- ------------------------------------------------------------------------------
FORM 10-Q
------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-42425
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
ALABAMA 63-0761690
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
(205) 879-9230
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X]
Number of shares of Common Stock, $10.00 par value, outstanding as of August 7,
1998: 200,000 shares.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND
(B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Report of Independent Accountants....................................
Condensed Statements of Income for the Three and Six Months
Months ended June 30, 1998 and 1997 (unaudited)....................
Condensed Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997..................................
Condensed Statements of Cash Flows for the
Six Months ended June 30, 1998 and 1997 (unaudited)................
Notes to Condensed Financial Statements (unaudited)..................
Item 2. Management's Narrative Analysis of the Results of Operations....
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K..................................
Signature....................................................................
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
American Foundation Life Insurance Company
Birmingham, Alabama
We have reviewed the accompanying condensed balance sheet of American Foundation
Life Insurance Company as of June 30, 1998, and the related condensed statements
of income for the three-month and six-month periods ended June 30, 1998 and 1997
and condensed statements of cash flows for the six-month periods ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
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 the condensed financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1997, and the related statements
of income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 11, 1998, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of December
31, 1997, is fairly stated in all material respects in relation to the balance
sheet from which it has been derived.
PricewaterhouseCoopers LLP
Birmingham, Alabama
July 28, 1998, except for Note G
as to which the date is August 7, 1998
2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------------------------------
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1998 - $350,465; 1997 - $359,326
six months: 1998 - $785,579; 1997 - $1,306,672) $1,574,295 $2,494,389 $3,102,267 $4,675,394
Net investment income 1,265,388 1,471,088 2,845,683 3,172,472
Realized investment gains (losses) (500,000) (500,000)
Other income 8,718 8,718
--------------- ------------ --------------- ------------
2,339,683 3,974,195 5,447,950 7,856,584
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1998 - $1,464,688; 1997 - $1,115,056
six months: 1998 - $1,611,589; 1997 - $1,818,056) 2,125,140 2,651,956 3,281,445 4,714,738
Amortization of deferred policy acquisition costs 77,998 89,702 204,596 175,405
Other operating expenses (net of reinsurance ceded:
three months: 1998 - $74,910; 1997 - $8,727
six months: 1998 - $(8,074); 1997 - $40,935) 517,489 614,582 915,015 1,231,840
---------- ---------- ----------- ----------
2,720,627 3,356,240 4,401,056 6,121,983
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX (380,944) 617,955 1,046,894 1,734,601
Income tax expense (benefit) (106,664) 210,104 293,130 589,764
---------- ---------- ---------- -----------
NET INCOME (LOSS) $ (274,280) $ 407,851 $ 753,764 $1,144,837
========== ========= ========== ==========
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS
JUNE 30 DECEMBER 31
1998 1997
--------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $ 69,976,596 $ 68,201,559
Mortgage loans on real estate 9,510,921 10,902,986
Investment in real estate, net 401,266 407,624
Policy loans 10,884,766 11,635,376
Short-term investments 3,042,238 873,844
-------------- --------------
Total investments 93,815,787 92,021,389
Cash 522,103 2,218,201
Accrued investment income 1,279,372 1,230,529
Accounts and premiums receivable, net 572,448 1,233,659
Reinsurance receivables 7,882,507 7,680,586
Deferred policy acquisition costs 1,841,534 1,692,285
Other assets 52,401 70,809
--------------- ---------------
$105,966,152 $106,147,458
LIABILITIES
Policy liabilities and accruals $ 55,872,901 $ 56,717,914
Annuity deposits 958,808 929,124
Other policyholders' funds 12,064,067 12,080,458
Other liabilities 6,192,203 8,964,653
Deferred income taxes 2,136,942 2,005,168
------------- -------------
77,224,921 80,697,317
