEY. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING NEW JERSEY. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 44 of 63 i Reporting Source:Regulator Allegations:BANKERS LIFE AND CASUALTY COMPANY ("BANKERS LIFE") AND BLC FINANCIAL SERVICES, INC. (COLLECTIVELY, "BANKERS") ACTED AS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISOR IN VIRGINIA IN VIOLATION OF SECTION 13.1-504 A OF THE VIRGINIA SECURITIES ACT ("ACT"). BY EMPLOYING AGENTS OR INVESTMENT ADVISOR REPRESENTATIVES NOT REGISTERED ON BEHALF OF BANKERS. BANKERS VIOLATED SECTION 13.1-504 B AND C OF THE ACT. PROEQUITIES, INC. ENTERED INTO AN AGREEMENT WITH BANKERS TO PROVIDE BROKERAGE AND INVESTMENT ADVISORY SERVICES OUT OF BANKERS LIFE BRANCH OFFICE LOCATIONS. THE REGISTERED REPRESENTATIVES AND/OR INVESTMENT ADVISOR REPRESENTATIVES WERE REGISTERED WITH PROEQUITIES, INC. PROEQUITIES, INC. WOULD EXERCISE EXCLUSIVE CONTROL OVER THE BROKER-DEALER AND INVESTMENT ADVISORY ACTIVITIES OF THE DUAL AGENTS AND ASSIGNED BANKERS LIFE SEVERAL SECURITIES RELATED ROLES. BY ENGAGING IN THIS CONDUCT, AND BY PARTICIPATING IN EMPLOYING DUAL AGENTS, PROEQUITIES, INC. ENTERED IN AN ACT, PRACTICE OR COURSE OF BUSINESS CONSTITUTING A VIOLATION OF THE ACT, WHICH IS GROUNDS FOR IMPOSING SANCTIONS UNDER SECTIONS 13.159 AND 13.1-521 OF THE ACT. Current Status:Final 93©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:VIRGINIA - DIVISION OF SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: PROEQUITIES, INC. SHALL REFRAIN FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT. Date Initiated:11/26/2012 Docket/Case Number:SEC-2012-00030 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Allegations:BANKERS LIFE AND CASUALTY COMPANY ("BANKERS LIFE") AND BLC FINANCIAL SERVICES, INC. (COLLECTIVELY, "BANKERS") ACTED AS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISOR IN VIRGINIA IN VIOLATION OF SECTION 13.1-504 A OF THE VIRGINIA SECURITIES ACT ("ACT"). BY EMPLOYING AGENTS OR INVESTMENT ADVISOR REPRESENTATIVES NOT REGISTERED ON BEHALF OF BANKERS. BANKERS VIOLATED SECTION 13.1-504 B AND C OF THE ACT. PROEQUITIES, INC. ENTERED INTO AN AGREEMENT WITH BANKERS TO PROVIDE BROKERAGE AND INVESTMENT ADVISORY SERVICES OUT OF BANKERS LIFE BRANCH OFFICE LOCATIONS. THE REGISTERED REPRESENTATIVES AND/OR INVESTMENT ADVISOR REPRESENTATIVES WERE REGISTERED WITH PROEQUITIES, INC. PROEQUITIES, INC. WOULD EXERCISE EXCLUSIVE CONTROL OVER THE BROKER-DEALER AND INVESTMENT ADVISORY ACTIVITIES OF THE DUAL AGENTS AND ASSIGNED BANKERS LIFE SEVERAL SECURITIES RELATED ROLES. BY ENGAGING IN THIS CONDUCT, AND BY PARTICIPATING IN EMPLOYING DUAL AGENTS, PROEQUITIES, INC. ENTERED IN AN ACT, PRACTICE OR COURSE OF BUSINESS CONSTITUTING A VIOLATION OF THE ACT, WHICH IS GROUNDS FOR IMPOSING SANCTIONS UNDER SECTIONS 13.159 AND 13.1-521 OF THE ACT. Resolution Date:11/26/2012 Resolution: Other Sanctions Ordered:PROEQUITIES, INC. SHALL REFRAIN FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Consent 94©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance PROEQUITIES, INC. SHALL REFRAIN FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT. Sanction Details:VIRGINIA AND PROEQUITIES, INC. ENTERED INTO A CONSENT ORDER. PER THE ORDER, PROEQUITIES, INC. SHALL PAY VIRGINIA A PENALTY IN THE AMOUNT OF $8,207.55. IT SHALL ALSO REFRAIN FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT. Regulator Statement IN ACCORDANCE WITH TERMS OF A MULTI-STATE SETTLEMENT, PROEQUITIES, INC. SHALL PAY $435,000 AMONG STATES WHERE DUAL AGENTS WERE LOCATED DURING THE PERIOD OF APRIL 30,2010 THROUGH DECEMBER 2, 2011. THE MULTI-STATE INVESTIGATION WORKING GROUP ALLOCATED VIRGINIA $8,207.55 OF THE AMOUNT, TO BE CONSIDERED A PENALTY. PROEQUITIES, INC. SHALL ALSO REFRAIN FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT. PROEQUITIES, INC. PAID VIRGINIA $8,207.55 WITHIN 10 DAYS OF ENTRY OF THE CONSENT ORDER. CONTACT GLORIA PULKOWSKI AT 804-371-9566 FOR FURTHER INFORMATION. i Reporting Source:Firm Initiated By:COMMONWEALTH OF VIRGINIA STATE CORPORATION COMMISSION AT RICHMOND Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:11/12/2012 Docket/Case Number:SEC-2012-00030 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE COMMONWEALTH OF VIRGINIA STATE CORPORATION COMMISSION AT RICHMOND ALLEGED THAT PROEQUITIES VIOLATED 13.1-504 A, B AND C OF THE VIRGINIA SECURITIES ACT ("ACT"), 13.1-501 ET SEQ., CODE OF VIRGINIA, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN VIRGINIA. Current Status:Final Resolution Date:11/12/2012 Resolution:Consent 95©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Resolution Date:11/12/2012 Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT ("ACT"). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO VIRGINIA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING VIRGINIA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Disclosure 45 of 63 i Reporting Source:Regulator Allegations:BLCFS HAS NEVER BEEN REGISTERED AS A DEALER OR INVESTMENT ADVISER IN TEXAS, AND IT HAS NOT REGISTERED AND AGENTS OR INVESTMENT ADVISER REPRESENTATIVES IN TEXAS. PROEQUITIES ENTERED IN AN AGREEMENTS WITH BLCFS EFFECTIVE APRIL 10, 2010 (THE "PROEQUITIES AGREEMENT"). THE PROEQUITIES AGREEMENT SPECIFIED THAT PROEQUITIES WOULD "EXERCISE EXCULSIVE CONTROL" OVER THE DEALER AND INVESTMENT ADVISORY ACTIVITIES OF PROEQUITIES AGENTS WHO WERE ALSO INSURANCE AGENTS FOR BANKERS LIFE (THE "DUAL AGENTS"). EVIDENCE OBTAINED DURING THE INVESTIGATION INDICATED THAT BANKERS SCREENED PROSPECTIVE SECURITIES AGENTS, TRAINED NEW AGENTS, CONDUCTED PERIODIC TRAINING SESSIONS FOR AGENTS, MONITORED AND ATTEMPTED TO INCREASE SECURITIES PRODUCTION OF SECURITIES AGENTS, AND PLAYED A SIGNIFICANT ROLE IN DETERMINING THE COMPENSATION OF AGENTS. ADDITIONALLY, EVIDENCE SHOWED THAT THE INVOLVEMENT OF BANKERS IN SECURITIES-RELATED ROLES LED TO CONFUSION IN THE REPORTING AND RESPONSIBILITY HIERARCHIES AS BETWEEN BANKERS AND PROEQUITIES. PROEQUITIES SHALL CEASE AND DESIST FROM VIOLATING THE TEXAS SECURITIES ACT. WITHIN TEN DAYS AFTER THE ENTRY OF THIS ORDER, PROEQUITIES SHALL PAY THE SUM OF $8,207.55 TO THE GENERAL FUND OF THE STATE OF TEXAS. Current Status:Final 96©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:TEXAS Principal Sanction(s)/Relief Sought: Cease and Desist Other Sanction(s)/Relief Sought: FINE Date Initiated:09/05/2012 Docket/Case Number:IC12-CAF-15 URL for Regulatory Action: Principal Product Type:Insurance Other Product Type(s): BLCFS HAS NEVER BEEN REGISTERED AS A DEALER OR INVESTMENTADVISER IN TEXAS, AND IT HAS NOT REGISTERED AND AGENTS ORINVESTMENT ADVISER REPRESENTATIVES IN TEXAS. PROEQUITIESENTERED IN AN AGREEMENTS WITH BLCFS EFFECTIVE APRIL 10, 2010(THE "PROEQUITIES AGREEMENT"). THE PROEQUITIES AGREEMENTSPECIFIED THAT PROEQUITIES WOULD "EXERCISE EXCULSIVE CONTROL"OVER THE DEALER AND INVESTMENT ADVISORY ACTIVITIES OFPROEQUITIES AGENTS WHO WERE ALSO INSURANCE AGENTS FORBANKERS LIFE (THE "DUAL AGENTS"). EVIDENCE OBTAINED DURING THEINVESTIGATION INDICATED THAT BANKERS SCREENED PROSPECTIVE SECURITIES AGENTS, TRAINED NEW AGENTS, CONDUCTED PERIODIC TRAINING SESSIONS FOR AGENTS, MONITORED AND ATTEMPTED TO INCREASE SECURITIES PRODUCTION OF SECURITIES AGENTS, AND PLAYED A SIGNIFICANT ROLE IN DETERMINING THE COMPENSATION OF AGENTS. ADDITIONALLY, EVIDENCE SHOWED THAT THE INVOLVEMENT OF BANKERS IN SECURITIES-RELATED ROLES LED TO CONFUSION IN THE REPORTING AND RESPONSIBILITY HIERARCHIES AS BETWEEN BANKERS AND PROEQUITIES. PROEQUITIES SHALL CEASE AND DESIST FROM VIOLATING THE TEXAS SECURITIES ACT. WITHIN TEN DAYS AFTER THE ENTRY OF THIS ORDER, PROEQUITIES SHALL PAY THE SUM OF $8,207.55 TO THE GENERAL FUND OF THE STATE OF TEXAS. Resolution Date:09/05/2012 Resolution: Other Sanctions Ordered:N/A Sanction Details:N/A Regulator Statement N/A Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Order i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE TEXAS STATE SECURITIES BOARD ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 23, 23-1, 23.A AND 28 OF THE TEXAS SECURITIES ACT, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN TEXAS. Current Status:Final 97©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:TEXAS STATE SECURITIES BOARD Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: CEASE AND DESIST FROM VIOLATIVE CONDUCT. Date Initiated:08/06/2012 Docket/Case Number:ORDER NO. IC12-CAF-15 Principal Product Type:No Product Other Product Type(s): IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE TEXAS STATE SECURITIES BOARD ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 23, 23-1, 23.A AND 28 OF THE TEXAS SECURITIES ACT, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN TEXAS. Resolution Date:09/05/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER TEXAS SECURITIES ACT. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO TEXAS. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING TEXAS. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 98©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Disclosure 46 of 63 i Reporting Source:Regulator Initiated By:OREGON DEPARTMENT OF CONSUMER AND BUSINESS SERVICES, DIVISION OF FINANCE AND CORPORATE SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: CIVIL PENALTY Date Initiated:08/22/2012 Docket/Case Number:S-12-0055 URL for Regulatory Action: Principal Product Type:Options Other Product Type(s): Allegations:PROEQUITIES ENGAGES IN CONDUCT GIVE RISE TO LIABILITY UNDER ORS 59.245(4). Current Status:Final Resolution Date:08/22/2012 Resolution: Other Sanctions Ordered: Sanction Details:PROEQUITIES ENGAGES IN CONDUCT GIVE RISE TO LIABILITY UNDER ORS 59.245(4). Regulator Statement THIS CASE AROSE FROM MULTI-STATE, COORDINATED INVESTIGATIONS CONCERNING BANKERS LIFE AND CASUALTY COMPANY ET AL. THE OREGON CASE REGARDING PROEQUITIES, INC RESOLVED BY CONSENT ORDER EXECUTED ON 8/22/12. SANCTIONS INCLUDE AN ORDER TO CEASE AND DESIST AND A CIVIL PENALTY, WHICH WAS PAID IN FULL ON 8/30/12 Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 99©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceTHIS CASE AROSE FROM MULTI-STATE, COORDINATED INVESTIGATIONS CONCERNING BANKERS LIFE AND CASUALTY COMPANY ET AL. THE OREGON CASE REGARDING PROEQUITIES, INC RESOLVED BY CONSENT ORDER EXECUTED ON 8/22/12. SANCTIONS INCLUDE AN ORDER TO CEASE AND DESIST AND A CIVIL PENALTY, WHICH WAS PAID IN FULL ON 8/30/12 i Reporting Source:Firm Initiated By:STATE OF OREGON DEPARTMENT OF CONSUMER AND BUSINESS SERVICES, DIVISION OF FINANCE AND CORPORATE SECURITIES. Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:08/06/2012 Docket/Case Number:S-12-0055 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE OREGON DIVISION OF FINANCE ALLEGED THAT PROEQUITIES VIOLATED ORS 59.165, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN OREGON. Current Status:Final Resolution Date:08/06/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER ORS 59.245(4). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO OREGON. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING OREGON. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 100©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING OREGON. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 47 of 63 i Reporting Source:Regulator Initiated By:UTAH Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: CEASE AND DESIST Date Initiated:07/19/2012 Docket/Case Number:SD-12-0041 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Allegations:THE DIVISION ALLEGED RESPONDENT'S AGENTS AND INVESTMENT ADVISER REPRESENTATIVES ACTED IN AN UNLICENSED CAPACITY ON BEHALF OF TWO UNLICENSED ENTITIES, BANKERS LIFE AND CASUALTY COMPANY AND BLC FINANCIAL SERVICES, INC., WITH WHICH RESPONDENT SHARED COMPENSATION. Current Status:Final Resolution Date:07/19/2012 Resolution: Other Sanctions Ordered: Sanction Details:THE FINE OF 8207.55 WAS PAID IN ITS ENTIRETY WITHIN TEN (10) DAYS FOLLOWING ENTRY OF THE ORDER. Regulator Statement A PDF OF THE STIPULATION AND CONSENT ORDER CAN BE VIEWED ONLINE AT: HTTP://SECURITIES.UTAH.GOV/DOCKETS/12004101.PDF (NOTE: THE WEB ADDRESS MUST BE ENTERED IN ALL LOWER CASE LETTERS). Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Stipulation and Consent 101©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Regulator Statement A PDF OF THE STIPULATION AND CONSENT ORDER CAN BE VIEWED ONLINE AT: HTTP://SECURITIES.UTAH.GOV/DOCKETS/12004101.PDF (NOTE: THE WEB ADDRESS MUST BE ENTERED IN ALL LOWER CASE LETTERS). i Reporting Source:Firm Initiated By:DIVISION OF SECURITIES OF THE DEPARTMENT OF COMMERCE OF THE STATE OF UTAH Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:DOCKET NO. SD-12-0041 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE UTAH DIVISION OF SECURITIES ALLEGED THAT PROEQUITIES VIOLATED SECTION 61-1-3 OF THE UTAH UNIFORM SECURITIES ACT, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN UTAH. Current Status:Final Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER UTAH CODE ANN.ET SEQ. 61-1-20. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO UTAH. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING UTAH. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 102©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING UTAH. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 48 of 63 i Reporting Source:Firm Initiated By:STATE OF CALIFORNIA DEPARTMENT OF CORPORATIONS Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:NO FILE NUMBER ASSIGNED Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE CALIFORNIA DEPARTMENT OF CORPORATIONS ALLEGED THAT PROEQUITIES VIOLATED CORPORATIONS CODE SECTIONS 25210(BROKER/DEALER) AND 25230 (INVESTMENT ADVISER AND INVESTMENT ADVISER REPRESENTATIVES), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN CALIFORNIA. Current Status:Final Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER CORPORATIONS CODE SECTION 25532, SUBDIVISION (B). Sanctions Ordered:Monetary/Fine $8,207.55 Consent 103©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER CORPORATIONS CODE SECTION 25532, SUBDIVISION (B). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO CALIFORNIA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING CALIFORNIA THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 49 of 63 i Reporting Source:Firm Initiated By:STATE OF MINNESOTA DEPARTMENT OF COMMERCE Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:FILE NO. 24041 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE MINNESOTA DEPARTMENT OF COMMERCE ALLEGED THAT PROEQUITIES VIOLATED MINN.STAT. ET. SEQ. 80A.56 THROUGH ET. SEQ. 80A.58, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MINNESOTA. Current Status:Final 104©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER MINN.STAT. ET. SEQ. 45.027 SUBD.5A AND ET. SEQ. 80A.81. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO MINNESOTA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MINNESOTA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 50 of 63 i Reporting Source:Regulator Initiated By:ALABAMA Date Initiated:07/16/2012 Allegations:THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENT ORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITY INVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THE ORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER AND INVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROM REGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITH AGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OF BANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION A PENALTY AMOUNT OF $8,207.55. Current Status:Final 105©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Other Other Sanction(s)/Relief Sought: CONSENT ORDER Date Initiated:07/16/2012 Docket/Case Number:CO-2012-0024 URL for Regulatory Action: Principal Product Type:Annuity(ies) - Variable Other Product Type(s): Resolution Date:07/16/2012 Resolution: Other Sanctions Ordered:THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENT ORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITY INVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THE ORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER AND INVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROM REGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITH AGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OF BANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION A PENALTY AMOUNT OF $8,207.55. Sanction Details:THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENT ORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITY INVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THE ORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER AND INVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROM REGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITH AGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OF BANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION A PENALTY AMOUNT OF $8,207.55. Regulator Statement THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENT ORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITY INVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THE ORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER AND INVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROM REGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITH AGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OF BANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION A PENALTY AMOUNT OF $8,207.55. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $8,207.55 Consent 106©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENT ORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITY INVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THE ORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER AND INVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROM REGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITH AGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OF BANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION A PENALTY AMOUNT OF $8,207.55. i Reporting Source:Firm Initiated By:STATE OF ALABAMA, ALABAMA SECURITIES COMMISSION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:ADMINISTRATIVE CONSENT ORDER NO. CO-2012-0024 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE ALABAMA SECURITIES COMMISSION ALLEGED THAT PROEQUITIES VIOLATED TITLE 8, CHAPTER 6, SECTION 2, CODE OF ALABAMA 1975, THE ALABAMA SECURITIES ACT, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN ALABAMA. Current Status:Final Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 8-6-16(A), CODE OF ALABAMA 1975. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO ALABAMA. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 107©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO ALABAMA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING ALABAMA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 51 of 63 i Reporting Source:Firm Initiated By:THE SECURITIES COMMISSIONER OF SOUTH CAROLINA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:FILE NO. 12022 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OF SOUTH CAROLINA ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 35-1-401, 35- 1-402, AND 35-1-403 OF THE SOUTH CAROLINA UNIFORM SECURITIES ACT OF 2005, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN SOUTH CAROLINA. Current Status:Final Resolution Date:07/11/2012 Resolution: Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 108©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER S.C. CODE ANN. ET SEQ 35-1-604(A)(SUPP.2011). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO SOUTH CAROLINA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING SOUTH CAROLINA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 52 of 63 i Reporting Source:Firm Initiated By:STATE OF SOUTH DAKOTA DEPARTMENT OF LABOR & REGULATION DIVISION OF SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Date Initiated:07/11/2012 Docket/Case Number:NONE ASSIGNED Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE SOUTH DAKOTA DIVISION OF SECURITIES ALLEGED THAT PROEQUITIES VIOLATED SDCL 47-31B-401, 47- 31B-402, 47-31B-403, AND 47-31B-404, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN SOUTH DAKOTA. Current Status:Final 109©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER SDCL 47-31B-604(A). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO SOUTH DAKOTA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING SOUTH DAKOTA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 53 of 63 i Reporting Source:Firm Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE NEVADA OFFICE OF SECURITIES ALLEGED THAT PROEQUITIES VIOLATED NEVADA'S UNIFORM SECURITIES ACT, NRS 90.211 ET.SEQ. SPECIFICALLY NRS 90.310 AND NRS 90.330, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NEVADA. Current Status:Final 110©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:STATE OF NEVADA OFFICE OF THE SECRETARY OF STATE SECURITIES DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:FILE NUMBER I-12-107 Principal Product Type:No Product Other Product Type(s): Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER NRS 90.630. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO NEVADA. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING NEVADA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent Disclosure 54 of 63 i Reporting Source:Firm 111©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Initiated By:RHODE ISLAND Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:ORDER NUMBER 12-045 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, RHODE ISLAND ALLEGED THAT PROEQUITIES VIOLATED THE RHODE ISLAND UNIFORM SECURITIES ACT 7- 11-101 ET.SEQ. OF THE RHODE ISLAND GENERAL LAWS OF 1989 AS AMENDED, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN RHODE ISLAND. Current Status:Final Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER 7-11-602(A) OF THE RIUSA. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO RHODE ISLAND. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING RHODE ISLAND. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 112©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING RHODE ISLAND. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 55 of 63 i Reporting Source:Regulator Initiated By:WISCONSIN Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:01/01/2005 Docket/Case Number:S-225316(EX) URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Allegations:ONE OF A SERIES OF SIMILAR CONSENT ADMINISTRATIVE ORDERS NEGOTIATED BY NASAA BASED ON ACTIVITY BANKERS LIFE AND CASUALTY CO. & BLC FINANCIAL SERVICES, PRO EQUITIES, INC. AND UVEST FINANCIAL SERVICES GROUP, INC. AS BROKER-DEALERS & INVESTMENT ADVISERS WITHOUT BEING REGISTERED, EXEMPT FROM REGISTRATION, OR A FEDERAL COVERED INVESTMENT ADVISER & ASSOCIATING WITH AGENTS & INVESTMENT ADVISER REPRESENTATIVES WHO WERE NOT REGISTERED ON BEHALF OF BANKERS LIFE & CASUALTY CO. AND BLC FINANCIAL SERVICES INC. ORDER IMPOSES MONETARY PENALTIES. Current Status:Final Resolution Date:07/13/2012 Resolution: Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? Yes Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Decision & Order of Offer of Settlement 113©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered: Sanction Details:PROEQUITIES SHALL PAY $435,000 TO THE STATES WHERE DUAL AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/12, THROUGH 12/2/11. THEY WILL PAY $8,207.55 TO DFI AS A MONETARY PENALTY. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction i Reporting Source:Firm Initiated By:STATE OF WISCONSIN, DEPARTMENT OF FINANCIAL INSTITUTIONS DIVISION OF SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:07/11/2012 Docket/Case Number:FILE NO. S-225316(EX) Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE WISCONSIN DIVISION OF SECURITIES ALLEGED THAT PROEQUITIES VIOLATED THE WISCONSIN UNIFORM SECURITIES LAW, CHAPTER 551, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN WISCONSIN. Current Status:Final Resolution Date:07/11/2012 Resolution: Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER CHAPTER 551.WIS.STAT ET. SEQ. 551.604(1)(A). Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO WISCONSIN. Sanctions Ordered:Monetary/Fine $8,207.55 Cease and Desist/Injunction Consent 114©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidancePROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TO WISCONSIN. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING WISCONSIN. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 56 of 63 i Reporting Source:Firm Initiated By:STATE OF MAINE, OFFICE OF SECURITIES Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:03/31/2012 Docket/Case Number:12-8129 Principal Product Type:No Product Other Product Type(s): Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENT WITH AN UNAFFILIATED FIRM, THE MAINE OFFICE OF SECURITIES ALLEGED THAT PROEQUITIES VIOLATED 32 M.R.S., SECTION 16604, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN MAINE. Current Status:Final Resolution Date:03/31/2012 Resolution: Sanctions Ordered:Monetary/Fine $8,207.50 Cease and Desist/Injunction Consent 115©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER 32 M.R.S., SECTION 16604. Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLE STATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THE AGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO 12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THE MULTI-STATE INVESTIGATION GROUP, WITH $8,207.50 BEING PAYABLE TO MAINE. Firm Statement PROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGH CONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVE PROCEEDINGS IN NUMEROUS STATES, INCLUDING MAINE. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICH THE CLIENTS WERE LOCATED. Disclosure 57 of 63 i Reporting Source:Regulator Initiated By:INDIANA Date Initiated:10/26/2010 Docket/Case Number:10-0270 CA Allegations:1.THE DIVISION ALLEGES THAT FROM APPROXIMATELY JANUARY 28, 2009, TO FEBRUARY 24, 2009, PEI ENGAGED IN DISHONEST AND UNETHICAL PRACTICES BY FAILING TO RESPOND TO A FORMAL WRITTEN REQUEST FROM A CLIENT IN VIOLATION OF IND. CODE § 23-19-4-12(D)(13) AND 710 IAC 1-17-1(Y) (2001). 2.THE DIVISION ALLEGES THAT FROM APPROXIMATELY MARCH 19, 2009, TO MAY 7, 2010, PEI ENGAGED IN DISHONEST AND UNETHICAL PRACTICES BY FAILING TO RESPOND TO A FORMAL WRITTEN COMPLAINT FROM A CLIENT IN VIOLATION OF IND. CODE § 23-19-4-12(D)(13) AND 710 IAC 1-17- 1(Y) (2001). 3.THE DIVISION ALLEGES THAT FROM APPROXIMATELY JANUARY 28, 2009, TO MAY 7, 2010, PEI ENGAGED IN DISHONEST AND UNETHICAL PRACTICES BY FAILING TO SUPERVISE ITS AGENTS AND EMPLOYEES IN VIOLATION OF IND. CODE § 23-19-4-12(D)(13) AND 710 IAC 1-17-1(V) (2001). Current Status:Final 116©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Docket/Case Number:10-0270 CA URL for Regulatory Action: Principal Product Type:Other Other Product Type(s): Resolution Date:10/26/2010 Resolution: Other Sanctions Ordered:NONE Sanction Details:PEI PAID A CIVIL PENALTY OF $9,000 TO THE DIVISION ON OR ABOUT OCTOBER 26, 2010. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $9,000.00 Consent i Reporting Source:Firm Initiated By:INDIANA SECRETARY OF STATE, SECURITIES DIVISION Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: CONSENT AGREEMENT Date Initiated:10/25/2010 Docket/Case Number:CAUSE NO. 10-0270 CA Principal Product Type:No Product Other Product Type(s): Allegations:THE INDIANA SECRETARY OF STATE, SECURITIES DIVISION, ALLEGED THAT THE FIRM VIOLATED INDIANA CODE BY FAILING TO TIMELY RESPOND TO A CUSTOMER COMPLAINT. Current Status:Final 117©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanction(s)/Relief Sought: CONSENT AGREEMENT Resolution Date:10/25/2010 Resolution: Other Sanctions Ordered: Sanction Details:CONSENT AGREEMENT AND $9000.00 FINE. Firm Statement THE COMPLAINT AT DISPUTE WAS RECEIVED BY THE FIRM IN JANUARY, 2009 AND WAS SUBMITTED TO THE FIRM'S EMPLOYEE WHO WAS THEN RESPONSIBLE FOR REVIEWING AND PROVIDING A RESPONSE TO SUCH COMPLAINT. THIS EMPLOYEE WAS TERMINATED WITH THE FIRM THROUGH RIF, AND THE FIRM LEARNED AFTER THAT EMPLOYEE'S LEAVING THAT HE HAD NOT RESPONDED TO A NUMBER OF COMPLAINTS. IN REVIEW OF THE COMPLAINT, THE REPRESENTATIVE INFORMED THE FIRM THAT THIS CUSTOMER HAD WITHDRAWN THE COMPLAINT AND THEREFORE NO RESPONSE WAS MADE. OVER A YEAR LATER, THE CUSTOMER FILED HIS COMPLAINT WITH INDIANA; THE FIRM PROVIDED A TIMELY RESPONSE AND MADE SETTLEMENT WITH THE CUSTOMER REGARDING THE ERROR THAT PROMPTED THE ORIGINAL COMPLAINT. ALTHOUGH THE FIRM BELIEVES THAT THIS WAS AN EXTRAORDINARY CIRCUMSTANCE OF AN EMPLOYEE FAILING TO DO HIS JOB, AND NOT AN INDICATION OF A SYSTEMIC PROBLEM AT THE FIRM, THE STATE DETERMINED THAT THIS WAS A VIOLATION OF THE INDIANA CODE. WITHOUT ADMITTING OR DENYING THE STATE'S ALLEGATIONS, BUT RATHER TO AVOID THE EXPENSE AND INHERENT UNCERTAINTY OF A FORMAL HEARING, THE FIRM ENTERED INTO A CONSENT AGREEMENT AND WAS FINED $9000.00. Sanctions Ordered:Monetary/Fine $9,000.00 Consent Disclosure 58 of 63 i Reporting Source:Firm Initiated By:NEW YORK DEPARTMENT OF INSURANCE Date Initiated:08/30/2010 Docket/Case Number:2010-0223-S Allegations:THE NEW YORK DEPARTMENT OF INSURANCE ALLEGED THAT THE FIRM VIOLATED ITS RULES BY FAILING TO REPORT ON THE FIRM'S MARCH, 2009 CORPORATE LICENSE RENEWAL THAT PROEQUITIES WAS INVOLVED IN AN ADMINISTRATIVE PROCEEDING THAT WAS COMMENCED BY THE THEN NASD PRIOR TO 3/18/2009. Current Status:Final 118©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: STIPULATION Docket/Case Number:2010-0223-S Principal Product Type:No Product Other Product Type(s): Resolution Date:08/30/2010 Resolution: Other Sanctions Ordered:STIPULATION ONLY. Sanction Details:STIPULATION AND $750.00 FINE. Firm Statement THE FIRM DID NOT BELIEVE THAT THIS MATTER WAS REPORTABLE AT THE TIME OF THE MARCH, 2009 RENEWAL AS IT WAS NOT FINALIZED BY THE NASD/FINRA UNTIL MAY, 2009. THIS WAS NOT AN INTENTIONAL FAILURE TO REPORT, BUT RATHER THE FIRM DID NOT BELIEVE THE MATTER WAS REPORTABLE AT THE TIME. Sanctions Ordered:Monetary/Fine $750.00 Other Disclosure 59 of 63 i Reporting Source:Regulator Initiated By:FINRA Principal Sanction(s)/Relief Sought: Date Initiated:03/23/2009 Docket/Case Number:2005001163701 Principal Product Type:Mutual Fund(s) Other Product Type(s): Allegations:NASD RULE 2110 - THE BREAKPOINT SELF-ASSESSMENT FOLLOW-UP REVIEW CONDUCTED FOR PROEQUITIES, INC. FOUND THAT THE FIRM FAILED TO RESPOND TO CUSTOMER REQUESTS FOR AN ACCOUNT REVIEW IN A TIMELY MANNER AND FAILED TO PROVIDE TIMELY REFUNDS TO CUSTOMERS FOLLOWING THE BREAKPOINT SELF-ASSESSMENT REQUIRED BY FINRA OF CERTAIN MEMBER FIRMS THAT SOLD FRONT-END LOAD MUTUAL FUNDS. Current Status:Final 119©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanction(s)/Relief Sought: Resolution Date:03/23/2009 Resolution: Other Sanctions Ordered: Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, THE FIRM WAS CENSURED AND FINED $25,000. Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Censure Monetary/Fine $25,000.00 Acceptance, Waiver & Consent(AWC) i Reporting Source:Firm Initiated By:FINRA Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:03/23/2009 Docket/Case Number:2005001163701 Principal Product Type:Mutual Fund(s) Other Product Type(s): Allegations:FINRA ALLEGED THAT, IN CONDUCTING THE BREAKPOINT SELF- ASSESSMENT IN 2003, PROEQUITIES FAILED TO RESPOND TO CUSTOMER REQUESTS FOR AN ACCOUNT REVIEW IN A TIMELY MANNER AND FAILED TO PROVIDE TIMELY REFUNDS TO CUSTOMERS, IN VIOLATION OF CONDUCT RULE 2110. Current Status:Final Resolution Date:03/23/2009 Resolution:Acceptance, Waiver & Consent(AWC) 120©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Resolution Date:03/23/2009 Other Sanctions Ordered:ACCEPTANCE, WAIVER AND CONSENT AND FINE. Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, AND SOLELY FOR THE PURPOSES OF THIS PROCEEDING BROUGHT BY OR ON BEHALF OF FINRA, PROEQUITIES CONSENTED TO THE FINDINGS THAT IT VIOLATED CONDUCT RULE 2110 WHILE CONDUCTING THE 2003 BREAKPOINT SELF- ASSESSMENT BY FAILING TO TIMELY RESPOND TO CUSTOMER REQUESTS FOR AN ACCOUNT REVIEW AND FOR FAILING TO PROVIDE TIMELY REFUNDS TO CUSTOMERS. Sanctions Ordered:Censure Monetary/Fine $25,000.00 Disclosure 60 of 63 i Reporting Source:Regulator Initiated By:FLORIDA Principal Sanction(s)/Relief Sought: Cease and Desist Other Sanction(s)/Relief Sought: Date Initiated:04/07/2004 Docket/Case Number:0093-S-2/04 URL for Regulatory Action: Principal Product Type:No Product Other Product Type(s): Allegations:FAILURE TO MAINTAIN A SYSTEM TO SUPERVISE ACTIVITIES OF AN ASSOCIATED PERSON ON A REGISTRATION AGGREMENT. Current Status:Final Resolution Date:04/07/2004 Resolution: Does the order constitute a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct? No Sanctions Ordered:Monetary/Fine $5,000.00 Cease and Desist/Injunction Stipulation and Consent 121©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered: Sanction Details:NA Regulator Statement FAILURE TO MAINTAIN A SYSTEM TO SUPERVISE ACTIVITIES OF AN ASSOCIATED PERSON ON A REGISTRATION AGGREMENT. FINAL ORDER ISSUED WITH STIP AND CONSENT. Sanctions Ordered:Monetary/Fine $5,000.00 Cease and Desist/Injunction i Reporting Source:Firm Initiated By:STATE OF FLORIDA OFFICE OF FINANCIAL REGULATION Principal Sanction(s)/Relief Sought: Other Other Sanction(s)/Relief Sought: FAILED TO SUPERVISE THE ACTIVITIES OF AN ASSOCIATED PERSON UNDER A REGISTRATION AGREEMENT. Date Initiated:09/13/2003 Docket/Case Number:0093-S-02/04 Principal Product Type:No Product Other Product Type(s): Allegations:FAILING TO MAINTAIN A SYSTEM TO SUPERVISE THE ACTIVITIES OF AN ASSOCIATED PERSON ON A REGISTRATION AGREEMENT, BRADFORD GLEN SMITH, TO ENSURE THAT BRADFORD GLEN SMITH WAS PROPERLY SUPERVISED. Current Status:Final Resolution Date:04/07/2004 Resolution: Other Sanctions Ordered:FIRM AGREED TO STIPULATION AND CONSENT Sanction Details:$5,000 FINE LEVIED AGAINST THE APPLICANT; TOTAL AMOUNT OF $5,000 PAID BY FIRM ON 4/7/04; NO PORTION OF PENALTY WAIVED; FIRM AGREES TO CEASE & DESIST FROM ALL PRESENT AND FUTURE VIOLATIONS OF CHAPTER 517, FLORIDA STATUTES, AND CHAPTER 3E, FLORIDA ADMINISTRATIVE CODE, AND THE NASD CONDUCT RULES. Firm Statement FROM 1998 THROUGH 2001, AN ASSOCIATED PERSON, BRADFORD GLEN SMITH, OF PROEQUITIES VIOLATED SECTION 517.161(1)(H), FLORIDA STATUES, RULE 3E-600.013(2)(H) AND 3E-600.013(1)(P), FLORIDA ADMINISTRATIVE CODE, AND NASD CONDUCT RULE 3040 BY ENGAGING IN PRIVATE SECURITIES TRANSACTIONS WITHOUT PRIOR NOTIFICATION AND APPROVAL OF PROEQUITIES, INC., AND FROM 1998 THROUGH 2001, AN ASSOCIATED PERSON, BRADFORD GLEN SMITH, OF PROEQUITIES VIOLATED SECTION 517.161(1)(H), FLORIDA STATUES, RULE 3E-600.013(2) BY ENGAGING IN A PROHIBITED BUSINESS PRACTICE, FAILING TO COMPLY WITH A REGISTRATION AGREEMENT BRADFORD GLEN SMITH EXECUTED ON MARCH 25, 1998, AND DEMONSTRATING UNWORTHINESS TO TRANSACT THE BUSINESS OF DEALER, INVESTMENT ADVISOR, OR ASSOCIATED PERSON. Sanctions Ordered:Monetary/Fine $5,000.00 Cease and Desist/Injunction Stipulation and Consent 122©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Firm Statement FROM 1998 THROUGH 2001, AN ASSOCIATED PERSON, BRADFORD GLEN SMITH, OF PROEQUITIES VIOLATED SECTION 517.161(1)(H), FLORIDA STATUES, RULE 3E-600.013(2)(H) AND 3E-600.013(1)(P), FLORIDA ADMINISTRATIVE CODE, AND NASD CONDUCT RULE 3040 BY ENGAGING IN PRIVATE SECURITIES TRANSACTIONS WITHOUT PRIOR NOTIFICATION AND APPROVAL OF PROEQUITIES, INC., AND FROM 1998 THROUGH 2001, AN ASSOCIATED PERSON, BRADFORD GLEN SMITH, OF PROEQUITIES VIOLATED SECTION 517.161(1)(H), FLORIDA STATUES, RULE 3E-600.013(2) BY ENGAGING IN A PROHIBITED BUSINESS PRACTICE, FAILING TO COMPLY WITH A REGISTRATION AGREEMENT BRADFORD GLEN SMITH EXECUTED ON MARCH 25, 1998, AND DEMONSTRATING UNWORTHINESS TO TRANSACT THE BUSINESS OF DEALER, INVESTMENT ADVISOR, OR ASSOCIATED PERSON. Disclosure 61 of 63 i Reporting Source:Regulator Initiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. Principal Sanction(s)/Relief Sought: Other Sanction(s)/Relief Sought: Date Initiated:07/18/2002 Docket/Case Number:C05020036 Principal Product Type:No Product Other Product Type(s): Allegations:SEC RULES 15C3-1, 17A-5, 17A-11 AND NASD RULE 2110 - WITHOUT ADMITTING OR DENYING THE ALLEGATIONS,RESPONDENT MEMBER CONSENTED TO THE ENTRY OF FINDINGS THAT IT ENGAGED IN A SECURITIES BUSINESS WHEN THE FIRM'S NET CAPITAL WAS BELOW THE REQUIRED MINIMUM; FAILED AND NEGLECTED TO PROVIDE NOTIFICATION THAT ITS NET CAPITAL WAS BELOW THE REQUIRED MINIMUM PURSUANT TO SEC RULE 15C3-1; FAILED AND NEGLECTED TO FILE AN ACCURATE FOCUS PART IIA REPORT. Current Status:Final Resolution Date:07/18/2002 Resolution: Other Sanctions Ordered: Sanctions Ordered:Censure Monetary/Fine $7,500.00 Acceptance, Waiver & Consent(AWC) 123©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Other Sanctions Ordered: Sanction Details:CENSURE AND FINE $7,500. i Reporting Source:Firm Initiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. - DISTRICT #5 Principal Sanction(s)/Relief Sought: Censure Other Sanction(s)/Relief Sought: Date Initiated:06/12/2002 Docket/Case Number:AWC# - C05020036 Principal Product Type:No Product Other Product Type(s): Allegations:NASD ALLEGED FIRM ENGAGED IN THE SECURITIES BUSINESS WHEN THE FIRM'S NET CAPITAL WAS BELOW THE REQUIRED MINIMUM AND FAILED TO NOTIFY THE NASD OF SUCH. Current Status:Final Resolution Date:07/18/2002 Resolution: Other Sanctions Ordered: Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, A CENSURE AND A MONETARY FINE IN THE AMOUNT OF $7500.00 WAS ASSESSED AGAINST THE FIRM. CORRECTIVE ACTIONS HAVE BEEN TAKEN TO PREVENT A SIMILAR TECHNICAL VIOLATION. Sanctions Ordered:Censure Monetary/Fine $7,500.00 Acceptance, Waiver & Consent(AWC) Disclosure 62 of 63 i Reporting Source:Regulator Initiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. Date Initiated:02/05/1998 Allegations: Current Status:Final 124©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Principal Sanction(s)/Relief Sought: Other Sanction(s)/Relief Sought: Date Initiated:02/05/1998 Docket/Case Number:C05970034 Principal Product Type: Other Product Type(s): Resolution Date:02/05/1998 Resolution: Other Sanctions Ordered: Sanction Details: Regulator Statement ON FEBRUARY 5, 1998, DISTRICT NO. 5 NOTIFIED RESPONDENTS PROEQUITIES, INC. NANCY C. ALCORN, AND THOMAS A. BLACK THAT THE LETTER OF ACCEPTANCE, WAIVER AND CONSENT NO. C05970034 WAS ACCEPTED; THEREFORE, RESPONDENT MEMBER AND ALCORN ARE CENSURED AND FINED $15,000, JOINTLY AND SEVERALLY, AND RESPONDENT BLACK IS CENSURED AND FINED $500 - (NASD RULES 1120(a)(2), 2110 AND 3010 - RESPONDENT BLACK EXECUTED A SECURITIES TRANSACTION ON BEHALF OF A PUBLIC CUSTOMER WHILE HIS REGISTRATION WAS INACTIVE DUE TO HIS FAILURE TO SATISFY THE REGULATORY ELEMENT OF THE NASD'S CONTINUING EDUCATION REQUIREMENTS; REPONDENT MEMBER, ACTING THROUGH RESPONDENT ALCORN, FAILED TO ENFORCE AND MAINTAIN ADEQUATE SUPERVISORY PROCEDURES TO ENSURE COMPLIANCE WITH THE REGULATORY ELEMENT OF THE NASD'S CONTINUING EDUCATION REQUIREMENTS; ALLOWED INDIVIDUALS TO MAINTAIN THEIR REPRESENTATIVE REGISTRATIONS WITH THE FIRM, ALTHOUGH THE INDIVIDUALS WERE NOT ACTIVELY ENGAGED IN THE SECURITIES BUSINESS OF THE FIRM; AND, ALLOWED AN INDIVIDUAL TO EFFECT TRANSACTIONS IN CUSTOMERS' ACCOUNTS WHEN HE WAS NOT PROPERLY REGISTERED WITH THE NASD). *** $15,000 PAID J&S ON 3/5/98, INVOICE NO. 98-05-216 *** Sanctions Ordered:Censure Monetary/Fine $15,000.00 Acceptance, Waiver & Consent(AWC) 125©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceON FEBRUARY 5, 1998, DISTRICT NO. 5 NOTIFIED RESPONDENTSPROEQUITIES, INC. NANCY C. ALCORN, AND THOMAS A. BLACK THAT THELETTER OF ACCEPTANCE, WAIVER AND CONSENT NO. C05970034 WASACCEPTED; THEREFORE, RESPONDENT MEMBER AND ALCORN ARECENSUREDAND FINED $15,000, JOINTLY AND SEVERALLY, AND RESPONDENT BLACKIS CENSURED AND FINED $500 - (NASD RULES 1120(a)(2), 2110 AND3010 - RESPONDENT BLACK EXECUTED A SECURITIES TRANSACTION ONBEHALF OF A PUBLIC CUSTOMER WHILE HIS REGISTRATION WASINACTIVEDUE TO HIS FAILURE TO SATISFY THE REGULATORY ELEMENT OF THENASD'S CONTINUING EDUCATION REQUIREMENTS; REPONDENT MEMBER,ACTING THROUGH RESPONDENT ALCORN, FAILED TO ENFORCE ANDMAINTAIN ADEQUATE SUPERVISORY PROCEDURES TO ENSURECOMPLIANCEWITH THE REGULATORY ELEMENT OF THE NASD'S CONTINUINGEDUCATIONREQUIREMENTS; ALLOWED INDIVIDUALS TO MAINTAIN THEIRREPRESENTATIVE REGISTRATIONS WITH THE FIRM, ALTHOUGH THEINDIVIDUALS WERE NOT ACTIVELY ENGAGED IN THE SECURITIESBUSINESS OF THE FIRM; AND, ALLOWED AN INDIVIDUAL TO EFFECT TRANSACTIONS IN CUSTOMERS' ACCOUNTS WHEN HE WAS NOT PROPERLY REGISTERED WITH THE NASD). *** $15,000 PAID J&S ON 3/5/98, INVOICE NO. 98-05-216 *** i Reporting Source:Firm Initiated By:NATIONAL ASSOCATION OF SECURITIES DEALERS, INC. Principal Sanction(s)/Relief Sought: Civil and Administrative Penalt(ies) /Fine(s) Other Sanction(s)/Relief Sought: Date Initiated:02/15/1998 Docket/Case Number:AWC #C05970034 Principal Product Type:No Product Other Product Type(s): Allegations:NASD ALLEGED VIOLATIONS BY THOMAS B. BLACK. MR. BLACK EXECUTED ONE SECURITIES TRANSACTION ON BEHALF OF PUBLIC CUSTOMER FP, WHILE REGISTRATION WAS INACTIVE DUE TO HIS FAILURE TO SATISFY THE REGULATORY ELEMENT OF THE ASSOCIATION'S CONTINUINING EDUCATION (CE) REQUIREMENTS. NASD ALLEGED VIOLATIONS BY PROEQUITIES AND NANCY C. ALCORN, EACH SEPARATELY. PROEQUITIES, INC. ACTING THROUGH MS. ALCORN FAILED TO ENFORCE AND MAINTAIN ADEQUATE SUPERVISORY PROCEDURES TO ENSURE COMPLIANCE WITH THE REGULATORY ELEMENT OF THE CE REQUIREMENTS. PROEQUITIES ACTING THROUGH MS. ALCORN, ALLOWED THREE INDIVIDUALS TO MAINTAIN THEIR REGISTRATIONS WITH THE FIRM ALTHOUGH THEY WERE NOT ENGAGED IN THE SECURITIES BUSINESS OF THE FIRM AND ALLOWED CAMERON B. KAUFMAN TO EFFECT 21 TRANSACTIONS IN CUSTOMERS' ACCOUNT WHILE NOT REGISTERED. Current Status:Final Resolution Date:02/05/1998 Resolution: Other Sanctions Ordered: Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, A CENSURE AND A MONETARY FINE IN THE AMOUNT OF $15,000.00 WAS PAID JOINTLY AND SEVERALLY BY PROEQUITIES, INC. AND NANCY C. ALCORN. CORRECTIVE ACTIONS HAVE BEEN TAKEN TO PREVENT FUTURE SIMILAR VIOLATION BY PROEQUITIES AND NANCY C. ALCORN. Sanctions Ordered:Censure Monetary/Fine $15,000.00 Settled 126©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceWITHOUT ADMITTING OR DENYING THE FINDINGS, A CENSURE AND A MONETARY FINE IN THE AMOUNT OF $15,000.00 WAS PAID JOINTLY AND SEVERALLY BY PROEQUITIES, INC. AND NANCY C. ALCORN. CORRECTIVE ACTIONS HAVE BEEN TAKEN TO PREVENT FUTURE SIMILAR VIOLATION BY PROEQUITIES AND NANCY C. ALCORN. Disclosure 63 of 63 i Reporting Source:Regulator Initiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. Principal Sanction(s)/Relief Sought: Other Sanction(s)/Relief Sought: Date Initiated:02/26/1986 Docket/Case Number:NEW-483-SC Principal Product Type: Other Product Type(s): Allegations: Current Status:Final Resolution Date:04/26/1986 Resolution: Other Sanctions Ordered: Sanction Details: Regulator Statement ENTERED 4/7/86: SUMMARY COMPLAINT NO. NEW-483-SC FILED FEBRUARY 26, 1986 BY DISTRICT NO. 5 AGAINST PROTECTIVE EQUITY SERVICES, INC. AND MASTON E. MARTIN, JR., ALLEGING VIOLATIONS OF ARTICLE III, SECTION 1 OF THE RULES OF FAIR PRACTICE IN THAT RESPONDENT MEMBER, ACTING THROUGH RESPONDENT MARTIN, FAILED TO FILE THE FOCUS PART I REPORT WITHIN TEN BUSINESS DAYS AFTER MONTH-END APRIL, 1985. SUMMARY COMPLAINT ACCEPTED MARCH 13, 1986, WHEREIN RESPONDENTS ARE CENSURED AND FINED $250.00, JOINTLY AND SEVERALLY. IF NO FURTHER ACTION, DECISION IS FINAL APRIL 26, 1986. APRIL 26, 1986 - DECISION IS FINAL. 3/18/86, FINES AND COSTS IN CONNECTION WITH THIS COMPLAINT HAVE BEEN PAID IN FULL. Sanctions Ordered:Censure Monetary/Fine $250.00 Consent 127©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User GuidanceENTERED 4/7/86:SUMMARY COMPLAINT NO. NEW-483-SC FILED FEBRUARY 26, 1986 BYDISTRICT NO. 5 AGAINST PROTECTIVE EQUITY SERVICES, INC. ANDMASTON E. MARTIN, JR., ALLEGING VIOLATIONS OF ARTICLE III,SECTION 1 OF THE RULES OF FAIR PRACTICE IN THAT RESPONDENTMEMBER, ACTING THROUGH RESPONDENT MARTIN, FAILED TO FILE THEFOCUS PART I REPORT WITHIN TEN BUSINESS DAYS AFTER MONTH-ENDAPRIL, 1985. SUMMARY COMPLAINT ACCEPTED MARCH 13, 1986, WHEREIN RESPONDENTS ARE CENSURED AND FINED $250.00, JOINTLY AND SEVERALLY. IF NO FURTHER ACTION, DECISION IS FINAL APRIL 26, 1986. APRIL 26, 1986 - DECISION IS FINAL. 3/18/86, FINES AND COSTS IN CONNECTION WITH THIS COMPLAINT HAVE BEEN PAID IN FULL. i Reporting Source:Firm Initiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. - DISTRICT #5 Principal Sanction(s)/Relief Sought: Censure Other Sanction(s)/Relief Sought: Date Initiated:02/26/1986 Docket/Case Number:NEW-483-SC Principal Product Type:No Product Other Product Type(s): Allegations:VIOLATION OF ARTICLE III, SECTION 1 OF THE RULES OF FAIR PRACTICE. FIRM FAILED TO FILE FOCUS PART I WIHIN TEN BUSINESS DAYS OF MONTH END. Current Status:Final Resolution Date:03/13/1986 Resolution: Other Sanctions Ordered: Sanction Details:FIRM WAS FINED $250.00 FOR FAILURE TO FILE FOCUS PART I IN A TIMELY MANNER. Firm Statement FIRM WAS FINED $250.00 FOR FAILURE TO FILE FOCUS PART I IN A TIMELY MANNER. FIRM PAID FINE ON 3/18/86. AT THE TIME OF THE COMPLAINT, THE FIRM WAS NOT AWARE THAT THEY WERE REQUIRED TO FILE FINANCIAL STATEMENTS AT THE DISTRICT OFFICE. THE SITUATION HAS BEEN CORRECTED AND EVERY EFFORT IS BEING MADE TO FILE THESE REPORTS IN A TIMELY MANNER. Sanctions Ordered:Censure Monetary/Fine $250.00 Consent 128©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Arbitration Award - Award / Judgment Brokerage firms are not required to report arbitration claims filed against them by customers; however, BrokerCheck provides summary information regarding FINRA arbitration awards involving securities and commodities disputes between public customers and registered securities firms in this section of the report. The full text of arbitration awards issued by FINRA is available at www.finra.org/awardsonline. Disclosure 1 of 4 Reporting Source:Regulator Type of Event:ARBITRATION Arbitration Forum: Case Initiated: Case Number: Allegations: Disputed Product Type: Sum of All Relief Requested: Disposition: Disposition Date: Sum of All Relief Awarded: FINRA 08/18/2009 09-04497 ACCOUNT ACTIVITY-OMISSION OF FACTS; ACCOUNT ACTIVITY-SUITABILITY; ACCOUNT RELATED-FAILURE TO SUPERVISE; ACCOUNT RELATED- NEGLIGENCE; ACCOUNT RELATED-OTHER OTHER TYPES OF SECURITIES; PRIVATE EQUITIES $8,951,793.00 AWARD AGAINST PARTY 03/02/2011 $187,600.04 There may be a non-monetary award associated with this arbitration. Please select the Case Number above to view more detailed information. Disclosure 2 of 4 i Reporting Source:Regulator Type of Event:ARBITRATION Arbitration Forum: Case Initiated: Case Number: Allegations: Disputed Product Type: FINRA 08/19/2009 09-04516 ACCOUNT ACTIVITY-SUITABILITY; ACCOUNT RELATED-FAILURE TO SUPERVISE; ACCOUNT RELATED-NEGLIGENCE; ACCOUNT RELATED- OTHER OTHER TYPES OF SECURITIES 129©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Disputed Product Type: Sum of All Relief Requested: Disposition: Disposition Date: Sum of All Relief Awarded: OTHER TYPES OF SECURITIES $8,514,373.00 AWARD AGAINST PARTY 05/06/2011 $1,541,047.00 There may be a non-monetary award associated with this arbitration. Please select the Case Number above to view more detailed information. Disclosure 3 of 4 i Reporting Source:Regulator Type of Event:ARBITRATION Arbitration Forum: Case Initiated: Case Number: Allegations: Disputed Product Type: Sum of All Relief Requested: Disposition: Disposition Date: Sum of All Relief Awarded: FINRA 12/02/2010 10-05310 ACCOUNT ACTIVITY-MISREPRESENTATION; ACCOUNT ACTIVITY-OMISSION OF FACTS; ACCOUNT ACTIVITY-SUITABILITY; ACCOUNT RELATED- NEGLIGENCE REAL ESTATE INVESTMENT TRUST; VARIABLE ANNUITIES $361,555.00 AWARD AGAINST PARTY 11/25/2011 $63,199.24 There may be a non-monetary award associated with this arbitration. Please select the Case Number above to view more detailed information. Disclosure 4 of 4 i Reporting Source:Regulator Type of Event:ARBITRATION Arbitration Forum: Case Initiated: Allegations: FINRA 04/04/2012 ACCOUNT ACTIVITY-BRCH OF FIDUCIARY DT; ACCOUNT ACTIVITY- MISREPRESENTATION; ACCOUNT ACTIVITY-OMISSION OF FACTS; ACCOUNT ACTIVITY-OTHER; ACCOUNT ACTIVITY-SUITABILITY 130©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance Case Initiated: Case Number: Disputed Product Type: Sum of All Relief Requested: Disposition: Disposition Date: Sum of All Relief Awarded: 04/04/2012 12-01167 $499,365.00 AWARD AGAINST PARTY 05/14/2013 $448,562.40 There may be a non-monetary award associated with this arbitration. Please select the Case Number above to view more detailed information. 131©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheck User Guidance End of Report This page is intentionally left blank. 132©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information ATTACHMENTS SECTION 17 15c3-1 Net Capital Requirement As the following pages illustrate, ProEquities maintains capital in excess of it’s required minimal capital. It’s also worth noting that Protective Life Corporation provides operating capital to ProEquities, as needed, to provide supplemental funding for the operations and activities of Proequities. - Broker/Dealer Request For Information From ProEquities' 2016 Audited Financial Report:From ProEquities' 2017 Audited Financial Report: ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission December 31, 2017 Schedule I 20 There were no material differences between the above computation of net capital pursuant to Rule 15c3- 1 and that filed with the Company’s unaudited December 31, 2017 FOCUS Report. Total stockholder's equity 17,386,830$ Deductions and/or charges Nonallowable assets Receivables and other (6,458,748) Gross deferred income tax asset (4,917,422) Haircut on securities positions (300,371) Net capital 5,710,289 Aggregate Indebtedness Items included in statement of financial condition Commissions payable 3,889,073 Due to parent and affiliates 1,947,841 Other accrued expenses 5,064,498 Total aggregate indebtedness 10,901,412 Computation of Basic Net Capital Requirement Greater of 6-2/3% of aggregate indebtedness or $250,000 726,761$ Excess net capital (net capital, less net capital requirement)4,983,528 Ratio: Aggregate indebtedness to net capital 190.91% Net Capital ProEquities, Inc. (a wholly owned subsidiary of Protective Life Corporation) Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission December 31, 2016 Schedule I 19 There were no material differences between the above computation of net capital pursuant to Rule 15c3- 1 and that filed with the Company’s unaudited December 31, 2016 FOCUS Report. Total stockholder's equity 18,550,456$ Deductions and/or charges Nonallowable assets Receivables and other (3,838,915) Gross deferred income tax asset (6,997,327) Haircut on securities positions (358,072) Net capital 7,356,142 Aggregate Indebtedness Items included in statement of financial condition Commissions payable 3,647,203 Due to parent and affiliates 1,331,796 Other accrued expenses 5,253,164 Total aggregate indebtedness 10,232,163 Computation of Basic Net Capital Requirement Greater of 6-2/3% of aggregate indebtedness or $250,000 682,144$ Excess net capital (net capital, less net capital requirement)6,673,998 Ratio: Aggregate indebtedness to net capital 139.10% Net Capital NAVIGATION RETURN TO TABLE OF CONTENTS - Broker/Dealer Request For Information BrokerCheck ReportPROEQUITIES, INC.Section TitleReport SummaryFirm HistoryCRD# 1570819Firm Profile 2 - 8Page(s)Firm Operations 10 - 19Disclosure Events 20 About BrokerCheck®BrokerCheck offers information on all current, and many former, registered securities brokers, and all current and formerregistered securities firms. FINRA strongly encourages investors to use BrokerCheck to check the background ofsecurities brokers and brokerage firms before deciding to conduct, or continue to conduct, business with them.āWhat is included in a BrokerCheck report?āBrokerCheck reports for individual brokers include information such as employment history, professionalqualifications, disciplinary actions, criminal convictions, civil judgments and arbitration awards. BrokerCheckreports for brokerage firms include information on a firm’s profile, history, and operations, as well as many of thesame disclosure events mentioned above.āPlease note that the information contained in a BrokerCheck report may include pending actions orallegations that may be contested, unresolved or unproven. 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Under most circumstances, information reported by brokerage firms, brokersand regulators is available in BrokerCheck the next business day.āWhat if I want to check the background of an investment adviser firm or investment adviserrepresentative?āTo check the background of an investment adviser firm or representative, you can search for the firm orindividual in BrokerCheck. If your search is successful, click on the link provided to view the available licensingand registration information in the SEC's Investment Adviser Public Disclosure (IAPD) website athttps://www.adviserinfo.sec.gov. In the alternative, you may search the IAPD website directly or contact yourstate securities regulator at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/P455414.āAre there other resources I can use to check the background of investment professionals?āFINRA recommends that you learn as much as possible about an investment professional beforedeciding to work with them. Your state securities regulator can help you research brokers and investment adviserrepresentatives doing business in your state.āThank you for using FINRA BrokerCheck.For more information aboutFINRA, visit www.finra.org.Using this site/information meansthat you accept the FINRABrokerCheck Terms andConditions. A complete list ofTerms and Conditions can befound atFor additional information aboutthe contents of this report, pleaserefer to the User Guidance orwww.finra.org/brokercheck. Itprovides a glossary of terms and alist of frequently asked questions,as well as additional resources.brokercheck.finra.org PROEQUITIES, INC.CRD# 15708SEC# 8-32590Main Office Location2801 HIGHWAY 280 SOUTHBIRMINGHAM, AL 35223Regulated by FINRA New Orleans OfficeMailing AddressP.O. BOX 518BIRMINGHAM, AL 35201-0518This firm is a brokerage firm and an investmentadviser firm. For more information aboutinvestment adviser firms, visit the SEC'sInvestment Adviser Public Disclosure website at:Business Telephone Number800-288-3035https://www.adviserinfo.sec.govReport Summary for this FirmThis report summary provides an overview of the brokerage firm. Additional information for this firm can be foundin the detailed report.Disclosure EventsBrokerage firms are required to disclose certaincriminal matters, regulatory actions, civil judicialproceedings and financial matters in which the firm orone of its control affiliates has been involved.Are there events disclosed about this firm?YesThe following types of disclosures have beenreported:TypeCountRegulatory Event 63Arbitration 4Firm ProfileThis firm is classified as a corporation.This firm was formed in Alabama on 07/11/1984.Its fiscal year ends in December.Firm HistoryInformation relating to the brokerage firm's historysuch as other business names and successions(e.g., mergers, acquisitions) can be found in thedetailed report.Firm OperationsIs this brokerage firm currently suspended with anyregulator?NoThis firm conducts 23 types of businesses.This firm is affiliated with financial or investmentinstitutions.This firm has referral or financial arrangements withother brokers or dealers.This firm is registered with:• the SEC• 1 Self-Regulatory Organization• 52 U.S. states and territorieswww.finra.org/brokercheckUser Guidance1©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceThis firm is classified as a corporation.This firm was formed in Alabama on 07/11/1984.CRD#This section provides the brokerage firm's full legal name, "Doing Business As" name, business and mailingaddresses, telephone number, and any alternate name by which the firm conducts business and where such name isused.Firm ProfileFirm Names and LocationsIts fiscal year ends in December.PROEQUITIES, INC.SEC#157088-32590Main Office LocationMailing AddressBusiness Telephone NumberDoing business as PROEQUITIES, INC.800-288-3035Regulated by FINRA New Orleans Office2801 HIGHWAY 280 SOUTHBIRMINGHAM, AL 35223P.O. BOX 518BIRMINGHAM, AL 35201-05182©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceThis section provides information relating to all direct owners and executive officers of the brokerage firm.Direct Owners and Executive OfficersFirm ProfilePositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?PROTECTIVE LIFE CORPORATIONPARENT75% or moreYesDomestic Entity08/1984YesIs this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):PositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?ANDERSON, ELIZABETH GILTZVICE PRESIDENT, ADVISORY AND PLANNINGLess than 5%NoIndividual07/2016Yes2209248Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):PositionPosition Start DateCYPHERT, MARK JOSEPHDIRECTOR/BOARD MEMBERIndividual07/20136233118Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):3©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDirect Owners and Executive Officers (continued)Firm ProfilePercentage of OwnershipIs this a public reportingcompany?Does this owner direct themanagement or policies ofthe firm?Less than 5%NoNoPositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?FLINT, CHRISTOPHER WADEPRESIDENT/CEOLess than 5%NoIndividual07/2015Yes2804477Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):PositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?GUERRERA, DARREN CYRILCFOLess than 5%NoIndividual04/2015Yes2541120Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):HARTLEY, RORY MARSHALLLegal Name & CRD# (if any):4©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDirect Owners and Executive Officers (continued)Firm ProfilePositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?MANAGING DIRECTOR, PROTECTIVE SECURITIESLess than 5%NoIndividual12/2004No1464251Is this a domestic or foreignentity or an individual?PositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?MEYERS, CRISTI LINTERIM DIRECTOR OF OPERATIONSLess than 5%NoIndividual03/2018Yes1493867Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):PositionPercentage of OwnershipPosition Start DateMILLER, HAROLD BLAINECHIEF SUPERVISION OFFICERLess than 5%Individual12/20154214267Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):5©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDirect Owners and Executive Officers (continued)Firm ProfileIs this a public reportingcompany?Does this owner direct themanagement or policies ofthe firm?NoYesPositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?SEURKAMP, AARON CHRISTOPHERSVP, LIFE AND ANNUITY DIVISIONLess than 5%Individual06/2018Yes4751862Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):PositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?WELLS, PAUL RICHARDDIRECTOR/BOARD MEMBERLess than 5%NoIndividual04/2013No6188199Is this a domestic or foreignentity or an individual?Legal Name & CRD# (if any):YOUHN, STEPHEN MICHAEL1414691Legal Name & CRD# (if any):6©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDirect Owners and Executive Officers (continued)Firm ProfilePositionPercentage of OwnershipIs this a public reportingcompany?Position Start DateDoes this owner direct themanagement or policies ofthe firm?CHIEF COMPLIANCE OFFICERLess than 5%NoIndividual04/2016YesIs this a domestic or foreignentity or an individual?7©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceThis section provides information relating to any indirect owners of the brokerage firm.Indirect OwnersFirm ProfileTHE DAI-ICHI LIFE INSURANCE COMPANY, LIMITEDSHAREHOLDERPROTECTIVE LIFE CORPORATION75% or moreNoForeign Entity02/2015YesLegal Name & CRD# (if any):Is this a domestic or foreignentity or an individual?Company through whichindirect ownership isestablishedRelationship to Direct OwnerRelationship EstablishedPercentage of OwnershipDoes this owner direct themanagement or policies ofthe firm?Is this a public reportingcompany?8©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm HistoryThis section provides information relating to any successions (e.g., mergers, acquisitions) involving the firm.No information reported.9©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsRegistrationsThis section provides information about the regulators (Securities and Exchange Commission (SEC), self-regulatoryorganizations (SROs), and U.S. states and territories) with which the brokerage firm is currently registered andlicensed, the date the license became effective, and certain information about the firm's SEC registration.This firm is currently registered with the SEC, 1 SRO and 52 U.S. states and territories.SEC Registration QuestionsThis firm is registered with the SEC as:A broker-dealer:A broker-dealer and government securities broker or dealer:A government securities broker or dealer only:This firm has ceased activity as a government securities broker or dealer:YesYesNoNoFederal Regulator Status Date EffectiveSEC Approved 10/11/1984Self-Regulatory Organization Status Date EffectiveFINRA Approved 03/01/198510©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsRegistrations (continued)U.S. States &TerritoriesStatus Date EffectiveAlabama Approved 01/10/1985Alaska Approved 04/09/1990Arizona Approved 09/20/1985Arkansas Approved 09/18/1985California Approved 06/20/1985Colorado Approved 04/02/1985Connecticut Approved 08/18/1988Delaware Approved 11/02/1988District of Columbia Approved 02/25/1990Florida Approved 04/29/1985Georgia Approved 04/22/1985Hawaii Approved 05/21/1990Idaho Approved 02/11/1986Illinois Approved 03/21/1985Indiana Approved 05/12/1987Iowa Approved 03/10/1986Kansas Approved 04/23/1985Kentucky Approved 01/23/1986Louisiana Approved 03/03/1986Maine Approved 09/09/1988Maryland Approved 07/31/1985Massachusetts Approved 08/07/1990Michigan Approved 11/14/1986Minnesota Approved 04/30/1990Mississippi Approved 08/05/1985Missouri Approved 06/24/1985Montana Approved 01/29/1990Nebraska Approved 05/07/1990Nevada Approved 09/03/1985New Hampshire Approved 04/17/1990New Jersey Approved 08/25/1988New Mexico Approved 02/26/1986New York Approved 09/20/1993U.S. States &TerritoriesStatusDate EffectiveNorth Carolina Approved 03/27/1985North Dakota Approved 05/08/1990Ohio Approved 01/16/1998Oklahoma Approved 09/03/1985Oregon Approved 03/26/1990Pennsylvania Approved 02/20/1987Rhode Island Approved 02/05/1990South Carolina Approved 04/03/1985South Dakota Approved 02/15/1990Tennessee Approved 08/19/1985Texas Approved 03/05/1985Utah Approved 03/05/1990Vermont Approved 05/31/1990Virgin Islands Approved 08/05/2005Virginia Approved 12/16/1986Washington Approved 03/13/1990West Virginia Approved 12/12/1988Wisconsin Approved 01/02/1986Wyoming Approved 01/21/198611©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsTypes of BusinessThis section provides the types of business, including non-securities business, the brokerage firm is engaged in orexpects to be engaged in.This firm currently conducts 23 types of businesses.Types of BusinessBroker or dealer making inter-dealer markets in corporation securities over-the-counterBroker or dealer retailing corporate equity securities over-the-counterBroker or dealer selling corporate debt securitiesUnderwriter or selling group participant (corporate securities other than mutual funds)Mutual fund retailerU S. government securities dealerU S. government securities brokerMunicipal securities dealerMunicipal securities brokerBroker or dealer selling variable life insurance or annuitiesSolicitor of time deposits in a financial institutionBroker or dealer selling oil and gas interestsPut and call broker or dealer or option writerBroker or dealer selling securities of non-profit organizations (e.g., churches, hospitals)Investment advisory servicesBroker or dealer selling tax shelters or limited partnerships in primary distributionsBroker or dealer selling tax shelters or limited partnerships in the secondary marketTrading securities for own accountPrivate placements of securitiesBroker or dealer selling interests in mortgages or other receivablesBroker or dealer involved in a networking, kiosk or similar arrangment with a: bank, savings bank or association, orcredit unionBroker or dealer involved in a networking, kiosk or similar arrangment with a: insurance company or agencyOther - PURSUANT TO AMENDED MEMBERSHIP AGREEMENT, FIRM IS APPROVED TO PARTICIPATE IN A RE-INTRODUCING CLEARING AGREEMENT AND A BROKER-TO-BROKER SERVICE ARRANGEMENT.ADDITIONALLY, THE FIRM IS APPROVED TO PARTICIPATE IN SECONDARY MARKET TRADING ACTIVITIES.12©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Types of BusinessThis firm does not effect transactions in commodities, commodity futures, or commodity options.This firm does not engage in other non-securities business.Non-Securities Business Description:13©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsClearing ArrangementsThis firm does not hold or maintain funds or securities or provide clearing services for other broker-dealer(s).Introducing ArrangementsThis firm does refer or introduce customers to other brokers and dealers.Name:PERSHING LLCBusiness Address:ONE PERSHING PLAZAJERSEY CITY, NJ 07399CRD #:7560Effective Date:02/16/2017Description:THE FIRM'S CUSTOMER ACCOUNTS ARE MAINTAINED WITH PERSHING,LLC, PURSUANT TO OUR CLEARING AGREEMENT.14©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsIndustry ArrangementsThis firm does have books or records maintained by a third party.Name:LASERFICHEBusiness Address:3545 LONG BEACH BLVD.LONG BEACH, CA 90807Effective Date:12/30/2016Description:LASERFICHE MAINTAINS ELECTRONIC DOCUMENT ORGANIZATIONSTORAGE FOR CLIENT RECORDS AND OTHER REQUIRED BOOKS ANDRECORDS.Name:BROADRIDGEBusiness Address:5 DAKOTA DRIVESUITE 300LAKE SUCCESS, NY 11042Effective Date:01/01/2016Description:BROADRIDGE (EMERALD PUBLICATIONS) MAINTAINS AND STORESPROXY VOTING, WEBSITE TEMPLATES, AND PRE-APPROVED ARTICLESTORAGEName:SUNGARD EXPERT SOLUTIONS (AKA FIS)Business Address:90 SOUTH 400 WESTSUITE 400SALT LAKE CITY, UT 84101Effective Date:09/30/2017Description:SES MAINTAINS AND STORES ELECTRONIC RECORDS OF TRADESURVEILLANCE AND SUPERVISION.Name:REGEDBusiness Address:2100 GATEWAR CENTRE BLVDSUITE 200MORRISVILLE, NC 27560Effective Date:12/14/2016Description:REGED MAINTAINS AND STORES BOOKS AND RECORDS RELATING TOADVERTISING, POLITICAL CONTRIBUTIONS, CONTINUING EDUCATION,AND OBA SUBMISSIONS AND APPROVAL.Name:SMARSH15©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsIndustry Arrangements (continued)This firm does have accounts, funds, or securities maintained by a third party.Business Address:851 SW 6TH AVENUESUITE 800PORTLAND, OR 97204Effective Date:05/16/2017Description:SMARSH PROVIDES STORAGE OF ELECTRONIC COMMUNICATIONSName:IRON MOUNTAINBusiness Address:3100 1ST AVENUE SOUTH,BIRMINGHAM, AL 35233Effective Date:12/15/2016Description:IRON MOUNTAIN PROVIDES OFFSITE STORAGE OF COPIES OFPAPERWORK AND REPORTS.Name:NATIONAL REGULATORY SERVICESBusiness Address:29 BROOK STREETLAKEVILLE, CT 35244Effective Date:04/01/2018Description:NRS MAINTAINS AND STORES THE FIRM'S WRITTEN SUPERVISORYPROCEDURES, COMPLIANCE MANUALS AND FORM ADV PART 2 BBROCHURE SUPPLEMENT.Name:PROTECTIVE LIFE CORPORATIONBusiness Address:ONE PERSHING PLAZAJERSEY CITY, NJ 07399Effective Date:05/21/1997Description:PROTECTIVE LIFE CORPORATION, PROEQUITIES, INC.'S PARENTCOMPANY MAINTAINS CERTAIN ACCOUNTING AND REGULATORYRECORDS ON BEHALF OF PROEQUITIES, INC., SUCH AS TAX RETURNS,CORPORATE MINUTES AND PAYROLL RECORDS.Name:PERSHING LLCBusiness Address:ONE PERSHING PLAZAJERSEY CITY, NJ 07399CRD #:7560Effective Date:02/16/2017Description:THE FIRM'S PROPRIETARY ACCOUNTS ARE MAINTAINED WITHPERSHING, LLC, PURSUANT TO OUR CLEARING AGREEMENT.16©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsIndustry Arrangements (continued)This firm does have customer accounts, funds, or securities maintained by a third party.This firm does not have individuals who control its management or policies through agreement.This firm does not have individuals who wholly or partly finance the firm's business.Control Persons/FinancingName:PERSHING LLCBusiness Address:ONE PERSHING PLAZAJERSEY CITY, NJ 07399CRD #:7560Effective Date:02/16/2017Description:THE FIRM'S CUSTOMER ACCOUNTS ARE MAINTAINED WITH PERSHING,LLC, PURSUANT TO OUR CLEARING AGREEMENT.17©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsOrganization AffiliatesThis section provides information on control relationships the firm has with other firms in the securities, investmentadvisory, or banking business.This firm is, directly or indirectly:· in control of· controlled by· or under common control withthe following partnerships, corporations, or other organizations engaged in the securities or investmentadvisory business.YesNoNo04/08/20152801 U.S. HIGHWAY 280 SOUTHBIRMINGHAM, AL 35223107542PROTECTIVE INVESTMENT ADVISORS INC. is under common control with the firm.PROTECTIVE INVESTMENT ADVISORS IS UNDER COMMON CONTROL WITHPROEQUITIES, INC. BOTH ARE SUBSIDIARIES OF PROTECTIVE LIFECORPORATION.Description:Investment AdvisoryActivities:Securities Activities:Country:Foreign Entity:Effective Date:Business Address:CRD #:NoYesNo07/30/19992801 HIGHWAY 280 SOUTHBIRMINGHAM, AL 3522335490INVESTMENT DISTRIBUTORS, INC. is under common control with the firm.INVESTMENT DISTRIBUTIONS, INC. IS UNDER COMMON CONTROL WITHDescription:Investment AdvisoryActivities:Securities Activities:Country:Foreign Entity:Effective Date:Business Address:CRD #:18©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm OperationsOrganization Affiliates (continued)PROEQUITIES, INC. BOTH ARE SUBSIDIARIES OF PROTECTIVE LIFECORPORATION.This firm is not directly or indirectly, controlled by the following:· bank holding company· national bank· state member bank of the Federal Reserve System· state non-member bank· savings bank or association· credit union· or foreign bank19©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDisclosure EventsAll firms registered to sell securities or provide investment advice are required to disclose regulatory actions, criminal orcivil judicial proceedings, and certain financial matters in which the firm or one of its control affiliates has been involved.For your convenience, below is a matrix of the number and status of disclosure events involving this brokerage firm orone of its control affiliates. Further information regarding these events can be found in the subsequent pages of thisreport.Final On AppealPendingRegulatory Event 0 63 0Arbitration N/A 4 N/A20©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDisclosure Event DetailsWhat you should know about reported disclosure events:1.BrokerCheck provides details for any disclosure event that was reported in CRD. It also includessummary information regarding FINRA arbitration awards in cases where the brokerage firm wasnamed as a respondent.2.Certain thresholds must be met before an event is reported to CRD, for example:RA law enforcement agency must file formal charges before a brokerage firm is required to disclose aparticular criminal event.3.Disclosure events in BrokerCheck reports come from different sources:RDisclosure events for this brokerage firm were reported by the firm and/or regulators. When the firmand a regulator report information for the same event, both versions of the event will appear in theBrokerCheck report. The different versions will be separated by a solid line with the reporting sourcelabeled.4.There are different statuses and dispositions for disclosure events:RA disclosure event may have a status ofpending, on appeal,orfinal.A "pending" event involves allegations that have not been proven or formally adjudicated.An event that is "on appeal" involves allegations that have been adjudicated but are currentlybeing appealed.A "final" event has been concluded and its resolution is not subject to change.RA final event generally has a disposition ofadjudicated, settledorotherwise resolved.An "adjudicated" matter includes a disposition by (1) a court of law in a criminal or civil matter,or (2) an administrative panel in an action brought by a regulator that is contested by the partycharged with some alleged wrongdoing.A "settled" matter generally involves an agreement by the parties to resolve the matter.Please note that firms may choose to settle customer disputes or regulatory matters forbusiness or other reasons.A "resolved" matter usually involves no payment to the customer and no finding ofwrongdoing on the part of the individual broker. Such matters generally involve customerdisputes.5.You may wish to contact the brokerage firm to obtain further information regarding any of thedisclosure events contained in this BrokerCheck report.Regulatory - FinalThis type of disclosure event involves (1) a final, formal proceeding initiated by a regulatory authority (e.g., a statesecurities agency, self-regulatory organization, federal regulator such as the U.S. Securities and Exchange Commission,foreign financial regulatory body) for a violation of investment-related rules or regulations; or (2) a revocation orsuspension of the authority of a brokerage firm or its control affiliate to act as an attorney, accountant or federalcontractor.Disclosure 1 of 63Reporting Source:RegulatorCurrent Status:Final21©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:FINRAPrincipal Sanction(s)/ReliefSought:Other Sanction(s)/ReliefSought:Date Initiated:03/07/2019Docket/Case Number:2016052179401Principal Product Type:Mutual Fund(s)Other Product Type(s):Allegations:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTEDTO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT ITDISADVANTAGED CERTAIN RETIREMENT PLAN AND CHARITABLEORGANIZATION CUSTOMERS THAT WERE ELIGIBLE TO PURCHASE CLASSA SHARES IN CERTAIN MUTUAL FUNDS WITHOUT A FRONT-END SALESCHARGE (ELIGIBLE CUSTOMERS). THE FINDINGS STATED THAT THESEELIGIBLE CUSTOMERS WERE INSTEAD SOLD CLASS A SHARES WITH AFRONT-END SALES CHARGE OR CLASS B OR C SHARES WITH BACK-ENDSALES CHARGES AND HIGHER ONGOING FEES AND EXPENSES. THEFINDINGS ALSO STATED THAT THE FIRM FAILED TO ESTABLISH ANDMAINTAIN A SUPERVISORY SYSTEM AND PROCEDURES REASONABLYDESIGNED TO ENSURE THAT ELIGIBLE CUSTOMERS WHO PURCHASEDMUTUAL FUND SHARES RECEIVED THE BENEFIT OF APPLICABLE SALESCHARGE WAIVERS.Resolution Date:03/07/2019Resolution:Other Sanctions Ordered:REMEDIATIONSanction Details:THE FIRM WAS CENSURED AND REQUIRED TO PROVIDE REMEDIATION TOELIGIBLE CUSTOMERS WHO QUALIFIED FOR, BUT DID NOT RECEIVE, THEAPPLICABLE MUTUAL FUND SALES CHARGE WAIVERS, AND WITHIN 30DAYS OF THE DATE THIS AWC IS ACCEPTED, THE FIRM WILL PROVIDE TOFINRA A DETAILED PLAN TO REMEDIATE ELIGIBLE CUSTOMERS BASED ONDoes the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:CensureAcceptance, Waiver & Consent(AWC)22©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSPECIFIC CRITERIA THAT IS NOT UNACCEPTABLE TO FINRA.Regulator StatementTHE FIRM ADVISED FINRA IT WAS UNDERTAKING A REVIEW TO DETERMINEWHETHER IT PROVIDED AVAILABLE SALES CHARGE WAIVERS TO ELIGIBLECUSTOMERS. AFTER IDENTIFYING ELIGIBLE CUSTOMER ACCOUNTS,FINRA STAFF REQUESTED THAT THE FIRM REVIEW THE APPLICABLESALES, DATING BACK TO JANUARY 1, 2011. THE FIRM ESTIMATES THAT,SINCE JANUARY 1, 2011, APPROXIMATELY 350 CUSTOMER ACCOUNTSPURCHASED MUTUAL FUND SHARES FOR WHICH AN AVAILABLE SALESCHARGE WAIVER WAS NOT APPLIED. AS A RESULT, THE FIRM ESTIMATESTHAT ELIGIBLE CUSTOMERS WERE OVERCHARGED BY APPROXIMATELY$136,660 FOR MUTUAL FUND PURCHASES MADE SINCE JANUARY 1, 2011.AS PART OF THIS SETTLEMENT, THE FIRM AGREES TO PAY RESTITUTIONTO ELIGIBLE CUSTOMERS ON THE TERMS SPECIFIED BELOW, WHICH ISESTIMATED TO TOTAL $152,880 (I.E., THE AMOUNT ELIGIBLE CUSTOMERSWERE OVERCHARGED, INCLUSIVE OF INTEREST). THE FIRM HASREPRESENTED IT WILL ALSO ENSURE THAT RETIREMENT ANDCHARITABLE WAIVERS ARE APPROPRIATELY APPLIED TO ALL FUTURETRANSACTIONS.Disclosure 2 of 63iReporting Source:RegulatorAllegations:IA RELEASE 40-5125, MARCH 11, 2019: THE SECURITIES AND EXCHANGECOMMISSION DEEMS IT APPROPRIATE AND IN THE PUBLIC INTEREST THATPUBLIC ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS BEINSTITUTED AGAINST PROEQUITIES, INC. ("RESPONDENT"). ON THE BASISOF THIS ORDER AND RESPONDENT'S OFFER, THE COMMISSION FINDSTHAT THESE PROCEEDINGS ARISE OUT OF BREACHES OF FIDUCIARYDUTY AND INADEQUATE DISCLOSURES BY THE RESPONDENT INCONNECTION WITH ITS MUTUAL FUND SHARE CLASS SELECTIONPRACTICES AND THE FEES IT RECEIVED. AT TIMES DURING THE RELEVANTPERIOD, RESPONDENT PURCHASED, RECOMMENDED, OR HELD FORADVISORY CLIENTS MUTUAL FUND SHARE CLASSES THAT CHARGED 12B-1FEES INSTEAD OF LOWER-COST SHARE CLASSES OF THE SAME FUNDSFOR WHICH THE CLIENTS WERE ELIGIBLE. RESPONDENT RECEIVED 12B-1FEES IN CONNECTION WITH THESE INVESTMENTS. RESPONDENT FAILEDTO DISCLOSE IN ITS FORM ADV OR OTHERWISE THE CONFLICTS OFINTEREST RELATED TO (A) ITS RECEIPT OF 12B-1 FEES, AND/OR (B) ITSSELECTION OF MUTUAL FUND SHARE CLASSES THAT PAY SUCH FEES.DURING THE RELEVANT PERIOD, RESPONDENT RECEIVED 12B-1 FEESFOR ADVISING CLIENTS TO INVEST IN OR HOLD SUCH MUTUAL FUNDSHARE CLASSES. AS A RESULT OF THE CONDUCT, RESPONDENTCurrent Status:Final23©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:UNITED STATES SECURITIES AND EXCHANGE COMMISSIONPrincipal Sanction(s)/ReliefSought:OtherOther Sanction(s)/ReliefSought:N/ADate Initiated:03/11/2019Docket/Case Number:3-19028Principal Product Type:Mutual Fund(s)Other Product Type(s):WILLFULLY VIOLATED SECTIONS 206(2) AND 207 OF THE ADVISERS ACT.Resolution Date:03/11/2019Resolution:Other Sanctions Ordered:UNDERTAKINGS AND PREJUDGMENT INTERESTSanction Details:THE RESPONDENT SHALL CEASE AND DESIST FROM COMMITTING ORCAUSING ANY VIOLATIONS AND ANY FUTURE VIOLATIONS OF SECTIONS206(2) AND 207 OF THE ADVISERS ACT. RESPONDENT IS CENSURED,SHALL PAY DISGORGEMENT OF $1,638,191.06 AND PREJUDGMENTINTEREST OF $214,192.04, AND SHALL COMPLY WITH THE UNDERTAKINGSENUMERATED IN THE OFFER OF SETTLEMENT.Regulator StatementRESPONDENT HAS SUBMITTED AN OFFER OF SETTLEMENT WHICH THECOMMISSION HAS DETERMINED TO ACCEPT. IN VIEW OF THE FOREGOING,THE COMMISSION DEEMS IT APPROPRIATE IN THE PUBLIC INTEREST TOIMPOSE THE SANCTIONS AGREED TO IN THE RESPONDENT'S OFFER.RESPONDENT SELF-REPORTED TO THE COMMISSION THE VIOLATIONSDISCUSSED IN THIS ORDER PURSUANT TO THE DIVISION OFENFORCEMENT'S SHARE CLASS SELECTION DISCLOSURE INITIATIVE("SCSD INITIATIVE"). ACCORDINGLY, THIS ORDER AND RESPONDENT'SOFFER ARE BASED ON THE INFORMATION SELF-REPORTED BYDoes the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?YesSanctions Ordered:CensureDisgorgement/RestitutionCease and Desist/InjunctionOrder24©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceRESPONDENT.Disclosure 3 of 63iReporting Source:RegulatorInitiated By:CONNECTICUTPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/20/2018Docket/Case Number:CO-18-8400-SURL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):Allegations:ON JULY 20, 2018, THE BANKING COMMISSIONER ENTERED A CONSENTORDER (NO. CO-18-8400-S) WITH RESPECT TO PROEQUITIES, INC. THECONSENT ORDER ALLEGED THAT THE FIRM VIOLATED SECTION 36B-31-6F(B) OF THE REGULATIONS UNDER THE CONNECTICUT UNIFORMSECURITIES ACT BY FAILING TO ESTABLISH, ENFORCE AND MAINTAIN ANADEQUATE SUPERVISORY SYSTEM IN CONNECTION WITH THE ACTIVITIESOF FORMER AGENT MATTHEW CHARLES WOODARD (CRD NO. 5699485).DURING HIS ASSOCIATION WITH THE FIRM, WOODARD WAS ALSO THEFOUNDING MEMBER, CONTROL PERSON AND TREASURER OF TOPPIKGINK539, LLC D/B/A TITAN BROKERAGE SERVICES, AN ACTIVITY THATWOODARD DID NOT DISCLOSE TO PROEQUITIES, INC. WOODARDALLEGEDLY PERSUADED ONE OF HIS PROEQUITIES CLIENTS TOAUTHORIZE A $10,000 WIRE TRANSFER FROM THE INVESTOR'SPROEQUITIES ACCOUNT TO TOPPIKGINK 539, LLC'S ACCOUNT, AND THATWOODARD USED AT LEAST A PORTION OF THE WIRED FUNDS NOT FORINVESTMENT BUT TO PAY HIS PERSONAL EXPENSES. THE CONSENTORDER ALLEGED THAT PROEQUITIES, INC. SHOULD HAVE TAKENADDITIONAL STEPS TO REVIEW THE TRANSACTION IN QUESTION.Current Status:FinalResolution Date:07/20/2018Resolution:Consent25©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:THE CONSENT ORDER FINED PROEQUITIES, INC. $7,500 AND DIRECTED ITTO CEASE AND DESIST FROM REGULATORY VIOLATIONS. IN ADDITION,THE CONSENT ORDER REQUIRED THAT THE FIRM REIMBURSE THEAFFECTED INVESTOR $90 TO COVER WIRE TRANSFER FEES. (PURSUANTTO A SEPARATE MARCH 23, 2018 CONSENT ORDER WITH WOODARD (NO.CO-17-8279-S), PROVISIONS HAD BEEN MADE FOR THE AFFECTEDINVESTOR TO RECEIVE $325,000 IN RESTITUTION.)Sanction Details:SEE RESPONSE TO ITEM 13.B.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $7,500.00Cease and Desist/InjunctioniReporting Source:FirmInitiated By:STATE OF CONNECTICUT DEPARTMENT OF BANKING, SECURITIES ANDBUSINESS INVESTMENTS DIVISIONDate Initiated:07/20/2018Allegations:THE DEPARTMENT ALLEGED THAT THE FIRM VIOLATED CERTAINPROVISIONS OF THE SECTION 36B-31-6F(B) OF THE CONNECTICUTUNIFORM SECURITIES ACT, WHICH REQUIRES BROKER DEALERS TOESTABLISH, ENFORCE AND MAINTAIN A SYSTEM FOR SUPERVISING THEACTIVITIES OF ITS AGENTS THAT IS REASONABLY DESIGNED TO ACHIEVECOMPLIANCE WITH APPLICABLE SECURITIES LAWS AND REGULATIONS.SPECIFICALLY, THE DEPARTMENT ALLEGED THAT PROEQUITIES DID NOTHAVE PROCEDURES IN PLACE TO CONFIRM THE PURPOSE AND NATUREOF A WRITTEN, THIRD-PARTY WIRE REQUEST, EVEN THOUGH THE WIREREQUEST WAS SIGNED BY THE CLIENT. FURTHERMORE, THEDEPARTMENT ALLEGED THAT PROEQUITIES FAILED TO SEEK FURTHERINFORMATION REGARDING THE FACT THAT THE THIRD PARTY WAS ANUNDISCLOSED OUTSIDE BUSINESS ACTIVITY OF THE CLIENT'SREGISTERED REPRESENTATIVE, EVEN THOUGH THE REGISTEREDREPRESENTATIVE HAD BEEN ASKED TO DISCLOSE (AND FAILED TODISCLOSE) ALL OUTSIDE BUSINESS ACTIVITIES TO PROEQUITIES.WITHOUT ADMITTING OR DENYING THE FINDINGS OF FACT ORCONCLUSIONS OF LAW, THE FIRM AGREED TO THE CONSENT ORDER, A$7,500 MONETARY FINE, AND $90 AS REIMBURSEMENT TO THE CLIENT.Current Status:Final26©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Docket/Case Number:CO-18-8400-SPrincipal Product Type:No ProductOther Product Type(s):Resolution Date:07/20/2018Resolution:Other Sanctions Ordered:Sanction Details:CEASE AND DESIST VIOLATION OF CERTAIN PROVISIONS OF THE SECTION36B-31-6F(B) OF THE CONNECTICUT UNIFORM SECURITIES ACT; A $7,500FINE WAS LEVIED AGAINST THE FIRM, WHICH THE FIRM PAID ON 7/17/2018.THE FIRM WAS ALSO REQUIRED TO REIMBURSE THE FORMER CLIENT $90FOR WIRE TRANSFER FEES.Sanctions Ordered:Monetary/Fine $7,590.00Cease and Desist/InjunctionConsentDisclosure 4 of 63iReporting Source:FirmInitiated By:STATE OF HAWAII DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRSDate Initiated:06/29/2017Docket/Case Number:SEU-2012-044Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF HAWAII DEPARTMENT OFCOMMERCE AND CONSUMER AFFAIRS ALLEGED THAT PROEQUITIESENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER HRS 485A-604,IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHERREGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOTREGISTERED AS A BROKER/DEALER IN HAWAII.Current Status:Final27©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Resolution Date:06/29/2017Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER HRS 485A-604.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOHAWAII.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING HAWAII. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 5 of 63iReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, NORTH CAROLINA ALLEGED THATPROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDERN.C.G.S. 78A-47(B) AND 78C-28(B), IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INNORTH CAROLINA.Current Status:Final28©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:STATE OF NORTH CAROLINA DEPARTMENT OF THE SECRETARY OF STATESECURITIES DIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:05/25/2017Docket/Case Number:NC FILE NO: 14 SEC 086Principal Product Type:No ProductOther Product Type(s):Resolution Date:05/25/2017Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER N.C.G.S. 78A-47(B) AND 78C-28(B).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TONORTH CAROLINA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING NORTH CAROLINA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 6 of 63iReporting Source:Regulator29©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:ARKANSAS SECURITIES DEPARTMENTPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/03/2016Docket/Case Number:S-16-0108-OR01URL for Regulatory Action:HTTP://WWW.SECURITIES.ARKANSAS.GOV/!USERFILES/PROEQUITIES,%20INC_%20CONSENT%20ORDER%20S-16-0108-17-OR01.PDFPrincipal Product Type:OtherOther Product Type(s):REAL ESTATE SECURITYAllegations:THE FIRM EMPLOYED AN AGENT OF THE FIRM TO SELL SECURITIES TO ANARKANSAS RESIDENT WHILE THE AGENT WAS NOT REGISTERED WITHTHE ARKANSAS SECURITIES DEPARTMENT.Current Status:FinalResolution Date:03/13/2017Resolution:Other Sanctions Ordered:Sanction Details:THE FIRM WAS FINED $1000.00.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $1,000.00ConsentiReporting Source:FirmAllegations:THE DEPARTMENT ALLEGED THAT THE FIRM VIOLATED ARK. CODE ANN.SS 23-42-301(B)(1), WHICH STATES THAT IT IS UNLAWFUL FOR AREGISTERED BROKER-DEALER TO EMPLOY AN UNREGISTERED AGENTEXCEPT A NONRESIDENT AGENT WHO IS REGISTERED BY ANY OTHERSTATE SECURITIES ADMINISTRATOR AND WHO EFFECTS TRANSACTIONSIN THIS STATE EXCLUSIVELY WITH REGISTERED BROKER-DEALERS.Current Status:Final30©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:ARKANSAS SECURITIES DEPARTMENTPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/03/2016Docket/Case Number:S-16-0108-17-OR01Principal Product Type:No ProductOther Product Type(s):Resolution Date:03/13/2017Resolution:Other Sanctions Ordered:Sanction Details:A $1,000 MONETARY FINE WAS LEVIED AGAINST THE FIRM. THE FIRM PAIDTHE FINE ON 3/17/2017.Firm StatementTHE DEPARTMENT ALLEGED THAT THE FIRM VIOLATED ARK. CODE ANN.SS 23-42-301(B)(1) WHEN ITS REGISTERED REPRESENTATIVE, WHO WASNOT REGISTERED WITH THE DEPARTMENT, SOLD A SECURITY ISSUED BYFT. COLLINS MULTIFAMILY III DST TO ONE ARKANSAS RESIDENT. WITHOUTADMITTING OR DENYING THE FINDINGS OF FACT OR CONCLUSIONS OFLAW, THE FIRM AGREED TO THE CONSENT ORDER AND A $1,000MONETARY FINE.Sanctions Ordered:Monetary/Fine $1,000.00ConsentDisclosure 7 of 63iReporting Source:RegulatorAllegations:1.SECTION 401(1) OF THE SECURITIES ACT, MCL 451.2401(1), PROHIBITS APERSON FROM ACTING AS A BROKER-DEALER IN MICHIGAN UNLESS THEPERSON IS REGISTERED OR PROPERLY EXEMPT FROM REGISTRATION.2. SECTIONS 402(4) AND 402(5) OF THE SECURITIES ACT, MCL 451.2402(4)AND MCL 451.2402(5), PROHIBIT A BROKER-DEALER FROM EMPLOYING ORASSOCIATING WITH AN AGENT UNLESS THE AGENT IS REGISTERED WITHTHE BROKER-DEALER.3. SECTION 403(1) OF THE SECURITIES ACT, MCL 451.2403(1), PROHIBITS ACurrent Status:Final31©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:MICHIGANPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:CONSENT ORDERDate Initiated:01/03/2017Docket/Case Number:331191URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):PERSON FROM ACTING AS AN INVESTMENT ADVISER IN MICHIGANUNLESS THE PERSON IS REGISTERED OR PROPERLY EXEMPT FROMREGISTRATION.4. SECTION 403(4) OF THE SECURITIES ACT, MCL 451.2403(4), PROHIBITSAN INVESTMENT ADVISER FROM EMPLOYING OR ASSOCIATING WITH ANINVESTMENT ADVISER REPRESENTATIVE THAT TRANSACTS BUSINESS INTHE STATE ON BEHALF OF THE INVESTMENT ADVISER UNLESS THEINDIVIDUAL IS REGISTERED AS AN INVESTMENT ADVISERREPRESENTATIVE.5. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, XXXXX ACTED ASAN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISER INMICHIGAN, IN VIOLATION OF SECTIONS 401(1) AND 403(1) OF THESECURITIES ACT, MCL 451.2401(1) AND MLC 451.2403(1).6. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, PROEQUITIESENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER SECTION 604 OFTHE SECURITIES ACT, MCL 451.2604.7. AS A RESULT OF THIS CONSENT ORDER, THE FOLLOWING RELIEF ISAPPROPRIATE AND IN THE PUBLIC INTEREST.Resolution Date:01/03/2017Resolution:Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoConsent32©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:Sanction Details:IN ACCORDANCE WITH THE TERMS OF THE MULTISTATE SETTLEMENT,$435,000 PAYABLE TO MULTIPLE STATES. $8,207.55 PAYABLE TO THEBUREAU'S SECURITIES INVESTOR EDUCATION AND TRAINING FUND AS ITSPORTION OF THE TOTAL AMOUNT, WHICH PORTION SHALL BECONSIDERED A CIVIL FINE.Sanctions Ordered:Monetary/Fine $8,207.55iReporting Source:FirmInitiated By:MICHIGAN DEPARTMENT OF LICENSING AND REGULATORY AFFAIRS,CORPORATIONS, SECURITIES, AND COMMERCIAL LICENSING BUREAUPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:01/03/2017Docket/Case Number:331191Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE MICHIGAN DEPARTMENT OF LICENSINGAND REGULATORY AFFAIRS, CORPORATIONS, SECURITIES, ANDCOMMERCIAL LICENSING BUREAU ALLEGED THAT PROEQUITIESVIOLATED SECTION 604 OF THE SECURITIES ACT, MCL 451.2604, IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN MICHIGAN.Current Status:FinalResolution Date:01/03/2017Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER SECTION 604 OF THE SECURITIES ACT, MCL 451.2604.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent33©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOMICHIGAN.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MICHIGAN. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 8 of 63iReporting Source:FirmInitiated By:LOUISIANAPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:09/26/2016Docket/Case Number:OFI-2016-005Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, LOUISIANA ALLEGED THAT PROEQUITIESVIOLATED THE LOUISIANA LSA-R.S. 51:703, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INLOUISIANA.Current Status:FinalResolution:Consent34©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceResolution Date:09/26/2016Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER R.S. 51:713.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOLOUISIANA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING LOUISIANA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionDisclosure 9 of 63iReporting Source:RegulatorAllegations:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTEDTO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT FAILED TOESTABLISH, MAINTAIN, AND ENFORCE ADEQUATE WRITTEN PROCEDURESTO SUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS(ETFS) AND THE CREATION AND DISSEMINATION OF CONSOLIDATEDREPORTS. THE FINDINGS STATED THAT THE FIRM PERMITTED ITSREGISTERED REPRESENTATIVES TO SOLICIT TRANSACTIONS IN NON-TRADITIONAL ETFS, THOUGH THE FIRM DID NOT HAVE IN PLACE WRITTENPROCEDURES RELATING TO SUITABILITY AND SUPERVISION OFRECOMMENDATIONS INVOLVING NON-TRADITIONAL ETFS. THE FIRM ALSOFAILED TO HAVE IN PLACE A PROCEDURE OR SYSTEM TO IDENTIFYINSTANCES IN WHICH A CUSTOMER MIGHT BE HOLDING A POSITION IN ANON-TRADITIONAL ETF FOR AN EXTENDED PERIOD OF TIME. IN ADDITION,THE FIRM DID NOT PROVIDE ADEQUATE TRAINING AND GUIDANCE TO ITSCurrent Status:Final35©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceREGISTERED REPRESENTATIVES REGARDING THE UNIQUECHARACTERISTICS AND RISKS OF NON-TRADITIONAL ETFS. THE FINDINGSALSO STATED THAT THE FIRM PERMITTED ITS REGISTEREDREPRESENTATIVES TO PREPARE AND DISSEMINATE CONSOLIDATEDREPORTS USING FIRM-APPROVED SOFTWARE APPLICATIONS. SOME OFTHOSE APPLICATIONS PROVIDED THE ABILITY TO MANUALLY ENTERSECURITIES POSITIONS AND VALUES. THE FIRM DID NOT HAVE WRITTENPROCEDURES ADDRESSING THE USE AND SUPERVISION OFCONSOLIDATED REPORTS. THE FINDINGS ALSO INCLUDED THATPERMITTED ITS REGISTERED REPRESENTATIVES, WHO WERE ALSOINVESTMENT ADVISERS (RR/IAS) TO OFFER INVESTMENT-ADVISORYSERVICES THROUGH INDEPENDENT REGISTERED INVESTMENT ADVISERS(RIAS). THE FIRM HAD IN PLACE WRITTEN PROCEDURES FORSUPERVISION AND RECORDKEEPING OF SUCH ACTIVITIES BUT FAILED TOENFORCE ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISIONOF REGISTERED PERSONS CONDUCTING INVESTMENT-ADVISORYBUSINESS THROUGH AN INDEPENDENT RIA. SPECIFICALLY, THE FIRMFAILED TO ENSURE THAT CERTAIN RR/IAS COMPLIED WITH THE FIRM'SREQUIREMENT THAT THEY PROVIDE WRITTEN NOTICE TO THE FIRM'SCOMPLIANCE DEPARTMENT OF ANY CHANGES IN THEIR RIA BUSINESS ORCLIENTELE. IN ADDITION, THE FIRM'S WRITTEN PROCEDURES REQUIREDTHAT SUPERVISING PRINCIPALS UTILIZE A "SECTION 40 BLOTTER" TOREVIEW RR/IA SECURITIES TRANSACTIONS EXECUTED AWAY FROM THEFIRM, BUT IN CERTAIN CIRCUMSTANCES THE FIRM DID NOT ENFORCETHAT REQUIREMENT, AND INDIVIDUAL SUPERVISING PRINCIPALS WEREPERMITTED TO UTILIZE THEIR OWN METHODS TO REVIEW THESETRANSACTIONS AND OFTEN DID NOT DOCUMENT THE REVIEWS. FINALLY,THE FIRM'S WRITTEN PROCEDURES REQUIRED THAT COMPLIANCEDEPARTMENT PERSONNEL CONDUCT AND DOCUMENT AN ANNUALREVIEW OF EACH RR/IA'S BUSINESS AND RECORDKEEPING PRACTICES,BUT SUCH REVIEWS WERE NOT CONSISTENTLY PERFORMED ORDOCUMENTED. FINRA FOUND THAT THE FIRM FAILED TO ADEQUATELYENFORCE CERTAIN PROVISIONS OF ITS WRITTEN PROCEDURESRELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES AND1035-EXCHANGE TRANSACTIONS. THE FIRM MAINTAINED WRITTENPROCEDURES RELATING TO THE SUPERVISION OF SALES OF VARIABLEANNUITIES THAT IDENTIFIED, BUT DID NOT SUFFICIENTLY ADDRESS,PARTICULAR FACTORS TO BE CONSIDERED IN ASSESSING THESUITABILITY OF A RECOMMENDATION TO BUY OR SELL, IN WHOLE OR INPART, A VARIABLE ANNUITY. THE FIRM FAILED TO ENSURE THAT SUCHREVIEWS WERE ALWAYS PERFORMED AND DOCUMENTED AND FAILED TOENSURE THAT REVIEWS OF A WEEKLY 1035-EXCHANGE REPORT WEREALWAYS CONDUCTED TIMELY AND CONSISTENTLY. THE FIRM'S WRITTENPROCEDURES ADDRESSING SUITABILITY OF VARIABLE-ANNUITYRECOMMENDATIONS IDENTIFIED, BUT DID NOT ADEQUATELY DISCUSS,36©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:FINRAPrincipal Sanction(s)/ReliefSought:Other Sanction(s)/ReliefSought:Date Initiated:08/08/2016Docket/Case Number:2014039418801Principal Product Type:No ProductOther Product Type(s):ANNUITY SHARE CLASS AS A FACTOR TO BE CONSIDERED IN ASSESSINGSUITABILITY.Resolution Date:08/08/2016Resolution:Other Sanctions Ordered:Sanction Details:THE FIRM WAS CENSURED AND FINED $200,000. FINE PAID IN FULL ONAUGUST 16, 2016.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:CensureMonetary/Fine $200,000.00Acceptance, Waiver & Consent(AWC)iReporting Source:FirmAllegations:FINRA ALLEGED THAT DURING THE TIME PERIOD JANUARY 1, 2008THROUGH APRIL 30, 2012, PROEQUITIES FAILED TO ESTABLISH, MAINTAIN,AND ENFORCE ADEQUATE WRITTEN PROCEDURES TO SUPERVISE SALESOF NON-TRADITIONAL EXCHANGE-TRADED FUNDS, IN VIOLATION OF NASDCONDUCT RULES 3010(B), 2110 AND FINRA RULE 2010. IN ADDITIONDURING THE TIME PERIOD APRIL 2006 THROUGH JULY 2013, PROEQUITIESFAILED TO ESTABLISH, MAINTAIN, AND ENFORCE WRITTEN PROCEDURESTO SUPERVISE THE CREATION AND DISSEMINATION OF CONSOLIDATEDREPORTS, IN VIOLATION OF NASD CONDUCT RULES 3010, SUBPARTS (B)Current Status:Final37©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:FINRAPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:08/08/2016Docket/Case Number:2014039418801Principal Product Type:OtherOther Product Type(s):ETF (EXCHANGE TRADED FUNDS) AND VA (VARIABLE ANNUITIES)AND (D)(2), 2110 AND FINRA RULE 2010. ALSO DURING THE TIME PERIODJANUARY 1, 2014 THROUGH MARCH 30, 2014, PROEQUITIES FAILED TOENFORCE ITS WRITTEN PROCEDURES RELATING TO THE SUPERVISIONOF REGISTERED PERSONS CONDUCTING INVESTMENT-ADVISORYBUSINESS THROUGH AN INDEPENDENT REGISTERED INVESTMENTADVISER, IN VIOLATION OF NASD CONDUCT RULES 3010(D) AND 3040(C)AND FINRA RULE 2010. IN ADDITION, DURING THE TIME PERIOD JUNE 3,2013 THROUGH MARCH 28, 2014, PROEQUITIES FAILED TO ENFORCECERTAIN PROVISIONS OF ITS WRITTEN PROCEDURES RELATING TO THESUPERVISION OF SALES OF VARIABLE ANNUITIES AND 1035-EXCHANGETRANSACTIONS, IN VIOLATION OF NASD CONDUCT RULE 3010(B) ANDFINRA RULES 2330(D) AND 2010 BY MAINTAINING WRITTEN PROCEDURESRELATING TO THE SUPERVISION OF SALES OF VARIABLE ANNUITIES THATIDENTIFIED, BUT DID NOT SUFFICIENTLY ADDRESS, PARTICULAR FACTORSTO BE CONSIDERED IN ASSESSING THE SUITABILITY OF ARECOMMENDATION TO BUY OR SELL, IN WHOLE OR IN PART, A VARIABLEANNUITY.Resolution Date:08/08/2016Resolution:Other Sanctions Ordered:Sanction Details:CENSURE AND PAYMENT OF A MONETARY SANCTION IN THE AMOUNT OF$200,000.00 UPON NOTICE THAT THIS AWC HAS BEEN ACCEPTED.Firm StatementWITHOUT ADMITTING OR DENYING LIABILITY, THE FIRM RECENTLYSETTLED A MATTER WITH FINRA RELATED TO FAILURE TO PROPERLYSUPERVISE SALES OF NON-TRADITIONAL EXCHANGE-TRADED FUNDS;FAILURE TO ESTABLISH, MAINTAIN AND ENFORCE PROCEDURES RELATEDTO THE SUPERVISION OF CONSOLIDATED REPORTS; FAILURE TOSanctions Ordered:CensureMonetary/Fine $200,000.00Acceptance, Waiver & Consent(AWC)38©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceENFORCE WRITTEN PROCEDURES RELATING TO THE SUPERVISION OFPERSON CONDUCTING BUSINESS THROUGH AN INDEPENDENTREGISTERED ADVISER; FAILURE TO ENFORCE VARIOUS PROVISIONS OFTHE WRITTEN PROCEDURES RELATED TO THE SUPERVISION OF SALESOF VARIABLE ANNUITIES AND 1035-EXCHANGES. THE FIRM SIGNED ALETTER OF ACCEPTANCE, WAIVER AND CONSENT AGREEING TO ACENSURE AND TO PAY FINRA A FINE OF $200,000.00.Disclosure 10 of 63iReporting Source:RegulatorInitiated By:FINRAPrincipal Sanction(s)/ReliefSought:OtherDate Initiated:11/11/2015Docket/Case Number:2014041841001Principal Product Type:Unit Investment Trust(s)Other Product Type(s):Allegations:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTEDTO THE SANCTIONS AND TO THE ENTRY OF FINDINGS THAT IT FAILED TOIDENTIFY AND APPLY SALES CHARGE DISCOUNTS TO CERTAINCUSTOMERS' ELIGIBLE PURCHASES OF UNIT INVESTMENT TRUSTS (UITS).THE FINDINGS STATED THAT THE FIRM FAILED TO APPLY SALES CHARGEDISCOUNTS TO ELIGIBLE UIT PURCHASES RESULTING IN CUSTOMERSPAYING EXCESSIVE SALES CHARGES OF APPROXIMATELY $109,709. THEFIRM HAS PAID RESTITUTION TO ALL AFFECTED CUSTOMERS. THEFINDINGS ALSO STATED THAT THE FIRM FAILED TO ESTABLISH, MAINTAINAND ENFORCE A SUPERVISORY SYSTEM AND WSPS REASONABLYDESIGNED TO ENSURE THAT CUSTOMERS RECEIVED SALES CHARGEDISCOUNTS ON ALL ELIGIBLE UIT PURCHASES. THE FIRM LACKED WSPSTO IDENTIFY TRANSACTIONS ELIGIBLE FOR SALES CHARGE DISCOUNTS,AND LACKED A PROCESS TO ASSURE THAT SUCH DISCOUNTS WEREPROPERLY APPLIED. IN ADDITION, THE FIRM FAILED TO CONDUCTQUARTERLY CLIENT FILE REVIEWS AS REQUIRED BY ITS OWNPROCEDURES AS A MEANS TO IDENTIFY SITUATIONS IN WHICHAPPROPRIATE PRICE BREAK INFORMATION HAD NOT BEEN DISCLOSED.AS A RESULT OF THESE FAILURES, THE FIRM DID NOT DETECT ANDCORRECT FAILURES BY ITS REGISTERED REPRESENTATIVES TOAPPROPRIATELY IDENTIFY TRANSACTIONS THAT WERE ELIGIBLE FORSALES CHARGE DISCOUNTS.Current Status:Final39©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanction(s)/ReliefSought:N/AResolution Date:11/11/2015Resolution:Other Sanctions Ordered:Sanction Details:THE FIRM WAS CENSURED, FINED $165,000, AND IS ORDERED TO PAY$109,709 TO CUSTOMERS.FINE PAID IN FULL ON NOVEMBER 24, 2015.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:CensureMonetary/Fine $165,000.00Disgorgement/RestitutionAcceptance, Waiver & Consent(AWC)iReporting Source:FirmInitiated By:FINRADate Initiated:10/22/2015Docket/Case Number:2014041841001Principal Product Type:Unit Investment Trust(s)Other Product Type(s):Allegations:FINRA ALLEGED THAT FROM MAY 1, 2009 TO APRIL 30, 2014 PROEQUITIESFAILED TO APPLY SALES CHARGE DISCOUNTS TO 713 ELIGIBLE UNITINVESTMENT TRUST (UIT) PURCHASES RESULTING IN CUSTOMERSPAYING EXCESSIVE SALES CHARGES OF APPROXIMATELY $109,709 INVIOLATION OF FINRA RULE 2010. IN ADDITION, FINRA ALLEGED THATPROEQUITIES FAILED TO ESTABLISH, MAINTAIN AND ENFORCE ASUPERVISORY SYSTEM AND WRITTEN SUPERVISORY PROCEDURESREASONABLY DESIGNED TO ENSURE THAT CUSTOMERS RECEIVED SALESCHARGE DISCOUNTS ON ALL ELIGIBLE UIT PURCHASES IN VIOLATION OFNASD CONDUCT RULE 3010 AND FINRA RULE 2010.Current Status:Final40©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Resolution Date:10/22/2015Resolution:Other Sanctions Ordered:Sanction Details:PAYMENT OF MONETARY SANCTION IN THE AMOUNT OF $165,000.00 UPONNOTICE THAT THIS AWC HAS BEEN ACCEPTED AND THAT SUCH PAYMENTIS DUE AND PAYABLE. PAYMENT OF RESTITUTION TO AFFECTEDCUSTOMERS IN THE AMOUNT OF $111,249.33 (MISSED DISCOUNTS PLUSINTEREST).Firm StatementWITHOUT ADMITTING OR DENYING LIABILITY, THE FIRM RECENTLYSETTLED A MATTER WITH FINRA RELATED THE SUPERVISORYPROCEDURES RELATED TO UNIT INVESTMENT TRUSTS. THE FIRM SIGNEDA LETTER OF ACCEPTANCE, WAIVER AND CONSENT AGREEING TO PAYFINRA A $160,000 FINE RELATED TO THIS MATTER. IT SHOULD BE NOTEDTHAT THE FIRM PAID RESTITUTION TO ALL AFFECTED CUSTOMERS IN THEAMOUNT OF $111,249.33 (MISSED DISCOUNTS PLUS INTEREST).Sanctions Ordered:CensureMonetary/Fine $165,000.00Disgorgement/RestitutionAcceptance, Waiver & Consent(AWC)Disclosure 11 of 63iReporting Source:RegulatorInitiated By:MISSOURIDate Initiated:06/09/2015Docket/Case Number:AP-15-21URL for Regulatory Action:HTTP://S1.SOS.MO.GOV/CMSIMAGES/SECURITIES/ORDERS/AP-15-21PROEQUITIESINCCONSENTORDER.PDFPrincipal Product Type:OtherOther Product Type(s):UNIVERSAL LIFE POLICIES; COVERED CALLSAllegations:RESPONDENT FAILED TO REASONABLY SUPERVISE AN AGENT.Current Status:Final41©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:RestitutionOther Sanction(s)/ReliefSought:MONETARY PENALTIES TO THE MISSOURI INVESTOR EDUCATION ANDPROTECTION FUND AND COSTSResolution Date:06/09/2015Resolution:Other Sanctions Ordered:COSTSSanction Details:RESPONDENT IS ORDERED TO PAY RESTITUTION TO INVESTORS IN THEAMOUNT OF $66,488 AND PAY INTEREST AT THE RATE OF 8% PER ANNUMIN THE AMOUNT OF $17,040. RESPONDENT SHALL PAY THE MISSOURISECRETARY OF STATE'S INVESTOR EDUCATION AND PROTECTION $40,000.RESPONDENT SHALL PAY $5,000 AS THE COSTS OF THIS INVESTIGATION.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $40,000.00Disgorgement/RestitutionConsentiReporting Source:FirmInitiated By:MISSOURI SECURITIES DIVISIONPrincipal Sanction(s)/ReliefSought:OtherDate Initiated:06/09/2015Docket/Case Number:AP-15-21Principal Product Type:OptionsOther Product Type(s):UNIVERSAL LIFE POLICIES AND OPTIONSAllegations:THE MISSOURI SECURITIES DIVISION HAS ALLEGED THAT PROEQUITIESFAILED TO REASONABLY SUPERVISE HARRY ALLEN WARD, WHO MADEUNSUITABLE SECURITIES RECOMMENDATIONS TO A MISSOURI COUPLEDURING THE APPROXIMATE PERIOD AUGUST 2011 TO JULY 2012.Current Status:Final42©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanction(s)/ReliefSought:CONSENT ORDERResolution Date:06/09/2015Resolution:Other Sanctions Ordered:PAYMENT OF RESTITUTION, MADE THROUGH THE MISSOURI SECRETARYOF STATE'S INVESTOR RESTITUTION FUND, OF $66,488, PLUS 17,040 ININTEREST. PAYMENT OF $40,000 TO THE MISSOURI SECRETARY OFSTATE'S INVESTOR PROTECTION FUND, AND $5,000 AS COST OF THISINVESTIGATION.Sanction Details:PAYMENT OF RESTITUTION, MADE THROUGH THE MISSOURI SECRETARYOF STATE'S INVESTOR RESTITUTION FUND, OF $66,488, PLUS 17,040 ININTEREST. PAYMENT OF $40,000 TO THE MISSOURI SECRETARY OFSTATE'S INVESTOR PROTECTION FUND, AND $5,000 AS COST OF THISINVESTIGATION.Firm StatementWITHOUT ADMITTING OR DENYING LIABILITY, THE FIRM RECENTLYSETTLED A MATTER WITH THE STATE OF MISSOURI'S DIVISION OFSECURITIES RELATING TO CERTAIN SECURITIES TRANSACTIONS IN THEACCOUNT OF A MISSOURI COUPLE IN 2011 AND 2012. THE ALLEGATIONSRELATE TO THE FIRM'S SUPERVISION OF ONE OF THE COUPLE'SACCOUNTS WHICH, OVER THE COURSE OF 8 MONTHS, INCURREDLOSSES AS A RESULT OF CERTAIN ALLEGEDLY UNSUITABLE OPTIONSTRANSACTIONS. THE FIRM AGREED, THROUGH THE STATE, TO REPAY THECLIENTS FOR THEIR LOSSES WITH INTEREST, PAY MONEY TO THESTATE'S INVESTOR EDUCATION AND PROTECTION FUND AND PAY FORTHE STATE'S COSTS OF INVESTIGATION. IN AGREEING TO SETTLE THISMATTER, THE STATE RECOGNIZED THAT THE FIRM HAS TAKEN SEVERALREMEDIAL STEPS TO ADDRESS THE ISSUES THAT WERE RAISED IN THECASE AND TO ENSURE THAT THE ISSUES REFERENCED IN THE ORDER DONOT RECUR. THE FIRM IS GLAD TO HAVE BEEN ABLE TO RESOLVE THISMATTER QUICKLY AND AMICABLY WITH THE STATE.Sanctions Ordered:Monetary/Fine $40,000.00Disgorgement/RestitutionConsentDisclosure 12 of 63iReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, OKLAHOMA ALLEGED THAT PROEQUITIESVIOLATED SECTION 1-604 OF THE OKLAHOMA UNIFORM SECURITIES ACTCurrent Status:Final43©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:OKLAHOMA DEPARTMENT OF SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:06/16/2014Docket/Case Number:ODS 13-030Principal Product Type:No ProductOther Product Type(s):("ACT") OF 2004, IN THAT PROEQUITIES SHARED COMMISSIONS WITHANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALERWAS NOT REGISTERED AS A BROKER/DEALER IN OKLAHOMA.Resolution Date:06/23/2014Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER SECTION 1-604 OF THE ACT.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOOKLAHOMA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING OKLAHOMA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55ConsentDisclosure 13 of 63i44©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceReporting Source:RegulatorInitiated By:CONNECTICUTPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:06/03/2013Docket/Case Number:CO-13-8024-SURL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):Allegations:ON JUNE 3, 2013, THE BANKING COMMISSIONER ENTERED A CONSENTORDER (NO. CO-13-8024-S) WITH RESPECT TO PROEQUITIES, INC., ACONNECTICUT-REGISTERED BROKER-DEALER LOCATED AT 2801 HIGHWAY280 SOUTH, BIRMINGHAM, ALABAMA. THE CONSENT ORDER FOLLOWED ARELATED MULTISTATE INVESTIGATION, CAPPED BY A GLOBALSETTLEMENT, INTO UNREGISTERED BROKER-DEALER AND INVESTMENTADVISORY ACTIVITY BY BANKERS LIFE AND CASUALTY COMPANY AND BLCFINANCIAL SERVICES, INC. AND THEIR AGENTS. THE COMMISSIONER HADENTERED A CONSENT ORDER REGARDING THOSE ENTITIES ON JUNE 29,2012 (NO. CO-12-8018-S). STATE REGULATORS ALSO NEGOTIATED ANANCILLARY GLOBAL SETTLEMENT WITH PROEQUITIES, INC.PROEQUITIES, INC. HAD PURPORTEDLY ENTERED INTO AN AGREEMENTWITH THE BANKERS LIFE ENTITIES PURSUANT TO WHICH CERTAINSECURITIES-RELATED ROLES WERE ASSIGNED TO THE BANKERS LIFEENTITIES. THE INVOLVEMENT OF THE BANKERS LIFE ENTITIES INSECURITIES-RELATED ROLES ALLEGEDLY LED TO CONFUSION IN THEREPORTING AND RESPONSIBILITY HIERARCHIES BETWEEN BANKERS LIFEAND PROEQUITIES, INC.Current Status:FinalResolution Date:06/03/2013Resolution:Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoConsent45©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:THE JUNE 3, 2013 CONSENT ORDER DIRECTED PROEQUITIES, INC. TOCEASE AND DESIST FROM MATERIALLY AIDING ANY PERSON IN AVIOLATION OF THE CONNECTICUT UNIFORM SECURITIES ACT AND ITSREGULATIONS. IN ADDITION, THE CONSENT ORDER DIRECTED THE FIRMTO PAY A FINE OF $8,207.55 WITHIN TEN BUSINESS DAYS FOLLOWING THECOMMISSIONER'S ENTRY OF THE CONSENT ORDER. THE FINE AMOUNTREPRESENTED CONNECTICUT'S PROPORTIONATE SHARE OF THE TOTALSTATE SETTLEMENT AMOUNT OF $435,000 AGAINST PROEQUITIES, INC.Sanction Details:SEE RESPONSE TO ITEM 13.B.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctioniReporting Source:FirmInitiated By:STATE OF CONNECTICUT DEPARTMENT OF BANKINGPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:05/31/2013Docket/Case Number:CO-13-8024-SPrincipal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, CONNECTICUT ALLEGED THATPROEQUITIES VIOLATED THE CONNECTICUT UNIFORM SECURITIES ACT("ACT") AND SECTIONS 36B-31-2 TO 36B-31-33, INCLUSIVE, OF THEREGULATIONS OF CONNECTICUT STATE AGENCIES PROMULGATEDUNDER THE ACT ("REGULATIONS"), IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INCONNECTICUT.Current Status:FinalResolution Date:06/03/2013Resolution:Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent46©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:CEASE AND DESIST FROM MATERIALLY AIDING ANY PERSON, INCLUDINGBANKERS, IN A VIOLATION OF THE ACT AND THE REGULATIONSTHEREUNDER.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOCONNECTICUT.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING CONNECTICUT. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 14 of 63iReporting Source:FirmInitiated By:STATE OF WEST VIRGINIADate Initiated:04/22/2013Docket/Case Number:12-0057Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE ALABAMA SECURITIES COMMISSIONALLEGED THAT PROEQUITIES VIOLATED WEST VIRGINIA CODE 32-2-201(A).WEST VIRGINIA CODE 32-2-201(C), AND WEST VIRGINIA CODE 32-2-201(E)(1), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHERREGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOTREGISTERED AS A BROKER/DEALER IN WEST VIRGINIACurrent Status:Final47©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Resolution Date:04/22/2013Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER WEST VIRGINIA CODE 32-4-407A(B).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOWEST VIRGINIA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING WEST VIRGINIA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 15 of 63iReporting Source:FirmInitiated By:STATE OF INDIANA SECURITIES DIVISIONDate Initiated:03/13/2013Allegations:THROUGH CONSENT ORDER, PROEQUITIES AGREED TO THE FINDINGSTHAT PROEQUITIES' BRANCH OFFICE HAD FAILED TO CONTRACT FOR ABRANCH AUDIT AS REQUIRED BY INDIANA CODE 23-19-4-11(I) AND SUBMITTHE AUDIT REPORT BY AN ESTABLISHED DEADLINE OF APRIL 17, 2012.Current Status:Final48©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:OtherOther Sanction(s)/ReliefSought:PAYMENT OF COSTS OF INVESTIGATIONDocket/Case Number:13-0063CAPrincipal Product Type:No ProductOther Product Type(s):Resolution Date:04/01/2013Resolution:Other Sanctions Ordered:NONE.Sanction Details:PAYMENT OF INVESTIGATIVE COSTS.Firm StatementPROEQUITIES WAS NOTIFIED THAT, DESPITE NOTICE FROM THE INDIANASECURITIES DIVISION, THE FIRM'S BRANCH OFFICE IN INDIANAPOLISFAILED TO COMPLETE THE REQUIRED AUDIT AND SUBMIT THECOMPLETED AUDIT REPORT BY THE APRIL 17, 2012 DEADLINE. THE FIRM'SHOME OFFICE WAS NOT NOTIFIED OF THE AUDIT REQUIREMENT, AND WASNOT AWARE THAT THE BRANCH OFFICE HAD FAILED TO COMPLY WITH THEAUDIT REQUIREMENT UNTIL NOTICE BY THE INDIANA SECURITIESDIVISION IN MARCH, 2013. THE FIRM HAS SINCE ESTABLISHEDPROCEDURES WHEREBY WE WILL CONTACT THE DIVISION ANNUALLY INMARCH TO DETERMINE WHICH, IF ANY, OF ITS BRANCHES HAVE BEENSELECTED FOR REVIEW.Sanctions Ordered:Monetary/Fine $2,000.00ConsentDisclosure 16 of 63iReporting Source:FirmInitiated By:STATE OF VERMONT DEPARTMENT OF FIANCIAL REGULATIONAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF VERMONT DEPARTMENT OFFINANCIAL REGULATION ALLEGED THAT PROEQUITIES VIOLATEDVERMONT UNIFORM SECURITIES ACT (2002), CODIFIED IN PERTINENTPART AT V.S.A. 5401-04 ET SEQ, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INVERMONT.Current Status:Final49©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:02/28/2013Docket/Case Number:13-001-SPrincipal Product Type:No ProductOther Product Type(s):Resolution Date:03/08/2013Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER 9 V.S.A. 5604.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOVERMONT.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING VERMONT. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 17 of 63iReporting Source:RegulatorAllegations:UNDER THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT, ACurrent Status:Final50©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:FLORIDA OFFICE OF FINANCIAL REGULATION ("OFR")Principal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:02/28/2013Docket/Case Number:0668-S-9/12URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):PERSON MAY NOT ACT AS A BROKER-DEALER IN THE STATE OF FLORIDAUNLESS REGISTERED OR EXEMPT FROM REGISTRATION. SEE SECTION517.12, FLORIDA STATUTES. SIMILARLY, A PERSON MAY NOT ACT AS ANINVESTMENT ADVISER IN THE STATE OF FLORIDA UNLESS REGISTERED,EXEMPT FROM REGISTRATION, OR A FEDERAL COVERED INVESTMENTADVISER. SEE SECTION517.12, FLORIDA STATUTES. A BROKER-DEALERMAY NOT EMPLOY OR ASSOCIATE WITH AN AGENT, UNLESS THEEMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS .AN AGENT OFTHE BROKER-DEALER. AN INVESTMENT ADVISER MAY NOT EMPLOY ORASSOCIATE WITH AN INVESTMENT ADVISER REPRESENTATIVE UNLESSTHE EMPLOYEE OR ASSOCIATED PERSON IS REGISTERED AS ANINVESTMENT ADVISER REPRESENTATIVE OF THE INVESTMENT ADVISOR.BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, BANKERS ACTED ASAN UNREGISTERED BROKER DEALER AND INVESTMENT ADVISER IN THESTATE OF FLORIDA IN VIOLATION OF SECTION 517.12, FLORIDA STATUTES.FURTHERMORE, BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTSWHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISERREPRESENTATIVES OF BANKERS, BANKERS VIOLATED SECTION 517.12,FLORIDA STATUTES. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE,UVEST HAS SUBJECTED ITSELF TO CONDUCT THAT IS GROUNDS FOR ANORDER IMPOSING SANCTIONS UNDER SECTION 517.221, FLORIDASTATUTES. AS A RESULT, THE EXECUTION OF THIS STIPULATION ANDCONSENT AGREEMENT AND THE FOLLOWING RELIEF ARE APPROPRIATEAND IN THE PUBLIC INTEREST.Resolution Date:02/28/2013Resolution:Order51©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:Sanction Details:ON 2/28/2013, THE OFFICE OF FINANCIAL REGULATION ("OFFICE")ENTERED A FINAL ORDER ADOPTING THE STIPULATION AND CONSENTAGREEMENT IN THE MATTER OF PROEQUITIES, INC. ("RESPONDENT").RESPONDENT NEITHER ADMITTED NOR DENIED THE FINDINGS BUTCONSENTED TO THE ENTRY OF FINDINGS BY THE OFFICE. RESPONDENTAGREES TO CEASE AND DESIST FROM ANY AND ALL FUTURE VIOLATIONSOF CHAPTER 517, F.S. AND THE ADMINISTRATIVE RULES THEREUNDERAND AGREES TO PAY AN ADMINISTRATIVE FINE OF $8,207.55.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55iReporting Source:FirmInitiated By:STATE OF FLORIDA OFFICE OF FINANCIAL REGULATIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:01/22/2013Docket/Case Number:0668-S-9/12Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF FLORIDA OFFICE OFFINANCIAL REGULATION ALLEGED THAT PROEQUITIES VIOLATED SECTION517.12, FLORIDA STATUTES, IN THAT PROEQUITIES SHARED COMMISSIONSWITH ANOTHER REGISTERED BROKER/DEALER, WHILE THATBROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INFLORIDA.Current Status:FinalResolution:Consent52©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceResolution Date:01/27/2013Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER SECTION 517.221, FLORIDA STATUTES.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOFLORIDA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING FLORIDA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionDisclosure 18 of 63iReporting Source:FirmInitiated By:SECURITIES COMMISSIONER OF STATE OF COLORADO.Date Initiated:08/06/2012Docket/Case Number:13-L-10Principal Product Type:No ProductAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OF STATEOF COLORADO ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 11-51-401(1)(1.5)(2)AND(2.5),C.R.S., IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INCOLORADO.Current Status:Final53©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Other Product Type(s):Resolution Date:09/17/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER SECTION 11-51-606(1.5),C.R.S.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOCOLORADO.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING COLORADO. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 19 of 63iReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF NEW MEXICO REGULATIONAND LICENSING DEPARTMENT SECURITIES DIVISION, ALLEGED THATPROEQUITIES VIOLATED SECTIONS 58-13B-3 AND 58-13B-5 OF THE NEWMEXICO SECURITIES ACT OF 1986 (1986, AS AMENDED THROUGH 2004)AND SECTIONS 58-13C-401 THROUGH 404 OF THE NEW MEXICO UNIFORMCurrent Status:Final54©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:STATE OF NEW MEXICO REGULATION AND LICENSING DEPARTMENTSECURITIES DIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:01/22/2013Docket/Case Number:13-13-996-002Principal Product Type:No ProductOther Product Type(s):SECURITIES ACT, NMSA 1978 58-13C-101 TO 58-13C-701 (2009)(THE"ACT"),IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHERREGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOTREGISTERED AS A BROKER/DEALER IN NEW MEXICO.Resolution Date:01/28/2013Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER NMSA 1978 58-13C-604(A)(2009).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TONEW MEXICO.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING NEW MEXICO. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent55©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDisclosure 20 of 63iReporting Source:FirmInitiated By:GOVERNMENT OF THE U.S. VIRGIN ISLANDSPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:01/07/2013Docket/Case Number:03-2013Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE GOVERNMENT OF THE U.S. VIRGINISLANDS, ALLEGED THAT PROEQUITIES VIOLATED CHAPTER 23, 9 VIC,SECTIONS 631, 632, 633 AND 634, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INTHE U.S. VIRGIN ISLANDS.Current Status:FinalResolution Date:01/16/2013Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER CHAPTER 23, 9 VIC, SECTION 664(A)(1).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOTHE U.S. VIRGIN ISLANDS.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING THE U.S. VIRGINISLANDS. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALERSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent56©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceREPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OFSECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BYPROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FORADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEENTERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Disclosure 21 of 63iReporting Source:FirmInitiated By:SECURITIES COMMISSIONER OF THE STATE OF KANSASPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:01/07/2013Docket/Case Number:K.S.C. NO. 2013-6061Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OF THESTATE OF KANSAS, ALLEGED THAT PROEQUITIES VIOLATED K.S.A. 17-12A401, K.S.A. 17-12A402, K.S.A. 17-12A403,AND K.S.A. 17-12A404, IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN KANSAS.Current Status:FinalResolution Date:01/10/2013Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER K.S.A. 17-12A604.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent57©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOKANSAS.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING KANSAS. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 22 of 63iReporting Source:FirmInitiated By:STATE OF OHIO DIVISION OF SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:12/04/2012Docket/Case Number:12-028Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF OHIO DIVISION OFSECURITIES, ALLEGED THAT PROEQUITIES VIOLATED OHIO REVISEDCODE ("ORC") 1707.14, 1707.141, 1707.16 AND 1707.161, IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN OHIO.Current Status:FinalResolution:Consent58©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceResolution Date:12/11/2012Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT IN VIOLATION OF THEACT, PURSUANT TO ORC 1707.23(G).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOOHIO.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING OHIO. THE PAYMENTSTO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OFTHE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISIONOF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WEREPAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCEBEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionDisclosure 23 of 63iReporting Source:FirmInitiated By:COMMONWEALTH OF KENTUCKY PUBLIC PROTECTION CABINETDEPARTMENT OF FINANCIAL INSTITUTIONSDate Initiated:12/04/2012Docket/Case Number:2012-AH-0266Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE COMMONWEALTH OF KENTUCKYPUBLIC PROTECTION CABINET DEPARTMENT OF FINANCIALINSTITUTIONS, ALLEGED THAT PROEQUITIES VIOLATED KRS 292.330, INTHAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN KENTUCKY.Current Status:Final59©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Principal Product Type:No ProductOther Product Type(s):Resolution Date:12/10/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER KRS 292.470.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOKENTUCKY.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING KENTUCKY. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 24 of 63iReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF ALASKA DEPARTMENT OFCOMMERCE, COMMUNITY, AND ECONOMIC DEVELOPMENT DIVISION OFBANKING AND SECURITIES, ALLEGED THAT PROEQUITIES VIOLATEDCurrent Status:Final60©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:STATE OF ALASKA DEPARTMENT OF COMMERCE, COMMUNITY, ANDECONOMIC DEVELOPMENT DIVISION OF BANKING AND SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:12/04/2012Docket/Case Number:12-900-SPrincipal Product Type:No ProductOther Product Type(s):ALASKA STATUTES ("AS") 45.55.030, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INALASKA.Resolution Date:12/04/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER AS 45.55.920.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOALASKA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING ALASKA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent61©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDisclosure 25 of 63iReporting Source:FirmInitiated By:COMMISSIONER OF SECURITIES AND INSURANCE MONTANA STATEAUDITOR STATE OF MONTANAPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:10/31/2012Docket/Case Number:SEC-2010-220Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE COMMISSIONER OF SECURITIES ANDINSURANCE MONTANA STATE AUDITOR STATE OF MONTANA, ALLEGEDTHAT PROEQUITIES VIOLATED MONT. CODE ANN. 30-10-201, IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN MONTANA.Current Status:FinalResolution Date:10/31/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER MONT. ANN. CODE 30-10-305.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOMONTANA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MONTANA. THESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent62©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 26 of 63iReporting Source:FirmInitiated By:IOWA INSURANCE DIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/12/2012Docket/Case Number:77065Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, IOWA INSURANCE DIVISION ALLEGED THATPROEQUITIES VIOLATED IOWA CODE SECTIONS 502.401(1), 402(1), 403(1)AND 404(1)(2011), IN THAT PROEQUITIES SHARED COMMISSIONS WITHANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALERWAS NOT REGISTERED AS A BROKER/DEALER IN IOWA.Current Status:FinalResolution Date:11/16/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER IOWA CODE SECTION 502.604(1)(2011).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent63©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOIOWA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING IOWA. THE PAYMENTSTO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OFTHE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISIONOF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WEREPAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCEBEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Disclosure 27 of 63iReporting Source:RegulatorAllegations:THE ARKANSAS SECURITIES COMMISSIONER ENTERED INTO A CONSENTORDER (ORDER NO. S-12-0135-12-OR01) WITH PROEQUITIES, INC., ONNOVEMBER 19, 2012. THE CONSENT ORDER WAS BASED ON A GLOBALSETTLEMENT BETWEEN PROEQUITIES AND A NUMBER OF STATES, LED BYA MEMBER TASK FORCE OF THE NORTH AMERICAN SECURITIESADMINISTRATORS ASSOCIATION ("NASAA"), REGARDING PROEQUITIES'AGREEMENT ("AGREEMENT") WITH BANKERS LIFE AND CASUALTYCOMPANY ("BANKERS") AND BLC FINANCIAL SERVICES, INC. ("BLCFS"),NEITHER OF WHICH HAVE BEEN REGISTERED WITH THE DEPARTMENT INANY CAPACITY. PURSUANT TO THE AGREEMENT, PROEQUITIESEXERCISED EXCLUSIVE CONTROL OVER THE BROKER-DEALER ANDINVESTMENT ADVISORY ACTIVITIES OF PROEQUITIES AGENTS WHO WEREALSO INSURANCE AGENTS FOR BANKERS (THE "DUAL AGENTS"), ANDCERTAIN SECURITIES-RELATED ROLES WERE ASSIGNED TO BLCFS OR TOBLCFS AND BANKERS. EVIDENCE SHOWED THAT THE INVOLVEMENT OFBANKERS AND BLCFS IN CERTAIN SECURITIES-RELATED ROLES LED TOCONFUSION IN THE REPORTING AND RESPONSIBILITY HIERARCHIES ASBETWEEN BANKERS, BLCFS, AND PROEQUITIES. AS A RESULT,PROEQUITIES ENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDERARK. CODE ANN. § 23-42-308 OF THE ARKANSAS SECURITIES ACT.PROEQUITIES PAID $435,000 TO BE DISTRIBUTED AMONG THE STATESWHERE DUAL AGENTS WERE LOCATED. THE CONSENT ORDER IMPOSEDCurrent Status:Final64©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:ARKANSAS SECURITIES DEPARTMENTPrincipal Sanction(s)/ReliefSought:Cease and DesistOther Sanction(s)/ReliefSought:FINE OF $8,207.55Date Initiated:11/19/2012Docket/Case Number:S-12-0135URL for Regulatory Action:Principal Product Type:InsuranceOther Product Type(s):A FINE OF $8,207.55 AS ARKANSAS'S PORTION OF TOTAL AMOUNT.Resolution Date:11/19/2012Resolution:Other Sanctions Ordered:Sanction Details:FINE OF $8,207.55 PAYABLE TO NASAA AS CONSIDERATION FOR THECOSTS ASSOCIATED WITH NASAA'S COORDINATION OF THECOLLABORATIVE INVESTIGATORY EFFORTS OF THE MULTI-STATE TASKFORCE AND TO FURTHER ADVANCE THE INVESTOR PROTECTIONEFFORTS OF NASAA, AS ARKANSAS'S PORTION OF THE TOTAL AMOUNT,WHICH WAS PAID BY PROEQUITIES ON NOVEMBER 21, 2012.Regulator StatementTHE CONSENT ORDER WAS BASED ON A GLOBAL SETTLEMENT BETWEENPROEQUITIES AND A NUMBER OF STATES, WHICH RESULTED FROM ANINVESTIGATION AND SETTLEMENT NEGOTIATION LED BY A MEMBER TASKFORCE OF NASAA.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55ConsentiReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTCurrent Status:Final65©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:ARKANSAS SECURITIES COMMISSIONERPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/12/2012Docket/Case Number:S-12-0135Principal Product Type:No ProductOther Product Type(s):WITH AN UNAFFILIATED FIRM, ARKANSAS SECURITIES COMMISSIONERALLEGED THAT PROEQUITIES VIOLATED ARK. CODE ANN. 23-42-301 OFTHE ARKANSAS SECURITIES ACT, CODIFIED AT ARK. CODE ANN. 23-42-101THROUGH 23-42-509 ("ACT"), IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INARKANSAS.Resolution Date:11/19/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER ARK. CODE ANN. 23-42-308 OF THE ACT.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOARKANSAS.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING ARKANSAS. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent66©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 28 of 63iReporting Source:FirmInitiated By:SECURITIES COMMISSIONER FOR THE STATE OF DELAWAREPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/12/2012Docket/Case Number:12-5-8Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, SECURITIES COMMISSIONER FOR THESTATE OF DELAWARE ALLEGED THAT PROEQUITIES VIOLATED 6 DEL. C.73-301(A) AND 6 DEL. C. 73-301(C), IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INDELAWARE.Current Status:FinalResolution Date:11/12/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER 6 DEL. C. 73-601.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TODELAWARE.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent67©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePROCEEDINGS IN NUMEROUS STATES, INCLUDING DELAWARE. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 29 of 63iReporting Source:FirmInitiated By:STATE OF INDIANA OFFICE OF THE SECRETARY OF STATE SECURITIESDIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/12/2012Docket/Case Number:12-0253 COPrincipal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, STATE OF INDIANA OFFICE OF THESECRETARY OF STATE SECURITIES DIVISION ALLEGED THAT PROEQUITIESVIOLATED IND. CODE 23-19-4-1, IND. CODE 23-19-4-2, IND. CODE 23-19-4-3,AND IND. CODE 23-19-4-4, IN THAT PROEQUITIES SHARED COMMISSIONSWITH ANOTHER REGISTERED BROKER/DEALER, WHILE THATBROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER ININDIANA.Current Status:FinalResolution Date:11/15/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent68©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceLIABILITY UNDER IND. CODE 23-19-6-4(A).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOINDIANA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING INDIANA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 30 of 63iReporting Source:RegulatorInitiated By:DISTRICT OF COLUMBIADate Initiated:11/27/2012Docket/Case Number:SB-CO-16-12URL for Regulatory Action:Allegations:PROEQUITIES HAS BEEN A BROKER-DEALER REGISTERED IN THEDISTRICT OF COLUMBIA AND A FEDERAL COVER INVESTMENT ADVISER.BANKERS LIFE & BLCF ENTERED INTO AN AGREEMENT WITHPROEQUITIES EFFECTIVE APRIL 30, 2010. THE PROEQUITIES AGREEMENTSPECIFIES THAT PROEQUITIES WOULD "EXERICES EXCLUSIVE CONTROL"OVER THE BROKER-DEALER AND INVESTMENT ADVISOR ACTIVITIES.BANKERS ACTED AS AN UNREGISTERED BROKER-DEALER ANDINVESTMENT ADVISER IN THE DISTRICT OF COLUMBIA IN VIOLATION OFDC OFFICIAL CODE §31-5601.01(3)(A),31-5602.02(A), BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTSWHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISERREPRESENTATIVES OF BANKER, BANKERS VIOLATED D.C. OFFICIAL CODE§31-5602.01(B) & §31-5602.02(F).Current Status:Final69©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:OtherOther Sanction(s)/ReliefSought:ADMINISTRATIVE CONSENT ORDERPrincipal Product Type:No ProductOther Product Type(s):Resolution Date:11/27/2012Resolution:Other Sanctions Ordered:PROEQUITIES SHALL PAY AN AMOUNT OF $8,027.55 TO THE DISTRICT OFCOLUMBIA MADE PAYABLE TO THE D.C. TREASURER PURSUANT TO D.C.OFFICIAL CODE § 1-204.50 AS ITS PORTION OF THE TOTAL AMOUNT, WHICHPORTION SHALL BE CONSIDERED A CIVIL PENALTY IN ACCORDANCE WITHDC OFFICIAL CODE §31-5606.02(B)(4). PROEQUITIES SHALL PAY ANAMOUNT OF $435,000.00 TO THE STATES WHERE DUAL AGENTS WERELOCATED DURING THE PERIOD FROM APRIL 30, 2010 THROUGHDECEMBER 2, 2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDEDBY THE MULTI-STATE INVESTIGATION WORKING GROUP. SUCH PAYMENTSHALL BE MADE WITHIN (10) DAYS FROM THE DATE THIS CONSENT ORDERIS SIGNED BY THE DEPARTMENT. PROEQUITIES SHALL NOT ATTEMPT TORECOVER ANY PART OF THE PAYMENTS ADDRESSED IN THIS CONSENTORDER FROM DUAL AGENTS, BANKERS LIFE, OR CUSTOMERS OFPROEQUITIES.FROM THE DATE OF THIS CONSENT ORDER THROUGH MARCH 31, 2015,AND WHILE BANKERS HAS DUAL AGENTS THAT ARE REGISTEREDREPRESENTATIVE OR INVESTMENT ADVISER REPRESENTATIVES OFPROEQUITIES, ANY AGREEMENT BETWEEN BANKERS AND PROEQUITIESSHALL BE CONSISTENT WITH PROVISION SET FORTH IN A SEPARATECONSENT ORDER EXECUTED BY BANKERS AND THE DEPARTMENT INCONSENT ORDER SB-CO-14-12.Sanction Details:SANCTION DETAILS OF THE ADMINISTRATIVE CONSENT ORDER CAN BEVIEWED ONLINE AT: WWW.DISB.DC.GOV UNDER SECURITIES RELATEDORDERS.Regulator StatementIN ACCORDANCE WITH TERMS OF A MULTI-STATE SETTLEMENT,Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55Order70©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePROEQUITIES, INC. SHALL PAY $435,000 AMONG STATES WHERE DUALAGENTS WERE LOCATED DURING THE PERIOD OF APRIL 30,2010THROUGH DECEMBER 2, 2011. THE MULTI-STATE INVESTIGATIONWORKING GROUP ALLOCATED DISTRICT $8,207.55 OF THE AMOUNT, TO BECONSIDERED A PENALTY. PROEQUITIES, INC. SHALL ALSO REFRAIN FROMENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE DISTRICTSECURITIES ACT. PROEQUITIES, INC. PAID DISTRICT OF COLUMBIA$8,207.55 WITHIN 10 DAYS OF ENTRY OF THE CONSENT ORDER. CONTACTMAURICE GOFF AT 202-442-4934 FOR FURTHER INFORMATION. "PROEQUITIES NEITHER ADMITTED OR DENIED THE FINDINGS OF FACTAND CONCLUSIONS OF LAW, BUT SETTLED THE MATTER PURSUANT TOTHE SETTLEMENT TERMS". ON 11/30/2012 WIRE PAYMENT RECEIVED$8,207.55 TRN#121130060403iReporting Source:FirmInitiated By:DISTRICT OF COLUMBIA DEPARTMENT OF INSURANCE, SECURITIES ANDBANKINGPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/12/2012Docket/Case Number:SB-CO-16-12Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE DISTRICT OF COLUMBIA DEPARTMENTOF INSURANCE, SECURITIES AND BANKING ALLEGED THAT PROEQUITIESVIOLATED D.C. OFFICIAL CODE 31-5602.01(A) AND 31-5602.02(A), IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN THE DISTRICT OF COLUMBIA.Current Status:FinalResolution Date:11/12/2012Resolution:Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent71©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER D.C. OFFICIAL CODE 31-5606.02(A).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOTHE DISTRICT OF COLUMBIA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING THE DISTRICT OFCOLUMBIA. THE PAYMENTS TO THE UNAFFILIATED BROKER/DEALERREPRESENTED A PORTION OF THE COMPENSATION FROM THE SALE OFSECURITIES AND/OR PROVISION OF INVESTMENT ADVICE BYPROEQUITIES REPRESENTATIVES, AND WERE PAYMENT FORADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCE BEENTERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Disclosure 31 of 63iReporting Source:RegulatorInitiated By:NEW HAMPSHIREBUREAU OF SECURITIES REGULATIONPrincipal Sanction(s)/ReliefSought:Cease and DesistDate Initiated:08/10/2010Docket/Case Number:C-2010-0012URL for Regulatory Action:Principal Product Type:OtherOther Product Type(s):Allegations:RESPONDENT HAD A CONTRACT WITH BANKERS LIFE AND CASUALTY, ANINSURNACE COMPANY THAT WAS NOT LICENSED TO SELL SECURITIES, TOPROVIDE BOKERAGE SERVICES IN THE SALE OF SECURITIES AND AIDEDAND ABETTED BANKERS IN UNLICENSED SECURITIES BUSINESS.Current Status:Final72©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanction(s)/ReliefSought:FINEResolution Date:11/01/2012Resolution:Other Sanctions Ordered:Sanction Details:THIS WAS PART OF A GLOBAL SETTLEMENT WITH BANKERS AND UVESTINCLUDING ALL 50 STATES.Regulator StatementSAME AS 7 ABOVE.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentiReporting Source:FirmInitiated By:STATE OF NEW HAMPSHIRE BUREAU OF SECURITIES REGULATIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:10/25/2012Docket/Case Number:C-2012-0012Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF NEW HAMPSHIRE BUREAUOF SECURITIES REGULATION ALLEGED THAT PROEQUITIES VIOLATED RSA421-B:6 AND 421-B:26-A, IN THAT PROEQUITIES SHARED COMMISSIONSWITH ANOTHER REGISTERED BROKER/DEALER, WHILE THATBROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN NEWHAMPSHIRE.Current Status:Final73©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceResolution Date:11/01/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER RSA 421-B:23.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TONEW HAMPSHIRE.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING NEW HAMPSHIRE. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 32 of 63iReporting Source:FirmInitiated By:COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE SECRETARY OFTHE COMMONWEALTH SECURITIES DIVISIONDate Initiated:10/16/2012Docket/Case Number:E-2011-0025Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, COMMONWEALTH OF MASSACHUSETTSSECURITIES DIVISION ALLEGED THAT PROEQUITIES VIOLATED MASS. GEN.LAWS CH. 110A, 201, IN THAT PROEQUITIES SHARED COMMISSIONS WITHANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALERWAS NOT REGISTERED AS A BROKER/DEALER IN MASSACHUSETTS.Current Status:Final74©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Principal Product Type:No ProductOther Product Type(s):Resolution Date:10/18/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER MASS. GEN. LAWS CH. 110A, 407A.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOMASSACHUSETTS.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MASSACHUSETTS. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 33 of 63iReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, OFFICE OF THE SECRETARY OF STATECOMMISSIONER OF SECURITIES STATE OF GEORGIA ALLEGED THATPROEQUITIES VIOLATED ARTICLE 4 OF THE GEORGIA UNIFORMCurrent Status:Final75©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:OFFICE OF THE SECRETARY OF STATE COMMISSIONER OF SECURITIESSTATE OF GEORGIAPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:10/16/2012Docket/Case Number:ENSC-120188Principal Product Type:No ProductOther Product Type(s):SECURITIES ACT OF 2008 ("2008 ACT") AND ITS PREDECESSOR, SECTION10-5-3 OF THE GEORGIA SECURITIES ACT OF 1973 ("1973 ACT"), IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN GEORGIA.Resolution Date:10/19/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER 1973 ACT AND THE 2008 ACT.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOGEORGIA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING GEORGIA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent76©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 34 of 63iReporting Source:RegulatorInitiated By:PENNSYLVANIA CONTACT: COUNSEL JACK CHIAPPETTA (412)-565-5083Principal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/08/2012Docket/Case Number:2012-07-03/120095URL for Regulatory Action:Principal Product Type:OtherOther Product Type(s):VARIABLE ANNUITY AND SECURITIES TRANSACTIONSAllegations:PROEQUITIES, INC. (RESPONDENT) VIOLATED CERTAIN PROVISIONS OFTHE PA SECURITIES ACT OF 1972 IN CONNECTION WITH THE OFFER ANDSALE OF SECURITIES IN PA IN THAT RESPONDENT SHARED COMMISSIONSWITH ANOTHER REGISTERED BROKER-DEALER WHILE THAT BROKER-DEALER WAS NOT REGISTERED AS A BROKER-DEALER IN PA.Current Status:FinalResolution Date:11/08/2012Resolution:Other Sanctions Ordered:Sanction Details:RESPONDENT PAID THE SUM OF $8207.50 CONTEMPORANEOUSLY WITHTHE SUBMISSION OF AN EXECUTED OFFER OF SETTLEMENT, WHICHAMOUNT REPRESENTS AN ADMINISTRATIVE ASSESSMENT. THE SUMCONSTITUTES THE COMMONWEALTH OF PA'S PROPORTIONATE SHARE OFTHE STATE SECURITIES COMMISSIONS' GLOBAL SETTLEMENT IN THEAMOUNT OF $435,000.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.50Settled77©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceRegulator StatementFINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER ISSUED TORESPONDENT.iReporting Source:FirmInitiated By:COMMONWEALTH OF PENNSYLVANIA BEFORE THE PENNSYLVANIADEPARTMENT OF BANKING AND SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:10/16/2012Docket/Case Number:2012-07-03 & 120095Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, PENNSYLVANIA DEPARTMENT OF BANKINGAND SECURITIES ALLEGED THAT PROEQUITIES VIOLATED CERTAINPROVISIONS OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (1972 ACT)IN CONNECTION WITH THE OFFER AND SALE OF SECURITIES IN THECOMMONWEALTH OF PENNSYLVANIA, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INPENNSYLVANIA.Current Status:FinalResolution Date:11/08/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER PENNSYLVANIA SECURITIES ACT OF 1972.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOPENNSYLVANIA.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent78©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceFirm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING PENNSYLVANIA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 35 of 63iReporting Source:FirmInitiated By:STATE OF NORTH DAKOTA SECURITIES DEPARTMENTPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:10/16/2012Docket/Case Number:NONE ASSIGNEDPrincipal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, STATE OF NORTH DAKOTA SECURITIESDEPARTMENT ALLEGED THAT PROEQUITIES VIOLATED N.D.C.C. 10-04-10,IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHERREGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOTREGISTERED AS A BROKER/DEALER IN NORTH DAKOTA.Current Status:FinalResolution Date:10/19/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent79©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceLIABILITY UNDER N.D.C.C 10-04-16(1).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TONORTH DAKOTA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING NORTH DAKOTA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 36 of 63iReporting Source:FirmInitiated By:COMMISSIONER OF COMMERCE AND INSURANCE FOR THE STATE OFTENNESSEE, AT NASHVILLEPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Date Initiated:10/16/2012Docket/Case Number:12-005Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE COMMISSIONER OF COMMERCE ANDINSURANCE FOR THE STATE OF TENNESSEE, AT NASHVILLE ALLEGEDTHAT PROEQUITIES VIOLATED TENN. CODE ANN. 48-2-109, IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN TENNESSEE.Current Status:Final80©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanction(s)/ReliefSought:Resolution Date:01/30/2013Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER TENN. CODE ANN. 48-2-116.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOTENNESSEE.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING TENNESSEE. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 37 of 63iReporting Source:RegulatorAllegations:ON SEPTEMBER 20, 2012, THE SECURITIES DIVISION ENTERED INTO ACONSENT ORDER WITH PROEQUITIES AS PART OF A MULTI-STATESETTLEMENT. THE CONSENT ORDER ALLEGES THAT PROEQUITIESVIOLATED THE WASHINGTON STATE SECURITIES ACT'S (THE "ACT")PROVISION REQUIRING REGISTRATION OF SECURITIES BROKER-DEALERSAND SALESPERSONS. WITHOUT ADMITTING OR DENYING THE DIVISION'SALLEGATIONS, PROEQUITIES AGREED TO CEASE AND DESIST FROMVIOLATING THE ACT AND TO PAY A FINE OF $8,207.55. PROEQUITIESWAIVED ITS RIGHT TO A HEARING AND JUDICIAL REVIEW OF THE MATTER.Current Status:Final81©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:WASHINGTONPrincipal Sanction(s)/ReliefSought:Cease and DesistOther Sanction(s)/ReliefSought:PAYMENT OF FINEDate Initiated:09/20/2012Docket/Case Number:S-12-0987-12-CO01URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):Resolution Date:09/20/2012Resolution:Other Sanctions Ordered:Sanction Details:PROEQUITIES SHALL PAY $8,207.55 TO THE SECURITIES DIVISION OF THEWA STATE DEPARTMENT OF FINANCIAL INSTITUTIONS AS ITS PORTION OFTHE TOTAL AMOUNT, WHICH PORTION SHALL BE CONSIDERED A FINE.THIS FULL AMOUNT WAS RECEIVED BY THE SECURITIES DIVISION ON 10-3-2012.Regulator StatementEDWARD THUNEN 3609028770Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55ConsentiReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF WASHINGTON DEPARTMENTOF FINANCIAL INSTITUTIONS SECURITIES DIVISION ALLEGED THATPROEQUITIES VIOLATED RCW 21.20.040, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INCurrent Status:Final82©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:STATE OF WASHINGTON DEPARTMENT OF FINANCIAL INSTITUTIONSSECURITIES DIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:09/17/2012Docket/Case Number:S-12-0987-12-CO01Principal Product Type:No ProductOther Product Type(s):WASHINGTON.Resolution Date:09/17/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM VIOLATING RCW 21.20.040.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOWASHINGTON.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING WASHINGTON. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 38 of 63iReporting Source:Firm83©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:OFFICE OF THE MISSISSIPPI SECRETARY OF STATE SECURITIES ANDCHARITIES DIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:09/17/2012Docket/Case Number:LS-12-0467Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE OFFICE OF THE MISSISSIPPISECRETARY OF STATE SECURITIES AND CHARITIES DIVISION ALLEGEDTHAT PROEQUITIES VIOLATED MISS. CODE ANN. SECTIONS 75-71-401THROUGH 75-71-404, IN THAT PROEQUITIES SHARED COMMISSIONS WITHANOTHER REGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALERWAS NOT REGISTERED AS A BROKER/DEALER IN MISSISSIPPI.Current Status:FinalResolution Date:09/17/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER MISS. CODE ANN. SECTION 75-71-604.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOMISSISSIPPI.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MISSISSIPPI. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent84©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 39 of 63iReporting Source:FirmInitiated By:DEPARTMENT OF FINANCE OF THE STATE OF IDAHOPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:09/17/2012Docket/Case Number:NONE ASSIGNEDPrincipal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE DIRECTOR OF THE DEPARTMENT OFFINANCE OF THE STATE OF IDAHO ALLEGED THAT PROEQUITIES VIOLATEDIDAHO CODE SECTIONS 30-14-401 THROUGH 404, IN THAT PROEQUITIESSHARED COMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER,WHILE THAT BROKER/DEALER WAS NOT REGISTERED AS ABROKER/DEALER IN IDAHO.Current Status:FinalResolution Date:09/17/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER IDAHO CODE SECTION 30-14-604(A).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent85©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceIDAHO.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING IDAHO. THE PAYMENTSTO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OFTHE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISIONOF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WEREPAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCEBEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Disclosure 40 of 63iReporting Source:FirmInitiated By:SECURITIES COMMISSIONER OF MARYLANDPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:09/17/2012Docket/Case Number:2012-0247Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OFMARYLAND ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 11-401 AND11-402 OF THE MARYLAND SECURITIES ACT, TITLE 11, CORPS. & ASS'NS,MD. CODE ANN. (2007 REPL.VOL. & SUPP. 2012)("ACT" OR "SECURITIESACT"), IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHERREGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOTREGISTERED AS A BROKER/DEALER IN MARYLAND.Current Status:FinalResolution Date:09/17/2012Resolution:Sanctions Ordered:Monetary/Fine $8,207.55Consent86©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER 11-701.1 OF THE SECURITIES ACT.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOMARYLAND.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MARYLAND. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Cease and Desist/InjunctionDisclosure 41 of 63iReporting Source:FirmInitiated By:STATE OF NEBRASKA DEPARTMENT OF BANKING & FINANCEDate Initiated:09/17/2012Docket/Case Number:NONE ASSIGNEDPrincipal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF NEBRASKA DEPARTMENT OFBANKING AND FINANCE ALLEGED THAT PROEQUITIES VIOLATED THESECURITIES ACT OF NEBRASKA, NEB.REV.STAT. 8-1101 THROUGH 8-1123(REISSUE 2007; CUM. SUPP. 2010; SUPP. 2011)("THE ACT"), IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN NEBRASKA.Current Status:Final87©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Resolution Date:09/17/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER NEB.REV.STAT. 8-1108.01 (REISSUE 2007) ANDNEB.REV.STAT. 8-1118(3) (REISSUE 2007).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TONEBRASKA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING NEBRASKA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 42 of 63iReporting Source:RegulatorAllegations:ACTED AS BROKER-DEALER AND INVESTMENT ADVISER WITHOUT BEINGREGISTERED, EXEMPT FROM REGISTRATION, OR A FEDERAL COVEREDINVESTMENT ADVISER; HAS EMPLOYED OR ASSOCIATED WITH AGENTSAND INVESTMENT ADVISER REPRESENTATIVES WHO WERE NOTREGISTEREDCurrent Status:Final88©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:MISSOURIPrincipal Sanction(s)/ReliefSought:Cease and DesistOther Sanction(s)/ReliefSought:MONETARY PENALTYDate Initiated:09/24/2012Docket/Case Number:AP-12-21URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):Resolution Date:09/24/2012Resolution:Other Sanctions Ordered:Sanction Details:$8207.55Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentiReporting Source:FirmInitiated By:STATE OF MISSOURI OFFICE OF SECRETARY OF STATEDate Initiated:09/18/2012Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF MISSOURI OFFICE OFSECRETARY OF STATE ALLEGED THAT PROEQUITIES VIOLATED SECTIONS409.4-401, 409.4-402, AND 409.4-403, RSMO. (CUM.SUPP. 2011), IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN MISSOURI.Current Status:Final89©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Docket/Case Number:AP-12-21Principal Product Type:No ProductOther Product Type(s):Resolution Date:09/24/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER SECTION 409.6-604, RSMO. (CUM. SUPP. 2011).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOMISSOURI.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MISSOURI. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 43 of 63iReporting Source:RegulatorAllegations:A BANK AND IT'S SUBSIDIARY ENTERED INTO AN AGREEMENT WITHPROEQUITIES (THE "PRO EQUITIES AGREEMENT"). THE PROEQUITIESCurrent Status:Final90©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:NEW JERSEY BUREAU OF SECURITIESPrincipal Sanction(s)/ReliefSought:Cease and DesistOther Sanction(s)/ReliefSought:CIVIL ADMINISTRATIVE PENALTIESDate Initiated:09/12/2012Docket/Case Number:2012-015URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):AGREEMENT SPECIFIES THAT PROEQUITIES WOULD "EXERCISEEXCLUSIVE CONTROL" OVER THE BROKER-DEALER AND INVESTMENTADVISORY ACTIVITIES OFPROEQUITIES AGENTS WHO WERE ALSOINSURANCE AGENTS FOR THE BANK (THE "DUAL AGENTS").IN ADDITION, THE PROEQUITIES AGREEMENT ASSIGNED SECURITIES-RELATED ROLES TO THE BANK AND ITS SUBSIDIARY WHICH ROLES THEYPERFORMED WHILE UNDREGISTERED IN NEW JERSEY.Resolution Date:09/21/2012Resolution:Other Sanctions Ordered:Sanction Details:1. UNDER THE SECURITIES LAW, A PERSON MAY NOT ACT AS A BROKER-DEALER IN NEW JERSEY UNLESS REGISTERED OR EXEMPT FROMREGISTRATION. N.J.S.A. 49:3-56(A).2. SIMILARLY, A PERSON MAY NOT ACT AS AN INVESTMENT ADVISER INNEW JERSEY UNLESS REGISTERED, EXEMPT FROM REGISTRATION, OR AFEDERAL COVERED INVESTMENT ADVISER. N.J.S.A. 49:3-56(A).3. A BROKER-DEALER MAY NOT EMPLOY OR ASSOCIATE WITH AN AGENT,AS DEFINED IN N.J.S.A. 49:3-49(B), UNLESS THE EMPLOYEE ORASSOCIATED PERSON IS REGISTERED AS AN AGENT OF THE BROKER-DEALER. N.J.S.A. 49:3-56(H).Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent91©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser Guidance4. AN INVESTMENT ADVISER MAY NOT EMPLOY OR ASSOCIATE WITH ANINVESTMENT ADVISER REPRESENTATIVE UNLESS THE EMPLOYEE ORASSOCIATED PERSON IS REGISTERED AS AN INVESTMENT ADVISERREPRESENTATIVE OFTHE INVESTMENT ADVISER. N.J.S.A. 49:3-56 (J).5. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, BANKERS ACTEDAS AN UNREGISTERED BROKER-DEALER AND INVESTMENT ADVISER INNEW JERSEY IN VIOLATION OFN.J.S.A. 49:3-56(A).6. FURTHERMORE, BY EMPLOYING OR ASSOCIATING WITH DUAL AGENTSWHO WERE NOT REGISTERED AS AGENTS OR INVESTMENT ADVISERREPRESENTATIVES OF BANKERS, BANKERS VIOLATED N.J.S.A. 49:3-56(H)AND N.J.S.A. 49:3-560).7. BY ENGAGING IN THE CONDUCT SET FORTH ABOVE, PROEQUITIESENGAGED IN CONDUCT GIVING RISE TO LIABILITY UNDER N.J.S.A. 49:3-69(A)(1).8. AS A RESULT, THIS CONSENT ORDER AND THE FOLLOWING RELIEF AREAPPROPRIATE AND IN THE PUBLIC INTEREST.Regulator StatementTHE CONDUCT ADDRESSED HEREIN HAS RESULTED IN NO KNOWNDIRECT CONSUMER HARM, AND THE PARTIES UNDERSTAND THATREGISTERED AGENTS OR REPRESENTATIVES OFPROEQUITIESPARTICIPATED IN ALL SECURITIES TRANSACTIONS AND AT LOCATIONSTHAT WERE REGISTERED WITH THE APPROPRIATE SECURITIESAUTHORITIES AS BROKER-DEALER LOCATIONS OF PROEQUITIES; ANDPROEQUITIES HAS COOPERATED WITH STATE REGULATORS CONDUCTINGTHE INVESTIGATIONS BY RESPONDING TO INQUIRIES, PROVIDINGDOCUMENTARY EVIDENCE, AND HALTING FURTHER PAYMENT TOANOTHER ENTITY OF BROKER-DEALER AND INVESTMENT ADVISERRELATED COMPENSATION WHILE THEINVESTIGATIONS WERE PENDING; AND PROEQUITIES, AS PART OF THISSETTLEMENT, AGREES TO COMPLY WITH ALL STATE ANDFEDERAL LICENSING, REGISTRATION, AND OTHER SECURITIES LAWS.iReporting Source:FirmInitiated By:STATE OF NEW JERSEY BUREAU OF SECURITIESAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE STATE OF NEW JERSEY BUREAU OFSECURITIES ALLEGED THAT PROEQUITIES VIOLATED N.J.S.A 49:3-47 ETSEQ. ("SECURITIES LAW"), SPECIFICALLY N.J.S.A. 49:3-56(A), IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN NEW JERSEY.Current Status:Final92©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:09/17/2012Docket/Case Number:2012-015Principal Product Type:No ProductOther Product Type(s):Resolution Date:09/21/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER N.J.S.A. 49:3-69(A)(1).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TONEW JERSEY.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING NEW JERSEY. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 44 of 63iReporting Source:RegulatorAllegations:BANKERS LIFE AND CASUALTY COMPANY ("BANKERS LIFE") AND BLCCurrent Status:Final93©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:VIRGINIA - DIVISION OF SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:PROEQUITIES, INC. SHALL REFRAIN FROM ENGAGING IN CONDUCT GIVINGRISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT.Date Initiated:11/26/2012Docket/Case Number:SEC-2012-00030URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):FINANCIAL SERVICES, INC. (COLLECTIVELY, "BANKERS") ACTED AS ANUNREGISTERED BROKER-DEALER AND INVESTMENT ADVISOR IN VIRGINIAIN VIOLATION OF SECTION 13.1-504 A OF THE VIRGINIA SECURITIES ACT("ACT"). BY EMPLOYING AGENTS OR INVESTMENT ADVISORREPRESENTATIVES NOT REGISTERED ON BEHALF OF BANKERS. BANKERSVIOLATED SECTION 13.1-504 B AND C OF THE ACT. PROEQUITIES, INC.ENTERED INTO AN AGREEMENT WITH BANKERS TO PROVIDE BROKERAGEAND INVESTMENT ADVISORY SERVICES OUT OF BANKERS LIFE BRANCHOFFICE LOCATIONS. THE REGISTERED REPRESENTATIVES AND/ORINVESTMENT ADVISOR REPRESENTATIVES WERE REGISTERED WITHPROEQUITIES, INC. PROEQUITIES, INC. WOULD EXERCISE EXCLUSIVECONTROL OVER THE BROKER-DEALER AND INVESTMENT ADVISORYACTIVITIES OF THE DUAL AGENTS AND ASSIGNED BANKERS LIFE SEVERALSECURITIES RELATED ROLES. BY ENGAGING IN THIS CONDUCT, AND BYPARTICIPATING IN EMPLOYING DUAL AGENTS, PROEQUITIES, INC.ENTERED IN AN ACT, PRACTICE OR COURSE OF BUSINESS CONSTITUTINGA VIOLATION OF THE ACT, WHICH IS GROUNDS FOR IMPOSING SANCTIONSUNDER SECTIONS 13.159 AND 13.1-521 OF THE ACT.Resolution Date:11/26/2012Resolution:Other Sanctions Ordered:PROEQUITIES, INC. SHALL REFRAIN FROM ENGAGING IN CONDUCT GIVINGRISE TO LIABILITY UNDER THE VIRGINIA SECURITIES ACT.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55Consent94©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSanction Details:VIRGINIA AND PROEQUITIES, INC. ENTERED INTO A CONSENT ORDER. PERTHE ORDER, PROEQUITIES, INC. SHALL PAY VIRGINIA A PENALTY IN THEAMOUNT OF $8,207.55. IT SHALL ALSO REFRAIN FROM ENGAGING INCONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIA SECURITIESACT.Regulator StatementIN ACCORDANCE WITH TERMS OF A MULTI-STATE SETTLEMENT,PROEQUITIES, INC. SHALL PAY $435,000 AMONG STATES WHERE DUALAGENTS WERE LOCATED DURING THE PERIOD OF APRIL 30,2010THROUGH DECEMBER 2, 2011. THE MULTI-STATE INVESTIGATIONWORKING GROUP ALLOCATED VIRGINIA $8,207.55 OF THE AMOUNT, TO BECONSIDERED A PENALTY. PROEQUITIES, INC. SHALL ALSO REFRAIN FROMENGAGING IN CONDUCT GIVING RISE TO LIABILITY UNDER THE VIRGINIASECURITIES ACT. PROEQUITIES, INC. PAID VIRGINIA $8,207.55 WITHIN 10DAYS OF ENTRY OF THE CONSENT ORDER. CONTACT GLORIA PULKOWSKIAT 804-371-9566 FOR FURTHER INFORMATION.iReporting Source:FirmInitiated By:COMMONWEALTH OF VIRGINIA STATE CORPORATION COMMISSION ATRICHMONDPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:11/12/2012Docket/Case Number:SEC-2012-00030Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE COMMONWEALTH OF VIRGINIA STATECORPORATION COMMISSION AT RICHMOND ALLEGED THAT PROEQUITIESVIOLATED 13.1-504 A, B AND C OF THE VIRGINIA SECURITIES ACT ("ACT"),13.1-501 ET SEQ., CODE OF VIRGINIA, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INVIRGINIA.Current Status:FinalResolution:Consent95©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceResolution Date:11/12/2012Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER THE VIRGINIA SECURITIES ACT ("ACT").Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOVIRGINIA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING VIRGINIA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionDisclosure 45 of 63iReporting Source:RegulatorAllegations:BLCFS HAS NEVER BEEN REGISTERED AS A DEALER OR INVESTMENTADVISER IN TEXAS, AND IT HAS NOT REGISTERED AND AGENTS ORINVESTMENT ADVISER REPRESENTATIVES IN TEXAS. PROEQUITIESENTERED IN AN AGREEMENTS WITH BLCFS EFFECTIVE APRIL 10, 2010(THE "PROEQUITIES AGREEMENT"). THE PROEQUITIES AGREEMENTSPECIFIED THAT PROEQUITIES WOULD "EXERCISE EXCULSIVE CONTROL"OVER THE DEALER AND INVESTMENT ADVISORY ACTIVITIES OFPROEQUITIES AGENTS WHO WERE ALSO INSURANCE AGENTS FORBANKERS LIFE (THE "DUAL AGENTS"). EVIDENCE OBTAINED DURING THEINVESTIGATION INDICATED THAT BANKERS SCREENED PROSPECTIVESECURITIES AGENTS, TRAINED NEW AGENTS, CONDUCTED PERIODICTRAINING SESSIONS FOR AGENTS, MONITORED AND ATTEMPTED TOINCREASE SECURITIES PRODUCTION OF SECURITIES AGENTS, ANDPLAYED A SIGNIFICANT ROLE IN DETERMINING THE COMPENSATION OFCurrent Status:Final96©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:TEXASPrincipal Sanction(s)/ReliefSought:Cease and DesistOther Sanction(s)/ReliefSought:FINEDate Initiated:09/05/2012Docket/Case Number:IC12-CAF-15URL for Regulatory Action:Principal Product Type:InsuranceOther Product Type(s):AGENTS. ADDITIONALLY, EVIDENCE SHOWED THAT THE INVOLVEMENT OFBANKERS IN SECURITIES-RELATED ROLES LED TO CONFUSION IN THEREPORTING AND RESPONSIBILITY HIERARCHIES AS BETWEEN BANKERSAND PROEQUITIES.PROEQUITIES SHALL CEASE AND DESIST FROM VIOLATING THE TEXASSECURITIES ACT. WITHIN TEN DAYS AFTER THE ENTRY OF THIS ORDER,PROEQUITIES SHALL PAY THE SUM OF $8,207.55 TO THE GENERAL FUNDOF THE STATE OF TEXAS.Resolution Date:09/05/2012Resolution:Other Sanctions Ordered:N/ASanction Details:N/ARegulator StatementN/ADoes the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55OrderiReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE TEXAS STATE SECURITIES BOARDCurrent Status:Final97©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:TEXAS STATE SECURITIES BOARDPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:CEASE AND DESIST FROM VIOLATIVE CONDUCT.Date Initiated:08/06/2012Docket/Case Number:ORDER NO. IC12-CAF-15Principal Product Type:No ProductOther Product Type(s):ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 23, 23-1, 23.A AND 28OF THE TEXAS SECURITIES ACT, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INTEXAS.Resolution Date:09/05/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER TEXAS SECURITIES ACT.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOTEXAS.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING TEXAS. THE PAYMENTSTO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OFTHE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISIONOF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WEREPAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCEBEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent98©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDisclosure 46 of 63iReporting Source:RegulatorInitiated By:OREGON DEPARTMENT OF CONSUMER AND BUSINESS SERVICES,DIVISION OF FINANCE AND CORPORATE SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:CIVIL PENALTYDate Initiated:08/22/2012Docket/Case Number:S-12-0055URL for Regulatory Action:Principal Product Type:OptionsOther Product Type(s):Allegations:PROEQUITIES ENGAGES IN CONDUCT GIVE RISE TO LIABILITY UNDER ORS59.245(4).Current Status:FinalResolution Date:08/22/2012Resolution:Other Sanctions Ordered:Sanction Details:PROEQUITIES ENGAGES IN CONDUCT GIVE RISE TO LIABILITY UNDER ORS59.245(4).Regulator StatementTHIS CASE AROSE FROM MULTI-STATE, COORDINATED INVESTIGATIONSCONCERNING BANKERS LIFE AND CASUALTY COMPANY ET AL. THEOREGON CASE REGARDING PROEQUITIES, INC RESOLVED BY CONSENTORDER EXECUTED ON 8/22/12. SANCTIONS INCLUDE AN ORDER TOCEASE AND DESIST AND A CIVIL PENALTY, WHICH WAS PAID IN FULL ONDoes the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent99©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser Guidance8/30/12iReporting Source:FirmInitiated By:STATE OF OREGON DEPARTMENT OF CONSUMER AND BUSINESSSERVICES, DIVISION OF FINANCE AND CORPORATE SECURITIES.Principal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:08/06/2012Docket/Case Number:S-12-0055Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE OREGON DIVISION OF FINANCEALLEGED THAT PROEQUITIES VIOLATED ORS 59.165, IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN OREGON.Current Status:FinalResolution Date:08/06/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER ORS 59.245(4).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOOREGON.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING OREGON. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED ASanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent100©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 47 of 63iReporting Source:RegulatorInitiated By:UTAHPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:CEASE AND DESISTDate Initiated:07/19/2012Docket/Case Number:SD-12-0041URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):Allegations:THE DIVISION ALLEGED RESPONDENT'S AGENTS AND INVESTMENTADVISER REPRESENTATIVES ACTED IN AN UNLICENSED CAPACITY ONBEHALF OF TWO UNLICENSED ENTITIES, BANKERS LIFE AND CASUALTYCOMPANY AND BLC FINANCIAL SERVICES, INC., WITH WHICHRESPONDENT SHARED COMPENSATION.Current Status:FinalResolution Date:07/19/2012Resolution:Other Sanctions Ordered:Sanction Details:THE FINE OF 8207.55 WAS PAID IN ITS ENTIRETY WITHIN TEN (10) DAYSFOLLOWING ENTRY OF THE ORDER.Regulator StatementA PDF OF THE STIPULATION AND CONSENT ORDER CAN BE VIEWEDSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionStipulation and Consent101©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceONLINE AT:HTTP://SECURITIES.UTAH.GOV/DOCKETS/12004101.PDF(NOTE: THE WEB ADDRESS MUST BE ENTERED IN ALL LOWER CASELETTERS).iReporting Source:FirmInitiated By:DIVISION OF SECURITIES OF THE DEPARTMENT OF COMMERCE OF THESTATE OF UTAHPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:DOCKET NO. SD-12-0041Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE UTAH DIVISION OF SECURITIESALLEGED THAT PROEQUITIES VIOLATED SECTION 61-1-3 OF THE UTAHUNIFORM SECURITIES ACT, IN THAT PROEQUITIES SHARED COMMISSIONSWITH ANOTHER REGISTERED BROKER/DEALER, WHILE THATBROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER IN UTAH.Current Status:FinalResolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER UTAH CODE ANN.ET SEQ. 61-1-20.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOUTAH.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent102©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING UTAH. THE PAYMENTSTO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OFTHE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISIONOF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WEREPAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCEBEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Disclosure 48 of 63iReporting Source:FirmInitiated By:STATE OF CALIFORNIA DEPARTMENT OF CORPORATIONSPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:NO FILE NUMBER ASSIGNEDPrincipal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE CALIFORNIA DEPARTMENT OFCORPORATIONS ALLEGED THAT PROEQUITIES VIOLATED CORPORATIONSCODE SECTIONS 25210(BROKER/DEALER) AND 25230 (INVESTMENTADVISER AND INVESTMENT ADVISER REPRESENTATIVES), IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN CALIFORNIA.Current Status:FinalResolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER CORPORATIONS CODE SECTION 25532, SUBDIVISION (B).Sanctions Ordered:Monetary/Fine $8,207.55Consent103©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOCALIFORNIA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING CALIFORNIA THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 49 of 63iReporting Source:FirmInitiated By:STATE OF MINNESOTA DEPARTMENT OF COMMERCEPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:FILE NO. 24041Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE MINNESOTA DEPARTMENT OFCOMMERCE ALLEGED THAT PROEQUITIES VIOLATED MINN.STAT. ET. SEQ.80A.56 THROUGH ET. SEQ. 80A.58, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INMINNESOTA.Current Status:Final104©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceResolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER MINN.STAT. ET. SEQ. 45.027 SUBD.5A AND ET. SEQ.80A.81.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOMINNESOTA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MINNESOTA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 50 of 63iReporting Source:RegulatorInitiated By:ALABAMAAllegations:THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENTORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITYINVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THEORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER ANDINVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROMREGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITHAGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OFBANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION APENALTY AMOUNT OF $8,207.55.Current Status:Final105©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:OtherOther Sanction(s)/ReliefSought:CONSENT ORDERDate Initiated:07/16/2012Docket/Case Number:CO-2012-0024URL for Regulatory Action:Principal Product Type:Annuity(ies) - VariableOther Product Type(s):Resolution Date:07/16/2012Resolution:Other Sanctions Ordered:THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENTORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITYINVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THEORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER ANDINVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROMREGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITHAGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OFBANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION APENALTY AMOUNT OF $8,207.55.Sanction Details:THE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENTORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITYINVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THEORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER ANDINVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROMREGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITHAGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OFBANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION APENALTY AMOUNT OF $8,207.55.Regulator StatementTHE ALABAMA SECURITIES COMMISSION ENTERED INTO A CONSENTORDER WITH PROEQUITIES INC REGARDING ITS UNREGISTERED ACTIVITYINVOLVING BANKERS LIFE AND CASUALTY AND UVEST FINANCIAL INC. THEDoes the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $8,207.55Consent106©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceORDER WAS BASED ON BANKERS' ACTIVITY AS A BROKER DEALER ANDINVESTMENT ADVISOR WITHOUT BEING REGISTERED, EXEMPT FROMREGISTRATION OR A FEDERAL COVERED IA, AND ASSOCIATING WITHAGENTS AND IAR'S WHO WERE NOT REGISTERED ON BEHALF OFBANKERS. UNDER THE ORDER, PROEQUITIES PAID THE COMMISSION APENALTY AMOUNT OF $8,207.55.iReporting Source:FirmInitiated By:STATE OF ALABAMA, ALABAMA SECURITIES COMMISSIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:ADMINISTRATIVE CONSENT ORDER NO. CO-2012-0024Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE ALABAMA SECURITIES COMMISSIONALLEGED THAT PROEQUITIES VIOLATED TITLE 8, CHAPTER 6, SECTION 2,CODE OF ALABAMA 1975, THE ALABAMA SECURITIES ACT, IN THATPROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN ALABAMA.Current Status:FinalResolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER SECTION 8-6-16(A), CODE OF ALABAMA 1975.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOSanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent107©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceALABAMA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING ALABAMA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 51 of 63iReporting Source:FirmInitiated By:THE SECURITIES COMMISSIONER OF SOUTH CAROLINAPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:FILE NO. 12022Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE SECURITIES COMMISSIONER OF SOUTHCAROLINA ALLEGED THAT PROEQUITIES VIOLATED SECTIONS 35-1-401, 35-1-402, AND 35-1-403 OF THE SOUTH CAROLINA UNIFORM SECURITIES ACTOF 2005, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHERREGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOTREGISTERED AS A BROKER/DEALER IN SOUTH CAROLINA.Current Status:FinalResolution Date:07/11/2012Resolution:Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent108©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER S.C. CODE ANN. ET SEQ 35-1-604(A)(SUPP.2011).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOSOUTH CAROLINA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING SOUTH CAROLINA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 52 of 63iReporting Source:FirmInitiated By:STATE OF SOUTH DAKOTA DEPARTMENT OF LABOR & REGULATIONDIVISION OF SECURITIESDate Initiated:07/11/2012Docket/Case Number:NONE ASSIGNEDPrincipal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE SOUTH DAKOTA DIVISION OFSECURITIES ALLEGED THAT PROEQUITIES VIOLATED SDCL 47-31B-401, 47-31B-402, 47-31B-403, AND 47-31B-404, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INSOUTH DAKOTA.Current Status:Final109©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Resolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER SDCL 47-31B-604(A).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOSOUTH DAKOTA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING SOUTH DAKOTA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 53 of 63iReporting Source:FirmAllegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE NEVADA OFFICE OF SECURITIESALLEGED THAT PROEQUITIES VIOLATED NEVADA'S UNIFORM SECURITIESACT, NRS 90.211 ET.SEQ. SPECIFICALLY NRS 90.310 AND NRS 90.330, INTHAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN NEVADA.Current Status:Final110©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:STATE OF NEVADA OFFICE OF THE SECRETARY OF STATE SECURITIESDIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:FILE NUMBER I-12-107Principal Product Type:No ProductOther Product Type(s):Resolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER NRS 90.630.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TONEVADA.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING NEVADA. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Sanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsentDisclosure 54 of 63iReporting Source:Firm111©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceInitiated By:RHODE ISLANDPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:ORDER NUMBER 12-045Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, RHODE ISLAND ALLEGED THATPROEQUITIES VIOLATED THE RHODE ISLAND UNIFORM SECURITIES ACT 7-11-101 ET.SEQ. OF THE RHODE ISLAND GENERAL LAWS OF 1989 ASAMENDED, IN THAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHERREGISTERED BROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOTREGISTERED AS A BROKER/DEALER IN RHODE ISLAND.Current Status:FinalResolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER 7-11-602(A) OF THE RIUSA.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TORHODE ISLAND.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING RHODE ISLAND. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent112©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 55 of 63iReporting Source:RegulatorInitiated By:WISCONSINPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:01/01/2005Docket/Case Number:S-225316(EX)URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):Allegations:ONE OF A SERIES OF SIMILAR CONSENT ADMINISTRATIVE ORDERSNEGOTIATED BY NASAA BASED ON ACTIVITY BANKERS LIFE ANDCASUALTY CO. & BLC FINANCIAL SERVICES, PRO EQUITIES, INC. ANDUVEST FINANCIAL SERVICES GROUP, INC. AS BROKER-DEALERS &INVESTMENT ADVISERS WITHOUT BEING REGISTERED, EXEMPT FROMREGISTRATION, OR A FEDERAL COVERED INVESTMENT ADVISER &ASSOCIATING WITH AGENTS & INVESTMENT ADVISER REPRESENTATIVESWHO WERE NOT REGISTERED ON BEHALF OF BANKERS LIFE & CASUALTYCO. AND BLC FINANCIAL SERVICES INC. ORDER IMPOSES MONETARYPENALTIES.Current Status:FinalResolution Date:07/13/2012Resolution:Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?YesSanctions Ordered:Monetary/Fine $8,207.55Decision & Order of Offer of Settlement113©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:Sanction Details:PROEQUITIES SHALL PAY $435,000 TO THE STATES WHERE DUAL AGENTSWERE LOCATED DURING THE PERIOD FROM 4/30/12, THROUGH 12/2/11.THEY WILL PAY $8,207.55 TO DFI AS A MONETARY PENALTY.Cease and Desist/InjunctioniReporting Source:FirmInitiated By:STATE OF WISCONSIN, DEPARTMENT OF FINANCIAL INSTITUTIONSDIVISION OF SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:07/11/2012Docket/Case Number:FILE NO. S-225316(EX)Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE WISCONSIN DIVISION OF SECURITIESALLEGED THAT PROEQUITIES VIOLATED THE WISCONSIN UNIFORMSECURITIES LAW, CHAPTER 551, IN THAT PROEQUITIES SHAREDCOMMISSIONS WITH ANOTHER REGISTERED BROKER/DEALER, WHILETHAT BROKER/DEALER WAS NOT REGISTERED AS A BROKER/DEALER INWISCONSIN.Current Status:FinalResolution Date:07/11/2012Resolution:Other Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER CHAPTER 551.WIS.STAT ET. SEQ. 551.604(1)(A).Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THESanctions Ordered:Monetary/Fine $8,207.55Cease and Desist/InjunctionConsent114©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceMULTI-STATE INVESTIGATION GROUP, WITH $8,207.55 BEING PAYABLE TOWISCONSIN.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING WISCONSIN. THEPAYMENTS TO THE UNAFFILIATED BROKER/DEALER REPRESENTED APORTION OF THE COMPENSATION FROM THE SALE OF SECURITIESAND/OR PROVISION OF INVESTMENT ADVICE BY PROEQUITIESREPRESENTATIVES, AND WERE PAYMENT FOR ADMINISTRATIVESERVICES. THAT AGREEMENT HAS SINCE BEEN TERMINATED. THE SALEOF SECURITIES AND/OR PROVISION OF INVESTMENT ADVICE TO RETAILCUSTOMERS WERE MADE BY REPRESENTATIVES OF PROEQUITIES, WHOWERE PROPERLY REGISTERED AT ALL TIMES WITH PROEQUITIES IN THESTATES IN WHICH THE CLIENTS WERE LOCATED.Disclosure 56 of 63iReporting Source:FirmInitiated By:STATE OF MAINE, OFFICE OF SECURITIESPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:03/31/2012Docket/Case Number:12-8129Principal Product Type:No ProductOther Product Type(s):Allegations:IN A MULTI-STATE REVIEW OF AN ADMINISTRATIVE SERVICES AGREEMENTWITH AN UNAFFILIATED FIRM, THE MAINE OFFICE OF SECURITIESALLEGED THAT PROEQUITIES VIOLATED 32 M.R.S., SECTION 16604, INTHAT PROEQUITIES SHARED COMMISSIONS WITH ANOTHER REGISTEREDBROKER/DEALER, WHILE THAT BROKER/DEALER WAS NOT REGISTEREDAS A BROKER/DEALER IN MAINE.Current Status:FinalResolution Date:03/31/2012Resolution:Sanctions Ordered:Monetary/Fine $8,207.50Cease and Desist/InjunctionConsent115©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:CEASE AND DESIST FROM ENGAGING IN CONDUCT GIVING RISE TOLIABILITY UNDER 32 M.R.S., SECTION 16604.Sanction Details:PROEQUITIES AGREED TO SETTLE THE MATTER AMONG THE MULTIPLESTATES FOR A TOTAL OF $435,000, AMONG THE STATES WHERE THEAGENTS WERE LOCATED DURING THE PERIOD FROM 4/30/2010 TO12/2/2011, ALLOCATED ACCORDING TO A SCHEDULE PROVIDED BY THEMULTI-STATE INVESTIGATION GROUP, WITH $8,207.50 BEING PAYABLE TOMAINE.Firm StatementPROEQUITIES AGREED TO RESOLVE THE INVESTIGATIONS THROUGHCONSENT ORDER IN EFFORT TO AVOID PROTRACTED AND EXPENSIVEPROCEEDINGS IN NUMEROUS STATES, INCLUDING MAINE. THE PAYMENTSTO THE UNAFFILIATED BROKER/DEALER REPRESENTED A PORTION OFTHE COMPENSATION FROM THE SALE OF SECURITIES AND/OR PROVISIONOF INVESTMENT ADVICE BY PROEQUITIES REPRESENTATIVES, AND WEREPAYMENT FOR ADMINISTRATIVE SERVICES. THAT AGREEMENT HAS SINCEBEEN TERMINATED. THE SALE OF SECURITIES AND/OR PROVISION OFINVESTMENT ADVICE TO RETAIL CUSTOMERS WERE MADE BYREPRESENTATIVES OF PROEQUITIES, WHO WERE PROPERLYREGISTERED AT ALL TIMES WITH PROEQUITIES IN THE STATES IN WHICHTHE CLIENTS WERE LOCATED.Disclosure 57 of 63iReporting Source:RegulatorInitiated By:INDIANADate Initiated:10/26/2010Allegations:1.THE DIVISION ALLEGES THAT FROM APPROXIMATELY JANUARY 28, 2009,TO FEBRUARY 24, 2009, PEI ENGAGED IN DISHONEST AND UNETHICALPRACTICES BY FAILING TO RESPOND TO A FORMAL WRITTEN REQUESTFROM A CLIENT IN VIOLATION OF IND. CODE § 23-19-4-12(D)(13) AND 710IAC 1-17-1(Y) (2001).2.THE DIVISION ALLEGES THAT FROM APPROXIMATELY MARCH 19, 2009,TO MAY 7, 2010, PEI ENGAGED IN DISHONEST AND UNETHICAL PRACTICESBY FAILING TO RESPOND TO A FORMAL WRITTEN COMPLAINT FROM ACLIENT IN VIOLATION OF IND. CODE § 23-19-4-12(D)(13) AND 710 IAC 1-17-1(Y) (2001).3.THE DIVISION ALLEGES THAT FROM APPROXIMATELY JANUARY 28, 2009,TO MAY 7, 2010, PEI ENGAGED IN DISHONEST AND UNETHICAL PRACTICESBY FAILING TO SUPERVISE ITS AGENTS AND EMPLOYEES IN VIOLATION OFIND. CODE § 23-19-4-12(D)(13) AND 710 IAC 1-17-1(V) (2001).Current Status:Final116©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Docket/Case Number:10-0270 CAURL for Regulatory Action:Principal Product Type:OtherOther Product Type(s):Resolution Date:10/26/2010Resolution:Other Sanctions Ordered:NONESanction Details:PEI PAID A CIVIL PENALTY OF $9,000 TO THE DIVISION ON OR ABOUTOCTOBER 26, 2010.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:Monetary/Fine $9,000.00ConsentiReporting Source:FirmInitiated By:INDIANA SECRETARY OF STATE, SECURITIES DIVISIONPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Date Initiated:10/25/2010Docket/Case Number:CAUSE NO. 10-0270 CAPrincipal Product Type:No ProductOther Product Type(s):Allegations:THE INDIANA SECRETARY OF STATE, SECURITIES DIVISION, ALLEGED THATTHE FIRM VIOLATED INDIANA CODE BY FAILING TO TIMELY RESPOND TO ACUSTOMER COMPLAINT.Current Status:Final117©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanction(s)/ReliefSought:CONSENT AGREEMENTResolution Date:10/25/2010Resolution:Other Sanctions Ordered:Sanction Details:CONSENT AGREEMENT AND $9000.00 FINE.Firm StatementTHE COMPLAINT AT DISPUTE WAS RECEIVED BY THE FIRM IN JANUARY,2009 AND WAS SUBMITTED TO THE FIRM'S EMPLOYEE WHO WAS THENRESPONSIBLE FOR REVIEWING AND PROVIDING A RESPONSE TO SUCHCOMPLAINT. THIS EMPLOYEE WAS TERMINATED WITH THE FIRM THROUGHRIF, AND THE FIRM LEARNED AFTER THAT EMPLOYEE'S LEAVING THAT HEHAD NOT RESPONDED TO A NUMBER OF COMPLAINTS. IN REVIEW OF THECOMPLAINT, THE REPRESENTATIVE INFORMED THE FIRM THAT THISCUSTOMER HAD WITHDRAWN THE COMPLAINT AND THEREFORE NORESPONSE WAS MADE. OVER A YEAR LATER, THE CUSTOMER FILED HISCOMPLAINT WITH INDIANA; THE FIRM PROVIDED A TIMELY RESPONSE ANDMADE SETTLEMENT WITH THE CUSTOMER REGARDING THE ERROR THATPROMPTED THE ORIGINAL COMPLAINT. ALTHOUGH THE FIRM BELIEVESTHAT THIS WAS AN EXTRAORDINARY CIRCUMSTANCE OF AN EMPLOYEEFAILING TO DO HIS JOB, AND NOT AN INDICATION OF A SYSTEMICPROBLEM AT THE FIRM, THE STATE DETERMINED THAT THIS WAS AVIOLATION OF THE INDIANA CODE. WITHOUT ADMITTING OR DENYINGTHE STATE'S ALLEGATIONS, BUT RATHER TO AVOID THE EXPENSE ANDINHERENT UNCERTAINTY OF A FORMAL HEARING, THE FIRM ENTEREDINTO A CONSENT AGREEMENT AND WAS FINED $9000.00.Sanctions Ordered:Monetary/Fine $9,000.00ConsentDisclosure 58 of 63iReporting Source:FirmInitiated By:NEW YORK DEPARTMENT OF INSURANCEDate Initiated:08/30/2010Docket/Case Number:2010-0223-SAllegations:THE NEW YORK DEPARTMENT OF INSURANCE ALLEGED THAT THE FIRMVIOLATED ITS RULES BY FAILING TO REPORT ON THE FIRM'S MARCH, 2009CORPORATE LICENSE RENEWAL THAT PROEQUITIES WAS INVOLVED IN ANADMINISTRATIVE PROCEEDING THAT WAS COMMENCED BY THE THENNASD PRIOR TO 3/18/2009.Current Status:Final118©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:STIPULATIONPrincipal Product Type:No ProductOther Product Type(s):Resolution Date:08/30/2010Resolution:Other Sanctions Ordered:STIPULATION ONLY.Sanction Details:STIPULATION AND $750.00 FINE.Firm StatementTHE FIRM DID NOT BELIEVE THAT THIS MATTER WAS REPORTABLE AT THETIME OF THE MARCH, 2009 RENEWAL AS IT WAS NOT FINALIZED BY THENASD/FINRA UNTIL MAY, 2009. THIS WAS NOT AN INTENTIONAL FAILURE TOREPORT, BUT RATHER THE FIRM DID NOT BELIEVE THE MATTER WASREPORTABLE AT THE TIME.Sanctions Ordered:Monetary/Fine $750.00OtherDisclosure 59 of 63iReporting Source:RegulatorInitiated By:FINRAPrincipal Sanction(s)/ReliefSought:Date Initiated:03/23/2009Docket/Case Number:2005001163701Principal Product Type:Mutual Fund(s)Other Product Type(s):Allegations:NASD RULE 2110 - THE BREAKPOINT SELF-ASSESSMENT FOLLOW-UPREVIEW CONDUCTED FOR PROEQUITIES, INC. FOUND THAT THE FIRMFAILED TO RESPOND TO CUSTOMER REQUESTS FOR AN ACCOUNTREVIEW IN A TIMELY MANNER AND FAILED TO PROVIDE TIMELY REFUNDSTO CUSTOMERS FOLLOWING THE BREAKPOINT SELF-ASSESSMENTREQUIRED BY FINRA OF CERTAIN MEMBER FIRMS THAT SOLD FRONT-ENDLOAD MUTUAL FUNDS.Current Status:Final119©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanction(s)/ReliefSought:Resolution Date:03/23/2009Resolution:Other Sanctions Ordered:Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, THE FIRM CONSENTEDTO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS;THEREFORE, THE FIRM WAS CENSURED AND FINED $25,000.Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoSanctions Ordered:CensureMonetary/Fine $25,000.00Acceptance, Waiver & Consent(AWC)iReporting Source:FirmInitiated By:FINRAPrincipal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:03/23/2009Docket/Case Number:2005001163701Principal Product Type:Mutual Fund(s)Other Product Type(s):Allegations:FINRA ALLEGED THAT, IN CONDUCTING THE BREAKPOINT SELF-ASSESSMENT IN 2003, PROEQUITIES FAILED TO RESPOND TO CUSTOMERREQUESTS FOR AN ACCOUNT REVIEW IN A TIMELY MANNER AND FAILEDTO PROVIDE TIMELY REFUNDS TO CUSTOMERS, IN VIOLATION OFCONDUCT RULE 2110.Current Status:FinalResolution:Acceptance, Waiver & Consent(AWC)120©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceResolution Date:03/23/2009Other Sanctions Ordered:ACCEPTANCE, WAIVER AND CONSENT AND FINE.Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, AND SOLELY FOR THEPURPOSES OF THIS PROCEEDING BROUGHT BY OR ON BEHALF OF FINRA,PROEQUITIES CONSENTED TO THE FINDINGS THAT IT VIOLATED CONDUCTRULE 2110 WHILE CONDUCTING THE 2003 BREAKPOINT SELF-ASSESSMENT BY FAILING TO TIMELY RESPOND TO CUSTOMER REQUESTSFOR AN ACCOUNT REVIEW AND FOR FAILING TO PROVIDE TIMELYREFUNDS TO CUSTOMERS.Sanctions Ordered:CensureMonetary/Fine $25,000.00Disclosure 60 of 63iReporting Source:RegulatorInitiated By:FLORIDAPrincipal Sanction(s)/ReliefSought:Cease and DesistOther Sanction(s)/ReliefSought:Date Initiated:04/07/2004Docket/Case Number:0093-S-2/04URL for Regulatory Action:Principal Product Type:No ProductOther Product Type(s):Allegations:FAILURE TO MAINTAIN A SYSTEM TO SUPERVISE ACTIVITIES OF ANASSOCIATED PERSON ON A REGISTRATION AGGREMENT.Current Status:FinalResolution Date:04/07/2004Resolution:Does the order constitute afinal order based onviolations of any laws orregulations that prohibitfraudulent, manipulative, ordeceptive conduct?NoStipulation and Consent121©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:Sanction Details:NARegulator StatementFAILURE TO MAINTAIN A SYSTEM TO SUPERVISE ACTIVITIES OF ANASSOCIATED PERSON ON A REGISTRATION AGGREMENT. FINAL ORDERISSUED WITH STIP AND CONSENT.Sanctions Ordered:Monetary/Fine $5,000.00Cease and Desist/InjunctioniReporting Source:FirmInitiated By:STATE OF FLORIDA OFFICE OF FINANCIAL REGULATIONPrincipal Sanction(s)/ReliefSought:OtherOther Sanction(s)/ReliefSought:FAILED TO SUPERVISE THE ACTIVITIES OF AN ASSOCIATED PERSONUNDER A REGISTRATION AGREEMENT.Date Initiated:09/13/2003Docket/Case Number:0093-S-02/04Principal Product Type:No ProductOther Product Type(s):Allegations:FAILING TO MAINTAIN A SYSTEM TO SUPERVISE THE ACTIVITIES OF ANASSOCIATED PERSON ON A REGISTRATION AGREEMENT, BRADFORDGLEN SMITH, TO ENSURE THAT BRADFORD GLEN SMITH WAS PROPERLYSUPERVISED.Current Status:FinalResolution Date:04/07/2004Resolution:Other Sanctions Ordered:FIRM AGREED TO STIPULATION AND CONSENTSanction Details:$5,000 FINE LEVIED AGAINST THE APPLICANT; TOTAL AMOUNT OF $5,000PAID BY FIRM ON 4/7/04; NO PORTION OF PENALTY WAIVED; FIRM AGREESTO CEASE & DESIST FROM ALL PRESENT AND FUTURE VIOLATIONS OFCHAPTER 517, FLORIDA STATUTES, AND CHAPTER 3E, FLORIDAADMINISTRATIVE CODE, AND THE NASD CONDUCT RULES.Firm StatementFROM 1998 THROUGH 2001, AN ASSOCIATED PERSON, BRADFORD GLENSanctions Ordered:Monetary/Fine $5,000.00Cease and Desist/InjunctionStipulation and Consent122©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceSMITH, OF PROEQUITIES VIOLATED SECTION 517.161(1)(H), FLORIDASTATUES, RULE 3E-600.013(2)(H) AND 3E-600.013(1)(P), FLORIDAADMINISTRATIVE CODE, AND NASD CONDUCT RULE 3040 BY ENGAGING INPRIVATE SECURITIES TRANSACTIONS WITHOUT PRIOR NOTIFICATION ANDAPPROVAL OF PROEQUITIES, INC., AND FROM 1998 THROUGH 2001, ANASSOCIATED PERSON, BRADFORD GLEN SMITH, OF PROEQUITIESVIOLATED SECTION 517.161(1)(H), FLORIDA STATUES, RULE 3E-600.013(2)BY ENGAGING IN A PROHIBITED BUSINESS PRACTICE, FAILING TO COMPLYWITH A REGISTRATION AGREEMENT BRADFORD GLEN SMITH EXECUTEDON MARCH 25, 1998, AND DEMONSTRATING UNWORTHINESS TOTRANSACT THE BUSINESS OF DEALER, INVESTMENT ADVISOR, ORASSOCIATED PERSON.Disclosure 61 of 63iReporting Source:RegulatorInitiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.Principal Sanction(s)/ReliefSought:Other Sanction(s)/ReliefSought:Date Initiated:07/18/2002Docket/Case Number:C05020036Principal Product Type:No ProductOther Product Type(s):Allegations:SEC RULES 15C3-1, 17A-5, 17A-11 AND NASD RULE 2110 - WITHOUTADMITTING OR DENYING THE ALLEGATIONS,RESPONDENT MEMBERCONSENTED TO THE ENTRY OF FINDINGS THAT IT ENGAGED IN ASECURITIES BUSINESS WHEN THE FIRM'S NET CAPITAL WAS BELOW THEREQUIRED MINIMUM; FAILED AND NEGLECTED TO PROVIDE NOTIFICATIONTHAT ITS NET CAPITAL WAS BELOW THE REQUIRED MINIMUM PURSUANTTO SEC RULE 15C3-1; FAILED AND NEGLECTED TO FILE AN ACCURATEFOCUS PART IIA REPORT.Current Status:FinalResolution Date:07/18/2002Resolution:Sanctions Ordered:CensureMonetary/Fine $7,500.00Acceptance, Waiver & Consent(AWC)123©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceOther Sanctions Ordered:Sanction Details:CENSURE AND FINE $7,500.iReporting Source:FirmInitiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. - DISTRICT #5Principal Sanction(s)/ReliefSought:CensureOther Sanction(s)/ReliefSought:Date Initiated:06/12/2002Docket/Case Number:AWC# - C05020036Principal Product Type:No ProductOther Product Type(s):Allegations:NASD ALLEGED FIRM ENGAGED IN THE SECURITIES BUSINESS WHEN THEFIRM'S NET CAPITAL WAS BELOW THE REQUIRED MINIMUM AND FAILED TONOTIFY THE NASD OF SUCH.Current Status:FinalResolution Date:07/18/2002Resolution:Other Sanctions Ordered:Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, A CENSURE AND AMONETARY FINE IN THE AMOUNT OF $7500.00 WAS ASSESSED AGAINSTTHE FIRM. CORRECTIVE ACTIONS HAVE BEEN TAKEN TO PREVENT ASIMILAR TECHNICAL VIOLATION.Sanctions Ordered:CensureMonetary/Fine $7,500.00Acceptance, Waiver & Consent(AWC)Disclosure 62 of 63iReporting Source:RegulatorInitiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.Allegations:Current Status:Final124©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePrincipal Sanction(s)/ReliefSought:Other Sanction(s)/ReliefSought:Date Initiated:02/05/1998Docket/Case Number:C05970034Principal Product Type:Other Product Type(s):Resolution Date:02/05/1998Resolution:Other Sanctions Ordered:Sanction Details:Regulator StatementON FEBRUARY 5, 1998, DISTRICT NO. 5 NOTIFIED RESPONDENTSPROEQUITIES, INC. NANCY C. ALCORN, AND THOMAS A. BLACK THAT THELETTER OF ACCEPTANCE, WAIVER AND CONSENT NO. C05970034 WASACCEPTED; THEREFORE, RESPONDENT MEMBER AND ALCORN ARECENSUREDAND FINED $15,000, JOINTLY AND SEVERALLY, AND RESPONDENT BLACKIS CENSURED AND FINED $500 - (NASD RULES 1120(a)(2), 2110 AND3010 - RESPONDENT BLACK EXECUTED A SECURITIES TRANSACTION ONBEHALF OF A PUBLIC CUSTOMER WHILE HIS REGISTRATION WASINACTIVEDUE TO HIS FAILURE TO SATISFY THE REGULATORY ELEMENT OF THENASD'S CONTINUING EDUCATION REQUIREMENTS; REPONDENT MEMBER,ACTING THROUGH RESPONDENT ALCORN, FAILED TO ENFORCE ANDMAINTAIN ADEQUATE SUPERVISORY PROCEDURES TO ENSURECOMPLIANCEWITH THE REGULATORY ELEMENT OF THE NASD'S CONTINUINGEDUCATIONREQUIREMENTS; ALLOWED INDIVIDUALS TO MAINTAIN THEIRREPRESENTATIVE REGISTRATIONS WITH THE FIRM, ALTHOUGH THEINDIVIDUALS WERE NOT ACTIVELY ENGAGED IN THE SECURITIESBUSINESS OF THE FIRM; AND, ALLOWED AN INDIVIDUAL TO EFFECTTRANSACTIONS IN CUSTOMERS' ACCOUNTS WHEN HE WAS NOTPROPERLYREGISTERED WITH THE NASD).Sanctions Ordered:CensureMonetary/Fine $15,000.00Acceptance, Waiver & Consent(AWC)125©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser Guidance*** $15,000 PAID J&S ON 3/5/98, INVOICE NO. 98-05-216 ***iReporting Source:FirmInitiated By:NATIONAL ASSOCATION OF SECURITIES DEALERS, INC.Principal Sanction(s)/ReliefSought:Civil and Administrative Penalt(ies) /Fine(s)Other Sanction(s)/ReliefSought:Date Initiated:02/15/1998Docket/Case Number:AWC #C05970034Principal Product Type:No ProductOther Product Type(s):Allegations:NASD ALLEGED VIOLATIONS BY THOMAS B. BLACK. MR. BLACK EXECUTEDONE SECURITIES TRANSACTION ON BEHALF OF PUBLIC CUSTOMER FP,WHILE REGISTRATION WAS INACTIVE DUE TO HIS FAILURE TO SATISFYTHE REGULATORY ELEMENT OF THE ASSOCIATION'S CONTINUININGEDUCATION (CE) REQUIREMENTS. NASD ALLEGED VIOLATIONS BYPROEQUITIES AND NANCY C. ALCORN, EACH SEPARATELY. PROEQUITIES,INC. ACTING THROUGH MS. ALCORN FAILED TO ENFORCE AND MAINTAINADEQUATE SUPERVISORY PROCEDURES TO ENSURE COMPLIANCE WITHTHE REGULATORY ELEMENT OF THE CE REQUIREMENTS. PROEQUITIESACTING THROUGH MS. ALCORN, ALLOWED THREE INDIVIDUALS TOMAINTAIN THEIR REGISTRATIONS WITH THE FIRM ALTHOUGH THEY WERENOT ENGAGED IN THE SECURITIES BUSINESS OF THE FIRM AND ALLOWEDCAMERON B. KAUFMAN TO EFFECT 21 TRANSACTIONS IN CUSTOMERS'ACCOUNT WHILE NOT REGISTERED.Current Status:FinalResolution Date:02/05/1998Resolution:Other Sanctions Ordered:Sanction Details:WITHOUT ADMITTING OR DENYING THE FINDINGS, A CENSURE AND AMONETARY FINE IN THE AMOUNT OF $15,000.00 WAS PAID JOINTLY ANDSEVERALLY BY PROEQUITIES, INC. AND NANCY C. ALCORN. CORRECTIVEACTIONS HAVE BEEN TAKEN TO PREVENT FUTURE SIMILAR VIOLATION BYSanctions Ordered:CensureMonetary/Fine $15,000.00Settled126©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidancePROEQUITIES AND NANCY C. ALCORN.Disclosure 63 of 63iReporting Source:RegulatorInitiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.Principal Sanction(s)/ReliefSought:Other Sanction(s)/ReliefSought:Date Initiated:02/26/1986Docket/Case Number:NEW-483-SCPrincipal Product Type:Other Product Type(s):Allegations:Current Status:FinalResolution Date:04/26/1986Resolution:Other Sanctions Ordered:Sanction Details:Regulator StatementENTERED 4/7/86:SUMMARY COMPLAINT NO. NEW-483-SC FILED FEBRUARY 26, 1986 BYDISTRICT NO. 5 AGAINST PROTECTIVE EQUITY SERVICES, INC. ANDMASTON E. MARTIN, JR., ALLEGING VIOLATIONS OF ARTICLE III,SECTION 1 OF THE RULES OF FAIR PRACTICE IN THAT RESPONDENTMEMBER, ACTING THROUGH RESPONDENT MARTIN, FAILED TO FILE THEFOCUS PART I REPORT WITHIN TEN BUSINESS DAYS AFTER MONTH-ENDAPRIL, 1985.SUMMARY COMPLAINT ACCEPTED MARCH 13, 1986, WHEREINRESPONDENTSARE CENSURED AND FINED $250.00, JOINTLY AND SEVERALLY. IF NOFURTHER ACTION, DECISION IS FINAL APRIL 26, 1986.Sanctions Ordered:CensureMonetary/Fine $250.00Consent127©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceAPRIL 26, 1986 - DECISION IS FINAL.3/18/86, FINES AND COSTS IN CONNECTION WITH THIS COMPLAINT HAVEBEEN PAID IN FULL.iReporting Source:FirmInitiated By:NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. - DISTRICT #5Principal Sanction(s)/ReliefSought:CensureOther Sanction(s)/ReliefSought:Date Initiated:02/26/1986Docket/Case Number:NEW-483-SCPrincipal Product Type:No ProductOther Product Type(s):Allegations:VIOLATION OF ARTICLE III, SECTION 1 OF THE RULES OF FAIR PRACTICE.FIRM FAILED TO FILE FOCUS PART I WIHIN TEN BUSINESS DAYS OFMONTH END.Current Status:FinalResolution Date:03/13/1986Resolution:Other Sanctions Ordered:Sanction Details:FIRM WAS FINED $250.00 FOR FAILURE TO FILE FOCUS PART I IN A TIMELYMANNER.Firm StatementFIRM WAS FINED $250.00 FOR FAILURE TO FILE FOCUS PART I IN A TIMELYMANNER. FIRM PAID FINE ON 3/18/86. AT THE TIME OF THE COMPLAINT,THE FIRM WAS NOT AWARE THAT THEY WERE REQUIRED TO FILEFINANCIAL STATEMENTS AT THE DISTRICT OFFICE. THE SITUATION HASBEEN CORRECTED AND EVERY EFFORT IS BEING MADE TO FILE THESEREPORTS IN A TIMELY MANNER.Sanctions Ordered:CensureMonetary/Fine $250.00Consent128©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceArbitration Award - Award / JudgmentBrokerage firms are not required to report arbitration claims filed against them by customers; however, BrokerCheckprovides summary information regarding FINRA arbitration awards involving securities and commodities disputesbetween public customers and registered securities firms in this section of the report. The full text of arbitration awards issued by FINRA is available at www.finra.org/awardsonline.Disclosure 1 of 4Reporting Source:RegulatorType of Event:ARBITRATIONArbitration Forum:Case Initiated:Case Number:Allegations:Disputed Product Type:Sum of All Relief Requested:Disposition:Disposition Date:Sum of All Relief Awarded:FINRA08/18/200909-04497ACCOUNT ACTIVITY-OMISSION OF FACTS; ACCOUNT ACTIVITY-SUITABILITY;ACCOUNT RELATED-FAILURE TO SUPERVISE; ACCOUNT RELATED-NEGLIGENCE; ACCOUNT RELATED-OTHEROTHER TYPES OF SECURITIES; PRIVATE EQUITIES$8,951,793.00AWARD AGAINST PARTY03/02/2011$187,600.04There may be a non-monetary award associated with this arbitration.Please select the Case Number above to view more detailed information.Disclosure 2 of 4iReporting Source:RegulatorType of Event:ARBITRATIONArbitration Forum:Case Initiated:Case Number:Allegations:FINRA08/19/200909-04516ACCOUNT ACTIVITY-SUITABILITY; ACCOUNT RELATED-FAILURE TOSUPERVISE; ACCOUNT RELATED-NEGLIGENCE; ACCOUNT RELATED-OTHER129©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceDisputed Product Type:Sum of All Relief Requested:Disposition:Disposition Date:Sum of All Relief Awarded:OTHER TYPES OF SECURITIES$8,514,373.00AWARD AGAINST PARTY05/06/2011$1,541,047.00There may be a non-monetary award associated with this arbitration.Please select the Case Number above to view more detailed information.Disclosure 3 of 4iReporting Source:RegulatorType of Event:ARBITRATIONArbitration Forum:Case Initiated:Case Number:Allegations:Disputed Product Type:Sum of All Relief Requested:Disposition:Disposition Date:Sum of All Relief Awarded:FINRA12/02/201010-05310ACCOUNT ACTIVITY-MISREPRESENTATION; ACCOUNT ACTIVITY-OMISSIONOF FACTS; ACCOUNT ACTIVITY-SUITABILITY; ACCOUNT RELATED-NEGLIGENCEREAL ESTATE INVESTMENT TRUST; VARIABLE ANNUITIES$361,555.00AWARD AGAINST PARTY11/25/2011$63,199.24There may be a non-monetary award associated with this arbitration.Please select the Case Number above to view more detailed information.Disclosure 4 of 4iReporting Source:RegulatorType of Event:ARBITRATIONArbitration Forum:Allegations:FINRAACCOUNT ACTIVITY-BRCH OF FIDUCIARY DT; ACCOUNT ACTIVITY-MISREPRESENTATION; ACCOUNT ACTIVITY-OMISSION OF FACTS;ACCOUNT ACTIVITY-OTHER; ACCOUNT ACTIVITY-SUITABILITY130©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceCase Initiated:Case Number:Disputed Product Type:Sum of All Relief Requested:Disposition:Disposition Date:Sum of All Relief Awarded:04/04/201212-01167$499,365.00AWARD AGAINST PARTY05/14/2013$448,562.40There may be a non-monetary award associated with this arbitration.Please select the Case Number above to view more detailed information.131©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. www.finra.org/brokercheckUser GuidanceEnd of ReportThis page is intentionally left blank.132©2019 FINRA. All rights reserved. Report about PROEQUITIES, INC. Confidential ProEquities, Inc. (a wholly owned subsidiary of Protective Life Corporation) Financial Statements and Supplementary Information Pursuant to SEC Rule 17a-5 December 31, 2017 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL AUDITED REPORT FORM X-17 A-5 PART Ill FACING PAGE Confidential OMB APPROVAL OMB Number: 3235-0123 Expires: August 31, 2020 Estimated average burden hours per response ...... 12.00 SEC FILE NUMBER B-32590 Information Required of Brokers and Dealers Pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17a-5 Thereunder REPORT FOR THE PERIOD BEGINNING 01/01/17 AND ENDING 12/31/17 ------------------------------------------- MM/DD/YY A. REGISTRANT IDENTIFICATION NAME OF BROKER-DEALER: ProEquities, Inc. ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) 2801 Highway 280 South (No. and Street) Birmingham Alabama (City) (State) MM/DD/YY OFFICIAL USE ONLY FIRM 1.0. NO. 35223 (Zip Code) NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT Darren Guerrera 205-268-5553 (Area Code-Telephone Number) B. ACCOUNTANT IDENTIFICATION INDEPENDENT PUBLIC ACCOUNT ANT whose opinion is contained in this Report* PricewaterhouseCoopers LLP (Name-if individual, state last, first, middle name) 569 Brookwood Village, Ste 851 Birmingham Alabama 35209 (Address) (City) (State) (Zip Code) CHECK ONE: I v' I Certified Public Accountant BPublic Accountant Accountant not resident in United States or any of its possessions. FOR OFFICIAL USE ONLY *Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See Section 240.17 a-5 (e)(2) SEC 1410 (06-02) Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. Confidential OATH OR AFFIRMATION 1, Darren Guerrera , swear (or affirm) that, to the best of my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of ProEquities, Inc . ----~----------------------------------------------------------------------------------, as of December 31 20 17 are true and correct. I further swear (or affirm) that neither the company nor any partner, proprietor, principal officer or director has any proprietary interest in any account classified solely as that of a customer, except as follows: Notary Public This report** contains (check all applicable boxes): 0 (a) Facing Page . ./ (b) Statement of Financial Condition . .{ (c) Statement of Income (Loss). (d) Statement of Changes in Financial Condition. Signature Chief Financial Officer Title (e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital. (f) Statement of Changes in Liabilities Subordinated to Claims of Creditors. ~ (g) Computation ofNet Capital. (h) Computation for Determination of Reserve Requirements Pursuant to Rule 15c3-3. (i) Information Relating to the Possession or Control Requirements Under Rule 15c3-3 . 0 U) A Reconciliation, including appropriate explanation of the Computation ofNet Capital Under Rule 15c3 -1 and the Computation for Determination of the Reserve Requirements Under Exhibit A of Rule 15c3-3. 0 (k) A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to methods of consolidation. ~ (I) An Oath or Affirmation . 0 (m) A copy of the SIPC Supplemental Report. 0 (n) A report describing any material inadequacies found to exist or found to have existed since the date of the previous audit. **For conditions of confidential treatment of certain portions of this filing, see section 240.17a-5 (e)(3). ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Index to Financial Statements and Supplementary Information December 31, 2017 Page(s) Report of Independent Registered Public Accounting Firm ............................................................. 1-2 Financial Statements Statement of Financial Condition ................................................................................................................. 3 Statement of Comprehensive Income .......................................................................................................... 4 Statement of Changes in Stockholder’s Equity ............................................................................................ 5 Statement of Cash Flows ............................................................................................................................. 6 Notes to Financial Statements ............................................................................................................... 7–19 Supplementary Schedules Schedule I - Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission ....................................................................................................................... 20 Schedule II - Computation for Determination of Reserve Requirements Under Rule 15c3-3 of the Securities and Exchange Commission ........................................................................ 21 Report of Independent Auditors on Agreed Upon Procedures Required by SEC Rule 17a-5(e)(4) .......................................................................................................................... 22–23 PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholder of ProEquities, Inc. Opinion on the Financial Statements We have audited the accompanying statement of financial condition of ProEquities, Inc. (“the Company”), a wholly owned subsidiary of Protective Life Corporation, as of December 31, 2017 , and the related statements of comprehensive income, changes in stockholder’s equity and cash flows for the year then ended, including the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all materia l respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Supplemental Information The accompanying information in Schedule I – Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission and Schedule II – Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission is supplemental information required by Rule 17a-5 under the Securities Exchange Act of 1934. The supplemental information is the responsibility of the Company’s management. The supplemental information has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. Our audit procedures included determining whether the supplemental information reconciles to the 2 of 2 financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with Rule 17a-5 under the Securities Exchange Act of 1934. In our opinion, the Schedule I – Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission and Schedule II – Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission is fairly stated, in all material respects, in relation to the financial statements as a whole. Birmingham, AL February 28, 2018 We have served as the Company's auditor since 1995. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 3 Assets Cash and cash equivalents 9,066,182$ Investments, at fair value 21,204,945 Receivables from brokers and dealers 8,535,351 State income tax receivable 552,813 Fixed assets, net of accumulated depreciation of $397,314 208,181 Other assets, net of allowance for uncollectible amounts of $31,625 4,295,794 Deferred income taxes, net 4,848,462 Total assets 48,711,728$ Liabilities and Stockholder's Equity Liabilities Commissions payable 3,889,073$ Securities sold but not yet purchased 737,010 Due to parent and affiliates 1,947,841 Deferred compensation obligation 19,617,516 Other accrued expenses 5,133,458 Total liabilities 31,324,898$ Stockholder's equity Common stock, $1 par value; 250,000 shares authorized, 114,408 shares issued and outstanding 114,408$ Additional paid-in capital 15,725,311 Retained earnings 1,547,111 Total stockholder's equity 17,386,830$ Total liabilities and stockholder's equity 48,711,728$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 4 Revenues Commissions 99,916,854$ Other revenues 6,086,235 Investment gain, net 1,966,956 Investment income 1,304,989 Total revenues 109,275,034$ Expenses Commissions 82,554,470 Salaries and wages 11,177,377 Technology 4,286,844 Legal, accounting and consulting 1,475,991 Clearing expense 1,750,437 Portfolio managers fee 1,577,120 Sales conference and promotions 816,794 Licenses, fees and assessments 672,226 Rent, related party 640,430 Corporate and divisional allocations, related party 2,442,792 Travel and entertainment 301,573 Postage, copies and supplies 249,637 Other operating expenses 2,455,909 Total expenses 110,401,600$ Loss before income taxes (1,126,566)$ Income tax expense (Note 5) 2,037,060 Net loss (3,163,626)$ Other comprehensive income - Total comprehensive loss (3,163,626)$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 5 Additional Total Paid-In Retained Stockholder's Shares Amount Capital Earnings Equity Balance at January 1, 2017 114,408 114,408$ 13,725,311$ 4,710,737$ 18,550,456$ Capital Contribution 2,000,000 2,000,000 Net Loss (3,163,626) (3,163,626) Balance at December 31, 2017 114,408 114,408$ 15,725,311$ 1,547,111$ 17,386,830$ Common Stock ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 The accompanying notes are an integral part of these financial statements. 6 Cash flows from operating activities Net loss (3,163,626)$ Adjustments to reconcile net income to net cash provided by operating activities Unrealized investment gain, net (1,376,359) Deferred income tax expense 2,067,238 Depreciation expense 33,120 Forgiveness of representative loans receivable 235,682 Change in assets and liabilities Investments (trading securities) (12,533) Investments (deferred compensation plan) (730,394) Receivables from brokers and dealers (1,759,317) State income tax receivable 235,725 Payments received on representative loans receivable 59,463 Issuance of representative loans receivable (2,414,860) Other assets (317,913) Securities sold but not yet purchased 193,148 Commissions payable 241,870 Deferred compensation obligation 2,118,054 Due to parent and affiliates 616,045 Other accrued expenses (201,334) Net cash used in operating activities (4,175,991)$ Cash flows from investing activities Purchases of fixed assets (241,301) Net cash used in investing activities (241,301)$ Cash flows from financing activities Captial Contribution 2,000,000 Net cash provided by financing activities 2,000,000$ Change in cash (2,417,292)$ Cash and cash equivalents Beginning of year 11,483,474$ End of year 9,066,182$ Supplemental disclosure of cash flow information Cash paid for income taxes 1,115,814$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 7 1. General ProEquities, Inc. (the “Company”) is a full-service broker-dealer incorporated under the laws of the state of Alabama. The Company is also a registered investment advisor. The Company operates across the United States and is headquartered in Birmingham, Alabama. The Company is registered with the Securities and Exchange Commission (the “SEC”) and is a member of the Financial Industry Regulatory Authority ("FINRA”). The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”). On February 1, 2015, PLC became a wholly owned subsidiary of Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha under the laws of Japan. PLC provides operating capital to the Company, as needed, to provide supplemental funding for the operations and activities of the Company. In addition to the Company's core broker-dealer operations, the Company maintains a fixed income division that offers a wide variety of fixed income products and services to individual and institutional investors. The Company also maintains a wholesaling division supporting variable life insurance sales. 2. Significant Accounting Policies Basis of Presentation and Use of Estimates The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP and prevailing industry practices requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Accounting for Securities Transactions The Company clears all exchange-based brokerage security transactions through Pershing, LLC ("Pershing"). Under the clearing arrangement, Pershing confirms securities trades, processes securities movements and records transactions for customers in its accounts, for which it receives a ticket charge per transaction. The Company also engages in investment security transactions with other settlement agents and with the direct product sponsor as issuer for certain investment security transactions. These trading activities may be conducted by the Company, its registered representatives/agents or through direct customer purchases with the affiliate counterparties. The Company’s commission revenues and related expenses are recorded on a trade date basis. The Company has evaluated the credit worthiness of Pershing and its other counterparties and determined the risk of material financial loss due to credit risk exposure to be minimal. Cash and Cash Equivalents Cash and cash equivalents include demand deposits and investments in money market funds which are considered highly liquid instruments. The carrying amounts reported in the Statement of Financial Condition for these financial instruments approximate their fair values (as defined by the Accounting Standards Codification (“ASC”) Fair Value Measurement and Disclosure Topic) due to their short-term nature. Cash and cash equivalents are classified as Level 1 in accordance with the fair value hierarchy of the ASC Fair Value Measurement and Disclosure Topic. Investments The Company has classified its investments as trading securities. Trading securities are reported at fair value, with the resulting unrealized and realized gains and losses recognized currently in earnings. Gains and losses realized on the sale of securities are computed using the specific ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 8 identification method. Unrealized gains and losses and realized gains and losses are combined and included in "Investment loss, net" in the accompanying Statement of Comprehensive Income. Fixed Assets Fixed assets are recorded at cost and are depreciated using the straight-line method over their estimated useful lives which range from 3 to 5 years. Maintenance and repairs are charged to expense when incurred; betterments and improvements that materially prolong the lives of the assets are capitalized. The cost of assets sold or retired and the related accumulated depreciation are removed from the respective accounts, and the gain or loss on such disposition is recognized currently. Other Assets Other assets are comprised primarily of prepaid expenses, loans to the Company’s representatives and reimbursable expenses paid by the Company on its agents' behalf. The Company's finance receivables are primarily in the form of agent debit balances and agent notes receivable. Certain agent notes receivable contain terms which may result in the Company forgiving the principal and interest payments should the agent meet certain sales targets. The Company has recorded an allowance of $31,625 against these receivables based on the specific terms at December 31, 2017. The Company records an allowance for credit losses, which is developed based upon the Company's historical experience of write-offs of the related agent debit balances. Notes receivable are reserved based upon specific indicators of an inability to pay or intent not to pay. The amount of such receivables which were forgiven or written off during the year ended December 31 2017, was $235,682. Contingent Liabilities The Company recognizes liabilities for contingencies when there is an exposure that, when fully analyzed, indicates it is both probable a liability has been incurred and the amount of loss or obligation can be reasonably estimated. The determination of whether a loss is probable and the estimate of an associated range of loss is subject to significant judgments and assumptions based on currently available information as of the reporting date and may materially change based on facts and circumstances presented in future periods. When a loss is considered to be probable and a range of possible loss can be estimated, the Company accrues the most likely amount within that range based upon management's judgment after the consideration of facts currently known and after consultation with its legal counsel, if appropriate. As a result of the extensive regulation of the financial services industry, the Company's operations are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations. Such reviews and inspections can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censures to censures with fines or other monetary repercussions. See Note 11 for further discussion. Recognition of Commission Revenue and Expense Commission revenues and commission expenses are recorded on a trade date basis for trades executed through the Company and are based on contractual agreements or terms for applicable investment security transactions. Trail fees, 12b-1 fees, marketing allowances received from product sponsors and advisory service fees are recognized as revenue when earned and are included in "Commissions" revenue in the Statement of Comprehensive Income. Marketing ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 9 allowance and advisory service fees totaling approximately $7.1 million were recognized as "Commissions" revenue during the year ended December 31, 2017. Investment Income Investment income primarily comprises interest income on money market funds, fixed maturity securities and income from securities related to the Company’s deferred compensation plans. Other Revenues Consisting primarily of representatives' technology and affiliation fees and miscellaneous clearing revenues, other revenues are recorded as earned. Income Taxes The results of operations of the Company are included in the consolidated federal and state income tax returns of PLC and its subsidiaries. The Company utilizes the asset and liability method in accordance with the Accounting Standards Codification ("ASC") Income Taxes Topic. 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 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, and the tax benefit is reflected in future periods when the Company generates taxable income. Income taxes recoverable (payable) are recorded in the due to/from affiliates account and are settled periodically, per the tax sharing agreement. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The legislation significantly changes U.S. tax law by, among other things, lowering the corporate income tax rate. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company does not believe any provisional tax impacts related to the Tax Reform Act are required in its financial statements for the year ended December 31, 2017. Concentration of Credit Risk The Company maintains depository accounts with certain financial institutions. Although these account balances exceed federally insured depository limits, the Company has evaluated the credit worthiness of these applicable financial institutions and determined the risk of material financial loss due to exposure from credit risk to be minimal. Accounting Pronouncements Not Yet Adopted ASU No. 2014-09 – Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Update is effective for annual and interim periods beginning after December 15, 2017. The Amendments in this Update are applicable to the Company’s Commission and Other Revenues, and will be adopted using the modified retrospective approach as of January 1, 2018. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 10 The Company does not anticipate a financial impact as a result of its adoption of the amendments in the Update. However, the Company plans to implement minor changes to its accounting policies and processes with respect to certain Commission Revenues to align its recognition of these revenues with the principles in ASC 606. ASU No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change will relate to the accounting model used by lessees. The Update will require all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The lease asset and liability will be measured at the present value of the minimum lease payments less any upfront payments or fees. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in the Update upon adoption. ASU No. 2016-01 - Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the Update requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The Update also introduces a single-step impairment model for equity investments without a readily determinable fair value. Additionally, the Update requires changes in instrument-specific credit risk for fair value option liabilities to be recorded in other comprehensive income. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2017 and will be applied on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the revised guidance. ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. The Update also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its operations and financial results. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 11 3. Related Parties The Company occupies office space under a monthly rental arrangement in the office building of an affiliate, Protective Life Insurance Company (PLICO), for which rent of approximately $0.6 million was expensed under contractual arrangements with PLC in 2017. In addition, during the year ended December 31, 2017, the Company expensed approximately $0.9 million in payments for providing various human resource services, approximately $0.5 million for providing legal services and approximately $1.9 million for providing technology support and infrastructure. The Company is billed by PLICO, which is also a wholly owned subsidiary of PLC, for these items and related amounts due are settled monthly in the normal course of the Company's operations. The Company also contracts with First Protective Insurance Group, Inc., an affiliate, for management and administrative services supporting its wholesaling division. The Company expensed $1.7 million for management and administrative services related to this agreement. The Company recorded commission revenue in 2017 from Investment Distributors, Inc., a subsidiary of PLC, of approximately $3.9 million. All employees of the Company participate in the PLC Defined Benefit Pension Plan and/or its Unfunded Excess Benefits Plan (collectively “the Plans”). The Plans are not separable by affiliates participating in the plans. The benefits are based on years of service and the employee's compensation. PLC's funding policy is to contribute amounts to the Plans sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act (ERISA) plus such additional amounts as PLC may determine appropriate from time to time. Contributions are intended to provide not only for benefits attributable for service to date but also for those benefits expected to be earned in the future. The employees of the Company also are eligible to participate in PLC's qualified, defined contribution employee benefit plan under Internal Revenue Code Section 401(k). PLC provides a match for employee contributions to the 401(k) plan in cash. PLC also has adopted a supplemental matching contribution program which is a nonqualified plan that provides supplemental matching contributions in excess of limits imposed on qualified deferred contribution plans by federal law. In addition, PLC provides limited health care benefits to eligible retired employees of the Company until age 65 and provides certain medical and other benefits to active employees of the Company. Charges related to these employee benefit plans provided by PLC were approximately $1.3 million and have been included in "Salaries and wages" in the Company’s Statement of Comprehensive Income for the year ended December 31, 2017. 4. Fixed Assets Fixed assets consist of the following as of December 31, 2017: Depreciation expense in the amount of $33,120 was recognized in 2017. System software 605,495$ Less: Accumulated depreciation (397,314) Net fixed assets 208,181 ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 12 5. Income Taxes The Company's effective income tax rate varied from the maximum federal income tax rate as follows for the year ended December 31, 2017: The provision for income tax expense is as follows: The following table shows the significant components of the net deferred income tax asset as of December 31, 2017. On December 22, 2017, the President of the United States signed into law the Tax Reform Act. The legislation significantly changes U.S. tax law by, among other things, lowering the corporate income tax rate. The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax assets at December 31, 2017, and recognized a $2.4 million tax expense in the Company’s statement of income for the year ended December 31, 2017. Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary Statutory federal income tax rate applied to pre-tax income 35.00 % State income taxes 0.57 % Non deductible expenses (1.77)% Federal Tax Law Changes (214.68)% Other 0.06 % Effective income tax rate (180.82)% Provision for income tax expense (benefit) Current (30,178)$ Deferred 2,067,238 2,037,060$ Deferred income tax asset Deferred compensation 4,768,246$ Legal reserve and contingencies 114,003 Accrued vacation 26,883 Other 8,290 Total gross deferred income tax asset 4,917,422$ Deferred income tax liability Prepaid expense 68,756$ Software 204 Total gross deferred income tax liability 68,960$ Net deferred income tax asset 4,848,462$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 13 information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company does not believe any provisional tax impacts related to the Tax Reform Act are required in its financial statements for the year ended December 31, 2017. The Company concluded, based on its recent history of operating income and anticipated operating income and cash flows for future periods, a valuation allowance on the gross deferred tax asset at December 31, 2017 was not required. The methodology for determining the realizability of deferred tax assets involves estimates of future taxable income from our core business operations, as well as estimated operating expenses to support that anticipated level of operations. Estimates of future taxable income generated from future operating results could change in the near term, perhaps materially, which may require the Company to provide a valuation allowance in future periods. Such allowance could be material to the Company's financial statements. In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2014. As of December 31, 2017, the Company evaluated the need for the recognition of uncertain tax liability in accordance with the guidance of ASC 740, "Income Taxes," and determined none should be recorded or disclosed. The Company's policy is to recognize interest and penalties related to tax contingencies in income tax expense during the period in which they are identified. Included in the "Due to parent and affiliates" on the accompanying financial statements are current income taxes payable of $0.9 million at December 31, 2017. 6. Receivables from Brokers and Dealers The receivables from brokers and dealers represents commissions and other fees to be collected from the clearing broker, mutual fund companies, product sponsors, variable annuity and variable life companies. Additionally, this balance includes cash required to be held on deposit at Pershing of $0.1 million. 7. Regulatory Requirements The Company is subject to the SEC’s Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital (as defined) and requires the ratio of aggregate indebtedness (as defined) to net capital shall not exceed 15 to 1. At December 31, 2017, the Company had computed net capital of $5.7 million which was $5.0 million in excess of its required minimum net capital of $0.7 million. The Company's aggregate indebtedness to net capital ratio at December 31, 2017 was 190.91%. The Company has claimed an exemption from the provisions of SEC Rule 15c3-3 under paragraph (k)(2)(ii), as it has disclosed that all exchange-based transactions are cleared with customers on a fully disclosed basis through a clearing broker or dealer and customer funds and securities are promptly transmitted to the clearing broker or dealer which carries all of the accounts of such customers. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 14 8. Deferred Compensation Plans The Company has established deferred compensation plans for the benefit of its registered representatives. Deferred compensation withheld under these plans is used to purchase investments (primarily mutual funds, equities, and life insurance policies), as directed by the participants. In addition, the Company may provide matching contributions for participants who meet certain production targets. Matching contributions of $19,000 were paid by the Company during 2017. A trust was established to aid the Company in meeting its obligations under the plans. Investments held by the trust are consolidated and reported as investments of the Company in the accompanying Statement of Financial Condition. Investments are reported at fair value with changes reported as "Investment gain, net" in the accompanying Statement of Comprehensive Income. Life insurance policies held by the trust are reported at their cash surrender value with changes reported as “Investment gain, net” in the accompanying Statement of Comprehensive Income. The Company records a deferred compensation obligation equal to the total reported fair value of the trust assets (See Note 9). Changes in the deferred compensation obligation are recorded as commission expense in the accompanying Statement of Income. The registered representatives who are grantors of the trust, participating in the deferred compensation plans, bear the entire investment risk of the underlying investments of the deferred compensation plans. 9. Investments The Company holds certain securities used for operational trading purposes with Pershing. The securities are classified as either marketable securities owned or securities sold but not yet purchased. The following table shows these securities at fair value as of December 31, 2017: The Company also holds securities related to the deferred compensation plans that are classified as trading. The investments in the deferred compensation plans consist of the following securities as of December 31, 2017: Sold Not Yet Owned Purchased U.S. government & agency obligations -$ 737,010$ Municipal obligations 1,582,957 - Equity securities 20,656 - 1,603,613$ 737,010$ Mutual fund investments 18,423,804$ Life insurance policies 475,991 Equity securities 490,961 U.S. government and agency obligations 210,576 19,601,332$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 15 The Company has recorded an offsetting liability for the value of these investments held in the deferred compensation plan. As of December 31, 2017, $16,184 was accrued as a deferred compensation obligation, but has not yet been contributed to the plan. The following table shows net unrealized losses and the net realized gains respectively, which are included in “Investment gains, net” on the Statement of Income. Generally, all investments are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible changes in risks in the near term could materially affect investment balances, the amounts reported in the Statement of Financial Condition and the amounts reported in the Statement of Comprehensive Income. 10. Fair Value of Financial Instruments The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the ASC Fair Value Measurements and Disclosures Topic, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. 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. Financial assets and liabilities recorded at fair value on the Statement of Financial Condition are categorized 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 d. Inputs that are derived principally from or corroborated by observable market data through correlation or other means Unrealized Gain (Loss) Realized Gain Gain, net Trading Securites (10,493)$ 243,631$ 233,138$ Deferred Comp Plan 1,386,852 346,966 1,733,818 Investment Gain, net 1,376,359$ 590,597$ 1,966,956$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 16 Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability. The following table presents the Company’s hierarchy for its assets measured at fair value on a recurring basis as of December 31, 2017. Level 1 Level 2 Level 3 Total Assets Inventory investments State, municipalities, and political subdivisions -$ 1,582,957$ -$ 1,582,957$ Equity securities 20,656 - - 20,656 Total inventory investments 20,656$ 1,582,957$ -$ 1,603,613$ Deferred compensation plan Equity securities 490,961$ -$ -$ 490,961$ US Government and authorities - 210,576 - 210,576 Mutual funds 18,423,804 - - 18,423,804 Life insurance policies - 475,991 475,991 Total deferred compensation plan 18,914,765$ 210,576$ 475,991$ 19,601,332$ Cash and cash equivalents 9,066,182$ -$ -$ 9,066,182$ Total assets measured at fair value on a recurring basis 28,001,603$ 1,793,533$ 475,991$ 30,271,127$ Liabilities US Government and authorities -$ 737,010$ -$ 737,010$ Equity Securities - - - - Total liabilities measured at fair value on a recurring basis -$ 737,010$ -$ 737,010$ ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 17 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. 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 the financial instruments, as listed in the above table. Fixed Maturity Securities and Securities Sold but Not Yet Purchased The fair value of fixed maturity securities and securities sold but not yet purchased is determined by management after considering third party pricing services as their primary source of information. Typical inputs used by this pricing method 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 maturities, third party pricing services normally derive the security prices through recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. 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 that is in accordance with the ASC Fair Value Measurements and Disclosures Topic. 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 1 and 2 because they have quoted market prices, or significant inputs used in pricing the securities are market observable. In addition, the Company has sold securities that it does not currently own and will therefore be obligated to purchase such securities at a future date. The Company has recorded these obligations in the financial statements at December 31, 2017, at fair values of the related securities and will incur a loss if the fair value of the securities increases subsequent to December 31, 2017 prior to purchase or settlement. Deferred Compensation Plan Investments The Company holds investments in open-ended mutual funds, life insurance policies, equity securities, U.S. government and agency obligations, and other investments related to the deferred compensation plan. Open-ended mutual funds are classified as Level 1 as published net asset values are utilized for the individual securities. Equity securities are classified as Level 1 at the closing prices on exchanges are utilized for individual securities. U.S. government and authorities investments are classified as either Level 1 or Level 2 based on the principal market for the security. Life insurance policies held by a related party (PLICO) are carried at their cash surrender value and reported as Level 3 under the market approach. Cash surrender value represents the amount of cash that may be realized by the owner of a life insurance contract upon discontinuance and surrender of the contract prior to maturity. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 18 The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the year ended December 31, 2017, for which the Company has used significant unobservable inputs (Level 3): Total realized and unrealized gains on Level 3 assets are reported in "Investment gain, net" within the Statement of Comprehensive Income The Company did not transfer any Level 1, 2, or 3 investments for the year ended December 31, 2017. Purchases and settlements represent activity that occurred during the period that results in a change of the asset but does not represent changes in fair value for the instruments held at the beginning of the period. The following table presents the valuation method for material financial instruments included in Level 3, as well as unobservable inputs used in the valuation of those financial instruments: 11. Commitments and Contingencies A number of civil jury or arbitration verdicts have been returned against companies in the jurisdictions in which the Company does business involving sales practices of representatives, alleged misconduct, and other matters. These matters have often resulted in the awarding of judgments against these companies that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, juries or arbitrators have substantial discretion in awarding punitive damages which creates the potential for unpredictable material adverse judgments in any given punitive damage suit. In the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions. In addition, the Company may also be the subject of reviews of its operations by regulatory authorities and self- regulatory organizations. The Company contests liability and/or the amount of damages as appropriate in each pending matter brought against it. Related to any such matters, if the Company has information available to it which indicates that it is probable that a liability has been incurred as of the date of the financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated liability by a charge to income. In many instances it may be inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any potential loss. In addition, even where loss is possible or an exposure to loss exists in excess Beginning Realized and Ending Balance Unrealized Purchases Sales Balance Assets Life insurance policies 399,206$ 76,785$ -$ -$ 475,991$ Total assets measured at fair value on a recurring basis 399,206$ 76,785$ -$ -$ 475,991$ Fair Value Valuation Unobservable Dec 31, 2017 Technique Input Assets Life insurance policies held in Cash Surrender Financial Stability of deferred compensation plan 475,991 Value Insurer ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Statement of Financial Condition December 31, 2017 19 of the liability accrued with respect to a previously recognized loss contingency, it is not always possible to reasonably estimate the amount of the possible loss or range of loss. Subject to the foregoing, management of the Company believes, based on currently available information, after consultation with outside legal counsel and taking into account its established reserves,that pending legal actions, investigations and regulatory inquiries will be resolved with no material adverse effect on the consolidated financial position of the Company. However, if during any period a potential adverse contingency should become probable or be resolved in an amount in excess of the established reserves, the results of operations in that period could be materially adversely affected. In addition, there can be no assurance that material losses will not be incurred from claims that have not yet been brought to the Company's attention or are not yet determined to be probable or reasonably possible to result in loss. The Company has established a total liability for all such matters of approximately $0.4 million as of December 31, 2017, which is included in "Other accrued expenses" on the Statement of Financial Condition. Management currently estimates the aggregate range of possible loss is from $0 to $1 million in excess of the accrued liability (if any) related to contingent matters as of December 31, 2017 where the likelihood of loss is at least reasonably possible. The Company policy for accounting for legal fees is to record such fees as the services are provided. In the normal course of business, the Company’s customer activities involve the execution and settlement of various customer securities. The Company uses a clearing broker-dealer to execute exchanged-based and customer transactions which are held in brokerage accounts maintained by the clearing broker-dealer. Such transactions may expose the Company and the clearing broker- dealer to significant off-balance sheet risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. In the event customers fail to satisfy their obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices in order to fulfill the customers’ obligations. 12. Subsequent Events The Company has evaluated events subsequent to December 31, 2017, and through the financial statement issuance date of February 28, 2018. The Company has not evaluated subsequent events after that date for presentation in these financial statements. ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Computation of Net Capital Pursuant to Rule 15c3-1 of the Securities and Exchange Commission December 31, 2017 Schedule I 20 There were no material differences between the above computation of net capital pursuant to Rule 15c3- 1 and that filed with the Company’s unaudited December 31, 2017 FOCUS Report. Total stockholder's equity 17,386,830$ Deductions and/or charges Nonallowable assets Receivables and other (6,458,748) Gross deferred income tax asset (4,917,422) Haircut on securities positions (300,371) Net capital 5,710,289 Aggregate Indebtedness Items included in statement of financial condition Commissions payable 3,889,073 Due to parent and affiliates 1,947,841 Other accrued expenses 5,064,498 Total aggregate indebtedness 10,901,412 Computation of Basic Net Capital Requirement Greater of 6-2/3% of aggregate indebtedness or $250,000 726,761$ Excess net capital (net capital, less net capital requirement) 4,983,528 Ratio: Aggregate indebtedness to net capital 190.91% Net Capital ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Computation for Determination of Reserve Requirements and Information Relating to Possession or Control Requirements Under Rule 15c3-3 of the Securities and Exchange Commission December 31, 2017 Schedule II 21 Exemption Under Section (k)(2)(ii) Has Been Claimed The Company is not required to file the above schedule as it has claimed an exemption from Securities and Exchange Commission Rule 15c3-3 (SEC Rule 15c3-3) under Paragraph (k)(2)(ii) of the rule, as it has disclosed that all transactions are cleared with customers on a fully disclosed through a clearing broker or dealer and customer funds and securities are promptly transmitted to the clearing broker or dealer which carries all of the accounts of such customers or the product sponsor or settlement agent with whom the customer transacts. PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Accountants To the Board of Directors and Management of ProEquities, Inc. In accordance with Rule 17a-5(e)(4) of the Securities Exchange Act of 1934, we have performed the procedures enumerated below with respect to the accompanying General Assessment Reconciliation (Form SIPC-7) of the Securities Investor Protection Corporation (SIPC) of ProEquities, Inc. for the year ended December 31, 201 7, which were agreed to by the Company, the Securities and Exchange Commission, Financial Industry Regulatory Authority, Inc., and the Securities Investor Protection Corporation (collectively, the "specified parties") solely to assist the specified parties in evaluating the Company's compliance with the applicable instructions of Form SIPC-7 during the year ended December 31, 2017. Management is responsible for the Company's compliance with those requirements. This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of tho se parties specified in this report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose. The procedures we performed and our findings are as follows: 1. Compared the listed assessment payments on page 1, items 2B and 2F of Form SIPC -7 with the respective cash disbursement records entries, as follows: a. Payment in the amount of $35,922 dated August 22, 2017, per Fed Reference Number 001263 compared to the SIPC-6 obtained from Darren Guerrera, Chief Financial Officer, noting no differences. b. Payment in the amount of $38,017 dated February 2, 2018, per Fed Reference Number 000722 compared to the SIPC-7 obtained from Darren Guerrera, Chief Financial Officer, noting no differences. 2. Compared the Total Revenue amount reported in the audited Form X-17A-5 for the year ended December 31, 2017 to the Total Revenue amount of $109,275,008 reported on page 2, item 2a of Form SIPC-7 for the year ended December 31, 2017, noting no differences. 3. Compared any adjustments reported on page 2, items 2b and 2c, of Form SIPC-7 with the supporting schedules and working papers, as follows: a. Compared deductions on line 2c of $60,267,983 to supporting documentation including general ledger balances for the year ended December 31, 201 7, provided by Darren Guerrera, Chief Financial Officer, noting no differences. 4. Recalculated the arithmetical accuracy of the calculations reflected in Form SIPC-7 and in the related schedules and working papers obtained in procedure 3, as follows: a. Recalculated the mathematical accuracy of the SIPC Net Operating Revenues on page 2, line 2d and the General Assessment @ .0015 on page 2, line 2e of $75,511 of the Form SIPC-7, noting no differences. b. Recalculated the applicable supporting schedules for the deduction in line 2c including the general ledger balances for the year ended December 31, 2017, obtained from Darren Guerrera, Chief Financial Officer , noting no differences. 5. Compared the amount of any overpayment applied to the current assessment on page 1, item 2C of Form SIPC-7 with page 1, item 2H of the Form SIPC-7T filed for the prior period ended December 31, 2016 on which it was originally computed noting no differences. 2 of 2 We were not engaged to and did not conduct an examination, the objective of which would be the expression of an opinion on the Company's preparation of Form SIPC-7 in accordance with the applicable instructions. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you. This report is intended solely for the information and use of management and the board of directors of ProEquities, Inc., the Securities and Exchange Commission, Financial Industry Regulatory Authority, Inc., and the Securities Investor Protection Corporation and is not intended to be and should not be used by anyone other than these specified parties. February 28, 2018 ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Exemption Report Under SEC Rule 17a-5 ProEquities, Inc’s Exemption Report ProEquities, Inc. (the “Company”) is a registered broker-dealer subject to Rule 17a-5 promulgated by the Securities and Exchange Commission (17 C.F.R. §240.17a-5, “Reports to be made by certain brokers and dealers”). This Exemption Report was prepared as required by 17 C.F.R. § 240.17a-5(d)(1) and (4). To the best of its knowledge and belief, the Company states the following: 1. The Company claimed an exemption from 17 C.F.R. § 240.15c3-3 under the following provision of 17 C.F.R. § 240.15c3-3 (k): (2) ii. 2. The Company met the identified exemption provisions in 17 C.F.R. § 240.15c3-3 (k) throughout the most recent fiscal year ended December 31, 2017 except as described below. For the 152 instances listed below, customer funds and securities were not promptly transmitted to the clearing broker, which carries all accounts of such customers, or the product sponsor or settlement agent with whom the customer transacts. Nature of Exception Number of Exceptions Dates of Exceptions Checks or securities were not remitted timely due to a representative error in timely remitting of the check or securities 101 January 2017 (5 exceptions) February 2017 (11 exceptions) March 2017 (8 exceptions) April 2017 (3 exceptions) May 2017 (9 exceptions) June 2017 (4 exceptions) July 2017 (7 exceptions) August 2017 (12 exceptions) September 2017 (12 exceptions) October 2017 (7 exceptions) November 2017 (4 exceptions) December 2017 (19 exceptions) Checks were held by representatives until initial account paperwork could be processed 23 January 2017 (1 exception) February 2017 (2 exceptions) March 2017 (4 exceptions) April 2017 (3 exceptions) June 2017 (5 exception) August 2017 (1 exception) September 2017 (1 exception) November 2017 (3 exceptions) December 2017 (3 exceptions) Checks were not remitted timely due to timing of representative vacations, holidays, and office hours held 16 January 2017 (2 exception) February 2017 (1 exceptions) March 2017 (1 exceptions) April 2017 (4 exception) May 2017 (1 exception) June 2017 (2 exception) September 2017 (4 exception) November 2017 (1 exception) Checks were held at the customer’s request 3 June 2017 (2 exception) December 2017 (1 exception) Checks were held due to home office input error 9 January 2017 (1 exception) April 2017 (1 exception) June 2017 (1 exception) ProEquities, Inc. Confidential (a wholly owned subsidiary of Protective Life Corporation) Exemption Report Under SEC Rule 17a-5 August 2017 (4 exceptions) September 2017 (1 exceptions) October 2017 (1 exception) I, Darren Guerrera, swear (or affirm) that , to the best of my knowledge and belief, this Exemption Report is true and coccec~ J'1 By : 1/vV\.J-.-./ ~ Darren Guerrera Title: Chief Financial Officer Date : February 28, 2018 PricewaterhouseCoopers LLP, 569 Brookwood Village, Suite 851, Birmingham, AL 35209 T: (205) 414 4000, F: (205) 414 4001, www.pwc.com/us Report of Independent Registered Public Accounting Firm To the Management of ProEquities, Inc. We have reviewed ProEquities, Inc.’s assertions, included in the accompanying ProEquities, Inc.’s Exemption Report, in which (1) the Company identified 17 C.F.R. § 240.15c3-3(k)(2)(ii) as the provision under which the Company claimed an exemption from 17 C.F.R. § 240.15c3-3 (the "exemption provision") and (2) the Company stated that it met the identified exemption provision throughout the year ended December 31, 2017 except as described in its Exemption Report with respect to the following exceptions: For the 152 instances listed below, customer funds and securities were not promptly transmitted to the clearing broker which carries all the accounts of such customers, or the product sponsor or settlement agent with whom the customer transacts. Nature of Exception Number of Exceptions Dates of Exceptions Checks or securities were not remitted timely due to a representative error in timely remitting of the check or securities 101 January 2017 (5 exceptions) February 2017 (11 exceptions) March 2017 (8 exceptions) April 2017 (3 exceptions) May 2017 (9 exceptions) June 2017 (4 exceptions) July 2017 (7 exceptions) August 2017 (12 exceptions) September 2017 (12 exceptions) October 2017 (7 exceptions) November 2017 (4 exceptions) December 2017 (19 exceptions) Checks were held by representatives until initial account paperwork could be processed 23 January 2017 (1 exception) February 2017 (2 exceptions) March 2017 (4 exceptions) April 2017 (3 exceptions) June 2017 (5 exception) August 2017 (1 exception) September 2017 (1 exception) November 2017 (3 exceptions) December 2017 (3 exceptions) Checks were not remitted timely due to timing of representative vacations, holidays, and office hours held 16 January 2017 (2 exception) February 2017 (1 exceptions) March 2017 (1 exceptions) April 2017 (4 exception) May 2017 (1 exception) June 2017 (2 exception) September 2017 (4 exception) November 2017 (1 exception) Checks were held at the customer’s request 3 June 2017 (2 exception) December 2017 (1 exception) Checks were held due to home office input error 9 January 2017 (1 exception) April 2017 (1 exception) June 2017 (1 exception) 2 August 2017 (4 exceptions) September 2017 (1 exceptions) October 2017 (1 exception) The Company’s management is responsible for the assertions and for compliance with the identified exemption provision throughout the year ended December 31, 2017. Our review was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and, accordingly, included inquiries and other required procedures to obtain evidence about the Company’s compliance with the exemption provision. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management's assertions. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to management's assertions referred to above for them to be fairly stated, in all material respects, based on the provisions set forth in paragraph (k)(2)(ii) of 17 C.F.R. § 240.15c3-3. February 28, 2018 M or ningstar ® Document R esear ch ℠ FORM 10-K PROTECTIVE LIFE CORP - N /A Filed: March 05, 2019 (period: December 31, 2018) Annual report w ith a comprehensive overview of the company The information c onta ine d herein ma y not be copie d, ada pte d or distributed a nd is not warranted to be a c curate, c omple te or timely . The us e r a s sumes all ris ks for any da ma ges or los s es aris ing from a ny use of this information, exc e pt to the e x te nt suc h da ma ges or los ses ca nnot be limite d or e x cluded by applicable la w. Pas t financ ia l performa nce is no guarantee of future re s ults . UNITED STATES SECURITIES AND EXCHANGE COMMISSIO N WASHINGTON, DC 2 05 49 ____________________________________________________________________________ FORM 10-K x Annual Repo rt Pursua nt to Sectio n 1 3 o r 15 (d) o f the Securities Ex cha ng e Act of 19 34 Fo r the fiscal year ended December 3 1, 2 01 8 o r ¨ Tra nsitio n Repo rt Pursuant to Secti on 13 or 15 (d) o f the Securi ties Excha nge Act of 1 93 4 For the tra nsitio n period fro m to Commission Fi le Number 00 1-11 33 9PROTECTIVE LIFE CORP ORATION (Exact n ame of regi strant as sp ecified in it s charter) DELAWARE (State or other ju risd ictio n o f inco rp oration or organ izatio n) 9 5-249 22 36 (IRS Emp lo yer Identification Numb er) 2 80 1 HIGHWAY 28 0 SOUT H BIRMINGHAM, AL ABAMA 3 52 23 (Ad dress o f p rincipal executi ve offices and zip cod e) Registrant’s teleph on e nu mber, in clu ding area cod e: (20 5) 26 8-1 00 0 Securities reg istered pu rsuan t to Section 1 2(b ) o f the Act: None Securities reg istered pu rsuan t to Section 1 2(g ) o f the Act: None Indicate b y ch eck m ark if the registrant is a well-k nown seaso n ed issu er, as d efined in Ru le 4 05 of the Secu rities Act. Yes ¨ No x Indicate b y ch eck m ark if the registrant is n ot requ ired to file reports pursuant to Sectio n 13 or Sectio n 15(d ) of the Ex change Act. Yes ¨ No x Note—Check in g th e b o x abov e will not reliev e any reg istran t required to file rep o rts pursuant to Sectio n 13 or 1 5 (d) of the Ex ch an g e Act fro m their o bligations und er those Sectio ns. Indicate by check m ark whether the registrant (1) has filed all reports req u ired to be filed by Section 13 o r 15(d) o f th e Secu rities Exchange Act of 1934 d u rin g the preceding 12 mo n th s (or for such sh o rter p eriod that the reg istran t was required to file su ch reports), an d (2) has been su b ject to such filing req u irements for the past 90 d ay s. Yes x No ¨ Indicate by check m ark wh eth er th e registrant has sub m itted electro n ically every In teractiv e Data File required to b e sub m itted p u rsu an t to Ru le 40 5 of Reg ulation S-T (§232.4 0 5 of th is chapter) durin g the preceding 1 2 m onths (or for su ch shorter period th at the registrant was req u ired to submit such files). Yes x No ¨ Indicate by ch eck m ark if d isclosu re of delinq u en t filers p ursuan t to Item 405 o f Regulation S-K is n o t contained h erein, and will n o t be con tain ed , to th e best of registrant’s knowledge, in d efinitive pro xy or info rmation statem en ts incorp orated by reference in Part III of th is Fo rm 10-K or any amend m en t to this Form 1 0-K. x Indicate b y check mark whether th e reg istrant is a larg e accelerated filer, an accelerated filer, a non-accelerated filer, a smaller rep o rtin g com p an y, or an emerg in g gro wth co mpany. See defin itions o f “large accelerated filer”, “accelerated filer”, “smaller rep o rting com p an y ”, an d “em erging growth company” in Rule 12b-2 of th e Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller rep o rting co m p an y ¨ Emerg ing Gro wth co m p an y ¨ If an emerg in g growth comp an y, indicate by ch eck m ark if th e registrant h as elected not to u se the extend ed transition p eriod for co mplyin g with an y new or rev ised finan cial accou n tin g stan d ards p rovided p u rsu an t to Section 13(a) of th e Exchange Act. ¨ Indicate by check mark whether th e registrant is a shell company (as defin ed in Rule 12 b -2 o f the Act). Yes ¨ No x Ag g regate market value of the registrant’s votin g co m mon stock held by n o n -affiliates of the registrant as o f Ju n e 3 0, 2018 : No n e ($0) Nu m ber of shares of Commo n Stock, $0 .0 1 Par Value, outstan d ing as o f Febru ary 1, 2 0 1 9: 1,00 0 Docu ments Incorp o rated by Reference: No ne Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PROTECTIVE LIFE CORPORATION ANNUAL REPORT ON FORM 10 -K FOR FISCAL YEAR ENDED DECEMBER 3 1, 20 18 TABLE OF CONTE NTS Pa g e PART I Item 1.Bu sin ess 3 Item 1A.Risk Facto rs 15 Item 1B.Un reso lv ed Staff Co mmen ts 35 Item 2.Pro perties 35 Item 3.Leg al Pro ceed i ng s 35 Item 4.Mine Safety Disclosure—Not App licabl e 35 PART II Item 5.Market for t he Registrant's Co mmon Equ ity, Rel ated Sto ckh older M att ers an d Issu er Pu rch ases o f Eq uity Secu rities 36 Item 6.Select ed Finan cial Data 37 Item 7.Manag ement's Discu ssi on an d An aly sis of Finan cial Co nd ition an d Resu lts of Operation s 39 Item 7A.Qu ant itative and Qualitative Di sclo sures Abo ut M ark et Risk 1 00 Item 8.Fin ancial Statements and Su ppl ementary Data 1 00 Item 9.Ch ang es in an d Disagreemen ts with Acco un tan ts o n Accounting and Fi nancial Disclo su re 1 87 Item 9A.Co ntro ls an d Procedu res 1 87 Item 9B.Other In fo rmation 1 88 PART III Item 10 .Direct ors, Execu tive Officers an d Corpo rate Gov ern an ce 1 89 Item 11 .Executiv e Compensation 1 93 Item 12 .Security Ownersh ip of Certain Ben efi cial Owners and M anagement and Related St ockh old er M atters 2 17 Item 13 .Certai n Relatio nships an d Related Transactio ns an d Director In dep end en ce 2 18 Item 14 .Principal Acco un tan t Fees and Services 2 19 PART IV Item 15 .Exhib its, Finan cial Statemen t Sched ules 2 20 Item 16 .Form 1 0-K Su mmary - Non e Sig natures 2 37 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART I Item 1 . Business Protecti ve Life Corp oration (the “Compan y”), is a ho ld in g co mp any headq uartered in Birmin gh am, Alabama, with su bsidiaries that prov ide finan cial serv ices primarily in t he United States throu gh th e prod uct io n, d istrib utio n, and admin istration of in surance and in vestmen t p rod ucts. Fo un ded in 19 07 , Protecti ve Life Insu ran ce Co mp any (“PLICO”) is the Compan y’s largest op eratin g subsid iary. Un l ess th e con tex t o th erwise req uires, th e “Co mp an y,” “we,” “us,” o r “o ur” refers to the con so lidated g ro up of Protective Life Corp oration and its subsidiaries. On Feb ru ary 1, 2 01 5, Th e Dai-ichi Life Insu ran ce Comp any, Limited , a ka bu shiki ka isha organ ized u nd er the laws of Japan (n ow k no wn as Dai-i ch i Life Ho ldi ng s, In c., “Dai -ichi Life”), acqu ired 1 00 % of th e Co mp any ’s ou tstan ding shares of commo n sto ck throu gh th e merg er o f DL Inv estment (Delaware), Inc., a Delaware corpo ration and wh olly owned su bsid iary of Dai-ichi Life, with and in to the Co mp any, with th e Co mp an y con tin uing as the survivin g entity (the “M erg er”). As a result o f the Merger, the Co mpan y is a direct, who lly o wn ed sub sid iary o f Dai -ichi Life. The Co mp an y op erates sev eral op eratin g segments, each having a strateg ic focu s. An o perating seg men t is distin gu ish ed by pro du cts, ch ann els of distri bu tion , and /or other strategic d istinctio ns. The Comp any ’s o perating seg men ts are Life M ark eting , Acqui siti on s, An nu iti es, Stable Value Prod uct s, and Asset Pro tectio n. The Compan y h as an add itio nal rep orting segment referred to as Corpo rate an d Oth er which co nsists of net in vestmen t inco me on assets sup po rti ng o ur eq uity capital, u nallo cated co rp orate overhead, and ex pen ses no t attrib utable to th e seg men ts ab ov e (in clu ding in terest o n certain corpo rate debt). This seg men t also includ es earn i ng s from sev eral no n-st rat eg ic or ru no ff lin es of b usiness, finan cin g an d investment-related transactio ns, an d th e op eratio ns of several small sub si diaries. Th e Comp any p eriod ical ly evaluates i ts op eratin g seg men ts and mak es ad ju stments to ou r segment rep ort in g as needed . Ad ditio nal informatio n co ncern in g the Company and its o perating segment s may b e fou nd in It em 7, Ma na gement’s Di scussio n a nd Ana lysis o f Fin an cia l Co nd itio n a nd Resu lts of Opera tions, and Note 22 , Op erati ng Segmen ts to the co nso lid ated financial statements inclu ded in th is rep ort. In the follo win g p aragraph s, th e Co mp any rep orts sales and ot her statisti cal in fo rmation . These statistics are u sed to measure th e relativ e prog ress o f its mark eting an d acqu isitio n efforts, b ut may n ot h ave an immediat e i mp act on repo rted segment o r co nso lidated adjusted o perating inco me. Sales d ata fo r tradition al l ife insurance is based on an nu alized premiums, wh ile un iv ersal life sales are b ased o n ann ualized p lan ned p remiu ms, o r “target” p remiu ms if lesser, plus 6 % o f amo un ts receiv ed in ex cess o f targ et premiums an d 10 % of sin gle p remiu ms. “Target” p remiu ms for u niversal l ife are tho se p remiu ms u po n wh ich fu ll first year co mmissio ns are paid. Sales of an nu iti es are measured b ased on th e amou nt of pu rch ase p ayment s receiv ed l ess surrenders occu rring withi n twelve mo nths o f the p urchase pay ments. Stable value con tract sales are measu red at th e time th e pu rch ase p ayments are received . Sales wi th in th e Asset Pro tectio n seg men t are b ased o n the amount of sin gle premiums and fees received . These statistics are deriv ed fro m various sales track in g an d admi nistrativ e systems an d are n ot derived from th e Co mp any ’s finan cial rep orting systems or finan cial statemen ts. These statist ics attempt to measu re o nly some o f the many fact ors that may affect fu tu re p ro fit ab i lity, and t herefore, are n ot in ten ded to b e predictive o f future profitabil ity. Life Ma rketing The Life Marketing segment markets fixed un iv ersal li fe (“UL”), in dexed u niversal life (“IUL”), v ariable uni versal life (“VUL”), b ank -o wned life in surance (“BOLI”), an d level premi um term insu ran ce (“trad itio nal”) p ro du cts on a natio nal basis, p rimarily th ro ug h n etwo rk s of ind epend ent i nsu ran ce ag ents and brok ers, brok er-dealers, fin ancial institution s, in dep end ent di stri bu tion organ izat io ns, an d affinity grou ps. The fol lo win g tabl e p resen t s th e Life Marketin g segmen t’s sales as defin ed ab ov e: Successor Compa ny For The Year Ended December 31,Sales (Dolla rs I n M i l l i o ns ) 20 18 $16 8 20 17 17 2 20 16 17 0 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 14 4 Predecesso r Co mpany Sales (Dolla rs I n M i l l i o ns ) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $1 2 Fo r the y ear end ed Decemb er 31, 20 14 13 0 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Acquisi tions The Acqu isit io ns seg men t focu ses o n acqu iring, co nv ertin g, an d servicin g p olicies and con tracts fro m o th er co mp anies. The seg ment’s primary fo cus is o n l ife insurance po licies an d ann uit y produ cts t hat were sold to i nd iv id uals. The level o f the seg men t’s acqui siti on activ ity is p redicated up on many facto rs, in cludi ng av ailable cap ital, o perati ng cap acit y, p otential ret urn on capital, an d market dy namics. Th e Co mp any ex pects acq uisitio n op po rtu nities to co nti nu e to be av ailable. Ho wever, the Compan y b elieves it may face increased competitio n and evo lv in g cap ital requ iremen ts th at may affect the en viron ment and th e fo rm of fu tu re acq uisiti on s. Mo st acq uisition s completed b y the Acq uisiti on s segment have n ot in clu ded the acqu i sition o f an active sales force, th us p oli cies acqu ired throu gh th e segment are ty pically block s o f bu siness where no n ew po licies are bei ng marketed. Therefo re, earning s an d acco un t values are ex pected to declin e as th e resu lt o f lap ses, d eath s, and o th er terminatio ns o f co verage, u nless new acquisiti on s are mad e. Th e segment’s reven ues and earn in gs may flu ctu ate from y ear to year d epen ding up on th e lev el o f acqu isitio n activ ity. In transactio ns where some mark eting activity was in clu ded , th e Co mp any may cease future mark eting effort s, red irect tho se efforts to an oth er seg ment of the Company, or elect to co ntinu e mark eting new pol icies as a co mp on ent of other segments. The Co mp any b elieves t hat its focu sed and d isciplined ap proach t o th e acqui siti on p ro cess an d its exp erience in the assimilatio n, con servatio n, and serv icing of acq uired po l ici es prov id es a sig nificant competitive adv antage. On May 1 , 2 01 8, Th e Linco ln Natio nal Life Insurance Co mp any (“Lin coln Life”) co mp leted th e acq uisition (the “Closin g”) of Libert y Mut ual Grou p In c.’s (“Liberty M utual ”) Group Benefits Busin ess an d Ind iv id ual Life an d An nu ity Bu siness (the “Life Bu sin ess”) th ro ug h th e acq uisition of all o f the issued and o utstand in g capital sto ck of Liberty Life Assurance Co mp any o f Bosto n (“Liberty ”). In co nn ection with the Clo sing and p ursuan t to th e M aster Tran saction Agreemen t, dated Jan uary 1 8, 2 01 8, PLICO and Protective Life an d An nu ity Insurance Company (“PLAIC”), a wh olly own ed su bsid iary o f PLICO, entered into reinsurance ag reemen ts (th e “Rein surance Agreemen ts”) an d related ancillary do cu men ts (in clu ding ad ministrativ e services ag reements an d tran sition servi ces ag reement s) p ro vidin g for th e rei nsu ran ce an d ad minist ratio n o f the Life Busin ess. Pursu ant to the Rein surance Ag reemen ts, Liberty ced ed t o PLICO an d PLAIC th e insurance po licies relat ed to th e Life Busin ess on a 1 00 % co insu ran ce basis. Th e agg reg ate ceding commission for the rein surance o f the Life Business was $42 2.4 million, wh i ch is the p urchase p rice. Oth er than cash receiv ed as p art of th e acq uired Liberty in vestmen t p ortfoli o as reflected in “amo unt s received from rein su ran ce tran saction ” in th e Consolid ated Statemen t o f Cash Flows an d as reflected in th e table below, thi s was a n on -cash transacti on . All po licies i ssu ed in states other than New Yo rk were ced ed to PLICO u nd er a rein surance ag reement b etween Lib erty and PLICO, an d all p olicies issued in New York were ced ed t o PLAIC un der a reinsu ran ce ag reemen t b etween Lib ert y and PLAIC. The agg reg ate statu to ry reserves of Lib erty ceded to PLICO an d PLAIC as o f the closing of t he Transactio n were ap prox imately $13 .2 b illio n, wh ich amou nt was based on i nitial estimates an d is subject to ad justmen t fo llowing the C lo sin g. Pu rsuan t to the terms of the Rein surance Agreements, each o f PLICO and PLAIC are requi red to mai ntain assets in tru st for th e ben efit of Lib erty to secu re th eir resp ecti ve o bligat io ns t o Lib erty un der the Rein surance Agreements. The trust acco un ts were in iti all y fu nd ed by each of PLICO and PLAIC pri ncipally wi th the in vestmen t assets th at were receiv ed fro m Lib erty. Additio nally, PLICO an d PLAIC h ave each ag reed to pro vide, on behalf of Liberty, ad minist ratio n an d po licyh older servicin g o f th e Life Bu siness rei nsu red b y it pu rsuant to admin istrative services ag reemen ts between Lib erty an d each o f PLICO and PLAIC. On Janu ary 2 3, 20 19, PLICO en tered in to a Master Transactio n Ag reemen t (th e “GWL&A Master Transact io n Ag reemen t”) with Great-West Life & An nu ity In surance Compan y (“GWL&A”), Great-West Life & An nui ty In surance Compan y o f New Yo rk (“GWL&A o f NY”), The Canada Life Assu ran ce Co mp any (“CLAC”) an d The Great-West Life Assu rance Co mp any (“GWL” and , to gether with GWL&A, GWL&A of NY and CLAC , th e “Sel lers”), p ursu ant to wh ich PLICO will acquire v ia rein surance (th e “Transacti on ”) su bstantiall y all of th e Sel lers’ in dividu al life in su rance and ann uity bu siness (the “Indi vidu al Life Bu siness”). Pursuan t to th e GWL&A Master Tran saction Agreemen t, PLICO an d PLAIC will enter in to rein surance ag reemen ts (the “Reinsu ran ce Agreements”) and rel ated an cillary d ocu men ts at th e clo sing of th e Tran saction. On the terms and su bject t o the con ditio ns of th e Reinsurance Ag reemen t s, the Sellers will ced e to PLICO and PLAIC, effect iv e as o f th e clo sing of the Transacti on , su bstantially all of th e insu ran ce po licies relating to th e In dividu al Life Busin ess. To sup po rt its o blig ation s un der th e Reinsu ran ce Agreements, PLICO will estab lish trust accou nts fo r the b en efit o f GWL&A, CLAC and GWL, and PLAIC will est ab l ish a trust acco un t for t he ben efit o f GWL&A o f NY. The Sellers will retain a blo ck of particip ating po licies, wh ich will be ad minist ered b y the Co mpan y. The Transactio n is su bject t o the satisfaction or waiv er o f cu sto mary closin g conditio ns, includ i ng reg ulato ry app ro vals and th e executio n of th e Reinsuran ce Agreements and related ancillary docu men ts. The GWL&A M aster Tran saction Ag reemen t an d oth er transacti on docu men ts co ntain certain cu stomary represen tat io ns an d warranties made b y each o f the p art ies, and certain customary cov enan ts regarding th e Sellers and th e In dividu al Life Bu siness, an d p ro vide for in demnification , amo ng other th in gs, for breaches o f tho se rep resen tatio ns, warran ties and cov enants. Annuiti es The Ann uities segmen t markets fi xed and v ariable ann uit y (“VA”) p ro du cts. These produ cts are p rimari ly so ld thro ug h brok er-deal ers, finan cial in stit utio ns, an d ind epen dent agen ts an d b ro kers. The Co mp an y’s variab le an nu i ties o ffer th e po licyh older the o pp ortun ity to i nv est in various i nv estment accou nts an d offer op t io nal features that gu arantee th e death and wit hd rawal b enefits of the un derly ing an nu ity. 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any ’s fix ed an nu ities includ e index ed ann uities, singl e premium d eferred ann uities, an d sing le p remiu m immed iat e ann uities. The Co mp any ’s fix ed ann uities also incl ud e mo dified gu aran teed ann uit ies whi ch g uarantee an in terest rate for a fixed p eriod . Cont ract values for these ann uities are “mark et-value adju sted ” u pon surren der p rio r t o maturity. In certain interest rate en viron ments, these pro du cts affo rd th e Co mp any with a measure of protecti on from th e effects of chan ges in interest rates. The deman d fo r ann uit y prod ucts is related to th e g eneral lev el of interest rates, p erforman ce of th e equi ty mark ets, and p erceived risk o f i nsu ran ce co mp anies. The followin g table presents fix ed ann uit y and VA sales: Successor Compa ny For The Year Ended December 31, Fix ed Annuities Va ria ble Annuities To tal Annuities (Dollars In M i l l io ns) 20 18 $2,1 40 $2 98 $2 ,43 8 20 17 1,1 31 4 26 1 ,55 7 20 16 7 27 5 93 1 ,32 0 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 5 66 1,0 96 1 ,66 2 Predecesso r Co mpany Fix ed Annuities Va ria ble Annuities To tal Annuities (Dollars In M i l l io ns) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $28 $59 $8 7 Fo r the y ear end ed Decemb er 31, 20 14 8 31 9 53 1 ,78 4 Stable Value Pro ducts The Stable Val ue Pro du cts seg men t sell s fixed and floati ng rate fu nd in g ag reemen ts direct ly to th e trustees o f mun icipal bond p ro ceed s, money mark et fun ds, b ank trust dep artments, and other in stit utio nal in vestors. The seg men t also issues fund in g agreements to the Fed eral Ho me Lo an Bank (“FHLB”) and markets g uarant eed i nv estment con tracts (“GICs”) to 4 01 (k ) and other qualified retiremen t savi ng s p lan s. GICs are con tracts which specify a ret urn on fun ds for a specified perio d and o ften pro vide flexibility fo r withd rawals at b oo k value in k eep i ng with the benefits prov i ded by th e plan. Th e deman d for GICs is related to th e relative attractiveness of th e “fixed rate” inv estment op tion i n a 40 1(k ) p lan co mp ared to th e equ ity-based in vestmen t op tion s which may be av ailabl e to pl an particip ants. Th e Co mp any also has an un reg istered fun ding agreement-b acked no tes p ro gram wh ich prov id es fo r offers o f no tes to b oth do mesti c and intern ation al in stitutio nal inv estors. M ost GICs an d fu nd ing agreements th e Compan y has written hav e maturiti es o f on e to twelv e years. The fol lo win g tabl e p resen t s Stable Value Pro du cts sales: Successor Compa ny For The Year Ended December 31,G ICs Funding Agreements Total (Dollars In M i l l io ns) 20 18 $89 $1 ,25 0 $1 ,33 9 20 17 1 16 1 ,65 0 1 ,76 6 20 16 1 90 1 ,66 7 1 ,85 7 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 1 15 69 9 81 4 Predecesso r Co mpany G ICs Funding Agreements Total (Dollars In M i l l io ns) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $— $— $— Fo r the y ear end ed Decemb er 31, 20 14 42 5 0 9 2 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Asset Pro tectio n The Asset Pro tectio n segmen t markets ex ten ded service cont racts, cred it life an d disab ility in su ran ce, and o th er specialized an cill ary pro du cts to protect co nsumers’ in vestmen ts i n au tomobiles, recreation al veh icles, wat ercraft, and p owerspo rts. In add i tion , the segmen t markets a gu aran teed asset protecti on (“GAP”) prod uct. GAP prod ucts are d esig ned to cov er th e d ifference bet ween the sched uled lo an pay-off amo unt and an asset’s actu al cash value in the case o f a to tal loss. Each ty pe of sp ecialized an cillary prod uct p ro tects ag ainst damag e or o th er lo ss to a p articu lar asp ect o f th e un derlyi ng asset. Th e segmen t ’s p ro du cts are p rimarily marketed th ro ug h a natio nal n etwork o f app ro ximately 8 ,50 0 automob ile, marine, RV, and po wersp orts d ealers. A n etwo rk of direct employ ee sales representatives an d g eneral agen ts di stri bu te these produ cts to the d ealer mark et. The follo win g table p resent s th e in surance and related prod uct sales measured b y the amo un t o f sin gle premiums and fees received : Successor Compa ny For The Year Ended December 31,Sa les (D oll ars In Millions) 20 18 $48 2 20 17 58 4 20 16 50 4 Fo r the p eriod of Feb ru ary 1, 2 01 5 t o December 31 , 20 15 48 2 Predecesso r Co mpany Sa les (D oll ars In Millions) Fo r the p eriod of Janu ary 1, 2 01 5 to Jan uary 3 1, 2 01 5 $3 7 Fo r the y ear end ed Decemb er 31, 20 14 48 7 In 20 18 , all of th e segmen t’s sales were thro ug h the auto mo bile, RV, marin e, an d p owerspo rts d ealer distri bu tion chan nel an d ap prox imately 8 3.7 % of th e segmen t’s sales were extend ed service co ntracts. A po rtion o f th e sales and resulting premiums are rein sured with prod ucer-affiliated reinsurers. Co rpo rate and Other The Co rp orate and Other seg men t primarily co nsists of net i nv estment inco me on assets sup po rting o ur eq uity cap ital, un allocated corpo rate ov erhead , and ex pen ses n ot attri bu tab le to t he seg men ts abo ve (includ in g int erest o n corpo rate deb t). Thi s seg men t in clu des earn in gs fro m several n on - strateg ic o r run off lines o f b usiness, finan cin g and in vestment rel ated tran saction s, and th e op eratio ns o f several small sub si diaries. The results of th is segmen t may flu ctu ate fro m y ear t o year. 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Inv estments As o f Decemb er 3 1, 2 01 8 (Successo r Co mp any ), the Co mp any ’s inv estment p ortfolio was ap prox imately $6 6.1 bil lion . Th e ty pes of assets in wh ich th e Co mp any may inv est are in fluen ced by vario us stat e insurance laws which p rescribe qu alified inv estment asset s. Within the p arameters of th ese laws, the Co mp any inv ests in assets giv in g co nsid eratio n to su ch factors as l iq uidity an d cap i tal n eed s, investmen t qu ality, in vestmen t return, mat ch ing of assets and liabilities, and th e ov erall co mposition of t he inv estment po rtfo lio by asset typ e and credit ex po su re. On February 1 , 20 15 , immed iat ely before th e Merger, th e fair value of th e Compan y’s inv est ment po rtfolio was signi fican t ly ab ov e th e carry in g value p rimarily d ue to lo w mark et i nterest rat es. As a resu lt o f pu rchase accoun ting app lied as o f Feb ruary 1, 2 01 5, the carryin g v alue o f the Compan y’s in vestmen t p ortfolio was adjusted to fair value which resu lted i n a drop in the o verall y ield o f the Compan y’s inv estment po rtfo lio for th e successo r p eriod . Fo r furth er informatio n regarding th e Co mp any ’s in vestmen ts, the matu rity of and th e co ncentrati on o f risk amo ng th e Co mp any ’s in vested assets, deriv ative fin anci al in stru men ts, an d liq uidity, see Note 2 , Summary o f Sign ifica nt Accounting Po licies, Note 5, Investmen t Opera tion s, and No te 7 , Derivative Fin an cia l In struments to th e conso lidated finan cial st atemen ts in clu ded in this repo rt, and Item 7, Ma nagemen t’s Discu ssion an d Analysis of Fina ncial Condi tion an d Resu l ts o f Op eratio ns. The fol lo win g tabl e p resen t s th e in vestmen t result s from con tinu in g o peration s o f the Compan y: Successor Compa ny Realized Inv estment Ga ins (Losses) Cash, Accrued Investment Income, and Investments a s of December 31, Percentage Earned on Av erag e o f Ca sh a nd Investments Net Investment Income Deriv a tive Fina ncia l Instruments All Other Investments (D ollars In Thous ands) Fo r The Year Ended Decem ber 31, 2 0 18 $66 ,93 6,7 64 $2,4 83 ,75 0 3.9 % $6 0,9 88 $(2 53 ,37 3) Fo r The Year Ended Decem ber 31, 2 0 17 55 ,37 0,9 26 2,0 51 ,58 8 3.8 (30 5,8 28 ) 1 09 ,68 6 Fo r The Year Ended Decem ber 31, 2 0 16 51 ,52 6,7 33 1,9 42 ,45 6 3.8 (4 0,2 88 ) 72 ,91 1 Feb ruary 1 , 2015 to December 3 1 , 2015 46 ,04 0,2 20 1,6 32 ,94 8 3.5 2 9,9 97 (1 93 ,87 9) Predecesso r Co mpany Realized Investment G ains (Lo sses) For The Perio d of Net Inv estment Inco me Deriv a tiv e Financial Instruments All Other Investments (D o l l a rs I n Tho usa nds ) Jan uary 1 , 2 015 to Jan uary 3 1 , 2015 $17 5,1 80 $(1 23 ,27 4) $8 0,6 72 Predecesso r Co mpany Realized Inv estment Ga ins (Losses) Ca sh, Accrued Inv estment Inco me, a nd Inv estments as of December 3 1 , Percenta g e Ea rned o n Average of Ca sh and Investments For The Year Ended December 3 1 , Net Investment Income Deriv a tive Fina ncia l Instruments All Other Investments (Dollars In Thousands) 20 14 $46 ,53 1,371 $2 ,19 7,7 24 4.7 % $(34 6,8 78 ) $1 98 ,12 7 Mo rtg ag e Lo ans The Company in vests a po rti on o f its in vestmen t portfolio in commercial mortg age lo ans. As o f Decemb er 3 1, 20 18 (Successo r Co mp any ), the Co mp any ’s mortg age lo an ho ld in gs were app ro ximately $7.7 b illion . The Co mp any h as sp ecialized i n making lo an s on credi t-orien ted co mmercial prop erties, credit-an chored strip sho ppi ng centers, senior living facil ities, and apartments. The Co mp an y’s u nd erwrit in g procedu res relat iv e to it s co mmercial lo an po rtfo lio are b ased, in the C ompany ’s view, o n a co nserv ative and d iscipli ned approach. Th e Compan y con centrates o n a small nu mb er of commercial real estate asset typ es asso ciat ed with t he n ecessities of life (retail, mu lti -family, sen io r livin g, p ro fessio nal o ffice b uildi ng s, and wareh ou ses). Th e Company believes th ese asset typ es tend to weath er eco no mic d owntu rn s b etter th an o th er commercial asset classes in wh ich it h as ch osen n ot to p articipate. Th e Co mp any b elieves th is d iscip lined approach has h elp ed to main tai n a relat iv ely low del in qu ency and fo reclo su re rate throu gh ou t its h istory. The majo rity of th e Comp any ’s mortg age loan portfolio was u nd erwritten and fun ded by t he Compan y. From time to time, th e Compan y may acq uire loan s in con ju nctio n with an acqui siti on . For mo re informati on 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents regardin g the Co mp any ’s i nv estment in mortg age loan s, refer to Item 7, Mana gement’s Discussio n an d Ana lysis o f Fin an cia l Condi tion a nd Resu lts o f Op erati on s, and No te 9 , Mortg ag e Loa ns to th e co nsolid ated finan cial statements includ ed herein . Ra tings Variou s Nationally Reco gn ized Stat istical Rating Organization s (“rating organ izatio ns”) review th e fin anci al p erforman ce and con dit io n o f in su rers, in clu ding o ur insurance sub si diaries, an d pu blish th eir financial stren gth ratin gs as in dicato rs o f an in su rer’s ab ility to meet p olicy ho ld er and co ntract h older ob ligatio ns. Th ese rating s are impo rtant to maintain in g p ub lic co nfid ence in an insurer’s prod ucts, its abi lity to mark et its prod ucts an d i ts competitive po sition . The fo l lo win g t ab le summarizes th e curren t fin ancial stren gth ratings o f o ur si gn ifican t member companies fro m the major ind epend ent rating organizations: Ra tings A.M. Best Fitch Sta nda rd & Poo r’s Mo o dy’s In su ran ce co mp any fi nancial streng th ratin g: Pro tectiv e Life In su ran ce Co mpan y A+ A+ AA- A1 West Co ast Life In surance Compan y A+ A+ AA- A1 Pro tectiv e Life and An nu ity In surance Compan y A+ A+ AA- — Pro tectiv e Prop erty & Casualty In surance Compan y A — — — MONY Life In surance Compan y A+ A+ A+ A1 The C ompany ’s ratin gs are sub ject to revi ew and ch ang e b y the rating o rg anization s at any time and with ou t n otice. A d owngrade or ot her n egativ e actio n by a rating s o rg anizati on with resp ect to th e fin an cial stren gth ratin gs of the Co mp any ’s insu ran ce su bsidiaries co uld adv ersely affect sales, rel ati on ships with dist ribu to rs, the level o f p olicy surren ders and with drawals, the Comp any ’s acqu isitio ns strategy or co mp etitive p osit io n i n the mark etp lace, and the co st or avai lability of reinsuran ce. The ratin g ag encies may tak e vario us actions, po sitive o r negative, with resp ect to th e finan cial streng th ratin gs of th e Co mp any ’s in surance su bsidiaries, i ncl ud in g as a result o f the Compan y’s statu s as a su bsidiary of Dai-ich i Life. Ratin g o rg anization s also p ub lish credit rating s for th e issuers of deb t secu rities, includ in g the Compan y. Credit rat in gs are in dicato rs of a d ebt issuer’s ab ility t o meet t he terms of d ebt o bligat io ns i n a timely mann er. Th ese rating s are impo rtant in the deb t issuer’s o verall ab i lity to access credit mark ets and other t yp es of liq uidity. Ratin gs are n ot reco mmen dations to b uy th e Compan y’s securities or prod ucts. A downg rad e or o th er n egativ e action by a rating s o rg anizati on with respect to o ur cred it ratin g co uld limi t the Compan y’s access to cap i tal mark ets, in crease th e cost of issuing deb t, an d a do wng rad e of su fficient magn i tu de, co mb in ed with oth er negativ e facto rs, coul d req uire th e Co mpan y t o po st coll ateral. The ratin g organ izat io ns may take vario us actio ns, po sitive or neg ative, with resp ect to the Company ’s deb t rating s. 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Life Insurance In-Force The fol lo win g tabl e p resen t s life insurance sales b y face amou nt and life insuran ce in -force: Successo r Compa ny Predecessor Compa ny Fo r The Yea r Ended December 3 1 , Februa ry 1 , 2 015 to December 31, 201 5 Janua ry 1, 201 5 to Janua ry 3 1, 201 5 For The Year Ended December 31 , 20 1 8 2 0 1 7 2 0 16 2 0 14 (Dollars In Thousands) (Do lla rs I n Thousa nds ) New Bu sin ess Writ ten Life Marketin g $59 ,71 6,9 49 $52,1 54,59 0 $4 8,6 54 ,14 0 $3 7,6 77 ,35 2 $3,4 25 ,21 4 $3 5,9 67 ,40 2 Asset Protection 37 3,7 65 4 83,29 9 6 46 ,22 5 6 41 ,79 4 58 ,34 5 8 78 ,67 1 Total $60 ,09 0,7 14 $52,6 37,88 9 $4 9,3 00 ,36 5 $3 8,3 19 ,14 6 $3,4 83 ,55 9 $3 6,8 46 ,07 3 Successo r Co mpany Predecesso r Co mpany As of December 31, As o f December 31 , 2018 20 1 7 20 1 6 2 0 1 5 2 0 14 (Do l la rs I n Tho usa nds ) (D ol l ars In Tho us a nds) Business Acq uired Acqu isitio ns $31 ,12 7,4 01 $— $8 3,2 85 ,95 1 $— $— In su ran ce In-Fo rce at End of Year(1 ) Life Marketin g $6 41 ,00 4,4 17 $61 3,7 52 ,20 9 $59 0,0 21 ,21 8 $56 5,8 58 ,83 0 $54 6,9 94 ,78 6 Acqu i sitions 2 59 ,16 8,4 14 24 6,4 99 ,11 5 26 3,7 71 ,25 1 19 9,4 82 ,47 7 21 5,2 23 ,03 1 Asset Protection 1 ,22 0,8 01 1,4 66 ,33 4 1,7 21 ,64 1 1,9 10 ,69 1 2,0 55 ,87 3 Total $9 01 ,39 3,6 32 $86 1,7 17 ,65 8 $85 5,5 14 ,11 0 $76 7,2 51 ,99 8 $76 4,2 73 ,69 0 (1)Rein suran ce assu m ed has been in clu d ed , rein surance ceded (Successo r 2 0 1 8 - $3 0 2 ,149,6 1 4 ; 2 0 1 7 - $3 2 8 ,377,39 8 ; 20 1 6 - $34 8 ,9 94,650 ; 2015 - $368,1 4 2 ,294); (Predecesso r 2 0 1 4 - $3 88,890 ,0 6 0) h as not been deducted. The ratio of v olun tary termi natio ns of i nd iv id ual l ife in su ran ce to mean ind iv id ual life insu ran ce in-fo rce, wh ich is determin ed by div id in g th e amou nt of in su ran ce termin ated d ue to lapses d uring the y ear by th e mean o f the i nsu ran ce in-force at th e b eginn i ng an d en d of the year, adjusted for the timing of maj or acq uisition s is as fo l lo ws: Successor Compa ny As of December 3 1, Ra tio o f Volunta ry Termina tion 20 18 5.1 % 20 17 4.5 20 16 4.9 20 15 4.2 Predecesso r Co mpany As of December 3 1, Ra tio o f Volunta ry Termina tion 20 14 4.7 % 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Inv estment Pro ducts In-Fo rce The amo un t of in vestmen t p rod ucts in -fo rce is measu red by acco un t balan ces. The followi ng tab le includ es the stable value p ro du cts an d fixed and variable an nu ity acco un t balan ces. A majority of the VA accou nt b alan ces are rep orted in the Co mp any ’s fin ancial statements as liabil ities related to sep arate acco un ts. Successor Compa ny As of December 3 1, Stable Value Pro ducts Fixed Annuities Variable Annuities (D o l l ars In Tho us a nds) 20 18 $5,2 34 ,73 1 $1 3,7 20 ,08 1 $1 2,2 88 ,91 9 20 17 4,6 98 ,37 1 1 0,9 21 ,19 0 1 3,9 56 ,07 1 20 16 3,5 01 ,63 6 1 0,6 42 ,11 5 1 3,2 44 ,25 2 20 15 2,1 31 ,82 2 1 0,7 19 ,86 2 1 2,8 29 ,18 8 Predecesso r Co mpany As of December 3 1, Stable Value Pro ducts Fixed Annuities Variable Annuities (D o l l ars In Tho us a nds) 20 14 $1,9 59 ,48 8 $1 0,7 24 ,84 9 $1 3,3 83 ,30 9 Underwriting The un derwri ting p olicies of the Compan y’s insu ran ce su bsid iaries are est ab l ish ed by manag ement. With respect to in divid ual insuran ce, the sub si diaries use informat io n fro m the app lication , an d in so me cases, th ird p arty med ical in fo rmation prov id ers, inspectio n rep ort s, credit repo rts, mo to r vehicle reco rd s, previou s un derwriting records, atten ding physician stat ements and /o r t he resu lts of a medi cal exam, to determin e wh eth er a p olicy sho uld b e issued as ap plied fo r, other th an app lied for, o r rejected. Su bstan dard risks may be referred to reinsurers for evaluatio n. Th e Co mp any do es utilize a “simplified issu e” app ro ach for certain p olicies. In th e case of “simp l ified issue” policies, co verage is rej ected if the respon ses to certain heal th questio ns co ntain ed in the ap plicat io n, o r the app licant’s in ability to mak e an un qu alified h ealth certification , in dicate adv erse h ealth o f the app licant. The Compan y’s insurance subsidiaries g en erally req uire b loo d samples to be d rawn wit h ind iv id ual in su ran ce ap plicatio ns ab ov e certain face amou nts b ased o n th e ap pli can t’s age. Blo od samples are tested for a wid e range of ch emical values an d are screened fo r an tibo dies to certain v i ru ses. Ap plicatio ns also con tain q uestio ns permitted by l aw regarding certain v iru ses which mu st be answered b y the p ro po sed insureds. The Compan y u tilizes an ad van ced un derwriting sy stem, TeleLife®, for certain prod uct lines in its life bu siness. TeleLife® streamlines the ap pli catio n pro cess throu gh a teleph on ic in terview of th e app licant, sch edu les med ical exams, accel erates the un derwriting p ro cess an d th e u lti mate issuan ce of a po l icy mostl y th rou gh electron ic mean s. The Compan y also in tro du ced a streamlined un derwri ting ap pro ach th at uti lizes th e TeleLife® p rocess and no ninv asiv e risk selectio n t oo ls to ap prov e some app licati on s witho ut req uiring a paramedical ex am or lab testing . The Co mp an y’s max imum retention limit on d irectly issued bu siness is $5 ,00 0,0 00 fo r any one life on certain of its tradition al life an d un iv ersal life prod uct s. Reinsurance Ceded The Compan y’s insuran ce sub sidiaries cede l ife in surance to o th er insu ran ce comp anies. Th e ced in g insurance company remain s l iab le with resp ect to ced ed insu ran ce sho uld an y rein surer fail t o meet th e ob ligatio ns assumed b y it. For app ro ximately 1 0 y ears prior to mid -2 00 5, the C ompany ent ered into rein surance con tracts in which th e Co mp any ced ed app ro ximately 90 % o f its newl y-written trad itio nal life insurance bu si ness o n a first dollar q uo ta sh are basis u nd er coin surance con tracts. In mid -20 05 , the Co mp an y sub stan tially discon tinu ed co in suri ng its newly written tradition al life in su ran ce an d moved to yearly ren ewab le term (“YRT”) reinsu ran ce. The amo un t o f insurance ret ained by the Company on an y on e life on tradition al life insurance was $50 0,000 in years prio r to mid-2 00 5. In 2 005, this retentio n amo un t was in creased to $1 ,00 0,0 00 fo r certain p olicies, and du rin g 2 00 8, was increased to $2,0 00 ,00 0 for certain po l ici es. Du rin g 2 01 6, the reten tion amo un t was in creased to $5 ,000,00 0. For app ro ximately 15 years prio r to 2 01 2, th e Comp any reinsured 90 % of th e mo rtality risk on th e majo rit y of i ts n ewly written un iv ersal life in surance o n a YRT b asis. Du ring 20 12, t he Compan y mov ed t o rein sure on ly amo un ts in excess o f its $2,00 0,0 00 retenti on , wh ich was in creased to $5 ,000,00 0 d uri ng 20 16 , fo r the majori ty of its newly written un iv ersal life an d level p remiu m term in su rance. 10 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Policy Lia bilities and Accrua ls The app licable in surance laws u nd er wh ich th e Co mp any ’s in surance su bsid iaries o perate req uire th at each insu ran ce co mp any rep ort p olicy liabilities to meet future o blig ation s on the ou tstand in g po licies. Th ese liab ilities are calculat ed in accordance with app licab le law. These liabil ities alo ng with add i tion al p remiu ms to be received and the compo unded i nterest earn ed o n those p remiu ms are con sidered to b e su fficient to meet t he v ari ou s pol icy an d co ntract ob ligati on s as they matu re. Th ese laws specify th at the liab ili ties sh all no t b e less th an liab ili ties calcu lat ed u sin g certain n amed mo rtality tab les an d interest rates. The po licy liabilities and accru als carried in th e Co mp an y’s fin ancial rep orts presented on th e b asis of acco un ting prin cip les gen erally accepted in th e United States of America (“GAAP”) d iffer fro m th ose specified by t he laws o f th e vario us states and carried in th e in su ran ce subsidiaries’ stat utory finan cial statemen ts (presented on the basis of statu to ry acco un ting p rinciples mand ated b y state insurance regu latio ns). Fo r po licy liabilities fo r traditio nal life, immediate an nu ity, an d h ealth con tracts, th ese differen ces arise from the u se o f mo rtality an d mo rb id ity tab les and int erest rate assumptio ns which are deemed to b e more app ro priate fo r fin ancial rep orting pu rp oses th an th ose requ ired for statuto ry acco un ting pu rp oses. The GAAP po licy l iabilities also in clu de lapse assumptio ns i n the calculation and u se the n et lev el p remiu m meth od o n all bu siness wh ich g enerally d iffers from po licy liabilities calculated fo r statutory finan cial statemen ts. Pol icy liabilities fo r un iv ersal life p olicies, d eferred ann uity co ntracts, GICs, and fun ding agreemen ts are g enerally carried in th e Compan y’s finan cial rep ort s at th e accou nt value of the p olicy or co ntract plu s accru ed interest. Add itio nal l iab ilities are h eld as ap propriat e fo r excess benefits ab ov e the accou nt value. Federal Tax es In g eneral, existin g law gen eral ly ex emp ts p olicy ho ld ers fro m curren t taxatio n on an in crease in th e v alu e o f their life in surance and an nu ity prod uct s d uri ng these prod ucts’ accu mulat io n ph ase. Th is favo rab le tax treat ment gi ves certain o f th e Co mp any ’s p ro du cts a comp etit iv e adv antage ov er in vestmen t prod uct s. If tax laws are revised such t hat th ere is an elimin ation o r scale-back of this favo rab le tax treatment, o r co mp eting inv estment p ro du cts are granted simil ar tax treatment, th en t he relative attractiven ess of the Company ’s prod ucts may be red uced or eliminated. The Company is sub ject to co rp orate inco me, exci se, fran chise, and premium taxes. In December 20 17 , th e Tax Cuts and Jo bs Act (the “Tax Refo rm Act”) was enacted . It sig nificantly chan ged U.S. tax law. Fo r examp le, it l owered the co rp orate inco me tax rat e, beg in ning in 2 01 8. This resu lted in a decrease in the Company’s effective tax rate. The Tax Reform Act increases th e Compan y’s taxable in come, as a result o f chan ges regardi ng p olicy acq uisition co sts an d p olicy ho lder b enefit reserves. Wh ile overall th e Tax Reform Act will cause the Co mp an y to repo rt higher amou nts of tax able in come, the Compan y ex pects to pay less fu tu re inco me tax es du e to th e lo wer tax rate. In ad dition , life in su ran ce pro du cts are often used to fun d estate tax ob ligatio ns. Recent an d possib ly futu re chang es to estate tax l aw may affect th e deman d for life insurance prod ucts. The Company’s i nsu ran ce sub sid iaries are generally taxed in the same mann er as are o th er compan ies in the in du stry. Certain tax law restrictions prevent the immed iate inclu sion of recen tly-acqu ired li fe insu ran ce companies in the Co mp any ’s con soli dat ed i ncome tax return . Add iti on all y, th ese restriction s limit th e amou nt o f life in su ran ce in come that can be o ffset b y no n-life-i nsu ran ce l osses. Overall, these restrictio ns may cau se the Co mp any ’s effectiv e tax rate to in crease. The Co mp any ’s d ecreased reliance o n rein surance fo r newl y wri tten tradition al l ife p ro du cts resulted in a redu ction in the tax es wh ich the Company cu rrentl y pay s, offset by an increase in i ts d eferred taxes. Th e Co mp any allo cates the ben efits of redu ced curren t taxes to the Life M ark eting an d Acq uisition segmen t s. The profitability and competitiv e p ositio n o f certain of th e Compan y p ro du cts are d epen dent on th e co ntin uatio n o f certai n tax benefi ts which are prov id ed b y curren t tax law an d the Co mpan y’s ab ility to g enerate fut ure taxab le inco me. Co mpetition Life and h ealth in surance is a mat ure and h ig hly co mp etit iv e in du stry. In recen t years, th e ind ustry’s life in surance sales have been relatively flat, th ou gh the ag in g po pu latio n has increased the deman d fo r retiremen t savings prod ucts. The Co mp any enco un ters sig nificant co mp etition in all lin es o f bu sin ess, incl ud in g in the Acqu isitio ns segmen t. The Compan y enco un ters competiti on fo r sales of life insurance and retiremen t p ro du cts fro m o th er insurance compan ies, man y o f wh ich hav e greater finan cial reso urces than th e Co mp any and which may h ave a g reater market sh are, o ffer a b ro ader ran ge o f prod ucts, services or featu res, assume a greater level of risk, h av e lower o perating or fin ancing costs, o r h ave lower profitability ex pect ation s. Th e Co mp any also faces comp etit io n fro m ot her prov id ers o f financial services. Compet itio n co uld result in , amon g o th er thing s, l ower sales or hig her lapses of existin g pro du cts. The Co mp any ’s ab ility to co mp ete is dep end ent u po n, amon g other thing s, its ab ili ty to attract and retain distribu to rs to market its i nsu ran ce and in vestmen t prod uct s, i ts abi lity to d evelop competiti ve an d profitable pro du cts, its ab ility to maintai n low un it costs, and its maint en ance o f adeq uate ratin gs from rat in g o rg anizati on s. As techn olog y ev olves, a co mp arison of a particular prod uct of any comp any fo r a p articu lar custo mer with competin g p rod ucts fo r th at custo mer is more readily av ailable, wh ich coul d lead to in creased co mp etition as well as ag ent o r custo mer b ehavior, includin g persisten cy, which differs from p ast behav io r. 11 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any en cou nters competition in its Acqu isitio ns seg men t from o ther insu ran ce co mpan ies as well as fro m other typ es of acq uirers, in clu ding priv ate equ i ty in vestors. M any of these co mp etito rs may hav e greater fin an cial resou rces th an the Co mp any and may be willing to assume a greater level of risk , hav e lower op erat in g o r fin anci ng co sts, or hav e lo wer profi tab ility ex pect ati on s. Risk Ma na gement Risk manag ement i s a cri tical p art of th e Co mp any ’s bu siness, an d the Compan y h as ado pted risk man agement processes in mu ltip le asp ects o f its op eratio ns, in clu ding p rod uct d evelo pment an d man agemen t, bu siness acqu isitio ns, u nd erwrit in g, in vestmen t man agemen t, asset -liab ility man agement , hedg ing , and techno lo gy. Th e Company’s Ent erp rise Risk Manag ement o ffice, u nd er the directio n o f th e C hief Risk Officer, alo ng wi th other d epartmen ts, manag ement g ro up s an d commi ttees, hav e respo nsib ilities fo r man aging d ifferent risk s th ro ug ho ut the Co mp any. Risk man ag emen t in clu des th e assessment of ri sk, a decisio n p ro cess wh i ch in clu des d etermi ning wh ich risks are acceptable and the mon itorin g an d man agemen t o f i denti fied risk s on an on go ing basis. The p rimary ob jectiv es of th ese risk manag ement processes are to det ermin e the acceptable level of variat io ns the Compan y exp eriences fro m its ex pected results an d to imp lement st rat eg ies design ed to limit su ch variatio ns to th ese lev els. Reg ulatio n St ate Reg ulatio n The Company is sub ject to g ov ern ment reg ulation in each o f the states in which it con du cts b usin ess. In many in stances, th e regu latory mod els emanate fro m th e Nation al Asso ciatio n of Insurance Co mmissio ners (“NAIC”). Su ch regu lation i s v ested in state ag encies h aving b ro ad admin istrati ve an d in some instances discretion ary p ower d eali ng wi th many asp ects of th e Compan y’s bu siness, which may includ e, amon g other th in gs, premium an d cost of in surance rates an d increases t hereto, in terest crediting pol icy, un derwritin g p ract ices, reserv e req uiremen t s, marketin g p ractices, ad vertisi ng , priv acy, d ata security, cybersecu rity, p olicy forms, rein surance reserve req uirements, insurer use o f capt iv e rein surance companies, acq uisition s, mergers, cap ital adeq uacy, claims p ract ices an d the remittance o f u nclaimed p ro perty. In ad dit io n, some state in su rance d epartments may enact ru les or reg ulatio ns with extra-t erritorial ap pli catio n, effectively extend in g th eir jurisdiction to areas such as permitted in su ran ce company in vestmen ts th at are no rmally th e p ro vince of an i nsu ran ce co mp any ’s domi cil iary state regu lat or. The Company ’s in su ran ce su bsid iaries are requ ired t o fil e p eriod ic rep orts wit h th e reg ulato ry ag encies in each o f the j urisd i cti on s in wh ich th ey do bu sin ess, an d their busin ess an d accou nts are subj ect t o ex aminatio n b y such ag encies at an y time. Und er th e ru les of th e NAIC, i nsu ran ce companies are ex amined perio dically (gen erally every three to five y ears) by on e or mo re o f th e regu latory ag encies on beh alf of t he states in wh ich they d o bu sin ess. At any given time, a nu mb er of finan cial an d/or market co nd uct ex ami natio ns o f th e Co mp any ’s sub si diaries may b e o ng oing . From time to time, regu lators raise issues du ring examinatio ns o r aud i ts for the Compan y’s su bsidiaries th at cou ld , if d etermined ad versely, hav e a material adv erse impact o n the Company. To date, n o su ch in su ran ce d epartmen t ex ami nat io ns h ave prod uced an y sign ifican t ad verse find in gs regarding any o f the Compan y’s insurance company sub si diaries. Un der th e in su ran ce guaranty fu nd laws in mo st states, in su ran ce co mp anies d oing bu siness in th e state can be assessed u p to prescribed limits fo r po licyh older losses in curred b y inso lvent companies. From time to time, companies may b e asked to con tri bu te amo un ts b eyo nd p rescri bed limits. It is po ssi ble t hat t he Co mp any cou l d be assessed with respect to p ro duct lin es n ot o ffered b y th e Compan y. In add itio n, leg islat io n may b e int ro du ced in v ariou s states with respect to g uaran ty fun d assessment laws related to insurance p ro du cts, in clu ding lon g-term care insu ran ce and o th er speci alt y p rod ucts, t hat in creases th e cost o f fu tu re assessments o r alters fu tu re premi um tax o ffsets received i n co nn ection with gu aran ty fun d assessments. Th e Compan y can no t predi ct t he amo un t, n atu re o r timin g of an y futu re assessmen ts o r legislation , any of which co uld h ave a material an d ad verse impact on th e Co mp any ’s finan cial co nd iti on or resu lts o f o perati on s. In ad dition, man y states, incl ud in g t he st ates i n which t he C ompany ’s insu ran ce su bsid iaries are domi cil ed , hav e en acted legislation or ad op ted regul ati on s regarding insu ran ce ho l ding compan y systems. Th ese laws req uire reg istration o f and perio dic repo rti ng by insurance co mp ani es d omici led withi n th e ju risdictio n which con trol or are co ntrolled b y o th er corpo ratio ns o r p erso ns so as to con stitut e an insurance ho ld in g compan y sy stem. These laws also affect t he acq uisition o f con trol of insu ran ce compan ies as well as transact io ns between insurance co mp anies an d compan ies con trollin g th em. Mo st states, in clu ding Tenn essee, wh ere PLICO is d omiciled , requ ire admin istrative app ro val of the acqu i sition o f co ntro l o f an insuran ce co mp any do mi cil ed in th e state o r th e acq uisition of co ntro l o f an insuran ce h oldin g compan y who se in surance subsidiary is inco rp orated in the state. In Ten nessee, th e acq uisition of 10 % of the v otin g secu rities o f an entity is deemed to b e th e acq uisition of co ntro l fo r the p urpose o f th e in surance h olding compan y statute and req uires no t o nly th e filin g of d etai led in fo rmatio n co ncerning t he acqui ring p art ies an d th e p lan of acqu isition, bu t also admi nistrativ e app ro val p rior to th e acq uisition . Holding company l egi slatio n h as b een ado pted in certai n states wh ere the Compan y’s in surance su bsid iaries are do miciled, which sub jects the sub si diaries to i ncreased rep ort in g requ iremen ts. Ho ld in g co mp any leg islatio n h as also b een proposed in ad ditional states, which, if ad op ted , will sub ject any do mi cil ed su bsidiaries to addi tion al repo rtin g an d su pervision req uirements. The stat es i n wh ich the Compan y’s in su ran ce sub sidiaries are do miciled also imp ose certain restrictio ns on the sub sidiaries’ ab ility to p ay d ivi dends to th e Co mp any. These restri ction s are based in part o n the prior year’s statutory inco me and su rp lu s. In gen eral, d iv i dend s u p t o sp ecified levels are co nsid ered ord in ary and may be paid with ou t p rior ap prov al. Divid en ds in larger amo un t s are con sidered ex traordin ary and are su bject to affirmative prio r ap proval by th e insu ran ce commission er of the st ate o f domicile. The maximu m amoun t th at wo uld q ualify as o rd in ary d i vidends to the Compan y by its in surance su bsid iaries in 2 01 9 is ap prox imately, in th e agg regate, $4 34 .0 millio n. No assurance can b e given th at more stri ng ent restrictio ns will no t be ad op ted from t ime to time b y states in wh ich the Co mp any ’s insurance sub sidi ari es are d omici led; such restriction s co uld hav e the effect, un der certain circu mstan ces, o f sign ifi can tly redu cin g divid en ds o r o th er amo un ts p ayab le to th e Co mp an y b y su ch subsidiaries witho ut prio r app rov al by state regu latory au thorities. 12 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents St ate insu ran ce reg ulato rs and the NAIC reg ularly re-examine ex isting laws and regu latio ns app licable to insurance compan ies and th eir p ro du cts. Ch ang es in th ese laws and reg ulations, or i n interpretatio ns th ereo f, are o ften made fo r th e ben efit of the co nsumer an d may lead to ad ditio nal exp ense fo r th e in surer. Fu rthermo re, some NAIC p ron ou ncemen ts, p arti cu larl y as they affect accou nti ng issues, take effect automaticall y in v ariou s states witho ut affirmative actio n b y tho se states. The NAIC is co nsid ering rev i sio ns to the Suit ab ility i n Ann uity Transact io ns Mo del Regu latio n whi ch , if ad op t ed b y regu lators, co uld impo se a stricter stand ard o f care u po n in su rers wh o sell ann uities. Likewise, sev eral stat es are co nsid ering o r h ave ado pted leg islatio n or reg ulato ry measu res t hat wo uld implement n ew req uirements an d stan dards ap pli cab le to th e sale of an nu ities and , in so me cases, life in su rance prod ucts. Th e NAIC an d several states, in clu ding Con necticut, Nevad a, New Jersey, and New Yo rk h av e passed laws or p ro po sed regu lation s req uirin g insurers, investment ad visers, brok er-dealers, an d/or ag en t s to d isclose co nflicts o f interest to clien ts or t o meet stand ard s that th eir advi ce b e i n the cu stomer’s b est in terest. These stand ard s v ary wid ely in scop e, ap plicab ility, an d timin g o f imp lementation . The ado ptio n an d enactmen t of these or any revised stan dards as law o r regu latio n co uld h ave a material ad verse effect u po n the man ner in which t he Compan y’s prod ucts are sol d and impact th e ov erall market fo r such p rod ucts. Fed eral Reg ula tion At th e fed eral lev el, the execu tive b ran ch o r federal agen cies may issu e orders or take oth er action with resp ect to fin ancial services and life in surance matters, and bil ls are ro utin ely in tro du ced in bo th chambers of the United States Co ng ress wh ich cou ld affect t he Compan y’s b usiness. In th e past, Co ng ress h as con si dered legislati on th at wo uld impact insu ran ce companies in nu merou s ways, such as p rov id in g fo r an o ptio nal fed eral charter o r a fed eral presence for in su ran ce, preemptin g state l aw in cert ain resp ects reg ardin g the regu lati on of rein surance, increasin g federal o versigh t in areas such as con su mer protecti on and so lv ency reg ulation, settin g tax rat es, and o th er matters. The Co mp any cann ot p redict whet her or in wh at fo rm legislatio n will be en acted and , if so, the imp act of su ch l eg islatio n o n the Compan y. The Co mp any is also sub ject to vario us co nd itio ns an d req uiremen ts o f t he Patient Protection an d Affo rd able Care Act o f 20 10 (the "Healt hcare Act"). Th e Healthcare Act makes si gn ifican t chang es to the reg ulation of h ealth in su ran ce and may affect th e Co mp an y in vario us ways, includ in g by po tentially t reatin g small b lo cks o f b usin ess th e Co mp any h as offered o r acqu ired o ver the y ears as health in surance, as well as b y p otentially affecting th e benefit p lan s t he Compan y spo nso rs fo r emplo yees o r retirees and th eir d ep end ents an d the Co mp any ’s exp enses and tax liabilities related to the p ro visi on of such b enefit s. In add itio n, th e Co mp an y may b e su bject to regu latio ns, gu idance or d etermi nat io ns eman ati ng fro m th e v ariou s regul ato ry auth orities au thorized un der th e Health care Act, al l o f which co uld h ave a si gn ifican t imp act on th e Comp any . The Do dd -Fran k Wall Street Refo rm and Co nsu mer Pro tectio n Act (“th e Dod d-Frank Act”) made sweep in g chang es to th e reg ulation o f finan cial serv ices entiti es, p ro du cts an d markets. The Dod d-Frank Act directed exist in g and n ewly -created g ov ern ment agencies and b od ies to p erform st ud ies and promulgate a mu ltitu de o f regu l ati on s i mp lemen ting the law, a p ro cess that h as su bstantially ad vanced but is no t yet complete. Altho ug h th e curren t presid ential ad ministratio n has ind icated a d esi re to revise or reverse some o f its p ro vision s, th e fate of th ese p ro po sals is u nclear, and we can no t p red ict with certainty ho w the Dodd -Fran k Act will co ntin ue to affect th e fin an cial mark ets gen erally, o r impact ou r bu siness, ratin gs, results of o peration s, fin ancial co nd ition , or liqu id ity . Amon g other thing s, the Dodd-Frank Act i mposed a co mp reh en sive new regu lat ory reg ime on the ov er-th e-co un ter (“OTC”) d erivativ es mark etp lace an d granted new joint regu l atory authority to the Un ited States Secu rities an d Ex ch ang e Commissio n (the “SEC”) and the U.S. Commo dit y Fu tu res Trad ing Co mmissio n (“CFTC ”) o ver OTC deriv atives. In co llabo ratio n with U.S. federal ban king regu lators, the CFTC has ad opt ed regu lation s wh ich categ orize th e Co mp any as a “fin ancial end -u ser” which is thereb y requ ired to post and co llect marg in in a v ariety of d erivatives t ransaction s. Reco mmendati on s and reports fro m entiti es created u nd er th e Do dd -Fran k Act, su ch as th e Federal Insu ran ce Office (“FIO”) an d the Finan cial Stab ility Ov ersight Co un cil (“FSOC”), co uld also affect t he mann er in which in su ran ce and reinsu ran ce are regu lated i n th e U.S. an d, th ereb y, the Compan y’s bu siness. Th e Do dd -Fran k Act also created t he Consu mer Fin an cial Pro tectio n Bu reau (“CFPB”), an ind epen den t di vision of the Dep artment o f Treasu ry with jurisdiction o ver cred it, sav in gs, payment, and o th er co nsumer fin ancial p ro du cts and services, oth er than inv estment pro du cts alread y reg ulated by the SEC o r the CFTC. Certain o f th e Co mp any ’s su bsidiaries sell prod uct s th at may b e reg ulated by th e CFPB, an d the Co mp any is un abl e to predict at th is time the way s in which the CFPB’s regul ati on s migh t d irectly o r indi rectly affect th e Co mp any or its su bsid iaries. Sales o f li fe insu ran ce p oli cies and ann uity con tracts o ffered by th e Co mp any are sub j ect to reg ulation s relatin g t o sales practi ces ad op ted by a variety o f federal an d state reg ulato ry au th orities. Certain ann uities and life insu ran ce po licies such as v ariable ann uities and v ariable un iv ersal life i nsu ran ce are reg ulated un der th e federal secu rities l aws ad ministered by th e SEC. On April 18 , 20 18 , th e SEC v oted to pro po se ru lemaki ng s and in terpretatio ns relating to t he standard o f con du ct ap plicab le to b ro ker-d ealers, inv estment ad visers, and their rep resen tativ es wh en making certain recommen datio ns t o retail cu stomers. Sp ecifically, un der the pro po sed reg ulation s, a b ro ker-d ealer wo uld be req uired to act in t he best in terest of a retail custo mer wh en recommen ding an y secu rities transactio n or in vestmen t strategy in vo lv in g securi ties to a retail customer. Th e SEC also prop osed an in terpretatio n reaffirming an d, i n so me cases, clarifying its v iews o f th e fid uciary d uty th at investment ad visers o we to their client s. An other SEC p ro po sal wou ld requ ire bro ker-d ealers and in vestmen t ad visers to p ro vide each customer with a summary o f the natu re of th e custo mer’s relatio nsh ip with th e in vestmen t profession al, as well as a restriction on the use o f th e terms “ad viser” an d “ad viso r” by brok er-dealers. The commen t perio d on th e p ro po sals closed on Au gu st 7 , 2 01 8. Th e SEC h as in dicated that it will issu e a final versio n o f the regu latio ns an d the interp retation before th e en d o f th e third q uarter 2 019. In ad dit io n, bro ker-d ealers, in surance agen cies an d o th er fin ancial insti tu tion s sell the Compan y’s an nu ities to emp lo yee ben efit p lan s gov erned by prov isio ns of the Employ ee Retirement Income Secu rity Act (“ERISA”) an d Indi vidu al Retiremen t Acco un ts that are g ov ern ed by similar p ro vision s u nd er th e Internal Rev enue Co de (th e “Co de”). Co nseq uen tly, o ur acti vities and 13 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th ose o f t he firms t hat sell th e Co mp an y’s p rod ucts are sub j ect to restrictio ns that requi re ERISA fid uci ari es to p erform their d uties solely in the interests o f ERISA p lan p articipan ts and b eneficiaries, and th at proh ib it ERISA fid uciaries fro m causing a cov ered plan or retirement account to engage in certain proh ib ited tran saction s absent an exemptio n. There remains signi ficant u ncertainty su rro un ding th e final form that th ese regu lations may take. Our cu rrent distribu t ors may co ntinue to mov e fo rward with their plans to limit the nu mb er o f prod ucts th ey o ffer, i ncl ud in g th e t yp es o f prod ucts o ffered b y th e Compan y. The Comp any may find it necessary to ch an ge sales representative and/or brok er co mp ensatio n, to limit the assistance o r ad vice it can p ro vide to o wners of the Compan y’s an nu i ties, to replace o r eng age add itio nal d istributo rs, or otherwise change th e man ner in which i t desig ns, su pervises, an d su pp orts sales of its an nu i ties an d, where ap pli cab le, life in su ran ce p ro du cts. In additio n, the Compan y co ntin ues to in cur expen ses in co nn ecti on wit h initial an d o ng oing complian ce ob ligatio ns with resp ect to su ch ru les, and i n th e agg reg ate th ese expenses may b e sig nificant. An y of the fo reg oing regu latory, legisl ative, o r j ud icial measures or the reaction to such act iv ity b y con sumers o r o th er members o f the insu ran ce ind ustry cou ld hav e a material adv erse imp act on our abilit y to sell ann uities and other prod uct s, to retain in -force bu sin ess, an d on ou r finan cial co nd ition or resu lts of o peration s. Certain l ife insurance policies, con tracts, and ann uities offered by th e Compan y are su bject to reg ulation u nd er the fed eral secu rities laws ad ministered by t he SEC. The federal secu rities laws co ntain reg ulato ry restriction s and crimin al, admini strativ e, an d priv ate remed ial provi sio ns. From time to time, th e SEC and th e Fin ancial Ind ustry Regu latory Au th ori ty (“FINRA”) examine o r inv estig ate th e activi ties of brok er-dealers an d i nv estment ad visers, in clu ding the C ompany ’s affiliated brok er-dealers and in vestmen t adv isers. These examin ation s or inv estig ati on s o ften focus o n the activ iti es o f the registered rep resen tativ es and reg istered in vestmen t ad visers do in g b usin ess th ro ugh such en tit ies an d the entities’ su pervision of th ose p erson s. The USA PATRIOT Act of 2 00 1 in clu des an ti-mo ney lau nd ering an d financial transparen cy laws as well as v arious reg ulation s ap plicab le to brok er- dealers an d o th er fi nancial serv ices co mp ani es, in clu ding insu ran ce companies. Fin ancial institu tio ns are req uired to co llect info rmation reg ard in g th e id ent ity of their customers, watch for and repo rt susp i cious transactio ns, respo nd to req uests fo r in fo rmation b y reg ulato ry au th ori ties an d law en fo rcemen t ag encies and share informatio n with other fi nancial institu tion s. As a resu lt, th e Co mp any is requ ired to maintai n certain in ternal co mp liance practices, procedu res, an d co ntro ls. Cyb er Security Reg ulati on In resp on se t o the g ro win g threat o f cy ber attacks in th e in surance ind ustry, certain jurisdictions h ave b egun to co nsider new cy bersecurity measures, in clu ding th e ado ptio n o f cy bersecurity regu lations th at, amon g o th er thing s, wou ld req uire in surance compan ies to estab lish and main t ain a cy bersecurity prog ram and implement and maintai n cyb ersecuri ty p olicies and p ro ced ures. On Octo ber 2 4, 20 17 , the NAIC ad op ted its In surance Data Security M od el Law (the “NAIC Mo del Law”), which i s in ten ded to serv e as mod el legisl ati on fo r states to en act in order to go vern cybersecu rity and data protection practi ces o f in surers, in surance agen ts, an d o th er licen sed entities reg istered un der state i nsu ran ce laws. To date, So uth Carol in a, Michigan , an d Oh io hav e ad op ted cy bersecurity reg ulation s that are based , at least in p art, on the NAIC’s Mo del Law, an d several o th er states h av e p en din g o r are co nsiderin g ado ptin g regul ati on s based on th e NAIC Mo del Law. Add iti on ally, the New York Dep artmen t o f Fin anci al Services (“DFS”) issued regul ation s go verning cy bersecurity req uirements for fi nancial serv ices compan ies, wh ich b ecame effective in March 2 01 7. The DFS reg ulation s requ ire insurance co mp an ies, amon g o th ers, li cen sed in New York to assess th eir sp ecific cyb er risk pro files an d d esig n cy bersecurity p ro grams to ad dress su ch risks, as well as file an nually with DFS a p ro gram complian ce certification pertaining to th eir co mp liance with DFS cyb ersecu rity req uiremen ts. The Company con tinu es to mo nito r wh eth er the o th er states in wh ich it con du cts b usin ess, as well as federal g ov ern men tal ag encies, ado pt data secu rity laws. The Compan y has imp l emented informatio n secu rity po licies that are desig ned to ad dress the securi ty of th e Co mp any’s in fo rmation asset s, wh ich in clu de p erson all y id en tifiab le in fo rmation (“PII”) and p ro tected health in format io n (“PHI”), as well as oth er p rop rietary an d con fiden tial in formatio n ab ou t th e Compan y, its emp lo yees, custo mers, ag en ts, an d bu siness partn ers. Add ition ally, the Co mp an y h as an information risk management commi ttee that, amon g other thing s, reviews emerg in g risks an d mon ito rs reg ulato ry requ iremen ts and ind ustry stan dards relatin g to t he secu rity of the Co mp any ’s in fo rmation assets, mo nito rs t he Co mp any ’s cybersecu rity in itiatives, an d app ro ves th e Co mpan y’s cyb er in cid ent respo nse plans. Th is committee meets regul arl y, and th e Board of Directo rs receives rep orts reg ard in g cy bersecuri ty matters. Furthermore, as p art o f th e Compan y’s in fo rmation secu rity p ro gram, th e Co mp any has incl ud ed securi ty featu res in its sy stems th at are in ten ded to protect t he pri vacy an d integrity o f th e Co mp any ’s in fo rmation assets, in clu ding PII and PHI. Notwithstand in g these effort s, cy ber threats an d related legal an d regu lat ory stand ards ap plicab le to th e insurance in du st ry are rapidly ev olvin g, and the Co mp any ’s an d the Co mp any ’s b usin ess partn ers’ and service p ro viders’ systems may con tinu e to be vu ln erab le to secu rity breach es, viru ses, prog ramming erro rs, an d oth er si mi lar d isru ptiv e prob lems o r inciden ts. An y su ch in cid ent co uld h ave a material ad verse effect on the Compan y’s op eratio ns, repu tatio n, custo mer relation ship s, and financial co nd ition. Other Reg ulatio n Other ty pes of regul ati on that co uld affect the Comp any an d its su bsid iaries includ e insurance co mp any inv estment laws and regu lati on s, state statutory acco un tin g p ractices, tax l aws, antitru st laws, minimu m solv ency req uirements, en terprise risk req uirements, state securities laws, fed eral p rivacy laws, techn olog y an d data reg ulatio ns, in surable interest laws, federal an ti-money lau nd ering an d an ti-terro rism laws, emp lo yment and immig ratio n laws and , because the Compan y o wns an d o perates real pro perty, state, fed eral, and lo cal env ironmen tal laws. Th e Comp any may also be sub ject to regul ation s in fluen ced by or related to in ternatio nal reg ulato ry autho rities o r initiatives. The Compan y’s sol e sto ckh older, Dai-ich i Life, is su bject to regu latio n b y the Japanese Finan cial Serv ices Autho rit y (“JFSA”). Und er ap plicab le laws an d reg ulation s, Dai-ichi Life is required to pro vide no tice to o r ob tain th e co nsen t of th e JFSA p rior to taking certain action s o r en gag in g in cert ain transactio ns, either directly or ind irectly th ro ug h its su bsidiaries, includ in g th e Co mp any and its con solidat ed su bsidiaries. Domestically, the NAIC may be influ enced by 14 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e in itiativ es o r regu latory stru ctures o r schemes of int ern ati on al regu latory b od i es, and th ose in itiativ es o r regu l atory st ru ctu res o r schemes may no t translate readily into the regu latory structures o r schemes of th e leg al system (incl ud in g the interpretat io n o r ap pli catio n of standards by j uries) u nd er wh ich U.S. insurers mu st op erate. Chan ges in laws an d reg ulations or in int erp ret ati on s thereof, o r to in itiativ es o r regulat ory stru ctures or sch emes of internatio nal regul ato ry bo dies, wh i ch are appl icable to th e Comp any cou ld hav e a sig nificant ad verse impact on th e Co mp any . Ad ditio nal issues related to regu latio n o f th e Co mp any and its insu ran ce sub sidiaries are d iscussed in Item 1A, Risk Factors, and in It em 7 , Man ag emen t’s Discussio n and Ana lysis o f Fina ncial Con dition an d Results o f Op erati on s, in clu ded herein. Employ ees As of December 3 1, 2 01 8, the Co mp an y had ap prox i mately 2 ,95 7 employ ees, of which 2 ,94 8 were fu ll-time and 9 were part-time empl oy ees. In clu ded in the total were ap prox imatel y 1,5 68 emp lo yees in Birmin gh am, Alab ama, of which 1 ,562 were ful l-time and 6 were p art-time emp lo yees. None of th e Compan y’s emp lo yees are rep resen ted b y a u nio n and the Co mp any is no t a p arty to any co llective bargaini ng ag reemen ts. Th e Compan y believ es its rel ati on s wi th its emp lo yees are sati sfactory. M ost employ ees are cov ered by co ntribut ory majo r med ical, den tal, v isio n, g rou p life, an d lo ng -term d isability in surance p lan s. The co st of t hese b enefits t o the Co mp an y in 20 18 was ap proxi mately $17.8 mill io n. In ad dition , su bstantiall y al l o f the employ ees may particip ate in a d efined b en efit pen sio n plan an d 4 01 (k) plan. The Co mp an y mat ch es employ ee con trib utions t o its 40 1(k ) p lan . See No te 1 6, Emp lo yee Benefit Pla ns to ou r con so lidated fin ancial statemen t s fo r ad dition al info rmati on . Intellectual Property The Compan y relies o n a combination of in tellectual prop erty laws, con fid en tiality p ro cedu res an d p olicies, and con t ractu al prov isions to protect its brand and its in tellect ual prop erty, which in clu des co py right s, t rad emark s, p aten ts, do main n ames, an d trade secrets. The success o f th e Compan y’s bu sin ess depen ds on its con tinued ability to use and protect its intellectu al prop erty, i nclud in g its trad emark an d serv ice mark p ortfo lio wh i ch is co mp osed o f bo th Un ited States registered and commo n law trad emarks an d serv ice mark s, includ in g th e Compan y’s Protective n ame an d lo go . The Co mp any ’s intellectu al prop erty assets are valuab le to the Company in maintain in g its b ran d an d marketin g its prod ucts; thu s, t he Company maintain s and protects its in tellect ual prop erty assets fro m infring emen t an d dilutio n. Av ailable Info rmatio n The Co mp any files rep orts wi th the SEC, in clu ding Ann ual Rep orts o n Fo rm 1 0-K, Qu arterly Repo rts on Form 10-Q, Curren t Repo rts on Form 8 -K, an d o th er rep ort s as requ ired. Th e Co mp any is an electro nic filer an d the SEC main tains an internet site at http ://www.sec.g ov that con tains the Compan y’s an nu al, q uarterly , and cu rrent rep ort s and other in fo rmation filed elect ro nically b y the Compan y. The Compan y mak es availab le free of charge t hrou gh its website, h ttp://www.protective.co m, the Company’s An nu al Repo rts o n Form 1 0-K, Qu arterly Repo rts o n Fo rm 1 0-Q, Current Repo rts on Form 8-K, and amen dments to tho se repo rts as so on as reaso nab ly p racticab le aft er such materials are electron ically filed with or fu rn ished to th e SEC. Th e in fo rmation fo und on th e Co mp any ’s website is n ot part o f th is o r an y o th er repo rt filed with or fu rn ished to th e SEC. The C ompany wil l fu rn i sh su ch do cument s to an yo ne who requ est s such co pies in writing. Requ est s fo r cop ies sh ou ld be directed to : Financial Informati on , Protecti ve Li fe Corpo ration , P.O. Bo x 2 60 6, Bi rmin gh am, Alab ama 35 20 2, Teleph on e (2 05 ) 2 68 -3 91 2, Fax (20 5) 26 8-36 42 . We also mak e availab le to th e pu blic cu rrent i nformatio n, includ ing finan cial in fo rmatio n, regarding th e Compan y an d o ur affiliates on the Financial In fo rmation pag e of o ur website, www.p ro tect iv e.co m. We en cou rag e in vesto rs, th e med ia an d o th ers in terested in u s an d o ur affiliates to rev iew the in fo rmation po st ed on ou r web site. The informatio n fou nd on th e C ompany ’s web site i s no t p art of th is or any ot her repo rt filed with or fu rn ished to the SEC. The Compan y h as ad opt ed a Code o f Bu sin ess Co nd uct , wh ich applies to all directors, officers an d employ ees of th e Co mp any and its who lly o wned sub si diaries. The Co de of Bu siness Co nd uct inco rp orates a co de of eth ics that appl ies to th e p rincipal ex ecutiv e o ffi cer an d all finan cial o ffi cers of th e Co mp any and its su bsidiaries. The Co de o f C on du ct is av ailable o n th e Company ’s web site, h ttp://inv esto r.protective.co m/co rpo rat e-g ov ern an ce/co de-of- co nd uct. Item 1 A. Ri sk Fa cto rs The o perating result s o f comp anies in th e insurance ind ustry have historically b een subject to sig nificant flu ctu ation s. The facto rs which co uld affect th e Comp any ’s fu tu re results in clu de, but are no t limited to, g eneral econ omic co nd itio ns an d k no wn tren ds an d u ncertaint ies which are discussed more fu lly b elo w. Genera l Risk Fa cto rs The Compa ny is controlled by Dai-ichi Life, which has the a bility to mak e impo rta nt decisi ons affecting o ur business. As o f Feb ru ary 1, 20 15 , the date of co mp letio n of ou r merger, all of ou r commo n stock b ecame o wned b y Dai-ich i Life Insu ran ce Co mp any, Limited (n ow kn own as Dai-ichi Life Holdin gs, Inc., “Dai-ich i Life”). As th e hold er of 100 % of ou r v otin g sto ck , Dai-ich i Life is enti tled t o elect all of ou r d irecto rs, to ap prove an y actio n req uiring the ap pro val of the ho ld ers of o ur v otin g sto ck, in clu ding ad op ting amen dments to ou r certificate o f in corpo ratio n and ap provi ng merg ers or sales of substan tially all o f o ur assets, and to prevent any t ran saction that requ ires th e approv al of sto ck hol ders. Dai-ichi Life has effectiv e con trol o ver ou r affairs, po licies an d op erations, such as th e app ointmen t o f manag ement, future issuan ces of our securities, th e pay ments o f distri bu tion s by us, if an y, in resp ect of ou r co mmon sto ck, the incu rrence of deb t b y u s, and th e en terin g into of ex t raord in ary transactio ns, an d 15 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Dai-ichi Li fe’s interests may no t in all cases b e align ed with th e in terests o f in vestors, i ncl ud in g h olders of our debt securities. Ad ditionally, o ur cred it ag reement an d ind ent ures permi t us to p ay divid en ds an d mak e other restricted p ayments to Dai-ichi Life un der certain ci rcumstances, and Dai-ichi Life may have an in terest in o ur do in g so. Dai-ich i Life h as no ob lig ation to prov id e us with any ad dit io nal debt or equ ity finan cing. The Compa ny is ex po sed t o risks rela ted to natural a nd ma n-ma de disa sters and catastro phes, such as d isea ses, epidemics, p andemics, ma licio us a cts, cyb er atta cks, terro rist a cts, a nd clima te change, which co uld a dversely affect the Co mp any’s o pera tio ns a nd results. Wh ile the Co mp any h as o btain ed in su ran ce, implemented risk management an d co nting ency plans, and taken p rev en t iv e measu res and ot her precau tion s, no p redict io ns of specific scenario s can b e made an d such measures may no t adeq uately predict the imp act on the Company from su ch events. A natural or man-mad e disaster or catastro ph e, includ in g a severe weather or g eolog ical ev ent such as a sto rm, tornad o, fire, flo od , earth qu ake, d i sease, ep idemic, pand emic, malicio us act, cy ber attack , terrorist act, o r th e effects o f climate chan ge, cou ld cause the Co mp any ’s work fo rce to be un able to eng age in op eratio ns at on e o r more of its facilities o r resu lt in sho rt- or lo ng -term in terru ption s in th e C ompany ’s bu siness o peration s, any of whi ch cou ld be material to th e Co mp an y’s o perating resul ts for a p arti cu lar perio d. Certain of th ese events cou ld also adv ersely affect the mortality, mo rb id ity, or other ex perien ce of th e Co mp any o r it s reinsurers an d hav e a sig nificant neg ati ve impact on th e Co mp any. In add itio n, claims arisi ng from th e o ccurren ce o f such ev ents or co nd ition s cou l d h ave a material adverse effect on th e Compan y’s fi nancial co nd ition and results of operatio ns. Su ch ev ents o r co nd iti on s cou ld also have an ad verse effect o n lapses and surren ders o f ex isting po licies, as wel l as sales o f n ew p oli cies. In ad dition , su ch even ts or con dition s co uld result in a decrease o r halt in economi c activ ity in large g eog raphi c areas, adv ersely affectin g th e Co mp any ’s bu siness withi n su ch g eog rap hic areas an d/or th e gen eral eco nomic cli mate. Such ev ents o r con ditio ns co uld also resu lt in add itio nal reg ulation or restrictio ns on th e Co mp any in th e condu ct of its b usin ess. Th e po ssi ble macro econ omic effects o f such ev ent s o r con dition s co uld also ad versely affect the Co mp an y’s asset p ortfolio, as well as many o ther aspects o f the Co mp any ’s b usin ess, fin ancial con dition, and resu lts o f o peration s. A disruptio n o r cyber a ttack affecting the electro nic, co mmunica tion and informa tion technolo gy systems o r other technolog i es of the Co mp any or tho se on whom the Co mp any relies could ad versel y a ffect the Compa ny’s b usiness, fina ncial condition, and results o f o peratio ns. In co nd uctin g its bu sin ess, t he Company relies ex ten si vely on vario us electron ic systems, includ in g co mp uter sy st ems, networks, d ata p ro cessing an d ad ministrativ e systems, and commu nication systems. The Compan y’s bu sin ess p artners, cou nterp arties, serv ice p ro viders, and distribut ors also rely on such systems, as d o securi ties ex chan ges and finan cial mark ets that are impo rtant to th e Co mp any ’s ability to con du ct its b usiness. These sy stems or th eir fu nct io nality co uld b e disabled, d isru pted, d amaged , or destroy ed b y intentio nal or un i ntent io nal acts o r ev ents su ch as cy ber attack s, v iruses, sabo tag e, un au tho rized tamperin g, p hy sical or electroni c b reak -ins o r o ther secu rit y breaches, acts of war or terro rism, h uman erro r, system failures, failu res of po wer or water sup ply, o r th e loss or malfun ction o f other u tilities or serv ices. They may also be disabled, disrup ted, damaged, or d estro yed by n atu ral ev ent s such as sto rms, tornad oes, fires, flo od s o r earth qu akes. Disrup tion , damage, or d estructio n of any of these sy stems co uld cau se t he Compan y o r others o n whom th e Co mp any relies to b e u nab le to con du ct b usin ess for an ex ten ded perio d of time o r co uld resul t in sign ifi can t exp end itures to rep lace, repai r, or rein st ate fu nct io nality, which co uld materially adv ersely imp act the Company’s bu si ness an d its financial co nd ition an d results of op eratio ns. Wh ile th e Co mp any and ot hers on whom it dep end s try to id ent ify threats an d imp lement measures t o p ro tect th eir systems, such protective measu res may no t be sufficien t. Add itio nally, we may no t become aware o f so ph isticated cy ber attack s for so me time after they occu r, which co uld increase th e Co mp any ’s exp osure. We may h ave t o incu r sign i fican t co sts t o add ress or remediate interrup tions, threats, an d v ulnerabilities in o ur i nformatio n an d techn olog y systems and to comply with exist in g an d future reg ulato ry requ irements related thereto . These risks are h eig htened as th e frequ ency and sop histicat io n o f cyber attack s in crease. The Compan y has relationships with ven do rs, d istrib utors, and other thi rd parties th at p ro vide o peration al o r informatio n techn olog y services to us. Althoug h th e Co mp any co nd ucts du e d iligen ce, neg oti ates con tractu al pro visio ns, an d, i n man y cases, con du cts p eriod ic rev iews o f su ch thi rd p arti es to co nfi rm complian ce with o ur informatio n security stand ard s, the failu re of su ch th ird part ies’ comp uter sy stems an d/or th eir d isaster reco very plans fo r any reaso n mig ht cau se sign ifican t in terru ptions i n o ur o peration s. Wh ile we maintain cy ber liabil ity in surance that p ro vides bo th third-party liab ility and first party liability cov erag es, our i nsu ran ce may n ot be su ffi cient to pro tect u s against al l losses. Co nfidenti al i nformation ma inta i ned in the systems o f the Compa ny o r o ther p arties upo n which the Co mp any relies could be compro mised or mi sap prop ria ted a s a result o f security brea ches o r o ther rela ted la pses o r incidents, da ma ging the Co mp any’s business and reputat io n and a dversely affecting its fina ncial co nd ition and results o f o pera tio ns. In th e cou rse of co nd uctin g its b usin ess, the Co mp an y retain s co nfid ential informatio n, in clu ding informatio n about its cu stomers and prop riet ary bu sin ess informat io n. Th e Compan y retai ns con fid en t ial informati on in v ariou s electro nic sy stems, i ncl ud in g compu ter systems, n etwo rk s, data p ro cessing an d admini strative sy stems, and co mmun icat io n sy stems. The Company maint ain s physical, admin istrative, and techn ical safegu ard s to p ro t ect th e in fo rmation and it relies o n co mmercial techno lo gies to maintain th e security o f it s systems and to mai ntain th e secu rity o f its transmissio n o f such in fo rmation to other p arti es, in cludi ng its bu siness p artners, cou nterp arties an d service p ro viders. Th e Co mp an y’s b usin ess partners, co un terparties and serv ice p ro viders likewise maintain con fid en t ial in formatio n, includ ing, in so me cases, customer in fo rmation , o n b ehalf of the Co mp any. An intentio nal o r un in ten tion al b reach o r co mp ro mise of th e security measures of t he Compan y o r su ch o th er p arties co uld result in th e disclo su re, misapprop riation , misuse, alt eratio n, o r destructio n o f th e co nfid ential informatio n retain ed b y or o n behalf of the Co mp any, o r th e inab ility of the Co mp any to con du ct b usin ess fo r an in det ermin ate amoun t of time. An y of th ese events o r circumstances cou ld damag e th e Co mp any ’s bu sin ess and adv ersely affect its finan cial co nd ition an d resu lts o f o perati on s by , amon g o ther thin gs, causin g h arm to th e Co mp any ’s b usin ess op eratio ns, rep utation and cu stomers, d eterring customers an d o th ers 16 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents from d oing b usin ess wit h th e Compan y, su bjecting the Compan y to sig nificant regu latory, civil, and crimin al l iab ility, an d req uiring th e Compan y to in cur sig nificant leg al an d o th er exp enses. Desp ite o ur efforts to ensu re th e integri ty o f ou r sy st ems, it is po ssible that we may no t b e able to an ticip ate and imp lemen t effectiv e preven tativ e o r detectiv e measu res agai nst secu rity b reaches of all typ es becau se the tech niques u sed to attack techn olog ies and data sy stems ch ang e frequ ently o r are no t recog nized u ntil lau nch ed and because cy ber attack s can ori ginate from a wide variety o f so urces or parties. Those part ies may also attemp t to frau du len tly in du ce emp lo yees, customers, o r other u sers o f ou r sy st em, th ro ug h ph ishing , p ho ne calls, o r o th er efforts, to delib erately o r i nadv ertently disclo se sensit iv e in fo rmation in order to gain access t o o ur dat a o r that of ou r cu st omers o r clien ts. Ad ditio nally, cy ber threats and relat ed legal an d reg ulato ry stand ard s ap pli cab le to o ur b usin ess are rapidly evo lv ing and may sub ject the Company to hei gh ten ed leg al stand ard s, n ew theo ries of liability, an d material claims an d p enalties th at we cann ot curren tly p red ict or anticipate. As cyb er threats an d ap pli cab le legal stan dards con tinu e to evo lv e, th e Comp any may be requ ired to ex pen d sig nificant add itio nal resou rces to co ntin ue to mod i fy or enh ance ou r protecti ve measures an d compu ter systems, and to in vesti gate and remediat e any information security v ulnerabilities. If the Company ex perien ces cy ber att ack s or oth er data security ev ents or other tech no lo gical failures or lap ses, includ in g u nau th orized access to, loss of, or acqu isit io n o f informatio n co llected or main tained b y the Co mp any o r its b usiness partn ers or ven do rs, t he Co mp any may be su bject to reg ulato ry inq uiries or proceedin gs, litig ation o r reput ati on al damage, or b e requ ired to pay claims, fines, o r p en alti es. Wh ile the Compan y has ex perien ced cy ber-ev ents and ot her d ata securi ty ev ents in th e past, an d to date the Co mpan y h as no t suffered an y material harm or l oss rel ating to such attacks, ev ents, failu res or lap ses at the Co mp any or th ird p arties, th ere can b e n o assurance th at the Compan y will no t suffer such harm or l osses in th e fu tu re. The Co mp any’s results a nd financia l condition may b e nega tively a ffected should a ctual exp eri ence differ fro m ma na gement’s mo dels, a ssump tions, or estima tes. In the co nd uct o f b usiness, the Co mp any makes certain assu mp tio ns and u tilizes certain in t ernal mod els regarding mortality, morbidity, persist en cy, ex pen ses, in terest rates, equ ity mark ets, tax, bu si ness mix , casu alty, co ntin gen t liab ilities, investment perfo rmance, and o th er facto rs approp riate to th e type of bu siness it exp ects to exp erience in fu tu re p eriod s. These assumpt io ns and mo dels are used to estimat e th e amo un ts of d eferred po licy acq uisition co sts, po licy liab ilities and accru als, fu ture earn in gs, an d vario us compo nents of the Compan y’s balance sh eet. Th ese assump t io ns and mo dels are also u sed in the op eratio n o f th e Co mp any ’s b usiness in mak i ng deci sio ns cru cial to t he su ccess o f th e Co mp any, includ in g th e pricing o f acq uisi tion s an d p ro du cts. The Co mp any ’s actual exp erience, as wel l as chan ges in estimates, i s used to prep are the Compan y’s fin anci al statemen ts. To the extent th e Co mp any ’s actual ex perien ce an d ch ang es in estimates differ from orig in al estimates, the Compan y’s fin anci al con ditio n may be adversely affected. Mo rtality, morbidity, an d casu alty assumptions in corpo rate un derly i ng assumption s abo ut man y facto rs. Su ch facto rs may in clu de, for examp le, h ow a p ro du ct is distribu t ed , fo r wh at pu rpo se th e p ro duct is purchased, the mix of cu stomers p urchasing th e prod ucts, persi sten cy and lap ses, future prog ress in th e field s o f heal th and med i cine, an d th e pro jected level of u sed vehicl e values. Actu al mort ali ty, morbidit y, and /o r casual ty exp erience may d i ffer from ex pectation s deriv ed fro m the Compan y’s mod els. In ad dition , con tinu ed activity in the viatical, strang er-owned , and /o r life settlement in du st ry could cau se th e Co mp any ’s lev el o f lapses to differ from it s assu mp tion s abo ut premium persisten cy an d lapses, wh ich co uld negatively i mp act the Compan y’s perfo rman ce. Ad ditio nally, th e calculatio ns the Compan y u ses t o estimate various components o f its balan ce sheet an d stat ements o f inco me are n ecessarily co mp lex an d i nv olve anal yzing an d in terpreting large qu antities o f data. The Co mp any cu rrently emplo ys v ari ou s techn iq ues for such calculation s and rel ies, i n certain in stan ces, o n third parties to mak e o r assist in making such calculation s. From time t o t ime it d evel op s and imp l ements mo re so ph isticated ad ministrativ e systems an d proced ures cap abl e o f facilitatin g the calculatio n of more p recise estimates. The systems an d proced ures th at th e Co mp any develop s and th e Co mpan y’s reliance up on th ird p arties cou l d resu l t in errors in th e calculation s th at imp act ou r fin ancial statemen ts or affect ou r fin ancial co nd ition . Mo dels, assu mp tion s and estimates invol ve judgmen t, an d b y their n atu re are imp recise and sub j ect to chan ges an d revisio ns ov er time. Acco rd in gly, th e Compan y’s resu lts may b e affected, p ositiv ely or n egat iv ely, fro m time to time, by errors in th e design , imp lemen tation, or use of i ts models, actual resu lts di ffering from assu mp tio ns, by ch ang es in estimates, and b y chan ges resu l ting from i mp lemen ting mo re sop histicated ad ministrative systems an d p ro cedu res that facilitate th e calculation of mo re p reci se estimates. The Compa ny may no t real ize its anticip ated financia l results fro m its a cquisitio ns strategy. The Co mp any ’s Acq uisition s segment focu ses o n th e acqui siti on s o f compan ies and b usiness o peration s, an d th e co in su ran ce of b locks o f in su rance bu sin ess, all o f wh ich h av e increased the Compan y’s earning s. Ho wev er, th ere can be n o assuran ce th at th e Co mp any will have fu tu re sui tab le o pp ortu nit ies fo r, or su fficient cap ital av ailable to fu nd , su ch tran saction s. If ou r compet itors h ave access to capital o n mo re favo rab le terms or at a lower cost, o ur ab ility to co mp ete for acq uisition s may b e diminished . In ad dit io n, th ere can b e n o assuran ce th at th e Co mp any will be able to realize any p ro jected operating effici en cies o r ach iev e th e an ticip ated finan cial resu lts fro m su ch tran saction s. The Co mp an y may be un able to co mp let e an acq uisition tran saction . Completion o f an acq uisition tran saction may b e more costl y o r tak e l on ger th an exp ected, or may h ave a d ifferent or more co st ly financing structure th an in itially con templated . In add i tion , the Compan y may no t be able to co mp lete or manag e mu ltip le acq uisition transactio ns at the same time, or t he completion of su ch tran saction s may b e delay ed o r b e mo re co stly th an initially co ntemp lated. The Co mp any, its affil iates, o r other p arties t o th e t ran saction may be u nab le to o btain regu latory app rovals req uired to complete an acq uisition transactio n. If the 17 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Co mp any iden tifies and completes su itable acq uisiti on s, it may n ot be ab le to successfully in tegrat e the b usin ess in a timely or co st-effect iv e man ner, or ret ain k ey p erson nel and bu sin ess relation ship s n ecessary to achieve an tici pated fi nancial results. In ad ditio n, a n umber o f risk s may arise in co nn ection with bu sin esses or b lo cks of insu ran ce bu siness that th e Compan y acq uires or rein su res, in clu ding u nforeseen liabilities or asset imp airmen ts; rating ag ency reaction s; an d reg ulato ry requ iremen ts th at cou ld imp act ou r op eratio ns o r capi tal requ irements. Add ition ally, i n connection with its acq uisi tion tran sactions th at in vo lv e reinsurance, the Comp any assumes, or ot herwise b ecomes respo nsib le fo r, the obligatio ns of p olicies and oth er liabilities of o th er in surers. An y regul ato ry , legal, finan cial, or other ad verse dev elo pment affecti ng th e o t her insurer co uld al so h ave an ad verse effect on th e Company . The Compa ny may exp erience co mp etition i n i ts a cquisitio n seg ment. The Co mp an y also faces sign ifi can t competit io n in its acq uisition s segmen t , in clu ding with respect t o the acq uisitio n o f su itable target co mp an ies, bu sin ess o peration s, and block s of reinsurance bu siness. Other market p arti cipan ts may have co mp eti tive advantages, includ ing with respect to access to cap ital (whether on more fav orable terms o r at a lo wer cost), investment retu rn req uiremen ts, tax ati on , an d risk toleran ces. Assets allocated to the MONY Closed Block b enefit only the holders o f certa in p olicies; ad verse p erformance of Closed Block a ssets o r a dverse exp erience of Closed Blo ck lia bil ities may neg atively affect the Co mp any. On Octo ber 1, 2 01 3, the Compan y co mp leted the acqu isitio n of MONY Li fe Insu ran ce Co mp any (“MONY”) fro m AXA Fin ancial, Inc. M ONY was co nv erted from a mu tu al insurance compan y to a stock co rpo rat io n in acco rd ance with its Plan of Reorgan izatio n d ated Au gu st 14 , 19 98 , as amen ded . In co nn ection with i ts d emu tu alizati on , an acco un ting mech an ism k no wn as a closed block (the “Clo sed Block”) was estab lished fo r the b en efit o f po licyh olders who owned certain in dividu al insurance po licies o f MONY in fo rce as of the date of demutualizat io n. Please refer to No te 4 , MONY Clo sed Blo ck o f Business, to th e co nsolid ated finan cial statements for a mo re detailed d escripti on of th e Closed Blo ck. Assets al lo cated to t he Clo sed Blo ck i nu re so lel y to th e b enefit of th e Closed Block ’s po licyh olders and will no t revert to t he ben efit o f the Co mp any. Howev er, if th e Clo sed Block h as in su fficient fun ds to mak e gu aranteed po licy b enefit pay men ts, such pay men ts mu st be mad e fro m assets o utside th e Clo sed Blo ck. Adv erse finan cial o r in vestmen t performance of the Clo sed Blo ck , o r adv erse mo rtal ity or lapse exp erience on p olicies in the Closed Block , may requ ire MONY to p ay po licyh old er ben efits u sing assets o utside th e Closed Blo ck, which even ts co uld h ave a material adv erse i mp act on th e Co mp any ’s fin ancial condi tion o r resu lts of o peration s an d neg ativel y affect the Company ’s risk-b ased cap ital ratio s. In add ition , regu lat ory acti on s co uld requi re payment o f dividen ds to po licyh olders in a larg er amo un t th an is anticipated by the Co mp any, wh ich co uld hav e a material adverse imp act o n the Co mp any . The Compa ny is dep end ent on the p erformance o f o t hers. The Compan y’s resu lts may be affected b y the p erforman ce o f ot hers because th e Co mp any has en tered into vario us arran gements inv olving other parties. Fo r ex ample, variab le life and an nu ity depo sits are in vested in fund s man ag ed b y third p arties, certai n mod ified coinsu ran ce assets are man aged by th ird p arties, an d the Compan y en ters in t o d eri vat iv e transact io ns with vario us cou nterp arties an d cleari ng ho uses. The Compan y may rely upon th ird p arties to ad minister certain po rtio ns o f its b usin ess or bu si ness that it rein su res. An y o f t he other parties up on wh ich the Compan y d epend s may defau lt on th eir ob ligatio ns to th e Co mp any du e to bank ruptcy, in so lv ency, lack of liqu id ity, adv erse eco no mi c co nd ition s, op eratio nal failu re, frau d, o r o ther reasons. Such defau lts co uld h ave a material adv erse effect on th e Co mp any ’s fin ancial co nd itio n an d results of op erat io ns. Certain of th ese other p arties may act on behalf o f the C ompany or represen t th e Co mp any in v ariou s capaciti es. Co nseq uen tly, the Compan y may be held respo nsib le for ob ligations th at arise fro m the acts or omissio ns o f these o ther p arties. Mo st o f th e Co mp an y’s prod ucts are so ld th rou gh in depen den t third-party dist ribu tion chan nels. There can be n o assurance th at the terms of th ese rel ati on ships will remain accept ab l e to us o r the distribu to rs, as they are sub ject to chan ge as a result o f b usiness co mb in ation s, mergers, co nsolid ation , o r ch ang es in b usin ess models, co mp en satio n arrang ements, or new d istrib uti on ch ann els. If on e o r mo re k ey dist ribu to rs termin ated their relat io nsh i p with us, in creased the costs o f selling ou r p ro du cts, o r redu ced th e amou nt of sales they p ro du ce fo r us, o ur resul ts o f o peration s cou ld be adv ersely affect ed . If we are un successful in attractin g an d retain ing k ey asso ciates who co nd uct ou r b usiness, sales o f o ur prod ucts cou ld decline an d o ur resu lts of operations and finan cial co nd iti on co uld b e materially adversely affected. Because o ur prod ucts are distribu ted th ro ug h u naffiliated third-party distri bu to rs, we may n ot be able to fully mo nito r o r co ntro l the man ner of their distri bu tion d espite o ur trainin g an d co mp liance p ro grams. If o ur p ro du cts are d istrib uted by su ch firms in an i napp rop riate mann er, or to cu stomers fo r wh om th ey are un suit ab le, we may su ffer rep utation al and other h arm to o ur bu sin ess. In additio n, ou r d istrib utors may also sell o ur co mp etitors’ prod uct s. If o ur co mp etito rs o ffer p ro ducts that are more attractiv e t han ou rs, or p ay h ig her co mpen sat io n than we d o, these dist ribu to rs may con centrate their effo rts on sellin g o ur competitors’ prod ucts in stead of ours. The Compa ny’s risk ma na gement p olicies, practices, and p roced ures co uld leave i t exp osed t o unidentified o r unanticipated risk s, which co uld nega tively affect it s busi ness o r result in l osses. The Co mp any has dev elo ped risk management p olicies an d procedu res and ex pects to co ntinu e enh ancing them in the fu tu re. Nonetheless, th e Co mp any ’s p oli cies and p ro cedures to iden tify, monitor, and man age bo th in ternal an d extern al risk s may no t p red ict future ex po su res, which could b e differen t o r sign i fican t ly greater than exp ected. 18 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents These i dentified risk s may no t b e th e on ly risk s faci ng th e Co mp any. Ad dition al risks an d u ncertaint ies n ot curren tly k no wn to the Compan y, or th ose that it curren tly d eems to b e immaterial, may ad versely affect its bu sin ess, fin anci al con ditio n and /or resu lts o f o perati on s. The Compa ny’s stra teg ies for mitig ating risk s arising from its da y-to-da y op eratio ns may p rove ineffective resulting i n a material adverse effect on its results of op erations and financia l co nd itio n. The Company’s performance is high ly dep enden t o n its ab ility to manag e risks that arise from a larg e nu mb er o f i ts d ay-to -d ay b usiness acti vities, in clu ding , but no t limited to, po licy pricing , reserv in g and v aluati on , un derwriting, claims p ro cessing , pol icy admin istration an d serv icing , admini stratio n o f rei nsu ran ce, ex ecutio n o f its inv estment and hed ging strategy, fin anci al and tax repo rtin g, an d o th er activ ities, man y o f wh ich are v ery complex. The Co mp any also may rely o n th ird parties for such acti vities. Th e Compan y seek s to mo nitor and con t ro l its ex po sure to risks arising o ut of o r related to th ese activ ities th ro ug h a v ariety of in ternal con trols, man agement review processes, an d ot her mechan isms. Howev er, the o ccurren ce o f u nan ticip ated risk s, or the occurren ce of risks of a greater mag nitu de th an ex pected , includ in g th ose arising fro m a failure in p ro cesses, procedu res or systems i mplemen ted b y th e Co mp any or a failu re on t he part o f employ ees or th ird p arti es up on wh ich th e Company relies in th is regard, may hav e a material adv erse effect on th e Co mp any ’s fi nancial co nd itio n o r resu lts of operatio ns. Events tha t d amag e our reput atio n o r the reputat io n o f o ur ind ustry co uld a dversely impa ct o ur b usiness, results of opera tions, or fina ncial condition. There are even ts wh ich co uld harm o ur repu tatio n, i ncl ud in g, bu t n ot li mited to, regulat ory in vestigatio ns, ad verse media co mmen tary, legal proceeding s, an d cy ber o r other informatio n security events. Dep end in g on t he sev erity o f damage to ou r rep utation , our sal es o f new b usiness, and /o r ret en tio n of ex isting b usin ess co uld be neg atively impacted, an d our ab ility t o compete for acqu isition tran saction s or en gag e i n finan cial tran saction s may be diminish ed, all of which co uld ad versely affect ou r resu lts of op eratio ns or finan cial co nd ition . As with all fi nancial services companies, th e Co mp any ’s ability to co nduct bu si ness is dep end ent u po n co nsu mer con fiden ce in the industry and its prod uct s. Actions o f competitors and fin anci al difficu lties o f other co mp anies in t he in du stry coul d un dermine consumer con fiden ce and ad versely affect ret en tio n o f existin g b usin ess and fu tu re sales o f the Compan y’s in su ran ce an d inv estment prod ucts. The Compa ny may no t b e ab le to p rotect its intellect ua l p rop ert y a nd ma y be subject t o i nfringement cla ims. The Co mpan y relies on a combinatio n of con tractu al righ ts and cop yrig ht, trad emark , p atent, an d trad e secret laws to establish an d p rot ect its in tellect ual p ro perty. Altho ug h the Comp any u ses a b road ran ge of measu res to protect its in tellectual p ro perty righ ts, third parties may in fring e o r mi sapp ro priate its in tel lectual prop erty. The Co mp any may hav e to litig ate to enforce and protect it s cop yri gh ts, trademarks, pat en t s, trade secrets, and know- ho w or to determin e th eir sco pe, v alidity, o r en fo rceab ility, which represents a d iv ersio n o f reso urces th at may b e sign ifi can t in amo un t an d may not p ro ve successful. The lo ss of intellectu al prop erty protection o r t he in ab i lity to secure o r enfo rce the protection of the C ompany ’s in tellectual p ro perty assets cou ld have a material ad verse effect on its b usin ess and ability to compete. The Co mp any also may be su bject to costly litig ati on in the event that an other part y alleg es its o perati on s o r acti vities infrin ge u po n th at party ’s in tellect ual p ro perty righ t s. Third parties may h ave, or may eventually be issu ed, patents th at co uld b e infrin ged b y the Compan y’s p ro du cts, meth od s, processes, or serv ices. An y party th at ho ld s su ch a p atent cou ld make a claim o f infringemen t against th e Co mp any. The Compan y may also b e sub ject to claims by th ird parties fo r infring emen t of copyrig ht an d trad emark s, violation of trad e secret s, o r b reach o f license u sage righ t s. Any such cl aims an d any resu ltin g litigatio n co uld resu lt in sig nificant liabil ity for d amages. If the Compan y were fo un d to hav e in frin ged thi rd party p atent o r o th er in tellect ual prop erty rig hts, it co uld incu r sub stan tial li ab ility, and i n so me ci rcumstances coul d b e en jo i ned from prov id in g certain p ro du cts or serv ices to its custo mers or u tilizin g and b enefiti ng fro m certain meth od s, p ro cesses, cop yrig hts, trademarks, trad e secrets, or licen ses, or alternativ ely co uld b e requ ired to en ter into co stly l icensin g arran gements wi th th ird parties, all of which co uld hav e a material ad verse effect on the Co mp any ’s business, resul ts of o perati on s, and finan cial co nd iti on . Develop ments in techno l og y may imp act our busi ness. Techn olog ical d evelop men ts and u nfo reseen chan ges i n tech no lo gy may impact o ur b usin ess. Techn olog y chan ges are increasing customer cho ices ab ou t ho w to interact with companies g enerally. Evo l ving custo mer preferences may driv e a n eed to red esig n ou r prod uct s, and o ur d istrib utio n channels and cu stomer serv ice areas may need to chang e to beco me more au to mated and avail ab le at th e p lace an d time of th e custo mer’s ch oo sin g. Ad dition ally, ch anges in tech no lo gy may impact ou r op eratio nal effecti veness and cou ld h av e an ad verse effect on ou r u nit cost competiti veness. Su ch ch ang es hav e th e po t en tial to disru pt our bu sin ess mod el. Techn olog y may also have a sign ifi can t impact o n th e compan ies in wh ich we i nv est. Fo r examp le, con sumers may chan ge th eir p urchasing behav io r to favo r o nli ne sh op ping activity , whi ch may adv ersely affect the v alu e of ret ail prop erties in wh ich we inv est. Ad van cements in med i cal tech no lo gies may also i mpact ou r b usin ess. For examp le, g enetic testing and the availab ility of th at information un eq ually to con sumers an d in su rers can resu lt in anti-sel ectio n risks if d ata from gen etic test in g g iv es ou r pro spectiv e cu stomers a clearer view into their fu tu re heal th an d lo ng evity ex pectation s, all owin g them to select p ro du cts p ro tectin g them against likelih oo ds o f mo rtality or lo ng ev i ty wi th more p recision based o n informat io n th at is no t availab le to us. Also, advancemen ts in medical techno lo gies th at extend li ves may ch alleng e o ur actu ari al assu mp tion s, especially in the ann uity bu siness. 19 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Risks Rela ted to the Financia l Env i ro nment Interest ra te fluctua tions and sustained p eri od s o f lo w or hig h interest rates co uld neg atively affect the C ompa ny’s interest ea rnings and spread i ncome, o r otherwi se impa ct its b usiness. Si gn ifican t ch an ges in in terest rat es exp ose the Compan y to th e ri sk o f not earn ing an t ici pated int erest on prod ucts wi th ou t sig nificant acco un t balan ces, o r no t realizing an ticipated spread s between the in terest rate earned o n in vestmen ts an d th e cred ited i nterest rates p aid o n in -force p olicies and co ntracts th at have si gn ifican t acco un t balances. Bo th risin g and d ecli ning interest rates as well as sustain ed perio ds of lo w in terest rates cou ld n egativ ely affect th e Comp any ’s in terest earning s and spread inco me. Ad ditio nally, chan ges o r reforms to Lon do n Inter-Bank Offered Rate (“LIBOR”), or un certain ty reg ard in g the reliabil ity o r co ntinued use of LIBOR as a b ench mark interest rat e, may imp act interest rates i n th e markets in which th e Compan y co nd ucts bu sin ess. Altern ative referen ce rates, includ in g the Secured Ov ern ig ht Fun ding Rat e (“SOFR”), have been ann ou nced, and it is un clear ho w markets will respond to th ese n ew rates, the effect o f chang es o r reforms to LIBOR, o r d iscontinu ation of LIBOR. If LIBOR ceases to exist or if th e meth od s o f calcu latin g LIBOR ch ang e from cu rrent metho ds fo r an y reason , in terest rates o n certain deriv ati ves and floatin g rate securi ties we h old, securi ties we h av e issued , real estate len ding and related activ ities we con du ct i n ou r in vestmen t manag ement b usiness, and any o th er assets or l iab ilities who se value is tied to LIBOR, may be ad versely affect ed . Furth er, any un certain ty regardin g t he con tinu ed u se and reliab ility o f LIBOR as a b ench mark int erest rate co uld ad versely affect the v alue o f such instruments. Lower interest rates may also result in lo wer sales o f certain of th e Co mp an y’s li fe in su rance and ann uity prod uct s. Add itio nally, durin g periods of declinin g or lo w in terest rates, certain previou sly-issued life in su ran ce and ann uity prod ucts may be relatively more attractive inv estments to con sumers, resu ltin g in increased p remiu m p aymen ts on prod ucts with flex ib le p remiu m featu res, repayment of po l icy lo an s, and i ncreased persi sten cy, o r a h ig her percen tag e of insurance p olicies remaining in fo rce from year to year du ring a perio d wh en th e Compan y’s in vestmen ts earn lower retu rn s. Certain o f the Co mp any ’s life i nsu ran ce and ann uity p ro du cts gu aran tee a mini mu m credited i nterest rate, an d the Comp any co uld b ecome un able t o earn its sp read inco me or may earn less in terest on its in vestmen ts th an it is requ ired to credi t to policy ho ld ers sho uld i nterest rates decrease sig nificantl y an d/or remain lo w fo r sustained perio ds. Add ition ally, th e p ro fitab ility of certain o f th e Compan y’s life in surance prod uct s that d o n ot h ave sig nificant accou nt b alan ces cou ld b e reduced sh ou ld i nterest rates decrease sig nificantly and /o r remai n low fo r sustain ed p eriod s. The Co mp any ’s exp ectatio ns for future i nterest earni ng s an d spreads are impo rtant compo nen ts in amort ization o f deferred acq uisitio n co sts (“DAC”) and value o f b usiness acqu ired (“VOBA”), and sign ifi can tly lo wer in terest earnings o r spread s may accelerate amo rtizat io n, thereby red ucing net in come in the affected repo rting perio d. Su stain ed perio ds of lo w interest rates cou ld also resu lt in an i ncrease in the valuatio n o f the future po licy b en efit o r po licyh older acco un t b alan ce liab ili ties asso ciated with the Compan y’s pro du cts. High er in terest rat es may create a less fav orable env iro nmen t fo r th e orig inatio n o f mortgag e lo ans an d decrease th e in vestmen t in come th e Co mp any receiv es i n t he fo rm of prepay men t fees, make-who le p aymen ts, and mortgag e p articipation in co me. Hi gh er interest rates wou ld also adv ersely affect the market value o f fix ed-income securities wit hin the Co mp an y’s in vestmen t p ortfo lio. High er interest rates may also in crease t he cost o f d ebt and other ob lig ati on s o f th e C ompany h aving flo ating rate o r rat e reset p ro visi on s. During perio ds of increasin g market i nterest rates, th e C ompany may o ffer high er cred iti ng rat es on in terest-sen siti ve pro du cts, su ch as u niversal life insu ran ce an d fixed an nu ities, and it may in crease cred itin g rates o n in -force prod uct s to keep th ese pro du cts co mp etitiv e. In addi tion , rap i dly-rising interest rates may cause in creased po licy surren ders, with drawals from life i nsu ran ce po licies an d ann uity cont racts, and requ ests fo r po licy lo ans as pol icy ho ld ers and con tract ho ld ers shift assets int o h igh er y ielding inv est ments. In creases in creditin g rates, as well as surrend ers and with drawals, co uld hav e an ad verse effect o n th e Compan y’s fin anci al co nd ition an d resu lts of operations, in clu ding earning s, equ ity (includ in g accumulated other comp reh ensiv e in co me (lo ss) (“AOCI”)), and statu to ry risk -b ased capital rati os. Ad ditio nally, the Co mp any ’s asset/liabi lity management pro grams an d proced ures inco rp orate assumptio ns abo ut the relation ship between short- term and lon g-term interest rates (i .e., the slo pe o f the y ield cu rv e) an d relation ships between risk -ad ju st ed and risk -free in terest rates, market liqu id ity, and other facto rs. Th e effectiv eness o f t he Co mp any ’s asset/l iab ility man agement p ro grams an d pro ced ures may b e n egativ ely affected when ever act ual results differ from th ese assu mp tion s. In g eneral, the Co mp any ’s results of op eratio ns improve when the y ield cu rv e is po sitively slo ped (i.e., when lo ng -term interest rat es are high er than sho rt-term interest rates), an d will be adv ersely affected b y a flat o r n egativ ely -slo ped cu rve. The Co mp any’s investment s a re sub ject to ma rk et and credit risk s. These risks could b e heig htened d uring period s of ex treme vo la til ity o r d i srupt io n in fina ncial and cred it ma rkets. Si gn ifican t vo latility o r disrup tion in d omestic o r fo reign credit markets, in clu ding as a resu lt o f so cial o r po litical u nrest or in st ab i lity d omest ically or ab ro ad, cou ld hav e an ad verse impact in sev eral way s on either th e Co mp any ’s finan cial co nd itio n o r result s from op eratio ns. Th e Co mp any ’s in vested assets an d d erivati ve fin ancial instru men ts are su bject to risks o f credit defau lts an d ch an ges in market val ues wh ich co uld be heigh t en ed b y volat ility o r disru pti on . Th e factors affectin g th e fin anci al an d credit markets co uld lead to other-than -temp orary imp airmen ts of assets in the Co mp any ’s inv estment po rtfo lio. The value of th e Co mp any ’s commercial mortg age lo an p ortfoli o dep end s in part on th e finan cial co nd itio n o f the tenants o ccu py in g the p ro perties th at t he Compan y has finan ced . The v alu e o f th e Co mp any ’s inv est ment po rtfolio , in clu ding its p ortfoli o of g ov ern ment deb t o blig ations, d ebt ob ligatio ns o f th ose en tities with an ex press o r implied go vernmental g uarantee, an d debt o blig ation s o f o ther issuers ho l ding a large amou nt of su ch o bligat io ns, depen ds in p art on th e ab ili ty of th e issu ers o r g uarantors of su ch deb t to main tain thei r cred it rati ng s and meet thei r con t ractu al o blig ations. Factors that may affect th e o verall default rate 20 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents on , an d mark et v alu e o f, the Co mp an y’s in vested assets, d eri vat iv e finan cial in struments, and mo rtgag e lo ans in clude in t erest rate levels, fin anci al market perfo rman ce, g eneral econ omic con dition s, and co nd itions affectin g certain secto rs o f t he eco no my, as well as p articu lar circu mstan ces affect in g the in dividu al tenan ts, b orro wers, issu ers, an d g uarant ors. Si gn ifican t co ntin ued finan cial and cred it market vol atility, ch ang es in i nterest rates and credi t spread s, credit d efau lts, real estate v alu es, market illiqu id i ty, declin es in eq uity prices, acts o f co rp orate malfeasance, ratin gs do wng rades of the i ssu ers o r gu arantors o f th ese in vestmen ts, and declin es in general econ omic con ditio ns an d con ditio ns affectin g certain secto rs o f the econ omy, eith er al on e o r in co mbin ation , co uld h ave a material adv erse i mp act on the Co mpan y’s results of o peration s, financial con dition , o r cash fl ows th ro ug h realized lo sses, impai rment s, chan ges in u nrealized lo ss p ositio ns, and in creased d emand s on cap ital, inclu din g ob ligati on s to p ost add ition al cap i tal an d collateral. In ad dition , market v olatilit y can mak e it d ifficult for th e Co mp any to value certain of it s assets, especially if trad in g beco mes less freq uen t. Valu ation s may in clu de assu mp tion s o r estimates th at may h ave sig nificant perio d-t o-perio d ch an ges th at cou ld hav e an adv erse imp act o n t he Compan y’s resu l ts o f o peration s or fin ancial con ditio n. Cred it ma rk et vola tility o r disruption could ad versely i mp act the Co mp any’s financia l co nd iti on or resul ts fro m o pera tions. Ch ang es in interest rates an d credi t sp reads co uld cause market price and cash flow variab ility in t he fixed -inco me in stru men ts in th e Co mp any ’s in vestmen t po rtfo lio . A wid eni ng of credit sp reads will increase th e u nrealized losses in th e Compan y’s in vestmen t po rtfol io . Sig nificant v olatility an d lack of l iq uidity in th e cred it mark ets cou ld cause issuers o f th e fix ed -in come securities in the Co mp any ’s inv estment p ort fo lio to d efau lt o n either princip al or in terest p ayments on these secu rities. Ad dition ally, market price v alu ation s may no t accu rately reflect th e un derly in g ex pected cash flows of securities within th e Co mp any ’s inv est ment po rtfolio . The Company ’s statu to ry surplu s is also imp acted b y wid ening credit spreads as a resu lt of th e accounting fo r the asset s and li ab ilities on its fixed mark et v alu e adjusted (“M VA”) an nu i ties. Statu to ry sep arat e acco un t assets sup po rtin g the fi xed MVA ann uit ies are record ed at fai r v alu e. In determin in g the statutory reserve fo r th e fixed M VA ann uities, th e C ompany is requ ired to u se cu rrent cred iti ng rates b ased on U.S. Treasu ries. In man y cap ital market scenario s, curren t cred itin g rat es based o n U.S. Treasuries are h ig hly correlated with mark et rates imp licit i n the fair val ue o f statutory separate acco un t assets. As a result, t he chan ge in th e stat utory reserv e fro m p eriod to p eriod will lik ely sub stant ially offset th e ch ang e in the fair value of th e statutory sep arate acco un t assets. However, in perio ds of v olatil e cred it markets, actual cred it spread s o n in vestmen t asset s may increase sh arp ly for certain sub -sectors o f the ov erall cred it market, resu lti ng in statutory separate acco un t asset mark et value losses. Cred it spreads are no t co nsistently fu lly reflected in cred itin g rates based on U.S. Treasuries, and the calculatio n of statu tory reserves will no t su bstantially o ffset the chang e in fair v alue of th e statu to ry separate accou nt assets resu ltin g in red uct io ns in statutory surplus. This situatio n wou ld result in th e need to dev ote sig nificant addi tion al cap ital to sup po rt fix ed M VA an nu ity prod uct s. The ab ility of the Co mp an y to imp lemen t finan cin g solutions desig ned to fun d a po rtio n of statu to ry reserv es o n bo th the trad itio nal and u niversal life block s o f bu si ness is d epend ent u po n factors such as th e rating s o f t he Co mp any, the size of the block s o f bu siness affected , the mo rtality ex perien ce of th e Company, th e cred it mark ets, and other facto rs. The Comp any canno t pred i ct the con tinu ed av ailabil ity of su ch soluti on s o r th e form th at th e market may dictate. To th e ex t en t that such fi nancing solu tion s were desired bu t are no t av ailable, the Compan y’s fin ancial po sition cou ld be adv ersely affected th ro ug h impacts in clu ding , bu t n ot limited to , high er b orro win g co sts, surplus strain , lo wer sales capacity, an d p ossib le redu ced earn in gs. Disrupti on of the ca pita l and credit markets could neg atively a ffect the Co mpany’s a bility to meet i ts liquid ity and financing need s. The Compan y n eeds liqu id ity to meet its o bligatio ns to its p olicy ho ld ers and its d ebt ho ld ers, to pay i ts op eratin g ex pen ses, i nterest on o ur deb t and dividen ds o n o ur cap ital stock , to prov id e o ur su bsidiaries with cash or col lateral, main tain o ur securities lend in g activ ities an d to replace certai n maturing liabilities. Volatility or d isru ptio n in th e credit mark ets cou ld also imp act t he Compan y’s ab ility to efficiently access fin ancial solutio ns fo r p urp oses of issuing lon g-term d ebt for fin ancing pu rp oses, its ab ility t o o btain fin ancial solution s for p urpo ses o f sup po rting certain trad itio nal an d u niversal life in surance p ro du cts for capital man agemen t pu rp oses, o r resu lt in an increase in the co st o f ex isting secu ritization struct ures. With ou t sufficient l iq uidity, we co uld b e fo rced to curt ail o ur op eratio ns an d l imit ou r inv estments, and o ur bu si ness an d fin ancial resu lts may suffer. Th e Co mp any ’s sources o f liq uid ity in clu de insu ran ce premiums, ann uity co nsid erations, d epo si t fun ds, cash fl ow fro m inv est ments an d assets, an d other income fro m its op eratio ns. In n ormal credit and capi tal market con dition s, the Co mp any ’s so urces of liq uidit y also in clu de a v ariety of sh ort-term and lo ng -term b orro win g arran gements, in clu ding issuing deb t secu rities. The Company ’s bu siness is dep end ent on the capit al and credit mark ets, includ in g con fid ence in such mark ets. When th e credit an d capital markets are disrup ted an d con fid ence is erod ed th e Co mp any may n ot be able to bo rrow mon ey, incl ud in g throu gh th e issuance o f deb t secu rities, or the cost of bo rrowi ng or raisin g cap ital may be p ro hibitiv ely high . If th e Co mp any ’s i ntern al so urces of liq uidity are inad eq uate du ring su ch p eri od s, th e Company co uld suffer negativ e effects fro m not b ein g ab le to bo rro w mon ey, o r fro m h av i ng to d o so on un fav orable terms. The n egat iv e effects cou ld in clu de being fo rced to sell assets at a lo ss, a lowering of th e Comp any ’s credit rat in gs an d the fin anci al stren gth rating s of i ts insurance su bsidiaries, and th e po ssibilit y t hat cu stomers, lend ers, ratin gs agencies, o r regu lators d evelop a neg ative p ercep tion of the Co mp an y’s finan cial pro spects, which co uld lead to furth er ad verse effects o n t he Compan y. Eq uity market vo la til ity co uld nega tively imp act the Co mp any’s b usiness. Volatility i n equ ity markets may deter pro spectiv e p urchasers of v ariable life an d an nu ity products and fi xed ann uity prod ucts th at hav e retu rns link ed to th e p erforman ce of equ i ty markets an d may cause some exist in g cu stomers to with draw cash val ues or red uce in vestmen ts in tho se p ro ducts. Th e amou nt of po licy fees received from variable prod ucts is affected b y the 21 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents perfo rman ce o f the eq uity mark ets, increasin g or d ecreasing as markets rise o r fall . Decreases in p olicy fees could material ly an d adversely affect th e profitabilit y of o ur variable ann uity products. Equ ity market v olatility can also affect th e pro fitab ility of an nu ity p ro du cts with riders. The estimated co st o f prov id i ng g uaran teed min imum d eath benefits (“GMDB”) and gu aran teed living withdrawal ben efits (“GLWB”) in corpo rates v ari ou s assu mp tion s ab ou t th e ov eral l p erforman ce of equ ity markets ov er certai n ti me p eriod s. Period s o f sig nificant an d sustain ed down tu rns in equ ity market s o r increased eq uit y mark et vo lat ility cou ld result in an in crease in th e v aluati on o f th e future p oli cy benefit or p olicy ho ld er accou nt b alan ce liabil ities asso ciated with such p rod uct s. Wh ile these liabilities are hed ged , there still may be a possi ble resulting n egat iv e impact to net i ncome and to th e statu t ory cap ital and risk -based capital ratios of the Co mp any ’s insurance sub si diaries. The amortization of DAC relat in g to an nu ity products and the estimated cost o f pro viding GM DB and GLWB in corpo rate v ariou s assumption s ab ou t th e ov erall p erforman ce of equ ity mark ets ov er certain time perio ds. The rate o f amort izatio n o f DAC and t he cost o f prov id ing GMDB and GLWB co uld in crease if equ ity mark et p erforman ce is worse than assumed . The Compa ny’s use o f d erivat ive financial i nstruments wi thin its risk management stra teg y may not be effective or sufficient. Th e Compan y uses d eri vat iv e fin ancial instruments withi n its ri sk man agemen t st rategy t o mitigate risks to wh ich it is ex po sed, in clu ding ri sks rel ated t o cred it an d equ ity mark ets, in terest rate lev els, foreig n exch ange, and vo lat ility o n its fixed in dexed an nu ity an d variab le ann uity prod ucts and associated gu aran teed benefit featu res. Th e Compan y may al so u se d erivativ e finan cial in stru men ts with in its risk manag emen t strategy to mitig ate ri sks ari sin g from its ex po sure t o inv estments in in dividu al issu ers or secto rs of issu ers an d to mitig ate the ad verse effects of in terest rate lev els or vo latility on its ov erall fin ancial con dition or results o f operations. Th ese d erivativ e fi nancial i nstru men ts may no t effectively offset t he ch ang es in the carrying val ue of the exp osures due to, amo ng o th er t hing s, th e time lag b etween chan ges i n th e v alu e o f su ch exp osures an d the changes in th e v alu e o f the deriv ative fin an cial in stru ments pu rch ased b y th e Co mp any, ex treme credit an d/or equ ity mark et an d/or interest rate lev els or vo latility, con tract h older beh avior t hat differs from th e Compan y’s ex pect ati on s, and basis risk. Th e use of deriv ative finan cial in st ru ments b y th e Company g enerall y to hed ge v ariou s risks th at imp act GAAP earning s may have an adverse impact on the level o f statutory capital and risk-based capit al ratios b ecau se earn ing s are reco gn ized differen tly un der GAAP an d statu to ry accou nting meth od s. Th e Compan y may also cho ose no t to h edg e, in wh ole o r i n part, th ese o r other risks th at it has id entified , d ue to , for ex ample, the availab ility an d/or co st of a suitab le deriv ati ve financial in stru ment. In add itio n, th e Compan y may fail to iden tify risks, or t he magn itud e o f risks, to wh ich it is ex posed . The d eri vat iv e finan cial in struments u sed b y the Co mpan y in its risk man agemen t strategy may no t be properly design ed, may no t be p ro perly implemen ted as design ed and /or may b e in sufficient to hedge th e risk s in relation to th e Comp any ’s ob ligatio ns. Th e Compan y is su bject to th e risk that its d erivative co un terparties or cleari ng ho use may fail o r refuse to meet their ob ligations to the Co mp any, wh ich may resu lt in asso ciated deriv ative fin ancial instrumen ts becomin g ineffectiv e or in efficient. The ab ove facto rs, eith er alo ne or in co mb in ation , may hav e a material ad verse effect on the Company ’s finan cial co nd itio n and resu lts of op eratio ns. The Compa ny’s ab ility to g row d ep end s i n l arg e pa rt upo n the co ntinued ava ilab ility of cap ital. The Compan y d ep loys sig nificant amo un ts of cap ital to sup po rt its sales and acq uisi tion s efforts. Alth ou gh th e Co mp any believes it has su fficient cap ital to fu nd its immediate capital needs, the amo un t of cap ital av ailabl e can v ary sig nificantly from p eriod to p eriod du e to a variet y of circumstan ces, some of which are n ot p red ictabl e or within the Co mp any ’s con trol. Furth ermore, ou r sole sto ckh older i s no t ob ligated to p ro vid e us with add iti on al capital. A lack o f su fficient capital cou ld have a material ad verse impact on th e Co mp any ’s fin ancial co nd itio n an d/or resu l ts o f o peration s. The Compa ny coul d b e forced to sel l investments a t a lo ss to co ver policyholder withd rawa ls. Man y o f the p ro du cts offered b y the Co mpan y allo w po licyh olders an d co ntract ho ld ers to withdraw th eir fun ds u nd er d efined circumstances. Th e Co mp any man ages its liab ilities and co nfig ures its i nv estment po rtfolio s so as to p ro vid e and maintain su fficien t liqu id ity to su pp ort exp ected withd rawal deman ds and con tract b enefits an d matu rities. Wh ile the Co mp an y own s a sig nificant amo un t of l iq uid assets, a certain p ortion o f its assets are relativ ely illiqu id . If the C ompany ex perien ces u nex pect ed withdrawal or surren der act iv ity, it cou ld ex hau st its liq uid assets an d b e forced to liq uidate o th er assets, perhaps at a lo ss or on o ther u nfavo rab le terms. If th e Co mp an y is fo rced to disp ose of assets at a lo ss or on u nfavo rab le terms, it cou ld have an adv erse effect on th e Co mp any ’s fin ancial co nd itio n, the d egree o f wh ich wo uld v ary in relation to th e magni tu de o f the un exp ected surren der or withd rawal activ ity. Difficul t g enera l economic co nd itio ns co uld materially a dversely affect the Co mp any’s b usiness and results of op eratio ns. The Co mp any ’s b usiness and resu lts o f op eratio ns cou ld b e material ly affected b y difficu lt g eneral eco no mic co nd itio ns. Stressed eco nomic co nd ition s and vo latili ty and disruption s in capital markets, particular mark ets or finan cial asset classes can h ave an ad verse effect o n the Co mp an y due to th e size of th e Compan y’s in vestment p ortfolio an d the sensitive nature o f insu ran ce l iabilities t o ch ang in g market facto rs. Disru ptio ns in on e mark et or asset class can also spread t o o th er markets o r asset classes. 