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE B
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value, shares authorized, issued, and
outstanding: 2,000 2,000 2,000
Common Stock, $10 par value
Shares authorized, issued, and outstanding: 200,000 2,000,000 2,000,000
Additional paid-in capital 8,200,000 6,200,000
Retained earnings 17,242,718 16,538,954
Accumulated other comprehensive income
Net unrealized gains on investments (net of income
tax: 1998 -$504,200; 1997 - $381,870) 1,296,513 709,187
-------------- --------------
28,741,231 25,450,141
-------------- --------------
$105,966,152 $106,147,458
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 753,764 $ 1,144,837
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs 204,596 175,405
Capitalization of deferred policy acquisition costs (353,845)
Deferred income tax 131,774 (10,724)
Interest credited to universal life and investment products 502,210 531,276
Policy fees assessed on universal life and investment products (501,699) (533,373)
Change in accrued investment income and other receivables 410,447 1,188,324
Change in policy liabilities and other policyholders'
funds of traditional life and health products (331,383) (2,552,726)
Change in other liabilities (2,772,450) (486,734)
Other (net) 18,409 20,169
--------------- --------------
Net cash used in operating activities (1,938,177) (523,546)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 43,867,398 55,713,990
Other 1,396,084 1,514,020
Sale of investments
Investments available for sale 275,980
Cost of investments acquired
Investments available for sale (46,470,555) (57,746,562)
------------ ------------
Net cash used in investing activities (1,207,073) (242,572)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to stockholders (50,000)
Change in universal life deposits (500,848) (282,172)
Capital contributions 2,000,000
------------
Net cash provided by (used in) financing activities 1,449,152 (282,172)
------------- -------------
INCREASE (DECREASE) IN CASH (1,696,098) (1,048,290)
CASH AT BEGINNING OF PERIOD 2,218,201 1,574,181
------------- ------------
CASH AT END OF PERIOD $ 522,103 $ 525,891
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Income taxes $ 200,000 $ 675,000
</TABLE>
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS
5
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of American
Foundation Life Insurance Company ("the Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the disclosures required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles. For further information, refer to the financial
statements and notes thereto included in the Company's Form S-1 filed on April
16, 1998.
All outstanding shares of the Company's common stock are owned by
Protective Life Insurance Company (Protective), which is the principal operating
subsidiary of Protective Life Corporation (PLC), an insurance holding company
domiciled in the state of Delaware. All outstanding shares of the Company's
preferred stock are owned by PLC. Protective is a wholly-owned subsidiary of
PLC.
NOTE B - COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. The Company does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against insurers in
the jurisdictions in which the Company does business involving the insurers'
sales practices, alleged agent misconduct, failure to properly supervise agents,
and other matters. Increasingly these lawsuits have resulted in the award of
substantial judgments against the insurers that are disproportionate to the
actual damages, including material amounts of punitive damages. In addition, in
some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments. In some states (including
Alabama), juries have substantial discretion in awarding punitive damages which
creates the potential for unpredictable material adverse judgments in any given
punitive damages suit. The Company and its affiliates, like other insurers, in
the ordinary course of business, are involved in such litigation. Although the
outcome of any such litigation cannot be predicted with certainty, the Company
believes that at the present time
6
<PAGE>
there are no pending or threatened lawsuits that are reasonably likely to have a
material adverse effect on the financial position, results of operations, or
liquidity of the Company.
NOTE C - OPERATING SEGMENTS
The following table sets forth operating segment income and assets for
the periods shown. Adjustments represent the inclusion of unallocated realized
investment gains (losses) and the recognition of income tax expense. There are
no asset adjustments.
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1998
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
<S> <C> <C> <C>
Premiums and policy fees $1,928,635 $ 900,620 $273,012
Net investment income 2,095,553 327,846
Realized investment gains (losses)
Other income
Total revenues 4,024,188 1,228,466 273,012
---------- ---------- --------
Benefits and settlement expenses 2,691,819 465,462 124,164
Amortization of deferred policy
acquisition costs 156,597 47,999
Other operating expenses 358,701 552,412 29,763
----------- ----------- ---------
Total benefits and expenses 3,207,117 1,017,874 201,926
---------- ---------- --------
Income before tax 817,071 210,592 71,086
CORPORATE
INVESTMENT AND
PRODUCTS OTHER ADJUSTMENTS TOTAL
Premiums and policy fees $ 3,102,267
Net investment income $ 422,284 2,845,683
Realized investment gains (losses) $(500,000) (500,000)
Other income
Total revenues 422,284 (500,000) (5,447,950)
---------- ---------- -----------
Benefits and settlement expenses 3,281,445
Amortization of deferred policy
acquisition costs 204,596
Other operating expenses $(25,861) 915,015
-------- ------------
Total benefits and expenses (25,861) 4,401,056
--------- ----------- ------------ -----------
Income before tax 25,861 422,284 (500,000) 1,046,894
Income tax expense 293,130 293,130
------------
Net income $ 753,764
===========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
SIX MONTHS ENDED JUNE 30, 1997
DENTAL AND CORPORATE
CONSUMER AND
ACQUISITIONS BENEFITS OTHER ADJUSTMENTS TOTAL
<S> <C> <C> <C>
Premiums and policy fees $2,003,471 $2,671,923 $4,675,394
Net investment income 2,339,872 517,623 $314,977 3,172,472
Realized investment gains (losses)
Other income 8,718 8,718
--------------- --------------- ---------- ------------
Total revenues 4,343,343 3,189,546 323,695 7,856,584
---------- ---------- --------- ----------
Benefits and settlement expenses 2,828,472 1,886,266 4,714,738
Amortization of deferred policy
acquisition costs 175,405 175,405
Other operating expense 441,555 790,285 1,231,840
----------- ---------- ----------
Total benefits and expenses 3,445,432 2,676,551 6,121,983
---------- ---------- ------------- ------------- ----------
Income before tax 897,911 512,995 323,695 1,734,601
Income tax expense $589,764 589,764
-----------
Net income $1,144,837
</TABLE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
JUNE 30, 1998
DENTAL AND CORPORATE
CONSUMER FINANCIAL AND
ACQUISITIONS BENEFITS INSTITUTIONS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Investments and other assets $74,608,108 $6,615,480 $1,515,594 $21,385,436 $104,124,618
Deferred policy acquisition costs 1,449,999 391,535 1,841,534
--------------------------- ---------------------------- --------------
Total assets $76,058,107 $6,615,480 $1,907,129 $21,385,436 $105,966,152
=========== ========== ========== =========== ============
OPERATING SEGMENT ASSETS
DECEMBER 31, 1997
DENTAL AND CORPORATE
CONSUMER AND
ACQUISITIONS BENEFITS OTHER TOTAL
Investments and other assets $76,644,539 $7,111,880 $20,698,754 $104,455,173
Deferred policy acquisition costs 1,692,285 1,692,285
------------ --------------- ----------------- -------------
Total assets $78,336,824 $7,111,880 $20,698,754 $106,147,458
=========== ========== =========== ============
</TABLE>
8
<PAGE>
NOTE D - STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles (i.e., GAAP) differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. At June 30, 1998, and for the six months then ended, the Company
had stockholders' equity and net income prepared in conformity with statutory
reporting practices of $23.0 million and $0.7 million, respectively.
NOTE E - INVESTMENTS
As prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 115, certain investments are recorded at their market values with the
resulting net unrealized gains and losses reduced by a related adjustment to
deferred policy acquisition costs, net of income tax, recorded as a component of
stockholders' equity. The market values of fixed maturities increase or decrease
as interest rates fall or rise. Therefore, although the adoption of SFAS No. 115
does not affect the Company's operations, its reported stockholders' equity will
fluctuate significantly as interest rates change.
The Company's balance sheets at June 30, 1998 and December 31, 1997,
prepared on the basis of reporting investments at amortized cost rather than at
market values, are as follows:
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Total investments $ 91,821,158 $ 90,930,332
All other assets 12,150,366 14,126,069
------------- -------------
$103,971,524 $105,056,401
============ ============
Deferred income taxes $ 1,438,828 $ 1,623,298
All other liabilities 75,087,978 78,692,149
------------- -------------
76,526,806 80,315,447
Stockholders' equity 27,444,718 24,740,954
------------- -------------
$103,971,524 $105,056,401
============ ============
9
<PAGE>
NOTE F - COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for
the six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
1998 1997
---- ----
<S> <C> <C>
Net income $ 753,764 $1,144,837
Increase (decrease) in net unrealized gains
on investments (net of income tax:
1998 - $(17,670); 1997 - $(6,850)) 227,326 (12,722)
Reclassification adjustment for amounts
included in net income (net of income
tax: 1998 - $140,000) 360,000
------------ -----------
Comprehensive income $1,341,090 $1,132,115
========== ==========
</TABLE>
NOTE G - ACQUISITION
On August 7, 1998, PLC announced an agreement in which the Company
will acquire, through a coinsurance transaction, a block of approximately
260,000 individual life insurance policies from Lincoln National Corporation.