22 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Vo lat ility in finan cial markets can also affect th e Company ’s b usiness by adv ersely impacting gen eral lev els of eco no mic activity, employ men t an d cu st omer behav io r. Lik e oth er financial in stituti on s, an d parti cul arl y life in surers, the Co mp any may b e ad versely affect ed b y th ese co nd iti on s. Th e p resen ce of th ese co nd ition s cou ld have an ad verse impact o n the Compan y b y, amon g oth er th ing s, decreasing deman d for its insu ran ce an d inv est ment prod ucts, and in creasi ng th e level of lap ses and su rrend ers o f its po licies. Th e Company and its su bsid iaries co uld also ex perien ce ad ditio nal ratin gs do wn grades from rat in gs agen cies, u nreali zed lo sses, si gn ifican t realized losses, impairment s in it s in vestmen t po rtfolio , an d charges incu rred as a resu lt of mark -to-market and fai r value accou ntin g p rinciples. If gen eral eco no mi c co nd itio ns b ecome more difficu lt, th e Co mp any ’s ab ility to access sources of capital an d liq uid ity may be limit ed . The Co mp any ma y be required to esta bli sh a va luation a llowa nce a ga inst its deferred ta x assets, which coul d have a material a dverse effect o n the Co mp any’s results of op eratio ns, fina ncial condition, and ca pita l p ositio n. Deferred tax assets are attribu tab le to certain differen ces b etween the financial statement carry in g amou nts o f exi sting assets an d liabilities an d their resp ecti ve tax b ases. Deferred tax assets rep resen t fu ture sav in gs o f tax es wh ich woul d otherwise be paid in cash . In g eneral, th e realizatio n of deferred tax assets i s d epen dent up on the gen eration of su fficient fu tu re ordinary and cap ital tax able income. Realization may also be limited for ot her reason s, includ ing bu t n ot limited to chan ges in tax rules o r regu lations. If it is determin ed that a certain deferred tax asset can no t be realized, then a d eferred tax valuation all owance is establi shed , with a correspo nd in g ch arg e to eit her adjusted op eratin g in come or o th er comp reh ensiv e in come (depen ding o n th e nature o f th e deferred tax asset). Based o n the Company ’s curren t assessment of futu re tax able inco me, in clu ding av ailable tax planni ng o pp ortunities, i t is more likel y th an n ot that th e Co mp any will g enerate su fficient tax able in come to real ize i ts material deferred tax assets n et o f an y ex isting valuation allowance. Th e Comp any has recog nized valuatio n allo wances of $6 .4 milli on and $5.0 million as of Decemb er 3 1, 20 18 an d Decemb er 31 , 2017, resp ectiv ely, rel ated to certain deferred tax assets which are mo re likely than n ot to ex pire un uti lized. These assets are state in co me t ax -rel ated. If fu t ure ev en t s d i ffer fro m th e Co mp any’s cu rrent fo recast s, an add itio nal v aluation allowance may need to be estab lish ed , which cou ld hav e a material adv erse effect on the Co mp any ’s results of o peration s, finan cial co nd iti on , o r cap ital p ositio n. The Compa ny coul d b e a dversely affected b y a n ina bility to access its cred it faci lity. The Compan y relies o n it s cred it facil ity as a po ten tial sou rce of liq uidity. The av ailability of these fu nd s cou ld b e critical to th e C ompany ’s credit an d fin ancial streng th ratin gs and it s ab ility to meet o blig ation s, particularly when al ternativ e so urces o f cred it or liquid ity are either d ifficu lt to access o r co stly. The availab ility o f t he Co mp any ’s credit facility is depen den t i n part on th e ab ility o f t he len ders to p ro vide fun ds und er th e facility. The Co mp any ’s credit facilit y co ntain s vario us affirmative an d neg ati ve co ven ants an d events of d efau lt, includ in g cov enan ts req uirin g th e Compan y to main tai n a sp ecified mi nimu m co nsolid ated n et worth . Th e Compan y’s rig ht to mak e b orro win gs un der th e facilit y is su bject to the ful fillmen t of certain con ditio ns, in clu ding its co mp liance with al l co ven ants. Th e Compan y’s failu re to compl y with the co ven ant s in the credit facility co uld restrict its ab ility to access this credit facility wh en n eeded . The Co mp any ’s inab ility to access so me o r all of the li ne o f credit un der th e cred it facility cou ld lead to d own grades in ou r credit and fin ancial streng th ratin gs and h ave a material ad verse effect on its liq uidit y and /or resu lts o f o perati on s. The amount o f st atutory cap ital or ri sk-ba sed cap ita l that the Compa ny has a nd the amount o f statutory cap i ta l or risk -b ased ca pita l t ha t it must ho ld to mainta in its financial strength and credit ra tings and meet o ther requirements can va ry sig nificantly fro m time to ti me and such a mo unts a re sensitive to a number of fa cto rs out sid e of the Co mp any’s co ntro l. The Compan y p rimarily co nd ucts bu siness th ro ug h licen sed insurance company su bsid iaries. Insuran ce reg ulato rs have established reg ulation s t hat prov id e minimu m capitalizati on req uiremen t s based on risk -b ased cap ital formul as fo r life an d p ro perty and casualty compan ies. The risk-based cap ital fo rmula fo r li fe insu ran ce comp anies establishes capit al requ irements relatin g to in surance, b usiness, asset, in terest rate, an d certain o th er risks. The risk -based cap ital formu la for pro perty an d casu alty co mp ani es estab lish es cap ital requ iremen ts relating to asset, cred it, underwritin g, and certain other risks. In any p articu lar y ear, statu to ry surplus amo un ts an d risk -b ased capi tal ratios may in crease o r d ecrease d ependi ng o n a v ariety o f factors, in clu ding , bu t n ot limited to , th e amou nt of statu to ry in come or lo sses g enerated b y the Compan y’s i nsu ran ce sub sidi ari es, th e amou nt of add itional capital its i nsu ran ce sub si diaries mu st ho ld to su pp ort bu siness growth , chan ges in th e Company’s stat utory reserve requirements, the Co mp an y’s ability to secu re cap ital mark et solution s to prov ide statu to ry reserve relief, ch an ges in eq uit y market lev els, th e v alu e of certain fixed -inco me and equ ity secu rities in it s in vestmen t po rtfo lio, th e credit rat in gs o f in vestmen ts hel d in its po rtfolio , in clu ding t ho se issued by, o r ex plicitly or impli cit ly gu aran teed by, a go vernment, th e value of certain deriv ative in stru ments, chang es in interest rat es, foreig n curren cy exchan ge rates o r tax rat es, credi t market v olatility, chan ges in co nsumer behav io r, an d ch ang es to the Nation al Association of In surance Commi ssion ers (th e “NAIC”) risk-b ased capital fo rmulas. Mo st o f these facto rs are ou tside o f th e Co mp any ’s co ntro l. At its Jun e 20 18 meetin g, t he NAIC’s Cap ital Ad equacy Task Force ado pted a change to th e fo rmulas used to calcu late risk-b ased capital to reflect a lo wer federal co rpo rat e in come tax rate. The NAIC’s ri sk-based cap ital fo rmulas n ow emp lo y a t ax facto r of 2 1%, i nstead of 3 5%. This chang e h ad a on e-ti me lo werin g effect on th e risk-based capital ratio s of t he Compan y and its su bsid iaries wh en i t b ecame effectiv e at the end of 20 18 . A p ro po sed ch an ge to the NAIC’s risk -based cap ital formu la that is cu rrently un der co nsid eratio n woul d upd ate th e facto rs used to calculate requi red cap ital for bo nd s. While the extent and timing of t his prop osed chan ge is un kn own , if adopt ed , 23 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents it wo uld likel y i ncrease the Co mpan y’s requ ired capital and decrease the statu tory risk -based cap ital ratios of th e Co mp any an d it s sub sidiaries. Th e Company ’s fin ancial streng th and cred it rating s are si gn ifican tly influen ced by the stat utory surplus amo un ts and risk -b ased cap ital ratio s o f its in surance company sub sidiaries. Ratin g o rg anizati on s may imp lemen t ch an ges to thei r in t ernal mo del s th at hav e the effect of in creasing or d ecreasing th e amou nt of statut ory capi tal the Company must ho ld in o rder to maintain it s cu rrent rat in gs. In add itio n, rati ng ag en cies may do wn grade the in vestmen ts h eld in th e Co mp any ’s p ort fo lio, which co uld result in a redu ction of th e Company ’s cap ital an d surplus an d/or its risk-based cap ital ratio. In scenario s of equ ity market d eclines, the amo un t of add iti on al statutory reserves or ri sk-based cap ital th e Compan y is req uired to ho ld for its variable prod uct gu aran tees may i ncrease at a rat e g reater than th e rate o f ch ang e of th e markets. In creases in reserv es or risk -b ased cap ital co uld result in a reductio n t o t he Compan y’s capit al, su rp lu s, and /o r ri sk-based capital ratio . Also, i n envi ro nment s where there is no t a correlative relatio nship b etween in terest rates an d sp read s, the Company’s market v alu e ad ju sted an nu ity p ro du ct can have a material ad verse effect o n the Co mp any ’s statutory su rp lus po sition . A rat ings d owngra de o r other nega t ive actio n b y a ra ting orga nization could ad versely affect the Compa ny. Variou s Nationally Reco gn ized Stat istical Rating Organization s (“rating organ izatio ns”) review th e fin anci al p erforman ce and con dit io n o f in su rers, in clu ding the Co mp any ’s insu ran ce su bsid iaries, an d pu blish th eir fin anci al streng th rating s as in dicato rs of an insu rer’s ab ility to meet po licyh older an d co ntract h older o blig ation s. Wh ile fin ancial streng th rating s are n ot a recommen datio n to b uy the Co mp any ’s secu rit ies or p ro du cts, th ese rating s are impo rtant to maintain in g p ub l ic con fid en ce in th e Compan y, its prod ucts, its ab i lity to market i ts p rod ucts, and its co mpetitive p osit io n. A do wng rad e or other n egativ e action by a ratin g organ izatio n with respect to th e fi nancial stren gth ratings o f t he Co mp any ’s in surance sub sidiaries or the deb t ratin gs o f the Co mp any co uld adversely affect the Compan y i n man y ways, inclu din g, bu t n ot li mi ted to, red ucing new sales o f insu ran ce an d in vestmen t p ro du cts, ad versel y affectin g relation sh ip s with d istrib utors and sales ag ents, increasin g the n umber o r amo un t of p olicy surren ders an d wit hd rawals of fu nd s, requ iring a red uctio n in p rices for th e Compan y’s in su rance prod ucts an d services in order to remain competiti ve, n egativ ely imp acting the Co mp any ’s ab ili ty to ex ecute its acq uisition strategy, and adv ersely affecting t he Co mp an y’s ability to ob tain reinsurance at a reason able pri ce, on reason abl e terms, or at al l. A do wn grade of suffici en t magn itud e co uld result i n th e Co mp any, its in surance su bsidiaries, or bo th b ein g req uired to co llateralize reserves, balances, or ob ligatio ns u nd er certain contractual ob ligatio ns, includ ing rein su ran ce, fun ding , swap , an d secu ritization agreements. A do wng rad e o f su fficient mag nitu de co uld also resu lt in th e terminatio n o f certain fun ding and swap agreements. Ratin g o rg anization s al so p ub lish cred it ratings fo r issuers of deb t secu rities, includ in g th e Co mp any. Cred it rating s are in dicators o f a debt issu er’s ab ility to meet t he terms of d eb t obl ig ation s in a timely mann er. These rati ng s are imp ortan t to the C ompany ’s ov erall ab i lity to access credit markets an d other ty pes of liqu i dity. Cred it rating s are no t recommen datio ns to bu y th e Company ’s secu rities o r prod ucts. Down grades o f th e Company’s credit rat in gs, or an ann ou nced p otential do wn grade o r o th er neg ative actio n, cou ld hav e a material ad verse effect on th e Co mp any ’s finan cial co nd iti on s and resu lts of op eratio ns in many way s, in clu ding , bu t n ot limit ed to, limitin g the Compan y’s access to capit al markets, in creasing the cost of deb t, imp airin g its abi lity to rai se capital to refinance matu rin g debt ob ligatio ns, limitin g its cap acity to sup po rt the growth of its i nsu ran ce su bsid iaries, req uiring it t o pay hig her amou nts in co nn ecti on with certain ex isting o r future fin ancing arran gemen ts o r transactio ns, and making it more d ifficult to maintain o r i mpro ve th e curren t finan cial streng th rating s o f its insu ran ce subsidiaries. A do wng rad e of su fficient mag nit ud e, in combinatio n with o th er facto rs, cou ld req uire th e C ompany to po st co llateral p ursuan t to certain co ntractual o bli gat io ns. Ratin g o rg anization s assign rati ng s based up on sev eral facto rs. Wh ile mo st of the factors relate to th e rated co mp an y, so me of the factors relate to the views of the rating o rg anization , gen eral econ omic co nd iti on s, rating s o f paren t companies, an d ot her circumstan ces o utsi de the rated compan y’s con trol. Facto rs id entified by rating ag encies th at co uld lead to n egativ e ratin g actio ns wit h respect to th e Company o r its in surance su bsid iaries in clu de, bu t are no t limited to , weak gro wth in earn in gs, a d eterio rati on of earn in gs (includ in g deterioration du e to sp read compression in in terest-sen si tive lin es o f b usin ess), sig nificant imp airmen ts in inv estment p ortfoli os, hei gh ten ed fin ancial leverage, lo wer interest co verage ratios, risk -b ased cap ital ratio s fal ling b elo w ratin gs th resh olds, a material reinsurance l oss, underperfo rman ce of an acq uisiti on , and th e rat in g o f a p aren t co mp any. In ad dition , rating organ izatio ns u se v ariou s models an d fo rmulas to assess th e streng th o f a rated compan y, and from ti me to time rat in g organ izatio ns h ave, in their d iscretion, altered the mo dels. Ch ang es to the mo dels cou ld imp act th e rat in g organ izatio ns’ jud gment o f the rating to b e assigned to the rat ed company. Rating o rganization s may take vario us acti on s, p ositiv e or n egat iv e, with resp ect to ou r deb t ratin gs and fin ancial streng th rating s of our i nsu ran ce su bsidiaries, in cludi ng as a resu lt o f ou r status as a su bsid iary o f Dai-ich i Life. Any n egativ e acti on by a rating org an i zatio n cou ld hav e a material ad verse imp act o n th e C ompany ’s fin ancial co nd ition o r resu lts of o peration s. The Co mp any cann ot p red ict wh at actio ns the rat in g organ izatio ns may take, o r what action s th e Compan y may take in resp on se to th e acti on s of th e ratin g o rg anization s. The Compa ny o pera tes a s a hold ing compa ny a nd dep end s on the ab ility of its subsid ia ries to tra nsfer funds to it to meet its ob liga tions. The Compan y op erates as a ho ld in g compan y for its insu ran ce an d o th er su bsid iaries an d d oes n ot have an y sign ifi can t o peration s of i ts o wn. Th e Co mp any ’s p rimary so urces of fun ding are dividen ds fro m its op eratin g su bsid iaries, rev enu es from inv estment, d ata processin g, leg al, and manag ement serv ices rend ered to sub sidiaries, in vestmen t in come, an d ex ternal finan cin g. Th ese fu nd in g sou rces sup po rt th e Company ’s g eneral corpo rate need s in clu ding its deb t serv ice. If the fu nd in g th e Compan y receiv es from its sub sidiaries is in sufficient for it to fun d its debt serv ice an d other h olding co mp any ob ligatio ns, it may b e requi red to rai se fu nd s th rou gh th e incu rrence o f d ebt , o r th e sale of asset s. 24 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The states in wh ich the Co mp any ’s in surance sub sidiaries are d omicil ed impo se certai n restrict io ns on th e su bsid iaries’ ability to p ay div id ends an d make o th er pay men ts to the Compan y. State in surance reg ulators may p ro hibit th e p ayment of d ivi dends o r oth er pay men ts to the Compan y b y its insurance sub si diaries if th ey determin e that the pay ments cou ld b e ad verse to th e insuran ce su bsid iary or it s p olicy ho lders o r con tract ho ld ers. In ad dit io n, th e amo un t of surplus that o ur in surance sub sidiaries co uld p ay as d i viden ds is co nstrain ed by the amo un t of surp lu s th ey ho ld to main tai n th eir finan cial stren gth rat in gs, to p ro vide an ad ditio nal lay er of margin fo r risk protection and fo r future investment in ou r b usinesses. The Compa ny coul d b e a dversely affected b y a n ina bility to access FHLB lend ing. Certain su bsidiaries of th e Compan y are members of the Fed eral Ho me Loan Ban k (the “FHLB”) o f Cin cin nati and th e FHLB o f New Yo rk . Membership p ro vides these Co mp any sub sid i ari es with access to FHLB finan cial serv ices, includ in g ad vances that prov id e an attractiv e fu nd in g sou rce fo r sho rt-term b orro win g an d for the sale of fu nd in g ag reement s. The ex ten t to wh ich membership or th e FHLB services are av ailabl e co uld be imp acted by legislative or regu lat ory actio n at th e state o r fed eral level . Any d evelop men ts th at limit access to FHLB financial serv ices cou ld h ave a mat eri al ad verse effect on th e Co mp any . In ad dition , th e ab ility o f the Compan y’s su bsid iaries t o access liqu id ity fro m the FHLB is impacted by o th er facto rs that are dep en den t o n market co nd ition s or p olicies est ab l ish ed b y the FHLB. Fluctuatio ns in th e market val ue o f co llateral can ad versely i mp act availab le b orro win g cap acit y. Ch ang es in co llateral h aircuts establish ed b y the FHLB an d what is deemed to be eligib le collateral by th e FHLB can also imp act the amo un t an d availab ili ty of fu nd in g. The Compa ny’s securities lend ing p ro gra m may subject it to liq uidity a nd other risks. The Co mp any main tains a secu rities len ding p ro gram in wh ich secu rities are lo an ed to th ird parties, includ i ng b ro kerage firms an d commercial bank s. Th e b orro wers o f the Compan y’s securities prov id e th e Co mp any with col lateral , typ ically in cash, which it sep arat ely main tains. The Company in vests the collateral i n ot her securi ties, includ in g primarily short-term g ov ern ment repo an d money market fun ds. Securi ties loan ed under th e p ro gram may be return ed t o the Compan y b y the b orro wer at any time, req uirin g the Co mpan y to ret urn the related cash co l lat eral. In some cases, th e Company may use th e cash co llateral p ro vid ed to p urchase other securi ties t o b e held as inv ested collateral, and the matu rit y o f such secu rities may ex ceed the term o f the securities lo aned un der th e prog ram and /o r th e market val ue o f such securities may fal l b elo w th e amo un t of cash co llateral th at the Co mp any is ob ligated to return to th e borro wer o f the Co mp any ’s loan ed securities. If th e Compan y is requ ired to retu rn sig nificant amou nts o f cash collateral on sh ort n otice an d i s forced to sell th e securities h eld as in vested co llateral to meet th e ob ligatio n, the Compan y may h av e difficu lty sellin g such secu rities in a timely mann er and /or th e Co mp any may b e forced t o sel l the securities in a vo lati le or illiqui d market fo r l ess th an i t otherwise wo uld hav e been able to realize un der n ormal market co nd ition s. In add ition , th e Comp any ’s abil ity to sell securiti es held as inv ested coll ateral may be restricted un der stressfu l mark et an d economi c co nd ition s in wh ich liqu idi ty det eriorates. The Co mp any’s fina ncial co nd itio n or results o f op erations co uld be ad versely impa cted if t he Co mp any’s a ssump tions rega rd ing the fair value and future performance of its invest ments d iffer fro m a ctual ex perience. The Co mp any makes assu mp tion s reg ard in g th e fair val ue an d exp ected future perfo rman ce o f i ts i nv estments. Exp ectations th at t he Co mp any ’s in vestmen ts in mo rtgag e-b acked and asset-back ed securities wi ll co ntin ue to perfo rm in accordan ce wi th their cont ractu al terms are b ased o n assu mp tion s a mark et particip ant wo uld use in d etermining the curren t fair value an d con si der t he p erforman ce o f th e u nd erl ying assets. It is reaso nably p ossib le th at th e un derly in g co llateral o f these in vestmen ts will p erform wo rse than curren t mark et ex pectation s and that such red uced perfo rmance may l ead to adverse ch ang es in th e cash flo ws o n th e Compan y’s ho ld in gs o f th ese t yp es o f securities. In ad dition, ex pect ati on s that the Comp any ’s in vestmen ts in co rp orate securities an d/or debt ob lig ation s will con tin ue to perfo rm in acco rd ance with t heir con tractu al terms are based on ev i dence g athered throu gh its n ormal credit su rv eillan ce p ro cess. It is po ssible that issu ers o f th e Co mp any’s inv estments in co rp orate securities an d/or d ebt ob ligatio ns will p erform worse than cu rrent exp ectations. Th e o ccu rrence of any o f the fo reg oing events cou ld lead the Compan y to reco gn ize write-do wns within its p ortfo lio o f mo rtg age and asset-back ed secu rities or it s p ortfolio of co rp orate securities and /o r deb t ob lig ation s. It is also po ssible that such un anticipated events wou ld lead th e Co mp any to d ispo se of such investments and reco gn ize th e effects o f any market mov ements in its fin ancial statement s. The Compan y also mak es cert ain assumptio ns wh en utilizin g in ternal mo del s to v alu e certain of its in vestment s. It is po ssible th at actu al results will differ fro m t he Comp any ’s assu mp tion s. Su ch even ts co uld result in a material chang e in th e value of t he Compan y’s in vestmen ts. Ad verse actio ns of certa in fund s or their a dvisers co uld have a d etrimental impa ct on the Compa ny’s ab ility to sel l its va ri ab le l ife and annui ty prod ucts, or mainta in current levels o f a ssets in t ho se pro ducts. Certain o f th e Comp any ’s insuran ce su bsidiaries h ave arrangemen ts with v ariou s o pen -en d inv estment co mp an i es, or “mu tu al fu nd s”, and the in vestmen t ad visers to th ose mu tu al fu nd s, to offer the mutu al fun ds as in vestmen t op tion s in the Co mp an y’s vari ab le life and ann uit y prod uct s. It is po ssible th at th e termin ation o f o ne or more o f t ho se arran gemen ts b y a mutual fu nd o r its adv iser co uld h ave a detrimen tal impact on th e co mpan y’s ab ility t o sell its variable life and an nu i ty p rod ucts, o r main tain curren t levels of assets in tho se prod ucts, wh ich cou ld h ave a material adv erse effect o n th e Co mp any ’s finan cial co nd iti on an d/or results of op eratio ns. 25 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Industry a nd Regula to ry Rela ted Risks The b usiness of the Co mp any is highly reg ulated and is subject to routine audits, ex aminations, and act io ns by reg ulators, la w enforcement ag encies, and self-reg ula to ry org ani zatio ns. The Comp any is su bject to reg ulation by the United States Secu rities and Exch an ge Commission (the “SEC”) an d each of th e states in wh ich it co nd ucts bu siness. Pro Eq uities, th e Co mp any ’s brok er d ealer, is su bject to the Fin ancial In du stry Reg ulato ry Auth ority (“FINRA”). In many in stan ces, th e regul ato ry mo dels emanate from t he NAIC an d, at the state l ev el, from the No rth American Secu rities Ad ministrators Asso ciat io n. Such regu lat io n is vested in state ag encies hav in g b ro ad ad minist rat iv e an d, in some instan ces, d i scretio nary p ower dealing with many aspects of the Compan y’s b usin ess, which may in clu de, amo ng other th in gs, p remiu m an d cost o f insurance rates and in creases thereto , in terest credi ting po licy, u nd erwritin g p ractices, reserv e requ iremen ts, mark eting practices, ad vertising , priv acy, cy bersecurity, po licy forms, rein surance reserv e requ iremen ts, insurer use o f cap tive rein surance compan ies, acq uisition s, mergers, capital ad equ acy, claims practices, an d the remi ttance of un claimed p rop ert y. In ad dition , so me state in su ran ce d epartments may en act ru les or reg ulation s with extra-territ orial ap plicatio n, effectively extend ing their jurisdiction to areas such as permitted insuran ce co mp any inv estments t hat are no rmally the p ro vince o f an insurance compan y’s do miciliary state regu lator. At any g iv en time, a nu mb er of finan cial, market con du ct, o r other examin ation s o r au dit s of the Co mp any ’s su bsidiaries may b e on goi ng . It is po ssi ble that an y examin ation or au dit may resu lt in p ayments of fi nes and p enalties, payments to customers, o r bo th , as wel l as changes in systems o r procedu res, any of which cou ld have a material adverse effect o n th e Co mpan y’s fin ancial con dition an d/or resu lts of o peration s. The Company ’s in su rance sub si diaries are requ ired to o btain state regu latory ap prov al for rate i ncreases fo r certain h ealth insurance pro du cts. Th e Compan y’s p ro fits may be ad versely affected if the requ ested rate in creases are n ot app ro ved in fu ll by reg ulato rs in a timely fashi on . St ate insu ran ce reg ulato rs and the NAIC reg ularly re-examine ex isting laws and regu latio ns app licable to insurance compan ies and th eir p ro du cts. Ch ang es in th ese laws and reg ulations, or i n interpretatio ns th ereo f, are o ften made fo r th e ben efit of the co nsumer an d may lead to ad ditio nal exp ense fo r th e in surer an d, thu s, cou ld hav e a material ad verse effect o n the Compan y’s fin an cial con dition and resu lts o f o peration s. At th e fed eral lev el, the execu tive b ran ch o r federal agen cies may issu e orders or take oth er action with resp ect to fin ancial services and life in surance matters, and b ills are ro uti nel y intro du ced in b oth ch amb ers o f the Un ited States Con gress that cou ld affect the Co mpan y an d it s bu siness. In th e past, Co ng ress h as co nsid ered legisl ation that wo uld imp act in su ran ce compan ies in nu merou s way s, su ch as p rov id in g for an o pti on al fed eral ch arter or a federal p resence fo r in surance, preemp ting state law in certain resp ects regarding the regu latio n o f reinsu ran ce, in creasi ng fed eral ov ersigh t in areas su ch as co nsumer p ro tectio n an d solven cy regu lati on , setti ng tax rates, an d o th er matters. The Co mp any cann ot p redict whether or i n wh at form leg islatio n will b e en acted an d, i f so , wh eth er t he enacted leg islation will p ositiv ely o r n egat iv ely affect th e Co mp an y o r whether any effects will b e material. In ad dit io n, ou r brok er-dealer su bsid iary and o ur variab le ann uities an d v ariable life in surance p ro du cts are su bject t o regu latio n an d sup ervision by the SEC and FINRA. These laws an d regu latio ns generally g ran t su perviso ry agencies and self-regu latory o rganization s bro ad admin istrative p owers, includ ing the p ower to limit or restrict th e brok er-dealer sub si diary fro m carry in g on i ts bu si nesses in the ev ent that it fails to co mp ly with su ch laws and regu latio ns. Th e fo reg oing reg ulato ry or go vernment al bodies, as well as th e DOL an d o th ers, h ave the authority to review o ur produ cts and business practi ces an d tho se of ou r ag ents, registered rep resen tati ves, associated perso ns, and emp lo yees. In recen t years, t here has been increased scrutiny of the in surance in du st ry b y th ese bo dies, wh ich h as in clu ded more ex ten si ve examinatio ns, regu lar sweep in qu iries, and mo re detailed rev iew of disclo su re do cument s. Th ese reg ulato ry o r go vernmen tal b od ies may brin g regu latory or o th er legal action s ag ain st us if, in their vi ew, ou r practi ces, or tho se of o ur agen ts or emp lo yees, are improp er. Th ese acti on s can resu l t in su bstantial fines, p enalties, or proh ib ition s or restrictio ns o n o ur bu sin ess activities an d cou ld hav e a material ad verse effect on ou r b usin ess, resul ts o f o peration s, or fin ancial con ditio n. The Compa ny may be subject to reg ulations of, or regula tions i nfluenced b y, internati onal regula to ry autho rities or initia tives. The NAIC and th e Co mp any ’s st ate reg ulato rs may b e in fluen ced by the in itiatives o f intern ation al regu latory b od i es, an d those initiatives may n ot translate readily into th e legal sy stem u nd er wh ich U.S. in surers mu st operate. Th ere is in creasing p ressu re to co nform to intern ation al stan dards du e to th e glob alizati on of th e b usin ess o f insu ran ce an d the most recen t fin ancial crisis. In add iti on to develop men ts at the NAIC and in th e Un ited States, th e Finan cial Stabi lity Board (“FSB”), con sist in g o f represen tat iv es of n ation al fin ancial au th ori ties of the G2 0 n ation s, and the G2 0 h ave issu ed a series of pro po sals in ten ded to pro du ce sign ifican t ch an ges in h ow finan cial co mp ani es, p articu larly companies th at are members of large and co mp lex fi nancial g ro up s, sho uld be reg ulated . The Int ern ati on al Associ ati on of In surance Sup erv iso rs (“IAIS”), at the d irection of th e FSB, h as pu blished an evo lv ing meth od for id ent ifying “g lobal sy stemically impo rtant in su rers” (“G-SIIs”) and high -level po licy measures t hat will app l y to G-SIIs. The FSB, working with n ation al au th oriti es and th e IAIS, h as d esig nated nine insu ran ce g ro up s as G-SIIs. Th e IAIS is developi ng the po licy measu res wh ich includ e h ig her cap ital req uirements and en han ced sup erv ision . Alt ho ug h n either the Co mp any n or Dai-ich i Life h as b een d esi gn ated as a G-SII, th e list o f designated insurers may be up dated perio dicall y by the FSB. It is po ssible that d ue to t he size an d reach of th e combined Dai -ichi Life grou p, or a change in t he meth od o f i dentify in g G-SIIs, th e co mb in ed g ro up , in clu ding th e Company , cou ld be d esig nated as a G-SII. The IAIS is also in th e p ro cess o f dev elo ping a common framework fo r th e su pervision o f in t ernation all y activ e insurance g ro up s (“IAIGs”). Th e framework, wh ich is cu rrentl y u nd er d iscu ssion , may in clu de a g lo bal capital measu rement st an dard fo r insurance gro up s deemed to b e IAIGs th at co uld ex ceed th e sum o f state o r oth er lo cal capital requi remen ts. In ad dition , th e IAIS is d ev elo ping a mod el framewo rk fo r the su pervision o f IAIGs t hat co ntemp lates “grou p wide su pervisi on ” across nat io nal 26 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents bo un daries an d legal entities, which co uld req uire each IAIG to conduct its o wn ri sk an d solv en cy assessment to mon itor an d manage its o verall so lv ency. The IAIS h as also pu blished a framewo rk for assessi ng and mitig ating g lo bal sy stemic risk . Th e framewo rk p ro po ses en han ced sup erv iso ry an d correct iv e measures and disclosu res fo r an y b uild -u p o f systemic risk in liqu id i ty risk , macro economic exp osure, co un terparty exp osure an d sub stitutability. It is lik ely th at the combi ned Dai-ich i Life gro up will be d eemed an IAIG, in which case it, an d th e Compan y, may be sub ject to sup erv isio n req uiremen ts, capital measuremen t stand ard s, and enh anced d isclo sures bey on d tho se app licable to an y co mp etito rs wh o are no t d esig nated as an IAIG. The Co mp any ’s so l e stock ho ld er, Dai-ich i Life, is also su bject to regu latio n by the Japan ese Fin ancial Serv ices Au th ority (“JFSA”). Un der ap pli cab le laws and regul ation s, Dai-ichi Life is req uired to p ro vide no tice to o r ob tain t he consent o f the JFSA prio r to tak in g certain acti on s o r en gagin g in certain tran saction s, either directly or in direct ly th ro ug h i ts su bsid iaries, includ in g the Compan y and its con so lidated su bsidiaries, which coul d limit th e ab ility of th e Co mp any to eng age in certain transactio ns o r busin ess initiatives. Wh ile it is no t yet kn own h ow or the extent to wh ich th e Compan y will b e imp acted b y these reg ulation s, th e Co mp any may exp erience in creased co sts of co mp liance, in creased di sclo sure, less flex ib ility in cap ital man agemen t, an d mo re burdensome regu latio n an d capital requ i remen ts for sp ecific lines of business. In ad ditio n, such reg ulatio ns cou ld imp act the bu sin ess of the Co mp any and its reserv e and cap ital requi remen ts, fin ancial co nd itio n or resu lts o f op eratio ns. NAIC a cti ons, pro no uncements a nd initia tives ma y affect the Co mp any’s pro duct p rofi ta bility, reserve a nd cap ital requirements, financia l cond itio n, o r results of op erations. Alth ou gh so me NAIC p ro no un cements, p art icularly as th ey affect acco un ting , reservin g and risk -b ased cap ital issu es, may tak e effect au to mat ically without affirmativ e action tak en b y th e states, the NAIC is n ot a g ov ern mental ent ity an d its p ro cesses and p ro cedures d o no t co mp ort with tho se t o wh ich go vernmen tal en tities ty pically adh ere. Th erefore, it is p ossib le th at action s co uld be taken b y th e NAIC th at become effectiv e with ou t th e p ro cedural safeg uards that wou ld be p resen t if go vernmental actio n was requ ired. In ad dition , with resp ect t o so me fin ancial regu latio ns and gu id elines, stat es sometimes defer to th e in terpretatio n of the insu ran ce dep artmen t o f a no n-domiciliary state. Neith er the actio n of t he n on -d omiciliary state no r th e acti on of the NAIC is bind in g o n a do miciliary stat e. Acco rdi ng ly, a state co uld ch oo se to follow a d ifferent int erp ret ati on . The Co mp any is also su bject to th e risk that comp l iance with any p articu lar reg ulato r’s interp retation o f a leg al, accou ntin g, or actu ari al issue may resu lt in n on -co mp liance with ano th er regu lator’s in terpretatio n o f th e same issue, particularly wh en complian ce is jud ged in h in dsig ht. There is an ad dition al risk t hat an y p articu lar regul ato r’s interp retation of a legal, acco un ting o r actuarial i ssu e may change o ver time to the Compan y’s detrimen t, o r th at ch ang es to th e ov eral l legal o r mark et en viron ment may cau se the Co mp any to chan ge i ts p ractices in way s th at may, in some cases, limit it s growth o r p rofitability. Statutes, reg ulations, interp retation s, an d instruct io ns may be ap plied with retro active impact, particularly in areas such as acco un ting, reserv e and risk-based capit al requ iremen ts. Also, regu l atory action s with prosp ective imp act can p otent ially hav e a signi fican t impact o n cu rrently sold prod uct s. The NAIC has an no un ced more focused inq uiries on certain matters that coul d h ave an i mp act o n the Co mp any ’s fin ancial co nd iti on and results of op eratio ns. Su ch inq uiries co ncern, fo r examp le, in surer use of capti ve rein su ran ce comp anies, v ariable ann uit y reserves an d cap i tal treatment, certain aspects of i nsu ran ce ho l ding compan y rep orting an d disclo su re, rein su ran ce, cyb ersecurity p ract ices, li qu id ity assessment, an d ri sk-based cap ital calculation s. In ad dit io n, th e NAIC co ntin ues t o co nsid er vario us in iti atives to ch an ge and mod ernize its fin anci al an d solv en cy req uirements an d reg ulation s. It h as ad op ted prin cip les-based reserv i ng metho do logies fo r life in su rance and ann uity reserves, bu t add itio nal formu las and /o r gui dance relevant to the n ew stand ard are being d evelop ed. Th e NAIC is al so co nsiderin g ch ang es to acco un ting and risk -b ased capit al reg ulatio ns, risk-based cap ital calculation s, go vernan ce practices of insurers, an d other i tems. Ad dition ally, t he NAIC is stu dyi ng a g ro up capital calcul ati on t hat wou ld measure capital acro ss U.S.-b ased in su rance grou ps. Th e Compan y cann ot cu rrently estimate wh at impact these mo re focused in qu iri es o r p ro po sed chan ges, i f th ey occu r, will have on its prod uct mix , prod uct profitabilit y, reserv e an d capital req uirements, fin ancial con ditio n, or results o f o perations. The Compa ny’s use o f ca ptive reinsura nce co mp anies to fina nce statuto ry reserves related to its term a nd uni versal l ife pro ducts and to reduce vol atility affecting its va ri ab le annui ty prod ucts ma y be limited or ad versely a ffected b y regula t ory a cti on, pro no uncements a nd interp ret atio ns. The Compan y cu rrently uses affili ated cap tive rein su ran ce co mp anies in various st ru ctu res to finan ce certain statutory reserves b ased o n a regu lation en titled “Valuat io n of Life Insu ran ce Policies Mo del Regu lation,” commo nly kn own as “Reg ulatio n XXX,” an d a su pp ortin g gu id eline entitl ed “The Ap plicatio n of th e Val uatio n of Life In su ran ce Po licies M od el Reg ulatio n,” co mmon ly k no wn as “Guideli ne AXXX,” wh ich are asso ciated wit h term life in surance and un iv ersal life insu ran ce with secon dary g uaran tees, respectiv ely, as well as to redu ce the v olatilit y i n statu to ry risk -b ased capital asso ciated with certain gu aran teed min imum withd rawal an d d eath benefit rid ers associated with cert ain o f th e Co mp any ’s v ariable an nui ty prod ucts. The NAIC h as ad op ted Actuarial Gu id eline XLVIII (“AG4 8”) an d th e sub stan tially similar “Term an d Universal Life In su rance Reserv e Fin anci ng Mo del Regul ati on ” (th e “Reserv e Mo del ”) wh ich establish nati on al stan dards for n ew reserv e fin ancing arran gemen ts for term life in su rance and u niversal life in su ran ce with seco nd ary g uarant ees. AG4 8 and the Reserv e Mo del g ov ern co llateral req uirements fo r captive rei nsu ran ce arran gemen ts. In o rd er to ob tai n reserve credi t, AG4 8 and the Reserve Mod el req uire a minimu m level o f fu nd s, co nsistin g of p rimary an d other secu rities, to be held b y or o n behalf of ced in g insu rers as security under each cap tive life rein surance treaty. As a resu lt o f AG4 8 and the Reserv e Mo del, the implemen tatio n o f new captiv e structures in the future may be less cap ital efficient, lead t o lo wer prod uct ret urns and/or increased pro du ct pricing , o r result in reduced sales of cert ain prod uct s. In so me circumst an ces, AG48 an d th e Reserve M od el cou ld imp act t he Co mp any ’s ability to en gag e in certain reinsu ran ce tran sactions with n on - affiliates. 27 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Fin ancial Co nd ition (E) Co mmitt ee of the NAIC has ado pted a framework fo r changes to curren t ru les and regu latio ns app licable to th e determination o f v ariable an nu ity reserves and risk -b ased capital. The chan ges are intend ed to d ecrease in centiv es fo r insurers to establish v ari ab l e an nu ities cap tives and wi ll appl y to bo t h in -force and n ew bu si ness. The new rules an d reg ulation s will li kel y h ave a 20 20 effectiv e d ate an d an op tion al 3- to 7-year transitio n p eriod fro m cu rrent rul es and reg ulatio ns, beginn i ng on t he effectiv e date. The ch ang es cou ld ad versely affect o ur future fin anci al co nd itio n and resu lts o f o perati on s. The NAIC ad op ted revision s to th e Part A Laws and Reg ulation s Preamb le (the “Preamb le”) o f the NAIC Finan cial Regul ation Stan dards an d Accredi tatio n Prog ram that includ es with in the defin iti on o f “multi-st ate insurer” certain insu rer-o wned captives and sp ecial p urpo se v ehicles th at are single- state licensed b ut assu me rein su ran ce from cedants operating in multip le states. Th e rev ised d efi nition su bjects cert ain capt iv es, includin g XXX/AXXX cap tives, variab le an nu i ty and lon g-term care cap tives, to all of the accreditatio n stan dards app licable to other t rad itio nal multi-state i nsu rers, includ ing stan dards related to cap ital an d surplus requ i remen ts, risk-b ased capital req uirements, inv estment laws, an d credi t for reinsurance l aws. Altho ug h we d o n ot ex pect th e revised d efinition to affect ou r ex isti ng li fe in su ran ce capti ves (or o ur ability to eng ag e in life i nsu ran ce cap tive t ransaction s in th e futu re), such ap pli catio n will lik ely prev ent us from eng ag i ng in variable ann uity captiv e transactio ns on th e same or a si mi lar basis as i n the p ast an d, i f appl ied ret ro acti vely, wou ld likely cau se us to recap t ure b usin ess fro m and un win d o ur exist in g v ariabl e an nu ity cap tive (“VA Captive”). Wh ile th e recaptu re of b usiness from ou r ex isting VA Cap tive, caused ei th er b y actio ns o f th e VAIWG or the effect of th e Preamb le, wou ld no t have a material ad verse effect on th e Compan y gi ven curren t market co nd itio ns, i n th e future the Co mp any cou l d ex perien ce flu ctu ation s in its risk -b ased cap ital rat io du e to market v olatility if it were pro hibited from eng aging in similar tran sactions o r req uired to u nwin d its ex isti ng VA Cap tive, wh ich cou ld adv ersely affect ou r future fin an cial con dition and resu lts o f o peration s. An y regu latory action or chan ge in in terpretatio n that mat eri all y adv ersely affects th e Co mp any ’s use o r material ly in creases t he Company’s cost o f using capti ves or reinsurers fo r th e affected bu siness, either retroact iv ely or p ro sp ecti vely, cou ld hav e a material adv erse impact on the Co mp any ’s fin ancial co nd ition or resul ts o f operations. If the Co mp an y were req uired to discon tin ue i ts u se of captives for in tercompan y rein surance tran saction s o n a retroact iv e basis, ad verse impacts wo uld includ e early terminatio n fees p ayab le to th ird p arty fin ance prov id ers with resp ect to cert ain structures, diminished cap ital po sition , an d hig her co st o f cap ital. Ad dition ally, find in g alternativ e means to su pp ort policy liabil ities efficien tly is an u nk no wn factor th at wou ld be depen den t, in p art, on future market con dition s and t he Compan y’s ab ili ty to ob tain requ i red regul ato ry app ro vals. On a p ro spectiv e basis, d isco nti nu ation of th e u se of captiv es cou ld impact th e ty pes, amo un t s and pricing of prod ucts offered b y the Compan y’s insu ran ce sub si diaries. Laws, reg ula tions, a nd initi atives rela ted to unrep orted deaths and uncla imed p roperty and death benefits ma y result in o pera tional b urdens, fines, unex pected p ayments, o r escheat ments. Si nce 2 01 2, vario us states h ave en acted laws that requ ire life insurers t o search for u nrepo rted deaths. Th e Nation al Con ference o f Insu ran ce Legislators (“NCOIL”) h as ad op ted the M od el Un claimed Life In su ran ce Benefits Act (the “Unclaimed Benefits Act”) an d l eg islatio n or reg ulation s have been enact ed in n umero us states th at are si mi lar to th e Un claimed Benefits Act, altho ug h each state’s versio n differs in so me respects. Th e Unclaimed Ben efits Act, if ado pted by an y state, impo ses req uirements on insu rers to perio dicall y compare t hei r life i nsu ran ce an d ann uity co ntracts an d retai ned asset acco un ts agai nst the U.S. So cial Secu rity Ad ministratio n’s Death Master Fil e or similar d atabases (a “Deat h Dat abase”), in vestig ate an y po ten tial match es to co nfi rm the d eath an d determin e wh eth er b enefit s are du e, an d t o attemp t to l ocate the ben eficiaries o f any ben efits that are du e o r, if no b eneficiary can be lo cated, esch eat th e ben efit to the state as unclaimed prop erty. Other states in which the Compan y d oes b usiness may also co nsid er ado pti ng legislation similar to the Un claimed Benefits Act. Th e C ompany cann ot predict whether such leg islat io n will be proposed o r enacted in addi tion al states. The Un iform Laws Co mmissio n has ado pted revision s to t he Un iform Uncl aimed Pro perty Act in a mann er likel y to imp act state unclaimed p ro perty laws an d requirements, th ou gh it is no t clear at this time to wh at ext en t o r whet her requ irements will con fli ct wit h otherwise impo sed search requ iremen ts. Other life i nsu ran ce in du stry asso ciatio ns and reg ulato ry associati on s are also con siderin g th ese matters. Certain states hav e amend ed or may amen d their un claimed property laws in a mann er which creates ad dition al ob l ig ation s fo r life insu ran ce co mp anies. Th e en actment o r amen dment o f su ch un claimed prop erty laws may req uire th e Co mp any to incu r sign ifi can t expenses, includ ing b enefits with respect to terminated p olicies fo r which no reserves are cu rrentl y h eld and un anticipat ed o perati on al exp enses. Any of t he forego in g co uld h ave a material ad verse effect o n th e Co mp any ’s fin anci al con ditio n an d resu lts o f o perati on s. A n umber o f st ate treasury dep artments and ad minist rat ors o f u ncl aimed p ro perty have aud ited life i nsu ran ce compan ies for co mp liance with un claimed p ro perty laws, and state i nsu ran ce regu l ators h ave ini tiated targeted mu lti-state examin ation s o f life in su rance co mp an ies wit h respect to th e co mp anies’ claims pay in g p ract ices and use of a Death Database to i dentify unrepo rted d eath s in th eir li fe in su ran ce p olicies, annui ty co ntracts, and ret ained asset accou nts. Th ere is n o clear basis in p rev io usly ex isting law fo r treating an un rep orted death as giving rise to a po licy b enefit th at wo uld b e sub ject to un claimed p ro perty proced ures. However, a n umber of life insurers h ave entered in to reso l utio n ag reemen ts with state treasu ry departments and admin istrato rs of u nclaimed prop erty o r settlement or co nsen t agreemen ts with stat e insu ran ce regu lators. The amo un ts p ub licly rep orted to h ave been p aid to b eneficiaries, escheated to t he states, an d/or paid as ad ministrativ e an d/or ex aminat io n fees to th e insuran ce regu lators in co nn ection with the settlement or co nsen t ag reements hav e been su bstan tial. Certain o f th e Co mp any ’s su bsidiaries as wel l as certain o th er insurance compan ies from wh om the Compan y h as coinsured b lo cks of life insurance an d ann uity po licies are subject to un claimed p ro perty aud its and /o r targeted mu lti-state examin ation s by in surance reg ulato rs similar to th ose described ab ov e. It i s p ossib le that t he au dit s, ex ami nat io ns, and /o r t he en actment o f st ate laws similar to th e Unclaimed B en efit s Act co uld result in add itio nal payments t o ben eficiaries, ad ditional esch eatment of fu nd s 28 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents deemed ab an do ned u nder state laws, pay ment of ad ministrativ e p enal ties an d/or examination fees to state autho rities, and ch anges to t he Co mp any ’s procedu res for iden tifying u nrepo rted deaths and escheatment o f aban do ned p ro perty. It is po ssible an y su ch add itio nal p ayments an d any co st s related to ch ang es in Company pro ced ures cou ld materially imp act t he Company’s fin anci al con dit io n and /or resu lts o f o peration s. It is also po ssible th at life in su rers, in clu ding the C ompany, may b e su bject to claims, regu l atory actio ns, law en forcement actio ns, and civil litig ation ari sin g fro m th eir p rio r bu si ness practices, un claimed prop erty practi ces, or relat ed au dits and examin ation s. Any resulting liab ilities, pay men ts, or co sts, includin g in itial and o ng oing co sts o f ch ang es to th e Co mp any ’s pro ced ures or sy stems, co uld b e significant and cou l d h ave a material ad verse effect o n the Co mp an y’s finan cial con dition and /o r resu lts o f op eratio ns. The Co mp any h as p rev io usly b een sub ject to lit ig ation regarding co mp liance with the West Virgi nia Uniform Un claimed Pro perty Act, b ut th e Co mp any do es n ot b eli ev e t hat lo sses ari sin g from the litig ation wi ll be material. Th e C ompany cann ot, h owever, p red ict whether oth er jurisdiction s will pu rsu e similar actio ns or if th ey d o, whether such acti on s will h ave a mat erial i mp act on th e Co mp any ’s finan cial co nd iti on an d/o r results of op eratio ns. The Comp any is subject to insurance guaranty fund la ws, rul es a nd regula tions that co uld a dversely a ffect the Company’s fina ncial condition or results of op eratio ns. Un der in surance guaran ty fu nd laws in most st ates, in su ran ce co mp ani es do in g b usiness th erei n can b e assessed u p to p rescrib ed l imits fo r po licyh older losses in curred b y inso lvent companies. From time to time, companies may b e asked to con tri bu te amo un ts b eyo nd p rescri bed limits. It is po ssi ble th at the Company cou ld be assessed with resp ect to produ ct l in es no t o ffered by th e Co mp any. In 2 01 7, the NAIC ado pted revision s to the Li fe and Health In surance Guaran t y Asso ciatio n Model Act th at, if ado pted by st ates, wou ld resu lt in an increase to the percentage of liabilities attrib utable to an y fu tu re lo ng t erm care p ro vider insolven cy that can be assessed to li fe insurers. Legislation may b e intro du ced in variou s states with resp ect to g uaran ty fund assessmen t laws related to in su ran ce p ro du cts, in clu ding lo ng term care insurance and other specialty p ro du cts, th at d iffers fro m the revi sed M od el Act and wh ich in creases t he cost of fu tu re assessmen ts and/or alters future p remiu m tax offsets receiv ed in con nection with g uaranty fun d assessments. Th e Co mp any can no t p red ict the amo un t , n atu re or timing of an y future assessment s or legislation , an y o f which cou ld hav e a material an d adv erse imp act on th e Co mp any ’s fi nancial co nd itio n o r resu lts of operatio ns. The Co mp any is sub j ect to insura ble interest la ws, rules, and regula tions tha t could ad versely affect the Compa ny’s fina ncial condit io n o r results of op eratio ns. The pu rch ase o f life in surance prod ucts is li mi ted b y state in su rab le in terest laws, wh ich in most ju risd ictio ns requ ire th at the pu rch aser o f life in surance name a b en eficiary that has so me in terest in the su st ained life o f t he in su red . To so me extent, th e insurable in terest laws p resent a b arrier to th e life settlement, or “strang er-owned ” ind ustry, in wh ich a fin ancial en tit y acq uires an in terest in life insurance p ro ceed s, an d efforts h ave b een made in so me states to lib eralize th e insurable interest laws. To the extent th ese laws are relax ed, th e Co mp any’s lapse assu mp tions may p ro ve t o be in correct, wh ich co uld ad versel y affect the Compan y’s fin anci al con ditio n o r results of op eratio ns. The Hea lthca re Act a nd rela ted regula tions co uld a dversely affect the results of op eratio ns or financia l co nd ition o f the Co mp any. The Compan y is sub ject to v ariou s cond itio ns and req uirements o f th e Pat ien t Pro tectio n and Affo rd able Care Act of 2 01 0 (t he “Healthcare Act”). The Health care Act mak es sig nificant chan ges to the regu lation of h ealth in surance an d may affect th e Compan y in vario us ways. The Health care Act may affect th e small block s of bu sin ess the C ompany has o ffered o r acqu ired o ver th e y ears that are, or are deemed to co nsti tu te, health in surance. The Healthcare Act may also affect th e b en efit p lan s th e Compan y sp on sors fo r emp loy ees o r retirees and their dep end ents, th e Compan y’s exp ense t o prov id e such b enefits, th e tax liabi lities o f the Compan y in co nn ection with the p ro vision of su ch b en efit s, and th e C ompany ’s ab ility to att ract or retain emp lo yees. In ad dition , the Co mp any may be sub ject to reg ulatio ns, g uid an ce or d etermi natio ns emanatin g from th e vario us reg ulato ry auth orities autho rized u nd er th e Health care Act. The Co mp any cann ot predict th e effect th at th e Healthcare Act, an y amend men ts or mod ifi catio ns to th e Health care Act, o r any reg ulatory p ron ou ncemen t made u nd er the Healthcare Act , will hav e on its results o f o peration s o r fin anci al con dit io n. Laws, rules, and reg ulati ons pro mulg ated in connectio n with the enactment of the Do dd -Fra nk Wall Street Reform and Consumer Pro tectio n Act may ad versely affect the results of opera tions or fina ncial condition of the Compa ny. The Dodd-Fran k Wall St reet Reform an d Co nsumer Pro tectio n Act (th e “Dod d-Frank Act”) enacted in July 20 10 mad e sweepi ng chan ges to th e regul ati on o f finan cial services entities, p ro du cts and mark ets. Alth ou gh th e n ew p resid en t ial ad minist ratio n has ind i cated a desire t o rev ise o r reverse some of its p ro vision s, the fate of these p ro po sal s is un clear, and we cann ot predict with certain ty h ow t he Dod d-Frank Act will co nti nu e to affect the fin ancial mark ets generally, o r imp act o ur bu sin ess, rating s, results o f o peration s, fin ancial con ditio n or l iq uidity . Amon g other thing s, the Dodd-Frank Act i mposed a co mp reh en sive new regu lat ory reg ime on the ov er-th e-co un ter (“OTC”) d erivativ es mark etp lace an d grant ed n ew jo in t regu latory aut ho rity to the SEC and the U.S. Commod i ty Fu tu res Trad ing Commission (“CFTC”) o ver OTC deriv atives. Wh ile the SEC an d CFTC co ntin ue to promulgate rules requ ired b y th e Dod d-Frank Act, mo st ru les hav e been fin alized and, as a resu lt, certai n o f th e Compan y’s deriv atives op eratio ns are subj ect to , among other thin gs, new record keeping , reporting an d do cumentation requ iremen ts an d new clearing requi remen ts for certain swap transact io ns (cu rrently, certain in terest rat e swaps an d in dex -b ased credit default swap s; cleared swap s requ ire the p osting of marg in to a clearing ho use via a fu tu res co mmissio n merchan t an d, in so me case, to th e fu tu res co mmissio n merch ant as well). In 2015 , U.S. federal b ank in g regu lators and th e CFTC ado pted regu lat io ns that will requ ire swap dealers, secu rit y-based swap dealers, majo r swap particip an t s, and majo r secu rit y-based swap partici pants (“Swap En tities”) to po st marg in to, and collect 29 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents marg in fro m, th eir OTC swap cou nterp arties (th e “Margin R ules”). Un der the Margin Ru les, th e Compan y wo uld be co nsid ered a “fin an cial en d-user” that , wh en facin g a Swap Enti ty, i s req uired to po st and collect variat io n marg in fo r its no n-cleared swap s. In add ition , dep en din g o n its deriv atives ex po sure, the Co mp any may b e requ ired to p ost an d collect initial margin as well. The in itial marg in requ iremen ts of th e M arg in Ru les will be ph ased-in o ver a p eriod o f five years b ased o n th e av erag e ag gregat e n otio nal amou nt of the Swap Entity’s (combined with all o f its affiliates) and it s co un t erparty’s (co mb in ed with all of its affiliates) swap po sitions. It is an tici pated that the Co mp any will no t be sub ject t o the in iti al marg in requ irements un til Sep tember 1, 20 20 . Th e variatio n margin requ irement to ok effect on Sep tember 1 , 20 16 , for swaps wh ere bo th th e Swap Entity (and its affiliates) and it s co unt erp art y (an d its affiliates) have an average d aily ag gregate no tion al amou nt o f swap s for M arch , April, and M ay o f 20 16 that exceeds $3 trill io n. Otherwise, the v ariation marg in req uirement, to which we are su bject, to ok effect o n M arch 1, 201 7. Other regu latory requ iremen ts may in direct ly imp act us. For ex amp le, no n-U.S. co un t erpart ies of th e Co mp an y may also be sub ject to n on -U.S. regul ati on o f their deri vativ es tran sactio ns with the Compan y. In add ition , co un terparties regul ated b y the Prud ential Reg ulato rs (which con sist o f th e Office of th e Co mp troller of th e Cu rrency, th e Bo ard of Governors of th e Federal Reserv e Sy stem, th e Federal Depo si t Insu ran ce Co rp oration , th e Farm Cred it Ad ministratio n, an d th e Fed eral Hou sin g Finan ce Agen cy ) are su bject to liqui dity, leverage, and capital requ irements th at imp act their deriv atives transact io ns wit h the Co mp any. Collectiv ely, these new req uirements h ave increased the d irect an d in direct costs of ou r deriv atives activ iti es and may furth er in crease th em in the future. Pursu ant to th e Dod d-Frank Act, in Decemb er 20 13 , t he Federal In surance Office (“FIO”) issu ed a rep ort on h ow to mod ernize an d improv e the system o f insurance reg ulation in th e Un i ted States and , in December 20 14 , th e FIO p ub lish ed its repo rt on t he breadth an d sco pe o f the g lo bal rei nsu ran ce mark et. In this rein su ran ce repo rt, th e FIO in dicates that reinsurance collateral con tinu es t o b e at the forefron t o f its t hink in g with reg ard to po ten tial direct federal in vo lv ement i n insu ran ce reg ulation . Sp ecifically, the FIO’s rein surance repo rt arg ues th at federal o fficials are well-po sition ed t o make d etermin ations regardin g wh eth er a fo reign jurisdiction h as su ffi cientl y effectiv e regu lat io n an d, in d oing so , consider o th er prud ent ial i ssues pen ding in th e U.S. and between t he U.S. and affected fo reign jurisdiction s. The reinsu ran ce rep ort not es that work con tin ues to wards initiatin g nego tiat io ns fo r cov ered ag reemen ts with leading reinsu ran ce jurisdiction s th at may h ave th e effect of preempti ng inco nsistent stat e laws. In 20 17 , the U.S. an d E.U. en tered in t o such a cov ered ag reement. It remain s to be seen whether the U.S. will neg otiate co vered agreements with o th er major U.S. trading p artners. More g enerall y, it remain s to be seen wh ether ei th er o f th e FIO’s repo rts wi ll affect th e man ner in wh ich in su ran ce an d reinsuran ce are regul ated in t he U.S. and th erefore affect th e Compan y’s bu sin ess. The Dod d-Frank Act also established the Fin ancial Stab ility Ov ersigh t Co un cil (the “FSOC”), which is autho rized to d etermine whether an i nsu ran ce co mp any is systematically sig nificant an d to reco mmend that it sh ou ld b e su bject to en han ced p rud en tial stand ard s an d to sup erv isio n by the Bo ard o f Go verno rs of t he Fed eral Reserv e Sy stem. In Ap ril 20 12 , the Fin ancial Stability Ov ersig ht Cou nci l (th e “FSOC”) app rov ed its final ru le fo r d esign ati ng no n- bank fin an cial compan ies as systemically imp ortan t fi nancial institu tio ns (“SIFI”). Un der th e final ru le, the Co mp an y’s assets, liabilities, and o perati on s do no t cu rrently satisfy th e finan cial th resho ld s that serv e as the first step o f th e th ree-stag e process to desig nat e a no n-ban k financial co mp any as a SIFI. While recent d ev elo pments sug gest that it is u nlikel y that FSOC wi ll be design ating ad dition al no n-ban k fi nancial companies as sy stematically sig nificant, there can be n o assu ran ce o f th at un l ess and un til FSOC’s autho rity to do so has b een rescind ed. The Con sumer Fin ancial Pro tectio n Bureau (“CFPB”) h as su pervi sory au th ority o ver certain no n-ban ks wh ose activities o r p ro du cts it determines po se risks to con sumers, an d issu ed a ru le in 2 01 6 amen din g reg ulatio ns u nd er the Home Mo rtg ag e Disclosure Act th at requ ires th e Co mp any to , among ot her th in gs, collect an d disclo se ex ten sive data related to its len ding p ractices. At this ti me, the ru le rel ates to repo rtin g data relat iv e t o Co mp any loan s made on multi-family ap artmen ts, seniors l iv in g h ou sing , man ufactured ho using commu nities, an d an y mix ed-use p ro perties wh ich con tai n a resid ential compo nen t. It is u nclear at this time ho w b urden so me complian ce with th is or other ru les p ro mu lgated un der th e Ho me M ort gage Disclo su re Act will become. Certain of t he Co mp an y’s su bsid iaries sell p ro du cts th at may be regu l ated by the CFPB. Th e CFPB cont in ues to b ring en fo rcemen t action s in vo lv in g a growi ng n umber o f issu es, includ ing act io ns b ro ug ht jo in tly with state Atto rn eys General, which cou ld di rectly o r ind irectly affect t he Company or an y o f it s sub sidiaries. The Co mp an y is u nab le at this time to predict t he impact of th ese acti vities on th e C ompany . Alth ou gh th e fu ll impact o f the Dod d-Frank Act cann ot be determin ed un til all o f the vario us stu dies man dated by th e law are co nd ucted and all implementing regu latio ns are ad op ted , many o f the leg islat io n’s requ irements cou ld hav e an ad verse impact o n th e finan cial services and insurance in du stri es. In ad ditio n, the Do dd -Frank Act cou ld make it mo re expen sive fo r us to con duct bu siness, req uire us to make ch ang es t o our b usin ess mod el or satisfy i ncreased capital req uiremen t s. New a nd a mended regul atio ns rega rd ing the standa rd of ca re o r sta nd ard of conduct ap plica ble to investment p rofessionals, insurance ag enci es, and fina ncial institut io ns t ha t recommend or sell annui ties or life insura nce pro ducts may ha ve a materi al a dverse imp act o n our ab ility to sell a nnuities and other p rod ucts a nd to reta in in-force b usiness and o n o ur fina ncial condition or result s of op erations. Sales o f li fe insu ran ce p oli cies and ann uity con tracts o ffered by th e Co mp any are sub j ect to reg ulation s relatin g t o sales practi ces ad op ted by a variety o f federal an d state reg ulato ry au th orities. Certain ann uities and life insu ran ce po licies such as v ariable ann uities and v ariable un iv ersal life i nsu ran ce are reg ulated un der th e federal secu rities l aws ad ministered by th e SEC. On April 18 , 20 18 , th e SEC v oted to pro po se ru lemaki ng s and in terpretatio ns relating to t he standard o f con du ct ap plicab le to b ro ker-d ealers, inv estment ad visers, and their rep resen tativ es wh en making certain recommen datio ns t o retail cu stomers. Sp ecifically, un der the pro po sed reg ulation s, a b ro ker-d ealer wo uld be req uired to act in t he best in terest of a retail custo mer wh en recommen ding an y secu rities transactio n or in vestmen t strategy in vo lv in g securi ties to a retail customer. Th e SEC also prop osed an in terpretatio n reaffirming an d, i n so me cases, clarifyi ng its views of th e fidu ciary d uty that in vestmen t ad visers owe to th eir 30 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents cli en ts. An other SEC prop osal wo uld requ ire b ro ker-d ealers and inv est ment ad visers t o p ro vid e each cu sto mer with a su mmary of the nat ure of the cu stomer’s rel ati on ship wit h the investment p ro fessio nal, as well as a restriction o n the use o f th e terms “adv iser” and “adv isor” by bro ker-d ealers. The co mment period on the p ro po sals clo sed on Au gu st 7 , 20 18 . The SEC h as in dicated th at it will issu e a fi nal v ersio n o f the reg ulations an d the in terpretatio n b efo re the end of th e third q uarter 20 19 . In ad dit io n, bro ker-d ealers, in surance agen cies an d o th er fin ancial insti tu tion s sell the Compan y’s an nu ities to emp lo yee ben efit p lan s gov erned by prov isio ns o f th e Emp lo yee Retirement In come Security Act (“ERISA”) and Ind iv id ual Retirement Accou nts (“IRAs”) that are g ov ern ed b y similar prov isions un der th e In ternal Reven ue Cod e (th e “Co de”). Co nsequ ent ly, o ur activities an d tho se o f th e firms that sel l the Co mp any ’s pro du cts are su bject to restrictions th at req uire ERISA fid uciaries to p erform their d uties so lely in the in terest s of ERISA p lan particip ants and b eneficiaries, and that proh ib it ERISA fiduciaries from cau sing a co vered p lan o r retirement account to en gag e in cert ain p roh ib ited tran saction s absen t an exempt io n. The NAIC is co nsid ering rev i sio ns to the Suit ab ility i n Ann uity Transact io ns Mo del Regu latio n whi ch , if ad op t ed b y regu lators, co uld impo se a stricter stand ard o f care u po n in su rers wh o sell ann uities. Likewise, sev eral stat es are co nsid ering o r h ave ado pted leg islatio n or reg ulato ry measu res t hat wo uld implement n ew req uirements an d stan dards ap pli cab le to th e sale of an nu ities and , in so me cases, life in su rance prod ucts. Th e NAIC an d several states, in clu ding Con necticut, Nevad a, New Jersey, and New Yo rk h av e passed laws or p ro po sed regu lation s req uirin g insurers, investment ad visers, brok er-dealers, an d/or ag en t s to d isclose co nflicts o f interest to clien ts or t o meet stand ard s that th eir advi ce b e i n the cu stomer’s b est in terest. These stand ard s v ary wid ely in scop e, ap plicab ility, an d timin g o f imp lementation . The ado ptio n an d enactmen t of these or any revised stan dards as law o r regu latio n co uld h ave a material ad verse effect u po n the man ner in which t he Compan y’s prod ucts are sol d and impact th e ov erall market fo r such p rod ucts. There remains signi ficant u ncertainty su rro un ding th e final form that th ese regu lations may take. Our cu rrent distribu t ors may co ntinue to mov e fo rward with their plans to limit the nu mb er o f prod ucts th ey o ffer, i ncl ud in g th e t yp es o f prod ucts o ffered b y th e Compan y. The Comp any may find it necessary to ch an ge sales representative and/or brok er co mp ensatio n, to limit the assistance o r ad vice it can p ro vide to o wners of the Compan y’s an nu i ties, to replace o r eng age add itio nal d istributo rs, or otherwise change th e man ner in which i t desig ns, su pervises, an d su pp orts sales of its an nu i ties an d, where ap pli cab le, life in su ran ce p ro du cts. In additio n, the Compan y co ntin ues to in cur expen ses in co nn ecti on wit h initial an d o ng oing complian ce ob ligatio ns with resp ect to su ch ru les, and i n th e agg reg ate th ese expenses may b e sig nificant. An y of the fo reg oing regu latory, legisl ative, o r j ud icial measures or the reaction to such act iv ity b y con sumers o r o th er members o f the insu ran ce ind ustry cou ld hav e a material adv erse imp act on our abilit y to sell ann uities and other prod uct s, to retain in -force bu sin ess, an d on ou r finan cial co nd ition or resu lts of o peration s. The Compa ny ma y be subj ect to regula tion, investigat io ns, enfo rcement actio ns, fi nes and p ena lties imp osed by the SEC, FINRA a nd other federa l a nd internatio nal regula to rs in co nnecti on with its b usiness op erati ons. Certain l ife insurance policies, con tracts, and ann uities offered by th e Compan y are su bject to reg ulation u nd er the fed eral secu rities laws ad ministered by t he SEC. The federal secu rities laws co ntain reg ulato ry restriction s and crimin al, admini strativ e, an d priv ate remed ial provi sio ns. From time to time, the SEC an d th e FINRA examin e o r inv estig ate th e act iv ities o f b ro ker-d ealers, insurer’s sep arate accou nts and inv est ment adv iso rs, includ ing the Co mp any ’s affi liated brok er-dealers an d in vestmen t ad visers. These ex aminatio ns or inv estigatio ns often focus on th e activit ies o f th e reg istered represen tat iv es an d registered inv estment ad visers doi ng b usiness throu gh su ch entities and the entities’ su pervisi on o f th ose persons. It is po ssi ble t hat any ex aminatio n o r i nv estigatio n co uld lead to en fo rcemen t actio n by th e regu l ator and /o r may resu lt in pay ments o f fin es an d p enal ties, payments to customers, or b oth, as wel l as ch anges in systems o r p ro ced ures of such entities, an y of wh ich co uld hav e a material ad verse effect o n th e Co mp any’s fin ancial con dition or resu lts o f o perati on s. The Co mp any may also be su bject to reg ulatio n by g ov ern ments of the co un t ries in which it cu rrently d oes, or may in the fu ture, do , b usin ess, as well as regu l ati on by th e U.S. Gov ern ment with resp ect to its op erat io ns in fo reign cou ntries, su ch as the Foreig n Co rrupt Practices Act. Penal ties for violating th e v ariou s laws g ov ern in g t he Company ’s bu siness in o th er co un tries may in clu de restriction s up on b usin ess op eratio ns, fi nes and imprison ment, bo th withi n t he U.S. and abroad . U.S. enforcement of anti-corrup tion laws con t in ues to increase in magn itu de, and penalt ies may be su bstan tial. The Company is sub ject to co nd iti on s and requ iremen ts set fo rth in th e Telep ho ne Con sumer Pro tectio n Act (“TCPA”), which p laces restrictio ns on th e u se o f auto mated telep ho ne and facsi mi le machines. Cl ass actio n lawsuits al leg in g violatio ns of th e act h ave been filed against a n umber o f co mp an ies, in clu ding life i nsu ran ce carriers. Th ese class actio n lawsu its co ntain al leg ati on s that d efend ant carriers were v icario usly l iable for the alleged wro ng fu l co nd uct of agen ts wh o v io lated the TCPA. So me of the class acti on s hav e resu lted in sub stan tial sett lemen ts ag ain st other in su rers. Any su ch action s against th e Co mp any co uld resu lt in a material adv erse effect upon our fin ancial con ditio n or results of op eratio ns. Other ty pes of regu l ati on that co uld affect t he Co mp any an d i ts su bsid iaries in clu de, bu t are n ot limited to, i nsu ran ce co mp an y inv estment laws and regul ati on s, state st atuto ry accou ntin g and reserv in g practices, antitrust laws, min imum sol vency requ iremen ts, enterp rise risk req uiremen t s, state securities laws, fed eral privacy laws, cyb ersecu rity regu lat io n, techn olog y an d d ata regu latio ns, in surable in terest laws, federal anti-mon ey laun derin g an d an ti- terro rism laws, emp lo yment and immigratio n laws (includ in g laws in Alabama wh ere o ver half of th e Comp any ’s emp loy ees are l ocated ), an d b ecause the Co mp any o wn s an d op erates real prop erty, state, federal, and l ocal env iron men tal laws. Und er some circu mstances, severe pen alties may b e imp osed for breach of th ese laws. The Compan y can no t predi ct what form an y fu tu re ch ang es to laws and /o r regu lations affecting p articipan ts in th e fin anci al services sector and /o r in surance ind ustry, in clu ding th e Compan y an d its compet itors o r those en tities with which it d oes bu siness, may take, o r wh at effect, if an y, such chan ges may h ave. 31 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Compan y’s abilit y t o enter into certain tran saction s is in flu enced b y h ow su ch a transactio n mig ht affect Dai-i chi Life’s taxatio n in Japan. Changes to t ax la w, or interpretatio ns of existing ta x la w could ad versel y affect t he Compa ny and its abi lity to compet e with non-insurance pro ducts or reduce the d ema nd fo r certa in insurance pro ducts. In general, existin g law ex empts po licyh olders from curren t tax ation o n th e increase i n val ue o f mo st insu ran ce and an nu ity p ro du cts du ring th ese prod uct s’ accumul ation ph ase. Th is fav orabl e tax treatment prov i des some of th e Compan y’s prod uct s with a compet itiv e adv antage o ver pro du cts offered b y no n-in surance compan ies. To the ex tent t hat th e law is revised to eith er redu ce th e tax favo red status of life insurance and an nui ty prod ucts, or to est abl ish th e tax favo red statu s of competin g prod uct s, th en all life insu ran ce co mp anies, in clu ding t he Compan y’s sub sid iari es, wo uld be adv ersely affected with resp ect to th eir abilit y to sell t heir p ro du cts. Fu rthermo re, such changes wo uld g enerally cau se i ncreased su rrend ers of existin g life in surance an d an nu ity prod uct s. For example, a ch an ge in law th at fu rther restri cts th e ded uctib ility o f in terest exp ense wh en a bu siness own s a life in surance p rod uct wou ld result in in creased surren ders of th ese prod ucts. Th e Co mp any is sub ject to co rp orate inco me, excise, franch ise, and premium tax es. Fed eral tax law prov id es certain ben efi ts to the Co mp any, such as th e d iv id end s-receiv ed d edu ction , t he d eferral of cu rrent tax ation o n d erivatives’ an d secu rities’ eco no mic income and the cu rrent ded uctio n fo r fu tu re po licy ben efits an d claims. Th e Tax Cut and Job s Act (th e “Tax Refo rm Act”), en acted in December 20 17 , requ ires t he C ompany to rep ort h ig her amou nts of taxab le inco me b oth cu rrently and in th e fu tu re. Ho wev er, it also sign ifican tly redu ced the corp orate i ncome tax rate. Ov erall, the Compan y ex pect s to pay less inco me tax i n t he fu t ure u nder the Tax R eform Act. The Co mp any ’s mid -2 00 5 transitio n from rely ing on rein su ran ce fo r newly-written traditio nal l ife p ro du cts to rein su ring some of th ese pro du cts’ reserves in to its cap t iv e in su ran ce companies resu lted in a n et redu ction in its cu rrent taxes, offset b y an in crease in its d eferred taxes. The resultin g benefit o f reduced curren t tax es is attribu ted to th e app l icable life p ro du cts and is an impo rtant co mp on en t of th e p ro fitab ility o f th ese p ro du cts. Th e Tax Reform Act, with its o verall lo wer t ax rate, has d ecreased the econ omic tax b enefit associated wit h t hese pro du cts. Ul timat ely , th e p ro fitability and competit iv e position o f th ese p ro du cts is d epen den t on the Compan y’s abilit y to co nti nu e d ed ucting its p ro vision for fu tu re po licy b enefit s an d claims an d th e Co mp any’s ab ility to generate taxable in come. Fina ncial services co mp anies are frequently the t arg ets o f lega l p ro ceed ings, including cla ss action litiga tion, which coul d result in substant ia l jud gments. A n umber of ju dg ments hav e b een retu rn ed agai nst in surers, b rok er-dealers, and o ther p ro viders of finan cial serv ices i nv olving , amon g o th er t hing s, sales, u nd erwrit in g practices, prod uct design , prod uct d i sclo sure, prod uct ad ministratio n, d enial or delay o f ben efits, ch arg in g ex cessiv e or impermi ssi ble fees, recommen ding u nsuitab le prod ucts to cu st omers, breachi ng fid uciary or o th er du ties to cu stomers, refun d o r claims p ractices, all eg ed agen t misco nd uct , fai lu re to p ro perly sup erv ise rep resen tatives, relation ships with ag ents o r o th er person s wit h wh om th e compan y do es b usin ess, employmen t-related matters, payment o f sales o r other cont in gen t co mmissio ns, and other matters. Often these legal p ro ceed in gs hav e resulted in the award o f sub stantial j ud gmen ts t hat are disp ro po rti on ate to the actu al d amag es, in clu ding material amou nts o f p un itiv e no n-econ omic co mp en sat ory d amages. In some st ates, juries, ju dg es, and arbitrators have su bstantial d i scretio n in awarding p un itive an d no n-econ omic compensato ry d amages, which creates the po ten tial for u np red ictable material ad verse jud gments o r awards in any giv en legal proceed in g. Arb itratio n awards are su bject to very limited app ellate review. In ad ditio n, in some leg al proceeding s, co mp anies have mad e material settlement pay ments. In some instances, sub stantial jud gments may be th e resu lt o f a p arty’s p erceived ability to satisfy su ch jud gment s as op po sed to the facts an d circu mstances regardi ng th e claims. Grou p h ealth cov erag e issu ed throu gh associations and cred it in surance cov erag es have received some negative pu blicity in th e media as well as in creased regu latory co nsideration and review an d liti gatio n. Th e Co mpan y h as a smal l clo sed b l ock o f g ro up health in surance cov erag e th at was issued to memb ers o f an asso ciatio n. A n umber of lawsu its an d in vestigat io ns reg ard in g th e meth od o f pay in g claims hav e b een init iat ed ag ain st life insurers. The Company offers payment metho ds that may be similar to th ose that hav e been the su bject o f su ch lawsuits an d investig ation s. The Co mp an y, lik e other fin ancial serv ices co mp anies in th e ordinary cou rse of b usiness, is inv olved in legal p ro ceed i ng s and regu latory action s. The occurren ce o f su ch matters may become more freq uen t and /o r severe wh en general econ omic con dition s have deteriorated . The Co mp any may be un able to predict th e ou tco me o f such matt ers an d may be u nab le to prov id e a reason able ran ge o f po ten tial lo sses. Given the inh eren t difficu lty in p red ictin g th e ou tcome o f such matt ers, it i s p ossib le th at an adverse ou tco me in certain su ch mat ters co uld be material to the Company ’s resu lts for an y particular rep orting perio d. The financia l services and insura nce ind ustries are someti mes t he targ et o f law enforcement investiga t io ns a nd the fo cus o f increa sed regula to ry scrutiny. The fin an cial serv ices an d insu ran ce in du stri es are sometimes the targ et o f l aw enfo rcemen t an d reg ulatory i nv estigatio ns relating to th e n umero us laws an d reg ulation s th at go vern such co mp ani es. Some compan ies hav e b een the subj ect o f l aw enforcement o r o th er action s resultin g from such in vestig ation s. Resulting pu blicity abo ut o ne compan y may generate in qu i ries in to o r liti gatio n against other financial service p ro vid ers, even th ose who do no t en gag e in the b usin ess lin es o r practices at issue in th e orig i nal action . It is imp ossib le to predict th e ou t co me of su ch inv estig ati on s o r actio ns, whet her th ey will ex pand into other areas no t yet co ntemplated , whether they will result in chan ges in regu latio n, wh eth er activities cu rrently tho ug ht to be lawfu l will be ch aracterized as un lawful, or th e imp act, if an y, of su ch scrutin y o n the fin ancial services and in surance ind ustry or t he Compan y. 32 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents From time to time, the Compan y receiv es sub po enas, requ ests, o r o t her in qu iries an d respo nd s t o them in the o rd inary cou rse o f b usin ess. New accounti ng rules, changes to ex isting a ccounting rules, or the grant of permitted accounting p ractices to compet itors co uld neg ati vely imp act the Co mp any. The Co mp any i s requ ired to co mp ly with accou ntin g prin cip les g en erally accepted in the United Stat es (“GAAP”). A n umber o f organ izatio ns are in strumental in the dev elo pment and in terpretat io n of GAAP such as th e SEC, the Fi nancial Accou nting Standard s Board (“FASB”), and the American In stit ute of Certified Publ ic Accou ntants (“AICPA”). GAAP is sub ject to co nstan t review b y these o rganization s and o th ers in an effort to ad dress emerg in g acco un ting rul es and issue interp retative accoun ting gu id ance o n a co ntin ual basis. Th e Company can g ive n o assuran ce th at fu tu re ch anges to GAAP will no t have a neg ative impact on t he Co mp any. GAAP includ es the req uirement t o carry certain assets and liabilities at fair val ue. Th ese fair v alu es are sen sitive to vari ou s facto rs in clu ding , b ut n ot limited to , interest rate mo vemen ts, cred it spread s, an d vario us other facto rs. Becau se o f th is sen siti vity, ch ang es in th ese fai r v alu es may cau se in creased levels of vol atility in th e C ompany ’s finan cial statements. The FASB regu larly un dertak es p rojects th at coul d resu l t in sign ifican t chan ges t o GAAP. Fu rthermo re, t he FASB co ntin ues to mon itor th e develop men t of In ternat io nal Fin anci al Rep orting Stand ards (“IFRS”) and to co nsider the activities of the Intern ati on al Accou ntin g Stand ard s Bo ard (“IASB”) and ho w th ese activ iti es may imp act GAAP stand ard settin g an d fin anci al rep ort in g. While the SEC has i nd icated th at it d oes n ot int end to in corpo rate IFRS int o the U.S. financial repo rting system in th e near term, any chan ges to co nform or con verge t he IFRS an d GAAP frameworks wo uld imp ose speci al d eman ds on issu ers in the areas of g ov ern ance, employ ee train i ng , i ntern al co ntrols, co ntract fulfillmen t and d isclo sure. Such chan ges wou ld affect ho w we manag e o ur b usiness, as it will lik ely affect bu siness processes su ch as th e d esig n of p ro du cts and co mp en sat io n plans. The Co mp any i s u nab le to predi ct wh eth er, an d if so , when the FASB projects will b e ado pted and /o r impl emented, o r th e d eg ree to which IFRS will be in corpo rated into th e U.S. finan cial repo rti ng system. In add iti on , th e Compan y’s in su ran ce sub sidiaries are req uired to comply with statutory acco un ting p rin ciples (“SAP”). SAP and v ariou s co mp on ents o f SAP (su ch as actuarial reserv in g meth od olo gy ) are su bject to co nstan t review by the NAIC an d its task fo rces an d co mmitt ees as well as state in surance dep artmen ts in an effort to ad dress emerg in g issu es and otherwise imp ro ve o r alter finan cial rep orting . Certain NAIC pron ou ncemen ts rel ated to acco un ting and repo rtin g matters take effect automatically with ou t affirmativ e action b y th e states, an d vario us prop osals eit her are cu rrentl y o r hav e previ ou sly b een pen ding b efo re commit tees an d task fo rces o f th e NAIC, some of which, if enacted , wou ld neg atively affect the Co mpan y. The NAIC is also cu rrentl y working to refo rm mod el regu lat io n in vario us areas. Th e Co mp any cann ot predict whether o r in what form refo rms will be enact ed by state legislatu res an d, if so, wh eth er the en acted reforms will p ositiv ely or neg atively affect th e C ompany. In ad ditio n, the NAIC Acco un t in g Practices an d Procedu res man ual prov id es that state insurance d epartments may permit i nsu ran ce compan ies d omici led in th e stat e t o dep art fro m SAP b y granting them permitted acco un ting p ractices. The Co mp any cann ot pred i ct wh eth er or when the in su rance dep art ments of the states of d omici le of its competitors may permit them to utilize ad vantageo us acco un ting practices that d epart from SAP, th e use o f wh ich is no t p ermitted by t he i nsu ran ce depart ments o f the states of do mi cil e o f th e Co mp an y’s insuran ce subsid iaries. With resp ect to regu latio ns and gu id elines, st ates sometimes d efer t o th e interp retation of the in su rance department o f th e state o f do micile. Neither the actio n o f th e d omici liary state n or actio n of the NAIC is bind i ng on a state. Accordingl y, a state co uld cho ose to follo w a d ifferent interpretatio n. The Co mp any can give no assu ran ce t hat fut ure chan ges to SAP or compo nen ts o f SAP or th e grant o f permit ted acco un ting p ractices to its co mp etito rs will n ot have a n egativ e imp act on the Co mp any. Fo r add itio nal in fo rmation regarding p end in g NAIC reforms, please see It em 7, Ma na gement’s Discu ssion an d An alysi s of Fina ncial Co nd iti on an d Resu lts o f Operatio ns. If o ur b usiness does not perform well, we may be req uired to reco gnize a n imp airment of our go od will a nd indefinite lived intangible assets which co uld ad versely affect our results o f o pera tio ns o r financia l conditio n. Go od will is th e excess o f the pu rch ase price in an acqu isitio n o ver the estimated fai r value o f n et assets acq uired. Goo dwill is n ot amort ized b ut is tested for impairment at least ann ually or mo re freq uently if ev en ts or circumstan ces such as ad verse chan ges in the b usiness climat e ind icate th at the fair value o f th e op eratin g un it may b e less than th e carry in g v alu e o f th at o perating u nit. We perfo rm o ur annu al g oo dwill imp airmen t testin g du ring the fo urth qu art er of each year b ased up on d ata as o f th e close of the th ird q uarter. Imp airmen t testing is perfo rmed using the fair v alue app ro ach, wh i ch requ i res th e u se of estimates and ju dg ment, at the o perating segment lev el. The estimated fair v alu e o f the op eratin g seg ment is imp acted b y the perfo rmance of th e b usin ess, wh i ch may b e ad versely impacted by p rol on ged mark et declin es o r oth er circu mstances. If it is d etermined that the go od will has been imp aired, we mu st write do wn th e goodwill b y th e amo un t of th e impairmen t, with a corresp on din g charge to n et inco me. Such wri te do wns cou ld hav e an ad verse effect on o ur resu lts of op erat io ns o r fin ancial po siti on . See Item 7, Ma na gement’s Discu ssion a nd An alysis of Financial Co nd itio n an d Results of Op eratio ns - Critica l Accou ntin g Policies - Goo dwill , and n otes 2 and 11 of th e n otes t o the con so lidated fin ancial statemen ts fo r ad dition al informatio n. The Co mp any ’s ind efinite lived intang ibl e assets represent the value of the Co mp any ’s insurance licen ses on t he d ate of the merger with Dai-ich i Life. Th ese assets are n ot amortized bu t are test ed for impairmen t at least an nu ally or more freq uently if ev en t s o r circumstan ces ind icate that the fai r val ue o f th e ind efinit e liv ed intang ib les is less th an th e carryi ng v alu e. We p erform o ur ann ual imp airmen t testing of in defin ite lived in tan gibles du ring th e fo urth qu art er of each y ear. Imp airmen t testing i s perfo rmed u sing th e fair v alue ap proach , wh ich req uires th e use o f estimates an d judgment. If i t is determin ed that th e in defin ite liv ed intang ib les have b een imp aired, we must writ e th em d own by th e amo un t o f th e impairment, with a co rresp on ding charge to net in come. Su ch write d own s cou ld have an adv erse effect o n o ur resu l ts o f o peration s or fin ancial po sition . 33 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The use of reinsurance intro duces variab ility in the Compa ny’s statements o f inco me. The t imin g o f p remiu m p ayments to and receipt of exp ense allo wances fro m rein surers differs from th e Company ’s receipt o f cu sto mer premium payments and in curren ce o f ex penses. These t imin g d ifferences int ro du ce v ariabilit y in certain co mp on ents of the Company ’s statemen ts of in come an d may also in trod uce v ariabi lity in th e Comp any ’s qu arterly fin ancial results. The Compa ny’s reinsurers co uld fa il to meet a ssumed ob liga tions, increa se rates, termi na te agreements or b e sub ject to ad verse develo pments that could affect the Co mp any. The Co mpan y and its in surance subsid iaries cede material amo un ts of insuran ce and tran sfer related assets to oth er insurance compan ies th rough rei nsu ran ce. Ho wev er, n otwithstandi ng the tran sfer of related assets o r o th er i ssues, the Compan y remains liab le with respect to ced ed insu ran ce sho uld any rei nsu rer fail to meet the assumed ob ligation s. Th erefore, the fai lu re, in solven cy, o r in ability o r u nwillin gn ess to p ay un der the terms of the reinsurance ag reement with t he Company of one or mo re o f the Compan y’s rein surers co uld n egativ ely impact th e Co mp any ’s earning s and finan cial po siti on . The Compan y’s resu lts an d its abilit y to co mp ete are affected by th e availab ility and cost o f rein su ran ce. Premium rates charged by the Co mpan y are based, in p art, on th e assu mption th at rein surance will be availab le at a certai n cost. Certain reinsurers may attemp t to in crease th e rates they ch arg e th e Co mp any for reinsurance, i ncl ud in g rates fo r new p olicies the Co mp any is issuing an d rates related t o p oli cies that the Co mp any has already issued . Th e Co mp any may n ot be ab le t o i ncrease the p remiu m rates it ch arg es fo r p olicies it has alread y issu ed, and fo r co mp etitive reason s i t may no t b e able to rai se th e premium rates i t charges for n ew p olicies to offset th e increase in rates charged by rein surers. If the cost of reinsu ran ce were to i ncrease, i f reinsurance were to become u navailab le, if alternativ es to rein surance were n ot avail ab le to the Company, or if a rein su rer sh ou ld fail to meet it s o bligatio ns, th e Co mpan y cou ld be adv ersely affected. The n umber of life rein su rers has remained relatively co nstant in recen t years. If th e reinsurance market con tracts in th e fu tu re, the Co mp an y’s ability to co nti nu e to o ffer its prod ucts o n t erms fav orable to it co uld be adv ersely imp acted. In ad dit io n, rein surers face chal len ges regarding illiqu i d cred it and /or cap ital mark ets, inv estment d owng rad es, rating ag ency do wng rades, deterioration o f g en eral eco no mic co nd itio ns, an d other facto rs n egativ ely imp acting th e fin ancial servi ces ind ustry. If rein surers, includ in g t ho se with sig nificant exp osu re t o in ternatio nal market s an d Eu ro pean Un io n member states, are un able to meet th eir ob ligation s, th e Compan y wou l d be adv ersely impacted . The Co mp an y has implemented a reinsurance p ro gram throug h the use of captiv e rein surers. Und er these arrang ements, a cap tive own ed b y th e Co mp any serves as the rein su rer, an d th e con so lidated book s and tax returns of th e Company reflect a liabil ity con sisting o f th e ful l reserve amou nt att ribu tab le to th e rein sured bu sin ess. The success o f th e Compan y’s cap t iv e reinsurance p ro gram is d epen den t on a n umber of facto rs ou tsid e t he co ntro l of th e Compan y, includ ing , b ut not limit ed to , co ntin ued access to fin anci al solu tion s, a favo rab le reg ulato ry env iron men t, and th e o verall tax p ositio n o f the Co mp any . If th e cap tive rein su rance p ro gram is no t successful, th e Co mp any ’s finan cial co nd iti on co uld b e adv ersely imp acted. The Compa ny’s po licy cla ims fluctuate fro m p erio d to p eriod resulting i n earning s volatility. The Compan y’s results may fluctuate from perio d to p eriod d ue to flu ctu ation s in t he amo un t o f policy claims receiv ed. In ad dition , certain of the Co mp any ’s li nes of b usin ess may exp erience high er clai ms if th e econ omy is g ro win g sl owly or in recession, or if equ ity mark ets declin e. Also , inso far as the Co mp any con tin ues to retain a larg er percen tag e of the ri sk of newly written life insuran ce pro du cts th an it has in t he p ast, its fi nancial resu lts may hav e greater v ariabilit y due to fluctuation s in mo rtality results. The Co mp any op era tes in a ma ture, hig hly co mp eti tive industry, which could limit its a bility to g ain or ma inta i n it s p ositio n in the industry and neg atively affect p ro fita bil ity. The insu ran ce in du st ry is a matu re an d h ighly competitiv e in du st ry. In recen t years, th e in du st ry has ex perien ced redu ced growth in life insurance sales. Th e Co mp any en cou nters sig nificant compet itio n in all lin es of bu si ness fro m o th er insurance comp anies, man y o f which h ave greater finan cial reso urces and hi gh er rati ng s th an the Compan y and which may hav e a g reater mark et sh are, offer a broad er rang e of prod ucts, servi ces or features, assume a greater lev el o f risk, have lo wer o perati ng or fin ancing costs, o r hav e differen t profitability ex pectation s than th e Compan y. The Co mp any also faces co mp etitio n fro m other prov i ders of fin ancial serv ices. Co mpetition cou ld result in , amo ng other thing s, lower sales or h ig her lap ses o f existin g p ro du cts. Co nsolid ation and ex pansio n amon g bank s, insurance compan ies, dist ribu to rs, and other fin ancial service compan ies with wh ich th e Compan y does bu siness co uld also h ave an adv erse effect on the Co mp any ’s fin ancial conditio n an d resu lts o f op eratio ns if su ch co mp anies require mo re favo rab le terms than previ ou sly offered to the Compan y o r if such co mp anies elect no t to con t in ue to do bu siness with the Company fol lo win g con so lidatio n o r ex pan sio n. The C ompany ’s ability to co mp ete is d epen den t up on , amon g o th er thi ng s, its abi lity to attract and retain d istrib uti on ch ann els t o market its in surance and in vestmen t prod uct s, its abil ity to d evel op co mp etit iv e an d p ro fitabl e p rod ucts, its abil ity to main tain low u nit co sts, and its maintenan ce o f ad equ ate ratin gs fro m rating ag enci es. As techn olog y evo lv es, compariso n o f a p arti cu lar prod uct o f an y compan y fo r a particular custo mer with co mp eting prod uct s for th at cu stomer is more readily av ailable, wh ich cou ld lead to increased co mp etition as well as ag ent or custo mer beh avior, includ in g persistency th at differs from past b eh avior. 34 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Compa ny’s ab ility to mai ntain co mp eti tive unit co sts is dep endent upo n the level of new sa les a nd persistency o f existing b usiness. The Compan y’s ab ili ty to maintain competitiv e un it costs is depen den t u po n a n umber of factors, su ch as th e lev el o f n ew sales, p ersistency of ex isting b usiness, and exp ense management. A decrease in sales or persisten cy with ou t a corresp on din g redu ction in ex penses may result in high er un it costs. Ad ditio nal ly, a d ecrease in p ersistency o f existin g bu siness may resu lt in h i gh er or more rapid amortization o f d eferred p olicy acq uisition co st s an d thu s high er un it costs and lo wer rep orted earning s. Al th ou gh many of th e Compan y’s p ro du cts co ntain surren der ch arg es, th e ch arg es decrease o ver ti me and may no t b e sufficien t to cov er the u namo rtized deferred p olicy acq uisition costs with resp ect to th e in surance pol icy or an nu ity co ntract being surren dered. Some of t he Co mp an y’s pro du cts do not con tain surrend er ch arg e features an d such p ro du cts can be surren dered o r exch anged with ou t pen alty. A decrease in persistency may also resu lt in hig her claims. Item 1 B . Unresol ved Staff Comments No ne. Item 2 . Pro perties The Co mp any ’s h ome office is locat ed at 2 80 1 High way 2 80 Sou th, Birmin gh am, Alabama. Th e Compan y owns three bu ildin gs con sisting o f 62 0,000 squ are feet at th e ho me o ffice lo catio n. The first bu ild in g was co nstructed i n 1 97 4, the seco nd bui ld in g was co nstructed in 1982 , and th e th ird bu ilding was co nstructed in 2 00 4. The Co mp any p rev io usly leased th e thi rd b uild in g, pu rsuan t to a lease wh ich expired in Decemb er 20 18 . At th e end o f the lease term in Decemb er 2 01 8, t he Company purch ased the b uild i ng fo r approx imately $7 5.0 million . Parki ng is p ro vided fo r ap prox imately 2 ,59 4 v ehicles. The Comp any leases admin istrative and mark eting office sp ace in 17 cities (exclu din g th e h ome o ffice b uild in g), wit h mo st leases bei ng for perio ds of th ree to ten years. The ag gregate an nu alized ren t is approx imatel y $8.3 mill io n. The Compan y believ es its p ro perties are adeq uate an d su itable fo r the Compan y’s b usin ess as curren tly co nd ucted and are adeq uately maint ain ed . The abo ve p ro perties do no t in clude prop erti es th e Co mp any owns fo r inv estment on ly . Item 3 . Leg al Proceeding s To the kn owledg e an d in th e o pinio n of manag ement, th ere are no material pen ding legal proceeding s to wh ich th e Co mpan y o r any of its sub si diaries is a p arty o r o f wh ich an y o f o ur prop erti es is the su bject, o th er than as set forth in Note 15 , Commitments an d Co ntin gen cies, of the no tes to th e co nsolid ated finan cial statements, includ ed herein . Item 4 . Mine Safety Discl osure—Not Applicable 35 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART II Item 5 . Ma rket for the Registrant’s Common Equity , Rela ted Stockholder Matters and Issuer Purchases of Equity Securities As o f February 1, 2 01 5, th e Co mp any b ecame a wh olly owned sub sidiary o f Th e Dai-ichi Life In surance Compan y, Limit ed (n ow known as Dai-ichi Life Holding s, Inc., “Dai-ichi Life”), an d as a resu lt th ere is n o mark et for ou r Co mmon Stock , of wh ich all sh ares are owned by Dai-ich i Life. Prio r to February 1 , 20 15 t he Compan y’s Co mmo n St ock was li sted on th e New York Sto ck Ex chan ge, but was delisted in co nn ection with o ur beco ming a who lly owned sub sidiary of Dai-ichi Life. The Compan y p aid $14 0.0 millio n an d $1 43 .8 millio n o f d i vidends d uri ng th e years end ed Decemb er 31, 20 18 and 2 01 7, respectiv ely, to its p arent, Dai-ichi Life. In the fu tu re, t he Co mp any ex pects to p ay cash d iv id end s to its parent , Dai-ichi Life, su bject t o its earn in gs an d fin ancial co ndi tion , regu latory requi remen ts, capi tal need s, and oth er relev an t fact ors. Th e C ompany ’s ab ility to pay cash dividen ds is dep end ent in p art on cash dividen ds recei ved by the Co mp any fro m its life i nsu ran ce su bsid iaries. See Item 7, Ma na gement’s Discussio n a nd An alysis of Fi na nci al C on dition an d Results of Opera tio ns , “Liq uidity and Capit al R esou rces” in clu ded h erein. Such su bsid iary div id ends are restricted by the vari ou s in surance laws o f th e states in wh ich th e sub si diaries are domesticated. See It em 1, Bu siness, “Regu l ati on ”. 36 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 6 . Selected Fina ncial Data The follo win g selected fin an cial data has been deriv ed fro m the Co mp any ’s aud ited co nsolid ated finan cial statemen ts. The inco me stat ement d ata fo r th e y ears en ded Decemb er 31 , 2 01 8, 2017 , 20 16 (Successo r Comp any ) and the balance sheet data as of Decemb er 31 , 2 01 8 and 2 01 7 (Successo r Co mp any ) have been deriv ed from th e Compan y’s aud ited co nsol id ated finan cial statement s includ ed elsewhere herein . Th e in come statemen t data for the perio d of February 1 , 2 01 5 t o December 3 1, 20 15 (Successo r Compan y), th e p eriod o f Jan uary 1, 2 01 5 to Janu ary 31 , 2 01 5 (Predecesso r Company), an d fo r th e y ear en ded Decemb er 31 , 2 01 4 (Pred ecessor Co mp any ), and the balance sheet d ata as o f December 3 1, 20 16 an d 201 5 (Successo r Compan y) an d as o f Decemb er 3 1, 2 01 4 (Predecesso r Co mp an y), hav e been d erived from th e Co mp any ’s au dit ed con solidated fin ancial statemen ts no t incl ud ed herein . See No t e 3 , Sign ifi ca nt Tran saction s to th e consolid ated finan cial statements for a discussio n o f acq uisition s and transactio ns du ring 20 18 . The selected fin ancial d ata set forth b elo w sh ou ld b e read in co njun ction with Item 7, Ma na gement’s Discu ssion a nd An alysis of Fin an cia l Co nd iti on a nd Resu l ts of Op erati on s and the au dited co nso l id ated fin ancial statements and related n otes in clu ded elsewh ere herein . Successo r and Predecesso r p eri od s are n ot co mp arab le. Successo r Co mpany Predecesso r Co mpany Fo r The Yea r Ended December 3 1 , February 1, 2 0 1 5 to December 3 1 , 2015 Ja nua ry 1, 201 5 to Janua ry 31, 201 5 Fo r The Year Ended December 3 1, 2 0 1 8 20 1 7 201 6 201 4 (D ollars In Thousands) (Dollars In Thousands, Ex cept Per Share Am o unts ) INCOME STATEMENT DATA Premiums and policy fees $3,6 8 0 ,845 $3,4 7 7 ,419 $3 ,4 0 7,931 $3,0 0 8 ,050 $26 1 ,8 66 $3,29 7 ,7 68 Reinsu rance ceded (1,3 8 4 ,941) (1,3 6 0 ,735) (1 ,3 1 4,716) (1,1 5 4 ,978) (8 9 ,9 56) (1,37 3 ,5 97) Net o f reinsurance ced ed 2,2 9 5 ,904 2,1 1 6 ,684 2 ,0 9 3,215 1,8 5 3 ,072 17 1 ,9 10 1,92 4 ,1 71 Net in v estment income 2,4 8 3 ,750 2,0 5 1 ,588 1 ,9 4 2,456 1,6 3 2 ,948 17 5 ,1 80 2,19 7 ,7 24 Realized in v estment g ain s (lo sses): Deriv ativ e financial instruments 6 0 ,988 (3 0 5 ,828) (4 0,288) 2 9 ,997 (12 3 ,2 74) (34 6 ,8 78) All o ther inv estments (2 2 3 ,649) 1 2 1 ,428 9 0,659 (1 6 6 ,886) 8 1 ,1 53 20 5 ,4 02 Oth er-th an-tem porary impairm en t losses (5 6 ,578) (3 ,962) (3 2,075) (2 8 ,659) (6 36) (2 ,5 89) Po rtio n reco gnized in oth er co mprehensiv e in co me (befo re tax es)2 6 ,854 (7 ,780) 1 4,327 1 ,666 1 55 (4 ,6 86) Net im p airment losses reco g nized in earnings (2 9 ,724) (1 1 ,742) (1 7,748) (2 6 ,993) (4 81) (7 ,2 75) Oth er income 4 5 3 ,685 4 4 6 ,662 4 1 5,653 3 8 8 ,531 3 6 ,4 21 43 0 ,4 28 Total rev enu es 5,0 4 0 ,954 4,4 1 8 ,792 4 ,4 8 3,947 3,7 1 0 ,669 34 0 ,9 09 4,40 3 ,5 72 Total benefits and expenses 4,6 5 7 ,936 3,9 8 3 ,735 3 ,8 8 9,950 3,3 1 0 ,827 33 9 ,7 27 3,82 0 ,2 83 Income befo re income ta x 3 8 3 ,018 4 3 5 ,057 5 9 3,997 3 9 9 ,842 1 ,1 82 58 3 ,2 89 Income tax expense (ben efit)8 0 ,657 (6 7 1 ,475) 2 0 0,968 1 3 1 ,543 (3 27) 19 8 ,4 14 Net inco me $3 0 2 ,361 $1,1 0 6 ,532 $3 9 3,029 $2 6 8 ,299 $1 ,5 09 $38 4 ,8 75 PER SH ARE DATA Net in co m e fro m co n tinuing o p erations—b asic $0 .02 $4 .81 Net in co m e available to PLC’s comm o n shareowners—basic $0 .02 $4 .81 Av erag e shares o u tstandin g —b asic 80,45 2 ,8 48 80,06 5 ,2 17 Net in co m e fro m co n tinuing o p erations—d iluted $0 .02 $4 .73 Net in co m e available to PLC’s comm o n shareowners—diluted $0 .02 $4 .73 Av erag e shares o u tstandin g —d iluted 81,75 9 ,2 87 81,37 5 ,4 96 Cash d iv idends p aid $— $0 .92 Total Pro tectiv e Life Corp o ration’s Sh areo wn ers’ Equity $6 8 .49 $6 2 .58 37 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Successor Compa ny Predecessor Co mpany As o f December 31, As o f December 3 1 , 2018 2 0 1 7 2 0 1 6 2 0 15 20 1 4 (D o l l a rs I n Tho usa nds ) (D ollars In Thous ands) BALANCE SH EET DATA Total assets $89,938 ,7 54 $79,63 4 ,7 67 $7 5,003,3 7 9 $6 8 ,4 88,697 $70,48 0 ,3 06 Total stab le v alu e p roducts an d an n uity acco unt balances 18,954 ,8 12 15,61 9 ,5 61 1 4,143,7 5 1 1 2 ,8 51,684 12,91 0 ,2 17 No n -recourse fu n d ing ob lig atio ns 2,632 ,4 97 2,74 7 ,4 77 2,796,4 7 4 6 85,684 58 2 ,4 04 Debt 1,101 ,8 27 94 5 ,0 52 1,163,2 8 5 1 ,5 88,806 1,30 0 ,0 00 Su bord in ated d eb t 605 ,4 26 49 5 ,2 89 441,2 0 2 4 48,763 54 0 ,5 93 Total sh areo wn er’s eq uity 5,767 ,7 34 7,12 7 ,1 99 5,471,5 2 1 4 ,5 81,224 4,96 4 ,8 84 38 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 7 . Ma na gement’s Discussion and Analysis o f Fina ncial Conditio n and Results o f Operati ons The followi ng M anagement’s Discussio n and An aly sis of Fi nancial Con dition an d Resu l ts of Op eratio ns (“M D&A”) sh ou ld b e read in con ju nctio n with ou r co nsolid ated au dit ed fin an cial st atemen ts an d related n otes in clu ded herein. FORWARD-LOOKING STATEMENTS—CAUTIONARY LANGUAGE This repo rt reviews o ur fin ancial condi tion an d resu lts of operation s, includ in g ou r liqu id i ty and cap ital reso urces. Hist orical i nformatio n is presented and discu ssed, an d where app ro priate, facto rs th at may affect future fin ancial perfo rmance are also id ent ified and discussed. Certain st atemen ts made in th is rep ort in clu de “forward -loo king statements” with in th e mean in g of th e Private Secu rities Litig ati on Refo rm Act of 199 5. Forward -loo king statements in clu de an y statement that may p red ict, forecast, indi cate, or imp ly future result s, p erforman ce, or achievemen ts instead o f historical facts an d may co ntain words lik e “believe,” “exp ect,” “estimate,” “p ro ject ,” “b ud get ,” “forecast,” “ant ici pat e,” “plan,” “will,” “sh all,” “may,” and other words, p hrases, or ex pression s with similar meaning . Fo rward -lo ok in g statemen ts inv olv e risks and un certainti es, wh ich may cause actu al results to d iffer materially from th e resu lts con tained in th e forward -loo kin g statemen ts, an d we cannot g i ve assu ran ces that such st atemen ts will prov e to be correct. Given th ese risks and un certainti es, in vestors sho uld n ot place un du e relian ce on fo rward-lo ok in g statements as a pred i cti on of actu al result s. We un dertak e no ob l ig ation to pu blicly u pd ate any fo rward-lo ok in g stat ements, whether as a resu lt of new in fo rmation, fu ture d evelop men ts, o r o th erwise. Fo r more in fo rmation abo ut th e risks, un certainti es, an d o th er facto rs th at cou ld affect o ur fu tu re result s, please refer to Item 1 A, Risk Fa cto rs, includ ed h erei n. IMPORTANT INVESTOR INFORMATION We file repo rts with t he SEC, in clu ding Ann ual Rep orts o n Form 10 -K, Quarterly Rep orts o n Fo rm 10 -Q, Cu rrent Rep orts on Form 8 -K, an d o th er reports as requ ired. Th e p ub lic may read an d co py an y materials we file with th e SEC at th e SEC’s Pu bli c Referen ce Roo m at 1 00 F Street, NE, Washing to n, DC 2 05 49 . Th e pu blic may ob tain in fo rmation o n th e op erat io n o f th e Pub lic Referen ce Roo m b y callin g th e SEC at 1 -8 00 -SEC-0 33 0. We are an electro nic filer and t he SEC maintain s an in ternet site at www.sec.go v th at co ntain s these rep orts and other informatio n filed electro nically by us. We mak e availab le th ro ug h ou r web site, www.p ro tect iv e.co m, ou r annual rep orts o n Fo rm 10-K, qu arterly rep orts o n Fo rm 1 0-Q, curren t rep orts on Form 8-K, an d amend men ts to th ose repo rts as so on as reaso nab ly practi cab le after such materials are electron ical ly filed wit h o r furnish ed to th e SEC. We will furn ish su ch do cuments to an yo ne who req uests su ch cop ies in writin g. Requ est s fo r copi es sho uld b e directed to : Fin ancial Informatio n, Pro tectiv e Life Co rp oratio n, P. O. Box 26 06 , Birming ham, Al abama 3 52 02 , Telep ho ne (2 05) 26 8-39 12 , Fax (20 5) 268 -3 64 2. We also mak e availab le to th e pu blic cu rrent i nformatio n, includ ing finan cial in fo rmatio n, regarding th e Compan y an d o ur affiliates on the Financial In fo rmation pag e of o ur website, www.p ro tect iv e.co m. We en cou rag e in vesto rs, th e med ia an d o th ers in terested in u s an d o ur affiliates to rev iew the in fo rmation we p ost o n o ur web si te. Th e info rmati on fo un d o n o ur web si te i s no t p art of th is or any o t her repo rt filed with o r fu rn ish ed to the SEC. OVERVIEW Our Business On Feb ruary 1 , 20 15 , Pro tectiv e Life Co rp oration (th e “Compan y”) became a wh olly o wned su bsidiary o f The Dai-ichi Life In surance Co mp any, Limited, a kab ushiki kaish a org an i zed un der the l aws o f Jap an (n ow k no wn as Dai-ichi Life Ho ld i ng s, In c., “Dai-ich i Life”), wh en DL In vestmen t (Delaware), In c., a who lly own ed su bsid iary of Dai-ichi Li fe, merged with an d into the Company (the “M erg er”). Prior to Feb ru ary 1, 20 15 , ou r stock was p ub licly traded on th e New Yo rk Sto ck Exchan ge. Su bseq uen t to the Merger, we remai n an SEC registrant for fi nancial rep orting p urposes in the Un ited States. The Co mp any, which is h eadq uartered i n Bi rmin gh am, Alabama, o perates as a ho ld in g comp any for its insurance and other su bsid iaries th at p ro vide fin ancial serv ices primarily in the Un ited States thro ug h the prod uctio n, d istrib ution , and admin istration o f in surance an d in vestmen t p rod ucts. Fo unded in 19 07 , Protecti ve Life In surance Co mpan y (“PLICO”) is ou r larg est op erat in g sub sid i ary. Unless the co ntext o th erwi se req uires, th e “Company,” “we,” “us,” or “ou r” refers to the con so lidated g ro up of Protective Life Co rp oration and ou r su bsid iaries. We hav e sev eral op eratin g segments, each hav in g a strategic focu s. An o perating seg men t is distin gu ished by p rod ucts, chan nels of d istrib utio n, an d/or o th er strategic distin cti on s. We p eriod ically eval uat e o ur op eratin g seg men ts an d make adjustments to ou r seg men t repo rti ng as needed . Ou r o perating segment s are Life M arketing , Acq uisition s, An nu ities, Stab le Val ue Prod ucts, and Asset Protecti on . We h ave an add i tion al repo rtin g segmen t referred to as Corpo rate and Other. •Life Ma rketing—We mark et fixed uni versal life (“UL”), in dex ed u niversal life (“IUL”), variable u niversal life (“VUL”), ban k-owned life insurance (“BOLI”), an d level premiu m term insu ran ce (“traditio nal”) p ro du cts o n a n ation al b asi s primaril y throu gh networks o f indepen den t in surance ag ents an d b ro kers, b rok er-dealers, fin ancial in stitutio ns, in dep end ent distrib utio n organ izatio ns, an d affin ity g rou ps. •Acquisit io ns—We focu s on acqui ring , co nv ertin g, and /o r servicin g po licies and contracts from ot her compan ies. Th is seg men t’s pri mary fo cus is o n life insurance p olicies and ann uity p ro du cts th at were so ld to ind iv id uals. Th e lev el of th e seg ment’s acq uisiti on activity is p red icated u po n man y factors, in clu ding av ailable capit al, op eratin g cap acity, p otential retu rn o n capital, an d market d yn amics. Policies acq uired thro ug h th e Acq uisitions segment are ty picall y block s of b usin ess wh ere no new po licies are being marketed . Therefo re earnin gs and acco un t v alu es are 39 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents exp ected to decline as the result o f lapses, death s, and other terminatio ns of coverage u nless new acqu isitio ns are mad e. •Annuities—We mark et fix ed and variab le annu ity (“VA”) p ro du cts. These pro du cts are primarily sold th ro ug h b ro ker-d ealers, finan cial institu t io ns, an d ind epend ent agen ts an d b ro kers. •Sta ble Va lue Pro ducts—We sel l fi xed and flo ating rate fun din g ag reemen ts d irectly to the tru stees of mun icipal b on d proceeds, mo ney market fund s, ban k tru st dep art ments, an d o th er institu tion al inv estors. Th e segmen t also issues fu nd in g ag reemen ts to the Fed eral Home Loan Ban k (“FHLB”), and markets g uaranteed inv estment co ntract s (“GICs”) to 401 (k ) an d other q ualified reti remen t saving s pl an s. We also h ave an u nregistered fu nd in g agreement-b acked no tes prog ram which prov id es for o ffers of n otes to bo th d omestic an d internatio nal institu t io nal in vestors. •Asset Protection—We mark et extend ed service con tracts, gu aran teed asset protection (“GAP”) p rod ucts, cred it life an d d isability insurance, and o ther specialized anci llary prod ucts to protect co nsu mers’ i nv estments in automob iles, recreation al v ehicles, watercraft, an d p owerspo rts. GAP products are d esig ned to cov er the differen ce between the sched uled lo an p ay-off amo un t and an asset’s actu al cash value in th e case o f a total loss. Each typ e o f speci ali zed anci llary prod uct protects ag ain st d amag e o r o ther loss to a particular asp ect of t he un derlyi ng asset. •Corporate and Other—This seg men t primaril y co nsists of n et in vestmen t in come o n assets su pp ortin g ou r equity cap ital, un allocated corpo rate o verhead , an d ex pen ses no t attribu tab le to the seg ments ab ov e (incl ud in g interest on corpo rate deb t). This seg men t includ es earn in gs from several n on -strateg ic or run off l in es o f bu siness, fin an cin g and inv est ment related transactions, an d th e operations o f several small sub sid i ari es. RECENT SIGNIFICANT TRANSACTIONS The Linco ln Natio na l Life Insurance Co mpa ny On May 1 , 2 01 8, Th e Linco ln Natio nal Life Insurance Co mp any (“Lin coln Life”) co mp leted th e acq uisition (the “Closin g”) of Libert y Mut ual Grou p In c.’s (“Liberty M utual ”) Group Benefits Busin ess an d Ind iv id ual Life an d An nu ity Bu siness (the “Life Bu sin ess”) th ro ug h th e acq uisition of all o f the issued and o utstand in g capital sto ck of Liberty Life Assurance Co mp any o f Bosto n (“Liberty ”). In co nn ection with the Clo sing and p ursuan t to th e M aster Tran saction Agreemen t, dated Jan uary 1 8, 2 01 8, PLICO and Protective Life an d An nu ity Insurance Company (“PLAIC”), a wh olly own ed su bsid iary o f PLICO, entered into reinsurance ag reemen ts (th e “Rein surance Agreemen ts”) an d related ancillary do cu men ts (in clu ding ad ministrativ e services ag reements an d tran sition servi ces ag reement s) p ro vidin g for th e rei nsu ran ce an d ad minist ratio n o f the Life Busin ess. Pursu ant to the Rein surance Ag reemen ts, Liberty ced ed t o PLICO an d PLAIC th e insurance po licies relat ed to th e Life Busin ess on a 1 00 % co insu ran ce b asis. Th e aggreg ate ceding co mmissio n fo r the reinsu ran ce o f t he Life Bu si ness was $4 22 .4 millio n. All pol icies issu ed in states other than New York were ceded to PLICO u nd er a reinsurance agreement between Lib erty an d PLICO, and all po licies issu ed in New York were ceded to PLAIC u nder a rei nsu ran ce agreemen t between Lib erty and PLAIC. Th e ag gregate statu to ry reserves of Lib erty ceded to PLICO an d PLAIC as o f th e closin g of th e Tran saction were app ro ximately $13.2 billion , wh ich amount was based o n in iti al estimates an d is sub ject to adjustmen t follo win g th e Closing. Pu rsu ant to th e terms o f th e Reinsurance Ag reemen ts, each of PLICO an d PLAIC are req uired to maintai n assets in trust for t he b en efit of Liberty to secu re their resp ective ob ligatio ns to Libert y un der th e Reinsurance Agreements. Th e trust acco un ts were initially fu nd ed by each of PLICO an d PLAIC principal ly with the in vestmen t assets that were received fro m Liberty. Ad dit io nally, PLICO and PLAIC hav e each agreed to p ro vid e, o n behalf of Li berty, admin istration and po licyh older serv icing of th e Life Business reinsu red by it pu rsuan t to ad mi nistrativ e serv ices agreemen ts b etween Liberty and each of PLICO and PLAIC. Great-West Life & Annuity Insura nce Company On Jan uary 2 3, 20 19 , PLICO entered i nto a Master Tran saction Ag reement (the “ GWL&A Master Tran saction Ag reemen t”) with Great-West Life & An nu ity In surance Compan y (“GWL&A”), Great-West Life & An nui ty In surance Compan y o f New Yo rk (“GWL&A o f NY”), The Canada Life Assu ran ce Co mp any (“CLAC”) an d The Great-West Life Assu rance Co mp any (“GWL” and , to gether with GWL&A, GWL&A of NY and CLAC , th e “Sel lers”), p ursu ant to wh ich PLICO will acquire v ia rein surance (th e “Transacti on ”) su bstantiall y all of th e Sel lers’ in dividu al life in su rance and ann uity bu siness (the “Indi vidu al Li fe B usiness”). Pu rsuant to th e GWL&A Master Tran sactio n Agreemen t, PLICO an d PLAIC, will enter i nto reinsurance agreements (the “Reinsu ran ce Agreements”) and rel ated an cillary d ocu men ts at th e clo sing of th e Tran saction. On the terms and su bject t o the con ditio ns of th e Reinsurance Ag reemen t s, the Sellers will ced e to PLICO and PLAIC, effect iv e as o f th e clo sing of the Transacti on , su bstantially all of th e insu ran ce po licies relating to th e In dividu al Life Busin ess. To sup po rt its o blig ation s un der th e Reinsu ran ce Agreements, PLICO will estab lish trust accou nts fo r the b en efit o f GWL&A, CLAC and GWL, and PLAIC will est ab l ish a trust acco un t for t he ben efit o f GWL&A o f NY. The Sellers will retain a blo ck of particip ating po licies, wh ich will be ad minist ered b y the Co mpan y. The Transactio n is su bject t o the satisfaction or waiv er o f cu sto mary closin g conditio ns, includ i ng reg ulato ry app ro vals and th e executio n of th e Reinsuran ce Agreements and related ancillary docu men ts. The GWL&A M aster Tran saction Ag reemen t an d oth er transacti on docu men ts co ntain certain cu stomary represen tat io ns an d warranties made b y each o f the p art ies, and certain customary cov enan ts regarding th e Sellers and th e In dividu al Life Bu siness, an d p ro vide for in demnification , amo ng other th in gs, for breaches o f tho se rep resen tatio ns, warran ties and cov enants. 40 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents RISKS AND UNCERTAINTIES The facto rs which cou ld affect o ur futu re resu lts in clu de, b ut are n ot li mi ted t o, general econ omic co nd iti on s an d th e foll owin g risk s and un certainti es: Gen eral •we are con trolled by Dai-ich i Life, which h as the ability to mak e impo rtant decisio ns affectin g o ur bu siness; •exp osure to risk s rel ated t o natural and man-mad e d isasters an d catastrop hes, su ch as d iseases, ep id emi cs, p and emi cs, malicio us acts, cy ber attacks, terrori st acts, and cli mate ch ang e, wh ich co uld ad versely affect o ur op erat io ns an d result s; •a d isru ptio n or cyb er attack affectin g th e electro nic, commu nication an d in fo rmation techn olog y systems o r other t ech no lo gies of t he Co mp any or t ho se on wh om th e Co mp any relies co uld ad versely affect o ur bu sin ess, fin anci al con dit io n, and results o f o peration s; •con fiden tial info rmation maint ain ed in th e systems of th e Comp any or other parties up on which we rely coul d b e co mp ro mised o r misap prop riated as a resu lt o f security breaches o r other related lapses o r in cid en ts, damaging o ur b usiness and repu tatio n and adv ersely affecting ou r financial co nd itio n an d results of op eratio ns; •ou r resu lts and finan cial co nd ition may b e negatively affected sho uld act ual ex perien ce d i ffer fro m man agement’s mo dels, assu mption s, or est imates; •we may n ot realize our an ticipated finan cial resu lts fro m o ur acquisitio ns strategy ; •we may ex perien ce co mp etition in ou r acq uisition segment ; •assets allocated t o t he M ONY Clo sed Block benefi t o nly the hol ders of cert ain policies; adv erse p erforman ce o f Closed Blo ck assets o r adverse exp erience of Clo sed Block liabilities may neg atively affect u s; •we are dep end en t on th e p erforman ce o f ot hers; •ou r risk management p olicies, p ractices, an d procedures cou l d leave us exp osed to un id entified o r un anticipated risks, which cou ld n egativ ely affect o ur bu si ness o r resu lt in lo sses; •ou r strat eg ies fo r mi tigatin g ri sks arisi ng from our day -to-day op eratio ns may prov e ineffective resu ltin g in a material ad verse effect on ou r results o f o perations an d fin ancial con dition; •even ts that d amag e o ur repu t ati on o r the rep utation of o ur in du stry co uld adv ersely imp act ou r business, result s of o peration s, or finan cial con ditio n; •we may n ot be ab le to pro tect o ur int ellectual prop erty an d may be sub ject to infrin gemen t claims; •dev elo pments in tech no lo gy may impact o ur bu siness; Fin an cia l En viron men t •int erest rat e flu ctu ation s and sustai ned p eriod s of lo w or h i gh interest rates cou ld neg atively affect o ur in terest earning s and spread in come, o r oth erwise imp act o ur bu si ness; •ou r inv estments are sub ject to market an d credit risks, which could b e h eig htened durin g perio ds o f extreme v olatility or d isru ptio n in finan cial and cred it market s; •cred it market vo latility o r di sru pti on co uld ad versely impact th e Co mp any ’s finan cial co nd ition or resu lts fro m o perati on s; •disrup tio n of t he capital and credit mark ets co uld n egativ ely affect t he Company’s ability to meet its l iq uidity and finan cial needs; •equ ity mark et v olatilit y cou ld neg atively imp act o ur bu sin ess; •ou r use o f d eri vat iv e fi nancial instruments within o ur risk man ag emen t strategy may no t b e effectiv e or suffici ent ; •ou r ab ili ty to grow dep end s in l arge p art up on th e con tinu ed availab ili ty of cap ital; •we co uld b e fo rced to sell in vestmen t s at a lo ss to co ver po licyh older withd rawals; •difficult g eneral econ omic con ditio ns co uld materially adv ersely affect o ur business an d resu lts of op eratio ns; •we may be requ ired to estab lish a valuatio n allowance ag ain st ou r d eferred tax assets, wh ich cou ld h av e a material adv erse effect on o ur results of operatio ns, finan cial co nd iti on , an d cap ital p osit io n; •we co uld b e adv ersely affect ed by an inab ility to access o ur cred it facility ; •the amo un t o f statut ory capital or risk -b ased cap ital that we h ave and th e amou nt of statu to ry capital or risk -b ased capital th at we mu st ho ld to maintain ou r financial strength an d credit rating s and meet other req uiremen ts can vary sig nificantly from time to time an d is sen si tive t o a nu mb er o f facto rs outside o f o ur con trol; •we co uld b e adv ersely affect ed by a ratin gs d own grade o r o th er n eg ative actio n b y a rati ng organization ; •we op erate as a h olding company and dep end on th e ab ility of our su bsid iaries to tran sfer fun ds to u s t o meet ou r o blig ation s; •we co uld b e adv ersely affect ed by an inab ility to access FHLB lend i ng ; •ou r secu rities lend in g p ro gram may su bject u s to liqu i dity and ot her risks; •ou r finan cial con dit io n o r resu l ts of op eratio ns cou ld b e adv ersely impacted if ou r assumptio ns reg ard in g th e fair value an d fu tu re p erforman ce of our in vestmen ts d iffer fro m actu al ex perien ce; •adv erse action s o f certain fun ds o r th eir ad visers co uld have a d etrimental impact on o ur ab ility to sell ou r variab le life and annuity prod ucts, o r maintain curren t levels of asset s in th ose p rod ucts; In du stry a nd Regu lat io n •the b usin ess o f ou r compan y is high ly regu lated and is sub ject to rout in e aud its, examinatio ns, and actio ns by regu lators, law en fo rcemen t agen cies, and sel f-reg ulato ry organ izatio ns; •we may b e sub ject to reg ulation s of, or reg ulatio ns influenced by , in ternat io nal regul ato ry au tho rities or ini tiatives; •NAIC action s, pron ou ncement s and in itiativ es may affect ou r p ro du ct p ro fit abi lity, reserv e an d capit al req uirements, fin an cial con dition or results o f o perations; 41 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents •ou r u se of cap t iv e rein su ran ce compan ies to fin ance statu to ry reserves related to ou r term an d u niversal life prod ucts and to red uce vo latility affecting ou r v ariable ann uity prod ucts, may be limited or adv ersely affected b y regu lat ory actio n, pro no un cements and in terpretatio ns; •laws, reg ulation s and i nitiatives related to un rep orted d eath s an d un claimed p ro perty an d death b enefits may result in o peration al bu rdens, fin es, un ex pected p aymen ts or escheatments; •we are su bject to insu ran ce g uaranty fun d laws, ru les an d regu latio ns that cou ld adv ersely affect ou r fin anci al con dit io n o r results of op erat io ns; •we are su bject to insu rab le interest laws, rules and reg ulation s that co uld ad versely affect o ur finan cial co nd iti on or resu lts o f o peration s; •the Healt hcare Act an d related reg ulatio ns co uld ad versely affect ou r resu lts of op eratio ns or finan cial co nd ition ; •laws, ru les an d regul ati on s p ro mu lg ated in con nectio n with the en actmen t of th e Dod d-Frank Wal l Street Reform an d Co nsumer Pro tectio n Act may adv ersely affect o ur results of op erations o r fin ancial conditio n; •new an d amen ded reg ulations regarding the stand ard of care o r stan dard o f co nd uct app licable to i nv estment profession als, in surance ag encies, and finan cial institu tion s th at reco mmend o r sell an nu ities o r l ife insurance prod ucts may h ave a material ad verse impact o n o ur ab ili ty to sell ann uities and oth er pro du cts an d t o retain in-fo rce bu siness an d o n o ur fin an cial con dition or results o f o peration s; •we may b e sub ject to regu l ati on , i nv estigatio ns, enfo rcemen t action s, fines an d pen alties imp osed b y th e SEC, FINRA an d o th er fed eral and int ern ati on al reg ulators in con nectio n with o ur business op eratio ns; •chan ges to tax law, o r interp retation s o f ex isting tax law coul d adversely affect o ur ability to co mp ete with n on -in surance p ro du cts or red uce the demand fo r certai n i nsu ran ce p rod uct s; •fin ancial serv ices compan ies are freq uentl y th e targ ets o f legal p ro ceed i ng s, in cludi ng class action li tigatio n, which cou ld resu lt in sub st an tial jud gmen ts; •the fin anci al services and insuran ce in du stries are sometimes th e target of law en forcement i nv estigatio ns and the focu s o f increased regu latory scrutin y; •new acco un ting rules, ch ang es to existin g acco unt in g ru les, or the grant o f permitted accou ntin g practices to competitors could n egativ ely impact us; •if o ur b usin ess d oes no t perfo rm well, we may be req uired to recog nize an impairmen t of o ur g oo dwi ll and ind efinit e lived intang ib le assets which co uld adv ersely affect ou r resu lts of op eratio ns or finan cial co nd iti on ; •use of rei nsu ran ce introd uces v ariabi lity in ou r stat ements o f income; •ou r rein surers co uld fail to meet assumed obl ig ation s, in crease rates, termin ate agreements or be su bject to ad verse develop men ts that co uld affect u s; •ou r policy claims fluct uat e from p eriod to period resu ltin g in earning s vo l ati lity ; •we o perate in a matu re, hig hly competitive in du st ry, which cou ld limit o ur ab ility to g ain or maint ain o ur po si tion in the ind ustry and neg atively affect profitabilit y; an d •ou r ab ili ty to mai ntain co mp etitiv e u nit co sts is depen den t u po n the level o f new sales an d p ersistency o f ex isting bu si ness. For more i nformatio n ab ou t th e risk s, u ncertainties, and other facto rs th at co uld affect o ur future results, please see It em 1 A, Risk Factors, of th is report. CRITICAL ACCOUNTING POLICIES Ou r accoun ting po licies requ i re the u se of judgmen ts relating to a variety o f assumpti on s and estimates, incl ud in g, b ut no t limited to exp ectat io ns o f cu rrent and fu tu re mortality, morbid ity, p ersistency, exp enses, an d i nterest rates, as well as exp ectatio ns arou nd th e valuat io ns o f inv est ments, securities, and certain intang ib le assets. Becau se of th e inh eren t u ncertaint y when u sing th e assumptio ns an d estimates, the effect o f certain acco un tin g pol ici es un der differen t cond itio ns or assumptio ns cou ld be materially d ifferent fro m tho se rep orted in th e con soli dat ed fin an cial statemen ts. A d iscu ssion of ou r v arious cri tical accou ntin g p olicies is presented b elo w. Fa ir va lue of fina ncial instruments—th e Fin ancial Acco un ting Stand ard s B oard (“FASB”) gu id ance defin es fair v alu e fo r accou nting p rin cip les generally accep ted i n the Un ited States of America (“GAAP”) and establish es a framework fo r measuring fair value as well as a fair val ue h ierarch y based on th e qu ality o f in pu ts used to measu re fair value an d en han ces d isclosure req uirements fo r fai r value measurements. The term “fair v alu e” in this do cu men t is defin ed in acco rd ance with GAAP. Th e standard describ es th ree l ev els o f inp uts t hat may be u sed t o measu re fair v alu e. For mo re i nformatio n, see Note 2 , Su mma ry o f Sig nifican t Accou ntin g Po licies an d No te 6 , Fair Va lu e o f Fina ncial Instruments , to th e co nso lid ated financial statements in clu ded in th is report. Avai lab le-fo r-sale securities and trading accou nt secu rities are reco rd ed at fair value, wh ich is primarily based on actively traded markets wh ere prices are based o n eith er direct mark et qu otes or o bserv ed transactio ns. Liqui dity is a sig nificant factor in the determin ation o f the fair v alu e for th ese securities. Market p rice qu otes may no t be readily av ail ab l e fo r so me p ositio ns or for some po sition s withi n a market sect or where t rad in g activ i ty h as slowed sig nificantly o r ceased. These situ ati on s are g en erally trig gered b y th e mark et’s percep t io n of cred i t un certainty reg ard ing a sin gle compan y or a sp ecific mark et secto r. In these in stances, fair v alu e is determin ed based on limited avai lable mark et in fo rmation and o th er fact ors, p rincipally fro m rev iewi ng the issuer’s fin ancial po sition , ch ang es in credit ratings, an d cash flo ws o n t he in vestmen ts. As o f Decemb er 3 1, 2 01 8, $1 .2 billion of av ailable-for-sale and trading acco un t assets, exclud i ng ot her lo ng -term in vestmen ts, were classified as Lev el 3 fair v alu e assets. For securities th at are priced v ia n on -b ind in g ind epend ent brok er q uo tations, we assess whet her p rices received from in dep enden t b rok ers represent a reaso nable estimate o f fair v alu e th ro ug h an analysis u sin g intern al and extern al cash flo w mod els d evelop ed based o n sp read s and , wh en avai lab le, market in dices. We u se a market-b ased cash flow an aly sis to valid ate th e reason ableness of p rices receiv ed from ind ependent b rok ers. These analytics, which are up dated d aily, i ncorp orate v ariou s metri cs (yield curv es, cred it spread s, prep ayment rates, etc.) to d etermine th e valuatio n of su ch ho ld in gs. As a result of this an aly sis, if we 42 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents determine th at th ere is a mo re ap prop riate fair val ue b ased up on the an aly tics, the price receiv ed from the indepen den t brok er is adjusted acco rdi ng ly. As o f Decemb er 3 1, 2 01 8, we did n ot adjust any prices receiv ed fro m i nd epend ent brok ers. Derivatives —We u tilize a risk man agemen t strategy that inco rp orates th e u se o f deriv ative finan cial instruments to reduce exp osu re to certain risk s, in clu ding b ut no t limited to, in terest rate risk , infl ati on risk, curren cy exch ang e risk, vo latili ty ri sk, and equ ity market risk. Assessing th e effectiv eness o f the hedg ing prog rams an d ev alu ating t he carry in g v alu es o f th e related deriv atives often inv olve a variet y o f assumpti on s and estimates. Deriv ative finan cial in struments are valued u sin g exchan ge p rices, ind epen den t b ro ker q uo tatio ns, or p ricin g valuatio n mod els, wh i ch u tilize market d ata inp uts. Th e fair values of most of ou r d erivat iv es are determin ed usin g exch ang e p rices or in dep en den t b ro ker qu otes, but certain deriv ati ves, includin g emb edd ed deriv atives, are valued based u po n in du stry stand ard models wh ich cal cu late the present-v alu e o f th e pro jected cash flo ws o f th e d erivativ es u sing current and imp lied fut ure mark et co nd i tion s. Th ese mo dels includ e market-o bservab le estimates of v olatilit y an d interest rates in the d eterminat io n o f fair value. Th e use of differen t assumptio ns may h ave a material effect o n the estimated fai r v alue amou nts, as well as th e amou nt of rep orted net inco me. In add ition , measuremen ts o f in effecti veness of hed ging relation ship s are su bject to interp retation s and est imation s, and any d i fferen ces may result in material chan ges to o ur results o f op eratio ns. Th e fair v alu es of deriv ative assets and l iabilities in clude adjustment s fo r mark et liq uid ity, co un terparty cred it qualit y, an d o th er d eal sp ecific facto rs, where app ro priate. Th e fair val ues o f deriv ative assets and liabil ities traded in the o ver-th e-cou nter market are d etermined usin g qu an t itative mod els th at requ ire the u se o f multip le mark et in pu ts in clu ding interest rates, prices, an d in dices t o g enerate co ntin uo us yield o r pricing curv es and v olatilit y facto rs. The p red omin ance of market input s are act iv ely qu oted an d can be v alidat ed throu gh extern al sou rces. Estimatio n risk is g reater for d eri vativ e finan cial in struments that are either o ptio n-based o r h ave lo ng er matu rity d ates where ob serv able market inp uts are l ess readi ly availab le or are un ob serv able, in wh ich case qu antitative based extrap olations of rate, p rice, or in dex scenario s are u sed in d etermi ning fair v alu es. As of Decemb er 3 1, 20 18 , th e fair value o f deriv ati ves rep ort ed on o ur balance sheet in “other lo ng -term in vestmen ts” and “o ther liab ilities” was $3 75 .8 million an d $75 5.5 millio n, respectively. Of th ose d erivativ e assets an d liab ili ties, $1 12 .3 million and $6 29 .9 million , resp ectively, were Lev el 3 fair v alu es det ermin ed by qu antitativ e mod els. Eva luatio n o f Other-Tha n-Tempo ra ry Imp airments —On e of the sig nificant estimates related to av ailable-for-sale and h eld -to-maturity securities is th e ev alu ation of inv estments for other-th an -temp orary imp airments. If a decline in th e fair v alu e of an av ailable-for-sale o r h eld -to -matu rity securi ty is ju dg ed to b e oth er-th an-tempo rary, the secu rity’s basis is adjusted , and an o ther-t han-temporary imp airment is reco gn ized throu gh a charge in the statemen t of i ncome. Th e po rtion o f th is other-th an -temp orary imp airmen t related t o credit lo sses on a secu rity is reco gn ized in earning s, wh ile t he n on -credit po rti on , represen ting the d ifference b etween fair v alu e and the d isco un ted exp ected fu ture cash flows o f th e security, i s reco gn ized within other comprehen sive in come (loss). The fair v alu e of the other-than -temp orarily imp aired in vestmen t b ecomes its new co st basis o n th e d ate an other-th an-temporary imp airmen t is recog nized. Fo r fix ed matu rities, we accrete the new co st b asis to par o r to th e estimat ed fu tu re value ov er th e ex pect ed remainin g life of th e secu rity by ad justin g the secu rity ’s fu tu re y ields, assumin g that fu tu re ex pected cash flo ws on th e securities can be pro perly estimated. Determin in g wh eth er a d ecline in th e curren t fair v alu e of inv ested asset s is oth er-th an-tempo rary is b oth ob jectiv e an d sub jectiv e, and can involv e a variety of assumptio ns an d estimates, particularly for in vestmen ts that are n ot acti vely traded in established mark ets. For ex amp le, assessing th e v alu e o f certain inv estments req uires that we p erform an analysis o f expected fu tu re cash flo ws, in clu ding rates of p rep ayments. Oth er in vestmen ts, such as co llateralized mortg age or bo nd ob ligation s, rep resen t selected tran ches o f a stru ctu red transactio n, sup po rted in the agg reg ate b y und erl ying in vestmen ts in a wide variety o f issuers. M an agement con siders a nu mb er of factors wh en d etermining the imp airmen t status of i nd iv id ual securities. Th ese inclu de th e eco no mic co nd iti on o f v ariou s in du stry seg men ts an d geo graph ic location s and other areas of iden tified risks. Alth ou gh it is p ossib le for the imp airment of on e inv estment t o affect o th er inv est ments, we eng ag e in on go in g risk management to safeg uard against and l imit any fu rther risk to our i nv estment po rtfo lio . Sp ecial atten tion is gi ven to co rrelativ e risk s within specifi c ind ustries, related p arties, an d b usiness markets. For certain securitized fin anci al assets with contractual cash flows, includ in g o ther asset-back ed securities, th e ASC Investments-Oth er Top ic requi res u s t o p eriod ical ly up dat e our b est estimate o f cash flo ws ov er the life of t he security. If the fair value o f a secu rit ized fi nancial asset is less t han its co st o r amortized cost an d there h as b een a d ecrease in th e p resen t val ue o f th e estimated cash flows since the last revised estimate, co nsiderin g bo th timing an d amou nt, an o th er-t han-t empo rary impai rmen t ch arg e is reco gn ized. Estimatin g fu tu re cash flows is a q uan titative and qualit ative p ro cess t hat in corpo rates in formatio n received fro m third p arty sources alon g with certain in ternal assu mp tions an d ju dg ments regarding the future performance o f th e un derly in g collateral. Projection s of ex pected fu ture cash flows may ch ang e b ased u po n n ew informatio n regardi ng the p erforman ce o f the un derly ing co llateral. In ad dition , we co nsid er o ur in ten t and ability to retai n a tempo rarily d epressed secu rity u ntil reco very. Each q uarter we review in vestmen ts with un realized lo sses and t est fo r other-than -temp orary imp airmen ts. We analyze v ariou s facto rs to determine if an y specific other-than -temp orary asset impai rment s exist. These includ e, bu t are no t limited to : 1) action s taken by ratin g ag enci es, 2) default b y th e issuer, 3) th e sign ifi can ce of the d ecline, 4 ) an assessmen t of ou r in ten t to sell the security (incl ud in g a more lik ely than no t assessment o f wh eth er we will b e requi red to sell the security ) b efo re reco verin g t he security’s amortized cost, 5) th e du ratio n o f the declin e, 6 ) an eco no mic an aly si s of th e issu er’s ind ustry, an d 7 ) th e finan cial stren gth, liq uidit y, and recoverab ili ty o f the issuer. M an agement p erforms a security b y security review each q uarter in ev aluati ng the need for any ot her-than -temp orary impairmen ts. Altho ug h n o set fo rmula is u sed in this p ro cess, th e in vestmen t p erforman ce, co llateral p osit io n, and co nti nu ed v iab ility of th e issuer are sig nificant measu res con sid ered , and in so me cases, an analysis regarding our exp ectations for recovery of th e security ’s en tire amortized cost basis th ro ug h the receipt o f future cash flows i s perfo rmed . On ce a determin ation has been made th at a specific o ther-t han-temporary impairmen t ex ists, the securi ty ’s basis i s adjusted, and an o th er-th an-tempo rary imp airmen t is reco gn ized. Equ ity secu rities that are other-than -temp orarily impaired are written d own to fair value with a realized loss recogni zed in earning s. Other-than -temp orary i mp airments to deb t securities that we do n ot i ntend to sel l an d do not exp ect to be req uired to sell before reco vering th e secu rity ’s amortized co st are wri tten d own to di scou nted ex pected fu tu re cash flo ws (“post impai rmen t co st”), and credit l osses are recorded in earning s. The d ifference bet ween the secu rities’ discou nted ex pected fu tu re cash flows and th e fair value of th e securities on th e imp airmen t d ate is reco gn ized in o t her 43 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents co mp reh ensive income (lo ss) as a n on -credit p ortion imp airmen t. When calcu latin g th e p ost impairment co st for resid ential mort gage-back ed securities (“RMBS”), co mmercial mo rtgag e-b acked securities (“CMBS”), an d o th er asset-backed securities (co llecti vel y referred to as asset-b acked secu rities o r “ABS”), we co nsid er all k no wn mark et data related to cash fl ows to estimate future cash flows. When calcu lat in g the p ost imp airmen t co st for corp orate d eb t securities, we co nsid er all con tractu al cash flo ws to estimat e exp ected fu tu re cash flo ws. To calculate the p ost impai rment cost, the ex pected fu tu re cash flo ws are d iscount ed at the orig inal pu rch ase y ield. Deb t securities that we in ten d to sell or ex pect to be req uired to sell befo re reco very are written down to fair value with the chan ge recogni zed in earn in gs. Ou r specific acco un ting p olicies related to o ur in vested assets are discu ssed in Note 2, S ummary o f S ig nifican t Acco un ting Policies, and No te 5, Investment Op eratio ns, to th e co nso lid ated fin ancial statements. As of Decemb er 31 , 2 01 8, we h eld $50 .3 billi on o f availab le-fo r-sal e inv estments, in clu ding $40 .0 b illio n in inv estments with a g ro ss un realized lo ss of $2.8 b illion, an d $2 .6 bi llio n of h eld -to-maturi ty i nv estments with a gross un recog nized h olding lo ss o f $86 .3 million. Reinsura nce—For each of ou r reinsu ran ce con tracts, we must d etermine if the con tract prov id es ind emn ificatio n against lo ss o r l iab ility relating to in surance risk, i n acco rd ance with ap pli cab le acco un tin g stan dards. We mu st rev iew all co ntractual featu res, particularly tho se that may limit the amo un t of in surance risk to which we are su bject or features that delay th e timely reimbu rsement of claims. If we d etermine that the po ssibilit y of a sign i fican t loss from in surance risk wi ll o ccur o nly u nd er remote circu mstances, we reco rd th e co ntract u nd er a d epo si t metho d of acco un ting with th e n et amo un t payab le/recei vable reflected in other rein surance assets o r liabilities on o ur con so lidated balance sh eets. Fees earn ed o n the co ntracts are reflected as ot her reven ues, as o pp osed t o premiums, i n o ur co nsolid ated statemen ts o f inco me. Ou r reinsu ran ce is ced ed to a diverse group of reinsurers. The co llectability o f reinsuran ce is largely a fu nct io n o f th e solven cy o f th e in divid ual rei nsu rers. We p erform perio dic credit rev iews on o ur rei nsu rers, fo cusing o n, amo ng o th er thi ng s, financial capacity, stability, tren ds, and co mmitmen t to th e rei nsu ran ce business. We also requ ire assets i n trust, let ters o f cred it, o r o th er accep tab le col lateral to sup po rt balances du e fro m reinsu rers no t autho rized to transact b usiness in the ap plicab le ju risd ictio ns. Despit e t hese measures, a rein surer’s inso lvency, in ability, or unwilling ness to mak e pay men ts u nd er th e terms of a reinsu ran ce co ntract cou ld have a material adv erse effect on o ur resu lts of o peration s an d fin an cial co nd ition . As of Decemb er 31 , 2 01 8, our third party rei nsu ran ce receiv ables amoun ted to $4.8 bil lion . These amo unt s in clu de ceded reserve b alances an d ceded ben efit p aymen ts. We account for reinsu ran ce as requi red b y FASB g uidan ce under the ASC Finan cial Serv i ces Topi c as ap plicab le. In accordan ce with thi s gu id ance, co sts fo r reinsurance are amort ized as a level percen tag e o f premiums fo r trad itio nal life products and a l ev el p ercentage of estimated gross profits fo r un iv ersal life p rod ucts. According ly, ceded reserv e an d d eferred acqu isit io n co st b alan ces are established using metho do lo gies co nsistent with tho se used in estab lishin g direct pol icy ho ld er reserves and d eferred acqu isitio n costs. Estab lish in g th ese b alan ces requ ires the use of v ariou s assumpti on s includ ing in vestmen t retu rn s, mo rtality, p ersistency, and expen ses. Th e assumptions made for est ab l ish in g ced ed reserv es and ced ed d eferred acq uisition co sts are co nsistent with tho se used for estab lish in g d irect p olicy ho ld er reserv es and deferred acqu isit io n costs. Assumptio ns are also mad e reg ard ing fu ture reinsuran ce premium rates and allowan ce rates. Assumptio ns mad e fo r mo rtalit y, persisten cy, and ex pen ses are co nsistent with those used fo r establishi ng di rect p oli cy ho l der reserves and deferred acqu i sition co sts. Assu mp tion s mad e fo r futu re reinsurance premium and allowance rates are co nsistent with rates prov id ed fo r in ou r v arious rein su ran ce ag reements. For certain of o ur reinsurance agreemen ts, premi um an d allo wance rates may be chan ged b y rein su rers on a prospective b asis, assumin g certain con t ractu al co nd itions are met (p rimarily th at rates are ch ang ed fo r all co mp anies with wh ich th e reinsurer h as si milar agreements). To th e ext en t th at future rates are mod ified , th ese assu mp tion s woul d b e rev ised and bo th cu rrent and future results wo uld be affected . For trad i tion al life pro du cts, assu mp tion ch ang es g enerally do n ot affect cu rrent resu lts. Fo r u niversal life prod uct s, assumptio ns are peri od ically u pd ated when ever actual exp erience and /o r exp ectatio ns fo r the fu tu re differ fro m th at assu med . When assumptio ns are up dated for un iv ersal life p ro du cts, ch ang es are reflected in the inco me statemen t as p art of an “u nlockin g” process. Du rin g t he year ended December 31 , 20 18 , we adjusted o ur estimates of future reinsuran ce co sts in both the Acq uisition s and Life Marketin g segments, resul ting in an app ro ximate $31 .5 million un favorab l e imp act. Deferred Acquisitio n Co sts a nd Va l ue o f Business Acq uired —In con ju nction wi th the M erg er, a p ort io n of th e p urchase price was allo cated to the righ t to receive fu tu re gross p ro fits fro m cash flows and earn in gs o f th e Compan y’s in su rance po licies and inv estment co ntract s as of the date of the M erger. This intang ib le asset, called v alu e of business acqu ired (“VOBA”), is based o n the actuarially estimated p resen t valu e o f fu tu re cash flo ws fro m th e Co mp any ’s insu ran ce po l ici es and inv estment con tracts in-fo rce o n th e date o f th e Merger. The esti mated p resen t val ue o f fu tu re cash fl ows u sed in the calculation of t he VOBA is based on cert ain assumpti on s, in clu ding mortality, persisten cy, ex pen ses, and i nterest rates that th e C ompany exp ects to ex perien ce in future y ears. The Co mp any amo rtizes VOBA in propo rtio n to gro ss p remiu ms fo r traditio nal life prod ucts, o r estimated gross margins (“EGMs”) fo r p art ici pat in g t raditio nal life pro du cts with in th e MONY b lock. For in terest sen sitive p ro du cts, the Compan y u ses vario us amortization bases includ ing ex pected gross pro fits (“EGPs”), rev enu es, o r in su ran ce in -fo rce. VOBA amortization includ ed accrued interest credited to acco un t balances of u p to ap proxi mately 7 .1%. VOBA is su bject to an nu al reco verabilit y t esting . We incur sign ificant costs in co nn ection with acq uiring new insurance bu sin ess. Po rtion s of these costs, which are determin ed to be in cremen tal direct co sts associated wi th successfully acq uired po licies an d coinsurance of b locks o f p olicies, are deferred and amortized o ver future perio ds. Some ex amp les o f acq uisition costs t hat are sub ject to deferral includ e co mmissio ns, un derwriting testin g fees, certain direct underwriti ng co sts, and premium taxes. The d eterminatio n of which costs are d eferrab le must be made o n a con tract-lev el basis. (All o th er acq uisition -related costs, includi ng market research , ad ministratio n, manag emen t o f distribu tion an d u nd erwriting fu nctio ns, and pro du ct d evelop men t, are con si dered n on -d eferrab le acq uisition costs and mu st be exp ensed in the p eriod in curred .) Th e recov ery o f the d eferred co st s is d epen dent on th e fu tu re pro fitab ility o f the relat ed po licies. Th e amou nt of fut ure profit i s dep end ent prin cip ally o n in vestmen t retu rns, mortality, mo rb idi ty, p ersist ency, and exp enses to admin ister th e bu sin ess an d certain eco no mic variables, su ch as inflatio n. Th ese costs are amortized o ver th e ex pected l iv es of 44 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e con tracts, b ased on the lev el an d t imin g of eith er gross p rofits or g ro ss premiums, d epen ding o n th e typ e o f con tract. Rev i sio ns to estimates resu lt in ch ang es to th e amounts ex pen sed in t he repo rtin g perio d in which the rev ision s are mad e and co uld resu lt in th e impairment of the asset and a charge to in come if estimated fu tu re pro fits are less th an th e u namortized deferred amou nts. As of Decemb er 31 , 2 01 8, we h ad a d eferred acqu isitio n costs (“DAC”) and VOBA asset o f $3.0 billion . We p eriodi cally rev iew an d u pd ate as app ro priate ou r key assumptio ns on cert ain life and ann uit y p ro du cts includ in g fu tu re mortality, exp enses, lapses, p remiu m p ersistency, inv estment y ields, and int erest sp read s. Chan ges to these assumptions result in ad ju stments wh ich increase or d ecrease DAC and VOBA amortizat io n and /or benefits an d exp enses. Go od will—Acco un ting fo r go od will req uires an estimate o f th e future p ro fitabi lity o f the associated l in es o f bu siness with in o ur o perating seg men ts to assess the recov erabil ity of t he cap italized g oo dwill. We ev alu ate th e carrying v alu e of good will at the segment (or repo rtin g un it) lev el at least ann ually an d b etween ann ual ev alu ation s if even ts o ccu r o r ci rcu mstances chan ge th at wou ld mo re l ik ely than no t redu ce the fair v alu e o f the reportin g u nit b elo w its carry ing amo un t. Su ch circumstan ces coul d in clu de, b ut are n ot limited to : 1) a sign ifican t adv erse chang e in leg al factors or in bu siness climate, 2) un anticipated co mp etition , or 3 ) an adv erse actio n or assessment b y a regu lator. Wh en ev alu ating whether go od will is impaired, we fi rst d etermi ne throu gh qu ali tat iv e analysis wh eth er rel ev ant ev en t s and circu mstances in dicate that it is mo re likely than n ot t hat segment g oo dwill b alances are imp aired as o f th e testin g date. If the qu alitativ e an aly sis d oes no t ind icat e that an imp airment of seg men t goodwill is more likely th an no t t hen n o other specific quanti tat iv e impairmen t testin g is req uired . If it is d etermined that it is more likely th an n ot that imp airment ex ists, we p erform a qu antitative assessment and co mpare o ur estimate o f th e fair value of t he rep ort in g u nit to wh ich th e go od will is assig ned to th e rep ortin g u nit’s carry ing amou nt, i ncl ud in g g oo dwill. We utilize a fair v alu e measuremen t (which includ es a d isco un t ed cash flo ws an aly si s) to assess th e carry in g v alu e o f the rep ort in g units in co nsideration of th e recov erab ility o f the go odwill balan ce assig ned to each rep orting un it as of the measu remen t d ate. Our material g oo dwill balances are at trib utable to certain o f o ur op eratin g seg men ts (which are each con si dered to b e repo rting u nit s). Th e cash fl ows used to determine the fair v alu e o f our repo rting u nits are d epen den t on a n umber o f sig nificant assumpti on s. Ou r estimates, which con sider a market particip an t v iew of fai r value, are su bject to ch ang e g i ven the inh erent un certain ty in predi cti ng fu tu re results and cash flo ws, wh ich are i mp acted b y such thin gs as p oli cy ho l der behav io r, competitor pricing , capital limitatio ns, new prod uct in trod uctio ns, an d specific ind ustry an d market con ditions. The b alan ce reco gn ized as go od will is no t amo rti zed , b ut is reviewed fo r impairment o n an an nu al basis, or more freq uen tly as ev ents o r circu mstan ces may warran t, includ in g th ose circu mstances wh ich wou ld mo re lik ely t han no t redu ce th e fai r v alu e of our rep orting u nits bel ow i ts carry ing amou nt. Du ring the fo urth q uarter o f 20 18 , we performed ou r ann ual q ual itative ev alu ation o f go od will based o n th e circumst an ces that ex isted as o f Octo ber 1, 20 18 an d determin ed th at there was no in dicati on that o ur segment g oo dwill was more likely th an no t imp aired and n o adjustment to imp air g oo dwill was necessary. We h ave assessed wh eth er ev ents hav e o ccu rred su bseq uen t to Octob er 1, 20 18 th at would imp act ou r con clu sion and no su ch even ts were id ent ified . As of December 31 , 2 01 8, we increased ou r g oodwill b alan ce by app roximately $32 .0 mi llio n. Refer to Note 1, Ba sis o f Presen ta tion fo r ad dit io nal in fo rmation . As of December 3 1, 2 01 8, we had go od will o f $82 5.5 millio n. Insura nce Liab iliti es and Reserves—Estab lish in g an adeq uate liab ili ty for ou r ob l ig ation s to p olicy ho lders requ ires th e u se of assumptio ns. Estimati ng liab ili ties fo r fu ture p olicy b enefits on life and h ealth insu ran ce p ro du cts requ ires th e u se of assumpti on s rel ati ve to fu tu re investment y ields, mortality, mo rb id i ty, persisten cy, p remiu m pay ment patterns, an d oth er assu mp tion s based on o ur hist orical ex perien ce, mod ified as n ecessary to reflect an ticipated trend s and to in clu de p ro vision s for po ssible ad verse d ev iation . Determin in g liab ili ties fo r o ur p ro perty and casualty in surance p ro du cts also requi res the use of assumptions, includ ing the frequ ency an d sev erity o f claims, an d t he effecti veness of intern al p ro cesses design ed t o red uce th e level o f claims. Our results depen d sig nificantly up on t he extent to which o ur actu al claims exp erience is con sisten t with the assu mp tio ns that we used in determin ing ou r reserves and p ricin g ou r prod ucts. Ou r reserve assu mption s an d estimates requ ire sig nificant jud gment an d, th erefore, are in herently u ncertain. We cann ot determine with precision the ultimate amo un ts th at we will p ay for actu al claims or th e timing of th ose payments. As o f Decemb er 3 1, 2 01 8, we had to tal po licy l iab ilities an d accruals of $4 2.8 billio n. Guaranteed Minimum Death Benefits—We establish liab ilities for gu aranteed minimum d eath b enefit s (“GMDB”) o n ou r VA p rod uct s. The meth od s used to estimate the liabilities employ assumptio ns abo ut mortality and the perfo rmance o f equ ity markets. We assu me ag e-b ased mo rtality from the Ru ark 20 15 ALB ad ju sted tab le for co mp any ex perien ce. Future decl in es in th e eq uity market wo uld increase o ur GMDB liability. Differen ces b etween the actual experience an d th e assu mp tion s u sed result in v ari an ces in profit an d cou ld result in losses. A po rtion o f o ur GMDB ben efits are sub ject to a do llar-for- do llar redu ction u po n withd rawal of related an nu ity dep osit s o n co ntracts issued prior t o Janu ary 1, 20 03 . As of Decemb er 31 , 20 18 , the GMDB reserv e was $4 4.3 millio n. Guaranteed Living Wi thdra wal Benefits—We estab lish reserves for gu aran teed living withd rawal benefi ts (“GLWB”) o n o ur VA p rod uct s. The GLWB is v alu ed in accordan ce with FASB gu id ance u nd er th e ASC Deriv atives and Hedg ing Top ic wh ich u t ilizes th e v alu ation techn iq ue prescribed b y t he ASC Fair Val ue M easurements and Disclosures To pic, wh i ch req uires th e embed ded deriv ati ve to be recorded at fair valu e usin g current in terest rates an d implied vo latilities for t he eq uity i nd ices. Th e fair value of th e GLWB is imp acted by equ ity market con dition s an d can result in th e GLWB emb edd ed deriv ati ve bei ng in an o verall n et asset o r net liability po siti on . In t imes o f favo rab le equ ity market co nd i tion s th e lik elihood and sev erity of claims is reduced an d exp ected fee in come increases. Since cl aims are gen erally exp ected later th an fees, th ese favorab l e eq uity market con dition s can result in th e present v alu e o f fees b ein g greater than the present value of claims, wh ich resu lts in a net GLWB emb edd ed deriv ative asset. In times o f un fav orable eq uity mark et con dition s the likelih oo d an d severity of claims is in creased and ex pected fee in come decreases and can resu lt i n the present value of claims ex ceedi ng the presen t value of fees resulting in a n et GLWB embed ded d erivativ e li ab i lity. The meth od s used to estimate t he emb ed ded deriv ative emp lo y assumptio ns ab ou t mo rtality, lap ses, po licyh older b ehav io r, equ i ty mark et returns, int erest rates, and mark et vo latility. We assu me age-b ased mo rtal ity from th e 45 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Ru ark 20 15 ALB table adjusted for compan y experience. Differences b etween the actu al ex perien ce an d the assu mp tions u sed result in variances in p ro fit and co uld resu lt in lo sses. As o f Decemb er 31, 20 18 , ou r n et GLWB liability held was $18 4.1 millio n. Pension a nd Other Po st retirement Benefits—Det ermin in g ou r o bligatio ns to emp lo yees u nd er ou r p ension plans an d o th er po stretiremen t b en efit plans req uires the use of assumptions. Th e calculation o f t he liability an d exp ense related to o ur b enefit plans incorporates th e foll owing sign i fican t assumptio ns: •app rop riate weig hted av erage d isco un t rate; •estimated rat e o f increase in th e comp ensati on of employees; an d •exp ected lo ng -term rate of ret urn o n the plan’s assets. See No t e 1 6, Emp lo yee Ben efit Pla ns, to the co nso lidated fin ancial statements in clu ded in th is report for fu rther in format io n o n t his plan. Deferred Tax es and Uncerta in Tax Posit io ns —Deferred federal in come t axes arise fro m t he recog nitio n of temp orary d ifferences between th e b asis of assets an d liabilities determined for fi nancial rep orting p urp oses and the basis d etermined for inco me tax pu rp oses. Such tempo rary differen ces are prin cip ally related to net u nrealized gains (lo sses), d eferred p olicy acq uisi tion co sts an d value of b usin ess acq uired , an d fut ure p olicy b enefits an d claims. Deferred tax assets an d liab ilities are measured u sin g the enact ed tax rates ex pect ed to be in effect when such d ifferences reverse. On Decemb er 2 2, 20 17 , th e Presid ent of th e Un i ted St ates sign ed into law th e Tax Cu ts an d Jo bs Act (th e “Tax Reform Act ”). Th e legislation sign ifican tly ch ang es U.S. tax law by, amon g o th er th in gs, lowerin g the co rpo rat e inco me tax rate. The Tax Reform Act permanen tly redu ces the U.S. corpo rate inco me tax rat e fro m a maximu m o f 35 % to a flat 2 1% rate, effect iv e Janu ary 1, 2 01 8. Also on December 22, 2017, th e SEC staff issued Staff Accou nti ng Bu l let in No. 1 18 (“SAB 1 18 ”) to ad dress th e app licati on of GAAP in situatio ns when a reg istrant do es n ot hav e th e necessary in fo rmation avail ab le, prep ared , or an alyzed (in clu ding compu tatio ns) in reaso nable d etail to co mp lete the acco un ting for certain in come t ax effects o f t he Tax Refo rm Act. We recog nized th e p ro vision al tax imp acts related t o th e revaluatio n o f deferred tax assets an d incl ud ed th ese amou nts in ou r conso lidated fin ancial statemen ts for th e y ear end ed December 31, 2 01 7 and disclo sed such items whi ch may h ave been reco rd ed on a p ro vision al basis. Th e fin al accou ntin g was compl eted o n December 2 2, 2 01 8 and an y adju stments to th ese prov isio nal amou nts are includ ed in o ur con solidated finan cial statemen ts for the year en ded December 31 , 2 018. We ev alu ate deferred tax assets fo r impairment qu arterly at the taxp ayi ng co mp on ent level within each tax j urisdi cti on . Deferred tax assets are reduced b y a v alu ation allo wan ce if, based on t he weig ht o f av ailabl e ev idence, it is more likely th an n ot th at some or all of su ch assets wil l n ot b e realized as fu tu re redu ction s o f curren t taxes. In d etermi ning t he n eed for a valu ation allo wance we con sider the reversal of existin g tempo rary di fferen ces, fu tu re tax able in come, and tax plann in g strategies. Th e d eterminatio n of an y valuatio n allo wan ce req uires management to mak e certai n ju dg men ts and assumptio ns regardin g future op eratio ns that are based on ou r h isto rical ex perience an d our ex pectation s of future perfo rmance. The ASC In come Taxes Topi c prescribes a recog nition t hresho ld and measu rement attrib ute fo r the fi nancial statement reco gn i tion and measu rement of an ex pected or actu al un certain in come tax return p ositio n an d prov i des gu i dance on discl osu re. Ad dition ally, in order for us to recog nize an y d egree o f benefit i n o ur finan cial statemen ts from such a p ositio n, there mu st be a greater th an 5 0 p ercent chan ce o f success with th e relevan t taxing autho rity with regard to th at p osit io n. In making th is anal ysis, we assu me that th e tax in g au th ority is fu lly info rmed o f all o f th e facts reg ard in g an y issu e. Our ju dg men ts an d assu mp tion s reg ard in g un certain tax po sition s are sub ject to chan ge ov er time du e to the en actment o f new leg islation, th e issu an ce o f rev ised or n ew regul ati on s or ru lin gs b y the v ariou s tax autho rities, and th e issuan ce o f n ew d ecisio ns b y the courts. Co ntingent Lia bilities—The assessment of p otenti al ob ligati on s fo r t ax , reg ulato ry, and li tigatio n matt ers i nh erentl y in vo l ves a variety of estimates of po ten tial fu tu re ou tco mes. We make such est imates after co nsu ltation with our adv isors an d a review of av ailable facts. Howev er, th ere can be n o assu rance th at future ou tco mes will not d iffer from man ag emen t’s assessments. 46 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. RESULTS OF OPERATIONS Ou r man agemen t and Board of Directors an aly zes an d assesses th e o perating p erforman ce o f each seg men t usin g “pre-tax ad justed op eratin g in come (loss)” an d “after-tax adjusted op eratin g in come (loss)”. Co nsistent with GAAP accou ntin g gu id ance for seg men t rep orting , p re-tax adjusted operating in come (loss) is ou r measu re o f segment performance. Pre-tax ad ju sted o perating i ncome (lo ss) is calcul ated by adju sting “inco me (loss) b efo re in come tax ,” by ex clu ding th e fo llo wing items: •realized gai ns an d losses on in vestmen ts an d d erivativ es, •chan ges in the GLWB embed ded deriv atives ex clu siv e of th e po rtio n attri bu table to the econ omic cost o f the GLWB, •actu al GLWB in curred claims, and •the amo rtizatio n o f DAC, VOBA, and certain p olicy liabilit ies that is imp acted by th e ex clu si on of th ese items. After-tax ad j usted o perating income (lo ss) is deriv ed from pre-tax ad ju st ed o perati ng in come (loss) wit h the inclusio n o f in come tax exp ense o r benefits associated with pre-tax ad justed op erating inco me. Inco me tax exp ense o r ben efits is allocated to th e items excluded from p re-tax adjusted operating in come (loss) at th e st atu to ry federal inco me tax rate for the associated p eriod . Fo r perio ds en ding o n and prio r to December 3 1, 20 17 a rate o f 3 5% was used . Beg in ning in 20 18 , a statu t ory fed eral in come tax rate of 21 % was u sed to allo cate in come tax ex pen se or b enefits t o items ex clu ded from pre-t ax adjusted op eratin g in come (loss). Income tax exp en se or b enefits allo cated to after-tax ad ju st ed o perating in co me (loss) can vary perio d to p eriod based o n ch ang es in ou r effective inco me t ax rate. The items exclud ed fro m adjusted o perating in co me (lo ss) are imp ort an t to u nd erstand in g the ov erall results o f o peration s. Pre-tax adjusted op eratin g i ncome (loss) an d after-tax adjusted op erat in g inco me (lo ss) are no t sub stit utes fo r inco me b efo re i ncome tax es or net in come (l oss), respect iv ely. These measures may n ot be co mp arab le to simi larly tit led measu res rep orted by o th er co mp ani es. Our belief is that pre-tax and after-tax adju sted operating in come (lo ss) enh ances man agemen t ’s an d the Board o f Di rectors’ u nd erstandi ng of th e o ngoin g o perati on s, th e un derly in g p ro fit ab ility of each segment, and helps facilitate t he allocatio n o f reso urces. In determining t he compo nen ts o f the p re-tax ad j usted o perating in come (loss) for each segment , p remiu ms an d p olicy fees, o th er inco me, ben efits an d settlement exp enses, and amo rti zatio n of DAC and VOBA are att ribu ted directl y to each o perating seg ment. Net in vestmen t in come is allo cated based on directly related assets requ ired fo r transactin g th e bu siness of that seg ment. Realized in vestmen t gai ns (losses) and o th er o perating ex pen ses are allocated to th e segments i n a mann er that mo st app ro priately refl ects the o peration s o f th at seg men t. Investments an d other asset s are allocated based o n p olicy l iab ilities net o f associated policy assets, while DAC/VOBA an d g oo dwill are sh own in the seg men ts to wh ich th ey are attribu table. We perio dicall y review an d up dat e as app ro priate ou r key assumptions used to measure certain balances related to in surance p ro du cts, in clu ding fu tu re mo rtalit y, exp enses, lapses, p remiu m persisten cy, b enefit u tilizat io n, in vestmen t y ields, interest rates, an d sep arate accou nt fu nd ret urns. Chan ges to th ese assu mp tion s resu lt i n ad ju stmen ts wh i ch increase or d ecrease DAC and VOBA amortization and /or ben efits and ex pen ses. Assumptio ns may b e up dated as p art of o ur an nu al assu mp tion rev iew process, as well as d urin g o ur q uarterly up date o f h istori cal bu sin ess activit y. Th is p eriod ic rev iew and updatin g of assumptio ns is co llectively referred to as “un lo cking .” When referring to un lo cking the referen ce is t o ch ang es in all b alan ce sh eet co mp on ents associated with th ese chan ges. The adjustmen ts asso ciated wit h un lo cking can creat e sign ifican t variab ility fro m perio d to p eriod in th e p ro fitab ili ty o f certain of th e Co mp any ’s o perating segments. 47 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fo llowi ng tabl e presents a su mmary o f resu lts and reco nciles pre-tax adjusted o perati ng inco me (loss) to con so lidated in come before inco me tax an d n et inco me: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Adjusted Opera ting Inco me (Lo ss) Life Marketin g $(1 9,3 76 ) $50,77 8 $39 ,74 5 Acqu i sitions 28 2,7 15 249,74 9 2 60 ,51 1 An nu ities 16 7,1 86 213,08 0 2 13 ,29 3 Stab le Valu e Prod ucts 10 2,3 28 105,26 1 61 ,29 4 Asset Protection 2 9,9 11 24,35 6 16 ,48 7 Co rp orate and Oth er (8 4,2 29 ) (136,33 2) (87 ,96 1) Pre-tax adjusted op eratin g inco me 47 8,5 35 506,89 2 5 03 ,36 9 Realized (lo sses) gains on in vestmen ts an d d erivativ es (9 5,5 17 ) (71,83 5) 90 ,62 8 In come b efo re inco me tax 38 3,0 18 435,05 7 5 93 ,99 7 Inco me t ax exp ense (ben efit)8 0,6 57 (671,47 5) 2 00 ,96 8 Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Pre-tax ad ju sted op eratin g inco me $47 8,5 35 $506,89 2 $5 03 ,36 9 Ad ju sted op eratin g inco me t ax (ex pen se) b enefit (10 0,7 16 ) 646,33 3 (1 69 ,24 8) After-tax adjusted o perating in come 37 7,8 19 1 ,153,22 5 3 34 ,12 1 Realized (losses) g ain s o n i nv estments and deriv atives (9 5,5 17 ) (71,83 5) 90 ,62 8 In come tax b enefit (ex pen se) o n ad ju st ments 2 0,0 59 25,14 2 (31 ,72 0) Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Realized in vestmen t (lo sses) g ains: Deriv ative fin ancial in stru men ts $6 0,9 88 $(305,82 8) $(40 ,28 8) All o th er inv estments (22 3,6 49 ) 121,42 8 90 ,65 9 Net imp airmen t losses reco gn ized in earnings (2 9,7 24 ) (11,74 2) (17 ,74 8) Less: related amo rti zation(1)(1 1,8 56 ) (39,48 0) 24 ,36 0 Less: VA GLWB econ omic co st (8 5,0 12 ) (84,82 7) (82 ,36 5) Realized (losses) g ain s o n i nv estments and deriv atives $(9 5,5 17 ) $(71,83 5) $90 ,62 8 (1)Includes amortizatio n of DAC/VOBA an d benefits an d settlement exp enses that are imp acted by realized g ain s (lo sses). Fo r The Year Ended Decemb er 31 , 20 18 , as co mp ared to The Yea r End ed December 3 1, 2 01 7 Net inco me fo r the year en ded Decemb er 31 , 2 01 8 was $3 02 .4 milli on wh ich was a d ecrease of $8 04 .2 millio n. Th e d ecrease in net inco me was primarily driv en by an unfavorable change in in come taxes o f $75 2.1 millio n which was driven b y the chan ge in the corpo rate tax rate in 2 01 7. Pre-tax ad justed o perating inco me was $47 8.5 million which was a decrease of $28 .4 millio n. The d ecrease in pre-tax ad ju sted o perating inco me consisted o f a decrease of $7 0.2 million in the Life M arketi ng seg men t, a d ecrease of $45.9 million in the An nu ities seg men t, and a decrease o f $2.9 million in the Stable Valu e Prod ucts segment. These d ecreases were partially offset by an increase o f $33 .0 millio n i n t he Acqu isitions segment, an in crease o f $5.6 mi llio n in the Asset Pro tectio n seg men t, and an increase of $5 2.0 millio n in the Corporate and Oth er seg ment. Net realized losses on inv est ments an d deriv atives fo r th e year end ed Decemb er 31 , 2018 was $9 5.5 million . Th ese losses were p rimarily du e to net impairmen ts of $2 9.7 mill io n, equ ity secu rit ies losses of $4 9.0 millio n, and net lo sses on VA GLWB d eri vat iv es (after ad j ustin g for econ omic cost and amortization) of $1 6.6 millio n. Ou r n et imp airmen ts o f $2 9.7 mi llio n were d riv en by i mp airments in the u tility sector. Th e equ ity secu rities losses of $4 9.0 mi llio n were p rimarily d riven b y th e ov erall declin e in market prices d urin g th e p eriod . Th e n et lo sses on VA GLWB deriv atives in clu ded a $2 5.8 million lo ss rel ated to v ariations in act ual su b-acco un t fun d perfo rmance fro m th e ind ices in clu ded in ou r hed ging p ro gram and a $8 .5 millio n loss fro m ch ang es to po licyh older assumpti on s whi ch was partially o ffset by a $17 .2 millio n g ain related to an in crease in ou r n on -perfo rmance risk du ring th e perio d. 48 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •Life Marketin g segment pre-tax adjusted op eratin g lo ss was $1 9.4 millio n for th e year end ed Decemb er 31 , 2 01 8, representing a d ecrease o f $70 .2 millio n fro m th e year en ded December 31 , 20 17 . The d ecrease was pri marily d ue to the imp act o f u nlock in g, hi gh er rein surance co sts, an d h ig her li fe claims for th e y ear ended Decemb er 31 , 20 18 , as co mp ared to the p rior year. The seg ment reco rd ed an u nfavo rab le $2 8.9 mill io n o f un lo cking for the y ear ended Decemb er 31 , 20 18 , as co mp ared to an un favorab l e $4 .0 millio n o f un lo cking for t he y ear en ded Decemb er 3 1, 2 01 7. •Acqu isit io ns segmen t pre-tax adju sted op eratin g inco me was $28 2.7 milli on fo r the y ear en ded Decemb er 3 1, 2 018, an i ncrease o f $3 3.0 million as compared to th e year en ded Decemb er 31 , 2 01 7, primarily du e t o th e favo rab le impact o f $5 1.3 millio n from th e Liberty rei nsu ran ce tran sactio n completed on May 1, 2 01 8, p art ly offset by th e exp ected run off o f th e in-force b locks of bu sin ess. •Ann uities segmen t pre-tax ad justed op erating inco me was $1 67 .2 millio n fo r th e year end ed December 31 , 2 01 8, as compared to $2 13 .1 million for th e year en ded December 3 1, 20 17 , a decrease of $45 .9 millio n, or 2 1.5 %. This v ariance was primarily th e result o f un fav orable u nlo ck ing, an u nfavo rab le chan ge in gu aranteed ben efit reserv es, an d lower VA fee in come, p artially offset by a fav orable ch ang e in sin gle p remiu m i mmed iate an nu ities (“SPIA”) mortal ity. Segmen t results were neg atively impacted by $25 .0 mil lion o f unfavorable un lo cki ng for the y ear end ed Decemb er 3 1, 20 18 , as compared t o $16 .5 million of fav orable unlo ck i ng fo r the y ear end ed December 31 , 20 17 . •Stable Valu e Prod uct s pre-tax adjusted op eratin g in come was $10 2.3 millio n an d decreased $2.9 millio n, or 2.8 %, fo r the y ear end ed December 3 1, 20 18 , as co mp ared to th e year end ed December 31 , 2 01 7. The d ecrease in adjusted op eratin g earn in gs pri marily resu lted from lower interest spreads dri ven by h i gh er credited rates on n ewly issu ed co ntracts. Parti cip ati ng mortg age inco me fo r th e y ear en ded Decemb er 31 , 2 01 8, was $26 .3 millio n as co mp ared to $33.5 millio n for t he year end ed December 31 , 20 17 . The ad ju sted o perating spread, wh ich ex clu des p articipatin g i ncome, decreased b y 2 0 basis p oints fo r the year en ded December 3 1, 20 18 , from th e p rio r year, du e primarily to an increase in cred ited interest. •Asset Pro tectio n segment p re-tax ad ju st ed o perating in co me was $29 .9 millio n, rep resen tin g an in crease o f $5.6 million , o r 22 .8%, for the year en ded December 3 1, 2 018, as co mp ared to the year end ed Decemb er 31 , 20 17. Service co ntract earni ng s increased $4 .8 mil lion p rimarily d ue to favo rab le loss ratio s and hig her in vestmen t inco me. Earning s fro m GAP and cred it i nsu ran ce prod uct lines increased $0.1 million an d $0.7 millio n, respectiv ely , primarily du e to lo wer exp enses, somewh at o ffset by lo wer vo lu me and hig her lo ss ratios. •Th e Co rp orate and Other segment ’s pre-tax adjusted o perating lo ss was $84 .2 million fo r the year en ded Decemb er 3 1, 20 18, as comp ared to an ad ju sted p re-tax o perati ng lo ss of $13 6.3 milli on fo r th e year ended December 31 , 2 01 7. The d ecrease in op eratin g loss is p rimarily attri bu tab le t o a decrease in co rp orate o verhead ex pen ses and an increase in investment i ncome. Fo r The Year Ended Decemb er 31 , 20 17 , as co mp ared to The Yea r End ed December 3 1, 2 01 6 Net i ncome for the y ear en ded December 31 , 201 7 was $1,1 06 .5 millio n whi ch was an i ncrease of $7 13 .5 millio n. The increase in n et in come was primarily driv en b y a fav orable ch ang e in in come taxes o f $87 2.4 millio n which was d riven by th e ch ang e in the co rp orate tax rate. Pre-t ax adjusted op eratin g in come was $50 6.9 million wh ich was an in crease o f $3.5 million . Th e increase in pre-tax adjusted operating income co nsisted of an $11 .0 million in crease in t he Life M ark eting seg ment, a $4 4.0 milli on in crease i n the Stab le Value Pro du cts segmen t, an d an increase o f $7.9 mil lion in t he Asset Pro tectio n segmen t . These increases were partially offset by a $10.8 mil lion decrease in th e Acqu isitio ns segmen t an d a $48 .4 mill io n d ecrease in the Corporate and Other segment. In co me tax (ben efit) exp ense decreased $8 72 .4 millio n for the year end ed Decemb er 3 1, 2 01 7, compared to 20 16 , du e to th e impact of the Tax Reform Act en acted on December 22, 2 01 7. We recog nized a prov isio nal $7 97 .6 mi llio n tax ben efit as a result of rev alu in g th e end in g net deferred tax liabilities from 35 % to th e newly en acted corpo rate inco me tax rate of 2 1%, p arti all y o ffset b y tax exp ense related to t he write-o ff o f cert ain deferred tax assets to reflect chang es in tax law which will p roh ib it the dedu ction o f th ose i tems in fu tu re perio ds. The effective tax rate was (1 54 .3%) an d 33.8 % fo r th e years end ed Decemb er 31 , 2 01 7 an d 20 16 , respectiv ely. The d ecrease in th e effect iv e tax rate was du e to th e impact o f th e Tax Reform Act. Further in fo rmation on th e co mp on ents o f the effective tax rates for th e year en ded December 3 1, 2 01 7 an d 2 01 6, i s presented in No te 18 , In come Taxes. Net realized losses on inv est ments an d deriv atives fo r th e year end ed Decemb er 31 , 2017 was $7 1.8 million . Th ese losses were p rimarily du e to net lo sses o n VA GLWB deriv atives (after ad ju stin g for econ omic co st an d amortization ) of $6 7.6 million an d net lo sses o n FIA deriv atives o f $6.6 mil lion . The net lo sses on VA GLWB d erivativ es includ ed a $3 5.9 milli on loss related to v ariation s in actu al sub -accou nt fun d perfo rmance from th e ind ices in clu ded in ou r hed ging prog ram, a $2 5.7 millio n loss related t o a d ecrease in ou r non -p erforman ce risk du ring th e p eriod , an d a $1 2.0 mi llio n loss from ch ang es to po licyh older assumpti on s. The n et l osses on FIA d erivativ es were p rimarily d riven by lo sses o f $5.9 millio n from ch ang es to po licyh older assu mp tion s. •Life Marketin g seg men t p re-t ax adju sted op eratin g in come was $5 0.8 million fo r th e year end ed Decemb er 3 1, 20 17 , rep resen ting an in crease o f $11 .0 mill io n fro m the y ear end ed Decemb er 3 1, 20 16. Th e increase was primarily du e to th e impact of un lo cking fo r the y ear en ded Decemb er 31 , 20 17 , as co mp ared t o the prio r year. Th e seg men t recorded an un fav orable $4.0 million o f un lo cking for the y ear ended Decemb er 3 1, 2 01 7, as compared to an u nfavo rab le $13 .3 million of un l ockin g for th e year en ded Decemb er 3 1, 2 01 6. •Acqu isit io ns seg men t pre-tax adju sted operating in come was $2 49 .7 million fo r t he year en ded Decemb er 31 , 2 01 7, a decrease o f $10 .8 million as co mp ared to th e y ear en ded Decemb er 3 1, 2 01 6, primarily d ue t o t he exp ected ru no ff of th e in -force block s of bu si ness. 49 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •Ann uities segmen t pre-tax ad justed op erating inco me was $2 13 .1 millio n fo r th e year end ed December 31 , 2 01 7, as compared to $2 13 .3 million for the year en ded Decemb er 3 1, 2016, a decrease o f $0.2 millio n, or 0.1 %. This varian ce was p rimarily the result o f an un fav orable ch ang e in SPIA mort ali ty an d high er no n-d eferred exp enses, p artially o ffset b y in creased interest spreads, g ro wth in VA fee inco me, an d favo rable u nlo ck ing. Segment resu lts were p ositiv ely impacted b y $16 .5 million of fav orable un lo cking for th e year en ded Decemb er 3 1, 2 01 7, as co mp ared to $8 .1 mil lion of fav orable un lo cki ng fo r the y ear end ed December 31 , 20 16 . •Stable Value Pro du cts pre-tax ad ju st ed o perating in come was $1 05 .3 mi llio n an d in creased $4 4.0 million, or 71 .7%, fo r the year ended Decemb er 31 , 2 01 7, as compared to the year end ed December 31 , 2 01 6. The in crease in ad ju st ed o perating earning s primarily result ed from an i ncrease in partici patin g mortg age in co me an d high er av erag e acco un t values. Particip ati ng mo rtgag e i ncome for t he y ear en ded Decemb er 31 , 2 01 7, was $33 .5 milli on as compared to $11 .0 million for the year en ded December 3 1, 20 16. The adj usted op eratin g sp read , wh ich exclu des parti cip ati ng in come, d ecreased b y 8 basis points fo r th e y ear ended Decemb er 3 1, 201 7, fro m the prior year, du e primarily to an in crease in cred ited interest. •Asset Pro tectio n segment p re-tax ad ju st ed o perating in co me was $24 .4 millio n, rep resen tin g an in crease o f $7.9 million , o r 47 .7%, for the year en ded December 3 1, 2 01 7, as compared to th e year end ed Decemb er 31 , 20 16 . Service cont ract earn i ng s in creased $13 .7 milli on p rimarily d ue to favo rab le loss rati os an d $4.8 millio n of on e-time transactio n co sts asso ciated with the US Warranty acq uisition in 20 16 . Cred it insurance earning s decreased $0.3 millio n primarily d ue to lower v olume. Earn in gs from the GAP prod uct lin e decreased $5.5 million p rimari ly resu lting from hi gh er l oss ratio s, somewhat o ffset by add itio nal in come p rov id ed by US Warranty. •Th e Co rp orate an d Oth er seg men t’s p re-tax ad ju sted o perati ng lo ss was $1 36 .3 million for th e y ear en ded Decemb er 3 1, 2 01 7, as compared to an ad ju sted p re-tax op eratin g loss of $88 .0 million for th e year end ed December 31 , 2016. Th e decrease is p rimarily attribu tab le to a $4 9.5 mill io n increase in co rp orate o verhead ex pen ses. The increase in o verhead ex pen ses was primaril y due to certain accrued ex pen ses t hat increased as a result o f th e favo rab le after-tax adj usted op eratin g inco me resu lts whi ch in creased d ue to th e ch an ge i n th e co rp orate t ax rate d uri ng th e p eriod. 