The transaction represents approximately $330 million of life insurance reserves
and approximately $65 million of annual premium.
NOTE H - RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets, or stockholders' equity.
10
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE
RESULTS OF OPERATIONS
American Foundation Life Insurance Company ("the Company"), a stock
life insurance company, was founded in 1978. All outstanding shares of the
Company's common stock are owned by Protective Life Insurance Company
("Protective"), which is the principal operating subsidiary of Protective Life
Corporation ("PLC"), an insurance holding company whose common stock is traded
on the New York Stock Exchange under the symbol "PL". All outstanding shares of
Company's preferred stock are owned by PLC. The Company is authorized to
transact insurance business in 29 states, including New York.
In accordance with General Instruction H(2)(a), the Company includes
the following analysis with the reduced disclosure format.
PLC through its subsidiaries provides financial services through the
production, distribution, and administration of insurance and investment
products. PLC operates through seven divisions whose principal strategic focuses
can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products. The life
insurance category includes the Acquisitions, Individual Life, and West Coast
Divisions. The specialty insurance products category includes the Dental and
Consumer Benefits ("Dental") and Financial Institutions Divisions. And the
retirement savings and investment products category includes the Guaranteed
Investment Contracts and Investment Products Divisions.
The Company, since it is licensed in the State of New York, is the
entity through which PLC markets, distributes, and services insurance and
annuity products in New York. As of June 30, 1998, the Company was involved in
the operations of three of PLC's Divisions: the Acquisition Division, the Dental
Division and the Financial Institutions Division. PLC's Investment Products
Division has plans to begin marketing through the Company in the third quarter
of 1998. The Company has an additional business segment which is described
herein as Corporate and Other.
Protective has entered into an inter-company guaranty agreement,
enforceable by the Company or its successors, whereby Protective has guaranteed
the Company's payment of claims made by the holders of Company policies
according to the terms of such policies. The guarantee will remain in force
until the earlier of (a) when the Company achieves a claims-paying rating equal
to or better than Protective without the benefit of any inter-company guaranty
agreement or (b) 90 days after the guaranty agreement is revoked by written
instrument; provided, however, even after any revocation or termination by such
notice, the guarantee shall remain effective as to policies issued during the
existence of the guaranty agreement.
This report includes "forward-looking statements" which express
expectations of future events and/or results. All statements based on future
expectations rather than on historical facts are forward-looking statements that
involve a number of risks and uncertainties, and the Company cannot give
assurance that such statements will prove to be correct. Please refer to Exhibit
99 for more information about factors which could affect future results.
11
<PAGE>
REVENUES
The following table sets forth revenues by source for the period shown,
and the percentage change from the prior period:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERCENTAGE
JUNE 30 DECREASE
1998 1997
---- ----
<S> <C> <C> <C>
Premiums and policy fees $3,102,267 $4,675,394 (33.6)%
Net investment income 2,845,683 3,172,472 (10.3)
Realized investment losses (500,000) --
Other income 8,718 --
---------------- -------------
$5,447,950 $7,856,584
========== ==========
</TABLE>
Premiums and policy fees decreased $1.6 million or 33.6% in the first
six months of 1998 over the first six months of 1997. Premiums and policy fees
from the Acquisitions Division decreased $0.1 million. Premiums and policy fees
related to the Dental Division decreased $1.8 million in the first six months of
1998 as compared to the same period in 1997, primarily due to the loss of a
large customer at December 31, 1997. The Financial Institutions Division began
operations in the Company in 1998 which resulted in $0.3 million of new premiums
and policy fees in the first six months of 1998.
Net investment income in the first six months of 1998 decreased by $0.3
million over the corresponding period of the preceding year, primarily due to a
decline in interest rates.
The Company generally purchases its investments with the intent to hold
to maturity by purchasing investments that match future cash-flow needs.
However, the Company may sell any of its investments to maintain approximate
matching of assets and liabilities. Accordingly, the Company has classified its
fixed maturities and certain other securities as "available for sale." The sales
of investments that have occurred have resulted principally from portfolio
management decisions to maintain approximate matching of assets and liabilities.
The Company reported a $500,000 realized investment loss in the first
six months of 1998 due to the establishment of an allowance for investment
defaults.
12
<PAGE>
INCOME BEFORE INCOME TAX
The following table sets forth operating income or loss and income or
loss before income tax by business segment for the periods shown:
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS) AND INCOME (LOSS) BEFORE
INCOME TAX SIX MONTHS ENDED JUNE 30
1998 1997
---- ----
<S> <C> <C>
Operating Income (Loss)(1)
Acquisitions $ 817,071 $ 897,911
Dental and Consumer Benefits 210,592 512,995
Financial Institutions 71,086
Investment Products 25,861
Corporate and Other 422,284 323,695
----------- -----------
Total operating income 1,546,894 1,734,601
---------- ----------
Realized Investment Gains (Losses) (500,000)
Total net (500,000)
Income (Loss) Before Income Tax
Acquisitions 817,071 897,911
Dental and Consumer Benefits 210,592 512,995
Financial Institutions 71,086
Investment Products 25,861
Corporate and Other (77,716) 323,695
------------ -----------
Total income before tax $1,046,894 $1,734,601
========== ==========
</TABLE>
(1) Income before tax excluding realized investment gains and losses.
Pretax earnings from the Acquisitions Division decreased $0.1 million
in the first six months of 1998 as compared to the same period of 1997. Earnings
from the Acquisitions Division are expected to decline over time (due to the
lapsing of policies resulting from deaths of insureds or terminations of
coverage) unless new acquisitions are made.
Dental Division pretax earnings were $0.3 million lower in the first
six months of 1998 as compared to the first six months of 1997 primarily due to
the loss of a large customer at December 31, 1997.
The Financial Institutions Division began operations in the Company in
1998. The Division had pretax earnings of $0.1 million for the first six months
of 1998.
The Investment Products Division which plans to began marketing in the
third quarter of 1998 incurred a small amount (less than $0.1 million) of
start-up expenses in the first six months of 1998.
The Corporate and Other segment consists of net investment income not
identified with the preceding operating divisions. Pretax income from this
segment was $0.4 million in the first six months of 1998 and $0.3 million in the
first six months of 1997.
13
<PAGE>
INCOME TAXES
The following table sets forth the effective tax rates for the periods
shown:
SIX MONTHS
ENDED ESTIMATED EFFECTIVE
JUNE 30 INCOME TAX RATES
1997 34.0 %
1998 28.0
The effective income tax rate for the full year of 1997 was 34.0%.
Management's estimate of the effective income tax rate for 1998 is 28%.
NET INCOME
The following table sets forth net income for the periods shown, and
the percentage change from the prior period:
SIX MONTHS NET INCOME
ENDED PERCENTAGE
JUNE 30 TOTAL DECREASE
1997 $1,144,837 (35.3) %
1998 753,764 (34.2)
Compared to the same period in 1997, net income in the first six months
of 1998 decreased $0.4 million, reflecting decreases related to the
Acquisitions, Dental and Investment Products Divisions and realized investment
losses which were partially offset by increases related to the Financial
Institutions Division and the Corporate and Other segment.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 132, "Employers' Disclosures About
Pension and Other Postretirement Benefits" which revises the footnote
disclosures about pension and other postretirement benefit plans. The FASB has
also issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of these accounting standards are not expected to have
a material effect on the Company's financial condition
YEAR 2000 DISCLOSURE.
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 often is denoted by such hardware
and software as "98." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather that the year 2000. This "Year 2000" issue potentially affects all
individuals and companies
14
<PAGE>
(including the Company, its customers, business partners, suppliers, banks,
custodians and administrators) The problem is most prevalent in older mainframe
systems, but personal computers and equipment containing computer chips could
also be affected.
The Company shares computer hardware and software with PLC, Protective,
and other affiliates of PLC. PLC began work on the Year 2000 problem in 1995 and
has developed and implemented a Year 2000 transition plan intended to identify
and modify or replace important hardware and/or software systems on which it
relies that have Year 2000 issues or to develop appropriate contingency
measures. PLC has also developed and implemented a plan to identify and modify
or replace secondary hardware and/or software systems on which it relies that
have Year 2000 issues. Substantial resources are being devoted to this effort;
however, the total costs to develop and implement these plans are not expected
to be material. PLC is also confirming that its service providers are
implementing plans to identify and modify or replace their systems that have a
Year 2000 issue.