50 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Life Ma rketing Segment R esults of Op erati ons Segment resu lts were as follo ws: Fo r The Yea r Ended December 3 1 , 20 1 8 2 0 17 2 0 16 (D o l l ars In Tho us a nds) REVENUES Gross premiums and po licy fees $1,9 17 ,19 0 $1,8 55 ,07 5 $1,7 72 ,52 3 Reinsu ran ce ced ed (8 73 ,96 2) (8 43 ,16 4) (8 00 ,27 6) Net premi ums and po licy fees 1,0 43 ,22 8 1,0 11 ,91 1 9 72 ,24 7 Net in vestmen t inco me 5 51 ,78 1 5 53 ,99 9 5 25 ,49 5 Other in come 1 26 ,01 2 1 12 ,85 5 1 11 ,29 2 Total o perating rev enu es 1,7 21 ,02 1 1,6 78 ,76 5 1,6 09 ,03 4 Real ized g ain s (lo sses)—inv estments (34 ,21 2) (6 ,29 1) 5 ,67 9 Real ized g ain s (lo sses)—d erivat iv es 2 ,98 6 (5 ,35 6) 13 ,13 5 Total reven ues 1,6 89 ,79 5 1,6 67 ,11 8 1,6 27 ,84 8 BENEFITS AND EXPE NSES Ben efits an d settlemen t ex penses 1,4 24 ,63 2 1,3 30 ,03 1 1,2 61 ,23 1 Amortization of DAC/VOBA 1 18 ,41 9 1 19 ,16 4 1 30 ,56 0 Other op erat in g ex penses 1 97 ,34 6 1 78 ,79 2 1 77 ,49 8 Operating benefits and exp enses 1,7 40 ,39 7 1,6 27 ,98 7 1,5 69 ,28 9 Amortization related to benefits an d settlemen t expenses (12 ,63 1) (10 ,89 3) 6 ,61 3 Amortization of DAC/VOBA related to realized g ain s (lo sses)— investments (1 ,50 2) 1 ,58 9 14 8 Total b enefits and exp enses 1,7 26 ,26 4 1,6 18 ,68 3 1,5 76 ,05 0 INCOME (LOSS) BE FORE INCOME TAX (36 ,46 9) 48 ,43 5 51 ,79 8 Less: realized g ain s (losses)(31 ,22 6) (11 ,64 7) 18 ,81 4 Less: amortization related to ben efi ts an d settlemen t ex penses 12 ,63 1 10 ,89 3 (6 ,61 3) Less: related amortization of DAC/VOBA 1 ,50 2 (1 ,58 9) (14 8) PRE-TAX ADJ USTE D OPERATING INCOME (LOSS)$(19 ,37 6) $50 ,77 8 $39 ,74 5 51 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fol lo win g tabl e summarizes key data fo r the Life M ark eting segment: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Sa les By Product(1 ) Tradit io nal $5 1,5 05 $8,06 5 $1 ,03 5 Un iv ersal life 11 6,7 46 164,07 4 1 68 ,67 1 BOLI — — — $16 8,2 51 $172,13 9 $1 69 ,70 6 Sa les By Distribution Channel Tradit io nal brok erage $14 5,2 80 $147,02 3 $1 46 ,06 2 Institu tional 1 4,0 64 16,29 1 16 ,29 4 Direct 8,9 07 8,82 5 7 ,35 0 $16 8,2 51 $172,13 9 $1 69 ,70 6 Averag e Life Insurance In-fo rce(2) Tradit io nal $3 50 ,39 8,0 22 $346 ,134,07 6 $36 1,9 76 ,53 9 Un iv ersal life 2 78 ,19 1,4 68 253 ,282,09 8 21 5,3 33 ,06 9 $6 28 ,58 9,4 90 $599 ,416,17 4 $57 7,3 09 ,60 8 Averag e Acco unt Va lues Un iv ersal life $7 ,75 2,0 76 $7 ,626,86 8 $7,4 49 ,47 0 Variable un iv ersal l ife 76 2,8 12 718,89 0 6 24 ,02 2 $8 ,51 4,8 88 $8 ,345,75 8 $8,0 73 ,49 2 (1)Sales d ata for traditional life in suran ce is based on an n u alized p remiums. Un iversal life sales are b ased on annualized planned prem iums, o r “targ et” prem iu ms if lesser, plu s 6% o f amo u n ts received in excess of target premiu m s and 1 0 % of single prem iu ms. “Target” premiu m s fo r u n iv ersal life are those p rem iums upon which full first y ear co m missions are p aid . (2)Amo u n ts are n o t ad justed for rein suran ce ceded. Op erati ng Expenses Detail Other op eratin g ex penses fo r the seg men t were as follows: Fo r The Yea r Ended December 3 1 , 20 1 8 2 0 17 2 0 16 (D o l l ars In Tho us a nds) Insura nce companies: First year co mmissio ns $1 92 ,43 5 $1 97 ,81 5 $1 96 ,37 5 Renewal co mmissio ns 41 ,31 4 39 ,93 1 38 ,08 9 First year ced in g allo wan ces (70 9) (2 ,24 4) (3 ,55 6) Renewal ced in g allo wances (1 75 ,26 1) (1 85 ,25 5) (1 65 ,61 4) General & admin istrati ve 2 23 ,66 3 2 28 ,96 0 2 13 ,87 9 Tax es, licenses, an d fees 39 ,04 4 36 ,04 5 33 ,06 8 Other op eratin g ex pen ses in curred 3 20 ,48 6 3 15 ,25 2 3 12 ,24 1 Less: co mmissio ns, allo wan ces and exp en ses capitalized (2 50 ,72 8) (2 54 ,37 5) (2 46 ,73 8) Other in surance compan y o perating expen ses 69 ,75 8 60 ,87 7 65 ,50 3 Distribution co mpanies: Co mmissio ns 88 ,97 7 84 ,45 8 79 ,29 9 Other op eratin g exp enses 38 ,61 1 33 ,45 7 32 ,69 6 Other distribu tio n compan y o perating exp en ses 1 27 ,58 8 1 17 ,91 5 1 11 ,99 5 Other o perating ex penses $1 97 ,34 6 $1 78 ,79 2 $1 77 ,49 8 52 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Pre-t ax adjusted o perating lo ss was $19.4 million fo r the year en ded December 3 1, 2018, rep resen ting a d ecrease of $7 0.2 mill io n fro m the year en ded December 31 , 20 17 . The d ecrease was primarily du e to th e impact of un locking , hig her rei nsu ran ce co sts, and high er li fe cl aims fo r the y ear en ded Decemb er 31 , 2018, as compared to th e prior y ear. The segmen t reco rd ed an u nfavo rab le $2 8.9 mil lion o f un lo cking for the year end ed Decemb er 31 , 20 18 , as co mp ared to an unfav orable $4 .0 million of unl ockin g for th e year en ded Decemb er 3 1, 2 01 7. Op erati ng reven ues Total o perating reven ues for the year en ded Decemb er 31 , 2 01 8, i ncreased $4 2.3 million , or 2 .5%, as compared to the year en ded Decemb er 31 , 20 17 . This in crease was driven by h i gh er premiums and po licy fees and dist ribu tion compan y revenu e. Net premiums a nd po licy fees Net premiums and po licy fees in creased b y $31 .3 million , or 3.1 %, fo r the y ear end ed Decemb er 31 , 20 18 , as compared to th e year en ded December 31 , 2 01 7, d ue to an in crease in po licy fees asso ciat ed with co ntin ued growth in u niversal life bu siness, as wel l as increases in traditional li fe premiums. Net in vestment i ncome Net inv estment in come in th e segmen t d ecreased $2 .2 million , o r 0 .4%, fo r the year en ded December 31 , 2 01 8, as co mp ared to the year en ded Decemb er 31 , 2 01 7 driv en b y lo wer tradition al life and d istrib utio n company investmen t in come of $5.7 million an d $4 .2 millio n, resp ectively, o ffset in p art by hi gh er uni versal life in vestmen t inco me o f $8.8 millio n. Other inco me Other i ncome i ncreased $13 .2 millio n for the y ear en ded December 31 , 2 01 8, as compared to th e year end ed Decemb er 3 1, 20 17 , primaril y d ue to high er rev enu e in th e segment ’s n on -in surance op eratio ns. Benefit s an d settlement exp enses Ben efits and settlement expenses increased by $94 .6 million , o r 7.1 %, fo r th e y ear end ed Decemb er 31, 20 18 , as compared to the year en ded Decemb er 31, 20 17 , driv en b y un lo cking and an increase in cl aims. Fo r th e year end ed Decemb er 3 1, 2 01 8, un iv ersal life un lo cking i ncreased p olicy ben efits an d sett lemen t ex pen ses $2 3.6 milli on , as co mp ared to an i ncrease o f $8.6 millio n for t he year end ed December 31 , 20 17 . Amo rtizatio n o f DAC/VOBA DAC/VOBA amo rti zatio n d ecreased $0 .7 million , or 0.6 %, fo r the y ear end ed December 31 , 20 18 , as compared t o the y ear end ed December 31 , 20 17 , du e to lower VOBA amortizatio n in th e traditio nal life block s, p artially o ffset by hig her VOBA amort izatio n in th e un iv ersal life b lo ck. For the y ear en ded Decemb er 31, 20 18 , u niversal life u nlo ck i ng increased amo rtizatio n $5.3 million, as co mp ared to a decrease o f $4 .6 million fo r t he year en ded Decemb er 3 1, 2 01 7. Other o perat in g expen ses Other o perating exp enses in creased $1 8.6 milli on fo r th e year end ed Decemb er 3 1, 20 18 , as compared to th e year end ed Decemb er 31 , 20 17 . Th is in crease was driv en b y lower ced in g allo wan ces and high er n ew b usin ess costs after cap italization . S ales Sales fo r th e seg men t decreased $3.9 milli on for the y ear en ded December 3 1, 2 01 8, as co mp ared to the year end ed Decemb er 31 , 20 17 , p rimarily du e t o lo wer sales in th e uni versal life blo ck , o ffset b y higher t rad itio nal life sales. The chan ge between p ro du cts was du e i n part to a sh ift in sales focu s from a p ro du ct with in th e un iv ersal life b l ock to a n ew term life p ro du ct. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Pre-t ax adjusted o perating in come was $50 .8 million fo r the y ear end ed December 31 , 20 17 , representing an in crease o f $11 .0 million from th e year en ded Decemb er 31 , 2 01 6. The in crease was p rimarily due to the impact of un lo cking for th e year en ded Decemb er 31 , 2 01 7, as co mp ared to th e p rio r year. The segment reco rd ed an u nfavo rable $4 .0 million of un lo cking fo r t he year en ded December 3 1, 2 01 7, as compared t o an u nfavo rab le $1 3.3 milli on o f un lo cki ng fo r the y ear end ed December 31 , 20 16 . Op erati ng reven ues Total o perating reven ues for the year en ded Decemb er 31 , 2 01 7, i ncreased $6 9.7 million , or 4 .3%, as compared to the year en ded Decemb er 31 , 20 16 . Th is increase was driv en by h ig her p olicy fees and h ig her u niversal life inv est ment in come du e to increases in net in -force reserv es, p artly offset by lo wer traditio nal life p remiums. 53 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net premiums a nd po licy fees Net premiums and po licy fees in creased b y $39 .7 million , or 4.1 %, fo r the y ear end ed Decemb er 31 , 20 17 , as compared to th e year en ded December 31 , 2 01 6, d ue to an in crease in po licy fees asso ciat ed with co ntin ued growth in u niversal life bu siness, as wel l as increases in traditional li fe premiums. Net in vestment i ncome Net in vestmen t in come in th e segment in creased $2 8.5 millio n, o r 5.4 %, fo r the y ear en ded December 31 , 20 17 , as compared to the y ear en ded Decemb er 31 , 2 01 6. Of th e increase in net i nv estment inco me, $22 .3 milli on resulted fro m growth in th e un iversal life block o f bu siness. Tradition al life in vestmen t inco me in creased $2 .0 million . Other inco me Other in come in creased $1 .6 million for th e year en ded December 31 , 20 17 , as compared t o the y ear end ed Decemb er 3 1, 2 01 6, p rimarily d ue to high er rev enu e in th e segment ’s n on -in surance op eratio ns. Benefit s an d settlement exp enses Ben efits and settlement expenses increased by $68 .8 million , o r 5.5 %, fo r th e y ear end ed Decemb er 31, 20 17 , as compared to the year en ded Decemb er 31, 20 16 , d ue primarily to an increase in u niversal life claims and reserv es, partially offset by lo wer traditional life claims and the impact o f un lo cki ng . For th e year ended Decemb er 31 , 20 17 , u niv ersal life un l ocking in creased po licy ben efits an d settlemen t ex penses $8 .6 mil lion , as co mp ared to an in crease o f $16 .3 million fo r the y ear end ed Decemb er 3 1, 20 16 . Amo rtizatio n o f DAC/VOBA DAC/VOBA amo rtizati on decreased $1 1.4 mil lion , or 8.7 %, for th e year end ed December 31 , 20 17, as co mpared to th e year en ded December 31 , 20 16 , du e to lo wer VOBA amo rtizatio n in th e traditional block s resulting fro m d ecreased lapses. Fo r th e year en ded December 31 , 20 17 , un iversal life un lo cki ng decreased amortizat io n $4.6 millio n, as co mpared to a d ecrease of $3 .0 million fo r th e y ear ended Decemb er 3 1, 2016. Other o perat in g expen ses Other op eratin g ex pen ses i ncreased $1 .3 millio n for t he year end ed Decemb er 3 1, 2 01 7, as co mp ared to th e year end ed December 31 , 201 6. Th is in crease was d riven b y hig her co mmissio ns and general and admin istrati ve exp en se, partially offset by lo wer new bu sin ess acqu isitio n costs after cap italization and high er rein surance allo wan ces. S ales Sales for t he segment in creased $2.4 milli on fo r the year end ed December 31 , 20 17 , as co mp ared to th e year en ded Decemb er 3 1, 2 01 6. Th e in creased in t rad itio nal l ife sales of $7.0 million was p rimarily du e to the introd uctio n of new term p ro du cts du ring 2 01 7 wh ich al so led to the decrease in un iv ersal life sales of $4 .6 mill io n for th e year en ded Decemb er 3 1, 2 01 7. Reinsura nce Cu rrently, t he Life Market in g segment rei nsu res sign i fican t amou nts of it s life in su ran ce in-fo rce. Pu rsuant to th e u nd erlying reinsu ran ce co ntracts, rei nsu rers pay allowances to th e segmen t as a percen tag e of b oth first year an d ren ewal premiums. Reinsurance all owances represent th e amou nt th e rein surer is willin g to p ay for reimb ursemen t o f acq uisiti on co sts in curred by th e direct writer o f th e b usin ess. A p ortio n o f rein surance allowan ces receiv ed is deferred as part o f DAC an d a p ortio n i s reco gn ized immediately as a redu ction of other op eratin g ex pen ses. As the n on -d eferred po rti on of allowances redu ces op eratin g exp enses in th e p eriod received , th ese amou nts represent a n et increase to op eratin g i ncome du ring that p eriod . Reinsu ran ce allo wan ces do n ot affect t he meth od olog y used to amortize DAC or the perio d ov er wh ich su ch DAC is amortized. Ho wev er, t hey do affect the amo un ts reco gn i zed as DAC amo rtizatio n. DAC on u niv ersal life-type, limi ted-p ay men t long du ratio n, and inv estment co ntracts bu sin ess is generally amortized b ased o n t he estimated g ross p rofits of t he pol ici es in -force. Reinsurance allowan ces are con si dered in t he determin ation of estimated gross profits, and therefo re, i mp act DAC amortization on t hese lin es of b usiness. Deferred reinsu ran ce allowances o n level term b usin ess are recorded as ceded DAC, which is amo rtized ov er estimated ced ed p remiu ms o f the p olicies in-fo rce. Th us, d eferred reinsu ran ce all owances may imp act DAC amortization . A more detailed d iscu ssion of th e compo nents o f rein su rance can b e fo un d in the Rein su ran ce sectio n o f No te 2 , Summa ry of Sign ifi ca nt Accou nti ng Policies to ou r con so lidated fin ancial statemen t s in clu ded in th is repo rt. 54 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Imp act of Reinsura nce Reinsu ran ce impacted th e Life Marketing segmen t li ne items as sho wn in the follo win g tabl e: Life Marketing Seg ment Line Item Impa ct of Reinsura nce Fo r The Yea r Ended December 3 1 , 20 1 8 2 0 17 2 0 16 (D o l l ars In Tho us a nds) REVENUES Reinsu ran ce ced ed $(8 73 ,96 2) $(8 43 ,16 4) $(8 00 ,27 6) BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses (8 05 ,95 1) (7 10 ,95 9) (7 76 ,50 7) Amortization of DAC/VOBA (5 ,60 9) (5 ,53 3) (6 ,04 8) Ot her o perating exp enses(1 )(1 68 ,58 3) (1 80 ,43 5) (1 61 ,35 2) Total b enefits and exp en ses (9 80 ,14 3) (8 96 ,92 7) (9 43 ,90 7) NET IMPACT OF REINSURANCE $1 06 ,18 1 $53 ,76 3 $1 43 ,63 1 Allowances receiv ed $(1 75 ,97 0) $(1 87 ,49 9) $(1 69 ,17 0) Less: Amou nt deferred 7 ,38 7 7 ,06 4 7 ,81 8 Allowances recog nized (ced ed o th er o perati ng ex pen ses)(1 )$(1 68 ,58 3) $(1 80 ,43 5) $(1 61 ,35 2) (1)Oth er o perating exp enses ced ed p er the income statem en t are eq u al to reinsu rance allo wan ces reco g nized after capitalizatio n. The table ab ov e do es not reflect th e imp act of rein surance o n ou r net inv est ment inco me. By cedin g bu sin ess to the assumin g compan ies, we fo rgo in vestmen t inco me o n the reserv es ceded . Con versely, the assumin g co mp anies will receiv e in vestmen t in come on th e reserves assu med, wh ich will in crease th e assu mi ng compan ies’ profitabilit y o n th e bu siness th at we ced e. Th e net inv estment inco me imp act to us and the assumin g co mp anies h as n ot b een qu an tified . Th e impact o f in clu ding forego ne in vestmen t in come wou ld be to su bstantially redu ce the favorab l e net imp act of rein surance reflected ab ov e. We est imate that the impact of fo reg on e investment i ncome wo uld be to red uce th e net imp act of rein surance presented in the table ab ov e b y 26 5% to 4 80 %. The Life M ark eting segment’s rei nsu ran ce p rog rams do no t materially impact the “o th er income” line o f o ur in come statement. As sho wn abo ve, reinsurance generally h as a favo rab le imp act on th e Life Marketin g seg men t’s o perating in come resu lts. The imp act of reinsurance is larg ely du e to ou r q uo ta share co in surance p ro gram in p lace pri or to mid-20 05 . Und er that prog ram, generally 90 % of th e segment’s traditio nal new bu sin ess was ced ed to rei nsu rers. Since mid-20 05 , a mu ch smaller percentage of overall term bu siness h as been ceded d ue to a ch ang e in rein surance st rategy on tradit io nal business. In ad dition, sin ce 20 12 , a much smaller percen tag e of th e segment’s n ew un iv ersal life b usin ess has b een ced ed. As a resu lt o f th at ch ang e, th e relativ e impact of rein surance o n th e Life M ark eting seg ment’s o verall results i s exp ected to d ecrease over time. Wh ile th e sign ifi can ce of rei nsu ran ce is ex pected to decline o ver time, th e ov eral l imp act o f rei nsu ran ce fo r a g iven perio d may flu ctu ate d ue to variatio ns in mo rtality an d u nlo ck ing of balan ces. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 The h ig her ceded premium and p olicy fees fo r th e y ear end ed Decemb er 31 , 20 18 , as co mp ared to the y ear en ded December 3 1, 2 01 7, was cau sed primarily by high er u niversal life po licy fees of $6 6.0 milli on , p arti all y o ffset b y lower ced ed trad itio nal life p remiu ms o f $35.3 mill io n. Ced ed b en efit s and settlement exp enses were high er fo r the y ear en ded Decemb er 31 , 20 18 , as compared to the y ear en ded Decemb er 31 , 20 17 , du e to high er ceded claims, p artl y o ffset by lo wer ceded tradition al life reserv es. Uni versal life and traditio nal life ceded claims were $9 9.4 millio n an d $1 1.5 mi llio n h ig her, respect iv ely, as compared to the y ear end ed December 31 , 20 17 . Trad iti on al l ife ced ed reserv es decreased $28 .4 million as compared to the year en ded Decemb er 3 1, 2 01 7. Ced ed amo rti zatio n o f DAC and VOBA in creased sligh t ly fo r the y ear end ed December 31 , 20 18 , as comp ared to th e year en ded Decemb er 3 1, 2 01 7. Ced ed oth er op eratin g ex pen ses refl ect th e impact of rei nsu ran ce allo wances n et of amo un ts deferred . 55 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 The h ig her ceded premium and p olicy fees fo r th e y ear end ed Decemb er 31 , 20 17 , as co mp ared to the y ear en ded December 3 1, 2 01 6, was cau sed primarily b y high er un iv ersal life p olicy fees o f $4 8.5 million , o ffset b y lo wer ced ed trad ition al life premiums o f $5 .1 mi llio n. Ced ed traditional life premiums fo r the y ear end ed December 31 , 20 17 , decreased from th e year en ded December 3 1, 2 01 6, p rimarily d ue to p ost l evel term activity . Ced ed b en efit s and settl ement exp enses were lo wer for th e year en ded December 31 , 20 17 , as compared to the y ear en ded Decemb er 3 1, 2 01 6, due to lo wer ceded claims and reserves. Trad ition al ceded b en efits decreased $30 .2 millio n fo r th e year end ed Decemb er 3 1, 20 17 , as co mp ared to t he y ear en ded Decemb er 31 , 20 16 , pri marily d ue to lo wer ced ed reserv es. Universal life ced ed benefits decreased $3 4.5 million for the y ear en ded December 31, 2 01 7, as co mp ared to th e year en ded December 3 1, 2 016, du e to a decrease i n ced ed claims, partially offset b y an in crease in ceded reserv es. Ceded u niversal life claims were $40 .0 million lower for the y ear end ed Decemb er 3 1, 2 01 7, as compared to th e year en ded December 31 , 20 16 , driv en b y fewer h ig h d ollar claims du ring th e cu rrent year. Ced ed amo rti zatio n o f DAC and VOBA decreased slig htly fo r th e y ear ended Decemb er 3 1, 20 17, as compared t o t he year end ed December 31 , 20 16 . Ced ed oth er op eratin g ex pen ses refl ect th e impact of rei nsu ran ce allo wances n et of amo un ts deferred . 56 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Acquisi tions Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $1 ,27 0,0 45 $1 ,113,35 5 $1,1 80 ,37 6 Reinsu ran ce ced ed (31 7,7 30 ) (328,16 7) (3 48 ,29 3) Net p remiu ms an d p oli cy fees 95 2,3 15 785,18 8 8 32 ,08 3 Net in vestmen t inco me 1 ,10 8,2 18 752,52 0 7 64 ,57 1 Other in come 1 4,3 13 11,42 3 10 ,80 5 Total o perating rev enues 2 ,07 4,8 46 1 ,549,13 1 1,6 07 ,45 9 Realized g ain s (losses)—inv estments (21 5,1 99 ) 121,03 6 69 ,01 8 Realized g ain s (losses)—derivativ es 16 7,5 48 (101,08 4) (46 0) Total reven ues 2 ,02 7,1 95 1 ,569,08 3 1,6 76 ,01 7 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 1 ,62 9,5 90 1 ,195,10 5 1,2 20 ,67 4 Amortization of VOBA 1 8,8 43 (6,33 0) 8 ,21 8 Other op eratin g exp enses 14 3,6 98 110,60 7 1 18 ,05 6 Op eratin g b enefits and exp enses 1 ,79 2,1 31 1 ,299,38 2 1,3 46 ,94 8 Amortization related to b enefits and set tlement exp enses 7,1 07 8,97 9 11 ,46 7 Amortization of VOBA related to realized g ain s (lo sses)—inv estments (1 53 ) (60 9) (4 0) Total b enefits and exp en ses 1 ,79 9,0 85 1 ,307,75 2 1,3 58 ,37 5 INCOME BEFORE INCOME TAX 22 8,1 10 261,33 1 3 17 ,64 2 Less: realized gains (losses)(4 7,6 51 ) 19,95 2 68 ,55 8 Less: amortization related to benefits and settlement exp enses (7,1 07 ) (8,97 9) (11 ,46 7) Less: related amo rti zation o f VOBA 1 53 60 9 4 0 PRE-TAX ADJ USTE D OPERATING INCOME $28 2,7 15 $249,74 9 $2 60 ,51 1 57 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fol lo win g tabl e summarizes key data fo r the Acqu isitio ns segmen t: For The Yea r Ended December 31 , 2018 2 0 1 7 2 0 16 (D ollars In Thous ands) Averag e Life Insurance In-Force(1) Tradit io nal $2 26 ,69 5,2 52 $22 7,4 87 ,17 5 $23 3,3 03 ,79 4 Un iv ersal life 30 ,15 3,1 43 2 7,4 73 ,47 7 2 9,5 98 ,01 4 $2 56 ,84 8,3 95 $25 4,9 60 ,65 2 $26 2,9 01 ,80 8 Averag e Acco unt Va lues Un iv ersal life $6 ,64 3,4 69 $4,1 99 ,56 8 $4,2 67 ,69 7 Fix ed annuity(2)8 ,73 6,3 31 3,5 38 ,20 4 3,5 60 ,38 9 Variable ann uity 1 ,17 6,0 23 1,1 89 ,69 5 1,1 81 ,33 2 $16 ,55 5,8 23 $8,9 27 ,46 7 $9,0 09 ,41 8 Interest Sprea d— Fix ed Annuities Net in vestmen t inco me yield 4 .18 % 4.0 7% 3.9 7% Interest cred ited to p olicy ho lders 3 .55 3.2 8 3.2 7 Interest sp read (3)0 .63 % 0.7 9% 0.7 0% (1)Amo u n ts are n o t ad justed for rein suran ce ceded. (2)Includes g eneral account b alances held with in variable annuity p rodu cts an d is n et o f coinsu rance ceded. (3)Earned rates ex clu d e p o rtfolios supp o rting m o dified coin suran ce and creditin g rates exclude 10 0 % cession s. Fo r t he Year Ended December 3 1, 2 01 8 as compa red to The Year Ended Decemb er 31 , 20 17 Pre-tax a djusted o peratin g inco me Pre-t ax ad j usted op eratin g income was $282.7 million fo r the year end ed December 3 1, 2 01 8, an in crease of $3 3.0 million as co mp ared to the year en ded Decemb er 31 , 2 01 7, primarily d ue to the fav orable imp act of $51 .3 millio n fro m th e Liberty rein su ran ce transactio n completed o n M ay 1 , 2 01 8, partly offset by th e exp ected run off o f the in-force b lo cks o f busin ess. Op erati ng reven ues Net p remiums an d po licy fees increased $1 67 .1 mill io n, o r 21 .3%, fo r th e year end ed Decemb er 31 , 20 18, as compared to th e year ended December 31 , 20 17 , p rimarily du e to th e premiums associated with the Liberty rein su ran ce transactio n mo re th an offsetting the exp ected ru no ff o f the in-force block s o f bu sin ess. Net investment in come increased $35 5.7 milli on , 47 .3%, fo r th e year end ed Decemb er 3 1, 20 18 , as co mp ared to the y ear en ded December 3 1, 20 17 , du e to the $37 4.4 millio n imp act o f the Liberty reinsurance transactio n, p artly offset b y the exp ected ru no ff of th e in -force block s of bu siness. Tota l b enefit s an d expen ses Total ben efi ts an d ex pen ses increased $49 1.3 mil lion , or 3 7.6%, fo r th e year end ed December 3 1, 2 01 8, as compared to the y ear en ded December 31 , 20 17 . The in crease was primaril y due to th e Lib erty rein surance tran saction , wh ich in creased benefits and exp enses $52 8.3 milli on . This was partly o ffset by th e ex pected run off o f the in-fo rce b lo cks o f b usin ess. Fo r t he Year Ended December 3 1, 2 01 7 as compa red to The Year Ended Decemb er 31 , 20 16 Pre-tax a djusted o peratin g inco me Pre-t ax ad ju sted o perati ng in come was $2 49 .7 mi llio n fo r th e year end ed Decemb er 3 1, 20 17 , a decrease of $10 .8 mill io n as compared to th e year en ded December 31, 2 01 6, p rimarily d ue to the ex pected ru no ff of t he in -fo rce block s o f b usiness. Op erati ng reven ues Net p remiu ms an d po licy fees decreased $46 .9 millio n, or 5 .6 %, for th e year end ed December 31 , 2 01 7, as compared to the year end ed Decemb er 31 , 20 16 , p rimarily d ue to the exp ected run off o f the in -force b locks o f b usiness. Net inv est ment in come d ecreased $12 .1 milli on , o r 1.6 %, fo r the year en ded Decemb er 3 1, 2 01 7, as compared to the y ear end ed December 31 , 20 16 . Tota l b enefit s an d expen ses Total b en efit s an d exp enses decreased $5 0.6 million , o r 3 .7 %, fo r th e y ear end ed Decemb er 31 , 2 01 7, as co mp ared to th e y ear end ed Decemb er 31 , 20 16 . The decrease was p rimarily du e to favo rab le amortization of VOBA, as well as th e ex pect ed run off o f the in-fo rce b lo cks o f b usin ess. Reinsura nce 58 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Acqui siti on s segment curren tly rein su res p ortions o f b oth its life an d annu ity in-fo rce. Th e cost of reinsurance to th e segment is reflected in the ch art sh own b elo w. A more det ail ed discu ssion of th e co mp on ents of reinsurance can b e found i n the Rein surance sectio n o f No te 2 , S ummary of S ig nifican t Acco un t in g Po licies to o ur con so lidated fin ancial statemen ts in clu ded in th is repo rt. Imp act of Reinsura nce Reinsu ran ce impacted th e Acq uisition s seg ment l in e items as sh own in th e fo llowing tab le: Acquisitio ns Segment Line Item Impa ct of Reinsura nce For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Reinsu ran ce ced ed $(31 7,7 30 ) $(328,16 7) $(3 48 ,29 3) BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses (26 7,9 98 ) (275,69 8) (2 76 ,94 7) Amortization of VOBA (6 35 ) (58 0) (43 8) Other op eratin g exp enses (3 5,9 40 ) (40,00 5) (43 ,46 3) Total b enefits and exp en ses (30 4,5 73 ) (316,28 3) (3 20 ,84 8) NET IMPACT OF REINSURANCE(1)$(1 3,1 57 ) $(11,88 4) $(27 ,44 5) (1)Assumes n o investm en t income on rein suran ce. Fo reg one investm en t income would substantially reduce the favorab le im p act o f rein surance. The seg men t’s reinsu ran ce programs d o no t materially imp act the o t her in come line of th e inco me statement. In addi tion , net inv estment inco me generally h as n o d irect imp act o n rein surance cost. Ho wev er, by ced ing bu sin ess to th e assumin g co mp anies, we fo rg o investment inco me o n the reserv es ced ed to th e assuming companies. Conversely, th e assumi ng companies will receive inv estment inco me o n the reserves assumed which wil l increase the assumin g co mp anies’ profi tability o n b usin ess assu med from the Compan y. For b usiness ceded un der mo dified co in surance arran gemen ts, th e amount o f in vestmen t in co me attribu tab le to the assu ming co mp any is i nclud ed as part o f th e o verall chan ge in po licy reserves an d, as su ch, is reflected in ben efit and settlement ex penses. Th e n et in vestmen t inco me imp act to u s and the assuming compan ies h as n ot b een qu antified as it is not fully reflected in ou r co nsolid ated finan cial statements. The n et i mp act of reinsurance was less fav orable by $1 .3 million for th e year end ed December 31 , 20 18 , as compared to th e year en ded December 31 , 20 17 , primarily d ue to lo wer ced ed b enefits an d ex pen ses partl y o ffset b y lo wer ceded revenu e. For the y ear en ded December 3 1, 2 01 8, ced ed rev en ues decreased by $1 0.4 mi llio n, while ced ed ben efits and ex pen ses d ecreased b y $11 .7 mil lion primarily du e to lo wer b en efit an d sett lemen t ex pen ses. The net imp act of reinsu ran ce was mo re fav orable by $15 .6 mil lion fo r th e year end ed December 31 , 2 01 7, as compared to th e y ear end ed December 31 , 20 16 , pri maril y d ue to lo wer ceded revenu es. For the y ear en ded December 31 , 2 01 7, ced ed reven ues d ecreased by $20 .1 mill io n, wh ile ceded ben efits an d ex pen ses decreased by $4 .6 mill io n p rimarily d ue to lower o perating exp enses. 59 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Annuiti es Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $14 8,0 33 $152,70 1 $1 46 ,45 8 Reinsu ran ce ced ed — — — Net p remiu ms an d p oli cy fees 14 8,0 33 152,70 1 1 46 ,45 8 Net in vestmen t inco me 34 0,6 85 321,84 4 3 22 ,60 8 Realized g ain s (losses)—derivativ es (8 5,0 12 ) (84,82 7) (82 ,36 5) Other in come 17 0,1 89 173,24 7 1 63 ,89 8 Total o perating rev enues 57 3,8 95 562,96 5 5 50 ,59 9 Realized g ain s (losses)—inv estments (4,2 94 ) 2 8 (4 ,24 1) Realized g ain s (losses)—derivativ es, net o f eco no mic co st (2 3,6 79 ) (112,68 7) 28 ,57 6 Total reven ues 54 5,9 22 450,30 6 5 74 ,93 4 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 22 7,2 29 212,53 3 2 13 ,18 1 Amortization of DAC and VOBA 2 8,4 26 (11,82 9) (16 ,28 4) Other op eratin g exp enses 15 1,0 54 149,18 1 1 40 ,40 9 Op eratin g b enefits and exp en ses 40 6,7 09 349,88 5 3 37 ,30 6 Amortization related to b enefits and set tlement exp enses (5 25 ) 4,09 6 91 9 Amortization of DAC/VOBA related to realized g ain s (lo sses)—inv estments (4,1 52 ) (42,64 2) 5 ,25 3 Total b enefits and exp en ses 40 2,0 32 311,33 9 3 43 ,47 8 INCOME BEFORE INCOME TAX 14 3,8 90 138,96 7 2 31 ,45 6 Less: realized gains (losses)—in vestmen ts (4,2 94 ) 2 8 (4 ,24 1) Less: realized gains (losses)—deriv atives, n et o f econ omic co st (2 3,6 79 ) (112,68 7) 28 ,57 6 Less: amortization related to benefits and settlement exp enses 5 25 (4,09 6) (91 9) Less: related amo rti zation o f DAC/VOBA 4,1 52 42,64 2 (5 ,25 3) PRE-TAX ADJ USTE D OPERATING INCOME $16 7,1 86 $213,08 0 $2 13 ,29 3 60 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The fol lo win g tabl e summarizes key data fo r the Ann uit ies seg men t: For The Year Ended December 31, 20 1 8 2 017 20 1 6 (Dollars I n Thousands) Sa les(1) Fix ed an nu ity $2,1 39 ,61 6 $1 ,13 0,8 43 $7 26 ,64 0 Variable ann uity 2 98 ,31 4 42 6,3 53 5 93 ,40 9 $2,4 37 ,93 0 $1 ,55 7,1 96 $1,3 20 ,04 9 Averag e Acco unt Va lues Fixed an nui ty (2 )$9,0 18 ,53 9 $8 ,24 5,3 82 $8,1 91 ,84 1 Variable ann uity 1 2,8 20 ,42 0 13 ,05 0,4 11 1 2,3 28 ,05 7 $2 1,8 38 ,95 9 $21 ,29 5,7 93 $2 0,5 19 ,89 8 Interest Sprea d—Fix ed Annuities(2) Net in vestmen t inco me yield 3.6 4% 3 .67 % 3.6 9% Interest cred ited to p olicy ho lders 2.5 0 2 .54 2.6 5 Interest sp read (3)1.1 4% 1 .13 % 1.0 4% (1)Sales are measured b ased o n the amount o f purch ase pay ments receiv ed less su rren d ers occurring with in twelv e m o nths o f the pu rch ase payments. (2)Includes g eneral account b alances held with in VA p rodu cts. (3)Interest spread on av erag e g en eral account v alu es. For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Deriva tiv es related to VA contra cts: Interest rate fu tures $(2 5,4 73 ) $26,01 5 $(3 ,45 0) Eq uit y futures (8 8,2 08 ) (91,77 6) (1 06 ,43 1) Cu rrency futu res 1 0,2 75 (23,17 6) 33 ,83 6 Eq uit y o ptio ns 3 8,0 83 (94,79 1) (60 ,96 2) Interest rate swaptio ns (14 ) (2,49 0) (1 ,16 1) Interest rate swaps (4 5,1 85 ) 27,98 1 20 ,42 0 To tal return swap s 7 7,2 25 (32,24 0) — Emb edd ed derivativ e - GLWB(1)(7 2,3 13 ) 3,61 4 68 ,05 6 Total d erivatives relat ed to VA co ntracts (10 5,6 10 ) (186,86 3) (49 ,69 2) Deriva tiv es related to FIA co ntracts: Embed ded deriv ative 3 5,3 97 (55,87 8) (16 ,49 4) Eq uit y futures 3 30 64 2 4 ,24 8 Vo lat ility futu res — — — Eq uit y o ptio ns (3 8,8 85 ) 44,58 5 8 ,14 9 Total d erivatives relat ed to FIA con tracts (3,1 58 ) (10,65 1) (4 ,09 7) Oth er 77 — — Econ omic cost - VA GLWB(2 )8 5,0 12 84,82 7 82 ,36 5 Realized gains (losses) - deriv atives, n et of econ omic cost $(2 3,6 79 ) $(112,68 7) $28 ,57 6 (1)Includes im p act o f nonp erforman ce risk o f $46 .3 million , $(41 .6 ) millio n, and $9.7 million for th e y ears ended Decemb er 31, 2 0 1 8 , 2017 , an d 2 016, respectively. (2)Eco nomic cost is th e lo ng-term expected av erag e co st o f pro v iding th e p rod u ct b en efit over the life o f the policy b ased on product pricin g assu mption s. Th ese include assump tio ns abou t th e econ o m ic/market enviro nment, and elective an d non-electiv e p o licy o wn er behavior (e.g. lapses, withdrawal timin g , mortality , etc.). 61 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As o f December 31 , 201 8 2017 (D ol l ars In Tho us a nds) GMDB—Net a mount at risk(1)$27 4,3 99 $72 ,82 5 GMDB Reserv es 3 9,2 40 30 ,94 4 GLWB a nd GMAB Reserves 18 4,0 71 1 11 ,76 0 Acco unt v alue subject to GLWB rider 8 ,39 9,3 00 9,7 18 ,26 3 GLWB Benefit Base 10 ,26 5,5 45 1 0,5 60 ,89 3 GMAB Benefit Ba se 1,2 38 3 ,29 8 S&P 50 0® Index 2,5 07 2 ,67 4 (1)Guaran teed benefits in excess of con tract h older acco unt balance. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Pre-t ax adj usted op eratin g inco me was $16 7.2 millio n fo r t he year ended December 31 , 2 01 8, as co mp ared to $21 3.1 million fo r the year en ded Decemb er 31 , 2 01 7, a decrease of $4 5.9 million , o r 21 .5%. This varian ce was p rimarily the result o f un fav orable u nlock in g, an u nfavo rab le chan ge in gu aranteed ben efit reserv es, and lower VA fee income, p artiall y offset by a favo rab le chan ge in SPIA mortality. Seg ment resu lts were n eg atively imp acted b y $2 5.0 mi llio n o f un fav orable un lo cking fo r th e year en ded December 31 , 20 18 , as compared to $16 .5 millio n o f favo rab le u nlock in g fo r the y ear en ded Decemb er 3 1, 2 01 7. Op erati ng reven ues Segment o perating reven ues in creased $10.9 millio n, or 1 .9%, fo r t he y ear end ed Decemb er 31 , 2 01 8, as co mp ared to th e y ear en ded Decemb er 31 , 20 17 , p rimarily d ue to h i gh er in vestmen t income, p arti all y offset by lo wer po licy fees an d other in come fro m the VA l in e o f b usiness. Average fixed acco un t balan ces increased 9.4 % and av erag e variab le acco un t balances decreased 1 .8% fo r t he y ear end ed Decemb er 31 , 2 01 8 as co mp ared t o th e year en ded Decemb er 3 1, 2 01 7. Benefit s an d settlement exp enses Ben efits an d set tlement exp enses increased $1 4.7 mi llio n, or 6.9 %, fo r t he year en ded Decemb er 31 , 20 18 , as co mp ared to the year end ed December 31 , 2 01 7. This in crease was primarily th e result o f high er cred ited in t erest, an u nfavo rab le ch ang e in gu aran teed b enefit reserv es, an d unfav orable unlo cki ng , partially offset by a fav orable ch ang e i n SPIA mortality. Includ ed in benefits and settlemen t ex penses was $3 .4 million of u nfavo rab le un lo cking fo r th e y ear en ded December 31, 2 01 8, as co mp ared to $0.2 million of fav orable u nlo ck ing fo r the year end ed December 31 , 20 17 . Amo rtizatio n o f DAC an d VOBA DAC an d VOBA amo rtizat io n un fav orably chang ed by $40 .3 million for the year end ed December 31, 2 018, as co mp ared to th e y ear ended Decemb er 3 1, 20 17 . The un fav orable ch ang es in DAC an d VOBA amortization were p rimarily d ue t o an unfav orable chang e in u nlock in g wh ich was $2 1.6 mi llio n u nfavo rab le for th e year en ded Decemb er 3 1, 2 01 8, as co mpared to $16 .3 million fav orable fo r the y ear end ed Decemb er 31 , 20 17 . Other o perat in g expen ses Other op eratin g expen ses increased $1.9 mil lion , or 1 .3%, for t he y ear ended Decemb er 31 , 20 18 , as co mpared to th e year end ed Decemb er 3 1, 20 17 . This increase was the result o f h ig her no n-deferred acqu isition co sts, partially o ffset by lo wer no n-deferred main ten ance and ov erh ead , and commission ex pen ses. S ales Total sales in creased $8 80 .7 million , o r 56.6%, for the year en ded Decemb er 31 , 2 01 8, as co mp ared to th e y ear end ed December 3 1, 20 17 . Sales of variable ann uities decreased $1 28 .0 millio n, or 30 .0% for th e year en ded Decemb er 3 1, 2 01 8, as compared t o t he year en ded December 31 , 2 01 7, p rimarily du e to th e relativ e compet itiv eness of ou r p ro du ct wi th in th e market . Sales of fixed ann uities i ncreased by $1 .0 b ill io n, o r 8 9.2 %, fo r th e y ear en ded Decemb er 3 1, 2 01 8, as compared to the y ear end ed December 31 , 20 17 , primarily du e to an i ncrease in sin gle premi um d eferred ann uities (“SPDA”) sales. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Pre-t ax adj usted op eratin g inco me was $21 3.1 millio n fo r t he year ended December 31 , 2 01 7, as co mp ared to $21 3.3 million fo r the year en ded Decemb er 3 1, 2016, a decrease of $0 .2 million, or 0.1 %. This varian ce was p rimarily the result o f an u nfavo rab le chan ge i n SPIA mort ality an d h ig her no n- deferred exp enses, partially offset b y increased interest spread s, g ro wth i n VA fee in come, an d fav orable un lo cking . Seg men t resu lts were po sitively imp acted by $1 6.5 million o f fav orable un locking for the year end ed Decemb er 31 , 20 17 , as comp ared to $8 .1 millio n of favorable u nlock in g fo r th e y ear en ded Decemb er 3 1, 2 01 6. 62 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Op erati ng reven ues Segment o perating reven ues in creased $12.4 millio n, or 2 .2%, fo r t he y ear end ed Decemb er 31 , 2 01 7, as co mp ared to th e y ear en ded Decemb er 31 , 20 16 , primarily du e t o high er po licy fees an d oth er in co me from the VA line of b usin ess. Tho se increases were partially offset by h ig her GLWB econ omic co st in th e VA line o f b usin ess. Av erag e fixed acco un t balan ces in creased 0.7 % and averag e variab le accou nt balances increased 5 .9% for the y ear end ed Decemb er 3 1, 2 01 7 as co mpared to the y ear end ed Decemb er 31 , 20 16 . Benefit s an d settlement exp enses Ben efits and settlemen t ex pen ses decreased $0.6 million , o r 0.3%, fo r the y ear en ded December 3 1, 20 17 , as co mp ared t o th e year end ed December 31 , 20 16 . Th is decrease was p rimarily th e result of lower cred ited in terest partially offset b y an u nfavo rab le change in SPIA mo rtalit y. In clu ded in benefits an d settlemen t exp enses was $0 .2 million of favo rab le unl ockin g fo r the year en ded Decemb er 3 1, 20 17 , as co mp ared to $0.4 mill io n of fav orable u nlo ck ing fo r the y ear end ed December 31 , 20 16 . Amo rtizatio n o f DAC an d VOBA DAC and VOBA amortization un fav orably ch ang ed b y $4.5 milli on , or 27 .4%, for t he y ear end ed Decemb er 3 1, 2 01 7, as co mp ared to th e year ended Decemb er 31 , 20 16 . Th e un fav orable chan ges in DAC an d VOBA amortization were primarily d ue to high er fee i ncome in th e VA line of bu siness and t he ru no ff of n egativ e VOBA in th e fix ed annuity l in es of b usin ess. These ch an ges were p artially offset by a fav orable ch ang e in u nlock in g. DAC an d VOBA un lo cki ng fo r the y ear end ed December 31 , 20 17 , was $16 .3 mill io n favo rable as compared t o $7.8 millio n favo rab le for th e year en ded Decemb er 3 1, 2 01 6. Other o perat in g expen ses Other op eratin g expen ses increased $8.8 mil lion , or 6 .2%, for t he y ear ended Decemb er 31 , 20 17 , as co mpared to th e year end ed Decemb er 3 1, 20 16 . This increase was the result o f h ig her no n-deferred acqu isition co sts, mai ntenance and ov erh ead, and commission exp enses. S ales Total sales in creased $2 37 .1 million , o r 18.0%, for the year en ded Decemb er 31 , 2 01 7, as co mp ared to th e y ear end ed December 3 1, 20 16 . Sales of variable ann uities decreased $1 67 .1 millio n, or 28 .2% for th e year en ded Decemb er 3 1, 2 01 7, as compared t o t he year en ded December 31 , 2 01 6, p rimarily du e to d i sru ption s in th e b ro ader market d riv en b y reg ulato ry ru le ch ang es an d th e relat iv e competiti veness o f ou r produ ct with i n th e market. Sales of fixed an nu ities in creased b y $40 4.2 millio n, o r 5 5.6 %, fo r the y ear end ed December 31 , 2017 , as co mp ared to the y ear end ed December 31 , 20 16 , primarily du e to an in crease in SPDA sales. 63 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Stable Value Pro ducts Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Net in vestmen t inco me $21 7,7 78 $186,57 6 $1 07 ,01 0 Other in come 2 96 2 4 22 9 Total o perating rev enues 21 8,0 74 186,60 0 1 07 ,23 9 Realized g ain s (losses)1,4 27 3,40 6 7 ,34 1 Total reven ues 21 9,5 01 190,00 6 1 14 ,58 0 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 10 9,7 47 74,57 8 41 ,73 6 Amortization of DAC 3,2 01 2,35 4 1 ,17 6 Other op eratin g exp enses 2,7 98 4,40 7 3 ,03 3 Total b enefits and exp en ses 11 5,7 46 81,33 9 45 ,94 5 INCOME BEFORE INCOME TAX 10 3,7 55 108,66 7 68 ,63 5 Less: realized gains (losses)1,4 27 3,40 6 7 ,34 1 PRE-TAX ADJ USTE D OPERATING INCOME $10 2,3 28 $105,26 1 $61 ,29 4 The fol lo win g tabl e summarizes key data fo r the Stable Valu e Prod ucts segment: For The Year Ended December 31, 20 1 8 2 017 20 1 6 (Dollars I n Thousands) Sa les(1) GIC $88 ,50 0 $11 5,5 00 $1 89 ,80 0 GFA 1,2 50 ,00 0 1 ,65 0,0 00 1,6 67 ,17 8 $1,3 38 ,50 0 $1 ,76 5,5 00 $1,8 56 ,97 8 Averag e Acco unt Va lues $4,9 46 ,95 3 $4 ,14 3,5 68 $2,7 53 ,63 6 Ending Account Values $5,2 34 ,73 1 $4 ,69 8,3 71 $3,5 01 ,63 6 Operating Spread Net in vestmen t inco me yield 4.4 0% 4 .50 % 3.9 6% Other in come y ield — — 0.0 1 Interest cred ited 2.2 1 1 .79 1.5 3 Op eratin g exp enses 0.1 2 0 .16 0.1 5 Op eratin g spread 2.0 7% 2 .55 % 2.2 9% Adju sted op eratin g sp read (2 )1.5 4% 1 .74 % 1.8 2% (1)Sales are measured at th e tim e th e p u rchase payments are receiv ed . (2)Excludes p articip atin g mortgage loan income. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Pre-t ax adjusted o perati ng inco me was $10 2.3 millio n and decreased $2 .9 milli on , o r 2 .8%, for the y ear ended December 3 1, 20 18 , as co mp ared to th e y ear en ded Decemb er 31 , 20 17 . Th e d ecrease in ad ju sted op erat in g earn in gs p rimarily resulted from lower interest spreads d riven b y h ig her credited rates on newly issu ed co ntract s. Particip ating mortg age inco me for th e year end ed Decemb er 3 1, 2 01 8, was $2 6.3 millio n as compared to $3 3.5 million fo r th e year en ded December 31 , 20 17 . The ad ju sted o perati ng spread, wh ich exclu des particip ating in come, decreased by 2 0 b asis po in ts fo r the y ear en ded December 31 , 2 01 8, from the p rior year, du e primarily to an i ncrease in credited in terest. 64 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Pre-t ax ad ju sted o perating income was $10 5.3 million and increased $44 .0 millio n, or 7 1.7 %, for the y ear en ded December 31, 2 01 7, as compared to th e year en ded December 31 , 20 16 . The increase in adjusted op eratin g earning s p rimarily resu lted fro m an in crease in parti cip ati ng mo rtgag e in come and high er av erag e acco un t values. Parti cipati ng mo rtgag e i ncome for t he y ear en ded December 31 , 2 01 7, was $3 3.5 milli on as co mp ared to $11 .0 millio n fo r th e year en ded Decemb er 31 , 20 16 . The adjusted o perating sp read, which ex clu des p articipatin g inco me, decreased by 8 b asis p oints for th e year en ded Decemb er 3 1, 2 01 7, fro m the p rior year, d ue p rimarily to an in crease in cred ited interest. 65 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Asset Pro tectio n Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $33 2,8 64 $343,48 9 $2 94 ,58 8 Reinsu ran ce ced ed (19 2,7 34 ) (189,32 3) (1 65 ,90 1) Net p remiu ms an d p oli cy fees 14 0,1 30 154,16 6 1 28 ,68 7 Net in vestmen t inco me 3 0,4 57 27,32 5 22 ,08 2 Other in come 13 9,6 56 146,08 3 1 18 ,37 6 Realized g ain s (losses)— (1) — Total o perating rev enues 31 0,2 43 327,57 3 2 69 ,14 5 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 11 3,0 73 126,45 9 1 06 ,66 8 Amortization of DAC/VOBA 6 2,7 26 16,52 4 20 ,03 3 Other op eratin g exp enses 10 4,5 33 160,23 5 1 25 ,95 7 Total b enefits and exp en ses 28 0,3 32 303,21 8 2 52 ,65 8 INCOME BEFORE INCOME TAX 2 9,9 11 24,35 5 16 ,48 7 Less: realized g ain s (lo sses) - inv est ments — (1) — PRE-TAX ADJ USTE D OPERATING INCOME $2 9,9 11 $24,35 6 $16 ,48 7 The fol lo win g tabl e summarizes key data fo r the Asset Protection segment: For The Year Ended December 31, 20 1 8 2 017 20 1 6 (Dollars I n Thousands) Sa les(1) Credi t insu ran ce $11 ,78 2 $1 5,2 92 $21 ,31 0 Serv ice con tracts 4 03 ,66 1 41 4,2 90 3 78 ,18 3 GAP 66 ,74 8 10 9,5 33 1 04 ,10 4 $4 82 ,19 1 $53 9,1 15 $5 03 ,59 7 Loss Ra tios(2 ) Credi t insu ran ce 27 .2% 2 0.5 % 32 .1% Serv ice con tracts 58 .1 6 2.6 76 .2 GAP 1 34 .7 12 1.9 1 09 .0 (1)Sales are b ased on th e amo u n t of single prem iu ms an d fees received (2)Incu rred claim s as a percentage of earn ed p remium s Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me Asset Pro tect io n seg men t p re-tax ad justed o perati ng in come was $29 .9 million , rep resen ting an increase o f $5.6 million , or 22 .8%, for th e year en ded Decemb er 3 1, 2 01 8, as co mp ared to th e year end ed December 31 , 20 17 . Service con tract earning s increased $4 .8 mill io n p rimarily du e to fav orable lo ss ratios an d high er inv estment inco me. Earning s fro m th e GAP and cred it insurance pro du ct lin es increased $0.1 million and $0 .7 mi llio n, resp ecti vely, primarily due to lo wer exp enses, somewh at o ffset b y lower vo lu me and high er loss ratio s. 66 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net premiums a nd po licy fees Net p remiu ms an d po licy fees decreased $14 .0 millio n, or 9 .1 %, for th e year end ed December 31 , 2 01 8, as compared to the year end ed Decemb er 31 , 20 17 . GAP premi ums decreased $1 3.6 milli on an d credit insurance premiums decreased $2.7 mi llio n as a result of lo wer sal es. The d ecrease was partly o ffset by an in crease in service co ntract premiums of $2.3 mill io n. Other inco me Other inco me decreased $6.4 millio n, or 4 .4%, fo r th e y ear end ed Decemb er 31 , 2 01 8, as co mp ared to th e y ear end ed Decemb er 31 , 2 01 7. Th e ch ang e was p rimari ly du e to lo wer vo lu me and the impact of an accou ntin g ch an ge imp lemented i n con juncti on with the ado ptio n o f ASU No . 20 14 -0 9. Benefit s an d settlement exp enses Ben efits an d settlemen t exp enses d ecreased $13 .4 million, or 10 .6%, for th e year en ded Decemb er 3 1, 20 18 , as compared to th e year en ded Decemb er 3 1, 2 01 7. GAP claims decreased $1 0.8 mi llio n d ue to lower v olu me. Service co ntract claims d ecreased $2.6 million primarily du e to lo wer l oss rat io s. C redit in surance claims were co nsistent with the p rior year. Amo rtizatio n o f DAC an d VOBA an d Oth er opera ting exp enses Amortization of DAC and VOBA i ncreased $4 6.2 mi llio n and other op eratin g exp enses decreased $5 5.7 mill io n for th e y ear ended Decemb er 31 , 20 18 , as comp ared to the year end ed December 31 , 20 17 . Th e ch ang e was primarily du e to t he i mpact of an acco un ting chan ge i mp lemen ted in con ju nction with the ado ptio n o f ASU No . 20 14 -0 9. S ales Total segmen t sales decreased $56.9 milli on , o r 1 0.6 %, fo r the y ear end ed December 31 , 20 18 , as co mp ared to th e y ear ended Decemb er 3 1, 20 17 . GAP sales decreased $4 2.8 millio n d ue to discon tin uing the relat io nsh i p with a si gn ifican t distribut io n part ner. Service co ntract sales decreased $1 0.6 mi llio n d ue to lower volu me resulting from th e impact of previou s pri ce increases. Cred it in su rance sales decreased $3.5 millio n d ue to d ecreasing demand fo r the p ro du ct. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me Asset Pro tect io n seg men t p re-tax ad justed o perati ng in come was $24 .4 million , rep resen ting an increase o f $7.9 million , or 47 .7%, for th e year en ded Decemb er 31, 20 17 , as compared to th e year end ed December 3 1, 2 01 6. Serv ice co ntract earn in gs in creased $1 3.7 million p rimarily du e to fav orable l oss rat io s an d $4 .8 millio n of o ne-time transactio n costs associated with t he US Warran ty acqui siti on i n 20 16 . Cred it insurance earning s decreased $0.3 million primarily du e to lower v olume. Earn in gs fro m the GAP product line d ecreased $5.5 millio n p rimarily resultin g fro m high er loss rat io s, somewhat o ffset by ad dit io nal in come p ro vided by US Warranty. Net premiums a nd po licy fees Net premiums and p olicy fees increased $25 .5 millio n, o r 19 .8%, for t he y ear end ed Decemb er 3 1, 2 01 7, as compared to the y ear en ded December 31 , 2 01 6. Service con tract premiums in creased $12 .1 milli on p rimarily d ue to the add itio n o f US Warranty bu siness, so mewhat o ffset b y h ig her ceded premiums in ex isting distribu tion chann els. GAP p remiu ms increased $1 5.0 million p rimarily d ue to h ig her p remiu m rates o n existin g b usin ess and th e ad dit io n o f US Warran ty bu sin ess. Cred it insu ran ce p remiu ms decreased $1 .6 million as a resu lt of lo wer sales. Other inco me Other i ncome i ncreased $27 .7 million , o r 2 3.4 %, for th e year end ed Decemb er 3 1, 20 17 , as compared to th e year end ed Decemb er 3 1, 20 16 , primarily du e to th e ad ditio n o f US Warranty busin ess in the service co ntract and GAP lines. Benefit s an d settlement exp enses Ben efits an d settlemen t ex pen ses in creased $1 9.8 mi llio n, o r 1 8.6 %, fo r the y ear end ed December 31 , 20 17 , as compared to th e year en ded December 31 , 20 16 . GAP claims i ncreased $23 .9 millio n d ue to high er lo ss ratios and t he acqui siti on of US Warranty. Service con tract claims d ecreased $2 .3 millio n primarily d ue t o lo wer lo ss rati os, so mewhat o ffset b y the add itio n o f claims fro m the US Warranty lin e. Credit insu ran ce cl aims d ecreased $1.8 millio n due primarily to lo wer l oss ratio s and lo wer vo lu me. Amo rtizatio n o f DAC an d VOBA an d Oth er opera ting exp enses Amortization of DAC an d VOBA was $3.5 mill io n, or 1 7.5 %, lo wer for year ended December 3 1, 20 17, as co mp ared t o th e y ear end ed Decemb er 31 , 20 16 , primarily du e to decreased amo rtizatio n o f in-force VOBA in t he GAP pro du ct lin e and lo wer vo lume in the credit p rod uct line. Oth er o perating ex pen ses were $34 .3 million h ig her for th e y ear en ded Decemb er 31 , 2 01 7, as co mp ared t o th e y ear en ded Decemb er 31 , 2 01 6, primarily due to th e acq uisition of US Warranty. S ales Total segmen t sales i ncreased $3 5.5 million, o r 7 .1%, for th e year en ded Decemb er 3 1, 2 01 7, as compared to the y ear end ed Decemb er 31, 20 16 . Servi ce co ntract sales increased $36 .1 mil lion du e to ad dit io nal vo lu me pro vided by US Warran ty . 67 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. GAP sales increased $5.4 million d ue to add iti on al v olu me p ro vided b y US Warran ty. Credit in surance sales decreased $6.0 mil lion d ue to decreasin g deman d for th e prod uct. Reinsura nce The majo rity o f th e Asset Pro tect io n segmen t’s reinsurance act iv ity relates to th e cession o f sin gle p remiu m credit life and cred it accid ent and h ealth in surance, v ehicle serv ice co ntracts, an d gu aran teed asset p ro tect io n in surance to p ro du cer affiliated reinsu ran ce compan ies (“PARCs”). These arran gements are coinsu ran ce co ntracts ceding th e bu si ness o n a first dollar q uo ta sh are b asis g enerally at 10 0% to limit t he seg ment’s exp osure and allow th e PARCs to share in the un derwriting i ncome o f th e prod uct. Rein su ran ce con tracts do not reliev e the Asset Protection seg men t from obl ig ation s to po licyh olders. The Asset Pro tectio n segment also carries a catastro ph ic reinsurance policy fo r the GAP prog ram. Losses in curred as a result o f t he recent hu rri can es are cov ered un der th is p olicy. The Asset Protective segmen t believ es losses fro m th ese cat astrop hes, net o f rei nsu ran ce, will hav e an immat eri al imp act on the segmen t’s resu lts o f o perati on s. A more detailed d iscu ssion of th e components o f rein surance can b e fo un d in the Rein su rance sectio n o f No te 2, S ummary of S ig nifican t Acco un t in g Po licies to o ur con so lidated fin ancial statemen ts in clu ded in th is repo rt. Reinsu ran ce impacted th e Asset Pro tectio n seg men t lin e items as sho wn in the fo llo wing tab le: Asset Pro tectio n Segment Line Item Impa ct of Reinsura nce For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Reinsu ran ce ced ed $(19 2,7 34 ) $(189,32 3) $(1 65 ,90 1) BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses (8 3,0 05 ) (80,43 9) (72 ,74 2) Amortization of DAC/VOBA (4,1 60 ) (3,21 6) (1 ,87 0) Other op eratin g exp enses (6 99 ) (3,68 5) (4 ,74 5) Total b enefits and exp en ses (8 7,8 64 ) (87,34 0) (79 ,35 7) NET IMPACT OF REINSURANCE(1)$(10 4,8 70 ) $(101,98 3) $(86 ,54 4) (1)Assumes n o investm en t income on rein suran ce. Fo reg one investm en t income would substantially ch an g e th e im p act o f rein suran ce. Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Reinsu ran ce p remiu ms ceded in creased $3.4 mill io n, or 1.8 %, for th e y ear end ed December 31 , 2 01 8, as compared to th e y ear end ed December 31 , 20 17 . Service co ntract ceded p remiu ms i ncreased $6.4 mill io n, or 4 .2%. GAP ced ed premi ums d ecreased $1.7 million , o r 7.1 %. Ced ed premiums in t he credit line decreased $1.3 mi llio n, o r 9 .8%. Ben efits and settlement ex penses ceded in creased $2.6 million, or 3 .2%, for the year ended Decemb er 3 1, 2018 , as compared to the y ear en ded Decemb er 31 , 2 01 7. The in crease was p rimarily du e to high er ceded losses in th e service co ntract p ro du ct line so mewhat o ffset b y lo wer ced ed lo sses in th e GAP prod uct line as a result o f Hurricane Harvey claims in curred in 20 17 . Amortization o f DAC and VOBA ceded was $0 .9 millio n, or 2 9.4 %, h ig her for the year end ed December 3 1, 20 18 , as co mp ared to th e y ear ended Decemb er 31 , 20 17 , d ue to in creases in al l p rod uct lines. Oth er op eratin g ex pen ses were $3 .0 millio n lo wer fo r th e year end ed December 31 , 2 01 8, as co mp ared to th e year en ded Decemb er 3 1, 2 01 7, d ue to decreases in all prod uct lines. Net in vestmen t in come has n o direct impact on reinsurance cost. Ho wev er, by ceding bu siness to t he assu ming co mp an ies, th e Asset Pro tectio n segmen t forg oes i nv estment in co me o n the reserves ceded . Co nv ersely, th e assumin g co mpan ies will receive in vestmen t inco me on th e reserves assumed wh ich gen erally will in crease the assumin g co mp anies’ profitab ility on bu siness ced ed. The n et inv estment inco me imp act to th e Asset Protection seg men t an d the assumin g compan ies h as no t b een q uan tified as it is n ot reflected in ou r co nsol id ated fi nancial stat ements. Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Reinsu ran ce premiums ceded in creased $23.4 mi llio n, o r 1 4.1 %, for th e year end ed December 31 , 20 17 , as compared to th e year en ded December 31 , 20 16 . Service co ntract ceded p remiu ms in creased $21 .1 millio n, or 1 6.1 %. GAP ced ed premiums in creased $4 .7 millio n, or 2 4.0 %. Ced ed p remiu ms i n th e credit li ne decreased $2.4 mill io n, o r 1 5.6 %. 68 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Ben efits and settlemen t exp en ses ced ed in creased $7.7 million , o r 10 .6%, for th e year ended December 3 1, 2 01 7, as co mp ared t o th e year en ded Decemb er 31, 20 16 . GAP ceded claims in creased $8.7 million part ly du e ceded claims related to Hu rri can e Harv ey. The increase was partially offset b y a $1.0 mi llio n d ecrease in ceded claims in t he cred it prod uct line. Amortization o f DAC and VOBA ceded was $1 .3 millio n, or 7 2.0 %, h ig her for the year end ed December 3 1, 20 17 , as co mp ared to th e y ear ended Decemb er 31 , 20 16 , d ue to in creases in al l p rod uct lines. Oth er op eratin g ex pen ses were $1 .1 millio n lo wer fo r th e year end ed December 31 , 2 01 7, as co mp ared to th e year en ded Decemb er 3 1, 2 01 6, d ue to decreases in all prod uct lines. Net in vestmen t in come has n o direct impact on reinsurance cost. Ho wev er, by ceding bu siness to t he assu ming co mp an ies, th e Asset Pro tectio n segmen t forg oes i nv estment in co me o n the reserves ceded . Co nv ersely, th e assumin g co mpan ies will receive in vestmen t inco me on th e reserves assumed wh ich gen erally will in crease the assumin g co mp anies’ profitab ility on bu siness ced ed. The n et inv estment inco me imp act to th e Asset Protection seg men t an d the assumin g compan ies h as no t b een q uan tified as it is n ot reflected in ou r co nsol id ated fi nancial stat ements. 69 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Co rpo rate and Other Segment R esults of Op erati ons Segment resu lts were as foll ows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) REVENUES Gross premiums and p olicy fees $1 2,7 13 $12,79 9 $13 ,98 6 Reinsu ran ce ced ed (5 15 ) (8 1) (24 6) Net p remiu ms an d p oli cy fees 1 2,1 98 12,71 8 13 ,74 0 Net in vestmen t inco me 23 4,8 31 209,32 4 2 00 ,69 0 Other in come 3,2 19 3,03 0 11 ,05 3 Total o perating rev enues 25 0,2 48 225,07 2 2 25 ,48 3 Realized g ain s (losses)—inv estments (1,0 95 ) (8,49 2) (4 ,88 6) Realized g ain s (losses)—derivativ es (8 55 ) (1,87 4) 82 6 Total reven ues 24 8,2 98 214,70 6 2 21 ,42 3 BENEFITS AND EXPE NSES Benefits an d settlemen t exp enses 1 7,6 47 16,38 2 17 ,94 6 Amortization of DAC/VOBA — — — Other op eratin g exp enses 31 6,8 30 345,02 2 2 95 ,49 8 Total b enefits and exp en ses 33 4,4 77 361,40 4 3 13 ,44 4 INCOME (LOSS) BE FORE INCOME TAX (8 6,1 79 ) (146,69 8) (92 ,02 1) Less: realized gains (losses)—in vestmen ts (1,0 95 ) (8,49 2) (4 ,88 6) Less: realized gains (losses)—deriv atives (8 55 ) (1,87 4) 82 6 PRE-TAX ADJ USTE D OPERATING INCOME (LOSS)$(8 4,2 29 ) $(136,33 2) $(87 ,96 1) Fo r The Year Ended Decemb er 31 , 20 18 , as co mp ared to The Yea r End ed December 3 1, 2 01 7 Pre-tax a djusted o peratin g inco me (lo ss) Pre-t ax adjusted op erat in g loss was $8 4.2 million fo r the y ear en ded Decemb er 3 1, 2 01 8, as comp ared to an ad ju sted p re-tax op eratin g loss of $13 6.3 mi llio n for th e year en ded December 3 1, 2 01 7. Th e decrease in o perating lo ss is primaril y attrib utable to a d ecrease in corpo rate ov erh ead exp enses an d an in crease in in vestmen t in co me. Op erati ng reven ues Net in vestmen t i ncome fo r t he segment in creased $25 .5 mil lion , or 1 2.2 %, fo r the year end ed December 3 1, 2 01 8, as compared to th e year en ded Decemb er 3 1, 2 01 7. Th e in crease in net in vestmen t inco me was primarily d ue to an increase in in vested assets and i nv estment yield s. Other inco me Other in come in creased $0 .2 million or 6.2 % for th e year en ded December 31 , 20 18 , as compared to the y ear en ded December 31, 20 17 . The increase in other in come is con sidered i mmaterial an d can flu ctu ate y ear ov er y ear. Tota l b enefit s an d expen ses Total b enefits and exp enses d ecreased $26 .9 million or 7.5 %, fo r the y ear end ed December 31 , 2 01 8, as co mp ared to the y ear end ed Decemb er 31 , 20 17 . Ot her o perating ex pen ses were high er du rin g th e year end ed December 31 , 2 01 7, as certain co mp ensati on ex pen ses were elevated du e to th e p osit iv e impact on p erforman ce metrics as a resu lt o f tax refo rm. Th is decrease was p artially o ffset by increased in terest exp ense du ring the year end ed Decemb er 31 , 20 18 . Fo r The Year Ended Decemb er 31 , 20 17 , as co mp ared to The Yea r End ed December 3 1, 2 01 6 Pre-tax a djusted o peratin g inco me (lo ss) Pre-t ax adjusted op erat in g loss was $1 36 .3 million for th e year end ed December 31 , 20 17 , as compared to an adjusted pre-tax o perating lo ss o f $8 8.0 mi llio n for the year en ded December 3 1, 201 6. The decrease is primarily attri bu tab le to a $4 9.5 millio n increase in corpo rate o verhead exp ense. Th e increase in o verhead exp en ses was primarily du e to certain accrued expenses that increased as a result of th e fav orable after-tax adj usted op eratin g in come results wh ich in creased du e to the ch ang e in the co rp orate tax rate du rin g t he perio d. 70 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Op erati ng reven ues Net inv estment inco me for th e segment increased $8.6 mill io n, or 4.3 %, for th e year ended December 3 1, 2017 , as co mp ared to th e year en ded Decemb er 3 1, 2 01 6. Th e in crease in net in vestmen t inco me was primarily d ue to an increase in in vested assets and i nv estment yield s. Other inco me Other inco me d ecreased $8.0 milli on o r 72 .6 % fo r th e year ended December 3 1, 2 01 7, as co mp ared t o th e year en ded December 3 1, 20 16 . Th e decrease in inco me was primarily du e to a decrease in the g ain o n ex ting uish men t o f d ebt. Tota l b enefit s an d expen ses Total ben efits and exp enses increased $48 .0 mill io n o r 15 .3%, fo r th e year end ed Decemb er 31 , 201 7, as compared to th e year en ded December 31 , 20 16 , p rimari ly du e to in creases i n corporate ov erh ead exp enses. 71 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents CONSOLIDATED INVESTMENTS As o f December 3 1, 2 01 8, o ur investment po rtfolio was approx imately $6 6.1 bi llio n. Th e typ es of assets in wh ich we may inv est are infl uenced by vario us state i nsu ran ce laws wh ich p rescrib e qu alified in vestmen t asset s. With in the p arameters o f th ese laws, we in vest in assets givin g co nsid eratio n to such facto rs as liq uidity an d capital n eeds, in vestmen t quality, i nv estment retu rn , match in g of assets and li ab i lities, an d th e o verall co mp ositio n of th e inv estment po rtfo lio b y asset typ e an d credit ex po sure. Within o ur fix ed matu rity i nv estments, we mai ntain po rtfol io s classified as “availab le-fo r-sale”, “trad ing”, an d “h eld -to-maturi ty ”. We pu rch ase ou r av ailable-for-sale inv estments with th e in ten t to ho ld to maturi ty by pu rch asing in vestmen ts th at match fu tu re cash flo w n eeds. Ho wev er, we may sell any of ou r av ailable-for-sale an d trading i nv estments to maint ain prop er matchi ng of assets an d liabilities. Acco rding ly, we classified $4 9.5 billion , or 9 0.8 %, o f ou r fixed matu rities as “av ailable-for-sale” as of December 31 , 20 18 . These secu rities are carried at fair v alu e o n o ur con so lidated b alan ce sheets. Ch ang es in fair value fo r o ur availab le-fo r-sal e p ort fo lio, n et o f tax and th e related impact o n certain insu ran ce assets an d li ab ilities, are reco rded d irectly to shareo wner’s eq uit y. Declines in fai r v alue that are oth er-th an-tempo rary are recorded as real ized losses in the con solidat ed statemen ts of in come, n et o f an y appl icable no n-credit co mp on ent of th e lo ss, which is reco rded as an adjustmen t to o th er co mp reh en sive inco me (loss). Trad in g secu rities are carried at fai r v alu e an d ch ang es in fair v alu e are reco rd ed o n the inco me statement as th ey o ccu r. Our trading po rtfolio acco un ted for $2 .4 billion , o r 4 .4%, of ou r fix ed maturities an d $3 0.9 mi llio n o f sh ort-term inv estments as of Decemb er 3 1, 2 01 8. The ch ange in fair value o f th e trad in g po rtfolio is passed to the reinsu rers th ro ugh the con tractu al terms of th e rein su rance arrang ements. Partially o ffsetti ng these amo un ts are co rresp on ding changes in the fair valu e of th e emb ed ded deriv ative asso ciated wi th th e u nderly in g rein surance arrang emen t. Fi xed maturiti es with respect to which we hav e bo th the po si tive in ten t an d abilit y to ho l d to maturity are classified as “h eld -to-maturity ”. We classified $2 .6 b illion , o r 4 .8%, o f ou r fix ed matu rities as “hel d-to -matu rity ” as o f Decemb er 3 1, 20 18 . Th ese secu rit ies are carried at amortized co st o n ou r co nsolid ated bal an ce sheets. Fair values for p rivate, n on -traded secu rit ies are d etermined as fo llows: 1) we ob tain estimates fro m ind epen den t p ricin g services and 2) we estimate fai r valu e b ased up on a co mp ari son to qu oted issues of t he same issu er or i ssues of o ther issuers with similar terms an d risk characteristics. We an aly ze the in depen den t pricing services v alu ation meth od olog ies and related inp uts, includ ing an assessment of the ob serv ability of market inp uts. Up on o btain in g th is in fo rmation related t o fair v alu e, manag ement makes a d eterminatio n as t o the ap prop riat e val uatio n amou nt. Fo r more i nformatio n ab ou t th e fair values o f ou r inv estments please refer to Note 6, Fa ir Value o f Finan cial Instru men ts, to th e fi nancial stat ements. The fol lo win g tabl e p resen t s th e rep orted values o f o ur in vested assets: As of December 3 1, 2 0 1 8 2 017 (Dolla rs I n Thousands) Pu blicly issu ed b on ds (amo rti zed cost: 2018 - $40 ,4 96,61 7; 201 7 - $3 0,8 80 ,19 6)$3 8,3 46 ,70 8 5 8.1 % $30 ,86 0,5 41 56 .5% Privately issu ed b on ds (amo rti zed cost: 2 01 8 - $1 6,4 97 ,52 3; 20 17 - $1 2,8 94 ,56 9)1 6,0 97 ,38 6 2 4.3 12 ,93 9,9 97 23 .7 Redeemab le preferred stock (amo rti zed cost: 2018 - $105,639; 2 01 7 - $9 7,6 90 )94 ,07 9 0.1 9 4,4 18 0 .1 Fix ed matu rities 5 4,5 38 ,17 3 8 2.5 % 43 ,89 4,9 56 80 .3% Equi ty securities (cost: 20 18 - $62 7,0 87 ; 2 01 7 - $7 40 ,81 3)5 95 ,88 4 0.9 75 4,3 60 1 .4 M ortg age loans 7,7 24 ,73 3 1 1.7 6 ,81 7,7 23 12 .5 In vestmen t real estate 6 ,81 6 — 8,3 55 — Po licy loan s 1,6 95 ,88 6 2.6 1 ,61 5,6 15 3 .0 Oth er lon g-term inv estments 7 59 ,35 4 1.1 91 5,5 95 1 .7 Sh ort-term in vestmen ts 8 07 ,28 3 1.2 61 5,2 10 1 .1 To tal in vestment s $6 6,1 28 ,12 9 10 0.0 % $54 ,62 1,8 14 1 00 .0% In cluded in the preced in g table are $2.4 b i llio n and $2 .7 bil lion of fixed matu rities and $30 .9 million and $56 .3 million of sho rt-term in vestmen ts classified as trad i ng securities as of Decemb er 3 1, 2 01 8 an d 2 01 7, resp ectiv ely. All o f th e fix ed matu rities in the trad in g po rtfo l io are in vested assets t hat are held pu rsuan t to M od co arran gemen ts un der wh ich th e eco no mic risk s and benefi ts o f the inv estments are p assed to th ird p arty rein surers. 72 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Fix ed Maturity Investments As o f Decemb er 3 1, 2 01 8, o ur fix ed matu rity in vestmen t h oldin gs were app ro ximately $54 .5 billio n. The ap prox i mate percen tag e distribut io n of ou r fixed matu rity inv estments by qu alit y rati ng is as foll ows: As o f December 31 , Ra ting 2 018 2 0 17 (Dollars i n Thousa nds ) AAA $6 ,82 2,1 18 1 2.5 % $5,7 40 ,115 13 .1% AA 6 ,21 9,5 79 1 1.4 3,5 77 ,512 8 .2 A 17 ,69 4,6 97 3 2.4 1 3,9 69 ,721 31 .8 BBB 19 ,45 5,6 34 3 5.7 1 5,7 52 ,970 35 .9 Belo w inv est ment grade 1 ,71 2,6 71 3.2 2,1 35 ,734 4 .8 Not rated(1 ) 2 ,63 3,4 74 4.8 2,7 18 ,904 6 .2 $54 ,53 8,1 73 10 0.0 % $4 3,8 94 ,956 1 00 .0% (1) Ou r “not rated” securities are $2 .6 billion , o r 4.8 % of o u r fix ed maturity investments, of h eld -to-maturity secu rities issu ed b y affiliates of th e Comp an y wh ich are co n sidered v ariable interest en tities (“VIE’s”) and are discu ssed in No te 5 , In vestment Opera tions, to the conso lid ated financial statements. We are no t th e p rimary beneficiary o f these entities an d th us th ese secu rities are n ot eliminated in con solidation . These securities are collateralized by n o n -recourse fu n ding o b lig ations issu ed b y cap tiv e in suran ce comp an ies that are wholly o wn ed subsidiaries o f the Co mpany. We use vario us Natio nal ly Reco gn ized St ati stical Ratin g Org anization s’ (“NR SRO”) rating s when classify in g secu rities b y q uality rating s. When th e vario us NRSRO rating s are no t co nsistent for a securi ty, we use th e secon d-hig hest con ven tion i n assig ning the rating . When th ere are no su ch p ub lished rat in gs, we assign a rat in g b ased on t he statu to ry acco un tin g rati ng system if such ratin gs are av ailable. The distribut io n o f o ur fixed mat urity inv est ments b y typ e is as follows: As of December 31, Type 2018 2017 (Dollars In Thousands) Corpo rate securities $37 ,786,66 1 $3 1,4 00 ,19 3 Resid ential mo rtgag e-b ack ed secu rities 3 ,853,42 6 2,5 86 ,90 6 Commercial mortg age-backed securities 2 ,484,00 9 2,0 36 ,62 6 Oth er asset-b acked secu rities 1 ,551,80 0 1,3 87 ,64 6 U.S. go vernment-related secu rities 1 ,699,29 9 1,2 50 ,48 6 Oth er g ov ern ment-rel ated secu rit ies 560,17 1 3 51 ,20 7 States, mun icipals, and po litical sub division s 3 ,875,25 4 2,0 68 ,57 0 Redeemab le preferred stock 94,07 9 94 ,41 8 Secu rities issued by affiliates 2 ,633,47 4 2,7 18 ,90 4 To tal fix ed in come po rtfo lio $54 ,538,17 3 $4 3,8 94 ,95 6 73 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents We perio dically up date ou r in du stry seg men tatio n based on an ind ustry accepted in dex . Updates to th is in dex can resu lt in a ch ange in segmen t ati on fo r certain securi ties between perio ds. The ind ustry segment compo sition of ou r fix ed matu rity securiti es is p resen ted in th e fo llowing tab le: As of December 31, 2 0 1 8 % Fair Value As of December 3 1, 201 7 % Fa ir Value (Dollars In Thousands) (Dolla rs I n Thousands) Bankin g $5 ,26 0,7 25 9.6 % $4,301,8 21 9 .8% Oth er fin ance 25 5,4 45 0.5 60,6 97 0 .1 El ectric utility 4 ,55 0,9 17 8.3 3,977,0 35 9 .1 Energy 4 ,06 4,3 40 7.5 4,009,9 26 9 .1 Natu ral gas 82 9,6 85 1.5 736,6 26 1 .7 In su ran ce 3 ,91 6,9 05 7.2 3,689,5 72 8 .4 Commu nication s 2 ,08 6,5 92 3.8 1,691,3 91 3 .9 Basic ind ustrial 1 ,74 4,8 53 3.2 1,629,3 49 3 .7 Con sumer n on cycl ical 5 ,21 7,1 11 9.6 3,816,0 11 8 .7 Con sumer cy cli cal 1 ,85 0,8 68 3.4 1,232,9 91 2 .8 Finan ce co mp anies 19 2,0 74 0.4 162,6 73 0 .4 Capi tal go od s 2 ,71 1,7 28 5.0 1,910,9 50 4 .4 Tran sp ortatio n 1 ,66 9,6 27 3.1 1,210,2 72 2 .8 Oth er ind ustrial 38 2,1 38 0.7 239,3 68 0 .5 Bro kerage 99 9,5 54 1.8 921,2 95 2 .1 Techn olog y 1 ,90 8,8 23 3.5 1,756,7 46 4 .0 Real est ate 20 6,7 95 0.4 82,1 25 0 .2 Oth er u tility 3 2,5 60 0.1 65,7 63 0 .1 Commercial mortg age-backed securities 2 ,48 4,0 09 4.6 2,036,6 26 4 .6 Oth er asset-b acked secu rities 1 ,55 1,8 00 2.8 1,387,6 46 3 .2 Resid ential mo rtgag e-b ack ed n on -ag ency secu rities 3 ,01 7,0 64 5.5 1,861,8 83 4 .2 Resid ential mo rtgag e-b ack ed ag ency secu rit ies 83 6,3 62 1.5 725,0 23 1 .7 U.S. go vernment-related secu rities 1 ,69 9,2 99 3.1 1,250,4 86 2 .8 Oth er g ov ern ment-rel ated secu rit ies 56 0,1 71 1.0 351,2 07 0 .8 State, mun ici pal s, and p olitical d iv isio ns 3 ,87 5,2 54 7.1 2,068,5 70 4 .7 Secu rities issued by affiliates 2 ,63 3,4 74 4.8 2,718,9 04 6 .2 Total $54 ,53 8,1 73 10 0.0 % $4 3,894,9 56 1 00 .0% The tot al M od co trad in g p ortfoli o fix ed maturi ties by ratin g is as follo ws: As of December 31, Ra ting 2018 2017 (Dollars In Thousands) AAA $301,15 5 $3 55 ,71 9 AA 299,43 8 2 77 ,98 4 A 798,69 1 9 11 ,49 0 BBB 872,61 3 8 90 ,10 1 Belo w inv est ment grade 144,29 5 2 28 ,89 5 To tal M od co t radin g fix ed maturi ties $2 ,416,19 2 $2,6 64 ,18 9 74 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents A po rti on of o ur bo nd p ortfolio is inv ested in RM BS, CM BS, an d ABS. ABS are secu rit ies th at are backed b y a p oo l of assets. Th ese h olding s as of Decemb er 3 1, 2 01 8, were approx imatel y $7.9 b i llio n. Mortgage-back ed secu rities (“MBS”) are constru cted from po ols o f mortg ages an d may hav e cash flo w vo lat ility as a result of ch ang es in th e rate at wh ich p rep ayments o f princi pal o ccu r with respect t o th e u nd erlying loan s. Exclud in g limit ati on s o n access to lendi ng and other extrao rdi nary econ omic co nd ition s, prepay men ts of pri ncipal on th e un derly i ng lo ans can b e exp ected to accelerate with d ecreases in mark et interest rates and dimin ish with increases in in terest rates. The followin g tab les in clu de the percen tag e of o ur coll ateral g ro up ed b y ratin g catego ry and cat eg orize th e estimated fair valu e b y y ear o f security orig in ation fo r o ur Pri me, Non -Prime, Commercial , an d Other asset-back ed securities as of December 31 , 2018 an d 2 01 7. As of December 3 1 , 2018 Prime(1 ) Non-Prime(1) Co mmercia l O ther asset-ba cked Tota l Fair Amortized Fa ir Amo rtized Fa ir Amortized Fair Amortized Fair Amo rtized Va lue Co st Value Cost Value Co st Value Co st Va lue Cost (D ollars In M i llio ns) Ra ting $ AAA $2,900 .5 $2,930 .7 $— $— $1 ,3 9 8.8 $1,427.2 $53 3 .3 $5 36.3 $4,832.6 $4,8 9 4 .2 AA 2 .9 2 .9 0 .2 0 .2 5 4 3.1 562.7 20 9 .8 2 07.2 756.0 7 7 3 .0 A 837 .9 846 .6 1 9 .0 1 9 .0 5 0 3.5 509.9 67 1 .1 6 87.5 2,031.5 2,0 6 3 .0 BBB 3 .7 3 .7 3 .1 3 .1 3 8.6 38.5 9 9 .5 1 00.4 144.9 1 4 5 .7 Below 22 .4 22 .4 6 3 .7 6 3 .7 — — 3 8 .1 38.6 124.2 1 2 4 .7 $3,767 .4 $3,806 .3 $8 6 .0 $8 6 .0 $2 ,4 8 4.0 $2,538.3 $1,55 1 .8 $1 ,5 70.0 $7,889.2 $8,0 0 0 .6 Ra ting % AAA 77 .0 % 77 .0 % —% —% 5 6.2% 56.2 % 3 4 .4% 34.1% 61.3 % 6 1 .1% AA 0 .1 0 .1 0 .3 0 .3 2 1.9 22.2 1 3 .5 13.2 9.6 9 .7 A 22 .2 22 .2 2 2 .1 2 2 .1 2 0.3 20.1 4 3 .2 43.8 25.7 2 5 .8 BBB 0 .1 0 .1 3 .6 3 .6 1.6 1.5 6 .4 6.4 1.8 1 .8 Below 0 .6 0 .6 7 4 .0 7 4 .0 — — 2 .5 2.5 1.6 1 .6 100 .0 % 100 .0 % 1 0 0 .0% 1 0 0 .0% 1 0 0.0% 100.0 % 10 0 .0% 1 00.0% 100.0 % 1 0 0 .0% Estima ted Fa ir Va lue o f Security by Yea r o f Security O rig inatio n 2 0 14 and prior $1,114 .3 $1,121 .7 $8 6 .0 $8 6 .0 $1 ,5 1 0.6 $1,538.9 $72 9 .0 $7 30.7 $3,439.9 $3,4 7 7 .3 2 0 15 579 .1 586 .5 — — 2 9 8.7 303.1 6 4 .4 66.2 942.2 9 5 5 .8 2 0 16 340 .6 348 .2 — — 4 4 1.0 460.1 22 7 .5 2 30.0 1,009.1 1,0 3 8 .3 2 0 17 666 .6 689 .1 — — 1 2 3.0 126.4 40 6 .1 4 15.5 1,195.7 1,2 3 1 .0 2 0 18 1,066 .8 1,060 .8 — — 1 1 0.7 109.8 12 4 .8 1 27.6 1,302.3 1,2 9 8 .2 Total $3,767 .4 $3,806 .3 $8 6 .0 $8 6 .0 $2 ,4 8 4.0 $2,538.3 $1,55 1 .8 $1 ,5 70.0 $7,889.2 $8,0 0 0 .6 (1)Included in Residential Mortg ag e-Back ed securities. 75 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents As of December 3 1 , 2017 Prime(1) No n-Prime(1 ) Co mmercia l O ther asset-ba cked Tota l Fair Amo rtized Fair Amo rtized Fa ir Amortized Fair Amortized Fair Amo rtized Va lue Cost Va lue Cost Value Co st Value Co st Va lue Cost (D ollars In M i llio ns) Ra ting $ AAA $2,264 .2 $2,2 6 8 .0 $— $— $1 ,2 5 8.2 $1,271.1 $59 1 .5 $5 90.5 $4,113.9 $4,1 2 9 .6 AA 1 .4 1 .4 — — 5 2 2.9 533.6 15 8 .5 1 50.1 682.8 6 8 5 .1 A 1 .1 1 .1 1 5 .9 15 .9 2 5 2.2 253.9 51 2 .9 5 08.6 782.1 7 7 9 .5 BBB 1 .5 1 .5 1 .5 1 .5 3.3 3.3 5 0 .2 49.6 56.5 5 5 .9 Below 92 .5 9 2 .1 2 0 8 .8 209 .0 — — 7 4 .5 73.7 375.8 3 7 4 .8 $2,360 .7 $2,3 6 4 .1 $2 2 6 .2 $226 .4 $2 ,0 3 6.6 $2,061.9 $1,38 7 .6 $1 ,3 72.5 $6,011.1 $6,0 2 4 .9 Ra ting % AAA 95 .9 % 9 5 .9% —% —% 6 1.7% 61.6 % 4 2 .6% 43.0% 68.4 % 6 8 .5% AA 0 .1 0 .1 — — 2 5.7 25.9 1 1 .4 10.9 11.4 1 1 .4 A — — 7 .0 7 .0 1 2.4 12.3 3 7 .0 37.1 13.0 1 2 .9 BBB 0 .1 0 .1 0 .6 0 .6 0.2 0.2 3 .6 3.6 0.9 0 .9 Below 3 .9 3 .9 9 2 .4 92 .4 — — 5 .4 5.4 6.3 6 .3 100 .0 % 1 0 0 .0% 1 0 0 .0% 100 .0 % 1 0 0.0% 100.0 % 10 0 .0% 1 00.0% 100.0 % 1 0 0 .0% Estima ted Fa ir Va lue o f Security by Yea r o f Security O rig inatio n 2 0 13 and prior $897 .4 $8 9 8 .8 $2 2 6 .2 $226 .4 $1 ,0 2 5.2 $1,039.4 $76 1 .2 $7 52.4 $2,910.0 $2,9 1 7 .0 2 0 14 203 .8 2 0 2 .8 — — 2 3 9.0 243.8 3 1 .2 31.6 474.0 4 7 8 .2 2 0 15 456 .4 4 5 8 .4 — — 2 1 3.7 211.9 2 9 .4 28.7 699.5 6 9 9 .0 2 0 16 237 .0 2 4 0 .0 — — 4 5 6.2 463.8 23 2 .9 2 30.3 926.1 9 3 4 .1 2 0 17 566 .1 5 6 4 .1 — — 1 0 2.5 103.0 33 2 .9 3 29.5 1,001.5 9 9 6 .6 Total $2,360 .7 $2,3 6 4 .1 $2 2 6 .2 $226 .4 $2 ,0 3 6.6 $2,061.9 $1,38 7 .6 $1 ,3 72.5 $6,011.1 $6,0 2 4 .9 (1) Included in Residential Mortg ag e-Backed securities The majo rity o f o ur RM BS h oldin gs as of December 31 , 2 01 8 were su per sen io r o r senior b on ds in the capital structure. Our tot al n on -ag ency po rtfo lio h as a wei gh ted -average l ife o f 1 4.7 9 y ears. Th e foll owin g table catego rizes th e weigh ted -av erag e life fo r o ur no n-agency po rtfol io , b y cat egory o f material ho ld ing s, as of December 3 1, 2 01 8: Non-a g ency portfo lio Weighted-Avera ge Life Prime 14 .84 Alt-A 3 .05 Sub -p rime 3 .47 Mo rtg ag e Lo ans We in vest a p ortio n o f ou r in vestmen t portfo lio in commercial mo rtgag e loans. As of December 3 1, 20 18 , o ur mortg age loan h olding s were ap proxi mately $7 .7 b illio n. We hav e sp ecialized in mak in g lo ans on either cred it-orien ted commercial properti es or credit-anch ored strip sh op pin g cen ters an d apartments. Ou r un derwri ting p ro cedu res relative to o ur co mmercial loan p ortfoli o are b ased, in o ur v iew, on a con serv ative an d disciplin ed app ro ach . We co ncentrate on a small n umber o f co mmerci al real estate asset typ es asso ciated with the necessities o f life (retail, multi-family, sen i or living , profession al office b uild i ng s, an d wareh ou ses). We b elieve th at t hese asset typ es ten d t o weather eco no mic do wn t urns b etter than o th er commercial asset classes in wh ich we hav e cho sen not to particip ate. We b eli ev e this discipl in ed ap pro ach h as helped to main t ain a rel ati vely lo w d eli nq uency an d fo reclosure rate th ro ug ho ut ou r h isto ry. Th e majority of ou r mo rtgag e lo ans p ort fo lio was un derwritten an d fun ded by u s. From t ime to time, we may acqu i re loan s i n co njun ction with an acq uisition . Ou r commercial mo rtgag e loan s are stated at un paid princip al balance, ad ju st ed for an y un amo rtized p remiu m or d isco un t, and n et of an allo wan ce fo r lo an l osses. Interest in come is accrued o n t he prin cip al amo un t o f the lo an based o n the lo an’s co ntractual interest rate. Amortization of p remiu ms an d discou nts is reco rd ed using the effecti ve y i eld metho d. In terest i ncome, amo rtizati on o f premi ums an d discou nts, an d prepay men t fees are repo rted i n net in vestmen t inco me. 76 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Certain o f the mortg age loans have call o ptio ns that occu r with in th e next 10 years. However, if i nterest rates were to sign ifican tly increase, we may be u nab le to exercise the call op tion s o n ou r ex isting mortg age loan s co mmen su rat e with the sig nificantly increased mark et rates. As of Decemb er 3 1, 20 18 , assumin g t he lo ans are call ed at th eir n ext call dates, ap prox imately $1 09 .8 mil lion will b e d ue in 20 19 , $81 9.4 millio n in 20 20 th rou gh 20 24 , and $6 1.2 mi llio n in 2 02 5 throu gh 20 29 . We offer a ty pe o f co mmerci al mortg age loan un der which we will permit a loan -to-value ratio of up to 85% in ex change for a particip ating interest in th e cash flows from th e un derly in g real estate. As o f December 31 , 20 18 an d Decemb er 31, 20 17 , app rox imately $70 0.6 mil lion and $66 9.3 milli on , resp ecti vel y, o f ou r t otal mo rtgag e loan s prin cip al balance hav e this particip ation featu re. Cash flo ws received as a resul t of th is p articipatio n feature are recorded as in terest inco me when receiv ed. Durin g the y ears en ded Decemb er 31 , 2 01 8, 20 17 , an d 20 16 , we reco gn ized, $2 9.4 millio n, $3 7.2 millio n, and $1 6.7 millio n, respect iv ely , of particip ating mo rtgag e loan in come. The fol lo win g tabl e includ es a breakd own o f o ur commercial mortgage loan po rtfol io : Commercial Mortg ag e Loa n Po rtfolio Profi le As o f December 31, 201 8 2 0 1 7 (D ollars In Thous ands) To tal nu mb er of loans 1 ,73 2 1 ,66 8 To tal amort ized co st 7,7 24 ,73 3 6,8 17 ,72 3 To tal un pai d princi pal balan ce 7,6 02 ,38 9 6,6 16 ,18 1 Curren t allo wance fo r loan lo sses (1 ,29 6) — Average lo an size 4 ,38 9 3 ,96 7 Weig hted-averag e amortizat io n 22 .5 y ears 22 .5 years Weig hted-averag e cou po n 4.6 0% 4.7 6% Weig hted-averag e LTV 5 5.3 9% 5 6.1 0% Weig hted-averag e deb t cov erag e ratio 1.5 5 1.5 5% Wh ile ou r mortg age lo ans d o n ot hav e qu oted market values, as o f December 31 , 20 18 , we estimat ed t he fair val ue of o ur mo rtgag e lo ans to be $7.4 billio n (usin g an intern al fair value mo del wh ich calculates the v alu e o f most l oans by using th e lo an’s d isco un ted cash flo ws to th e loan ’s call or maturity date), which was app ro ximately 3.5 9% less t han th e amortized cost, less any related lo an l oss reserve. At th e ti me of orig in ation , ou r mo rtg ag e len ding criteria targets th at the loan-t o-val ue ratio on each mortgag e is 75 % or less. We targ et pro jected rental pay men ts fro m credit anch ors (i .e., excl ud in g ren tal p ay men ts fro m smaller local tenants) o f 70 % o f the p ro perty’s projected operatin g exp enses and debt service. As of Decemb er 3 1, 20 18 , app rox imately $3.0 million o f in vested asset s consist ed o f no np erforming mortg age lo ans, restru ctu red mortg age loan s, o r mortgag e l oans that were foreclo sed and were co nv ert ed to real estate p ropert ies. We d o not ex pect t hese in vestmen ts to adv ersely affect our liq uidity or ab ility to main tain p ro per match in g o f assets and liabilit ies. During the y ear end ed December 31 , 2 01 8, certai n mo rtg age lo an tran saction s occu rred t hat wo uld have b een accou nted fo r as trou bled d ebt restructurin gs. Fo r all mo rtgag e lo ans, th e impact of tro ub led deb t rest ru ctu ring s is reflected in ou r in vestmen t balan ce and in th e allowan ce fo r mo rtgag e loan cred it losses. During th e y ear en ded December 3 1, 2 01 8, we reco gn ized on e tro ub led d eb t restru ctu ring as a resu lt o f grant in g a co ncessio n to a bo rro wer which in clu ded lo an terms un av ailable fro m o t her len ders. Th is con cession was t he result of an ag reement bet ween th e creditor and th e deb to r. We did n ot identi fy any lo ans wh ose p rin cip al was perman ently impaired du rin g the y ear end ed Decemb er 3 1, 20 18 . It is ou r po licy to cease to carry accrued i nterest on loan s that are o ver 9 0 d ays delin qu ent. Fo r lo ans less th an 90 day s d elinq uen t, interest is accrued un less it is determin ed that the accru ed in terest is n ot co llecti ble. If a l oan becomes o ver 90 day s d elinq uen t, it is ou r g eneral p oli cy to in itiate fo reclosure proceeding s unl ess a wo rko ut arrang ement to brin g the loan curren t is in place. 77 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Unrealized Gains and Losses—Av aila ble-for-Sa l e Securi ties The informatio n presented b elo w relates to in vestmen ts at a certai n p oint in time and is no t necessarily in dicative o f the status of th e po rtfolio at any time after Decemb er 31, 20 18 . Info rmation ab ou t un realized g ain s an d lo sses i s sub ject to rap id ly ch ang in g con ditions, in clu ding volat ility of finan cial mark ets an d ch ang es in interest rates. M anag ement co nsid ers a n umber o f factors in d etermining if an u nrealized lo ss is o th er-th an-tempo rary, includ in g the ex pected cash to b e co llected an d the intent, likel ih oo d, and /o r ab ility to h old the secu rity un til recov ery. C on sisten t with o ur lo ng-stan ding practice, we do no t u tilize a “brig ht lin e test” to determin e other-than -temp orary impairments. On a q uarterly basis, we p erform an anal ysis o n ev ery security wit h an un realized loss to d etermine if an o th er-t han-t empo rary imp airmen t h as occurred . This analysis includ es rev iewin g sev eral met rics in clu ding collateral , ex pected cash fl ows, rating s, and liqu id ity. Furt hermore, si nce th e timing of reco gn izing real ized g ain s and lo sses is larg ely based o n manag ement’s decisio ns as to the ti mi ng and selecti on of inv estments to be sold, the tables an d in fo rmation p ro vided below sho uld be co nsidered wit hin the con tex t o f th e o verall un realized gain/(lo ss) p osit io n of th e portfolio . We had an o verall net u nrealized loss o f $2.6 b illio n, prio r to in come tax an d t he related impact o f certain in surance assets and liabilit ies o ffset s, as of December 3 1, 2 01 8, an d an o verall net un realized g ain of $3 6.0 million as of Decemb er 3 1, 2 01 7. For fixed matu rity hel d th at are in an u nrealized lo ss po sition as o f December 31 , 20 18 , th e fair valu e, amortized cost, un realized loss, an d total time perio d t hat th e secu rit y h as been in an un real ized loss po si tion are presen ted in th e table below: Fa ir Value % Fa ir Va lue Amortized Co st % Amo rtized Co st Unrealized Loss % Unrealized Lo ss (D ollars In Thous ands) <= 90 day s $6 ,39 7,0 56 1 6.0 % $6,5 80 ,32 3 15 .3% $(1 83 ,26 7) 6 .6% >9 0 d ays b ut <= 18 0 d ays 4 ,28 4,9 44 1 0.7 4,4 67 ,48 2 10 .5 (1 82 ,53 8) 6 .6 >1 80 day s bu t <= 2 70 day s 3 ,80 0,5 56 9.5 4,0 05 ,66 9 9 .4 (2 05 ,11 3) 7 .5 >2 70 day s bu t <= 1 year 7 ,84 0,3 93 1 9.6 8,3 61 ,31 7 19 .6 (5 20 ,92 4) 18 .9 >1 year bu t <= 2 years 5 ,18 9,3 63 1 3.0 5,4 05 ,60 7 12 .7 (2 16 ,24 4) 7 .9 >2 years bu t <= 3 years 5 ,82 4,5 58 1 4.6 6,2 80 ,68 6 14 .7 (4 56 ,12 8) 16 .6 >3 years bu t <= 4 years 6 ,61 6,4 60 1 6.6 7,6 03 ,02 7 17 .8 (9 86 ,56 7) 35 .9 >4 years bu t <= 5 years — — — — — — >5 years — — — — — — To tal $39 ,95 3,3 30 10 0.0 % $4 2,7 04 ,11 1 1 00 .0% $(2,7 50 ,78 1) 1 00 .0% The rang e of maturity dates for securiti es in an un real ized lo ss p ositio n as of December 31 , 2 01 8 varies, with 21 .4% maturing in less than 5 years, 17 .3% matu ring b etween 5 an d 10 y ears, an d 61 .3% maturin g after 10 years. The followin g tab le sho ws the credit rati ng of secu rit ies in an un realized l oss po sition as of Decemb er 3 1, 2 01 8: S&P o r Equiva lent Designa tion Fa ir Value % Fa ir Va lue Amortized Cost % Amortized Co st Unrealized Loss % Unrealized Lo ss (D ollars In Thous ands) AAA/AA/A $22 ,21 9,3 15 5 5.6 % $23 ,36 5,7 33 5 4.7 % $(1,1 46 ,41 8) 41 .7% BBB 16 ,44 6,7 22 4 1.2 17 ,84 3,2 34 4 1.8 (1,3 96 ,51 2) 50 .8 In vestmen t g rad e 38 ,66 6,0 37 9 6.8 41 ,20 8,9 67 9 6.5 (2,5 42 ,93 0) 92 .5 BB 95 9,7 41 2.4 1 ,07 1,5 96 2.5 (1 11 ,85 5) 4 .0 B 18 9,1 61 0.5 24 4,6 55 0.6 (55 ,49 4) 2 .0 CCC o r lower 13 8,3 91 0.3 17 8,8 93 0.4 (40 ,50 2) 1 .5 Belo w inv est ment grade 1 ,28 7,2 93 3.2 1 ,49 5,1 44 3.5 (2 07 ,85 1) 7 .5 To tal $39 ,95 3,3 30 10 0.0 % $42 ,70 4,1 11 10 0.0 % $(2,7 50 ,78 1) 1 00 .0% As of December 3 1, 2 01 8, the Barclays Inv est ment Grad e Index was p riced at 1 43 .3 b asis p oin ts v ersu s a 10 year av erag e of 154.3 b asi s po in ts. Similarly, the Barclay s High Yield Ind ex was pri ced at 541 .0 b asi s p oints v ersus a 10 y ear averag e o f 58 6.4 basis po in ts. As of December 31 , 20 18, th e fiv e, ten, and thirty -y ear U.S. Treasu ry o blig ation s were trad in g at l ev els o f 2.5 %, 2 .7%, and 3 .0%, as co mp ared to 10 y ear av erag es o f 1 .7%, 2.5%, and 3.3%, resp ecti vel y. As o f Decemb er 3 1, 2018, 9 2.5 % of the unrealized lo ss was asso ciated with securities t hat were rated in vestmen t grade. We hav e ex amined the perfo rman ce of th e un derly in g co llateral an d cash flows an d ex pect th at o ur in vestmen ts will co ntin ue to p erform in acco rd ance with their co ntractual terms. Facto rs such as cred it enh ancemen ts wit hin the d eal stru ctu res and th e un derly in g co llateral p erforman ce/characteristics su pp ort the recov erability o f th e in vestmen ts. Based on th e facto rs discussed, we do no t co nsider th ese un realized lo ss p ositio ns to b e other-th an -temp orary. Ho wev er, from time to time, we may sel l securiti es in th e o rdi nary cou rse of manag in g ou r p ortfolio to meet diversifi cation, cred it qu ality, yield en hancement, asset/liability manag ement, an d liqu id ity requ iremen ts. 78 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exp ectations th at in vestmen ts in mort gage-back ed an d asset-b ack ed securities will con tinu e to perfo rm in acco rd ance with th eir con tractu al terms are based o n assumptio ns th at a mark et p articipan t wo uld u se in d etermining the cu rrent fair value. It is reason ably possi ble th at the un derly in g co llateral o f th ese inv est ments will p erform worse th an current mark et exp ectatio ns an d that su ch an ev en t may l ead to ad verse changes in th e cash flows o n o ur ho ld in gs of th ese ty pes of securities. This coul d lead t o p otential fu ture write-down s with in ou r p ort fo lio o f mortgag e-b ack ed an d asset-backed securities. Exp ectatio ns th at o ur inv estments in corpo rate securities and /or deb t ob ligatio ns will con tinu e to p erform in accordan ce with th eir con t ractu al terms are b ased on eviden ce gathered t hrou gh ou r no rmal credi t survei llance pro cess. Al th ou gh we do no t an tici pate such events, it is reaso nab ly po ssible that issuers of o ur i nv estments in co rpo rat e secu rit ies wi ll perfo rm wo rse th an curren t ex pectation s. Su ch even ts may lead u s to reco gn ize po t en tial fu tu re writ e-d owns withi n o ur po rtfo lio o f co rporat e securities. It is also possi ble th at such un anticipated ev ents wo uld lead us to disp ose of t ho se certain h olding s an d recog nize th e effects of an y such mark et mov ements in o ur finan cial statemen ts. As o f Decemb er 3 1, 2 01 8, we h eld a total of 4,0 05 p ositio ns th at were in an un realized lo ss po sition . In clu ded in that amo un t were 2 35 po sition s o f below in vestmen t grade securi ties with a fair value o f $1.3 billion th at were in an u nrealized loss po si tion . To tal un realized lo sses related to bel ow in vestmen t g rad e secu rities were $207.9 mil lion , $1 55 .0 million of which h ad b een in an u nrealized loss p ositio n fo r more th an t welve mon th s. Belo w in vestmen t g rad e secu rities in an un realized loss po si tion were 1.9 % of in vested assets. As o f Decemb er 3 1, 2 01 8, securi ties in an un realized loss po si tion th at were rated as b elo w inv est ment grade represented 3.2 % of th e to tal fair v alu e an d 7.5 % o f t he total unrealized loss. We have th e ab ility and in tent to h old th ese secu rities to matu rit y. After a review o f each secu rity and its exp ected cash flows, we believ e the d ecline i n market value to b e temp orary . The follo win g table in clu des the fair value, amortized co st, u nrealized loss, an d to tal time p eriod th at the secu rit y h as been in an u nrealized l oss po sition fo r all b elow inv estment grade secu rities as of December 31 , 20 18 : Fa ir Value % Fa ir Va lue Amortized Co st % Amo rtized Co st Unrea lized Lo ss % Unrea lized Loss (D ollars In Thous ands) <= 90 day s $43 4,8 81 3 3.8 % $4 56 ,01 1 30 .5% $(2 1,1 30 ) 10 .1% >9 0 d ays b ut <= 18 0 d ays 4 5,4 16 3.5 50 ,31 7 3 .4 (4,9 01 ) 2 .4 >1 80 day s bu t <= 2 70 day s 14 5,2 66 1 1.3 1 61 ,43 5 10 .8 (1 6,1 69 ) 7 .8 >2 70 day s bu t <= 1 year 9 7,6 74 7.6 1 08 ,28 1 7 .2 (1 0,6 07 ) 5 .1 >1 year bu t <= 2 years 17 0,0 23 1 3.2 1 99 ,91 2 13 .4 (2 9,8 89 ) 14 .4 >2 years bu t <= 3 years 3 4,9 44 2.7 41 ,99 2 2 .8 (7,0 48 ) 3 .4 >3 years bu t <= 4 years 35 9,0 89 2 7.9 4 77 ,19 6 31 .9 (11 8,1 07 ) 56 .8 >4 years bu t <= 5 years — — — — — — >5 years — — — — — — To tal $1 ,28 7,2 93 10 0.0 % $1,4 95 ,14 4 1 00 .0% $(20 7,8 51 ) 1 00 .0% 79 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents We h ave n o material co ncen tration s of i ssuers o r g uarant ors of fix ed maturity securities. Th e in du stry segment compo sition of all securities in an un realized loss po sition hel d as o f December 31 , 20 18 is p resent ed in the fo llo wing tab le: Fair Va lue % Fa ir Va lue Amortized Co st % Amo rtized Co st Unrealized Lo ss % Unrealized Lo ss (Do l la rs I n Tho usa nds ) Bankin g $4 ,4 46,65 8 10 .9% $4 ,65 3,3 09 10.8% $(20 6,6 51 ) 7 .5% Oth er fin ance 1 06,04 1 0 .3 11 1,2 60 0.3 (5,2 19 ) 0 .2 El ectric utility 4 ,0 70,11 5 10 .2 4 ,42 6,6 09 10.4 (35 6,4 94 ) 13 .0 Energy 3 ,3 80,55 2 8 .5 3 ,67 9,0 48 8.6 (29 8,4 96 ) 10 .9 Natu ral gas 7 23,33 0 1 .8 78 2,4 18 1.8 (5 9,0 88 ) 2 .1 In su ran ce 3 ,4 20,32 1 8 .6 3 ,69 9,7 93 8.7 (27 9,4 72 ) 10 .2 Commu nication s 1 ,8 34,02 9 4 .6 2 ,03 0,5 90 4.8 (19 6,5 61 ) 7 .1 Basic ind ustrial 1 ,3 93,95 3 3 .5 1 ,50 9,0 59 3.5 (11 5,1 06 ) 4 .2 Con sumer n on cycl ical 4 ,2 56,25 8 10 .7 4 ,62 9,8 77 10.8 (37 3,6 19 ) 13 .6 Con sumer cy cli cal 1 ,3 91,70 5 3 .5 1 ,49 6,4 25 3.5 (10 4,7 20 ) 3 .8 Finan ce co mp anies 1 43,67 9 0 .4 15 4,9 74 0.4 (1 1,2 95 ) 0 .4 Capi tal go od s 2 ,2 58,80 7 5 .7 2 ,40 6,7 22 5.6 (14 7,9 15 ) 5 .4 Tran sp ortatio n 1 ,3 94,13 7 3 .5 1 ,48 9,6 70 3.5 (9 5,5 33 ) 3 .5 Oth er ind ustrial 1 91,05 5 0 .5 20 3,2 21 0.5 (1 2,1 66 ) 0 .4 Bro kerage 8 07,66 7 2 .0 84 8,2 31 2.0 (4 0,5 64 ) 1 .5 Techn olog y 1 ,3 59,02 0 3 .4 1 ,44 9,9 03 3.4 (9 0,8 83 ) 3 .3 Real est ate 73,09 8 0 .2 7 4,3 23 0.2 (1,2 25 ) — Oth er u tility 18,44 2 — 2 0,0 47 — (1,6 05 ) — Commercial mortg age-backed securities 1 ,8 51,82 1 4 .6 1 ,90 9,9 22 4.5 (5 8,1 01 ) 2 .1 Oth er asset-b acked secu rities 8 36,14 1 2 .1 87 1,5 39 2.0 (3 5,3 98 ) 1 .3 Resid ential mo rtgag e-b ack ed n on -ag ency securiti es 1 ,7 49,47 8 4 .4 1 ,79 8,8 17 4.2 (4 9,3 39 ) 1 .8 Resid ential mo rtgag e-b ack ed ag ency securiti es 5 39,89 6 1 .4 55 2,7 53 1.3 (1 2,8 57 ) 0 .5 U.S. go vernment-related secu rities 1 ,2 15,94 4 3 .0 1 ,26 1,6 66 3.0 (4 5,7 22 ) 1 .7 Oth er g ov ern ment-rel ated secu rit ies 3 57,77 0 0 .9 39 1,6 20 0.9 (3 3,8 50 ) 1 .2 States, mun icipals, and po litical d iv isio ns 2 ,1 33,41 3 5 .3 2 ,25 2,3 15 5.3 (11 8,9 02 ) 4 .3 Total $39 ,9 53,33 0 1 00 .0% $42 ,70 4,1 11 100.0% $(2 ,75 0,7 81 ) 1 00 .0% 80 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents We h ave n o material co ncen tration s of i ssuers o r g uarant ors of fix ed maturity securities. Th e in du stry segment compo sition of all securities in an un realized loss po sition hel d as o f December 31 , 20 17 is p resent ed in the fo llo wing tab le: Fa ir Value % Fair Value Amo rtized Cost % Amortized Cost Unrea lized Lo ss % Unrealized Lo ss (D o l l ars In Tho us a nds) Bankin g $1,7 33 ,30 9 8.0 % $1,7 58 ,54 9 7 .9% $(2 5,2 40 ) 3 .7% Oth er fin ance 54 ,45 4 0.3 58 ,19 8 0 .3 (3,7 44 ) 0 .5 El ectric utility 3,1 11 ,71 9 14.3 3,2 42 ,95 2 14 .5 (13 1,2 33 ) 19 .2 Energy 1,3 97 ,31 2 6.4 1,4 58 ,69 0 6 .5 (6 1,3 78 ) 9 .0 Natu ral gas 6 04 ,43 1 2.8 6 24 ,20 3 2 .8 (1 9,7 72 ) 2 .9 In su ran ce 1,6 97 ,23 3 7.8 1,7 43 ,14 0 7 .8 (4 5,9 07 ) 6 .7 Commu nication s 1,2 38 ,08 2 5.7 1,3 03 ,26 4 5 .8 (6 5,1 82 ) 9 .6 Basic ind ustrial 5 81 ,24 9 2.7 6 03 ,24 8 2 .7 (2 1,9 99 ) 3 .2 Con sumer n on cycl ical 2,0 16 ,11 2 9.3 2,0 77 ,55 2 9 .3 (6 1,4 40 ) 9 .0 Con sumer cy cli cal 6 30 ,91 5 2.9 6 51 ,41 5 2 .9 (2 0,5 00 ) 3 .0 Finan ce co mp anies 39 ,71 0 0.2 40 ,58 1 0 .2 (8 71 ) 0 .1 Capi tal go od s 1,1 21 ,91 9 5.2 1,1 46 ,54 5 5 .1 (2 4,6 26 ) 3 .6 Tran sp ortatio n 7 91 ,77 6 3.6 8 12 ,35 8 3 .6 (2 0,5 82 ) 3 .0 Oth er ind ustrial 1 74 ,79 7 0.8 1 85 ,70 1 0 .8 (1 0,9 04 ) 1 .6 Bro kerage 3 80 ,33 1 1.8 3 84 ,86 0 1 .7 (4,5 29 ) 0 .7 Techn olog y 5 76 ,85 5 2.7 5 98 ,11 2 2 .7 (2 1,2 57 ) 3 .1 Real est ate 43 ,09 6 0.2 43 ,61 0 0 .2 (5 14 ) 0 .1 46 ,73 1 0.1 47 ,51 4 0 .2 (7 83 ) 0 .3 Commercial mortg age-backed securities 1,5 53 ,92 8 7.2 1,5 84 ,11 4 7 .1 (3 0,1 86 ) 4 .4 Oth er asset-b acked secu rities 2 20 ,82 2 1.0 2 26 ,58 6 1 .0 (5,7 64 ) 0 .8 Resid ential mo rtgag e-b ack ed n on -ag ency securiti es 8 22 ,79 4 3.8 8 38 ,84 6 3 .7 (1 6,0 52 ) 2 .4 Resid ential mo rtgag e-b ack ed ag ency securiti es 3 60 ,02 5 1.7 3 67 ,00 6 1 .6 (6,9 81 ) 1 .0 U.S. go vernment-related secu rities 1,1 66 ,34 2 5.4 1,1 98 ,51 9 5 .4 (3 2,1 77 ) 4 .7 Oth er g ov ern ment-rel ated secu rit ies 1 40 ,12 4 0.6 1 45 ,07 1 0 .6 (4,9 47 ) 0 .7 States, mun icipals, and po litical d iv isio ns 1,1 98 ,01 5 5.5 1,2 43 ,62 8 5 .6 (4 5,6 13 ) 6 .7 Total $2 1,7 02 ,08 1 100.0 % $2 2,3 84 ,26 2 1 00 .0% $(68 2,1 81 ) 1 00 .0% 81 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Risk Ma na gement a nd Impai rment Rev iew We moni to r the o verall cred it q ual ity o f our p ortfoli o wi th in est ab lish ed g uidelin es. Th e fo llowing t abl e in clu des o ur availab le-for-sale fixed matu rities b y credit rating as of December 31 , 2 01 8: Ra ting Fair Value Percent of Fair Value (D o l l a rs I n Tho us a nds ) AAA $6,5 20 ,96 3 13 .2% AA 5,9 20 ,14 1 12 .0 A 1 6,8 96 ,00 6 34 .1 BBB 1 8,5 83 ,02 1 37 .5 In vestmen t g rad e 4 7,9 20 ,13 1 96 .8 BB 1,1 70 ,49 1 2 .4 B 2 45 ,30 9 0 .5 CCC o r lower 1 52 ,57 6 0 .3 Belo w inv est ment grade 1,5 68 ,37 6 3 .2 To tal $4 9,4 88 ,50 7 1 00 .0% No t includ ed in th e table abo ve are $2 .3 b illion o f inv estment grade an d $14 4.3 million of below inv est ment g rade fixed maturities classified as trading securities an d $2.6 billion o f fixed matu rit ies classi fied as h eld-to-maturity. Limitin g bo nd exp osu re to any cred itor gro up is ano th er way we manag e credit risk . We held n o credit default swap s o n the p ositio ns listed b elo w as of Decemb er 3 1, 2 01 8. Th e fo llowing tab le su mmarizes ou r ten l arg est matu rity exp osu res to an in div id ual creditor grou p as o f December 31 , 20 18 : Fair Value of Credito r Funded Securities Unfunded Exposures To tal Fair Value (D o l l a rs I n Millions) Fed eral Ho me Lo an Bank $332 .5 $— $3 32 .5 AT&T, Inc. 270 .5 — 2 70 .5 Well s Fargo & Co 249 .6 3 .2 2 52 .8 Berk shire Hathaway Inc. 252 .5 — 2 52 .5 Duk e Energy Co rp 245 .9 — 2 45 .9 M organ St an ley 233 .0 — 2 33 .0 Comcast Corp 228 .0 — 2 28 .0 The Go ld man Sachs Grou p Inc. 218 .1 — 2 18 .1 Exelon Corp 216 .7 — 2 16 .7 United Health Gro up In c. 215 .9 — 2 15 .9 To tal $2,462 .7 $3 .2 $2,4 65 .9 Determin in g wh eth er a d ecli ne i n the cu rrent fair val ue o f inv est ed assets is an other-than -temp orary declin e in value is b oth ob ject iv e and sub jectiv e, and can inv olve a v ariety o f assumptio ns and estimates, p articu larly for in vestmen ts that are n ot actively traded in estab lish ed mark ets. We rev iew ou r p ositio ns o n a mo nth ly basis for po ssi ble credit co ncerns an d review o ur curren t ex po sure, credit en han cement, and delin qu ency ex perien ce. Man ag emen t co nsid ers a nu mb er o f factors wh en d etermining t he imp airmen t status of ind iv id ual secu rities. Th ese i ncl ud e th e econ omic co nd ition of v ariou s in du stry segmen ts an d geo graph ic lo cation s and o th er areas o f identified risk s. Since it is p ossib le fo r the impairment of o ne i nv estment to affect other in vestmen ts, we en gage in ongo in g risk man agement to safeg uard ag ain st and limit an y further risk to ou r in vestmen t p ortfolio. Speci al attention is given to co rrelative risk s within specifi c ind ustries, related p arties, an d b usiness market s. For certain securitized finan cial assets with co ntractual cash flo ws, in clu ding RMBS, CM B S, and other asset-back ed securi ties (co llectively referred to as asset-back ed securities or “ABS”), GAAP req uires us to p eriod ically up date ou r b est estimate o f cash flows o ver th e life o f the security . If th e fair v alu e o f a securitized fin anci al asset is less th an it s cost or amo rtized cost an d th ere h as b een a decrease in the p resen t val ue o f th e exp ected cash flows sin ce t he last revised est imate, con siderin g b oth timing an d amou nt, an o th er-t han-tempo rary impairment charge is recog nized . Esti matin g future cash flows is a qu an titative and qu alitative 82 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents process that inco rp orates information receiv ed from th ird part y sources alon g with certai n in ternal assumption s and jud gments reg ard in g the fut ure perfo rman ce of the un derlyi ng collateral . Projection s of expected fu tu re cash flo ws may ch ang e based up on new informatio n regardin g the p erforman ce o f th e un derly in g collateral. In add iti on , we con sider ou r intent and ab i lity to retain a temp oraril y dep ressed secu rity un til recov ery . Securiti es in an un realized loss p ositio n are reviewed at least quarterly to d etermine i f an o th er-th an-tempo rary imp airmen t i s present based on certain quanti tat iv e and qu alitativ e facto rs. We co nsid er a n umber o f factors in d etermining wh eth er the impairmen t is other-than -temp orary. These in clu de, bu t are no t l imited to : 1 ) action s taken by rating ag encies, 2 ) d efault b y th e issuer, 3 ) the significance of th e d ecli ne, 4) an assessmen t of ou r i ntent to sell the security (in clu ding a mo re lik ely than no t assessment of wh eth er we will be req uired to sell the secu rity ) b efo re reco verin g the security’s amortized cost, 5) th e time period du ring whi ch t he declin e has o ccurred , 6) an econ omic an aly sis of th e issuer’s in du stry, an d 7 ) the fin ancial stren gth, li qu id ity, and recov erab ility o f th e issu er. M anagement p erforms a secu rit y-by -secu rity review each qu arter in ev alu ating the need for an y other-than -temp orary impairmen ts. Alth ou gh n o set fo rmula is u sed in this p ro cess, the in vestmen t perfo rmance, co llateral p ositio n, and con tin ued viabilit y o f th e issu er are sig nificant measures co nsidered, alo ng with an anal ysis reg ardin g ou r ex pectation s fo r recov ery o f the secu rity’s ent ire amo rti zed co st basis th ro ug h the receip t o f future cash flows. Based o n ou r an aly sis, for th e year en ded Decemb er 3 1, 2 01 8, we reco gn ized app rox imately $2 9.7 million o f cred i t related impairmen ts on in vestmen t secu rities in an u nrealized loss po siti on th at were oth er-th an-tempo rarily imp aired resultin g i n a charge t o earn in gs. There are certai n risks and un certain ties associated wit h d etermining whether d eclin es in fair values are other-th an-temp orary. These in clude sig nificant chan ges in g en eral econ omic co nd ition s an d b usin ess mark ets, trend s in certain in du stry segments, interest rate fl uctuatio ns, ratin g ag ency actio ns, chan ges in sign ifican t acco unt in g estimates and assumptio ns, commission o f fraud , and legislativ e actio ns. We con tinuously mo nito r th ese facto rs as th ey relate to the inv estment po rtfol io in det ermin in g the statu s of each i nv estment. We h ave dep osits with cert ain financial institu tion s which exceed federally in su red limits. We hav e reviewed th e creditwo rthiness of th ese fin ancial in stit utio ns an d b elieve t hat th ere is mi nimal risk o f a material lo ss. Certain Europ ean cou ntries h ave exp erienced varying deg rees o f fi nancial stress, wh ich co uld hav e a detrimental impact on reg io nal or glo bal eco no mic co nd itio ns and on so vereig n and n on -sov ereig n obl ig ation s. The ch art sho wn belo w includ es our no n-sov ereign fair value ex po su res in th ese co un tries as of Decemb er 31 , 20 18 . As of Decemb er 31 , 20 18 , we had no material un fu nd ed ex po sure and h ad n o material direct so vereig n fair v alu e ex po su re. 83 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Tota l Gross Non-sov ereign Debt Funded Financia l Instrument a nd Country Financial Non-fina ncia l Expo sure (D ollars In M i llio ns) Securities: Un ited Kin gd om $77 5.7 $1 ,00 6.6 $1,7 82 .3 Fran ce 32 2.0 40 2.9 7 24 .9 Netherland s 29 0.7 28 2.2 5 72 .9 Switzerland 31 5.0 22 5.9 5 40 .9 Germany 11 0.0 42 2.7 5 32 .7 Spain 6 4.5 27 4.5 3 39 .0 Belgi um — 19 9.7 1 99 .7 No rway 4.0 13 9.6 1 43 .6 Ireland 3 8.8 8 4.6 1 23 .4 Italy 9.9 10 8.1 1 18 .0 Fin lan d 11 4.4 — 1 14 .4 Lu xembo urg — 6 7.5 67 .5 Swed en 3 9.8 1 9.3 59 .1 Denmark 3 0.5 — 30 .5 Portu gal — 2 2.6 22 .6 Slo ven ia — 0.5 0 .5 Total secu rities 2 ,11 5.3 3 ,25 6.7 5,3 72 .0 Deriva tiv es: Un ited Kin gd om 2 4.6 — 24 .6 Germany 2 1.3 — 21 .3 Fran ce 1.3 — 1 .3 Switzerland 1.1 — 1 .1 Total d erivativ es 4 8.3 — 48 .3 Total secu rities an d d erivat iv es $2 ,16 3.6 $3 ,25 6.7 $5,4 20 .3 84 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Rea lized Gai ns a nd L osses The fol lo win g tabl e sets forth realized in vestmen t g ain s and lo sses for th e perio ds sho wn: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturity g ain s - sales $2 8,0 95 $18,79 0 $41 ,69 8 Fixed maturity losses - sales (1 8,1 83 ) (5,84 9) (9 ,48 8) Equi ty gai ns an d losses (4 8,9 64 ) (2,33 0) 9 2 Impairments on fix ed maturity secu rities (2 9,7 24 ) (11,74 2) (17 ,74 8) M od co trading portfolio (18 5,9 00 ) 119,20 6 67 ,58 3 Oth er 1,3 03 (8,38 9) (9 ,22 6) To tal realized gains (lo sses) - investments $(25 3,3 73 ) $109,68 6 $72 ,91 1 Derivat iv es related to VA con t racts: Interest rate fu tures $(2 5,4 73 ) $26,01 5 $(3 ,45 0) Eq uit y futures (8 8,2 08 ) (91,77 6) (1 06 ,43 1) Cu rrency futu res 1 0,2 75 (23,17 6) 33 ,83 6 Eq uit y o ptio ns 3 8,0 83 (94,79 1) (60 ,96 2) Interest rate swaptio ns (14 ) (2,49 0) (1 ,16 1) Interest rate swaps (4 5,1 85 ) 27,98 1 20 ,42 0 To tal return swap s 7 7,2 25 (32,24 0) — Embed ded deriv ative - GLWB (7 2,3 13 ) 3,61 4 68 ,05 6 Total d erivativ es related to VA co ntract s (10 5,6 10 ) (186,86 3) (49 ,69 2) Derivat iv es related to FIA co ntracts: Embed ded deriv ative 3 5,3 97 (55,87 8) (16 ,49 4) Eq uit y futures 3 30 64 2 4 ,24 8 Vo lat ility futu res — — — Eq uit y o ptio ns (3 8,8 85 ) 44,58 5 8 ,14 9 Total d erivativ es related to FIA co ntracts (3,1 58 ) (10,65 1) (4 ,09 7) Derivat iv es related to IUL con tracts: Embed ded deriv ative 9,0 62 (14,11 7) 9 ,52 9 Eq uit y futures 2 61 (81 8) 12 9 Eq uit y o ptio ns (6,3 38 ) 9,58 0 3 ,47 7 Total d erivativ es related to IUL cont racts 2,9 85 (5,35 5) 13 ,13 5 Emb edd ed d erivativ e - M od co rein surance t reaties 16 6,7 57 (103,00 9) 39 0 Oth er d erivat iv es 14 5 0 (2 4) To tal realized gains (lo sses) - d erivatives $6 0,9 88 $(305,82 8) $(40 ,28 8) Real ized g ain s an d losses on in vestmen t s reflect po rtfolio man agemen t activ ities design ed to main tain p roper matching of assets and liab ilities and to en hance lo ng -term in vestmen t po rtfolio p erforman ce. Th e n et realized inv estment g ain s (losses), exclud ing imp airmen ts, equ ities, and Mo dco trad ing po rtfo lio activ ity du ring th e year end ed December 3 1, 2 01 8, primarily reflects th e n ormal operation of o ur asset/liability p rog ram within th e co ntext o f th e ch ang in g interest rate and spread en viro nment, as well as tax p lan ning st rategi es design ed to u tilize cap ital lo ss carryforward s. 85 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Real ized lo sses includ e other-th an -temp orary imp airments an d actual sal es of inv estments. Th ese other-th an -temp orary imp airmen ts resu lted from ou r an aly si s o f circu mstances and ou r belief t hat cred it even ts, loss severity, chan ges in cred i t en han cement, and/or oth er ad verse con ditio ns of the resp ective issuers h ave cau sed, or wil l lead to, a d eficien cy in the con tractu al cash flo ws related to these i nv estments. These other-than -temp orary imp airmen ts are presented i n t he chart b elo w: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Oth er M BS $(1 69 ) $(8 1) $(17 8) Corpo rate securities (2 9,5 55 ) (8,03 1) (16 ,83 0) Equi ties — (2,63 0) — Oth er — (1,00 0) (74 0) To tal $(2 9,7 24 ) $(11,74 2) $(17 ,74 8) As previo usly discu ssed, man agemen t con sid ers sev eral factors when determin ing o th er-th an-tempo rary impairments. Altho ug h we pu rch ase securities with th e intent to ho ld th em unt il maturity, we may chang e ou r p osit io n as a resu l t of a change in circumstan ces. Any such decisio n is con sisten t with ou r classificatio n of al l bu t a sp ecific po rti on o f ou r in vestmen t portfolio as availab le-fo r-sale. For the year en ded Decemb er 3 1, 2 01 8, we so ld securities in an un realized l oss p ositio n with a fair v alu e o f $47 2.4 millio n. Fo r such secu rities, th e p roceeds, reali zed lo ss, and to tal ti me perio d t hat the secu rity had been in an un realized loss po si tion are presented in the table bel ow: Proceeds % Pro ceeds Realized Loss % Rea lized Loss (D o l l a rs I n Tho us a nds ) <= 90 day s $29 3,1 56 62 .1% $(6,8 86 ) 37 .9% >9 0 d ays b ut <= 18 0 d ays 8 1,6 39 17 .3 (7,4 88 ) 41 .2 >1 80 day s bu t <= 2 70 day s 3 6,2 39 7 .7 (1,4 81 ) 8 .1 >2 70 day s bu t <= 1 year 1 7,7 11 3 .7 (2 33 ) 1 .3 >1 year 4 3,6 26 9 .2 (2,0 95 ) 11 .5 To tal $47 2,3 71 1 00 .0% $(1 8,1 83 ) 1 00 .0% For the year end ed December 31, 2 01 8, we so ld securities in an u nrealized lo ss p ositio n with a fair v alue (proceeds) o f $4 72 .4 million . The l oss realized o n the sal e o f these secu rities was $1 8.2 millio n. We mad e th e decisio n to exit th ese h oldin gs in co njun ction wit h our overall asset liability manag ement pro cess. For th e y ear en ded December 31 , 2 01 8, we so ld securities in an u nrealized gain position with a fair val ue of $1.3 billio n. The g ain real ized o n th e sale of t hese securities was $2 8.1 mi llio n. For th e y ear end ed Decemb er 3 1, 2 018, net losses of $18 5.9 million related to ch ang es i n fair v alu e on o ur M od co trad ing po rtfolio s were in clu ded in real ized g ain s an d losses. Of this amo un t, ap prox i mately $8.7 mil lion of l osses were realized th ro ug h th e sale o f certain secu rities, which will b e rei mbursed b y o ur rei nsu ran ce p artners o ver ti me th ro ugh the rein su rance settlemen t p ro cess fo r this b lo ck o f b usiness. The M od co emb edd ed d eri vat iv e associated with the trading po rtfolio s had realized p re-tax gains o f $166 .8 mil lion du ring th e year en ded December 3 1, 20 18 . The g ain s o n the embed ded deriv ati ve were due to treasury yi eld s in creasing and credit spreads wi denin g. Real ized inv estment gains an d losses related to equ ity secu rities is primaril y d riven by ch ang es in fair v alu e du e to mark et flu ctu ation s as chan ges in fai r v alu e o f eq uit y secu rities are recorded in n et in come. Du rin g 2 01 8, bo th co mmo n and p referred eq uity mark ets exp erienced sig nificant v olatil ity and declinin g prices du ring th e fo urth qu arter. Th e real ized losses du rin g t he perio d o n o ur equ ity secu rit ies were p rimarily the result of th ese market d eclines. Real ized in vestmen t gai ns an d lo sses related to d eri vat iv es rep resent chan ges in th eir fair v alu e du ring the p eriod an d termin ation g ain s/(l osses) on th ose d erivativ es th at were closed du ring the perio d. We u se vario us derivativ e instrumen t s to manage risks related to certain life insurance an d ann uity products. We can use th ese deriv atives as eco no mic h edg es ag ain st risks inherent in the prod ucts. These risk s have a direct imp act on the cost of th ese p ro du cts an d are correlated wi th the equ ity mark ets, interest rat es, foreig n curren cy lev els, and o verall vo lat ility. The hedg ed risk s are record ed th ro ug h the recog nitio n of embed ded d erivativ es associated wit h the p ro du cts. These p ro du cts in clu de t he GLWB rid er asso ciated with th e variab le an nu ity, fixed in dex ed an nu ity p ro du cts as well as in dex ed un iv ersal life p ro du cts. Du ring th e year en ded December 3 1, 2 01 8, we ex perien ced net realized losses on deriv atives related to VA con tracts o f app ro ximately $1 05 .6 million . These net lo sses o n d erivativ es related to VA con tracts were affected b y cap ital mark et imp acts, ch ang es i n the Co mpan y’s no n-perfo rmance risk, variatio ns in actual sub -accou nt fund performance from the in dices includ ed in o ur h edg in g program, as well as up dates to certain p oli cy hol der assumptio ns du ring th e year en ded December 3 1, 2 01 8. We also u se vario us swaps and o th er ty pes of d erivativ es to mitig ate risk related t o other exp osures. Th ese co ntracts g enerated immaterial gains fo r th e y ear en ded Decemb er 3 1, 2 01 8. 86 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents LIQUIDITY AND CAPITAL RESOURCES The Ho lding Co mpa ny Overview Ou r p rimary so urces of fu nd ing are dividen ds fro m o ur op eratin g su bsid iaries; rev enu es from in vestmen t management, d ata p ro cessing , legal, and manag ement servi ces rend ered to sub sidi aries; inv estment in come; and ex t ernal finan cin g. Th ese sou rces o f cash sup po rt ou r g eneral corpo rate needs in clu ding ou r co mmo n sto ck d iv id end s and debt service. We exp ect to use a po rtion of o ur p ositiv e cash flo w fro m o peration s to p ay d iv i dend s to o ur p arent, Dai-ichi Li fe. We p aid a $1 40 .0 million dividen d d uring th e y ear ended Decemb er 3 1, 20 18. The states in whi ch o ur insurance sub sid i ari es are do miciled impo se certain restrict io ns on the in su ran ce sub sidiaries’ ab ility to pay us d iv id end s. These restrictions are b ased in p art o n th e pri or y ear’s statutory in come and /or su rp lu s. Gen erally, th ese restrictio ns p ose no sh ort-term liq uidity co ncerns. We plan to retain po rtion s of th e earn in gs o f o ur insu ran ce sub sid iari es in th ose co mp an ies primarily to sup port their future growth. Deb t a nd other ca pita l resources Ou r p rimary sou rces o f capital are throu gh retain ed inco me from ou r o perating su bsidiaries, capital in fu sion s fro m our paren t, Dai -ichi Life, as well as ou r abil ity to access d eb t finan cing markets. Add itio nally, we have access to the Cred it Facility discu ssed b elo w. On May 3 , 2018 , we amend ed th e Credit Facil ity (as amend ed th e “Cred it Facility ”). We hav e the ability to bo rrow un der a Cred it Facility arran gement on an u nsecu red basis up to an ag gregat e prin cip al amou nt of $1.0 billio n. We have the ri gh t in certain circumstan ces to req uest that the co mmitmen t under th e Credit Facility be increased u p to a max imum prin cip al amou nt of $1.5 billi on . We are n ot aware o f an y n on -co mp liance with the finan cial d ebt cov enants o f the Cred it Facilit y as o f December 31 , 20 18 . There was n o o utstand in g b alance as o f Decemb er 31, 20 18 . Ou r agg reg ate prin cip al balance with ou r deb t, subord in ated d ebt secu rities, an d a Credit Facility in creased $31 7.1 million du ring the year en ded Decemb er 3 1, 2 01 8, as compared to a d ecrease of $1 21 .5 million du ring t he year ended December 31 , 2 017. Ch ang es in prin cip al d urin g 2 01 8 an d 2 01 7 are d etailed below: Description Cha nge in Principa l (D ollars In Thous ands) 20 18 8 .45 % Sen io r No tes (20 09 ), d ue 2 03 9 (Par value: $19 0,0 44 )$(42 ,88 4) 6 .40 % Sen io r No tes (20 07 ), d ue 2 01 8 (Par value: $15 0,0 00 )(1 50 ,00 0) 4 .30 % Su bo rd inated Deb t, d ue 2 02 8 (Par value: $4 00 ,00 0)4 00 ,00 0 3 .55 % Su bo rd inated Fu nd in g Ob ligatio n, d ue 2 03 8 (Par value: $55 ,00 0)55 ,00 0 3 .55 % Su bo rd inated Fu nd in g Ob ligatio n, d ue 2 03 8 (Par value: $55 ,00 0)55 ,00 0 20 17 8 .45 % Sen io r Notes (20 09 ), d ue 2 03 9 (Par valu e: $23 2,9 28 )$(13 ,99 8) 6 .25 % Su bo rd in ated Deb t, d ue 2 04 2 (Par val ue: $287,5 00)(2 87 ,50 0) 6 .00 % Su bo rd in ated Deb t, d ue 2 04 2 (Par val ue: $150,0 00)(1 50 ,00 0) 5 .35 % Su bo rd in ated Deb t, d ue 2 05 2 (Par val ue: $500,0 00)5 00 ,00 0 Net chang e in th e Credit Facility balan ce du ring 20 18 and 2017 are detailed b elow: Description Cha ng e in Principa l Interest Rate (D ollars In Thousands) 20 18 Credi t Facility $— o ne-mo nth LIBOR + 1.0 0% 20 17 Credi t Facility $(170,00 0) o ne-mo nth LIBOR + 1.0 0% 87 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Liquidi ty Liq uidity refers to a compan y’s abil ity to generate adeq uate amo un ts o f cash t o meet i ts need s. We meet o ur liqu id ity requ iremen ts primarily th ro ug h po siti ve cash flo ws fro m ou r op eratin g sub sidiaries. Primary sou rces of cash fro m th e o perati ng su bsid iaries are p remiu ms, dep osits for p oli cy hol der acco un ts, inv estment sales and maturities, an d inv estment income. Primary uses of cash includ e benefit p ay men ts, with drawals from po licyh older acco un ts, in vestmen t p urchases, p oli cy acqu isitio n co sts, in terest pay ments, an d o th er o perating exp enses. We b elieve that we have sufficien t li qu id ity to fu nd ou r cash needs u nd er n ormal op eratin g scen arios. In th e even t of sign ifican t un anticipat ed cash req uirements b eyo nd o ur n ormal liqui dity n eed s, we h ave ad dition al sou rces of liq uidity av ailable depen ding o n market con ditions and the amou nt and timing of the liqu idi ty n eed . Th ese ad dition al sou rces of liq uid ity in clu de cash flo ws from op eratio ns, th e sale o f liq uid assets, accessin g ou r credi t facility, and other sources describ ed herein . Ou r d ecision to sell inv estment assets coul d be impacted by acco un ting ru les, includ ing ru les relat in g to the l ik eliho od of a requ iremen t to sell secu rit ies b efo re reco very o f o ur cost basis. Un der stressful market and eco no mic con ditio ns, li qu id ity may broad ly deteriorate, wh ich cou ld n eg atively impact ou r ab ility to sell in vestmen t assets. If we req uire on sh ort no tice sig nificant amo un ts of cash in excess o f no rmal requ irements, we may hav e difficul ty selli ng in vestmen t assets in a timely mann er, be forced to sell th em for less than we o th erwise wou ld hav e b een able to realize, or bot h. The liq uidity requ iremen ts of o ur reg ulated i nsu ran ce subsidiaries p rimarily relate to th e liabilit ies associated with th eir vario us in su ran ce and in vestmen t p ro du cts, op erat in g ex penses, and in come tax es. Li ab ilities arising fro m insu ran ce and in vestmen t prod ucts includ e th e pay ment o f p oli cy hol der benefits, as well as cash p ayments in con nect io n with policy su rrend ers an d wi th drawals, pol icy lo an s, and ob lig ati on s to red eem fu ndi ng ag reements. Ou r insurance su bsidiaries main tai n inv estment strategi es in ten ded to prov id e adeq uat e fu nd s to pay ben efits and ex pected su rrenders, withd rawals, lo ans, and redemp t io n ob ligations with ou t forced sales of in vestmen ts. In add itio n, o ur insurance sub sid iari es h old hig hly liqu i d, high -q uality sh ort-term in vestmen t securiti es an d other li qu id inv est ment grade fixed matu rity secu rit ies to fu nd o ur ex pected op erat in g exp enses, su rrend ers, and with drawals. As of Decemb er 3 1, 2 01 8, o ur to tal cash and in vested assets were $66 .3 b illio n. Th e li fe insu ran ce sub sid iaries were co mmitt ed as of December 31 , 2018 , to fund mortgag e loan s i n t he amo un t o f $68 5.3 million. Ou r cash flo ws are used to fun d an in vestmen t po rtfo lio th at prov id es for fu t ure ben efit p ayments. We employ a formal asset/l iab ility prog ram to manag e t he cash flo ws o f ou r in vestmen t po rtfolio relativ e t o o ur lo ng -term b en efit ob lig ation s. Th e h olding co mp an y held $1 21 .6 millio n of cash an d sho rt- term inv estment s, and ou r su bsid iaries h eld app ro ximately $8 59 .4 mil lion in cash and sh ort-term inv estments as o f Decemb er 31, 20 18 . The fol lo win g chart includ es t he cash flo ws provi ded b y o r u sed in operating, in vesting , and financing activities for th e fo llowing perio ds: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net cash (used i n) prov id ed b y o perating activi ties $(14 4,1 29 ) $195,27 2 $2 49 ,63 8 Net cash u sed in in vestin g act iv ities (1 ,94 7,8 94 ) (2 ,624,77 0) (4,3 66 ,98 5) Net cash p rovid ed by fin an cin g activ ities 2 ,01 3,4 27 2 ,333,62 6 4,0 69 ,45 7 To tal $(7 8,5 96 ) $(95,87 2) $(47 ,89 0) Fo r The Year Ended Decemb er 31 , 20 18 as co mp ared to The Yea r End ed December 3 1, 2 01 7 Net Ca sh (Used in) Provided b y Op erating Act ivi ties - Cash flo ws fro m o perating activ ities are affect ed b y th e timing o f premiums received , in vestmen t in come, and benefits and ex pen ses paid. Prin cip al so urces o f cash inflo ws from o perating activ ities includ e sales of o ur prod ucts an d services as well as in co me from investments. Due to the nature of ou r bu siness and the fact that many o f th e p ro du cts we sell produ ce finan cin g and inv estin g cash flows it is imp ort an t to co nsid er cash flows g enerated b y inv estin g and finan cin g act iv ities in co njun ction with tho se gen erated b y o perati ng activ ities. Net Ca sh Used i n Investing Activities - Changes i n cash from in vestin g activ ities primarily related to our i nv estment po rtfo lio . Net Cash Pro vid ed by Fina ncing A cti vit ies - Ch ang es in cash fro m fin anci ng activ ities in clu ded $522.4 milli on of outflo ws from secured fin ancing liabilities for th e year en ded December 31 , 20 18 , as compared t o the $22 0.0 mi llio n o f in flows for the y ear end ed Decemb er 3 1, 2 01 7 an d $2.5 billion in flows of in vestmen t prod uct an d u niversal life net activity as co mp ared t o $2.4 b illion in th e prio r year. Net activi ty related to the credit facility an d d ebt resulted in i nflo ws o f $3 17 .1 mill io n fo r th e year end ed December 31 , 2 01 8, as compared to $12 1.5 mil lion o f ou tflo ws for y ear end ed Decemb er 31 , 20 17 . Net repay men t of no n-reco urse fun ding o blig ation s eq ual ed $11 9.0 million du rin g the y ear en ded December 31, 2 01 8, as comp ared t o n et repay men t o f $4 7.0 b ill io n du rin g the year en ded Decemb er 31 , 20 17 . The Comp any paid a dividen d du rin g the year en ded Decemb er 3 1, 20 18 of $1 40 .0 million , as co mp ared to a d i viden d of $14 3.8 millio n d urin g the y ear end ed Decemb er 31 , 20 17 . 88 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Fo r The Year Ended Decemb er 31 , 20 17 as co mp ared to The Yea r End ed December 3 1, 2 01 6 Net Ca sh Provi ded b y Op erating Activi ties - Cash flows from op eratin g activ ities are affected b y th e timing of premiums received , in vestmen t in come, an d benefits an d ex pen ses p aid . Pri ncipal sou rces of cash in flows from op eratin g activ i ties i ncl ud e sales of ou r prod ucts and services as well as in come from in vestmen ts. Due to the natu re of ou r bu sin ess an d th e fact th at many of the p rod ucts we sell p ro du ce fin an cin g an d in vesti ng cash fl ows it is impo rtant to con sid er cash flows g enerated b y inv estin g an d fin ancing activ iti es in con ju nct io n with th ose g enerated b y o perating acti vities. Net Ca sh Pro vided By (Used in) Investing A cti vit ies - C hang es i n cash from in vestin g act iv ities p rimari ly related to o ur i nv estment po rtfo lio. Net Cash (Used in) Provi ded by Fina nci ng Activities - Chan ges in cash from finan cin g activ iti es in clu ded $2 20 .0 mi llio n of in flo ws from secu red finan cin g liab ilities fo r the y ear end ed Decemb er 3 1, 2 01 7, as compared to the $35 9.5 milli on of in flows for the y ear end ed Decemb er 3 1, 2 01 6 and $2.4 billio n in flows of inv estment prod uct and u niversal life net activity as co mp ared to $2.1 billi on in the p rio r y ear. Net act iv ity related to the credit facility and debt resul ted in o utflo ws o f $12 1.5 million for th e year en ded Decemb er 3 1, 20 17 , as co mp ared to $3 68 .1 million of o utflo ws fo r y ear end ed December 31 , 20 16 . Net repayment of n on -recou rse fun ding ob ligatio ns eq ualed $4 7.0 mi llio n d urin g the year en ded Decemb er 31 20 17 , as co mp ared to n et issuan ces o f $2 .1 billio n durin g th e y ear end ed Decemb er 31 , 2 01 6. Th e Compan y paid a d iv id end d uri ng the year end ed December 3 1, 20 17 o f $14 3.8 million , as co mp ared to a d i viden d of $89 .3 mil lion du ring th e year en ded December 3 1, 2 01 6. Throu gh o ur su bsidiaries, we are members o f th e FHLB o f C in cin nat i an d th e FHLB o f New York. FHLB ad van ces prov i de an attractiv e fun ding sou rce for sh ort-t erm bo rrowing and fo r th e sale o f fu nd in g ag reemen t s. M embersh ip in t he FHLB requ i res that we pu rch ase FHLB cap ital sto ck b ased o n a mi nimu m requ iremen t an d a percentage o f th e do llar amo un t of adv ances ou tstand in g. Our bo rro wing cap acity is determined b y cri teria establi shed b y each resp ecti ve b ank . In add ition , ou r ob ligatio ns un der t he advances must be collaterali zed . We maintai n co ntro l ov er an y such pledg ed assets, in clu ding the righ t of substitution . As o f December 31 , 20 18 , we had $65 0.9 millio n of fun ding agreement-rel ated adv an ces and accru ed in terest ou tstand in g un der the FHLB prog ram. Wh ile we an ticip ate that th e cash flo ws of ou r o perati ng sub si diaries will b e suffici en t to meet o ur i nv estment commitmen ts and op eratin g cash needs in a n ormal cred it market env iron men t, we reco gn ize that in vestmen t co mmitmen ts sch edu led to be fun ded may, fro m t ime to time, exceed th e fu nd s th en av ailable. Therefore, we hav e establish ed rep urchase agreement prog rams fo r certain o f ou r insu ran ce su bsid iaries to prov id e li qu id ity when n eeded. We ex pect that th e rate recei ved o n its in vestmen ts will eq ual or ex ceed its bo rrowing rate. Und er th is p rog ram, we may, fro m time to time, sell an inv estment security at a sp ecific p rice an d ag ree to repurch ase t hat security at ano ther specified p rice at a later d ate. Th ese bo rrowing s are ty pically for a term less th an 90 days. The mark et val ue o f secu rities to be repu rch ased is moni to red and collateral l evels are ad ju sted wh ere approp riate to protect th e cou nterp arty ag ain st credit exp osu re. Cash receiv ed is inv ested in fixed maturi ty securi ties, and the ag reement s p ro vided for net settlemen t in t he ev ent of d efau lt o r on termi nat io n of th e ag reemen ts. As of Decemb er 31, 20 18 , th e fair val ue of securities p led ged u nd er the rep urchase pro gram was $45 1.9 millio n an d the repurch ase o blig ation o f $4 18 .1 millio n was in clu ded i n o ur co nso lid ated balance sh eets (at an averag e b orro win g rat e of 2 45 b asis po in ts). Du rin g the year en ded December 31 , 20 18 , th e max imum balance ou tstan ding at an y o ne p oint in time related to th ese pro grams was $88 5.0 milli on . The av erage daily balan ce was $5 11 .4 million (at an average bo rrowing rat e o f 18 4 b asis p oints) d uri ng the year en ded Decemb er 31 , 2 01 8. As o f December 3 1, 201 7, th e fair value of secu rit ies pledg ed u nd er th e repu rch ase prog ram was $1 ,00 6.6 mi llio n and th e repu rch ase ob ligatio n o f $8 85.0 million was includ ed in ou r co nsolid ated balance sheets (at an averag e b orro win g rate of 1 42 basis po in ts). Du ring the y ear en ded Decemb er 3 1, 20 17 , th e max imum b alan ce ou tstand ing at an y o ne po in t in time rel ated to t hese p ro grams was $9 88 .5 millio n. The av erag e daily b alan ce was $6 24 .7 millio n (at an averag e b orro win g rate of 101 basis po in t s) d uring th e y ear ended Decemb er 3 1, 20 17. We particip ate in securities l en din g, p rimarily as an i nv estment yield en han cement, whereby securi ties that are hel d as in vestmen ts are lo aned ou t to th ird parties fo r sh ort p eri od s o f time. We req uire in itial collateral o f 102 % o f t he market v alu e o f th e lo an ed securities to b e sep arately main tained . The lo aned secu rities’ market valu e is mon i to red on a d aily b asis. As of Decemb er 3 1, 2 01 8, secu rities with a mark et value o f $72 .2 million were loaned un der th is prog ram. As collateral for th e l oaned secu rit ies, we receive sho rt-term in vestmen ts, which are recorded in “sh ort-term in vestmen ts” with a co rresp on ding liability reco rd ed in “secu red finan cing l iab ilities” to acco un t for its o blig ation t o retu rn th e collateral . As of December 31 , 20 18 , th e fair v alu e of the co llateral related to this pro gram was $7 7.2 millio n an d we had an obl ig ation to return $77 .2 million of collateral to th e securities b orrowers. Pendin g Tran sa cti on with Great-West Life & An nu ity In su ran ce Co mpa ny As d iscussed in Note 24 , S ub seq uent Events, to th e co nso lidated fin ancial statemen ts incl ud ed herein , o n Jan uary 23 , 2019 , PLICO entered into an ag reement to acq uire v ia reinsu ran ce su bstanti all y all o f GWL&A’s in dividual life insu ran ce and an nu ity b usiness. En t ry into th e rein su ran ce agreements at closin g will represent an estimated cap i tal inv estment by the Compan y of app ro ximately $1.2 bi llio n, su bject to adj ustmen t. Th e tran saction is expected to close in the first h alf o f 20 19 , su bject to th e receipt o f reg ulato ry approv als and satisfaction o f cu stomary closing co nd itio ns. We intend t o fu nd the acq uisition th ro ug h a combin ati on of a n ew term lo an facil ity, a capit al con tribu tion from Dai-ichi Life and avai lab le cash o n h and . The timin g of the bo rrowi ng s an d th e amo un ts to be drawn fro m a n ew term lo an facility an d ou r existin g facility are to be determin ed an d will dep end o n th e timin g of th e ex pected closing of th e transactio n an d mark et con ditio ns at such time. Statutory Ca pital A li fe in su ran ce compan y’s stat utory capital is co mp uted according to ru les p rescrib ed b y t he NAIC, as mod ified by st ate law. Generally sp eaking , other states in which a co mp any do es b usin ess d efer to the interp retation o f th e do miciliary state with resp ect to NAIC rules, un less inco nsistent with th e other state’s regu latio ns. Statu to ry acco un tin g rules are different from GAAP 89 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents an d are intend ed to reflect a mo re co nservativ e view, for example, req uiring immed i ate exp ensin g o f po licy acq uisition costs. The NAIC’s risk -b ased cap ital requi remen ts requ ire insurance co mp anies to calcu late an d rep ort i nformatio n un der a risk -b ased capital formula. Th e achievement o f lon g-term growth will requi re growt h in the st atu to ry cap ital of o ur in surance sub sidiaries. The sub sidi ari es may secure addi tion al st atuto ry capital th ro ug h v ari ou s sou rces, such as ret ained statutory earni ng s or o ur equity con tribu tion s. In g eneral, dividen ds u p to sp ecified level s are co nsid ered o rd in ary an d may be paid witho ut prio r ap proval of the insurance commissioner of the stat e of d omicile. Dividen ds in larg er amou nts are con sidered ex traordinary and are sub ject t o affirmativ e prio r ap proval by such commission er. The maximu m amou nt that wo uld qu alify as an ordinary di viden d to us from ou r in surance su bsid iaries in 20 19 is ap proxi mately $43 4.0 milli on . St ate insurance regu lators an d th e NAIC have ado pted risk-based cap ital (“RBC”) requ iremen ts for l ife insu ran ce compan ies to ev alu ate th e ad equ acy o f statutory capital and su rpl us in relatio n to in vestmen t and insu ran ce risk s. Th e req uirements p rovid e a mean s o f measuring t he min imum amo un t of statu to ry surplus app ro pri ate for an insu ran ce compan y to su pp ort its ov eral l bu sin ess op eratio ns based o n its size an d risk profi le. A co mp any ’s risk-based statutory surp lu s is cal cu l ated by app ly i ng factors an d perfo rmin g calculation s relatin g to v ariou s asset, p remiu m, claim, ex pense, and reserv e items. Reg ulato rs can then measure the adeq uacy o f a co mp any ’s statutory surplus b y comparin g i t to RBC. We manag e o ur cap ital consu mp tion by u sing th e ratio of o ur total adj usted cap i tal , as d efined b y th e insuran ce regu lators, to ou r compan y actio n lev el RBC (k no wn as t he RBC ratio), also as defin ed by i nsu ran ce regul ato rs. As o f December 31 , 2 01 8, ou r total adju sted cap ital and company acti on level RBC were ap pro ximat ely $4.7 billio n an d $1 .0 b illion , resp ecti vel y, pro viding an RBC ratio o f ap prox imately 4 59 %. St atuto ry reserv es estab lish ed fo r VA con t racts are sen si tive to ch ang es in the equ ity markets and are affect ed by the lev el of acco un t values relativ e to the lev el of an y gu aran tees and p ro du ct desig n. As a result, t he relati on ship between reserve chang es an d equ i ty mark et perfo rmance may be no n-lin ear du ring any g iv en repo rtin g perio d. Market con dition s g reatly influ ence the cap ital requ ired du e to t heir imp act o n th e valuatio n of reserv es and d eri vat iv e in vestmen ts mitig ating the risk in th ese reserv es. Ri sk mitig ati on activities may result in mat eri al an d so met imes co un terin tu iti ve impacts o n statutory surplus and RBC ratio . No t ab ly, as changes in th ese market and no n-market factors o ccur, b oth ou r p otential o blig ation and the related statutory reserves an d/or req uired capital can vary at a no n-linear rat e. Ou r stat utory su rpl us is i mp acted b y credi t sp read s as a resu lt of accou ntin g for th e asset s and liabilities o n o ur fixed M VA an nu ities. Statutory separate acco un t assets su pportin g the fix ed M VA an nu ities are recorded at fair valu e. In det ermin in g t he statu to ry reserve for th e fixed MVA ann uities, we are req uired t o u se curren t crediting rates b ased o n U.S. Treasu ries. In many cap ital mark et scen arios, curren t crediting rates b ased o n U.S. Treasu ries are high ly correlated with market rates imp licit in the fai r v alu e of statut ory separate accou nt assets. As a resul t, the chang e i n the statutory reserve from period to perio d will l ik ely sub stan tially o ffset the chan ge in th e fair value of th e stat utory sep arate accou nt assets. Howev er, in period s of v olatil e cred i t markets, actual cred it spread s o n in vestmen t assets may in crease or decrease sharply fo r certain su b-secto rs of the o verall cred it mark et, resu ltin g in statu to ry sep arate acco un t asset mark et v alu e gains or lo sses. As actu al credit spreads are not fu lly reflect ed in cu rrent cred iting rates based o n U.S. Treasu ries, the cal cu l ati on of statutory reserves will no t sub stantially o ffset th e chan ge in fair v alu e of the statutory sep arate acco un t asset s resultin g in a ch an ge in statu t ory surplus. Th e resu lt of this mismatch had a neg ative impact to o ur stat utory su rp lu s of ap prox i mately $67 million on a pre-tax basis for the year en ded Decemb er 31 , 20 18 , as co mp ared to a positiv e impact to ou r statu tory su rp lu s o f approx imatel y $12 millio n o n a pre-tax b asi s fo r the y ear end ed Decemb er 31 , 20 17 . We cede material amo un ts o f in surance an d transfer related assets to o th er in surance co mp anies thro ug h reinsu ran ce. However, notwith stan ding the transfer of related assets, we remain li ab l e with respect to ceded insurance sho uld any rein su rer fail to meet th e o blig ations th at it assu med. We evalu ate the finan cial co nd i tion of our reinsurers an d mon itor the associ ated co ncen tration o f credit risk. For t he y ear end ed Decemb er 3 1, 2018 , we ced ed p remiu ms to th ird p arty rein surers amoun ting to $1 .4 b illion . In add ition , we h ad receivab les fro m rein surers amounting to $4 .8 b illio n as o f Decemb er 31, 20 18. We review reinsurance receivab le amou nts for co llectab ility an d estab lish bad d eb t reserves if d eemed ap prop riat e. Fo r ad dit io nal informat io n related to ou r rei nsu ran ce ex po su re, see Note 13, Reinsura nce, to the con so lidated fin anci al statemen ts in clu ded in th is repo rt. Ca ptive Reinsura nce Companies Ou r life in surance su bsid iaries are su bject to a reg ulation entitl ed “Valu ation of Life In su ran ce Policies Mo del Regulat io n,” commo nly k no wn as “Reg ulation XXX,” and a su pp orting gu i delin e en titled “The Ap plicatio n o f th e Valu ation of Life Insu ran ce Po licies Mo del R eg ulatio n,” commo nly k no wn as “Gu id eline AXXX.” Th e regu latio n and su pp orting gu id eline req uire insurers to establish st atuto ry reserves for term and u niv ersal li fe in su ran ce p olicies with lon g-t erm premium g uaran tees th at are co nsistent with th e statu to ry reserv es requ ired fo r other ind iv id ual life insurance p olicies wi th similar g uarantees. Man y mark et p articipan ts b elieve that th ese l ev els of reserves are non -econ omic. We u se captiv e reinsurance compan ies to impl ement reinsurance and capital manag ement action s t o satisfy th ese reserve req uirements b y fin anci ng th e no n-eco no mic reserves either thro ug h the i ssu an ce of no n-reco urse fu nd ing ob ligatio ns b y the cap tives o r o btain in g Lett ers o f Cred it fro m third -p arty fi nancial institu tions. Ou r cap tive rein su ran ce co mp anies assu me b usin ess fro m affiliates o nly. Ou r cap tiv es are cap italized to a lev el we b eli ev e i s su fficient t o sup po rt the co ntractual ri sks and ot her g eneral o bligat io ns of th e respect iv e capti ve en tity. All of ou r captiv e rein surance companies are wh oll y owned sub si diaries an d are lo cated domestical ly . The captiv e in surance co mpan ies are sub j ect to reg ulation s in the state o f d omici le. The Nation al Asso ciatio n of In su ran ce Commission ers (“NAIC”), th ro ugh v ariou s commi ttees, sub grou ps an d ded icat ed task fo rces, is reviewin g the use o f captiv es and special p urpo se veh icles used to transfer in surance risk in relation to existin g state laws an d regu latio ns, an d several committees hav e ad op ted or exp osed for comment whit e p apers and rep ort s th at, if or when imp l emented, co uld imp ose ad ditional requ i remen ts on th e use o f cap tives and other reinsu rers. Th e Finan cial Con dition (E) Co mmittee o f the NAIC established a Variable Annu ity Issu es Wo rk in g Grou p to examine co mp any use of variable ann uity 90 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents cap tives. Th e Co mmitt ee h as prop osed ch ang es in th e regu latio n o f v ariable an nu ities an d v ari abl e an nu ity capti ves, which cou l d adv ersely affect o ur fut ure finan cial co nd iti on an d results of op eratio ns if ado pted. The NAIC h as ad op ted Actuarial Gu id eline XLVIII (“AG4 8”) an d th e sub stan tially similar “Term an d Universal Life In su rance Reserv e Fin anci ng Mo del Regul ati on ” (th e “Reserv e Mo del ”) wh ich establish nati on al stan dards for n ew reserv e fin ancing arran gemen ts for term life in su rance and u niversal life in su ran ce with seco nd ary g uarant ees. AG4 8 and the Reserv e Mo del g ov ern co llateral req uirements fo r captive rei nsu ran ce arran gemen ts. In o rd er to ob tai n reserve credi t, AG4 8 and the Reserve Mod el req uire a minimu m level o f fu nd s, co nsistin g of p rimary an d other secu rities, to be held b y or o n behalf of ced in g insu rers as security under each cap tive life rein surance treaty. As a resu lt o f AG4 8 and the Reserv e Mo del, the implemen tatio n o f new captiv e structures i n the future may b e less cap ital effici en t, lead to lower prod uct returns and /o r increased p ro du ct p ricin g o r resu lt in reduced sales of cert ain prod uct s. In so me circumst an ces, AG48 an d th e Reserve M od el cou ld imp act t he Co mp any ’s ability to en gag e in certain reinsu ran ce tran sactions with n on - affiliates. We also use a cap tive reinsu ran ce co mp any t o rein sure risk s associ ated with GLWB and GM DB riders which h elp s u s t o manage th ose ri sks on an eco no mic basis. In an effo rt to mitig ate th e equ ity mark et risk s relat iv e to our RBC ratio, in the fou rth q uarter of 20 12 , we established an i nsu ran ce sub si diary , Sh ad es Creek Captiv e In su ran ce Co mp any (“Shad es Creek ”), to wh ich PLICO has reinsu red GLWB an d GM DB riders relat ed to it s VA con tracts. The p urpo se of Sh ad es Creek is to redu ce th e v olatil ity in RBC du e to n on -eco no mic variables includ ed within th e RBC calculatio n. We maintain an in terco mp any cap ital supp ort agreement with Shad es Creek th at prov ides th ro ug h a g uarantee that we will co ntrib ute assets or pu rchase surp lu s n otes (or cause an affiliate or third p arty to con t ribu te assets or p urchase surplus no tes) in amo un ts necessary fo r Sh ades Creek’s reg ulato ry cap ital level s to eq ual or exceed minimum thresh olds as d efined b y the agreemen t. As o f Decemb er 31 , 20 18 , Sh ad es Creek main tained cap ital levels in ex cess o f the req uired minimum thresh olds. The max imum po ten tial future pay men t amount wh ich cou ld be requ ired u nd er the capit al su pp ort ag reemen t will b e d ependent o n nu merou s facto rs, in clu ding the perfo rmance o f equ ity markets, the lev el of interest rates, perfo rmance o f asso ciated hedg es, an d related po licyh older behav io r. For add itio nal in fo rmation reg ardin g risk s, un certainti es, an d oth er fact ors th at cou ld affect ou r u se of cap tive reinsurers, p lease see Part I, Item 1 A, Risk Fa cto rs, o f this repo rt. Ratin gs Variou s Nationally Reco gn ized Stat istical Rating Organization s (“rating organ izatio ns”) review th e fin anci al p erforman ce and con dit io n o f in su rers, in clu ding o ur insurance sub si diaries, an d pu blish th eir financial stren gth ratin gs as in dicato rs o f an in su rer’s ab ility to meet p olicy ho ld er and co ntract h older ob ligatio ns. Th ese rating s are impo rtant to maintain in g p ub lic co nfid ence in an insurer’s prod ucts, its abi lity to mark et its prod ucts an d i ts competitive po sition . The fo l lo win g t ab le summarizes th e curren t fin ancial stren gth ratings o f o ur si gn ifican t member companies fro m the major ind epend ent rating organizations: Ra tings A.M. Best Fitch Sta ndard & Po o r’s Moody’s In su ran ce co mp any fi nancial streng th ratin g: Pro tectiv e Life In su ran ce Co mpan y A+ A+ AA- A1 West Co ast Life In surance Compan y A+ A+ AA- A1 Pro tectiv e Life and An nu ity In surance Compan y A+ A+ AA- — Pro tectiv e Prop erty & Casualty In surance Compan y A — — — MONY Life In surance Compan y A+ A+ A+ A1 Ou r rating s are sub ject to rev iew and chang e by th e ratin g o rg anization s at an y ti me and witho ut no tice. A d own grade or o th er n egativ e actio n b y a rat in gs organ izatio n wi th respect to th e fin ancial stren gth ratin gs of our in su ran ce sub sidi aries cou ld ad versely affect sales, relatio nships with d i stributo rs, th e level of p olicy surren ders an d with drawals, co mp etit iv e p osit io n in th e marketplace, an d th e co st o r availab ili ty o f rein surance. The rating ag en cies may tak e vario us actio ns, po siti ve o r n egat iv e, wit h respect to the fin ancial stren gth rat in gs o f ou r insurance su bsid iaries, includ in g as a resul t o f ou r stat us as a sub si diary of Dai-ichi Life. Ratin g o rg anization s also p ub lish credit rating s for th e issuers of deb t secu rities, includ in g the Compan y. Credit rat in gs are in dicato rs of a d ebt issuer’s ab ility t o meet t he terms of d ebt o bligat io ns i n a timely mann er. Th ese rating s are impo rtant in the deb t issuer’s o verall ab i lity to access credit mark ets an d o th er typ es o f liq uid ity. Rat in gs are n ot reco mmen datio ns to b uy ou r securities or prod ucts. A do wng rad e o r o ther n egativ e actio n b y a ratin gs organization with respect to ou r cred i t rating co uld li mi t o ur access to cap ital mark ets, i ncrease the cost o f issu in g d ebt, an d a d owng rad e of suffici en t magn itu de, co mb in ed with other n egat iv e factors, cou ld requ ire u s to p ost co llateral. The rating agen cies may take vario us action s, po sitive or n egat iv e, with resp ect t o our debt rati ng s, in clu ding as a resu lt of ou r status as a su bsid iary o f Dai-ichi Life. 91 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents LIABILITIES Man y o f ou r p ro ducts con tain surren der charges an d other features that are design ed to reward p ersistency and pen alize th e early withdrawal o f fu nd s. Certain stable v alu e an d ann uity con tracts hav e mark et-value adjustment s th at protect us ag ain st inv estment lo sses i f in terest rates are h ig her at th e time of su rrend er than at the time o f issu e. As o f Decemb er 3 1, 2 01 8, we h ad p olicy liabil ities and accruals o f ap prox i mately $4 2.8 billi on . Our in terest -sen si tive life insu ran ce po licies hav e a weigh ted averag e minimu m credi ted in terest rate o f app rox imately 3.4 7%. Co ntractua l Oblig ati ons We en ter into v ariou s ob ligation s to third parties in th e o rd inary cou rse o f ou r o peration s. Ho wever, we d o no t b elieve th at o ur cash flow requi remen ts can be assessed so lely based u po n an anal ysis of these ob ligatio ns. Th e most sig nificant facto rs affecting o ur futu re cash flows are ou r ability to earn an d collect cash from ou r custo mers, and the cash fl ows arising from ou r inv estment prog ram. Future cash o utflows, whether th ey are co ntract ual ob ligatio ns or no t, will also vary b ased u po n o ur future need s. Alth ou gh so me o utflows are fix ed, o th ers depen d on fu tu re ev ents. Ex amp les of fixed ob ligatio ns include ou r o bligatio ns to p ay p rincipal an d interest o n fix ed-rate bo rrowi ng s. Examples of ob lig ati on s th at will vary includ e ob ligatio ns to pay in terest on v ariable-rate b orrowings an d in surance liabi lities th at d epen d on future interest rat es, market p erforman ce, or surren der p ro vision s. Many o f ou r ob ligatio ns are link ed t o cash-gen eratin g co ntracts. In additio n, o ur op eratio ns inv olve sign ifican t ex pen ditu res that are no t b ased u po n co ntract ual ob ligatio ns. These inclu de ex pen ditu res for i ncome tax es and payroll. As o f Decemb er 3 1, 2018, we carried a $7.4 million liab ility fo r un certain t ax p ositio ns, in clu ding interest o n un recognized tax ben efits. Th ese amou nts are n ot inclu ded in th e lo ng -term co ntract ual ob ligation s tabl e because of the di fficu lty in mak in g reaso nab ly reliable est imates o f th e o ccu rrence o r timing of cash settlemen ts with th e resp ective taxi ng au tho rities. The tab le b elo w sets fort h future maturities o f o ur con tractu al o blig ation s. Pa y ments due by period To tal Less tha n 1 y ea r 1 - 3 years 3 - 5 years More than 5 years (Dolla rs I n Thousands) Debt (1)$1 ,51 4,9 86 $45 6,6 13 $6 6,517 $66 ,51 7 $9 25 ,33 9 Non -recou rse fun ding ob ligati on s(2 )4 ,32 4,2 25 28 8,5 92 65 8,159 6 12 ,66 8 2,7 64 ,80 6 Su bo rd i nated deb t(3)1 ,58 4,5 94 3 0,6 55 6 1,310 61 ,31 0 1,4 31 ,31 9 Stable value pro du cts(4)5 ,52 8,1 62 1 ,35 7,4 12 3 ,18 3,833 8 49 ,74 3 1 37 ,17 4 Operati ng leases(5)2 4,2 72 5,4 54 7,100 6 ,30 0 5 ,41 8 M ortg age loan an d inv estment commitment s 79 0,2 35 65 1,1 59 13 9,076 — — Secu red financing liabilities(6)49 5,6 73 49 5,6 73 — — — Po licyh older ob lig ati on s(7 )56 ,49 4,2 27 3 ,49 5,6 83 7 ,51 4,091 5,7 64 ,25 7 3 9,7 20 ,19 6 Tota l(8)$70 ,75 6,3 74 $6 ,78 1,2 41 $11 ,63 0,086 $7,3 60 ,79 5 $4 4,9 84 ,25 2 (1)Debt in clu d es all prin cip al amo u n ts o wed o n n ote ag reemen ts and exp ected interest payments d u e o ver the term of th e n o tes. (2)Non -recourse fun d ing oblig atio n s in clu d e all u n d iscoun ted p rincipal amoun ts owed and expected future in terest p ay m en ts due ov er the term of the notes. Of the total u n d iscoun ted cash flows, $1.7 billio n relates to the Gold en Gate V tran saction. Th ese cash o u tflo ws are match ed and p redomin an tly offset by the cash inflo ws Go ld en Gate V receives from no tes issu ed by a nonconso lidated v ariab le in terest en tity. Additio n ally, $2 .6 b illion relates to the Go ld en Gate transaction . These cash o u tflows are matched an d p red ominantly offset by the cash inflo ws Go ld en Gate receives fro m n o tes issu ed by a no n co n solid ated variable in terest en tity. Th e remainin g amou n ts are asso ciated with th e Gold en Gate II notes h eld by third parties as well as certain oblig atio n s assumed with th e acquisition of MONY Life Insurance Co m p an y. (3)Su b ord in ated d eb t secu rities in clu des all principal am ounts an d interest p ay men ts d u e o v er the term o f the ob lig atio ns. (4)Anticip ated stab le v alu e p rodu ct cash flows in clu d ing interest. (5)Includes all lease payments required under o p erating lease agreements. (6)Rep resents secured b o rro win g s and accrued interest as part of o u r rep u rchase pro g ram as well as liab ilities associated with securities len ding tran sactions. (7)Estim ated contractual policyho ld er o b ligations are based on mortality, m o rbid ity, and lap se assum p tions comp arab le to our historical ex perience, m o d ified fo r recen t ob served tren ds. These o bligations are b ased on cu rrent b alan ce sheet values an d include expected in terest creditin g , bu t do n o t incorp o rate an expectation o f future m arket growth, o r future deposits. Due to th e sig nificance o f the assump tions used , th e amou n ts presen ted could materially differ from actual results. As v ariab le sep arate acco u n t o bligations are legally in sulated fro m g en eral account o b lig ations, th e variab le sep arate acco u nt obligation s will b e fully fu n ded by cash flo ws fro m v ariable separate account assets. We ex pect to fully fu nd the general acco unt ob lig atio ns from cash flows fro m general acco u n t investm en ts. (8)Excluded from th is table are certain pensio n oblig atio n s. Employ ee Benefit Plans We sponso r a tax -q ualifi ed defin ed b en efit p ensio n plan (“Qu alified Pensio n Plan”) coveri ng sub stan tially all o f o ur emplo yees. In add itio n, we spo nsor an unfu nd ed, n on qu alified excess benefit p ension p lan (“No nq ualifi ed Ex cess Pensio n Plan ”) an d prov id e o th er postretirement b en efit s to eligi ble employ ees. We rep ort th e n et fu nd ed status of o ur p ension an d other p ostreti remen t plans in the con solidated b alan ce sheet. Th e net fun ded status rep resen ts the differen ces between th e fair value o f p lan assets an d the p ro jected b en efit obligatio n. 92 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Ou r fu nd ing po l icy i s to con trib ute amou nts to t he Qu alified Pen sio n Plan su fficient to meet t he min imum fun din g requi remen ts o f th e Employ ee Retiremen t Inco me Secu rity Act (“ERISA”) p lu s su ch add i tion al amo unt s as we may d etermine to b e ap prop riat e from time to time. Co ntrib utio ns are in ten ded to p ro vide n ot o nly fo r ben efi ts attribu ted to serv ice to date, bu t also for tho se exp ected to b e earn ed in th e future. We may also mak e add itio nal co ntrib utio ns in future p eriod s to main tain an adjusted fun ding target attainment p ercentage (“AFTAP”) of at least 8 0% an d to av oid certain Pen sio n Benefit Gu aran ty Corpo ratio n (“PBGC ”) rep ort in g trigg ers. We h av e n ot yet d etermined the to t al amount we will fun d d urin g 20 19 , bu t may co ntribu te an amo un t that wo uld eliminate th e PBGC variab le-rate premiums payab le in 2 01 9. Th e Comp any curren tly esti mates th at amo un t will be b etween $10 mi llio n an d $20 mi llio n. For a complete discussion o f ou r ben efit plans, add i tion al in fo rmation rel ated to th e fun ded statu s of o ur b enefit pl an s, and o ur fun ding po licy, see No te 1 6, Emp lo yee Ben efit Pla ns, to the con so lidated fin ancial statemen t s in clu ded in th is repo rt. OFF-BALANCE SHEET ARRANGEMENTS We have en tered into in demnity agreements with each o f o ur d irecto rs as well as o perati ng leases th at d o n ot result in an obligatio n b ein g recorded on th e b alan ce sheet. Refer to Note 15 , Co mmitmen ts an d Con tin gencies, of th e con soli dated finan cial statemen ts for mo re informati on . MARKET RISK EXPOSURES Ou r fin ancial p ositio n and earning s are sub ject to vari ou s mark et risk s in cludi ng ch an ges in in terest rates, the yi eld curv e, sp read s b etween risk - ad justed an d risk -free in terest rates, foreig n curren cy rates, used v ehicle prices, eq uit y price risks and issu er d efau lts. We analyze an d manag e the risks arising from market expo sures o f finan cial i nstru men ts, as well as other risks, th ro ug h an integrated asset/li ab i lity man agement pro cess. Th e primary focu s o f ou r asset/liabil ity p ro gram is the management of int erest rate risk within the insurance operations. Our asset /liab ility manag ement p ro grams an d procedu res in vo lv e th e mon i to ring of asset an d li ab ility du ratio ns fo r v ariou s pro du ct l in es; cash flow testin g u nd er v ari ou s in terest rate scenario s; an d the co ntin uo us rebalancing of assets an d liab ili ties with resp ect to yi eld, credit and market risk , and cash flow ch aracteristics to main tain an app ropriate b alance b etween risk an d p ro fitability fo r each prod uct catego ry , and fo r u s as a wh ole. It is ou r policy to main tain asset an d liabi lity duration s within on e year of one ano ther, althou gh , from t ime to time, a broad er interv al may be all owed. We are exposed to credit risk with in o ur in vestmen t po rtfo lio and th ro ug h deriv ative co unt erp art ies. Credit risk relates to the uncertainty of an ob ligo r’s co ntin ued ab i lity to make timely payments in acco rdance with the cont ractu al terms of th e in st ru ment or con tract. We man age cred it risk th ro ug h estab lished inv estment p olicies wh ich at temp t to ad dress qu ality o f ob ligo rs and co un terparties, credit con cen tration li mi ts, diversification requ irements, and acceptable risk lev els u nd er ex pected and stressed scenario s. Derivativ e count erp art y cred it risk is measu red as th e amou nt owed to us, n et o f co llateral h eld , based up on cu rrent market co nd itio ns. In ad ditio n, we p eriod i cally assess ex po sure related to p otential p ay men t ob ligations b etween us and ou r co un terparties. We min imize th e cred it risk in deriv ati ve finan cial i nstru men ts b y ent ering into transacti on s with h ig h qu alit y cou nterp arties (A-rated or high er at the time we en ter in to th e con tract), an d we maintain cred it sup port ann exes with certain of th ose co un terparties. We utilize a risk man agemen t strategy that inco rp orates the use of d erivati ve financial i nstru men ts to red uce ex po su re to certain risk s, in clu ding b ut no t limited to, interest rate risk , curren cy ex chan ge risk, v olatility risk , and equ ity market risk. These strateg ies are d evelop ed thro ug h ou r an aly sis o f data from finan cial simu latio n mo dels and o th er internal and in du stry so urces, and are th en in co rpo rat ed into ou r risk manag emen t p ro gram. See Note 7 , Derivati ve Fina ncial Instru men ts, to th e co nsol id ated fi nancial stat ements i nclud ed in th i s rep ort for add ition al informat io n o n o ur finan cial in struments. Deriv ative i nstru men ts ex po se us to cred it and mark et risk an d co uld result in material chan ges fro m p eriod to p eriod. We attempt to minimize o ur credit ri sk b y en terin g into tran saction s with high ly rated cou nterp arti es. We man age the market risk by estab lishin g and mo nitorin g limits as to the t yp es and degrees o f risk that may be un dertaken . We mo nito r ou r u se o f deriv atives i n co nnection with o ur ov erall asset/liability man agemen t prog rams an d risk manag ement strategies. In add itio n, all d erivativ e prog rams are mo nitored b y our risk manag ement dep artmen t. Deriv ative in stru men ts th at are used as part o f ou r in terest rate risk man agemen t strategy includ e interest rate swaps, interest rate futures, interest rate cap s, and in terest rate swap tion s. Deriv ative instruments that are u sed as part of the Compan y’s fo reign curren cy ex change risk man agement strategy in clu de fo rei gn curren cy swap s, fo reign cu rrency fu tures, fo reign equ ity futures, and fo reign equ ity o ptio ns. We may use t he fo llowing ty pes of deriv ative con tracts to mitig ate ou r ex po sure to certain gu aran teed b enefits related to VA contracts, fix ed in dexed ann uities, and in dex ed u niversal life: •Fo reign Cu rrency Fu tu res •Varian ce Swaps •In terest Rat e Futu res •Equ ity Op tion s •Equ ity Futu res •Credit Deriv atives 93 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents •In terest Rat e Swaps •In terest Rat e Swaptio ns •Vo l ati lity Fu tu res •Vo l ati lity Optio ns •Total Return Swap s We believ e that o ur asset/liabilit y manag emen t prog rams an d proced ures an d certain p ro du ct feat ures p ro vide protection ag ain st the effects of ch ang es in in terest rates un der vario us scen arios. Ad ditio nal ly, we b elieve ou r asset/liabi lity manag emen t pro grams and procedures prov id e sufficien t liqu id ity to en able us to fulfill o ur ob lig ati on to pay b enefits u nd er o ur vario us insurance and dep osit co ntracts. However, o ur asset/liab ility manag ement prog rams an d procedu res incorporate assumptio ns abo ut the relation sh ip b etween sho rt-term an d long-term in terest rates (i.e., th e slop e o f th e y ield curve), rel ati on ships between risk-ad j usted an d risk-free interest rates, mark et liqu id ity, sp read mo vemen t s, impli ed v olatilit y, po licyh older beh avior, an d other facto rs, and the effectiv eness of o ur asset/liability management pro grams an d proced ures may b e n egativ ely affected when ever actu al resu lts d iffer from th ose assumptio ns. The fol lo win g tabl e sets forth the estimated mark et v alu es of ou r fix ed matu rity investment s and mo rtgag e lo an s resultin g fro m a h yp othetical immediate 1 00 b asi s po in t i ncrease in i nterest rat es from levels prevailing as of December 3 1, 2 01 8 and 2017, an d the percen t ch ang e in fair value th e fo llowing estimated fair val ues wou l d rep resent : As o f December 31 , Amo unt Percent Chang e (Do l l a rs I n Milli ons ) 2 01 8 Fixed matu rities $5 0,142 .4 (8.1 )% Mo rtg ag e lo ans 7,035 .1 (5.5 ) 2 01 7 Fixed matu rities $4 0,286 .8 (8.2 )% Mo rtg ag e lo ans 6,369 .5 (5.5 ) Estimated fair values from the hy po th etical in crease in rates were d erived fro m th e d uration s o f our fix ed matu rities and mortg age lo an s. Du ration measures the ch an ge in fair v alu e resu ltin g from a ch ang e in in t erest rates. While these estimated fair v alu es p ro vide an in dication of ho w sensitiv e th e fair values o f ou r fixed maturities an d mort gage lo ans are to chan ges in i nterest rates, th ey d o no t rep resen t manag ement’s view of future fair v alu e chan ges or the po tential imp act of flu ctuation s in cred it spreads. Act ual resu lts may differ from these estimates. In the ordin ary co urse o f o ur co mmercial mo rtgag e lend in g o peration s, we may co mmit to p rov id e a mo rtgag e lo an before the pro perty to b e mortgag ed h as b een b uilt o r acq uired . Th e mo rtgag e loan commitmen t is a con tractu al ob ligatio n to fund a mort gage lo an wh en cal led up on b y the bo rrower. The co mmitmen t is no t recog nized in ou r finan cial statemen ts un til t he co mmitment is actually fun ded . Th e mo rtgag e l oan commitment con tains terms, in clu ding th e rat e o f interest, which may be d ifferent than p rev ailin g interest rates. As of December 31, 2 01 8 and 2 017, we had o utstan ding mo rtgag e loan co mmitmen ts o f $6 85 .3 million at an averag e rat e o f 4.4 % and $5 72 .3 milli on at an averag e rat e o f 4 .1%, resp ectively, with estimated fair v alu es of $67 1.3 million an d $58 3.0 millio n, respectively (usin g disco un ted cash flows fro m th e first call d ate). Th e foll owing table sets fo rth the est imated fair v alu e o f o ur mortgage loan co mmitments resulting from a h yp othetical immediate 1 00 basis poi nt in crease in int erest rate levels p rev ailin g as o f Decemb er 3 1, 20 18 and 20 17 , and the p ercent change in fair value that th e fo llowing estimated fair val ues wou l d rep resent : As o f December 31 , Amo unt Percent Chang e (Do l l a rs I n Milli ons ) 2 01 8 $638 .8 (4.8 )% 2 01 7 $557 .0 (4.5 )% The estimated fair v alu es from the hyp othet ical increase in rates were deriv ed from th e d uration s of ou r o utstan ding mo rtgag e loan co mmitmen ts. Wh ile these estimated fair v alu es p ro vide an ind i catio n of h ow sensitiv e th e fair v alu e of o ur o utstand in g commitmen ts are to ch anges i n in terest rates, they do not rep resent manag ement’s view o f fu tu re market chan ges, and actu al market results may d iffer from th ese estimates. As previou sly di scussed, we u til ize a risk manag ement strateg y th at involv es the u se o f deriv ative finan cial instru men ts. Derivat iv e instru men ts ex po se us to credit and mark et risk and co uld result i n mat eri al ch ang es from p eriod to perio d. We mini mize ou r cred it risk b y ent ering into t ransacti on s with high ly rated co un terparties. We manage the market risk by estab lishin g and mon itori ng limits as to th e typ es an d d egrees o f risk th at may b e u nd ertaken . We moni to r o ur use o f d erivativ es in con nectio n wi th ou r o verall asset/liabil ity management prog rams and procedures. As o f December 3 1, 2 01 8, to tal d erivativ e cont racts with a n otio nal amou nt o f $33.2 billion were in a $61 8.7 million n et lo ss po si tion . Incl ud ed in th e $3 3.2 billion is a n otion al amou nt of $2.4 b illion in a $2 5.8 million n et loss p ositio n th at relates to ou r Mo dco tradin g p ort fo lio. Also includ ed in the to tal, is $1 2.5 bi llio n in a $184 .1 million n et loss p ositio n t hat relates to our GLWB embed ded d erivativ es, $2 .6 billion in a $21 7.3 millio n net lo ss po sition th at relates to ou r FIA emb edd ed deriv atives, 94 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents $2 33 .5 million in a $90 .2 million net lo ss position th at relates to ou r IUL embed ded deriv ati ves, and $3 .3 million in a $0 .3 million net lo ss p ositio n t hat rel ated to o th er d erivativ es. As o f December 3 1, 2 01 7 to tal deriv ative con tracts with a no tion al amo un t o f $26 .3 billi on were in a $644 .8 millio n n et lo ss p osit io n. In clu ded in th e $26 .3 billion is a no t io nal amount o f $2 .5 bil lion in a $2 14 .2 millio n net lo ss po sition that relates to o ur Mo dco trad in g p ortfolio . Also in clu ded in the to tal, i s $9.6 b illion in a $11 1.8 millio n net l oss position th at relates to o ur GLWB embed ded deri vativ es, $2.0 b illion in a $21 8.7 million n et lo ss po sition th at relates to ou r FIA emb edd ed deriv atives, an d $16 8.3 million in a $80 .2 million net lo ss p ositio n that relates to o ur IUL embedd ed d erivativ es. We recog nized gains o f $61 .0 millio n and lo sses o f $30 5.8 millio n an d $40 .3 mil lion related to d erivativ e finan cial in stru ments for th e years ended Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively. The fo llo wing tab le sets fo rth the n otio nal amo un t and fair v alu e o f o ur in terest rate risk related deriv ative fin anci al instru men ts an d the estimated fai r v alu e resultin g fro m a h yp othetical immediate p lu s and minu s 100 b asis po in ts chang e in in terest rates from lev els p rev ailin g as o f Decemb er 31: Fair Value Resulting Fro m an Immediate +/– 1 0 0 bps Cha nge in the Underlying Reference Interest Rates (1)(2 ) Notional Amo unt Fa ir Va lue as o f December 31, +100 bps –100 bps (D o l l ars In Millions) 20 18 Fu tu res $1,14 9.9 $(9.8 ) $1 3.1 $(3 3.3 ) Rec flo ating pay fixed swaps 40 0.0 — 1 2.9 (1 4.5 ) Rec fix ed p ay flo ating swaps 2,24 0.5 1 7.1 (22 3.0 ) 30 2.0 GLWB embedd ed d erivativ e 12,45 0.1 (18 4.1 ) 7 7.6 (52 2.0 ) Total $16,24 0.5 $(17 6.8 ) $(11 9.4 ) $(26 7.8 ) 20 17 Fu tu res $1,30 2.3 $2.3 $(4 1.2 ) $5 7.8 Swaption s 22 5.0 — 2.3 — Rec flo ating pay fixed swaps — — — — Rec fix ed p ay flo ating swaps 1,86 2.5 5 2.5 (14 5.9 ) 29 0.8 GLWB embedd ed d erivativ e 9,61 5.4 (11 1.8 ) 17 5.1 (49 1.3 ) Total $13,00 5.2 $(5 7.0 ) $(9.7 ) $(14 2.7 ) (1)Interest rate ch an g e scen ario su b ject to floo r, based o n treasury rates as o f Decem b er 31, 2 0 1 8 and 201 7 . (2)Includes an effect for in flation . 95 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing table sets forth th e n otion al amoun t and fair value of ou r equ ity risk related d erivativ e financial instrumen ts an d t he estimated fair value resu l ting from a hy po th etical i mmed iate plus an d min us ten p ercen tage p oint chan ge i n equ ity level fro m lev els prev aili ng as of Decemb er 3 1: Fa ir Va lue Resulting Fro m an Immedia te +/– 10% Chang e in the Underlying Reference Index Equity Lev el Notional Amo unt Fa ir Va lue as o f December 31, +1 0 % –1 0 % (D o l l ars In Millions) 20 18 Futures $67 2.0 $(3 3.3 ) $2 7.0 $(9 3.5 ) Op tion s 9,82 3.9 18 6.0 17 9.2 24 0.3 Rec floatin g p ay asset swaps 76 8.2 (2 3.1 ) (10 2.3 ) 5 6.2 Rec asset p ay flo ating swaps 13 8.1 4.0 1 8.2 (1 0.2 ) GLWB embed ded deriv ative 12,45 0.1 (18 4.1 ) (12 3.9 ) (25 2.1 ) FIA emb edd ed d erivativ e 2,57 6.1 (21 7.3 ) (26 1.2 ) (21 2.7 ) IUL emb ed ded deriv ative 23 3.6 (9 0.2 ) (9 6.4 ) (8 7.4 ) Total $26,66 2.0 $(35 8.0 ) $(35 9.4 ) $(35 9.4 ) 20 17 Futures $38 1.1 $(2.4 ) $(3 2.2 ) $2 7.3 Op tion s 7,54 9.4 16 6.4 15 7.7 17 7.0 Rec floatin g p ay asset swaps 43 4.3 (0.2 ) (4 3.6 ) 4 3.2 GLWB embed ded deriv ative 9,61 5.4 (11 1.8 ) (1 2.4 ) (23 4.6 ) FIA emb edd ed d erivativ e 1,95 1.7 (21 8.7 ) (23 2.9 ) (18 6.7 ) IUL emb ed ded deriv ative 16 8.3 (8 0.2 ) (8 2.7 ) (7 0.4 ) Total $20,10 0.2 $(24 6.9 ) $(24 6.1 ) $(24 4.2 ) 96 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The followin g tab le sets fo rth th e no tion al amount an d fair v alu e of o ur cu rrency risk related derivativ e finan cial instru men ts and the estimated fair value resu l ting from a hy po th etical i mmed iate plus an d min us ten p ercen tage p oint chan ge i n curren cy level from lev els p rev ailin g as o f Decemb er 3 1: Fair Value Resulting From a n Immediate +/– 10 % Cha ng e in the Underlying Reference in Currency Lev el Notio nal Amount Fair Value as o f December 31, +1 0 % –10% (D oll ars In Millions) 20 18 Futures $2 02 .7 $(2 .2) $(22 .6) $1 8.2 Rec fixed pay fixed swap s 1 17 .2 (0 .9) 11 .6 (1 3.4 ) $3 19 .9 $(3 .1) $(11 .0) $4.8 20 17 Futures $2 56 .4 $(2 .1) $(27 .9) $2 3.7 Rec fixed pay fixed swap s 1 17 .2 6 .0 19 .7 (7.7 ) $3 73 .6 $3 .9 $(8 .2) $1 6.0 Estimated gains an d l osses were d erived u si ng p ricin g mod els sp ecific to deriv ative finan cial in struments. Wh i le th ese estimated gains an d losses prov id e an indi cation o f h ow sensit iv e o ur deriv ati ve finan cial instruments are to chang es in in terest rates, vol atility, equ ity levels, an d credi t sp reads, they do not rep resent manag ement’s view o f fu tu re market chan ges, and actu al market results may d iffer from th ese estimates. Ou r stable v alu e co ntract an d ann uity p ro du cts tend to b e more sen sitive to mark et risk s th an ou r no n-ann uity prod ucts. As such , man y o f th ese prod uct s co ntain surren der ch arg es and o th er features th at reward p ersist en cy and pen ali ze t he earl y withd rawal o f fun ds. Certain stab le value and an nu ity co ntracts h av e market-v alu e ad justmen ts that pro tect u s against inv estment lo sses if in terest rates are higher at the time o f surren der th an at th e time o f issu e. Ad ditio nal ly , ap proxi mately $0.7 billion of ou r stable value con tracts have n o early termi natio n rig hts. As of December 3 1, 20 18 , we had $5 .2 b illio n o f stab le v alu e prod uct accou nt balances with an estimated fair v alu e of $5 .2 billio n (u sing discou nted cash flo ws) and $1 3.7 b illio n o f ann uity accou nt b alances with an estimated fair v alue of $13 .3 b illio n (u sin g discounted cash flows). As of Decemb er 31 , 20 17 , we had $4.7 b illion of stable value prod uct accou nt bal an ces with an estimated fair v alue of $4 .7 billion (usin g disco un ted cash flo ws) an d $10 .9 b illio n o f ann uity accou nt balances with an estimated fair value of $10 .5 bil lion (u si ng discou nted cash flows) The fo llowing tab le sets fort h th e estimat ed fair values o f o ur stable value and an nu ity accou nt balan ces resu ltin g fro m a hy po th etical immed iate plus an d minu s 1 00 b asi s po in ts ch ang e in interest rates fro m lev els p rev ailin g an d t he percen t ch ang e in fair value that the follo win g estimated fair values wo uld represent: Fa ir Va lue Resulting Fro m an Immedia te +/– 1 0 0 bps Cha nge in the Underlying Reference Interest Rates Fa ir Value a s of December 3 1 , +100 bps –100 bps (Dollars In M i l lio ns) 20 18 Stab le v alu e p roduct accoun t b alances $5 ,20 0.7 $5 ,10 6.1 $5 ,29 5.4 An nu ity accou nt balances 13 ,27 2.2 13 ,01 8.3 13 ,41 9.2 20 17 Stab le v alu e p roduct accoun t b alances $4 ,69 8.9 $4 ,59 2.7 $4 ,80 5.1 An nu ity accou nt balances 10 ,49 7.1 10 ,34 1.3 10 ,61 2.7 Estimated fair v alu es from th e h yp othetical ch ang es in interest rates were d erived from the d uration s of our stabl e v alu e an d ann uit y acco un t balan ces. While these estimat ed fair values prov id e an ind icatio n o f ho w sensit iv e th e fair v alu es o f o ur stable value an d an nu ity acco un t balan ces are to ch ang es in in terest rat es, th ey do no t represent man agemen t’s v iew of fut ure mark et ch ang es, an d actual mark et resu lts may differ fro m these esti mates. 97 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Certain of o ur liab ilities relate to p rod ucts whose profitabilit y co uld be si gn ifican tly affected by ch ang es in in terest rates. In addi tion to traditio nal wh ole li fe an d term insu ran ce, many u niversal l ife p olicies wit h secon dary gu aran tees th at i nsu ran ce co verag e will remain in fo rce (sub ject to the payment o f speci fied p remiu ms) h ave su ch ch aracteristics. Th ese prod ucts d o n ot allo w us to adjust p olicy ho ld er premi ums after a po licy is issu ed, an d most o f th ese prod uct s do no t h ave sign ifican t accou nt values u po n wh ich we credit interest. If int erest rates fall, these p ro du cts co uld h ave bot h d ecreased interest earn in gs an d increased amortization of deferred acqu isitio n co sts an d VOBA, an d the conv erse cou ld occu r if interest rates rise. Impa ct o f Co ntinued Lo w Interest Ra te Env iro nment Si gn ifican t ch ang es in interest rates exp ose us to t he risk o f no t realizing anticipated spread s b etween th e i nterest rate earned on inv estments an d th e in terest rate cred i ted t o in -force p olicies an d con tracts. In ad dition , certain of o ur insurance an d in vestmen t pro du cts gu aran tee a minimu m gu aran teed in terest rate (“M GIR”). In perio ds o f prolon ged low int erest rates, t he interest sp read earned may be negativ ely imp acted to th e extent ou r ability to redu ce po licyh older crediting rates is limited b y th e g uaranteed minimu m cred ited in terest rates. Add iti on ally, t ho se p olicies wit ho ut accou nt values may exhi bit lo wer profi tability in p eriod s o f p ro lo ng ed low int erest rates du e to reduced inv estment in come. The tables below p resen t acco un t v alu es b y rang e of curren t minimu m g uaranteed interest rates an d cu rrent cred iting rates for ou r u niv ersal life and deferred fixed ann uity prod ucts as o f December 31 , 20 18 and 20 17 : Credited Rate Summary As o f December 31 , 2 018 Minimum Gua ranteed Interest Ra te Account Va lue At MG IR 1 - 50 bps a bo ve MG IR More tha n 50 bps a bove MG IR Total (Do l l a rs I n Milli ons ) Life Insurance >2% - 3% $2,3 92 $1,3 22 $2,0 31 $5,745 >3% - 4% 4,5 12 9 24 4 99 5,935 >4% - 5% 2,4 45 4 35 1 2,881 >5% - 6% 1 88 — — 188 Su btotal 9,5 37 2,6 81 2,5 31 14,749 Fi xed Annuities 1 % $3 41 $5 84 $2,2 78 $3,203 >1% - 2% 3 70 1 65 1,1 45 1,680 >2% - 3% 1,6 86 1 02 3 1,791 >3% - 4% 2 61 4 — 265 >4% - 5% 2 60 — — 260 >5% - 6% 2 — — 2 Su btotal 2,9 20 8 55 3,4 26 7,201 Total $1 2,4 57 $3,5 36 $5,9 57 $21,950 Percent ag e of Total 57 % 16 % 27 % 100% 98 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Credited Rate Summary As o f December 31 , 2 017 Minimum Gua ranteed Interest Ra te Account Va lue At MG IR 1 - 50 bps a bo ve MG IR More tha n 50 bps a bove MG IR Total (Do l l a rs I n Milli ons ) Universa l Li fe Insura nce >2% - 3% $2 06 $1,2 52 $2,0 06 $3,464 >3% - 4% 4,1 46 9 93 8 5,147 >4% - 5% 1,9 87 13 1 2,001 >5% - 6% 1 99 — — 199 Su btotal 6,5 38 2,2 58 2,0 15 10,811 Fi xed Annuities 1 % $5 71 $2 39 $5 40 $1,350 >1% - 2% 4 73 3 31 70 874 >2% - 3% 1,8 97 63 4 1,964 >3% - 4% 2 54 — — 254 >4% - 5% 2 71 — — 271 >5% - 6% 2 — — 2 Su btotal 3,4 68 6 33 6 14 4,715 Total $1 0,0 06 $2,8 91 $2,6 29 $15,526 Percent ag e of Total 64 % 19 % 17 % 100% We are active in mitigatin g t he impact o f a co ntin ued lo w interest rat e envi ro nment throu gh prod uct d esi gn , as well as ad ju st in g cred itin g rates on cu rrent i n-fo rce pol ici es and co ntracts. We also manag e in terest rate and reinvestment risk s throu gh ou r asset/liability man agemen t p ro cess. Our asset /liab ility manag ement prog rams an d p ro cedu res in vol ve th e mon itori ng o f asset an d liab ility d uration s; cash fl ow testin g u nd er vario us interest rate scen arios; and th e regul ar rebalan cin g o f assets an d liab ilities with resp ect t o y ield, credi t an d mark et risk, and cash flow characteristi cs. These p ro grams also in corpo rate the use of d erivative finan cial in struments pri marily t o red uce ou r ex po sure to in terest rate risk , in flation risk , cu rrency exchan ge risk , vo latili ty risk, an d equ ity mark et risk. Employ ee Benefit Plans Pursu ant to t he acco un ting g uidan ce relat ed to o ur o bligatio ns to employ ees un der o ur p ension plan and o th er po st retirement ben efi t plans, we are requi red to mak e a nu mb er o f assumptio ns to est imate related l iab ilities and exp en ses. Ou r most sig nificant assu mption s are th ose for the d isco un t rate and ex pected lon g-term rate of retu rn . Discou nt Ra te Assumption The assumed d isco un t rates u sed to determin e th e b en efit ob ligati on s were b ased on an anal ysis o f fu tu re ben efi ts exp ected to be paid u nd er th e plans. The assu med d isco un t rate reflect s th e interest rate at which an amo unt that is inv ested in a po rtfo lio o f hig h-qu ality d ebt in stru ments on th e measuremen t d ate wou ld prov i de th e fu tu re cash flows n ecessary to pay ben efi ts wh en t hey co me due. 99 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo l lo win g presents o ur estimates of th e hy po th etical impact to th e Decemb er 31 , 2 01 8 ben efit ob l ig ation an d to the 20 18 b enefit co st , associated with sen siti vities related to th e di scou nt rate assumpti on : Defined Benefit Pension Pla n Other Po stretirement Benefit Pla ns(1) (Do l l a rs in Thous ands) Increa se (Decrease) in Benefit Obli ga tion: 1 00 basis p oint in crease $(2 5,6 95 ) $(3 ,86 1) 1 00 basis p oint decrease 3 0,7 40 4 ,54 0 Increa se (Decrease) in Benefit Co st: 1 00 basis p oint in crease $3 46 $(4 3) 1 00 basis p oint decrease (4 51 ) 8 5 (1)Includes excess p en sion p lan , retiree medical plan, and p o stretirem en t life in surance plan. Long-Term Rate of Retu rn Assump tion To d etermin e an ap prop riate lo ng -term rate of return assumpti on for o ur d efined b enefit pensio n plan, we received ev alu ati on s o f market perfo rman ce based on th e Co mp any ’s asset allo catio n as p rov id ed by extern al co nsu ltants. For o ur p ostretirement l ife insu ran ce plan, we utilized 25 y ear av erag e and an nu ali zed retu rn result s o n th e Barcl ay’s sho rt treasu ry index to determine an ap pro priate lo ng -term rate o f return assu mp tion. The followin g presents o ur estimates of the h yp othetical imp act to th e 20 18 b enefit cost, associated with sensitiv iti es related to th e lo ng -term rate o f ret urn assu mp tio n: Defined Benefit Pension Plan Po stretirement Life Insurance Plan (Dolla rs in Tho us a nds ) Increa se (Decrease) in Benefit Co st: 10 0 b asis po in t increase $(2,5 32 ) $(49 ) 10 0 b asis po in t d ecrease 2,5 31 49 IMPACT OF INFLATION In flation in creases the n eed fo r life i nsu ran ce. Man y p olicy ho ld ers wh o o nce had adeq uat e insurance pro grams may i ncrease their li fe i nsu ran ce co verage to p ro vide the same relativ e finan cial benefit and protection . Hig her in terest rates may result in h igh er sal es of cert ain o f o ur i nv estment prod ucts. The hig her in terest rates that hav e tradition ally accompan ied in flatio n cou l d al so affect ou r o peration s. Po l icy lo an s increase as po licy loan in terest rat es b ecome relativ ely more at tractive. As in terest rates in crease, disintermedi ation o f stable v alu e an d ann uity acco un t b alances and in dividu al life p olicy cash v alu es may in crease. Th e market value o f ou r fi xed-rate, l on g-term inv est ments may d ecrease, we may be u nab le to implement fully the interest rate reset an d call p rov isions o f ou r mortg age loan s, and ou r abi lity to mak e attractiv e mo rtg ag e lo ans, in clu ding particip ating mortg age loan s, may decrease. In ad dit io n, p articipatin g mortg age loan in come may decrease. Th e differen ce between th e in t erest rate earn ed o n inv estments and the interest rate cred ited to life insu ran ce an d in vestmen t p ro du cts may al so b e adv ersely affected by rising in terest rat es. Du rin g t he periods cov ered b y this repo rt, we b elieve inflation has n ot had a material impact o n o ur bu siness. RECENTLY ISSUED ACCOUNTING STANDARDS See No te 2, S ummary of Sign i fican t Acco un tin g Pol ici es, to th e co nsolid ated financial stat ements i ncl ud ed in th i s rep ort for in formatio n reg ard ing recently issued acco un ting stand ard s. Item 7 A. Qua ntitati ve and Qua litativ e Disclosures Abo ut Ma rket Risk The in fo rmation requ ired b y th is item is in clu ded in Item 7 , Manag emen t’s Discu ssion a nd An alysis of Fin an cia l Co nd iti on an d Results o f Op erati on s. Item 8 . Financia l Sta tements a nd Supplementa ry Da ta In dex to Co nso l id ated Financial Statements The fol lo win g fin anci al statemen ts are lo cated in th is repo rt on t he pag es in dicated . 10 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Page Con soli dated Statements of In come Fo r Th e Year End ed December 31 , 20 18 , Fo r Th e Year End ed Decemb er 31, 20 17 , and Fo r Th e Year End ed December 31 , 2 016 10 2 Con soli dated Statements of Comprehensiv e In come (Loss) For Th e Year End ed December 31 , 20 18 , Fo r Th e Year End ed Decemb er 31 , 20 17 , and Fo r The Year En ded Decemb er 3 1, 2 01 6 10 3 Con soli dated Balance Sheets as of December 3 1, 2 01 8 an d as o f Decemb er 31 , 20 17 10 4 Con soli dated Statements of Sh areo wn er’s Eq uity Fo r The Year En ded Decemb er 3 1, 2 01 8, For The Year En ded December 3 1, 2 01 7, an d For The Year En ded Decemb er 3 1, 201 6 10 6 Con soli dated Statements of Cash Flo ws Fo r Th e Year End ed Decemb er 3 1, 20 18 , Fo r The Year En ded Decemb er 3 1, 2 01 7, and Fo r The Year Ended Decemb er 3 1, 20 16 10 7 Notes to C on solidated Finan cial Statemen ts: 1. Basis of Presentation 10 9 2. Su mmary of Sign ifican t Accou nting Po licies 10 9 3. Sig nificant Tran saction s 12 0 4. M ONY Clo sed Block of Business 12 2 5. Inv estment Op eratio ns 12 4 6. Fair Value of Fin ancial In stru men ts 13 2 7. Derivativ e Finan cial In struments 14 4 8. Offset ting of Assets an d Liab ilities 14 8 9. M ortg age Lo ans 15 0 10 . DAC and VOBA 15 4 11 . Go od will 15 4 12 . Certain Nont rad itio nal Lon g-Duration Con tracts 15 5 13 . Reinsu ran ce 15 6 14 . Deb t an d Oth er Ob ligatio ns 15 9 15 . Co mmitmen ts an d Co ntin gen cies 16 4 16 . Emp lo yee Benefit Plans 16 6 17 . Accumulated Oth er Comprehen sive In come (Lo ss)17 2 18 . In co me Tax es 17 3 19 . Supplemen tal C ash Flo w 17 6 20 . Related Party Tran saction s 17 6 21 . St atuto ry Rep ortin g Practices 17 7 22 . Op eratin g Segmen ts 17 8 23 . Co nsol id ated Qu arterly Information 18 2 24 . Subseq uent Ev ents 18 3 Report of In dep enden t Reg istered Pu blic Accou ntin g Firm 18 5 For sup plemen tal q uarterly fi nancial in format io n, please see No te 23 , Con soli da ted Qua rterly Resu lts—Una ud ited of t he n otes to co nsol id ated finan cial statements includ ed herein . 