The majority of the modifications necessary for PLC's mainframe systems to
be able to process transactions dated beyond 1999 have been completed. PLC
currently anticipates that its remaining systems with Year 2000 issues will be
addressed and appropriate action taken before December 31, 1999. Due to the fact
that PLC does not control all of the factors that could impact its Year 2000
readiness, there can be no assurances that PLC's efforts will be successful,
that interactions with other service providers with Year 2000 issues will not
impair PLC's operations, or that the Year 2000 issue will not otherwise
adversely affect PLC.
PLC is developing detailed contingency plans for a large percentage of its
remaining Year 2000 issues. PLC is also using research, direct inquiry, and/or
testing to determine the Year 2000 readiness of critical vendors and business
partners.
Should some of PLC's systems not be available due to Year 2000 problems,
in a reasonably likely worst case scenario, PLC may experience significant
delays in its ability to perform certain functions, but does not expect an
inability to perform critical functions or to otherwise conduct business.
15
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibit 27 - Financial data schedule
Exhibit 99 - Safe Harbor for Forward-Looking Statements
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
Date: August 14, 1998 /S/ JERRY W. DEFOOR
-------------------
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of American Foundation Life Insurance Company and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<DEBT-HELD-FOR-SALE> 69,976,596 65,956,372
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 9,510,921 13,224,653
<REAL-ESTATE> 401,266 416,102
<TOTAL-INVEST> 93,815,787 95,440,671
<CASH> 522,103 525,891
<RECOVER-REINSURE> 7,882,507 8,346,051
<DEFERRED-ACQUISITION> 1,841,534 1,744,066
<TOTAL-ASSETS> 105,966,152 108,751,760
<POLICY-LOSSES> 55,872,901 57,291,919
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 12,064,067 17,651,100
<NOTES-PAYABLE> 0 0
2,000 2,000
0 0
<COMMON> 2,000,000 2,000,000
<OTHER-SE> 26,739,231 23,672,134
<TOTAL-LIABILITY-AND-EQUITY> 105,966,152 108,751,760
3,102,267 4,675,394
<INVESTMENT-INCOME> 2,845,683 3,172,472
<INVESTMENT-GAINS> (500,000) 0
<OTHER-INCOME> 0 8,718
<BENEFITS> 3,281,445 4,714,738
<UNDERWRITING-AMORTIZATION> 204,596 175,405
<UNDERWRITING-OTHER> 915,015 1,231,840
<INCOME-PRETAX> 1,046,894 1,734,601
<INCOME-TAX> 293,130 589,764
<INCOME-CONTINUING> 753,764 1,144,837
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 753,764 1,144,837
<EPS-PRIMARY> 0<F1> 0<F1>
<EPS-DILUTED> 0<F1> 0<F1>
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
<FN>
<F1>American Foundation is a wholly-owned subsidiary of Protective Life Insurance
Company, which is a wholly-owned subsidiary of Protective Life Corporation (NYSE: PL)
and is not required to present EPS information.
</FN>
</TABLE>
Exhibit 99
to
Form 10-Q
of
American Foundation Life Insurance Company
for the six months
ended June 30, 1998
Safe Harbor for Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Act")
encourages companies to make "forward-looking statements" by creating a safe
harbor to protect the companies from securities law liability in connection with
forward-looking statements. Forward-looking statements can be identified by use
of words such as "expect," "estimate," "project," "budget," "forecast,"
"anticipated," "plan," and similar expressions. American Foundation Life
Insurance Company ("the Company") intends to qualify both its written and oral
forward-looking statements for protection under the Act.
To qualify oral forward-looking statements for protection under the
Act, a readily available written document must identify important factors that
could cause actual results to differ materially from those in the
forward-looking statements. The Company provides the following information to
qualify forward-looking statements for the safe harbor protection of the Act.
The Company is a stock life insurance company founded in 1978. All
outstanding shares of the Company's common stock are owned by Protective Life
Insurance Company ("Protective"), which is the principal operating subsidiary of
Protective Life Corporation ("PLC"), an insurance holding company whose common
stock is traded on the New York Stock Exchange under the symbol "PL". All
outstanding shares of Company's preferred stock are owned by PLC. The Company is
authorized to transact insurance business in 29 states, including New York.