10 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF INCOME For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Premiu ms an d p olicy fees $3 ,68 0,8 45 $3 ,477,41 9 $3,4 07 ,93 1 Reinsu ran ce ced ed (1 ,38 4,9 41 ) (1 ,360,73 5) (1,3 14 ,71 6) Net o f reinsu ran ce ced ed 2 ,29 5,9 04 2 ,116,68 4 2,0 93 ,21 5 Net in vestmen t inco me 2 ,48 3,7 50 2 ,051,58 8 1,9 42 ,45 6 Realized inv estment gains (l osses): Deriv ative fin ancial instrumen t s 6 0,9 88 (305,82 8) (40 ,28 8) All o t her in vestmen ts (22 3,6 49 ) 121,42 8 90 ,65 9 Other-than -temp orary impai rment lo sses (5 6,5 78 ) (3,96 2) (32 ,07 5) Po rtio n recog nized in oth er comprehen siv e in come (b efore tax es)2 6,8 54 (7,78 0) 14 ,32 7 Net imp airmen t losses reco gn ized in earnings (2 9,7 24 ) (11,74 2) (17 ,74 8) Other in come 45 3,6 85 446,66 2 4 15 ,65 3 To tal rev enu es 5 ,04 0,9 54 4 ,418,79 2 4,4 83 ,94 7 Benefits and ex penses Benefits an d settlemen t exp enses, net o f reinsu ran ce ced ed: (2 01 8 - $1 ,19 1,978 ; 2 01 7 - $1 ,24 2,7 97 ; 2 01 6 - $1 ,18 1,9 60 )3 ,51 5,8 69 2 ,957,27 0 2,8 80 ,43 5 Amortization of deferred po l icy acq uisi tion costs and value o f b usiness acquired 22 5,8 08 78,22 1 1 49 ,06 4 Other op eratin g exp enses, n et o f rein su ran ce ced ed : (201 8 - $2 05 ,352; 20 17 - $22 2,9 63 ; 2 01 6 - $2 07 ,19 7)91 6,2 59 948,24 4 8 60 ,45 1 Total b enefits and exp enses 4 ,65 7,9 36 3 ,983,73 5 3,8 89 ,95 0 Inco me before i ncome tax 38 3,0 18 435,05 7 5 93 ,99 7 In come tax (ben efit) exp ense Cu rrent 9 5,5 61 26,25 2 (46 ,71 9) Deferred (1 4,9 04 ) (697,72 7) 2 47 ,68 7 Total inco me tax exp ense (ben efit)8 0,6 57 (671,47 5) 2 00 ,96 8 Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 See No tes to Conso lidated Fin anci al Statements 10 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF COMPRE HENSIVE INCOME (LOSS) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Oth er comprehen si ve in come (loss): Ch an ge in n et u nrealized gains (losses) o n inv estments, net of in come tax : (20 18 - $(3 77 ,41 2); 2 017 - $3 32,89 6; 201 6 - $324 ,267)(1 ,42 0,4 99 ) 707,29 8 6 02 ,21 1 Reclassificatio n ad ju st ment for in vestmen t amo un t s in clu ded in net in come, n et o f inco me t ax : (2 01 8 - $4 ,161; 20 17 - $48 9; 20 16 - $(5 ,09 4))1 5,6 51 64 2 (9 ,46 0) Ch an ge in n et u nrealized (lo sses) relating to other-than -temp orary impaired inv est ments for whi ch a po rtion h as been recogn ized in earning s, net of in come tax: (20 18 - $(5 ,51 6); 20 17 - $76 1; 20 16 - $(1 ,08 1))(2 0,7 51 ) 39 1 (2 ,00 8) Ch an ge in accumulated (loss) g ain —d erivativ es, net of in come tax: (2 018 - $(5 01 ); 2 01 7 - $(30 3); 2016 - $370)(1,8 84 ) (56 3) 68 8 Reclassificatio n ad ju st ment for deriv ati ve amo un ts in clu ded in n et inco me, net of inco me t ax : (2 01 8 - $3 01 ; 2 01 7 - $2 43 ; 2 01 6 - $2 1)1,1 30 45 1 3 9 Ch an ge in p ostretirement benefits liab ility ad ju stmen t, n et of i ncome tax : (20 18 - $(4 14 ); 2017 - $(4,0 47 ); 20 16 - $(2 ,61 6))(1,5 57 ) (15,22 5) (4 ,85 9) To tal other comprehen siv e in come (l oss)(1 ,42 7,9 10 ) 692,99 4 5 86 ,61 1 Total comprehensiv e inco me (loss)$(1 ,12 5,5 49 ) $1 ,799,52 6 $9 79 ,64 0 See No tes to Conso lidated Fin anci al Statements 10 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATE D BALANCE SHEETS As of December 31, 2018 2017 (Dollars In Thousands) Assets Fix ed matu rities, at fair value (amortized co st : 2 01 8 - $5 4,4 66 ,30 5; 20 17 - $41 ,15 3,5 51 )$51 ,904,69 9 $4 1,1 76 ,05 2 Fix ed matu rities, at amortized cost (fair v alu e: 2 01 8 - $2 ,54 7,2 10 ; 2 01 7 - $2 ,77 6,327 )2 ,633,47 4 2,7 18 ,90 4 Eq uit y securities, at fair value (co st: 2 01 8 - $6 27 ,08 7; 20 17 - $74 0,8 13 )595,88 4 7 54 ,36 0 Mortgag e loan s (rel ated to secu rit izatio ns: 20 18 - $13 4; 20 17 - $22 6,4 09 )7 ,724,73 3 6,8 17 ,72 3 Inv est ment real estate, net o f accu mu lat ed dep reciation (2 01 8 - $2 51 ; 2 01 7 - $1 32 )6,81 6 8 ,35 5 Policy lo ans 1 ,695,88 6 1,6 15 ,61 5 Other lo ng -term in vestmen ts 759,35 4 9 15 ,59 5 Sho rt-term inv estments 807,28 3 6 15 ,21 0 To tal in vestmen ts 66 ,128,12 9 5 4,6 21 ,81 4 Cash 173,71 4 2 52 ,31 0 Accru ed inv estment in come 634,92 1 4 91 ,80 2 Accou nts and premiums receivab le 113,50 7 1 24 ,93 4 Reinsu ran ce receiv ables 4 ,764,74 3 5,0 75 ,69 8 Deferred po licy acq uisition costs and value o f b usiness acq uired 3 ,023,15 4 2,1 99 ,57 7 Go od wil l 825,51 1 7 93 ,47 0 Other in tan gibles, net of accu mu lated amo rtizati on (2 01 8 - $1 97 ,58 3; 20 17 - $14 0,3 68 )613,43 1 6 63 ,57 2 Pro perty and equ ip ment, net of accu mu lated d epreciatio n (20 18 - $33 ,19 9; 20 17 - $22 ,92 6)184,95 7 1 11 ,41 7 Other assets 250,03 6 2 27 ,35 7 Inco me t ax receivab le — 76 ,54 3 Assets relat ed to sep arate accou nts Variab le an nu ity 12 ,288,91 9 1 3,9 56 ,07 1 Variab le u niversal life 937,73 2 1,0 35 ,20 2 Total assets $89 ,938,75 4 $7 9,6 29 ,76 7 See No tes to Conso lidated Fin anci al Statements 10 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATE D BALANCE SHEETS (continued) As of December 31, 2018 2017 (Dollars In Thousands) Lia bilities Future po licy b enefits and claims $41 ,901,55 2 $3 0,9 57 ,59 2 Un earned premiums 872,59 4 8 75 ,40 5 Total p olicy liabilit ies an d accru als 42 ,774,14 6 3 1,8 32 ,99 7 Stab le v alu e p roduct accoun t b alances 5 ,234,73 1 4,6 98 ,37 1 An nu ity accou nt balances 13 ,720,08 1 1 0,9 21 ,19 0 Other po licyh olders’ funds 1 ,128,37 9 1,2 67 ,19 8 Other liabilities 2 ,374,11 2 2,3 53 ,56 5 Inco me t ax pay able 38,54 7 — Deferred in come tax es 839,31 6 1,2 32 ,40 7 No n-recourse fu nd in g o blig ations 2 ,632,49 7 2,7 47 ,47 7 Secured fin an cin g li ab ilities 495,30 7 1,0 17 ,74 9 Debt 1 ,101,82 7 9 45 ,05 2 Sub ordinated d ebt 605,42 6 4 95 ,28 9 Liabil ities related to sep arat e acco un ts Variab le an nu ity 12 ,288,91 9 1 3,9 56 ,07 1 Variab le u niversal life 937,73 2 1,0 35 ,20 2 To tal liabilities 84 ,171,02 0 7 2,5 02 ,56 8 Commitments and co ntingencies—No te 1 5 Shareo wner’s equity Co mmo n Stock, 2 01 8 an d 2 01 7 - $.0 1 par value; shares autho rized: 5,0 00 ; shares issued: 1,0 00 — — Ad dition al p aid -in-capital 5 ,554,05 9 5,5 54 ,05 9 Retained earn in gs 1 ,639,44 1 1,5 60 ,44 4 Accumulated other co mp reh ensiv e inco me (lo ss): Net un realized g ain s (lo sses) on in vestmen ts, net o f in co me tax: (2 01 8 - $(36 8,8 30 ); 20 17 - $7,4 16 )(1 ,387,50 4) 27 ,89 6 Net un realized lo sses relatin g t o o th er-th an-tempo rary imp aired i nv estments fo r wh ich a p ortio n h as been recog nized in earning s, net of in come tax: (2 01 8 - $(6 ,054); 2 01 7 - $(53 8))(22,77 3) (2 ,02 2) Accu mu lat ed (lo ss) gain - deriv ati ves, n et of i ncome tax : (20 18 - $(2 ); 20 17 - $19 8)(7) 74 7 Po stretirement ben efits li abi lity adjustmen t, n et o f inco me t ax : (201 8 - $(4,1 12 ); 20 17 - $(3 ,46 9))(15,48 2) (13 ,92 5) To tal shareowner’s eq uity 5 ,767,73 4 7,1 27 ,19 9 To ta l lia bilities a nd shareowner’s equity $89 ,938,75 4 $7 9,6 29 ,76 7 See No tes to Conso lidated Fin anci al Statements 10 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF SHARE OWNER’S EQUITY Commo n Sto ck Additiona l Pa id-In- Ca pita l Trea sury Sto ck Retained Ea rnings Accumulated O ther Co mprehensive Income (Loss) To tal Sha reo wner’s equity (Do l la rs I n Tho usa nds ) Balan ce, December 31 , 2 015 $— $5,55 4 ,0 59 $— $2 6 8 ,299 $(1,2 4 1 ,134) $4,58 1 ,2 24 Net income fo r 201 6 3 9 3 ,029 39 3 ,0 29 Other com p rehensiv e in co m e 5 8 6 ,611 58 6 ,6 11 Co mprehensive income fo r 2016 97 9 ,6 40 Dividends to parent (8 9 ,343) (8 9 ,3 43) Balan ce, December 31 , 2 016 $— $5,55 4 ,0 59 $— $5 7 1 ,985 $(6 5 4 ,523) $5,47 1 ,5 21 Net income fo r 201 7 1,1 0 6 ,532 1,10 6 ,5 32 Other com p rehensiv e in co m e 6 9 2 ,994 69 2 ,9 94 Co mprehensive income fo r 2017 1,79 9 ,5 26 Cu mulative effect adju stments 2 5 ,775 (2 5 ,775) — Dividends to parent (1 4 3 ,848) (14 3 ,8 48) Balan ce, December 31 , 2 017 $— $5,55 4 ,0 59 $— $1,5 6 0 ,444 $1 2 ,696 $7,12 7 ,1 99 Net income fo r 201 8 3 0 2 ,361 30 2 ,3 61 Other com p rehensiv e in co m e (1,4 2 7 ,910) (1,42 7 ,9 10) Co mprehensive income fo r 2018 (1,12 5 ,5 49) Cu mulative effect adju stments (8 3 ,364) (1 0 ,552) (9 3 ,9 16) Dividends to parent (1 4 0 ,000) (14 0 ,0 00) Balan ce, December 31 , 2 018 $— $5,55 4 ,0 59 $— $1,6 3 9 ,441 $(1,4 2 5 ,766) $5,76 7 ,7 34 See No tes to Conso lidated Fin anci al Statements 10 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For The Year Ended December 3 1, 2 018 2 0 17 20 1 6 (Do l la rs I n Tho usa nds ) Cash flows from o pera ting activ iti es Net i ncome $30 2,3 61 $1 ,10 6,5 32 $3 93 ,02 9 Adjustmen ts to recon cile net in come to n et cash prov id ed b y o perating acti vities: Realized inv estment (g ain s) lo sses 19 2,3 85 19 6,1 42 (32 ,62 3) Amortization of deferred po l icy acq uisi tion costs and value o f b usiness acqui red 22 5,8 08 7 8,2 21 1 49 ,06 4 Capit alization of deferred po licy acq uisiti on co sts (44 6,4 69 ) (33 3,2 52 ) (3 27 ,93 8) Depreciatio n an d amo rtizati on ex pen se 6 7,9 02 6 2,6 09 37 ,50 4 Deferred in come tax (1 4,9 04 ) (69 7,7 27 ) 2 47 ,68 7 Accru ed inco me tax 11 5,0 90 4 0,2 80 (1 62 ,61 9) Interest cred ited to u niversal life and in vestmen t p rod uct s 88 2,9 04 69 2,9 93 6 99 ,22 7 Policy fees assessed o n u niversal life and in vestmen t p ro du cts (1,55 8,8 68 ) (1 ,35 4,6 85 ) (1,2 62 ,16 6) Ch an ge in rein su ran ce receivab les 31 1,2 27 24 8,1 48 2 22 ,30 2 Ch an ge in accrued inv est ment income and ot her receiv ables 5,7 31 (6,6 43 ) (36 ,36 0) Ch an ge in p olicy liabilities an d o th er p olicy ho ld ers’ fun ds o f trad ition al life an d h ealth p ro du cts (61 8,5 50 ) (29 4,2 05 ) (2 08 ,07 5) Trading securi ties: Mat urities an d p rincipal red uctio ns of in vestmen ts 15 5,6 92 16 5,5 75 1 54 ,63 3 Sale o f inv estments 49 3,1 41 28 1,4 41 4 59 ,80 2 Co st o f in vestmen ts acq uired (58 9,3 79 ) (35 5,4 10 ) (5 32 ,42 9) Other net ch ang e in trading securiti es 3 8,3 46 9,1 51 22 ,42 7 Amortization of premiums and accretion of discou nts o n inv estments and mo rtgag e loan s 30 7,9 18 31 9,5 82 3 75 ,04 4 Ch an ge in o th er liab ili ties 3 3,9 80 13 8,3 04 1 32 ,22 0 Other, n et (4 8,4 44 ) (10 1,7 84 ) (81 ,09 1) Net cash (used in) prov ided by o perating a ctivities (14 4,1 29 ) 19 5,2 72 2 49 ,63 8 See No tes to Conso lidated Fin anci al Statements 10 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. 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Table o f Co ntents PROTECTIVE LIFE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Fo r The Yea r Ended December 3 1 , 2018 2 0 1 7 2016 (D o l l a rs In Tho us a nds ) Cash flows from investing a ctivities M aturities and prin cip al redu ction s of investment s, available-fo r-sale 1,8 68 ,24 5 696,57 4 1,2 99 ,75 3 Sale of in vestmen ts, av ailable-for-sale 2,5 76 ,11 9 1 ,802,21 5 1,9 56 ,30 2 Cost of in vestment s acq uired, availab le-fo r-sale (5,5 77 ,92 1) (4 ,029,23 3) (4,9 82 ,90 7) Change in in vestmen t s, hel d-to -matu rity 81 ,00 0 47,00 0 (2,1 81 ,00 0) M ortg age loans: New len ding s (1,5 89 ,45 9) (1 ,671,92 9) (1,3 96 ,28 3) Repay men ts 1,0 68 ,55 2 923,34 7 8 63 ,87 3 Change in in vestmen t real estate, n et 97 8 (10 4) 2 ,85 1 Change in po licy loan s, net 51 ,21 8 34,62 5 49 ,26 8 Change in other lo ng -term inv estments, net (1 68 ,89 7) (91,51 8) (2 50 ,55 7) Change in sh ort-term inv estments, n et (2 17 ,30 0) (279,19 1) (72 ,81 0) Net unsettled secu rity transactions 13 ,38 4 (19,02 3) 28 ,85 3 Pu rch ase of prop erty an d equi pmen t (92 ,26 9) (37,53 3) (5 ,29 5) Cash received from or paid for acqu isit io ns, n et o f cash acq uired 38 ,45 6 — 3 20 ,96 7 Net cash used in inv esting activi ties (1,9 47 ,89 4) (2 ,624,77 0) (4,3 66 ,98 5) Cash flows from fi na nci ng activ ities Borro win gs u nd er lin e of cred it arrang ements and deb t 1,0 75 ,00 0 1 ,035,00 0 2 65 ,00 0 Princip al p ayments on line o f credit arran gemen t an d d ebt (7 57 ,88 4) (1 ,156,49 8) (6 33 ,07 4) Issuan ce (rep ayment) o f n on -recou rse fun din g obl ig ation s (1 19 ,00 0) (47,00 0) 2,0 94 ,70 0 Secu red financing liabilities (5 22 ,44 2) 220,02 8 3 59 ,53 6 Div id end s to sh areown er (1 40 ,00 0) (143,84 8) (89 ,34 3) In vestmen t p rod uct an d u niversal li fe dep osits 5,6 22 ,41 4 4 ,683,12 1 4,3 93 ,59 6 In vestmen t p rod uct an d u niversal li fe withd rawals (3,1 44 ,27 3) (2 ,256,98 1) (2,3 20 ,95 8) Oth er fin anci ng activ i ties, net (38 8) (19 6) — Net cash pro vided by financing activ i ties 2,0 13 ,42 7 2 ,333,62 6 4,0 69 ,45 7 Cha ng e in ca sh (78 ,59 6) (95,87 2) (47 ,89 0) Cash at beg inning of period 2 52 ,31 0 348,18 2 3 96 ,07 2 Cash at end of period $1 73 ,71 4 $252,31 0 $3 48 ,18 2 See No tes to Conso lidated Fin anci al Statements 10 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PROTECTIVE LIFE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Ba sis of Presentati on On Feb ruary 1 , 20 15 , Pro tectiv e Life Co rp oration (th e “Compan y”) became a wh olly o wned su bsidiary o f The Dai-ichi Life In surance Co mp any, Limited, a kab ush iki kaisha organ ized un der th e laws of Japan (n ow kn own as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”), wh en DL In vestmen t (Delaware), Inc. a who lly owned su bsid iary o f Dai-ichi Life, merg ed wi th and in to the Co mp an y. Pri or to Feb ruary 1 , 20 15 , t he Compan y’s sto ck was pu blicly traded o n the New York Sto ck Ex chan ge. Su bsequ en t to th e Merger d ate, the Compan y remain s as an SEC reg istrant wit hin the United States. Th e Company is a h olding co mp any with su bsidiaries th at prov id e fin ancial serv ices th rough t he p rod uctio n, di stri bu tion , an d ad ministratio n of in surance an d in vestmen t prod uct s. The Co mp any mark ets in dividu al li fe insu ran ce, credit life an d d isab ili ty in surance, g uaran t eed in vestmen t co ntracts, g uaran t eed fu nd ing ag reements, fix ed and v ariable an nu ities, and ex ten ded service con t racts throu gh ou t t he Un ited States. Th e Compan y also main tains a separate segmen t devo ted to the acq uisition of insurance p oli cies from o th er compan ies. Fo un ded in 1 90 7, Protective Life In surance Co mp any (“PLICO”) is t he Co mp any ’s largest op erat in g su bsid iary. These fin ancial stat ements h ave b een prepared in acco rd ance with acco un ting p rinciples g en erally accept ed in the Un ited St ates o f America (“GAAP”). Such accou ntin g p rinciples differ fro m statu to ry rep orting practices u sed b y i nsu ran ce co mp ani es in repo rting to state reg ulatory autho rit ies (see also No t e 2 1, S ta tu tory Rep orting Practices a nd Oth er Regu la to ry Matters). The op eratin g resu lts of comp anies in the i nsu ran ce ind ustry hav e h isto rically been su bject t o significant fluctuatio ns d ue to ch ang in g competiti on , eco no mic condi tion s, in t erest rates, in vestmen t p erforman ce, insurance ratin gs, claims, persisten cy, and other factors. Entities Included The co nsolid ated fin anci al statements in clu de th e accou nts o f Pro tectiv e Life Co rp oratio n an d su bsidiaries and i ts affili ate co mp anies in which th e Co mp any ho ld s a maj ority v oting o r eco no mic in terest. Interco mp any balan ces and transactio ns h ave b een eliminated. Du ring the fo urth quarter of 2 01 8, the Co mp any reco rd ed an ad ju stment related to prio r perio ds to correct an erro r p ertain ing to the tax ded uct ib ility of certain deferred co mp ensation fo llowing the Dai -ichi acqu isitio n an d app licati on of p urchase accoun ting i n 2 01 5. The ad ju stment resu lted in a $3 2.0 mi llio n increase to g oo dwill, with a co rrespo nd in g increase in the deferred tax liability for $2 1.3 mi llio n an d a decrease in d eferred in come t ax ex pense fo r $1 0.7 millio n. Th e Co mpan y co ncluded th at t he adjustmen t was no t q uan titativ ely or q ualitativ ely material to p rev io usly repo rted an nu al or in terim perio ds or the curren t in t eri m perio d. As a result, this ad j ustmen t was recorded b y t he Co mp any with in th e p resen ted an nu al con solidated finan cial statements fo r the year en ded Decemb er 3 1, 2 01 8. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use o f Esti mates The preparation of fin anci al statemen t s in con fo rmity with GAAP req uires man ag emen t to make estimates an d assumptio ns th at affect th e reported amou nts o f assets and liabil ities an d d isclosure of co nting ent assets an d liab ili ties at the d ate of th e finan cial statemen ts an d the rep orted amo un ts of rev en ues an d exp enses du rin g th e rep ortin g perio d. Actu al resu lts co uld differ fro m th ose estimates. The most sig nificant estimat es includ e t ho se u sed in d etermining deferred p olicy acqu isitio n co sts (“DAC”) and related amo rti zatio n perio ds, go od will recov erab ility, v alu e of b usiness acqu ired (“VOB A”), i nv estment and certain d erivativ es fair v alu es, other-than -temp orary impairments, fu ture p oli cy ben efits, p ensio n and other po st retirement ben efits, prov isio ns for in come taxes, reserves for con ting ent liabilit ies, rein surance risk transfer assessment s, and reserves for lo sses in co nn ection wit h unresolved leg al matters. Significa nt Acco unting Po licies Va luati on of Inv estment Securities The Compan y d etermines th e appro priate classificatio n o f investment secu rities at th e time o f pu rch ase and perio dically re-ev alu ates such design ation s. In vestmen t secu rities are classified as eith er trad in g, availab le-fo r-sale, o r h eld -to-maturity secu rities. In vestmen t secu rities classified as trad ing are recorded at fair val ue with ch ang es in fair valu e recorded in realized gains (losses). Inv estment securities p urchased for lo ng term inv est ment pu rp oses are classified as avail ab le-for-sale and are reco rd ed at fair v alu e with chang es in un realized gains and losses, n et of t ax es, repo rted as a co mp on ent o f ot her co mp reh ensive in come (loss). Inv est ment secu rities are classified as h eld -to-maturity when th e Company h as t he intent and ability to ho ld the secu rit ies to matu rity and are reported at amortized cost. In t erest inco me on avai lab le-fo r-sale and held-to -matu rit y securities in clu des the amort izatio n of premiums and accretion of discou nts an d are recorded in in vestmen t inco me. The fair v alu e of fix ed matu rity, sho rt-term, an d eq uity secu rities is determin ed b y manag ement after co nsiderin g one o f three pri mary sou rces o f in fo rmation : th ird party p ricin g serv ices, no n-bind in g in dep end en t broker qu otations, or pricin g matrices. Security p ricin g is app lied using a “wat erfall” ap proach whereb y p ub licly availab le p rices are first sou gh t from th ird p arty p ricin g serv ices, the remain i ng un priced securities are submitted to in dep end en t brok ers fo r n on -b in din g p rices, or lastly, securi ties are p riced u sing a pri cing matrix . Ty pical inp uts u sed by th ese three pricing metho ds in clu de, b ut are no t limited to : b enchmark yield s, 10 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents reported trad es, b rok er/dealer qu otes, issu er sp read s, two-sided mark ets, ben chmark secu rit ies, bids, o ffers, an d referen ce d ata in clu ding market research pu blicat io ns. Based on t he typ ical trading v olumes and the lack o f q uot ed mark et p rices for availab le-fo r-sal e and trading fix ed matu rities, third p arty p ricing serv ices d erive the majo rity o f secu rity p rices from o bservab le mark et inp uts such as recent repo rted trad es for id entical or similar secu rities mak ing ad justmen ts th ro ug h th e rep ort in g d ate based up on availab le market ob servable informatio n as o utlined abo ve. If there are n o recent repo rted trades, th e th ird party p ricin g services an d brok ers may u se matrix or mod el pro cesses to d ev elo p a secu rity price where fut ure cash flo w ex pectations are d evel op ed based up on collateral perfo rmance an d d isco un t ed at an estimated market rate. Certain securi ties are priced via in dep end ent no n-bin ding bro ker qu otation s, wh ich are co nsid ered to hav e n o signi ficant u no bservab le i np uts. Wh en usin g no n-b in ding in depen den t b ro ker q uo tatio ns, the Compan y ob tains o ne qu ote per security, ty pically fro m t he brok er from wh ich th e Co mp any purchased th e security. A p ricin g matrix is u sed to p rice securities for which the Compan y is un ab le to ob tain o r effectiv ely rely on either a price fro m a third p art y service or an indepen den t b ro ker quotat io n. Includ ed in th e pricing of o th er asset- backed securiti es, collateral ized mort gage o bligat io ns (“CMOs”), and mo rtg ag e-b acked securities (“M BS”) are estimates of th e rate of future prepay ments o f prin cip al and u nd erlying co l lat eral su pp ort o ver the remain in g l ife o f t he securities. Such estimates are deri ved b ased on th e characteristics o f the un derly ing structure an d rates o f prepay men ts previou sly exp erienced at th e interest rate l ev els p ro jected fo r th e u nd erlying co llateral. The basis fo r th e co st o f securities sold was determin ed at the Co mmittee o n Unifo rm Secu rit ies Id ent ificatio n Procedu res (“CUSIP”) level on a first in first ou t basis. The co mmittee sup plies a un iq ue ni ne-ch aracter id entificatio n, call ed a CUSIP nu mber, fo r each class of secu rity app ro ved for trad in g in th e U.S., to facil itate clearing an d settlement. These n umbers are used when any b uy and sell ord ers are recorded . Each qu arter th e Co mp any reviews in vestmen ts wi th u nrealized lo sses an d tests for o th er-t han-tempo rary imp airmen ts. Th e Co mp any an aly zes vario us factors to d etermine if any sp ecific other-than -temp orary asset i mp airments ex ist. These includ e, b ut are no t limited t o: 1) actio ns tak en by rating ag encies, 2 ) default b y th e issu er, 3 ) th e sig nificance o f the declin e, 4) an assessment o f th e Co mp any ’s intent to sell t he security (includi ng a mo re likely th an n ot assessment of whether t he Compan y will be requ i red to sell the secu rity ) before recoverin g the secu rity’s amortized co st, 5) th e du ration of the decline, 6) an eco no mic analysis of the issu er’s in du stry, an d 7 ) th e fin anci al streng th , l iq uidity, an d reco verab ility o f th e issuer. Manag emen t p erforms a security b y security review each q uarter in evaluatin g the need fo r an y o th er-t han-tempo rary impairments. Alth ou gh n o set formu la is u sed in thi s p ro cess, the in vestmen t p erforman ce, co llateral p ositio n, an d cont in ued viability of the issu er are sig nificant measu res co nsid ered , an d in some cases, an an alysis regardin g the Co mp any ’s exp ectatio ns fo r recov ery of the secu rity ’s en tire amortized co st basis th ro ug h th e receip t of future cash flows is perfo rmed . Once a determination h as been made th at a sp ecific other-than -temp orary impai rment ex ists, the security ’s basis is ad ju sted and an oth er-th an-tempo rary impairment is recog nized . Equi ty securities that are o th er-th an-tempo rarily imp aired are written do wn to fair value with a realized loss recog nized i n earn in gs. Other-th an - temp orary impairments t o deb t secu rities that th e Co mp an y d oes n ot in t en d to sell an d d oes n ot exp ect to be required to sel l b efore reco verin g the security ’s amortized co st are wri tten d own t o d iscount ed ex pected future cash flows (“p ost imp airmen t co st ”) an d credit lo sses are recorded in earn ings. Th e differen ce between th e secu rit ies’ discou nted ex pect ed fut ure cash flo ws an d the fair value o f the securi ties on th e impai rment date is reco gn ized in other compreh ensiv e in come (lo ss) as a no n-cred it po rti on impairmen t. Wh en calcu latin g the p ost impairment cost for residen tial mortgage-back ed securi ties (“RM BS”), co mmercial mo rtg age-backed secu rities (“CMBS”), and other asset-back ed securities (co llectivel y referred to as asset-backed securities o r “ABS”), th e Co mp any co nsiders all k no wn market data related to cash fl ows to esti mate fu t ure cash flo ws. When calculating the po st imp airmen t cost for corpo rate d eb t securities, th e Comp any con siders al l co ntractual cash flows to estimate exp ected fu tu re cash flows. To calculate the post impai rmen t cost, the ex pected fu tu re cash flows are d isco un ted at the o riginal p urchase yield . Debt secu rities that the Co mp any intend s to sell or exp ects to b e requ ired to sell before recov ery are writ ten d own to fair v alu e with t he chan ge reco gn ized in earnings. Ca sh Cash in clu des all demand d epo si ts redu ced by the amo un t o f o utst an din g checks an d d rafts. As a result o f t he C ompany ’s cash management system, ch ecks issued from a p articu lar ban k bu t n ot y et p resent ed for p aymen t may creat e neg ative b oo k cash b alan ces with th e ban k at certai n repo rti ng dates. Such negativ e b alances are incl ud ed in ot her liabilit ies an d were $1 53 .3 millio n as of December 31 , 2 01 8 an d $13 2.7 millio n as of December 31 , 20 17 , resp ecti vel y. Th e Comp any has d epo sits wi th certain fi nancial institu tions which ex ceed fed erally in su red li mi ts. Th e C ompany has reviewed the creditwo rthin ess of th ese finan cial in stitutio ns and b elieves there is mini mal ri sk o f a material loss. Deferred Policy Acquisitio n Costs The incremental di rect costs associated with su ccessful ly acqu ired insurance p olicies, are d eferred to the ex ten t such costs are deemed reco verable from fu tu re p ro fits. Su ch co st s in clu de co mmissio ns an d other costs o f acq uiring t raditio nal life an d h ealth in surance, cred it insu ran ce, un iv ersal life in surance, an d i nv estment p ro du cts. DAC are su bject to recov erability testing at the end o f each acco un tin g perio d. Trad ition al life and h ealth i nsu ran ce acq uisition co sts are amortized ov er t he premi um-p aymen t p eriod o f the related p olicies in p roportion to the ratio of an nu al premium in come t o th e p resen t value o f th e total anticipated premium in come. Cred it insurance acq uisition costs are being amo rtized in prop ortio n to earned premium. Acq uisition co sts for un iv ersal life and in vestmen t produ cts are amo rti zed ov er th e lives of th e po licies i n relation to th e p resen t v alu e o f estimated g ross p ro fit s before amortization. The Compan y makes certain assumpti on s reg ard ing th e mo rtalit y, persistency, ex pen ses, and interest rates (eq ual to t he rate u sed to compu te liabilities fo r future p olicy b enefits, curren tly 1 .0% to 7.1 %) th e Compan y exp ects to ex perien ce i n fu tu re perio ds when d etermining the present value o f estimated g ro ss p ro fits. Th ese assumpti on s are b est estimates and are p eriodi cally u pd ated wh enev er act ual ex perien ce and /o r ex pectation s for th e fut ure ch ang e from that assumed. Add i tion ally, these costs h ave been ad ju sted by an amou nt eq ual to th e amortization th at wou ld h ave been recorded if unrealized gains or lo sses o n in vestmen ts associated with o ur un iv ersal life and in vestmen t p ro du cts h ad been realized. Acqu isitio n co sts for st ab le v alu e co ntract s are amortized o ver th e term of t he con tracts u sing th e effective yield metho d. 11 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Va lue of Businesses Acquired In con ju nction with th e Merg er and the acq uisition o f in su ran ce po licies or inv estment co ntracts, a po rtio n of the pu rch ase p rice is allo cated t o th e righ t to receiv e fu ture gross p rofits from cash flo ws and earning s of associated in su ran ce po licies and inv estment co ntracts. This in tan gible asset, cal led VOBA, is based o n the actuarially estimated present v alu e of fut ure cash fl ows from associated insu ran ce po licies and in vestmen t con tracts acq uired . Th e estimated present v alu e o f future cash flows used in the calcu latio n of th e VOBA is b ased on certain assu mp tion s, in clu ding mo rtality, persi sten cy, exp enses, an d interest rates th at th e Co mp any ex pects to ex perien ce i n fu ture y ears. Th e Compan y amo rtizes VOBA in prop ortion to gross p remiu ms for traditio nal life prod uct s, o r estimated g ro ss margins (“EGMs”) fo r particip ating trad ition al life produ cts within the MONY Life Insu ran ce Compan y (“MONY”) b lock. Fo r in terest sensitive prod uct s, th e Compan y u ses v ariou s amo rtizati on bases in clu ding exp ected gross profits (“EGPs”), revenues, accou nt v alu es, or i nsu ran ce in -force. VOBA is sub ject to an nu al recov erabil ity testing. Intangible Assets In tangi ble assets wit h d efinite liv es are amortized o ver th e est imated u seful life o f th e asset an d reviewed for impairment whenev er ev ents or ch an ges in circumst an ces ind icate th at th eir carryin g amou nt may n ot b e reco verable. Amo rtizab le in tan gible assets p rimari ly con sist of d istrib utio n relation sh ip s, trade names, tech no lo gy, an d so ftware. Intang ib le assets with indefi nite liv es, pri marily insuran ce licenses, are no t amortized, b ut are reviewed for impairment on an ann ual basis or when ever ev ents or chan ges in circu mstances ind icat e that their carrying amo un t may n ot be reco verable. So ftware is gen erally amortized o ver a th ree year useful life. In tangi ble assets recog nized b y t he Compan y i ncl ud ed th e fo llo wing (ex clu ding go od will): As o f December 3 1 , Estimated 201 8 2017 Useful Life (Do l l a rs I n Tho usa nds ) (In Y ears) Distribu tion relatio nsh ip s $37 7,4 41 $4 02 ,97 5 14 -22 Trad e n ames 7 8,6 29 85 ,34 0 13 -17 Tech no logy 9 3,4 33 1 07 ,34 3 7 -1 4 Other 3 1,9 28 35 ,91 4 To tal in tan gible assets sub ject to amort izatio n 58 1,4 31 6 31 ,57 2 In surance licenses 3 2,0 00 32 ,00 0 Ind efinite To tal in tan gible assets $61 3,4 31 $6 63 ,57 2 Id en tified in tan gible assets were val ued u sing th e ex cess earn in gs metho d, reli ef fro m roy alt y metho d o r co st ap pro ach , as app ro priate. Amortizable int an gib le assets will b e amo rtized straigh t line ov er their assi gn ed u seful liv es. Th e fo llowing is a schedu le of future estimated ag gregate amort izatio n exp ense: Yea r Amo unt (D o l l ars In Tho us a nds ) 2 01 9 $5 5,2 99 2 02 0 5 2,2 98 2 02 1 4 9,6 93 2 02 2 4 6,4 35 2 02 3 4 5,1 35 Property a nd E quipment In co njun ction with th e Merger, prop erty and eq uipment was recorded at fair value as of th e M erg er d ate and will be dep reci ated fro m t his basis in fu tu re p eriod s based on t he respectiv e estimated u sefu l liv es. Real estate assets were recorded at ap praised values as of th e acqu isit io n d ate. Th e Comp any has estimated t he remain in g u sefu l life o f the ho me o ffice b uild in g to b e 25 years. Land is n ot dep reciated. The Co mp any dep reciates its assets using the straig ht-line meth od o ver the estimated u sefu l lives of the assets. The Comp any ’s furn iture is depreciated o ver a ten year usefu l life, office eq uipment an d mach in es are depreciated ov er a five year u seful life, an d co mp uters are d ep reciated o ver a fou r year useful life. Majo r rep airs o r impro vemen ts are cap italized and dep reciated ov er th e estimated u sefu l lives of the assets. Oth er rep airs are ex pensed as in curred . Th e co st an d related accumulated d epreciat io n of prop erty and eq uipment sold or retired are remov ed from th e accou nts, and resu ltin g g ains o r lo sses are includ ed in inco me. 11 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Prop ert y and equ ip men t co nsisted o f the follo win g: As of December 31, 2018 2017 (Dollars In Thousands) Home o ffice b uildi ng $144,66 9 $68 ,12 3 Data processin g eq uipment 28,79 3 24 ,10 2 Oth er, p rincipal ly fu rn iture and equ ip ment 19,77 4 17 ,19 8 To tal property an d eq uipment sub ject to dep reci ati on 193,23 6 1 09 ,42 3 Accu mu lated d epreciation (33,19 9) (22 ,92 6) Land 24,92 0 24 ,92 0 To tal property an d eq uipment $184,95 7 $1 11 ,41 7 Sepa rate Acco unts The sep arate accou nt asset s rep resen t fun ds fo r which the Compan y d oes n ot bear th e in vestmen t risk . These assets are carried at fair v alu e an d are eq ual to t he sep arate acco un t liab ilities, which represent th e po licyh older’s equ i ty in th ose assets. The inv estment income and in vestmen t g ain s an d losses on th e separate acco un t assets accru e directly to th e p olicy ho ld er. Th ese amo un ts are rep orted sep arately as assets and liab iliti es related to separate acco un ts in th e acco mp anyin g co nso lidated financial statements. Amou nts assessed ag ainst p oli cy accou nt balances for the costs of in su ran ce, p oli cy admin istration , and other serv ices are includ ed in p remiu ms an d p olicy fees in the accompan ying con solid ated statemen ts o f inco me. Stable Value Pro duct Account Bal ances The Stab le Valu e Pro du cts segment sell s fix ed and flo ating rate fu nd in g agreements di rectly t o qu ali fied in stitutio nal inv est ors. Th e seg men t also issues fu nd in g agreements to t he Federal Ho me Loan Bank (“FHLB”), and mark ets gu aran teed inv estment con t racts (“GICs”) to 4 01 (k) and o ther qu alified ret irement saving s plans. GICs are con t racts wh ich specify a return o n dep osits fo r a speci fied perio d and often p rovid e flex ib ili ty for withd rawals at book value in keep in g with th e b enefits p ro vided by th e p l an . The Co mp any reco rd s its stable v alu e con tract liabi lities in th e conso lidated bal an ce sh eets in “stable value prod uct accou nt b alances” at th e depo sit amou nt pl us accru ed interest, adjusted for any un amo rtized p remiu m o r d isco un t. Interest on the con tracts is accru ed based up on con tract terms. Any premium o r d iscou nt is amortized u sin g the effectiv e yield meth od . The seg ment’s p ro du cts co mp lemen t the Co mpan y’s ov erall asset/liab ili ty manag emen t in that th e terms may be tailored to the n eeds o f PLICO as th e seller o f the co ntracts. Stable value p ro du ct acco un t b alan ces in clu de GICs an d fundin g ag reemen ts th e Co mp any has issued. As of Decemb er 31 , 2018 an d Decemb er 3 1, 20 17 , the Compan y had $4 ,08 3.8 mi llio n and $3 ,33 7.9 millio n, resp ectively, of stable v alue prod uct accou nt b alances marketed throu gh structured p ro grams. Mo st GIC s and fu nd in g ag reemen ts th e Co mp any h as written h ave maturities of on e to twel ve years. As o f Decemb er 3 1, 2 01 8, future maturities o f stab le value p ro du cts were as fo llows: Year of Ma turity Amount (Do lla rs I n M il l i o ns ) 20 19 $1 ,25 3.9 20 20 - 2 02 1 3 ,04 2.5 20 22 - 2 02 3 81 8.7 Thereafter 11 8.7 Deri va tive Fina ncial Instruments The Compan y reco rd s its deriv ati ve fin an cial in stru men ts in th e co nsol id ated balan ce sheet in “ot her lo ng -term in vestmen ts” an d “o th er liab iliti es” in accordan ce with GAAP, which requi res th at all d erivative instruments be recog nized in the balance sheet at fair v alu e. Th e chan ge in the fair value of deriv ati ve fin ancial in stru ments is rep orted either in th e statemen t of inco me o r in the statemen t of oth er co mp reh ensive in come (loss), dep endin g upon wh eth er th e deriv ati ve in stru ment qu alified for an d also has b een p rop erl y id entifi ed as b ein g p art o f a hedgi ng relatio nship, and also o n t he ty pe of hedg ing rel ati on ship that exists. Fo r cash flow h edg es, th e effective po rti on of th eir gain o r loss i s rep orted as a compo nent o f o th er co mp reh en sive inco me (lo ss) and reclassified into earn in gs i n th e perio d du rin g wh ich the hedg ed item impacts earn i ng s. An y remain in g gai n or loss, t he ineffectiv e p ortion , is recog nized in cu rrent earning s. For fair v alue hed ge d erivativ es, their gai n o r lo ss as well as th e offsettin g lo ss or gain on t he h edg ed it em at trib utable to th e hed ged risk are recog nized in curren t earn in gs. Effectiven ess o f th e Compan y’s hed ge relatio nships is assessed o n a qu arterly basis. The Co mp any rep orts chan ges in fair values o f d erivatives that are n ot p art of a q ual ifying hed ge relatio nship in earn in gs. Ch ang es i n the fair v alu e of deriv atives th at are reco gn ized in curren t earning s are 11 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents reported in “Realized inv estment gains (losses)—Derivativ e financial instruments”. Fo r addi tion al informatio n, see Note 7, Derivative Fina ncial In st ruments. Insurance Liabilities and Reserves Estab lish in g an ad equ ate li ab i lity for the Co mp any ’s o blig ations to p olicy ho ld ers req uires the u se o f certain assumptio ns. Estimating liab ili ties for fu tu re po licy benefits on l ife and h ealth in surance prod ucts requ ires th e use of assumptio ns relativ e to futu re in vestmen t yield s, mortality, morbidity, persistency, an d other assumptio ns b ased o n the Co mp any ’s h isto rical ex perien ce, mo dified as necessary to reflect an ticip ated tren ds and to in clu de prov isio ns fo r p ossib le ad verse d ev i ati on . Determin i ng liabilit ies for the Co mp any ’s pro perty and casualty insurance pro du cts also req uires th e use of assumptio ns, in clu ding the p ro jected levels o f u sed veh icle prices, the frequ ency an d severity of claims, and th e effectiven ess o f in ternal processes desig ned to red uce the level o f claims. Th e Compan y’s resu lts d epend sig nificantly up on the ex ten t to which its actu al claims ex perien ce is co nsistent wi th the assumptio ns th e Co mp any used in d etermin i ng its reserv es and pricing its p ro du cts. Th e Company ’s reserv e assumpti on s and estimates req uire sig nificant ju dg ment and , therefore, are inh eren tly u ncertain. Th e C ompany cann ot determin e with p recision th e ultimate amounts that i t wi ll pay fo r actual claims o r th e timing of th ose p ayments. Gua ranteed Living Withdra wal Benefits The Compan y also est ab lish es reserv es for gu aran teed living with drawal ben efits (“GLWB”) on i ts variable an nu ity (“VA”) products. The GLWB is valued i n acco rd ance with FASB g uid an ce u nd er the ASC Deriv atives an d Hed gin g To pic wh ich u til izes th e v alu ation techn i qu e p rescrib ed by th e ASC Fair Valu e Measu remen ts and Discl osu res Top i c, wh ich requi res the emb edd ed d erivativ e to be reco rd ed at fair v alu e using curren t interest rates an d imp lied vo lat ilities for th e eq uit y indices. The fair valu e of th e GLWB is impacted by eq uity market co nd itio ns an d can result in the GLWB emb edd ed deriv ative being in an ov erall net asset o r net liabilit y p ositio n. In times o f favorabl e equ ity market con ditions th e likeliho od and sev erity o f claims is red uced and ex pected fee inco me in creases. Since claims are g enerally exp ected l ater t han fees, these favo rab le equ ity market co nd itio ns can result in th e present val ue o f fees b ein g greater than th e p resen t value o f clai ms, wh ich result s in a net GLWB embed ded d eri vativ e asset. In ti mes of unfav orable eq uity mark et co nd ition s th e likelih oo d an d severity o f clai ms is increased an d ex pect ed fee in come d ecreases an d can result in th e present value of claims ex ceed ing th e present v alu e of fees result in g in a n et GLWB embedd ed d erivativ e liabil ity. The meth od s used to esti mate the embed ded deriv ative empl oy assu mption s abo ut mortality, lapses, p olicyhol der b ehav io r, eq uity mark et retu rn s, in terest rates, and mark et vo l ati lity. The Compan y assu mes age-based mo rtality from th e Ruark 2 01 5 ALB table ad justed for company exp erience. Differences b etween the actu al experience and the assu mp tion s used result in v ariances in p ro fit an d co uld result in lo sses. As of December 31 , 20 18 and 2017 , o ur net GLWB liab ili ty hel d was $1 84 .1 million and $1 11 .8 million, respectively. Goo dwill The b alan ce reco gn ized as go od will is no t amo rti zed , b ut is reviewed fo r impairment o n an an nu al basis, or more freq uen tly as ev ents o r circu mstan ces may warran t, in clu ding th ose circumstan ces which wo uld more l ik ely th an not redu ce th e fair val ue o f the Co mp any ’s reportin g u nits b elow its carry ing amo un t. Acco un ting for go od will req uires an estimate o f th e fu tu re profitabilit y o f th e asso ciated lin es o f b usin ess wi th in t he Compan y’s op eratin g segmen t s to assess the recoverability o f the capitalized go od will. Th e Co mp any ’s material g oo dwill balances are attribu tab le t o certain of i ts o perating segmen t s (which are each co nsid ered to be rep orting un its). Th e Compan y evaluates th e carrying val ue of g oo dwill at th e seg ment (o r rep ortin g un it) level at least an nu ally and b etween ann ual ev alu ation s if ev ents o ccur o r circumstances chang e that wo uld more lik ely than n ot reduce the fair v alu e o f th e repo rting un it b elow its carry in g amou nt. Such circumstances co uld in clu de, b ut are not l imited to : 1) a signi fican t adv erse chang e in leg al facto rs or in bu siness cli mate, 2 ) u nan ticip ated compet itio n, o r 3) an adv erse actio n or assessment by a reg ulato r. Wh en ev alu ating whether go od will is imp aired, the Compan y first determines th rou gh qu alit ati ve an aly sis whether relevan t events an d circumstan ces i nd icate th at it i s more likely th an no t that seg men t go od will balan ces are impaired as o f th e testin g d ate. If the q ual itative an alysis do es no t ind icate th at an impairmen t o f segmen t go od wil l is mo re lik ely than n ot t hen n o ot her speci fic qu an titative i mp airment testing is requ ired. If it is d etermined th at it is mo re lik ely th an n ot th at imp airmen t ex ists, the Compan y p erforms a q uantitativ e assessment an d co mp ares its estimate o f th e fair value o f the rep orting u nit to which the go od wil l is assig ned t o the rep orting u nit’s carrying amo un t, in clu ding g oo dwill. The Co mp any u tilizes a fair value measurement (which in clu des a disco un ted cash flo ws analysis) to assess the carry in g value of the repo rting u nits i n co nsid erat io n of the recov erab ility of the g oo dwi ll balan ce assig ned to each repo rtin g u nit as o f t he measu rement d ate. Th e cash flows u sed t o determin e th e fair value of th e Co mp any ’s reporting u nits are dep end ent o n a numb er of sig nificant assumptio ns. Th e Compan y’s est imates, wh ich co nsid er a market p articipan t view o f fair value, are sub ject to chan ge giv en t he i nh erent u ncertain ty in p red ictin g futu re results and cash flo ws, which are impact ed by su ch thing s as p olicyhol der beh av ior, co mp etito r prici ng , cap ital limitatio ns, n ew p ro du ct introd uct io ns, an d sp ecific ind ustry and market con dition s. Inco me Ta xes The Compan y an d its sub sidiaries file a co nsolid ated fed eral in come tax retu rn that in clu des b oth life insu ran ce companies an d n on -life i nsu ran ce co mp anies. Th e Co mp any has o ne life in surance su bsidiary th at is no t el ig ib le to be includ ed in th e consolid ated fed eral inco me tax return an d files a separate corpo rate tax ret urn. On Decemb er 22 , 20 17 , the Presi dent of th e Unit ed States sign ed in t o law th e Tax Cuts and Jo bs Act (the "Tax Reform Act"). Furth er i nformatio n on th e tax imp acts o f the Tax Reform Act is includ ed in No te 18, In come Ta xes. The Compan y u ses the asset an d li ab i lity metho d o f accou nting fo r inco me tax es. Generally, most i tems in pretax bo ok in come are also in clu ded in taxab le in come in the same year. Howev er, some i tems are recog nized for b oo k pu rp oses and for tax p urpo ses in differen t years or are nev er recog nized fo r eit her b oo k o r tax p urpo ses. Th ose d ifferences that will n ever be reco gn ized 11 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents fo r either b oo k or t ax p urposes are permanen t differen ces (e.g., the dividen ds-received d edu cti on ). As a resu lt, the effective tax rate reflected i n th e fin ancial statements may d iffer from th e statu tory rate reflected in the tax retu rn . Tho se differen ces that are reported in d ifferent y ears for bo ok an d tax pu rp oses are temp orary and will reverse over time (e.g ., th e valuatio n o f fu tu re p olicy ben efits). Th ese tempo rary d ifferences are acco unt ed for in the int erv en ing perio ds as deferred tax assets and liabilities. Deferred tax asset s generally represent reven ue that is tax able b efo re i t is recog nized in finan cial inco me and exp en ses t hat are ded uctib le after th ey are recog nized in financial inco me. Deferred tax liabilities g enerall y represent rev enues th at are taxab le after th ey are reco gn ized in finan cial in come o r expen ses o r lo sses that are d edu ctible before t hey are reco gn ized in fin anci al inco me. Compo nen ts of accu mu lated ot her compreh ensiv e in come (lo ss) (“AOCI”) are presented net o f tax , an d it is th e Co mp any’s p olicy to u se the agg reg ate portfo lio app ro ach to clear th e d isprop ortionate tax effects that remain in AOCI as a result o f tax rate ch ang es and cert ain other events. Under th e ag gregate po rtfo l io app ro ach , disp ro po rti on ate t ax effects are cleared on ly wh en the p ortfoli o o f inv estments that g ave rise to the d eferred tax it em is sold o r o th erwise disp osed of in its enti ret y. The applicati on o f GAAP requ ires th e Co mpan y t o eval uate t he recov erab ility o f t he Co mp any ’s deferred tax assets and establish a v alu ation all owance, if necessary, to redu ce th e Compan y’s deferred tax assets t o an amou nt t hat is more likely th an no t to b e realized. Con sid erab le ju dg ment is requi red in d etermining wh ether a valu ation allo wance is n ecessary, an d if so, the amo un t of su ch val uatio n allowance. In eval uat in g th e need for a v alu ation all owance the Company may con sid er many facto rs, in clu ding : (1) the nature of th e deferred tax asset s and liabilities; (2 ) whether th ey are ordinary o r capital; (3 ) in wh ich tax ju risd ictio ns they were gen erated and the timing of their rev ersal; (4) taxab le in come in prior carry back years as well as p ro jected tax able earning s excl usive of rev ersing temp orary di fferen ces an d carryforwards; (5) the len gth of time th at carryo vers can be utilized in t he vario us t ax ing ju risdict io ns; (6 ) an y u niqu e tax ru les that wou ld impact th e u til izatio n o f the deferred tax assets; and (7 ) any tax plann in g strateg ies that th e Co mp any wo uld employ to av oid a tax b enefit from expiring unused . Alt ho ug h realizat io n is n ot assured, man agemen t b elieves it is more lik ely th an no t t hat the deferred tax assets, n et o f v alu ation allowances, will be reali zed . GAAP p rescri bes a comprehen si ve mo del fo r ho w a co mp an y sho uld recog nize, measure, present, and disclose in it s fin an cial statemen ts un cert ain tax po sition s th at a compan y has taken o r exp ects to take o n tax retu rn s. The ap pli catio n of th is gu id ance is a two-step p ro cess, th e first step being recog nit io n. The Co mp any d etermi nes wheth er it is mo re likely th an no t, based o n th e techn ical merits, th at th e tax po sition wi ll b e su stain ed upon ex aminatio n. If a tax p ositio n d oes n ot meet th e mo re lik ely th an n ot reco gn itio n thresh old, the b enefit of th at p ositio n is n ot reco gn ized in th e finan cial statements. The second step is measuremen t. Th e Compan y measu res the tax po sition as t he largest amou nt of b enefit th at is g reater th an 50 percen t lik ely o f being realized up on ultimate reso lu tion with a tax in g auth ority that h as fu l l kn owledg e o f all relev an t info rmati on . This measu remen t co nsid ers the amo un ts an d p ro bab ili ties of th e ou tco mes that co uld be realized up on ultimate settlement using th e facts, circumstan ces, and in fo rmation avai lab le at the repo rting date. The Co mp any ’s liabi lity fo r in come taxes in clu des the liabi lity for un recogn ized tax benefits, in terest and penalties which rel ate to tax years still sub ject to rev iew by the In ternal Reven ue Service (“IRS”) o r o th er tax in g ju risd ictio ns. Au dit period s remain op en fo r rev iew un til the statute o f limit ation s ex pires. Gen erally, for tax years which p ro du ce n et o perating lo sses, cap ital losses or t ax cred it carryforward s, t he statu te o f limitations d oes n ot clo se u ntil th e exp iration o f t he statute o f limitatio ns for the tax year in which th ey are fully u til ized. The completion o f rev iew o r th e ex piratio n of the st atute o f limitatio ns for a g iv en au dit perio d cou ld result in an adjustment t o th e liabilit y fo r in co me tax es. Th e Company classifies all in terest and p enal ties related to tax u ncertainties as in co me tax expense. See No te 1 8, Inco me Taxes, for add itio nal in fo rmation reg ard in g inco me taxes. Va ria ble Interest Entities The Co mp any h olds certain in vestmen ts in entities in which its own ersh ip in terests co uld po ssibly be con sidered variab le in terests u nd er To pic 8 10 of th e FASB ASC (exclu din g d eb t an d eq uity securities held as trading , available for sale, o r h eld to maturi ty ). Th e Company rev iews th e ch aract eristics o f each o f th ese app licable entities an d co mp ares th ose characteristics t o ap pli cab le criteria to d etermi ne wh eth er th e entity i s a Variable Interest En tit y (“VIE”). If the entity is determin ed to be a VIE, the Co mp any th en perfo rms a d etailed rev iew to determine wh eth er th e in terest wou ld b e con sid ered a v ariabl e in terest un der th e gu i dance. The Compan y th en p erforms a qu alit ati ve review of al l v ariable interests with the en tity an d d etermines whet her th e Compan y is th e primary ben eficiary. ASC 81 0 prov id es th at an entity is the primary b eneficiary of a VIE if t he en tity h as 1 ) th e p ower to d irect th e activ ities of the VIE th at most sig nificantly imp act t he VIE’s econ omic p erforman ce, an d 2) th e ob lig ati on to absorb losses o f the VIE that cou ld pot en t ial ly be sig nificant to the VIE or the righ t t o receiv e b enefits from the entity that cou ld po tentially be significant to the VIE. Fo r mo re i nformatio n on th e Compan y’s inv estment in a VIE refer to Note 5, Investmen t Op eratio ns, to th e co nsolid ated finan cial statements. 11 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Policy ho lder Liabilities, Rev enues, and Benefits Ex pense Future Po licy Benefits and Claims Futu re pol icy b enefit liabil ities for t he year in dicated are as fo llows: As of December 31, 2018 2017 2018 2017 Total Policy Liabilities and Accruals Reinsurance Receivable (D o l l a rs I n Tho usa nds ) (Do l la rs I n Tho usa nds ) Life and annuity benefit reserves $40,883,229 $29,972,938 $3,582,850 $3,898,079 Unpaid life claim liabilities 654,077 595,188 383,376 362,827 Life and annuity future policy benefits 41,537,306 30,568,126 3,966,226 4,260,906 Other policy benefits reserves 142,855 157,101 80,688 92,330 Other policy benefits unpaid claim liabilities 221,391 232,365 176,155 185,826 Future policy benefits and claims and associated reinsurance receivable $41,901,552 $30,957,592 $4,223,069 $4,539,062 Unearned premiums 872,594 875,405 541,674 536,636 Total policy liabilities and accruals and associated reinsurance receivable $42,774,146 $31,832,997 $4,764,743 $5,075,698 Liab ilities fo r life an d an nu ity ben efit reserves co nsist of liab ili ties for tradit io nal life in surance, cash values asso ciated with un iv ersal life insu ran ce, immediate an nu ity b enefit reserves, an d oth er ben efits associated with life and an nui ty benefi ts. Th e un paid life claim liab ilities co nsist of curren t pend ing claims as well as an estimate o f incu rred b ut no t repo rted life in surance cl aims. Other pol icy ben efit reserves co nsist of certai n h ealth insurance p olicies t hat are in ru no ff. Th e un paid claim l iabilities associated with other pol icy benefits includ es curren t p end in g claims, th e present value of estimated fu tu re claim p ayments fo r p olicies currently receiv ing benefits an d an estimat e o f claims i ncurred but no t y et rep ort ed . Tra ditional Life, Health, a nd Credit Insurance Products Trad itio nal life in su ran ce p ro du cts con sist p rincipally of th ose p ro du cts with fixed and gu aran teed p remiu ms and ben efits, an d th ey incl ud e wh ole life insurance po licies, term and term-lik e life in surance p olicies, limited p aymen t life insurance pol ici es, and certain ann uities with life co ntin gen cies. In acco rd ance with ASC 80 5, the l iabilities fo r future po licy b enefits on traditio nal life insu ran ce prod ucts, when co mb in ed wi th th e associated VOBA, were recorded at fair value o n the d ate of t he M erg er. These values were computed u sin g assumptions th at in clu de interest rates, mortality, l ap se rates, ex pen se estimates, and o th er assumption s b ased on the Co mpan y’s exp erience, mod ified as necessary to refl ect an ticip ated trend s an d to includ e p ro visi on s for po ssi ble ad verse dev iatio n. Liab ilities fo r futu re p olicy ben efi ts o n tradition al life i nsu ran ce prod ucts hav e been co mp uted u sing a net lev el meth od in clu ding assu mp tion s as to in vestmen t y ields, mort ality, p ersist ency, and other assu mp tion s based o n the Compan y’s ex perien ce, modi fied as n ecessary to reflect anti cipated tren ds and to in clu de pro vision s fo r p ossib le ad verse dev iatio n. Reserve investment yield assumpti on s on December 31 , 2 01 8, ran ge fro m ap proxi mately 2.0 0% to 5.50%. The liab ility for future p olicy b enefits an d claims on t raditio nal life, h ealt h, an d cred it insu ran ce p ro du cts in clu des est imated un paid claims th at hav e been repo rted to u s and clai ms incu rred b ut no t y et repo rted. Pol icy claims are ch arg ed to exp ense in the p eriod in wh i ch th e claims are in curred . Trad itio nal li fe in surance premiums are recog nized as rev en ue when d ue. Health and credit insu ran ce p remiu ms are reco gn ized as revenu e o ver th e terms of the po lici es. Benefits and expenses are asso ciated with earn ed premiums so th at profits are recog nized ov er th e life of the con tracts. This is acco mp lished b y means o f th e p ro vision for liab ili ties for futu re p olicy b enefits and t he amortization o f DAC and VOBA. Gro ss premiums in excess of net premiums related to immediate annu ities are deferred and recogn ized o ver th e life o f the p olicy . Univ ersal Life and Investment Pro ducts Un iv ersal life and inv estment pro du cts in clu de u niversal life insurance, g uaran t eed inv estment con tracts, gu aran teed fu nd in g agreements, d eferred an nu ities, and an nu ities witho ut life co ntin gen cies. Premiums and p olicy fees for u niversal life and in vestmen t produ cts co nsist o f fees th at have been assessed ag ain st po licy acco un t b alan ces fo r the co sts of insu ran ce, p olicy admin i stration, and su rrend ers. Such fees are reco gn ized wh en assessed an d earned . Ben efit reserv es for univ ersal life and inv estment p rod uct s represent po licy acco un t b alances b efo re app licab l e su rrend er charges plu s certain deferred pol icy in itiatio n fees that are reco gn ized in in co me o ver th e term o f the p olicies. Pol icy benefits an d claims th at are charged to ex pen se i nclud e b enefit claims in curred in th e p eriod in excess o f related p oli cy acco un t balances and interest credit ed to p olicy accou nt bal an ces. Interest rates credited to u niversal life prod uct s ran ged from 1.0 % to 8.7 5% and inv estment prod ucts ran ged from 0.1 9% to 1 1.2 5% in 2 01 8. 11 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any est ab lish es liab ili ties for fix ed in dex ed an nu ity (“FIA”) prod ucts. These prod uct s are deferred fixed annuities with a gu aran teed mi nimu m interest rate plu s a con ting ent return based on equ ity mark et p erforman ce. The FIA prod uct is con sid ered a hy bri d fin ancial instrument un der the Financial Accou ntin g Stand ard s Board (“FASB”) Accou nti ng Stand ard s Co dification (“ASC” o r “Co dification ”) To pic 8 15 - Deriva tives an d Hed ging wh ich all ows t he Company to mak e the election to valu e th e liabilities o f these FIA p ro du cts at fair v alu e. This electio n was mad e fo r the FIA p roducts issued prio r to 20 10 as th e po lici es were issu ed. These p rod ucts are no l on ger being marketed. The futu re ch ang es i n the fair value o f th e liabil ity fo r th ese FIA prod ucts are record ed in Benefit an d settlement exp enses with the liability being recorded in Ann uity a cco un t b alan ces. For more i nformatio n reg ard in g th e determination o f fair v alu e o f ann uit y acco un t b alan ces p lease refer to Note 6 , Fair Valu e of Fina ncial Instru men t s . Premiums a nd p olicy fees fo r t hese FIA prod uct s con sist o f fees th at h ave been assessed ag ain st th e policy accou nt bal an ces fo r surren ders. Su ch fees are reco gn ized wh en assessed and earn ed. The Company curren tly mark ets a deferred fixed ann uity wit h a gu aranteed min imum in terest rate plus a co ntin gen t retu rn based o n eq uity market perfo rman ce and t he p ro du cts are co nsidered h ybrid fin an cial instrumen ts un der the FASB’s ASC Topi c 81 5 - Derivati ves a nd Hedg ing . Th e Compan y did no t elect to valu e t hese FIA prod ucts at fair value. As a result, the Co mp any accou nts for t he p ro vision th at prov id es for a cont in gen t retu rn b ased o n equ ity mark et performance as an embed ded d erivativ e. Th e embed ded d erivativ e is bifurcated fro m th e h ost con tract and recorded at fai r value in Oth er li ab ilities. Ch ang es i n the fair value o f th e emb edd ed d erivat iv e are recorded in Realized in vestment ga in s (lo sses) - Deriva tive fin an cia l instru ments. Fo r more in fo rmation reg ardin g the determin ation of fair value of th e FIA embed ded deriv ative refer to Note 6, Fair Va lu e o f Fina ncial In struments . The ho st co ntract is acco un ted for as a UL - Type insurance co ntract i n acco rd ance with ASC Top ic 9 44 -Fina ncial S ervices—Insu ra nce and is recorded in An nu ity a cco un t ba la nces with an y d isco unt to th e min i mum accou nt value being accreted using t he effective y ield method. The Co mp any mark ets u niversal life p ro du cts with a gu aranteed minimu m int erest rate plus a con ting ent retu rn based o n equ ity market p erforman ce an d the products are con sidered hy brid finan cial in struments un der th e FASB’s ASC To pic 8 15 - Deriva tives a nd Hed ging . The Compan y d id not elect to value th ese ind exed u niv ersal life (“IUL”) prod ucts at fair v alu e p rio r to th e Merger d ate. As a resu lt, th e Co mp an y accou nts fo r the pro vision that prov id es fo r a con ting ent return b ased o n eq uity market perfo rman ce as an emb edd ed d erivat iv e. The emb edd ed derivativ e is b ifurcated from th e ho st co ntract and recorded at fair value i n Oth er lia bilities. Ch ang es i n th e fair value o f t he embedded deriv ative are recorded i n Rea lized in vestmen t ga in s (losses) - Deriva tive fina ncial in st ruments. For mo re informatio n regarding th e det ermin ati on of fai r v alu e o f the IUL emb ed ded deriv ative refer to No t e 6 , Fair Va lu e of Fin ancia l In struments. Th e ho st con tract is accou nted for as a d ebt in stru men t in acco rd ance with ASC Top ic 9 44 - Fi na nci al S ervices - Insura nce and is recorded in Future pol icy benefits an d cla ims with an y d isco unt to the min imum account value b eing accreted using th e effective yield metho d. Benefits and settlemen t ex pen ses incl ud e accrued interest an d ben efit claims incurred du rin g t he perio d. The Compan y’s accou ntin g p olicies with resp ect to variab le u niversal life (“VUL”) an d VA are i dentical excep t that po licy accou nt bal ances (exclud i ng acco un t b alances that earn a fi xed rate) are v alu ed at fair value and rep orted as compo nen ts o f assets an d liab iliti es rel ated to separate acco un ts. The Co mp any establishes liab iliti es for gu aranteed minimum d eath b en efit s (“GMDB”) o n its VA p ro du cts. Th e meth od s u sed to est imate th e liabilities employ assu mp tio ns ab out mo rtalit y an d th e perfo rmance o f equ ity market s. Th e Compan y assumes ag e-b ased mortali ty fro m th e R uark 2 01 5 ALB table ad ju st ed for co mp any exp erience. Future d eclines in the eq uit y mark et wou ld i ncrease th e Compan y’s GMDB liab ili ty. Differen ces b etween th e actu al ex perien ce and th e assu mp tion s used resu lt in varian ces in profit and co uld resu lt in losses. A p ortio n of the C ompany ’s GMDB b enefits are sub ject to a do llar-fo r-dol lar red uct io n u po n wi th drawal of related ann uity dep osits on con tracts issued prio r to Janu ary 1, 2 00 3. As of Decemb er 3 1, 20 18 an d 20 17 , th e GMDB reserve was $4 4.3 milli on an d $34 .1 millio n, respectively. Property a nd Casualty Insura nce Products Pro perty and casu alty in surance pro du cts includ e serv ice con tract b usin ess, su rety b on ds, an d g uarant eed asset protecti on (“GAP”). Premiums and fees asso ciat ed with service co ntracts and GAP p rod uct s are reco gn ized b ased o n exp ected claim pat terns. For all o t her p ro du cts, p remiu ms are gen erally recog nized o ver the terms of the co ntract on a pro-rata b asis. Co mmissio ns and fee inco me asso ciated with oth er p ro du cts are recog nized as earned when th e rel ated services are prov id ed to th e cu stomer. Unearned p remiu m reserves are main tained fo r th e po rtio n o f the premi ums th at is related to th e u nex pired perio d o f th e po licy. Benefit reserv es are record ed when insu red ev en ts occu r. Benefit reserv es inclu de case basis reserv es for k no wn b ut u np aid claims as o f th e b alance sheet d ate as well as in curred b ut n ot rep orted (“IBNR”) reserves for claims wh ere th e in sured even t has o ccu rred b ut h as no t been repo rted to th e Co mp any as of the balance sh eet date. Th e case b asis reserv es an d IBNR are calcu lated b ased on h i sto rical exp erience an d on assumptio ns relatin g to claim severity an d freq uency , th e lev el of used veh icle prices, an d o th er factors. Th ese assumption s are mod ified as necessary to reflect anticipated tren ds. Effective Jan uary 1 , 20 18, the Compan y ad op ted Accou nti ng Stand ard s Upd ate ("ASU") No . 20 14 -0 9, Revenu e f rom C on tra cts with Custo mers. In co nsid eratio n o f the amen dments in th is Up date, th e Co mp any rev ised its reco gn iti on p attern fo r ad ministrativ e fees asso ciated wi th certain v ehicle service an d GAP p roducts. Prev io usly, these fees were recogni zed b ased on the wo rk effo rt in vo lv ed in satisfy in g th e Compan y’s con tract ob ligatio ns. Th e Compan y will recogn ize th ese fees o n a claims occurrence b asi s in future perio ds. To reflect this chan ge in accoun ting p rin ciple, th e Compan y reco rd ed a cu mu lative effect adjustment as o f Jan uary 1, 2 01 8 th at resulted in a d ecrease in retained earn in gs of $9 3.9 milli on . Th e p re-tax imp act to each affected lin e i tem on th e Co mp any ’s fi nancial stat ements i s reflected i n t he tab le b elo w: 11 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents As of December 31, 2 0 1 8 As Reported Previous Accounting Metho d (D o l l a rs In Millions) Fi na nci al Statement Line Item: Balance Sheet Deferred po licy acq uisition costs and value o f b usiness acq uired $3 ,02 3.2 $2,8 81 .6 Other liabilities $2 ,37 4.1 $2,1 10 .5 For The Year Ended December 31, 2 0 1 8 As Reported Prev io us Accounting Method (D o l l ars In Millions) Fi na nci al Statement Line Item: Statements o f Income Other in come $45 3.7 $4 54 .4 Amortization of deferred po l icy acq uisi tion costs and value o f b usiness acquired $22 5.8 $1 77 .0 Other op eratin g exp enses, n et o f rein su ran ce ced ed $91 6.3 $9 68 .1 Reinsurance The Co mp any u ses rein su rance extensively in certai n of i ts segments an d acco unt s for rein su ran ce and the recog nitio n of the impact of rei nsu ran ce co sts in acco rdance wit h th e ASC Finan cial Services - Insurance Top ic. The fo llowing su mmarizes so me of the key asp ects of the Co mp any ’s accou nti ng po licies for reinsurance. Reinsurance Acco unting Methodolog y —Ced ed p remiu ms of the Co mp any ’s trad itio nal life insu ran ce p ro du cts are treated as an offset to direct premium and po licy fee revenu e and are recogn ized wh en due to the assu ming co mpan y. Ceded clai ms are t reated as an offset to direct b en efit s and settlement exp enses and are reco gni zed wh en the claim is in curred o n a direct b asi s. Ceded p olicy reserv e chan ges are also treated as an o ffset to b enefits and settlement ex pen ses an d are recogni zed du ring th e appl icable finan cial repo rtin g p eriod . Ex pen se allowances p aid b y the assumin g co mpan ies wh ich are all ocable to the curren t perio d are t reated as an o ffset to oth er op erat in g exp enses. Sin ce rein surance treaties ty pically prov ide fo r allowan ce p ercentages t hat decrease ov er the lifetime of a p olicy, allowan ces in excess o f the “ult imate” or fi nal level all owance are capitalized . Amort izatio n of capi talized rein su rance ex pen se allo wances represen ting recov ery of acq uisition co sts is treated as an o ffset t o direct amo rti zation of DAC o r VOBA. Amo rtizatio n of deferred ex pen se allo wances is calculated as a lev el percen tag e of ex pected p remiu ms i n all du rati on s g iv en ex pected fu tu re lapses an d mort ality and accretion d ue to in terest. The Company utilizes rein surance on certain sh ort d uration in su rance con tracts (pri marily issued th ro ug h the Asset Protection segmen t). As part o f th ese rein su ran ce tran saction s the Compan y receives rein surance allo wan ces wh ich reimb urse th e Co mp any fo r acqu isitio n co sts such as co mmissio ns and premium taxes. A ced i ng fee is also co llected to cov er other ad minist rativ e co sts an d profits fo r the C ompany. As a co mp on ent o f rein surance costs, rei nsu ran ce all owances are acco un ted fo r in acco rd ance with the relev ant prov isio ns of ASC Fin ancial Serv ices—In surance Top ic, which state th at rei nsu ran ce costs sho uld be amortized ov er th e con tract perio d o f th e rein surance if the co ntract is sho rt-d uration. Acco rd in gly, rein surance all owances receiv ed related to sho rt-du rat io n co ntracts are cap italized an d ch arg ed to exp en se in p rop ortion t o p remiu ms earned . Ceded un amortized acq uisition costs are netted wit h d irect un amo rti zed acq uisitio n costs in the b alan ce sheet. Ced ed p remiu ms and po licy fees on th e Compan y’s fixed uni versal life (“UL”), VUL, b ank -o wned life in su ran ce (“BOLI”), and an nu ity prod ucts reduce premiums an d p olicy fees reco gn ized by the Co mp any. Ceded claims are treated as an o ffset to d irect b enefits an d sett lemen t exp en ses an d are recog nized wh en th e cl aim is incu rred on a d irect basis. Ced ed po licy reserve ch ang es are also treated as an o ffset to ben efi ts and settlemen t exp enses and are recog nized d urin g the ap plicable valuatio n p eriod . Si nce reinsurance treaties typ ically p ro vide for allo wan ce percen tag es that decrease ov er the lifetime o f a po licy, allowances in excess of the “u ltimat e” o r fin al lev el allowan ce are capitalized . Amo rtizatio n o f capitalized rein su ran ce ex pense allo wances are amo rtized b ased o n future ex pected gross profits. Assumption s reg ard ing mo rtality, lap ses, and interest rates are co ntin uo usly rev iewed and may be perio dically ch ang ed. Th ese chan ges will resu lt in “u nlock in g” that changes t he balance in th e ceded d eferred acq uisition cost and can affect the amortization of DAC an d VOBA. Ceded un earned rev enu e liabilities are also amo rtized b ased on expected g ro ss profits. Assu mp tion s are b ased on the best cu rrent estimate of ex pected mortality, lapses and in terest spread. The Compan y h as also assu med certain p olicy risks wri tten b y o th er i nsu ran ce co mp anies th ro ugh reinsu ran ce ag reemen ts. Premiu ms an d p olicy f ees as well as Ben efits an d settlement exp enses includ e amo un ts assumed un der reinsurance agreements 11 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents an d are net of rei nsu ran ce ced ed. Assu med reinsu ran ce is accou nted for in acco rd ance with ASC Fi nancial Serv ices—In surance To pic. Reinsurance Al lo wances—Long-Duration Contra cts —Reinsu ran ce allowan ces are intend ed to reimb urse the ced in g company for so me p ort io n o f th e ceding co mp any ’s co mmissio ns, exp enses, and tax es. Th e amou nt an d timing o f rein surance allowances (both first y ear and renewal allowances) are co ntractually determin ed b y the app licable reinsu ran ce co ntract and do no t n ecessarily bear a relatio nship to the amo unt an d inciden ce of ex pen ses actually paid by th e cedi ng co mp any in any given year. Ultimate reinsurance al lo wan ces are defin ed as th e lo west allowance p ercentage p aid b y the rein su rer in an y p oli cy d uration o ver th e l ifetime o f a un iv ersal li fe po licy (o r throu gh the end o f the lev el term perio d for a traditio nal life p oli cy ). Ulti mate reinsurance all owances are determin ed du ring th e nego tiat io n o f each rein surance agreemen t and will d iffer b etween agreements. The Company determin es its “cost of reinsu ran ce” to includ e amou nts paid to the rein surer (ceded p remiu ms) net of amou nts reimbu rsed by th e rei nsu rer (i n th e form of allowances). As n oted within ASC Fin anci al Services—Insu ran ce Top ic, “The differen ce, if any, between amou nts paid fo r a rei nsu ran ce co ntract and th e amou nt of th e liabilities for po licy ben efits relating to th e u nd erlyin g rein sured co ntracts is p art of th e estimated cost to b e amortized.” Th e Co mp any ’s po licy is to amo rtize the cost of reinsurance ov er t he life o f the u nd erlying reinsu red con tracts (for lo ng -d uration po licies) i n a mann er co nsistent with th e way in wh ich ben efi ts an d ex pen ses o n th e un derly in g co ntracts are recog nized. For t he Compan y’s lo ng -d uration con tracts, it is th e Co mp any ’s practice to d efer rei nsu ran ce allowances as a co mp on ent of the co st of reinsu ran ce and reco gn ize t he p ortion related t o the recov ery of acq uisition co sts as a reductio n o f app licable un amo rtized acqu isitio n costs in su ch a manner th at net acqu isitio n costs are capitalized and ch arg ed to ex pen se in proportio n to n et rev enu e reco gn ized . Th e remain in g balance o f reinsurance allo wances are includ ed as a co mp on ent o f th e co st of rei nsu ran ce an d tho se allo wances which are allocable to the curren t p eri od are recorded as an o ffset to op eratin g expenses in the curren t peri od co nsistent with th e recog nit io n of b enefits an d exp enses on the un derly ing rein sured con tracts. This practice is co nsistent with the C ompany ’s practi ce of cap italizin g direct ex pen ses (e.g. commission s), an d resu lts in the reco gn i tion of reinsurance allowan ces on a systematic b asi s ov er the life of the rein sured p oli cies o n a b asis co nsistent wit h th e way in which acqu isitio n costs o n th e u nd erlyin g reinsured con tracts wou ld be recog nized. In some cases rein surance allowan ces all ocable to the curren t perio d may ex ceed n on -deferred di rect costs, which may cau se n et oth er op erat in g exp enses (related to sp ecific co ntracts) to b e negativ e. Amo rtizatio n o f Reinsurance Allo wances—Rein su ran ce allowances do n ot affect the met ho do lo gy u sed to amortize DAC and VOBA, or th e period ov er which su ch DAC an d VOBA are amo rtized . Rein surance allowan ces offset th e direct exp enses cap italized , red ucing th e net amou nt t hat is capitalized . DAC an d VOBA on trad itio nal life p olicies are amortized b ased on the pat tern of estimated g ro ss premiums o f th e pol icies in fo rce. Reinsurance allo wan ces do no t affect the gross p remiu ms, so th erefore th ey do n ot i mp act trad itional life amortization p attern s. DAC and VOBA on u niversal l ife produ cts are amortized based on the p att ern o f estimated g ro ss p ro fits o f the po licies in force. Rein surance allowan ces are co nsidered in th e determination o f estimated gross profits, and th erefore do impact amortization patterns. Reinsurance Assets a nd Li abilities —Claim liabilities and policy ben efits are calcul ated co nsistently fo r all po licies, regard l ess of wh eth er o r no t th e p oli cy is reinsu red . Once th e clai m liabil ities an d p olicy ben efits for t he un derly ing p olicies are estimated , th e amounts recov erable from th e reinsurers are estimated based on a numb er o f factors i ncl ud in g the terms o f t he reinsu ran ce co ntracts, hist orical p ayment p attern s of reinsurance partn ers, and th e finan cial streng th and credit wo rthiness of reinsu ran ce p artners and reco rd ed as Reinsu ra nce receivab les on th e balance sh eet. Th e reinsu ran ce receiv ables as o f th e Merger date, were recorded in t he balance sh eet u sing cu rrent accou ntin g po licies an d the most current assumpti on s. As o f the Merger dat e, th e Co mp any also calculated th e ceded VOBA asso ciated with t he rein sured p olicies. Th e reinsurance receivab les co mb in ed with t he asso ciated ced ed VOBA rep resen t th e fair value of th e reinsuran ce assets as of th e Merger dat e. Liab ilities fo r unpaid rein surance claims are p ro du ced from clai ms an d rein su ran ce system records, which co ntain th e relevan t terms o f th e in dividu al rein su ran ce co ntracts. Th e Compan y mon itors claims d ue fro m rein su rers to en sure that balances are set tled o n a timely b asi s. Incurred b ut no t reported claims are reviewed to ensu re that app ro priate amounts are ced ed. The Compan y analyzes an d mo nit ors th e credit wo rth in ess of each of its rein surance p art ners to minimize co llection issues. For newly execu ted rei nsu ran ce co ntracts with reinsurance companies that d o n ot meet p red etermined stand ard s, the Comp any req uires co llateral su ch as asset s held i n tru sts o r let ters of cred it. Co mpo nents of Reinsurance Co st—Th e fo llowing in come statement lin es are affected by rein su ran ce co st : Premiu ms an d po licy fees (“rein su ran ce ceded ” o n th e Compa ny’s fin an cia l sta temen ts) rep resen t con sideration p aid to t he assumin g compan y fo r accepting th e ced in g co mp any ’s risks. Ceded premiums and po licy fees in crease reinsurance cost. Benefit s an d settlement expen ses in clu de incu rred claim amounts ceded and ch anges in ced ed po licy reserves. Ceded ben efits and settlemen t ex pen ses d ecrease reinsu ran ce co st. Amo rtizatio n o f d eferred p olicy a cquisitio n co st a nd VOBA reflect s t he amortization of cap italized rein su rance allowances representi ng reco very o f acq uisition costs. Ceded amort izatio n decreases reinsurance cost. Other expen ses in clu de rei nsu ran ce allo wan ces p aid b y assu ming co mp anies to t he Co mp any less amo un ts rep resen tin g recovery of acqu i sition co sts. Rein surance allowan ces decrease rein surance cost. The Compan y’s rein su ran ce p ro grams do no t materially impact the o th er inco me lin e of th e Company’s inco me statemen t . In add itio n, n et in vestmen t in come gen erally h as n o direct i mp act o n th e Compan y’s reinsurance co st. However, it sh ou ld b e n oted th at by ceding b usin ess to the assumin g co mp anies, th e Comp any fo rg oes in vestmen t inco me on th e reserves ced ed to the assu ming 11 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents co mp anies. Con versel y, th e assu mi ng compan ies will receive in vestmen t in co me on th e reserv es assu med which will i ncrease th e assu ming compan ies’ profitabilit y on business assumed fro m the Compan y. Acco unting Pronouncements Recently Ado pted ASU No. 20 14 -0 9 - Rev enue from Co ntracts with Customers (To pic 6 06 ). Th i s Update prov id es fo r sig nificant revision s to t he recog nition o f reven ue from con tracts with custo mers acro ss vario us in dustries. Un der t he n ew gu i dance, en tit ies are requ ired to ap ply a prescrib ed 5 -step pro cess to depict th e tran sfer of promised good s o r services to cu stomers in an amo un t that reflects th e co nsideration to wh ich th e en tity exp ects to be entitl ed in ex chan ge fo r th ose go od s o r serv ices. The acco un ting for revenu es associated with in surance p rod uct s is n ot wi th in the scop e of this Up date. Th e Upd ate was orig inally effectiv e fo r ann ual and interim p eriod s beg in nin g after Decemb er 15 , 20 16 . Ho wev er, in Aug ust 20 15 , th e FASB issu ed ASU No . 2 01 5-14 - Revenu es fro m Co ntra cts with C ustomers: Deferral of th e Effective Da t e, to d efer the effecti ve d ate of ASU No. 20 14 -09 b y on e year to ann ual and in terim p eriod s beginni ng aft er December 15 , 2017 . The Company ado pted this Upd ate usin g the mod ified ret ro spectiv e appro ach via a cu mu lativ e effect adjustmen t to ret ained earn in gs as o f Jan uary 1 , 2 01 8. Th e amend men ts in the Upd ate, alo ng with clarify in g u pd ates i ssued sub seq uent to ASU 2 01 4-09 , impact ed so me of th e Compan y’s smaller lines o f bu si ness, sp ecifically revenues at th e Co mp any ’s affil iat ed brok er deal ers and insurance ag ency, and certain rev enues associated with the Co mp an y’s Asset Protecti on pro du cts. The lines of b usin ess to which th e rev ised g uid an ce appl ies are n ot material to th e Co mp an y’s finan cial statemen ts. In co nsid eratio n of t he amen dments in t his Up dat e, th e Compan y rev ised its reco gn ition pattern fo r admin istrative fees associated with certain veh icle service and GAP produ cts. Previou sly, th ese fees were reco gn ized based o n th e wo rk effo rt inv olved in satisfyin g th e Compan y’s con tract ob ligatio ns. Th e Company will recog nize these fees on a claims o ccurren ce basis in futu re perio ds. To reflect th is chan ge in accou ntin g pri nci ple, the Co mp any reco rd ed a cumulative effect adjustmen t as of Janu ary 1, 2 01 8 th at resulted in a decrease in retain ed earni ng s of $9 3.9 milli on . Th e Co mp any also implemented mino r chan ges to its accou ntin g and d isclosures with respect to th e lin es o f bu siness referen ced ab ove to ensu re complian ce with the revised gu id ance. See abo ve for additio nal discussio n. ASU No . 2 01 6-01 - Financia l Instruments - Reco gnitio n and Measurement o f Fina ncial Assets and Fina ncial Liabiliti es. The amen dments in th is Up date ad dress certai n asp ects o f reco gn ition , measuremen t, p resen tatio n, and disclosu re o f fin ancial instrumen t s. Mo st no tab ly, th e Update req uires that eq uit y i nv estments (ex cep t those accou nted for un der the eq uity met ho d of accou ntin g o r tho se th at result in co nso lid ation of th e in vestee) be measured at fai r v alu e with chan ges in fair value recog nized in net inco me. Th e Upd ate also in tro du ces a sing l e-step impairmen t mo del for equi ty i nv estments with ou t a readily d eterminab le fair value. Add itio nally, th e Upd ate requ i res chang es in i nstru men t-sp ecific credit risk for fair value o ption l iab ilities t o be recorded in other comprehensiv e in come. The amend men ts in th i s Upd ate were effecti ve the interim perio ds beg in ning after December 15 , 20 17 an d were app lied o n a modi fied retro sp ectiv e b asi s. The Co mp any recorded a cumulative-effect adjustmen t at t he date of ad opt io n, Janu ary 1 , 2 01 8, t ransferring un realized gains an d lo sses o n av ail abl e-for-sale equ ity secu rities to ret ained earn in gs from accu mu lated o th er co mp reh ensive inco me. Th e impact of th is adjustmen t, n et o f in come tax , resu lted in a $1 0.6 milli on in crease to retained earn in gs and a correspo nd in g d ecrease to accu mu lat ed o th er co mp reh ensive inco me, resultin g in no net impact to con soli dat ed sh areo wn er’s equ ity. The Co mp an y has u pd ated its d isclo sures in No te 5 , In vestmen t Opera tion s an d Note 6 , Fair Va lue of Fin an cia l Instru ments in acco rdance with th e ASU. ASU No. 2 01 6-1 5 - Sta tement of Cash Flo ws: Classifica tio n o f Certain Cash Receipts and Ca sh Payments. Th e amendmen ts in thi s Upd ate are in ten ded to redu ce d iv ersit y in p ractice in ho w certain tran sactio ns are classified in the statemen t of cash flo ws. Specific tran saction s add ressed in th e n ew gu id ance in clu de: Debt p rep ayment /ex ting uish ment co st s, con t in gen t co nsid eratio n payments, proceeds from the settl ement o f corpo rate-o wned life in surance p olicies, an d d istrib uti on s received fro m eq uity meth od i nv estments. Th e Upd ate d oes no t in trod uce an y new accou ntin g or fin anci al repo rting requi remen ts, an d was effectiv e for t he int eri m peri od s beg in ning after December 15 , 20 17 usin g the retrosp ective metho d. There was n o fin anci al impact. ASU No. 2 01 6-1 8 - Sta tement of Cash Flo ws (Topic 23 0): Restri cted Cash (a co nsensus o f the FASB Emerging Ta sk Fo rce). The amend ments in th is u pd ate p rov id e g uidan ce on th e p resen tatio n of restricted cash or restricted cash eq uivalents in the statemen t o f cash flo ws, thereby redu cin g diversity in practice related to the presentation o f th ese amo un ts. Th e amend men ts req uire th at a statemen t of cash flo ws exp l ain th e ch an ge du ring the perio d in the total of cash , cash eq uivalents, an d amo un ts g enerall y describ ed as restricted cash o r restricted cash equ ivalen ts. The Up dat e is effecti ve for p ub lic bu siness en tities for fiscal years b eginn i ng aft er December 15 , 20 17 , an d interim p eriod s with in th ose fiscal years. There was no impact to the Compan y o n ad op tion . ASU No. 2 01 7-01 - Business Combina tions (To pic 80 5): Cla rifying the Definitio n of a B usiness. Th e purpo se of this u pd ate is to clarify th e defin itio n o f a bu siness with th e ob jectiv e o f ad ding gu id ance to assist en tities wi th ev alu ating whet her tran sactio ns sh oul d b e accou nted for as acqu isitio ns (o r dispo sals) of assets or b usin esses. The amend ments in the Up date p ro vide a sp ecific test b y which an en tit y may determin e whether an acqu i sition in vo lv es a set o f assets o r a bu si ness. Th e amen dments in the Up date are to be ap plied prospectiv ely fo r perio ds begin ning after Decemb er 15 , 20 17 . Th e Co mp any has rev iewed the revised req uirements, and d oes n ot an ticip ate that the chan ges wil l imp act its po lici es or recen t con clusio ns related to its acq uisition activities. ASU No. 2 01 7-07 - Co mpensation - Retirement Benefits (Topi c 7 15 ): Impro ving the Presentati on o f Net Perio dic Pension Co st and Net Perio dic Postretirement Benefit Co st. The amend ments in th is up date req uire en t ities to disag gregate th e curren t-service-cost co mp on ent fro m o th er comp onents o f net b en efit cost and p resen t it with other cu rrent co mp ensati on co sts in th e inco me st atemen t. The other co mp on ents of n et ben efit cost mu st b e presen ted ou tside o f inco me fro m o perati on s if th at sub to tal is p resen ted . In add itio n, the Update requ ires entiti es to disclo se t he in come statement l in es th at co ntain th e other compo nen ts if th ey are n ot p resen ted o n ap prop riat ely descri bed separate lines. The amend men ts in th is up date are effective fo r in terim an d ann ual perio ds b eginn in g after December 15 , 20 17 . As p ro vid ed for in th e ASU, the Co mp any applied the p ro vision s of the statement retro sp ectiv ely for compo nents of net p eriodi c p ensio n costs an d p ro sp ectiv ely fo r cap italization of th e serv ice 11 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents co sts compo nent of net perio dic co sts and n et p eriod ic p ostreti remen t b enefits. The Update d id no t imp act th e Co mp any ’s finan cial po siti on , resu lts of op eratio ns, o r cu rrent disclo su res. Acco unting Pronouncements No t Yet Adopted ASU No. 2 01 6-02 - Leases. The amen dment s in th i s Upd ate add ress cert ain aspects of recogn itio n, measurement, presentatio n, and disclosu re o f leases. Th e most sig nificant chang e will relate to th e acco un ting mo del used by l essees. The Up dat e will req uire all leases wi th terms g reater than 12 mo nths to b e reco rd ed on th e balan ce sheet in the form o f a lease asset and li ab ility. Th e lease asset an d liabil ity will be measu red at th e present value of the mi nimu m lease pay men ts less any up fro nt pay men ts or fees. Th e amend men ts in the Up date are effectiv e for ann ual and interim perio ds beg in ning after Decemb er 15, 20 18 o n a mo dified retro sp ecti ve basis. The Compan y exp ects to reco rd a cumulative effect adjustment as o f the date o f ado ption , Jan uary 1 , 20 19 , estab lish in g a righ t o f use asset an d lease liab ility of $2 1.5 million on it s co nso lid ated balance sheet t o be reflected in th e pro perty an d eq uipment and other lia bilities lin e items, respectiv ely . The Compan y will mak e u pd ates to it s disclosu res in the first qu arter in o rd er to co mp ly wit h t he new g uidance. ASU No . 20 17 -0 8 - Receiva bles - Nonrefunda ble Fees and Other Costs (Subtopic 3 10 -2 0): Premium Amorti za tio n o n Purcha sed Callable Debt Securities. The amend men ts in th is Upd ate req uire th at p remiu ms on callable deb t secu rities b e amo rtized to the first call date. This is a ch ang e from curren t gu id ance, un der wh ich premiums are amo rti zed to th e mat urity d ate of t he security.The amendments are effective fo r an nual and int eri m p eriod s b eginn ing aft er December 15 , 20 18 . The Compan y recorded a cu mu lativ e effect adjustment as of th e ado ptio n d ate, Jan uary 1 , 2019 , resu ltin g in a $5 1.2 million reductio n t o retained earning s, net of in come tax. ASU No . 20 17 -1 2 - Deriva tiv es and Hedging (To pic 81 5): Ta rgeted Improv ements to Acco unting for Hedging Activi ties. The amen dments in th is Up date are design ed to permit hed ge acco un ting to be ap plied to a broad er rang e o f hedgi ng strategies as well as to mo re closely align h edg e accou ntin g and risk man agemen t ob jectiv es. Specific p ro vision s includ e requ iring chan ges in the fair value of a hed ging instrument b e reco rd ed in the same in come statement l in e as th e h edg ed item wh en it affect s earn in gs. Th ere was no i mpact to th e Co mp any on ado ptio n. ASU No . 2 01 6-1 3 - Financia l Instruments-Credit Losses: Measurement of Credit Lo sses o n Fina ncial Instruments. The amend ments in th is Up date int ro du ce a new cu rrent exp ected cred it loss (“CECL”) mo del for certain fin ancial assets, in clu ding mo rtg age loan s and rein surance receiv ables. Th e new mod el will n ot ap ply to deb t securiti es classifi ed as avai lable-fo r-sale. Fo r assets within the sco pe of the new mod el, an entity wi ll reco gn ize as an all owance against earni ng s its estimate o f the co ntractual cash flo ws no t ex pected to b e collect ed o n d ay o ne o f the asset’s acqu isition. The al lo wan ce may be reversed th ro ug h earn ings if a secu rity reco vers in v alu e. Thi s differs from th e curren t imp airment mo del, which requires reco gn itio n o f credit losses when th ey have been incu rred and recogni zes a secu rity’s su bseq uen t reco very in v alu e in o th er compreh ensiv e inco me. The Up date also mak es target ed ch ang es to the curren t imp airmen t mo del fo r availab le-fo r-sal e d ebt secu rit ies, which comprise the majority o f the Co mp any ’s in vested assets. Similar to the CECL model, credit loss impairments wi ll be record ed in an allo wan ce against earning s that may b e rev ersed for su bseq uen t reco veries in value. The amen dments in th is Up date are effective for annu al and interim p eriod s b eginn in g after December 15 , 20 19 o n a mod ified retro sp ecti ve b asis. The Compan y is reviewin g its po licies and processes to en su re co mp liance with the req uiremen t s in th is Upd ate, u po n ado ptio n, and assessin g th e i mpact this stan dard wil l have on its op eratio ns an d fin anci al results. ASU No . 20 18-12 - Financial Serv ices - Insura nce (Topi c 94 4): Ta rgeted Improv ements to Acco unting for Long-Dura tion Contra cts. Th e amend men ts in this Upd ate are d esi gn ed to mak e improv ements to the existin g recog nition, measu rement, presentation , an d d isclo sure req uirements fo r certain lon g-du rati on co ntracts issued by an in surance compan y. Th e new amend men ts requ ire in surance enti ties to prov id e a more cu rrent measu re of the liability fo r futu re po licy b enefits for tradition al an d l imited-pay ment con tracts b y regu larly refin i ng th e liab ili ty fo r actual p ast ex perien ce an d u pd ated fu tu re assumptions. Th is differs fro m curren t req uirements wh ere assumptio ns are lo cked -in at con tract issu ance fo r th ese cont ract typ es. In ad dit io n, th e up dated liability will be disco un ted using an u pp er-mediu m grade (lo w-credit-risk ) fix ed inco me i nstru men t y ield that reflects the characteristics of th e liability which d iffers fro m cu rrently u sed rates b ased on th e in vested assets sup po rtin g th e li abi lity. In ad dition , t he amen dment s in t ro du ce n ew req uirements to assess mark et-based insurance co ntract option s an d guaran tees for Mark et Risk Ben efits an d measu re th em at fair v alu e. Th is Up date also req uires in surance entities to amortize d eferred acq uisition co sts on a co nstant-level basis ov er the exp ected life of the co ntract . Fin ally this Upd ate req uires n ew disclo su res in clu ding liability ro llfo rwards and in fo rmation ab ou t sign ifican t in pu ts, jud gements, assumptio ns, and meth ods used in the measu remen t. Th e amend men ts in th i s Up date are effectiv e for ann ual an d i nterim perio ds b eginn ing after Decemb er 1 5, 20 20 wit h early ado ption p ermitted . The Company is cu rrentl y revi ewing its p olicies, processes, an d ap plicab le sy stems t o determin e th e impact this stand ard will h ave o n i ts o peration s and finan cial resu lts. 3. SIGNIFICANT TRANSACTIONS On May 1 , 2 01 8, Th e Linco ln Natio nal Life Insurance Co mp any (“Lin coln Life”) co mp leted th e acq uisition (the “Closin g”) of Libert y Mut ual Grou p In c.’s (“Liberty M utual ”) Group Benefits Busin ess an d Ind iv id ual Life an d An nu ity Bu siness (the “Life Bu sin ess”) th ro ug h th e acq uisition of all o f the issued and o utstand in g capital sto ck of Liberty Life Assurance Co mp any o f Bosto n (“Liberty ”). In co nn ection with the Clo sing and p ursuan t to th e M aster Tran saction Ag reement, d ated January 18, 20 18 (the “Master Tran saction Agreement”) PLICO and Protecti ve Life and Ann uity Insurance Co mp any (“PLAIC”), a who lly owned su bsid iary of PLICO, en tered in to rein surance ag reemen t s (th e “Rein surance Agreements”) and related an cillary do cuments (includ in g ad mi nistrat iv e serv ices agreemen ts an d tran sition serv ices ag reemen ts) p ro viding fo r th e rein su ran ce an d admini stratio n of t he Life Busin ess. 12 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Pursu ant to t he Rein surance Ag reement s, Li berty ced ed to PLICO an d PLAIC the in surance p olicies related to t he Life Bu sin ess o n a 10 0% co insu ran ce basis. Th e agg reg ate ceding commission for th e reinsurance o f the Life B usiness was $4 22 .4 million , which is th e pu rch ase p rice. Oth er than cash receiv ed as part o f the acqu ired Liberty in vestmen t p ort fo lio as reflected in “amo un ts receiv ed fro m rein surance t ran saction ” in the Co nso lidated Cond en sed Statemen t o f Cash Flows an d as reflected in the table below, th is was a n on -cash transactio n. All po licies i ssu ed in states other than New Yo rk were ced ed to PLICO u nd er a rein surance ag reement b etween Lib erty and PLICO, an d all p olicies issued in New York were ced ed t o PLAIC un der a reinsu ran ce ag reemen t b etween Lib ert y and PLAIC. The agg reg ate statu to ry reserves of Lib erty ceded to PLICO and PLAIC as o f th e clo si ng of the Tran saction were ap prox imately $13 .2 billion , which amou nt was b ased o n in iti al estimates and is su bject to ad justmen t fo llowing the C lo sin g. Pu rsuan t to the terms of the Rein surance Agreements, each o f PLICO and PLAIC are requi red to mai ntain assets in tru st for th e ben efit of Lib erty to secu re th eir resp ecti ve o bligat io ns t o Lib erty un der the Rein surance Agreements. The trust acco un ts were in iti all y fu nd ed by each of PLICO and PLAIC pri ncipally wi th the in vestmen t assets th at were receiv ed fro m Lib erty. Additio nally, PLICO an d PLAIC h ave each ag reed to pro vide, on behalf of Liberty, ad minist ratio n an d po licyh older servicin g o f th e Life Bu siness rei nsu red b y it pu rsuant to admin istrative services ag reemen ts between Lib erty an d each o f PLICO and PLAIC. The terms o f t he Reinsurance Agreements resulted in an acq uisition o f the Li fe Business b y the Compan y in acco rdance with ASC Top ic 8 05 , Business C ombinat io ns. The fo llowing table d etails the pu rch ase co nsideration an d prel imin ary allo cation o f assets acq uired an d l iab ilities assu med from the Life Bu siness rei nsu ran ce transact io n as o f the tran saction date. These estimates remain p relimin ary and are su bject to ad ju stment. Whi le t hey are no t ex pected t o b e materially different th an those sho wn, any material adju stments t o t he est imates will be reflected, retroactively, as o f the d ate o f the acqu isitio n. Fa ir Va lue As o f Ma y 1 , 2018 (D o l l ars in Thousands) Assets Fix ed matu rities $1 2,5 88 ,51 2 Mortgag e loan s 4 35 ,40 5 Policy lo ans 1 31 ,48 9 Total inv estments 1 3,1 55 ,40 6 Cash 38 ,45 6 Accru ed inv estment in come 1 52 ,03 0 Reinsu ran ce receiv ables 27 2 Value of bu siness acq uired 3 36 ,86 2 Other assets 91 6 Total assets 1 3,6 83 ,94 2 Lia bilities Future po licy b enefits and claims $1 1,7 47 ,50 1 Un earned premiums — Total p olicy liabilities and accru als 1 1,7 47 ,50 1 An nu ity accou nt balances 1,8 23 ,44 4 Other po licyh olders’ funds 41 ,93 6 Other liabilities 71 ,06 1 Total liab ilities 1 3,6 83 ,94 2 Net assets acqui red $— The followin g un aud ited p ro forma co nd ensed co nso lidated resu lts o f op eratio ns assu mes that the aforemen tion ed tran sactio ns of the Life Bu siness were co mp leted as o f Jan uary 1 , 20 17 . The un aud ited p ro fo rma con densed results o f o peration s are p resen ted so lely for in fo rmation pu rpo ses and are no t necessarily in dicative of th e con so lidated con den sed resu lts of op erat io ns that mig ht have been achieved had t he transactio n been co mp leted as o f the date in dicated: 12 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Una udited For The Year Ended December 3 1 , 2018 For The Year Ended December 31, 201 7 (Dollars In Thousands) Revenu e $5 ,36 4,6 93 $5,6 54 ,25 7 Net i ncome $34 8,5 05 $1,2 33 ,99 1 The amo un t o f rev enu e an d inco me before inco me tax of th e Life Bu sin ess since t he transactio n d ate, M ay 1, 2 01 8, inclu ded in th e co nsol id ated statements o f inco me fo r the y ear end ed December 31 , 20 18 , amou nted to $57 8.0 milli on an d $49 .8 million. Also , in clu ded in th e in come before in come tax fo r the y ear end ed December 31 , 20 18 , is ap prox imately $5.5 mi llio n o f n on -recurring t ransacti on co sts. 4. MONY CLOSED B LOCK OF BUSINESS In 199 8, MONY Life In surance Co mp any (“MONY”) con verted fro m a mu tu al in su ran ce company to a sto ck corpo ratio n (“d emu tu alizati on ”). In co nn ection with its demu t ualization, an acco un ting mechan ism kn own as a closed b l ock (th e “Closed Block”) was established for certain i nd iv id uals’ particip ating po licies in force as of the d ate o f demu tu alization . Assets, li abi lities, and earning s o f the Closed Block are specifi cally iden tified to su pp ort its particip ating po licyh olders. The Co mp an y acq uired th e Closed Blo ck in co njun ction with the acqu isitio n o f MONY in 2 01 3. Assets allo cated to the Cl osed Block in ure solely to th e ben efi t o f each Clo sed Block ’s po licyh olders and will n ot rev ert to th e b enefit of MONY or th e Compan y. No reallo cation , tran sfer, bo rro win g or lend in g of assets can b e mad e b etween t he Closed Block an d oth er po rtio ns o f M ONY’s gen eral acco un t, an y of MONY’s sep arat e acco un t s o r any affi liate o f M ONY with ou t t he ap prov al of the Su perin ten den t of Th e New Yo rk State Department o f Financial Serv ices (th e “Superi ntend en t”). Closed Blo ck asset s an d liab iliti es are carried on th e same basis as similar assets and liabilities held in t he gen eral acco un t. The excess o f Cl osed Block liabilities o ver Closed Blo ck asset s (ad ju sted to exclu de the i mp act of related amou nts in AOCI) at t he acqu isit io n d ate of Octo ber 1 , 2 01 3, rep resen ted the estimated max imum future p ost-tax earni ng s from the Closed Block th at wo uld be reco gn ized in in come fro m con tinu ing op eratio ns o ver the peri od th e po licies an d co ntracts in the Closed Blo ck remain in fo rce. In co nn ecti on with the acq uisition of M ONY, t he Compan y develop ed an actuarial calculatio n o f the exp ected timing of MONY’s Clo sed Block ’s earn in gs as o f Octob er 1 , 20 13 . Pu rsu ant to the acqu isit io n o f the Co mp any b y Dai-ich i Life, th is actuarial calcul ation o f the exp ected timin g of MONY’s Closed Block earning s was recalcu lat ed and reset as Feb ru ary 1 , 20 15 , alon g with th e estab lish ment of a po licyh older divid en d o bli gatio n as o f su ch d ate. If the actu al cu mu lative earning s from the Clo sed Blo ck are greater than the exp ected cumulativ e earn ings, o nly t he ex pected earn in gs will b e recog nized in th e Compan y’s n et in come. Actual cu mu lativ e earning s in ex cess of ex pected cu mu lative earning s at any p oin t in time are recorded as a po licyh older dividen d obligatio n b ecause they will ultimately be p aid to Closed Blo ck p olicyh olders as an add itio nal p olicy ho ld er d iv i dend u nless o ffset by future p erformance th at is l ess favo rab le th an orig in ally exp ected. If a po licyh older d iv idend o bli gatio n has been previou sly estab lish ed an d th e act ual Closed Blo ck earni ng s in a sub sequ ent perio d are less than th e exp ected earning s fo r th at perio d, the p olicy ho ld er d iv idend ob lig ati on wo uld b e red uced (bu t no t b elo w zero ). If, ov er the perio d the po licies an d con tracts in th e Clo sed Blo ck remain in fo rce, the actual cumulative earning s o f th e C lo sed Block are less th an the exp ected cumulative earnings, on ly actual earn in gs wou ld b e reco gn i zed in in come fro m co nti nu in g op erat io ns. If the C lo sed B lo ck has in suffici en t fu nd s to mak e g uaranteed p olicy benefit pay men ts, such p ayments will b e made from assets o utside t he Clo sed Block . Man y exp enses related to Cl osed Blo ck op eratio ns, in cludi ng amort ization of VOBA, are ch arg ed to op eratio ns ou tsid e o f the Closed Blo ck ; acco rd in gly, n et rev enu es of the Clo sed Blo ck do no t rep resen t the actual profitabilit y of th e Cl osed Block o peration s. Operatin g co sts an d exp enses o utside of th e Closed Blo ck are, therefo re, d isp roportion ate to the business ou tside o f the Cl osed Block . 12 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Summarized finan cial in fo rmation fo r the Cl osed Block as of December 31 , 20 18 an d Decemb er 3 1, 2017 and is as fo llows: As of December 31, 2018 2017 (Dollars In Thousands) Clo sed blo ck lia bilities Future po licy b enefits, po licyh old ers’ acco un t b alan ces and o t her p oli cyhol der liabi lities $5 ,679,73 2 $5,7 91 ,86 7 Policy ho ld er d iv idend ob lig ati on — 1 60 ,71 2 Other liabilities 22,50 5 30 ,76 4 Total closed block liabilities 5 ,702,23 7 5,9 83 ,34 3 Clo sed blo ck a ssets Fix ed matu rities, availab le-fo r-sal e, at fair v alu e 4 ,257,43 7 4,6 69 ,85 6 Mortgag e loan s on real estate 75,83 8 1 08 ,93 4 Policy lo ans 672,21 3 7 00 ,76 9 Cash an d o ther invested assets 116,22 5 31 ,18 2 Other assets 136,38 8 1 22 ,63 7 Total closed block assets 5 ,258,10 1 5,6 33 ,37 8 Excess of rep orted clo sed b lo ck l iab ilities o ver clo sed b lo ck assets 444,13 6 3 49 ,96 5 Po rti on of ab ov e rep resen ting accumu l ated o th er co mp reh ensive inco me: Net u nrealized inv estments gains (losses) n et o f p olicy ho ld er d iv idend ob ligati on : $(1 41 ,12 8) and $(1 3,4 29 ); and net of in come tax: $6 1,6 76 and $2 ,82 0 (120,52 8) — Fu tu re earning s to be recog nized fro m clo sed b lock assets an d cl osed block liabilities $323,60 8 $3 49 ,96 5 Reconciliation of th e po licyh older dividen d o blig ation is as fo llows: For The Year Ended December 31, 2018 2017 (Dollars In Thousands) Po licyh older divid en d o bli gat io n, b eg innin g b alance $160,71 2 $31 ,93 2 Ap plicable to net rev enu e (l osses)(33,01 4) (55 ,24 1) Ch an ge in n et u nrealized in vestmen t gain s (lo sses) allocated t o p olicy ho ld er d iv id end ob ligatio n (127,69 8) 1 84 ,02 1 Po licyh older divid en d o bli gat io n, end ing b alan ce $— $1 60 ,71 2 12 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Closed Blo ck revenu es and exp enses were as follows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Premiu ms an d o th er inco me $17 1,1 17 $180,09 7 $1 89 ,70 0 Net in vestmen t inco me 20 2,2 82 203,96 4 2 11 ,17 5 Net in vestmen t g ain s (1,9 70 ) 91 0 1 ,52 4 Total reven ues 37 1,4 29 384,97 1 4 02 ,39 9 Benefits and o ther deductions Benefits an d settlemen t exp enses 33 7,3 52 335,20 0 3 53 ,48 8 Other op eratin g exp enses 7 14 1,94 0 2 ,80 4 Total b enefits and other ded uct io ns 33 8,0 66 337,14 0 3 56 ,29 2 Net revenues befo re inco me ta xes 3 3,3 63 47,83 1 46 ,10 7 In come tax ex pen se 7,0 06 27,71 8 16 ,13 7 Net revenues $2 6,3 57 $20,11 3 $29 ,97 0 5. INVE STMENT OPERATIONS Major catego ries o f n et i nv estment in come are summarized as fo llows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturities $2 ,05 1,5 05 $1 ,631,56 5 $1,5 52 ,99 9 Equi ty securities 3 5,2 99 39,80 6 38 ,83 8 M ortg age loans 32 2,2 07 298,38 7 2 70 ,74 9 In vestmen t real estate 1,8 88 2,48 1 2 ,15 3 Sh ort-term in vestmen ts 10 2,8 57 108,47 6 1 06 ,82 8 2 ,51 3,7 56 2 ,080,71 5 1,9 71 ,56 7 In vestmen t ex pen ses 3 0,0 06 29,12 7 29 ,11 1 Net in vestmen t inco me $2 ,48 3,7 50 $2 ,051,58 8 $1,9 42 ,45 6 Net real ized inv est ment gains (losses) for all other in vestmen ts are su mmari zed as fo llo ws: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturities $9,9 12 $12,94 1 $32 ,21 0 Equi ty gai ns an d losses(1 )(4 8,9 64 ) (2,33 0) 9 2 Impairments (2 9,7 24 ) (11,74 2) (17 ,74 8) M od co trading portfolio (18 5,9 00 ) 119,20 6 67 ,58 3 Oth er inv estments 1,3 03 (8,38 9) (9 ,22 6) To tal realized gains (lo sses) - investments $(25 3,3 73 ) $109,68 6 $72 ,91 1 (1 ) Beg in ning Jan u ary 1, 2 0 1 8, all chan ges in th e fair mark et valu e o f equity secu rities are reco rded as a realized g ain (loss) as a result o f the adoptio n of ASU No. 2 0 1 6-0 1 . 12 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Gross realized g ain s and gross realized lo sses o n i nv estments availab le-fo r-sal e (fix ed maturi ties and sho rt-term inv estments) are as fo llows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Gro ss reali zed gains $2 8,0 95 $18,86 8 $42 ,08 5 Gro ss reali zed lo sses: Imp airmen ts losses $(2 9,7 24 ) $(11,74 2) $(17 ,74 8) Other realized losses $(1 8,1 83 ) $(8,25 7) $(9 ,78 3) The chart b elo w summarizes the fair val ue (proceeds) and th e gains/losses realized o n secu rit ies the Compan y sold that were in an u nrealized g ain po sition an d an un real ized loss po si tion . For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Securities in a n unrealized ga in po sition: Fair v alu e (p ro ceed s)$1 ,30 0,8 66 $879,18 1 $1,1 98 ,33 3 Gain s realized $2 8,0 95 $18,86 8 $42 ,08 5 Securities in a n unrealized lo ss positio n(1): Fair v alu e (p ro ceed s)$47 2,3 71 $185,15 7 $85 ,83 5 Losses realized $(1 8,1 83 ) $(8,25 7) $(9 ,78 3) (1 ) The Co m pan y made the decision to ex it these hold in gs in co n junction with its overall asset liability m an ag em en t p rocess. The chart below su mmarizes th e realized gains (lo sses) on equ ity secu rities so ld du ring th e p eriod and eq uity securities still held at th e repo rting date. For The Year Ended December 3 1, 2018 (Do l l a rs I n Tho usa nds ) Net gains (losses) recog nized durin g the peri od on eq uity securi ties $(48 ,96 4) Less: net gains (losses) reco gn ized on equity secu rities so ld du ring th e perio d $(6 ,16 5) Gain s (losses) recog nized d urin g the p eriod on eq uity secu rities still h eld $(42 ,79 9) 12 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The amo rtized cost and fair v alu e o f th e Co mp any ’s inv est ments cl assified as availab le-fo r-sale are as fo llo ws: As of December 31, 2 01 8 Amortized Co st G ro ss Unrealized G a ins G ro ss Unrealized Losses Fair Va lue Total OTTI Recognized in OCI(1 ) (Dolla rs I n Thousands) Fixed maturities: Residen tial mortg age-backed securities $3 ,65 0,5 39 $2 3,2 47 $(6 2,196 ) $3,6 11 ,59 0 $(1 8) Co mmercial mo rtgag e-b ack ed secu rities 2 ,34 9,2 74 3,9 11 (5 8,101 ) 2,2 95 ,08 4 — Other asset-back ed securi ties 1 ,41 0,0 59 1 7,2 32 (3 5,398 ) 1,3 91 ,89 3 — U.S. g ov ern men t-related securities 1 ,68 3,4 32 1,7 95 (4 5,722 ) 1,6 39 ,50 5 — Other go vernmen t-related securiti es 54 5,5 22 4,2 92 (3 3,850 ) 5 15 ,96 4 — States, mu nicip als, an d p olitical sub div isions 3 ,68 2,0 37 2 5,7 06 (11 8,902 ) 3,5 88 ,84 1 87 6 Co rp orate securities 38 ,63 4,8 88 11 2,9 92 (2 ,38 5,052 ) 36,3 62 ,82 8 (29 ,68 5) Redeemabl e p referred sto ck 9 4,3 62 — (1 1,560 ) 82 ,80 2 — 52 ,05 0,1 13 18 9,1 75 (2 ,75 0,781 ) 49,4 88 ,50 7 (28 ,82 7) Sh ort-term in vestmen ts 77 6,3 57 — — 7 76 ,35 7 — $52 ,82 6,4 70 $18 9,1 75 $(2 ,75 0,781 ) $50,2 64 ,86 4 $(28 ,82 7) As of December 31, 2 01 7 Fixed maturities: Residen tial mortg age-backed securities $2 ,33 0,8 32 $1 9,4 13 $(2 3,033 ) $2,3 27 ,21 2 $4 1 Co mmercial mo rtgag e-b ack ed secu rities 1 ,91 4,9 98 5,0 10 (3 0,186 ) 1,8 89 ,82 2 — Other asset-back ed securi ties 1 ,23 4,3 76 2 0,9 36 (5,763 ) 1,2 49 ,54 9 — U.S. g ov ern men t-related securities 1 ,25 5,2 44 1 85 (3 2,177 ) 1,2 23 ,25 2 — Other go vernmen t-related securiti es 28 2,7 67 9,4 63 (4,948 ) 2 87 ,28 2 — States, mu nicip als, an d p olitical sub div isions 1 ,77 0,2 99 1 6,9 59 (4 5,613 ) 1,7 41 ,64 5 (3 7) Co rp orate securities 29 ,60 6,4 84 62 3,7 13 (52 8,187 ) 29,7 02 ,01 0 (2 ,56 4) Redeemabl e p referred sto ck 9 4,3 62 2 32 (3,503 ) 91 ,09 1 — 38 ,48 9,3 62 69 5,9 11 (67 3,410 ) 38,5 11 ,86 3 (2 ,56 0) Equi ty securities 73 5,5 69 2 2,3 18 (8,771 ) 7 49 ,11 6 — Sh ort-term in vestmen ts 55 8,9 49 — — 5 58 ,94 9 — $39 ,78 3,8 80 $71 8,2 29 $(68 2,181 ) $39,8 19 ,92 8 $(2 ,56 0) (1)These amounts are included in th e g ross un realized g ains an d gro ss u n realized losses column s ab ove. 12 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Compan y ho ld s certain inv estments p ursu an t to certain modified coinsurance (“Mo dco”) arran gemen ts. The fi xed mat urities held as part o f th ese arran gements are cl assifi ed as t radin g securities. The fair value o f the i nv estments held p ursu an t to th ese Mo dco arran gements are as follo ws: As of December 31, 2018 2017 (Dollars In Thousands) Fixed maturities: Residen tial mortg age-backed securities $241,83 6 $2 59 ,69 4 Co mmercial mo rtgag e-b ack ed secu rities 188,92 5 1 46 ,80 4 Other asset-back ed securi ties 159,90 7 1 38 ,09 7 U.S. g ov ern men t-related securities 59,79 4 27 ,23 4 Other go vernmen t-related securiti es 44,20 7 63 ,92 5 States, mu nicip als, an d p olitical sub div isions 286,41 3 3 26 ,92 5 Co rp orate securities 1 ,423,83 3 1,6 98 ,18 3 Redeemabl e p referred sto ck 11,27 7 3 ,32 7 2 ,416,19 2 2,6 64 ,18 9 Equi ty securities 9,89 2 5 ,24 4 Sh ort-term in vestmen ts 30,92 6 56 ,26 1 $2 ,457,01 0 $2,7 25 ,69 4 The amo rti zed cost and fair v alu e of availab le-fo r-sal e an d h eld -to-maturity fixed maturiti es as of December 31 , 2 01 8, b y ex pected mat urity, are sho wn b elo w. Ex pected maturiti es of securities withou t a sin gle mat urity date are allocated b ased on estimated rates of prepay ment that may differ from actual rates of prepay ment. Av a ilable-for-sa le H eld-to -ma turity Amo rtized Cost Fair Value Amo rtized Cost Fa ir Value (D ollars In Thous ands) (Dollars In Thousands) Due in on e year or less $1 ,14 6,7 30 $1 ,14 2,1 40 $— $— Due after o ne y ear throu gh five y ears 9 ,27 2,7 31 9 ,12 0,0 56 — — Due after five years th ro ugh ten y ears 9 ,20 0,7 24 8 ,94 7,5 46 — — Due after ten y ears 32 ,42 9,9 28 30 ,27 8,7 65 2 ,633,47 4 2,5 47 ,21 0 $52 ,05 0,1 13 $49 ,48 8,5 07 $2 ,633,47 4 $2,5 47 ,21 0 12 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The ch art b elo w summarizes th e Compan y’s other-than -temp orary i mp airments of inv estment s. All of the impairmen ts were rel ated to fix ed matu rities o r eq uity securiti es. Fixed Ma turities Equity Securities Tota l Securities (Dollars In Thousands) For The Year Ended December 31, 2018 Oth er-th an-tempo rary imp airmen ts $(5 6,5 78 ) $— $(56 ,57 8) Non -credit imp airmen t losses record ed in other comprehen siv e in come 2 6,8 54 — 26 ,85 4 Net i mp airment losses recog nized in earn ing s $(2 9,7 24 ) $— $(29 ,72 4) For The Year Ended December 31, 2017 Oth er-th an-tempo rary imp airmen ts $(1,3 32 ) $(2,63 0) $(3 ,96 2) Non -credit imp airmen t losses record ed in other comprehen siv e in come (7,7 80 ) — (7 ,78 0) Net i mp airment losses recog nized in earn ing s $(9,1 12 ) $(2,63 0) $(11 ,74 2) For The Year Ended December 31, 2016 Oth er-th an-tempo rary imp airmen ts $(3 2,0 75 ) $— $(32 ,07 5) Non -credit imp airmen t losses record ed in other comprehen siv e in come 1 4,3 27 — 14 ,32 7 Net i mp airment losses recog nized in earn ing s $(1 7,7 48 ) $— $(17 ,74 8) There were n o o th er-t han-t empo rary imp airmen ts related to fix ed maturities or equ ity secu rities that th e Co mp any in ten ded to sell or expected to b e requi red to sell fo r the y ears en ded Decemb er 3 1, 2 01 8, 20 17, and 20 16 . The fo llowing chart is a ro llforward o f availab le-fo r-sale credit losses o n fix ed maturities held by th e Co mp an y for wh i ch a p ortio n of an other-th an - temp orary impairment was recognized in o th er co mp reh en sive inco me (loss): For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Begi nn in g b alance $3,2 68 $12,68 5 $22 ,76 1 Add itio ns fo r n ewly imp aired secu rities 2 4,8 58 73 4 14 ,87 6 Add itio ns fo r p rev io usly impaired secu rit ies 12 3,17 5 2 ,06 3 Reducti on s fo r p rev io usly impaired securities d ue to a chan ge in expected cash flo ws — (12,72 6) (24 ,39 6) Reducti on s fo r p rev io usly impaired securities that were so ld in th e cu rrent period (3,2 70 ) (60 0) (2 ,61 9) Oth er — — — Endi ng balan ce $2 4,8 68 $3,26 8 $12 ,68 5 12 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing tab le in clu des the gross un realized l osses an d fair v alu e o f the Compan y’s i nv estments th at are n ot d eemed to b e o th er-th an- temp orarily imp aired, aggreg ated by inv estment catego ry and l en gth of time that in divid ual securities have b een in a co ntinuou s un realized lo ss p ositio n as of Decemb er 3 1, 2 01 8: Less Tha n 12 Mo nths 12 Months o r More To tal Fair Va lue Unrealized Loss Fa ir Value Unrea lized Lo ss Fair Value Unrealized Loss (D ollars In Thous ands) Resid ential mo rtgag e-b ack ed secu rities $1 ,48 5,0 09 $(3 1,3 02 ) $804 ,364 $(30 ,89 4) $2,2 89 ,37 3 $(62 ,19 6) Commercial mortg age-backed securities 42 2,4 38 (7,4 42 ) 1,429 ,384 (50 ,65 9) 1,8 51 ,82 2 (58 ,10 1) Oth er asset-b acked secu rities 68 7,2 71 (3 0,9 63 ) 148 ,871 (4 ,43 5) 8 36 ,14 2 (35 ,39 8) U.S. go vernment-related secu rities 13 0,2 90 (4,6 68 ) 1,085 ,654 (41 ,05 4) 1,2 15 ,94 4 (45 ,72 2) Oth er g ov ern ment-rel ated secu rit ies 22 6,2 01 (1 5,2 67 ) 131 ,569 (18 ,58 3) 3 57 ,77 0 (33 ,85 0) States, mun icipalities, an d p olitical su bd iv isio ns 1 ,00 4,2 62 (2 7,1 80 ) 1,129 ,152 (91 ,72 2) 2,1 33 ,41 4 (1 18 ,90 2) Corpo rate securities 18 ,32 6,3 31 (97 0,5 53 ) 1 2,859 ,732 (1,4 14 ,49 9) 3 1,1 86 ,06 3 (2,3 85 ,05 2) Redeemab le preferred stock 4 1,1 47 (4,4 67 ) 41 ,655 (7 ,09 3) 82 ,80 2 (11 ,56 0) $22 ,32 2,9 49 $(1 ,09 1,8 42 ) $1 7,630 ,381 $(1,6 58 ,93 9) $3 9,9 53 ,33 0 $(2,7 50 ,78 1) RMBS an d CMBS had gross un realized lo sses greater th an twelv e mo nths of $3 0.9 mi llio n an d $50 .7 million as of December 31 , 2018 , respect iv ely. Facto rs such as th e cred it enh ancemen t with in th e deal structure, th e average life of th e securities, an d the p erforman ce o f th e u nderlyin g co llateral su pp ort th e recov erab ility o f these inv estments. The other asset-back ed securities have a gross un realized loss g reater than twelv e mon th s of $4 .4 mil lion as of December 3 1, 20 18 . Th is cat eg ory predomi nately in clu des stu dent-lo an b ack ed au ction rate securities (“ARS”), the u nd erlying collateral, of which is at least 97% g uaranteed b y th e Fed eral Family Ed ucatio n Loan Pro gram (“FFELP”). At this time, t he Compan y has n o reaso n to believ e t hat th e U.S. Dep artment o f Edu cation wou ld n ot h on or the FFELP g uarantee, if it were necessary. The U.S. g ov ern ment-related securi ties an d th e o th er go vernmen t-relat ed secu rities had g ro ss un realized l osses g reat er th an twelv e mon th s of $4 1.1 mi llio n an d $18 .6 mil lion as of December 31 , 2 01 8, respectiv ely . These d eclines were related to chan ges in in terest rates. The states, mun icipalities, and po lit ical sub division s categ ories had gross un realized lo sses g reater than t welve mon th s o f $91 .7 millio n as o f Decemb er 3 1, 2 01 8. Th e agg reg ate d eclin e in market value o f these secu rities was d eemed temp orary du e to po sitive factors sup po rtin g the recov erab ility o f th e resp ective inv estments. Positiv e factors co nsid ered in clu de credit ratin gs, th e finan cial health of the issu er, th e con tin ued access of the issuer to capital mark ets, an d o th er p ertin ent in formatio n. The co rp orate securiti es categ ory has gross u nrealized lo sses greater t han t welve mo nths of $1.4 b illion as o f Decemb er 3 1, 2 01 8. Th e ag gregate decline in mark et value o f th ese secu rit ies was deemed temp orary d ue to p osit iv e factors sup po rting the recov erab ility of th e respective in vestmen t s. Posit iv e facto rs con sidered includ e cred it rating s, the fi nancial health of the issu er, th e con t in ued access o f the issuer to cap ital mark ets, and oth er p ertin ent in fo rmation . As o f December 3 1, 2 01 8, the Comp any had a to tal of 4,0 05 positions th at were in an unrealized lo ss po sition , b ut the Co mp any d oes no t con si der th ese un realized l oss po sition s to be ot her-than -temp orary. Th is is b ased on th e aggreg ate factors d iscu ssed previo usly and becau se the Co mp any has the ab ility and in ten t to h old th ese in vestmen ts un til the fair values recov er, an d th e Co mp any do es no t intend t o sell o r ex pect to be requ ired to sell the securities b efo re recov eri ng th e Co mp any ’s amortized cost o f the secu rities. 12 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing tab le in clu des the gross un realized l osses an d fair v alu e o f the Compan y’s i nv estments th at are n ot d eemed to b e o th er-th an- temp orarily imp aired, aggreg ated by inv estment catego ry and l en gth of time that in divid ual securities have b een in a co ntinuou s un realized lo ss p ositio n as of Decemb er 3 1, 2 01 7: Less Tha n 12 Mo nths 12 Months o r More To tal Fair Va lue Unrealized Loss Fa ir Value Unrea lized Lo ss Fair Value Unrealized Loss (Do lla rs In Thousands) Resid ential mo rtgag e-b ack ed secu rities $76 6,5 99 $(9,6 71 ) $416 ,221 $(13 ,36 2) $1,1 82 ,82 0 $(23 ,03 3) Commercial mortg age-backed securities 75 7,4 71 (8,5 92 ) 796 ,456 (21 ,59 4) 1,5 53 ,92 7 (30 ,18 6) Oth er asset-b acked secu rities 8 6,5 06 (3 22 ) 134 ,316 (5 ,44 1) 2 20 ,82 2 (5 ,76 3) U.S. go vernment-related secu rities 9 4,1 10 (6 88 ) 1,072 ,232 (31 ,48 9) 1,1 66 ,34 2 (32 ,17 7) Oth er g ov ern ment-rel ated secu rit ies 2 4,8 30 (1 69 ) 115 ,294 (4 ,77 8) 1 40 ,12 4 (4 ,94 7) States, mun icipalities, an d p olitical su bd iv isio ns 17 0,2 68 (1,7 38 ) 1,027 ,747 (43 ,87 4) 1,1 98 ,01 5 (45 ,61 2) Corpo rate securities 5 ,05 4,3 16 (5 5,7 95 ) 1 0,962 ,689 (4 72 ,39 4) 1 6,0 17 ,00 5 (5 28 ,18 9) Redeemab le preferred Stock 2 2,0 48 (1,1 20 ) 23 ,197 (2 ,38 3) 45 ,24 5 (3 ,50 3) Equi ties 8 6,5 86 (1,4 01 ) 91 ,195 (7 ,37 0) 1 77 ,78 1 (8 ,77 1) $7 ,06 2,7 34 $(7 9,4 96 ) $1 4,639 ,347 $(6 02 ,68 5) $2 1,7 02 ,08 1 $(6 82 ,18 1) RMBS an d CMBS had gro ss u nrealized losses g reat er than twelve mont hs of $1 3.4 million and $2 1.6 million, respectiv ely, as of December 31 , 20 17 . Facto rs su ch as the credit enh an cement with in t he d eal stru ctu re, th e av erag e life of th e securi ties, and t he p erforman ce o f th e un derly in g col lateral sup po rt th e reco verab i lity of th ese in vestmen ts. The other asset-back ed securities have a gross un realized loss g reater than twelv e mon th s of $5 .4 mil lion as of December 3 1, 20 17 . Th is cat eg ory predomi nately in clu des stu dent-lo an b ack ed au ction rate securiti es, th e un derly in g co l lat eral, of which is at least 97 % gu aran teed by the Fed eral Family Edu cati on Lo an Pro gram (“FFELP”). At th is time, th e Compan y has no reason t o b elieve th at th e U.S. Dep artment o f Ed ucation wo uld no t ho no r th e FFELP gu arantee, if it were necessary. The U.S. g ov ern ment-related securi ties an d th e o th er go vernmen t-relat ed secu rities had g ro ss un realized l osses g reat er th an twelv e mon th s of $3 1.5 mi llio n an d $4.8 millio n as o f Decemb er 31, 20 17 , respectively. Th ese declin es were related to chang es in int erest rates. The states, mun icipalities, and po lit ical sub division s categ ories had gross un realized lo sses g reater than t welve mon th s o f $43 .9 millio n as o f Decemb er 3 1, 2 01 7. Th ese declin es were related to ch ang es in in terest rat es. The co rp orate secu rit ies catego ry h as gro ss u nrealized losses g reat er than t welve mon ths of $4 72 .4 mil lion as of Decemb er 31, 20 17 . The ag gregate decline in mark et value o f th ese secu rit ies was deemed temp orary d ue to p osit iv e factors sup po rting the recov erab ility of th e respective in vestmen t s. Posit iv e facto rs con sidered includ e cred it rating s, the fi nancial health of the issu er, th e con t in ued access o f the issuer to cap ital mark ets, and oth er p ertin ent in fo rmation . As of December 31 , 20 18 , the Compan y h ad secu rities in its av ailable-for-sale p ortfoli o wh ich were rated bel ow i nv estment grade with a fair value o f $1 .6 billio n an d had an amo rti zed cost o f $1.8 billion . In ad dition , in cluded in th e Co mp any ’s trading portfo lio, the C ompany hel d $1 44 .3 mill io n o f securities which were rated below in vestmen t grade. App ro ximately $26 2.8 milli on o f t he bel ow in vestmen t grade securities hel d by th e Co mpan y were no t pu blicly trad ed. The ch ang e in un realized g ain s (l osses), net o f in come tax, on fix ed maturity an d equ ity securiti es, classi fied as av ailable-for-sale is su mmari zed as fo llows: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Fixed maturities $(2 ,04 1,4 45 ) $1 ,086,72 7 $8 02 ,36 8 13 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The amortized co st and fair value of th e Co mp an y’s inv est ments classified as h eld -to-maturi ty as o f December 31 , 20 18 an d Decemb er 3 1, 20 17 , are as fo llows: Amortized Cost Gross Unreco g nized H o lding Gains Gro ss Unrecog nized Ho lding Losses Fair Va lue Tota l O TTI Reco g nized in OCIAs of December 3 1, 201 8 (Do l l a rs I n Tho usa nds ) Fixed maturities: Securities issu ed b y affiliates: Red Mo un tain LLC $75 0,4 74 $— $(81 ,65 7) $66 8,8 17 $— Steel C ity LLC 1 ,88 3,0 00 — (4 ,60 7) 1 ,87 8,3 93 — $2 ,63 3,4 74 $— $(86 ,26 4) $2 ,54 7,2 10 $— Amortized Co st G ro ss Unrecognized Holding G ains Gross Unreco g nized H o lding Losses Fa ir Value To tal OTTI Recognized in OCIAs of December 3 1, 201 7 (D oll ars In Tho us ands) Fixed maturities: Securities issu ed b y affiliates: Red Mo un tain LLC $7 04 ,904 $— $(19 ,16 3) $6 85 ,74 1 $— Steel C ity LLC 2,0 14 ,000 76 ,58 6 — 2,0 90 ,58 6 — $2,7 18 ,904 $76 ,58 6 $(19 ,16 3) $2,7 76 ,32 7 $— Du ring the years end ed December 31 , 20 18 , 20 17 , an d 2 01 6, the Compan y d id no t record an y oth er-th an-tempo rary imp airments o n h eld -to-maturity securities. The Co mp any ’s h eld -to -matu rity secu rit ies had $86 .3 millio n of gross u nreco gn ized hol ding losses by maturi ty as o f Decemb er 31 , 20 18 . Th e Co mp any d oes no t con sid er th ese u nrecogni zed h olding losses to be other-than -temp orary b ased on certain p ositiv e factors asso ciated with the securities wh ich include credit ratin gs of th e guaran to r, fin an cial health o f the issu er an d gu arantor, co nti nu ed access o f th e issuer to capital markets an d o ther pertinen t in fo rmation . Th ese held -to -matu rity secu rities are issued b y affi liates of th e Compan y which are con sid ered VIE’s. The Company is not the primary beneficiary o f th ese en tities an d th us the secu rities are n ot elimin ated in con solidatio n. These secu rities are co l lat eralized by n on -recou rse fu nd ing ob ligatio ns issu ed b y captive i nsu ran ce co mp anies th at are affiliates of th e Co mp any . The Compan y’s held-to-matu rity secu rities had $7 6.6 million of g ro ss un reco gn ized ho ld i ng gains and $1 9.2 milli on o f gross unrecog nized ho ld ing lo sses by mat urity as of December 3 1, 2 01 7. Th e Compan y d oes not co nsid er th ese un recog nized h olding lo sses t o be o th er-th an-tempo rary b ased on cert ain po sitive factors associated with th e secu rities which in clu de cred it ratin gs o f the gu aran to r, fi nancial h ealth of th e issu er and gu aran to r, co ntin ued access o f th e issu er to cap ital mark ets an d oth er pertin ent in fo rmation . The Compan y h eld $140.5 million of no n-in come prod uci ng securities for the year en ded December 31 , 2 01 8. In cluded in the Compan y’s invested assets are $1 .7 billion of p olicy lo ans as of December 31 , 20 18 . The interest rates o n stan dard p olicy lo ans range from 3.0 % to 8.0 %. The co llateral loan s on life insurance po licies h ave an interest rate of 13 .64 %. Va ria ble Interest Entities The Co mp any h olds certain in vestmen ts in entities in which its own ersh ip in terests co uld po ssibly be con sidered variab le in terests u nd er To pic 8 10 of the Finan cial Acco un ting Stand ard s Bo ard (“FASB”) Accou ntin g Standard Co dificatio n (“ASC” or “Co dification ”) (exclu din g deb t and eq uit y securities held as t radin g, availab le for sale, o r h eld to mat urity). The Co mp an y reviews th e characteristics o f each o f th ese ap plicab le en tities and compares th ose ch aracteristics to ap plicab le criteria to determin e wh eth er the en tit y is a VIE. If th e entity is d etermined to be a VIE, t he Compan y then perfo rms a d etai led review t o d etermine wh eth er th e in terest wou ld b e con sidered a v ariable i nterest u nd er the gu id ance. Th e Compan y th en p erforms a q ualitative review o f all variable in terests with th e en tity an d d etermi nes whether the Compan y is th e p rimary ben eficiary. ASC 81 0 provi des t hat an en tity is the p rimary ben eficiary of a VIE if the en tity has 1) the po wer to d irect th e activities of the VIE t hat mo st sig nificantly imp act th e VIE’s eco no mic performance, and 2 ) th e o blig ation to absorb lo sses of the VIE th at co uld po ten tially be si gn ifican t to the VIE or t he ri gh t to receive ben efi ts from the entity th at cou ld p otentially b e sign i fican t to th e VIE. Based on th is an aly si s, th e Co mp any had an in terest in two sub sidi ari es as of December 3 1, 2 01 8 and Decemb er 31 , 2 01 7, Red Mou ntain LLC (“Red Mo un tain”) and Steel City LLC (“Steel City ”), that were d etermined to be VIEs. The activ i ty most sig nificant to Red M ou ntain is th e issu ance o f a no te in co nn ection with a finan cin g transacti on inv olving Go lden Gate V Vermon t Captiv e In surance Compan y (“Go lden Gate V”) in wh ich Go ld en Gate V issued no n-reco urse fu nd in g o bligatio ns to Red Mou ntain and Red Mo un tain issu ed a no t e (the “Red M ou ntain No te”) to Gol den Gate V. For details of th i s 13 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents transact io n, see Note 14 , Deb t a nd Oth er Ob l ig atio ns. Th e Co mp any h as th e p ower, v i a its 1 00 % o wnership throu gh an affili ate, to d irect the acti vities of th e VIE, bu t did n ot h ave th e o bligatio n to ab sorb losses related t o th e p rimary risk s or sou rces of variability t o th e VIE. The variability of lo ss wou ld be bo rn e primarily by the third p arty in i ts fu nctio n as prov i der of cred it en han cement o n the Red M ou ntain Note. Accord in gly, it was d etermined t hat th e Compan y is no t th e p rimary ben eficiary of the VIE. The Company’s risk o f lo ss related to th e VIE is limit ed to its i nv estment, throu gh an affil iat e, of $1 0,0 00 . Ad ditio nal ly, th e Compan y has guaran teed Red Mo un tain’s pay men t ob ligation for the cred it en han cement fee to the un related third p arty p ro vider. As of Decemb er 3 1, 2 01 8, n o p ay men ts have b een mad e or requi red rel ated to this g uarant ee. St eel City, a newly formed wh olly own ed subsidiary of th e Co mp any, entered into a fin ancing ag reemen t o n Jan uary 1 5, 20 16 in vo lv i ng Go ld en Gate Captiv e Insurance Co mp an y, in which Go ld en Gate issued no n-reco urse fu nd in g ob ligations to Steel C ity and Steel City i ssu ed th ree n otes (the “St eel City No tes”) to Go ld en Gate. Cred it en han cement o n th e Steel Cit y No tes is pro vided by u nrelated th ird parties. For d etails of the finan cin g transactio n, see No te 1 4, Debt an d Oth er Oblig ation s. The activit y mo st sig nificant to Steel Ci ty is the issu an ce of th e Steel City Notes. Th e Co mp an y h ad the p ower, via its 10 0% o wnership, to direct th e activities o f the VIE, bu t did n ot hav e the obl ig ation to absorb lo sses related to th e primary risk s o r sou rces o f v ariability to th e VIE. The v ari abi lity of lo ss wou ld b e bo rn e p rimari ly by the third parties in th eir fu nct io n as provi ders of credit en han cement on the Steel City No tes. Acco rd in gly, it was d etermined th at th e Co mp an y is n ot the primary b enefici ary o f th e VIE. Th e Compan y’s risk o f lo ss related to th e VIE is limited to its in vestmen t o f $10 ,00 0. Ad dition ally, th e Co mp any has g uaran teed Steel City’s payment ob ligatio n for the cred it enh an cement fee to the u nrelat ed th ird party prov id ers. As o f Decemb er 31, 20 18 , no pay ments h ave been made o r requ ired related t o t his gu aran tee. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Compan y d etermined the fair value o f its fin ancial instruments b ased o n th e fair v alu e hierarchy establish ed in FASB gu i dance referenced in the Fair Val ue M easurements and Disclosures To pic wh i ch req uires an entity to maximize th e use o f o bservab le inp uts and minimize th e use o f u no bservab le in pu ts when measu ring fair v alue. The Co mp any has ado pted th e prov isio ns from the FASB gu id ance that is referenced in the Fair Value Measu rements an d Discl osu res Top ic fo r n on -financial assets and liab ili ties (su ch as prop erty an d equ ip men t, go od will, and other in tan gible assets) th at are req uired to be measured at fair v alu e on a p eriod ic b asis. The effect o n the Co mpan y’s perio dic fair v alue measuremen ts for non -fin anci al assets and liabil ities was n ot material. The Company has cat egorized its fin ancial in stru men ts, b ased on th e prio rity of th e in pu ts to th e v alu ation tech niqu e, into a three level hierarchy. The fair value hierarch y giv es the high est p riority t o qu oted prices in activ e mark ets fo r identical assets o r liabilities (Lev el 1) an d th e lowest p rio rity to un ob serv able inpu ts (Level 3). If the inp uts u sed t o measu re fair value fall with in differen t levels of th e hierarchy, th e catego ry lev el is based on th e lowest prio rity lev el inp ut th at is sign ifican t to the fair value measurement of th e in stru men t. Fi nancial assets an d l iab ilities recorded at fair val ue on th e con soli dated balance sh eets are categorized as fo l lo ws: •Lev el 1 : Unad ju sted q uo ted prices for id entical assets or liabilities i n an act iv e mark et. •Lev el 2: Qu oted p rices in markets that are n ot active o r sig nificant in put s th at are ob servab le ei th er d irectly o r in directly. Lev el 2 i np uts includ e th e fo llowing : a) Qu oted p rices fo r similar assets o r liab ilities in acti ve markets b ) Qu oted prices fo r iden tical o r similar asset s or liabilities in n on -activ e markets c) In pu ts o t her th an qu oted mark et p rices th at are o bserv ab le d )Inp uts that are derived p rincipally fro m or corrob orated b y o bserv ab l e mark et d ata throu gh co rrel ati on or other means. •Lev el 3: Pri ces or valuatio n t ech niqu es t hat requ ire in put s th at are b oth unob serv able an d sig nificant to th e ov erall fair value measu rement . They reflect management’s own estimates ab ou t the assumpt io ns a mark et participant wou ld use in p ricin g the asset or l iab ility. 13 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The foll owing tab le presents the Co mp any ’s h ierarch y for it s assets an d liabilities measured at fair v alu e o n a recurrin g basis as of Decemb er 31 , 20 18 : Measurement Categ o ry Lev el 1 Lev el 2 Lev el 3 To tal (Dolla rs In Thousands) Assets: Fixed maturity secu rit ies—av ailable-for-sale Residen tial mortg age-backed securities 4 $— $3,6 11 ,59 0 $— $3,6 11 ,59 0 Co mmercial mo rtgag e-b ack ed secu rities 4 — 2,2 95 ,08 4 — 2,2 95 ,08 4 Other asset-back ed securi ties 4 — 9 70 ,25 1 4 21 ,64 2 1,3 91 ,89 3 U.S. g ov ern men t-related securities 4 1,010 ,485 6 29 ,02 0 — 1,6 39 ,50 5 State, muni cip ali ties, and po litical su bd iv i sio ns 4 — 3,5 88 ,84 1 — 3,5 88 ,84 1 Other go vernmen t-related securiti es 4 — 5 15 ,96 4 — 5 15 ,96 4 Co rp orate securities 4 — 3 5,7 24 ,55 2 6 38 ,27 6 3 6,3 62 ,82 8 Redeemabl e p referred sto ck 4 65 ,536 17 ,26 6 — 82 ,80 2 To tal fix ed maturity secu rities—avai lable-fo r-sale 1,076 ,021 4 7,3 52 ,56 8 1,0 59 ,91 8 4 9,4 88 ,50 7 Fixed maturity secu rit ies—trading Residen tial mortg age-backed securities 3 — 2 41 ,83 6 — 2 41 ,83 6 Co mmercial mo rtgag e-b ack ed secu rities 3 — 1 88 ,92 5 — 1 88 ,92 5 Other asset-back ed securi ties 3 — 1 33 ,85 1 26 ,05 6 1 59 ,90 7 U.S. g ov ern men t-related securities 3 27 ,453 32 ,34 1 — 59 ,79 4 State, muni cip ali ties, and po litical su bd iv i sio ns 3 — 2 86 ,41 3 — 2 86 ,41 3 Other go vernmen t-related securiti es 3 — 44 ,20 7 — 44 ,20 7 Co rp orate securities 3 — 1,4 17 ,59 1 6 ,24 2 1,4 23 ,83 3 Redeemabl e p referred sto ck 3 11 ,277 — — 11 ,27 7 To tal fix ed maturity secu rities—trading 38 ,730 2,3 45 ,16 4 32 ,29 8 2,4 16 ,19 2 Total fi xed matu rit y securities 1,114 ,751 4 9,6 97 ,73 2 1,0 92 ,21 6 5 1,9 04 ,69 9 Equi ty securities 3 531 ,523 3 6 64 ,32 5 5 95 ,88 4 Oth er lon g-term inv estments(1)3 &4 83 ,047 1 80 ,43 8 1 12 ,34 4 3 75 ,82 9 Sh ort-term in vestmen ts 3 730 ,067 77 ,21 6 — 8 07 ,28 3 Total in vestmen ts 2,459 ,388 4 9,9 55 ,42 2 1,2 68 ,88 5 5 3,6 83 ,69 5 Cash 3 173 ,714 — — 1 73 ,71 4 Oth er assets 3 29 ,257 — — 29 ,25 7 Assets related to separate acco un ts Variable ann uity 3 1 2,288 ,919 — — 1 2,2 88 ,91 9 Variable un iv ersal l ife 3 937 ,732 — — 9 37 ,73 2 Total assets measured at fai r v alu e o n a recu rring basis $1 5,889 ,010 $4 9,9 55 ,42 2 $1,2 68 ,88 5 $6 7,1 13 ,31 7 Lia bilities: Ann uity acco un t b alan ces(2 )3 $— $— $76 ,11 9 $76 ,11 9 Oth er liab ilities(1)3 &4 56 ,018 69 ,50 1 6 29 ,94 2 7 55 ,46 1 Total li ab i lities measu red at fair val ue on a recurrin g b asis $56 ,018 $69 ,50 1 $7 06 ,06 1 $8 31 ,58 0 (1)Includes certain freestandin g an d em bed ded deriv ativ es. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. (3)Fair Valu e th roug h Net Income. (4)Fair Valu e th roug h Oth er Co m prehensiv e Income. 13 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The foll owing tab le presents the Co mp any ’s h ierarch y for it s assets an d liabilities measured at fair v alu e o n a recurrin g basis as of Decemb er 31 , 20 17 : Level 1 Level 2 Level 3 Total (Do llars In Tho usands) Assets: Fixed maturity secu rit ies—av ailable-for-sale Residen tial mortg age-backed securities $— $2,3 27 ,21 2 $— $2,3 27 ,21 2 Co mmercial mo rtgag e-b ack ed secu rities — 1,8 89 ,82 2 — 1,8 89 ,82 2 Other asset-back ed securi ties — 7 45 ,18 4 5 04 ,36 5 1,2 49 ,54 9 U.S. g ov ern men t-related securities 958,77 5 2 64 ,47 7 — 1,2 23 ,25 2 State, muni cip ali ties, and po litical su bd iv i sio ns — 1,7 41 ,64 5 — 1,7 41 ,64 5 Other go vernmen t-related securiti es — 2 87 ,28 2 — 2 87 ,28 2 Co rp orate securities — 2 9,0 75 ,10 9 6 26 ,90 1 2 9,7 02 ,01 0 Redeemabl e p referred sto ck 72,47 1 18 ,62 0 — 91 ,09 1 To tal fix ed maturity secu rities—avai lable-fo r-sale 1 ,031,24 6 3 6,3 49 ,35 1 1,1 31 ,26 6 3 8,5 11 ,86 3 Fixed maturity secu rit ies—trading Residen tial mortg age-backed securities — 2 59 ,69 4 — 2 59 ,69 4 Co mmercial mo rtgag e-b ack ed secu rities — 1 46 ,80 4 — 1 46 ,80 4 Other asset-back ed securi ties — 1 02 ,87 5 35 ,22 2 1 38 ,09 7 U.S. g ov ern men t-related securities 21,18 3 6 ,05 1 — 27 ,23 4 State, muni cip ali ties, and po litical su bd iv i sio ns — 3 26 ,92 5 — 3 26 ,92 5 Other go vernmen t-related securiti es — 63 ,92 5 — 63 ,92 5 Co rp orate securities — 1,6 92 ,74 1 5 ,44 2 1,6 98 ,18 3 Redeemabl e p referred sto ck 3,32 7 — — 3 ,32 7 To tal fix ed maturity secu rities—trading 24,51 0 2,5 99 ,01 5 40 ,66 4 2,6 64 ,18 9 Total fi xed matu rit y securities 1 ,055,75 6 3 8,9 48 ,36 6 1,1 71 ,93 0 4 1,1 76 ,05 2 Equi ty securities 688,21 4 3 6 66 ,11 0 7 54 ,36 0 Oth er lon g-term inv estments(1)51,10 2 4 17 ,96 9 1 36 ,00 4 6 05 ,07 5 Sh ort-term in vestmen ts 482,46 1 1 32 ,74 9 — 6 15 ,21 0 Total in vestmen ts 2 ,277,53 3 3 9,4 99 ,12 0 1,3 74 ,04 4 4 3,1 50 ,69 7 Cash 252,31 0 — — 2 52 ,31 0 Oth er assets 28,77 1 — — 28 ,77 1 Assets related to separate acco un ts Variable ann uity 13 ,956,07 1 — — 1 3,9 56 ,07 1 Variable un iv ersal l ife 1 ,035,20 2 — — 1,0 35 ,20 2 Total assets measured at fai r v alu e o n a recu rring basis $17 ,549,88 7 $3 9,4 99 ,12 0 $1,3 74 ,04 4 $5 8,4 23 ,05 1 Lia bilities: Ann uity acco un t b alan ces(2 )$— $— $83 ,47 2 $83 ,47 2 Oth er liab ilities(1)5,75 5 2 40 ,92 7 7 60 ,89 0 1,0 07 ,57 2 Total li ab i lities measu red at fair val ue on a recurrin g b asis $5,75 5 $2 40 ,92 7 $8 44 ,36 2 $1,0 91 ,04 4 (1)Includes certain freestandin g an d em bed ded deriv ativ es. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. Determinatio n o f Fai r Va lues The valuatio n meth od olog ies used to determine the fair values o f assets an d liab iliti es reflect mark et p articipan t assumptio ns an d are based on th e ap pli catio n o f the fair v alu e hi erarch y that prio ritizes ob servable market inp uts over u no bservab le inp uts. The Compan y d etermines the fair v alu es of cert ain finan cial assets and fin ancial liab ilities based on q uo ted market prices, where av ailable. Th e Comp any also d etermines cert ain fair val ues b ased on fut ure cash flo ws discou nted at th e ap prop riat e cu rrent 13 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents mark et rate. Fair val ues reflect ad ju stments for co un terparty credit qualit y, the Comp any ’s cred it stan ding , liq uid ity, an d where app rop riate, risk marg in s on un ob serv able parameters. The fo llowing is a discussio n of the methodo lo gies u sed to d etermine fair v alu es for the finan cial instrumen ts as list ed in th e ab ov e table. The fair v alu e of fix ed matu rity, sho rt-term, an d eq uity secu rities is determin ed b y manag ement after co nsiderin g one o f three pri mary sou rces o f in fo rmation : th ird party p ricin g serv ices, no n-bind in g in dep end en t broker qu otations, or pricin g matrices. Security p ricin g is app lied using a “wat erfall” ap proach whereb y p ub licly availab le p rices are first sou gh t from th ird p arty p ricin g serv ices, the remain i ng un priced securities are submitted to in dep end en t brok ers fo r n on -b i nd in g p rices, o r last ly, secu rities are priced usin g a p ricin g mat rix. Typ ical inp uts u sed b y th ese th ree pricing metho ds in clu de, but are no t limited to: bench mark yield s, reported trad es, b ro ker/d ealer q uo tes, i ssu er spreads, two -sid ed markets, b enchmark secu rities, bids, o ffers, and reference data in clu ding market research pu blicatio ns. Thi rd party pricing serv ices p rice 93 .6% of the Compan y’s availab le-fo r-sal e and tradi ng fix ed maturity secu rities. Based o n th e typ i cal trad ing v olumes an d th e lack of q uo ted mark et prices fo r availab le-fo r-sale and tradi ng fix ed maturiti es, third p arty p ricin g servi ces deriv e th e majori ty of secu rity p rices from ob servable mark et inpu ts such as recent repo rted trades fo r id entical or similar securities mak in g adj ustmen ts th ro ug h th e rep ortin g date based u po n av ailable mark et o bserv ab l e in fo rmatio n o utl in ed ab ov e. If th ere are n o recent repo rted trades, th e th ird party p ricing serv ices an d brok ers may u se matrix or mod el p ro cesses to dev elo p a secu rit y p rice where fu tu re cash flo w exp ectatio ns are d evel op ed b ased u po n col lateral perfo rman ce an d d isco un ted at an estimated market rate. Certain securities are p riced v ia in dep end ent n on -bi nd in g bro ker q uo tatio ns, wh ich are co nsid ered to h ave n o sign ifi can t u no bservab le inp uts. When u sing no n-bind ing indepen den t b ro ker qu otation s, th e Co mp any ob tains o ne qu ote per security, typ ically from th e b ro ker from wh ich we p urchased th e secu rity. A pricing mat rix is used to price secu rities fo r wh ich th e Co mp any is u nable to ob tain o r effect iv ely rel y on either a price fro m a th i rd party pricing serv ice o r an indepen den t b ro ker qu otation . The pricing matri x used by the Compan y beg in s wit h curren t sp read levels to determine t he market p rice for th e secu rity. Th e credit sp read s, assig ned by bro kers, in corpo rate th e issuer’s cred it rati ng , liqu id ity discou nts, weig hted- average o f co ntracted cash flows, ri sk p remiu m, if warran ted , du e to th e issu er’s ind ustry, and th e security’s time to mat urity. Th e Co mp any uses credit ratin gs p ro vided by natio nally reco gn ized rating agen cies. For secu rities th at are p riced vi a no n-bin ding ind epend ent b ro ker q uo tatio ns, t he Co mp any assesses whether p rices received fro m in dep end en t brok ers represent a reaso nab le estimate of fai r value t hrou gh an an aly sis using in ternal an d ex ternal cash flow mo dels dev eloped b ased on spreads an d, when av ailable, mark et in dices. The Comp any uses a mark et-based cash flow anal ysis to valid ate th e reason ableness o f pri ces received from ind epen den t brok ers. These an aly tics, which are u pdated daily, inco rp orate v ariou s metrics (yield curves, credit spreads, p rep ayment rates, etc.) to determin e the valuatio n of such ho ld in gs. As a resu lt of this analysis, if th e Co mp an y d etermi nes th ere is a mo re app ro priate fair value based up on the analytics, the price recei ved fro m the in depen den t brok er is adjusted according ly. The Comp any d id n ot ad ju st an y qu otes o r prices recei ved fro m brok ers du ring the years en ded Decemb er 31 , 20 18 an d 2 01 7. The Company has an aly zed th e third party pricing serv ices’ v alu ation meth od olo gies an d related in put s an d h as also evaluat ed th e vario us typ es of securities in its inv estment p ortfoli o to determin e an app ro pri ate fair v alu e h ierarchy level b ased up on trad in g activity an d th e ob servab ility of mark et in pu ts th at is in accordan ce with th e Fair Valu e M easurements and Disclo sures Top ic of the ASC. Based on this eval uatio n an d in vestmen t class analysis, each p rice was classified in t o Lev el 1, 2 , o r 3 . M ost prices p rovid ed b y th ird party pricin g serv ices are classified into Level 2 because th e sign ifi can t in pu ts used in pricing th e securities are market ob serv able and the o bservab le in pu ts are corrob orated by the Co mpan y. Since the mat rix p rici ng of certain d ebt securities in clu des sign ifican t n on -ob serv able in pu ts, they are classified as Level 3. Asset-B acked Securities This catego ry mainly con si sts of residen tial mortgag e-back ed securities, commercial mo rtgag e-b ack ed securiti es, and o th er asset-b ack ed securities (collecti vely referred to as asset-backed securities o r “ABS”). As o f December 31 , 2 01 8 , th e C ompany held $7.4 billion o f ABS classified as Lev el 2. Th ese securities are p riced from in fo rmation prov id ed by a third party pricing serv ice and ind epen den t broker q uo tes. Th e third party pricing serv ices and brok ers main ly v alu e securities using b oth a mark et an d in co me ap proach to v aluation . As p art of this v alu ation pro cess t hey con sid er th e fo llowing characteristics of th e item bei ng measured to b e relev ant in pu ts: 1) weig hted-averag e co upon rate, 2) weigh ted -av erage y ears to maturi ty, 3) ty pes o f u nd erlyin g assets, 4) weig hted-average co up on rate of the un derly in g assets, 5 ) weigh t ed -av erag e y ears to maturity o f th e u nd erlying assets, 6) sen io rity lev el o f the tranches owned , an d 7 ) credit ratings o f the secu rities. After rev iewing these ch aracteristics of th e ABS, th e th ird p arty p ricin g service an d b ro kers use certai n input s to det ermin e the v alu e o f the secu rity. Fo r ABS classified as Level 2, th e v alu ati on woul d con sist of p red ominantly market o bservab le in pu ts su ch as, bu t no t limited to : 1) monthly princip al and in terest payments o n th e un derly in g assets, 2) av erage life o f th e security, 3 ) prep ayment sp eed s, 4 ) credit sp reads, 5) treasu ry an d swap yield cu rv es, and 6) d isco un t margin. The Co mp any reviews the methodo lo gies an d val uat io n techn i qu es (in clu ding the ability to o bserve in pu ts) in assessin g th e information receiv ed fro m ex ternal p rici ng serv ices an d i n con sideration of th e fair v alu e p resent ati on . As of December 3 1, 2 01 8, the Compan y h eld $4 47 .7 millio n of Lev el 3 ABS, which in clu ded $42 1.6 million o f o th er asset-back ed securities classified as availab le-fo r-sal e an d $26 .1 mil lion o f ot her asset-b acked securities classified as trading . Th ese securities with in the av ailable-for-sale po rtfo lio are p red omin an t ly ARS wh ose un derly in g col lat eral is at least 9 7% gu aran teed b y t he FFELP. As a result o f the ARS market co llapse durin g 20 08 , th e Co mp any p rices its ARS u sin g an inco me app ro ach val uat io n mo del. As part of th e valu ation process the Compan y rev iews the fo llo wing characteristics o f th e ARS in d etermin i ng th e rel ev ant in put s: 1 ) weigh ted -av erage co up on rate, 2) weigh ted -av erag e years to mat urity, 3) ty pes of un derly in g assets, 4) weig hted-average co up on rate of the un derly in g assets, 5 ) weigh t ed -av erag e y ears to maturity o f th e u nd erlying assets, 6) sen io rity lev el o f the tranches owned , 7 ) cred it ratin gs of th e securi ties, 8 ) l iq uidity premium, and 9 ) p ay do wn rate. In perio ds where mark et activity in creases and there are tran saction s at a price th at is n ot th e resu lt of a distressed or fo rced sale we con sid er tho se pri ces as part of 13 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents ou r v aluation . If the mark et activit y du rin g a perio d is so lely the result o f the i ssuer red eemi ng positio ns we co nsider th ose tran saction s in o ur valuatio n, bu t still con sider th em to be level th ree measu rements du e to th e nat ure of th e tran sactio n. Co rpora te Securities, Redeema ble Preferred Sto ck, U.S. Go vernment -Rela ted Securities, States, Municip als, a nd Politica l Subd i visions, and Other Go vernment Related Securities As o f Decemb er 3 1, 2 01 8, th e Co mpan y classified ap prox i mately $42 .3 b illio n o f corp orate securities, red eemable preferred sto ck, U.S. g ov ern ment- rel ated secu rities, states, mu nicip als, and po lit ical su bd i visio ns, an d o th er go vernment-related securi ties as Lev el 2 . The fair v alu e o f the Level 2 securities is predomi nantl y p riced b y brok er q uo tes and a th ird party pricin g service. Th e C ompany h as rev iewed th e valuatio n techni qu es of the b rokers an d th ird party pricing service an d has determin ed th at su ch techn iq ues u sed Level 2 mark et ob servable inputs. The fol lo win g characterist ics of th e secu rities are co nsid ered to be th e primary relevan t in pu ts to the valu ation: 1) weig hted- av erage cou po n rate, 2 ) weig hted-av erag e years to maturity, 3) sen io rit y, and 4) credi t ratin gs. The Company rev iews t he metho do lo gies and valuatio n tech niqu es (includ in g the abil ity to ob serve in pu t s) in assessin g the in format io n received from ex ternal pricing services an d in co nsid eratio n o f the fair value presentation. The brok ers and third p arty pri cing serv ice ut ilize val uatio n mo del s that co nsist o f a h yb rid i ncome an d market app roach to v alu ation . The p ricing models utilize the follo win g inp uts: 1) princip al an d interest pay men ts, 2 ) treasury y ield cu rv e, 3) credit spreads fro m n ew issue and secon dary trad ing mark ets, 4 ) d ealer q uo tes with adjustmen ts fo r i ssues with earl y red emp tion features, 5) liqu id ity p remiu ms p resen t o n p rivate p lacemen ts, an d 6 ) d isco un t marg ins fro m d ealers in th e new issue market. As of December 3 1, 20 18 , the C ompany classified app ro ximately $6 44 .5 million of securities as Lev el 3 val uat io ns. Lev el 3 secu rities p rimarily represen t inv estments in illiqu id b on ds fo r wh ich no price is readily availab le. To d etermine a p rice, th e Company u ses a d isco un ted cash flow mod el with bo th o bservab le and u no bserv ab l e i np uts. These in pu ts are en tered in to an indu stry stand ard p ricing mod el to d etermine th e final p rice o f t he security. Th ese in pu ts in clu de: 1) prin cip al an d in terest p ayments, 2 ) co up on rate, 3) sector and issuer lev el spread o ver treasury, 4) u nd erl ying collateral, 5) cred it rating s, 6) matu rity, 7 ) emb edd ed o ptio ns, 8 ) recent new issuan ce, 9 ) co mp arat iv e bond an aly si s, and 10 ) an il liqu id ity p remiu m. Eq uities As o f Decemb er 3 1, 2 01 8, the Co mp any held app ro ximately $6 4.4 millio n of equ i ty securi ties classified as Level 2 and Lev el 3. Of this to tal, $6 3.4 mi llio n represents FHLB stock . The Co mpan y b elieves that th e cost of th e FHLB stock ap proxi mates fai r v alu e. Other Long-Term Invest ments a nd Other Lia bilit ies Other lon g-term in vestmen ts and o t her liabil ities con si st entirely o f free-stand ing and embedded deriv ative finan cial instrumen t s. Refer to Note 7 , Derivati ve Fi na nci al Instru ment s for add ition al in fo rmation related to deriv ati ves. Deriv ative financial in st ru ments are v alu ed u sing exch ang e prices, in depen den t b ro ker q uo t ati on s, or p ricin g v alu ation mod els, wh ich u til ize market d ata in pu ts. Exclud in g emb edd ed deriv atives, as of December 31 , 20 18 , 10 0% o f d erivativ es b ased u po n n otional v alu es were pri ced usin g ex chan ge p rices or ind ep end ent broker qu otation s. Inp uts used to v alu e deriv atives in clu de, b ut are n ot l imited to, interest swap rates, cred it sp read s, interest rate and equ i ty market vo latili ty in dices, equi ty in dex l ev els, and treasury rates. Th e Co mp any perfo rms mo nthly an aly si s on deriv ative v alu ati on s th at includ es bo th qu antitativ e an d q ualitative an aly ses. Deriv ative instrumen t s classified as Level 1 gen erally in clu de futures and op tion s, which are traded o n act iv e ex chan ge markets. Deriv ative in stru men ts classified as Lev el 2 primarily includ e swap s, o ption s, an d swaptio ns, which are traded o ver-the-cou nter. Lev el 2 also in clu des certain cen trally cleared d erivatives. These d erivativ e v alu ation s are determin ed using ind epen dent b roker q uo tatio ns, which are co rrob orated with ob serv able mark et inp uts. Deriv ative i nstru men ts classified as Level 3 were emb edd ed deriv atives and in clu de at least o ne sign ifican t n on -o bservab le i np ut. A deriv ative in strument con taining Level 1 an d Lev el 2 in pu t s will b e classified as a Level 3 fin anci al i nstru men t in its entirety if it h as at least on e sig nificant Level 3 in pu t. The Co mp any utilizes d erivativ e instrumen ts to manag e the risk asso ciated with certai n assets and liab ili ties. Ho wev er, the d erivativ e instruments may n ot b e classified within the same fair value h ierarchy level as th e asso ciated assets an d liab ili ties. Th erefo re, th e chang es in fair v alu e on deriv atives reported in Level 3 may no t reflect t he offsettin g imp act o f the chan ges in fair value o f the asso ciated assets and liabilities. The embedd ed d erivatives are carried at fair v alu e in “other lon g-term inv est ments” an d “o th er liab ili ties” on the Co mpan y’s con soli dated co nd ensed balance sh eet. The ch anges in fai r v alu e are recorded in earn in gs as “Realized inv estment gains (losses) - Derivat iv e finan cial in struments”. Refer to No te 7 , Derivative Fin an cia l Instru men ts fo r more in fo rmation related to each embed ded deriv atives g ain s and lo sses. The fair value o f the GLWB embed ded deriv ative is derived th ro ug h the inco me meth od of valuatio n using a v aluati on mo del th at p roj ects future cash fl ows u sing multiple risk neutral sto chastic eq uit y scen arios and p oli cy hol der beh avior assumpt io ns. The risk neu tral scenario s are g enerated usin g th e cu rrent swap cu rv e an d projected equ ity vol ati lities an d correlation s. The projected equ ity v olatilities are b ased on a blend o f historical v olatil ity and n ear- term eq uity mark et implied v olatilities. The eq uity co rrelatio ns are based o n h i sto rical price ob serv ation s. For p olicyh older b eh avior assumptio ns, exp ected lapse and utilizatio n assumptio ns are used an d u pd ated fo r act ual ex perien ce, as necessary. The Co mp an y assumes age-based mo rtalit y fro m the Ru ark 20 15 ALB table with attain ed ag e facto rs varying from 87 .0% - 10 0.0 %. The p resen t v alu e o f th e cash flows is d etermi ned u sing th e discou nt rate 13 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents cu rve, wh ich is based u po n LIBOR p lu s a credit sp read (to represent th e Co mp an y’s n on -perfo rman ce risk). As a resu lt of usin g sign ifican t u no bservab le in pu ts, the GLWB embed ded deriv ative is categorized as Lev el 3 . Po licyh older assu mp tion s are reviewed on an ann ual basis. The b alan ce of th e FIA embed ded deriv ative is impacted by p olicy ho ld er cash flo ws associated with the FIA produ ct that are all ocated t o the embed ded d erivative in ad dit io n t o chan ges i n th e fair v alue o f t he emb ed ded deriv ative du rin g the rep orting perio d. Th e fair value of the FIA emb edded deriv ati ve is deriv ed t hrou gh th e in come meth od of val uat io n u sin g a v alu ation mo del th at pro jects fu tu re cash flows u sing curren t ind ex v alu es and vo lat ility, th e hed ge b ud get used to price th e prod uct , an d policyh older assumption s (bo th electiv e an d no n-elective). For po licyh older beh avior assumptio ns, exp ected lapse and withd rawal assumptio ns are u sed an d up dated for actu al ex perience, as necessary. The Compan y assumes age-based mortality fro m th e 2 01 5 Ruark ALB mortality tab le mo dified with compan y exp erience, with attained ag e factors varying fro m 87% - 100%. Th e p resen t value o f th e cash flo ws i s d etermined usin g th e d isco un t rate curv e, which is based u po n LIBOR up to o ne year and con stant maturity treasu ry rates p l us a credit sp read (to represent th e Compan y’s n on -p erforman ce risk ) thereafter. Po licyh older assumptio ns are reviewed o n an ann ual b asis. As a resu lt of u si ng sig nificant un ob servable in pu t s, th e FIA embed ded d erivative is catego rized as Lev el 3 . The balance of th e ind exed un iv ersal life (“IUL”) embedd ed d erivat iv e is i mpacted by po licyh older cash flo ws associated with th e IUL p ro du ct t hat are allocated to th e embed ded deriv ative in add itio n to changes in th e fai r v alu e of t he emb edd ed d erivativ e du rin g the repo rting perio d. The fair value o f th e IUL embed ded deriv ative is deriv ed throu gh the in come method o f valuat io n using a v alu ation mod el that p ro jects future cash flo ws u sin g curren t in dex values and vo lati lity, the hed ge b ud get used to price the p ro du ct, an d p olicy ho ld er assumptio ns (b oth electi ve and no n-electiv e). For po licyh older beh avior assumptio ns, exp ected lapse and withd rawal assumptio ns are u sed an d up dated for actu al ex perience, as necessary. The Compan y assumes age-based mortality fro m the SOA 2 01 5 VBT Primary Tab les modi fied with co mpan y exp eri en ce, with attain ed ag e factors v ary in g from 37 % - 577%. Th e p resen t v alu e of th e cash flows is determined u sin g th e discou nt rate cu rv e, which is b ased up on LIBOR up to on e year an d co nstan t matu rity treasury rates p lu s a credit spread (to represent t he Compan y’s no n-perfo rmance risk) th ereafter. Policy ho ld er assumpti on s are reviewed o n an annu al b asis. As a resu lt of u si ng sig nificant un ob servable in pu t s, th e IUL emb edd ed d eri vat iv e is categ ori zed as Level 3. The Co mp any h as assumed and ceded certain block s of p olicies u nder mo dified co in surance agreements in which t he in vestmen t resu l ts of th e un derly in g p ortfo lios in ure directly to t he rein surers. As a result, these ag reement s con tain embed ded deriv atives that are reported at fair value. Ch ang es in th eir fair v alu e are repo rted in earning s. The in vestmen ts suppo rtin g th ese ag reement s are d esignated as “tradi ng secu rities”; therefo re chang es in their fair value are also reported in earn in gs. As of Decemb er 3 1, 2 01 8, th e fair value of the embedd ed deriv ative is based up on the relation ship between the statutory po licy liabil ities (net of p olicy lo ans) of $2.3 b illio n and th e stat utory un realized g ain (loss) o f th e securities o f $25 .8 million . As a result , ch ang es in the fair value of t he emb edd ed d erivat iv es are larg ely offset by t he chan ges in fai r v alu e of th e rel ated in vestmen ts an d each are rep ort ed i n earn i ng s. The fair v alue o f th e embed ded d erivati ve is co nsid ered a Lev el 3 valuatio n d ue t o the un observab le nature of th e po licy liab ilities. Annuity Acco unt Ba la nces The Co mp any reco rd s a certain legacy block o f FIA reserves at fair v alu e. Based on the characterist ics of these reserves, th e Co mpan y believ es that th e fu nd value app ro ximates fair v alu e. The fair value measurement of these reserv es is co nsid ered a Lev el 3 valuatio n due to th e u nobserv able nature o f th e fu nd val ues. Th e Level 3 fair v alu e as of December 3 1, 2 01 8 is $76 .1 mil lion . Sepa ra te Accounts Separate accou nt assets are in vested in op en -en ded mu tu al fun ds an d are in clu ded in Lev el 1 . 13 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Va luati on of Level 3 Fina ncial Instruments The fo llowing table presents th e v alu ati on meth od for mat eri al finan cial instrument s in clu ded in Level 3, as well as th e u no bserv ab le inp uts used in th e v alu ation of those finan cial instruments: Fair Value As of December 31, 20 1 8 Valua tion Technique Uno bserv a ble Input Range (Weig hted Average) (D oll ars In Tho us a nds) Assets: Other asset-backed securities $42 1 ,4 58 Liq uidation Liquid atio n valu e $85.75 - $99.9 9 ($95 .3 6 ) Discounted cash flow Liquid ity premiu m 0 .02% - 1.25% (0.64 %) Payd o wn rate 1 0 .96% - 13.11 % (12.0 3 %) Co rporate secu rities 63 1 ,0 68 Discounted cash flow Spread o v er treasu ry 0.84% - 3.0% (1.84 %) Lia bilities:(1) Em b ed d ed derivatives—GLWB(2)$18 4 ,0 71 Actu arial cash flo w m o del Mo rtality 87 % to 100 % o f Ruark 2 0 1 5 ALB tab le Lapse Ruark Predictive Mo d el Utilizatio n 9 9%. 10 % of p o licies have a o ne-time o ver-u tilizatio n of 4 00% Nonperform an ce risk 0 .2 1% - 1 .16% Em b ed d ed derivative—FIA 21 7 ,2 88 Actu arial cash flo w m o del Ex p en ses $145 p er policy Withd rawal rate 1.5 % prio r to age 70, 1 0 0 % of the RMD for ag es 70+ Mo rtality 87 % to 100 % o f Ruark 2 0 1 5 ALB tab le Lapse 1.0 % - 30 .0 %, depending o n du ration/su rren d er ch arge perio d Nonperform an ce risk 0 .2 1% - 1 .16% Em b ed d ed derivative—IUL 9 0 ,2 31 Actu arial cash flo w m o del Mo rtality 3 7 % - 5 7 7% of 2015 VBT Primary Tables Lapse 0.5 % - 10 .0 %, depending o n d u ration/d istrib u tion channel and sm oking class Nonperform an ce risk 0 .2 1% - 1 .16% (1)Excludes m o d ified coin surance arran g em en ts. (2)The fair v alu e for th e GLWB embedded deriv ativ e is presen ted as a net liability . The chart ab ov e ex clu des Lev el 3 finan cial in stru ments that are valued using bro ker q uot es an d those which b oo k v alu e ap proxi mates fai r v alu e. The Compan y has co nsid ered all reaso nab ly availab le q uan tit ati ve inp uts as of December 3 1, 2 01 8, bu t th e valuat io n techn iq ues and inp uts u sed by some brok ers in p ricin g certain fin ancial instrument s are n ot shared with th e C ompany. Th is resu lted in $40 .4 millio n o f finan cial in st ru men ts being classified as Lev el 3 as of December 31 , 2 01 8. Of th e $4 0.4 millio n, $26 .2 million are o th er asset-b acked secu rities, $13 .5 million are corp orate securities, and $0 .7 mil lion are equ ity secu rit ies. In certain cases the Compan y h as determin ed that bo ok value materially ap prox imates fair value. As of December 31 , 20 18 , the Compan y h eld $6 3.6 mi llio n o f fin ancial instrumen t s where b oo k v alu e ap proxi mates fai r v alu e wh ich was p red omin antly FHLB stock . 13 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowing table presents th e v alu ati on meth od for mat eri al finan cial instrument s in clu ded in Level 3, as well as th e u no bserv ab le inp uts used in th e v alu ation of those finan cial instruments: Fa ir Va lue As o f December 31 , 2 017 Valuation Technique Unobserv a ble Input Ra nge (Weig hted Average) (Do lla rs I n Tho usa nds ) Assets: Other asset-backed securities $504,2 2 8 Disco u nted cash flo w Liquidation v alu e $90 - $97 ($94.91) Disco u nted cash flo w Liquidity p remium 0 .06% - 1.17% (0.75 %) Paydo wn rate 1 1 .31% - 11.97% (11.5 4 %) Co rporate secu rities 617,7 7 0 Disco u nted cash flo w Spread ov er treasury 0 .81% - 3.95% (1.06 %) Lia bilities:(1) Em b ed d ed derivatives—GLWB(2)$111,7 6 0 Actuarial cash flow mo d el Mortality 91.1% to 106.6 % of Ruark 2 0 1 5 ALB table Lapse 1.0% - 30.0 %, depen ding o n product/duration/fu n ded status of g u aran tee Utilization 9 9%. 10 % o f p o licies have a o n e-time ov er- u tilizatio n of 4 0 0% No nperfo rmance risk 0 .1 1% - 0 .79% Em b ed d ed derivative—FIA 218,6 7 6 Actuarial cash flow mo d el Exp enses $146 p er p olicy Withdrawal rate 1 .5% prior to ag e 7 0 , 100% o f the RMD fo r ages 70 + Mortality 1 9 94 MGDB table with company experien ce Lapse 1.0% - 30.0 %, depen ding o n du ration/su rrend er ch arge period No nperfo rmance risk 0 .1 1% - 0 .79% Em b ed d ed derivative - IUL 80,2 1 2 Actuarial cash flow mo d el Mortality 3 4 % - 1 5 2 % of 2 015 VBT Primary Tables Lapse 0.5% - 10.0 %, depen ding o n d u ration/distrib u tion channel and sm oking class No nperfo rmance risk 0 .1 1% - 0 .79% (1)Excludes m o d ified coin surance arran g em en ts. (2)The fair v alu e for th e GLWB embedded deriv ativ e is presen ted as a net liability . The chart ab ov e ex clu des Lev el 3 finan cial in stru ments that are valued using bro ker q uot es an d those which b oo k v alu e ap proxi mates fai r v alu e. The Compan y has co nsid ered all reaso nab ly availab le q uan tit ati ve inp uts as of December 3 1, 2 01 7, bu t th e valuat io n techn iq ues and inp uts u sed by some brok ers in p ricin g certain fin ancial instrument s are n ot shared with th e C ompany. Th is resu lted in $50 .4 millio n o f finan cial in st ru men ts being classified as Lev el 3 as of December 31 , 2 01 7. Of th e $5 0.4 millio n, $35 .4 million are o th er asset-b acked secu rities, $14 .6 million are corp orate securities, and $0 .4 mil lion are equ ity secu rit ies. In certain cases th e Co mp any d etermined that bo ok value mat eri ally app ro ximates fair v alu e. As o f December 3 1, 201 7, the Co mp any h eld $6 5.7 mi llio n o f fin ancial instrumen t s where b oo k v alu e ap proxi mates fai r v alu e, wh ich was p red omin antly FHLB stock . The asset -b ack ed secu rities classified as Level 3 are predo minan tly ARS. A chan ge in th e pay do wn rate (the projected annual rate o f principal reductio n) o f th e ARS can sign ifi can tly i mp act the fair value of th ese securities. A d ecrease in the pay do wn rat e wou ld in crease the projected wei gh ted av erag e life o f the ARS an d increase th e sensitiv ity o f th e ARS’ fair v alu e to chang es in interest rates. An in crease in the liqui dity premium wou ld resu lt i n a decrease in th e fair value of th e secu rities, while a d ecrease in th e li qu id ity p remiu m wou ld in crease th e fair value of th ese secu rities. Th e liq uid ati on v alu e fo r these securities are sen sitive to th e i ssu er’s av ailable cash flows an d ability to redeem t he secu rities, as well as the cu rrent h olders’ will in gn ess to liqu id ate at the sp ecified p rice. The fair value o f co rpo rat e bo nd s classified as Lev el 3 is sensitiv e to chan ges in th e int erest rate sp read ov er the co rresp on ding U.S. Treasury rate. This sp read represents a risk p remiu m th at is impacted b y co mp any sp ecific an d mark et facto rs. An in crease in the sp read can be caused b y a perceived in crease in cred it risk o f a sp ecific issu er and /o r an in crease in the ov erall mark et risk premium associated with similar securities. Th e fair v alu es of corpo rate bo nd s are sensit iv e to chan ges in sp read . When ho ld in g th e t reasu ry rate constant, t he fair v alu e of corp orate b on ds in creases when spreads decrease, and decreases wh en sp read s in crease. 13 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fair value o f the GLWB embedd ed d erivativ e is sensitiv e to chan ges in th e discou nt rate which includ es the Compan y’s no np erforman ce ri sk, vo lat ility, lapse, an d mo rtal ity assump t io ns. Th e vo latility assumption is an observ able in pu t as it is based on market in pu ts. The Compan y’s no np erforman ce risk, lapse, and mo rtalit y are u no bservab le. An in crease in th e th ree uno bservab le assu mp tion s wou ld resul t in a decrease in the fair val ue of th e liabilit y and co nv ersely, if th ere is a decrease in the assumption s the fair v alu e wou ld increase. Th e fair value is also d epend ent o n th e assu med p olicy ho ld er utilizatio n of th e GLWB wh ere an increase in assu med u t ilizat io n wo uld result in an i ncrease in the fair value o f the li ab ility and con versely, if there is a d ecrease in the assumptio n, the fair value wou ld decrease. The fair v alu e of the FIA emb edd ed d erivative is p red omin antly imp acted by o bservab le in pu ts such as discou nt rates and equ ity returns. However, th e fair v alue o f the FIA embed ded deriv ative i s sensitiv e to no n-perfo rmance risk , which is un ob servable. The v alu e of th e liability i ncreases with decreases in the d isco un t rate and n on -p erforman ce risk and d ecreases with increases i n the discou nt rate an d no np erforman ce risk . Th e value of the liab ility increases with increases in eq uit y return s and th e liabi lity decreases wit h a decrease in eq uity return s. The fair value of th e IUL embed ded deriv ative is pred ominantl y imp acted by ob servable inp uts such as disco un t rates and equ ity returns. Ho wever, th e fair value of the IUL emb edd ed d eri vat iv e is sen siti ve to no n-perfo rmance risk , wh ich is u no bserv ab le. Th e value of th e liability in creases with decreases in th e d isco unt rate an d no n-performance risk and decreases with in creases i n the discou nt rate and n on -p erforman ce risk. Th e val ue of th e liabilit y increases with increases in eq uit y return s and th e liabi lity decreases wit h a decrease in eq uity return s. 14 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The follo win g table presents a recon ciliatio n of th e beg in ning and end ing balances for fair value measurements for the y ear en ded Decemb er 31 , 20 18 , fo r which the Compan y h as used sign ifican t u no bservab le inp uts (Level 3): Total Gains (lo sses) included in Ea rning s rela ted to Instruments still held a t the Reporting Date Total Rea lized a nd Unrealized Gains Total Rea lized a nd Unrealized Losses Beginning Balance Included in Earnings Included in Other Comprehensiv e Inco me Included in Ea rning s Included in Other Comprehensive Income Purcha ses Sa les Issuances Settlements Tra nsfers in/out o f Level 3 Other Ending Balance (Dollars In Tho usa nds) Assets: Fix ed matu rity secu rities available-for-sale Residential mortgage-b acked secu rities $— $— $— $— $(99 5) $22,225 $— $— $— $(21 ,2 81 ) $5 1 $— $— Commercial mortgage-b acked secu rities — — 50 — (2,49 6) 48,621 (293 ) — — (45 ,8 32 ) (5 0) — — Oth er asset-backed secu rities 50 4,36 5 3,716 16,503 (15 9) (2 5,57 7) — (80 ,051 ) — — 2 22 2,62 3 42 1,64 2 — U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals, and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 62 6,90 1 — 12,537 — (2 9,01 7) 1 08,491 (97 ,676 ) — — 20 ,7 21 (3,68 1) 63 8,27 6 — Total fixed maturity securities— available-fo r- sale 1,13 1,26 6 3,716 29,090 (15 9) (5 8,08 5) 1 79,337 (178 ,020 ) — — (46 ,1 70 ) (1,05 7) 1,05 9,91 8 — Fix ed matu rity secu rities—trading Residential mortgage-b acked secu rities — — — — — — — — — — — — — Commercial mortgage-b acked secu rities — — — — — — — — — — — — — Oth er asset-backed secu rities 3 5,22 2 464 — (3,79 8) — 8,728 (14 ,511 ) — — 1 64 (21 3) 2 6,05 6 (3 ,1 79 ) U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 5,44 2 45 — (14 5) — 999 — — — — (9 9) 6,24 2 (1 01 ) Total fixed maturity securities— tradin g 4 0,66 4 509 — (3,94 3) — 9,727 (14 ,511 ) — — 1 64 (31 2) 3 2,29 8 (3 ,2 80 ) To tal fix ed maturity secu rities 1,17 1,93 0 4,225 29,090 (4,10 2) (5 8,08 5) 1 89,064 (192 ,531 ) — — (46 ,0 06 ) (1,36 9) 1,09 2,21 6 (3 ,2 80 ) Eq uity securities 6 6,11 0 375 — (9 3) — 36 (2 ,103 ) — — — — 6 4,32 5 2 82 Oth er long-term inv estmen ts(1)13 6,00 4 5 1,161 — (7 4,82 1) — — — — — — — 11 2,34 4 (23 ,6 60 ) Sh ort-term inv estmen ts — — — — — — — — — — — — — To tal inv estmen ts 1,37 4,04 4 5 5,761 29,090 (7 9,01 6) (5 8,08 5) 1 89,100 (194 ,634 ) — — (46 ,0 06 ) (1,36 9) 1,26 8,88 5 (26 ,6 58 ) To tal assets measured at fair valu e o n a recurrin g basis $1,37 4,04 4 $5 5,761 $29,090 $(7 9,01 6) $(5 8,08 5) $1 89,100 $(194 ,634 ) $— $— $(46 ,0 06 ) $(1,36 9) $1,26 8,88 5 $(26 ,6 58 ) Lia bilities: Ann uity accou nt balan ces(2)$8 3,47 2 $— $— $(3,50 5) $— $— $— $62 3 $1 1,48 1 $— $— $7 6,11 9 $— Oth er liabilities(1)76 0,89 0 40 1,350 — (27 0,40 2) — — — — — — — 62 9,94 2 1 30 ,9 48 To tal liabilities measured at fair valu e o n a recurrin g basis $84 4,36 2 $40 1,350 $— $(27 3,90 7) $— $— $— $62 3 $1 1,48 1 $— $— $70 6,06 1 $1 30 ,9 48 (1)Rep resents certain freestan ding and emb edd ed d erivatives. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. For t he year end ed December 31 , 20 18 , th ere were $3 9.7 million of secu rities tran sferred i nto Lev el 3 . For th e y ear en ded December 3 1, 20 18 , $85 .7 million o f securi ties were tran sferred into Lev el 2. This amo un t was tran sferred from Lev el 3. Th ese transfers resulted from securities that were priced internally u sing sig nificant un ob servable in pu ts wh ere market o bserv able inp uts were not av ailable in previ ou s perio ds but were p riced by in dep end ent pricing serv ices o r b rok ers as o f Decemb er 31 , 20 18 . For t he year end ed December 31 , 20 18 , th ere were no transfers from Level 2 to Lev el 1 . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. For t he year end ed December 31 , 20 18 , th ere were no transfers from Level 1 into Lev el 2 . 14 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The follo win g table presents a recon ciliatio n of th e beg in ning and end ing balances for fair value measurements for the y ear en ded Decemb er 31 , 20 17 , fo r which the Compan y h as used sign ifican t u no bservab le inp uts (Level 3): Total Gains (lo sses) included in Ea rning s rela ted to Instruments still held a t the Reporting Date Total Rea lized a nd Unrealized Gains Total Realized and Unrealized Lo sses Beginning Balance Included in Earnings Included in Other Comprehensiv e Inco me Included in Earnings Included in Other Comprehensiv e Inco me Purchases Sales Issuances Settlements Tra nsfers in/out o f Level 3 Other Ending Balance (Dollars In Tho usa nds) Assets: Fix ed matu rity secu rities available-for-sale Residential mortgage-b acked secu rities $3 $— $83 $— $— $1 1,86 2 $(3) $— $— $(11 ,9 44 ) $(1) $— $— Commercial mortgage-b acked secu rities — — — — — — — — — — — — — Oth er asset-backed secu rities 56 2,60 4 1,409 15,136 — (10 ,931 ) 10 0 (59,1 75) — — (6 ,6 43 ) 1,86 5 50 4,36 5 — U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals, and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 66 4,04 6 — 27,637 — (13 ,089 ) 13 1,82 2 (1 69,0 02) — — (10 ,3 53 ) (4,16 0) 62 6,90 1 — Total fixed maturity securities— available-fo r- sale 1,22 6,65 3 1,409 42,856 — (24 ,020 ) 14 3,78 4 (2 28,1 80) — — (28 ,9 40 ) (2,29 6) 1,13 1,26 6 — Fix ed matu rity secu rities—trading Residential mortgage-b acked secu rities — — — — — — — — — — — — — Commercial mortgage-b acked secu rities — — — — — — — — — — — — — Oth er asset-backed secu rities 8 4,56 3 3,768 — (1,15 7) — — (52,8 35) — — — 88 3 3 5,22 2 3 ,4 83 U.S. g ov ern ment- related securities — — — — — — — — — — — — — States, mu nicipals and political sub division s — — — — — — — — — — — — — Oth er g ov ern ment- related securities — — — — — — — — — — — — — Corpo rate secu rities 5,49 2 101 — (5 8) — — — — — — (9 3) 5,44 2 44 Total fixed maturity securities— tradin g 9 0,05 5 3,869 — (1,21 5) — — (52,8 35) — — — 79 0 4 0,66 4 3 ,5 27 To tal fix ed maturity secu rities 1,31 6,70 8 5,278 42,856 (1,21 5) (24 ,020 ) 14 3,78 4 (2 81,0 15) — — (28 ,9 40 ) (1,50 6) 1,17 1,93 0 3 ,5 27 Eq uity securities 6 9,01 0 2 52 (2,63 0) (53 ) — (2 74) — — 3 — 6 6,11 0 3 Oth er long-term inv estmen ts(1)12 4,32 5 2 7,158 — (1 5,47 9) — — — — — — — 13 6,00 4 11 ,6 79 Sh ort-term inv estmen ts — — — — — — — — — — — — — To tal inv estmen ts 1,51 0,04 3 3 2,438 42,908 (1 9,32 4) (24 ,073 ) 14 3,78 4 (2 81,2 89) — — (28 ,9 37 ) (1,50 6) 1,37 4,04 4 15 ,2 09 To tal assets measured at fair valu e o n a recurrin g basis $1,51 0,04 3 $3 2,438 $42,908 $(1 9,32 4) $(24 ,073 ) $14 3,78 4 $(2 81,2 89) $— $— $(28 ,9 37 ) $(1,50 6) $1,37 4,04 4 $15 ,2 09 Lia bilities: Ann uity accou nt balan ces(2)$8 7,61 6 $— $— $(4,00 1) $— $— $— $6 23 $8,76 8 $— $— $8 3,47 2 $— Oth er liabilities(1)57 1,84 3 9 3,071 — (28 2,11 8) — — — — — — — 76 0,89 0 (1 89 ,0 47 ) To tal liabilities measured at fair valu e o n a recurrin g basis $65 9,45 9 $9 3,071 $— $(28 6,11 9) $— $— $— $6 23 $8,76 8 $— $— $84 4,36 2 $(1 89 ,0 47 ) (1)Rep resents certain freestan ding and emb edd ed d erivatives. (2)Rep resents liabilities related to fix ed in d ex ed an n u ities. For t he year end ed December 31 , 20 17 , th ere were an immaterial amou nt of transfers of securities in to Level 3. For th e y ear en ded December 3 1, 20 17 , $28 .9 million o f securi ties were tran sferred into Lev el 2. This amo un t was tran sferred from Lev el 3. Th ese transfers resulted from securities that were priced internally u sing sig nificant un ob servable in pu ts wh ere market o bserv able inp uts were not av ailable in previ ou s perio ds but were p riced by in dep end ent pricing serv ices o r b rok ers as o f Decemb er 31 , 20 17 . For t he year end ed December 31 , 20 17 , th ere were no transfers from Level 2 to Lev el 1 . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. For t he year end ed December 31 , 20 17 , th ere were no transfers from Level 1 into Lev el 2 . Total realized an d u nrealized gai ns (lo sses) o n Lev el 3 assets and liab ilities are p rimari ly repo rted i n either realized i nv estment g ain s (losses) with in th e co nso lidated con den sed statements of in come (lo ss) or o th er comprehen si ve in come (lo ss) within sh areo wn er’s eq uity based o n the app ro pri ate acco un ting treatment fo r the item. 14 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Purchases, sales, issu ances, an d settlements, net, represent the acti vity that o ccurred d urin g th e p eriod that resu lts in a ch ang e o f th e asset or liab ility bu t do es n ot represent chang es in fair v alu e for the instru men ts h eld at the begin ning o f the p eriod. Su ch activ ity p rimarily relates to pu rch ases an d sales o f fixed matu rity secu rities and issuan ces an d settlemen ts of fixed in dex ed ann uities. The Compan y reviews t he fair value h ierarch y classi ficati on s each repo rtin g perio d. Chan ges in the o bservab ility of th e valuation attribu tes may resu lt in a reclassi fication o f certain finan cial assets o r liabil ities. Su ch reclassificatio ns are rep orted as transfers in an d ou t of Lev el 3 at the b eginn ing fair value for the repo rting period in wh ich the ch anges occu r. Th e asset transfers in th e t abl e(s) ab ov e primarily related to p ositions mo ved from Lev el 3 to Level 2 as t he Compan y determin ed that certain in pu ts were o bserv abl e. The amou nt o f to tal gains (lo sses) for assets an d liabilities still h eld as of the repo rting d ate p rimarily rep resen ts chan ges in fair v alu e of trad ing securities an d certain derivativ es th at exist as of th e rep orting date and th e ch ang e in fair value o f fix ed ind exed an nu i ties. Estima ted Fa ir Va lue of Financia l Instruments The carrying amo un ts an d esti mated fair v alu es of th e C ompany ’s finan cial in struments as o f the peri od s sho wn b elo w are as fo llows: As of December 31, 201 8 2 0 1 7 Fair Value Lev el Carry ing Amo unts Fair Values Carry ing Amo unts Fair Values (Dollars In Thousands) (D ollars In Thousands) Assets: Mortgag e loan s on real estate 3 $7 ,72 4,7 33 $7 ,44 7,702 $6,8 17 ,72 3 $6,7 40 ,17 7 Policy lo ans 3 1 ,69 5,8 86 1 ,69 5,886 1,6 15 ,61 5 1,6 15 ,61 5 Fix ed matu rities, held-to-maturity(1)3 2 ,63 3,4 74 2 ,54 7,210 2,7 18 ,90 4 2,7 76 ,32 7 Lia bilities: Stab le v alu e p roduct accoun t b alances 3 $5 ,23 4,7 31 $5 ,20 0,723 $4,6 98 ,37 1 $4,6 98 ,86 8 Future po licy b enefits and claims(2)3 1 ,67 1,4 14 1 ,67 1,434 2 20 ,49 8 2 20 ,49 8 Other po licyh olders’ funds(3 )3 13 1,1 50 13 1,782 1 33 ,50 8 1 34 ,25 3 Debt:(4) Bank bo rro wings 3 $— $— $— $— Senior Notes 2 1 ,10 0,5 08 1 ,06 5,338 9 43 ,37 0 9 33 ,92 6 Sub ordinated d eben tu res 2 49 5,4 26 49 4,265 4 95 ,28 9 5 01 ,21 5 Sub ordinated fun ding ob lig ation s 3 11 0,0 00 9 5,476 — — No n-recourse fu nd in g o blig ations(5)3 2 ,63 2,4 97 2 ,55 0,237 2,7 47 ,47 7 2,8 04 ,98 3 Excep t as noted b elo w, fair values were estimated usin g quoted mark et p rices. (1)Securities purch ased fro m unconsolidated su b sidiaries, Red Mountain LLC and Steel City LLC. (2)Sin g le premiu m immediate an nuity with o u t life contin g en cies. (3)Su p plementary contracts without life co ntingencies. (4)Excludes capital lease oblig atio n s of $1.3 million and $1 .7 million as of Decem ber 31 , 2 0 18 and 20 1 7 , resp ectiv ely . (5)As o f Decem b er 31, 2 0 18, carry ing amoun t o f $2 .6 b illion and a fair value of $2.5 billio n related to non -recourse fundin g ob lig atio ns issued b y Go ld en Gate and Golden Gate V. As o f Decem b er 31, 2 0 17, carry ing amoun t o f $2 .7 b illion and a fair value of $2.8 billio n related to n o n -recourse fu n ding ob lig atio ns issu ed b y Go lden Gate and Go ld en Gate V. Fair Va lue Mea surements Mo rtga ge lo ans o n rea l estate The Comp any estimates th e fair v alu e o f mortg age lo ans u sin g an intern ally d ev elo ped mod el. Th is mod el in clu des inp uts deriv ed by th e Co mp any based o n assu med d iscou nt rates relativ e to the Company ’s curren t mortg age lo an len ding rate an d an exp ected cash flow analysis based on a review o f the mortgag e loan terms. Th e mo del also con tains the Co mpan y’s d etermi ned representativ e risk ad ju stment assu mp tion s related to cred it and liqu id ity risks. Policy l oa ns The Compan y b elieves the fair value o f p oli cy l oans app ro ximates bo ok value. Policy l oans are fun ds prov id ed to p olicy ho ld ers in return fo r a claim on th e po licy. The fun ds p ro vided are limited to th e cash su rrend er v alu e of th e un derly in g p olicy. Th e nature of po licy loan s i s to hav e a negligible default risk as the loan s are fully collaterali zed b y the value o f th e pol icy. Policy l oans d o n ot h ave a stated matu rit y an d th e balances an d accrued interest are rep aid eit her by t he p olicy ho ld er or with proceeds from the p olicy. Du e to the collateral ized nature of p olicy loan s and u np red ictable timin g o f rep aymen ts, the Co mp any bel iev es th e carry in g v alu e of po licy loan s app ro ximates fair v alu e. 14 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Fixed ma turi ties, hel d-to -maturity The Co mp any estimates th e fair value of its fix ed matu rity, held-to-matu rity securities usin g in ternal d isco un ted cash flo w mod els. The discou nt rat es used in th e model are based on a cu rrent market yield fo r simil ar fin ancial in stru men ts. St ab le value p roduct and o ther i nvestment contract ba la nces The Compan y estimates the fair value o f stable value p ro du ct accou nt b alances an d o th er inv est ment con tract b alan ces (includ ed in Fu tu re po licy benefits a nd cla ims as well as Oth er po licyho ld er f un ds lin e items o n o ur balance sh eet) u sing mo del s based on discou nted ex pected cash flo ws. The d isco un t rat es used in th e models are based on a cu rrent market rate fo r similar fin ancial in stru men ts. Deb t Ba nk bo rro w ings The C ompany bel iev es the carryin g value of its ban k bo rro wing s app ro ximates fair value as t he bo rrowing s pay a flo ating in terest rate plus a sp read based o n the rating of th e Company ’s senior deb t wh ich th e Co mp any believes ap prox i mates a mark et interest rate. Senior no tes a nd sub ordina ted deb t securiti es The Co mp any esti mates the fair value of it s Senior No tes an d Su bo rd in ated d ebt secu rities usin g qu oted market p rices from third party p ricing serv ices, where available. The Co mp an y also determines certain fair values b ased o n future cash flo ws discou nted at th e app ro priate cu rrent market rate. Fund ing o bli ga tions The Compan y estimat es th e fair value o f its sub ord in ated and no n-reco urse fundi ng ob ligation s usin g internal discou nted cash flo w mo dels. Th e discou nt rates used in th e mo del are based on a cu rrent market yield fo r similar fin ancial instrumen ts. 7. DERIVATIVE FINANCIAL INSTRUME NTS Ty pes o f Deriva tive Instruments a nd Deriva tive Stra teg ies The Co mp an y utili zes a risk management strategy t hat in corpo rates the use of derivativ e finan cial i nstrumen ts t o redu ce exp osure to certain risks, in clu ding b ut no t limited to, i nterest rat e risk, curren cy exch ang e risk, vo latili ty ri sk, and equ ity market risk . Th ese strat eg ies are d evelop ed t hrou gh th e Co mp any ’s an aly si s o f d ata from fin anci al simulation mo dels an d other internal and in du stry so urces, an d are th en incorporated i nto th e Co mp any ’s risk manag ement pro gram. Deriv ative in stru men ts exp ose the Co mp any to cred it an d market ri sk and co uld result in material ch ang es from p eriod to p eriod . Th e Co mp any att empts to minimize its credit in con nectio n with its o verall asset/liability man agemen t p ro grams and risk management strateg ies. In add iti on , all d eri vat iv e prog rams are mo nit ored by ou r risk management dep artment. Derivatives Related t o Interest Rate Risk M anag ement Deriv ative i nstrumen ts th at are used as part o f the Comp any ’s in terest rate risk man agemen t strategy in clu de i nterest rat e swap s, in terest rate futures, in terest rate caps, an d interest rate swaptio ns. Derivatives Related t o Foreig n Currency Exchange Risk M anag ement Deriv ative instruments that are u sed as part of the Compan y’s fo reign curren cy ex change risk man agement strategy in clu de fo rei gn curren cy swap s, fo reign cu rrency fu tures, fo reign equ ity futures, and fo reign equ ity o ptio ns. Derivatives Related t o Risk M iti ga tion of C erta in Annuity Contracts The Co mp an y may use th e fol lo win g typ es o f deriv ative co ntracts to mitigate its exp osu re to certain g uaranteed b enefits related to VA con tracts and fixed in dexed ann uities: •Fo reign Curren cy Futures •Variance Swaps •Int erest Rate Fu tu res •Eq uity Optio ns •Eq uity Fu tu res •Cred it Derivat iv es •Int erest Rate Swaps •Int erest Rate Swapti on s •Volatilit y Futures •Volatilit y Option s •To tal Return Swaps 14 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Acco unting fo r Deriva tive Instruments The Compan y reco rd s its deriv ati ve fin an cial in stru men ts in th e co nsol id ated balan ce sheet in “ot her lo ng -term in vestmen ts” an d “o th er liab iliti es” in accordan ce with GAAP, which requi res th at all d erivative instruments be recog nized in the balance sheet at fair v alu e. Th e chan ge in the fair value of deriv ati ve finan cial in struments is reported eith er in t he statemen t o f inco me or in other co mp reh ensive inco me (loss), d epen ding upon wh eth er it qu alified fo r and also h as been p ro perly identi fied as b eing part o f a h edg in g relatio nshi p, and also on th e ty pe o f h edg in g relatio nsh i p t hat ex ists. It is the Compan y's p olicy no t to o ffset assets and liab iliti es asso ciated with open deriv ative co ntracts. Howev er, th e Chicago Mercantile Ex change (“CME”) rules characterize variation margi n tran sfers as settlement pay ments, as o pposed to ad ju stments to col lat eral. As a result, d erivativ e assets and liabilities asso ciated with centrally cleared d erivat iv es fo r which the CM E serv es as th e cen t ral clearing party are presented as if these d erivativ es had been settled as of th e rep orting date. For a deriv ative finan cial instrumen t to b e accou nted fo r as an accou nti ng h ed ge, it must be iden tified and d ocu men ted as such o n th e d ate o f design ation . For cash flow h edg es, t he effect iv e po rtion of their realized gain o r lo ss is repo rted as a co mpon en t of o th er co mp reh ensive in come and reclassified i nto earning s in the same perio d du ring which the h edg ed item i mp acts earning s. An y remaining gain or lo ss, th e in effective p ortion , is recog nized i n curren t earni ng s. Fo r fair v alu e hedg e deriv atives, t heir gain o r loss as well as th e offsettin g lo ss o r g ain attribu table to th e h edg ed risk of th e hedg ed item is recog nized i n curren t earning s. Effectiv eness o f the Co mp an y’s h edg e relatio nships is assessed o n a qu arterly b asi s. The Co mp any repo rts chan ges in fai r values of deriv atives that are n ot p art o f a qu alify in g hed ge relation sh ip throug h earnin gs in th e p eriod o f ch ang e. Ch ang es in t he fair val ue of d eri vat iv es th at are recog nized in cu rrent earn in gs are rep ort ed in “Realized inv estment gains (l osses)-Deri vat iv e finan cial instruments”. Deriva tive Instruments Designated a nd Qualifying as Hedg ing Instruments Ca sh-Flow Hedges •To hed ge a fixed rate no te den omin ated in a foreign cu rrency, the Company entered in to a fi xed-t o-fixed fo reign curren cy swap in o rd er to hed ge the foreig n currency ex chang e risk associated wit h t he no te. Th e cash flo ws receiv ed o n the swap are id entical to th e cash flow p aid on the no te. •To hed ge a flo ating rate no te, the Co mpan y en tered into an in terest rate swap to exch ang e th e floatin g rate o n the n ote fo r a fixed rat e in order to hed ge the i nterest rate risk associated with th e no te. Th e cash flo ws receiv ed o n the swap are id entical to th e cash flo w v ariability p aid on th e no t e. Deriva tive Instruments No t Desi gnated and No t Qua lifyi ng as Hedg ing Instruments The Compan y u ses v ariou s oth er d eri vat iv e in stru ments for risk man agemen t p urp oses that d o n ot qu alify for hed ge accou ntin g treatmen t. Ch an ges in th e fair value o f these d erivativ es are reco gni zed in earn in gs d uri ng th e p eriod of chan ge. Deri va tives Rel ated to Variable Annuity Contra cts •Th e Compan y uses eq uity futu res, equ ity op tio ns, to tal ret urn swaps, in t erest rate fu tu res, interest rate swaps, interest rate swaptio ns, cu rrency fut ures, v olatility fu tu res, v olatility o ption s, an d varian ce swaps to mitig ate the risk related to certain gu aran teed min imum b enefit s, includ ing GLWB, with in it s VA prod ucts. In g eneral, th e cost of such b enefits v aries wit h th e level o f equ ity and in terest rate mark ets, foreig n curren cy lev els, an d o verall vo latility . •Th e Co mp any markets certain VA prod ucts with a GLWB rid er. The GLWB co mp on ent is co nsid ered an emb edd ed d erivativ e, no t co nsid ered to be clearl y and clo sely related to th e ho st co ntract. Deri va tives Rel ated to Fixed Annuity Co ntracts •Th e Co mp any uses equ ity fu tu res an d op tion s to mitigat e th e risk within its fix ed ind exed ann uity p ro du cts. In gen eral , th e cost o f such ben efits varies with the lev el o f eq uity and ov erall vo l ati lity . •Th e Co mpan y mark ets certain fixed in dexed an nu i ty p roducts. The FIA compo nent is co nsid ered an embedded d erivativ e, n ot con sid ered to be clearly and closely related to th e h ost cont ract. Deri va tives Rel ated to Index ed Universa l Life Contra cts •Th e Compan y u ses equ ity fu tu res and o ptio ns t o miti gat e th e risk with in it s ind exed un i versal life prod ucts. In gen eral, th e cost of such ben efits varies with the lev el o f eq uity market s. •Th e Co mpan y mark ets certain IUL pro du cts. Th e IUL co mp on ent is co nsidered an emb edd ed derivativ e as it is no t con sidered to be clearly and clo sel y related to th e ho st co ntract. Other Deriva tives •Th e Co mp any uses v ariou s swaps an d o ther types o f d eri vat iv es to manag e risk rel ated to o th er ex po sures. •Th e Co mp any is in vo lved in vario us mo dified co in su ran ce arran gement s which co ntain emb edd ed d erivativ es. Chan ges in th eir fair value are reco rd ed in cu rrent perio d earn i ng s. The inv estment po rtfol io s th at sup po rt th e rel ated 14 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents mo dified co in su ran ce reserv es had fair v alu e chang es which su bstan tially o ffset th e g ain s or l osses on th ese embed ded deriv atives. The fol lo win g tabl e sets forth realized in vestmen t g ain s and lo sses for th e perio ds sho wn: Rea lized investment g ains (l osses)—deriv ative financia l instruments For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Deriva tiv es related to VA contra cts: Interest rate fu tures $(2 5,4 73 ) $26,01 5 $(3 ,45 0) Eq uit y futures (8 8,2 08 ) (91,77 6) (1 06 ,43 1) Cu rrency futu res 1 0,2 75 (23,17 6) 33 ,83 6 Eq uit y o ptio ns 3 8,0 83 (94,79 1) (60 ,96 2) Interest rate swaptio ns (14 ) (2,49 0) (1 ,16 1) Interest rate swaps (4 5,1 85 ) 27,98 1 20 ,42 0 To tal return swap s 7 7,2 25 (32,24 0) — Embed ded deriv ative - GLWB (7 2,3 13 ) 3,61 4 68 ,05 6 Total d erivativ es related to VA co ntract s (10 5,6 10 ) (186,86 3) (49 ,69 2) Deriva tiv es related to FIA co ntracts: Embed ded deriv ative 3 5,3 97 (55,87 8) (16 ,49 4) Eq uit y futures 3 30 64 2 4 ,24 8 Eq uit y o ptio ns (3 8,8 85 ) 44,58 5 8 ,14 9 Total d erivativ es related to FIA co ntracts (3,1 58 ) (10,65 1) (4 ,09 7) Deriva tiv es related to IUL co ntracts: Embed ded deriv ative 9,0 62 (14,11 7) 9 ,52 9 Eq uit y futures 2 61 (81 8) 12 9 Eq uit y o ptio ns (6,3 38 ) 9,58 0 3 ,47 7 Total d erivativ es related to IUL cont racts 2,9 85 (5,35 5) 13 ,13 5 Emb edd ed d erivativ e - M od co rein surance t reaties 16 6,7 57 (103,00 9) 39 0 Oth er d erivat iv es 14 5 0 (2 4) Total realized g ain s (losses)—deriv atives $6 0,9 88 $(305,82 8) $(40 ,28 8) 14 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fol lo win g tabl es present th e co mp on ents o f the gain o r loss on deriv atives th at qu alify as a cash flo w hed ging relation ship: Ga in (Lo ss) on Deriva tives in Ca sh Flo w Relatio nship Amo unt of Gains (Losses) Deferred in Accumulated O ther Co mprehensive Income (Loss) o n Deriv a tives Amount a nd Lo ca tion o f G ains (Lo sses) Recla ssified fro m Accumulated O ther Co mprehensive Income (Loss) into Inco me (Lo ss) Amount a nd Lo ca tion o f (Losses) Recog nized in Income (Loss) o n Deriv a tiv es (Effectiv e Portio n) (Effectiv e Portio n) (Ineffective Po rtion) Benefits and settlement ex penses Realized investment g a ins (losses) (D oll ars In Thous ands) For The Yea r Ended December 3 1, 2 01 8 Foreig n cu rrency swap s $(81 2) $(7 98 ) $— Interest rate swaps (1 ,57 4) (6 33 ) — Total $(2 ,38 6) $(1,4 31 ) $— For The Yea r Ended December 3 1, 2 01 7 Foreig n cu rrency swap s $(86 7) $(6 94 ) $— Total $(86 7) $(6 94 ) $— For The Yea r Ended December 3 1, 2 01 6 Foreig n cu rrency swap s $1 ,05 8 $(60 ) $— Total $1 ,05 8 $(60 ) $— Based on ex pected cash flows o f the un derly in g h edg ed items, the Compan y exp ects to reclassify $0 .1 million ou t o f accumulated ot her co mp reh ensive inco me into earni ng s du ring the nex t twelv e mon th s. 14 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The tab les b elo w present in fo rmation abo ut th e n atu re an d accou ntin g treatmen t o f the Compan y’s p rimary d erivativ e finan cial in stru ments and the lo cation in an d effect on th e co nsolid ated finan cial statements for th e perio ds p resen ted below: As o f December 31, 2 0 18 2 0 1 7 Notio nal Amount Fa ir Va lue Notio na l Amount Fa ir Value (D oll ars In Thous ands) Oth er lon g-term inv estments Cash flow hed ges: Fo reign cu rrency swaps $— $— $1 17 ,17 8 $6 ,01 6 Deriv atives n ot design ated as hed ging in st ru ments: In terest rate swap s 1 ,515,50 0 28 ,50 1 1,2 65 ,00 0 55 ,41 1 Total retu rn swaps 138,07 0 3 ,97 1 1 90 ,93 8 13 5 Emb edd ed deriv ative - M od co reinsurance treaties 585,29 4 7 ,07 2 64 ,47 2 1 ,00 9 Emb edd ed deriv ative - GLWB 3 ,984,07 0 1 05 ,27 2 4,8 97 ,06 9 1 34 ,99 5 In terest rate futures 286,20 8 10 ,30 2 1,0 71 ,87 0 3 ,17 8 Equ ity futu res 12,63 3 48 3 62 ,26 6 15 4 Cu rrency fu tu res — — 1 ,11 7 2 Equ ity o pti on s 5 ,624,08 1 2 20 ,09 2 4,4 36 ,46 7 4 03 ,96 1 In terest rate swap tion s — — 2 25 ,00 0 1 4 Other 15 7 13 6 15 7 20 0 $12 ,146,01 3 $3 75 ,82 9 $1 2,3 31 ,53 4 $6 05 ,07 5 Oth er liab ilities Cash flow hed ges: In terest rate swap s $350,00 0 $— $— $— Fo reign cu rrency swaps 117,17 8 90 4 — — Deriv atives n ot design ated as hed ging in st ru ments: In terest rate swap s 775,00 0 11 ,36 7 5 97 ,50 0 2 ,96 0 Total retu rn swaps 768,17 7 23 ,05 4 2 43 ,38 8 31 8 Emb edd ed deriv ative - M od co reinsurance treaties 1 ,795,28 7 32 ,82 8 2,3 90 ,53 9 2 15 ,24 7 Emb edd ed deriv ative - GLWB 8 ,466,01 9 2 89 ,34 3 4,7 18 ,31 1 2 46 ,75 5 Emb edd ed deriv ative - FIA 2 ,576,03 3 2 17 ,28 8 1,9 51 ,65 0 2 18 ,67 6 Emb edd ed deriv ative - IUL 233,55 0 90 ,23 1 1 68 ,34 9 80 ,21 2 In terest rate futures 863,70 6 20 ,10 0 2 30 ,40 4 91 7 Equ ity futu res 659,35 7 33 ,75 3 3 18 ,79 5 2 ,59 3 Cu rrency fu tu res 202,74 7 2 ,16 3 2 55 ,24 8 2 ,08 7 Equ ity o pti on s 4 ,199,68 7 34 ,17 8 3,1 12 ,81 2 2 37 ,80 7 Other 3,28 8 25 2 — — $21 ,010,02 9 $7 55 ,46 1 $1 3,9 86 ,99 6 $1,0 07 ,57 2 8. OFFSETTING OF ASSETS AND L IABILITIES Certain of the Co mp any ’s d erivat iv e instru men ts are sub ject to en forceab le master n etti ng arrang emen ts th at prov id e for the net settlement o f all deriv ati ve co ntracts b etween th e Compan y and a co un terparty in th e even t of d efau lt o r up on the occurren ce o f certain terminatio n even ts. Collateral su pp ort ag reements asso ciated with each master n etting arrangement prov i de t hat th e Comp any will receiv e or pledg e fin an cial collateral in the even t eit her mi nimu m t hresho ld s, or in certain cases rat in gs levels, hav e b een reach ed. Ad ditionally, cert ain of th e Co mp any’s repurchase agreements p ro vide for net settlement on termi nat io n o f the agreement. Refer to No te 1 4, Debt an d Other Ob liga tion s for details of the Company ’s rep urchase agreemen t p ro grams. Co llateral received includ es bo th cash and n on -cash co l lat eral. Cash co llateral recei ved b y th e Co mp any is reco rd ed o n th e co nsolid ated b alan ce sheet as “cash ”, wi th a correspo nd in g amou nt recorded in “o th er liab iliti es” to represent th e Co mp any ’s ob ligatio n to retu rn th e co llateral. Non -cash co llateral receiv ed by th e Company is no t recogni zed on th e con solid ated balance 14 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents sheet u nless t he C ompany exercises i ts rig ht to sell or re-p led ge the un derly in g asset. As of December 3 1, 2 01 8, the fair v alu e o f n on -cash co llat eral received was $45 .0 millio n. As of December 31 , 20 17 , th e Co mp any had n ot recei ved an y n on -cash collateral. The tab les belo w present th e deriv ative instrumen ts by assets an d liab ilities fo r the Co mp an y as o f Decemb er 3 1, 2 01 8: Net Amounts o f Assets Presented in the Sta tement o f Fina ncia l Position Gro ss Amounts Not Offset in the Statement o f Fina ncia l Po sitio n Gross Amounts O ffset in the Statement of Fina ncia l Po sitio n Gross Amo unts of Recognized Assets Financial Instruments Co llateral Received Net Amount (Dollars In Thousands) O ffsetting of Derivative Assets Deriv ativ es: Free-Stan d ing deriv ativ es $2 63,349 $— $2 6 3 ,349 $70 ,3 2 2 $9 9,199 $9 3 ,8 28 To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 2 63,349 — 2 6 3 ,349 70 ,3 2 2 9 9,199 9 3 ,8 28 Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 7,072 — 7 ,072 — — 7 ,0 72 Em b ed d ed derivative - GLWB 1 05,272 — 1 0 5 ,272 — — 10 5 ,2 72 Other 136 — 136 — — 1 36 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 1 12,480 — 1 1 2 ,480 — — 11 2 ,4 80 To tal d erivatives 3 75,829 — 3 7 5 ,829 70 ,3 2 2 9 9,199 20 6 ,3 08 Tota l Assets $3 75,829 $— $3 7 5 ,829 $70 ,3 2 2 $9 9,199 $20 6 ,3 08 Net Amounts o f Lia bilities Presented in the Sta tement o f Fina ncia l Position Gro ss Amounts Not Offset in the Statement o f Fina ncia l Po sitio n Gross Amounts O ffset in the Statement of Fina ncia l Po sitio n G ro ss Amo unts o f Reco g nized Liabilities Financial Instruments Co llateral Po sted Net Amount (Do l l a rs I n Tho usa nds ) O ffsetting of Derivative Lia bilities Deriv ativ es: Free-Stan d ing deriv ativ es $1 25,519 $— $1 2 5 ,519 $70 ,3 2 2 $4 7,856 $7 ,3 41 To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 1 25,519 — 1 2 5 ,519 70 ,3 2 2 4 7,856 7 ,3 41 Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 32,828 — 3 2 ,828 — — 3 2 ,8 28 Em b ed d ed derivative - GLWB 2 89,343 — 2 8 9 ,343 — — 28 9 ,3 43 Em b ed d ed derivative - FIA 2 17,288 — 2 1 7 ,288 — — 21 7 ,2 88 Em b ed d ed derivative - IUL 90,231 — 9 0 ,231 — — 9 0 ,2 31 Other 252 — 252 — — 2 52 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 6 29,942 — 6 2 9 ,942 — — 62 9 ,9 42 To tal d erivatives 7 55,461 — 7 5 5 ,461 70 ,3 2 2 4 7,856 63 7 ,2 83 Rep u rchase agreements(1 )4 18,090 — 4 1 8 ,090 — — 41 8 ,0 90 Tota l Lia bilities $1 ,1 73,551 $— $1,1 7 3 ,551 $70 ,3 2 2 $4 7,856 $1,05 5 ,3 73 (1)Borrowings u nder rep u rchase agreements are for a term less than 90 d ays. 14 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Th e tab les b elo w p resen t th e d erivativ e in stru men ts b y assets an d l iab ilities fo r the Compan y as o f December 31 , 20 17 : Net Amounts o f Assets Presented in the Sta tement o f Fina ncia l Positio n Gross Amounts Not Offset in the Statement o f Fina ncial Po sitio n Gro ss Amo unts Offset in the Statement of Financial Position G ro ss Amo unts o f Reco gnized Assets Fina ncia l Instruments Collateral Receiv ed Net Amount (D oll ars In Thous ands) O ffsetting of Derivative Assets Deriv ativ es: Free-Stan d ing deriv ativ es $4 6 8 ,871 $— $4 6 8 ,871 $242,10 5 $1 0 8,830 $11 7 ,9 36 To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 4 6 8 ,871 — 4 6 8 ,871 242,10 5 1 0 8,830 11 7 ,9 36 Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 1 ,009 — 1 ,009 — — 1 ,0 09 Em b ed d ed derivative - GLWB 1 3 4 ,995 — 1 3 4 ,995 — — 13 4 ,9 95 Other 200 — 200 — — 2 00 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 1 3 6 ,204 — 1 3 6 ,204 — — 13 6 ,2 04 To tal d erivatives 6 0 5 ,075 — 6 0 5 ,075 242,10 5 1 0 8,830 25 4 ,1 40 Tota l Assets $6 0 5 ,075 $— $6 0 5 ,075 $242,10 5 $1 0 8,830 $25 4 ,1 40 Net Amounts o f Lia bilities Presented in the Sta tement o f Fina ncia l Position Gro ss Amounts Not Offset in the Statement o f Fina ncia l Po sitio n Gross Amounts O ffset in the Statement of Fina ncia l Po sitio n G ro ss Amo unts o f Reco g nized Liabilities Fina ncia l Instruments Collateral Posted Net Amount (Do l l a rs I n Tho usa nds ) O ffsetting of Derivative Lia bilities Deriv ativ es: Free-Stan d ing deriv ativ es $2 46,682 $— $2 4 6 ,682 $2 42,10 5 $4,577 $— To tal d erivatives, subject to a master netting arran gemen t or similar arrang ement 2 46,682 — 2 4 6 ,682 2 42,10 5 4,577 — Deriv ativ es not subject to a master netting arran gem en t or similar arrangement Em b ed d ed derivative - Mod co reinsu ran ce treaties 2 15,247 — 2 1 5 ,247 — — 21 5 ,2 47 Em b ed d ed derivative - GLWB 2 46,755 — 2 4 6 ,755 — — 24 6 ,7 55 Em b ed d ed derivative - FIA 2 18,676 — 2 1 8 ,676 — — 21 8 ,6 76 Em b ed d ed derivative - IUL 80,212 — 8 0 ,212 — — 8 0 ,2 12 Total deriv ativ es, not subject to a master n etting arran g em en t o r similar arran gemen t 7 60,890 — 7 6 0 ,890 — — 76 0 ,8 90 To tal d erivatives 1 ,0 07,572 — 1,0 0 7 ,572 2 42,10 5 4,577 76 0 ,8 90 Rep u rchase agreements(1 )8 85,000 — 8 8 5 ,000 — — 88 5 ,0 00 Tota l Lia bilities $1 ,8 92,572 $— $1,8 9 2 ,572 $2 42,10 5 $4,577 $1,64 5 ,8 90 (1)Borrowings u nder rep u rchase agreements are for a term less than 90 d ays. 9. MORTGAGE LOANS Mo rtg ag e Lo ans The Co mp an y in vests a po rtio n of i ts in vestmen t po rtfo lio in commercial mo rtg ag e loan s. As of Decemb er 3 1, 20 18 , th e Co mp any ’s mo rtgag e loan ho ld in gs were app rox imately $7 .7 billion . Th e Co mp any h as sp ecialized in makin g loan s o n credit-orient ed co mmercial p ro perties, cred it-an cho red strip sho pp in g cen ters, sen i or liv in g facilities, and apartments. Th e Compan y’s un derwri ting p ro ced ures relativ e t o it s commercial lo an po rtfo lio are b ased, in the Co mp any ’s v iew, on a con servat iv e and di scip lined ap proach . Th e Compan y con centrates o n a small nu mb er of co mmercial real est ate asset ty pes asso ciated with the 15 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents necessities of life (retail, multi-family, sen io r liv in g, p ro fessio nal o ffice b uild in gs, an d wareh ou ses). The Co mp any bel ieves that th ese asset typ es tend to weather econ omic do wnt urns better than o th er commercial asset classes in which it h as ch osen n ot to particip ate. The Co mp any b elieves th is d isciplined ap proach has helped to maint ain a rel ativel y low d elinq uen cy and foreclosure rate th ro ug hout its history. The majority of t he Compan y’s mortgag e lo ans po rtfo lio was u nd erwritten by th e Co mp any . From time to t ime, the Compan y may acqu ire lo ans in co njun ction with an acq uisition . The Co mp any ’s co mmercial mortg age lo ans are stated at u np aid p rincipal b alan ce, adjusted fo r any u namortized premium or d iscou nt, and net of an all owance for loan lo sses. In terest in come is accrued on the p rin cipal amount of the loan b ased o n th e lo an’s co ntractual interest rate. Amortization o f premiums and d iscou nts is recorded u si ng t he effectiv e y ield met ho d. In terest in come, amo rtizatio n of p remiu ms and d isco un t s an d prepayment fees are reported in net investment i ncome. The fol lo win g tabl e includ es a breakd own o f the Co mp an y’s co mmercial mo rtgag e lo an portfolio by prop erty type as of December 31 , 20 18 : Type Percentage of Mo rtgage Lo a ns o n Rea l Estate Retai l 4 5.0 % Office Buil ding s 1 3.2 Apartment s 1 0.2 Wareho uses 1 1.3 Sen io r h ou sing 1 5.8 Oth er 4.5 10 0.0 % The Co mpan y specializes in o riginatin g mo rtgag e lo ans on ei th er credit-ori en ted o r credit-anch ored co mmercial p rop ert ies. No sing le ten ant’s ex po su re represents mo re than 1.2% of mortgag e loan s. App ro ximately 62 .5% o f the mortg age l oans are on prop erti es lo cated in the follo win g stat es: State Percentage of Mo rtgage Lo a ns o n Rea l Estate Florida 8.8 % Alab ama 8.6 Texas 7.5 Georgia 7.3 Califo rn ia 7.2 M ich ig an 4.8 Tenn essee 4.7 Utah 4.7 Ohio 4.5 North Caro lina 4.4 6 2.5 % Du ring the year en ded December 31 , 2 01 8, t he Co mp any fun ded ap prox imately $1.5 billion o f n ew loan s, wit h an average l oan size of $9 .1 milli on . The average size mo rtgag e lo an in the p ort fo lio as of Decemb er 31, 20 18 , was $4.4 million an d th e weig hted-averag e interest rate was 4 .6%. The larg est sin gle mo rtgag e lo an at Decemb er 3 1, 2018 was $4 8.8 million. Certain o f t he mo rtgag e loan s hav e call o ptio ns that occu r within the n ext 10 years. However, if in terest rates were to sign i fican t ly in crease, we may be un able to ex ercise th e call op tion s on ou r ex isting mo rtgag e lo ans co mmen su rate with the sign ifican tly increased market rates. Assumin g t he loans are called at th eir nex t call d ates, ap pro ximately $10 9.8 milli on wo uld become d ue in 20 19 , $8 19 .4 million in 20 20 throu gh 20 24 , and $6 1.2 millio n in 2025 th ro ug h 2 02 9. The Co mp any o ffers a typ e o f commercial mo rtgag e loan und er wh ich the Co mp any will p ermit a lo an-to -v alu e ratio of u p to 85 % in ex chang e for a particip ating int erest i n the cash flo ws fro m th e un derly in g real est ate. As of Decemb er 3 1, 20 18 an d December 3 1, 2 01 7, app ro ximately $7 00 .6 millio n and $6 69 .3 mil lion , respectiv ely, of the Company ’s mo rtgag e loan s h ave th is p articipatio n feature. Cash flo ws receiv ed as a resu lt of this particip ation featu re are recorded as in terest in co me when recei ved. Du ring th e years end ed December 31 , 2 01 8, 20 17 , and 2016, the Co mp any reco gn ized $29 .4 millio n, $3 7.2 mi llio n, an d $16 .7 mil lion of particip ating mo rtgag e lo an i ncome, resp ectively. 15 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents As o f Decemb er 3 1, 2 01 8, app roximately $3 .0 millio n of inv ested assets co nsisted of n on perfo rmi ng mortg age lo ans, restructured mo rtgag e loan s, o r mortgag e loan s th at were fo reclosed and were co nv erted to real estat e p ro perties. The Compan y does no t ex pect these inv estments to adv ersely affect its liqu id ity o r ab ili ty to mai ntain prop er matching of assets and liabil ities. Du ring th e year en ded December 31 , 20 18 , certain mortg age loan transactio ns occurred that were acco un ted for as troubl ed d ebt restructuri ng s. For all mortgage lo ans, th e impact o f trou bled d ebt restru ctu ring s is generally reflected in ou r inv estment balance and in th e allowance for mo rtgag e lo an cred it l osses. Du rin g the year end ed December 31 , 20 18 , th e C ompany reco gn ized on e trou bled debt restru ctu ring tran saction as a result of th e Company g ran tin g a con cessio n to a bo rrower which in clu ded loan terms u nav ailabl e fro m ot her lenders. This co ncessio n was th e result o f an ag reemen t between t he credito r an d th e deb to r. Th e Company d id n ot identi fy any l oans who se p rincipal was permanen tly imp aired d urin g the y ear end ed Decemb er 31 , 20 18 . As o f December 31 , 2 01 7, approx imatel y $6.5 millio n of i nv ested assets con sist ed o f no np erforming , restructured, o r mo rtgag e lo ans th at were fo reclosed and were con verted to real estate prop erties. The Compan y d oes n ot expect these in vestmen ts to ad versel y affect its l iq uidity or ab ility to maint ain prop er matching of assets an d liab iliti es. Du ring th e year en ded Decemb er 31, 20 17 , cert ain mort gage loan transactio ns o ccurred th at were accou nted fo r as trou bled d ebt restructurin gs. Fo r all mo rtgag e lo ans, th e impact of tro ub led deb t restru ctu ring s is g enerally reflected in o ur i nv estment balance an d in th e all owance fo r mo rtgag e l oan cred it lo sses. Du rin g th e y ear en ded Decemb er 31, 2017, th e Compan y recog nized two tro ub led d ebt restru ctu ring s as a resu lt o f th e Compan y g ran ting co ncessio ns to bo rro wers which in clu ded lo an s terms u nav ailable fro m o th er len ders. These con cession s were th e result o f ag reemen ts between th e creditor and th e debtor. The Compan y d id no t id entify an y loan s who se p rincipal was permanen tly impaired du ring th e year end ed December 31 , 20 17 . As o f December 31 , 2 01 6, approx imatel y $1.5 millio n of i nv ested assets con sist ed o f no np erforming , restructured, o r mo rtgag e lo ans th at were fo reclosed and were con verted to real estate prop erties. The Compan y d oes n ot expect these in vestmen ts to ad versel y affect its l iq uidity or ab ility to maint ain prop er matching of assets an d liab iliti es. Du ring th e year en ded Decemb er 31, 20 16 , cert ain mort gage loan transactio ns o ccurred th at were accou nted fo r as trou bled d ebt restructurin gs. Fo r all mo rtgag e lo ans, th e impact of tro ub led deb t restru ctu ring s is g enerally reflected in o ur i nv estment balance an d in th e all owance for mortg age lo an credit lo sses. Du rin g th e year end ed December 31 , 2 01 6, th e Compan y recog nized a troub led deb t restruct urin g as a resu lt o f th e Co mp any g ranting a co ncession to a bo rro wer which in clu ded l oan terms un availab le from other lend ers and redu ced the ex pected cash flows o n th e loan . This co ncessio n was the resu lt o f an agreement b etween t he credito r and th e d eb tor. The Co mp any d id n ot id en t ify any loan s wh ose pri ncipal was permanen tly imp aired d urin g the y ear end ed Decemb er 31 , 20 16 . As of December 3 1, 2 01 8, t here was an allowan ce for mortgag e loan credit losses of $1 .3 millio n and as of December 3 1, 2 01 7 there were no all owances for mo rtgag e lo an cred it losses. Du e to th e Company ’s l oss ex perien ce an d n atu re o f the loan po rtfo l io , th e Co mp any bel iev es th at a collectiv ely ev alu ated allowance woul d b e in app ro priate. The Co mp an y believes an allo wan ce calculated th ro ug h an analysis o f specific lo ans that are b elieved to hav e a high er risk o f cred it impai rmen t p ro vides a mo re accu rate p resen t ati on o f exp ected losses in the portfolio an d is consistent with the ap pli cab le gu i dance fo r lo an impairments in ASC Sub to pic 31 0. Sin ce the Co mpan y u ses the sp ecific i dentification met ho d for calculating th e allowance, it is necessary to review th e eco no mic situ ation of each bo rro wer to determin e th ose that hav e high er risk o f credit imp airmen t. Th e Comp any has a team o f p ro fessio nals t hat mo nito rs bo rrower con dition s su ch as pay ment p ract ices, b orro wer credit, o perating p erforman ce, an d prop erty co nd itio ns, as well as en su ring t he timely pay men t o f prop erty tax es an d insu ran ce. Th rough this mo nito rin g process, the Compan y assesses the risk o f each loan . When issues are id entified, th e sev erit y of th e issues are assessed and revi ewed fo r po ssible cred it i mpairment. If a loss is p ro bab le, an exp ected loss calcu latio n is perfo rmed an d an allo wan ce is estab lished for that loan b ased on the exp ected lo ss. The exp ected lo ss is calcu lated as the excess carrying v alu e o f a loan o ver eith er th e present val ue o f ex pected fu tu re cash flo ws discou nted at the lo an’s o riginal effectiv e in terest rate, or the curren t estimated fair value of th e loan ’s un derly in g collateral. A lo an may be su bseq uen tly ch arg ed off at such po in t that th e Comp any no lo ng er ex pects to receiv e cash pay men ts, the p resen t v alu e o f futu re exp ected payments of th e reneg otiated l oan is less than th e cu rrent prin cip al balance, or at such time th at the Compan y is p arty to foreclo sure or bank rup tcy proceeding s asso ciated with th e b orrower an d d oes n ot exp ect to reco ver th e p rin cip al balance of t he lo an. A ch arg e off is recorded b y elimin ating the allowan ce against th e mortg age lo an and recording the ren ego tiated loan or the collateral p ro perty rel ated to the lo an as in vestmen t real estate o n th e b alance sheet , which is carried at th e l ower of the apprai sed fai r value o f th e p ro perty o r th e u np aid prin cip al b alance o f the l oan, less estimated sellin g co st s asso ciated with the p ro perty . As o f December 31 , 2018 2 017 (D o l l ars In Tho us a nds) Begi nn in g b alance $— $72 4 Ch arg e o ffs — (6 ,70 8) Recov eries (2 09 ) (73 1) Pro vision 1,5 05 6 ,71 5 Endi ng balan ce $1,2 96 $— It i s the Co mp any ’s p olicy to cease accruing interest on loans t hat are ov er 90 d ays d elinqu en t. Fo r loan s less than 90 d ays delin qu ent, interest is accrued u nless i t is determined th at th e accrued interest is no t collectib le. If a lo an becomes ov er 9 0 d ays delin qu en t, it is the Co mp any ’s gen eral pol icy to in itiate fo reclosu re p ro ceeding s un less a worko ut arrang ement to bring th e lo an current is in pl ace. For lo ans sub ject to a po olin g an d servicin g ag reement , th ere are certain add itio nal restrictio ns an d/or req uirements related to wo rko ut proceeding s, and as such , th ese lo ans may hav e differen t attrib utes and /o r circu mstan ces affectin g 15 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e status o f d elinq uen cy o r categ ori zatio n o f those in n on perfo rmin g status. An an aly sis of th e delin qu ent lo ans is sh own in the foll owin g ch art: 30 - 5 9 Days Delinquent 60 - 89 Days Delinquent G reater than 9 0 Da y s Delinquent Tota l Delinquent (D o l l a rs In Tho us a nds ) As of December 31, 2 01 8 Co mmercial mo rtgag e lo ans $1 ,04 4 $— $1 ,2 34 $2 ,27 8 Nu mb er of delinquent commercial mort gage loan s 4 — 1 5 As of December 31, 2 01 7 Commercial mortg age loan s $1 ,81 7 $— $— $1 ,81 7 Number o f delin qu en t co mmercial mo rtg age lo ans 2 — — 2 The Compan y’s commercial mortgage lo an p ortfolio co nsists o f mortgag e lo ans th at are collateral ized by real estate. Due to th e coll ateralized nature of the loan s, an y assessmen t of impairment an d u ltimate l oss g iv en a defau l t on th e lo ans i s based u po n a con sideration o f the estimated fair value of th e real estate. Th e Co mp any limits accru ed in terest inco me on impai red loan s to ni net y day s of in terest. Once accrued in terest o n th e impaired loan is received , in terest inco me i s reco gn ized o n a cash basis. Fo r informati on regarding i mpaired lo ans, p lease refer to th e fo llowing chart: Recorded Inv estment Unpaid Principa l Ba lance Rela ted Allowance Av erag e Reco rded Investment Interest Income Reco gnized Cash Ba sis Interest Inco me (D ollars In Thous ands) As of December 31, 2 01 8 Co mmercial mo rtgag e lo ans: With no related all owance reco rd ed $— $— $— $— $— $— With an allo wan ce recorded 5 ,68 4 5 ,30 9 1 ,29 6 1,8 95 26 7 29 3 As of December 31, 2 01 7 Commercial mortg age loan s: Wi th no rel ated allo wance reco rd ed $— $— $— $— $— $— Wi th an allowan ce recorded — — — — — — Mo rtgag e lo ans that were mo dified in a tro ub led deb t restructuri ng as of Decemb er 3 1, 2 01 8 an d December 31 , 20 17 were as fo llows: Number o f Contra cts Pre-Mo difica tion Outstanding Recorded Inv estment Post-Modifica tion Outsta nding Reco rded Investment (Do lla rs I n Thousands ) As of December 31, 2 01 8 Troub led d ebt restructurin g: Co mmercial mo rtg ag e lo ans 1 $2,6 88 $1 ,74 2 As of December 31, 2 01 7 Troub led d ebt restructurin g: Co mmercial mo rtg ag e lo ans 1 $4 18 $41 8 15 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 10 . DEFERRED POL ICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED Deferred Policy Acquisitio n Costs The balances an d chan ges in DAC are as follo ws: As of December 31, 2018 2017 (Dollars In Thousands) Balance, b eg inn in g o f p eriod $837,78 5 $5 72 ,32 8 Capi tal izatio n o f commission s, sales, and issue exp enses 446,46 8 3 33 ,25 0 Amo rtizatio n (133,33 7) (52 ,55 9) Change du e to un real ized inv estment gains and lo sses 56,15 3 (15 ,23 4) Implemen tatio n o f ASU 2 01 4-09 138,43 4 — Balance, end of perio d $1 ,345,50 3 $8 37 ,78 5 Va lue of B usiness Acquired The balances an d chan ges in VOBA are as fo llows: As of December 31, 2018 2017 (Dollars In Thousands) Balance, b eg inn in g o f p eriod $1 ,361,79 2 $1,4 47 ,50 1 Acquisitio ns 336,86 2 — Amo rtizatio n (92,47 1) (25 ,66 2) Change du e to un real ized inv estment gains and lo sses 71,46 8 (60 ,04 7) Balance, end of perio d $1 ,677,65 1 $1,3 61 ,79 2 Based on th e balan ce recorded as of December 31 , 2018 , the ex pected amo rtizatio n o f VOBA for t he nex t fiv e years is as fo llows: Ex pected Years Amortization (Do l l a rs I n Tho usa nds ) 20 19 $13 9,6 62 20 20 12 8,4 65 20 21 11 4,0 81 20 22 10 4,1 47 20 23 9 4,7 40 11 . GOODWILL Du ring the fou rth qu arter o f 20 18 , th e Compan y p erformed its an nu al qu ali tat iv e eval uat io n o f go od will based on the ci rcumstances that existed as of Octob er 1, 2 01 8 and determin ed th at there was no in dication th at i ts seg men t go odwill was mo re lik ely th an no t imp aired and no ad justmen t to i mpair go od wil l was n ecessary. Th e Co mp any has assessed wh eth er ev ents h av e occu rred su bsequ ent to Octo ber 1, 2 01 8 that wou ld impact th e Compan y’s co nclusio n and n o such even ts were id entifi ed . After co nsid eratio n of ap plicab le facto rs an d circu mstan ces n oted as p art o f th e ann ual assessmen t, the Co mp any d etermined that n o trigg ering ev ents h ad occu rred and it was more likel y th an no t that t he in crease in the fair value of th e reportin g un it wo uld ex ceed t he in crease in the carryin g v alue o f the repo rtin g u nit s. As o f Decemb er 3 1, 2 01 8, the Company increased its goo dwill balan ce by ap prox imately $32 .0 million. Refer to No te 1, Ba sis of Present atio n fo r ad dit io nal in fo rmation . As of December 3 1, 2 01 8, the b alance o f g oo dwi ll fo r the Compan y was $82 5.5 mi llio n. 15 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 12 . CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS The C ompany issues v ari abl e u niversal life and VA prod ucts th rou gh it s separate acco un ts fo r which i nv estment in co me and in vestmen t g ain s and lo sses accrue directl y to , an d inv estment risk is b orne by, the co ntract ho ld er. Th e Co mp any also o ffers, for o ur VA p ro du cts, certain GMDB. Th e most sig nificant of th ese g uarantees in vo lv e 1 ) retu rn of th e h ig hest ann iv ersary d ate acco unt v alu e, o r 2 ) retu rn of th e g reater of th e high est an niversary date acco un t value o r t he last ann iv ersary d ate acco un t v alu e co mp ou nd ed at 5 % i nterest or 3) return o f p remiu m. Th e GLWB rider prov id es t he con tract h older with pro tectio n against certai n adv erse mark et imp acts o n the amou nt th ey can withd raw and is classified as an embedd ed d erivativ e and is carried at fair value on t he Compan y’s b alan ce sheet . The VA separate accou nt b alances sub ject to GLWB were $8.4 billio n an d $9.7 billio n as of December 31 , 201 8 and 20 17 , respectively. For mo re in fo rmation regarding the val uatio n of and inco me imp act of GLWB, p lease refer to Note 2 , Su mma ry of Sign ifi ca nt Accou nting Policies, Note 6 , Fair Va lue of Fi na nci al In struments, and Note 7, Deriva tive Fin an cia l Instruments. The GM DB reserve is calcu lat ed b y app ly in g a ben efit ratio , eq ual to the present v alu e of to tal exp ected GMDB claims d ivi ded by the present v alu e of total expected co ntract assessmen t s, to cu mu lat iv e co ntract assessmen ts. Th is amou nt is t hen ad ju sted by the amo un t o f cumulative GMDB claims p aid an d accrued interest. Assumptions u sed in t he calculation o f th e GMDB reserve were as foll ows: mean inv estment p erforman ce of 6 .51 %, ag e-b ased mortality from the Ru ark 2 01 5 ALB table ad ju st ed for co mp any an d in du st ry experience, lapse rates determin ed b y a d yn amic formu la, and an average discou nt rate of 4.8%. Ch ang es in th e GMDB reserve are includ ed in b enefits and settl ement exp enses in the accompan ying con soli dated st atemen ts of in come. The VA sep arate acco unt balances sub ject to GM DB were $1 1.8 bi llio n an d $13 .7 billion as of December 31 , 2018 an d 2 01 7, resp ectiv ely. Th e to tal GMDB amou nt pay able based on VA accou nt balances as of December 31 , 20 18 , was $34 0.6 milli on (includ in g $27 4.4 millio n in th e Ann uities seg ment and $6 6.2 millio n i n the Acqu isitio ns seg men t) with a GMDB reserve o f $3 9.2 millio n an d $5.1 mi llio n in the Ann uit ies and Acq uisition s seg men t, resp ectively. The average attained ag e of co ntract ho ld ers as of Decemb er 3 1, 2 01 8 for th e Company was 71 years. These amounts exclud e certain VA bu siness which has b een 10 0% rein su red to Common wealth An nu ity and Life In su ran ce Co mp any (formerly kn own as Allmerica Fin ancial Life In su ran ce and An nu ity Co mp any ) (“CALIC”), u nd er a Mo dco agreemen t. The g uaranteed amou nt p ayable associ ated with th e an nu ities reinsu red to CALIC was $12 .3 mi llio n and is includ ed in th e Acq uisition s segment. The average att ain ed age of co ntract hold ers as of Decemb er 3 1, 2 01 8, was 68 years. Activ ity relatin g to GMDB reserves (excl ud in g tho se 10 0% rein su red un der th e Mo dco ag reemen t) i s as fo llo ws: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Begi nn in g b alance $3 4,0 83 $34,79 6 $36 ,42 7 In curred gu aran tee ben efits 1 3,6 19 90 2 67 8 Less: Paid g uarantee b enefits 3,3 81 1,61 5 2 ,30 9 Endi ng balan ce $4 4,3 21 $34,08 3 $34 ,79 6 Accoun t b alances o f v ariable annui ties with g uarantees in vested in VA separate accou nts are as follo ws: As of December 31, 201 8 201 7 (D ollars In Thous ands) Equi ty mu tu al fun ds $5,3 00 ,02 4 $8,9 14 ,63 7 Fixed in come mutual fu nds 6,5 68 ,57 5 4,8 20 ,34 9 To tal $1 1,8 68 ,59 9 $1 3,7 34 ,98 6 Certain of the Co mp any ’s fixed ann uities an d un iv ersal li fe p rod uct s h ave a sales in du cement in t he form of a retro active in terest cred it (“R IC”). In ad dit io n, certain ann uit y con t racts prov id e a sales inducement in th e fo rm of a b on us interest credit. Th e Company maintain s a reserv e fo r all in terest credits earned to date. Th e Co mp any d efers the exp ense associated with the RIC and b on us int erest credits each perio d and amortizes th ese costs in a mann er similar to th at u sed for DAC. 15 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Activ ity in th e Co mp any’s d eferred sales ind ucemen t asset was as follo ws: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Deferred asset, b eg inn in g o f p eriod $3 0,9 56 $22,49 7 $11 ,75 6 Amo un ts d eferred 1 3,3 36 14,24 6 16 ,21 2 Amo rtizatio n (4,7 15 ) (5,78 7) (5 ,47 1) Deferred asset, end of perio d $3 9,5 77 $30,95 6 $22 ,49 7 13 . REINSURANCE The Compan y rein su res certain of its risks with (ced es), and assumes risks from, other insu rers u nd er y early renewable t erm, coi nsu ran ce, and modi fied coinsu ran ce ag reemen ts. Und er yearly renewab le term agreements, th e Co mp an y rein sures on ly th e mortal ity risk , wh ile u nd er coinsurance th e Co mp any reinsu res a prop ort io nate share o f all risk s ari sin g u nd er t he reinsu red po licy. Un der co in su rance, t he reinsurer recei ves a prop ortio nate sh are o f the premiums less commission s an d is liabl e for a corresp ondin g share o f al l ben efit pay men ts. M od ified co in su ran ce is accou nted for in a mann er similar to co insu ran ce ex cept th at t he liabil ity for fu tu re p oli cy ben efits is h eld by th e ced in g co mp any, an d settlemen ts are mad e o n a n et b asis b etween the co mp an ies. Reinsu ran ce ceded arrang emen ts do n ot d isch arg e the Co mp any as th e pri mary insurer. Ceded balances wo uld rep resen t a l iab ility of the Company in the event th e rein surers were un able to meet thei r ob ligations to us u nd er th e terms of the reinsurance ag reemen ts. Th e Co mp an y monitors th e co ncen tration of credit risk th e Co mp any has with an y reinsurer, as well as th e financial co nd itio n o f its rein surers. As of December 3 1, 2 01 8, th e Co mp any had reinsu red ap prox imatel y 3 4% of the face v alu e of its life insurance in-force. The C ompany h as rein su red approx imatel y 15% of th e face val ue of its life in surance i n-fo rce with the foll owin g three reinsurers: •Security Life of Den ver In surance Co. (curren tly ad ministered b y Han no ver Re) •Swiss R e Life & Healt h America Inc. •The Linco ln Natio nal Li fe Insu ran ce Co . (cu rrently admin istered by Swiss Re Life & Health America Inc.) The Co mp any has no t exp erienced any credit lo sses fo r th e y ears end ed December 31 , 20 18 , 2 017, o r 2 01 6 related to th ese reinsu rers. Th e Co mp any has set limits on the amo un t of insu ran ce retain ed on the life of an y o ne p erso n. The amou nt o f in surance retained by the Co mp any on an y o ne life on tradition al life in su ran ce was $50 0,0 00 in years prio r to mid -2 00 5. In 2 00 5, this retenti on amou nt was in creased to $1 ,00 0,0 00 fo r certain po lici es, an d d uring 20 08 it was increased to $2,0 00 ,00 0 for certain po licies. During 20 16 , th e reten tion amo un t was increased to $5,00 0,0 00 . Reinsu ran ce premiums, co mmissio ns, ex pen se reimb ursemen ts, b enefits, and reserves related to reinsured l on g-du ratio n co ntract s are account ed fo r ov er th e life of the un derly i ng rein sured cont racts u sing assumptio ns co nsistent with th ose used to acco un t fo r the un derly ing co ntract s. The co st o f rei nsu ran ce related to sh ort-du rati on con tracts is acco un ted fo r ov er the rein su ran ce co ntract p eriod . Amo un ts reco verable from rein surers, fo r bo th sh ort-and lo ng -d uration reinsurance arrang ements, are estimated in a mann er co nsistent with the claim liab ilities and po licy b en efits associated with rein sured p olicies. The fol lo win g tabl e p resen t s th e net life i nsu ran ce in -force: As o f December 31, 2 018 2 0 17 (D oll ars In Thous ands) Direct l ife in surance i n-fo rce $76 5,9 86 ,22 3 $75 1,5 12 ,46 8 Amo un ts assumed fro m oth er compan ies 13 5,4 07 ,40 8 11 0,2 05 ,19 0 Amo un ts ced ed to oth er compan ies (30 2,1 49 ,61 4) (32 8,3 77 ,39 8) Net l ife in surance i n-fo rce $59 9,2 44 ,01 7 $53 3,3 40 ,26 0 Percent ag e of amo un t assumed to net 2 3% 2 1% 15 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fol lo win g tabl e reflects th e effect of reinsu ran ce on life, accid ent/h ealth, and prop erty an d liab ili ty in surance p remiu ms written an d earned : Gross Amo unt Ceded to Other Co mpanies Assumed fro m Other Co mpanies Net Amo unt (D o l l ars In Tho us a nds ) For The Yea r Ended December 31 , 20 18 : Premi ums and po licy fees: Life i nsu ran ce $2 ,681,19 1 $(1,1 73 ,19 4) $6 26 ,28 3 $2,1 34 ,28 0 (1 ) Acciden t/h ealth insu ran ce 47,02 8 (30 ,12 6) 12 ,82 6 29 ,72 8 Property an d liab ili ty in surance 308,63 4 (1 81 ,62 1) 4 ,88 3 1 31 ,89 6 To tal $3 ,036,85 3 $(1,3 84 ,94 1) $6 43 ,99 2 $2,2 95 ,90 4 December 31 , 20 17 : Premi ums and po licy fees: Life i nsu ran ce $2 ,655,84 6 $(1,1 51 ,17 5) $4 35 ,11 3 $1,9 39 ,78 4 (1 ) Acciden t/h ealth insu ran ce 51,99 1 (33 ,05 1) 14 ,94 5 33 ,88 5 Property an d liab ili ty in surance 309,84 8 (1 76 ,50 9) 9 ,67 6 1 43 ,01 5 To tal $3 ,017,68 5 $(1,3 60 ,73 5) $4 59 ,73 4 $2,1 16 ,68 4 December 31 , 20 16 : Premi ums and po licy fees: Life i nsu ran ce $2 ,610,68 2 $(1,1 26 ,91 5) $4 54 ,99 9 $1,9 38 ,76 6 (1 ) Acciden t/h ealth insu ran ce 58,07 6 (36 ,93 5) 17 ,43 9 38 ,58 0 Property an d liab ili ty in surance 261,00 9 (1 50 ,86 6) 5 ,72 6 1 15 ,86 9 To tal $2 ,929,76 7 $(1,3 14 ,71 6) $4 78 ,16 4 $2,0 93 ,21 5 (1)Includes annu ity policy fees o f $1 7 7 .1 millio n , $173 .5 million , an d $160.4 m illion, for th e y ears ended Decemb er 31, 201 8 , 2017, and 2 0 16, respectiv ely . As o f Decemb er 3 1, 2 01 8 and 20 17 , p oli cy an d claim reserves relatin g to insuran ce ceded o f $4.7 bil lion and $5.1 bil lion , resp ectiv ely, are included in rein su rance receivab les. Sh ou ld any o f t he rei nsu rers be un able to meet its ob ligatio n at the time of th e claim, the Compan y wou ld be ob ligated to pay such claims. As o f December 31 , 2 01 8 an d 2 01 7, the Compan y h ad paid $11 5.8 million an d $96 .6 mill io n, respect iv ely, of ceded benefits wh ich are recov erab le from reinsu rers. In ad ditio n, as of December 31 , 201 8 and 2 017, the Co mp any h ad receiv ables o f $64 .8 millio n an d $65 .1 million , respect iv ely, rel ated to insurance assu med. 15 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Company’s t hird party rei nsu ran ce receiv abl es amou nted to $4 .8 bil lion and $5.1 bi llio n as o f Decemb er 3 1, 2 01 8 and 20 17 , respect iv ely. These amo un ts includ e ced ed reserve balances and ced ed ben efit p aymen ts. The ced ed ben efit p aymen ts are recov erab le from reinsu rers. Th e follo win g table sets fort h the receivab les attrib utable to ou r more sig nificant rein surance partn ers: As of December 3 1 , 201 8 2 017 Reinsurance Receivable A.M. Best Rating Reinsura nce Receiv a ble A.M. Best Rating (Dolla rs I n M il l i o ns ) Secu rity Life of Denv er Insu ran ce Co mp any $72 2.2 A $7 40 .8 A Swiss Re Life & Health Ameri ca, Inc.60 3.8 A+ 6 14 .8 A+ Li ncoln Natio nal Life In su ran ce Co .46 1.1 A+ 4 89 .1 A+ SCOR Glo bal Life(1)31 7.2 A+ 3 31 .8 A+ Tran samerica Life Insurance C o.30 1.0 A+ 3 35 .6 A+ RGA Rein su ran ce Co mp an y 26 0.5 A+ 2 78 .3 A+ American Un ited Life Insuran ce Co mp any 24 2.8 A+ 2 66 .7 A+ Cent re Rein surance (Bermu da) Ltd 19 7.4 NR 2 12 .2 NR The Canad a Life Assu rance Compan y 18 8.2 A+ 1 86 .1 A+ Emp loy ers Reassu ran ce Co rp oration 17 8.4 B+ 1 93 .9 A- (1)Includes SCOR Glob al Life Americas Reinsu rance Comp any , SCOR Glo b al Life USA Reinsu ran ce Co, and SCOR Glob al Life Rein suran ce Co of Delaware The Compan y’s reinsu ran ce con tracts typi cally d o n ot h av e a fix ed term. In gen eral, th e reinsurers’ ab ility to termin ate co verag e for existin g cessio ns i s limited to such circumst an ces as material breach o f con tract or n on -payment o f premiums by the ced in g compan y. The reinsurance co ntracts generally con tain provi sio ns intend ed to p ro vide th e ced in g company with th e abil ity to ced e future b usiness o n a b asi s co nsistent with h i sto rical terms. Ho wever, eith er p arty may t ermin ate any of th e co ntracts with resp ect to future bu sin ess u po n approp riate not ice to th e other party . Gen eral ly, th e rein surance con tracts d o no t limit th e o verall amou nt of the loss that can be in curred b y the reinsurer. Th e amou nt of liab ilities ced ed un der co ntracts t hat p rov id e fo r the pay men t o f ex perience refu nd s is immat eri al. 15 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 14 . DEBT AND OTHER OBLIGATIONS Debt a nd Subo rdina ted Debt Securi ties Deb t an d su bo rd in ated deb t secu rities are su mmarized as follo ws: As o f December 31, 2 0 1 8 20 1 7 Outsta nding P rinci pal Carry i ng A mounts Outsta nding P rincipal C arrying A m ounts (D ollars In Thous ands) Debt (y ear of issue): Credi t Facility $— $— $— $— Capit al l ease o bligatio n 1,3 19 1,3 19 1,68 2 1 ,68 2 6 .40 % Sen io r No tes (20 07 ), d ue 2 01 8 — — 150,00 0 1 50 ,51 8 7 .37 5% Senior Notes (2 00 9), du e 20 19 40 0,0 00 41 6,4 69 400,00 0 4 35 ,80 6 8 .45 % Sen io r No tes (20 09 ), d ue 2 03 9 19 0,0 44 28 8,5 47 232,92 8 3 57 ,04 6 4 .30 % Sen io r No tes (20 18 ), d ue 2 02 8 40 0,0 00 39 5,4 92 — — $99 1,3 63 $1 ,10 1,8 27 $784,61 0 $9 45 ,05 2 Su bo rd i nated deb t (year of issue): 5 .35 % Su bo rd inated Deb entures (20 17 ), d ue 20 52 $50 0,0 00 $49 5,4 26 $500,00 0 $4 95 ,28 9 3 .55 % Su bo rd inated Fu nd in g Ob ligatio ns (2 01 8), du e 2 038 5 5,0 00 5 5,0 00 — — 3 .55 % Su bo rd inated Fu nd in g Ob ligatio ns (2 01 8), du e 2 038 5 5,0 00 5 5,0 00 — — $61 0,0 00 $60 5,4 26 $500,00 0 $4 95 ,28 9 The Co mp any ’s fu tu re maturities o f d ebt , ex cludi ng n otes payab le t o ban ks, t he cap ital lease o blig ations, and sub ordinated deb t secu rities, are $4 16 .5 mil lion in 20 19 and $6 84 .0 mil lion th ereafter. Du ring th e y ear en ded December 3 1, 20 18 , th e Co mp any rep urchased and sub sequentl y exting uished $6 5.6 mill io n (p ar val ue - $4 2.9 millio n) o f th e Co mp any’s 8 .45 % Seni or Notes d ue 20 39 . Th ese rep urchases resulted in a $1.8 million pre-tax gain fo r th e Compan y. Th e g ain is recorded in other in come in the co nso lidated statements of income. Du ring 20 18 , PLICO issued $110.0 million of Sub ordin ated Fu nd in g Ob lig ati on s at a rate o f 3 .55 % d ue 20 38 . These ob lig ation s are no n-reco urse to th e Co mp any . Du ring 20 18 , the Comp any issued $40 0.0 million o f its Sen io r No tes at a rate o f 4 .30 %, du e 2 02 8. Th ese no tes were issu ed n et of a discount o f $1.0 mi llio n. At issu ance, these n otes were carried o n the Co mp any ’s balance sh eet n et o f th e discoun t an d the associated deferred issu ance exp enses of $3.7 mi llio n. Th e Co mp any u sed the n et pro ceed s from th e o fferin g for general corp orate pu rp oses, in clu ding th e repay ment of amo un ts o utstand in g u nd er ou r Credit Facility. Du ring 20 17 , the Co mp any issu ed $50 0.0 milli on of its Su bo rd inated Deb entures du e 20 52 . At issu ance, th ese Su bo rd in ated Deb entures were carried o n t he Company ’s balance sh eet net o f the asso ciated d eferred issu ance exp enses o f $4 .8 million . The Compan y used t he net proceeds from th e offerin g to call and red eem, at par, the en t ire $15 0.0 million o f 6 .00 % Su bo rd in ated Deb en t ures du e 2 04 2 an d $287.5 millio n of 6 .25% Subord in ated Deb entures du e 20 42 . Un der a revo lv in g line o f credit arrang ement that was in effect until M ay 3 , 2 01 8 (the “20 15 Credi t Facility”), the Co mp an y had th e abil ity to bo rrow o n an un secured b asis up to an ag gregat e prin cip al amo unt of $1 .0 billi on .The Company had th e rig ht in certain circu mstances to requ est that th e co mmitmen t un der the Cred it Facility be in creased u p to a max imum p rincipal amou nt o f $1.2 5 b illio n. Balances o utst an din g un der the 2 01 5 Cred it Facility accrued in terest at a rate equ al to, at th e op tion of th e Borro wers, (i) LIB OR p lu s a sp read b ased on th e ratin gs o f th e Co mp any ’s Sen io r Deb t, o r (ii) th e sum of (A) a rate eq ual to th e h ig hest o f (x ) the Ad ministrative Ag ent’s prime rate, (y ) 0 .50 % above th e Fu nds rat e, or (z) th e o ne-mo nth LIBOR p lus 1 .00 % an d (B) a spread based o n t he ratin gs o f th e Co mp any ’s Senior Deb t. Th e 2 01 5 Cred it Facility also p ro vided for a facility fee at a rate that varies with t he ratin gs o f the Co mp any ’s Sen io r Deb t and that is cal cu lated o n the ag gregate amou nt of commitments un der th e 20 15 C redit Facili ty, whether used or un used . The an nu al facili ty fee rate was 0 .12 5% of th e agg reg ate p rincipal amo un t. The Cred it Facility p ro vided t hat th e Company was liab le for the full amo un t o f any ob ligatio ns fo r bo rrowing s o r let ters o f credit, in clu ding t ho se of PLICO, u nd er th e 20 15 Cred it Facility. Th e mat urity dat e of t he 2 01 5 Credit Facility was February 2 , 20 20 . On M ay 3 , 20 18 , th e Company amen ded th e 20 15 Cred it Facility (as amend ed, the “Credi t Facility”). Und er the Credit Facility, the Compan y h as th e ab ility to borro w on an u nsecu red basis u p to an agg reg ate p rincipal amo un t of $1 .0 billio n. The Co mp any h as t he rig ht in certain ci rcumstances to request th at the co mmitmen t u nd er th e Credit Facili ty be increased u p to a maximu m p rin cip al amo un t of $1 .5 b illion . Bal an ces o utstand in g un der the Credit Facility accrue interest at a rate equ al to, at th e op t io n o f the Bo rrowers, (i) LIBOR p lu s a sp read based on th e ratings of the Co mpan y’s Sen io r Deb t, o r (ii) the sum of (A) a rate 15 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents eq ual to th e h igh est o f (x) th e Admin istrati ve Agen t’s Prime rate, (y) 0.5 0% ab ov e th e Fu nd s rate, or (z) th e on e-mon th LIB OR p lu s 1.0 0% an d (B) a sp read based on th e ratin gs of th e Comp any ’s Sen i or Deb t. The Cred it Facilit y al so p ro vid ed for a faci lity fee at a rate th at v aries with th e ratin gs of th e Compan y’s Senior Debt and that is calculated on the ag gregat e amou nt of co mmitmen ts un der the Credi t Facility, wh eth er used or un used. Th e an nu al facility fee rate is 0.125% o f th e ag gregate p rincipal amou nt. Th e Credit Facility prov id es th at th e Compan y is liab le fo r the fu ll amou nt of an y ob ligatio ns for bo rrowi ng s o r let ters of credit, includ in g tho se of PLICO, u nd er the Credit Facility. The maturity d ate of th e Credit Facility is May 3, 20 23 . The Compan y i s no t aware of an y no n-complian ce with th e fin ancial d ebt co venan ts o f th e Cred it Facil ity as o f December 31 , 20 18 . Th e Co mp an y did n ot h ave an o utstand in g balance on th e Credit Facility as o f Decemb er 3 1, 2018. The fol lo win g is a summary o f the Compan y’s est imated d ebt cov enant calcu latio ns as of Decemb er 3 1, 2 01 8: Requirement Actua l Results Con soli dated net worth margi n greater th an o r equal to $0 g reater t han $1 b illio n Debt to to tal cap ital ratio less than 40 % less th an 2 3% No n-Reco urse Funding Obliga tions Go ld en Gate Cap tive In suran ce Co mp an y On Janu ary 15 , 2 01 6, Golden Gate Cap tive Insuran ce Co mp any (“Golden Gate”), a Vermon t sp ecial p urpose fin ancial in su ran ce co mpan y an d a wh olly o wned su bsidiary o f PLICO, and Steel City, LLC (“St eel Ci ty ”), a wh oll y o wned su bsid iary o f th e Compan y, entered into an 1 8-year tran saction to finan ce $2.1 88 billion of “XXX” reserv es related to th e acqu ired GLAIC Block and the other term life insurance b usiness rein su red to Go ld en Gate b y PLICO an d WCL, a d irect who lly own ed sub sidi ary o f PLICO. Steel City issued n otes with an ag gregate ini tial prin cip al amo un t of $2 .18 8 b illio n to Go ld en Gate in ex chan ge fo r a surplu s no te issued b y Golden Gate with an in itial prin cip al amo un t o f $2.1 88 b ill io n. Th ro ug h the stru ctu re, Hann ov er Life Reassu ran ce Co mp any of America (Bermu da) Lt d., Th e Canada Life Assurance Compan y (Barb ado s Bran ch) and Nomura Americas Re Lt d. (collectiv ely, the “Risk- Takers”) prov id e credit en han cement to t he Steel City Notes fo r th e 1 8-year term in ex chan ge for cred it enh ancemen t fees. Th e transaction is “no n-recourse” to PLICO, WCL and the Co mp any, meaning t hat no ne of these co mp anies, o th er th an Go ld en Gate, are liable t o reimbu rse t he Risk-Tak ers for any credit en han cement pay ments req uired to b e made. As o f December 31 , 2 01 8, t he agg reg ate prin cip al b alance of th e Steel Cit y Notes was $1.8 83 billi on . In co nn ection with th i s tran saction , t he Compan y has en tered in to certain su pp ort agreements un der which it gu aran tees o r otherwise sup po rts cert ain ob ligatio ns of Go ld en Gate o r Steel City, in clu ding a gu arantee o f th e fees to th e Risk-Takers. The sup po rt ag reemen ts p ro vide th at amounts wou ld b eco me payab le by the Co mp any if Go l den Gate’s an nu al gen eral corp orate ex pen ses were h ig her than mo deled amo un ts, certain rein surance rat es ap plicable to the sub ject b usin ess in crease bey on d mod eled amou nts or in th e ev en t write-d own s du e to o th er-th an-tempo rary imp airmen ts o n assets held in certain acco un ts ex ceed defined thresh old level s. Ad ditio nally , th e Co mp any has en tered int o a separate agreemen t to g uarant ee p ayment of certain fee amou nts in co nn ection with the cred it enh ancemen t o f the Steel City Notes. As of Decemb er 3 1, 2 01 8, n o p aymen ts have b een mad e un der th ese ag reements. In co nn ection with th e tran sactio n ou tlined ab ov e, Go ld en Gate had a $1.8 83 billi on ou tstan ding no n-reco urse fun ding o blig ation as o f December 31 , 2 01 8. Thi s no n-reco urse fu nd ing o bligat io n matu res in 2 03 9 an d accru es in terest at a fixed annual rate o f 4 .75 %. Go ld en Gate II Cap tive In suran ce Co mpa ny Go ld en Gate II Captive In surance C ompany (“Golden Gat e II”), a So uth Caro lina special pu rpose fin ancial capt iv e insu ran ce co mp an y and a who lly owned by PLICO, h ad $57 5 millio n o f o utstandin g non-reco urse fun ding ob ligatio ns as o f Decemb er 3 1, 20 18 . These ou tstand ing n on -recou rse fu nd ing ob ligatio ns were issued to sp ecial pu rp ose trusts, which in tu rn issued securi ties to third parties. Certain o f o ur affi liates o wn a p ortion o f these securities. As of Decemb er 31 , 20 18 , secu rities related to $20.6 mi llio n of th e o utstan ding bal an ce o f the n on-recou rse fun ding o bligat io ns were held by ex ternal p arties an d secu rities related to $5 54 .4 million o f th e n on -recourse fu nd in g ob ligatio ns were held b y th e Compan y and its affiliates. The Co mp any h as entered into certain su pp ort ag reement s wit h Golden Gate II ob ligatin g the Compan y to mak e cap ital co ntribu tions o r p ro vide su pp ort related to certain of Golden Gate II’s exp en ses and in certain circu mstances, to collaterali ze certain of th e Co mp any ’s ob ligatio ns to Go ld en Gate II. These sup po rt ag reements prov id e th at amou nts wo uld b ecome payab le b y th e Comp any t o Gold en Gate II if i ts an nu al g eneral co rp orate ex pen ses were h i gh er than mo deled amou nts o r if Golden Gate II’s inv estment inco me on certai n in vestmen ts o r premium inco me was b elow certain act uarial ly d etermined amo un t s. Th e Co mp any mad e a pay men t of $0 .6 mi llio n un der th e In terest Su pp ort Agreement d urin g th e secon d q uarter of 2 01 8. In ad dit io n, certain Interest Sup po rt Ag reement ob lig ati on s t o the Co mp any of $4 .9 mil lion hav e b een co llateralized by PLC u nd er the terms of th at ag reemen t. As of Decemb er 3 1, 2 01 8, n o p aymen ts hav e b een received un der th e YRT Premiu m Su pp ort Ag reement . Re-eval uatio n and , if necessary, ad ju st ments o f an y su pp ort ag reemen t co llateralization amo un ts o ccur an nually du ring th e first q uarter p ursu ant to th e terms o f the su pp ort ag reements. Du ring th e year en ded Decemb er 31 , 20 18 , th e Co mp any and its affiliates repu rch ased $38 .0 millio n o f its o utstan ding no n-reco urse fu nd ing ob ligatio ns, at a discou nt. During th e y ear December 3 1, 20 17 , th e Compan y an d its affil iates d id no t rep urchase any of its o utstand in g no n-reco urse fu nd ing ob ligatio ns. Go ld en Gate V Vermo nt Ca pti ve Insura nce Comp an y On Octo ber 10 , 2 01 2, Go ld en Gat e V Vermon t Cap tive In surance Co mp an y (“Gold en Gate V”), a Vermo nt sp ecial pu rp ose finan cial in su rance co mp any, and Red M ou ntain , LLC (“Red M ou ntain ”), bo th wh oll y owned sub sidi ari es o f PLICO, en tered in to a 20 -year tran sactio n to fi nance u p to $945 mi llio n o f “AXXX” reserv es related to a b lock o f u niversal life insu ran ce po licies wi th 16 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents secondary gu aran tees issu ed b y o ur direct wh olly own ed su bsid iary PLICO and in direct who lly o wned sub sid iary, West Co ast Life In surance Compan y (“WCL”). Go ld en Gate V issued n on -recou rse fu nd in g obligatio ns to Red Mo un tain, and Red Mo un tai n issu ed a no te with an initial prin cip al amoun t o f $2 75 mi llio n, increasin g to a maximu m o f $94 5 million in 2027, t o Golden Gate V fo r depo sit to a rein su rance tru st su pp orting Golden Gate V’s ob lig ation s un der a rein su ran ce ag reemen t with WCL, pu rsu ant to which WCL cedes liab ili ties relating to t he po l ici es of WCL an d retroced es liabilities relatin g to th e po licies o f PLICO. Thro ug h the structure, Hann ov er Life Reassurance Compan y of America (“Hann ov er Re”), th e ultimate risk taker in the tran saction , prov id es credit en hancement to the Red Mo un tain n ote for th e 20 -y ear term in exch ang e for a fee. The transact io n is “no n-reco urse” to Golden Gate V, Red Mo un tain, WCL, PLICO an d the Comp any, mean in g that n one of th ese co mp anies are liable fo r the reimbu rsement of an y credit enh ancemen t p ayments requi red to be made. As of Decemb er 3 1, 20 18 , t he p rincipal b alan ce of the Red Mou ntain n ote was $67 0 million . Future schedu l ed cap ital con trib ution s to prefu nd credit enhancemen t fees amou nt to app ro ximately $1 14 .6 million and will be p aid in ann ual installmen ts th rough 20 31 . In co nn ecti on with th e transact io n, th e Compan y has en tered in to certain sup po rt ag reement s u nd er whi ch it g uaran tees or ot herwise sup po rts certain ob lig ation s o f Golden Gate V or Red Mo un tain. The sup po rt ag reemen ts pro vide that amou nts wo uld become pay able by the Comp any if Gol den Gate V’s annual gen eral corporate ex pen ses were high er than mo deled amou nts o r in th e even t write-d own s d ue to other-than -temp orary i mpairments o n assets held in certain acco unt s exceed defin ed th resh old levels. Add itio nally, the Co mp any h as entered into sep arat e agreemen ts to indemnify Gol den Gate V with resp ect to mat erial adv erse ch ang es in no n-gu aran teed element s o f in surance po licies reinsu red b y Gol den Gate V, an d to gu aran tee p ayment o f certain fee amou nts in con nectio n with th e credit en han cement of th e Red Mo unt ain note. As of December 31 , 2 018, n o p ayments hav e been made un der th ese agreements. In co nn ection with th e tran sactio n ou tli ned ab ov e, Go ld en Gate V had a $670 million ou tstan ding non-reco urse fun ding o blig ation as o f Decemb er 3 1, 2 01 8. Th is no n-reco urse fun ding ob lig ati on mat ures in 2 03 7, h as sched uled increases in p rincipal to a max imum of $945 mil lion , an d accrues in terest at a fi xed an nu al rate o f 6 .25 %. No n-reco urse fu nd ing obligatio ns o utstand in g as o f Decemb er 3 1, 20 18 , on a co nsolid ated basis, are sh own in th e fo llowing tab le: Issuer O utstanding Principal Carry ing Value(1) Maturity Year Year-to-Da te Weighted-Avg Interest Rate (Dollars In Thousands) Golden Gate Cap tive Insurance Comp any (2 )(3 ) $1 ,88 3,0 00 $1 ,88 3,000 20 39 4 .75 % Golden Gate II Cap tiv e Insurance Company 2 0,6 00 1 7,703 20 52 4 .99 % Golden Gate V Vermo nt Cap tive Insurance Comp any (2 )(3 ) 67 0,0 00 72 9,454 20 37 5 .12 % M ONY Life Insu ran ce Co mp any (3) 1,0 91 2,340 20 24 6 .19 % Total $2 ,57 4,6 91 $2 ,63 2,497 (1) Carrying v alues inclu de premiu m s and d iscounts an d do not rep resent u n paid prin cip al b alan ces. (2) Ob lig ations are issu ed to n o n-consolidated subsid iaries of the Company. These o b ligations collateralize certain h eld -to -maturity securities issu ed by wh o lly o wn ed su b sidiaries of PLICO. (3) Fixed rate oblig atio n s No n-reco urse fu nd ing obligatio ns o utstand in g as o f Decemb er 3 1, 20 17 , on a co nsolid ated basis, are sh own in th e fo llowing tab le: Issuer Outstanding Principa l Carry ing Value(1) Maturity Year Year-to-Da te Weighted-Avg Interest Rate Golden Gate Cap tive Insurance Comp any (2 )(3 ) $2 ,01 4,0 00 $2 ,01 4,000 20 39 4 .75 % Golden Gate II Cap tiv e Insurance Company 5 8,6 00 4 9,787 20 52 3 .88 % Golden Gate V Vermo nt Cap tive Insurance Comp any (2 )(3 ) 62 0,0 00 68 1,285 20 37 5 .12 % M ONY Life Insu ran ce Co mp any (3 ) 1,0 91 2,405 20 24 6 .19 % Total $2 ,69 3,6 91 $2 ,74 7,477 (1)Carry in g values in clu d e p remiums an d disco u n ts and d o not rep resent un p aid p rincipal balances. (2)Oblig atio n s are issued to non-co n solid ated su bsid iaries of th e Co mpany. These ob lig atio ns collateralize certain h eld -to-matu rity secu rities issued by wholly o wn ed su bsid iaries of PLICO. (3)Fix ed rate obligation s 16 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Letters o f Credit Go ld en Gate III Vermon t Cap t ive In su ran ce Co mpa ny On Ap ril 2 3, 20 10 , Golden Gate III Vermo nt Captive Insurance Co mp an y (“Go ld en Gate III”), a Vermo nt special p urpose finan cial insu ran ce co mp any an d whol ly o wned sub sidi ary o f PLICO, entered into a Reimbu rsement Agreement (the “Reimbu rsement Agreement”) with UBS AG, Stamford Branch (“UBS”), as issu in g len der. Und er th e Reimb ursemen t Agreement, UBS issued a letter of credit (t he “LOC”) to a tru st fo r th e ben efit of WCL. The Reimb ursemen t Ag reemen t has u nd erg on e t hree sep arate amen dment s an d restat ements. The Reimb ursemen t Ag reemen t’s cu rrent effect iv e d ate is Ju ne 25 , 20 14 . Th e LOC bal an ce reach ed its sched uled peak o f $93 5 millio n i n 201 5. As o f December 31 , 2 01 8, the LOC bal an ce was $86 0 mill io n. The term of th e LOC is ex pected to be ap pro ximat ely 1 5 years from the original issuance date. This transactio n is “non-recou rse” to WCL, PLIC O, and th e Co mp any, meaning that n on e o f th ese co mpan ies oth er th an Go ld en Gate III are liab le fo r reimb ursemen t on a draw of th e LOC. Th e Compan y has entered i nto cert ain sup po rt ag reemen ts with Go lden Gate III o blig ating the Co mp any to make capit al co ntribu t io ns or p ro vide sup po rt related to certain o f Go ld en Gate III’s ex pen ses an d in certain circu mstances, to coll ateralize certain of the Co mp any ’s o blig ation s to Golden Gate III. Fu tu re sched uled cap ital con trib ution s amou nt to ap pro ximat ely $70 .0 mill io n and will be paid in two installments with th e last pay ment o ccu rring in 20 21 . Th ese con trib utio ns may be su bject to po tential offset against dividen d pay men ts as permitted u nd er th e terms of th e Rei mb ursemen t Agreemen t. The su pp ort ag reemen ts p ro vide t hat amou nts wo uld become p ayable b y th e C ompany to Gol den Gate III if its ann ual gen eral corpo rate ex penses were high er th an mod eled amo un ts or if sp ecified catastro ph ic lo sses o ccur d uri ng d efined time perio ds with resp ect to th e po licies rein sured b y Golden Gate III. Pu rsuant to th e terms o f an amen ded and restated letter agreement with UBS, the Co mp any has co ntin ued to gu aran tee the p ay men t o f fees to UBS as specified in th e Reimb ursemen t Agreement. As o f Decemb er 3 1, 2 01 8, n o p ay men ts have b een mad e un der th ese ag reemen t s. Go ld en Gate IV Vermon t Cap t ive In su ran ce Co mpa ny Go ld en Gate IV Vermon t Capt iv e Insuran ce Co mp any (“Go lden Gate IV”), a Vermon t sp ecial p urpo se finan cial insu ran ce co mp any an d who lly owned su bsidiary of PLICO, i s party to a Reimbu rsement Ag reemen t with UBS AG, Stamford Branch , as issuin g lend er. Un der th e Reimb ursemen t Agreement, dated December 10 , 20 10 , UBS issued an LOC in th e in iti al amo un t o f $27 0 millio n to a tru st for the ben efit of WCL. Pu rsuant to the terms of th e Reimb ursemen t Agreement, th e LOC reached its sch edu led peak amou nt of $7 90 million in 2 01 6. As of Decemb er 3 1, 2018, the LOC b alance was $770 mi llio n. Th e term o f th e LOC is ex pected to be 1 2 years from th e o riginal issuan ce d ate (stated maturity of December 3 0, 2 02 2). The LOC was issued to sup po rt certain obl ig ation s of Gold en Gate IV to WCL u nd er an in demnity rein su ran ce agreement, pu rsu ant to which WCL cedes liab iliti es relatin g to th e po licies of WC L and retroced es liab ilities relat in g to the p oli cies of PLICO. Th is t ransaction is “n on -recou rse” to WCL, PLICO, and the C ompany, meaning th at n on e o f th ese co mp anies other th an Go ld en Gate IV are liable fo r reimbu rsement on a draw o f the LOC. Th e Co mp any has en tered into certai n su pp ort ag reements with Go ld en Gat e IV o blig ating th e Compan y to make capital con tribu tion s o r p ro vid e sup po rt relat ed to certain o f Go ld en Gate IV’s ex pen ses an d in certain circumstan ces, to co llateralize certain o f t he C ompany ’s ob lig ation s to Go l den Gate IV. Th e sup po rt agreements provi de th at amount s would become p ayable b y t he Co mp any to Golden Gate IV if it s an nu al gen eral corp orate ex pen ses were h ig her than mod eled amou nts or if sp ecified catastrop hic lo sses o ccu r du ring defin ed time perio ds with respect to th e po licies rein su red by Gol den Gate IV. The Co mp any has also en tered into a separate agreement to gu arantee the payments o f LOC fees u nd er th e t erms o f th e Reimbu rsement Agreement. As of Decemb er 3 1, 20 18 , no p aymen t s h ave been made un der th ese ag reements. Secured Financing Transa cti ons Repurcha se Pro gra m Borrowi ng s Wh ile the Compan y anticipates th at th e cash flows of its op eratin g su bsid iaries will b e sufficien t to meet its inv estment commitmen ts an d operating cash needs in a n ormal credit market en viro nment, the Compan y recog nizes th at in vestmen t commitments sched uled to b e fun ded may, fro m time to time, ex ceed the fu nd s then av ailable. Therefo re, the Company has established rep urchase agreement pro grams for certain of its in su ran ce subsid iaries to p rov id e liqu id ity when n eeded . Th e Co mp any ex pects that th e rate receiv ed on its in vestmen ts will eq ual o r exceed its b orro win g rate. Un der this pro gram, th e Co mp any may, fro m time to time, sell an inv estment security at a sp ecific price and ag ree to rep urchase th at securi ty at an oth er specified p rice at a later d ate. These b orro win gs are ty pically for a term less th an 9 0 day s. Th e mark et v alue o f secu rities t o be repu rch ased i s mo nito red and co llateral level s are adjusted wh ere app ro pri ate to protect the cou nterp arty against cred it exp osu re. Cash received is inv est ed in fixed matu rity secu rities, and th e ag reemen ts p rov id ed fo r net settlemen t in th e ev ent o f d efault o r o n terminatio n o f the ag reements. As of Decemb er 3 1, 2018, the fair value o f secu rities p led ged un der the repu rch ase prog ram was $4 51 .9 millio n and th e repu rch ase o bligat io n of $4 18.1 million was includ ed in th e Compan y’s co nsolid ated balance sheets (at an average bo rrowi ng rate of 24 5 b asi s po int s). Du ring the y ear en ded Decemb er 31, 20 18 , th e maximu m b alan ce o utstand in g at any one p oint i n time rel ated to th ese prog rams was $88 5.0 millio n. The average d aily b alance was $5 11 .4 mil lion (at an av erage borro win g rate o f 1 84 basis po in ts, respectiv ely ) d urin g t he year en ded December 31 , 2 01 8. Du ring the y ear en ded December 3 1, 2 01 7, th e max imum b alance outstand in g at an y on e poi nt i n time related to these p ro grams wa s $98 8.5 million . Th e av erag e daily balance was $6 24 .7 mil lion (at an av erage b orrowin g rate o f 1 01 basis po in ts) du ring the year en ded Decemb er 31 , 20 17 . S ecurit ies Lend in g The Compan y participates in secu rit ies lend in g, p rimarily as an inv estment yield enh ancemen t, whereby securities that are held as investments are lo aned o ut to third parties fo r sh ort perio ds o f time. Th e Co mp any requ ires in itial collateral o f 1 02 % of th e mark et value of th e loan ed securities to b e separately maintained. The l oaned securities’ market value is mon itored on a daily basis. As of December 31, 2 01 8, secu rities wi th a market value o f $7 2.2 mi llio n were lo aned u nd er th is p rog ram. As collateral fo r th e lo aned securities, th e Co mp any recei ves sh ort-term in vestmen ts, whi ch are recorded in “sh ort- term inv estment s” wit h a correspond in g liab ility recorded in “secu red fin an cin g liab ili ties” to acco un t for its o blig ation to return th e co llateral. As o f 16 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Decemb er 3 1, 2 01 8, the fair val ue of t he collateral related to th is prog ram was $77 .2 millio n an d th e Comp any h as an ob ligatio n to return $7 7.2 million o f co llateral to the secu rities b orro wers. The follo win g table prov id es th e fair v alu e of collateral pledg ed for rep urchase ag reemen ts, grou ped by asset class, as o f Decemb er 31 , 2 01 8 and Decemb er 3 1, 2 01 7: Repurcha se Ag reements, Securities Lending Transa ctions, and Repurcha se-to -Maturity Transactio ns Acco unted fo r a s Secured Borro wings Rema ining Contra ctual Ma turity of the Ag reements As o f December 3 1 , 2018 (Dolla rs I n Thousands) Overnight and Greater Tha n Co ntinuo us Up to 3 0 days 30 - 90 da y s 9 0 days To tal Repurchase a g reements and repurchase-to-maturity tra nsactio ns U.S. Treasury an d agen cy securities $4 3 3,182 $18,7 1 3 $— $— $45 1 ,8 95 Mo rtg age loans — — — — — Total rep u rchase agreements an d repurch ase-to-m atu rity tran sactions 4 3 3,182 18,7 1 3 — — 45 1 ,8 95 Securities lending tra nsa ctions Fix ed m atu rity secu rities 7 1,285 — — — 7 1 ,2 85 Eq uity securities 891 — — — 8 91 Red eemable preferred stock — — — — — Total securities lendin g transactions 7 2,176 — — — 7 2 ,1 76 Tota l securities $5 0 5,358 $18,7 1 3 $— $— $52 4 ,0 71 Repurcha se Ag reements, Securities Lending Transa ctions, and Repurcha se-to -Maturity Transactio ns Acco unted fo r a s Secured Borro wings Rema ining Contra ctual Maturity of the Agreements As of December 3 1, 201 7 (D ollars In Thousands) Overnight and Greater Tha n Co ntinuo us Up to 30 days 30 - 90 da y s 9 0 days To tal Repurchase a g reements and repurchase-to-maturity tra nsactio ns U.S. Treasury an d agen cy securities $307,63 3 $— $— $— $30 7 ,6 33 Mo rtg age loans 698,97 4 — — — 69 8 ,9 74 Total rep u rchase agreements an d repurch ase-to-m atu rity tran sactions 1 ,006,60 7 — — — 1,00 6 ,6 07 Securities lending tra nsa ctions Co rpo rate secu rities 118,81 7 — — — 11 8 ,8 17 Eq uity securities 5,69 9 — — — 5 ,6 99 Red eemable preferred stock 75 5 — — — 7 55 Total securities lendin g transactions 125,27 1 — — — 12 5 ,2 71 Tota l securities $1 ,131,87 8 $— $— $— $1,13 1 ,8 78 16 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Interest Expense In terest ex pense is su mmarized as follo ws: For The Year Ended December 31, 201 8 2017 2 016 (D ollars In M i llio ns) Debt, subordinated debt, and su bord in ated fund in g obligation s $6 6.5 $61.3 $6 2 .1 No n -recourse fu n d ing ob lig atio ns, o th er oblig atio n s, and rep urchase agreements 1 7 2.6 1 71.9 1 6 3 .7 Total interest expense $2 3 9.1 $2 33.2 $2 2 5 .8 15 . COMMITMENTS AND CONTINGENCIES The Compan y has en tered into ind emn ity ag reemen ts with each of its cu rrent direct ors other th an tho se th at are employ ees of Dai-ichi Life t hat prov id e, amon g other thin gs and sub ject to certain limitatio ns, a con tractu al righ t to in demnification to the fullest ex ten t p ermissib le un der th e law. The Co mp any h as agreemen ts with certain o f its o fficers prov id in g up to $10 millio n in ind emn ificatio n. These ob ligatio ns are in ad ditio n to t he cu st omary ob ligatio n to ind emn ify o fficers and directors con t ained in th e C ompany ’s go vernance d ocu ments. The Compan y leases ad ministrativ e an d mark eting office space in app ro ximately 17 cities (exclud ing the ho me office b uild in g), with most leases being for p eriod s less than on e year to nine years. The Company had rental ex pense o f $8.3 millio n, $7 .8 milli on , an d $6.7 mil lion , for th e years en ded Decemb er 3 1, 2 01 8, 2 01 7, an d 20 16 , resp ectively. The ag gregate ann ualized ren t was app ro ximately $8.3 mi llio n for the year en ded December 31 , 2 01 8. Th e fo llowing is a sch edu le b y year of fu tu re min imum ren tal pay ments requ ired u nd er these leases: Year Amo unt (Do lla rs In Tho usands) 2 01 9 $5,454 2 02 0 3,707 2 02 1 3,393 2 02 2 3,129 2 02 3 3,171 Th ereafter 5,418 Ad ditio nally, th e Compan y p rev io usly leased a b uild i ng co ntig uo us to i ts h ome o ffice. The lease was ren ewed in December 20 13 an d was ext ended to Decemb er 20 18 . At th e en d o f the lease term in December 2 01 8, th e Co mp any p urchased th e b uild in g for ap proxi mately $75 million . Th e b uild in g is recorded in prop erty a nd eq uipmen t o n the con so lidated b alance sh eet. As o f December 3 1, 2 01 8 and 20 17 , th e Co mp any had ou tstand in g mortg age loan co mmitmen ts of $6 85 .3 mil lion at an av erag e rate o f 4.42 % and $5 72 .3 mil lion at an av erag e rate o f 4 .14 %, resp ectively. Un der th e in surance g uaran ty fun d laws in mo st stat es, in surance compan ies d oin g b usiness th erein can b e assessed up to prescrib ed limits fo r po licyh older losses in curred b y inso lvent companies. From time to time, companies may b e asked to con tri bu te amo un ts b eyo nd p rescri bed limits. It is po ssi ble t hat t he Co mp any cou l d be assessed with respect to p ro duct lin es n ot o ffered b y th e Compan y. In add itio n, leg islat io n may b e int ro du ced in v ariou s states with resp ect to gu aran ty fu nd assessmen t laws related to in surance p ro du cts, in clu ding lon g term care in surance an d o ther specialty prod uct s, t hat in creases th e cost o f fu tu re assessments o r alters fu tu re premi um tax o ffsets received i n co nn ection with gu aran ty fun d assessments. Th e Compan y can no t predi ct t he amo un t, n atu re o r timin g of an y futu re assessmen ts o r legislation , any of which co uld h ave a material an d ad verse impact on th e Co mp any ’s finan cial co nd iti on or resu lts o f o perati on s. A number of civil ju ry v erd icts h ave been returned against in surers, b ro ker-d ealers, and o th er prov id ers of fi nancial servi ces i nv olving sales, refu nd or claims p ractices, alleged ag ent misco nduct, fai lu re to p rop erl y superv i se representatives, relat io nsh ips with agen ts o r p erso ns wi th wh om the in su rer d oes bu sin ess, an d oth er matters. Often th ese lawsuits h ave resu lted in the award of substan tial ju dg men ts that are disp ro po rti on ate to the actual d amages, in clu ding materi al amo un ts of pu nitive and non-econ omic co mp en sat ory d amages. In some stat es, ju ries, ju dg es, and arb itrators h av e sub stantial discretion in awarding p un itive and n on -economi c compen sato ry damag es wh ich creates t he po ten tial fo r u np red ictable material ad verse jud gments or awards in any given lawsuit o r arbitration. Arbi tration awards are sub ject to v ery limited app ellate rev iew. In ad dition , in some class actio n and other lawsu its, compan ies have made material settlement payments. Th e finan cial servi ces and in surance ind ustries in particular are also so met imes th e target of l aw en fo rcemen t and regul ato ry inv estig ati on s relating to th e n umero us laws and reg ulation s th at go vern su ch co mp anies. Some co mp anies h ave been the su bject of law en forcement o r regu latory action s or other actio ns resultin g fro m su ch in vesti gat io ns. Th e Co mp any, in the o rd in ary co urse of bu siness, i s in vo lv ed in such matters. 16 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any establi shes l iab ilities for li tigatio n and regu latory action s when it is p ro bab le th at a loss has been incu rred and the amo un t of the l oss can b e reason ably est imated. Fo r matters where a loss is believ ed to b e reason ably po ssible, b ut n ot prob able, n o liability is established. For su ch matters, th e Co mp any may p ro vid e an estimate o f th e p ossib le lo ss or rang e o f lo ss or a statement th at such an est imate can no t be made. The Co mp any reviews relev an t in fo rmation with resp ect to litigatio n an d reg ulato ry matters o n a qu art erl y an d an nu al b asis and u pd ates its established liabilities, d isclo sures an d esti mates of reaso nably po ssi ble lo sses o r rang e o f loss based on such rev iews. Certain o f the Compan y’s insurance subsidiaries, as well as certain other in surance compan ies fo r which the Co mpan y h as coinsured b lo cks o f life in surance an d ann uity p oli cies, are u nd er aud it for co mp liance with the un claimed pro perty laws of a nu mb er of states. Th e au dits are being co nd ucted on behalf o f the treasu ry dep artmen ts or un claimed p ro perty admin istrato rs in such states. The focu s of the aud its is on whether th ere hav e been unreported death s, matu rit ies, or p olicies that h av e ex ceed ed limiting ag e with resp ect to which deat h benefits or o th er payments u nder life in su ran ce or an nu ity po licies sho uld b e treated as u nclaimed p ro perty th at sh ou ld be esch eated to the state. Th e Co mp any is p resen tly un ab le to esti mate the reason ably p ossib le l oss o r range of loss th at may resu lt from th e au dits d ue to a n umber of facto rs, includ in g u ncertainty as to th e legal th eory or th eories that may g iv e rise to liab ility, th e earl y stag es of the au dits being conducted , and u ncertaint y as to whether t he Compan y or other co mpan ies are respon sib le fo r the liabilities, if any, ari sin g in co nn ection with certain co-in su red p olicies. Th e Co mp an y will con t in ue to mon itor the matter for an y d ev elo pments th at wou ld make th e l oss co nti ng en cy associ ated with th e aud its reaso nab ly estimab le. Certain o f the Co mp any’s sub sidiaries are u nd er a targ eted multi-st ate examin ation with respect to th eir claims payin g p ractices and t heir u se of the U.S. So cial Secu rity Ad ministratio n’s Death Master File or simil ar d atabases (a “Death Datab ase”) to id ent ify u nrepo rted death s in th eir life in su rance po licies, ann uity co ntracts and retained asset account s. There is no clear basis in previou sly exist in g law fo r requ iring a life insu rer to search for unreported death s in order to determine whether a b enefit is o wed , and sub stan tial legal au th ori ty ex ists to su pp ort the p ositio n that th e p rev ailin g ind ustry p ractice was lawfu l. A nu mb er o f life in surers, h owever, h ave en tered in to settlemen t o r con sent ag reemen ts with st ate insurance regu lat ors u nd er wh ich the life in surers ag reed to imp lement procedu res for perio dically comparin g their life in surance and an nu i ty co ntracts and ret ained asset accou nts against a Death Datab ase, treati ng con firmed death s as giving rise to a death b enefit u nd er their po licies, locatin g ben efi ciaries an d p aying them th e b en efit s and interest, esch eating th e b enefits and in terest to the state if the ben eficiary co uld n ot be fo un d, an d p ay ing p enalties to th e state, if req uired . It has b een pu blicly repo rted that th e life insu rers hav e p aid admin istrati ve and /o r ex amin ation fees to the in su ran ce regu lators in con nectio n with the settlemen t or con sent agreements. Th e Co mp any believ es th at insurance reg ulato rs cou ld deman d from th e Co mp any admin istrative an d/or examin ation fees relatin g to th e targeted multi-state ex aminatio n. Based o n p ub licl y rep orted pay men ts b y o th er life in su rers, th e Company do es no t b elieve su ch fees, if assessed , wo uld h ave a material effect on its finan cial statemen ts. Advance Trust & Life Escrow S ervices, LTA, as Securities In termediary of Life Partners Positio n Ho ld er Tru st v. Pro tective Lif e In suran ce Co mpa ny, Case No . 2 :1 8-CV-0 12 90 , is a pu tat iv e class action that was fi led on Au gu st 1 3, 2 01 8 in the Un ited States District Cou rt for the No rthern District of Alabama. Plain tiff alleg es that PLICO requ ired policyh olders to pay un lawful and ex cessive co st of insurance charges. Plain tiff seeks to represent al l owners o f un iv ersal li fe and v ariable u niversal life p olicies issued o r admin i stered by PLICO o r its predecessors th at prov id e th at cost of insurance rat es are to b e determined b ased o n ex pectation s o f fu tu re mort ali ty exp erience. Th e plain tiff seek s class certification , compen sato ry d amages, pre-jud gment and p ost- ju dg ment in terest, costs, and o th er un sp ecified relief. The Company is vigorou sly defen ding th is matter an d cann ot pred i ct th e o utcome o f or reaso nably estimate th e p ossib le loss or ran ge o f loss th at mig ht resu lt fro m t his litig ation . 16 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 16 . EMPLOYEE BENEFIT PLANS Qual ified Pension Plan and Nonqualified Excess Pension Pl an The Compan y spo nso rs a Qualified Pen sio n Pl an cov ering su bstan tially all of its employ ees. Ben efits are b ased o n years of service an d th e employ ee’s co mp ensatio n. Effective Janu ary 1, 20 08 , th e Compan y mad e th e follo win g chan ges to its Qualified Pensio n Plan. Th ese ch ang es have b een reflect ed in th e co mp utations wi th in th is note. •Emp lo yees h ired after Decemb er 3 1, 2 00 7 and any fo rmer employ ee h ired after th at d ate, will receiv e a cash balance ben efit. •Emp lo yees active o n Decemb er 31, 20 07 , with ag e p lus y ears o f v esting service less than 55 years will receive a fin al pay -b ased p ensio n ben efit for serv ice throu gh Decemb er 3 1, 2 00 7, p lu s a cash b alance b enefit fo r service aft er December 31 , 20 07 . •Emp lo yees active o n Decemb er 31, 20 07 , with ag e p lus y ears o f v esting service eq ualin g o r ex ceed in g 5 5 y ears, wi ll receiv e a final pay-b ased p ensio n b enefit fo r service bo th before an d after December 31, 2 00 7, with a mod est red uctio n in the formu la for benefits earned after December 31 , 2 007. •All p articipan ts termi nat in g emp loy ment on or after Decemb er o f 2 00 7 may elect to receiv e a lump sum benefit. The Company also sp on sors a Non qu alified Ex cess Pen sio n Plan , wh ich is an un fu nd ed no nq ualified plan that prov id es defin ed p ension ben efits in ex cess o f limits i mposed on th e Qu alified Pension Plan b y federal tax law. The fo llowi ng table presents th e b enefit o blig ation , fair v alu e o f plan assets, fun ded statu s, an d amounts no t yet recog nized as compo nen ts of net perio dic p ensio n costs fo r the Compan y’s defin ed b enefit pen sio n p lan and un fu nd ed excess benefit plan as o f Decemb er 3 1, 2 01 8 and 20 17 : December 3 1 , 2018 December 3 1 , 2017 Qua lified Pensio n Pla n Nonqua lified Ex cess Pension Plan Qua lified Pensio n Plan Nonqualified Ex cess Benefit Pla n (D o l l ars In Tho us a nds ) Accumula ted benefit oblig atio n, end of yea r $26 9,8 02 $46 ,29 9 $2 78 ,08 4 $50 ,14 9 Cha ng e in projected benefit o blig atio n: Pro jected b en efit ob ligatio n at begin ning of year $30 0,4 23 $54 ,59 0 $2 65 ,84 8 $47 ,80 2 Serv ice cost 1 3,1 85 1 ,41 5 12 ,01 1 1 ,35 0 Interest cost 9,8 30 1 ,43 6 9 ,84 6 1 ,48 0 Amen dments — — — — Actuarial (gain)/lo ss (1 5,6 08 ) (2 ,00 1) 26 ,53 9 7 ,86 1 Benefits p aid (1 9,7 01 ) (8 ,09 5) (13 ,82 1) (3 ,90 3) Pro jected b en efit ob ligatio n at en d o f y ear 28 8,1 29 47 ,34 5 3 00 ,42 3 54 ,59 0 Cha ng e in pl an assets: Fair value of p lan assets at beg in ning of year 26 0,9 26 — 2 01 ,84 3 — Actual retu rn on plan assets (6,0 70 ) — 29 ,40 4 — Employ er co ntribut io ns(1)1 8,8 00 8 ,09 5 43 ,50 0 3 ,90 3 Benefits p aid (1 9,7 01 ) (8 ,09 5) (13 ,82 1) (3 ,90 3) Fair value of p lan assets at end of year 25 3,9 55 — 2 60 ,92 6 — After reflecting FASB g uidance: Fun ded status (3 4,1 74 ) (47 ,34 5) (39 ,49 7) (54 ,59 0) Amounts recog nized in the ba la nce sheet: Other liabilities (3 4,1 74 ) (47 ,34 5) (39 ,49 7) (54 ,59 0) Amounts recog nized in accumulated o ther co mprehensive inco me: Net actuarial (g ain )/lo ss 1 0,3 70 9 ,02 5 2 ,85 0 13 ,52 1 Prior service co st /(cred it)— — — — To tal amo un ts recog nized in AOC I $1 0,3 70 $9 ,02 5 $2 ,85 0 $13 ,52 1 (1)Employ er co n trib u tions are shown b ased o n the calen d ar year in which contributio n s were made to each p lan . 16 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Weigh ted -av erage assumpt io ns u sed to d etermine b enefit ob ligatio ns as of Decemb er 3 1 are as fo llows: Qualified Pensio n Pla n No nqualified Excess Pensio n Pla n 2018 2 0 1 7 2 018 2 0 17 Disco un t rate 4 .21 % 3.55 % 3.9 3% 3.2 6% Rate of compen sation in crease 4.75% p rior to age 40 / 3 .75 % fo r ag e 40 and ab ov e 4.7 5% p rio r to ag e 4 0/ 3.7 5% for age 4 0 and abo ve 4 .75% prio r to ag e 4 0/ 3.7 5% for age 4 0 an d abo ve 4 .75 % prio r to ag e 40 / 3.7 5% fo r age 4 0 an d abo ve Weight ed-av erag e assumpt io ns u sed to determine t he net p eriod ic ben efit cost fo r the years en ded Decemb er 3 1, 2 01 8, 20 17 , an d 2 01 6 are as fo llows: Qua lified Pension Plan No nqualified Excess Pensio n Pla n For The Yea r Ended December 31, 2018 2 0 1 7 2 0 16 2 018 20 1 7 2 0 16 Discount rate 3.55% 4.04% 4.29% 3.25% 3.60% 3.63% Rate of compensation increase 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above 4.75% prior to age 40/ 3.75% for age 40 and above Expected long-term return on plan assets 7.00% 7.00% 7.25% N /A N/A N/A The assumed d isco un t rates u sed to determin e th e b en efit ob ligati on s were b ased on an anal ysis o f fu tu re ben efi ts exp ected to be paid u nd er th e plans. The assu med d isco un t rate reflect s th e interest rate at which an amo unt that is inv ested in a po rtfo lio o f hig h-qu ality d ebt in stru ments on th e measuremen t d ate wou ld prov i de th e fu tu re cash flows n ecessary to pay ben efi ts wh en t hey co me due. To determin e an ap prop riate long-term rate of retu rn assu mp tion, the Co mp any received evalu ations o f market perfo rmance b ased on th e Compan y’s asset allo cation as prov id ed b y external co nsultan ts. Co mp on ents of the net perio dic ben efi t cost for th e years end ed December 31 , 20 18 , 2 017, an d 2 01 6 are as fo llows: Q ualified Pensio n Pla n No nqualified Excess Pensio n Pla n For The Year Ended December 3 1, 2 0 1 8 2 0 17 2 016 2 0 1 8 2017 2 016 (Do l la rs I n Tho usa nds ) Service cost—benefits earned during the period $13,185 $12,011 $12,791 $1,415 $1,350 $1,413 Interest cost on projected benefit obligation 9,830 9,846 9,751 1,436 1,480 1,353 Expected return on plan assets (17,058) (13,570) (13,780) — — — Amortization of prior service cost/(credit)— — — — — — Amortization of actuarial loss/(gain)(1)— — — 969 634 178 Preliminary net periodic benefit cost 5,957 8,287 8,762 3,820 3,464 2,944 Settlement/curtailment expense(2)(3)(4)— — (964) 1,526 — 2,135 Total net periodic benefit cost $5,957 $8,287 $7,798 $5,346 $3,464 $5,079 (1)2 0 1 8 av erag e remainin g service p erio d u sed is 9.1 7 years and for the u nfu n d ed excess benefit p lan was 7 .7 3 years fro m Janu ary 1, 2 0 1 8 to June 30, 2 0 18 and 7 .8 7 from July 1 , 2 0 1 8 to Decem b er 31, 2 0 1 8. (2)In 2016, th e Co mpany amen ded its Qualified Pension Plan to offer a lim ited-tim e op p o rtun ity o f benefit payou ts to elig ible, terminated-v ested p articipants (“lu mp su m win d o w”). The lump sum win d o w p rov id ed elig ible, termin ated-vested particip an ts with an o p tio n to elect to receive a lump sum settlem en t o f his or h er pensio n benefit in December 2 0 1 6 o r to elect receip t o f month ly pen sio n b en efits comm en cin g in December 2 0 1 6. Th is even t trig g ered settlement acco u n ting fo r the Co m pan y an d resu lted in the reco g nition o f $1 .0 millio n o f settlem en t inco me fo r the twelv e months en ded December 3 1, 2016 . (3)The Nonqualified Excess Pensio n Plan trig gered settlem en t accountin g fo r the year ended Decem ber 31 , 2 018 since th e to tal lump sum p aym en ts exceeded th e settlemen t th resho ld of service co st plu s interest co st. (4)In 2016, th e Board of Directo rs o f Pro tectiv e Life Co rpo ration appro v ed th e con v ersio n o f the accrued b en efit payable under th e Nonq u alified Ex cess Pensio n Plan as of March 3 1 , 2016 to John D. Johns, the Co m p an y's Ch airman and Chief Ex ecu tiv e Officer at th e tim e, in to a lump sum amou n t. Th e lu m p su m am o unt is allo cated to a b o ok entry that will b e treated as thou g h it were a p ay deferral acco u n t un d er th e Com p an y ’s d eferred compensatio n plan for officers. Mr. Jo hns will con tin ue to accru e benefits as though he were accruin g benefits und er the Non q u alified Excess Pensio n Plan with resp ect to this contin u ed serv ice as an emp lo yee of the Co mpany after March 31 , 2016 . Th e co n v ersio n even t req u ired the Co mpany to re-measure the No n q u alified Excess Pensio n Plan as of May 3 1, 2 0 16 and resu lted in the recog n ition o f $2 .1 million in settlemen t ex pen se durin g the twelve mo n th s ended Decem b er 31, 2 0 1 6. 16 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents For th e Quali fied Pen sio n Plan, the Co mp any d oes no t expect to amort ize an y net actuarial loss/(g ain) from o th er comprehen sive in co me in to net perio dic ben efit cost d urin g 20 19 since the net actu arial lo ss/(g ain ) sub ject t o amortization is less th an 1 0% of the greater of the smo oth value o f asset s o r th e projected benefit o blig ation . For the u nfun ded excess benefi t p lan , the Compan y ex pects to amortize app ro ximately $0 .6 milli on o f net actuarial loss from other co mp reh ensive inco me i nto n et p eri od ic ben efit co st du ring 20 19 . Estimated future ben efit p aymen ts un der th e Qu alified Pension Plan an d Nonq ualified Excess Pensio n Plan are as fo llows: Years Qua lified Pensio n Plan No nqualified Ex cess Pension Pla n (Dolla rs I n Thousands) 2 01 9 $19 ,54 4 $6 ,78 8 2 02 0 20 ,72 3 5 ,19 6 2 02 1 21 ,15 3 5 ,28 6 2 02 2 22 ,53 8 5 ,58 3 2 02 3 22 ,76 5 4 ,75 4 20 24 - 2 02 8 1 20 ,35 5 19 ,58 6 Qual ified Pension Plan Assets Allo cation of plan assets o f the Qualifi ed Pen si on Plan by categ ory as o f Decemb er 31 , 20 17 are as follo ws: Asset Ca teg ory Ta rg et Allo ca tion fo r 2 0 1 7 2017 (1 ) Cash an d cash eq uivalents 2 % 1 5% Equi ty securities 60 5 5 Fixed in come 38 3 0 Total 1 00 % 10 0% (1) Du rin g 2 0 17, the Co mpany made a $43.5 million con tributio n to the defin ed b enefit pen sion p lan an d allo cated the contrib ution to cash and cash eq u iv alen ts pending furth er an aly sis of its inv estment strategy. The p lan ’s in v estment p olicy was amended to allow for an actual asset allocation outsid e of the cu rrent target allo cation until the inv estmen t strategy an aly sis was co mplete. Prio r to th e amend ment fo r the $4 3.5 mi llio n con tri bu tion made in 20 17 , the defined b enefit p ension plan had a t arg et asset allo cation o f 6 0% do mestic equ ities, 38 % fixed in come, an d 2 % cash. Du ring 2 01 8, th e Co mp an y completed an asset an d liabilit y stu dy o f its defined ben efit pen si on p lan and th e asso ciated in vestmen t po rtfol io . As a resu lt, th e Plan’s in vestmen t p olicy statemen t an d inv estment po rtfolio were up dated. Th ese ch ang es are reflected in the d isclo sures below. Allo cation of plan assets o f the d efi ned b enefit pen si on plan by categ ory, as o f December 31 , 20 18 are as follo ws: Asset Ca teg ory Ta rg et Allo ca tion fo r 2 0 1 8 2 0 1 8 Retu rn -Seeki ng 60 % 6 1% Li ab ility -Hedgi ng Fixed In co me 40 3 9 Total 1 00 % 10 0% The Compan y’s targ et asset allocatio n is d esig ned to prov id e an acceptabl e level of risk and balance between return-seekin g assets and liability- hedg ing fix ed in come assets. The weigh ting towards return -seek in g securiti es is d esign ed to h elp p ro vide for an increased level o f asset g rowth potential and liqu id ity. The Compan y’s inv est ment po l icy in cludes v ariou s gu id elines an d p rocedu res d esign ed to en sure assets are inv ested in a manner necessary t o meet ex pected fu tu re benefi ts earn ed b y participants. The in vestmen t gu id elines con sider a b ro ad ran ge of econ omic con dition s. Cen tral to the po licy are target all ocation rang es (sho wn ab ove) by majo r asset catego ries. Th e o bjectives of t he targ et allocatio ns are to mai ntain i nv estment portfolio s th at d iv ersify risk th ro ug h pru dent asset allo cati on p arameters, ach iev e asset ret urns that meet or ex ceed th e pl an s’ actu arial assu mp tion s, and ach iev e asset returns that are co mp etitiv e with like institu tions emp l oy in g simil ar investment strateg ies. The Qu alified Pen sio n Plan’s return-seekin g assets are in a Ru ssel l 30 00 i nd ex fu nd t hat i nv ests in a do mestic equ ity in dex collecti ve trust managed by No rth ern Tru st Corpo ratio n, a Spartan 50 0 ind ex fund manag ed b y Fidelity, an d a Co llective All C ou ntry Worl d ex -US in dex fu nd man aged by No rth ern Tru st . The Plan’s cash is inv est ed in a collect iv e trust man aged b y 16 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents No rthern Tru st Corpo ratio n. The Plan ’s liab ility-h ed gin g fix ed in co me assets are inv ested in a g ro up d epo sit ad mi nistratio n an nu ity contract wi th PLICO and a Lo ng Go vernment Credit Bon d ind ex fun d man aged b y Black Ro ck. Th e No rthern Trust Col lectiv e All Co un try Wo rld ex-US ind ex fu nd and the BlackRock Lon g Go vernment Credit Bo nd in dex fu nd were add ed to the Plan’s inv estment po rtfo lio du ring 20 18 . Pl an assets of th e Qualified Pensio n Plan by catego ry as of December 31 , 2018 an d Decemb er 3 1, 20 17, are as follo ws: As of December 31, 2018 2017 (Dollars In Thousands) Asset Ca teg ory Cash an d cash eq uivalents $1,22 5 $39 ,89 7 Equi ty securities: Co llective Russell 30 00 equ ity ind ex fun d 70,59 9 74 ,51 1 Fid elity Sp artan 5 00 in dex fu nd 46,30 0 71 ,63 2 No rthern Trust ACWI ex-US Fun d 41,92 4 — Li ab ility -h edg in g fix ed inco me: Grou p Depo si t Admin i stration Ann uity Con tract 78,70 7 74 ,88 6 Black Rock Lon g Gov ern men t Credit Bon d Index Fun d 15,20 0 — To tal in vestment s 253,95 5 2 60 ,92 6 Emp loy er con tri bu tion receiv able — — To tal $253,95 5 $2 60 ,92 6 The valuatio n metho do lo gies used to determine t he fair values reflect market p arti cipan t assu mp tio ns and are based o n the app lication o f the fair value h ierarchy that p rioritizes ob servable mark et inp uts ov er u no bserv ab l e in pu ts. Th e fo llo wing is a descrip tion o f th e valuation metho do lo gies u sed fo r assets measu red at fair value. The Qualified Pension Plan ’s gro up dep osit admin istration ann uity cont ract with PLICO is recorded at co ntract value, wh ich the Co mp any b elieves app ro ximates fair val ue. Co ntract v alu e represents co ntrib utio ns mad e u nd er the co ntract, p lu s in terest at the co ntract rat e, l ess fu nd s u sed to p urchase an nu ities. For th e remai ning in vestmen ts, the Compan y determin es th e fair v alu es based o n q uo ted mark et p rices. Wh ile th e Co mp any believes its valuatio n metho d is app ro priate and co nsistent wit h other market p arti cip an ts, th e u se of differen t meth od olog ies o r assu mp tio ns to d etermi ne fair v alu e co uld resu lt in a differen t fair value measu rement at the rep ort in g d ate. The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the Qualified Pen sion Pl an ’s assets at fair value as of December 31 , 2018 : Level 1 Level 2 Level 3 Total (D ollars In Thous ands) Cash $1 ,22 5 $— $— $1 ,22 5 Equi ty securities 1 58 ,82 3 — — 1 58 ,82 3 Fixed in come 15 ,20 0 — — 15 ,20 0 Gro up dep osit ad ministratio n an nu ity co ntract — — 78 ,70 7 78 ,70 7 To tal in vestment s $1 75 ,24 8 $— $78 ,70 7 $2 53 ,95 5 The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the Qualified Pen sion Pl an ’s assets at fair value as of December 31 , 2017 : Level 1 Level 2 Level 3 Total (Do lla rs In Tho usands) Cash $39 ,89 7 $— $— $39 ,89 7 Equi ty securities 1 46 ,14 3 — — 1 46 ,14 3 Gro up dep osit ad ministratio n an nu ity co ntract — — 74 ,88 6 74 ,88 6 To tal in vestment s $1 86 ,04 0 $— $74 ,88 6 $2 60 ,92 6 For t he year end ed December 31 , 20 18 an d Decemb er 3 1, 2017, there were n o tran sfers b etween level s. 16 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowi ng tabl e presents a reco nciliation of the beginn i ng and en ding b alan ces for the fair value measu remen ts for the year end ed Decemb er 31 , 20 18 an d for the year en ded December 31 , 2 017, for which the Compan y h as used si gn ifican t u no bservab le inp uts (Level 3 ): December 31, 2 0 18 December 31 , 2 017 (Dollars In Thousands) Balance, b eg inn in g o f y ear $7 4,8 86 $71 ,22 6 Interest i ncome 3,8 21 3 ,66 0 Transfers from collectiv e sho rt-term i nv estments fu nd — — Transfers to collectiv e sho rt-term i nv estments fu nd — — Balance, end of year $7 8,7 07 $74 ,88 6 The fo llowing table represents th e Plan ’s Level 3 fin ancial in stru men t, th e v alu ation techn iq ue used , an d the sig nificant unob serv able inp ut an d the ranges o f v alues fo r that in pu t as o f Decemb er 3 1, 20 18: Instrument Fair Value Principa l Va lua tion Technique Significa nt Uno bserv a ble Inputs Rang e o f Significant Input Va lues (D ollars In Thous ands) Gro up dep osit ad ministratio n an nu ity co ntract $7 8,7 07 Co ntract Value Co ntract Rate 5 .06 % - 5 .14 % In vestmen t securities are ex po sed t o v arious risks, su ch as interest rate, mark et, and cred it risks. Due to the level o f risk associated with cert ain in vestmen t securities and the lev el of u ncertai nty related to ch ang es in th e v alu e o f in vestmen t securities, i t is at least reaso nably p ossib le th at ch ang es in risks in th e near term cou ld materiall y affect the amo unt s rep orted . Qual ified Pension Plan Funding Po licy The Co mp any ’s fun ding p olicy is to con tribu te amou nts to the Qu alified Pen sion Plan su ffi cient to meet the minimu m fu nd in g req uirements o f the Emp lo yee Retiremen t Inco me Security Act (“ERISA”) plu s such ad dition al amo un t s as the Compan y may d etermine to be app ro pri ate from ti me to time. Co ntrib utio ns are in ten ded to prov id e no t o nly for ben efits attribu ted to serv ice to d ate, bu t also for t ho se exp ected to b e earned in th e fu tu re. Un der the Pensio n Protection Act o f 20 06 (“PPA”), a p lan co uld be sub ject to cert ain ben efit restrictio ns if th e p lan ’s ad ju st ed fund in g target att ainment p ercentage (“AFTAP”) drop s b elo w 8 0%. Therefo re, the Comp any may make ad ditio nal con tribution s in fu tu re perio ds to main tain an AFTAP o f at least 80 %. In g en eral, th e AFTAP is a measu re o f h ow well a plan i s fu nd ed an d is ob tained by dividin g a plan’s assets b y it s fu nd ing liabilities. AFTAP is based o n particip ant d ata, plan prov isio ns, p lan meth od s an d assu mp tion s, fu nd in g cred it balan ces, an d plan assets as o f th e p lan v alu ation dat e. So me of th e assumptio ns an d meth od s used to d etermine a pl an ’s AFTAP may be differen t fro m the assu mp tion s and metho ds u sed t o measu re a plan’s fun ded status o n a GAAP b asi s. In Ju ly of 2 01 2, th e M ov in g Ahead fo r Prog ress in th e 21 st Century Act (“M AP-21 ”), wh ich i ncl ud es p en sion fun ding stabilization p ro vision s, was sig ned into law. These pro visio ns establish an in terest rate co rrid or wh ich is design ed to stabil ize the segment rates used to d etermine fu nd in g req uirements from th e effects o f interest rate vol atility. In Au gu st of 2014, t he Hig hway and Tran spo rtat io n Fun ding Act of 20 14 (“HATFA”) was sig ned in to l aw. HAFTA ex ten ds the fun ding relief p ro vided by MAP-21 by delay ing the i nterest rat e co rrid or exp an sion . The fu nd in g stabil izatio n prov i sio ns o f MAP-21 and HATFA red uced the Compan y’s mini mu m req uired Qualified Pen sion Pl an con tri bu tion s. Since the fun ding st abi lization prov isio ns o f MAP-2 1 and HATFA do no t ap ply fo r Pensio n Ben efit Gu aran ty Corpo ratio n (“PBGC”) reporting purpo ses, the Compan y may also mak e add iti on al co ntribu tio ns in fu t ure perio ds to av oid certain PBGC repo rtin g trig gers. Du ring the twelv e mo nths end ed Decemb er 31 , 20 18 , t he Co mpan y con trib uted $18 .8 million to th e Qualified Pen si on Plan fo r th e 20 17 p lan year. The Co mp an y has no t y et det ermin ed what amount it will fun d du ring 2 01 9, b ut may co ntribu t e an amou nt that wou ld el imin ate the PBGC variab le-rate premium p ayab le in 2 01 9. Th e Co mp any cu rrently estimates that amo un t will be between $1 0 millio n and $2 0 mill io n. Other Postretirement Benefits In add itio n to p en sion ben efits, th e Compan y prov id es limited h ealthcare ben efits to elig ib le retired empl oy ees un til age 65. Th is p ostretiremen t benefit is p ro vided b y an un fu nd ed plan. As of Decemb er 3 1, 2 01 8 an d December 31 , 20 17 , the accu mu lat ed p ostretirement b enefit o blig ation an d projected benefit ob l ig ation were immat erial. For a closed grou p of retirees over age 65 , the Compan y p ro vides a prescriptio n drug ben efit. As of Decemb er 3 1, 2 01 8 and December 31 , 201 7, th e Co mp any ’s li ab i lity related to th is b enefit was immat eri al. 17 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp any also offers life insurance b enefits for retirees fro m $10 ,00 0 up to a max imum o f $75,000 wh ich are prov id ed throu gh th e p ayment o f premiums u nd er a grou p life insurance p oli cy. Th is p lan is partially fun ded at a max imum of $50 ,00 0 face amou nt o f in su ran ce. The ben efit ob ligation associated with t hese ben efits is as follows: As of December 31, Postretirement Life Insurance Pla n 2018 2017 (Dollars In Thousands) Cha ng e in Benefit Oblig ation Benefit ob ligatio n, b eginn in g o f y ear $10,97 8 $9 ,63 4 Service co st 15 3 12 2 In terest co st 36 6 35 4 Actu ari al (gain)/loss (1,04 5) 1 ,34 7 Benefit s paid (44 0) (47 9) Benefit ob ligatio n, en d of year $10,01 2 $10 ,97 8 For t he po stretiremen t life in su rance p lan , th e Co mp any ’s discou nt rate assu mp tion used t o d etermine the ben efit o bligatio n and t he net perio dic benefit cost as o f December 31 , 20 18 , is 4 .38 % and 3.7 4%, respectiv ely . The Company’s exp ected lo ng -term rate o f retu rn assumpti on used to d etermine the net perio dic ben efit cost as o f December 31 , 2018 , is 2.7 5%. To determine an ap propriate long-term rate o f retu rn assu mp tion , th e Co mp any utilized 25 y ear av erage an d ann ualized ret urn results on th e Barclay’s sho rt treasury ind ex. In vestmen ts o f the Co mpan y’s g ro up life insurance plan are h eld by Wells Fargo Ban k, N.A. an d are in vested in a money market fu nd . In vestmen ts are stated at fair value and are b ased o n th e ap pli catio n o f t he fair value h ierarchy th at pri oritizes o bservab le market inpu ts o ver un ob serv able in pu ts. The mon ey market fu nd s are val ued b ased on histo rical co st, wh ich rep resen ts fair v alu e, at y ear end . Th is meth od of v alu ati on may prod uce a fair v alu e calcu latio n t hat may no t be reflectiv e o f future fair val ues. Fu rthermo re, while th e Co mp any b elieves its valuatio n metho d is ap pro priate an d con sisten t with oth er mark et participants, th e u se o f different meth od olog ies or assumpti on s to determin e fair valu e co uld result in a differen t fair v alu e measuremen t at th e repo rting date. The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the l ife in surance plan’s assets at fai r v alue as o f Decemb er 3 1, 2 01 8: Lev el 1 Level 2 Lev el 3 Total (Do l l a rs I n Tho usa nds ) M on ey market fu nd $4,8 54 $— $— $4 ,85 4 The fol lo win g tabl e sets forth by lev el, wi th in th e fai r v alu e h ierarch y, the l ife in surance plan’s assets at fai r v alue as o f Decemb er 3 1, 2 01 7: Lev el 1 Level 2 Lev el 3 Total (Dollars In Tho usa nds) M on ey market fu nd $5,1 04 $— $— $5 ,10 4 For t he year end ed December 31 , 20 18 an d Decemb er 3 1, 2017, there were n o tran sfers b etween level s. In vestmen ts are ex po sed to v arious risks, su ch as interest rate and credit risks. Du e to th e lev el o f risk asso ciated with investmen ts an d the level o f un certainty related to credit risks, it is at least reason ably p ossib l e that chan ges in risk i n t he near term cou ld materially affect th e amou nts repo rted. 17 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 40 1(k) Pla n The Compan y sp onso rs a tax-q ualified 40 1(k) Plan (“40 1 (k ) Plan ”) which co vers su bstan tially all employ ees. Emp lo yee co ntribu tio ns are mad e on a b efo re-tax basis as p rovid ed by Sectio n 4 01(k) of th e In ternal Revenu e Cod e or as after-tax “Ro th” con tribution s. Empl oy ees may co ntrib ute up to 25 % o f th eir elig ib le an nu al compensation to th e 40 1(k ) Plan, limi ted to a max imum ann ual co ntribu tio n amou nt as set p eri od ically by th e In ternal Rev en ue Service ($18 ,50 0 for 20 18 ). Th e Plan also p ro vides a “catch -u p” co ntribu tion pro vision wh ich permits eligi ble particip ant s (ag e 50 o r over at the en d of t he calen dar year), to make ad ditional con trib utions t hat exceed th e reg ular an nu al con trib utio n limit s u p to a limit perio dically set by the Intern al Rev enu e Service ($6,0 00 fo r 2 01 8). Th e Company match es the sum of all emplo yee co ntribu tions do llar fo r do llar up to a maximu m of 4% of an emp lo yee’s pay p er year per person . All matching co ntribut io ns vest immed iat ely. For the y ear end ed December 3 1, 2 01 8 and Decemb er 3 1, 20 17 , th e Compan y reco rded an ex pen se o f $9 .2 mil lion and $8.2 million associated wit h 4 01 (k ) Plan match in g co ntrib utio ns, resp ectiv ely . The Company also has a sup plemen tal match in g co ntribu tio n program, wh i ch is a n on qu alified plan that prov id es supplemen tal mat ch ing co ntrib utio ns in ex cess o f the l imits imposed on qu ali fied d efi ned co ntrib utio n p lan s by fed eral tax law. Th e ex pen se reco rd ed b y the Compan y for t his employ ee benefi t was $1 .3 millio n, $1 .1 mill io n, and $0 .6 millio n, respectively, in 2 01 8, 2 01 7, an d 2 01 6. 17 . ACCUMULATED OTHER COMPREHENSIVE INCOME (L OSS) The follo win g tables su mmarize th e ch ang es in the accumulated balances for each compo nen t o f AOCI as o f December 3 1, 2 01 8, Decemb er 31 , 20 17 , an d Decemb er 3 1, 20 16 . Cha ng es in Accumula ted Other Comprehensiv e Income (Loss) by Compo nent Unrea lized Gains and Losses on Investments(2) Accumula ted G a in and Loss on Deriv a tiv es Minimum Pension Benefits Liability Adjustment Tota l Accumula ted O ther Comprehensiv e Income (Loss) (Dollars In Thousands, Net of Ta x ) Balance, December 3 1, 20 15 $(1,2 47 ,06 5) $— $5,93 1 $(1,2 41 ,13 4) Other co mp reh ensiv e inco me (lo ss) before reclassificatio ns 6 02 ,21 1 68 8 (5,65 9) 5 97 ,24 0 Other co mp reh ensiv e inco me (lo ss) relating to other-than - temp orary impaired in vestmen ts for which a portion has b een reco gn ized in earnings (2 ,00 8) — — (2 ,00 8) Amo un t s recl assified fro m accumulated o t her comprehensiv e in come (loss)(1 )(9 ,46 0) 3 9 80 0 (8 ,62 1) Balance, December 3 1, 20 16 $(6 56 ,32 2) $72 7 $1,07 2 $(6 54 ,52 3) Other co mp reh ensiv e inco me (lo ss) before reclassificatio ns 7 07 ,29 8 (56 3) (15,72 6) 6 91 ,00 9 Other co mp reh ensiv e inco me (lo ss) relating to other-than - temp orary impaired in vestmen ts for which a portion has b een reco gn ized in earnings 39 1 — — 39 1 Amo un t s recl assified fro m accumulated o t her comprehensiv e in come (loss)(1 )64 2 45 1 50 1 1 ,59 4 Cu mu lat iv e effect adjustmen ts (26 ,13 5) 13 2 22 8 (25 ,77 5) Balance, December 3 1, 20 17 $25 ,87 4 $74 7 $(13,92 5) $12 ,69 6 Other co mp reh ensiv e inco me (lo ss) before reclassificatio ns (1,4 20 ,49 9) (1 ,88 4) (3,54 6) (1,4 25 ,92 9) Other co mp reh ensiv e inco me (lo ss) relating to other-than - temp orary impaired in vestmen ts for which a portion has b een reco gn ized in earnings (20 ,75 1) — — (20 ,75 1) Amo un t s recl assified fro m accumulated o t her comprehensiv e in come (loss)(1 )15 ,65 1 1 ,13 0 1,98 9 18 ,77 0 Cu mu lat iv e effect adjustmen ts (10 ,55 2) — — (10 ,55 2) Balance, December 3 1, 20 18 $(1,4 10 ,27 7) $(7) $(15,48 2) $(1,4 25 ,76 6) (1)See Reclassification table b elow for d etails. (2)As of Decemb er 31, 2 015, 2 016, 2 0 1 7 an d 2 018, n et unrealized losses reported in AOCI were o ffset by $623.0 millio n , $4 2 4 .1 million, $(6.3) millio n and $6 13.4 millio n , respectively, d ue to the imp act tho se net unrealized losses would h av e h ad o n certain of th e Comp any ’s insu rance assets an d liab ilities if the net unrealized losses had b een reco g n ized in net income. 17 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fol lo win g tabl es summarize the reclassification s amo un ts o ut of AOCI for th e y ears en ded December 3 1, 2 01 8, 2 01 7, and 20 16. G ains/(losses) in net inco me: Affected Line Item in the Conso lidated Sta tements of Income Fo r The Yea r Ended December 3 1 , 2 018 2017 2 016 (D o l l a rs In Tho us a nds ) Deriv ativ e instruments Benefits an d settlement expenses, net of reinsu rance ceded(1) $(1,43 1 ) $(694) $(60) Tax (exp en se) benefit 30 1 243 21 $(1,13 0 ) $(451) $(39) Un realized g ain s and losses o n av ailab le- for-sale securities Realized in v estment g ain s (lo sses): All oth er investm en ts $9,91 2 $1 0,611 $3 2 ,3 02 Net im p airment lo sses reco g nized in earning s (29,72 4 ) (1 1,742) (1 7 ,7 48) Tax (exp en se) or ben efit 4,16 1 489 (5 ,0 94) $(15,65 1 ) $(642) $9 ,4 60 Pen sion b en efits liability ad justm en t Oth er operating ex p en ses: Amortizatio n of n et actuarial g ain /(loss) $(2,51 8 ) $(634) $(1 ,2 31) Tax (exp en se) or ben efit 52 9 133 4 31 $(1,98 9 ) $(501) $(8 00) (1) See Note 7, Deriva tive Financial Instrumen ts fo r additio n al info rmation 18 . INCOME TAXES The Compan y’s effective inco me tax rate rel ated to co ntin uing operatio ns varied from th e maximu m federal i ncome tax rate as fo llows: For The Yea r Ended December 31, 2 0 1 8 2017 2 0 16 Statu to ry fed eral in come tax rate ap plied to pre-tax income 21 .0 % 35.0 % 35 .0 % State inco me tax es 4 .9 0.6 0 .8 In vestmen t inco me n ot sub ject to tax (2 .9) (5.0) (2 .7) Prior perio d adjustments (2 .8) — — Fed eral Tax l aw ch an ges — (183.3) — Oth er 0 .9 (1.6) 0 .7 21 .1 % (154.3)% 33 .8 % The an nu al prov isio n fo r fed eral income tax in t hese fi nancial st atemen ts differs fro m th e an nu al amou nts of inco me tax exp ense rep orted i n th e Co mp any ’s i ncome t ax retu rn s. Certain sign ifican t rev enues and exp enses are approp riately repo rted in differen t years with resp ect to th e fin ancial statements an d the tax retu rn s. 17 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The compo nen ts o f th e Co mp any’s inco me t ax are as follo ws: Fo r The Yea r Ended December 3 1 , 20 1 8 2017 2016 (D o l l ars In Tho us a nds ) Current income tax expense: Federal $87 ,27 6 $21,85 3 $(50 ,63 8) State 8 ,28 5 4,39 9 3 ,91 9 To tal curren t $95 ,56 1 $26,25 2 $(46 ,71 9) Deferred i ncome tax expense: Federal $(30 ,62 9) $(693,86 0) $2 40 ,12 7 State 15 ,72 5 (3,86 7) 7 ,56 0 To tal deferred $(14 ,90 4) $(697,72 7) $2 47 ,68 7 The compo nen ts o f th e Co mp any’s n et d eferred in co me tax liab ility are as fo llows: As of December 31, 2018 2017 (Dollars In Thousands) Deferred i ncome tax assets: Lo ss an d cred i t carryfo rward s $46,23 6 $2 09 ,40 1 Deferred compen sation 126,39 8 1 38 ,94 5 Deferred po licy acq uisition costs 116,04 4 23 ,87 6 Premiu m o n corp orate deb t 46,15 4 57 ,40 2 Net u nrealized loss on in vestmen ts 374,90 5 — Other 25,69 1 28 ,17 9 Valuatio n allo wan ce (5,07 9) (3 ,95 1) 730,34 9 4 53 ,85 2 Deferred i ncome tax lia bilities: Premiu m receivab les an d p olicy liabilit ies 408,50 2 5 73 ,46 9 VOBA an d o th er intang ib les 478,52 6 4 33 ,32 1 Inv est ed asset s (o th er than un realized g ain s (lo sses))682,63 7 6 72 ,54 9 Net u nrealized g ain s on in vestmen ts — 6 ,92 0 1 ,569,66 5 1,6 86 ,25 9 Net deferred inco me tax liabilit y $(839,31 6) $(1,2 32 ,40 7) The deferred tax assets rep orted abo ve inclu de certai n deferred tax assets relat ed to no nq ualifi ed deferred co mp en sat io n and oth er emp lo yee b en efit liabilities t hat were assumed b y AXA and th ey were n ot acqu ired by the Company in con nectio n wi th th e acq uisi tion of MONY. The fu ture tax d edu ction s stemming from these liabilit ies will b e cl aimed b y the Company on MONY’s tax return s in its p ost-acq uisition perio ds. Th ese d eferred tax assets hav e b een estimated as of the M ONY Acqu isitio n d ate (an d th rough the December 31 , 2 01 8 rep ort in g d ate) b ased o n all availab le i nformatio n. Howev er, it is po ssible th at t hese est imates may be adjusted in fu tu re rep ortin g p eriod s based on actuarial chan ges t o t he projected fu tu re p aymen ts associated with these liab ilities. An y such ad ju st ments wi ll be reco gn ized by th e Co mp any as an adjustment to in come tax expense d uring th e perio d i n which they are realized . On December 2 2, 20 17 , the Presiden t of the Un ited States sign ed into l aw th e Tax Reform Act. The legislation sign ifican tly chan ges U.S. tax law b y, amon g o th er th in gs, lowerin g the co rpo rat e inco me tax rate. The Tax Reform Act permanen tly redu ces the U.S. corpo rate inco me tax rat e fro m a maximu m o f 35 % to a fl at 21 % rate, effective Jan uary 1, 2 01 8. As a resu lt of the red uctio n in th e U.S. corporate i ncome tax rate from 3 5% to 2 1% an d ch ang es t o tax law rel ated to th e ded uctib ility of cert ain deferred tax asset s un der th e Tax Reform Act, we revalued ou r en ding net deferred t ax liabil ities at December 31 , 2017 , an d recog nized a prov i sio nal $79 7.6 mi llio n tax ben efit in o ur co nso lidated statemen t of income for the y ear en ded December 3 1, 20 17 . As a result of the prio r perio d adj ustmen t to d eferred tax liabilities, as discu ssed in No te 1 , Basis o f Present atio n, the Compan y recorded an add itio nal $1 0.7 millio n for t he year end ed December 31 , 20 18 . 17 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Also o n December 2 2, 20 17 , th e SEC staff issued Staff Acco un ting Bu lletin No. 118 (“SAB 1 18”) to add ress the app lication of GAAP i n situ ation s wh en a reg istrant d oes no t have th e necessary in formatio n av ailable, prepared, or analyzed (in clu ding comput ati on s) in reason able d etail to complete th e acco un ting fo r cert ain inco me tax effects o f the Tax Refo rm Act. The Company recog nized the prov isional tax impact s b ased on reaso nab le estimates made by th e Compan y as to the effects o f tax reform on deferred assets du e to the ap plicatio n and in terpretation of Secti on 16 2(m) an d includ ed th ose amou nts in its con so lidated fin anci al statemen t s fo r th e year en ded December 31 , 20 17 . The accou nti ng was co mp leted b y Decemb er 2 2, 2 01 8 an d there were n o material ad justmen ts to the p ro vision al tax b en efit . In management’s ju dg men t, t he gross deferred in come tax asset as of Decemb er 3 1, 2 018 will more likely than n ot be fully realized. Th e Co mp any has reco gn i zed a val uat io n al lo wan ce of $6 .4 million an d $5.0 millio n as o f December 3 1, 2 01 8 and December 31 , 2 01 7, resp ectively, relat ed to state-based fu tu re ded uct ib le tempo rary differen ces that it h as determined are more li kel y th an no t to exp ire u nu til ized. Th is resultin g un fav orable ch ange o f $1.4 mi llio n, b efo re federal in come taxes, in creased stat e inco me tax exp ense in 2 01 8 b y the same amou nt. A t Decemb er 3 1, 201 8, the Co mp any has no n-life net o perati ng lo ss carryforwards for fed eral inco me tax p urposes of $1 35 .4 milli on , whi ch are av ailable to offset future no n-life grou p federal taxab le inco me (an d li fe g ro up tax able in come with limitation s) an d b egin to ex pire in 20 36 . In add iti on , in clu ded i n th e d eferred income tax assets ab ov e are app ro ximately $1 9.7 mi llio n in state n et o perating lo ss carryfo rward s at trib utable to cert ain ju risdict io ns, wh ich are available to offset future tax in th e resp ective state j urisd i cti on s, exp irin g b etween 2 01 9 an d 2 03 8. As of December 3 1, 20 18 and December 3 1, 20 17 , some o f the Compan y’s fix ed maturi ties were rep orted at an un realized lo ss, altho ug h the net amou nt is an un realized g ain at December 3 1, 2 01 8. If the Compan y were to realize a tax -b asis n et capital loss for a year, th en su ch lo ss co uld n ot be dedu cted against that year’s o th er taxab le inco me. Howev er, such a loss cou ld b e carried back and fo rward ag ain st any pri or year or future y ear tax-basis n et cap ital gains. Therefo re, th e Compan y has relied u po n a prud ent an d feasible t ax -plann in g strateg y reg ard in g its fixed maturi ties that were rep orted at an un realized lo ss. The Company has th e abil ity and the in ten t to eith er ho ld such fix ed mat urities t o mat urity, thereby avoi ding a real ized loss, or to g enerate an offsettin g realized gain from u nrealized g ain fixed matu rities if such u nrealized loss fixed matu rities are sold at a lo ss pri or to mat urity. A recon cil iat io n o f the b eg i nn in g and end in g amou nt of un reco gn ized tax b enefits is as fo llows: As of December 31, 2 018 2017 2016 (Dollars In Thousands) Balance, b eg inn in g o f p eriod $1 1,3 53 $9,85 6 $13 ,13 8 Add itio ns fo r tax p ositio ns o f the cu rrent year — 1,85 7 2 ,12 2 Add itio ns fo r tax p ositio ns o f p rior years — 7 0 1 ,31 8 Reducti on s of tax po sition s of prior years: Ch an ges in ju dg ment (4,2 19 ) (43 0) (97 5) Settlements du ring t he perio d — — (5 ,74 7) Lap ses o f app l icable st atute of limitation s — — — Balance, end of perio d $7,1 34 $11,35 3 $9 ,85 6 In cluded in th e end o f p eri od b alance abo ve, As o f December 31 , 20 18 , th ere were no unreco gn ized tax benefits for which the ultimate ded uct ib ility is certain bu t for which t here is un certain ty abo ut th e timing o f such d edu ction s. As of December 31 , 2 01 7 an d 2 01 6, t here were ap prox imately $0 .7 milli on , an d $0.7 million of such un recog nized tax b enefit s. Oth er t han interest and pen alties, the d isall owance of t he sh orter ded uct ib ility p eriod wou ld no t affect th e an nu al effectiv e in come tax rate bu t wo uld accel erate to an earlier p eri od th e pay ment o f cash to the taxing autho rity. The total amou nt of u nreco gn i zed tax benefits, if reco gni zed , th at wou ld affect the effective inco me tax rate is ap prox imately $7.1 million , $10.7 million , and $9.2 mi llio n fo r the years en ded Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively. An y accru ed in terest related to th e u nrecog nized tax b enefits and o th er accru ed in come taxes h ave been includ ed in in come tax exp ense. Th ese amou nts were a $0.0 4 millio n detrimen t, a $2.4 milli on b enefit, an d a $3.1 millio n b enefit fo r the y ears end ed Decemb er 31 , 2 01 8, 20 17 , and 20 16 , resp ecti vel y. Th e Compan y has app rox imately $0 .3 mil lion , $(1.1 ) million, and $2 .8 million o f accrued interest associated with un reco gn ized tax b enefits as of Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively (before tak in g into co nsideration t he related in come tax b enefit th at is asso ciated with such an exp ense). In Ju ne 20 12 , the IRS prop osed favorab l e and u nfavo rab le adj ustmen ts t o th e Compan y’s 20 03 through 20 07 repo rted tax ab le in comes. The Co mp any pro tested certain un fav orable adjustmen t s and sou gh t reso lu tion at the IRS’ App eals Division . In Octob er 20 15 , Ap peals accept ed the Co mp any ’s earlier prop osed settlement offer. In Septemb er 2 01 5, the IRS p roposed fav orable and un fav orable ad justmen ts to th e Comp any ’s 2 00 8 throu gh 2 01 1 repo rted taxab le in come. Th e Compan y agreed to these adjustmen ts. In April 20 17 , a ro utin e review by Co ng ress’ Joi nt Co mmittee on Tax ation was fin alized without ch ang e an d the Co mp an y receiv ed an ap prox imate $6.2 mi llio n n et refu nd in th e fo urth qu arter o f 2 01 7. The resulting net ad justmen t to the Compan y’s current in co me taxes for th e y ears 2 00 3 throug h 20 11 did n ot materially affect th e Co mp any or its effectiv e tax rate. 17 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents In Jul y 20 16 , th e IR S prop osed fav orable an d un fav orable ad ju stmen ts to th e Co mp any ’s 20 12 an d 20 13 rep orted taxab le i ncome. The Company ag reed to th ese adjustmen ts. The resulting settlement paid in Septemb er 2016 did not materially imp act the Compan y o r its effectiv e tax rate. These ag reemen ts wit h the IRS are th e primary cause for the redu ction s o f u nrecog nized t ax b en efit s sh own in th e abo ve ch art . The Co mp any believes th at in the n ext 1 2 mo nths, n on e of th e un recognized tax b enefits will b e red uced. In g eneral, the Compan y is n o lon ger sub ject to in come tax ex aminatio ns b y tax in g autho rit ies fo r tax years that b egan b efo re 20 14 . Du e t o th e aforemention ed IRS ad ju stments to the Compan y’s pre-2 01 4 taxable in come, t he Co mp any has amen ded certain of its 20 03 th ro ug h 2 01 3 state i ncome tax retu rn s. Su ch amen dment s wil l cause su ch years to remain o pen , pend ing th e stat es’ acceptances o f the return s. 19 . SUPPLEMENTAL CASH FLOW INFORMATION The fol lo win g tabl e sets forth su pp lemen t al cash flow in fo rmation: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Cash pa id / (received) during the yea r: Interest on deb t $26 0,2 41 $253,70 8 $2 34 ,92 8 Inco me t ax es (2 6,8 56 ) (14,16 3) 1 12 ,88 6 Total cash in terest p aid o n d ebt for t he y ear en ded December 31 , 20 18 , was $2 60 .2 mil lion . Of th is amou nt, $5 6.7 millio n related to interest o n d ebt , $2 9.3 million related t o interest o n sub ordinated d ebt and su bo rd inated fun ding ob l ig ation s, $9 .3 milli on on repu rchase agreements, an d $16 4.9 million rel ated to n on -recou rse fundin g o blig ation s and other ob ligation s. 20 . RELATED PART Y TRANSACTIONS Certain corpo ratio ns with wh ich the Co mp any ’s direct ors were affiliated p aid u s premiums an d po licy fees o r other amou nts fo r v ariou s ty pes of in surance and in vestmen t prod uct s, in terest on bond s we o wn an d commissions o n secu rities u nd erwritin g in wh ich ou r affiliates particip ated. Such amo un ts to taled $6 .8 mill io n, $6.8 mill io n, and $7 .2 mil lion fo r the y ears ended Decemb er 3 1, 20 18 , 20 17 , an d 2 01 6, respectiv ely. Th e Co mp any p aid commission s, in terest on deb t an d in vestmen t prod uct s, and fees to these same corp oration s totaling $2 .3 millio n, $2.4 million , an d $2.7 million for th e years en ded Decemb er 3 1, 2 01 8, 2 01 7, and 20 16 , resp ectively. Prio r t o th e Merger, th e Co mp any h ad n o related p arty tran saction s with Dai-i ch i Life. During th e p eriod s end in g December 31 , 20 18 an d December 31 , 2 01 7, th e Compan y paid a manag ement fee to Dai-ich i Life of $1 2.2 million an d $10 .9 million for certain services p ro vided to the Co mp any, resp ecti vel y. The Compan y p aid $140.0 million and $14 3.8 million of dividen ds d uri ng th e y ear en ded Decemb er 3 1, 2 01 8 an d December 3 1, 20 17 , respect iv ely, to its parent, Dai-ichi Life. The Compan y h as guaran teed PLICO’s ob lig ati on s for bo rrowing s o r letters of cred it un der th e rev olvin g lin e of cred it arrang emen t to wh ich the Co mp any is also a p art y. Th e Compan y h as also issu ed gu aran tees, entered into su pp ort ag reemen ts an d/or assumed a d uty to in demnify its in direct wh olly owned cap tiv e insurance compan ies in certai n respects. The Compan y guaranteed the o bligat io ns of PLICO un der a sy nthetic lease entered i nto b y PLICO, as lessee, wit h a n on -affiliated third p arty, as lesso r. Un der the terms of the sy nthetic lease, finan cing of $75 million was avai lab le to PLICO for co nstruct io n of an office b uildi ng an d parkin g deck wh ich was completed o n Feb ru ary 1 , 2 00 0. The synt het ic lease was amen ded and restated as of Decemb er 19 , 2 01 3 and was extend ed to Decemb er 20 18 . At th e end of th e lease term, the Compan y p urchased th e b uil ding fo r ap prox imately $75 millio n. The Co mp any has agreements with certai n o f its sub si diaries u nd er wh ich it sup plies investment , leg al an d data pro cessin g serv ices on a fee b asis an d prov id es o th er man ag erial and admin istrative serv ices on a sh ared cost basis. Such o th er manag erial an d admin istrative serv ices in clu de b ut are no t limited to acco un ting , finan cial rep orting , complian ce serv ices, reinsurance admin istration , tax reporting , reserve compu tati on , an d p ro jectio ns. The Co mp any h as an i ntercompan y capi tal su pp ort agreement with Shad es Creek Cap tive In surance Co mp any (“Sh ades Creek”), a direct who lly owned subsidiary. Th e agreement provi des throu gh a gu aran tee that th e C ompany will co ntrib ute asset s or purchase su rp lu s n otes (or cause an affiliate or th ird party to co ntrib ute assets or pu rchase su rp l us no t es) in amou nts necessary for Shad es Creek’s reg ulatory capi tal levels to eq ual o r ex ceed min imum th resh olds as d efined b y the agreement. As of Decemb er 3 1, 2 01 8, Sh ades Creek main tained cap ital l ev els in ex cess of the requ ired minimu m thresho l ds. Th e maximu m pot en t ial future p ayment amou nt wh ich co uld be req uired un der the capital sup po rt ag reement will be depen den t on nu merou s facto rs, includ ing th e p erforman ce of eq uity markets, t he lev el o f interest rates, performance o f asso ciated h edg es, an d related p olicy ho ld er b ehavio r. 17 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 21 . STATUTORY RE PORTING PRACTICES AND OTHER REGULATORY MATTE RS The Compan y’s in surance sub sid iaries prepare statuto ry finan cial statemen ts fo r reg ulato ry pu rpo ses in accordan ce with acco un ting practices prescribed b y th e NAIC an d th e appl icable stat e insu ran ce dep artmen t laws and regulat io ns. These fin an cial stat ements vary materially from GAAP. Statu to ry acco un ting p ract ices includ e p ub lication s o f th e NAIC, state laws, regu latio ns, gen eral admini strative ru les as well as certain p ermit ted accou ntin g practi ces grant ed b y th e respective state i nsu ran ce dep artmen t. Generally, the most sig nificant d ifferences are that statu to ry fin ancial statemen ts do n ot refl ect 1) deferred acq uisition costs an d VOBA, 2) ben efit liabilities that are calculated usin g Co mp any estimates o f ex pected mortality, i nterest, and withdrawals, 3) deferred in come tax es that are no t sub ject to statut ory limits, 4) reco gni tion o f realized gain s an d lo sses on t he sale o f secu rities in the p eriod they are sold , an d 5 ) fi xed matu rities reco rded at fair v alu es, bu t instead at amo rtized co st. St atuto ry net income (loss) fo r PLIC O was $32 1.1 milli on , $73 1.2 million , and $(39 1.6 ) million fo r th e years en ded Decemb er 31 , 2 01 8, 201 7 and 20 16 , resp ectively. Statutory cap ital and su rp lu s for PLICO was $4 .3 b ill io n and $4 .3 b ill io n as of December 31 , 2 01 8 and 20 17 , resp ectively. Th e Statutory net loss in curred by PLICO fo r the y ear end ed December 31 , 20 16 was cau sed b y the requ ired Statutory accou nti ng treatmen t o f the initial gain reco gn ized on th e retrocession o f th e t erm bu siness assu med fro m Gen worth Life and An nu i ty Insu ran ce Compan y to Gold en Gate Captiv e Insu ran ce Compan y, which resu lted in ap proxi mately a $1 .2 b illio n gai n being includ ed as a compo nen t of surplus, rath er th an reflected in Statutory n et in come as of the January 15 , 20 16 cessio n d ate. The Company ’s in su ran ce su bsid iaries are su bject to vario us stat e statu t ory and regul ato ry restriction s on th e insurance sub sidiaries’ ab ility to p ay dividen ds to Protective Life Corpo ratio n. In gen eral, dividen ds up to sp ecified lev els are co nsidered ordinary an d may be p aid witho ut p rior approv al o f th e in surance commissions o f th e state of do micile. Div id end s i n larg er amou nts are co nsid ered ex traordin ary and are su bject to affirmativ e prio r ap prov al by such co mmissio ner. The max imum amou nt th at wou ld q ualify as ord in ary d iv id end s to th e Compan y fro m ou r insuran ce sub sid i ari es, an d which wou ld co nsequ en tly be free from restrict io n and availab le for th e payment of divid en ds to th e Co mp any ’s shareowner in 20 19 is ap prox i mately $43 4.0 million . Th is resu lts in ap prox imately $5.3 b illio n o f the Co mp an y’s net assets being restricted fro m tran sfer to PLC witho ut p rior app ro val fro m the respectiv e st ate in surance dep artmen t. St ate insu ran ce reg ulato rs and the Nat io nal Association of Insuran ce Commission ers (“NAIC”) hav e ado pted risk -b ased cap ital (“RBC”) requi remen ts fo r life in su ran ce co mp anies to eval uat e the ad equ acy of statu to ry capi tal an d surplus in relation to in vestmen t an d insurance risk s. Th e requi remen ts pro vide a means of measurin g th e minimum amo un t of statu to ry su rplus app ro priate for an in su rance co mp any to sup po rt its o verall bu siness op eratio ns b ased o n its size and risk profile. Ad ditio nally, the Compan y has certain assets th at are on dep osit with state reg ulato ry auth orities and restricted fro m use. As of Decemb er 3 1, 20 18 , th e Co mp any ’s insu ran ce sub si diaries had on dep osit with regu latory au th orities, fixed maturity an d sho rt-term inv estments with a fair v alu e of ap proxi mately $40 .8 millio n. The st ates of do micile o f the Company’s insu ran ce su bsid iaries h ave ado pted prescribed acco un ting practices th at differ fro m the req uired acco un ting ou tlin ed in NAIC Statuto ry Acco un ting Prin cip les (“SAP”). The in su ran ce su bsid iaries al so h av e certain accou ntin g p ract ices permitted b y the states of do micile th at d iffer from th ose fo un d in NAIC SAP. Certain prescribed p ract ices impact th e statu t ory surplus o f PLICO, th e Compan y’s primary op erating sub si diary. These p ractices in clu de th e n on - ad mission of go odwill as an asset fo r statu to ry rep ortin g. The favo rable (un fav orable) effects of PLICO’s statu to ry su rp lu s, compared to NAIC statutory surplus, from th e use of th is prescribed practices was as fo llows: As of December 31, 2018 2017 (D ollars In M illio ns) Non -ad mission of go od will $(18 1) $(21 9) To ta l (net)$(18 1) $(21 9) The Compan y also has certain p rescribed and permitted p ractices wh ich are ap plied at the sub sidi ary lev el an d d o n ot h ave a d irect imp act o n th e statutory su rp lu s o f PLICO. Th ese p ract ices in clu de p ermissio n to foll ow the actuarial g uidelin es of t he d omiciliary state of th e ceding insurer fo r cert ain cap tive reinsu rers, accou nting for t he face amo un t of all issu ed, an d ou tstand i ng letters of cred it an d n otes issued by an affiliate as assets in the statutory finan cial statemen ts o f certain who lly owned sub sid iaries that are con sid ered “Special Purpo se Fi nancial Capt iv es”, and a reserve differen ce related to a cap tive insurance company . 17 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The favo rab le (u nfavo rab le) effects o n th e stat utory surplu s o f th e Co mp an y’s insu ran ce su bsid iaries, compared to NAIC stat utory surp lu s, fro m the use o f these p rescrib ed and permitted p ractices were as foll ows: As of December 31, 2018 2017 (D ollars In M illio ns) Acco un tin g for Letters o f Credit as ad mitted assets $1,63 0 $1 ,67 0 Acco un tin g for certain n otes as admitted assets $2,55 3 $2 ,63 4 Reserv in g b ased o n state sp ecific actu arial p ractices $12 1 $12 2 Reserv in g d ifference related to a cap tive insurance company $(5 0) $(3 7) 22 . OPERATING SEGMENT S Th e Co mp any has sev eral op erating seg ments, each h avi ng a strateg ic focus. An o perati ng segmen t is d isting uished by prod ucts, chan nels of distri bu tion , and /o r other strategic d istinctio ns. The Co mp an y perio dically ev alu ates its o perating seg ments an d makes adjustmen t s t o it s seg ment repo rting as needed . A b rief d escription of each segment fo llows. •The Life Market in g seg men t mark ets fixed UL, IUL, VUL, BOLI, and l ev el premi um term insurance (“tradi tion al”) prod ucts o n a natio nal b asi s p rimarily th ro ug h netwo rks of i nd ep end ent insuran ce agen ts and b ro kers, b ro ker-d ealers, fin ancial in stitut io ns, in dep end en t d istrib ution organ izatio ns, an d affinity grou ps. •The Acqu isitio ns segment fo cu ses o n acqu iri ng , co nv ertin g, an d servicin g p olicies and co ntracts acqu ired fro m o th er compan ies. The segmen t’s primary focu s is on life insuran ce p olicies an d an nu i ty p ro du cts th at were sol d to ind iv id uals. The level o f th e seg ment’s acq uisi tion activity is predicated up on man y facto rs, in cludi ng avai lable capital, op eratin g cap acity, po ten tial retu rn o n capit al, and market d yn amics. Po licies acqu ired throu gh the Acqu i sition s segmen t are typ ically bl ocks o f b usin ess wh ere no new po licies are b eing market ed . Therefore earning s an d acco un t values are exp ected to d ecline as t he resu lt o f lap ses, d eath s, an d other t ermin ati on s o f cov erag e un l ess n ew acq uisi tion s are mad e. •The An nu iti es seg ment mark ets fixed and VA prod ucts. Th ese p ro du cts are p rimarily sold th rou gh brok er-dealers, finan cial in stituti on s, and indepen den t ag en t s and brok ers. •The Stab le Value Pro du cts segment sells fixed an d floatin g rate fun din g ag reemen ts directly t o the trustees of mun icipal bo nd pro ceed s, mon ey mark et fun ds, ban k tru st dep artmen ts, an d other in st itutio nal i nv esto rs. This seg men t also issues fu nd in g ag reemen t s to the FHLB, an d markets GICs to 4 01 (k ) and o th er qu ali fied retirement sav i ng s p lan s. Th e Compan y also h as an unregi stered fu nd in g agreement-b acked n otes p ro gram which p ro vides fo r o ffers o f n otes t o bot h d omestic an d internatio nal in stitut io nal in vestors. •The Asset Pro tection segmen t markets ex ten ded service co ntract s, GAP products, credit life an d disability in surance, an d oth er speci alized an cillary prod ucts to protect co nsumers’ in vestmen ts in au to mo biles, recreational v ehicles, watercraft, and p owerspo rts. GAP cov ers the d ifference between the lo an pay-off amo un t and an asset’s actual cash v alu e i n th e case o f a total lo ss. Each ty pe of sp ecial ized ancillary p rod uct p rot ects against d amage o r o th er loss to a parti cul ar asp ect of th e un derly in g asset. •The Corpo rate an d Other segmen t p rimarily co nsists o f net in vestmen t inco me o n assets su pp orting ou r eq uity cap ital, u nallo cated co rp orate o verhead and ex pen ses n ot attrib utable to th e segments abo ve (i nclud in g interest o n corp orate d ebt ). Th is segment in clu des earning s fro m sev eral non-strategic or run off li nes o f b usin ess, v ariou s fin ancing and in vestmen t related transact io ns, an d th e op eratio ns o f several small sub si diaries. The Co mpan y’s man agemen t an d Bo ard o f Directors an aly zes and assesses th e operating perfo rmance o f each segment u sin g “pre-tax ad ju sted op eratin g inco me (lo ss)” and “after-tax ad ju sted o perating inco me (lo ss)”. Con sisten t with GAAP accounting gu i dance for seg men t rep orting , p re-tax ad justed op eratin g in come (lo ss) is th e Compan y’s measu re of segmen t performance. Pre-tax adj usted op eratin g in come (lo ss) is calculated b y adjusting “inco me (lo ss) before in come tax,” b y exclud in g the followin g it ems: •realized g ain s and lo sses o n inv estments and deriv atives, •ch ang es in th e GLWB emb edd ed d erivat iv es excl usive o f the p ortion attribut abl e to the eco no mi c co st of th e GLWB, •actual GLWB incu rred claims, an d •the amortization of DAC, VOBA, and certain po licy liab ilities th at is impacted b y t he exclusio n o f these i tems. The items exclud ed fro m adjusted o perating in co me (lo ss) are imp ort an t to u nd erstand in g the ov erall results o f o peration s. Pre-tax adjusted op eratin g i ncome (loss) an d after-tax adjusted op erat in g inco me (lo ss) are no t sub stit utes fo r inco me b efo re i ncome tax es or net in come (l oss), respect iv ely. These measu res may no t b e co mp arab le to similarly titled measures rep orted b y o th er co mp an ies. The C ompany believ es th at pre-tax an d after-tax adjusted op eratin g in come (lo ss) en han ces man agement ’s an d th e Bo ard o f Directo rs’ un derstand in g of th e o ng oing o peration s, th e u nd erlying p ro fitability o f each segmen t , an d h elp s facilitate th e allocatio n o f resou rces. 17 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents After-tax ad j usted o perating income (lo ss) is deriv ed from pre-tax ad ju st ed o perati ng in come (loss) wit h the inclusio n o f in come tax exp ense o r benefits associated with pre-tax ad justed op erating inco me. Inco me tax exp ense o r ben efits is allocated to th e items excluded from p re-tax adjusted operating in come (l oss) at th e statu to ry federal inco me t ax rate for t he associated p eriod. Fo r perio ds end in g on and p rior to Decemb er 31 , 20 17 , a rate o f 35 % was used . Beg in ning in 20 18 , a statu t ory fed eral in come tax rate of 21 % was u sed to allo cate in come tax ex pen se or b enefits t o items ex clu ded from pre-t ax adjusted op eratin g in come (loss). Income tax exp en se or b enefits allo cated to after-tax ad ju st ed o perating in co me (loss) can vary perio d to p eriod based o n ch ang es in th e Co mp any ’s effectiv e in come tax rate. In determining t he compo nen ts o f the p re-tax ad j usted o perating in come (loss) for each segment , p remiu ms an d p olicy fees, o th er inco me, ben efits an d settlement exp enses, and amo rti zatio n of DAC and VOBA are att ribu ted directl y to each o perating seg ment. Net in vestmen t in come is allo cated based on directly related assets requ ired fo r transactin g th e bu siness of that seg ment. Realized in vestmen t gai ns (losses) and o th er o perating ex pen ses are allocated to th e seg ments in a man ner th at mo st app ro pri ately reflect s the o peration s o f that seg men t. In vestment s an d oth er assets are allo cated b ased on statutory pol icy liabilities net of asso ciated statu to ry po licy assets, while DAC/VOBA an d g oo dwill are sh own in th e segment s to which t hey are attribu tab le. There were n o sig nificant in tersegment transactio ns du ring th e year en ded December 3 1, 2 01 8, 2 01 7, and 20 16. 17 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The fo llowi ng tabl es p resen t a su mmary o f resu lts and reco nciles pre-tax adjusted o perati ng inco me (loss) to con so lidated in come before inco me tax an d n et inco me: For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Life Marketin g $1 ,68 9,7 95 $1 ,667,11 8 $1,6 27 ,84 8 Acqu i sitions 2 ,02 7,1 95 1 ,569,08 3 1,6 76 ,01 7 An nu ities 54 5,9 22 450,30 6 5 74 ,93 4 Stab le Valu e Prod ucts 21 9,5 01 190,00 6 1 14 ,58 0 Asset Protection 31 0,2 43 327,57 3 2 69 ,14 5 Co rp orate and Oth er 24 8,2 98 214,70 6 2 21 ,42 3 Total revenu es $5 ,04 0,9 54 $4 ,418,79 2 $4,4 83 ,94 7 Pre-tax Adjusted Opera ting Inco me (Lo ss) Life Marketin g $(1 9,3 76 ) $50,77 8 $39 ,74 5 Acqu i sitions 28 2,7 15 249,74 9 2 60 ,51 1 An nu ities 16 7,1 86 213,08 0 2 13 ,29 3 Stab le Valu e Prod ucts 10 2,3 28 105,26 1 61 ,29 4 Asset Protection 2 9,9 11 24,35 6 16 ,48 7 Co rp orate and Oth er (8 4,2 29 ) (136,33 2) (87 ,96 1) Pre-t ax adjusted o perating income 47 8,5 35 506,89 2 5 03 ,36 9 Realized g ain s (losses) on in vestmen ts an d d erivativ es (9 5,5 17 ) (71,83 5) 90 ,62 8 Inco me before in come tax 38 3,0 18 435,05 7 5 93 ,99 7 Inco me t ax exp ense (ben efit)8 0,6 57 (671,47 5) 2 00 ,96 8 Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Pre-tax ad ju sted op eratin g inco me $47 8,5 35 $506,89 2 $5 03 ,36 9 Ad ju sted op eratin g inco me t ax (ex pen se) b enefit (10 0,7 16 ) 646,33 3 (1 69 ,24 7) After-tax adjusted o perating in come 37 7,8 19 1 ,153,22 5 3 34 ,12 2 Realized g ain s (losses) on in vestmen ts an d d erivativ es (9 5,5 17 ) (71,83 5) 90 ,62 8 Inco me t ax ben efit (exp ense) on adjustmen ts 2 0,0 59 25,14 2 (31 ,72 1) Net income $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Realized in vestmen t (lo sses) g ains: Deriv ative fin ancial in stru men ts $6 0,9 88 $(305,82 8) $(40 ,28 8) All o th er inv estments (22 3,6 49 ) 121,42 8 90 ,65 9 Net imp airmen t losses reco gn ized in earnings (2 9,7 24 ) (11,74 2) (17 ,74 8) Less: related amo rti zation(1)(1 1,8 56 ) (39,48 0) 24 ,36 0 Less: VA GLWB econ omic co st (8 5,0 12 ) (84,82 7) (82 ,36 5) Realized (losses) g ain s o n i nv estments and deriv atives $(9 5,5 17 ) $(71,83 5) $90 ,62 8 (1) In clu d es am ortization o f DAC/VOBA and b en efits and settlemen t ex pen ses th at are impacted b y realized gains (losses). 18 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net i nv estment inco me Life Marketin g $55 1,7 81 $553,99 9 $5 25 ,49 5 Acqu i sitions 1 ,10 8,2 18 752,52 0 7 64 ,57 1 An nu ities 34 0,6 85 321,84 4 3 22 ,60 8 Stab le Valu e Prod ucts 21 7,7 78 186,57 6 1 07 ,01 0 Asset Protection 3 0,4 57 27,32 5 22 ,08 2 Co rp orate and Oth er 23 4,8 31 209,32 4 2 00 ,69 0 Total n et inv estment in come $2 ,48 3,7 50 $2 ,051,58 8 $1,9 42 ,45 6 Amortiza tion of DAC a nd VOBA Life Marketin g $11 6,9 17 $120,75 3 $1 30 ,70 8 Acqu i sitions 1 8,6 90 (6,93 9) 8 ,17 8 An nu ities 2 4,2 74 (54,47 1) (11 ,03 1) Stab le Valu e Prod ucts 3,2 01 2,35 4 1 ,17 6 Asset Protection 6 2,7 26 16,52 4 20 ,03 3 Co rp orate and Oth er — — — Total amo rti zation o f DAC and VOBA $22 5,8 08 $78,22 1 $1 49 ,06 4 O perating Segment Assets As of December 31, 20 1 8 (D oll ars In Thous ands) Life Ma rketing Acquisitions Annuities Sta ble Va lue Pro ducts In vestmen ts and ot her assets $14 ,575,70 2 $3 1,8 59 ,52 0 $2 0,1 99 ,59 7 $5,1 07 ,33 4 DAC an d VOBA 1 ,499,38 6 4 58 ,97 7 8 89 ,69 7 6 ,12 1 Oth er intang ib les 262,75 8 31 ,97 5 1 56 ,78 5 7 ,38 9 Goo dwi ll 215,25 4 23 ,86 2 3 43 ,24 7 1 13 ,92 4 To tal assets $16 ,553,10 0 $3 2,3 74 ,33 4 $2 1,5 89 ,32 6 $5,2 34 ,76 8 Asset Pro tection Corporate and O ther To tal Conso lidated In vestmen ts and ot her assets $1 ,01 9,2 97 $12 ,71 5,2 08 $85 ,47 6,6 58 DAC an d VOBA 16 8,9 73 — 3 ,02 3,1 54 Oth er intang ib les 12 2,5 90 3 1,9 34 61 3,4 31 Goo dwi ll 12 9,2 24 — 82 5,5 11 To tal assets $1 ,44 0,0 84 $12 ,74 7,1 42 $89 ,93 8,7 54 18 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents O perating Segment Assets As of December 31, 20 1 7 (D oll ars In Thous ands) Life Ma rketing Acquisitions Annuities Sta ble Va lue Pro ducts In vestmen ts and ot her assets $14 ,914,41 8 $1 9,5 88 ,13 3 $2 0,9 38 ,40 9 $4,5 69 ,63 9 DAC an d VOBA 1 ,320,77 6 74 ,86 2 7 72 ,63 4 6 ,86 4 Oth er intang ib les 282,36 1 34 ,54 8 1 70 ,11 7 8 ,05 6 Goo dwi ll 200,27 4 14 ,52 4 3 36 ,67 7 1 13 ,81 3 To tal assets $16 ,717,82 9 $1 9,7 12 ,06 7 $2 2,2 17 ,83 7 $4,6 98 ,37 2 Asset Pro tection Corporate and O ther To tal Conso lidated In vestmen ts and ot her assets $91 8,9 52 $15 ,04 3,5 97 $75 ,97 3,1 48 DAC an d VOBA 2 4,4 41 — 2 ,19 9,5 77 Oth er intang ib les 13 3,2 34 3 5,2 56 66 3,5 72 Goo dwi ll 12 8,1 82 — 79 3,4 70 To tal assets $1 ,20 4,8 09 $15 ,07 8,8 53 $79 ,62 9,7 67 23 . CONSOLIDATED QUARTERLY RESULTS—UNAUDITED The Co mp an y’s un aud ited co nsolid ated qu arterly op eratin g data fo r th e y ears en ded Decemb er 3 1, 2 01 8 and 20 17 is p resen ted bel ow. In the op in io n of man ag emen t, all adj ustmen ts (con sisting on ly o f n ormal recurrin g items) necessary for a fair statement of qu arterly results h ave been reflected in th e follo win g data. It is also manag ement’s op ini on , h owever, that q uarterly o perating data for in surance enterp rises are not n ecessarily in dicative of resu lts th at may b e ex pected in succeeding qu arters or years. In o rd er to ob tai n a more accu rate in dication o f p erforman ce, th ere sh ou ld be a review of operating resu lts, chan ges in shareo wner’s eq uity , and cash flo ws fo r a p eri od of several quarters. 18 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents First Q uarter Second Q ua rter Third Qua rter Fourth Qua rter (D oll ars In Thous ands) For The Yea r Ended December 3 1, 2 01 8 Premiums and po licy fees $889,16 6 $9 41 ,86 8 $8 78 ,18 2 $9 71 ,62 9 Rein surance ceded (345,42 3) (3 90 ,94 1) (2 69 ,33 5) (3 79 ,24 2) Net of rein surance ceded 543,74 3 5 50 ,92 7 6 08 ,84 7 5 92 ,38 7 Net i nv estment in come 520,86 3 6 16 ,46 2 6 72 ,13 9 6 74 ,28 6 Realized in vestmen t g ain s (lo sses)(9,54 0) (37 ,33 7) (47 ,33 4) (68 ,45 0) Net i mp airment losses recog nized in earn ing s (3,64 5) (5) (1 4) (26 ,06 0) Oth er inco me 114,41 1 1 13 ,86 1 1 13 ,53 0 1 11 ,88 3 Total reven ues 1 ,165,83 2 1,2 43 ,90 8 1,3 47 ,16 8 1,2 84 ,04 6 Total b enefits and exp enses 1 ,074,03 4 1,1 45 ,13 6 1,2 10 ,44 9 1,2 28 ,31 7 In come before inco me tax 91,79 8 98 ,77 2 1 36 ,71 9 55 ,72 9 In come tax ex pen se 17,68 6 17 ,27 7 26 ,61 9 19 ,07 5 Net i ncome $74,11 2 $81 ,49 5 $1 10 ,10 0 $36 ,65 4 First Q uarter Second Q ua rter Third Qua rter Fourth Qua rter (D oll ars In Thous ands) For The Yea r Ended December 3 1, 2 01 7 Premiums and po licy fees $860,58 6 $8 68 ,13 9 $8 55 ,08 8 $8 93 ,60 6 Rein surance ceded (316,07 6) (3 42 ,89 8) (3 25 ,12 0) (3 76 ,64 1) Net of rein surance ceded 544,51 0 5 25 ,24 1 5 29 ,96 8 5 16 ,96 5 Net i nv estment in come 506,41 3 5 07 ,77 1 5 07 ,91 4 5 29 ,49 0 Realized in vestmen t g ain s (lo sses)(47,03 7) (54 ,47 1) (64 ,19 1) (18 ,70 1) Net i mp airment losses recog nized in earn ing s (7,83 1) (2 ,78 5) (27 3) (85 3) Oth er inco me 109,24 2 1 11 ,31 1 1 10 ,97 0 1 15 ,13 9 Total reven ues 1 ,105,29 7 1,0 87 ,06 7 1,0 84 ,38 8 1,1 42 ,04 0 Total b enefits and exp enses 992,94 8 9 61 ,29 9 9 73 ,53 8 1,0 55 ,95 0 In come before inco me tax 112,34 9 1 25 ,76 8 1 10 ,85 0 86 ,09 0 In come tax ex pen se (b enefit)36,93 5 41 ,50 0 28 ,30 8 (7 78 ,21 8) Net i ncome $75,41 4 $84 ,26 8 $82 ,54 2 $8 64 ,30 8 24 . SUB SEQUENT EVENTS The Company has ev alu ated the effects o f ev en t s sub sequ ent to December 31 , 201 8, an d throu gh the dat e we filed ou r con so lidated finan cial statements wi th th e Un ited States Secu rities and Ex chang e Commi ssion . All accou ntin g an d d isclosure req uiremen ts related to sub seq uent even ts are in clu ded in o ur con so lidated fin anci al statemen ts. On Janu ary 2 3, 20 19, PLICO en tered in to a Master Transactio n Ag reemen t (th e “GWL&A Master Transact io n Ag reemen t”) with Great-West Life & An nu ity In surance Compan y (“GWL&A”), Great-West Life & An nui ty In surance Compan y o f New Yo rk (“GWL&A o f NY”), The Canada Life Assu ran ce Co mp any (“CLAC”) an d The Great-West Life Assu rance Co mp any (“GWL” and , to gether with GWL&A, GWL&A of NY and CLAC , th e “Sel lers”), p ursu ant to wh ich PLICO will acquire v ia rein surance (th e “Transacti on ”) su bstantiall y all of th e Sel lers’ in dividu al life in su rance and ann uity bu siness (the “Indi vidu al Life Busin ess”). Pursu ant to th e GWL&A Master Transaction Ag reemen t, PLICO an d Pro tectiv e Life an d An nu ity Insurance C ompany (“PLAIC”), a who lly owned su bsid iary of PLICO, will en ter into reinsu ran ce agreements (the “Reinsu ran ce Ag reemen ts”) an d related ancillary d ocu men ts at th e cl osing of the Tran saction . On th e terms an d su bject to t he co nd ition s o f th e Rein su ran ce Ag reemen ts, th e Sellers will cede to PLICO an d PLAIC, effective as o f the closin g of th e Transactio n, sub st an t ial ly all o f th e in surance p olicies relatin g to the Ind iv i du al Life Business. To su pp ort its o bli gat io ns un der the Reinsuran ce Agreemen ts, PLICO will establish tru st acco un ts fo r th e ben efi t o f GWL&A, CLAC an d GWL, and PLAIC will estab lish a trust accou nt for the benefit of GWL&A of NY. The Sellers will retain a b lo ck o f p articipatin g p olicies, which will b e admin istered by th e Comp any . 18 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Transactio n is su bject t o the satisfaction or waiv er o f cu sto mary closin g conditio ns, includ i ng reg ulato ry app ro vals and th e executio n of th e Reinsuran ce Agreements and related ancillary docu men ts. The GWL&A M aster Tran saction Ag reemen t an d oth er transacti on docu men ts co ntain certain cu stomary represen tat io ns an d warranties made b y each o f the p art ies, and certain customary cov enan ts regarding th e Sellers and th e In dividu al Life Bu siness, an d p ro vide for in demnification , amo ng other th in gs, for breaches o f tho se rep resen tatio ns, warran ties and cov enants. 18 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Report of Independent Registered Public Acco unting Firm To the Board o f Direct ors and Sh areown er o f Pro tectiv e Life Corpo ratio n Op inions on the Fina ncial Sta tements and Internal Control over Financia l Rep orting We h ave aud ited th e acco mp any in g con so lidated balance sheets of Protective Li fe Corpo ratio n an d its su bsid iaries (th e “Compan y”) as o f Decemb er 31 , 20 18 an d 20 17 , an d th e related con so lidated statemen ts o f inco me, co mp reh ensive inco me (loss), sh areown er’s equi ty an d cash flo ws fo r each of th e th ree years in th e perio d en ded December 31 , 201 8, includ in g the related n otes an d fin ancial stat ement sch edules listed in t he ind ex ap pearing u nd er item 15 (2 ) (collecti vely referred to as t he “con solid ated finan cial statements”). We also hav e aud ited the Co mp any 's in ternal con trol o ver finan cial rep ortin g as of Decemb er 3 1, 20 18 , based on criteria estab lish ed in Int erna l Co ntro l - Integrated Framework (20 13 ) issu ed by th e Committee o f Sponso ring Organ izatio ns of th e Treadway Co mmissio n (COSO). In ou r op in io n, th e con soli dat ed finan cial statemen ts referred t o ab ov e p resen t fairly, in all material respect s, the finan cial p osition of the Co mp any as of Decemb er 3 1, 2 01 8 and 20 17 , an d th e resu lts of its o peration s and its cash flo ws fo r each of th e th ree y ears in th e perio d ended Decemb er 3 1, 2 01 8 in co nformity with accou ntin g p rinciples generally accepted in th e Un ited States o f Ameri ca. Also in ou r o pinion, th e Co mp any main tained , in al l material resp ects, effectiv e in ternal con trol o ver finan cial rep orting as o f Decemb er 3 1, 2 01 8, based on criteria established in In terna l Con tro l - Integrat ed Framework (2 01 3) issued by th e COSO. Change in Accounting Princip le As d escrib ed in Note 2 t o t he con so lidated fin ancial statemen ts, th e Co mp any ch ang ed the man ner in which it accou nts for admin istrati ve fees associated with certain prop erty an d casu alty insu ran ce prod ucts in 20 18 . Ba sis fo r Opinio ns The Compan y's manag ement i s resp on sible fo r these co nso lid ated financial statements, fo r main taining effective intern al co ntro l o ver finan cial reporting , and fo r its assessmen t of the effectiv eness of intern al con trol o ver fin anci al repo rti ng , in clu ded in Man agemen t's Repo rt o n In ternal Co ntro l ov er Finan cial Rep orting appearing u nd er Item 9A. Our respo nsib ility is to exp ress op in i on s on the Co mpan y’s con solidated fin anci al statemen ts and on the Company's in ternal con tro l ov er finan cial rep ort in g based o n ou r au dits. We are a pu blic acco un tin g firm regist ered with th e Pub lic Co mp an y Accou nti ng Oversigh t Bo ard (United States) (PCAOB) an d are requ ired to be ind epen dent with respect to the Compan y i n acco rdance with the U.S. federal securiti es laws and th e ap pli cab le rules and reg ulation s of t he Secu rities and Exch ang e Co mmissio n an d the PCAOB. We co nd ucted ou r aud its in acco rd ance with th e standard s of th e PCAOB. Tho se st an dards requ ire th at we p lan an d perform th e au dits to o btain reaso nable assurance ab ou t wh eth er th e con soli dated finan cial statements are free o f material misstatemen t, whet her due to error o r fraud , an d wh eth er effective in ternal co ntrol ov er fin ancial rep ortin g was maintain ed in all material resp ects. Ou r aud its o f th e con soli dated finan cial statemen t s incl ud ed p erforming p ro cedu res to assess th e risk s o f mat eri al misstatement o f th e con solidated finan cial statements, whether d ue to error o r frau d, and p erformin g proced ures th at respo nd to tho se risks. Such p rocedu res includ ed examin in g, on a test b asis, ev idence reg ard in g th e amou nts and d isclosures in the con solid ated finan cial statements. Our au dits also includ ed evaluatin g the acco un tin g princip l es u sed an d si gn ifican t estimates mad e b y manag ement, as well as ev alu ating t he o verall p resen tatio n of the co nsolid ated finan cial statements. Ou r au dit o f in ternal co ntrol o ver fin an cial repo rtin g in clu ded o btain in g an understan ding o f in ternal con t ro l ov er financial rep orting, assessi ng t he risk th at a material weak ness ex ists, an d testi ng an d evaluatin g t he design and o perating effectiv eness o f intern al con t ro l based on th e assessed risk . Ou r au dits also includ ed perfo rming such other procedu res as we co nsidered n ecessary in th e circu mstan ces. We believ e th at o ur aud its prov i de a reaso nab le basis for ou r opin io ns. As describ ed in M anagement’s Repo rt o n In ternal Con trol o ver Finan cial Repo rting, man ag emen t h as ex clu ded certain elements o f th e in ternal con tro l o ver finan cial repo rting of the in div id ual life an d an nu ity o peration s o f Lib ert y Life Assu ran ce Co mp any of B oston (“Lib erty Life”) fro m its assessment of the Co mp any ’s in ternal co ntrol ov er fin an cial rep orting as of Decemb er 3 1, 2 01 8 becau se it was acq uired by th e Co mp an y in a p urchase bu siness co mb in ation du ring 20 18 . Su bsequen t to th e acq uisitio n, certain elements of the intern al co ntro l ov er fin ancial repo rting of in divid ual life an d an nu ity op eratio ns o f Lib erty Life were integrated in to the Co mp an y’s existin g systems an d in ternal con trol o ver fin an cial repo rtin g. Tho se con trols th at were no t in tegrated h ave been ex clu ded from man agemen t’s assessment of t he effectiven ess o f internal co ntrol ov er fi nancial repo rting as o f Decemb er 3 1, 2 01 8. We h ave also ex clu ded th ese elemen ts of th e internal co ntro l o ver finan cial rep orting of th e in dividu al life and annui ty op erat io ns o f Libert y Life fro m o ur au dit of th e Co mp any ’s int ern al con tro l o ver finan cial rep orting. Th e exclu ded elements rep resen t co ntrols over ap proxi mately $1 54 millio n of con solidated assets, $1 3,580 millio n o f co nso lidated liab ili ties, $2 08 millio n o f co nsolid ated reven ues an d $47 9 million of con so lidated ben efits and ex pen ses. Definiti on and Limita tio ns o f Int erna l Cont rol over Fina ncial Rep orting A co mp an y’s intern al con trol ov er finan cial repo rtin g i s a process d esig ned to p ro vide reaso nab le assurance reg ard in g th e reliabil ity of finan cial rep ortin g an d th e preparation of fin ancial statements for extern al pu rp oses in accordan ce with g enerally accepted accou nti ng pri ncipl es. A co mp any ’s intern al co ntrol ov er finan cial repo rti ng includ es th ose p olicies an d p ro ced ures th at (i) pertain to th e main ten ance of records th at, in reaso nable det ail, accurately an d fairly reflect the transactions an d d isp ositio ns o f the asset s of the compan y; (ii) prov id e reaso nable assurance that tran saction s are reco rd ed as necessary to permit preparatio n o f fi nancial stat ements i n accordan ce with gen erally accepted accoun ting prin cip les, an d that receip ts and ex pen ditu res of th e co mp any are 18 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents being mad e o nly in accordan ce with aut ho rization s o f man agemen t and d irecto rs of the company ; and (iii) prov id e reason able assu ran ce reg ard ing preventi on o r ti mely detection of un autho rized acqu isitio n, u se, or dispo sition of th e company ’s assets th at co uld h ave a mat eri al effect o n the fin ancial statements. Because o f i ts i nh erent limitations, intern al con t ro l ov er fin anci al rep orting may n ot prevent or detect misst atemen ts. Also , p ro jectio ns o f any evaluatio n of effectiv eness to future p eriod s are su bject to th e risk t hat con trols may become in adeq uate because of chan ges in conditio ns, or that th e d eg ree of complian ce with the po licies or procedu res may d eterio rate. Birming ham, Al abama March 5 , 2 01 9 We h av e serv ed as the Compan y’s aud i to r since 1 97 4. 