Protective Life Corporation ("PLC") through its subsidiaries provides
financial services through the production, distribution, and administration of
insurance and investment products. PLC operates through seven divisions whose
principal strategic focuses can be grouped into three general categories: life
insurance, specialty insurance products, and retirement savings and investment
products. The life insurance category includes the Acquisitions, Individual
Life, and West Coast Divisions. The specialty insurance products category
includes the Dental and Consumer Benefits ("Dental") and Financial Institutions
Divisions. And the retirement savings and investment products category includes
the Guaranteed Investment Contracts and Investment Products Divisions.
The Company, since it is licensed in the State of New York, is the
entity through which PLC markets, distributes, and services insurance and
annuity products in New York. As of June 30, 1998, the Company was involved in
the operations of three of PLC's Divisions: the Acquisition Division, the Dental
Division and the Financial Institutions Division. PLC's Investment Products
Division has plans to begin marketing through the Company in the third quarter
of 1998. The Company has an additional business segment which is described
herein as Corporate and Other.
<PAGE>
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of the Company are discussed more fully below.
MATURE INDUSTRY; COMPETITION. Life and health insurance is a mature
industry. In recent years, the industry has experienced virtually no growth in
life insurance sales, though the aging population has increased the demand for
retirement savings products. Insurance is a highly competitive industry and the
Company encounters significant competition in all lines of business from other
insurance companies, many of which have greater financial resources than the
Company, as well as competition from other providers of financial services.
The life and health insurance industry is consolidating, with larger,
more efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that the Company's ability to compete is dependent
upon, among other things, its ability to attract and retain distribution
channels to market its insurance and investment products, its ability to develop
competitive and profitable products, its ability to maintain low unit costs, and
its maintenance of strong claims-paying and financial strength ratings from
rating agencies.
The Company and its affiliates compete against other insurance
companies and financial institutions in the origination of commercial mortgage
loans.
RATINGS. Ratings are an important factor in the competitive position of
life insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company and its insurance
affiliates. A downgrade in the ratings of the Company and its life insurance
affiliates could adversely affect its ability to sell its products and its
ability to compete for attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While
most of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control. For the past several years rating downgrades in the industry
have exceeded upgrades.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from
year to year on account of fluctuations in policy claims received by the
Company.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the
Company and its insurance affiliates allow policyholders and contractholders to
withdraw their funds under defined circumstances. The Company and its insurance
affiliates design products and configure investment portfolios so as to provide
and maintain sufficient liquidity to support anticipated withdrawal demands and
contract benefits and maturities. Formal asset/liability management programs and
procedures are used to monitor the relative duration of the Company's assets and
liabilities. While the Company and its insurance affiliates own a significant
amount of liquid assets, many of their assets are relatively illiquid.
Significant unanticipated withdrawal or surrender activity could, under some
circumstances, compel the Company and its insurance
<PAGE>
affiliates to dispose of illiquid assets on unfavorable terms, which could have
a material adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in
interest rates expose insurance companies to the risk of not earning anticipated
spreads between the interest rate earned on investments and the credited rates
paid on outstanding policies. Both rising and declining interest rates can
negatively affect the Company's spread income. For example, certain of the
Company's insurance and investment products guarantee a minimum credited
interest rate. While the Company develops and maintains asset/liability
management programs and procedures designed to preserve spread income in rising
or falling interest rate environments, no assurance can be given that
significant changes in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of the Company's
insurance and investment products.
REGULATION AND TAXATION. The Company and its insurance affiliates are
subject to government regulation in each of the states in which they conduct
business. Such regulation is vested in state agencies having broad
administrative power dealing with all aspects of the insurance business
including premium rates, marketing practices, advertising, policy forms, and
capital adequacy, and is concerned primarily with the protection of
policyholders rather than stockholders. The Company cannot predict the form of
any future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income
tax payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. Congress is currently reviewing
certain proposals contained in President Clinton's Fiscal Year 1999 Budget
which, if enacted, would adversely impact the tax treatment of variable annuity
and certain other life insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including the Company and its affiliates, would be
adversely affected with respect to their ability to sell such products, and,
depending on grandfathering provisions, the surrenders of existing annuity
contracts and life insurance policies. The Company cannot predict what future
initiatives the President or Congress may propose which may affect the Company.