18 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 9 . Changes in a nd Disa greements wi th Acco unta nts o n Accounting a nd Financia l Disclosure No ne. Item 9 A. Control s and Pro cedures (a ) Disclo sure Contro ls and Procedures In order t o en sure that th e informatio n th e Company must d isclose in its filin gs wit h the Securiti es and Ex change Commission is recorded , processed , su mmarized , an d rep orted o n a timely basis, th e Compan y’s man ag emen t, wit h th e particip ation o f i ts Chief Executive Officer and Chief Fin ancial Officer, evaluated th e effectiven ess o f th e d esig n and op eratio n of its d isclosure con trols and proced ures (as such term is defined in Ru les 13 a-1 5(e) un der the Securiti es Exchan ge Act o f 1 93 4, as amended (th e “Ex chan ge Act”)), ex cep t as o th erwise n oted b elo w. Based on their ev alu ation as o f Decemb er 31 , 20 18 , th e en d of th e p eriod co vered by th is Form 10 -K, th e Co mp any ’s Ch ief Executive Officer an d Chief Fin an cial Officer h av e co nclud ed t hat the Compan y’s disclo su re con tro ls an d p ro cedu res were effectiv e. It sh ou ld be n oted that any sy stem of con trols, n o matter h ow well d esig ned and op erat ed , can p ro vide o nly reaso nable, n ot ab solu te, assurance that the con trol system’s ob jectiv es will b e met. Fu rther, the desig n of any co ntrol sy stem is based in part up on certain ju dg ments, includ in g the costs an d b enefits of con tro ls an d the l ik eliho od of fu tu re ev ents. Becau se of th ese and ot her in heren t li mitatio ns o f co ntrol systems, no ev alu ation of con trols can p ro vid e ab solu te assu ran ce that all con trol issues, if an y, with in th e Co mp any hav e b een d etected . (b) Manag ement’s Report on Interna l Contro ls Ov er Financial Repo rting Man ag emen t o f th e Compan y is resp on sibl e fo r estab lish in g an d maint ain in g ad equ ate intern al co ntrol over finan cial rep ort in g as defin ed in Ru le 1 3a-15 (f) u nd er the Exch ang e Act. The Compan y’s intern al con t ro l over fin ancial reportin g is a process d esig ned to prov id e reasonable assu rance regardin g th e reliab ility o f fin ancial rep ort in g and th e prep aratio n o f fin ancial statemen ts fo r extern al p urpo ses in accordan ce wi th acco un ting prin cip les generally accepted in the Unit ed States of America. The Compan y’s in ternal con trol ov er fin ancial repo rtin g includ es those po licies an d p ro ced ures t hat : •p ertain to th e mai ntenance o f reco rd s that in reason able detail accurately and fairly reflect the tran saction s an d di spo sition s o f th e assets o f th e co mp any ; •p rov id e reaso nab le assurance th at tran sactio ns are recorded as necessary to permit preparation o f finan cial statemen t s in acco rd ance with accou nting p rin cip les g enerall y accept ed in the United States o f America, and that receip ts an d ex pendi tu res o f the Co mpan y are bei ng made o nly in accordan ce with autho rization s o f man agement an d d irecto rs of th e Co mp any ; an d •p rov id e reaso nab le assurance regarding p reven tio n o r timely detectio n of unautho rized acq uisition , u se o r d ispo sition of the Co mp any ’s assets that co uld h ave a material effect o n the financial statements. Because o f its in herent limitatio ns, intern al con trol ov er finan cial repo rting may no t preven t or detect misstatemen ts. Also , p ro jectio ns o f any ev alu ation o f effectiv eness to future p eriod s are su bject to th e risk s that con tro ls may become inad eq uate becau se of ch ang es i n co nd itions, or that the d egree of co mp liance with th e p oli cies o r p ro ced ures may deteriorate. Man ag emen t assessed th e effectiven ess of th e Compan y’s in ternal cont ro l ov er financial rep orting as of December 3 1, 2018 . In making t his assessmen t , man ag emen t u sed th e crit eria set fo rth by t he Commit tee o f Spon sorin g Org ani zatio ns of the Treadway Commission (“COSO”) in Interna l Co ntro l—Integra ted Fra mewo rk (2 01 3). The Company entered in to reinsu ran ce ag reemen ts with Li berty Life Assu ran ce Compan y o f Bosto n (“Lib erty Life”) to acquire it s in dividu al life an d ann uity o peration s effect iv e M ay 1 , 201 8 in a t ran saction accou nted fo r as a p urchase bu sin ess co mb in ation. Sub sequ ent to th e acqu isitio n, cert ain elemen ts of the in ternal co ntro l ov er finan cial rep ortin g of the in dividu al life and ann uit y o peration s of Liberty Life were in teg rated in to the Co mp any ’s ex isting sy stems and in ternal con trol ov er fin ancial reportin g. In co nd uctin g o ur evaluatio n o f the effectiv en ess o f intern al co ntro l o ver finan cial rep orting as of December 31 , 20 18 , th e Co mp any has ex clu ded th ose co ntrols at Liberty Life th at relate t o systems and pro cesses for assets an d liabilities o f th e acqu ired bu sin ess th at were no t int eg rated in to o ur ex isting systems and in t ernal co ntro l over fin ancial repo rting. The p ort io n o f th e bu si ness no t integrated into o ur ex isti ng sy stems and co ntro ls rep resen ts ap proxi mately $1 54 mil lion of co nso lid ated assets, app ro ximately $2 08 million o f co nsolid ated rev enu e, app ro ximately $4 79 million o f co nsol id ated benefits an d exp enses, an d ap prox imately $13 ,58 0 million of liabil ities o n the related con so lidated fin ancial statemen ts. Based on th e Company ’s assessmen t o f intern al co ntrol ov er fin anci al repo rtin g, management has co nclud ed that, as of December 31 , 20 18 , the Co mp any ’s i ntern al co ntro l o ver fin anci al repo rtin g was effectiv e to p ro vide reason able assu ran ce regarding the reliabilit y o f finan cial rep orting and preparatio n o f fi nancial stat ements for ext ern al pu rpo ses in acco rdance with generally accepted accou nting p rin cip les. The effecti veness o f the C ompany ’s in ternal co ntro l o ver fin ancial rep ortin g as of Decemb er 31 , 2 01 8, h as b een aud ited by Pricewaterho useCo op ers LLP, an ind epen dent reg i stered p ub lic acco un ting firm, as stated in th eir att estatio n repo rt in clu ded in Item 8 . March 5 , 2 01 9 18 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents (c) Changes in Internal Contro l Over Fina ncial Reporting Other th an t he con sid eratio ns no ted in management’s rep ort, there h ave b een no ch ang es in th e Co mp any ’s in ternal con trol ov er fin ancial rep ortin g du ring th e ann ual perio d en ded December 31 , 20 18 , that have materially affected , or are reason ably likel y to materially affect, the Co mp any ’s in ternal co ntrol ov er financial rep orting . Th e Co mp any ’s intern al co ntro ls exist within a dy namic env iro nmen t and th e Compan y co ntin ually striv es t o imp ro ve its in ternal co ntrols and procedures to enh an ce th e qu ali ty of its fin an cial rep orting. Item 9 B . Other Informa tion No ne. 18 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART III Item 1 0. Directors, Executive Officers and Co rpo rate Gov erna nce The curren t ex ecut iv e officers an d d irecto rs o f the Compan y are as fo llows: Name Ag e (as of 2/1/20 19 )Title Jo hn D. Jo hn s 66 Ex ecu tiv e Ch airman of th e Co mp any an d a Di recto r Rich ard J. Bielen 58 Presiden t, Chief Executiv e Officer an d a Di rector D. Scott Ad ams 54 Ex ecu tiv e Vice Presid ent, Ch ief Dig ital an d Inn ov ation Officer M ark L. Drew 57 Ex ecu tiv e Vice Presid ent, Gen eral Co un sel an d Secretary M ichael G. Temple 56 Vice Chairman, Fin ance and Risk Carl S. Th ig pen 62 Ex ecu tiv e Vice Presid ent and Ch ief In vestmen t Officer Steven G. Walk er 59 Ex ecu tiv e Vice Presid ent and Ch ief Finan cial Officer Norimitsu Kawahara 54 Directo r Tetsuy a Kiku ta 54 Directo r Vanessa Leo nard 58 Directo r Jo hn J. McMaho n, Jr.76 Directo r Ung yo ng Sh u 56 Directo r Jesse J. Spikes 68 Directo r Toshiaki Su mino 49 Directo r William A. Terry 61 Directo r W. Michael Warren, Jr.71 Directo r All executiv e o fficers are elected ann ually an d serve at the p l easure of t he Bo ard of Directo rs. Non e of the ex ecu tiv e officers are related to any director of th e Co mp any or to any o t her ex ecutiv e officer. Mr. Joh ns has b een Executiv e Chairman of th e Compan y sin ce Ju ly 2017. He p rev io usly served as Chairman of the Board of the Co mp an y from Janu ary 20 03 to Ju ly 20 17 and Ch ief Ex ecu tiv e Officer o f th e Co mp any from December 20 01 to July 20 17 . He h as b een a director of the Compan y sin ce May 19 97 . From Aug ust 199 6 to Jan uary 2 01 6, Mr. Jo hn s also served as Presi dent o f the Compan y. Mr. Jo hn s h as been emplo yed b y th e Co mp any and its sub si diaries since 19 93 . Mr. Bi elen has b een Ch ief Execu tive Officer o f th e Co mp any since Ju ly 2 01 7 an d Presid ent of the Co mp an y since January 2 01 6. Fro m Janu ary 20 16 to Ju ly 2 01 7, Mr. Bielen also served as Chi ef Op eratin g Officer o f th e Compan y. Fro m Jun e 2 00 7 to Jan uary 20 16 , M r. Bi elen served as Vice Ch airman and Ch ief Fin anci al Officer o f th e Company. From August 20 06 to Jun e 20 07 , M r. Bielen served as Executi ve Vice Presiden t, Ch ief Inv estment Offi cer, an d Treasu rer o f th e Co mp an y. M r. Bielen became a d irecto r of the Company o n Feb ru ary 1 , 2 01 5. Mr. Bielen has been emp lo yed b y th e Compan y and its sub si diaries since 19 91 . Mr. Adams h as b een Executi ve Vice Presid ent an d Ch ief Digital an d In no vation Offi cer sin ce M arch 201 8. From Jan uary 20 16 to March 20 18 , Mr. Ad ams serv ed as Executive Vice Presi dent an d Ch ief Administrativ e Officer of t he Compan y. From Ap ril 20 06 t o Jan uary 20 16 , Mr. Adams served as Seni or Vice Presid ent and Ch ief Human Resou rces Officer o f the Compan y. Mr. Drew has b een Ex ecu tive Vice Presid en t , Gen eral Co un sel an d Secretary o f the Co mp an y sin ce Au gu st 2 018. From Au gu st 2 016 to Au gu st 20 18 , Mr. Drew serv ed as Executive Vice Presid ent and General Co un sel o f th e C ompany. Fro m 20 06 to Au gu st 20 16 , M r. Drew served as M an aging Shareh old er o f May nard, Coo per & Gale, P.C., a Birming ham, Alabama based law firm, where Mr. Drew wo rk ed fro m 1 98 8 u ntil Ju ly 20 16 . Mr. Temple has b een Vice Chairman, Finan ce an d Risk since M arch 20 18 . Fro m No vemb er 2 01 6 to M arch 20 18 , h e serv ed as Ex ecutiv e Vice Presid ent, Finan ce an d Risk of th e Company. From Janu ary 20 16 to Nov emb er 2 01 6, Mr. Temple served as Execu tive Vice Presi dent, Fin ance and Risk, and Ch ief Risk Officer o f th e Compan y. Fro m Decemb er 20 12 to Janu ary 2 01 6, Mr. Temple served as Execu tive Vice Presid ent an d Ch ief Risk Offi cer o f t he Co mp any. Prio r to jo in i ng the Company, M r. Temple serv ed as Senio r Vice Presiden t and Ch ief Risk Offi cer at Un um Grou p, an insu ran ce co mp any in Ch attano og a, Tenn essee. Mr. Thigp en h as b een Executive Vice Presiden t an d Chief In vestmen t Officer of the Co mp any since June 20 07 . Fro m Janu ary 20 02 to June 2 00 7, Mr. Th ig pen serv ed as Sen io r Vice Presid en t an d Chief M ort gage and Real Estate Officer of the Compan y. Mr. Th ig pen h as been employ ed b y t he Company an d its sub sidiaries since 19 84 . Mr. Walker has b een Ex ecu tiv e Vice Presiden t an d Chief Financial Officer o f the Co mpan y sin ce Janu ary 20 16 . From Janu ary 20 16 to M arch 20 17 , Mr. Walker also served as Co ntro ller o f th e Co mp any . From March 20 04 to January 20 16 , M r. Walk er 18 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents serv ed as Sen io r Vice President, Chief Accou nti ng Officer, an d Co ntro ller o f the Co mp an y. Mr. Walker has b een emp lo yed by th e Co mp any an d its sub si diaries since 20 02 . Certain o f these ex ecu tive o ffi cers also serve as ex ecu tive o fficers and /o r di recto rs of vario us o f th e Co mp any ’s sub sid iaries. Qual ifica tion of Directo rs The Co mp any ’s Board con si sts of 11 directors. The fo llowing su mmarizes so me of the key exp eriences, qu ali fication s, ed ucatio n, an d other att ribu tes o f the cu rrent directors: Richa rd J . Bielen. Mr. Bielen jo ined th e Compan y in Ju ly 19 91 as Vice Presid ent. In Jun e 19 96 , M r. Bielen became Senior Vice Presiden t of t he Co mp any ; in Janu ary 2002, h e became Ch ief In vestmen t Officer and Treasurer o f th e C ompany ; in Au gu st 20 06 , he became Ex ecutiv e Vi ce Presid ent of the Co mp any ; in Ju ne 20 07 h e b ecame Vice Chai rman an d Chi ef Fi nancial Officer o f th e Compan y; in Janu ary 2 01 6, he b ecame Presiden t and Ch ief Operating Officer o f the Co mp an y; and in Ju ly 20 17 , he became Ch ief Executi ve Officer and Presid ent of th e Company. Befo re join in g Pro tectiv e, Mr. Bi elen was Senior Vice Presid ent of Opp enh eimer & Comp any. Prior t o joining Opp enh eimer, Mr. Bielen was a Senior Accou ntant with Arthu r And ersen and Compan y. Mr. Bielen serv es on the Bo ard of Directo rs of th e United Way of Central Alabama an d as a trustee o f Ch ildren’s of Alabama. Mr. Bi elen is a fo rmer Direct or of the McWan e Science Cen ter and p rev iously served o n th e Board of Directors of Infin ity Pro perty and Casu alty Corpo ratio n un til Ju ly 2 01 8. M r. Bielen receiv ed his un dergradu ate deg ree and Masters o f Busin ess Admin istration from New York Universi ty. Mr. Bielen became a Directo r fo r the Compan y in 20 15 . We b elieve that M r. Bielen’s back grou nd in bu sin ess; h is sk ills and exp erience as a sen io r executi ve o f th e Compan y an d Opp enh eimer an d as a leader in other b usin ess, ci vic, edu cation al an d ch aritab le organizations; h is kn owledge and exp erience as a lead er in th e life i nsu ran ce in du stry, alon g with his lo ng -stand ing k nowled ge o f the Compan y and his seaso ned bu si ness jud gment, are valuab le to u s and ou r Bo ard o f Directors. J ohn D. Jo hns. Mr. Joh ns join ed Protective in Octob er 19 93 as Executiv e Vice Presid ent an d Chief Fin anci al Officer. In Au gu st 1 99 6, M r. Joh ns became Presi dent and Ch ief Operating Officer; in Janu ary 2 002, h e became President and Ch ief Execu tive Officer; in Jan uary 2 00 3, he b ecame Ch airman , Presid ent and Ch ief Execu tive Officer; in Janu ary 2 01 6, h e became t he Chai rman and Chi ef Ex ecu tiv e Officer; and as of July 2 01 7, h e became Ex ecut iv e Ch airman of the Co mp an y. Befo re joinin g Pro tectiv e, M r. Joh ns was Ex ecu tive Vice Presiden t and Gen eral Cou nsel o f So nat In c. Pri or to joining Son at, Mr. Joh ns was an attorney i n p riv ate p ract ice, focu sin g on commercial and fin ancing t ransaction s an d the finan cial services i nd ustry. Mr. Joh ns is o n th e B oards of Directors of Reg io ns Fi nancial Corp oration , Gen uine Parts Co mp any an d Th e Sou th ern Company. He is a Tru stee o f the Altamon t Sch oo l . He is o n the ex ecutiv e commi ttee of th e American Co un cil of Life Insurers an d serv ed as Chairman from 20 13 -2 01 4. He is a member of th e Finan cial Services Round table. He is a director o f t he Econ omic Dev elo pment Partnersh ip o f Alabama and th e Coaliti on for Reg io nal Tran spo rtation. He has p rev io usly served o n t he Bo ard of Tru stees of Th e Un iv ersity o f Alabama Sy st em and in a l ead ersh i p role fo r the Birmin gham Civil Righ ts In stitute, other fin ancial services in dustry association s, and civic and ed ucat io nal o rganization s. He was ind ucted in t o the Alab ama Academy of Hon or in 20 13 . Mr. John s receiv ed an u nd erg rad uate degree from t he University of Alabama an d a Master o f Bu si ness Admin istration and a Juri s Doctorate fro m Harvard Univ ersity. Mr. Jo hn s b ecame a Director fo r th e Compan y in 1 997. We b elieve th at M r. Jo hn s’s backg ro un d i n th e p ractice o f law; h is sk ill s an d exp eri ence as a sen io r execu tive of th e Compan y and So nat; h is ex perien ce as a lead er in o th er b usin ess, civ i c, ed ucatio nal and charitable organ izatio ns; his k no wled ge and exp erience as a leader in th e life in surance i nd ustry; hi s lo ng -stan ding kn owl edge o f the Co mpan y; and his seaso ned bu sin ess jud gment are valuab le to o ur Bo ard of Directo rs. No rimitsu Ka wahara. M r. Kawahara is th e Executiv e Officer, Ch ief of Intern ational Life Insu ran ce Bu si ness Unit , o f Dai-ich i Life. M r. Kawahara cu rrentl y serves as a Director of DLI North America, In c. an d Co mmissio ner o f PT Pan in Dai-ichi Life. Mr. Kawah ara h as held vario us positio ns with Dai-ich i Life sin ce 1 99 7, in clu ding Execu tive Officer, Chief General Man ager, Asia Pacific and Gen eral Manag er, Intern ational Busin ess M anagement Dep art ment. Mr. Kawahara has also served as M anagin g Direct or of b oth DLI Asia Pacific Pte. Ltd . and Dai-ichi Li fe Intern ational (Asia Pacific) Limited. Mr. Kawahara has also served as a Di recto r of Star Un io n Dai-ich i Life Insurance Co mp any Limited , Directo r of TAL Dai-ichi Life Au st ral ia PTY Limited, Director of TAL Life Limited , and a M ember of the Memb er’s C ou nci l o f Dai-ichi Insuran ce Compan y o f Vietnam Li mi ted . Mr. Kawahara received a Bach elo r of Arts deg ree in Eco no mics from Hitotsu bash i University in Tok yo , Japan . Mr. Kawah ara became a Director of th e Co mp an y in 2 01 8. We bel iev e that Mr. Kawah ara’s kn owled ge an d exp erience as a lead er in the in ternat io nal life insu ran ce ind ustry, alo ng wi th h is lo ng-stan ding k no wled ge an d serv ice with Dai-ichi Life and his season ed b usin ess ju dgmen t, are valuable to us an d o ur Board o f Directo rs. Tetsuy a Kikuta . Mr. Kiku ta is th e M an aging Ex ecutiv e Offi cer o f Dai-ichi Life and the Manag in g Execu tive Officer of Th e Dai-i ch i Li fe Insurance Co mp any, Limited. Mr. Kik uta curren tly serves as a Director fo r each of th e fo llowing co mp anies: Th e Dai-ich i B uild in g Co ., Ltd., The Dai-ichi Life In surance Co mp an y Limited, Mizuh o-DL Fin anci al Techn olog y Co ., Ltd., an d Soh go Ho using Co., Ltd . M r. Kik uta has held vario us po sition s with Dai-ich i Life since 20 08 , inclu din g Man ag i ng Ex ecu tiv e Officer, Ch ief General Man ager, Inv estment; Execu tive Officer, Ch ief General Man ager, Inv estment; General Man ager, Inv est ment Pl an nin g Dep artmen t; an d Gen eral Manag er, Eq uity Inv est ment Dep artmen t and Intern ation al Business Manag ement Dep artmen t with The Dai -ichi Life In surance Co mp any, Limited an d Man ag i ng Directo r of Dai-ich i Life Intern ation al (AsiaPaci fic) Limited. Mr. Kiku ta has also served as a memb er of the Member’s Co un cil o f Dai-ich i Li fe In surance Co mp any o f Vi etnam, Limited, an d as a Directo r fo r the following compan ies: TAL Dai-ichi Life Au stralia Pty Limited; TAL Life Limited ; an d TAL Limited. Mr. Kikuta earn ed a Bachelor of Commerce d egree from Hitotsu bash i Un iv ersity in Tok yo , Jap an an d receiv ed a Master of Bu sin ess Admin istration d eg ree from Columbia University. Mr. Ki ku ta b ecame a Direct or for t he Co mp an y in Au gu st 2 01 8. We believe th at M r. Ki ku ta’s kn owledg e and ex perien ce as a leader i n th e intern ation al life insu ran ce ind ustry, alon g with his lo ng -stan ding k no wled ge and serv ice with Dai -ichi Life and his seaso ned b usin ess j ud gmen t, are val uable to us an d o ur Board o f Di recto rs. Va nessa Leonard. M s. Leo nard i s a practicin g attorney an d is a Prin cip al at Leon ard Mitch ell Co nsu l ting . She prov id es co nsulting serv ices fo r no t-fo r-pro fit o rg anization s, primaril y i n t he areas o f management, leg al, and organ izat io nal behav io r. She 19 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents was p rev io usly a sen io r co nsu l tant and manag er wi th KPMG, Higher Education C on sultin g, So utheast M ark et in Wash in gton , D.C. and Atlanta, Geo rgi a an d a fin anci al anal yst fo r Emory Universi ty in Atlan ta, Georgia. In h er con sultin g and an aly st roles, Ms. Leo nard focused on manag ement acco un ting matters (p rimarily governmental complian ce an d in direct co st accou nti ng ) fo r h ig her ed ucat io n in stitution s. Ms. Leon ard is a memb er of th e Bo ard o f Trustees of th e Un iv ersity of Alabama, where sh e is Chairman of its Au dit Committee and serves on its Phy sical Propert ies, Co mp ensation, Finan ce, Nomin ating , Leg al Affairs and Publ ic Review Co mmittees. M s. Leon ard is also a memb er o f the Health Care Aut ho rity fo r Bap tist Health Board , UAB Ed ucatio n Fou nd ation Bo ard , and t he UAB Health System Bo ard . Ms. Leon ard p revio usly serv ed o n th e Gov ern or’s Task Force t o Streng th en Alab ama’s Families and the Bo ard of th e Un ited Way for t he Lak e Martin Area in Alab ama. M s. Leo nard received an un dergradu ate deg ree in Health Care Manag ement fro m th e Un iversity of Alabama, a Master of Bu siness Admi nistratio n from the University o f Mississip pi, an d a Ju ris Docto rate from the Un iv ersity of Alab ama Scho ol o f Law. Ms. Leon ard became a Director fo r th e Co mp any in 2 00 4. We b elieve that M s. Leo nard’s ex perien ce as an atto rn ey; her man agemen t acco un ting experience an d skills i n th e field o f accou nti ng an d compli an ce with comp l icated reg ulation s fo r larg e, co mp lex o rg anization s; an d h er lead ersh ip ro les in civic an d n ot-for- profit organ izatio ns are valuab le to ou r Bo ard of Directors. J ohn J. McMahon, J r. Mr. McM aho n is Ch airman of Ligo n In du stries, LLC. Prev io usly, M r. M cMah on was a lawy er in private practi ce in Birming ham, Alabama, b efo re sp end in g twenty-five y ears with McWan e, In c., a p rivately -h eld manu facturing co mp any wit h i ntern ation al o perati on s hav in g ov er twenty plants an d ov er on e b illio n do llars i n sales. Durin g his career at McWan e, Inc., Mr. McM aho n held nu merou s manag ement p ositio ns, incl ud in g Presid ent and Chairman of th e Board, an d nego t iat ed o ver twen ty -fiv e acqu isitio ns ran ging fro m p ubl icl y-held co mp anies t o small p rivately -h eld co mp an ies. Mr. McM ah on serves on th e B oard o f Directors o f ProAssu ran ce Co rpo rat io n, an d h e serves o r has serv ed o n the Bo ard s o f Directors o f o th er pu blicly- and priv atel y-held compan ies, includ in g Nat io nal Ban k o f Commerce, Alabama Natio nal Ban corpo ratio n, John H. Harlan d Compan y, an d Co op er/T. Smith Co mp any. He was on the Board of Trustees of Birmin gh am-So uthern Co llege. He has also been a Directo r or Tru stee of the B irming ham Airp ort Au th ority an d the Un iv ersit y o f Alabama System. Mr. M cMah on receiv ed h is un dergradu ate deg ree fro m Birmin gh am-So uthern Co llege and a Ju ris Doctorate fro m the Un iv ersity o f Alab ama Sch oo l of Law. M r. M cMah on became a Director fo r th e C ompany in 1 98 7. We believe th at Mr. M cMah on ’s b ack grou nd as a lawyer in priv ate practice; h is sk ills and his lo ng exp erience as a seni or executiv e of McWan e an d Lig on In du stri es; h is ex perien ce as a lead er in o th er b usin ess, civic, ed ucatio nal, an d no t-fo r-p ro fit organ izatio ns; his lo ng -standi ng k no wledg e o f t he finan cial services ind ustry; an d his season ed bu siness jud gment are valuable to ou r Bo ard of Directors. Ungy ong Shu. Mr. Shu is the Presid ent and Ch ief Ex ecu tiv e Officer of Co re Valu e Man agemen t Company, Limited, an ad visory firm that h e estab lished i n 2 01 3. Mr. Shu worked in various po sition s for J.P. M org an Secu rit ies Japan, Limited from 19 86 t o 2 00 7. These p ositio ns in clu ded M ergers an d Acq uisi tion s Anal yst, Corp orate Finance Asso ciat e, Vi ce Presid ent o f In vestmen t Bank in g, head of Jap an Finan cial Institu tion s Grou p, Man aging Direct or, Co -Ch ief Op eratin g Officer of Jap an Inv estment Ban king , an d Sen io r Inv estor Clien t M anagement. Mr. Sh u worked in v ariou s po sition s fo r M errill Lyn ch Japan Secu rit ies Limited fro m 20 07 to 2013. These po si tion s in clu ded Chairman of Japan Fin ancial In stitut io ns Gro up , Co -Head of Asi a Fin ancial In stit utio ns Grou p, Co -Head o f Japan In vestmen t Bankin g, and Vice Ch airman . Mr. Shu serv es as a director of Dai-ichi Life an d DESCENTE, LTD. M r. Shu graduated fro m Hito tsub ashi Uni versity in Japan, wh ere he majo red in laws. M r. Shu became a Directo r fo r the Compan y in 2 01 5, an d h e serv ed as a director of Dai-ichi Life In su rance Compan y, Limited fro m 20 15 to 20 16 . We b elieve t hat Mr. Sh u’s b ackg ro un d in b usiness, in clu ding his exp erience and serv ice in in vestmen t b ank in g, h is legal train in g, an d strategic and fi nancial p lan ning kn owledg e, are val uable to us an d o ur Board o f Di recto rs. J esse J . Spikes. M r. Spik es practiced law fo r almo st 4 0 y ears. Until M ay 31 , 20 17 , Mr. Sp ikes was Sen io r Cou nsel in th e Atlanta office of Den to ns US, LLP. After serving as Leg al Advi sor to the Al Bahrain Arab African Bank in Man ama, Bahrai n and the Arab Afri can In ternat io nal Bank in Cairo , Egy pt wh ere he liv ed from 19 81 to 1 98 5, h e joined Atlanta-b ased Lo ng , Ald ridg e & No rman LLP (“LAN”) in 19 86 where h e b ecame a p artner in 1 98 9. LAN later merg ed with McKenn a & Cuneo LLP to b ecome M cken na Lo ng & Ald rid ge LLP, and , sub sequ ently, the leg acy firm o f Denton s’ At lanta office. He al so serv ed as Gen eral Cou nsel t o Atl an ta Life Insu ran ce Co mp any, Law Clerk to Ju dge Damo n J. Keith o f th e United States C ou rt of Ap peals, Six th Circuit , and an asso ciate with the p red ecessor firm o f Atlanta-b ased Alston & Bird . M r. Sp ik es’s l aw p ractice focu sed o n bu sin ess law, i nclud in g co rp orate an d b ank in g transact io ns, g ov ernan ce an d complian ce, intern al in vestigat io ns, aud its and speci al committee representation s, an d marketing an d sp orts law matt ers. He also rep resen ted bu sinesses, in divid uals and go vernmental en tities in th e pu blic p ro curemen t arena. M r. Sp ik es h as also served as a d irecto r o f pu blicly- and priv atel y-held co mpan ies, an d in leadersh ip ro les with th e At lan ta Area Co un cil of the Boy Sco uts o f America. C urren tly, Mr. Spikes is p resid ent of Rib s On The Ru n, In c., an Atlanta-b ased co mp any that dev elo ps recipes fo r, and then p rep ares and sells, ru bs, sauces and smok ed-meat pro du cts. He also serves on the Bo ard o f Tru stees fo r HSOC, In c., a sub sidiary o f Ch ildren’s Health care o f Atlanta, In c. t hat man ag es Hu gh es Sp ald ing Child ren ’s Hospital. M r. Sp ik es receiv ed his BA d egree i n Eng lish fro m Dartmo uth Colleg e, h is BA deg ree in Philo so ph y and Politics fro m University College at Ox fo rd Un iv ersity and a Juris Doctorate fro m Harvard Law Sch oo l. Mr. Spikes became a Director for the Co mp an y in 201 1. We b elieve th at Mr. Spikes’s sk ill and exp erience as an att orney , en trepreneu r an d l ead er in o th er b usin ess and civ ic org an i zatio ns are valuab le to o ur Board of Directo rs. To shia ki Sumino. Mr. Su mino is the Ex ecu tiv e Officer, Ch ief Gen eral Manag er, No rth America o f Dai-ichi Life and the Presiden t, Ch ief Executi ve Office of DLI No rth America Inc. Mr. Sumin o also serv es as a Directo r of DLI No rth America Inc. M r. Sumin o h as h eld vario us po sition s with Dai-i ch i Life, in clu ding Ex ecu tive Officer, Chief o f Co rporat e Plann in g Un it for Dai-ich i Life Holding s, Inc. from 20 16 to 2 01 8 an d th e fo llo wing p osit io ns wit h Th e Dai- ichi Life In surance Company, Limited fro m 1 99 7 to 20 16 : General Man ager, Gro up Manag emen t Head qu arters; Staff Gen eral Man ager, Co rp orate Planni ng Dep artmen t; Co rpo rat e Plan ning Departmen t ; and Secu rities Plann i ng Dep artmen t. M r. Su mi no earned a Bach elor o f Law deg ree fro m the University of To ky o i n Tok yo , Japan an d M CJ and LLM deg ree from New Yo rk University Sch oo l o f Law. Mr. Su mino became a Di rector fo r the Compan y in Ap ril 20 18 . We believ e th at Mr. Sumi no ’s knowledg e and experience as a lead er in t he intern ation al life in surance in du stry, alon g with h is lo ng -stan ding k no wledg e and serv ice with Dai -ichi Life and his seaso ned b usin ess j ud gmen t, are val uable to us an d o ur Board o f Di recto rs. 19 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Will ia m A. Terry. Mr. Terry is Chairman an d on e of th e fo un ders o f High lan d Asso ciates, In c., an inv estment adv isory firm th at has ad vised on ap proxi mately twenty-sev en b illion dol lars of assets (as of December 2 01 8) fo r no t-fo r-p ro fit health care organ izatio ns, fo un datio ns, endowmen ts, an d select in dividu als. He serv es as a memb er and director o f Alabama Capit al Network, LLC. He p rev io usly served as a man aging memb er and d irecto r o f Hig hland Strategi es, LLC u nti l M arch 2 01 8. Befo re starti ng High lan d Associates i n 19 87 , Mr. Terry worked in th e Investment M anagement Co nsulting Gro up of In terstate/Joh nso n Lan e Co rp oration . Mr. Terry previously served as a member of th e Ex ecutiv e Co mmitt ee an d Presiden t for th e Mo un tain Bro ok C ity Scho ols Fou nd ation an d Ch airman o f the Ex ecu tiv e Bo ard o f the Greater Alabama Co un cil of Bo y Scou ts o f America. Mr. Terry received an un dergradu ate degree from Dav idso n Co llege and is a CFA ch arter h older. M r. Terry became a Directo r for the Company i n 2 00 4. We b eli ev e th at Mr. Terry’s sk ill s and ex perien ce at High lan d Associates in th e field o f inv est ments an d as a lead er o f th e firm; hi s exp erience as a leader in civic, edu cational, and n ot-for-profit organizations; and his seasoned b usin ess jud gmen t are val uable to ou r Bo ard of Directors. W. Michael Wa rren, Jr. Mr. Warren is Presiden t and Chief Execu tive Officer of Children ’s o f Alabama, an ind ependent, n ot-for-profit, freestan ding p ediatric h ealth care center. Prior to joinin g Child ren ’s in Jan uary 2 00 8, Mr. Warren was Chai rman and Ch ief Executiv e Officer o f En erg en Co rp oratio n and its two p rimary su bsid iaries, Alagasco an d En erg en Resou rces. M r. Warren became Presiden t o f Alagasco in 1 98 4 and held a nu mb er of in creasi ng ly important p ositio ns with Energen b efo re b ein g named Presiden t and Ch ief Execu tive Offi cer in Febru ary 1 99 7 and Chai rman in Janu ary 19 98 . Mr. Warren was a lawyer in priv ate p ractice in Birming ham, Alabama, b efo re j oining Alab ama Gas in 1 98 3. M r. Warren served o n the Board o f Directo rs of Energen Co rp oration un til hi s term exp i red in April 20 10 . Mr. Warren h as served as Ch airman o f the Board o f Direct ors of th e Bu siness Co un cil of Alab ama, th e Un ited Way, an d Children ’s of Alabama. He al so h as been Ch airman of th e Metro po lit an Develop ment Board, t he Alab ama Sy mp ho ny Board of Directo rs, an d the Ameri can Heart Association Bo ard of Directors. He h as chaired the gen eral campaign of th e United Way for Cen tral Alabama an d the United Neg ro Co llege Fu nd . M r. Warren received an und ergradu ate deg ree from Au bu rn Un iv ersit y an d a Juris Doctorate from Duk e Un iv ersit y. M r. Warren became a Director for th e Co mp any in 20 01 . We believ e th at Mr. Warren’s backg ro un d as an attorn ey ; his sk ills and lo ng exp erience as Chairman an d CEO o f a h ig hly- regul ated pu bli cly -h eld u tilit y; h is con tin uing ex perience as Presid en t and CEO of Ch ildren’s o f Alab ama; h is exp erience as a leader in o th er bu si ness, civ ic, an d n ot-fo r-profi t o rg anization s; an d h is season ed bu siness ju dg ment are v alu able to o ur Board o f Di rectors. Audit Co mmittee The Board h as a sep arately design ated stand in g au dit co mmittee. Its members are Van essa Leo nard, Ch airperson , Wi lliam A. Terry, an d W. Michael Warren, Jr. Th e Aud it Co mmittee is governed b y a written charter that was app ro ved b y th e Bo ard . Th e Au dit Co mmit tee an nu ally revi ews its p erformance of its resp on sibilities un der th e ch arter. On No vember 6 , 2 018, the Au dit Committee d etermined th at it had satisfied its resp on sibi lities un der th e ch arter d urin g 20 18 . Ou r Board h as det ermin ed th at William A. Terry, a member of ou r Au dit Committee, is an au dit commit tee finan cial ex pert u nd er the ru les o f the SEC an d is ind epen den t u nd er ap pli cab le SEC stand ard s. While Mr. Terry po ssesses th e attrib utes o f an aud it co mmittee fin ancial ex pert (as defin ed u nd er th e SEC rules), he is n ot an d has n ev er been an accou ntant or au dito r, an d th is fin ancial exp ert d esi gn ati on d oes no t imp ose any d uti es, o blig ation s or liabilities t hat are greater th an the dut ies, o blig ation s, and l iabilities impo sed b y b ein g a member of th e Audit Commit tee or t he Board. See It em 10 , Qu alificatio n o f Di recto rs, for fu rther discussio n o f Mr. Terry’s exp erience and qu alification s. Co de o f Ethics The Compan y h as ado pted a Co de o f Bu siness Co nd uct, which ap plies to all directors, o fficers, and emp lo yees o f th e Company. Th e Cod e of Bu siness Co nd uct in corpo rates a co de o f eth i cs th at app lies t o the prin cip al ex ecu tiv e o ffi cer and all fi nancial o ffi cers (in clu ding th e Ch ief Finan cial Officer an d the C hief Accou ntin g Officer) o f t he Co mp any. The Cod e o f Bu sin ess Con du ct i s av ailable on the Compan y’s websit e at http ://in vestor.protective.com/co rpo rat e-gov ernan ce/co de-of-co nd uct . In t he ev ent the Co mp any amen ds o r waives any o f the p ro vision s of the Co de of Busin ess Co nd uct ap plicab le to o ur p rincipal ex ecut iv e o fficer, prin cip al financial officer, or pri nci pal acco un tin g o fficer that relate to any elemen t of the d efinitio n o f “co de o f eth ics” en umerated in Item 4 06 (b) of Reg ulation S-K un der th e 1 93 4 Act, th e Co mp any in ten ds to d isclo se th ese actio ns on th e Co mp any ’s web site. 19 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 1 1. Executive Compensatio n Un less th e co ntext otherwise requ ires, the “Comp any ,” “we,” “us,” o r “o ur” refers to Pro tectiv e Life Corpo ratio n. Co mpensa tion Discussion and Ana l ysis In thi s sectio n, we describ e t he material compo nen ts of o ur ex ecu tiv e compensation p ro gram in 20 18 for o ur n amed execu tive officers, wh ose co mp ensation is set fo rth in th e Summary Co mpen sat io n Tab le and other compen sation tab les co ntain ed h erein: Na med Executive Officers for 2 01 8 •Richard J. Bielen, ou r Presid ent and Ch ief Execu tive Officer; •Steven G. Wa lker, ou r Ex ecutiv e Vice Presid ent and Ch ief Finan cial Officer; •Jo hn D. Jo hns, ou r Ex ecutiv e Ch airman of th e Co mp any ; •Michael G. Temple, o ur Vice Chairman, Fin ance and Risk ; and •Carl S. Thigpen, o ur Execu tive Vice Presiden t an d Chief Investment Offi cer. Our Co mpensatio n Philo sophy The ob jectiv es of our executive compensation prog ram are to: 1) attract an d retain th e most q ualified ex ecutiv es; 2 ) reward them for achievi ng h igh levels o f p erforman ce; and 3) align executiv e and Dai-ichi Life i nterests. Principles o f Our Compensa tio n Pro gra m To meet ou r ex ecut iv e compensation ob j ectiv es, we d esig n our p ro gram to : 1 ) align compen sation wi th bu siness go als an d resu lts; 2 ) co mp ete for ex ecutiv e tal en t; 3) su pp ort risk man agemen t p ract ices; 4) take into accou nt market an d ind ustry p ay and practices; and 5) be commu nicated effectiv ely so th at o ur officers un derstan d h ow co mpen sat io n is lin ked to perfo rmance. Th e key co mp on ents o f o ur execu tive co mp en satio n p ro gram are: 1 ) base salaries; 2 ) an nu al cash in centiv e awards; 3) lon g-term cash in cen tives; and 4) retiremen t an d d eferred co mp ensatio n p lan s. Ba ckg round of Co mpensa tion Prog ram In 2015, as a result of the Company ’s merg er with Dai-ich i Life (th e “M erg er”), t he Co mp any ’s stock ceased t o be p ub licly trad ed. The Co mp ensatio n Discussion an d Anal ysis an d the related tabl es and disclo su res that follo w prov id e details reg ard ing ou r 2 01 8 co mp ensatio n p rograms, wh ich were ori ginal ly restructured u pon th e M erg er in 20 15 to reflect th e fact that we n o lon ger h ave a p ub licl y trad ed class of stock t o u se in ou r co mp ensation prog rams. In 2 01 5, we ad op ted lon g-t erm incen tive and an nu al incentiv e prog rams. In Nov emb er 20 17 , th e Bo ard ad op ted the Pro tectiv e Life Corpo ration An nu al Incen tive Plan (“AIP”) and th e Protective Life Co rp oration Lo ng -Term In centiv e Plan (“LTIP”), which b ecame effective Jan uary 1 , 20 18 , un der which an nu al and lon g-term cash in centiv es h ave been mad e availab le to o ur n amed executive o fficers and certain o th er emp lo yees since 2 01 8. On No vember 6 , 20 18 , th e Board app ro ved an amend men t and restat ement o f th e AIP and the LTIP. Fo r mo re in fo rmation about th ese plans, please see “Ad op tion o f Annual In cen tiv e Plan and Lon g-Term In centiv e Plan” in t his Item 1 1. Except fo r M r. Jo hn s, no ne of o ur n amed ex ecu tiv e officers are cu rrently employ ed pu rsuan t to an employ men t agreement. The emplo ymen t p eriod s an d terms of employ ment u nd er th e 2 01 5 employ men t agreements with the o t her named ex ecutiv e o fficers (th e “Employ men t Agreements”) exp ired in February 2017 or Feb ru ary 20 18 , as app licable. In November 20 17 , M r. Joh ns en t ered into a letter agreement (th e “Letter Ag reemen t”) with th e Co mp any th at estab lished h is compen sation arran gements d uri ng t he p eriod h e is serv in g as Executiv e Ch airman of the Company. Fo r mo re in fo rmation ab ou t th e Letter Ag reemen t , p lease see “Potent ial Payments u po n Terminat io n o r Chan ge o f Contro l” in this Item 1 1. Co mpensation Co mmittee The Co mp ensatio n and M anagement Succession Committee o f ou r Bo ard o f Directo rs (“Compen satio n Co mmittee”), which co nsists of three in depen den t d irecto rs, o versees the compen sation program fo r o ur officers. In 20 18 , th e Co mp ensatio n Co mmittee met two times. Amon g its du ties, t he Compen sation Committee is resp on sible fo r formul ating compensation and related recommen datio ns fo r ap prov al b y th e Bo ard , in cludi ng : po l ici es an d pro grams app licable to the Compan y’s officers an d k ey emplo yees; the AIP, includi ng the total amo un t o f bon uses to be p aid each y ear un der the AIP and the metho do logy used to d etermine in dividual b on uses; th e ad ministratio n of th e LTIP and the achievemen t o f any ap pli cab le perfo rman ce ob jectiv es; corp orate go als an d obj ectives relevan t to the compen sation of th e Ch ief Executive Officer (“CEO”) an d evaluatio n o f the CEO’s perfo rman ce in ligh t o f these g oals and ob jectiv es; b ase sal ary, AIP b on us, LTIP ob ject iv e, an d o th er co mp en satio n o f the CEO and th e ot her senior officers o f th e Co mp any ; and t he perfo rmance o f sen io r o ffi cers and sen io r management successio n p lan s. The Co mpen sat io n Committee’s charter, which sets o ut its du ties and resp on si bilities, can b e fo un d on our web site at h ttp://inv esto r.protecti ve.com/co rp orate-go vernan ce/compen sation . The Co mp ensatio n Committee h as retained Willis Towers Watson , an ind epen den t compensation co nsu ltant, to revi ew, assess an d prov id e inp ut with respect to certain asp ects o f o ur compen sation prog ram fo r ex ecu tiv e o fficers. Th e co nsultan t repo rts 19 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents directly to th e Compen sation Committee with respect to these services, and t he Compen sation Committee may rep lace t he consu ltant at an y time. Th e co nsultan t gives th e Compen satio n Co mmittee adv ice ab ou t: 1 ) th e co mp ensatio n prov id ed to o ffi cers at ot her compan ies in the in su ran ce in du stry, using prox y st atemen t data, p ub lish ed survey sou rces, and the con sultant ’s p roprietary data; 2) th e amo un t an d ty pe of co mp ensation to provi de to o ur officers and key emplo yees; 3) the v alu e of lon g-term in cen tive grants; 4) t he allo cation of total comp ensation amo ng t he v ariou s elements; and 5 ) in ternal pay equ ity amon g k ey ex ecu tiv es. Rep resen tativ es o f the co mpen sat io n co nsu ltant attend reg ular Co mp ensatio n Co mmittee meetin gs and co nsult with t he Chairp erson of th e Co mp ensatio n Co mmittee (wit h o r wi th ou t management present) u pon requ est. The compen satio n consu ltant also adv i ses th e Corpo rate Go vernan ce an d No minatin g Commit tee on director compensation . Co mpensation Co mmittee Interlo cks a nd Insider Partici pa tion Du ring 20 18 , the members o f o ur Co mp ensatio n Committee were M r. McM aho n (Ch airperson ), M r. Spik es, an d M r. Terry. No relatio nsh i p th at wo uld creat e a “compen sation co mmittee in terlo ck” (as d efined in th e SEC reg ulations) ex isted du ring 2 01 8 between an y o f t hese indi vidu als and any o f ou r ex ecutiv e officers. Co mpensation Peer Group For 2 01 8, th e comp ensati on con sultant fo cused o n the pay practi ces of a p eer g ro up o f 15 life in su rance an d finan cial servi ces companies that are similar to u s in size and bu sin ess mix and th at represent a po ssible so urce o f officer and k ey emp lo yee talen t. Th e Co mp ensati on Co mmitt ee selects th e co mp anies in this compen sation peer g ro up taking in to acco un t the recommen datio ns o f the co nsultan t and ou r man agemen t. Th e co nsu ltant also prov id es a summary o f compen satio n su rv ey d ata for ot her co mp anies to give the Compen satio n Committee add itio nal in fo rmation fo r co mp ariso n p urpo ses. The compen sation peer grou p for th e 20 18 compensation cycle includ ed: •Lin coln Nat io nal Co rp oratio n •Prin cip al Fin anci al Gro up , In c. •Ameripri se Finan cial, Inc. •Afl ac Inco rp orated •Gen worth Finan cial, In c. •Un um Gro up •Reinsurance Gro up of America, In c. •CNO Fin an cial Gro up , In c. •Assurant, In c. •Torchmark Co rpo rat io n •Primerica, Inc. •FBL Fin ancial Gro up , In c. •Vo ya Fin ancial Gro up, In c. •Ath en e Hol ding •American Eq uity In vestment Life In surance Ou r compen sation con sultan t, alo ng wit h ou r Compen sation Co mmitt ee and ou r man agemen t, con sider the compo si tion o f the peer g ro up ann ually. We rev ised o ur p eer g rou p for 2 018 by remo ving XL an d StanCo rp d ue to transactio n activity that eith er to ok tho se co mp an i es private or materially ch anged th e nature o f t he co mp any. We add ed Vo ya Financial Gro up , Inc., Ath ene Ho ld i ng , and American Equ ity Inv estment Life Insu ran ce due to thei r size and co mp arab ility to the Company, and in o rder to k eep a critical mass within the peer g rou p after t he omissio n o f th e two co mp an i es referenced ab ov e. We believe that t he p eer g ro up has th e ap pro priate mix o f co mp anies and that it p ro vides th e ap pro priate means of comparin g o ur co mpen sat io n p ro grams and perfo rman ce to th at o f k ey competitors. Pay fo r Performa nce The Compen sation Commi ttee is co mmitted to ty in g ex ecu tiv e co mp ensatio n to Co mp any perfo rmance. To evaluate its implementatio n o f this pay fo r p erforman ce ph ilosophy, the Compen sation Committee members con sider a wide rang e of i nformatio n (i nclud in g information th ey receiv e bo th as Co mp ensatio n Commit tee memb ers an d as Bo ard memb ers), in clu ding: 1 ) o ur d eploy men t o f capital fo r acqu isit io ns and prod ucts; 2 ) o ur ad j usted operating earning s, th e rate of growth of ou r adjusted o perating earning s, and the deg ree of difficu lty in achieving o ur earn in gs g oal s; 3 ) ou r fin ancial st ren gth (as measured by o ur statu to ry capit al, risk-based capital (“RBC”), and rati ng agen cy rating s); 4) o ur budgets, exp ense manag ement, an d bu dg et v ariances; an d 5 ) pay for performance analyses prepared by th e compensation con sultan t. 19 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents The Co mp ensatio n Committee do es n ot p lace a particular weigh ting o n any o f th ese facto rs, bu t in stead co nsid ers th e informatio n as a wh ole. Based on this on go in g rev iew, the Co mp ensatio n Committee b elieves th at ou r compen satio n prog ram p ro vides a strong lin k between Co mp any p erforman ce and th e co mp ensatio n o f o ur officers. Co mpo nents of Our 2 01 8 Co mpensati on Prog ra m The key co mp on ents of o ur executiv e co mp ensation p ro gram are: 1) b ase salaries; 2) an nu al cash incentive awards; 3) lo ng -term cash in centiv es; an d 4 ) retirement and deferred compen sation plans. The Co mp en sat io n Co mmittee co nsid ers each compo nen t (sep arately and with th e o th ers) for o ur sen io r officers. The Co mp ensation Committee targets the to tal an nu al comp ensati on p ack age to b e at t he median of the compensation p eer grou p. As p art of this rev iew, th e Compen sation Co mmittee co nsid ers th e to tal “mix” o f the base salary, annu al cash in cent iv e and lo ng -term compen sation d elivered to o ur sen io r o fficers, an d co mp ares that co mp ensation mix to t he co mp ensati on mix o f comparable o fficers at other co mp anies. The ann ual incentive and lon g-t erm incenti ve comp on ents of th e prog ram are desig ned so ab ov e-av erage co mp any perfo rmance will resu lt in ab ov e-medi an total co mp ensatio n, an d b elo w-av erage co mp any perfo rmance will resu lt in b elo w-med ian total compen satio n. The C ompensation Co mmittee do es n ot have formal p olicies regardin g th ese facto rs, b ut tries to make ou r practices g enerally co nsistent wit h t he practices of th e peer grou p. The compensation co nsultan t reco mmend s a compen sat io n pack age fo r o ur CEO. Our Hu man Reso urces Dep artmen t prov i des the Co mp ensation Co mmittee with ad dit io nal in fo rmation abo ut ou r o fficers and ou r compen sation arrang emen ts. Our CEO, wit h adv ice fro m the compen sation con sultant , recommen ds co mp ensatio n p ackages for our senior officers; h owever, he do es no t prov id e recommen dat io ns ab ou t h is own co mp en satio n. As previo usly disclosed , ex cep t for M r. Jo hn s, no ne of o ur n amed execu tive officers are emp lo yed p ursu an t to an emplo ymen t agreement. Pu rsu ant to the Letter Agreemen t wit h Mr. Joh ns, d urin g 20 18 an d th ereafter so long as he remains Ex ecutiv e Chairman un der the terms o f th e Letter Agreement, Mr. Joh ns’s an nual b ase salary is $1.2 millio n, p ayable semi-mon t hly consistent with t he Compan y’s n ormal pay ro ll po licy. Un der th is agreement, Mr. Jo hn s is en titled to th e same p erqui sites an d ben efits as were cu rrently in effect on the date o f th e Letter Ag reement in 20 17 , b ut h e is n ot en titled to any n ew or ad dit io nal an nu al incen tive b on uses o r lon g-t erm incen tive g ran ts. Any cu rrent or fut ure amou nts p ay able un der lo ng -term in centiv e awards that were ou tstand in g as o f No vember 2 017 are to be p aid in acco rd ance with the t erms of such awards an d h is Emp lo yment Ag reement. Fo r more in fo rmation abo ut th e Letter Agreemen t, see “Po ten tial Payment s up on Termin ation or Chan ge of Con trol” in th is Item 1 1. Ba se Sa la ries Base salary is the primary fix ed po rti on o f ex ecut iv e p ay. It co mp ensates in divid uals fo r p erforming th eir day -to-day du ties and resp on si bilities and prov id es th em with a level of in come certainty. Salary adju stments hav e historically been made in late Feb ru ary /early March and hav e been effectiv e March 1 of that year. In makin g it s b ase salary reco mmen dations to th e Board, the C ompensation Committee con siders the resp on sibilities of the job , ind iv id ual perfo rman ce, the relative v alu e o f a positio n, experience, compariso ns to salaries fo r similar po siti on s in o th er compan ies, and in ternal p ay equ i ty. Fo r the CEO, the Compen sation Committee also con sid ers Co mp any perfo rmance. No particular wei gh ting is g i ven to an y o f these facto rs. The Co mp ensatio n Committee reviewed the performance and b ase salaries of the named ex ecutiv e o fficers ex cept for Mr. Joh ns at its February 20 18 meeting . At the recommen dat io n of the Co mpen sat io n Co mmittee, th e B oard ap prov ed th e fol lo win g an nu al base salaries (and the related percentage in creases from t he p rev io usly -effectiv e base salari es), effectiv e March 1 , 2018: 1) Bielen , $780,000 (4 %); 2) Walker, $43 0,0 00 (3.6 %); 3 ) Temple, $51 5,0 00 (8 .4%); and 4) Thigp en, $5 30 ,00 0 (2 .9%). As previou sly described, effective Jan uary 1, 20 18, Mr. Jo hn s’s ann ual base salary b ecame $1,2 00 ,00 0 per th e terms o f the Letter Ag reement. Annual Incentive Pla n Awards Officers and k ey employ ees are eligible for an nu al cash in cen tive op po rtun i ties u nd er th e AIP. The AIP’s purp ose is to attract, retain, mo tivate, and reward qu alified officers an d k ey employ ees by pro viding them with t he o pp ortu nity to earn co mp etitive co mp ensatio n d irectly link ed to th e Co mp any ’s perfo rman ce. On Nov ember 6, 2 01 8, the Board o f Directors o f the Compan y ap prov ed an amend ment and restatement of the AIP to simplify the p rocess for determinin g th e co mp osition of the committee o f officers which is au th ori zed to admin i ster the AIP in resp ect of all particip ants in the AIP, oth er th an th e Executi ve Chairman, Presiden t and Chief Ex ecutiv e Officer, an d all members of the Compan y’s Perfo rmance & Accou ntabil ity Committee. The Co mp en sat io n Co mmittee recommends to the Board fo r its ap prov al th e target annu al incen tive o pp ortun ities and performance o bjectives fo r ou r n amed ex ecu t iv e officers for the curren t y ear, ex clu ding M r. Joh ns. Historically, in recommend in g th ese target op po rtun iti es, th e Co mp ensati on Co mmittee has co nsid ered th e respo nsibilities of the job , ind iv id ual p erforman ce, th e relative value o f a po si tion , comparison s to an nu al in cent iv e op po rtun ities for similar p ositio ns in o th er co mp anies, and internal pay equ i ty. No part icular weig ht is g iv en to any o f th ese facto rs. In February 20 18 , the Bo ard app ro ved th e terms of th e 20 18 ann ual in centiv e op po rtuni ties for named execu tive o ffi cers. Th ere are no gu aran teed mi nimu m p aymen ts fo r any officer u nd er ou r AIP. 19 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Payment of an nu al incentives is b ased on achi ev emen t o f on e or more perfo rmance goals. Fo r 20 18 , th e Board establi shed , at th e recommen datio n o f th e Co mp ensatio n Co mmittee, th ese perfo rmance go als (weig hted as sho wn in th e tab le) fo r the n amed ex ecu t iv e o fficers: G oal (in millio ns, excep t percentages) Thresho ld (50% payo ut) Target (100% pay o ut) Max imum (200% pay o ut) After-tax Adj usted Op erating Income (6 0%)$357 $4 17 $4 77 Valu e o f New Business (3 0%)$40 $55 $70 Expense Manag emen t (10 %)(1)$494 $4 80 $4 66 RBC b elo w 3 75 % (Neg ative modifier (2 0%))375% 3 75 % 3 75 % (1) Do es not in clud e exp enses related to th e Liberty Mutu al acquisition After-tax adjusted operating i ncome, measured from Jan uary 1 th ro ug h December 3 1, 2018 , i s d erived fro m pre-tax adj usted op eratin g in come with th e i nclusion o f in come tax ex pen se o r ben efits associated with pre-tax adj usted op eratin g in come. Pre-tax adju sted o perating inco me is calcu lat ed by ad justin g “inco me before in come tax” b y ex clu ding th e fo llowing items: •realized g ain s and lo sses o n inv estments and deriv atives, •ch ang es in th e GLWB emb edd ed d erivat iv es excl usive o f the p ortion attribut abl e to the eco no mi c co st of th e GLWB, •actual GLWB incu rred claims, an d •the amortization of DAC, VOBA, and certain po licy liab ilities th at is impacted b y t he exclusio n o f these i tems. In co me tax ex pen se o r b enefits is allo cated to the items exclud ed from pre-tax ad ju sted o perating inco me at th e statu to ry federal inco me tax rate o f twenty-on e percen t. Income tax ex pense o r b enefits allocated to after-tax adju sted op erating in come can v ary perio d to perio d b ased on ch ang es in th e Co mp any ’s effectiv e in come tax rate. Valu e o f n ew b usiness is measured as th e ex pect ed value of new po licies written from Jan uary 1 th ro ug h December 31 , 2 018. Th e val ue of new bu sin ess includ es in come exp ected to be realized in bo th the current year an d fu tu re y ears. For pu rpo ses of the v alu e of new bu siness go al, the v ariable an nu ity bu sin ess measurement is based on a mark et co nsistent embed ded value analysis. All other bu siness is measured as p resen t v alu e of exp ected future earning s fro m n ew sales abo ve the 6 .75 % assumed co st o f cap ital. The ex pen se manag ement p erforman ce g oal p ro vides man agemen t with an in centiv e to prudentl y manag e o perating ex pen ses an d to maint ain effici en t op eratio ns. Th e exp ense man agemen t perfo rmance goal is measu red fro m Janu ary 1 throu gh Decemb er 31 , 20 18 an d is d efi ned as ot her operating ex pen ses b efo re t he effect o f p oli cy acqu isitio n co st d eferrals, exclud in g in terest ex pen se, th e effects o f rein surance, certain perfo rmance incenti ves, ag en t co mmissio ns, certain n on -d eferred sellin g co sts, certain exp enses associated with acqu isit io n-related activ ity, exp enses incu rred as p art of lo ng -term ex pen se reductio n initiativ es, certain legal costs, cert ain reg ulato ry fees o r other exp enses impo sed on the Co mp any, an d manag ement fees p aid to Dai-ichi Life. In ad dit io n, certain exp ense items are con sidered vari ab le an d are therefo re ad ju sted based on variatio ns in new bu sin ess v olumes. RBC is th e co mp any actio n level “ri sk b ased capital” percen tag e of Protecti ve Li fe Insu ran ce Co mp any (“PLICO”) as o f December 31 , 20 18 , determined as set forth in the app licable in st ru ction s est ab l ish ed b y the Nation al Association o f In surance Commission ers (“NAIC”) an d filed with th e state o f Tenn essee, and b ased on statutory accou nting p rinciples. RBC is intend ed to be a limit on th e amou nt of ri sk t he Comp any can take, and it requi res a co mp any with a h igh er amo un t of risk to h old a h ig her amo un t o f cap ital. The Board det ermined that th e ov erall resu lts achieved i n ad ju sted operating earning s, exp ense man agemen t , an d capital deplo ymen t g oals wou ld b e red uced b y 20 % if RBC was less than 37 5% o n December 31 , 2 01 8. For a furt her discussio n o f RBC, see Note 21, Statu to ry Rep orting Practices an d Oth er Regu la to ry Mat ters, t o th e au dited fin ancial st atemen ts incl ud ed in this Ann ual Rep ort o n Form 1 0-K. The amou nt p ayable b ased on each of the abo ve-describ ed perfo rman ce o bjectives can rang e fro m 50 % (fo r performance at th resh old lev els) to 20 0% (fo r p erforman ce at or abo ve max imum) o f the p ortio n of t arg et award related to such p erforman ce objective. At th e th resh old level of perfo rmance, fifty percen t (50 %) of th e allocable po rtion of th e target award will b e payab le, wi th 10 0% p ayab le for perfo rmance at target. Fo r ach ievement between th e stated perfo rman ce level s (i.e., b etween th resho ld and targ et, and b etween targ et and maxi mu m), the amou nt p ayable will b e d etermined by math ematical in terpo latio n. No amo un t is payab le b elo w the thresho ld level of p erformance. The Compen satio n Co mmittee recommend s to th e Board o f Directors for its determination th e ach iev ement o f the p erforman ce ob jectiv es fo r th e in cen tive o pp ortun ities grant ed t o the n amed ex ecutiv e officers in th e previou s y ear. For other officers an d man agers, th e Comp ensati on Co mmittee reviews th e to tal in cen tive o pp ortun ities an d the metho ds used to determin e in dividu al p aymen ts. At its Feb ru ary 25 , 2019 meeting , th e Bo ard d etermined th at, in respect to 2 01 8 p erforman ce: 1) ou r after-tax adju sted op erat in g income was $378 mi llio n; 2) ou r v alu e of new bu siness was $68 millio n; 3) o ur ex pen se man agemen t amou nt was $481 millio n; and 4) ou r RBC was ab ov e 45 0%. 19 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Lo ng -Term Incentiv e Awa rds In co nn ection wi th the M erg er in 2 01 5, t he Bo ard ap proved a lo ng -term incen tive program th at estab lish ed a formu l a equi ty v alu e for th e Co mp any un der wh i ch o ur named execu tive o fficers receiv e awards, payab le in cash, that will in crease or d ecrease i n v alu e as the v alu e determin ed u nd er this fo rmula ch ang es b ased o n the op eratio n o f ou r b usin ess. Sin ce 20 15 , t he Compen satio n Co mmittee h as ann ually g ran ted th ree forms of lon g-term in cen tiv e awards (Performan ce Unit Awards, Restricted Un it Award s, and Paren t Based Awards, as d efi ned b elo w) to th e n amed ex ecu tive o fficers un der the p ro gram, th e details o f which were disclo sed in the Co mp any ’s Ann ual Repo rts on Fo rms 10 -K fo r th e y ears ended December 3 1, 2 01 5, 20 16 , an d 20 17 . Certain of th ose awards h ave vested an d were earned in 20 18 . Effective Janu ary 1 , 2 01 7, th e Co mp an y ado pted a n ew Lo ng -Term Incen tive Plan (“LTIP”) pu rsuan t to wh ich the afo remen t io ned lon g-term in cen tiv e award s wou l d be g ran ted go in g forward . Effective Jan uary 1, 2 01 8, the Co mp any app ro ved an amend men t to th e LTIP chan ging t he d efinition o f PL Tang ib le Bo ok Value to excl ud e any cu mu lativ e effect adju stments fro m new accou ntin g p ro no uncemen ts. On Nov ember 6, 2 01 8, the Bo ard of Directors o f the Co mpan y ap prov ed an amend men t an d restatement o f the LTIP. Th e amend men t an d restatemen t o f the LTIP, amon g o th er thing s, (i) clarifies that th e Co mp ensati on Co mmittee can ad ju st th e calculation of perfo rmance criteria, in cludi ng PL Tang ibl e Boo k Valu e (as d efined i n th e LTIP), with resp ect to awards o f Perfo rmance Un its u nd er th e LTIP in order to reco gn ize certain sp ecial or no nrecu rring situatio ns o r circu mstances for the Compan y, (i i) all ows th e Co mp ensation Co mmittee to adjust th e defin itio n and calculat io n of PL Tang ib le Bo ok Value with resp ect to award s of Restricted Unit s u nd er th e LTIP in ord er to reco gn ize cert ain sp ecial o r no nrecurring situatio ns or circumstan ces for the Co mp any, (iii) co nfirms th at th e exercise by th e Co mp ensatio n Co mmit tee of its autho rit y to adjust t he calculatio n of perfo rmance criteria wi th resp ect to Perfo rman ce Un its and Rest ricted Units d oes n ot co nstitu te an amendmen t o f an award, and (iv) simplifies the process for det erminin g th e co mp osit io n of th e co mmitt ee o f o fficers of t he Compan y which is autho rized to ad minist er t he LTIP in respect of cert ain p arti cip an ts in th e LTIP. In February 20 18 , the Compensation Co mmittee an d t he Bo ard d etermined a to tal target v alue of th e lon g-term incentiv e awards to b e g ran ted to each executive officer in 20 18 , exclud in g Mr. Jo hn s. Such awards again co nsisted o f Performan ce Un i t Award s, Restricted Un it Awards, an d Paren t-Based Awards, which wil l vest and may be earned on v ariou s dates i n 2 02 0 or 2 02 1. In d etermining the to tal targ et val ue o f lon g-term in cen tive awards in a given year, the Compensation Co mmittee con sid ers a named ex ecutiv e o fficer’s resp on sibilit ies, perfo rmance, previou s lo ng -term incen tive award s, the amo un t o f lo ng -term cash incen tives p ro vided to officers in similar po si tion s at o ur p eer compan ies, an d intern al co mp en satio n eq uity. No p arti cu lar weig ht is given to an y o f these facto rs. In 2 018, n on e of ou r n amed ex ecutiv e officers h ad a gu aran teed mi nimu m t arget amo un t for awards to be granted u nd er the LTIP. The Compensation Co mmitt ee co nsidered a nu mb er o f factors when it grant ed lo ng -term in centiv e awards in 2 01 8, includ in g the d esire to maint ain th e app ro priate balance b etween perfo rmance-b ased and retentio n-based incen tives an d in fo rmation p ro vided b y the comp ensati on con sultant comparin g th e value of ou r lon g-term in cen tive award s g ran ted to n amed executiv e officers to th e v alu e prov id ed b y o ur compensation peer g ro up . The 20 18 lon g-term i ncenti ve op po rtu nities fo r th e n amed ex ecutiv e officers are co mp rised of th ree sep arate award s: 1 .Perfo rmance un its are gen eral ly d esi gn ed to vest b ased o n the ach iev emen t of two o bjectives - cumul ative after-tax ad j usted operating in come (“Op erat in g In come Objective”) and av erage return on eq uity (“ROE Objective”) - o ver the perio d from Jan uary 1, 20 18 to December 31 , 20 20 and generally sub ject to th e named ex ecu tive o fficer’s co ntin ued emplo ymen t un til th e ap pli cab le p ayment date of the earned award (the “Perfo rmance Unit Award s”); 2 .Restricted u nits are gen erally desig ned to vest in two equ al installments on each o f Decemb er 3 1, 2 02 0 an d Decemb er 3 1, 2 02 1, are valued based o n the tan gible bo ok v alu e o f the Company on th e appl icable vestin g d ate and are g enerally su bject to th e n amed ex ecut iv e officer’s con tinued employ men t u ntil su ch respective d ates (th e “Restricted Unit Award s”); and 3 .A do llar den omin ated award th at is gen eral ly d esi gn ed to vest in Decemb er 2 02 0 based on th e n amed ex ecu tiv e o fficer’s con tinu ed emplo ymen t, the v alu e o f wh ich wil l b e ad ju sted t o reflect the chan ge in t he value o f Dai-ichi Life’s commo n stock ov er the three-y ear measu remen t p eriod stated b elo w (the “Parent-Based Awards”). Long-Term Incentive Awards Vesting in 2 01 8 The followin g lo ng -term incentive award s were earn ed in 20 18 : (i) th e second tranch e of the Restricted Unit Awards th at were granted in 20 15 (with a fo ur-year vesting p eriod ); (ii) the first tranche of the Restricted Un it Award s th at were g ran ted i n 20 16 (with a three-y ear v est in g perio d); (iii) the Parent- Based Awards t hat were g ran ted in 20 16 (with a th ree-year vesting perio d); and (iv ) th e Performan ce Un i t Award s that were granted in 201 6 (with a three-y ear perfo rman ce perio d). The p erforman ce measures related to such awards h ad the follo win g levels of achievemen t. 19 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Restricted Unit Award s: Awa rd Perfo rmance Measure Beg inning Ta ngible Bo ok Va lue ($ in millions) Ending Ta ngible Boo k Va lue ($ in millions) Tangible Book Value Per Unit Perfo rma nce 201 5 Restricted Un it Awards (4-y ear v est) Tangib le Book Value per Un it $4 ,3 7 8 $6 ,1 17 $1 3 9 .72 201 6 Restricted Un it Awards (3-y ear v est) Tangib le Book Value per Un it $4 ,6 7 1 $6 ,0 72 $1 2 9 .99 Parent-Based A wa rd s: Awa rd Perfo rmance Measure Initial Da i-ichi Stock Value Fina l Dai-ichi Stock Value Dai-ichi Stock Percenta g e 2 0 16 Parent-Based Award s Dai-ichi stock perform an ce 1 ,341 y en 1,832 y en 1 3 7 % Perfo rmance Unit Awa rds: Award Performance Measure Beginning Tang ible Bo o k Value ($ in millio ns) Ending Ta ngible Book Va lue ($ in millions) Tangible Bo o k Value Per Unit Perfo rmance Actua l Result for RO E o r COE Performance Measure Percenta ge of Award Earned 20 1 6 Parent- Based Awards 50% b ased on Tan g ib le Boo k Valu e p er Un it x ROE Performan ce (%) $4,671 $6,0 7 2 $1 29.99 9.47 % 200% 50 % of awards based on Tangible Bo ok Value per Un it x Cu m ulative Op erating Earnings (“COE”) Perfo rmance ($) $4,671 $6,0 7 2 $1 29.99 $1,8 6 5 200% The amounts p aid to the n amed ex ecutiv e officers based up on the ap plicab le levels o f ach iev ement o f th ese awards are set forth in th e “No n-equ ity in cen tiv e p lan compensation - 2 01 8” column o f th e Summary Compen satio n Tab le and th e app licab l e foo tno te thereto. Perfo rmance Unit Awa rds The p urpo se of the Performan ce Un it Awards is to enco urage o ur named execu tive o fficers to fo cus o n earning s g ro wth and return s on equ i ty. Th e nu mber of un its su bject t o each Perfo rmance Unit Award is determin ed b y d iv id in g 6 0% o f each n amed execu tive o fficer’s target lo ng -term in centiv e op po rtun ity b y an amo un t equ al to 90 % o f the Company’s app licable tang ib le bo ok val ue per u nit as of Janu ary 1, 20 18 . On e-h alf o f the un its su bject to each Performan ce Unit Award will be sub ject to achi ev i ng the ROE Objective an d on e-h alf will be sub ject to ach iev in g t he Op eratin g In come Objective. The amou nt p ay able in respect of each u nit can ran ge from 0% (for perfo rmance ag ainst the ap pli cab le o bjective b elo w th e t hresho ld level) to 2 00% (fo r perfo rman ce at or abo ve max imum). One h un dred percent (1 00 %) o f the award will be p ay able fo r p erforman ce at target. For achi evemen t b etween the stated perfo rman ce lev els (i.e., between thresho ld and target , an d b etween targ et and max imum), the amo un t will be d etermined by math ematical in terpo latio n. Specifically, p aymen t with respect to the ROE Objective will be based on th e fo llowing sched ule: Average Return on Equity Percenta ge of Performance Units Ea rned Less than 5.5% —% 5.8% 1 0 0 % 6 .0% o r more 2 0 0 % 19 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents There wi ll b e straig ht-line in terpo latio n b etween average return on equ ity between 5.5 % an d 5 .8% to determin e the exact p ercen tage to be p aid between 0 % and 10 0%; and between 5.8 % and 6.0 % to det ermin e the ex act percentage to be p aid bet ween 10 0% and 20 0%. Payment with respect to th e Op eratin g Inco me Objective will be based on th e fo llowing sched ule: Cumulative After-tax Adjusted O pera ting Income (Do lla rs I n M il l i ons ) Percenta ge of Performance Units Ea rned Less than $1,25 1 —% $1,322 1 0 0 % $1,393 o r more 2 0 0 % There will b e straig ht-line interp olatio n b etween cu mu lativ e after-tax adjusted op erat in g inco me b etween $1,2 51 ,00 0,0 00 and $1 ,32 2,0 00 ,00 0 to determine the exact p ercentage to be p aid b etween 0 % an d 1 00 %; and between $1,3 22,00 0,0 00 and $1,3 93 ,00 0,0 00 to determine the exact p ercen tag e to b e paid between 10 0% an d 2 00 %. The Performan ce Un it Awards g enerally will b e fo rfeited if th e named executive o fficer’s emp lo yment terminates p rior t o the d ate o f p ayment. Ho wever, a named ex ecu tiv e officer who se employ men t terminat es earli er du e to d eath , d isab ility o r retiremen t on o r after early retiremen t or n ormal ret irement eligibilit y un der the t erms o f the Qual ified Pension Plan will receive a payment wit h resp ect t o a p ro -rata p ortion , based o n service throu gh th e date o f termin ation , of th e Perfo rmance Unit Award s t hat wo uld o th erwise be p ay able (o r such g reater amount as th e Co mp ensatio n Co mmittee may determin e in its discretion ), and t he remain in g p ortion will b e fo rfeited. Restricted Unit Award s and Parent-Based Awa rd s The pu rpo se of th e Restricted Unit Awards is to en cou rag e o ur named execu tive o fficers to fo cus o n reten tion and value creatio n. Th e nu mb er o f restricted u nits su bject to each Restricted Un it Award is d etermin ed by d iv id in g 30 % o f each n amed execu tive officer’s target lon g-term in centiv e op po rtun ity by an amou nt eq ual to the Company ’s applicab le t an gible bo ok v alu e p er un it as o f Janu ary 1 , 2 01 8. Th e Rest ricted Unit Awards v est i n two eq ual i nstallmen ts on December 31 , 20 20 and December 31 , 20 21 and are v alu ed at pay ou t based on th e tan gible b oo k v alu e of t he Compan y o n th e ap pli cab le v estin g d ate. Th e in itial cash valu e of the Parent-Based Awards is eq ual to 10 % o f the targ et lon g-term in cen tiv e award o pp ort un ity for each named ex ecu tiv e officer. At vestin g, th e amou nt p ayab le in respect o f su ch Paren t-Based Awards sh all b e su ch in iti al value mult ip lied by the percentage ch ang e in th e value o f the co mmon st ock of Dai-ichi Life, wh ether su ch v alu e has increased o r d ecreased, o ver t he period from Janu ary 1, 2 01 8 to December 31 , 2 02 0, as measured b ased o n the average value o f such co mmon sto ck in Jan uary 2 01 8 an d December 20 20 , resp ectively. Payment of th e Restricted Un it Awards an d Parent-Based Award s will g enerally be con t in gen t upon the officer’s b ein g emp l oy ed on th e date o f vestin g, ex cept th at a named execu tive officer wh ose employ men t terminates du e to d eath, disability, or reti remen t on or after no rmal retiremen t ag e un der th e terms o f t he Qu alified Pen sion Plan will fu lly vest in such award . A n amed execu tive officer who se employ men t terminates o n o r after early retiremen t eli gibility but before n ormal retirement ag e un der th e t erms o f th e Qu alified Pen sion Plan will receive a p ro -rated p ort io n of the Parent-Based Award, which will immed iately vest, based o n a fraction, th e nu merator of which is th e n umber of co mp lete an d p artial calend ar mon th s between Janu ary 1, 20 18 and th e ret irement date, an d t he den omin ato r of which is 36. A named ex ecutiv e o fficer who se employ men t termin ates on or after early retiremen t elig ib i lity bu t before normal retiremen t ag e un der th e terms of th e Qu alified Pensio n Plan will receiv e a pro-rated p ortion of the restricted u nits, which will immed iat ely vest, based on mu ltip ly ing 1) th e nu mb er of u nv ested restricted un its that wou ld become vested at th e app licable dated by 2) a fraction , t he nu merato r o f wh ich is the nu mb er of complete and p art ial calen dar mon th s b etween Janu ary 1 , 2 01 8 and t he retirement d ate, an d th e d eno mi nat or o f wh ich is (x ) 36 , in th e case of t he p ortio n o f th e restricted un its that wou ld b ecome vested at Decemb er 3 1, 20 20 , and (y) 48, in th e case o f th e po rti on of the restrict ed u nits t hat wo uld b ecome v est ed at Decemb er 3 1, 20 21 . In the case o f a sp ecial termin ation o f t he named ex ecu t iv e o fficer, wh ich co nsists of a t erminati on o f emp lo yment d ue to (i) a d iv est iture o f a bu sin ess segmen t or a sig nificant p ortion o f th e assets o f th e Compan y or (ii) a sign ifi can t red uctio n by the Co mp any of it s work force, th e d eterminatio n o f wh eth er, to wh at ex ten t, and on wh at co nd ition s any p ayment sh all b e mad e with resp ect to any u nv ested p ortion o f yo ur lon g-t erm in centiv e award s shal l be at th e discretion o f t he Co mp ensatio n Committee. In th e case of any other termin ation , the named ex ecutiv e o fficer’s Restrict ed Un it Award s and Parent- Based Awards will be forfeited . The Gran ts o f Pl an -Based Awards Tabl e h as mo re information ab ou t these award s. 19 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Retirement a nd Deferred Co mpensa tion Pl ans We believe it is imp ortant to prov ide ou r employees, i nclud in g o ur named execu tive o ffi cers, with th e op po rtun ity to accumu l ate reti remen t saving s. All simil arly-situ ated emp l oy ees earn ben efits u nd er ou r tax-qu alified p en sion p l an (“Qualifi ed Pen sio n Plan ”) usin g th e same fo rmula. Ben efits u nd er ou r Qu alified Pen si on Plan are l imited by the In ternal Reven ue Code. We b elieve th at we sh ou ld p rovid e retiremen t sav in gs withou t impo sing the restrictio ns on benefits co ntain ed i n t he Int ern al Revenue Cod e th at wou ld otherwise li mi t o ur emp lo yees’ retiremen t security. Therefo re, l ik e many large co mp an i es, we have implemented a n on qu ali fied ex cess b enefit p ension p lan (“Nonqu ali fied Excess Pen sio n Plan”) that mak es u p th e difference b etween: 1 ) th e b en efit determined u nd er the Qualified Pen sion Plan fo rmula, with ou t ap plyin g th ese limit s; and 2) the ben efi t actually p ayable u nd er th e Qualified Pen sion Plan , takin g these limits i nto acco un t. All o f th e named ex ecu tiv e officers, except for M r. Jo hn s, p articipate in th e Non qu alified Excess Pen sio n Plan. In stead , M r. Joh ns wi ll co ntin ue t o accrue ben efits as tho ug h he were particip ating in the Non qu alified Ex cess Pen sio n Plan , an d th ose amo unt s will be cred ited to a ret irement pay deferral accou nt. Fo r more in fo rmation abo ut th is arran gement, see “Ret irement Pay Deferral Accoun t for Joh n D. Jo hn s” in th is Item 1 1. In ad ditio n, we prov id e a n on qu alified d eferred co mp ensatio n p lan (“DCP”) fo r n amed ex ecutiv e officers an d o th er k ey officers. Throu gh December 31 , 20 18 , eligible officers cou ld defer: 1 ) u p to 75 % of their b ase sal ary ; 2 ) up to 85 % o f an y an nu al incen tive award; and /o r 3) up to 9 4% of th e amo un ts payab le wh en Performan ce Un i t Award s, Restri cted Un it Awards, or Parent-Based Awards are earned (for the Restricted Unit Awards an d Paren t-Based Awards, percentages are su bject to red uctio n if the employ ee is elig ib le for early retiremen t). Officers were al so en t itled t o d efer u p to 85 % o f th eir reten tion bo nu s in stallments p ayable un der th eir Emp l oy ment Agreements. Emp lo yees that con trib ute a po rti on of th eir salary, o vertime and cash in cen t iv es to our tax -q ualified 40 1(k ) p lan (“4 01 (k ) Pl an ”) receiv e a do llar- fo r-do llar co mp an y match in g con tri bu tion , wh ich may b e at th e maximu m 4 % of th e employ ee’s eligible pay (which is sub j ect to limits impo sed b y the In ternal Rev enu e Co de). For mo re in format io n abo ut th ese p lan s, see the “All Other Co mp ensatio n Table”, “Po st-Employmen t Benefits”, and “Non qu alified Deferred Co mp ensatio n” in this Item 11 . Perquisites a nd Other Benefits The Compan y has o t her p ro grams th at help u s attract and retain k ey talen t and enh ance th eir prod uctiv ity. In 20 18 , we p ro vided mo dest perqu isites to ou r named execu tive o fficers, includ ing a finan cial and tax p lan ning p ro gram for certain senior officers and d in in g clu b memb ersh ip s for Mr. Jo hn s. We rei mburse the o fficers fo r bu si ness-related meals in accordan ce with ou r reg ular po licies. They p ay fo r all p erso nal meals. From t ime to ti me, o ur n amed ex ecutiv e officers also may u se th e Co mp any 's tick ets for sp ortin g, cultu ral or oth er even ts for p erso nal use rath er than busin ess p urpo ses. Co mpa ny Aircraft Policy We d o bu si ness in every state in the Unit ed States and h ave offices in ten states. Our emp lo yees and o fficers ro uti nel y use commercial air service for bu sin ess trav el, an d we g enerally rei mb urse them on ly fo r th e coach fare fo r do mestic air travel. We also main tain a company aircraft program in order to prov id e fo r timely and co st-effect iv e travel to these wide-spread locatio ns. Un der th is p ro gram, we do n ot op erate an y aircraft, own a han gar, or emp lo y p ilots. In stead , we h ave pu rch ased a fraction al interest in each of fo ur aircraft. We p ay a fixed fee p er aircraft, p lu s a v ariable charge for h ou rs actually flo wn, in exchan ge for the ri gh t to use th e fo ur aircraft fo r an ag gregate of ap proxi mately 40 0 ho urs p er y ear. Our directors, o ffi cers, an d employ ees u se t hese aircraft for selected bu sin ess trip s, an d, in certain circumstan ces, a sp ou se or g uest o f a di rector o r officer may accompan y him or her o n bu siness-relat ed travel . All t rav el un der the prog ram must be app ro ved b y th e Executive Ch airman . Wh eth er a particular trip wil l b e made o n a Company aircraft o r o n a commercial flig ht dep end s, in gen eral, upon th e av ailability of commercial air serv ice at th e d estin ation , the sched ule an d cost of th e commercial air t rav el, th e n umber o f emp lo yees who are making th e trip, t he expected travel time, and th e n eed for flexible travel arrang ements. Based on in fo rmation prov id ed b y t he compen sation con sult an t, the Compen satio n Committee has ado pted a p olicy th at allo ws each of th e Executi ve Chairman an d the CEO (and th eir respect iv e gu ests) to u se the Compan y aircraft for perso nal trip s for up to 2 5 h ou rs per year to redu ce their person al trav el time an d thereby increase th e time th ey can effectivel y co nd uct Compan y b usin ess. Th e Compan y d oes no t p rov id e tax reimb ursemen t payments with resp ect to th is air travel. S pousal Travel Po licy If an employ ee’s sp ou se trav els with the employ ee on Compan y b usin ess, we reimbu rse th e emp lo yee for t he associated travel exp enses if the spo use’s presence o n the trip is deemed necessary o r appro priate fo r th e pu rp ose o f th e trip . In 2 01 7, the Co mp any beg an p ro vidin g the n amed executive officers with tax reimb ursemen t pay men ts with resp ect to these reimb ursed exp enses. However, no ne o f ou r named ex ecutiv e o fficers were pro vided t his perquisite d urin g 2 01 8. For mo re info rmati on ab ou t p erq uisites an d o th er b enefits, see th e “All Other Co mp ensati on Table” in this Item 11 . Accounting and Tax Issues Prio r to the enactment o f th e Tax Cut s an d Job s Act (the “Tax Refo rm Act”), whi ch was sign ed in to law on Decemb er 22 , 2 01 7, and g en erally became effecti ve fo r the Co mp any o n Jan uary 1, 2 01 8, we were no t su bject to th e ex ecutiv e co mp ensatio n d eduction limitatio ns of Sectio n 16 2(m) of th e In ternal Rev enue Code since th e d ate of the Merger because the Compan y h as no t h ad any pu blicly trad ed equ ity secu rit ies. However, as a resu l t of the en actment of th e Tax Refo rm Act, Section 1 62 (m) no w app lies to all co mp anies that file repo rts pu rsu ant to Sect io n 15 (d ) of the Securi ties Ex chan ge Act of 19 34 , includ in g compan ies that have i ssued pu blicly t raded debt securiti es. Acco rd in gly, effective Janu ary 1 , 20 18 , the Compan y became su bject t o Sectio n 16 2(m). 20 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Section 16 2(m) g en erally i mposes a $1 million l imit on th e amo un t o f co mp en sat io n that a pu blic co mpan y can deduct in an y on e y ear for any “cov ered employ ee”. Under Secti on 16 2(m), as amen ded b y the Tax Reform Act, the foll owin g in dividuals are co nsid ered ou r co vered employ ees who se co mp en satio n by us is gen erally sub j ect to Sectio n 1 62 (m)’s d ed uction li mitatio ns for t he tax year begin ning Janu ary 1, 201 8: •An y ind iv id ual who serv ed as the Compan y’s princi pal ex ecutiv e officer o r p rincipal finan cial officer at an y time du ring th e tax abl e y ear; •The th ree most high ly compen sated ex ecutiv e officers o f the Compan y (as id entified in th e Summary Compen sat io n Tab le o f this An nu al Rep ort o n Form 1 0-K) for th e tax ab le y ear; and •An y ind iv id ual who has b een a cov ered employ ee for any prior tax y ears, b eginn in g January 1 , 20 18 . As a resul t of th e Tax Refo rm Act, compensation paid to ou r cov ered employ ees in ex cess of $1 mill io n will n ot be ded uct ib le un less it qu ali fies fo r transitio n relief ap plicab le to certai n written bind in g arrangemen ts that were in place as of Novemb er 2, 20 17 , an d that h av e n ot been materially mo dified aft er su ch d ate. Further, th e Compen sation Committee reserves th e right to mo dify co mp en satio n arran gement s t hat were in effect as of No vemb er 2, 2 01 7 if it determines th at su ch mo dificat io ns are co nsistent with the Co mp an y’s b usiness needs. Wh ile the Compen sation Co mmittee may co nsid er th e d edu ctibilit y of awards as on e facto r in determin in g execu tive compen sation , th e Co mp ensatio n Committee also lo ok s at o th er factors in mak ing i ts decisio ns, as no ted abov e, and retains th e flex ib ility to award compen sation that it determines to be con si sten t wi th th e go als o f o ur executive compen sation prog ram even if th e awards are n ot ded uctib le b y Co mp an y for t ax pu rp oses. Because ou r sto ck is not p ub licly trad ed, we are no l on ger usin g o ur stock as a cu rrency for ou r lo ng -term incenti ve award s, wh ich limits ou r flexibility in stru ctu ring ou r co mp ensatio n to av ail ou rselv es of th e benefit of fix ed equ ity acco un ting . We still structure ou r p ro grams taking int o accou nt th e prov isio ns o f Section 40 9A of t he In t ernal Revenu e C od e. Clawback Policy Un der the federal securities laws, if we have t o prepare an accou nting restatemen t d ue to o ur material no nco mp liance du e to misco nd uct with th e Un ited States Securities and Exch ang e Commissi on (the “SEC”) fi nancial repo rting req uirements, then ou r CEO an d Ch i ef Fin ancial Officer wo uld h ave to rei mburse us fo r: 1 ) an y b on us or o th er incen tive-based or equ ity -b ased co mp ensatio n th ey received d urin g the twelv e-mon th p eriod after we first issu e or file th e fi nancial d ocu men t that reflects th e restatemen t; and 2) any profits they realized fro m the sale of ou r secu rities d urin g the twelve-mo nth p eriod . The Compan y’s lon g-term incen tive award agreements in clu de a pro vision requ iring th e ex ecutiv e to rep ay, as liquid ated d amag es, amou nts receiv ed un der t he awards if the Compensation Commit tee reason ably determin es in go od faith that the ex ecu t iv e vio lat ed certain prov isio ns of th e award ag reement related to sol ici ting cu st omers or employ ees, v io lating trad e secret protection s, o r failin g to co op erate wi th the Company in co nn ectio n with claims, l awsu its, arbitration s, p ro ceed in gs, ex aminatio ns, inquiries o r inv est ig ation s in vo l ving th e Co mp any . Risk Assessment Based on its revi ew o f the Compan y’s co mp ensatio n policies as d escribed in the Compen sation Discu ssion and Analysis, the Co mp en satio n Co mmittee con clu ded th at ou r co mp ensatio n p ro gram i n 20 18 : 1 ) p ro vided th e ap prop riat e level of co mp ensation to o ur senior officers; 2 ) was properly design ed to link compen sation and performance; and 3) d id no t encou rag e ou r officers or emp lo yees to tak e un necessary an d excessive risks or to mani pu late earning s o r o th er fin ancial measu res. COMPENSATION COMMITTE E REPORT The Co mp ensatio n Commi ttee rev iewed and d iscussed the Co mp ensati on Discussio n an d Analysis with man agemen t. Based o n thi s review and discussio n, th e Co mp ensatio n Committee recommend ed to th e Board of Directors th at th e Co mp ensatio n Discu ssion an d An aly sis b e includ ed in th is ann ual report. COM PENSATION AND M ANAGEMENT SUC CESSION COMM ITTEE Jo hn J. McMah on , Jr., Ch airperson Jesse J. S pikes William A. Terry 20 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Summary Co mpensa tion Table The follo win g table sets fo rth th e to tal compensation earn ed by each o f the Co mp any ’s named execu tive o fficers for th e fiscal years end ed December 31 , 2 01 8, Decemb er 3 1, 2017 and December 31 , 2 01 6. Summary Compensa tion Table Na me a nd principal po sitio n with the Co mpany (a) Year (b) Salary ($) (c) Bo nus ($) (d) No n-equity incentiv e plan compensa tion(1 ) ($) (g) Cha nge in pension value & no nqualified deferred compensatio n earnings ($) (h) All other compensatio n ($) (i) Tota l Compensatio n ($) (j) Richa rd J . Bielen 2 0 1 8 $77 5 ,000 $— $4 ,376,9 6 4 $1 ,2 62,385 $200 ,4 9 6 $6 ,614,84 5 Presiden t and Chief Executive Officer (prin cip a l executive officer) 2 0 1 7 $68 1 ,667 $1,62 7 ,3 80 $4 ,270,3 9 4 $1 ,2 24,334 $198 ,5 8 6 $8 ,002,36 1 2 0 1 6 $59 1 ,667 $2,54 0 ,8 81 $— $8 68,418 $179 ,5 1 0 $4 ,180,47 6 Steven G. Walker 2 0 1 8 $42 7 ,500 $— $1 ,388,5 2 1 $61,911 $70 ,1 1 7 $1 ,948,04 9 Execu tive Vice Presid en t and Chief Fin a n cia l Officer (prin cip al fina n cia l o fficer) 2 0 1 7 $41 0 ,000 $— $1 ,477,6 8 0 $1 19,931 $57 ,9 1 3 $2 ,065,52 4 2 0 1 6 $37 9 ,167 $91 9 ,7 25 $— $85,164 $85 ,0 6 7 $1 ,469,12 3 J o hn D. Johns 2 0 1 8 $1,20 0 ,000 $— $9 ,561,6 8 8 $(50,239 ) $489 ,6 5 2 $1 1 ,201,10 1 Execu tive Chairma n o f the Co mp a n y 2 0 1 7 $1,00 0 ,000 $— $1 1 ,148,9 5 1 $82,343 $896 ,1 0 9 $1 3 ,127,40 3 2 0 1 6 $1,00 0 ,000 $2,22 3 ,0 00 $— $2 ,2 64,908 $896 ,6 6 8 $6 ,384,57 6 Michael G. Temple 2 0 1 8 $50 8 ,333 $— $1 ,780,3 7 3 $55,602 $78 ,8 2 4 $2 ,423,13 2 Vice Cha irman, Finance and Risk 2 0 1 7 $46 6 ,667 $67 9 ,7 70 $1 ,766,1 3 2 $54,877 $38 ,7 2 8 $3 ,006,17 4 2 0 1 6 $42 0 ,833 $1,10 3 ,8 70 $— $34,542 $39 ,1 1 6 $1 ,598,36 1 Ca rl S. Thig pen 2 0 1 8 $52 7 ,500 $— $2 ,234,4 7 6 $5 97,962 $103 ,5 7 1 $3 ,463,50 9 Execu tive Vice Presid en t and Chief Investment Officer 2 0 1 7 $51 3 ,333 $1,32 2 ,7 99 $2 ,463,0 1 4 $1 ,1 42,024 $107 ,4 0 7 $5 ,548,57 7 2 0 1 6 $50 2 ,500 $2,02 5 ,3 00 $— $1 ,1 26,676 $146 ,1 2 5 $3 ,800,60 1 (1)Fo r 2 0 18, th ese nu m b ers include: (i) the fo llowing am o unts of cash in cen tiv es th at will b e p aid on or prio r to March 1 5 , 201 9 , fo r 2 0 18 p erformance under our AIP: Mr. Bielen, $1 ,0 33,50 0 ; Mr. Walk er, $319,10 0 ; Mr. Tem ple, $4 3 6,700 ; and Mr. Th igpen, $477,5 0 0 ; (ii) the followin g amoun ts o f Perfo rmance Unit Awards earn ed with respect to th e 2 0 1 6-2 0 1 8 p erform an ce period (g ran ted in 2016 ), th at will b e paid in cash on o r p rior to March 15, 2019: Mr. Bielen, $2,599 ,8 0 0; Mr. Walk er, $8 22,837 ; Mr. Jo h ns, $7 ,3 22,33 7 ; Mr. Tem p le, $1,039 ,9 20; and Mr. Th igpen, $1 ,3 4 2,797; (iii) the follo win g amounts with resp ect to the first in stallment o f the Restricted Unit Award s th at v ested on Decem ber 3 1, 2 018 (gran ted in 201 6 ) th at will be p aid in cash on o r prio r to March 1 5, 2 019: Mr. Bielen , $29 2 ,4 78; Mr. Walker, $92 ,6 1 8; Mr. Joh n s, $823,81 2 ; Mr. Tem p le, $1 1 6,991; and Mr. Th igpen, $151 ,1 1 3; (iv ) the follo win g am ounts with respect to the second in stallment of th e Restricted Unit Award s that vested on Decem ber 31, 20 1 8 (granted in 2015 ) that will b e paid in cash on o r p rior to March 15, 2 019: Mr. Bielen , $24 6 ,2 57; Mr. Walk er, $89,0 7 2 ; Mr. Jo h ns, $838,32 0 ; Mr. Temple, $1 0 4 ,790; and Mr. Thigpen, $157 ,1 8 5; an d (v ) the following amoun ts o f Parent-Based Awards that vested o n December 31, 2 018 (gran ted in 201 6 ), an d th at will b e paid in cash on or prior to March 15, 2 0 19: Mr. Bielen , $204,9 3 0 ; Mr. Walk er, $64,89 5 ; Mr. Jo h n s, $5 7 7 ,220; Mr. Temple, $81 ,9 7 2; and Mr. Thigpen, $1 0 5 ,881. Discussi on of Summary Co mpensa tion Table Co lu mn (c)-Sa la ry. These amo un ts in clu de b ase salary for 2 01 8 th at the named execu tive officer co ntrib uted to ou r 40 1(k) Plan and to ou r DCP. The No nq ualifi ed Deferred Co mp ensatio n Tab le h as mo re informatio n ab ou t 2 01 8 p articipatio n in the DCP. Co lu mn (d)-Bon us. Bon us amo un ts paid fo r 20 18 were mad e un der o ur AIP and LTIP an d are repo rted in t he “Non-eq uity in cen tive plan co mp ensation” co lu mn of th e Su mmary Co mp ensatio n Tab le. For 20 17 , th ese amou nts includ e th e fo llowi ng amou nts o f reten tion bo nu ses und er the terms o f th e named executi ve o fficer's Employ men t Agreement, which was p aid on or prior to M arch 15 , 20 18 fo r 20 17 serv i ce: M r. Bielen , $1 ,62 7,3 80 ; Mr. Temp le, $6 79 ,77 0; an d Mr. Th ig pen , $1,3 22,79 9. For 20 16 , th ese amo un ts includ e: (i) for all of th e named execu tive o fficers, ann ual cash incenti ves g uaranteed un der th e Emp lo yment Ag reemen ts pay able in 20 17 for 20 16 p erforman ce an d (ii) for M r. Bielen , M r. Walk er, and Mr. Thigp en, reten tion b on uses pay ab le in 20 17 un der the terms of t he Empl oy ment Agreements for 20 16 serv ice. Co lu mn (g )-Non -equi ty incen tive plan co mp ensa t io n. For 2 01 8, th ese amo un ts refl ect (i) th e cash in centiv es p ayab le o n or p rio r to M arch 1 5, 2019 fo r 20 18 perfo rman ce u nd er ou r AIP, (ii) the Performance Unit Awards earn ed with respect to the 20 17 -2 01 8 p erforman ce perio d (granted in 20 16 ), and that are pay able on or prior to M arch 15 , 20 19 , (ii i) th e first installment of t he Rest ricted Un it Awards th at v est ed on December 3 1, 2 01 8 (granted in 20 16 ) an d th at are p ayab le o n o r b efo re M arch 15 , 20 19 , (iv) the seco nd in stallmen t o f th e Restricted Un it Awards th at v ested on December 31, 2 01 8 (granted in 20 15 ) an d th at are p ayab le o n or b efo re March 1 5, 2 01 9, and (v ) th e Parent-Based Awards t hat vested on December 3 1, 20 18 (granted in 20 16 ), and t hat are payab le on or prio r to March 15 , 20 19 . Fo r 2 01 7, these amou nts refl ect (i) th e cash incentiv es pay able on or prio r to March 1 5, 2018 for 20 17 perfo rmance un der ou r an nu al incen tive p lan , (ii) th e Perfo rmance Unit Award s earn ed with resp ect to t he 20 15 -20 17 perfo rmance perio d (granted in 2 01 5), and th at are payab le o n or pri or t o March 1 5, 2018 , (iii) for all o f th e named ex ecutiv e officers, the first i nstallmen t of t he Restricted Unit Awards th at v ested o n December 31 , 2 01 7 (g ran ted i n 2015) an d that are pay ab l e on o r before March 1 5, 20 18 , an d (iv) the Parent-Based Awards that vested on Decemb er 31 , 2 01 7 (g ran ted in 20 15 ), an d that are p ay able on or prio r to March 15 , 20 18 . These amou nts are b ased o n the achievemen t o f the Co mp an y’s g oals as determin ed b y 20 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents th e Compensation Committee and the Bo ard . All amo un ts reflected in clu de an y portio n of the in cen tives that th e n amed executi ve o ffi cer elected to co ntrib ute to ou r 4 01 (k ) Plan or to ou r DCP. The grants of Perfo rman ce Un it Award s, Restricted Unit Awards, an d Parent-Based Awards are no t reflected in th e Summary Compen sation Tab le. The awards will be reflected in the Su mmary Co mp ensati on Table in th e y ear in which they are earn ed . The Gran ts of Pl an -Based Award s Tab le an d t he discussio n th at follows p ro vides in formatio n ab ou t th e Perfo rmance Unit Awards, Restrict ed Un it Awards, and Parent-Based Awards th at were granted in 20 18 . Co lu mn (h)-Ch an ge in pen sio n val ue a nd no nq ua lified deferred co mpen sati on earn ings. These amou nts represent the increase or d ecrease in th e actuarial p resen t value of th e named executiv e o ffi cer’s benefits un der o ur tax Qualified Pensio n Plan and o ur No nq ualified Ex cess Pen sio n Plan. Chan ges in in terest rates can sign ifican tly affect th ese numb ers fro m year to y ear. Fo r 20 18 , the to tal ch an ge in the present v alu e o f pen sio n ben efits for each named ex ecutiv e officer was div id ed between the plans as fo llows: Na me Qua lified Pensio n Pla n No nqualified Excess Pensio n Pla n To tal Bielen $(2,5 16 ) $1 ,264,90 1 $1 ,26 2,3 85 Walker $1 2,6 48 $49,26 3 $6 1,9 11 Jo hn s $(5 0,2 39 ) $— $(5 0,2 39 ) Temp le $1 2,5 93 $43,00 9 $5 5,6 02 Thig pen $(5,0 04 ) $602,96 6 $59 7,9 62 The Pen sion Ben efits Table h as mo re info rmati on ab ou t each officer’s particip ation in these plans. All o f t he named executive officers h ave acco un t b alances in o ur DCP. The earn in gs o n a named executive officer’s b alan ce reflect the earnin gs o f no tion al in vestmen ts selected b y th at named ex ecu tive officer. These earn in gs are th e same as for any o th er in vesto r in t hese investments, an d we do n ot prov id e an y ab ov e-mark et or p referenti al earn in gs rat es. Co lu mn (i)—All other co mpen satio n. For 20 18 , th ese amo un ts includ e th e fo llowing : All Other Compensatio n Ta ble Na me 40 1 (k) ma tching No nqualified deferred compensa tio n plan contributio ns Fina ncia l planning program O ther perquisites Tota l Bielen $11 ,00 0 $118,10 2 $— $7 1,3 94 $20 0,4 96 Walker $11 ,00 0 $42,38 9 $1 5,6 39 $1,0 89 $7 0,1 17 Jo hn s $11 ,00 0 $340,00 2 $1 5,5 26 $12 3,1 24 $48 9,6 52 Temp le $11 ,00 0 $52,02 1 $1 5,3 12 $4 91 $7 8,8 24 Thig pen $11 ,00 0 $90,74 5 $— $1,8 26 $10 3,5 71 4 01(k) Ma tching Ou r emp lo yees can cont ribu te a p ortio n of th eir salary, o vertime and cash in cen tiv es to o ur 40 1(k) Pl an and receiv e a do llar-for-d ollar company match in g con trib uti on . The max imum match is 4% of t he employ ee’s eligib le p ay (which is su bject to limits imp osed b y th e Intern al Rev enue C od e). The table sh ows the matching recei ved b y the n amed ex ecut iv e officers. No nq ua lified Deferred Co mp ensa tion Pl an Co ntributions The tab le includ es, with respect to each o f t he executives, su pp lemental matching con trib utio ns th at we made under ou r DCP to each n amed ex ecutiv e o fficer’s acco un t in 2 01 8 with respect to t he officer’s p art icipat io n in ou r DCP du ring 20 17 (“DC P Su pp lemental M atchin g Con trib uti on ”). The No nq ualifi ed Deferred Compen satio n Table p ro vides mo re info rmati on abo ut this plan. Th is colu mn also includ es p ayments made to Mr. Joh ns’s retirement pay deferral accou nt in lieu of the Non qu alified Excess Pensio n Plan . Fo r more i nformatio n o n th is retirement pay deferral acco un t, see “Discussio n o f No nq ualifi ed Deferred Co mp ensatio n Tab le - Reti remen t Pay Deferral Acco un t fo r Jo hn D. Joh ns” in this Item 11. Fina ncial Pl anning Pro gra m These amo un ts in clu de t he amo un ts we p ay for th e fees and travel expen ses o f the third party prov id er o f o ur fin an cial and tax pl annin g p ro gram. 20 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Other Perquisites These amo un ts includ e: (i) the amo un t we pai d fo r club memb ersh ips for Mr. Jo hn s ($3,9 81 ); (ii) th e amou nt we paid for a fishing trip fo r M r. Joh ns, $2 ,975; (iii) the amou nt we p aid for sp ort in g ev ents for o ur ex ecut iv e and their family memb ers to : M r. Biel en , $1,4 74 ; Mr. Walk er, $8 90 ; M r. Temple, $24 5; an d M r. Th i gp en , $1 ,320; (iv ) the amo un t we p aid for th eatre t ick ets fo r o ur ex ecut iv e an d th eir famil y memb ers to: Mr. Bielen, $5 80 ; M r. Walker, $1 99 ; M r. Joh ns, $2 89 ; Mr. Temple, $24 6; and M r. Thigp en, $506; an d (v) the estimated i ncremental co st th at we in cu rred in 20 18 for M r. Jo hn s o r h is gu est s to u se Co mp any aircraft fo r perso nal trip s, $115 ,8 79 and Mr. Bielen an d h is g uests t o use Compan y ai rcraft for personal trips, $69 ,34 0. Th e esti mated in cremen tal co st is b ased o n incremen tal ho urly charges an d fuel allocable to the perso nal travel time o n the aircraft, as well as an y intern ational flat fees related to th e flig ht. From time-to -time, family memb ers o f the n amed ex ecutiv e officers are acco mmod ated as add itio nal passeng ers o n flig hts on Compan y ai rcraft . There is n o incremental co st to th e Co mp any fo r this perqu i site. Grants of Pla n-Based Awa rds During 2 01 8 We ad op ted a lo ng -term in cen t iv e p rog ram in 2 01 5 that est ab lish ed a formu la equ i ty val ue for th e Co mp any un der whi ch ou r named executive officers will receive awards, payab le in cash , th at will in crease or decrease in v alu e as th e val ue determin ed u nd er this formu la chan ges b ased o n the operation of o ur b usiness. Effectiv e Jan uary 1, 20 17 , the Co mp any adop ted a n ew LTIP p ursuan t to wh ich these in centiv e award s wo uld be granted. The 20 18 lon g- term incen tive oppo rtun ities fo r th e n amed executiv e o fficers are comprised o f th ree sep arate award s: 1) Performan ce Un i t Award s; 2) Restricted Unit Awards; an d 3 ) Paren t-Based Award s. Ou r an nu al incen tive award s are g ran ted pu rsuant t o o ur AIP, b ased o n targ et amou nts for (i) after-tax ad ju st ed operatin g in co me, (ii) value of n ew bu sin ess, (iii) exp ense management, an d (iv) risk-b ased capital. This table h as informatio n abo ut: 1) the awards granted in 2 01 8 p ursu ant to th e LTIP which will vest in 2020 o r 2021 an d 2) the awards granted in 20 18 p ursu an t to th e AIP, wh i ch wil l be pay able in M arch 2 01 9. Becau se we no lo ng er hav e p ub licly traded stock , no ne of the i ncentiv e awards g ranted in 20 18 were eq uit y incenti ve awards. 20 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Grants of Plan-Ba sed Awa rds Ta ble Estima ted Po ssible Payo uts Under Non-Equity Incentive Pla n Awa rds Na me (a) Grant Date (b) Compensa tion Co mmittee Meeting Da te Type of Award Number of Units (c) Threshold ($) (d) Targ et ($) (e) Ma ximum ($) (f) Bielen 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $4 87,500 (1) $9 7 5 ,000 (1) $1,950 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 14,9 6 5 (2) —(2) 1,4 9 6 ,500 (2) 2,993 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 6,7 3 5 (3) — 6 7 3 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 2,2 4 5 (4) — 2 2 4 ,500 (4) — Wa lker 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $1 50,500 (1) $3 0 1 ,000 (1) $602 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 3,8 3 5 (2) —(2) 3 8 3 ,500 (2) 767 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 1,7 2 5 (3) — 1 7 2 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 5 7 5 (4) — 5 7 ,500 (4) — J o hns(5 ) — $— $— $— Temple 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $2 06,000 (1) $4 1 2 ,000 (1) $824 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 5,5 0 0 (2) —(2) 5 5 0 ,000 (2) 1,100 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 2,4 7 5 (3) — 2 4 7 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 8 2 5 (4) — 8 2 ,500 (4) — Thigpen 3/1 5 /18 2 /2 1 /18 Annu al Incen tive (1) — $2 25,250 (1) $4 5 0 ,500 (1) $901 ,0 0 0 (1 ) 3/1 5 /18 2 /2 1 /18 Perform an ce Unit Awards (2) 5,5 0 0 (2) —(2) 5 5 0 ,000 (2) 1,100 ,0 0 0 (2 ) 3/1 5 /18 2 /2 1 /18 Restricted Un it Awards (3) 2,4 7 5 (3) — 2 4 7 ,500 (3) — 3/1 5 /18 2 /2 1 /18 Parent-Based Award s (4) 8 2 5 (4) — 8 2 ,500 (4) — (1)These numbers reflect thresh o ld, target, an d max imum payou ts to th e n amed execu tive o fficers u n der the AIP. Th e level o f payout is tied to the Comp any ’s after-tax adjusted o p erating income, value of new b usin ess, expense m an ag ement, an d RBC. Th e am o unt in th e “Thresh o ld” co lumn reflects the amoun t th at wo u ld be payab le to the named executive officers u n der th e AIP if each perfo rmance goal were ach iev ed at th e th resh o ld lev el. There is no m in imum p ayo u t. (2)These nu m b ers reflect the Perform an ce Un it Awards g ranted to each n am ed ex ecutiv e o fficer alo n g with th e estimated payouts at the threshold , target, and m ax im um amou n ts. The numb er of Perfo rmance Un it Awards determin ed to be granted reflect a discoun t to the boo k value to reflect th e risk of forfeiture associated with perfo rmance conditio n s. The level o f payou t is tied to the Co mpany’s ROE and cum u lativ e after-tax adjusted operatin g income. These v alues reflect a reasonable estimate based o n a value of each unit at $1 0 0 at the date of g ran t usin g the grant-date tan g ible book v alu e o f the Co mpany. (3)These numb ers reflect the Restricted Un it Awards and target value of Restricted Un it Award s gran ted to each n am ed ex ecutive officer. (4)These numb ers reflect the Parent-Based Awards an d target value of th e Parent-Based Awards g ranted to each named ex ecu tiv e o fficer. (5)Mr. Johns did no t receiv e g ran ts o f any awards u n der the AIP o r LTIP in 20 1 8 . Discussi on of Grants of Pla n-Based Awa rds Ta ble Co lu mn (b) - Gra nt da te. At its Feb ruary 21 , 20 18 meetin g, t he Board granted lon g-term incen tive award s valued in th e amou nts reflected in the table wit h a grant date o f March 1 5, 20 18 . Co lu mn (c) - Nu mber o f u nits. These amounts reflect the nu mb er of each o f th e Performan ce Unit Awards, Restricted Unit Award s, an d Parent-Based Awards g ran ted to the n amed ex ecutiv e officers in 2 01 8. Th e target value of each award is reflected in col umn (e). Co lu mns (d), (e), an d (f) - Estimated p ossib le p ayo uts un der n on -eq uity incen tive pl an awards. For a d iscussio n of th e p erforman ce targ ets an d th e estimated po ssible p ayo uts un der no n-equ ity i ncentive plan awards, see “Ann ual Cash In cent iv e Awards” and “Long Term Incen tive Award s” in th e C ompensation Disclosu re an d Analysis ab ov e. Termina tion of Emp lo yment; Change o f Co ntrol Special vesting an d pay men t pro visio ns ap ply t o Perfo rmance Un it Awards, Restri cted Unit Award s, an d Parent-Based Award s if th e o ffi cer’s employ men t en ds. See “Potential Pay men ts u po n Termination o r Ch ang e of Co ntrol ” in this Item 11 fo r more in fo rmation . Outstanding Equity Awards a t December 31 , 20 18 The named execu tive o fficers had no ou tstandi ng eq uit y award s as of December 31 , 20 18 . 20 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Option Ex ercises a nd Stock Vested During 2 01 8 In 2 01 8, no ne of th e n amed executive officers h eld an y awards that were exercisabl e for, con vertible into o r that may be settled fo r stock o f the Co mp any . Adoptio n of Annua l Incentive Pl an and Long-Term Incentive Plan On No vember 6, 20 17 , th e Bo ard adopt ed th e Protective Life Corpo ration Ann ual Incen tive Plan (“AIP”) and the Protective Life Corp oration Lon g- Term In centiv e Plan (“LTIP”). Th e Co mp any intend s to mak e g ran ts o f an nu al and lo ng -term cash incentiv es un der th e AIP an d the LTIP, respectively, to officers an d key emp lo yees o f th e Company an d its su bsidiaries b eginn in g in 20 18 . On Nov emb er 6, 2 01 8, th e Bo ard of th e Co mp any ap prov ed an amend men t and restat ement of each of the AIP and th e LTIP. A summary of these plans fo llows. Annual Incentive Pla n Un der the AIP, officers and k ey emplo yees of the Co mp any an d its sub sidiaries are elig ib le fo r ann ual cash incen tive op po rtun ities b ased up on the ach iev ement of key ann ual go als that wil l enh ance Compan y p erformance. Th e Co mp ensation Co mmittee will design ate the officers an d k ey emp l oy ees to particip ate in th e AIP (“Part ici pants”). For each calen dar year, th e Compensation Committee wi ll reco mmend for ap prov al by the Bo ard the p erforman ce ob jectiv e o r ob ject iv es that must be satisfied in o rder for Part ici pants to b e elig ib le to receiv e an in centiv e p ay men t fo r t hat year. The perfo rmance o bjectives est ab l ish ed un der the AIP shall be rel ated to on e o f the fo llo wing criteria, which may b e d etermined solely b y referen ce to the perfo rmance of th e Co mp an y o r a sub si diary o r a division o r bu sin ess un it or based o n comparative perfo rmance relative to other co mp anies: n et in come; op eratin g inco me; b oo k value; embed ded v alu e or eco no mic value add ed; return on equ ity, assets or in vested capital; assets, sales or rev enu es or growth in asset s, sales o r reven ues; efficiency or ex pen se man agemen t; cap ital ad equ acy (in clu ding risk-based capital); i nv estment returns or asset q ual ity; completion o f acq uisi tion s, fin anci ng s, or simil ar tran saction s; custo mer serv ice metrics; th e value o f n ew bu sin ess o r sales; or su ch oth er reason abl e cri teria as the Compen satio n Committee may recommen d an d the Bo ard may ap prove. With respect to an y Participan t, the Compen satio n Committee may establish multiple perfo rmance o bjecti ves. The AIP p rov id es th at th e Co mp ensatio n Co mmitt ee will establish a targ et amou nt fo r each Participant and that Particip ants’ targ eted amou nts may be ag gregated to create a pool to b e allo cated in the discretio n o f th e Co mp ensatio n Commit tee. The C ompensation Co mmittee may establish t he po ol in resp ect of any p erforman ce objective b ased on th e ext ent to wh ich th e o bjective is met or ex ceed ed, o r the extent to wh ich ob jectiv es are on ly partially ach iev ed. The Compensation Co mmittee may pro vide th at amo un ts b elo w or in ex cess of the agg reg ate of al l Particip ant targ ets for such p erforman ce ob jectiv e will be fun ded fo r p erformance in ex cess of, or at stated lev els b elo w, targeted p erforman ce. Th e Comp ensati on Co mmittee may also establish a th resh old level of ach iev ement fo r an y p erformance o bjecti ve below which n o amo un t shall be fun ded in resp ect of such perfo rmance ob jectiv e. Ad ditio nal ly, the C ompensation Committee may, in its d iscretion , allo cate th e po ol amon g division s o r bu siness un i ts, in wh ich case the autho rized manag er of each division or b usiness un it will th en (i) mak e in div id ual determin ation s reg ard ing th e con trib ution of each Part ici pant in h is or her respectiv e di vision or bu sin ess u nit to the achievement of th e ov erall stated perfo rmance ob jectiv es, and (ii) reco mmend , fo r ap prov al b y the Compen sation Committee, th e amou nt pay able, if an y, from such d i visio n o r b usin ess uni t al lo cati on to each such Particip ant. The Comp ensati on Co mmittee may d elegate an y and all o f its d uties an d responsibilities (in clu ding th e selection o f Participan ts) in resp ect of any Particip an t s (oth er th an th e Ex ecutiv e Ch airman, Presiden t and Ch ief Ex ecutiv e Officer and all members o f the Company ’s Perfo rmance an d Accou ntabil ity Co mmittee) to a co mmitt ee o f o fficers comprised o f the Presiden t and Chief Ex ecutiv e Officer an d an y two or mo re o f h is or her d i rect repo rti ng officers. Un less the Co mp ensation Committee o th erwi se d etermi nes to p ay th e Participant a greater amo un t, if a Particip ant’s employ men t terminates d ue to death , disability o r n ormal or early retirement un der th e terms o f the Qualified Pen sion Plan, the Part ici pant sh all receive an an nu al i ncenti ve pay men t eq ual to th e amou nt th e Particip ant wo uld h ave received if th e Particip ant had remained emp lo yed th ro ug h the end of t he year, pro -rated based on th e n umber of days th at elap sed d urin g the y ear in wh i ch th e terminatio n o ccu rs. Except as prov id ed in the pri or sentence, un less th e Co mp ensatio n Commit tee shall determine to auth orize a payment, no amou nt shall b e payab le to a Particip ant as an ann ual in cen tiv e award un less th e Participan t is still an employ ee of th e Co mp any or on e of its su bsidiaries o n t he date pay ment is made o r such earlier d ate as t he Compensation Committee may sp ecify. The amen ded an d restated AIP will co nti nu e in effect un til o therwise amen ded o r terminated by th e Bo ard . Lo ng T erm Incentiv e Plan Un der th e LTIP, emp lo yees o f the Compan y an d i ts sub sid iaries are eligible to recei ve three typ es of incentiv e awards (collectively, “Awards”): 1 . “Perfo rmance Unit,” an Award wh ich becomes vested an d n on -forfeitabl e u po n the attainment , in wh ole or in part, o f p erforman ce o bjectives, determin ed b y the Compen satio n Committee, du ring an award perio d, and which is p ay able in cash b ased amou nts set by th e Co mp ensation Committee. 2 .“Restricted Un it,” an Award which b eco mes vested an d n on -forfeitable, in who le o r in part, u po n th e satisfaction of su ch cond itio ns as sh all be determin ed by the Comp ensati on Committee, an d wh ich is payab le in cash b ased on the Company ’s “Tang ib le Boo k Valu e Per Uni t,” as defined in the LTIP. 20 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents 3 . “Parent-Based Award,” a cash -d eno minated Award based on the v alu e of the co mmo n sto ck of th e Compan y’s sole stock ho ld er, Dai-ichi Life or its successo r o ver th e li fe of the Award. Un der t he LTIP, th e Compensation Committee sh all select the eligible p articipan ts (“LTIP Participan ts”), the n umber o f Award s each LTIP Particip an t will be granted, and th e perfo rman ce cri teria (if an y) fo r each Award. In the case o f Performan ce Un its, th e perfo rmance ob jectiv es shall b e related to at least o ne of th e followi ng criteria, wh ich may be d etermined so lely b y referen ce to t he perfo rmance of the Compan y or a d iv i sio n o r su bsidiary or based on comparative p erformance relativ e t o o th er co mp anies: (i) pre-t ax and/or after-tax adjusted op eratin g in come, o perating earn i ng s, net inco me, operating in come, b oo k v alu e, embed ded v alu e or eco no mic value add ed o f the Compan y o r a su bsid iary, d iv i sio n o r b usin ess un it (in clu ding measu res o n a per sh are basis) o r the accumulated earning s of any of th e forego ing , (ii) ret urn o n equ ity, assets or in vested capital, (iii) assets, sales or rev enu es, or growt h i n assets, sales o r reven ues, o f the Compan y o r a su bsidiary, division or bu siness u nit, (iv) efficiency o r ex pen se man ag emen t (such as un it cost), (v ) risk man agemen t o r th ird-party ratin gs, (v i ) cap ital adeq uacy (in clu ding risk-b ased cap ital), (v ii) inv estment retu rn s or asset qu ality, (v iii) premium inco me or earned premium, (ix) v alu e o f new b usin ess o r sal es, (x) n ego tiation o r completion o f acquisitio ns, finan cin gs or similar transactio ns, (xi) customer serv i ce metrics, an d (x ii) such oth er reason able crit eri a as the Co mp ensatio n Co mmitt ee may determin e. The Co mp ensati on Committee may chan ge th e perfo rmance o bjectives ap pli cab le with respect to any Performance Un its to reflect such factors, includ in g ch ang es in a LTIP Parti cipan t’s du ties o r resp on si bilities o r ch ang es in bu sin ess o bjecti ves, as the Compen sation Committee shall d eem necessary o r ap prop riate. The Compen sation Committee may delegate an y an d all o f its auth ority (i ncl ud in g the selection o f LTIP Participan ts) with resp ect to an y LTIP Particip an t s (other th an the Ex ecu tive Chairman, Presid ent an d Ch i ef Executi ve Officer and Performan ce and Acco un tab ility Committee memb ers) to a co mmitt ee co mp rised o f the Presiden t an d Chief Executive Officer and an y two o r more o f hi s or her direct rep orting officers. The LTIP prov ides for special p ayo uts o f award s upon certain chan ge o f co ntro l transact io ns o f th e Co mp any as defined in th e LTIP. In add ition, in th e case o f Paren t-Based Awards, th e p ayo uts will occur up on a chang e of con trol of Dai-ich i Life. The LTIP p ro vides that u po n a terminatio n o f a LTIP Particip ant’s emp lo yment d ue to deat h, disabil ity, o r n ormal retirement, all Restricted Un its an d Parent-Based Awards will b eco me fu lly vested and , u nless th e Co mpen sat io n Co mmitt ee determin es to pro vide fo r treatment that is more favo rab le to a Particip an t , all Performan ce Unit s will v est pro rata b ased on the LTIP Part ici pant’s perio d of employ men t du ring the award period relativ e t o th e total len gth of th e award perio d. Th e LTIP has speci al v esting p ro vision s fo r th e Awards u po n a termi nat io n o f employmen t du e to early retirement and sp ecial vesti ng an d p aymen t p ro vision s fo r t ermin ati on after a majo r divestitu re or red uctio n in force b y the Co mp any. In th e case o f a termi nat io n “fo r cause” (as defin ed in th e LTIP), all v ested and un vested award s are forfeited . Oth erwise, u nv est ed amo un ts g enerally are fo rfeited u po n termin ation of emplo ymen t. 20 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Post-Empl oy ment Benefits This tab le co ntain s in formatio n abo ut ben efits payab le to the n amed ex ecu tiv e o fficers u po n their retirement. Pension Benefits Table Na me (a) Plan Name (b) Number of y ea rs credited service (#) (c)(1 ) Present value o f accumula ted benefit ($) (d)(2 ) Payments during the last fisca l year ($) (e) Bielen Pen si on 28 $1,0 11 ,52 5 $— Ex cess Pen sio n 28 7,0 74 ,33 2 — To tal $8,0 85 ,85 7 $— Walker Pen si on 17 $3 88 ,57 3 $— Ex cess Pen sio n 17 4 88 ,70 6 — To tal $8 77 ,27 9 $— Jo hn s Pen si on 25 $1,1 80 ,50 4 $— Ex cess Pen sio n — — To tal $1,1 80 ,50 4 $— Temp le Pen si on 6 $69 ,77 1 $— Ex cess Pen sio n 6 1 55 ,00 7 — To tal $2 24 ,77 8 $— Thig pen Pen si on 35 $1,5 30 ,82 2 $— Ex cess Pen sio n 35 7,0 74 ,07 2 — To tal $8,6 04 ,89 4 $— (1)The nu mb er o f y ears o f serv ice th at are used to calculate the named execu tive o fficer’s benefit under each plan, as o f Decemb er 3 1, 201 8. (2)The actu arial present value o f the n amed executiv e officer’s ben efit u nd er each plan as o f Decemb er 3 1, 20 18 . The v alu ation metho d an d material assumptio ns that we used to calcu late these amo un ts are set forth in Note 16 , Emp lo yee Ben efit Pl an s, o f the No tes to ou r Con so lidated Finan cial St atemen ts in th is An nu al Repo rt on Fo rm 10 -K. Discussi on of Pension Benefits Table We hav e “defin ed ben efit” p ension plans, as fu rther describ ed b elo w, to h elp prov id e ou r elig ib le employ ees with reti remen t secu rit y. Qua lified Pension Pl an Almo st all of our full-time employ ees particip ate in ou r Qu alified Pension Plan. Th e Qu alified Pensio n Plan p rov id es differen t b enefit fo rmulas fo r th ree d ifferent g ro up s: 1) the “g ran dfath ered group” (an y employ ee emp lo yed on Decemb er 3 1, 2007 who se age pl us years of v estin g service total 5 5 of more as of th at d ate); 2) t he “no n-grand fathered g ro up ” (an y emp lo yee emp loy ed on December 31 , 2 007 wh ose ag e pl us y ears o f v estin g service was less than 55 as of th at d ate); and 3) th e “po st-2007 gro up ” (any emp lo yee first h ired after December 31 , 2 00 7 o r an y former emp lo yee who is rehired after that date). Mr. Bielen, Mr. Jo hn s, and Mr. Thi gp en are in th e g ran dfath ered grou p; M r. Walk er is in the n on -g ran dfath ered grou p; and M r. Temple is in th e po st- 20 07 grou p. For employ ees in the g ran dfath ered grou p an d no n-grand fathered g ro up , t he mon th ly l ife ann uity ben efit pay ab l e un der th e Qualified Pension Plan at no rmal retirement age (usu ally ag e 6 5) for serv ice before 20 08 equ als: •1 .1% o f th e employ ee’s fin al avera ge p ay times y ears o f serv ice th rough 2007 (u p t o 3 5 years), pl us •0 .5% o f th e employ ee’s fin al av erag e p ay o ver th e employ ee’s S ocial Secu rity covered pay times years of serv ice t hrou gh 20 07 (u p to 3 5 y ears), plus •0 .55 % of t he emp lo yee’s final average pay times years of service thro ug h 2 00 7 (in excess o f 3 5 y ears). For serv ice after 2 00 7, emp lo yees in th e gran dfathered grou p con tin ue to earn a mo nthly life an nui ty b enefit pay able at no rmal retiremen t age (usually ag e 65 ), calcu lated as follows: •1 .0% o f th e employ ee’s fin al avera ge p ay times y ears o f serv ice after 2 00 7 (up to 35 years minu s service b efo re 2 00 8), plus 20 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents •0 .45 % of th e employ ee’s final av erag e p ay o ver th e employ ee’s So cia l S ecu rity covered pa y ti mes years o f serv ice after 2 00 7 (u p to 35 years min us serv ice before 20 08 ), p lu s •0 .50 % of t he emp lo yee’s final average pay times t he lesser o f y ears o f service after 200 7 and to tal years of service min us 35 years. The total ben efit pay ab le to empl oy ees in the grand fathered g ro up will n ot b e less than t he b enefit the employ ee wou ld h ave receiv ed h ad he been a no n-grand fathered emp lo yee. For service after 20 07 , emp lo yees in th e no n-grand fathered g roup an d p ost-20 07 gro up earn a hy po th etical acco un t b alan ce th at is credited with pay credits and interest credits. In terest is cred ited to a p articipan t’s acco un t effective as of Decemb er 3 1 of each year, b ased o n th e v alue of the p articipan t’s acco un t on Janu ary 1 o f th at y ear. The in terest rate is b ased on the 30 -y ear Treasuries’ con stan t maturities rate pu blished b y the IRS. Th e rate fo r a calend ar year is t he rate pu blished fo r Octo ber of th e previou s year. Pay credits fo r a year are based on a percen tag e of eligible pa y fo r that year, as foll ows: Credited Service % o f Pay Credit 1 - 4 y ears 4% 5 - 8 y ears 5% 9 - 12 years 6% 13 - 1 6 y ears 7% 17 or mo re y ears 8% Fin al avera ge pay fo r g ran dfath ered emp lo yees i s th e averag e of th e employee’s eligible pay fo r the 6 0 co nsecu tive mon th s th at p ro du ces the high est average. (However, if the emp lo yee’s av erag e el ig ib le pay for an y 36 co nsecu tive mo nths as of Decemb er 31 , 2 00 7 is greater than the 60 -co nsecu tive mont h averag e, the 36 -mon th nu mb er wil l be used .) For n on -g ran dfath ered employ ees, final average pay is th e av erag e o f th e employ ee’s elig ibl e p ay fo r the 36 co nsecu tive mon th s b efore January 1, 2 00 8 that prod uces the h ig hest average. Eligible p ay includ es compo nen ts of p ay such as base salary, ov ertime and ann ual incentive award s. Pay d oes no t in clu de p aymen t of certain co mmissio ns, perfo rman ce shares, gains o n SAR ex ercises, vesting of restricted stock u nits, severance pay , or other ex t raord in ary items. S ocial Secu ri ty covered pa y is o ne-twelft h o f the average of t he So cial Security wag e bases for the 35 -y ear p eriod end in g when th e emplo yee reaches So cial Security retirement ag e. Fo r n on -g ran dfath ered parti cip an ts, So cial Security co vered pay is d etermined as of Decemb er 3 1, 2 00 7. Th e wag e b ase is th e maximu m amo un t o f p ay fo r a year fo r which Soci al Secu rity taxes are paid. So cial Security retirement ag e is b etween age 6 5 and 67 , depen ding on th e employ ee’s d ate o f b irth . Un less special IRS ru l es ap ply , b enefits are n ot paid b efo re emp l oy ment end s. An emp l oy ee may elect to receive: •a life ann uity (mon th ly pay men ts for t he emp lo yee’s life o nly), or •a 50 %, 7 5%, o r 10 0% jo int an d survivor an nu ity (the emp lo yee receiv es a smaller ben efit for life, an d th e employ ee’s d esig nated su rv iv or receiv es a benefit of 50%, 75%, or 100% of th e redu ced amo un t fo r life), o r •a fiv e, ten , o r 15 y ear p eriod cert ain an d life ann uity ben efit (th e emp lo yee receives a smaller b en efit fo r life and , if th e employ ee di es before the selected perio d, the emp lo yee’s desig nated su rv iv or receives the red uced amou nt unt il th e en d o f the p eriod ), o r •a lump su m b enefit. If an emplo yee cho oses o ne o f th ese b en efit op tions, th e ben efit is adj usted using the in terest rate assu mp tion s an d mo rtality tables sp ecified in th e Qu alified Pensio n Plan, so i t h as th e same actu arial v alu e as the b enefit determin ed by t he Qual ified Pen sio n Plan fo rmulas. An employ ee who se emplo ymen t end s before ag e 6 5 may b eg i n benefi t pay ments after terminatio n o f emp lo yment . Th e b enefit for serv ice before 20 08 is redu ced for co mmencemen t b efo re age 6 5, so th e ben efit remains the actu arial eq uivalent of a b enefit beg in ning at ag e 65 . If an emp lo yee retires on o r after age 55 with at least 1 0 years o f vesti ng service, th e employ ee may take an “early retiremen t” ben efi t wit h resp ect to benefits earn ed throu gh 20 07 , b eginn in g immediatel y after empl oy ment end s. Mr. Bielen, M r. Walker, and Mr. Th ig pen are eligible fo r early ret irement. The early retiremen t b enefit fo r p re-20 08 serv ice is based o n the Quali fied Pen sion Plan formu la. Th e b enefit is redu ced b elo w the level of th e ag e 65 b enefit; ho wev er, th e redu ction for an early retirement ben efit is n ot as great as the redu ction fo r early commencement of a vested b enefit. (For example, th e early ret irement red uctio n at ag e 55 is 5 0%; th e actuarial red uctio n (usin g the Qualified Pen sio n Plan in terest rates an d mortality tables) is 6 2%. At age 6 2, the early retiremen t redu ction is 2 0%, an d the actuarial redu ction is 27 %). No nqua lified Ex cess Pensio n Plan Ben efits u nd er o ur Qual ified Pensio n Plan are limited by the In ternal Revenu e Cod e. We b elieve we sho uld p ay o ur emp lo yees the total p ension benefit t hey h ave earn ed, with ou t imp osing t hese Cod e limits. Therefore, like many large compan ies, 20 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents we h ave a Non qu alified Ex cess Pension Plan that mak es up t he difference between : 1 ) th e benefit d etermin ed u nd er the Qu alified Pension Plan fo rmula, without ap plyin g these limits; an d 2 ) the b enefit actu all y p ay able un der th e Qu alified Pension Plan, taking th ese limit s in to acco un t . Pursu ant to the Non qu alified Ex cess Pensio n Plan’s ch an ge of con trol prov isio n, an emp lo yee will receive a lump su m p ay men t o f his or her p re- 20 05 ex cess p ension ben efit in Janu ary immediately foll owin g th e employ ee’s date of terminatio n. Prior t o the M erg er in 2 01 5, b enefits un der the No nq ualifi ed Excess Pensio n Plan wit h respect to serv ice before 20 05 were paid at the same ti me and in th e same fo rm as th e related b enefits u nd er ou r Qu alified Pen si on Plan. Fo r an emp lo yee’s po st-20 04 b enefit, an empl oy ee will recei ve p ayment p ursu an t t o th e emp lo yee’s orig i nal pay men t elect io n (lump sum or an nu ity) three or six mo nths after terminatio n, as ap plicab le based on whether t he employ ee is a “specified employ ee” un der Sectio n 40 9A of the In ternal Rev en ue Cod e. Fo r any dist ribu tion s to an emp lo yee who was a participant in th e No n-qu alified Ex cess Pen si on Plan and employ ed o n t he date o f th e M erg er in 2 01 5, th e more fav orable lump su m fact ors will b e u sed to calculate th e b en efit . Th ese more favorable lu mp su m fact ors includ e the use of (a) th e mo rtalit y table u sed fo r determin in g lu mp su m pay ment amou nts u nd er th e Qualifi ed Pensio n Plan , an d (b ) an interest rate equ al to th e lesser of (i ) th e sum o f 0.7 5% and the yield o n U.S. 10 -y ear treasury no tes at con stant maturity as mo st recen tly p ub lished b y the Federal Reserve Bank o f New Yo rk , and (ii) th e in terest rate u sed fo r d etermining lump sum payment amo un ts un der t he Qualifi ed Pension Plan. Pay men t is made from ou r general assets (an d is th erefore sub ject to th e claims o f o ur credit ors), an d n ot from th e assets of th e Qu alified Pension Plan. No nqua lified Deferred Compensa tion Arra ng ements This tab le h as in fo rmation abo ut th e named execu tive o fficers’ p articipatio n in n on qu alified d eferred compensation arrang ements in 2 01 8. No nqua lified Deferred Co mpensati on Ta ble Na me (a) Executiv e contributions in last FY ($) (b)(1) Registra nt contributio ns in last FY ($) (c)(2) Aggregate earnings in la st FY ($) (d) Aggreg ate withdrawals/ distributio ns ($) (e) Ag greg a te ba lance at last FYE ($) (f)(3) Bielen $7 2,3 40 $1 18 ,10 2 $1 97 ,05 8 $3 ,07 6,7 41 $13 ,67 8,7 38 Walker $1 2,7 64 $42 ,38 9 $(70 ,00 0) $— $2 ,09 5,2 59 Jo hn s $— $3 40 ,00 2 $8 58 ,24 4 $— $42 ,35 0,4 85 Temp le $3 7,8 01 $52 ,02 1 $1 ,71 2 $— $21 1,6 39 Thig pen $40 3,9 02 $90 ,74 5 $11 ,87 9 $— $2 ,09 5,1 89 (1)These amo un ts in clu de: a.the follo win g amo un ts that are also includ ed in co lu mn (c) (Salary ) of th e Summary Compen sation Table as co mp ensatio n earn ed and d eferred by th e officer in 2 01 8 u nd er t he DCP: Mr. Biel en , $3 1,0 00 ; Mr. Temple, $2 0,3 33 ; an d M r. Thi gp en, $2 6,3 75 . b.the foll owin g amou nts t hat are also in clu ded in column (g) (No n-equ ity incen tive p lan co mp ensatio n) of t he Su mmary Comp ensati on Table for 2 01 8 as co mp en satio n earned u nd er the AIP wit h respect to 20 18 perfo rmance and deferred b y the o fficer in 20 19 un der th e DCP: Mr. Bielen , $41,340; M r. Walk er, $12 ,76 4; Mr. Temp le, $17 ,46 8; and Mr. Thigpen, $23 8,7 50 . c.the foll owin g amou nts t hat are also in clu ded in column (g) (No n-equ ity incen tive p lan co mp ensatio n) of t he Su mmary Comp ensati on Table as co mp ensatio n earn ed u nd er th e LTIP wi th resp ect to awards v estin g December 31 , 2018 an d d eferred b y the officer in 2 01 9 u nd er the DCP: M r. Th igpen , $1 38 ,77 7. (2)For Mr. Bielen, Mr. Walker, Mr. Temple, and Mr. Th ig pen , th ese amo unt s are th e DCP Sup plemental Matching Con tribu tion s allo cated to the o fficer’s accou nt in 2 01 8 wi th resp ect to th e o ffi cer’s particip ation du ring 20 17 in o ur DCP, t he terms o f which p ro vide that th e o fficer wil l not receiv e th e match in g co ntrib utio n u nless the o ffi cer is emp lo yed on th e date of th e allocatio n o r termi nated du e to d eath, d isability, o r wh ile eligible fo r no rmal or early retiremen t un der the Compan y’s Qualified Pensio n Plan. Th e Compan y will incu r t he expen se at th e ti me of allo cation . For Mr. Joh ns, this amou nt in clu des 1) th e DCP Suppl emental Mat ch i ng Co ntrib utio n all ocated to his accoun t in 2 01 8 with respect to his p articipatio n in o ur DCP d uri ng 2 01 7 ($11 8,1 20 ) and 2) the lu mp sum amo un t that was determin ed as if h e accru ed a b en efit in th e No nq ualified Excess Pen sion Pl an and which is credited t o h is bo ok -en try retirement p ay d eferral acco un t in 20 18 ($2 21 ,88 2). Fo r Mr. Bielen , M r. Walk er, Mr. Joh ns, Mr. Temp le, an d Mr. Thig pen, these DCP Sup plemen tal Matching Contrib utio ns an d, for M r. Joh ns, the amount of co mp ensation credited to his reti remen t p ay d eferral acco un t , are rep orted in th e Su mmary Co mp ensatio n Tab le as co mpen sat io n for 20 18 . (3)These amou nts reflect th e fo l lo win g amou nts that h ave b een repo rted as co mp en sat io n to the o fficer in previ ou s p ro xy statements (with resp ect to p eriods prior to th e Merger) and An nu al Repo rts on Forms 10-K (fo r perio ds after the Merger): Mr. Bielen, $1 6,3 67 ,97 9; M r. Walker, $2 ,11 0,1 06 ; Mr. Joh ns, $4 1,152,2 39; Mr. Temp le, $12 0,104; and M r. Th ig pen , $1 ,58 8,663 . 21 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Discussi on of No nqua lified Deferred Compensa tion Table Deferra ls by Our Officers In g eneral, t he named executive officers an d o th er k ey officers can elect to p articipate in o ur un fu nded, u nsecu red DCP. An o fficer who defers co mp ensation u nd er th e DCP do es no t pay inco me tax es o n the co mp ensatio n at that time. Instead, th e o fficer pays inco me tax es o n the co mp ensatio n (and an y earning s on the compensation ) o nly wh en t he officer receiv es th e co mp ensati on an d earning s fro m t he DCP. Throu gh December 31 , 20 18, elig ib le o fficers co uld d efer: 1 ) up to 7 5% o f th eir base salary; 2) u p to 85 % of an y an nu al incen tive award ; and /o r 3 ) up to 94 % of th e amou nts p ay able when Performan ce Un it Awards, Restricted Unit Award s, and Parent-Based Awards are earned . An elect io n to d efer base salary for a calend ar y ear must b e made b y Decemb er 3 1 of th e previou s y ear. Generally, an election to defer an y an nu al in cen tiv e pay ou t fo r a calend ar y ear mu st be mad e b y Jun e 3 0 of that y ear. Generally, an electio n to d efer earned p erformance un its mu st be mad e b y Jun e 3 0 of t he last year in th e award ’s p erforman ce perio d. An electio n to d efer earn ed Restricted Un it Award s o r Parent-Based Awards mu st b e mad e with in 3 0 days aft er the d ate of the award . Deferred co mp ensatio n accrues earning s based on t he p art ici pant’s electi on among no tion al inv est ment cho i ces av ailable un der th e DCP. For 201 8, the in vestmen t retu rns for each of the no tional investment cho ices were: Investment Cho ice Return BlackRo ck To tal Return Fund (0 .82 )% Columbia Mid Cap In dex Fun d R5 (11 .35 )% DFA Emerging M ark ets I (13 .62 )% DFA US Small Cap (13 .13 )% Dod ge & Co x Intern ation al Sto ck (17 .98 )% Dod ge and Cox Stock (7 .07 )% Fidelity 5 00 Ind ex Fu nd (4 .40 )% Well s Fargo Go vernment Mon ey M ark et Institution al 1 .69 % JP Mo rg an M id -Cap Gro wth R5 (5 .02 )% M etrop olitan West Low Duration Bon d I 1 .41 % T Rowe Price Growth Stock (1 .03 )% Pimco Real Return In stit utio nal (1 .97 )% Temp leton Fo reign A (15 .00 )% Vanguard To tal Bo nd M arket Index - Ad miral (0 .03 )% Protective Life LIBOR Fun d 2 .73 % An o fficer may elect to receive pay ments in a lump su m o r i n u p to ten ann ual installmen ts, which electio n can b e chan ged u nd er cert ain circu mstan ces. An o fficer may elect to receiv e a deferred amo un t (and earn in gs) u po n termin ation o f empl oy ment and if such election is mad e, the o fficer may no t chang e this electio n. An o fficer may in stead elect to receiv e a deferred amou nt (and earning s) o n a fixed date (which mu st b e a Febru ary 1 5, and must begin no later than the officer’s 70 t h birthd ay), which electio n can b e ch ang ed u nd er certain circu mstances. An officer may al so req uest a distribu tio n if the officer h as an extreme an d u nex pect ed fin an cial hardshi p, as determin ed u nd er IR S rules. Supplementa l Matching We mak e sup plemental matchin g con trib ution s to the accou nt o f elig ib le officers u nder the DCP. Th ese co ntribu tio ns pro vide matchi ng that we wo uld o th erwise co ntribu te to ou r 40 1(k) Plan, bu t which we cann ot co ntrib ute b ecau se of Intern al Reven ue Co de limit s o n 4 01 (k ) plan matching . For a calend ar y ear, th e sup plemen tal mat ch that an officer receives is: •th e lesser of •4% o f elig ib le co mp en satio n p ayable du rin g t he year, wh eth er received in cash o r d eferred , an d •th e to tal amou nt t he officer d eferred du ring th e year under the 4 01 (k ) Pl an and deferrals o f b ase salary an d cash bo nu ses un der th e DCP; min us •th e actu al matching co ntrib utio n the officer received u nd er t he 40 1(k) Plan fo r that y ear, as d etermin ed whil e appl ying the restricti on s impo sed by th e Internal Rev en ue Co de. An officer’s sup plemen tal matching con trib ution s may be allo cated in on e percent in crement s amo ng the same no tion al inv estment fun ds available fo r d eferral s un der th e DCP. Su pp lemen tal matching is p aid on ly after termin ation of emp lo yment. The officer can elect p ayment in a lump sum or in up to ten an nu al installments, and such election cann ot be chan ged . 21 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Other Prov isio ns No tion al inv estment ch oices un der th e DCP must be in on e p ercen t increments. An o fficer may tran sfer mo ney b etween t he no tion al inv estment ch oices o n any b usiness d ay. We d o no t prov id e an y ab ov e-mark et or p referential earning s rates an d d o no t gu aran tee th at an o fficer’s no tion al in vestmen ts will mak e mo ney. Up on an o fficer’s d eath or disability, the officer's plan b alan ce is p aid in a lump sum. Accou nt balances are p aid in cash. Retirement Pa y Deferral Account fo r Jo hn D. J ohns In 20 16 , the Bo ard app ro ved t he co nv ersion o f th e accrued b en efit pay able un der the No nq ual ified Ex cess Pension Plan as o f March 3 1, 20 16 to Mr. Joh ns into a lump sum amou nt. The lump su m amou nt is allo cated to a book en try th at will b e treated as th ou gh it were a pay deferral accou nt un der th e Co mp any ’s DCP. Mr. Jo hn s will co ntin ue to accru e benefi ts as tho ug h h e were accruing ben efits u nd er the Non qualified Excess Pension Plan wi th resp ect t o t his co nti nu ed serv ice as an employ ee o f Compan y after March 31 , 20 16 . At th e en d of each calen dar year (or the date Mr. Joh ns’ employ ment terminates, if earlier), the ad ditio nal ben efit accrued durin g such year (or portion thereof) will b e con verted into its then p resen t val ue, u sing th e mortality tab les and ap pli cab le in terest rate on such date an d cred ited to Mr. Joh ns’ retiremen t p ay deferral acco un t. Treatin g t he accrued b enefit as a p ay deferral acco unt as th ou gh i t were un der the DCP will all ow the amou nt o f such ben efit to b e treated in th e same mann er as if it were payab le cu rrently to M r. Jo hn s an d then deferred un der th e DCP. This will allow th e accrued b enefit to be d eemed i nv ested , at Mr. Jo hn s’ electio n, among the vario us n oti on al investment op po rtun ities av ailable to particip ants (in clu ding Mr. John s) for th eir deferred co mp en satio n u nd er the DCP u ntil it is payab le to Mr. Joh ns. Potentia l Payments upon Termina tio n o r Change o f Contro l The info rmation b elo w describ es an d qu antifies the co mp ensatio n that wou ld h ave accrued to th e named executiv e o ffi cers up on a termin ation o f th e execu tives’ emp lo yment o r a ch an ge-in-co ntrol o f Company on December 3 1, 20 18 , u nd er (i) the AIP an d th e LTIP an d (ii) fo r M r. Jo hn s, th e terms o f t he Letter Agreement. Howev er, th e actu al benefit to a named ex ecutiv e o fficer can on ly b e determin ed at the time o f th e chan ge-in -co ntrol even t or su ch ex ecutiv e’s separation from the Company. Ad dition ally, th e b enefits describ ed below are in ad ditio n t o ben efits av ailable g enerally to salaried employees up on a termi natio n of employ men t, such as distribut io ns of th eir remai ning p aid time o ff balan ce o r distribu tions un der the 40 1(k) Plan and the Co mp any ’s disabilit y ben efits. As descri bed in the C ompensation Discussio n an d An alysis, with th e ex cep tion o f M r. Jo hn s, n on e o f th e n amed executiv e o fficers are p arty to an y written emp lo yment arrang ements that prov id e fo r p aymen ts in th e ev ent of a chang e in con trol or terminatio n o f employ men t. Letter Agreement with J ohn D. Jo hns On Nov emb er 2 8, 2 01 7, Mr. Jo hn s entered in to the Letter Ag reemen t with t he Compan y d ated Nov ember 6, 20 17 th at establishes his d uties, co mmitmen ts and co mpen sat io n with resp ect to his ro le as Execu tive Chairman . Upo n a termin ation o f Mr. Joh ns’s service as Executi ve Ch airman, th e o nly co mp ensation p ayable to Mr. Joh ns are (i) accrued b ut u np aid comp ensati on u nd er the Letter Ag reemen t for an y reaso n; (ii) any v ested amou nts or benefits owin g to him un der th e Compan y’s o th erwise ap plicable comp ensati on p ro grams o r emp lo yee ben efi t plans an d prog rams, in clu ding an y compen sation previ ou sly d eferred by Mr. Jo hn s (tog eth er with an y accrued earn in gs thereo n) an d no t yet paid by the Co mp any ; an d (iii) any o th er amoun ts or b enefits payab le d ue t o M r. Jo hn s’ retiremen t, termin ation , death or disab ility u nd er the Compan y’s plans, po licies, p ro grams o r arran gemen t s. Annual Incentive Pa yments Except as pro vided in th e following sentence, un less th e Co mp ensatio n Co mmittee determin es to autho rize a payment, no amou nt will b e pay able to th e named ex ecutiv e officers as an an nu al in centiv e award u nless th e named ex ecutiv e o fficer is still an emp lo yee of the Co mp any o r on e of its subsid iaries on the date p aymen t i s made or such earlier date as th e Co mp en sat io n Committee may specify. Un l ess th e Compen sation Co mmitt ee sh all o th erwise determine to p ay t he named execu tive officer a g reat er amo un t, if a named execu tive o fficer’s emp lo ymen t terminates d ue to d eath , di sability (as determined in accordan ce wi th g enerally app licable Co mpan y p olicies) or no rmal or early retirement un der the t erms o f an y retiremen t plan maintain ed b y th e Co mp any or a sub sid iary, su ch named ex ecut iv e o fficer sh all receiv e an ann ual incenti ve p ayment eq ual to th e amo un t the n amed execu tive officer wou ld h ave receiv ed if th e named ex ecut iv e officer had remain ed empl oy ed throu gh the en d o f th e year, multiplied b y a fraction , t he n umerat or of wh ich is th e n umber of days th at el ap sed du ring th e year in wh ich th e terminatio n o ccurs before and in clu ding th e dat e o f the n amed ex ecutiv e officer’s termin ation of emp lo yment an d the d eno minator of whi ch is 36 5. Lo ng -Term Incentiv e Awa rds The n amed executi ve o fficers receiv e ann ually three ty pes of lon g-term in cent iv e award s: Perfo rmance Unit Awards, Restricted Un it Award s, and Paren t-Based Awards. These awards are describ ed in more detail in th e Co mp en satio n Discu ssion an d Analysis - Lon g-Term In centiv e Awards an d Grants of Plan-Based Awards. Up on a termi nat io n o f emp loy ment, th e awards prov id e fo r d ifferin g v estin g and pay men t terms dep end in g u po n the t yp e o f termin ation. In th e case o f a chan ge in con t ro l o f the Compan y, •A named ex ecu tiv e officer will b e deemed to have earned the g reater o f (i) 10 0% of the p erforman ce un its an d (ii) the p ercentage o f such p erforman ce un its th at wo uld d erive fro m appl ying th e schedules at Compen sation 21 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Discussio n and An aly sis - Lon g-Term In cen t iv e Awards t hrou gh the date o f th e chan ge in co ntro l even t, and wi ll b e settled in cash with in 4 5 day s fo llowing the dat e of th e chan ge in con tro l event, b ased up on the Company Co ntro l Boo k Valu e Per Unit, (as defined in th e LTIP), if av ailable wit hin 1 0 d ay s b efo re su ch pay men t d ate; o r, if th e Comp any C hang e in C on trol Boo k Value Per Unit is n ot th en availab le, then 9 0% o f th e v alu e o f su ch perfo rman ce u nits, b ased on the PL Tan gible Bo ok Value Per Un it, (as defin ed in th e LTIP), determin ed as of the most recen t ly rep orted qu arterly b alan ce sheet preced in g such Comp any chan ge in co ntro l shall b e paid with in 45 day s o f the Co mp any ch ang e in con trol, fo llowed by an ad dit io nal p aymen t in resp ect of such p erforman ce un its within 7 5 day s o f su ch Compan y chang e in co ntro l eq ual to the ex cess, if an y, o f (i) th e Ch ang e in Co ntro l Bo ok Value Per Unit o ver (ii) 90 % of th e PL Tan gible Bo ok Valu e Per Un it d etermined as of th e mo st recent ly rep orted qu arterly b alance sh eet p receding su ch Compan y chan ge in cont ro l; •The restricted u nits wil l immedi ately vest in full an d b e set tled in cash , within 4 5 d ays fo llowing th e date of th e change in con t ro l ev ent , b ased up on the Comp any Ch an ge in Co ntro l Boo k Valu e Per Un it, if avai lab le with in 1 0 day s b efo re such p aymen t date; or, if the Co mp any Ch ang e in Con trol Boo k Value Per Unit is no t then available, then 9 0% of th e value o f such p erforman ce un its, b ased o n the PL Tang ib le Bo ok Valu e Per Un it determin ed as o f the most recen tly repo rted q uarterly balance sh eet preceding such Company chan ge in co ntro l shall b e paid wi th in 45 day s of the Compan y ch an ge in co ntrol , fo llowed by an add iti on al p ay men t in resp ect o f su ch p erforman ce u nit s with in 75 d ay s of such Compan y chan ge in cont ro l equ al to the excess, if any, o f (i) the Compan y C hang e in Con tro l B oo k Valu e Per Un it ov er (ii) 9 0% o f the PL Tang ib le Boo k Value Per Unit d etermined as of th e most recen tly repo rted q uarterly balan ce sheet p reced in g such Co mp any ch ang e in con trol; an d •The Parent-Based Award s wil l vest immed iately an d b e settled in cash within 6 0 d ay s follo win g t he date o f the chan ge in con tro l even t, b ased on th e Parent Stock Percentage, (as d efi ned in th e LTIP), b ut the Final Paren t Sto ck Valu e, (as defin ed in the LTIP), sh all b e d etermined b ased on th e av erage of th e closin g prices of Dai-ichi Life co mmon sto ck on all trad in g d ays du rin g th e 3 0-calen dar d ay period en ded on th e date o n which the Co mp an y ch ang e in co ntrol occurs. In th e case o f a ch ang e in co ntro l of Dai-ich i Life, that resu lts in the co mmo n st ock of Dai-i ch i Life n o lo ng er b ein g acti vely trad ed on a public securities ex change (“Paren t Chan ge in Con t ro l”), •The Paren t-Based Award s will b e co nv erted to restricted un its as of th e date o f th e Parent Ch ang e in Co ntrol. Su ch con versio n will result from the fo llowing : First, t he do llar value of th e Parent-Based Award s wil l be determin ed as of the Parent Ch ang e in Con trol, with th e Fin al Paren t Sto ck Value, (as defin ed in the LTIP), u sed to d etermine the Parent Sto ck Percentage determin ed u sin g the av erag e o f th e closin g p rices o f the Parent commo n sto ck o n al l trad in g d ays during th e 30 -calend ar d ay p eri od end ed on the d ate on which the Paren t Ch ange in Co ntro l occurs. The resultin g do llar v alu e of the Paren t-Based Award s shall then b e con verted in to restricted un its b y dividing su ch do llar v alu e by th e PL Tang ib le Boo k Value Per Un it determin ed as of the mo st recently rep ort ed qu arterly balan ce sheet preced in g the Paren t Ch ang e in Co ntro l. After su ch con version, the conv ert ed un its will co nti nu e to b e sub ject to th e terms of th e Parent -Based Award Ag reemen t, includ in g b ut not limited to , th e v estin g sch edu le and timin g pro vision s of such agreement. In th e case o f an early retiremen t o f the n amed ex ecu tiv e o fficer un der th e terms o f the Co mp an y’s Qualified Pen sion Plan, •A pro-rated po rtio n of the p erforman ce un its will b e settl ed in cash b ased on a fraction , the n umerator o f wh ich is the n umber o f days the o fficer was emp lo yed during th e award p eriod , an d the d eno minator of whi ch is th e to tal nu mb er of day s i n the award perio d; •A pro-rated p ortion of the restricted u nits will immediatel y v est b ased o n the p ro du ct o f th e n umber of unv ested restricted un its that wou ld b ecome vested at the ap plicab le d ate ti mes a fractio n, th e nu merato r of which is the nu mber o f co mp lete and p art ial calen dar mo nths b etween Janu ary 1 , 20 18 an d the executive’s retirement d ate, an d th e den omin ato r of which is (i) 36 in th e case o f th e un i ts th at are schedu led to vest at Decemb er 3 1, 2020, or (ii) 4 8 in the case of th e un its that are sched uled to v est at December 3 1, 2 02 1; and •A p ro -rated po rtio n o f the Paren t-Based Award s will immediatel y vest b ased o n a fraction , th e nu merator o f which is t he nu mb er o f co mp lete an d p artial calend ar mon th s b etween Jan uary 1 , 2 01 8 an d the o fficer’s retirement date, an d the d eno minat or of wh i ch is 36 . In the case o f th e d eath , d isab ili ty, or retirement o f the n amed ex ecu tiv e officer o n or after n ormal ret irement ag e u nd er t he terms of th e Qualified Pensio n Plan , •A pro-rated po rtio n of the p erforman ce un its will b e settl ed in cash b ased on a fraction , the n umerator o f wh ich is the n umber o f days the o fficer was emp lo yed during th e award p eriod , an d the d eno minator of whi ch is th e to tal nu mb er of day s i n the award perio d; •The restricted u nits will vest i n full; and •The Parent-Based Awards will vest in ful l. 21 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents In the case o f a sp ecial termin ation o f t he named ex ecu t iv e o fficer, wh ich co nsists of a t erminati on o f emp lo yment d ue to (i) a d iv est iture o f a bu sin ess segment o r a sig nificant p ortio n of th e assets of the Company or (ii) a sig nificant reductio n by the Company of its work force, the Co mp ensation Co mmittee d etermi nes to what extent, and o n wh at terms, th e Perfo rmance Uni t Award s, R estricted Unit Awards, an d Parent-Based Awards will be p aid . Un less the Co mp ensation Committee d etermi nes to p ro vide fo r t reatment that is mo re fav orable, i f a n amed executi ve officer’s emp lo yment is termi nat ed other than for death , disabilit y, normal o r early retiremen t, sp ecial termin ation , o r cause, any un vested Perfo rmance Unit Awards, Restricted Unit Awards, an d Parent-Based Awards will be forfeited as of th e date of th e o fficer’s terminatio n o f employ men t. Un less th e Co mp ensatio n Commit tee determin es to prov id e fo r treat ment th at is mo re favo rab le, terminatio n o f a n amed execu tive o fficer’s employ men t for “cau se”, will resu lt in a forfeiture o f each typ e o f award . "Cau se" mean s an y n amed ex ecu tiv e o fficer's convict io n or plea of no lo co ntend ere to a felo ny , an act o r acts of extreme disho nesty or gross mi scon du ct, or v io latio n o f the Compan y’s Cod e of Business Co nd uct. Un less otherwise n oted abo ve, any Restri cted Un it Awards o r Paren t-Based Awards th at beco me v ested wil l b e p ayab le in accordan ce with t he no rmal v esting sched ule as if t he named ex ecu tive o ffi cer had remain ed emp lo yed th rou gh th e last vesti ng dat e, an d an y Performan ce Un it Awards that are earned will b e p ayab le as if the n amed ex ecu tiv e o fficer had remain ed emp lo yed fo r the d uration of th e award p eriod . In No vember 20 17 , th e Compensation Committee ap pro ved th at, u po n Mr. Jo hn s’ reti remen t from th e Company, all of Mr. Joh ns’ o utstand in g Perfo rman ce Un it Award s will fu lly vest on the date o f his retiremen t and will b e p ayab le at th e same time an d in the same man ner as t hey wou ld had M r. Joh ns remained emplo yed thro ug h t he end of each app licable award p eri od . No nqua lified Deferred Co mpensa tion Each n amed executive o fficer is cu rrently fully v ested in th e amo un ts rep orted in th e “Agg reg ate Bal an ce at FYE” co lumn o f th e Non qu alified Deferred Co mp ensatio n Table, and t herefore these amou nts wo uld b e pay able to n amed ex ecutiv e officers up on t ermin ati on of emp loyment for any reason . In ad dit io n, a named executi ve officer whose emp lo yment terminated du e to no rmal or early retirement , d eath , or d i sability wou ld receiv e th e DCP Su pp lemen tal M atch in g Co ntrib utio n th at wo uld hav e been allocated u nd er ou r DCP to each named ex ecutiv e officer’s accou nt with respect to the officer’s serv ice du rin g 2 01 8. Pension Benefits All of th e Compan y’s elig ib le emplo yees particip ate in the Qualified Pension Pl an . Ben efits u nd er th e Qualified Pen sio n Plan are ful ly v ested after th ree years of service. Up on termination of emplo ymen t fo r an y reason , employees are en titled to receiv e th eir vested b enefits. Each named executi ve officer wo uld be enti tled to receiv e th e amou nts d esign ated as pen sio n b enefits represented in th e “Presen t Valu e of Accumulated Benefit” column o f the Pensio n Ben efits Tab le. The Pen sio n Benefits Table al so shows th e amo un ts pay able to each n amed execu tive officer up on sep aratio n from serv ice u nd er Sectio n 40 9A of th e In ternal R ev enu e Co de u nd er the Non qu alified Excess Pension Plan. Termina tion Payments The fo llowing tab les and fo otno tes d escribe th e potential pay men ts to the named ex ecutiv e officers u po n terminatio n o f emp lo yment as o f Decemb er 3 1, 2 01 8. The tab les do n ot i ncl ud e: •co mp ensatio n o r b enefits p revio usly earned by th e n amed ex ecutiv e officers o r incen tive award s t hat were alread y fully vested; •the v alu e o f p ension ben efits that are disclo sed in the 2 01 8 Pen sion Ben efits Table, ex cept fo r any pen sion en han cement trig gered b y the ev ent, if app licabl e; •the amou nts pay able un der th e DCP that are d isclosed i n t he 20 18 Non qu alified Deferred Compensation Table; o r •the v alu e of any b enefits (such as retiree health co verage, life in surance and disabil ity co verag e) p ro vided on th e same b asis to sub stan tially all o th er employ ees. 21 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Change o f Cont rol The tab le set fo rth below sho ws the cash p aymen ts and o t her benefits that wo uld have b een pay able to each of th e named execu tive o fficers had a ch ang e of control of th e Co mp any occurred on December 31 , 20 18 . Na me Perfo rmance Units Restricted Units Parent-Ba sed Awa rds To tal Bielen $7 ,22 7,8 98 $2,2 14 ,35 6 $5 56 ,81 8 $9,9 99 ,07 2 Walker $2 ,05 9,9 29 $6 40 ,18 1 $1 57 ,74 5 $2,8 57 ,85 5 Jo hn s $14 ,36 7,8 87 $4,0 71 ,59 6 $9 49 ,03 4 $1 9,3 88 ,51 7 Temp le $2 ,72 8,2 20 $8 44 ,36 5 $2 10 ,65 4 $3,7 83 ,23 9 Thig pen $3 ,19 3,3 97 $1,0 01 ,34 8 $2 43 ,08 4 $4,4 37 ,82 9 Dea th, Disa bilit y, o r Normal Retirement The tab le set fo rth b elo w sho ws th e cash pay men ts an d o th er b en efit s th at wou ld hav e been p ayable to each of th e named executiv e officers h ad h is employ men t b een t ermin ated d ue to d eath, d isability or no rmal retirement (o n o r after no rmal retiremen t ag e) o n Decemb er 31, 20 18 . Na me 201 9 DCP Supplemental Ma tching Contributio n Performance Units Restricted Units Parent-Based Awards Annua l Incentiv e Pa y ments To tal Bielen $15 4,2 15 $5 ,34 0,6 15 $2 ,37 1,9 76 $55 6,818 $1,0 33 ,50 0 $9,4 57 ,12 4 Walker $2 8,4 12 $1 ,56 1,0 71 $68 2,3 94 $15 7,745 $3 19 ,10 0 $2,7 48 ,72 2 Jo hn s(1 )$1 3,5 00 $12 ,26 9,1 14 $4 ,23 8,5 67 $94 9,034 $— $1 7,4 70 ,21 5 Temp le $6 1,1 93 $2 ,03 8,3 61 $90 2,5 83 $21 0,654 $4 36 ,70 0 $3,6 49 ,49 1 Thig pen $9 6,6 32 $2 ,45 5,1 90 $1 ,06 4,2 02 $24 3,084 $4 77 ,50 0 $4,3 36 ,60 8 (1) Mr. John s is th e o nly named execu tive officer who would b e elig ib le for n orm al retirement on December 3 1 , 2018. Ea rl y Retirement The tab le set fo rth b elo w sho ws th e cash pay men ts an d o th er b en efit s th at wou ld hav e been p ayable to each of th e named executiv e officers h ad h is employ men t b een t ermin ated d ue to early ret irement on December 31 , 20 18 . Na me 2 0 1 9 DCP Supplemental Ma tching Co ntribution Performa nce Units Restricted Units Parent-Based Awards Annual Incentive Payments Tota l Bielen $1 54 ,21 5 $5 ,34 0,6 15 $1 ,43 2,3 35 $3 76 ,90 8 $1,0 33 ,50 0 $8 ,33 7,5 73 Walker $28 ,41 2 $1 ,56 1,0 71 $43 1,8 28 $1 10 ,75 9 $3 19 ,10 0 $2 ,45 1,1 70 Jo hn s(1 )$— $— $— $— $— $— Temp le(2)$— $— $— $— $— $— Thig pen $96 ,63 2 $2 ,45 5,1 90 $69 2,2 33 $1 74 ,34 0 $4 77 ,50 0 $3 ,89 5,8 95 (1) Becau se Mr. Jo h n s is elig ible fo r norm al retirement, n o amounts are sh o wn u nder th e Early Retirement scenario . (2) Mr. Temple would n o t be eligible fo r early retirement on Decem ber 31 , 2 018. 21 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Other Termina tion (o ther t ha n for “cause”) The tab le set fo rth b elo w sho ws th e cash pay ments and other ben efits that wou ld hav e b een pay able to Mr. Temple had his emp lo yment been termi nat ed (other than for “cause” or for o ne o f th e reason s specifi ed in th e tables abov e) o n December 31 , 2 01 8. Mr. Temp le is ou r on ly n amed execu tive officer who wou ld no t b e eligi ble fo r n ormal or early retiremen t o n Decemb er 31, 20 18 . Na me Restricted Units Parent-Based Awards To tal Bielen $— $— $— Walker $— $— $— Jo hn s $— $— $— Temp le $34 5,000 $81 ,97 2 $4 26 ,97 2 Thig pen $— $— $— Co mpensa tion Policies and Practices as Related to Risk Ma na gement The Compen sation Committee meets at least on ce a year with the Co mp any ’s Chief Risk Officer to rev iew incenti ve compen satio n arran gemen ts in order to iden tify any features that mig ht enco urage u nn ecessary o r ex cessive risk taking . In co nd uct in g this review, we con sidered n umero us fact ors pertaini ng to each su ch prog ram, includ i ng the follo win g: th e p urpo se of th e p ro gram; th e d esig n o f t he plan, in clu ding risk ad ju stments; th e n umber o f particip an t s, as well as key empl oy ees or employ ee grou ps; th e to tal amou nt t hat cou ld b e paid un der t he p ro gram; the ab ili ty of the particip ants to tak e actio ns th at co uld influ ence the calcu latio n o f th e co mp ensatio n p ayab le; th e scop e of t he risk s that cou ld be created b y actio ns tak en ; ali gn ment with th e Co mp any ’s risk ap petite; and th e manner in whi ch o ur risk manag ement p oli cies an d practices serve to red uce th ese risk s. Based on this rev iew, we have co nclud ed that no ne o f o ur prog rams create risks that are reason ably lik ely to hav e a material ad verse effect o n the Compan y. Pay Ra tio As req uired b y Section 9 53 (b) of the Dod d-Frank Wall St reet Refo rm and Co nsu mer Pro tectio n Act, and Item 40 2(u) o f Regu latio n S-K, we are prov id in g th e follo win g in formatio n ab ou t t he relatio nship of the ann ual t otal co mp ensation of ou r employ ees an d th e an nu al to tal co mp en sat io n of Mr. Bielen , ou r CEO and Presid ent. For 201 8: •the median o f the ann ual to tal compensation of all emp lo yees o f the Compan y (other th an o ur CEO) was $7 5,3 89 ; an d •the an nu alized tot al compen sation of ou r CEO was $6,614,8 45 . Based o n this in fo rmation , for 2 01 8 o ur estimate of t he ratio of t he total compensation of Mr. Bielen, ou r curren t CEO and President, to th e med ian of th e an nu al total co mp ensatio n o f all empl oy ees was 8 8 to 1 . To id entify th e median of th e ann ual to tal compen satio n o f all ou r employ ees, as well as to d etermine the an nu al to tal compen sation o f o ur med ian employ ee and o ur CEO, th e Co mp any to ok th e fo llowing step s: 1 . We iden tified our emp lo yee p op ulation , con sisting of fu ll-time, part-time, an d temp orary employees, as of December 31 , 20 18 . 2 . To id entify th e “med ian employ ee” from o ur emp l oy ee po pu latio n, we compared the amoun t of Box 5 earn ing s (B ox 5 is M edicare taxab le wag es an d includ es all fo rms of compen sation ) o f o ur emp lo yees as reflected in o ur pay ro ll reco rd s as rep orted to th e In ternal Rev enu e Servi ce o n Form W-2 for 20 18 . 3 . We iden tified our med ian usin g t his compen sation measu re, which was con sist en tly ap pli ed to all ou r employ ees in clu ded in th e calculation . 4 . Once we iden tified o ur medi an emp l oy ee, we co mb in ed all o f th e elemen t s of such employee’s compen satio n for 2 01 8 in acco rd ance with the requi remen ts of Item 4 02 (c)(2 )(x) of Regu lat io n S-K, resulting in ann ual to tal compensation of $7 5,3 89 . 5 . Wi th resp ect to the an nu al total co mp ensation of ou r CEO, we in clu ded th e amo un ts rep orted in th e 20 18 Summary Compen sation Tab le includ ed in th is An nu al Repo rt on Fo rm 10 -K. Given th e d ifferent metho do lo gies th at v ariou s pu bli c co mp ani es will use to d etermine an estimate of th eir pay ratio , the estimated rat io reported ab ov e sho uld no t b e u sed as a b asis fo r co mp ari son between companies. 21 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Directo r Co mpensati on This tab le co ntain s in formatio n abo ut the 20 18 compen sation of ou r n on -employ ee di rectors. Director Compensa tion Table Na me (a) Fees earned o r pa id in cash ($) (b) All other compensatio n ($) (c) Tota l ($) (d) Sh in ich i Aizawa $— $382 $3 82 Tomoh i ko Asan o $— $382 $3 82 Norimitsu Kawahara $— $— $— Tetsuy a Kiku ta $— $— $— Vanessa Leo nard $1 10,00 0 $— $11 0,0 00 Jo hn J. McMaho n, Jr.$1 06,00 0 $— $10 6,0 00 Ung yo ng Sh u $1 00,00 0 $— $10 0,0 00 Jesse J. Spikes $1 00,00 0 $— $10 0,0 00 Toshiaki Su mino $— $1,446 $1,4 46 William A. Terry $1 00,00 0 $4,125 $10 4,1 25 W. Michael Warren, Jr.$1 03,00 0 $— $10 3,0 00 Discussi on of Directo r Co mpensati on Ta ble Co lumn (b ) - Fees ea rned o r pa id in cash The 20 18 cash co mp ensatio n co mp on ent s were - •Bo ard membership - $2 5,0 00 per qu arter •Ad ditio nal retain er for Au dit Co mmittee Chairp erson - $2,5 00 per q uarter •Ad ditional retainer fo r Co mp ensatio n an d M anag ement Su ccessio n Co mmittee Chairp erson - $1,50 0 p er q uarter •Ad ditio nal retain er for Co rporat e Go vernance an d Nomin ating Committee Ch airperson - $750 p er q uarter Cash retain ers are pai d in Feb ruary, M ay, Aug ust, and Nov ember. Co lumn (c)—Al l Other Compensati on The amo un t in this co lu mn reflects: •Gifts g iv en t o the director i n con nectio n with th e direct or’s retirement valued at $3 82 to each M r. Asan o and M r. Aizawa. •The amo un t we paid for sp orting even ts for M r. Terry ($1,1 50 ) an d M r. Sumin o ($1 ,44 6). •The amo un t we paid for a fish in g trip to Mr. Terry ($2 ,97 5). •Person al use of th e co rp orate jet to Mr. Terry (no in cremen tal cost). Item 1 2. Security Ownership o f Certain Beneficial Owners a nd Manag ement and Rela ted Stockho lder Ma tters On February 1, 2 01 5, th e Co mpan y con summated th e M erg er, and o ur stock ceased to b e p ub licly trad ed. By reason o f th is tran saction , o ur ex ecutiv e officers and directors n o lon ger h old shares of commo n sto ck o f the Co mp any. Dai-ich i Life no w own s 1 00 % of the o utstand in g co mmon stock of th e Co mp any . 21 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 1 3. Certa in Relationships and Rela ted Tra nsactio ns Revi ew a nd Ap prova l o f Rela ted Party Tra nsactio ns We rev iew all relat io nsh ip s and t ran saction s in which we and “related p arties” (o ur directors, d irecto r no minees, executive o ffi cers, th eir immedi ate famil y memb ers, and certai n affiliated en t ities) p articipate to determin e if any related p arty has a d irect or ind irect material in terest. Our General Cou nsel’s Office is p rimarily resp on sible for d ev elo ping an d implementi ng processes to ob tai n th e necessary in fo rmation an d for d etermining , b ased on th e facts and circu mstan ces, wh eth er a d irect o r indi rect material i nterest exist s, and we have written po licies in place regardin g relat io nsh ips an d tran saction s wi th “related parties”. Pursu ant to ou r po licies, if the General Co un sel’s Office det ermin es that a tran sactio n may req uire disclo su re un der SEC rul es, the Gen eral Cou nsel’s Office will n otify: •the Co rp orate Gov ern ance and Nomin ati ng Co mmittee, if the tran saction in vo lv es on e of ou r d irecto rs or direct or no minees; otherwise •th e Au dit Co mmittee. The relevant Bo ard co mmitt ee will app rov e o r ratify the transaction o nly i f it det ermin es that th e tran saction is i n ou r b est in t erests. In co nsidering th e tran sactio n, t he committee will con sider all rel ev ant factors, i ncludin g (as app licab l e): •ou r b usiness ratio nale fo r en terin g into the tran saction ; •th e alt ernati ves to enterin g into the tran saction s; •wh eth er the t erms of th e transact io n are co mp arab le to t ho se th at cou l d be o btain ed in arms-len gth d ealing s with an un related th ird p arty; •the po ten tial fo r the tran saction to l ead to an actu al or app aren t con flict o f interest, and an y safeg uards imp osed to preven t actual o r ap parent con flicts; an d •th e ov erall fairness o f the tran saction to us. Based on the informatio n available t o the Co mp any ’s General Cou nsel’s Office and t o the Bo ard , except as describ ed b elo w, there hav e been no transact io ns b etween th e Co mp any an d any related party since Janu ary 1 , 2 01 8, n or are an y curren tly p ro po sed, for wh ich di sclo sure is requ ired un der th e SEC rul es. Related Pa rt y Transa cti ons E ntered into b y the Co mp any Dai-ichi Life is t he sole shareho ld er of th e Co mp an y an d provi des certain serv ices t o th e Co mp any pu rsu ant to a Glo bal Services Agreement dated Septemb er 8, 2 01 6. Th e services in clu de pl an nin g, mon itori ng and adv isin g with respect to the followi ng matters regarding the Dai -ichi Life g roup as a wh ole: Develop men t and admin istration of th e management plan; d evelop men t and admin istration o f the capit al man agemen t strategy ; o rg anization and co mp any rules; b ud get co ntrol an d set tlement of acco un ts; pu blic relation s; h uman resou rces sy stems; IT strateg y; risk management; complian ce manag ement, man ag emen t o f int ern al transactio ns an d co nflict o f i nterest, an d informatio n management; intern al aud it, in ternal con trol, and legal risk co ntrol; sharin g informat io n on life insuran ce b usiness; and p ro vide adv iso ry serv ices to h elp increase the Co mp any 's profits. Du ring the fiscal year en ded Decemb er 3 1, 2 01 8 the Compan y p aid a fee to Dai-ichi Life o f $12 .2 mil lion fo r the services provi ded to the Co mp an y. Directo r Independence No ne of th e Co mp any ’s securiti es are listed on , an d the Compan y is not su bject to th e listin g stand ard s or ru les o f, any natio nal securities ex change or au to mated in ter-d ealer q uo tation sy stem of a n ation al securi ties association . However, for pu rp oses o f disclo sing the in dep end en ce o f ou r d irecto rs un der ap pli cab le SEC ru les, we hav e ch osen t o app l y t he indep end ence stand ards of th e New Yo rk Sto ck Ex ch ang e (“NYSE”). The Co rp orate Gov ern ance and No minatin g Committee and th e Board ev alu ated t he ind epen dence o f ou r directors u nd er such stand ard s after a review and discussi on of information regardin g each d irecto r’s relatio nshi p with u s and ou r senior man ag emen t an d thei r affiliates. After su ch review an d d iscu ssion, the Board affirmatively determined that the fo llo wing n on -employee d irecto rs are in dep end ent u nd er NYSE ind epen den ce st an dards: Ms. Leo nard, Mr. McMaho n, M r. Shu , M r. Sp ik es, Mr. Terry an d M r. Warren . The Bo ard also determined th at all memb ers o f t he Aud it C ommi ttee, the Compensation an d M anag ement Su ccessio n Co mmittee, an d the Co rp orate Go vernance an d No mi nat in g Co mmittee are in dep en den t un der NYSE ind ependence standard s relatin g to membership on such co mmitt ees. 21 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Item 1 4. Principal Accountant Fees a nd Services The fo llowing table sh ows the ag gregate fees b illed by Pricewaterh ou seCoo pers LLP fo r 2 01 8 and 2 01 7 with resp ect to vario us services p ro vided to th e Co mp any an d its sub sidiaries: For The Year Ended December 31, 2 0 1 8 201 7 (Do l la rs I n Mill i ons ) Aud it fees $7 .2 $7 .5 Aud it related fees 0 .5 0 .6 Tax fees 0 .1 0 .7 All other fees — — $7 .8 $8 .8 Audit Fees were fo r p ro fessio nal serv ices rend ered fo r the au dits o f ou r co nso lidated fin ancial statements, inclu din g integrated au dit s of ou r co nsolid ated finan cial statemen ts an d th e effectiv eness of i ntern al cont ro ls ov er fin ancial repo rtin g, au dit s (GAAP an d statutory basis) of certain of ou r sub si diaries, issuan ce of comfo rt letters and con sents, assistance wi th rev iew o f d ocu men ts filed with th e SEC an d other reg ulato ry au th oriti es, and exp enses rel ated to the ab ov e serv ices. Audit-Rela ted Fees were fo r assu ran ce an d related serv ices relat ed to emp lo yee b enefit plan au dits, d ue d iligence an d accou ntin g co nsul tat io ns in co nn ection with acqu isitio ns, attest services th at are n ot req uired by statute or regul ation , an d co nsu ltatio ns co ncern in g fi nancial accou nti ng an d repo rting stan dards. Tax Fees were for services related to tax co mp liance, includi ng t he p rep aratio n and rev iew of tax retu rns and claims fo r refund and tax plann in g and tax ad vice, includi ng assistan ce wi th tax au dits and ap peals, con sultation s on tax regu lation s and legislative chan ges, ad vice related to acqu isitions, tax serv ices for emp lo yee ben efit p lan s, and req uests for ru ling s o r tech nical ad vice from tax au th orities. All Other Fees i nclud e fees th at are ap pro priately no t includ ed i n t he Aud it, Aud it-Rel ated, an d Tax catego ries. The Au dit Co mmitt ee’s po licy is to pre-app rov e th e aud it, aud it-related, tax an d other servi ces prov id ed by th e in dep end ent accou ntant s t o the Co mp any and its su bsidiaries. Un der t he p re-app ro val p ro cess, the Audit Committee rev iews and app ro ves sp ecific services an d catego ries o f serv ices and the maximu m ag gregate fee for each serv ice o r serv ice categ ory. Perfo rmance o f an y add itio nal services or cat eg ori es of services, o r o f serv ices th at wo uld resu lt in fees in excess of the est ab lish ed max imum, req uires the separate pre-app rov al of the Aud it Co mmittee or o ne of it s memb ers who h as b een del eg ated p re- ap proval autho rit y. The Aud i t Co mmittee or its Chairp erson p re-ap pro ved all Aud it, Au dit-Related, Tax and Ot her services p erformed for the Co mp any b y Pricewaterho useCo op ers LLP with resp ect to fiscal y ear 2 01 8. 21 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents PART IV Item 1 5. Exhibits, Fina ncial Statement Schedules The fol lo win g d ocuments are filed as p art of th is rep ort: 1 . Fi nancial Statements (See Item 8 , Fi na nci al Statemen ts an d Sup plemen ta ry Data) 2 . Fi nancial Statement Sch edu les: The follo win g sch edu les are lo cated in th i s rep ort on th e pag es in dicated . All o th er sch edu les to th e con solidated fin an cial statemen ts req uired by Article 7 of Reg ulatio n S-X are n ot req uired un der th e related instructio ns o r are in app licable an d therefo re h ave been omitted . Pa g e Sch edu le II—Co nd ensed Finan cial In fo rmation of Regi strant Fo r The Year En ded Decemb er 3 1, 2 01 8, For The Year En ded Decemb er 31 , 20 17 , Fo r Th e Year End ed Decemb er 31 , 20 16 , and As of Decemb er 3 1, 2 01 8 an d 2 01 7 22 1 Sch edu le III—Sup plementary Insu ran ce Info rmati on Fo r Th e Year End ed December 31 , 20 18 , Fo r Th e Year End ed Decemb er 31, 20 17 , and Fo r Th e Year End ed Decemb er 31 , 20 16 22 9 Sch edu le IV—R einsurance Fo r The Year En ded Decemb er 3 1, 2 01 8, For The Year En ded Decemb er 3 1, 2 01 7, and Fo r The Year En ded December 31 , 2 016 23 0 Sch edu le V—Valu ation and Qualifying Acco un ts As of Decemb er 3 1, 2 01 8 and December 31 , 20 17 23 1 The Repo rt of In dep end ent Reg istered Pu bli c Accou nti ng Firm wh ich cov ers the fin ancial statement sched ules app ears o n pag e 18 8 o f this rep ort. 3 . Exh ib its: For a list of exh ib its, refer to the “Ex hibit In dex” filed as p art of thi s rep ort b eginn in g o n p age 236 b elo w, an d inco rporat ed herein by th is reference. The agreements in clu ded as exh ib its to this rep ort are includ ed to p rov id e y ou with info rmation regarding th e terms o f tho se ag reement s an d are no t in ten ded to p ro vide an y other factual o r d isclo sure in fo rmation abo ut th e Co mp any o r the o th er part ies to or in any of th e ag reemen ts in cluded as ex hibits. Su ch ag reemen ts may co ntain representation s an d warran ties by the p arties to such agreements th at hav e been mad e so l ely for the b enefit o f the p arties speci fied in th e agreements. These representation s an d warran ties (i) sh ou ld n ot in all in st an ces b e treated as catego rical statements o f fact , bu t rather as a way of allocatin g th e risk to on e of the parties if th ose st atemen ts prov e to be inaccu rat e, (ii) may have been qu alified by d isclosures that were made to the ot her party i n co nn ection wi th t he n ego tiation o f th e ap plicable ag reemen t, which disclo su res are n ot n ecessarily reflected in th e ag reemen t in clu ded as an ex hibit , (iii) may appl y stand ard s of materiality in a way th at is d ifferent from what may b e viewed as material to y ou , and (iv) were mad e only as of th e dat e o r dates speci fied in th e ag reemen t s an d are subject to more recen t d evel op ments. Accordin gly, the rep resent ation s and warran ties con tai ned in the agreements in clu ded as ex hibit s may not d escribe t he actu al state o f affairs as o f the d ate they were made o r at an y o ther ti me. 22 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT S OF INCOME PROTECTIVE LIFE CORPORATION (Parent Company) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Revenues Dividen ds fro m sub sid iaries*$3 1,6 00 $261,09 0 $5 41 ,76 2 Serv ice fees from sub si diaries*25 0,2 41 285,97 9 2 50 ,66 8 Net in vestmen t inco me 8,4 17 9,45 7 8 ,60 7 Realized inv estment gains (l osses)4 68 (45,09 1) (29 ,28 9) Other in come 2,2 11 2,04 9 9 ,82 8 Total reven ues 29 2,9 37 513,48 4 7 81 ,57 6 Expenses Op eratin g and admin istrative 12 3,0 04 182,52 5 1 43 ,94 1 Interest 6 3,8 78 61,26 3 60 ,13 7 Total ex penses 18 6,8 82 243,78 8 2 04 ,07 8 In come before inco me tax and other items b elo w 10 6,0 55 269,69 6 5 77 ,49 8 In come tax (ben efit) exp ense Cu rrent (3 0,8 54 ) (9,44 1) 33 4 Deferred 4 5,0 82 46,02 0 20 ,71 5 To tal in come tax ex pen se (b enefit)1 4,2 28 36,57 9 21 ,04 9 In come before eq uity in un distribut ed income from sub sidiaries*9 1,8 27 233,11 7 5 56 ,44 9 Equi ty (loss) in u nd istrib uted inco me of su bsid iaries 21 0,5 34 873,41 5 (1 63 ,42 0) Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 * Eliminated in Co nso lid atio n See No tes to Conso lidated Fin anci al Statements 22 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDUL E II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF COMPREHENSIVE INCOME (L OSS) PROTECTIVE LIFE CORPORATION (Parent Company) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Net i ncome $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Total other comprehensiv e income (lo ss)$(1 ,42 7,9 10 ) $692,99 4 $5 86 ,61 1 Total comprehensiv e inco me (loss)$(1 ,12 5,5 49 ) $1 ,799,52 6 $9 79 ,64 0 * Eliminated in Co nso lid atio n See No tes to Conso lidated Fin anci al Statements 22 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDUL E II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS PROTECTIVE LIFE CORPORATION (Parent Company) As of December 31, 2018 2017 (Dollars In Thousands) Assets Fix ed matu rities $241,86 2 $1 40 ,10 2 Eq uit y securities 38,17 6 38 ,86 1 Other lo ng -term in vestmen ts 1 0 1 0 Sho rt-term inv estments 115,62 5 79 ,81 8 Inv est ments in su bsid iaries (equ ity meth od )*7 ,289,81 2 8,5 63 ,20 1 Total inv estments 7 ,685,48 5 8,8 21 ,99 2 Cash 5,98 2 3 ,76 0 Receiv ables from su bsidiaries*24,90 9 38 ,39 4 Pro perty and equ ip ment, net 1,10 5 1 ,69 2 Inco me t ax receivab le — 51 3 Deferred in come tax 30,05 0 1 03 ,71 6 Other assets 38,13 4 38 ,48 7 Total assets $7 ,785,66 5 $9,0 08 ,55 4 Lia bilities Accru ed ex penses and other liabilities $411,96 3 $4 42 ,69 6 Inco me t ax pay able 10,03 4 — Debt 1 ,100,50 8 9 43 ,37 0 Sub ordinated d ebt securities 495,42 6 4 95 ,28 9 Total liab ilities 2 ,017,93 1 1,8 81 ,35 5 Commitments and co ntingencies—No te 3 Shareo wner’s equity Co mmo n sto ck — — Ad dition al p aid -in-capital 5 ,554,05 9 5,5 54 ,05 9 Retained earn in gs, includ in g u nd i stributed inco me o f su bsid iaries: (20 18 - $1,102,3 94 ; 2017 - $89 1,860)1 ,639,44 1 1,5 60 ,44 4 Accumulated other co mp reh ensiv e inco me (lo ss): Net un realized g ain s o n i nv estments, all from su bsidiaries, net of in come tax : (20 18 - $(3 68 ,83 0); 2 01 7 - $7 ,41 6)(1 ,387,50 4) 27 ,89 6 Net un realized lo sses relatin g t o o th er-th an-tempo rary imp aired i nv estments fo r wh ich a p ortio n h as been recog nized in earning s, net of in come tax: (2 01 8 - $(6 ,054); 2 01 7 - $(53 8))(22,77 3) (2 ,02 2) Accu mu lat ed gain (loss)—d erivatives, net of in come tax : (20 18 - $(2 );20 17 - $19 8)(7) 74 7 Po stretirement ben efits li abi lity adjustmen t, n et o f inco me t ax : (201 8 - $(4,1 12 ); 20 17 - $(3 ,46 9))(15,48 2) (13 ,92 5) Total shareo wner’s eq uity 5 ,767,73 4 7,1 27 ,19 9 Total liabilities and sha reo wner’s equity $7 ,785,66 5 $9,0 08 ,55 4 * Eliminated in Co nso lid atio n See No tes to Conso lidated Fin anci al Statements 22 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT S OF CASH FLOWS PROTECTIVE LIFE CORPORATION (Parent Company) For The Year Ended December 31, 2 018 2017 2016 (Dollars In Thousands) Cash flows from o pera ting activ iti es Net in co me $30 2,3 61 $1 ,106,53 2 $3 93 ,02 9 Ad ju stments t o reco ncile n et inco me to net cash p ro vided by op erat in g activities: Real ized inv est ment (gain s) lo sses (4 68 ) 45,09 1 29 ,28 9 Equ ity in u nd istrib uted n et inco me of su bsidiaries*(21 0,5 34 ) (873,41 5) 1 63 ,42 0 Dep reciation ex pen se 5 87 73 9 50 6 Receiv ables fro m su bsidiaries*1 3,4 85 (28,79 4) 15 ,18 1 Inco me tax receivab le 5 13 10,54 8 2 ,10 9 Deferred i ncome tax es 4 5,0 82 46,02 0 20 ,71 5 Accrued inco me taxes 1 0,0 34 — — Accrued ex pen ses and other liabilit ies (2 8,2 09 ) (52,84 6) (33 ,63 9) Other, net (5 7,5 95 ) 4,22 6 (16 ,42 6) Net cash pro vided by operating a ctivities 7 5,2 56 258,10 1 5 74 ,18 4 Cash flows from investing a ctivities Sale o f inv estments, availab le-fo r-sal e 67 5,0 00 — — Co st o f inv est ments acqu ired, av ailable-for-sale (77 6,7 43 ) (26,42 3) (59 ,02 5) Return o f and /or (ad dition al) capi tal in vestmen ts in sub sidi ari es (2,6 00 ) 38,41 0 (45 ,76 2) Ch an ge in o th er lon g-t erm investments — — (1 0) Ch an ge in sho rt-term in vestmen ts (3 5,8 07 ) (79,81 8) — Purchase o f p ro perty and eq uip ment — — (1 ,64 9) Sales o f p ro perty and equ ip ment — (10 0) — Net cash used in inv esting activi ties (14 0,1 50 ) (67,93 1) (1 06 ,44 6) Cash flows from fi na nci ng activ ities Bo rrowing s un der line o f credit arran gemen ts an d d ebt 96 5,0 00 1 ,035,00 0 2 65 ,00 0 Principal pay ments o n lin e of cred it arrang ements and deb t (75 7,8 84 ) (1 ,156,49 8) (6 33 ,07 4) Dividen ds to shareo wner (14 0,0 00 ) (143,84 8) (89 ,34 3) Net cash pro vided by (used in) financing a ctivities 6 7,1 16 (265,34 6) (4 57 ,41 7) Cha ng e in ca sh 2,2 22 (75,17 6) 10 ,32 1 Cash at beg inning of yea r 3,7 60 78,93 6 68 ,61 5 Cash at end of yea r $5,9 82 $3,76 0 $78 ,93 6 *Elimin ated in Consolid ation See No tes to Conso lidated Fin anci al Statements 22 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT PROTECTIVE LIFE CORPORATION (Parent Company) NOTES TO CONDENSED FINANCIAL INFORMATION The Compan y pu blishes co nsol id ated fi nancial statements th at are its primary finan cial statements. Th erefore, this p aren t compan y cond en sed finan cial in fo rmation is n ot i ntend ed to be the p rimary finan cial st atemen ts of the Co mpan y, and sh ou ld b e read in conj un ction with th e con soli dated finan cial statements and no tes, in clu ding th e di scussio n o f signi ficant acco un ting po licies, thereto of Protective Life Co rp oration and sub sidiaries. 1. BASIS OF PRESENTATION Na ture of Opera tions On Feb ruary 1 , 20 15 , Pro tectiv e Life Co rp oration (th e “Compan y”) became a wh olly o wned su bsidiary o f The Dai-ichi Life In surance Co mp any, Limited, a kab ushiki kaish a org an ized under the laws o f Japan (n ow kn own as Dai-ich i Life Holdin gs, Inc., “Dai-ichi Life”), when Dai-ichi Life p urchased all ou tstand in g shares of th e C ompany ’s stock . Prio r to Febru ary 1, 2 01 5, and for th e perio ds th is repo rt p resen ts, th e Co mp any ’s stock was pu blicly trad ed o n th e New Yo rk St ock Ex chang e. The Co mp any is a h olding co mp any wi th su bsid iaries that p ro vide finan cial serv ices th ro ug h t he prod uct io n, dist ribu tion , an d ad ministration of insu ran ce an d in vestmen t prod uct s. Th e Co mp any markets ind iv id ual life in su ran ce, credit life an d d i sability insuran ce, gu aran teed in vestmen t co ntracts, g uaranteed fun ding agreemen ts, fixed and v ari ab l e ann uities, and ex ten ded serv ice co ntracts throu ghout th e Unit ed States. Th e Co mp any also main tai ns a separate seg ment d ev oted to th e acqu isitio n o f in surance p olicies fro m o t her companies. Fou nd ed in 19 07 , Protective Life In surance Compan y (“PLICO”) is th e Co mp any ’s larg est o perating su bsidiary. The acco mpan ying co nd ensed fin ancial statements of the Co mp any sh ou l d b e read in conj un ction with t he co nsolid ated fin anci al statements and no tes th ereto of Pro tect iv e Life Co rpo rat io n and su bsid iaries in clu ded in th is An nu al R ep ort o n Fo rm 1 0-K filed with th e United States Securities and Exch an ge Co mmissio n. 2. DEBT AND OTHER OBLIGATIONS Debt a nd Subo rdina ted Debt Securi ties Deb t an d su bo rd in ated deb t secu rities are su mmarized as follo ws: As o f December 31, 2018 2017 O utstanding Principal Ca rrying Amo unts Outstanding Principal Ca rrying Amounts (D oll ars In Thous ands) Debt (y ear of issue): Credi t Facility $— $— $— $— 6 .40 % Sen io r No tes (20 07 ), d ue 2 01 8 — — 1 50 ,00 0 1 50 ,51 8 7 .37 5% Senior Notes (2 00 9), du e 20 19 400,00 0 41 6,4 69 4 00 ,00 0 4 35 ,80 6 8 .45 % Sen io r No tes (20 09 ), d ue 2 03 9 190,04 4 28 8,5 47 2 32 ,92 8 3 57 ,04 6 4 .30 % Sen io r No tes (20 18 ), d ue 2 02 8 400,00 0 39 5,4 92 — — $990,04 4 $1 ,10 0,5 08 $7 82 ,92 8 $9 43 ,37 0 Su bo rd i nated deb t (year of issue): 5 .35 % Su bo rd inated Deb entures (20 17 ), d ue 20 52 500,00 0 49 5,4 26 5 00 ,00 0 4 95 ,28 9 $500,00 0 $49 5,4 26 $5 00 ,00 0 $4 95 ,28 9 The Co mp any ’s fu tu re maturities of deb t, exclu din g no tes pay able to ban ks and sub ordin ated deb t secu rities, are $41 6.5 million in 2 01 9, and $6 84 .0 mil lion th ereafter. Du ring th e y ear en ded Decemb er 31 , 2 01 8, th e Co mp any repu rch ased and su bseq uen tly exting uished $6 5.6 mill io n (p ar val ue - $4 2.9 millio n) o f th e Co mp any’s 8 .45 % Seni or Notes d ue 20 39 . Th ese rep urchases resulted in a $1.8 million pre-tax gain fo r th e Compan y. Th e g ain is recorded in other in come in the co nso lidated statements of income. Du ring 20 18 , the Comp any issued $40 0.0 million o f its Sen io r No tes at a rate o f 4 .30 %, du e 2 02 8. Th ese no tes were issu ed n et of a discount o f $1.0 mi llio n. At issu ance, these no tes are carried o n the Co mp any ’s b alance sheet net of the d iscount and the asso ciated d eferred issu an ce exp enses of $3.7 mi llio n. Th e Co mp any u sed the n et pro ceed s from th e o fferin g for general corp orate pu rp oses, in clu ding th e repay ment of amo un ts o utstand in g u nd er ou r Credit Facility. 22 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Du ring 2 01 7, th e Comp any issu ed $500.0 mill io n o f its Sub ordinated Deben tu res du e 20 52 . At issuan ce, th ese Su bo rd inated Deben tu res are carried on th e C ompany ’s b alan ce sheet net of th e asso ciated d eferred issuan ce ex pen ses o f $4.8 mill io n. The Company used the net p ro ceeds fro m th e o ffering to call and red eem, at par, the en t ire $15 0.0 mi llio n of i ts 6 .00 % Sub ordin ated Debentu res du e 2 04 2 and $2 87 .5 million o f its 6 .25 % Su bo rd in ated Deben tu res du e 2 04 2. Un der a revo lv in g line o f credit arrang ement that was in effect until M ay 3 , 2 01 8 (the “20 15 Credi t Facility”), the Co mp an y had th e abil ity to bo rrow on an u nsecu red b asis u p to an ag gregate p rincipal amou nt o f $1.0 billion . Th e Co mp an y h ad th e rig ht in certain circu mstances to req uest th at th e co mmitmen t un der the Cred it Facility be in creased u p to a max imum p rincipal amou nt o f $1.2 5 b illio n. Balances o utst an din g un der the 2 01 5 Cred it Facility accrued in terest at a rate equ al to, at th e op tion of th e Borro wers, (i) LIB OR p lu s a sp read b ased on th e ratin gs o f th e Co mp any ’s Sen io r Deb t, o r (ii) th e sum of (A) a rate eq ual to the hi gh est of (x) the Ad ministrativ e Ag ent’s p rime rat e, (y ) 0 .50 % ab ov e the Fun ds rate, o r (z) th e on e-mon th LIBOR p lu s 1.0 0% an d (B) a spread based o n t he ratin gs o f th e Co mp any ’s Senior Deb t. Th e 2 01 5 Cred it Facility also p ro vided for a facility fee at a rate that varies with t he ratin gs o f the Co mp any ’s Sen io r Deb t and that is cal cu lated o n the ag gregate amou nt of commitments un der th e 20 15 C redit Facili ty, whether used or un used . The an nu al facili ty fee rate was 0 .12 5% of th e agg reg ate p rincipal amo un t. The Cred it Facility p ro vided t hat th e Company was liab le for the full amo un t o f any ob ligatio ns fo r bo rrowing s o r let ters o f credit, in clu ding t ho se of PLICO, u nd er th e 20 15 Cred it Facility. Th e mat urity dat e of t he 2 01 5 Credit Facility was February 2 , 20 20 . On M ay 3 , 20 18 , th e Company amen ded th e 20 15 Cred it Facility (as amend ed, the “Credi t Facility”). Und er the Credit Facility, the Compan y h as th e ab ility to borro w on an u nsecu red basis u p to an agg reg ate p rincipal amo un t of $1 .0 billio n. The Co mp any h as t he rig ht in certain ci rcumstances to request th at the co mmitmen t u nd er th e Credit Facili ty be increased u p to a maximu m p rin cip al amo un t of $1 .5 b illion . Bal an ces o utstand in g un der the Credit Facility accrue interest at a rate equ al to, at th e op t io n o f the Bo rrowers, (i) LIBOR p lu s a sp read based on th e ratings of the Co mpan y’s Sen io r Deb t, o r (ii) the sum o f (A) a rate eq ual to the high est of (x ) the Admin istrative Agen t’s Prime rat e, (y) 0.50% abov e th e Funds rate, or (z) th e on e-mon th LIBOR p lu s 1.0 0% an d (B) a sp read based on the rat in gs of th e Compan y’s Sen ior Debt. The Credit Facilit y also p ro vid ed fo r a facil ity fee at a rate th at varies with th e ratings of th e Comp any ’s Senior Debt and that is calculat ed o n the aggregate amo un t of commitments u nd er th e Cred it Facilit y, wh eth er used or u nu sed. The an nu al facili ty fee rate i s 0.1 25 % o f t he ag gregate p rincipal amou nt. Th e Credit Facility p rov id es that th e Compan y is liab le fo r t he fu ll amou nt o f any ob ligatio ns fo r bo rrowi ng s o r let ters o f credit , in clu ding tho se o f PLICO, un der the Credit Facility. The matu rit y d ate of the Credit Facility is May 3, 2023 . The Company is n ot aware of an y n on -co mp liance with the fin ancial deb t co ven ant s of th e Credit Facility as o f Decemb er 3 1, 2018 . Th e Co mp an y d id n ot hav e an ou tstand in g b alan ce o n the Credi t Facility as o f December 31 , 20 18 Interest Expense In terest ex pen se o n d ebt an d sub ordinated d ebt secu rities totaled $6 3.9 mi llio n, $61 .3 million , an d $60 .1 million fo r th e y ears end ed Decemb er 31 , 20 18 , 2 01 7, an d 2 01 6, respect iv ely . 3. COMMITMENTS AND CONTINGENCIES The Company previou sl y leased a b uild in g co ntig uo us to its h ome o ffice. Th e lease was renewed i n December 20 13 an d was extend ed to December 20 18 . At th e en d of th e lease term in December 20 18, PLICO purch ased th e bu ilding for app ro ximately $75 million . The bu ild in g is reco rd ed in p rop ert y and eq uipmen t o n the con so lidated b alance sh eet. Go ld en Gate Cap tive In suran ce Co mp an y On Janu ary 15 , 2 01 6, Golden Gate Cap tive Insuran ce Co mp any (“Golden Gate”), a Vermon t sp ecial p urpose fin ancial in su ran ce co mpan y an d a wh olly o wned su bsidiary o f Protective Life In su ran ce Comp any (“PLICO”), and Steel City, LLC (“Steel City”), a wh olly o wn ed sub sidiary o f th e Company, en tered in t o an 18 -year tran sactio n to fi nance $2.1 88 b illio n o f “XXX” reserv es related t o the acq uired GLAIC Block and t he o th er term life i nsu ran ce bu sin ess reinsured to Go ld en Gate by PLICO and West Coast Life (“WCL”), a d irect who lly o wn ed su bsid iary of PLICO. Steel Ci ty issu ed no t es with an ag gregate init ial p rincipal amou nt o f $2.1 88 billion to Golden Gat e in exch an ge for a su rp lu s no te issued b y Golden Gat e with an initial p rincipal amou nt o f $2 .188 billio n. Th ro ug h th e structu re, Hann ov er Life Reassu ran ce Company of America (Bermu da) Ltd ., Th e Canad a Life Assu ran ce Compan y (Barbados Branch ) and No mu ra Americas Re Ltd . (collectiv ely, th e “Ri sk-Tak ers”) prov id e credit enh ancemen t to th e St eel City Not es for th e 18 -y ear term in exch ang e fo r credit en han cement fees. The tran saction is “no n-reco urse” t o PLICO, WCL and t he Compan y, meaning that no ne o f th ese companies, o th er th an Golden Gate, are liab le to reimbu rse t he Risk -Takers for any cred i t enh an cemen t pay ments req uired to b e mad e. As o f December 3 1, 20 18 , the agg reg ate prin cip al balan ce o f the Steel City No tes was $1.883 b illion . In co nn ection wi th thi s tran saction , t he Compan y has en tered in to certain su pp ort agreements un der wh ich it g uarantees or oth erwise sup po rts certain o bli gat io ns of Golden Gate or Steel City, in clu ding a gu aran tee o f th e fees to th e Risk -Takers. Th e su pp ort ag reements p ro vid e that amo un ts wou ld become p ay able b y th e Co mpan y if Go ld en Gate’s annual gen eral co rp orate exp enses were hi gh er th an mo deled amou nts, cert ain rein surance rates ap plicab le to th e su bject bu si ness increase b ey on d mod eled amo un ts o r in th e ev ent write-d own s du e to other-th an - temp orary imp airments o n assets held in certain accounts ex ceed d efined th resh old lev els. Add itio nally, the Co mp any has en tered into a separate agreemen t to g uarant ee pay men t of certain fee amoun ts in co nn ection with th e cred it en han cement o f the Steel Cit y No t es. As o f December 3 1, 20 18 , n o pay men ts h ave been made un der th ese agreements. In co nn ection with th e tran sactio n ou tlined ab ov e, Go ld en Gate had a $1.8 83 billi on ou tstan ding no n-reco urse fun ding o blig ation as o f December 31 , 2 01 8. Thi s no n-reco urse fu nd ing o bligat io n matu res in 2 03 9 an d accru es in terest at a fixed annual rate o f 4 .75 %. 22 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Go ld en Gate II Cap tive In suran ce Co mpa ny Go ld en Gate II Cap tive In surance Co mp any (“Go ld en Gate II”), a Sou th Carolin a sp ecial pu rp ose fin ancial cap tive in surance co mp any who lly owned by PLICO, h ad $57 5 millio n o f o utstandin g non-reco urse fun ding ob ligatio ns as o f Decemb er 3 1, 20 18 . These ou tstand ing n on -recou rse fu nd ing ob ligatio ns were issued to sp ecial pu rp ose trusts, which in tu rn issued securi ties to third parties. Certain o f o ur affi liates o wn a p ortion o f these securities. As of Decemb er 31 , 20 18 , secu rit ies related to $20 .6 million o f th e o utst andin g balan ce of the no n-reco urse fun ding o bli gatio ns were h eld b y ex t ernal p arties, an d secu rities related to $5 54 .4 million of the no n-reco urse fu nd in g obl ig ation s were h eld by the Compan y and o ur affiliates. The C ompany has entered into certain su pp ort ag reement s wit h Golden Gate II ob ligatin g the Compan y to mak e cap ital co ntribu tions o r p ro vide su pp ort related to certain of Golden Gate II’s exp en ses and in certain circu mstances, to collaterali ze certain of th e Co mp any ’s ob ligatio ns to Go ld en Gate II. These sup po rt ag reements prov id e th at amou nts wo uld b ecome payab le b y th e Comp any t o Gold en Gate II if i ts an nu al g eneral co rp orate ex pen ses were h i gh er than mo deled amou nts o r if Golden Gate II’s inv est ment in come o n certain inv estments or premium inco me was b elo w certain actuarially determin ed amo un ts. As o f Decemb er 31 , 2 01 8, th e Co mp any made a pay men t of $0 .6 million un der th e In terest Su pp ort Agreement du rin g the seco nd qu arter o f 20 18 . In add itio n, certain Interest Sup po rt Ag reemen t obl ig ation s to t he Co mp any o f $4.9 mi llio n h ave b een collateralized by th e PLC u nd er the terms of that agreement. As of December 31 , 20 18 , no payments h ave b een received und er the YRT Premi um Su pp ort Agreement. Re-ev alu ation and , if n ecessary, ad ju stments of any su pp ort ag reement co llateralization amo un ts o ccur ann ual ly du ring th e first q uarter pu rsu ant to th e terms o f the su pport ag reements. Du ring th e year en ded Decemb er 31 , 20 18 , th e Co mp any and its affiliates repu rch ased $38 .0 millio n o f its o utstan ding no n-reco urse fu nd ing ob ligatio ns, at a disco un t. During th e year end ed December 3 1, 2 01 7, the Compan y an d it s affliliates did no t repu rch ase any of its o utstand in g n on -recou rse fu nd in g o blig ation s. Go ld en Gate III Vermon t Cap t ive In su ran ce Co mpa ny On Ap ril 2 3, 20 10 , Golden Gate III Vermo nt Captive Insurance Co mp an y (“Go ld en Gate III”), a Vermo nt special p urpose finan cial insu ran ce co mp any an d whol ly o wned sub sidi ary o f PLICO, entered into a Reimbu rsement Agreement (the “Reimbu rsement Agreement”) with UBS AG, Stamford Branch (“UBS”), as issu in g len der. Und er th e Reimb ursemen t Agreement, UBS issued a letter of credit (t he “LOC”) to a tru st fo r th e ben efit of WCL. The Reimb ursemen t Ag reemen t has u nd erg on e t hree sep arate amen dment s an d restat ements. The Reimb ursemen t Ag reemen t’s cu rrent effect iv e d ate is Ju ne 25 , 20 14 . In acco rd ance wi th the terms of the Reimb ursemen t Agreement, the LOC balance reached its sched uled peak amo un t of $9 35 million in 2 01 5. As of Decemb er 3 1, 20 18 , th e LOC b alance was $8 60 milli on . The term o f th e LOC is exp ected to b e app ro ximately 15 years from the orig i nal issu ance dat e. Th is transact io n i s “no n-recou rse” to WCL, PLICO, an d t he Company, mean in g that no ne of th ese co mp anies other th an Golden Gate III are liab le for rei mbursement o n a draw of th e LOC. The Co mp any has entered in to certain su pp ort agreements wi th Golden Gate III o blig ating the Compan y to mak e cap ital con t ribu tion s or prov id e sup po rt related to certain of Go lden Gate III’s expen ses and in certain circumstances, to co llat eralize certain o f the Co mp any ’s o bligat io ns t o Gol den Gate III. Future sch edu led cap ital con trib uti on s amou nt to approx imately $7 0 million an d will be paid in two i nstallmen ts with the last p ayment occu rrin g in 20 21 . Th ese contrib utio ns may be subject to po ten tial o ffset against d iv id end pay men ts as permitted u nd er th e terms o f th e Reimb ursemen t Agreemen t. Th e su pp ort agreements p ro vide th at amou nts woul d b ecome pay ab le by th e Compan y to Golden Gate III if it s ann ual general corpo rate exp enses were h ig her than mo deled amoun ts or if specified catast ro ph ic lo sses o ccur d urin g defin ed time p eriod s with respect to th e po licies rein sured b y Go ld en Gate III. Pu rsu ant to th e terms o f an amend ed an d restated letter agreemen t with UBS, th e Co mp an y h as con tinued to g uarantee th e p ayment of fees to UBS as specified in th e Reimb ursemen t Ag reemen t. As o f Decemb er 3 1, 2018, no pay men ts h ave been mad e u nd er these ag reemen ts. Go ld en Gate IV Vermon t Cap t ive In su ran ce Co mpa ny Go ld en Gate IV Vermon t Capt iv e Insuran ce Co mp any (“Go lden Gate IV”), a Vermon t sp ecial p urpo se finan cial insu ran ce co mp any an d who lly owned su bsidiary of PLICO, i s party to a Reimbu rsement Ag reemen t with UBS AG, Stamford Branch , as issuin g lend er. Un der th e Reimb ursemen t Agreement, dated Decemb er 10 , 2 01 0, UB S issued an LOC in the in itial amou nt of $2 70 million to a trust fo r t he benefit of WCL. In accordan ce with the terms of th e terms of the Reimb ursemen t Agreement, the LOC balance reach ed its schedu led p eak amou nt o f $7 90 milli on in 2 01 6. As o f December 3 1, 20 18 , the LOC balan ce was $77 0 mill io n. The term o f th e LOC is ex pected to b e 1 2 y ears fro m th e o riginal issu ance date (stated mat urity of Decemb er 30 , 2022 ). The LOC was issued to su pp ort certain ob ligatio ns of Golden Gate IV to WCL un der an in demni ty reinsurance agreemen t, p ursu ant to which WCL ced es l iab ilities rel ati ng to the po licies o f WCL and retroced es liabilities relating to th e p olicies of PLICO. Th is tran sactio n is “n on -recou rse” to WCL, PLICO, and th e Co mp any, mean in g that no ne o f th ese comp anies o th er than Go l den Gate IV are li ab l e fo r reimbu rsement on a draw of th e LOC. The Compan y h as entered in to certain support agreements with Golden Gate IV ob lig ati ng the Company to make cap ital co ntribu tions or prov id e suppo rt related to certain o f Golden Gate IV’s exp enses and in certain circu mstances, to co llateralize certain o f th e Compan y’s ob l ig ation s to Golden Gate IV. Th e su pp ort agreemen ts provi de th at amo un ts wou ld become p ayab le by th e Compan y to Gol den Gate IV if its ann ual general corp orate exp en ses were high er t han mod eled amou nts or if speci fied catastrop hic lo sses o ccu r d uri ng defin ed time p eriod s with resp ect to th e po licies rein su red by Go ld en Gat e IV. The Compan y h as also entered in to a separate agreement to g uarantee th e pay ments o f LOC fees u nd er the terms o f the Rei mb ursemen t Ag reement. As o f Decemb er 31 , 2018 , n o pay ments hav e been made un der th ese agreements. Go ld en Gate V Vermo nt Ca pti ve Insura nce Comp an y On Octo ber 10 , 2 01 2, Go ld en Gat e V Vermon t Cap tive In surance Co mp an y (“Gold en Gate V”), a Vermo nt sp ecial pu rp ose finan cial in su rance co mp any, and Red M ou ntain , LLC (“Red M ou ntain ”), bo th wh oll y owned sub sidi ari es o f PLICO, en tered in to a 20 -year tran sactio n to fi nance u p to $945 mi llio n of “AXXX” reserv es related t o a b lo ck of un iv ersal life insu ran ce po licies with seco nd ary g uaran tees issued by o ur direct wh olly own ed sub sidi ary PLICO and in direct wh olly owned sub sid i ary, WCL. Golden Gate V issued n on -recou rse fun ding ob ligatio ns to Red M ou ntain , an d Red M ou ntain issu ed a no te with an in itial p rincipal amo un t of $2 75 millio n, increasin g to a maximu m o f $94 5 millio n in 2 02 7, to Golden Gat e V for d epo sit to a rei nsu ran ce tru st sup po rti ng Go ld en Gate V’s ob ligati on s un der a rein su ran ce ag reemen t with WCL, p ursu ant to wh ich WCL ced es liabilit ies relatin g to the 22 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents po licies of WCL and retro ced es liabilit ies relating to th e p olicies o f PLICO. Throu gh th e structure, Hann ov er Life Reassurance Company of America (“Hann ov er Re”), the ultimate risk tak er in the transactio n, prov id es credit enh ancemen t t o th e Red M ou ntain n ote for the 2 0-year term in exchan ge for a fee. The transactio n is “n on -recou rse” to Go ld en Gate V, Red Mo un tain, WCL, PLICO an d the Co mp any, meaning that no ne of these compan ies are liable for th e rei mbursement o f any cred it enh ancemen t p aymen ts req uired to be mad e. As o f Decemb er 3 1, 2 01 8, t he pri nci pal b alan ce o f th e Red Mo un tain n ote was $670 mi llio n. Future sch edu led cap ital co ntribu tio ns t o prefu nd cred it en han cement fees amo un t to ap prox imately $11 4.6 million an d will b e paid in ann ual in stallments th ro ugh 2 03 1. In con nectio n with the transactio n, the Compan y has en tered in to cert ain sup po rt ag reement s un der wh ich it g uarantees o r otherwise su pp ort s certain ob ligations of Golden Gate V or Red Mo un tai n. Th e su pp ort ag reemen ts prov ide t hat amou nts wo uld b ecome payab le b y th e Co mp any if Gol den Gate V’s an nu al g eneral corpo rate exp en ses were h ig her th an mod eled amou nts or i n the even t write-d own s du e to other-than -temp orary impairmen ts on assets h eld in cert ain accounts ex ceed defin ed th resho ld lev els. Ad dition ally, th e Co mp any has entered in to separate agreements to in demn i fy Gold en Gate V with resp ect to material adv erse chan ges in non-gu aranteed elemen t s o f insu ran ce pol ici es rein sured b y Go lden Gate V, and to gu arantee pay men t o f certain fee amo un ts in connectio n wit h the credit en han cement o f the Red M ou ntain no te. As of December 3 1, 20 18 , no pay men ts have b een mad e un der th ese ag reemen t s. In co nn ection with t he transaction o utl in ed abo ve, Golden Gate V had a $67 0 million o utstand in g no n-reco urse fun ding o bli gat io n as o f December 31 , 2 01 8. Thi s no n-reco urse fu nd ing o bligat io n matu res in 2 03 7, h as sched uled increases in prin cip al to a max imum of $9 45 millio n, and accru es in terest at a fixed an nu al rate o f 6 .25 %. The Compan y is party to an interco mp any cap ital sup po rt agreement with Shad es Creek Cap tive Insu ran ce Co mp any (“Shad es Creek”), a direct wh olly owned insurance sub sid i ary. The ag reemen t p ro vides t hrou gh a gu arantee that th e Compan y will con trib ute assets o r pu rch ase su rplus not es (or cau se an affiliate o r th ird p arty to con trib ute assets o r p urchase surplus no tes) in amou nts n ecessary fo r Sh ades Creek ’s regu latory cap ital levels to eq ual o r ex ceed mi nimu m th resh olds as defin ed by th e agreemen t. As of Decemb er 31, 20 18 , Shad es Creek main tained capit al levels in ex cess o f t he requ ired min imum th resh olds. The maximu m po ten tial fu tu re p ayment amo un t wh ich cou l d b e req uired u nd er the cap ital sup po rt ag reemen t will be d epend ent o n n umero us facto rs, in clu ding th e perfo rmance of equ ity mark ets, the level o f in terest rates, p erforman ce o f associ ated h edg es, and rel ated p oli cy ho lder b ehav io r. 4. SHAREOWNER’S EQUITY On Febru ary 1, 2 01 5, Dai-ichi Life acqu ired 1 00 % o f th e Compan y’s ou tstan ding sh ares of co mmon stock throu gh the Merger o f DL Inv estment (Delaware), In c., a wh olly own ed su bsidiaries o f Dai-i ch i Life, with and in to th e C ompany , with the Compan y co ntin uing as th e surv iv in g en tity . 5. SUPPLEMENTAL CASH FLOW INFORMATION Fo r The Yea r Ended December 3 1 , 2018 2 0 1 7 2016 (D o l l a rs In Tho us a nds ) Cash pa id (received) during the y ear for: Interest paid o n d ebt $83 ,43 9 $78,94 4 $95 ,09 5 Inco me t ax es (ad justed for amo un ts receiv ed fro m affi liates u nd er a tax sh ari ng ag reemen t)(40 ,98 6) (23,11 0) (2 ,59 6) 6. DERIVATIVE FINANCIAL INSTRUME NTS In con nect io n with the issuance o f no n-reco urse fun ding o blig ations by Golden Gate II, th e Compan y has ent ered in to certai n sup po rt ag reemen ts with Go ld en Gate II obl ig ating it to p rov id e su pp ort pay men ts to Go ld en Gate II under certain adv erse in terest rate co nd itio ns an d to the ex t en t o f any reductio n in the reinsurance premiums receiv ed by Gold en Gate II d ue to an in crease in the premium rates ch arged to PLICO un der it s th ird party yearly renewab le term rein su ran ce ag reemen ts. Each of th ese agreements exp ires o n Ju ly 10 , 20 52 . In con nect io n with the Go ld en Gate V fin ancing t ransaction , the Compan y entered in to sep arate Portfolio Main t en ance Agreements with Golden Gate V an d WCL. The agreemen ts o bligate the Compan y to reimbu rse Go ld en Gate V and West Co ast Life fo r o th er-th an-tempo rary imp airmen t losses on certain asset portfolio s above a sp ecified amount. Each o f these ag reemen ts ex pires on Octob er 1 0, 2 03 2. In con nectio n with th e Gold en Gate fin anci ng tran saction , the C ompany en tered in to certain supp ort agreements un der which it gu arantees o r otherwise suppo rts certain o blig ation s o f Golden Gate. Th e agreements o bligate th e C ompany to reimbu rse Golden Gate for o th er-th an-tempo rary impai rmen t lo sses o n certain asset p ortfolio s ab ov e a specifi ed amou nt and to th e extent o f any reducti on in the reinsu ran ce premiums receiv ed by Golden Gate d ue to an in crease in the premium rat es ch arg ed to PLICO un der its th ird part y yearly renewable term rei nsu ran ce agreemen ts. Each o f th ese agreements exp ires on Janu ary 15 , 2 03 4. As of December 3 1, 20 18 and 20 17 , th e Company includ ed in its balance sh eets a co mb in ed liab ility fo r th ese ag reements o f $90 .0 millio n and $9 1.6 millio n, resp ectively. Durin g th e y ears end ed December 3 1, 2 01 8, 2 01 7, and 2 01 6, the Company in clu ded in its statements of in come u nrealized gains of $1 .5 mil lion and un realized losses of $4 2.7 millio n an d $29 .3 million , respectively. 22 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES Segme nt Defe rred Polic y Ac quisition Costs and Value of Businesse s Ac quir ed Future Policy Be nefits and Claims Unearned Pre miums Stable Value Pr oducts, Annuity Contracts and Othe r Polic yholde rs’ Funds Net Premiums and Policy Fees Net Investment Income(1 ) Bene fits and Se ttlement Expe nse s Amor tization of Deferr ed Policy Acquisitions Costs and Value of Businesse s Acquired Othe r Operating Expenses(1 ) Pr emiums Wr itten(2 ) (Dollar s In Thousands) For The Year Ended Dece mbe r 31, 2018: Life Ma rke ting $1,499,386 $15,318,019 $98 $422,037 $1,043,228 $551,781 $1,412,001 $116,917 $197,346 $92 Ac quisitions 458,976 25,427,730 2,206 6,018,954 952,315 1,108,218 1,636,697 18,690 143,698 13,750 Annuities 889,697 1,050,161 — 8,324,931 148,033 340,685 226,704 24,274 151,054 — Sta ble Value Products 6,121 — — 5,234,731 — 217,778 109,747 3,201 2,798 — Asse t Protec tion 168,974 52,636 869,615 — 140,130 30,457 113,073 62,726 104,533 135,596 Corpora te and Other — 53,006 675 82,538 12,198 234,831 17,647 — 316,829 12,186 Total $3,023,154 $41,901,552 $872,594 $20,083,191 $2,295,904 $2,483,750 $3,515,869 $225,808 $916,258 $161,624 For The Year Ended Dece mbe r 31, 2017: Life Ma rke ting $1,320,776 $15,438,739 $107 $424,204 $1,011,911 $553,999 $1,319,138 $120,753 $178,792 $111 Ac quisitions 74,862 14,323,713 2,423 4,377,020 785,188 752,520 1,204,084 (6,939) 110,607 15,964 Annuities 772,633 1,080,629 — 7,308,354 152,701 321,844 216,629 (54,471) 149,181 — Sta ble Value Products 6,864 — — 4,698,371 — 186,576 74,578 2,354 4,407 — Asse t Protec tion 24,442 55,847 872,600 — 154,166 27,325 126,459 16,524 160,235 148,093 Corpora te and Other — 58,664 275 78,810 12,718 209,324 16,382 — 345,022 12,732 Total $2,199,577 $30,957,592 $875,405 $16,886,759 $2,116,684 $2,051,588 $2,957,270 $78,221 $948,244 $176,900 For The Year Ended Dece mbe r 31, 2016: Life Ma rke ting $1,218,944 $14,595,370 $119 $426,422 $972,247 $525,495 $1,267,844 $130,708 $177,498 $122 Ac quisitions 106,532 14,693,744 2,734 4,247,081 832,083 764,571 1,232,141 8,178 118,056 18,818 Annuities 655,618 1,097,973 — 7,059,060 146,458 322,608 214,100 (11,031) 140,409 — Sta ble Value Products 5,455 — — 3,501,636 — 107,010 41,736 1,176 3,033 — Asse t Protec tion 33,280 60,790 844,919 — 128,687 22,082 106,668 20,033 125,957 121,821 Corpora te and Other — 63,208 723 75,301 13,740 200,690 17,946 — 295,498 13,689 Total $2,019,829 $30,511,085 $848,495 $15,309,500 $2,093,215 $1,942,456 $2,880,435 $149,064 $860,451 $154,450 (1)Allo cation s o f Net Investment In co me and Other Operating Expenses are based on a n u mber of assump tio ns and estimates and resu lts would ch an ge if d ifferen t m eth o ds were app lied . (2)Excludes Life In suran ce 22 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHE DULE IV—REINSURANCE PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES G ro ss Amount Ceded to Other Co mpanies Assumed fro m Other Co mpanies Net Amount Percenta g e o f Amo unt Assumed to Net (D oll ars In Tho us a nds) Fo r The Year En ded Decemb er 3 1, 2 01 8: Life in surance i n-fo rce $76 5,9 86 ,22 3 $(30 2,1 49 ,61 4) $13 5,4 07 ,40 8 $59 9,2 44 ,01 7 2 3.0 % Premiu ms an d p oli cy fees: Life in surance 2,6 81 ,19 1 (1,1 73 ,19 4) 6 26 ,28 3 2,1 34 ,28 0 (1 ) 2 9.3 % Acciden t/heal th in surance 47 ,02 8 (30 ,12 6) 12 ,82 6 29 ,72 8 4 3.1 Prop erty an d l iab ility insurance 3 08 ,63 4 (1 81 ,62 1) 4 ,88 3 1 31 ,89 6 3.7 To tal $3,0 36 ,85 3 $(1,3 84 ,94 1) $6 43 ,99 2 $2,2 95 ,90 4 Fo r The Year En ded Decemb er 3 1, 2 01 7: Life in surance i n-fo rce $75 1,5 12 ,46 8 $(32 8,3 77 ,39 8) $11 0,2 05 ,19 0 $53 3,3 40 ,26 0 2 1.0 % Premiu ms an d p oli cy fees: Life in surance 2,6 55 ,84 6 (1,1 51 ,17 5) 4 35 ,11 3 1,9 39 ,78 4 (1 ) 2 2.5 % Acciden t/heal th in surance 51 ,99 1 (33 ,05 1) 14 ,94 5 33 ,88 5 4 4.1 Prop erty an d l iab ility insurance 3 09 ,84 8 (1 76 ,50 9) 9 ,67 6 1 43 ,01 5 6.8 To tal $3,0 17 ,68 5 $(1,3 60 ,73 5) $4 59 ,73 4 $2,1 16 ,68 4 Fo r The Year En ded Decemb er 3 1, 2 01 6: Life in surance i n-fo rce $73 9,2 48 ,68 0 $(34 8,9 94 ,65 0) $11 6,2 65 ,43 0 $50 6,5 19 ,46 0 2 3.0 % Premiu ms an d p oli cy fees: Life in surance 2,6 10 ,68 2 (1,1 26 ,91 5) 4 54 ,99 9 1,9 38 ,76 6 (1 ) 2 3.5 % Acciden t/heal th in surance 58 ,07 6 (36 ,93 5) 17 ,43 9 38 ,58 0 4 5.2 Prop erty an d l iab ility insurance 2 61 ,00 9 (1 50 ,86 6) 5 ,72 6 1 15 ,86 9 4.9 To tal $2,9 29 ,76 7 $(1,3 14 ,71 6) $4 78 ,16 4 $2,0 93 ,21 5 (1)Includes annu ity policy fees o f $1 7 7 .1 millio n , $173 .5 million , an d $160.4 m illion fo r th e y ears en ded Decemb er 3 1, 201 8 , 2017, and 2 0 16, respectiv ely . 23 0 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS PROTECTIVE LIFE CORPORATION AND SUBSIDIARIES Additions Description Balance a t beginning o f period Charged to costs a nd expenses Charges to o ther acco unts Deductions Balance at end of period (Dollars In Thousands) As of December 31, 2 01 8 Allo wan ce fo r losses on commercial mortg age loan s $— $(20 9) $— $1,5 05 $1 ,29 6 As of December 31, 2 01 7 Allo wan ce fo r losses on commercial mortg age loan s $7 24 $(7 ,43 9) $— $6,7 15 $— 23 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents EXHIBIT INDEX Exhibit Number *2.1 Master Agreement, d ated as o f April 1 0, 20 13 , by an d amon g AXA Eq uit ab l e Finan cial Services, LLC, AXA Fin ancial, Inc. an d Protecti ve Life In su ran ce Co mp any, filed as Exh ib it 2 (b ) to the Co mp any ’s Quarterly Report on Fo rm 1 0-Q filed Aug ust 2 , 2 01 3 (No. 0 01 -1 13 39 ). *2.2 Ag reemen t an d Plan of Merger, dated as o f Ju ne 3 , 2014 , b y an d amo ng The Dai -ichi Life In surance Compan y, Limited, DL In vestmen t (Delaware), In c. and Protective Life Co rp oration, filed as Exh ib it 2.1 t o the Co mp any’s Curren t Rep ort o n Fo rm 8-K fi led February 3 , 20 15 (No . 00 1-11 33 9). *2.3 Master Tran sactio n Agreement, dated as o f Janu ary 1 8, 20 18 , b y and amon g Protective Life In surance Comp any, Protective Life Co rp oration, Th e Linco ln Nation al Life Insu ran ce Company, Lin coln Natio nal Corp oration , Liberty M utual Insu ran ce Co mp any, Lib erty Mu t ual Fire Insu ran ce Compan y and Liberty Mu tu al Gro up , Inc., filed as Ex hibit 2.1 to the Co mp any ’s Cu rrent Report on Fo rm 8-K fi led Janu ary 2 2, 2 01 8 (No. 0 01 -1 13 39 ). *2.4 Master Transactio n Agreement, dat ed as of Janu ary 23 , 20 19 , by an d amon g Pro tect iv e Life In surance Compan y, Great-West Life & Ann uity Insurance Co mp any, Great-West Life & An nu ity Insu ran ce Co mp an y o f New Yo rk , The Can ada Life Assu ran ce Co mp any an d The Great -West Life Assurance Compan y, filed as Ex hibit 2 .1 to the Co mp an y’s Current Rep ort o n Form 8 -K filed Janu ary 2 5, 2 01 9 (No. 0 01 -1 13 39 ). *3.1 Amend ed and R estated Bylaws of th e Co mp any , effecti ve as of Feb ru ary 25 , 20 19 , filed as Exh ibi t 3 .1 t o t he Compan y’s Curren t Rep ort o n Form 8 -K filed M arch 1, 20 19 (No . 00 1-11 33 9). *3.2 Amend ed and Restated By laws o f the Co mp an y, effective as o f Aug ust 8, 2 01 8, fi led as Exh ibi t 3 .1 to the Co mp any ’s Curren t Rep ort o n Form 8 -K filed Aug ust 8 , 20 18 (No. 0 01 -1 13 39 ). *4.1 Referen ce is mad e to Exh ib it 3.1 abo ve (No . 00 1-11 339). *4.2 Referen ce is mad e to Exh ib it 3.2 abo ve (No . 00 1-11 339). *4 .3(a) Senior Ind enture, dated as of June 1 , 19 94 , between the Compan y an d The Bank o f New Yo rk , as Tru stee, filed as Exh i bit 4 (c)(1) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded Decemb er 3 1, 2 01 7, filed M arch 2, 2 01 8 (No . 00 1-11 33 9). *4.3 (b ) Supplemen tal In den tu re No . 11 , dated as o f Decemb er 1 1, 2 00 7, b etween the Co mp any and The Bank of New York Tru st Co mp any, N.A., as Tru stee, fil ed as Ex hibit 4.1 to th e Compan y’s Curren t Rep ort on Form 8-K filed December 7 , 200 7 (No. 00 1- 1 1339). *4 .3(c) Supplemen tal Ind enture No. 12 , d ated as of Octo ber 9 , 2 00 9, bet ween the Co mp any and The Ban k of New Yo rk Mello n Tru st Co mp any, N.A., as Trustee, filed as Ex hibit 4 .1 to the Compan y’s Curren t Report on Fo rm 8-K filed Octob er 9, 2 00 9 (No. 00 1- 1 1339). *4.3 (d ) Supplemen tal Ind enture No. 13 , d ated as of Octo ber 9 , 2 00 9, bet ween the Co mp any and The Ban k of New Yo rk Mello n Tru st Co mp any, N.A., as Trustee, filed as Ex hibit 4 .3 to the Compan y’s Curren t Report on Fo rm 8-K filed Octob er 9, 2 00 9 (No. 00 1- 1 1339). *4 .3(e) Supplemen tal In den tu re No. 1 5, d ated as o f Au gu st 23 , 2 01 8, b etween Pro tectiv e Life Co rp oratio n and The Bank of New Yo rk Mello n Tru st Co mp any, N.A., as successor Tru stee, sup plemen ting th e Sen io r In dentu re d ated Jun e 1, 1994, filed as Ex hibit 4.2 to Co mp any ’s Cu rrent R ep ort on Fo rm 8-K filed Au gu st 2 4, 2 01 8 (No. 0 11 -1 13 39 ). *4.3 (f) Form o f 4 .30 0% Senior Note du e 20 28 (incl ud ed in Ex hibit 4 .3(e), ab ov e). *4 .4(a) Subord in ated In den tu re, d ated as of Ju ne 1, 1994, between th e Co mp any and AmSou th Bank , as Trustee, fil ed , as Ex hibit 4(d)(1) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded Decemb er 3 1, 2 01 7, filed M arch 2, 2 01 8 (No . 00 1-11 33 9). *4.4 (b ) Supplemen tal In den tu re No . 11 , dated as o f Aug ust 10 , 20 17 , between t he Compan y an d Th e Ban k o f New Yo rk M ellon Trust Co mp any, N.A., as Tru stee, fil ed as Ex hibit 4.2 to th e Compan y’s Curren t R ep ort o n Fo rm 8 -K fi led Au gu st 10 , 2 01 7 (No . 0 01 - 1 1339). 23 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number *10 .1(a)† The Compan y’s Excess Ben efit Plan , Amend ed and Restated as o f Decemb er 31, 20 08 and Refl ectin g the Terms of th e Decemb er 3 1, 20 10 Amend men t, filed as Exh ib it 10 (c) t o th e Compan y’s Ann ual Rep ort on Form 10 -K fo r th e y ear en ded December 3 1, 2 012 fi led February 2 8, 2 01 3 (No. 0 01 -1 13 39 ). *1 0.1 (b )† Amend ment to th e Compan y’s Excess Ben efit Plan, d ated as of Ap ril 17 , 20 14 , filed as Ex hibit 10 (a) to th e Compan y’s Qu arterly Repo rt o n Form 10-Q filed May 8 , 20 14 (No . 00 1-11 33 9). *10 .1(c)† 2 016 Amen dment to th e Company ’s Excess Ben efit Plan, dated as of December 1 9, 20 16 , fil ed as Exh ibi t 10(a)(3 ) to t he Co mp any ’s An nu al Repo rt on Fo rm 10 -K filed February 2 4, 2017 (No . 00 1-11 33 9). *1 0.1 (d )† Excess Benefit Plan Settlement Agreement, dat ed as of Sep tember 30 , 20 16 , b etween the Co mp an y an d Jo hn D. Joh ns, fi led as Exh ib it 10 to th e Comp any ’s Qu arterly Rep ort o n Form 1 0-Q filed No vember 7, 2016 (No . 00 1-11 33 9). *10 .2(a)† Protecti ve Life Corpo ratio n An nu al Incen tive Plan, effectiv e Janu ary 1 , 20 18 , filed as Exh ib i t 1 0.1 to the Co mp an y’s Cu rrent Rep ort o n Form 8 -K filed Nov emb er 1 3, 201 7 (No . 00 1-11 33 9). 1 0.2 (b )† Amend ed and Restated Pro tectiv e Life Corpo ratio n Ann ual In cen tiv e Pl an , amen ded an d restated as of Nov ember 6, 2 01 8, filed h erewith . *10 .2(c)† Protecti ve Li fe Corpo ration 2 017 Ann ual In cen tiv e Pl an , fil ed as Ex hibit 1 0(a) to th e Co mp any ’s Qu arterly Rep ort o n Form 1 0- Q filed Au gu st 3 , 20 17 (No . 0 01-11 33 9). *1 0.2 (d )† Protecti ve Li fe Corpo ration 2 016 Ann ual In cen tiv e Pl an , fil ed as Ex hibit 1 0(a) to th e Co mp any ’s Qu arterly Rep ort o n Form 1 0- Q filed May 6 , 20 16 (No . 0 01 -11 33 9). *10 .3(a)† Protecti ve Li fe Corpo ratio n Lo ng -Term In centiv e Plan, effective Jan uary 1, 2 01 8, filed as Ex hibit 1 0.2 to th e Co mp any ’s Cu rrent Report on Fo rm 8-K fi led No vember 13, 2 01 7 (No. 0 01 -1 13 39 ). *1 0.3 (b )† Amend ment One to th e Prot ective Life Co rpo rat io n Lo ng -Term In cen tive Plan , filed as Ex hibit 1 0 to the Compan y’s Quarterly Rep ort o n Form 1 0-Q filed May 11 , 20 18 (No. 0 01 -1 13 39 ). *10 .3(c)† Amend ed and Restated Pro tective Life Co rp oration Lo ng -Term In cen tive Plan , filed as Exh ib it 10.1 to the Co mp an y’s Cu rrent Rep ort o n Form 8 -K filed Nov emb er 1 3, 201 8 (No . 00 1-11 33 9). 1 0.3 (d )† 2 018 Lon g-Term In centiv e Pl an Awards Accep tance Form, filed h erewith. 1 0.4 (a)† 2 018 Paren t-Based Award Letter o f the Compan y, filed h erewith. 1 0.4 (b )† 2 018 Paren t-Based Award Prov isio ns o f the Co mpan y, filed h erewi th . *10 .4(c)† 2 017 Parent-Based Award Pro vision s of the Co mp any, filed as Ex hibit 10 (b) to th e Co mp an y’s Quarterl y Rep ort on Fo rm 1 0-Q fi led Au gu st 3, 2017 (No . 00 1-11 33 9). *1 0.4 (d )† 2 016 Parent-Based Award Pro vision s of the Co mp any, filed as Ex hibit 10 (b) to th e Co mp an y’s Quarterl y Rep ort on Fo rm 1 0-Q fi led May 6, 20 16 (No . 00 1-11 33 9). 1 0.5 (a)† 2 018 Performan ce Un its Award Letter (fo r k ey o fficers) of th e Co mp any , filed herewith . 1 0.5 (b )† 2 018 Performan ce Un its Pro vision s (fo r k ey officers) o f the Compan y, filed h erewith. *10 .5(c)† 2 017 Perfo rmance Units Prov isio ns (for key officers) o f th e Co mp any, filed as Exh ib it 1 0(c) to th e Co mp any ’s Quarterly Repo rt o n Form 1 0-Q filed Aug ust 3, 2 01 7 (No. 001 -1 13 39 ). *1 0.5 (d )† 2 016 Perfo rmance Units Prov isio ns (for key officers) o f th e Co mp any, filed as Exh ib it 1 0(c) to th e Co mp any ’s Quarterly Repo rt o n Form 1 0-Q filed M ay 6, 2 01 6 (No. 001-1 13 39 ). 1 0.6 (a)† 2 018 Performan ce Un its Award Letter o f the Compan y, filed h erewith . 1 0.6 (b )† 2 018 Performan ce Un its Pro vision s of the Company , fil ed herewith. *10 .6(c)† 2 017 Perfo rman ce Uni ts Pro vision s o f the Compan y, filed as Ex hibit 1 0(d) to the Co mpan y’s Qu arterly Rep ort o n Form 10 -Q fi led Au gu st 3, 2017 (No . 00 1-11 33 9). 23 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number *1 0.6 (d )† 2 016 Perfo rman ce Uni ts Pro vision s o f the Compan y, filed as Ex hibit 1 0(d) to the Co mpan y’s Qu arterly Rep ort o n Form 10 -Q fi led May 6, 20 16 (No . 00 1-11 33 9). 1 0.7 (a)† 2 018 Restricted Units Award Let ter (for key officers) of th e C ompany , fil ed herewith. 1 0.7 (b )† 2 018 Restricted Units Award Let ter of th e Co mp any , filed herewith . 1 0.7 (c)† 2 018 Restricted Units Prov isions o f the Compan y, filed h erewith. *1 0.7 (d )† 2 017 Restricted Un its Pro visio ns o f the Compan y, filed as Ex hibit 1 0(e) t o th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q fil ed Au gu st 3, 20 17 (No . 00 1-11 33 9). *10 .7(e)† 2 016 Restricted Un its Pro visio ns o f the Compan y, filed as Ex hibit 1 0(e) t o th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q fil ed May 6, 20 16 (No . 00 1-11 33 9). *1 0.8 † Form of th e C ompany ’s Ind emn ity Ag reement fo r Officers, filed as Exhibit 1 0(h) to the Co mp any’s Ann ual Repo rt on Form 1 0-K fo r the year end ed December 31 , 20 17 , filed March 2 , 2 01 8 (No. 0 01 -1 13 39 ). *1 0.9 † Form o f th e Co mp any ’s Director Ind emnit y Ag reemen t, fi led as Exh ib it 10 (c) to t he Compan y’s Qu art erl y Repo rt on Fo rm 10 -Q fi led Au gu st 5, 2010 (No . 00 1-11 33 9). *1 0.1 0(a)† Emp lo yment Ag reemen t, dated as o f Ju ne 3 , 2 01 4, between the Comp any an d Joh n D. Jo hn s, filed as Ex hibit 10 (b ) t o th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q filed Au gu st 8 , 20 14 (No . 00 1-11 33 9). *1 0.1 0(b)† Letter Agreement, dat ed as o f Nov ember 6, 20 17 an d ent ered i nto on No vember 2 8, 20 17 , b etween th e Co mp an y and Joh n D. Joh ns, filed as Exh ib it 10 .1 to the Compan y’s Curren t Rep ort o n Form 8 -K filed December 4, 2 01 7 (No . 00 1-11339 ). *1 0.1 0(c)† Co nfid entiality and Non -Co mp etition Ag reemen t, dated as of Nov emb er 2 8, 2 017, between t he Compan y an d Joh n D. Joh ns, fi led as Exh ib it 10 .2 to the Co mpan y’s Current Rep ort o n Form 8 -K filed December 4, 2 01 7 (No. 001 -1 13 39 ). *10 .11 † Tran siti on Letter Agreement, dated as o f Decemb er 3 0, 20 16 , between th e Comp any and Deb orah J. Lo ng, fil ed as Ex hibit 1 0(j) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K filed February 24, 20 17 (No . 00 1-11 33 9). *1 0.1 2(a)† Form o f Emp lo yment Ag reement between th e Co mp any an d Ex ecutiv e Vice President, fil ed as Ex hibit 1 0(c) to the Compan y’s Qu arterly Repo rt o n Form 10-Q filed Au gu st 8, 20 14 (No . 00 1-11 33 9). *1 0.1 2(b)† Form o f Emp lo yment Ag reement between th e Co mp any an d Senior Vice Presi dent, filed as Ex hibit 1 0(d) t o t he Compan y’s Qu arterly Repo rt o n Form 10-Q filed Au gu st 8, 20 14 (No . 00 1-11 33 9). *10 .13 † The Compan y’s Deferred Co mp ensatio n Plan fo r Officers, as Amen ded and Restated as of Aug ust 1, 2 01 6, filed as Ex hib it 10 to th e Co mp any’s Qu art erly Repo rt on Fo rm 10 -Q filed Augu st 5 , 20 16 (No .0 01-11 33 9). *1 0.1 4 Amend ed and R estated Cred it Agreement, dated as o f Feb ruary 2, 2 01 5, amon g Pro tect iv e Life Co rp oratio n and Protective Life In surance Compan y, as borro wers, t he several lend ers from time to time a p arty thereto , Reg io ns Ban k, as Admin istrative Agen t, an d Wells Farg o Bank , Nation al Asso ciat io n, as Syn dicati on Ag ent, filed as Exh i bit 1 0.1 to th e Co mp any ’s Cu rrent R ep ort on Form 8 -K filed February 3 , 20 15 (No. 0 01 -1 1339). *10 .14 (a) Fi rst Amendmen t to Amended and Restat ed Cred it Agreement, dat ed as of M ay 3 , 2 01 8, amon g Pro tectiv e Life Co rpo rat io n and Protecti ve Li fe Insu ran ce Co mp any , as Bo rrowers, th e several lend ers fro m time to time thereto , an d Regio ns Bank , as Ad ministrativ e Ag ent fo r Len ders, filed as Ex hibit 1 0.1 to th e Company ’s Curren t Repo rt on Fo rm 8-K filed May 9, 2 01 8 (No. 0 01-11 33 9). *1 0.1 5 Secon d Amen ded and Restated Lease Ag reement, dated as of December 19 , 2013 , b etween Pro t ectiv e Life In su ran ce Co mp any an d Wacho via Dev elo pment Corpo ratio n, filed as Ex hibit 10 (j) to the Compan y’s Ann ual Rep ort on Fo rm 10 -K fo r th e y ear en ded December 3 1, 2 01 3 filed February 2 8, 2 01 4 (No. 00 1-11339 ). 23 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number *1 0.1 6 Secon d Amen ded and Restated In vestmen t an d Participatio n Agreemen t, d ated as o f Decemb er 1 9, 2 01 3, between Pro tectiv e Life In surance Compan y and Wach ov i a Dev elopmen t Co rp oration , filed as Exhi bit 1 0(k) to th e Company ’s Annual Rep ort o n Form 1 0-K fo r the y ear end ed Decemb er 31, 20 13 filed Feb ru ary 28 , 20 14 (No . 0 01-11 33 9). *1 0.1 7 Secon d Amen ded and Restated Guaran ty , dated as o f December 19 , 20 13 by th e Co mp any in fav or of Wach ov ia Develop men t Co rp oration, fil ed as Ex hibit 1 0(l) t o the Compan y’s Ann ual Rep ort o n Form 1 0-K fo r the y ear end ed December 31 , 20 13 filed February 2 8, 2 01 4 (No. 001-1 13 39 ). *1 0.1 8 Amend ment and Clarificatio n o f the Tax All ocation Agreement, dated as o f Jan uary 1 , 19 88 , b y an d amon g Pro tect iv e Life Co rp oration and its su bsid iaries, filed as Ex hib it 10 (h ) to Pro tectiv e Life In su ran ce Co mp an y’s Annu al Repo rt on Fo rm 10 -K for th e y ear ended Decemb er 3 1, 2004, filed M arch 3 1, 2 00 5 (No. 0 01 -3 19 01 ). *1 0.1 9 Third Amend ed an d Restated Reimbu rsement Agreement, dated as o f Ju ne 2 5, 2 01 4 b etween Golden Gate III Vermo nt Cap t iv e In surance Compan y and UBS AG, Stamfo rd Bran ch, filed as Ex hibit 1 0(a) to the Co mp an y’s Quarterl y Repo rt on Fo rm 10 -Q fi led Au gu st 8, 2014 (No . 00 1-11 33 9).± *1 0.2 0 Secon d Amen ded and Restated Guaran tee Agreemen t, dated as o f Au gu st 7 , 20 13 , between th e Co mp any and UBS AG, Stamford Branch , filed as Exh ib it 10 (q) to th e Co mp any ’s Qu arterly Repo rt on Fo rm 10 -Q filed No vemb er 4 , 20 13 (No . 001-11 33 9). *1 0.2 1 St ock Purchase Ag reemen t, d ated as o f Octob er 2 2, 2 01 0, by and amo ng RBC In su ran ce Ho ld in gs (USA) In c., Athen e Ho ld i ng Ltd ., Protecti ve Life Insu ran ce Co mp any an d RBC USA Holdco Co rp oratio n (solely fo r p urposes o f Section s 5.1 4-5.1 7 an d Articles 7 , 8 an d 1 0), filed as Exh ib i t 1 0.01 t o t he Compan y’s Curren t Repo rt on Fo rm 8-K filed Octo ber 2 8, 2 01 0 (No. 0 01 - 1 1339). *1 0.2 2 Reimb ursemen t Agreemen t, d ated as o f Decemb er 1 0, 2 01 0, between Golden Gate IV Vermon t Capti ve Insu ran ce Co mp any an d UBS AG, Stamford Branch , filed as Exh ib it 10(u) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded December 3 1, 2 01 0 filed February 2 8, 2 01 1 (No. 00 1-1 13 39 ).± *1 0.2 3 Letter o f Guaranty, d ated as o f Decemb er 1 0, 2 01 0, b etween Pro tectiv e Life Co rp oratio n and UBS AG, Stamfo rd Bran ch, fil ed as Exh ib it 10 (v ) to th e Co mp any ’s An nu al Repo rt on Fo rm 10 -K for th e year en ded Decemb er 3 1, 2 01 0 filed February 2 8, 201 1 (No. 0 01 -1 13 39 ). *1 0.2 4 Co in su ran ce Ag reemen t, d ated as o f Septemb er 3 0, 2 01 5, by and between Lib erty Life In surance Compan y and Pro tective Life In surance Compan y, filed as Ex hibit 1 0 to the Co mp an y’s Current Rep ort o n Form 8 -K/A filed Au gu st 5, 201 1 (No . 00 1-11 33 9). *1 0.2 5 Master Agreement, dated as of Sep tember 30 , 20 15 , by and amo ng Pro tectiv e Life Insu ran ce Co mp any and Genworth Life and An nu ity In su ran ce Comp any, filed as Exh ib it 1 0 to t he Co mp an y’s Quarterly Repo rt o n Fo rm 1 0-Q filed No vember 6, 20 15 (No. 0 01-11 33 9). *1 0.2 6 Termin ation an d Release Ag reemen t amon g Pro tectiv e Life Corpo ratio n, Pro tect iv e Life In surance Compan y, Wacho via Dev elo pmen t Co rp oration, Wells Fargo Ban k, Natio nal Association , Su nTrust Bank and Cit ib ank , N.A., filed as Ex hibit 1 0.1 to th e Co mp any’s Cu rrent Rep ort o n Form 8 -K filed Decemb er 17, 20 18 . 1 4.1 Co de o f Busin ess Con du ct for Protective Life Co rp oration and all of its su bsidiaries, revised Ju ne 1 1, 2 01 8, filed h erewith. *1 4.2 Supplemen tal Po licy on Co nflict o f Interest fo r the Compan y and all of its sub sidiaries, rev ised Jun e 12, 2 01 7, filed as Exhi bit 1 4(b ) to the Compan y’s Annual Rep ort on Fo rm 1 0-K for the year en ded Decemb er 31 , 2 01 7, filed March 2, 20 18 (No. 00 1- 1 1339). 2 1 Subsidiaries of t he Registrant. 2 4 Powers of Attorney . 3 1.1 Certification Pu rsuan t to Secti on 30 2 of t he Sarban es-Ox ley Act of 20 02 . 3 1.2 Certification Pu rsuan t to Secti on 30 2 of t he Sarban es-Ox ley Act of 20 02 . 3 2.1 Certification Pu rsuan t to 1 8 U.S.C Sectio n 1 35 0, as Ad op ted Pu rsu ant to Sectio n 9 06 of th e Sarbanes-Oxley Act of 20 02 . 23 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents Exhibit Number 3 2.2 Certification Pu rsuan t to 1 8 U.S.C Sectio n 1 35 0, as Ad op ted Pu rsu ant to Sectio n 9 06 of th e Sarbanes-Oxley Act of 20 02 . 1 01 Fi nancial st atemen ts fro m th e ann ual repo rt on Form 10-K o f Pro tectiv e Life Co rporat io n fo r th e y ear end ed Decemb er 31 , 2 01 8, fi led o n March 5, 2 01 9 formatted in XBRL: (i) th e Co nso lid ated Statemen ts o f Inco me, (ii) the Conso lidated Statements o f Co mp reh ensive Inco me (Lo ss), (iii), the Con so lidated Balan ce Sheets, (i v) Co nsolid ated Statemen ts o f Shareowner’s Equi ty, (v ) the Con solidated Statement of C ash Flo ws, an d (vi) th e No tes to Co nso l id ated Financial Statements. *Inco rp orated by Referen ce †Man ag emen t cont ract o r co mp ensatory p lan or arrang ement ±Certain p ortion s o f this Ex hibit h ave been omitted pu rsuant to a req uest fo r co nfidenti al treatment. The n on -p ub lic in fo rmatio n has been fi led separately with the Secu rities an d Ex chan ge Commission pu rsu ant to Rule 24 b-2 u nd er the Ex chang e Act. Th e Co mp any hereb y ag rees to furnish a co py of an y instrument th at d efines the rig hts of ho ld ers of lo ng -term debt t o t he Secu rities and Exch ang e Co mmissio n, u po n requ est. 23 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents SIGNATURES Pursu ant t o the requ i remen ts of Secti on 13 o r 1 5(d) o f th e Secu rities Ex chan ge Act o f 1 93 4, th e reg istrant has du ly caused this repo rt to be sig ned on its beh alf by th e un dersig ned , th ereu nto d uly auth orized. PROTECTIVE LIFE CORPORATION By : /s/ PAUL R. WELLS Pau l R. Wells Sen io r Vice Presid ent, Ch i ef Acco unt in g Officer and Con troller M arch 5, 20 19 Pursu ant to th e requ irements of the Securities Exchan ge Act of 1 93 4, th is rep ort h as b een sig ned b elow by the fo llo wing p erson s o n beh alf o f the registran t an d in the capacities and on th e dates in dicated. Sig nature Capa city in Which Sig ned Date * Ex ecu tiv e Ch airman of th e Bo ard and Director March 5, 2 01 9 JOHN D. JOHNS /s/ RICHARD J. BIELEN Presiden t, Chief Executiv e Officer (Principal Execu tive Offi cer) an d Di rector March 5, 2 01 9 RICHARD J. BIELEN /s/ STEVEN G. WALKER Ex ecu tiv e Vice Presid ent and Ch ief Finan cial Officer (Prin cip al Fin anci al Officer) March 5, 2 01 9 STEVEN G. WALKER /s/ PAUL R. WELLS Sen ior Vice Presid ent, Ch i ef Account in g Officer and Con troller (Ch ief Acco un t in g Officer/Co ntrol ler) March 5, 2 01 9 PAUL R. WELLS * Directo r March 5, 2 01 9 NOR IM ITSU KAWAHARA * Directo r March 5, 2 01 9 TETSUYA KIKUTA * Directo r March 5, 2 01 9 VANESSA LEONARD * Directo r March 5, 2 01 9 JOHN J. MCM AHON, JR. * Directo r March 5, 2 01 9 UNGYONG SHU * Directo r March 5, 2 01 9 JESSE J. SPIKES * Directo r March 5, 2 01 9 TOSHIAKI SUMINO * Directo r March 5, 2 01 9 WILLIAM A. TERRY * Directo r March 5, 2 01 9 W. MICHAEL WARREN, JR. *Rich ard J. B iel en , by si gn in g h is n ame h ereto , do es sign th is d ocu men t o n b ehalf of each o f the perso ns ind i cated ab ov e p ursu ant to po wers o f att orney d uly ex ecuted b y su ch p erso ns an d filed with th e Securi ties and Exch an ge Co mmissio n. 23 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table o f Co ntents By : /s/ RICHARD J. BIELEN RICHARD J. BIELEN Atto rney-i n-fact 23 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION ANNUAL INCENTIVE PLAN (Originally effectiv e Janua ry 1, 20 1 8 ) (Am ended a nd Resta ted as o f Novem ber 6 , 201 8 ) 1 .Purpo se. The purp o se of the Plan is to en able the Compan y an d its Su b sidiaries to attract, retain, mo tivate an d re ward q u alified officers and k ey emplo y ees by p rovidin g them with the oppo rtun ity to earn c o mp etitiv e comp en sation d irectly lin k ed to th e Co mp an y 's p erfo rmance. 2 .Definitions. Un less th e co n text require s oth erwise, th e following terms as u sed in th e Plan sh all hav e th e m ean ing s ascrib ed to ea ch b elow. "Bo ard " shall mean th e Board of Directo rs of th e Co mp any. "Co mmittee" sh all m ean the Co mp ensatio n and Manag eme n t Succession Committee of th e Bo ard (or such o ther committee of the Bo ard as the Bo ard ma y desig n ate from time to time ) or an y su b co mmittee thereof. "Co mp any " shall mean Protective Life Co rporation. "Particip ant" shall mean each officer o r k ey employee o f the Co mp any or a Subsid iary whom the Co mmittee d esig nates as a p articip ant in th e Plan. "Plan " sh all m ean th e Protective Life Co rporation Ann u al Ince n tiv e Plan, as set forth h erein an d as may b e amen d ed from time to time. "Su b sidiary " sh all m ean (a) an y co rporation o f wh ich th e Comp an y possesses d irectly or in d irectly fifty percent (50%) or m o re o f th e total combined votin g p ower of all classes of stock of such co rporation and (b) any other busine ss o rg an izatio n , regardless of fo rm, in which th e Compan y p o ssesses d irec tly or in directly fifty percent (50 %) o r more o f the total co m b ined equity in terests in su ch o rga n izatio n . 3 .Adm inistra tio n. The Co mmittee sha ll admin ister and inte rp ret the Plan. Any d eterminatio n mad e by the Co mmittee under the Plan shall be fin al and conclu sive. The Co mmittee shall estab lish pe rforman ce objectives in accord ance with Sectio n 4 and sh all certify wh eth er su ch p erfo rmance ob jectiv es h av e been achiev ed, su b jec t to the Board's ap p roval. No twith stan din g any thing else contained h erein to the contrary, th e Co mmittee may deleg ate any an d all o f its d uties and resp onsib ilities (inc luding th e selectio n o f Participants) in resp ect o f all Participants o ther th an the Execu tiv e Chairma n , Presid ent an d Chief Ex ec u tive Officer and all members of th e Co mp an y 's Perfo rmance and Accou n tability Committee to a committee of o fficers comp rised o f the President an d Ch ief Executiv e Officer, an d any two or mo re of h is or h er d irect rep orts, as d etermined from time to time in h is or her sole discretion . In the ev ent th at, at any time any o f th e aforementio n ed o ffices sh all b e v acant (or th e title asso ciated with such position shall be ch ang ed), the p erso n performin g the d u ties of su ch position sha ll be eligible to serv e on su ch officer's co mmittee. The Co mmittee m ay emp loy su ch leg al coun sel, co nsultan ts and ag en ts (including counsel o r ag ents who are emp lo y ees o f the Compa n y o r a Su b sid iary) as it may d eem desirable for th e admin istratio n o f the Plan and m ay re ly upon an y o p in ion receiv ed from any su ch coun sel, consultant or ag ent an d any computa tio n receiv ed fro m any su ch c o n su lta n t o r agen t. All expen ses incu rred in the admin istratio n of th e Plan , includ ing (without limitatio n) ex pen ses for the en g agem ent of an y c o u nsel, consultant o r ag en t, sh all b e paid b y th e Compa n y. No memb er o r fo rm er mem b er o f the Bo ard o r the Committee, o r an y other person invo lved in the admin istration o f the Plan , shall b e liab le for an y act, o m issio n , in terpretatio n , c o n stru ctio n o r d eterminatio n m ade in c o n ne ction with the Plan o th er th an as a result of suc h indiv id u al's willful misco n d u ct. 4 . Ince ntiv e Pa y ments. (a)Establishing the Perfo rm ance Criteria. On or b efo re April 1 o f each calendar year d u rin g which the Plan is in effect, the Co mmittee shall reco mmen d fo r appro v al by th e Boa rd the pe rforman ce obje ctive or objectives th at must b e satisfied in ord er for Particip ants to b e eligib le to re ceive an incentiv e paymen t fo r th at y ear. The Co mmittee may estab lish differe n t p erfo rman ce objectives fo r differen t Participants to qualify. The p erfo rm ance o bjectiv e(s) may state, in terms o f an ob jectiv e fo rmula o r stand ard , the method fo r comp uting th e amo u nt of the inc entive fu n din g eligib le fo r pay ment to the Participan ts if th e o b jectiv e(s) are achiev ed. With respect to any Participant, th e Committee may estab lish multiple performan ce o b jectiv es. If th e Committee establish es multiple p erfo rmance o b jectiv es, the Comm ittee shall make clear wh eth er (i) a sp ecified perc entage of th e annual incen tiv e o p portunity will be elig ib le for fu ndin g b ased on th e achievem ent (in whole or in part) of a specified o bjectiv e, (ii) funding o f any a mou n t is con tin gen t upon ac h iev emen t (in wh o le or in part) of more th an o n e such c riteria, o r (iii) th e am o u nt fu nded upon the achievement of o n e ob jectiv e may Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. b e red u ced o r increased based eith er on th e lev el o f ach ieve men t of a differen t objective or at th e discretion o f th e Committee or auth orized d iv isio n o r b u siness unit man ager. (b )Av ailab le Performan ce Criteria. Any p erfo rmance ob jectiv es estab lish ed u n d er Section 4(a) shall be related to o n e o f the following criteria, wh ich m ay be d ete rmined so lely b y reference to th e performance of the Compan y or a Su bsid iary or a div ision or b u siness u nit o r ba sed on comparativ e perfo rm ance relativ e to othe r co mpanies: n et in co me; o p erating in come; boo k value; embe d d ed v alu e or econ o m ic valu e a d d ed; re turn o n equity, assets or invested cap ital; assets, sales or reven u es or gro wth in asse ts, sales o r revenues; efficiency or ex pe n se manage men t; c apital adeq u acy (in cluding risk -based capital); investmen t return s o r asset qu ality ; completion o f acqu isitio ns, fin ancin g s, or similar transactio n s; custo mer service metrics; the va lue of n ew bu siness o r sa les; or su ch o ther reasonab le criteria as the Committee may recommen d an d the Board may appro v e. (c)Amoun t Pay able. The Committee shall establish a targ et amo unt fo r each Participant. Each Particip an t’s targ eted amo u n t ma y b e ag g reg ated to create a pool to b e allocated in the so le discretion o f th e Co mmittee. The Co mmittee m ay estab lish the po o l in respect o f any p erfo rmance objective based o n the extent to wh ich su ch o bjective (or such o b jectiv e and an y other lin k ed performanc e o b jectiv e) is met or exceede d , or the ex ten t to which su ch ob jectiv e(s) are o nly p artially ach ieved . Th e Co mmittee may p ro vid e th at amoun ts below o r in excess o f the ag g reg ate of all Partic ipan t targets for suc h performance o b jec tiv e will be fu n de d fo r perfo rm ance in ex cess of, o r at state d levels be low, targeted p erfo rmance. The Co mmittee may estab lish a thresh old level of achievem ent fo r an y p erfo rmance o b jectiv e below which no amoun t sh all be fu n d ed in respect o f such p erforman ce ob jective. The Co m mittee may, in its discretion , allocate the poo l amo ng d ivisio n s or b u siness units. The auth orized m anag er o f each d ivisio n o r b usin ess u nit, sh all th en (i) mak e in d iv idual d etermin atio n s regarding th e co ntrib u tion of each Participan t in his o r h er respectiv e div ision or b u siness u n it to the achievem ent o f th e overall stated performan ce objectives, an d (ii) rec o mmen d, fo r a p p roval b y the Co m mitte e, th e amou n t pay able , if an y , fro m suc h division or busin ess u nit allo cation to e ach such Particip an t. An y other p ro vision in th e Plan to the contrary n o twith stan din g , (i) the Co m mittee sh all h av e the right, in its so le d iscretio n , to p ay to an y Partic ipan t an an nual incentiv e payment for su ch y ear in an amo unt ba sed on individ ual perfo rmance or any o th er criteria or the occ u rren ce o f any su ch e v ent that th e Committee shall d eem ap p ropria te, and (ii) the Co mmittee may, in its so le d isc retio n , prov ide fo r a min imum in centive pay ment to an y o r all, o r any class of, Particip ants in resp ect of any calendar year, reg ard less o f wh eth er a n y applica b le perfo rm ance objectives are attain ed. (d )Effect o f Termin ation of Emp lo y ment. Except as prov ided in the follo wing sente n ce, u n less th e Committee sh all d etermin e to a u tho rize a p ay ment, no am o u nt sh all be p ay able to a Particip ant a s an an n u al in cen tive award unle ss th e Particip ant is still an em p loy ee o f th e Compan y or o n e o f its Sub sidiaries o n th e d ate payment is made o r such earlier d ate as th e Co mmittee may sp ecify. Un less th e Co mmittee shall o therwise determin e to p ay the Particip ant a greater amoun t, if a Participan t's emp lo y m ent termin ate s d u e to d eath, disability (as determined in accord ance with g enera lly app licab le Company policies) or n o rmal o r early retiremen t und er the term s of the q u alified Protective Life Corpo ratio n Pen sion Plan, su ch Particip ant sh all rec eiv e an annu al incen tiv e payment eq u al to the amo unt the Particip ant wo uld h ave received if th e Participant h ad remain ed emp loyed th ro ugh th e en d o f th e ye ar, mu ltip lied by a fraction, th e n u m erato r of wh ich is the number of d ays that elapse d during the y ear in which th e termina tio n occu rs b efo re and includ ing th e date of the Participant's termin atio n o f em p loy ment an d the d enomin ator of which is 365. 5 . Pay m e nt. Payme n t of any inc entiv e pay m ent d etermined u nder Section 4 sh all be m ade to each Partic ipan t (su b jec t to any v alid d eferral electio n made by th e Particip ant) a s soo n as practicab le after th e Co mmittee certifies that th e applicab le p erfo rman ce o b jectiv es have b een achiev ed (or, in the case of any in cen tive payment p ayab le u n d er th e fin al parag raph of Section 4(c), after the Co mmittee d etermin es th e amount o f any su ch pay ment o r that any co ndition to such paymen t h as b een satisfied ), but in n o event later than the March 15 immed iately fo llo win g the cale n d ar year du rin g wh ich su ch in cen tive paymen t was earned. The p rovision s of th is Section 5 sh all be ad m inistere d so th at th e Plan is n o t a pla n of d eferred co mp ensation as prov ided in Sectio n 409A of the Intern al Reven u e Code o f 1 9 8 6, as amended . 6 . General Pro v isions. (a)Effectiv en ess of the Plan. Th e Plan wa s o rig inally effectiv e with resp ec t to th e ca len d ar y ear begin nin g Jan u ary 1 , 2 0 1 8, an d sh all co n tinue in effect u ntil o therwise amen d ed or termin ated in accord ance with Section 6(b ). (b )Amend ment and Te rmination. Up o n th e reco mmendation of th e Co m mittee, the Bo ard may at any time amen d , su sp end, disco n tinue or termin ate the Plan; pro vid ed that no su ch amend ment, su sp ensio n, discontin u an ce or termination sh all adversely affect th e rig h ts of an y Particip ant with respect to any c alendar y ear that has alread y commenced . (c)Desig n atio n o f Bene ficiary. Each Participan t may design ate a b en eficia ry o r b eneficiaries (which bene ficiary m ay be an en tity o th er than a natu ral person) to receiv e an y pay ments that may be made afte r th e Participant's d eath. Such designation may be chan ge d o r canc eled at an y time with o u t the consen t of any such be n efic iary. Any such designation, ch ange o r cancellation must b e mad e o n a form o r in a manner appro v ed b y or acceptable to the Co mmittee an d shall no t b e effectiv e un til received by the Co mmittee. If no beneficiary h as been n amed, or the d esignated ben eficiary or b eneficiaries sh all h ave pred eceased the Pa rticipan t, th e b eneficiary sh all b e th e Participan t's sp ouse or, if n o spo u se su rviv es th e Participan t, the Particip ant's estate. If a Particip ant d esig nates more than o n e ben eficiary, th e pay m ent shall b e made to su ch ben eficiaries in eq u al shares, u n less the Particip ant has d esig n ated otherwise. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (d )No Rig h t o f Co n tinued Emplo y ment. No th ing in th e Pla n sh all b e con strued as co n ferrin g upon an y Participan t any righ t to co n tinue in th e emplo y ment o f the Co mp any or its Subsid iaries. (e)No Limitatio n to Co rporate Actio n . Nothin g in the Plan shall preclude th e Co mp any from au thorizing the pay ment to the eligible emp loyees of o ther co mp ensatio n, includ ing (without limitatio n ) base salaries, awards und er an y oth er p lan o f th e Co m p any o r its Subsidiaries, a n y oth er incentiv e p aymen ts or b o nuse s (wh ether or n o t based o n th e attainmen t of p erforman ce o bjectiv es) and retentio n o r o ther sp ecial pay m ents. (g )Nonalien atio n of Benefits. Ex cep t as expressly p rovid ed h erein , no Particip ant o r ben eficiary shall h av e th e power or righ t to tran sfer, anticipate, o r othe rwise en cumber th e Participant's interest u n der th e Plan . The Co mpany's ob lig atio n s u nder th e Plan are n o t assignable or tran sferable ex cept to (i) a corpo ratio n wh ich a cquires all or substantially all o f th e Co m p any 's assets, or (ii) any corp o ratio n in to which the Compan y m ay be merged o r c o n so lidated . The p rovisio n s o f th e Plan shall inu re to th e ben efit o f each Particip ant and th e Pa rticipan t's b en eficia ries, he irs, executo rs, ad ministrato rs o r su cc esso rs in in tere st. (h )Withho lding. Any amo u n t payab le to a Particip ant o r a ben eficiary und er th e Plan shall b e subje ct to an y applicab le federal, state and local inco me and emp lo y m ent taxes an d an y o ther amo unts th at th e Compan y o r a Subsidiary is req u ired b y law to d educt an d with hold from su ch p ay ment. (i)Severab ility. If any pro vision of the Plan is held unenforceable, th e remain d er o f the Plan sh all continu e in fu ll force and effect without reg ard to such unen forceable pro vision and shall b e applied as thoug h the unen forceable pro vision were n o t contained in the Plan . (j)Go v ern ing La w. The Plan shall be con strued in acco rd an ce with an d gov erned by the laws of the State o f Delaware, with out referen ce to the p rin cip les o f conflict of laws. (k )Headings. Headin g s are inserted in th e Plan for con v enien ce of referen ce only an d are to b e ignored in the construction o f the p rovision s of th e Plan. (sig n ature p age fo llows) IN WITNESS WHEREOF, Protective Life Co rp oration h as execu ted this document as o f __ day o f _________________, 2 0 1 8. PROTECTIVE LIFE CORPORATION Rich ard J. Bielen Presid ent and Chie f Executiv e Offic er 1 o f 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2 0 1 8 Long -Term Incentive Plan Awards Acceptance For m As of March 15, 2 0 1 8, y o u were g ra n ted lon g -term incen tiv e award s un d er the Protectiv e Life Co rp oration Lo ng-Term Incentiv e Plan (the “Pla n ”). In co n jun ction with these awa rd s, y ou h ave been p rovided with Awa rd Letters and th e applicab le pro vision d ocu m ents (“Provisio n s”). The Award Letters, Provisio n s, and th e Plan g o vern y o ur respectiv e 2 018 Awards. Th e 2 0 18 Awards c o n tain terms and con d itio n s re g ard ing the vestin g an d pay m ent of the Award s, termin atio n o f emp lo y m ent, tax withho lding, confiden tiality, non -so licitation of Co m p any emp loy ee s an d custo m ers, regulatory comp lian ce, a n d o ther importan t matters. If you ag ree to a n d accep t th e terms of th e 2018 Awards, please sig n wh ere indicated b elow b y [Da te], 2018 . [Employee’s e lectronic sig n atu re] [Rich’s electronic sig n ature] Rich Bielen Preside n t and Ch ief Ex ecu tive Officer o f Protectiv e Life Corp o ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 PARENT-BASED AWARD LETTER The Compe n sation an d Man agement Su ccessio n Co mmittee o f the Compan y 's Bo ard o f Directo rs h as awarded y o u: Paren t-Based Award Valu ed a t _______ Date o f Gran t: March 1 5 , 201 8 This Paren t-Based Award was awarded pu rsu an t to the Protective Life Co rporatio n Lo ng-Term In cen tive Plan (th e “Plan”), and is subject to the terms an d co n d itio n s c o n tain ed in the 2 018 Parent-Based Award Provision s (“Pro visions”), as set fo rth in Ap p end ix A to th is Award Letter, and the Plan . The Plan and the Pro visions co n tain terms and co n ditions reg ard ing the v esting o f this Parent-Based Awa rd , termin atio n of e mploymen t, tax withh o ld ing, n o n -solicita tio n o f Co mp any employees and c u stome rs, reg u lato ry complian ce and oth er matters, an d I enco urag e you to read the Pro v isions carefu lly. Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 20 1 8 PARENT-BASED AWARD PROVISIONS As of March 15, 2 0 18, the Bo ard of Directo rs o f Pro tectiv e Life Corp o ratio n (the “Co mp any”) g ra n ted y o u a cash denomin ated award (“Paren t-Based Award ”) und er th e Protective Life Co rpo ratio n Lon g -Te rm In cen tive Plan (the “Plan”) th at, su bject to the satisfaction o f th e applicab le terms an d co n d itio n s related to such Parent-Based Award , in cluding, but not limite d to , th e satisfactio n of the ap plicable serv ice vestin g condition s sp ecified b elow, will en title you to receiv e a cash amount d etermin ed in the ma n n er described b elo w. Yo u ha v e also receiv ed a Parent-Based Award Le tter (“Award Letter”), which together with these 201 8 Parent-Based Award Provision s (“Provisio n s”) an d the Plan , con stitutes your fu ll award . 1 . Awa rd. (a)General Pro v isions. The In itial Value and th e Date of Grant o f the Parent-Based Award are set forth in y o u r Award Letter. (b )Defin ition s. Capitalized terms th at are u sed b u t n o t defined h erein sh all ha v e the mean in g ascrib ed to th em in the Plan . 2 . Vesting a nd Pa y ment o f Pa rent-Ba sed Award. (a)General Vestin g Rule . Un less v ested o n an earlier d ate as pro v id ed in these Pro visions o r th e Plan , y our Parent-Based Awa rd will v est o n Decemb er 31 , 202 0 (c o llectively, the “Regular Vesting Sched u le”), sub ject to y o u r co n tinued employmen t throu g h su ch d ate . (b )Payment o f Parent-Based Award. (i) Reg u lar Vesting . If y our Pa rent-Base d Award b eco mes vested in accord ance with Section 2(a), it will be settled in ca sh following (but not later th an the March 15 immediately fo llowin g) the date as o f wh ich such Paren t-Based Awa rd becomes ve sted . Su ch amou n t pay able will b e calculated in acco rdanc e with Section 2(b)(iii) b elo w. (ii) Early Vesting . An y Paren t-Based Award that b ecomes v ested u nder Sectio n 4 by reason o f y o u r termination of emp lo y m ent p rior to the d ate su ch Paren t-Based Award wou ld oth erwise hav e become vested p u rsuan t to Sectio n 2 (a) (“Early Vestin g ”) sh all n o netheless be se ttled in ca sh follo wing (bu t n o t later than the March 15 immed iately fo llo win g ) the date as of which suc h Pare n t- Based Award wo u ld h av e b ec o me vested (b u t for su ch Early Vestin g ) if y o u had remained in th e Compan y's emp loymen t th ro ugh the applica b le date sp ecified in Section 2(a). Su ch amount p ayable will be calcu lated in acc o rdan ce with Sectio n 2 (b)(iii) below. (iii) Th e aggregate amo u n t p ay able in re sp ect o f an y v ested Parent-Based Award under Section 2 (b)(i) o r (ii) sh all b e equal to the percentage of su ch Parent-Based Award th at h as b eco me v ested multiplied by th e pro d uct o f th e In itial Value and Parent Stock Percen tag e. 3 .Cha ng e in Co ntro l. (i)In the ev en t o f a Co mp an y Ch ang e in Control, a ll of your Paren t-Ba sed Award will immed iately v est an d sh all be settled in cash, b ase d on the Paren t Sto ck Percentag e, bu t th e Fin al Paren t Stoc k Value sh all be determin ed based on the av erage o f the closin g p rices of th e Parent co mmo n sto ck on all trad ing day s du ring th e 30-ca len d ar day p eriod en d ed on th e d ate o n which th e Comp an y Chan ge in Co ntrol o ccu rs. Payment of th e amo unt so d etermine d will be paid within 60 day s follo win g th e d ate o n wh ich the Co mp any Ch ang e in Co n tro l occurs. (ii)In the even t of a Parent Change in Co n tro l th at re su lts in th e co mmon sto ck of Parent n o lon g er b ein g activ ely trad ed o n a pu b lic sec u rities exc h ang e, all of y our Parent-Base d Award s shall be co n verted to Restricted Units as of th e d ate o f the Parent Ch ang e in Co n tro l. Su ch conv ersio n to Restricted Units shall be effected in th e man ner describ ed b elow. First, the d o llar v alue o f your Parent-Based Awards shall b e determin ed as o f th e Paren t Chan g e in Co n tro l, with the Fin al Parent Sto ck Value u sed to d etermine the Parent Stock Percentage d etermined u sing the averag e of th e closing pric es o f th e Pare n t co m mon stock o n all trad in g day s d urin g th e 3 0 -c alendar day perio d en d ed o n th e date on wh ich th e Parent Chan ge in Control occurs. Th e resultin g do llar v alu e of the Parent-Based Award s sh all th en b e co n v erted into Restricted Units by div id ing such dollar value by th e PL Tangible Bo o k Valu e Per Un it determin ed as o f th e mo st recently rep o rted q uarterly balance sh eet p reced ing th e Parent Ch ange in Co ntrol. No twith stan din g th e foregoing, all terms an d p rovisio n s o f the Parent-Based Award Ag reement sh all o therwise be maintained, includ ing , b ut not lim ited to , th e v estin g sch edu le an d p ay men t timin g p rovisions of su ch ag reemen t. 4 .Term ina tio n o f Employm ent. (a)Death, Disability or No rmal Retirement. If you r em p loy men t is termin ated by death , Disability or Normal Retirement, y o u r Parent-Based Award will im mediately v est in fu ll. (b )Early Retiremen t. Un less th e Committee determin es to prov ide fo r treatment that is mo re fav orable to you on su ch term s and conditions as the Co mmittee may d etermin e, if your emplo y ment with the Compan y an d its Sub sidiarie s term inates due to Early Retire men t, a pro-ra ted p o rtion of your Pare n t-Based Award will immediately v est based on a fractio n , th e numerato r o f wh ich is the n u mb er o f complete and partial calend ar months be tween Jan u ary 1 , 2 0 1 8 an d y o ur Early Retireme n t date, and th e denomin ator of wh ich is 3 6 . Any portio n o f y o ur Parent-Based Award th at d o es n ot vest upon you r Early Retirement p u rsuan t to the prec edin g sentence will be fo rfeited. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (c)Sp ecial Termin atio n . If y our emp lo y m ent is te rm inated by reaso n of (1 ) th e d ivestitu re o f a b u siness segmen t o r a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Parent-Based Award sh all b e at th e d iscretio n of th e Comm ittee. An y po rtion o f y o u r Paren t-Based Award that th e Comm ittee d etermin es is not eligible for pa y ment un d er th is Section 4(c) sh all be fo rfeited as of th e d ate you r em p loy ment termina tes. (d )Oth er Terminatio n. Unless th e Co m mitte e determin es to p rov ide for treatment th at is more fav orab le to you o n su ch term s an d cond itio n s as the Co m mittee m ay determine, if y our emp loymen t is terminated for a n y reaso n n ot set forth in Sections 4 (a), (b ) or (c) p rio r to th e ap plicable vesting dates specified in Section 2(a), the u n v ested po rtion of yo u r Parent-Based Award will b e fo rfeite d . (e)Termin atio n for Cau se . Unless the Co mmittee d etermin es to prov ide fo r treatm ent tha t is more favo rable to yo u on su ch term s and co n d itio n s as th e Co mmittee may determin e, if y o u r emp lo y ment is termin ated for Cau se p rio r to the date you r Pare n t- Based Award is paid pu rsu ant to Section 2(b ), all o f the vested and unvested p o rtion s of your Paren t-Based Award will b e forfeited. 5 . Federal Income Tax Consequences. (a)General. Th e fo llowin g descriptio n of the fed eral in come tax conseq u en ces o f the Parent-Based Award is b ase d on currently app licab le pro v isio ns of the Cod e, and is on ly a gen eral su m mary. The su m mary do es not discuss state and local tax laws, wh ich may d iffer fro m th e fe d eral tax law, o r federal estate, g ift and e mploymen t tax laws. Yo u are u rg ed to consult with you r own tax adviso r reg ard ing th e app lication of th e tax laws to y o u r p articula r situ ation . (b )Grant of Pare n t-Based Award . Th is Parent-Based Award gran t will n o t subject you to federal inco me tax. (c)Paymen t o f Paren t-Based Award . You will recognize ord inary income fo r federal inco me ta x purp o ses o n th e p aymen t da te. Th e amoun t o f income recogn ized will b e equal to the ag greg ate amo u n t of cash p aid . Notwithstand ing th e fo re g o in g , if y o u hav e mad e an effective e lection u n der th e Co m p any 's Deferred Co mpensatio n Plan fo r Officers (“Defe rred Compen satio n Plan”), the tax ation of such d eferred amo unt will b e han dled as d iscussed in Sec tio n 5 (d). (d)Deferred Co mp ensatio n Plan. Yo u may elect to defer p ay ment in respect of y o ur v ested Paren t-Based Award, and the reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u mak e effectiv e d eferral electio n s, y o u will recognize ord in ary in come when the amoun t d erived fro m th e d eferred p o rtion of y our Parent-Based Award p aymen t is paid fro m th e Deferred Compen satio n Plan , in an amo unt equal to th e amou n t of cash p aid . Yo u will be pro v id ed with mo re in forma tio n abou t this d eferral opp o rtu n ity and th e De ferred Co mpensa tio n Plan . (e)ERISA. Neith er th e Plan n or this Parent-Based Award is q u alified under Sectio n 401(a) of the Co d e an d neithe r is su b ject to any of th e prov isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 6 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax withho lding oblig atio n s attributable to your Parent-Based Award, wh ether u nder th is Plan or u n de r the Deferred Co m p ensation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Parent-Based Award. 7 .Non-tra nsferability o f Parent-Based Award. Yo ur Paren t-Ba sed Award may not be assign ed, p ledged, o r oth erwise tran sferre d , ex ce p t upon you r d ea th by the laws of in testacy or descen t a n d d istrib u tion. 8 .Beneficia ry Desig na tio ns. Yo u may nam e a b eneficiary o r ben eficiaries (who must b e memb ers of y o ur family a n d wh o may b e named contin g ently o r successively ) with respect to y our rig h ts un d er the Plan and this Parent-Based Award (in clu d in g th e righ t to receive any p aymen t in resp ect o f y our Paren t-Based Award a fter you r d eath ) by submittin g a written ben eficiary designation in a form acceptab le to the Comp an y. Any such d esignation will be effectiv e only when filed with th e Co mp an y 's Ch ief Finan cial Officer and Controller (o r such othe r perso n as th e Co mp an y may d esig nate) before you r date of d eath, an d will (u n less spe cifically set fo rth therein) revoke all prior desig n atio n s. If th ere is no beneficiary design ation in effect on the date of your d eath, y our beneficiary will be y o u r su rviv in g spo u se o r, if y o u h ave n o su rv iv ing spouse, your estate. 9 .Adm inistra tio n of the Plan. The Co m mittee h as fu ll p o wer to ad minister and in terpret the Plan an d these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 10.Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, termina tio n or d isco n tinuance of these Pro v isions or the Plan will un fav o rab ly affect a n y Parent-Based Award p re v iou sly g ran ted . 11.Effect on Employm ent a nd Other Benefits. Receip t o f a Paren t-Based Award un d er th e Plan do es n o t g iv e any Particip ant any righ t to receiv e awards in the future or to con tin ue in th e emp lo y of th e Co mp an y a n d its su b sidiaries, and Parent-Based Awa rd recipients are subject to d isciplin e and disch arg e in th e sam e man n er as an y othe r employee. Subje ct to the terms of the applica b le plan s, inco me recognized as a result o f any pa y ment in respect of Paren t-Based Awards will not be includ ed in th e formula fo r calcu lating ben efits un d er th e Company's Pension Plan, 40 1 (k), and disability pla n s. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 12.Co o peration in Litiga tio n. By acceptin g a Pa rent-Base d Award su bject to the Plan , yo u agree th at afte r y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . 13.No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Co m p a n y. Acco rd in g ly, b y ac cep ting a Parent-Based Award subject to th e Plan and th ese Provision s, you agree th at for o n e year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 14.No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y acceptin g a Paren t-Based Award su bject to th e Plan and th ese prov isio n s, you agree th at, during th e Restricted Perio d, you will no t — wh eth er on y o ur o wn b ehalf o r o n beha lf o f or in co n ju n ctio n with an y perso n o r en tity — directly o r indire ctly so licit or accep t any b u siness o f the type co n ducted by the Company as o f yo u r termin atio n date from an y person or entity that was eith er (1) a cu stomer, d istrib u to r, or ag ent o f the Co mp any as o f that date or (2) a pro sp ective cu stomer, distribu tor, or agent co ntacted , called u p o n, or serviced by th e Comp an y during th e twe lve month s before yo u r termina tio n date, or ind u ce, p romote, facilitate, or oth erwise co n tribute to the solicitatio n of su ch cu stomers, distribu tors, or a g ents or p rospectiv e custo m ers, distributors, or agents. You fu rth er agree that, d u rin g the Restric ted Perio d , y ou will n ot co mmunicate fo r b u siness purp o ses with an y person o r entity that was either (1 ) a cu stomer, d istrib u to r, or ag en t o f the Compan y as o f y o u r termin ation date o r (2) a pro sp ectiv e cu stomer, d istrib u tor, or ag en t con tacted, called u p o n, o r serviced b y the Compan y d u rin g the twelv e mo n ths before y o ur termin atio n d ate. This Sec tio n 1 4 sh all not apply if you wo rked in, or were a resid ent o f, th e state o f Califo rnia when y o u r emplo yment terminated. 15.Co nfidential Info rm a tio n. The Compan y has expen ded an d co n tinues to exp end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m p a n y. A c c o rd in g ly, by accep ting a Pa rent-Base d Award su b ject to th e Plan and these pro v isions, y o u ag ree to perm anen tly maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in clu d es, but is n o t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, a lgorith ms, tech nical d ata, research p lan s, systems, etc.), prod u cts (in cludin g with o u t lim itation , p ro duct d esig n , p ricin g , and d evelop ment info rmatio n ), transactions o r potential transaction s, serv ices, trad e se crets, know-h ow, fo rmu las, pro cesses, ideas, invention s (whether o r not patentable), train ing materials, p erso n n el information, attorney-clie n t commu nicatio ns, an d th ird -pa rty re latio nsh ip s. The above list is not exh austive and Co n fid en tial In formation in cludes an y o th er in formation th at sho u ld be reaso nab ly u n d erstood as th e confiden tial or p roprietary in formatio n of the Co mpany. Confidential In forma tio n in cludes n o t o n ly info rm ation d isclosed b y th e Company to you, b u t also information dev elo ped or learned by you during th e course o f y o u r emp lo y m ent with the Compa n y . Info rmatio n is no t con fid ential, h o we v er, if it is availab le in the p u blic do main th roug h n o fault of your own . 16.Reco v ery o f Dama g es by the Co mpa ny. Yo u ag ree th at if yo u we re to v iolate any o f Sectio ns 12, 13 , 1 4 , and 1 5 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to recover liquid ate d damages fro m you e q u al to the amo unt of in co me that y ou realize u n der this Paren t-Based Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 2 , 13, 14, o r 1 5 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 2 , 13, 1 4 , or 15. 17.Parent-Based Awa rd Subject to the Plan. Th ese Pro visions are su bject to the Plan as appro v ed b y the Bo ard . The term s an d pro v isions o f the Plan as it may b e amen d ed fro m time to time are h ereby in corp o rated h erein by reference. In the ev ent o f a conflict b etween an y term or p rovision co ntain ed h erein and a term or pro v ision of th e Plan , th e ap p licable terms and pro visions of the Plan will govern an d prevail. 18.Acceptance of Awar d. If yo u wish to accep t your Paren t-Based Award , you must ex ecute a 201 8 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 19.Co m munica tio ns with Go v ernment Ag encies. Noth in g in th ese Prov isio n s, inclu d ing , with o ut limita tio n, Se ction 1 2 , 1 5 or 1 6 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Qu estion s regardin g a Paren t-Based Award su b ject to the Plan a n d req u ests fo r ad d itio n al in fo rmatio n abo u t th ese Provisio n s, the Plan or the Comm ittee shou ld be directed to Rachel Go o d so n, Protective Life Corp o ratio n , P.O. Box 260 6 , Birmingham , Alab ama 3 5 2 02 (teleph o n e (20 5 ) 2 6 8 -57 2 4 , e-mail Rachel.Good so n @Protective.com). Th e Plan , these Pro v isions and yo u r Award Letter contain the formal terms and co n d itio n s of y o ur Award, an d yo u should retain th em fo r fu ture referen ce. You m ay o b tain a copy of the Plan b y written o r ema il request to Rach el Go o dson. Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 PERFORMANCE UNITS AWARD LETTER The Compe n sation an d Man agement Su ccessio n Co mmittee o f the Compan y 's Bo ard o f Directo rs h as awarded y o u: _______ Performance Un its Award Perio d: Ja n u ary 1, 2 0 18 – December 3 1 , 2020 Gran t Da te: March 15, 2 0 18 These Pe rforman ce Un its were award ed pursuant to the Pro tec tiv e Life Corp o ratio n Lon g -Term In cen tive Plan (the “Plan”), a n d are subje ct to the terms and co n d itio ns contained in the 20 1 8 Perfo rmance Units Award Pro v isions (“Pro visions”), as set fo rth in Ap p en d ix A to th is Award Letter, and th e Plan. The Plan and th e Prov isio n s contain terms an d con d itio n s regardin g the p ayme n t of these Perfo rmance Units, termin atio n of employmen t, tax withholdin g, non -so licitation of Compan y emp lo y ees an d cu sto mers, regu latory comp lian ce and o th er matters, an d I enc o u rag e y ou to read th e Pro v isio ns ca refu lly . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2018 PERFORMANCE UNITS PROVISIONS As o f March 15 , 2 0 1 8, th e Bo ard of Direc tors o f Pro tectiv e Life Corp o ratio n (the “Compa n y ”) g ran ted yo u performan ce units (“Perfo rmance Un its”) under the Pro tective Life Co rp oration Lo n g -Term In cen tive Plan (th e “Plan ”) that, sub ject to the satisfactio n o f the applica b le term s an d con d itio n s related to su ch Perfo rmance Units, inclu d ing , but n ot limited to , th e satisfaction of th e ap plicable p erfo rmance vestin g co n d itio n s specified belo w, will en title you to receive a cash am o u nt b ased on the PL Tangible Bo o k Valu e of th e Compa n y. You hav e a lso re ce ived a Performan ce Un it Award Letter (“Award Letter”), wh ich tog eth er with th ese 2 0 1 8 Perfo rman ce Un its Pro visions (“Provision s”) and th e Plan, constitutes y our “Perfo rmance Unit Award.” 1 .Genera l Pro visions. The nu mber o f Perfo rm ance Un its tha t y o u h ave been awarded, th e Award Perio d of th e Perfo rmance Units, and th e Date of Gran t of th e Pe rforman ce Un its are set fo rth in y our Award Letter. 2 .Ea rn-Out of Performa nce Units. (a)General. Whether y o u will rece ive an y cash pay m ent in respect of your Performance Un it Award will be determin ed b ase d u p o n the exten t to wh ich the applicab le p erfo rm ance objectives have bee n satisfied an d , e x cep t as otherwise p rovided in Se ction 5 belo w, yo u r contin u ed employme n t u ntil the date the Perfo rmance Units are p aid. Your right to ve st in, and th e amount p ayable in respect of, o ne -h alf (1/2 ) o f yo u r Perfo rmance Units is d epen de n t o n the Co mp any's Cumulativ e After-tax Adju sted Op erating Inco me d u rin g th e Award Perio d, and o n Ave rage Retu rn on Eq u ity over the Award Period with reg ard to the rem ain ing o ne-h alf (1 /2) of the Perfo rmance Units, in each c ase a s spe cified b elow. (b)Cu mulativ e After-tax Ad ju sted Opera tin g In come . Paymen t with respect to o ne-h alf of y o ur Perfo rm ance Un its will b e based on th e Co mp any 's Cu mu lative After-tax Adjusted Operatin g Income during the Award Perio d , as d etermine d in acco rdan ce with the fo llowin g sched u le: Cum ula tiv e After-ta x Adjusted Operating Incom e (d o lla rs in millio n s) Percentage o f Perfo rm a nce Units Earned Le ss th an $[____]0% $[____]100% $[____] or more 200% There will b e straig h t-lin e in terp olatio n betwee n Cu mu lative After-tax Ad justed Operatin g In come between $[________] and $[________] to de term ine the exact percentage to be p aid between 0 % an d 1 0 0%; an d b etween $[________] and $[________] to d etermin e th e ex act p ercen tage to b e p aid b etwe en 1 00% an d 2 0 0%. (c ) Avera g e Return on Eq u ity . Paymen t with respect to o ne -h alf of y our Perfo rmance Un its will b e b ased o n th e Co mp an y 's Av erage Retu rn on Eq u ity d uring th e Award Perio d, as determin ed in acco rdance with the fo llowin g sched ule: Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Average Return o n Equity Percenta ge of Performance Units Ea rned Less than [__]%0 % [__]%1 0 0% [__]% o r mo re 2 0 0% There will b e straig ht-line in terpo lation b etween Averag e Re turn on Equity betwee n [__]% an d [__]% to d etermin e th e exac t p ercen tage to be p aid b etween 0% an d 1 00%; a n d b etwe en [__]% an d [__]% to determine the exac t pe rcen tage to be p aid b etween 100% and 2 0 0 %. 3 . Definitions. Cap italized terms th at are u sed but n o t defin ed herein shall h ave the mean ing ascribed to th em in the Plan . For p u rposes of th ese Pro visions, the fo llo win g term s sha ll have th e follo win g me anin gs: “Av erag e Return on Eq u ity” shall mean annualiz ed Cumulative After-tax Ad justed Operatin g In come during the Award Period d ivided b y the averag e o f th e GAAP Bo ok Valu e of Equity, ex cluding accu mu lated o ther co mp rehensiv e in come as o f the end of each fiscal q u arter du rin g the Award Period (o r, if ap plicable, the n u m b er of quarters co mple ted throu g h the date o f a Change in Control) and exclud ing the cu m u lative after-tax adju stmen ts that are ex clu ded fro m Cumu lative After-tax Adjusted Op erating Inco m e du rin g th e Award Perio d . “Cu mula tiv e After-tax Ad ju ste d Op erating Income” is d efined as th e Compan y's total income e arned after tax es during th e Awa rd Perio d , ex cluding the imp act o f realized g ain s o r lo sses on investme n ts an d deriv atives, any imp airmen t lo sses record ed o n g o o dwill an d other in tangible assets crea ted by the Merger, an y ex pen se b o rne by the Co mp any that was the resu lt of actions o r requ irem ents of th e Compan y's Paren t an d were not includ ed in th e b u sin ess plan , and unplan n ed ch ang es to income resu lting fro m n ew acco u n ting pron o u ncemen ts. Any lo st in come due to d iv idends p aid in e x cess of plann ed amoun ts will be ad de d back to d etermine after tax opera tin g income. 4.Time a nd Form of Pa y ment. As soon as practicab le, b u t not later than 60 day s, after the end of the Award Pe riod , the Committee will de term ine the exten t to wh ich an y Perfo rmance Unit Award has b een earne d . Except as oth erwise set fo rth h erein , the valu e of each earned Performan ce Unit shall equal th e PL Tan gib le Book Value Per Unit d ete rm ined as o f the most recently rep orted q u arterly b alance sheet d ate last preceding th e date o f p ay ment and sh all b e pa id not later th an th e March 1 5 follo wing the end of the Award Perio d . 5.Term ina tio n o f Employm ent. (a)Death, Disability or Retirement. Un less th e Co mmittee d etermin es to pro vid e fo r treatment th at is mo re favo rable to y o u on su ch terms an d co nditions as th e Committee may d ete rm ine, if your employmen t is terminated by death , Disability o r b y Ea rly Retiremen t or Normal Retirement, yo u (o r, as app licab le, yo u r leg al rep resen tative o r b eneficiary ) will rec eiv e a paymen t with resp ect to a pro -ra ta p o rtion o f you r Performan ce Un its, d etermine d b ased on a fractio n , the n u m erato r o f whic h is yo u r perio d o f emp loy men t d u rin g the Award Perio d and th e d eno min ator of wh ich is the total number o f days in the Award Period. The amo unt in respect o f yo u r p ro-rated Performan ce Un its will b e de term ined b y applyin g the perfo rm ance achieved thro u g h the end of th e Award Period (or th e d ate o f a Ch an g e in Con tro l, if applicable) again st th e sch edu les set fo rth in Sectio n s 2 (b) and 2(c) above. The remain ing p o rtion o f y our Perfo rmance Units (i.e., the exc ess ov er th e p ro-rated portio n) sh all be fo rfeited as of th e date yo u r emp lo y m ent te rminates. Page 2 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (b )Special Termination . If you r em p loy ment is termin ated by reason of (1) th e d iv estitu re of a bu siness seg men t or a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Performance Unit Award shall b e at the d iscretio n of the Committee. An y p ortio n o f you r Performa n ce Un its which the Committee d etermin es is not eligible for pa y ment un d er th is Section 5(b ) shall b e forfeited as o f the d ate y our e mployme n t termin ates. (c)Other Term ination. Un less the Committee determines to pro v ide for treatmen t th at is mo re favorable to y o u o n su ch term s and conditions as the Co mmittee m ay determin e, if y our emp lo y m ent is terminated for any reaso n not set forth in Sec tio ns 5(a) or (b ), an y u nvested p o rtion of your Performance Un it Award will b e forfeited. (d )Termination for Ca u se . Unless th e Co m mittee de term ines to pro v id e for treatm ent that is mo re favorable to y ou on su ch terms and co nditions as th e Co mmittee may d eterm ine, if y our emp loymen t is te rminated for Cause p rio r to th e date y our Perfo rmance Units are p aid p ursuan t to Sectio n 4 , all of you r v ested and un v ested Pe rforman ce Un its will b e forfeited. 6 . Co mpany Change in Co ntro l. In the even t of a Comp an y Chan g e in Control, the Award Period shall b e deeme d to ha v e ended o n the d ate o f the Compa n y Chan g e in Co ntrol an d y ou sh all be d eemed to hav e earn ed th e g reater of (i) 1 00% of the Perfo rmance Un its, or (ii) the p ercen tag e o f su ch Perfo rmance Un its that wo u ld d erive from ap ply in g the schedule in Sectio n 2(b) to Cumulative After-tax Ad ju sted Operating In co me throu g h the date of th e Compan y Chan ge in Co n tro l (in stead of over the Awa rd Period). Any earned Performance Un its shall be paid shall be paid with in 4 5 d ays fo llowing the date o n wh ich the Co mpany Change in Control o ccurs, b ased o n th e Co mp any Ch an g e in Con tro l Bo o k Valu e Per Unit, if availa b le within 1 0 day s before su ch p ay ment date; o r, if th e Co mpany Ch ange in Co n tro l Bo o k Valu e Per Un it is not then availa b le, th en 90% o f the v alue of each Performan ce Un it, b ase d on the PL Tangible Book Valu e Per Un it determin ed as of the mo st recently rep orted q uarterly balan ce sheet precedin g such Compa n y Ch ange in Co n tro l, shall be paid within 45 d ays o f th e Compan y Ch ang e in Co ntrol, fo llowed by an additional p ay men t in respect of each such Perfo rm ance Un it within 75 day s of su ch Co mp any Change in Control eq u al to the excess, if an y, of (i) the Chan g e in Con trol Bo ok Valu e Per Un it ov er (ii) 9 0 % o f th e PL Tangible Book Valu e Per Un it d etermin ed as o f th e mo st recently repo rted q u arterly balance sh eet precedin g su ch Company Change in Control. 7 . Federal Income Tax Consequences. (a)Gen eral. The fo llo win g d escrip tio n o f th e fed eral inc o me tax consequen ces o f the Perfo rmance Units is based on currently ap p licable p rovision s o f the Co d e and reg ulation s, and is on ly a g eneral su mmary. The summ ary d oes not discuss sta te a n d local tax laws, wh ich m ay differ fro m the federa l tax law, or federal estate, gift and emp lo y ment tax laws. You are u rge d to co nsult with y o u r o wn tax advisor reg ard ing th e ap p lication of th e tax laws to y o ur p articu lar situ ation . (b )Gran t of Performan ce Un its. Th is gran t of Performan ce Un its will n ot cause y o u to b e subject to federal inco me tax. (c)Payment o f Perfo rmance Units. Yo u will recogn ize o rdina ry inco me for fed eral in co me ta x pu rp ose s on th e p ay men t d ate. Th e amo unt of inco me reco g n ized will b e equal to the agg regate amo u n t o f cash paid . Notwithstanding the foreg oin g , if y o u have mad e a n effectiv e election u nder the Comp an y 's Deferred Co m p ensation Plan for Officers (“Deferred Compe n sation Plan ”), the tax ation o f such d eferred amoun t will be h andled as discussed in Section 7(d). Page 3 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (d )Deferred Compensatio n Plan . Yo u may elect to d efer p ay men t in re sp ect o f you r earn ed Perfo rmance Un its, and th e reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u make e ffective de ferral elections, you will reco g nize o rdina ry in come wh en the deferred p o rtion o f th e am o u nt p ay able o n y our Perfo rmance Units is paid from th e Deferred Compen satio n Pla n , in an amo u nt eq ual to th e amoun t o f cash p aid . You will be pro v ided with more info rm ation ab o u t th is d eferral oppo rtu n ity, and the Deferred Co mp ensation Plan, before y o ur Perfo rmance Units be come pay ab le. (e)ERISA. Neith er the Plan nor this Performance Un it Award is qualified und er Section 40 1 (a) of the Co d e an d n either is su b ject to any of th e pro v isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 8 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax with holdin g o b ligations attribu tab le to yo u r Perfo rman ce Un its, whether under th is Plan or un d er th e Deferre d Comp en sation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Perfo rmance Units. 9.Non-tra nsferability o f Performa nce Units. Yo u r Performan ce Units may n o t be assig n ed , pled g ed, or otherwise tran sferre d , ex ce p t upon you r d ea th by the laws of in testacy or descen t a n d d istrib u tion. 10.Beneficia ry Designations. You may name a b en eficiary o r b eneficiaries (wh o must b e memb ers of you r family a n d wh o m ay be n ame d contin g en tly o r suc ce ssive ly) with resp ec t to y our rights u nder th e Plan and th is Perfo rmance Unit Award (inclu d in g the right to receive payment in resp ect o f y our Performan ce Un its after your death) by su bmitting a written b eneficiary d esig n atio n in a fo rm a cceptable to the Co mpany. An y such design ation will b e effectiv e o n ly wh en filed with the Co mpany's Ch ief Financial Officer o r Co ntroller (o r such o ther p erso n as th e Compan y may desig n ate) before yo u r d ate o f d eath, and will (u n less sp ec ifically set fo rth therein) rev o ke all p rio r desig n atio n s. If th ere is n o beneficiary designation in effect o n the date o f y o u r d eath , y our b eneficiary will b e your surv iving sp o use or, if you hav e no su rvivin g spo u se, yo u r estate. 11.Adm inistratio n o f the Pla n. The Co mmittee has full p o wer to admin ister and in terpret the Plan and these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 12.Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, termin atio n or disco n tinuan ce of the se Prov isio n s o r th e Plan will u nfav orab ly affect an y Performanc e Unit Award p rev iously g ra n ted . 13.Effect on Em plo y ment a nd Othe r Benefits. Receipt o f a Perfo rm ance Unit Award und er th e Plan d oe s no t giv e any Particip ant any right to receive awards in th e future o r to co n tin ue in the emplo y o f the Compan y and its su b sidiaries, an d Perfo rmance Un it Award re cip ients are su bject to discip line and d isch arg e in th e sam e man n er as an y oth er emp lo y ee. Su bject to th e term s o f th e applica b le p lan , in come reco g n ize d as a result of an y p aymen t in resp ect of Performanc e Un its will not b e in clu ded in th e formula for ca lcu lating ben efits und er th e Compan y's Pensio n Plan, 401 (k), and d isability plan s. Page 4 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 14.Co o peration in Litig a tio n. By accep ting a Perfo rman ce Un it Award su b ject to the Plan, y o u ag ree that after y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . 15.No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Compa n y . Accord ing ly, by accep tin g a Perfo rmance Un it Award sub ject to the Plan an d these Pro v isions, y o u ag ree th at for o n e year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 16.No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y accep ting a Pe rforman ce Un it Award su b ject to th e Plan and th ese p rovisio n s, yo u agree that, during the Restricted Period, you will n o t — wh eth er on you r o wn b ehalf or on beh alf o f or in co nju nc tio n with any person or en tity — d irectly o r indirectly solicit o r accep t any b usin ess o f the ty p e co n d uc ted by th e Compan y as o f yo u r term ination d ate fro m any person o r entity that wa s eith er (1) a custo m er, distributo r, o r ag ent o f the Compan y as o f th at d ate or (2 ) a p rospectiv e cu stomer, distribu tor, or agen t co n tacted , called u p o n, o r serviced b y the Comp an y d u rin g the twe lve months b efo re yo u r termination date, or in duce, p romo te, facilitate, o r o th erwise contrib ute to the so licitation o f su ch cu sto mers, distribu tors, or ag ents o r pro sp ectiv e custo mers, d istrib u tors, or ag en ts. Yo u further agree th at, d u rin g the Restricted Period, y o u will n o t c o mmunicate for b u siness pu rpose s with any perso n or en tity that wa s eithe r (1 ) a custo m er, distributor, or agen t of the Compan y as of y o u r termin atio n d ate o r (2) a p rospectiv e c u stome r, d istrib u to r, o r a g ent contacted, called up o n , o r serviced by th e Co m p any d u rin g the twelv e months b efo re y o u r termin atio n d ate. Th is Sectio n 16 sh all n o t apply if you work ed in , or were a residen t of, the state of Californ ia wh en your em p loy ment termin ate d . 17.Co nfidential Info rm a tio n. The Compan y has exp ended an d co ntinu es to ex p end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m pan y. Acco rdingly, by acceptin g a Performance Un it Award su b jec t to the Plan and these p rovisio n s, y ou agree to perman ently maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in cludes, but is no t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, alg o rithms, tech nical data, re search plans, Page 5 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. sy stems, etc.), pro d u cts (includ ing without limitation, pro d u ct design , p ricin g , and d evelo p m ent in formatio n), tran sac tio ns or p otential tran sactions, services, trade secrets, k n o w-ho w, formu las, p rocesses, ideas, inven tions (whether o r n o t patentable), train ing mate rials, p erson n el info rmatio n , a tto rney -client communications, and th ird -party relatio n sh ip s. Th e abov e list is n o t ex h austiv e and Con fid ential In formation includ es an y other in formation that sho u ld b e reaso nab ly u nderstoo d a s the co n fid en tial or p roprietary information o f the Compa n y . Co n fid ential Information includ es not only in formation disclose d b y th e Compa n y to y ou, but also in formatio n dev eloped or learned b y you d u rin g the co u rse o f yo u r emp loymen t with the Co mpany. In formation is no t confiden tial, however, if it is availa b le in the pu b lic domain th rough no fau lt o f y o ur own. 18.Recovery of Da m ages by the Com pany. You agree that if y ou were to vio late an y o f Section s 1 4, 15, 16 and 1 7 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to recover liq u id ated d amag es from yo u eq ual to the amo u nt of in come th at yo u realize under this Perfo rmance Un it Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 4 , 15, 16, o r 1 7 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 4 , 15, 1 6 , or 17. 19.Perform ance Units Subject to the Pla n. Th ese Pro v isio ns a re sub ject to the Plan as ap prov ed b y th e Bo ard . The term s an d pro v isions o f the Plan as it may b e amen d ed fro m time to time are h ereby in corp o rated h erein by reference. In the ev ent o f a conflict b etween an y term or p rovision co ntain ed h erein and a term or pro v ision of th e Plan , th e ap p licable terms and pro visions of the Plan will govern an d prevail. 20.Acceptance o f Awa rd. If y o u wish to accept you r Performan ce Unit Award , y o u must execu te a 2 0 18 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 21.Comm unications with Gover nm ent Ag encies. Nothin g in these Prov isio n s, in clu d in g , withou t limitatio n , Se ction 1 4 , 1 7 or 1 8 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Qu estion s reg ard ing a Perfo rmance Unit Award su b ject to the Plan and req u ests for a d d itio n al information abo u t these Provision s, th e Plan o r th e Co m mittee should be directed to Rach el Go odson, Pro tective Life Co rporation , P.O. Bo x 260 6 , Birmingham, Alab ama 3 5202 (telephon e (2 0 5 ) 268 -5724, e-m ail Rach el.Go odson@Pro tec tiv e.co m). The Plan, th ese Provisio n s and y o ur Award Letter co n tain th e formal terms a n d co nditions o f yo u r Award, an d y o u shou ld re tain th em fo r fu ture referen ce. Yo u may o b tain a co p y o f the Pla n by written o r email req u est to Rachel Goo d so n . Page 6 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 PERFORMANCE UNITS AWARD LETTER Protectiv e Life Corp o ratio n h as awarded y o u : _______ Performance Un its Award Perio d: Ja n u ary 1, 2 0 18 – December 3 1 , 2020 Date o f Gran t: March 1 5 , 201 8 These Pe rforman ce Un its were award ed pursuant to the Pro tec tiv e Life Corp o ratio n Lon g -Term In cen tive Plan (the “Plan”), a n d are subje ct to the terms and co n d itio ns contained in the 20 1 8 Perfo rmance Units Award Pro v isions (“Pro visions”), as set fo rth in Ap p en d ix A to th is Award Letter, and th e Plan. The Plan and th e Prov isio n s contain terms an d con d itio n s regardin g the p ayme n t of these Perfo rmance Units, termin atio n of employmen t, tax withholdin g, non -so licitation of Compan y emp lo y ees an d cu sto mers, regu latory comp lian ce and o th er matters, an d I enc o u rag e y ou to read th e Pro v isio ns ca refu lly . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2018 PERFORMANCE UNITS PROVISIONS As o f March 15 , 2 0 1 8, th e Bo ard of Direc tors o f Pro tectiv e Life Corp o ratio n (the “Compa n y ”) g ran ted yo u performan ce units (“Perfo rmance Un its”) under the Pro tective Life Co rp oration Lo n g -Term In cen tive Plan (th e “Plan ”) that, sub ject to the satisfactio n o f the applica b le term s an d con d itio n s related to su ch Perfo rmance Units, inclu d ing , but n ot limited to , th e satisfaction of th e ap plicable p erfo rmance vestin g co n d itio n s specified belo w, will en title you to receive a cash am o u nt b ased on the PL Tangible Bo o k Valu e of th e Compa n y. You hav e a lso re ce ived a Performan ce Un it Award Letter (“Award Letter”), wh ich tog eth er with th ese 2 0 1 8 Perfo rman ce Un its Pro visions (“Provision s”) and th e Plan, constitutes y our “Perfo rmance Unit Award.” 1 .Genera l Pro visions. The nu mber o f Perfo rm ance Un its tha t y o u h ave been awarded, th e Award Perio d of th e Perfo rmance Units, and th e Date of Gran t of th e Pe rforman ce Un its are set fo rth in y our Award Letter. 2 .Ea rn-Out of Performa nce Units. (a)General. Whether y o u will rece ive an y cash pay m ent in respect of your Performance Un it Award will be determin ed b ase d u pon the exten t to which the app licab le performan ce objective h as bee n satisfied and, e x cep t as oth erwise p rovided in Section 5 b elo w, you r contin u ed employme n t until the date the Perfo rmance Units are p aid. (b)Cu mulativ e After-tax Adjusted Opera tin g Inco me . Pay ment with respect to you r Perfo rmance Units will b e based on the Co mpany's Cu m u lative After-tax Adju sted Operatin g In come d uring the Award Period , as determined in acco rdan ce with the fo llowing sched ule: Cum ula tiv e After-ta x Adjusted Operating Incom e (d o lla rs in millio n s) Percentage o f Perfo rm a nce Units Earned Le ss th an $[____]0% $[____]100% $[____] or more 200% There will be straig h t-line interp o lation b etween Cumulativ e After-tax Adju sted Operatin g Inco me between $[_________] and $[_________] to d etermin e th e ex act p ercen tage to b e paid between 0% and 100%; an d b etween $[[_________] and $[_________] to d etermin e th e ex act p ercen tage to b e p aid b etwe en 1 00% an d 2 0 0%. 3 . Definitions. Cap italized terms th at are u sed but n o t defin ed herein shall h ave the mean ing ascribed to th em in the Plan . For p u rposes of th ese Pro visions, the fo llo win g term s sha ll have th e follo win g me anin gs: “Cu mula tiv e After-tax Ad ju ste d Op erating Income” is d efined as th e Compan y's total income e arned after tax es during th e Awa rd Perio d , ex cluding the imp act o f realized g ain s o r lo sses on investme n ts an d deriv atives, any imp airmen t lo sses record ed o n g o o dwill an d other in tangible assets crea ted by the Merger, an y ex pen se b o rne by the Co mp any that was the resu lt of actions o r requ irem ents of th e Compan y's Paren t an d were not includ ed in th e b u sin ess plan , and unplan n ed ch ang es to income resu lting fro m n ew acco u n ting Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. p ronou n cements. An y lost in come du e to d iv idends paid in ex cess of p lanned amoun ts will b e ad ded b ack to d etermine after tax o p erating in co me. 4.Time a nd Form of Pa y ment. As soon as practicab le, b u t not later than 60 day s, after the end of the Award Pe riod , the Committee will de term ine the exten t to wh ich an y Perfo rmance Unit Award has b een earne d . Except as oth erwise set fo rth h erein , the valu e of each earned Performan ce Unit shall equal th e PL Tan gib le Book Value Per Unit d ete rm ined as o f the most recently rep orted q u arterly b alance sheet d ate last preceding th e date o f p ay ment and sh all b e pa id not later th an th e March 1 5 follo wing the end of the Award Perio d . 5.Term ina tio n o f Employm ent. (a)Death, Disability or Retirement. Un less th e Co mmittee d etermin es to pro vid e fo r treatment th at is mo re favo rable to y o u on su ch terms an d co nditions as th e Committee may d ete rm ine, if your employmen t is terminated by death , Disability o r b y Ea rly Retiremen t or Normal Retirement, yo u (o r, as app licab le, yo u r leg al rep resen tative o r b eneficiary ) will rec eiv e a paymen t with resp ect to a pro -ra ta p o rtion o f you r Performan ce Un its, d etermine d b ased on a fractio n , the n u m erato r o f whic h is yo u r perio d o f emp loy men t d u rin g the Award Perio d and th e d eno min ator of wh ich is the total number o f days in the Award Period. The amo unt in respect o f yo u r p ro-rated Performan ce Un its will b e de term ined b y applyin g the perfo rm ance achieved thro u g h the end of th e Award Period (or th e d ate o f a Co mp any Ch ang e in Control, if applicable) ag ainst th e schedule set fo rth in Sectio n 2 (b) abo v e. The remainin g p o rtion of y our Perfo rmance Units (i.e., the exc ess ov er th e p ro-rated portio n) sh all be fo rfeited as of th e date yo u r emp lo y m ent te rminates. (b )Special Termination . If you r em p loy ment is termin ated by reason of (1) th e d iv estitu re of a bu siness seg men t or a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Performance Unit Award shall b e at the d iscretio n of the Committee. An y p ortio n o f you r Performa n ce Un its which the Committee d etermin es is not eligible for pa y ment un d er th is Section 5(b ) shall b e forfeited as o f the d ate y our e mployme n t termin ates. (c)Other Term ination. Un less the Committee determines to pro v ide for treatmen t th at is mo re favorable to y o u o n su ch term s and conditions as the Co mmittee m ay determin e, if y our emp lo y m ent is terminated for any reaso n not set forth in Sec tio ns 5(a) or (b ), an y u nvested p o rtion of your Performance Un it Award will b e forfeited. (d )Termination for Ca u se . Unless th e Co m mittee de term ines to pro v id e for treatm ent that is mo re favorable to y ou on su ch terms and co nditions as th e Co mmittee may d eterm ine, if y our emp loymen t is te rminated for Cause p rio r to th e date y our Perfo rmance Units are p aid p ursuan t to Sectio n 4 , all of you r v ested and un v ested Pe rforman ce Un its will b e forfeited. 6 . Co mpany Change in Co ntro l. In the even t of a Comp an y Chan g e in Control, the Award Period shall b e deeme d to ha v e ended o n the d ate o f the Compa n y Chan g e in Co ntrol an d y ou sh all be d eemed to hav e earn ed th e g reater of (i) 1 00% of the Perfo rmance Un its, or (ii) the p ercen tag e o f su ch Perfo rmance Un its that wo u ld d erive from ap ply in g the schedule in Sectio n 2(b) to Cumulative After-tax Ad ju sted Operating In co me throu g h the date of th e Compan y Chan ge in Co n tro l (in stead of over the Awa rd Period). Any earned Performance Un its shall be paid shall be paid with in 4 5 d ays fo llowing the date o n wh ich the Co mpany Change in Control o ccurs, b ased o n th e Co mp any Ch an g e in Con tro l Bo o k Valu e Per Unit, if availa b le within 1 0 day s before su ch p ay ment date; o r, if th e Co mpany Ch ange in Co n tro l Bo o k Valu e Per Un it is not then availa b le, th en 90% o f the v alue of each Performan ce Un it, b ase d on th e PL Tangib le Book Page 2 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Valu e Per Unit determin ed as of th e mo st recen tly rep o rted quarterly balan ce sh eet preced in g su ch Company Change in Co n tro l, sh all b e paid within 45 d ays of the Co mp any Cha n g e in Co ntrol, fo llo wed b y an ad d itio n al pay ment in resp ect o f each su ch Perfo rmance Un it within 7 5 d ay s of su ch Co mp any Ch ang e in Control equ al to th e ex cess, if any, o f (i) the Chan ge in Co n tro l Bo o k Value Per Unit o v er (ii) 9 0 % o f the PL Tangible Boo k Value Per Unit determined as o f the most recently reported q u arte rly balanc e sh eet precedin g su ch Compan y Chan ge in Control. 7 . Federal Income Tax Consequences. (a)Gen eral. The fo llo win g d escrip tio n o f th e fed eral inc o me tax consequen ces o f the Perfo rmance Units is based on currently ap p licable p rovision s o f the Co d e and reg ulation s, and is on ly a g eneral su mmary. The summ ary d oes not discuss sta te a n d local tax laws, wh ich m ay differ fro m the federa l tax law, or federal estate, gift and emp lo y ment tax laws. You are u rge d to co nsult with y o u r o wn tax advisor reg ard ing th e ap p lication of th e tax laws to y o ur p articu lar situ ation . (b )Gran t of Performan ce Un its. Th is gran t of Performan ce Un its will n ot cause y o u to b e subject to federal inco me tax. (c)Payment o f Perfo rmance Units. Yo u will recogn ize o rdina ry inco me for fed eral in co me ta x pu rp ose s on th e p ay men t d ate. Th e amo unt of inco me reco g n ized will b e equal to the agg regate amo u n t o f cash paid . Notwithstanding the foreg oin g , if y o u have mad e a n effectiv e election u nder the Comp an y 's Deferred Co m p ensation Plan for Officers (“Deferred Compe n sation Plan ”), the tax ation o f such d eferred amoun t will be h andled as discussed in Section 7(d). (d )Deferred Compensatio n Plan . Yo u may elect to d efer p ay men t in re sp ect o f you r earn ed Perfo rmance Un its, and th e reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u make e ffective de ferral elections, you will reco g nize o rdina ry in come wh en the deferred p o rtion o f th e am o u nt p ay able o n y our Perfo rmance Units is paid from th e Deferred Compen satio n Pla n , in an amo u nt eq ual to th e amoun t o f cash p aid . You will be pro v ided with more info rm ation ab o u t th is d eferral oppo rtu n ity, and the Deferred Co mp ensation Plan, before y o ur Perfo rmance Units be come pay ab le. (e)ERISA. Neith er the Plan nor this Performance Un it Award is qualified und er Section 40 1 (a) of the Co d e an d n either is su b ject to any of th e pro v isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 8 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax with holdin g o b ligations attribu tab le to yo u r Perfo rman ce Un its, whether under th is Plan or un d er th e Deferre d Comp en sation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Perfo rmance Units. 9.Non-tra nsferability o f Performa nce Units. Yo u r Performan ce Units may n o t be assig n ed , pled g ed, or otherwise tran sferre d , ex ce p t upon you r d ea th by the laws of in testacy or descen t a n d d istrib u tion. 10.Beneficia ry Designations. You may name a b en eficiary o r b eneficiaries (wh o must b e memb ers of you r family a n d wh o m ay be n ame d contin g en tly o r suc ce ssive ly) with resp ec t to y our rights u nder th e Plan and th is Perfo rmance Unit Award (inclu d in g the right to receive payment in resp ect o f y our Performan ce Un its after your death) by su bmitting a written b eneficiary d esig n atio n in a fo rm a cceptable to the Co mpany. An y such design ation will b e effectiv e o n ly wh en filed with the Co mpany's Ch ief Financial Page 3 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Officer o r Controller (or such o th er perso n as th e Company may design ate) before y o ur date o f d eath , an d will (unless specifically set fo rth th erein ) revo k e all p rio r desig n atio n s. If the re is n o ben eficiary d esig n atio n in effect on th e d ate o f y o u r d eath, yo u r b eneficiary will be you r surv iv ing spouse o r, if yo u have no surv iving sp o use, y o ur estate. 11.Adm inistratio n o f the Pla n. The Co mmittee has full p o wer to admin ister and in terpret the Plan and these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 12.Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, termin atio n or disco n tinuan ce of the se Prov isio n s o r th e Plan will u nfav orab ly affect an y Performanc e Unit Award p rev iously g ra n ted . 13.Effect on Em plo y ment a nd Othe r Benefits. Receipt o f a Perfo rm ance Unit Award und er th e Plan d oe s no t giv e any Particip ant any right to receive awards in th e future o r to co n tin ue in the emplo y o f the Compan y and its su b sidiaries, an d Perfo rmance Un it Award re cip ients are su bject to discip line and d isch arg e in th e sam e man n er as an y oth er emp lo y ee. Su bject to th e term s o f th e applica b le p lan , in come reco g n ize d as a result of an y p aymen t in resp ect of Performanc e Un its will not b e in clu ded in th e formula for ca lcu lating ben efits und er th e Compan y's Pensio n Plan, 401 (k), and d isability plan s. 14.Co o peration in Litig a tio n. By accep ting a Perfo rman ce Un it Award su b ject to the Plan, y o u ag ree that after y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . 15.No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Compa n y . Accord ing ly, by accep tin g a Perfo rmance Un it Award sub ject to the Plan an d these Pro v isions, y o u ag ree th at for o n e year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 16.No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y accep tin g a Performan ce Un it Award su bject to th e Plan an d these p rovision s, y o u agree th at, du ring th e Restricted Period, Page 4 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. y o u will no t — wh eth er on y o ur o wn beha lf o r on b eh alf of or in conjunction with an y person o r entity — directly o r indire ctly so licit o r accep t an y b u siness of the ty pe co nducted by th e Compan y as of your terminatio n d ate fro m any pe rso n o r entity th at was either (1) a cu stomer, distributo r, or agen t o f th e Comp an y as o f th at d ate o r (2) a p ro sp ective cu stomer, d istrib uto r, or agen t con tacted, called u p o n, o r serviced b y the Comp an y d u rin g the twe lve months b efo re yo u r termination date, or in duce, p romo te, facilitate, o r o th erwise contrib ute to the so licitation o f su ch cu sto mers, distribu tors, or ag ents o r pro sp ectiv e custo mers, d istrib u tors, or ag en ts. Yo u further agree th at, d u rin g the Restricted Period, y o u will n o t c o mmunicate for b u siness pu rpose s with any perso n or en tity that wa s eithe r (1 ) a custo m er, distributor, or agen t of the Compan y as of y o u r termin atio n d ate o r (2) a p rospectiv e c u stome r, d istrib u to r, o r a g ent contacted, called up o n , o r serviced by th e Co m p any d u rin g the twelv e months b efo re y o u r termin atio n d ate. Th is Sectio n 16 sh all n o t apply if you work ed in , or were a residen t of, the state of Californ ia wh en your em p loy ment termin ate d . 17.Co nfidential Info rm a tio n. The Compan y has exp ended an d co ntinu es to ex p end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m pan y. Acco rdingly, by acceptin g a Performance Un it Award su b jec t to the Plan and these p rovisio n s, y ou agree to perman ently maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in cludes, but is no t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, a lgorith ms, tech nical d ata, research p lan s, systems, etc.), prod u cts (in cludin g with o u t lim itation , p ro duct d esig n , p ricin g , and d evelop ment info rmatio n ), transactions o r potential transaction s, serv ices, trad e se crets, know-h ow, fo rmu las, pro cesses, ideas, invention s (whether o r not patentable), train ing materials, p erso n n el information, attorney-clie n t commu nicatio ns, an d th ird -pa rty re latio nsh ip s. The above list is not exh austive and Co n fid en tial In formation in cludes an y o th er in formation th at sho u ld be reaso nab ly u n d erstood as th e co n fid ential o r prop rietary information o f the Company. Co nfiden tial In formatio n inclu d es n o t only info rm ation d isclosed b y th e Company to you, b u t also information dev elo ped or learned by you during th e course o f y o u r emp lo y m ent with the Compa n y . Info rmatio n is no t con fid ential, h o we v er, if it is availab le in the p u blic do main th roug h n o fault of your own . 18.Recovery of Da m ages by the Com pany. You agree that if y ou were to vio late an y o f Section s 1 4, 15, 16 and 1 7 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to recover liq u id ated d amag es from yo u eq ual to the amo u nt of in come th at yo u realize under this Perfo rmance Un it Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 4 , 15, 16, o r 1 7 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 4 , 15, 1 6 , or 17. 19.Perform ance Units Subject to the Pla n. Th ese Pro v isio ns a re sub ject to the Plan as ap prov ed b y th e Bo ard . The term s an d pro v isions o f the Plan as it may b e amen d ed fro m time to time are h ereby in corp o rated h erein by reference. In the ev ent o f a conflict b etween any term o r p rovision co n tain ed Page 5 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. h erein an d a term o r pro vision of th e Plan, the ap p licable terms and prov isio n s of the Plan will g o ve rn and prev ail. 20.Acceptance o f Awa rd. If y o u wish to accept you r Performan ce Unit Award , y o u must execu te a 2 0 18 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 21.Comm unications with Gover nm ent Ag encies. Nothin g in these Prov isio n s, in clu d in g , withou t limitatio n , Se ction 1 4 , 1 7 or 1 8 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Qu estion s reg ard ing a Perfo rmance Unit Award su b ject to the Plan and req u ests for a d d itio n al information abo u t these Provision s, th e Plan o r th e Co m mittee should be directed to Rach el Go odson, Pro tective Life Co rporation , P.O. Bo x 260 6 , Birmingham, Alab ama 3 5202 (telephon e (2 0 5 ) 268 -5724, e-m ail Rach el.Go odson@Pro tec tiv e.co m). The Plan, th ese Provisio n s and y o ur Award Letter co n tain th e formal terms a n d co nditions o f yo u r Award, an d y o u shou ld re tain th em fo r fu ture referen ce. Yo u may o b tain a co p y o f the Pla n by written o r email req u est to Rachel Goo d so n . Page 6 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 RESTRICTED UNITS AWARD LETTER The Compe n sation an d Man agement Su ccessio n Co mmittee o f the Compan y 's Bo ard o f Directo rs h as awarded y o u: ______ Restricted Units Date o f Gran t: March 1 5 , 201 8 These Restricted Un its were award ed pursu ant to the Protectiv e Life Corp o ratio n Lo n g -Term Incen tiv e Plan (th e “Plan ”), an d are su b ject to th e terms and conditions c o n tain ed in the 2 0 18 Restricted Units Award Pro visions (“Prov isio n s”), as set forth in Ap pen d ix A to this Award Letter, and the Plan. The Plan an d th e Pro visions contain terms an d co n ditions rega rd in g th e vesting o f th ese Re stricted Un its, termin atio n o f emplo y ment, tax with h o ld ing, n on-solicitation of Co mp any emp loyees a n d custo m ers, regu latory complian ce and o ther matters, an d I en cou rage y o u to read th e Provisio n s carefully . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. [NAME] MARCH 1 5, 20 1 8 RESTRICTED UNITS AWARD LETTER Protectiv e Life Corp o ratio n h as awarded y o u : ______ Restricted Units Date o f Gran t: March 1 5 , 201 8 These Restricted Un its were award ed pursu ant to the Protectiv e Life Corp o ratio n Lo n g -Term Incen tiv e Plan (th e “Plan ”), an d are su b ject to th e terms and conditions c o n tain ed in the 2 0 18 Restricted Units Award Pro visions (“Prov isio n s”), as set forth in Ap pen d ix A to this Award Letter, and the Plan. The Plan an d th e Pro visions contain terms an d co n ditions rega rd in g th e vesting o f th ese Re stricted Un its, termin atio n o f emplo y ment, tax with h o ld ing, n on-solicitation of Co mp any emp loyees a n d custo m ers, regu latory complian ce and o ther matters, an d I en cou rage y o u to read th e Provisio n s carefully . Please retain these d o cu men ts in yo u r p erson al rec o rds. Richard J. Bielen Preside n t and Ch ief Ex ecu tive Officer of Pro tectiv e Life Corpo ratio n Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 2 0 18 RESTRICTED UNITS PROVISIONS As of March 1 5 , 2018, y o u were g ran ted restricted units (“Restricted Units”) u nder the Protectiv e Life Corp o ratio n Lo n g-Term In centive Plan (the “Plan”) th at, sub ject to the satisfaction of th e ap p licable term s and condition s related to su ch Restricted Un its, includ ing , b u t not limited to, the satisfaction o f the ap plicable serv ice v estin g co nditions sp ecified belo w, will entitle y o u to re ceive a ca sh amo u n t based on th e Ta n g ib le Bo ok Valu e of Pro tectiv e Life Corp o ratio n (th e “Co mp any ”). Yo u h ave also receiv ed a Restricted Un it Award Letter (“Award Le tter”), which together with these 20 1 8 Restricted Units Pro visions (“Pro v isio ns”) and the Plan, c o n stitu tes y o u r “Restricted Unit Awa rd .” 1 . Awa rd. (a)General Provision s. Th e number o f Restric ted Un its that you have b een award ed (su b ject to ad ju stment as prov ided in these Provisio n s an d the Plan ), an d the Date o f Gra n t of th e Restricted Units, are set forth in yo u r Award Letter. (b )Defin ition s. Capitalized terms th at are u sed b u t n o t defined h erein sh all ha v e the mean in g ascrib ed to th em in the Plan . 2 . Vesting a nd Pa y ment o f Restricted Units. (a)General Vesting Ru le . Unless v ested o n an earlier da te as p rovided in th ese Pro v isio ns or th e Plan, 50% of y our Restricted Un its will vest on Dec emb er 3 1, 2 020, an d th e remainin g 50 % of y o ur Restricted Un its will v est on Decembe r 31, 2021 (collectiv ely, the “Regular Vesting Sch edule”), subject in ea ch case to your co n tinued employmen t thro u gh such date (except as o therwise p rovided in Section 4 b elow). (b )Pay m ent o f Restricted Units. (i) Reg u lar Vesting . Restricted Units th at become v ested in accord ance with Section 2(a) shall b e settled in cash fo llowing (but n o t later th an th e March 15 imme d iately fo llo win g ) the d ate as of which such Restricted Units b ecome vested b ased on the PL Tan g ib le Book Value Per Un it d ete rmined as of th e most recently rep o rted qu arterly balance sheet da te last precedin g th e d ate of p aymen t. (ii) Early Vesting . Any Restric ted Units that b ecome v ested u nder Sectio n 4 b y reaso n of your termin atio n of emp lo y m ent p rio r to the d ate such Re stricted Un its wo u ld o therwise hav e beco me v ested pu rsu ant to Sectio n 2(a) (“Early Vesting”) sh all n onetheless be settled in cash fo llowin g (b ut not later than the March 1 5 immediately fo llowing) th e d ate as of which su ch Restricted Units wo uld have become vested (b ut for such Early Ve stin g ) if you had remained in the Co m p any 's emplo ymen t thro u gh ea ch of th e ap p licable dates specified in Sectio n 2(a), based on th e PL Tan gib le Book Value Per Unit determin ed as of the most rec ently repo rted q u arterly balance sh eet date last p reced ing th e da te of payment. 3 .Com pany Cha nge in Control. In th e ev en t of a Compan y Ch ange in Control, all o f your Re stricted Un its will imm ediately v est and sh all b e settled in c ash within 45 day s following th e date on which the Compan y Change in Co ntro l o ccu rs, based o n th e Co m p any Chan g e in Co ntrol Book Valu e Per Unit, if av ailable with in 1 0 d ay s b efo re such payment date; o r, if th e Co m p any Chan g e in Con tro l Book Valu e Per Unit is no t then av ailable, the n 90% of th e v alu e o f each Restricted Unit b ased on th e PL Tan gib le Book Value Pe r Un it determin ed as o f th e mo st recently repo rted quarterly balance sheet p reced in g su ch Co mp an y Chan ge in Co ntrol, sh all b e paid within 4 5 day s o f the Co mpany Chan ge in Con tro l, follo wed b y an ad ditio nal p aymen t within 75 d ays o f such Co m p any Chan g e in Co n tro l eq u al to the exc ess, if an y, o f (i) the Chan g e in Co n tro l Bo o k Value Per Unit o v er (ii) 90 % o f the PL Tan gib le Bo ok Valu e Per Un it d etermin ed as of th e m o st re ce n tly repo rted q ua rterly b alance sh eet prec edin g su ch Co mpany Change in Control. 4 .Term ina tio n o f Employm ent. (a)Death, Disability or No rmal Retirement. If you r em p loy men t is termin ated by death , Disability or Normal Retirement, y o u r Restricted Un its will immediately v est in full. (b )Early Retiremen t. Un less th e Committee determin es to prov ide fo r treatment that is mo re fav orable to you on su ch term s and conditions as the Co mmittee may d etermin e, if your emplo y ment with the Compan y an d its Sub sidiarie s term inates due to Early Retiremen t, a p ro -ra ted po rtion of y o ur Restricted Units will immed iately v est. The p o rtion o f your Restricted Un its that wo u ld o therwise have b ecome vested based o n emplo yment th roug h each o f Decemb er 3 1 , 2 0 2 0 an d Decemb er 3 1 , 2 0 2 1 will be separately ca lcu lated by mu ltip ly ing (1 ) the number o f u nvested Restricted Un its that wo u ld beco me v ested at th e ap plicable d ate by (2 ) a fractio n , the nu merator of which is th e number o f co mp lete and partia l calen dar months b etween January 1 , 201 8 an d y o ur Early Retire men t d ate, an d the de n o m inato r of which is (x ) 36 , in the case of the p o rtion o f the Restricted Un its th at wou ld b ecome v ested at Decem b er 3 1 , 2 0 2 0, and (y ) 48, in the case of the portio n of the Restricte d Un its th at would become v ested at December 31, 2021. An y Restricted Un its that d o n o t vest upon you r Early Retirement p u rsuan t to the prec edin g sentence will b e forfeited . (c)Sp ecial Termin atio n . If y our emp lo y m ent is te rm inated by reaso n of (1 ) th e d ivestitu re o f a b u siness segmen t o r a significan t portio n o f the assets o f the Co mp any, or (2 ) a significan t reductio n b y th e Compan y in its salaried wo rk force, the d etermin atio n of wh ether, to wh at e x ten t, an d on wh at c o n d itio ns a n y pay ment sh all b e mad e with resp ect to an y unv ested p o rtion o f y o u r Restricted Unit Award shall be at th e d iscretio n o f th e Committee. Any portio n o f yo u r Restricted Units that th e Committee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. d etermin es is not eligible for pa y ment un d er th is Section 4(c) sh all be fo rfeited as of th e d ate you r em p loy ment termina tes. (d )Oth er Terminatio n. Unless th e Co m mitte e determin es to p rov ide for treatment th at is more fav orab le to you o n su ch term s an d cond itio n s as the Co m mittee m ay determine, if y our emp loymen t is terminated for a n y reaso n n ot set forth in Sections 4 (a), (b ) o r (c) prior to the ap plicable vestin g d ates sp ecified in Se ction 2(a), y o u r u nvested Restricted Units will be fo rfeited . (e)Termin atio n for Cau se . Unless the Co mmittee d etermin es to prov ide fo r treatm ent tha t is more favo rable to yo u on su ch terms and co nditions as th e Co mmittee may d eterm ine, if y our emp loymen t is te rminated for Cause p rio r to th e date y our Restricted Units are p aid p ursuan t to Sectio n 2 (b), all of y our vested and unvested Restricted Units will be fo rfeited . 5 . Federal Income Tax Consequences. (a)General. The follo win g d escrip tion of the fed eral income tax conseq ue n ces o f th e Restricted Units is based on currently app licab le pro v isio ns of the Cod e, and is on ly a gen eral su m mary. The su m mary do es not discuss state and local tax laws, wh ich may d iffer fro m th e fe d eral tax law, o r federal estate, g ift and e mploymen t tax laws. Yo u are u rg ed to consult with you r own tax adviso r reg ard ing th e app lication of th e tax laws to y o u r p articula r situ ation . (b )Grant of Restricted Un its. This grant of Restricted Units will not su b ject y o u to fed eral in co me tax . (c)Paymen t of Restricte d Units. Yo u will recognize ord inary inco me for fed eral inco m e tax p u rposes o n th e p aymen t d ate. Th e amo unt of inco me reco g n ized will b e equal to the agg regate amo u n t o f cash paid . Notwithstanding the foreg oin g , if y o u have mad e a n effectiv e election u nder the Comp an y 's Deferred Co m p ensation Plan for Officers (“Deferred Compe n sation Plan ”), the tax ation o f such d eferred amoun t will be h andled as discussed in Section 5(d). (d )Deferred Co mpensa tio n Plan . You may elect to de fer payment in resp ect of yo u r v ested Restricted Units, and th e reco gnition o f ta x able in come with respect to su ch p aymen t, b y making d eferral electio n s under the Deferred Co m p ensation Plan. If y o u mak e effectiv e d eferral electio n s, y o u will recognize ord in ary in come when the amoun t d erived fro m th e d eferred p o rtion of y our Restricted Un its p aymen t is p aid fro m the Deferred Compensatio n Plan, in an a mou n t eq ual to th e amou n t of cash p aid. Yo u will b e p rovid ed with more information a b o ut th is deferral o p p ortunity an d the Deferred Co mp en sation Plan. (e)ERISA. Neith er the Plan nor this Restricted Unit Award is q u alified un d er Section 4 0 1(a) of th e Co de and n eith er is su b ject to any of th e prov isio ns o f the Emp lo y ee Retireme n t Inco me Security Act of 1974 , as amen d ed. 6 . Tax Withholding. Th e Co mp any will with hold an amount in cash su ffic ien t to satisfy a n y ap p licable federal, state and /or local tax withho lding o b ligations attributable to you r Restricted Un its, whether u n d er th is Plan o r un d er th e Deferred Comp en sation Plan , if y o u h ave mad e deferral electio ns u n d er tha t p lan in resp ect to yo u r Restricted Units. 7 . No n-transfera bility of Restricted Units. You r Restricted Units ma y n ot b e assign ed, pledg ed, or otherwise tran sferred, except u p on y our death b y the laws of in testacy or d escen t and distributio n . 8 . Beneficia ry Desig na tio ns. Yo u may n ame a b eneficiary o r b eneficiaries (who must be membe rs of y o u r family and wh o may b e named con tin gen tly o r suc ce ssive ly) with respect to your righ ts u nder th e Plan an d this Restricted Unit Award (in cluding th e righ t to receiv e any p aymen t in respect of your Restric ted Units after y our d eath ) by su b mittin g a written ben eficiary d esig n atio n in a fo rm accep tab le to the Co m p any. An y such d esig n atio n will b e effective on ly when filed with the Compa n y 's Ch ief Financial Officer and Controller (o r such othe r perso n as th e Co mp an y may d esig nate) before you r date of d eath, an d will (u n less spe cifically set fo rth therein) revoke all prior desig n atio n s. If th ere is no beneficiary design ation in effect on the date of your d eath, y our beneficiary will be y o u r su rviv in g spo u se o r, if y o u h ave n o su rv iv ing spouse, your estate. 9 .Adm inistra tio n of the Plan. The Co m mittee h as fu ll p o wer to ad minister and in terpret the Plan an d these Provision s and to adop t such ru les an d reg ulation s consistent with the terms of th e Plan as th e Committee d eems n ecessa ry or ad v isab le in ord er to ca rry ou t th e p rovision s o f th e Plan . Ex cept as o th erwise pro v id ed in the Plan, the Committee’s in terpretation an d co n stru ction o f the Plan and these Pro v isio ns and its determin atio n o f an y cond ition s applicab le to Awa rd s o r th e granting o f Award s to spe cific Particip ants is conclu sive an d b in d ing on all Particip ants. 1 0 .Am endm e nt. By a ction of the Boa rd o r th e Committee, th e Co mp any may from time to time amend , termin ate or d isco n tinue th e Plan and/o r these Pro v isions in accord ance with th e terms o f the Plan in effect at th e time of the amendmen t, but no amend ment, terminatio n or discontin u ance o f the se Pro v isions or th e Plan will unfavorably affe ct any Restricted Unit Award p re v iou sly g ran ted . 1 1 .Effect on Employm ent and Other Be nefits. Receip t of a Restricted Un it Award u n d er th e Plan d o es n o t g iv e any Particip ant any right to receiv e awards in th e future o r to co ntinu e in th e emp loy of the Co mp any and its su b sidiaries, an d Restricted Un it Award re cip ients are su bject to discip line and d isch arg e in th e sam e man n er as an y oth er emp lo y ee. Su bject to th e term s o f th e applica b le p lans, inco me recog n ized as a resu lt of any pay ment in respect o f Restricted Units will not be inclu d ed in th e fo rmu la for ca lcu lating ben efits und er th e Compan y's Pensio n Plan, 401 (k), and d isability plan s. 1 2 .Co o peration in Litig a tio n. By acceptin g a Restricted Unit Award sub ject to the Plan , you ag ree that after y o ur emp lo y m ent termin ate s (reg ard less of the reaso n ), you will co o perate fully with the Co mp an y in co nnectio n with an y cu rren t or futu re claims, lawsuits, arbitratio n s, p roceed in g s, examinations, in q uiries or in v estig ation s in v o lv ing th e Compa n y th at relate to your se rv ice with th e Compan y. This in cludes be ing availa b le on reasonab le no tice for in terviews and o th er commu nications with th e Compan y's counsel in c o n n ection with any su ch matter and app earin g at the Co mp an y 's req u est (and without a sub p o en a) to be dep osed or to give testimo n y . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 1 3 .No n-Solicita tio n o f Compa ny Em plo y ees. Th e Co mp any has exp ended an d contin u es to exp end sig nifican t time and expen se in recru itin g and train ing its employees an d th e loss of emp lo y ees wo uld cause significan t and irreparab le h arm to the Co m pan y. Acco rdingly, by ac ce p ting a Restricted Unit Award su b ject to th e Plan an d th ese Prov isio n s, y o u ag ree tha t fo r one year b eginnin g on th e date y o ur emp loymen t termina tes (regardless of th e reason ) (th e “Restricted Perio d”), you will not (directly or indirectly ) h ire, solicit for hire, or assist others in hirin g o r so lic iting fo r h ire, any emp loyee of the Co mp an y o r its sub sidiaries (“Co m p any Emp lo y ees”). This p rovision shall n o t proh ibit you or a fu ture emplo y er of you rs fro m hirin g, solicitin g fo r h ire, o r assisting o thers in hirin g o r so lic iting fo r h ire, any Co mpany Em p loy ee wh o : (1) respond s to a ge n eral solicitatio n o r ad v ertisement th at is n o t d irected to Company Emp loyees or (2 ) is referred to yo u r futu re em p loy er by a search firm, employme n t ag ency, o r similar o rga n izatio n with o ut an y assistan ce, in p u t, o r invo lvem ent b y yo u . 1 4 .No n-Solicita tio n of Co mpany Custom ers, Distributo rs, or Agents. Th e Compa n y has expended a n d co n tinues to expend significa n t time an d ex pe n se in developing relatio n sh ip s and re lated goo d will with its custo mers, distributors, a n d ag ents; and the loss of these relationships (or any asso ciate d b u sin ess) would cause significant and irreparab le h arm to th e Co mp any. Acco rdingly , b y accepting a Restricted Unit Award sub ject to the Plan and the se pro v isio ns, y o u ag ree th at, d u rin g th e Restricted Period, you will no t — wh eth er on y o ur o wn b ehalf o r o n beha lf o f or in co n ju n ctio n with an y perso n o r en tity — directly o r indire ctly so licit or accep t any b u siness o f the type co n ducted by the Company as o f yo u r termin atio n date from an y person or entity that was eith er (1) a cu stomer, d istrib u to r, or ag ent o f the Co mp any as o f that date or (2) a pro sp ective cu stomer, distribu tor, or agent co ntacted , called u p o n, or serviced by th e Comp an y during th e twe lve month s before yo u r termina tio n date, or ind u ce, p romote, facilitate, or oth erwise co n tribute to the solicitatio n of su ch cu stomers, distribu tors, or a g ents or p rospectiv e custo m ers, distributors, or agents. You fu rth er agree that, d u rin g the Restric ted Perio d , y ou will n ot co mmunicate fo r b u siness purp o ses with an y person o r entity that was either (1 ) a cu stomer, d istrib u to r, or ag en t o f the Compan y as o f y o u r termin ation date o r (2) a pro sp ectiv e cu stomer, d istrib u tor, or ag en t con tacted, called u p o n, o r serviced b y the Compan y d u rin g the twelv e mo n ths before y o ur termin atio n d ate. This Sec tio n 1 4 sh all not apply if you wo rked in, or were a resid ent o f, th e state o f Califo rnia when y o u r emplo yment terminated. 1 5 .Co nfidential Info rm a tio n. The Compan y has expen ded an d co n tinues to exp end con siderab le time and resources d evelo p ing its Confiden tial Info rmation ; an d this in fo rmatio n is of great co mp etitiv e im p o rtance an d co mmercial value to the Compan y. The imp roper u se o r disclosure o f th e Company’s Co n fid ential In fo rmatio n wo u ld cause sig n ificant and irreparab le harm to the Co m p a n y. Ac c o rd in g ly, by accep tin g a Re stricted Un it Award su bject to th e Pla n and these pro v isions, y ou ag ree to perm anen tly maintain the confiden tiality o f th e Co mp any’s “Co nfiden tial Info rmatio n .” Co n fid ential In formation in clu d es, but is n o t limited to, all info rm ation not gene rally known to th e p ublic (in sp o k en , p rin ted , electro nic, or an y oth er form o r med iu m) relating to th e Compa n y ’s: b u siness (inclu d in g with out lim itation , busin ess plans an d strategies, fin ancial in formation, custo mer or p rospective customer info rm ation , ag ent or p rospe ctive ag ent in fo rmatio n , d istrib u tor o r pro sp ective d istrib u to r in forma tio n, marketing pla n s, terms of agreemen ts, etc.), tech nolo gies (in clu din g with out limitation , compute r software , d atab ases, web design , tech n ical d ra wing s, d esig ns, sche matics, a lgorith ms, tech nical d ata, research p lan s, systems, etc.), prod u cts (in cludin g with o u t lim itation , p ro duct d esig n , p ricin g , and d evelop ment info rmatio n ), transactions o r potential transaction s, serv ices, trad e se crets, know-h ow, fo rmu las, pro cesses, ideas, invention s (whether o r not patentable), train ing materials, p erso n n el information, attorney-clie n t commu nicatio ns, an d th ird -pa rty re latio nsh ip s. The above list is not exh austive and Co n fid en tial In formation in cludes an y o th er in formation th at sho u ld be reaso nab ly u n d erstood as th e confiden tial or p roprietary in formatio n of the Co mpany. Confidential In forma tio n in cludes n o t o n ly info rm ation d isclosed b y th e Company to you, b u t also information dev elo ped or learned by you during th e course o f y o u r emp lo y m ent with the Compa n y . Info rmatio n is no t con fid ential, h o we v er, if it is availab le in the p u blic do main th roug h n o fault of your own . 1 6 .Reco v ery o f Dama g es by the Co mpa ny. Yo u ag ree th at if yo u we re to v iolate any o f Sectio ns 12, 13 , 1 4 , and 1 5 the amo u n t o f d amag es suffered b y the Co mp any would be d ifficu lt to d etermin e. Therefore, y ou agree th at th e Company will be entitled to reco v er liqu idated d amag es from you e q u al to th e amoun t of in come th at y o u re alize under th is Restricted Un it Award (inclu d in g all legally req uired withho ldings) (o r, if less, the po rtion thereo f determined by th e Co m mitte e) if the Co mmittee reasonably d etermin es in good faith that y ou v io lated any o f Sections 1 2 , 13, 14, o r 1 5 . All d eterminations u n de r th is Section shall be mad e b y the Comm ittee, acting re asonab ly and in g ood faith , an d its d etermina tio ns shall be fin al, b in d in g an d co n clusiv e on you, th e Compan y, and an y other p erson or en tity affected th ereby. Th is liq uid ated damages pro v ision d oes not relin q u ish an y equitable re med ies and oth er claims for damages th at the Co mp any may have . Th e Compan y will be entitled to recover costs and exp enses, inclu d in g attorneys’ fe es, incu rred in en fo rcing or bringing an y actio n to p rotect its rig h ts u nder Sections 1 2 , 13, 1 4 , or 15. 1 7 .Restricted Units Subject to Pla n. These Pro v isio ns are subje ct to the Plan as appro v ed b y th e Bo ard . Th e term s and p rovision s o f th e Plan as it may be amen d ed from time to time are hereb y in corp o rated herein b y reference. In th e event of a co nflict b etween an y term o r prov isio n co n tain ed here in an d a term or p rovision o f th e Plan, th e ap p licable terms an d prov isio n s o f th e Plan will g o v ern and prev ail. 1 8 .Acceptance of Award. If yo u wish to a cc ept y o u r Restricte d Un it Award, yo u must execute a 201 8 Lon g -Term In centive Plan Award s Accep tanc e Form, in the man n er sp ecifie d b y th e Co mp any, which may be in the fo rm o f a n electro n ic signatu re, n o later tha n _________ __, 2 018. 1 9 .Co m munica tio ns with Go v ernment Ag encies. Noth in g in th ese Prov isio n s, inclu d ing , with o ut limita tio n, Se ction 1 2 , 1 5 or 1 6 hereo f, (i) is in tended to or will b e used in an y wa y to lim it your rig h ts to co mmu n icate with a governmen t age n cy, as p rovid ed fo r, prote cted und er or warranted by applica b le law o r (ii) limits you r rig h t to receive an award from th e gov ernmen t fo r info rm ation pro v id ed to an y g o ve rn ment agen cy. You may not be h eld crimina lly or civ illy liab le u nder an y fed eral or state trade sec ret law for th e d isclosure o f a trade secret that: (a) is made (i) in confiden ce to a federal, state, or local go v ern ment official, either directly o r ind irectly, o r to an attorn ey; and (ii) so lely fo r th e purp o se of rep ortin g o r in v estigating a suspec ted v iola tio n o f law; o r (b) is mad e in a complaint or othe r do cume n t th at is filed under seal in a lawsuit or oth er pro ceed ing. Qu estion s regardin g a Restricted Un it Award su b ject to the Plan an d requests for additional info rm ation abou t th ese Provisio n s, the Plan or the Comm ittee shou ld be directed to Rachel Go o d so n, Protective Life Corp o ratio n , P.O. Box 260 6 , Birmingham , Alab ama 3 5 2 02 (teleph o n e (20 5 ) 2 6 8 -57 2 4 , e-mail Rachel.Good so n @Protective.com). Th e Plan , these Pro v isions and yo u r Award Letter contain the formal terms and co n d itio n s of y o ur Award, an d yo u should retain th em fo r fu ture referen ce. You m ay o b tain a copy of the Plan b y written o r ema il request to Rach el Go o dson. Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Page 1 of 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Cod e of Business Cond uct for Protective Life Corporation and all of its subsidiaries and affiliates (collectively r eferr ed to in this Code as “the Company”), including Protective Life Ins urance Company Wes t Coast Life Insuranc e Company Protec tiv e Life & Annuity Ins urance Company Protective Property & Cas ualty Insuranc e Company MONY Life Ins urance Company ProEquities, Inc. Firs t Protective Insuranc e Group Revised June 11, 2018 You have a responsibility to report any suspected violations of this Code. A suspected violation could be a situation that you observe or a situation that is brought to your attention by someone else. Suspected violations m ust be reported promptly to at least one of the following: •The Human Res ourc es Complianc e Off icer, Sandy Littleford (in the Human Resources Department), at (205) 268-6429 or s andy .littleford@prot ec tiv e.com •The Chief Compliance Officer, Steve Callaway (in the Legal Department), at (205) 268- 3804 or s t ev e.callaway @protective.com •The General Counsel, Mark Drew, (in the Legal Department) at (205) 268-4941 or mark .drew@protectiv e.com •The Chief Human Resources Officer, Wendy Evesque, (in the Human Resourc es Department) at (205) 268-5697 or wendy .evesque@protective.com •The Code of Busines s Conduct telephone hotline at (205) 268-CODE (2633) or (800) 421-3564 (You may communic ate to the telephone hotlines anonymously.) •The Code of Busines s Conduct report form (You may c ommunicate using the f orm anony mously .) Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of C ontents Our Valu es 1 A St atement of Our Eth ical Prin cip les 2 A St atement of Our Princip les o f Ethical Market Co nd uct 2 Obt ainin g Gu idance Ab ou t Ethical Con cerns 2 Except ion s 2 Complian ce an d Speaking Up 3 Comp lian ce with th e Cod e 3 Individ ual Jud gmen t and Qu estion s to Ask Yo urself 3 Sp eak Up and Repo rt Su spected Vio lations 3 Penalty fo r Violat ion s 4 Waivers of the Code of Busin ess Con du ct 4 Con du ctin g t he Co mpany’s Bu sin ess 4 Busin ess Relatio nsh ips 4 Dealin g with Each Other 5 Dealin g with Customers 5 Dealin g with Producers and Ag ent s 5 Dealin g with Sup pliers 5 Dealin g with Reg ulators 6 Dealin g with Pub lic Officials an d Emp loyees 6 Doing Business with Any Government 6 Inter acting with Public Officials and Employees 6 Political Contributions, Political F undr aising and Political Activity at Work 7 Dealin g with Aud ito rs 8 En gagin g in Busin ess Ou tsid e th e Unit ed Stat es 8 Dealin g with News Med ia, In vestors or th e Pu blic 8 Dealin g with Adverse Part ies 8 Avoiding Con flicts o f In terest 8 Yo ur Private Int erest s 8 Gifts, Meals and En tertain men t 9 Corpo rate Opp ortun ity 9 Disparag emen t 10 Industrial Esp ion ag e 10 Preven tio n o f F rau d 11 App ro priate Use and Saf egu ard ing of Compan y Prop ert y 11 Con fid ent ial In fo rmat ion 11 Use o f Soft ware 12 Use o f Compan y Systems and Devices 12 Accu rate Records, Rep ortin g and Disclosu re 13 Acco unt ing an d Au diting Matt ers 13 Th ird Party Wo rkers 14 Complyin g with L aws 14 In General 14 Antitrust Laws 14 Securities Laws 15 Proh ibit ion s o n Emplo ymen t in th e In surance Ind ustry 15 Charitab le Co ntribu tio ns 15 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our Values Throughout our Company ’s his tory , our mis sion has remained boldly alive in our name. We are Prot ec tiv e. We are c ommitted to tearing down the barriers that prev ent so many people from enjoying the peac e of mind and s atisfaction that come from taking care of t heir future financial needs and the needs of thos e who depend on them. This is our purpose. This will be our legac y. Four core values guide us in all that we do: Do the Right Thing, Serv e People, Build Trus t, and S implif y Ev ery thing. We serv e with integrity and honesty, treating each of our c us tomers t he way we would lik e to be treated. Each of us is responsible for the integrity of the Company , and eac h of us must be willing to raise ethical c oncerns . People in management posit ions have a s pecial res ponsibility to demonstrate high ethic al standards and to creat e an env ironment that requires ethic al behavior. This Code is intended to ass ist us in mak ing the right c hoices. These s ame rules apply to every one in the Company : employees , senior management and our B oard of Directors. Howev er, these guidelines do not cover every s ituation. You s hould be guided by the spirit of the guidelines as well as the language, and y ou should get help whenever you are in doubt. Remember, the accomplishment of t he Company 's mis sion and the fulfillment of the Company ’s commitment to all thos e we serv e are dependent on eac h of us applying high ethic al standards t o whatever we do for the Company. 1 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. A Statem ent of Our Ethical Principles •We will deal fairly and honestly with all people and treat each as we would ex pect each to treat us if t he s ituation were rev ers ed. •We will trust and respec t each ot her and maintain an environment where people may question a Company prac tic e without fear. •We will res pect the dignit y of eac h individual. •We will not pursue any bus iness opportunity in v iolation of the law or these principles . •We will undertake only thos e busines s ac tiv ities that will withstand public ethical s crutiny and our own s tandards of integrity. •We will disc lose any conflict of interest we may have (including, but not limited to, thos e res ulting from outs ide bus iness activities and/or v olunteer work) regarding our responsibilities to the Company and remov e the c onflic t where required. A Statem ent of Our Principles of Ethical Market Conduct In addition to the Company’s ethical principles , we fully support the following principles of ethic al mark et c onduct: •We will conduc t busines s ac cording to high s tandards of hones ty and fairnes s and will render that serv ice to our c us tomers whic h, in the same c irc ums tanc es , we would apply to or demand f or ourselves. •We will prov ide c ompetent and c us tomer-focused sales and serv ice. •We will engage in active and fair competition. •We will prov ide adv ertis ing and s ales materials that are clear as to purpos e and hones t and fair as to c ontent. •We will prov ide for fair and ex peditious handling of c us tomer c omplaints and dis putes. •We will maintain a sy stem of superv ision and rev iew that is reasonably des igned to achiev e complianc e with these princ iples of ethical mark et c onduct. Obtaini ng Guidance About Ethical Concerns We all s hare a responsibility for the Company’s integrity and reputation. It may take courage to rais e an ethic al iss ue; howev er, our Company ex pects this of you, c onsiders it an important res pons ibility of y ours , and our management will s upport you in carry ing out y our res pons ibility. When y ou have an ethic al conc ern, the best thing to do is to disc us s it with y our manager or any ot her appropriate pers on in the Company. The doors of the Legal Department and the Human Resources Department are always open to y ou. Except ion s No s et of guidelines , inc luding this Code, can c ov er all the s ituations y ou may encounter, and there may be s ituations in whic h exc eptions are appropriate. If you encounter a s ituation where the application of a rule or principle contained in this Code s eems inappropriate, t alk to your manager about it. Your manager c an c onsult with the appropriate approval authority to determine if an ex ception is in order. In c as e of doubt as to approv al authority , the Legal Department should be c onsulted. 2 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Compli ance and Speaking Up Complian ce with th e Cod e Complianc e with this Code is ess ent ial to being true to our Company ’s vis ion and v alues . The Company will insist on c ompliance. You are responsible for understanding and comply ing with thes e requirements. Your manager is responsible for as sis ting you. Individ ual Jud gmen t and Qu estion s to Ask Yo urself Ev en though this Code provides y ou with general guidanc e and your manager and the Legal Department are available to help y ou, you ultimately mus t depend on y our own indiv idual judgment in dec iding on the correc t cours e of action. As y ou c onsider a part icular s ituation, as k y ours elf these ques tions : •Is my action c onsis tent with approved Company prac tic es ? •Is my action c onsis tent with the Company 's preeminent values? •Does my action av oid any appearanc e of conflict of interest or impropriety? •Am I c onsidering any outs ide employment or v olunteer work t hat would interfere with my role with and responsibilities for t he Company ? •Can my ac tions withs tand the light of day? •Can I in good c onsc ience defend my action to my s upervis or, to other employees , and t o the general public? •Does my action meet my pers onal code of behav ior? •Does my action c onform to the s pirit of these guidelines ? •Is my ac tion the “right thing” to do? If the ans wer to any of these questions is “no,” y ou s hould rec onsider your c ours e of ac tion or seek guidance from your manager, the Legal Department or t he Human Resources Department before y ou act. Be c areful about s ubstitut ing c ollective judgment for y our individual judgment. As k yours elf: “What s pecifically am I being as ked to do? Does it seem unethic al or improper?” Us e your good judgment and c ommon sens e. If s omething would s eem unethic al or improper to a reasonable person, it probably is. Sp eak Up and Repo rt Su spected Vio lations You have a responsibility to speak up and report any suspec ted violations of this Code. A suspec ted violation could be a situation that you observ e or a sit uation that is brought to y our attention by someone else. If you aren’t sure whether a s ituation ris es to the level of a Code violation, talk to y our manager or to one of t he people lis ted below. If you report an ac tion to y our manager and suspect that it may be a Code v iolation, you should mak e sure that y ou or y our manager report it to one of t he appropriate contacts for Code violations. 3 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Suspec ted v iolations must be reported promptly to at least one of the following: •The Human Res ourc es Complianc e Offic er, Sandy Lit tleford (in the Human Res ources Department) at (205) 268-6489 or sandy.littleford@protective.c om •The Chief Compliance Officer, Stev e Callaway (in the Legal Department ) at (205) 268- 3804 or stev e.callaway@protec tiv e.com •The General Counsel, Mark Drew (in t he Legal Department) at (205) 268-4941 or mark.drew@protec tiv e.com •The Chief Human Res ourc es Officer, Wendy Evesque (in t he Human Resources Department) at (205) 268-5697 or wendy .evesque@protective.c om •The Code of Busines s Conduct telephone hot line at (205) 268-CODE (2633) or (800) 421-3564 (You may communicate to the telephone hotlines anony mously .) •The Code of Busines s Conduct report form (You may c ommunic ate using the form anony mously .) No employee will s uffer any adv erse action, retribution or c areer dis advantage for questioning a Company prac tic e or for making a good faith report of a s us pected violat ion of this Code or ot her irregularity. The Company will inves tigate poss ible v iolations . In doing s o, we will respec t the int eres ts of all parties conc erned. If requested, the identity of employ ees reporting suspec ted violations will be kept conf idential unles s we are required to reveal it to c onduct an adequate inv es tigation, to enforce these guidelines or t o comply wit h applic able law or judic ial proc es s. After reporting a s us pected v iolation, an employee is ex pected to c ooperate with the persons investigating t he s ituation (the “Investigativ e Team” or “Team”). In most c as es , t hat means that the reporting employee will res pond promptly to request s of the Investigativ e Team, if the Team has any reques ts . I n mos t cases , an employee’s role in relation to the s us pected v iolation will hav e been fulfilled by reporting it and res ponding to the Team’s reques t s. The report ing employee should not expec t or c onsider hims elf or herself to be a part of the Investigativ e Team. The Team will determine the appropriate met hod for carry ing out the investigation, and the appropriate communic ations about the investigation, including any communic ations with the employee who reported the s us pected violation. Penalty fo r Violat ions Those who violate the standards in this Code will be s ubjec t to disc iplinary act ion up to and including t ermination of employ ment. Waivers of the Code of Busin ess Con du ct Any waiv er of t he Code for execut iv e officers or directors may be made only by t he Company ’s Board of Directors or a committee of the Board and will be promptly disc los ed as required by law or s tock exc hange regulation. Conducting the Company’s Business Business Relatio nsh ips In c onducting the Company’s bus iness , we deal with a v ariety of people and organiz ations, inc luding other employees , c us tomers, suppliers, competitors, community repres entativ es , and t he investment c ommunity. •Our relations hips are bus iness relations hips and should be based on our Company's long-term bus iness interests. While we may develop friends hips or other relationships with those with whom we deal, our dealings wit h others s hould reflect our Company 's bes t interest. 4 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •All of our bus iness relations hips should be based on hones ty and fairnes s. •We want long-term, mutually beneficial bus iness relations hips, and trus tworthines s is es sential to es tablis h and keep them. •We will be truthful. If there is a mistak e or misunderstanding, we will correc t it immediately. From time to time, we may enter into relationships with other busines ses to pursue opportunities . It is import ant t hat t he bus iness es with whom we work will conduc t their ac tiv ities ethic ally and in c ompliance with all applic able legal and regulatory requirements . Dealin g with Each Other Basic to our relations hip with each other is the recognit ion of the value and worth of each indiv idual and t he nec es sity to prov ide a work ing c limate that is protectiv e and supportiv e of the well-being of all employ ees. •We are c ommitted t o prov iding opportunity to our employees; we will employ and promote those employees who are best qualified for the job. See the Equal Employ ment Opportunit y Policy in the Employee Handbook. •We will listen carefully and value the opinions and experience of employees and respec t their diverse bac kgrounds , cult ures , religions , ex perienc es and beliefs. •We will provide protec tion to all employ ees or applicants for employment against s ex ual or other harass ment. The full text of the Company's Harass ment Prev ention Policy is inc luded in the Employ ee Handbook . •Applicants f or employment and employ ees will be ev aluated for employ ment and promotion on a non-disc riminatory bas is. Dealin g with Customers Serv ing c ust omers is the focal point of our busines s. Satis fy ing c us tomers is the only way to ensure bus iness s uc cess. •We must work with customers to understand and anticipate their needs and to identify and remove obst ac les c us tomers may see in doing busines s with us. •We must acc urately repres ent our products and services in our marketing, adv ertis ing and sales efforts . •We need to res pond promptly and c ourteously to our customers and inv es t igate and res olv e customer c omplaints . •We seek to provide high quality products and services. We should ev aluate customer s atisfac tion and continuous ly improv e our quality . Dealin g with Producers and Ag ent s Our produc ers and agents are an es sential link in providing quality products and s ervic es to our c us tomers . •We must s elect and retain agents that s hare our values and our commit ment to qualit y. •We desire t o form last ing relations hips with our agents – relations hips based not just on product ion, but als o on compatible philos ophies and attitudes. Dealin g with Sup pliers Pros pective suppliers will have a chance to compete fairly for our busines s. •We will s elect s uppliers based on high quality produc t, s ervic e and v alue. 5 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •We want long-term relat ionships with our suppliers. Dealin g with Reg ulators Our busines s is highly regulated. Our regulators hav e a responsibility to t he public; to the extent our regulators perf orm their jobs well, we and other good c ompanies benefit. •We will alway s respond to and cooperate with regulatory aut horities . If a regulator c ont ac ts y ou and y ou are not t he des ignated employee responsible for dealing with that regulator, y ou should courteously ass ist the regulator in reac hing the appropriate employ ee. •To av oid c onfusion, only certain employees are designated to repres ent t he Company when c ommunic ating with regulators . If y ou are not a designated employ ee, y ou s hould refer any inquiry from a regulator t o one of the employ ees in your divis ion that is s o designated. If y ou have questions about who is s o des ignated, you should call Gov ernment Affairs about the types of c ommunic ation you engage in wit h regulat ors. •Regulators are public offic ials . All of the rules regarding our int erac tions with public officials apply to regulators . Dealin g with Pub lic Officials an d Emp loyees Federal, s tat e, local and foreign gov ernments hav e vary ing and c omplicated res trictions on int erac ting with public offic ials and employ ees, fundraising ac tiv ities, and giving gifts to public off icials and employ ees. There are even more res trictiv e rules for certain people – brok ers, dealers, investment adv isers and anyone who “lobbies .” Becaus e of the complexity of thes e laws , and the fac t that they frequent ly change, the following sections will inform you about sev eral situations y ou may fac e: Doing Busines s with Any Government To protec t the public interes t, the federal and some state and local gov ernments hav e enac ted laws and regulations that mus t be met by private c ontrac tors. Thes e laws and regulations are oft en harsh and impose s trict requirements on contrac tors that are s ignific antly different and more ex tens ive than those we enc ounter in our commerc ial contracts. In many instances, violation c an res ult in criminal s anctions , meaning the employee can be indiv idually liable. Since these laws inv olv e the public trus t and t heir violation often involves c riminal sanc tions , it is ess ential that there be stric t c ompliance with all laws and regulations – in both s pirit and letter – in transacting bus iness with the government. In c onducting gov ernment busines s, it is es sential that the terms of the c ontract with the government be stric tly complied with and no deviations or subs titutions be made without the writt en approval of t he c ontrac ting officer or ot her authorized representative. Additionally , there are laws and regulations governing ethic s and campaign contributions for s ome indiv iduals who conduc t regular business with government entities—for example, brok ers , dealers and investment adv isers . Thes e people als o must c omply with any et hics rules which apply to these int erac tions . Interacting with Public Of fic ials and Employ ees Federal, s tat e, local and foreign gov ernments have vary ing and c omplicated laws gov erning interactions with public offic ials , public employ ees, and their families, s ome of whic h prohibit or s ev erely restric t the provis ion of gifts , s uc h as meals , gratuities or entertainment to s uc h individuals. While there are ex ceptions to some of thes e laws , they are generally narrowly c onstrued. It i s therefore the policy of the Company that no employee is allowed to provide any gift or thing of value to public official s, public employees, or their families unl ess an exception under the law clearly applies. Please refer to the Government Affairs Guidelines in t he Employ ee Handbook for further 6 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. guidance regarding Alabama and Federal law. If y ou are contemplating activity that might involve laws in ot her states or territories, please c ont ac t Government Affairs for s pecific guidance. You should not directly or indirec t ly offer, mak e, or solicit inappropriate payments or contributions t o try to influenc e any public official or ot her public employee to take action, f ail to tak e ac t ion, or give an advantage over another person or busines s. If a gift is meant to corruptly influence or bribe a public official or employee, it is always prohibited and there is no exception. This inc ludes domes tic or foreign off ic ials and employ ees, political parties, party off icials , c andidates , legislators , and regulators . It is important to be aware that c ertain ac tiv ity is defined by the f ederal and state gov ernments as “lobbying.” If you are lobby ing, or you are a lobby ist, there are many requirements and restric tions which apply to both y ou and the Company. Definitions v ary among juris dic tions , but “lobby ing” generally is the practice of promoting, oppos ing, or influencing legislation, regulation, or of fic ial ac tion at any level of gov ernment. It is the policy of the Company that only certain people, working through Government Affairs, m ay engage in lobbyi ng on behalf of the Company. If you are conc erned that your ac tiv ity might be lobbying, please c ontact Government Affairs. These laws frequently change, s o you should periodic ally update the adv ice, suc h as legal or ethic s opinions, that you hav e received on a prev ious oc casion. In many instances, v iolators of these laws are s ubjec t to c riminal penalties. If y ou antic ipate interacting with a public of fic ial or employee, governmental body (including regulators ) government-related entity (e.g. water authority, public hos pital) or a lobbyist, it is your res pons ibility to learn the applicable law. For more inf ormation, pleas e rev iew the Government Affairs Guidelines loc ated on PRISM. Politic al Contributions , Political Fundraising and Political Ac tiv ity at Work Certain employ ees and the direct ors of the Company may part icipat e in the Protective Life Corporation State Political Ac tion Committ ee and/or the Protec tiv e Life Corporation Federal Politic al Action Committee. Exc ept in c as es rev iewed by the Legal Depart ment and approv ed by the Executiv e Chairman, Company resources shall not be us ed to s upport political parties, political caus es or candidates. •Individual employ ees are welc ome to support any political party, political c ommittee, politic al caus e, or candidat e that they wish, but they must do s o on their own time and may not use Company res ources. Employ ees should take st eps to ens ure that there is no s uggestion in their volunteer ac tiv ities that the Company is supporting a partic ular candidate, political c ause, or party (e.g. if appearing in a c andidate’s brochure, do not wear a Protective golf s hirt). •Likewise, employ ees are welc ome to s erve as public offic ials . Howev er, if y ou s erve in such a role, it is imperative that y ou report that fac t to Government Affairs, become familiar with all relev ant ethics law res trictions, and recuse y ours elf from any activit y that may overlap with Protec tiv e or its bus iness interests. •Employ ees seek ing public office by election or appointment, inc luding incumbents , should notify their department management and Government Affairs of their intention prior to qualifying as a candidate for elect ive office or acc epting an appointment. Prior management approval mus t be obtained to determine whether running for or holding public office will interfere with the employee’s job, be c ontrary t o the Company’s interests , caus e a conflict of interest or the perc eption thereof, or v iolate any laws or regulat ions. 7 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •No employee may seek elec tion for or ac cept appointment to any regulatory board, commiss ion, or other body (including, but not limited to, the Alabama Department of Insurance) that direc tly regulates the Company . •If a planned contribution, whet her traditional or in-k ind, could in any way be look ed upon as inv olv ing Company funds , property or s erv ic es, Gov ernment Affairs should be c onsulted. •If y ou work in an area (e.g. brokers , dealers and inv es tment adv isers) that has res trictions on political c ont ributions, make sure y ou unders tand y our department rules for c ont ributions, and c all Government Affairs if y ou have any questions. For more inf ormation, pleas e rev iew the Government Affairs Guidelines loc ated on PRISM. En gagin g in Busin ess Ou tsid e th e Unit ed Stat es The bus iness activities of the Company and its s ubsidiaries are foc used on c onsumers in the United States, and our dealings with foreign persons and entities are currently v ery limited, Nevertheless , as members of the Dai-ic hi Life Group, the Company and its subs idiaries are part of a global busines s organiz ation, and we are c ommitted t o complianc e with both domestic and foreign laws and regulations des igned to prevent, deter, and detect bribery and c orruption. Before y ou engage in any bus iness activities on behalf of the Company that inv olv e pers ons or entities outside the U.S., y ou should seek guidance from the Company’s Legal Department. Dealin g with Aud ito rs Our busines s is heav ily dependent on the ac curacy of our financial and acc ounting informat ion. The public relies on the role of our independent public acc ountants in auditing t his information. You may not take any ac tion to influence, c oerc e or manipulate the Company’s or it s subs idiaries’ independent public ac countants for the purpos e of rendering the financ ial statements of t he Company mis leading. Dealin g with News Med ia, In vestors or th e Pu blic Contac t with news media and the inv es tment community, and any public dis cuss ion of Company bus iness and products , should only be made through one of the Company's authorized spok es persons . If y ou are ques tioned by news report ers or investment analys ts y ou should refer t hem to the appropriate Company Media Contac t Person. For details about the appropriate pers on to c ontact regarding media or other Company -related c ommunic ations, see the Company’s Policy on Communicat ions with News Media in the Employ ee Handbook . Failure to observ e this policy c an caus e tremendous harm to t he Company and spread mis information. We must exerc ise particular c are when cons idering releas e of informat ion of a sens itiv e or material nature, the disc los ure of whic h c ould influenc e the judgment of investors to buy, s ell or hold Company securities . Dealin g with Adverse Part ies We are committed to c onducting our business with hones ty and integrity. That commitment also ex tends to s ituations in whic h we find ourselves in an adv ersarial relations hip with another party , s uc h as a lawsuit or other dis pute. It is important that communicat ions in thes e situat ions be handled by the appropriate people who are authorized to c ommunicate on behalf of the Company. For example, if an attorney who does not repres ent the Company c ontacts you about s omething other than an ordinary , non-adv ersarial matter, y ou s hould immediately – before communicating with that attorney – contact the Company ’s Legal Department for instruc tions . Avoiding Conflicts of Interest 8 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Yo ur Private Int erests You are expec ted to av oid s ituations where y our privat e interes ts or the priv ate interests of your loved ones c onf lic t with the Company’s interests. •You mus t dis close any potent ial conflict of interest to your manager s o it c an be resolved. "P otential c onflic ts of interest" inc lude busines s or pers onal relationships wit h customers, s uppliers , agents, employees or c ompetitors or any other pers on or entity with whom the Company does busines s. ◦“Suppliers ” inc lude any person or entit y which furnishes goods or s ervic es to t he Company . For ex ample, "suppliers" would include re-insurers , printers , bank ers, law firms, marketers , lobby ing firms and entities from or through which the Company purc hases advertising. •You s hould not have any business or financ ial relationship with c us tomers , suppliers or competitors t hat could influence or appear to influenc e you in carry ing out y our res pons ibilit ies. This would include the owners hip of s tock in these companies. However, ownership of a nominal amount of s tock in a public ly owned c ompany would not be c onsidered a conflict unless the amount was large enough to influenc e you. •You may not market produc ts or s ervic es that c ompete with ours. Nor may you work for a c ompetitor, customer or supplier as an employ ee, consultant or member of its board of direc t ors without written approv al of the Chief Executiv e Offic er or the Board of Direc tors. •The Company recognizes that some employees maintain a law lic ense and that they may wis h to engage in priv ate practice, cons ulting, and/or expert witnes sing in their free time. The actual conf lict s of interest and the appearanc e of c onflic ts of interest that may res ult from this outs ide work are a s pecial c oncern to the Company . Acc ordingly , the Company prohibits employ ees from doing outs ide legal work for c ompensat ion. Employees s eeking to do pro bono legal work may do s o only after c ontacting Stev e Callaway or Melinda Peev y in the Legal Department and receiving ex press permiss ion to partic ipate in the work . •Similarly, the Company recognizes that there are employees wit h particular prof es sional expertis e who may wish to engage in cons ulting and/or expert witnes sing serv ices f or legal matters in their free time. Employees s eeking t o do this work may do so only after contac ting Stev e Callaway or Melinda Peev y in the Legal Department and rec eiv ing expres s permis sion to participate in the work. If y ou are not sure if your s ituation or relations hip with another organization might conflict with your job performance or our Company's interes t s, you should dis cuss it with your manager. Most potential c onflic t situations are readily res olved and it is alway s best for you to raise y our conc ern before engaging in the ac tiv ity . Gift s, Meals and En tertain men t Except when dealing with public officials, public employees, or their fam ilies (see “Deal ing with Public Officials and Employees”), y ou may rec eiv e or give customary business amenities s uc h as meals, provided they are ass oc iated with a bus iness purpose, reasonable in c os t, appropriate as t o time and plac e and would not give the appearance of improperly influencing the recipient. Ex cess ive gif ts and entert ainment (given or rec eiv ed) are inherently compromising and do not belong in our busines s relations hips. You may not giv e or receive gifts, meals or entert ainment to or from anyone in relation to Company busines s unles s: •They are of limited v alue, do not influence or giv e t he appearanc e of influenc ing the rec ipient and cannot be viewed as a bribe, k ick back or pay off . •They do not v iolate any law or generally ac cepted ethic al standards including the standards of the recipient's organiz ation. 9 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •They c an withs tand public ethical rev iew. Under no circumstances may you giv e money to, or receive money from, a customer or a s upplier. You are to courteously dec line or return any kind of gift, f av or or offer of exces sive entertainment whic h violates thes e guidelines and inform the pers on mak ing the offer of our polic y. The above rules on gifts , meals and entertainment apply to ev ery one in the Company. You should be aware that some employees may be subject to additional limitations and/or recordkeeping requirements due to s pecific laws and regulations – for ex ample, laws and regulations gov erning the ac tiv ities of broker-dealers and inv es tment advis ors. You should consult your manager for information on any rules spec ific to your area of the Company . Corpo rate Opp ortunity You are prohibited from taking for y ours elf pers onally opportunities that are dis covered through the use of Company property, information or posit ion without the cons ent of the Chief Execut ive Offic er or the Board of Direc tors . You may not us e Company property, inf ormation or pos ition for improper pers onal gain, and y ou may not c ompete with the Company direc tly or indirectly. You owe a dut y to the Company to adv ance its legitimate interests when the opportunity t o do s o arises. Your work produc t belongs s olely to the Company. Disparagement No one should ev er make false, misleading or dis paraging remark s about indiv iduals or organiz ations or their products and s ervic es . •Do not disparage our competitors or their produc ts or employees . We should sell our produc ts and serv ices on their merits. •If you make c omparisons between our products and those of a competitor, they s hould be relev ant , ac curate, fac tual and up-to-date. Industrial Espionage You may not engage in indus trial espionage or ac quire information about other c ompanies through improper means. You have a responsibility not to s teal or misuse the intellec tual property of any supplier, customer, busines s partner or compet itor. We regularly ac quire information about other companies in conduc ting our bus iness . This is ac ceptable when this information is properly ac quired. Proper sources would inc lude information that is published or in the public domain or that is lawfully rec eiv ed from the owner or an authorized third party. Ex amples of improper means of acquiring information are: •Rec eiv ing from a third party information that was illegally or improperly acquired by the t hird party. •Rec eiv ing c onfident ial inf ormation of a c ompany from present or former employ ees who are unauthorized to disc los e it. If y ou are offered proprietary information under suspicious c irc umstances, y ou should immediately c onsult our Legal Department. If you come into poss es sion of information from another company that is marked confidential, or t hat you believ e is confidential, you should cons ult our Legal Department if y ou have any questions regarding the proper authorization of your pos sess ion. 10 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Prevention of Fraud Ev ery employee has an obligation to ac t to detec t, deter and prevent fraud. If you disc ov er facts that may indic ate fraudulent ac tiv ity, you must report the discovery immediately. For example, if y ou disc ov er a document that appears to be a fak e, you should report it immediately . Appropriate Use and Safeguarding of Company Property Each of us is responsible for protecting Company property . The Company’s property includes your work product, the Company ’s trade s ec rets , technology and propriet ary information as well as phys ical property. The property and s ervic es of the Company – including third party services and technologies that you may ac cess due to y our job role – are to be used solely for the benefit of the Company and s hould be used only as authorized by the Company. Managers are responsible for s etting up and keeping good controls t o protec t t he Company from los s or unauthorized or unlawful use of its property or s ervic es . Eac h of us is res pons ible for ass isting in prev enting was te and thef t and as suring t he integrity of the controls. Confidential Information The Company regularly develops confidential or proprietary informat ion that is very valuable to the Company. This type of information includes, but is not limited to, all information that is not generally known to the public and relates to the Company ’s: •business plans , strategies, and pricing; •administration and produc t development; •technologies ; •c ust omers (inc luding pros pective c us tomers); •agents (inc luding prospec tiv e agents) ; •distributors (inc luding prospect ive distributors); and any other information that giv es the Company a competitive adv antage. The Company also regularly receives non-public , confidential information from those with whom we do busines s. Ex amples of these types of inf ormation are the information we receive from our customers , agents, administrators, s uppliers and busines s partners. Any of this information should be c onsidered the Company’s property, which we hav e a duty to prot ec t. We may als o be subject to laws and regulations that require us to safeguard this information, s uc h as the laws and regulations that require us to protect customer information. Additionally , we may have agreements that s pell out our obligations for using and protecting the information, s uc h as our c ust omers ’ authoriz ations for medical information or confidentiality agreements we hav e with our agents and s uppliers . In c onnection with your activ ities on behalf of t he Company , you may have acc es s to and become knowledgeable about inf ormation that is confidential, priv ate or proprietary . Through t he c ours e of your employment with t he Company , you may als o develop or create information that should be c onsidered the Company’s c onfidential, private or propriety information. You mus t protect the confidentiality and privacy of that inf ormation. •You may only use or dis close confidential, priv ate or proprietary inf ormation for Company purpos es ; you may not use or dis close it for pers onal benefit or for the benefit of c ompeting interests . 11 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •To preserve c onfidentiality , you should only disc los e confidential information to Company employees who have a “need to know” t hat information for busines s purposes. If you s hare c onfidential information wit h an employee, you should tell the employee that the information is confidential. If you need to s hare information outs ide the Company , you s hould exerc ise additional c aution. Generally, confidential information should not be disclos ed to a third party unless the disclosure is c ov ered by an ex pres s written agreement between the Company and the third party. •You mus t limit your use of c onfidential, privat e or proprietary informat ion to what is authorized by any agreement relating to t he information or, if there is no ex pres s agreement, to what is impliedly authorized. Your responsibility to keep information c onfidential c ontinues after y ou leav e employment with the Company. For furt her information on the appropriate handling of c onf idential inf ormation, pleas e c onsult the Company I nformation, Company Work Product, and Company Property Polic y. None of the above s t atements about k eeping information confidential are intended to prec lude or dissuade employ ees from engaging in legally protec ted ac tiv ities, such as dis cuss ing the terms and conditions of employ ment or reporting any suspec ted v iolations of this Code. Use of Software One form of int ellect ual property we ac quire is computer sof tware. In addition t o being c opyrighted, computer sof tware programs are us ually subject to licens e agreements . Thes e agreements res trict the Company’s use (and, therefore, your use) of the software. For example, a lic ense may prohibit copy ing of the programs and restrict its us e to a spec ified computer. •You should understand t he limitations on the us e and c opying of any software. If you have questions, y ou s hould contact t he I nformation Security Officer (Tim Searcy , ex t. 5289). •You should not copy software, us e it on a different computer or give it t o a third party unless y ou hav e confirmed that the lic ense agreement permits such copy ing or us e. •Any authorized copies shall contain the proper c opyright and other required notic es of the v endor. •Downloading software us ing the Company’s elec tronic communicat ions sy stems is disc ouraged. If y ou need to ins tall a spec ific applic ation on your work station or another Company sy stem, pleas e submit a reques t through the IT Self-Servic e Portal. Use of Company Systems and Devices (use is not private) The Company ’s sy stems and devic es s uc h as telephones, v oic e mail, email, smartphones, Intranet and Internet acc es s (both wired and wireles s), and desk top and lapt op c omputers are intended to be us ed for the Company’s bus iness . The Company recognizes that it is sometimes ac ceptable for employ ees t o us e thes e systems or devices for lawful personal purposes. You s hould, howev er, keep s uc h use to a minimum and remember that s uc h us e is not priv ate. We will respec t the priv ac y of eac h of our employ ees. Our work on behalf of the Company , howev er, is not priv ate; it belongs to the Company . The Company reserv es the right to ac cess communications within its sy stems or on its devic es . The Company may monitor, interc ept or record communications s uc h as telephone c alls , electronic communications including email, ins tant mes sages, text mess ages and Intranet or Internet ac cess as it deems necess ary or 12 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. appropriate to ens ure customer s atisfac tion, to improve quality , to guard against inappropriate us es and, in rare cas es , to guard against unlawful us es . An employee s hould not attempt to acces s another employee’s c ommunic ations without the other employee’s permis sion or other appropriate authorization. The Legal Department should be c onsulted for guidance on the appropriate authorizat ion for acc es sing employee communications . If communications are monitored, s t eps should be tak en to disc ontinue monitoring if the communic ations are determined to be personal, lawf ul and appropriate under this Code. Accurate Records, Reporting and Disclosure Company records mus t reflec t an ac curate and v erif iable record of all t rans ac tions and dispos ition of as sets . We have internal acc ounting c ontrols , including controls to limit trans ac tions to t hose whic h are properly authorized and to promote both acc ountability for assets and report ing acc urac y. It is our responsibility to ensure that doc uments filed with or s ubmitted to the Securities and Ex change Commiss ion and other regulators or other public c ommunic ations by the Company and its s ubsidiaries c ont ain full, fair, acc urate, timely and unders tandable dis closure. •Information that y ou record and s ubmit to another party , whether inside or outs ide our Company , must be accurate, timely and complete. It s hould honestly reflect the transaction or material. •Like all Company employees , financial officers and employ ees must understand and apply the rules and regulations applic able to their job duties. In c as e of financ ial employees , this inc ludes all laws, rules, regulat ions and ac counting princ iples inv olv ed in ac counting for transactions of the Company. Accounting and Auditing Matters The integrity of our financ ial reports is ess ential, and we intend to comply with all financial reporting and acc ounting regulations applic able to the Company . If you hav e conc erns or c omplaints regarding questionable ac counting or audit ing matters of the Company, you mus t submit thos e conc erns or complaints to the General Counsel. The term “ques tionable acc ounting or auditing matt ers” includes: •fraud or deliberate error in the preparation, evaluation, review or audit of Company financial s t atements; •fraud or deliberate error in the recording and maintenanc e of the Company’s financ ial records ; •defic iencies in or noncompliance with the Company’s internal ac counting c ontrols ; •misrepresentation or fals e statement t o or by a senior officer or ac countant regarding a matter contained in the Company’s financ ial records, financial reports or audit reports ; or •deviation from full and fair reporting of the Company’s financ ial condition. If a report of suspec t ed v iolation of the Code relat es to ac counting, internal acc ounting c ont rols or auditing matters, the report will be transmit ted to the Chairman of the Audit Commit tee by the General Couns el. You may elect to remain anonymous by making your c oncerns k nown via the Code of Business Conduc t Hotline (205-268-2633 or 800-421-3564) or electronic ally at hot line@protective.c om. If y ou c hoos e t o mak e an anonymous submis sion, y ou are encouraged to giv e as muc h detail as pos sible so that we will have the information necess ary to carry out an 13 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. investigation. We will treat any non-anony mous c omplaint received confidentially in ac cordance with our policies for reporting other v iolations under the Code. In the event that, as a manager, you receive a report of a c oncern regarding questionable ac counting or auditing matters , it is your responsibility to submit that c oncern to the General Couns el. Third Party Workers Cons ultants, agents, and other third party workers retained by our Company are ex pected to adhere to this Code and other Company policies in the course of their work on behalf of t he Company . •In retaining a consultant, you should ens ure that no c onflic t of interes t ex ists, that the c onsultant is genuinely qualified in the business for which retained, that the c ompensat ion is reasonable for the serv ices being performed, and that there is a written agreement outlining the statement of work and requiring the cons ultant to comply with all applic able laws and appropriate Company policies. •Consultants , agents , and other third party work ers may not be retained to do anything illegal or improper. You may not do anything indirectly that you may not do directly, and you may not do through a third party what y ou may not do y ours elf. Complying with Laws In General The Company intends t o conduc t its business in a way that not only c onforms to the letter of the law, but also promotes the spirit of f airness and honesty behind the laws . •Every employ ee has the res pons ibility to bec ome familiar with and c omply with the laws and regulations t hat govern his or her area of responsibility . Ignorance of applic able laws is not acc eptable. •If you have ques tions about the meaning or application of any law or regulation, you should cons ult with and be guided by the adv ice of the Legal Department. Dec isions regarding the applic ation of the v arious laws s hould not be made without that adv ice. •You may not tak e any action that y ou k now or that our Legal Department has adv ised would violat e any law or regulation. Ant itrust Laws The antitrust laws are intended to pres erve c ompetit ion by prohibiting actions t hat could unreasonably restrain the f unctioning of a f ree and competitive marketplac e. •Any agreement that c ould limit competition in a spec ific mark et may be a violation of these laws and mus t be reviewed by the Legal Department. •Bec ause verbal ex changes can be viewed as an agreement, you need to exerc ise c aution whenever you meet with competitors . •Keep your dis cuss ions to the busines s purpos e of the meeting. •Avoid dis cuss ions with c ompetit ors related to mark et share, projec ted s ales for any s pecif ic produc t or serv ice, revenues and ex pens es , produc tion sc hedules, inventories , unannounc ed products and s ervic es , pricing strategies , market ing and, of course, any confidential, private or proprietary Company information. •You s hould not dis cuss with a compet itor whether the Company or the c ompetit or intends to enter or withdraw from a spec ific market. 14 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. These guidelines also apply to inf ormal contac t s you may hav e with competitors, including those at trade s hows or meetings of profes sional organiz ations. Each of the following may be a violation of the antitrus t laws . In many instanc es , violators are s ubjec t to criminal penalties . Before engaging in any discuss ions with a c ompetitor concerning the following, you must rev iew the matt er with the Legal Department : •Prices or rates •Alloc ation of mark ets or customers •Limitations on production or quality •Boyc ott of suppliers •Intent ions or motiv ations c oncerning entering or withdrawing from a market. The Company has an Antitrust Complianc e Manual, loc ated on PRISM that prov ides more comprehens ive informat ion and guidance about the antitrust laws than this Code. You s hould mak e sure that y ou understand and c omply with the Antitrus t Compliance Manual. Securities Laws: Transact ions in Comp any Secu rit ies, Dai-ichi Secu rities, an d Other Comp anies’ Securit ies Federal Law prohibits buy ing or s elling securities bas ed on "inside information," which is informat ion not publicly available that c ould affec t the price of the sec urities. Penalties for violations of thes e laws c an be severe, and c ould inc lude significant fines and impris onment . As the Company is now a wholly owned s ubsidiary of The Dai-ic hi Life Insuranc e Company, Ltd., c ommon stoc k in the Company is no longer publicly t raded. Howev er, certain Company securities , inc luding debt s ec urities, c ontinue to be public ly traded. •If you have material ins ide informat ion about the Company , Dai-ichi, or any other c ompany, y ou may not buy or s ell, or advis e others to buy or sell, thos e securities . Note t hat this would inc lude "giv ing tips" to friends or family. •Ins ide information t hat might be material inc ludes earnings es timates, s ignific ant bus iness dev elopments, ex pans ion or curtailment of operations, sale or purchas e of subs tantial as sets or any other ac tiv ity of significanc e. •You have an obligation to prot ec t any confidential or material non-public inf ormation y ou obtain from t he Company or its subs idiaries , or from Dai-ichi or its subs idiaries. For furt her guidanc e on trading in s ec urities and inside inf ormation, pleas e c onsult the Company’s polic y on Trading in the Sec urities of Protective, Dai-ic hi, and Ot her Companies , loc ated on PRISM. Proh ibit ion s o n Emplo ymen t in th e In surance Ind ustry It is a federal c rime for a pers on who has ev er been c onvic ted of a felony inv olv ing dishones ty or breac h of trus t to work in the busines s of insurance unless that person obtains the cons ent of the appropriate state department of ins uranc e, and it is a federal c rime for a pers on who works in the busines s of insurance to willfully permit a person who has been c onvic ted of a felony inv olv ing dishones ty or breac h of trus t to work in the busines s of insuranc e. If y ou hav e ever been c onvic ted of a felony and hav e not obtained the required cons ent, or if y ou k now that a f ellow employ ee, cons ultant or agent has been conv icted of a felony , you must immediately report the situat ion to the Legal Department. Charitable Contributions All of the Company’s c haritable contributions, inc luding in-k ind c ontributions , must be managed through t he Protec tiv e Life Foundation. You may not us e Company monies to make c haritable c ontributions . I n addition, any purchas e of goods or s ervic es from a charitable organizat ion for a 15 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. marketing purpose must be coordinated through the Protec tiv e Life Foundation's Ex ec utive Direc tor. A ll other purchas es of goods or s ervic es from a charitable organization must be done on an arm’s-length bas is. For example, purc hases of tic kets to the s ymphony or adv ertis ing through a charitable organization must be coordinated through the Prot ec tiv e Life Foundation's Ex ec utive Direc tor, but purc hases of flu v ac cine through a non-profit hospital, if done on an arm’s -length bas is for fair v alue, may be done through the Company. All reques ts for charitable contributions are to be submitted to the Executiv e Director of the Protec tiv e Life Foundation. ******************* By faithfully adhering to the Code, we ass ure thos e who s hare an interest in our Company – notably our customers , s hareowners and employ ees – that Protec tiv e is committed to the vis ion and v alues that s erve as our foundation. This will help to ensure the Company ’s continued succ es s, growth and viabilit y. Since it s inc eption, Protec tiv e has c onsis tently required those who ac t on its behalf to do so with int egrity. Our c ommitment to this fundamental principle remains central in all that we do. You have a responsibility to report any suspec t ed v iolations of this Code. A suspec ted v iolation could be a situation that you observe or a situat ion that is brought to y our attention by s omeone else. Suspec ted v iolations must be reported promptly to at least one of the following: •The Human Res ourc es Complianc e Offic er, Sandy Lit tleford (in the Human Res ources Department) at (205) 268-6429 or sandy.littleford@protective.c om •The Chief Compliance Officer, Stev e Callaway (in the Legal Department ) at (205) 268- 3804 or stev e.callaway@protec tiv e.com •The General Counsel, Mark Drew (in t he Legal Department) at (205) 268-4941 or mark.drew@protec tiv e.com •The Chief Human Res ourc es Officer, Wendy Evesque (in t he Human Resources Department) at (205) 268-5697 or wendy .evesque@protective.c om •The Code of Busines s Conduct telephone hot line at (205) 268-CODE (2633) or (800) 421-3564 (You may communicate to the telephone hotlines anony mously .) •The Code of Busines s Conduct report form (You may c ommunic ate using the form anony mously .) 16 Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Ex hibit 21 to Fo rm 10 -K of Protecti ve Life Corpo ratio n for Fisca l Yea r Ended December 31, 20 18 Principa l Subsidiaries of the Reg istra nt The follo win g who lly owned sub sidiary of Protective Life Co rp oration is o rganized u nd er the l aws o f th e State of Tenn essee and do es bu sin ess u nd er its co rp orate n ame: Pro tectiv e Life In surance Compan y Th e fo llowing who lly o wned sub sid iary o f Prot ective Li fe Insu ran ce Co mp any is inco rp orated un der th e laws of th e State o f Nebraska an d d oes b usin ess u nd er its co rpo rat e n ame: West Co ast Life Insurance Company The foll owin g wh olly own ed su bsid iary o f Pro tect iv e Life In surance Compan y is in corpo rated u nd er the laws of th e State of Alab ama and do es bu sin ess u nd er its co rpo rat e n ame: Pro tect iv e Life an d An nu ity Insurance Company The foll owin g wh olly own ed su bsid iary o f Pro tect iv e Life In surance Compan y is in corpo rated u nd er the laws of th e State of M issou ri and do es bu sin ess u nd er its co rpo rat e n ame: Protective Pro perty & Casualty In su ran ce Co mp an y Th e following wh olly own ed su bsid iary o f Pro tectiv e Life In surance Compan y is incorporated u nd er the laws of th e St ate of New Yo rk and d oes busin ess u nd er its co rpo rat e n ame: M ONY Life Insurance Company Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Ex hibit 24 PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ NORIM ITSU KAWAHARA Norimitsu Kawahara Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ TETSUYA KIKUTA Tetsuy a Kiku ta Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ VANESSA LEONARD Vanessa Leo nard Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ JOHN J. MCMAHON, JR. Jo hn J. McMaho n, Jr. Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by his/her execu tion hereof o r upon an iden tical co unt erp art hereof, do es h ereb y co nstitu te an d ap poi nt Jo hn D. Jo hn s, Rich ard J. Bielen , M ark L. Drew o r Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ UNGYONG SHU Ung yo ng Sh u Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ JESSE J. SPIKES Jesse J. Spikes Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ TOSHIAKI SUMINO Toshiaki Su mino Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by his/her execu tion hereof o r upon an iden tical co unt erp art hereof, do es h ereb y co nstitu te an d ap poi nt Jo hn D. Jo hn s, Rich ard J. Bielen , M ark L. Drew o r Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ WILLIAM A. TERRY William A. Terry Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ W. MICHAEL WARREN, JR. W. Michael Warren, Jr. Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Lee Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PROTECTIVE LIFE CORPORATION DIRECTOR POWER OF ATTORNEY KNOW ALL M EN BY THESE PRESENTS, that th e u nd ersig ned Di rector o f Pro tect iv e Life Corp oration , a Delaware corpo ration (th e “Co mp any”), by h i s/h er ex ecu tio n hereof or up on an iden tical cou nterp art hereof, do es hereby co nstitu te an d app oint Jo hn D. Joh ns, Rich ard J. Bielen, M ark L. Drew, or Steven G. Walker, an d each o r any o f th em, h is/h er true and lawful attorneys-in-fact an d agents, fo r him/her an d in h is/h er name, place and stead, to ex ecu te an d sign th e An nu al Repo rt o n Form 10 -K fo r the year en ded December 31 , 2 01 8, to b e filed b y the Co mp any with th e Secu rities and Exch an ge Commission pu rsu ant to th e prov isio ns o f th e Securities Exch ange Act of 19 34 and , fu rther, to ex ecu te an d sign any and all amend men ts to such Ann ual Report, and to file same, with all exh ib its and sch edu les thereto an d all other d ocu men ts in con nectio n t herewith , with th e Securities an d Ex ch ang e Co mmissio n, granting un to sai d atto rn eys-in-fact and agen ts, and each o f th em, full po wer an d au thority t o d o and perfo rm each an d every act and t hing req uisite an d necessary to be don e in and abo ut th e premises, as fully to all in ten ts an d pu rp oses as th e un dersign ed mig ht o r co uld d o in person, h ereby ratify in g an d co nfirmin g all th e acts of said at to rn eys-i n-fact an d ag ents or any of th em which they may lawfu lly d o in the p remises o r cau se to be d on e b y v irtue hereof. IN WITNESS WHEREOF, th e un dersig ned has ex ecu ted th is Po wer of Attorney and cau sed it to b e witnessed on th is 25 th day of Febru ary 2 01 9. /s/ JOHN D. JOHNS Jo hn D. Jo hn s Directo r WITNESS: /s/ FELICIA M. LEE Felicia M. Le Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 1.1 Certificatio n Pursuant to Secti on 302 of the Sa rba nes-Ox l ey Act o f 2 00 2 I, Rich ard J. Biel en , certify that: 1.I have reviewed th e An nu al Rep ort o n Form 1 0-K for t he year end ed December 31 , 20 18 , o f Protecti ve Li fe Corpo ration ; 2.Based o n my k no wledg e, th is an nu al repo rt do es no t co ntain any un true statement of a material fact or omit to state a material fact necessary to mak e th e statemen ts made, in lig ht of t he circumst an ces un der which su ch statemen ts were mad e, n ot mislead ing with respect to the p eriod cov ered b y this repo rt; 3.Based o n my k no wledg e, th e finan cial statements, and other finan cial in fo rmation in clu ded in th is annual repo rt, fairly present in all materi al respects th e fin ancial con ditio n, results o f o peration s and cash flows of t he reg istrant as of, and fo r, the period s presented in this rep ort; 4.Th e registran t’s o th er certi fy in g o fficer and I are respo nsib le for estab lish in g an d maintaini ng disclo su re con tro ls an d p ro ced ures (as defin ed in Ex change Act Rules 1 3a-15 (e) an d 1 5d -15 (e)) and int ern al con trol over fi nancial repo rting (as d efi ned in Exchan ge Act Ru les 1 3a-15 (f) an d 1 5d -1 5(f)) fo r the reg i strant and hav e: a)Desig ned such discl osu re co ntro ls an d p ro cedu res, o r caused su ch d isclosure co ntrols and procedures to be desig ned u nder o ur su pervision , to ensure th at material informatio n relatin g to th e registran t, includ in g its co nsolid ated sub sidiaries, is made k no wn to us by ot hers within tho se entities, particularly d urin g the p eriod in whi ch thi s rep ort is b eing prepared; b )Desig ned such in ternal con trol ov er fin ancial repo rtin g, o r cau sed su ch intern al co ntro l o ver finan cial reporting to be d esig ned un der our su pervisi on , to p rov id e reasonable assu ran ce regarding th e reliab ility o f fi nancial repo rtin g an d the p rep aratio n o f fin anci al statemen ts fo r extern al p urpo ses in accordan ce with gen eral ly accep ted acco un ting prin cip les; c)Ev alu ated the effect iv eness o f the regist rant’s discl osu re co ntro ls an d p ro cedu res an d p resen ted in th is repo rt o ur co nclusio ns ab ou t the effectiven ess of t he disclosu re co ntro ls and p rocedu res, as o f the en d o f the p eri od co vered b y this rep ort based on such ev alu ation ; an d d )Disclosed in this rep ort an y ch ang e in the registran t’s int ern al con trol over fi nancial repo rting th at occu rred d urin g the regist rant’s mo st recent fiscal qu arter (th e registran t’s fou rth fiscal qu arter in the case o f an an nu al repo rt) that has materially affected, o r is reason abl y lik ely to materially affect, th e registran t’s intern al con t ro l o ver finan cial repo rting ; an d 5.Th e registran t’s o th er certi fy in g o fficer and I h av e disclosed , b ased o n o ur mo st recent eval uat io n o f intern al co ntro l o ver finan cial reporting , to th e reg i strant’s auditors and th e aud it committee o f the regist ran t’s bo ard of directors (or person s performing th e eq uivalent fu nctio ns): a)All sign ifican t d eficien cies and material weakn esses in the desig n o r o peration of in ternal control ov er fin anci al rep ortin g which are reaso nab ly lik ely to ad versel y affect the registrant’s ability to reco rd , process, summarize and report fin anci al i nformatio n; and b )Any fraud , wh eth er o r n ot material, that in vo lv es man agemen t o r o th er employ ees wh o h ave a si gn ifican t role in th e registran t’s intern al co ntro l ov er financial repo rtin g. Date: M arch 5, 2 01 9 /s/ Rich ard J. Bielen Presi dent and Chief Ex ecut iv e Officer Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 1.2 Certificatio n Pursuant to Secti on 302 of the Sa rba nes-Ox l ey Act o f 2 00 2 I, Steven G. Wal ker, certify that: 1.I have reviewed th e An nu al Rep ort o n Form 1 0-K for t he year end ed December 31 , 20 18 , o f Protecti ve Li fe Corpo ration ; 2.Based o n my k no wledg e, th is an nu al repo rt do es no t co ntain any un true statement of a material fact or omit to state a material fact necessary to mak e th e statemen ts made, in lig ht of t he circumst an ces un der which su ch statemen ts were mad e, n ot mislead ing with respect to the p eriod cov ered b y this repo rt; 3.Based o n my k no wledg e, th e finan cial statements, and other finan cial in fo rmation in clu ded in th is annual repo rt, fairly present in all materi al respects th e fin ancial con ditio n, results o f o peration s and cash flows of t he reg istrant as of, and fo r, the period s presented in this rep ort; 4.Th e registran t’s o th er certi fy in g o fficer and I are respo nsib le for estab lish in g an d maintaini ng disclo su re con tro ls an d p ro ced ures (as defin ed in Ex change Act Rules 1 3a-15 (e) an d 1 5d -15 (e)) and int ern al con trol over fi nancial repo rting (as d efi ned in Exchan ge Act Ru les 1 3a-15 (f) an d 1 5d -1 5(f)) fo r the reg i strant and hav e: a)Desig ned such discl osu re co ntro ls an d p ro cedu res, o r caused su ch d isclosure co ntrols and procedures to be desig ned u nder o ur su pervision , to ensure th at material informatio n relatin g to th e registran t, includ in g its co nsolid ated sub sidiaries, is made k no wn to us by ot hers within tho se entities, particularly d urin g the p eriod in whi ch thi s rep ort is b eing prepared; b )Desig ned such in ternal con trol ov er fin ancial repo rtin g, o r cau sed su ch intern al co ntro l o ver finan cial reporting to be d esig ned un der our su pervisi on , to p rov id e reasonable assu ran ce regarding th e reliab ility o f fi nancial repo rtin g an d the p rep aratio n o f fin anci al statemen ts fo r extern al p urpo ses in accordan ce with gen eral ly accep ted acco un ting prin cip les; c)Ev alu ated the effect iv eness o f the regist rant’s discl osu re co ntro ls an d p ro cedu res an d p resen ted in th is repo rt o ur co nclusio ns ab ou t the effectiven ess of t he disclosu re co ntro ls and p rocedu res, as o f the en d o f the p eri od co vered b y this rep ort based on such ev alu ation ; an d d )Disclosed in this rep ort an y ch ang e in the registran t’s int ern al con trol over fi nancial repo rting th at occu rred d urin g the regist rant’s mo st recent fiscal qu arter (th e registran t’s fou rth fiscal qu arter in the case o f an an nu al repo rt) that has materially affected, o r is reason abl y lik ely to materially affect, th e registran t’s intern al con t ro l o ver finan cial repo rting ; an d 5.Th e registran t’s o th er certi fy in g o fficer and I h av e disclosed , b ased o n o ur mo st recent eval uat io n o f intern al co ntro l o ver finan cial reporting , to th e reg i strant’s auditors and th e aud it committee o f the regist ran t’s bo ard of directors (or person s performing th e eq uivalent fu nctio ns): a)All sign ifican t d eficien cies and material weakn esses in the desig n o r o peration of in ternal control ov er fin anci al rep ortin g which are reaso nab ly lik ely to ad versel y affect the registrant’s ability to reco rd , process, summarize and report fin anci al i nformatio n; and b )Any fraud , wh eth er o r n ot material, that in vo lv es man agemen t o r o th er employ ees wh o h ave a si gn ifican t role in th e registran t’s intern al co ntro l ov er financial repo rtin g. Date: M arch 5, 2 01 9 /s/ Stev en G. Walker Execu tive Vi ce Presid en t an d Chief Fin ancial Officer Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 2.1 CERTIFICATION PURSUANT TO 1 8 U.S.C. SECTION 13 50 , AS ADOPTED PURSUANT TO SECTION 9 06 OF THE SARBANE S-OXLEY ACT OF 2 00 2 In co nn ection with the Ann ual Repo rt of Protective Life Corp oration (the “Compan y”) on Form 10-K fo r the y ear end ed Decemb er 3 1, 20 18, as filed with the Securiti es and Exchan ge Commissio n on the date hereo f (t he “Rep ort”), I, Richard J. Bi elen, Presiden t an d Ch ief Executi ve Officer of th e Co mp any , cert ify, pu rsu ant to 18 U.S.C. § 1 35 0, as ado pted p ursu ant to § 906 of th e Sarb anes-Oxley Act o f 2 00 2, that to th e best of my kn owl edge: (1 )Th e Rep ort fully complies with th e req uirements of Sectio n 1 3(a) o r 1 5(d) of th e Securities Exch ang e Act of 19 34 ; an d (2 )Th e info rmation contai ned in the Repo rt fairly presents, in all material respects, th e finan cial co ndi tion and resu lts o f o perati on s of th e Compan y. /s/ Rich ard J. Bielen Presi dent and Ch i ef Ex ecu tive Officer March 5 , 2 01 9 This certifi catio n acco mpan ies th e Rep ort p ursuan t to §90 6 o f th e Sarb anes-Oxley Act o f 2 00 2 an d sh all no t, ex cep t to the ex ten t requ ired b y the Sarban es- Ox ley Act of 20 02, be d eemed filed b y the Compan y for pu rp oses of §1 8 o f the Secu rit ies Ex chan ge Act o f 1 93 4, as amen ded . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibi t 3 2.2 CERTIFICATION PURSUANT TO 1 8 U.S.C. SECTION 13 50 , AS ADOPTED PURSUANT TO SECTION 9 06 OF THE SARBANE S-OXLEY ACT OF 2 00 2 In co nn ection with the Ann ual Repo rt of Protective Life Corp oration (the “Compan y”) on Form 10-K fo r the y ear end ed Decemb er 3 1, 20 18, as filed with the Securiti es and Exchan ge Commissio n on the date hereo f (t he “Rep ort”), I, Stev en G. Walk er, Ex ecu tive Vice Presid en t an d Ch ief Finan cial Officer o f the Co mp any , certify, pursuan t to 1 8 U.S.C. § 13 50 , as ad op ted pu rsuant t o § 906 of t he Sarban es-Ox ley Act of 20 02 , th at to the b est o f my k no wledg e: (1 )Th e Rep ort fully complies with th e req uirements of Sectio n 1 3(a) o r 1 5(d) of th e Securities Exch ang e Act of 19 34 ; an d (2 )Th e info rmation contai ned in the Repo rt fairly presents, in all material respects, th e finan cial co ndi tion and resu lts o f o perati on s of th e Compan y. /s/ Stev en G. Walker Execu tive Vi ce Presid en t an d Chief Fin ancial Officer March 5 , 2 01 9 This certifi catio n acco mpan ies th e Rep ort p ursuan t to §90 6 o f th e Sarb anes-Oxley Act o f 2 00 2 an d sh all no t, ex cep t to the ex ten t requ ired b y the Sarban es- Ox ley Act of 20 02, be d eemed filed b y the Compan y for pu rp oses of §1 8 o f the Secu rit ies Ex chan ge Act o f 1 93 4, as amen ded . Sourc e: PR OTECTIVE LIFE CORP, 10-K, March 05, 2019 Powered by Morningstar® Document Research℠ The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.