LITIGATION. A number of civil jury verdicts have been returned against
insurers in the jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. The Company and
its affiliates, like other insurers, in the ordinary course of business, are
involved in such litigation. The outcome of any such litigation cannot be
predicted with certainty. In addition, in some class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
<PAGE>
INVESTMENT RISKS. The Company's invested assets are subject to
customary risks of defaults and changes in market values. The value of the
Company's commercial mortgage portfolio depends in part on the financial
condition of the tenants occupying the properties which the Company has
financed. Factors that may affect the overall default rate on, and market value
of, the Company's invested assets include interest rate levels, financial market
performance, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. The Company has actively
pursued a strategy of acquiring blocks of insurance policies. This acquisition
strategy has increased the Company's earnings in part by allowing the Company to
position itself to realize certain operating efficiencies associated with
economies of scale. There can be no assurance, however, that suitable
acquisitions, presenting opportunities for continued growth and operating
efficiencies, will continue to be available to the Company, or that the Company
will realize the anticipated financial results from its acquisitions.
RELIANCE UPON THE PERFORMANCE OF OTHERS. The Company has entered into
various ventures involving other parties. Examples include, but are not limited
to: many of the Company's products are sold through independent distribution
channels; the Investment Products Division's variable annuity deposits are
invested in funds managed by unaffiliated investment managers; a portion of the
sales in the Dental and Financial Institutions Divisions comes from arrangements
with unrelated marketing organizations. Therefore the Company's results may be
affected by the performance of others.
YEAR 2000. Computer hardware and software often denote the year using
two digits rather than four; for example, the year 1998 often is denoted by such
hardware and software as "98." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted because
the hardware and/or software will interpret "00" as representing the year 1900
rather that the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including the Company, its customers, business
partners, suppliers, banks, custodians and administrators) The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
The Company shares computer hardware and software with PLC, Protective,
and other affiliates of PLC. PLC began work on the Year 2000 problem in 1995 and
has developed and implemented a Year 2000 transition plan intended to identify
and modify or replace important hardware and/or software systems on which it
relies that have Year 2000 issues or to develop appropriate contingency
measures. PLC has also developed and implemented a plan to identify and modify
or replace secondary hardware and/or software systems on which it relies that
have Year 2000 issues. Substantial resources are being devoted to this effort;
however, the total costs to develop and implement these plans are not expected
to be material. PLC is also confirming that its service providers are
implementing plans to identify and modify or replace their systems that have a
Year 2000 issue.
The majority of the modifications necessary for PLC's mainframe systems
to be able to process transactions dated beyond 1999 have been completed. PLC
currently anticipates that its remaining systems with Year 2000 issues will be
addressed and appropriate action taken before December 31, 1999. Due to the fact
that PLC does not control all of the factors that could impact its Year 2000
readiness, there can be no assurances that PLC's efforts will be successful,
that
<PAGE>
interactions with other service providers with Year 2000 issues will not impair
PLC's operations, or that the Year 2000 issue will not otherwise adversely
affect PLC.
PLC is developing detailed contingency plans for a large percentage of
its remaining Year 2000 issues. PLC is also using research, direct inquiry,
and/or testing to determine the Year 2000 readiness of critical vendors and
business partners.
Should some of PLC's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, PLC may experience
significant delays in its ability to perform certain functions, but does not
expect an inability to perform critical functions or to otherwise conduct
business.
REINSURANCE. As is customary in the insurance industry, the Company and
its insurance affiliates cede insurance to other insurance companies. However,
the ceding insurance company remains liable with respect to ceded insurance
should any reinsurer fail to meet the obligations assumed by it. Additionally,
the Company assumes policies of other insurers. Any regulatory or other adverse
development affecting the ceding insurer could also have an adverse effect on
the Company.
Forward-looking statements express expectations of future events and/or
results. All forward-looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events and they
are subject to numerous known and unknown risks and uncertainties which could
cause actual events or results to differ materially from those projected. Due to
these inherent uncertainties, investors are urged not to place undue reliance on
forward-looking statements. In addition, the Company undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events, or changes to projections over time.
