- -------------------------------------------------------------------------------
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 September 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 [ x ] No [ ]
Number of shares of Common Stock, $10.00 par value, outstanding as of
November 6, 1998: 250,000 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 Nine Months
ended September 30, 1998 and 1997 (unaudited)........................
Condensed Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997....................................
Condensed Statements of Cash Flows for the
Nine Months ended September 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 September 30, 1998, and the related condensed
statements of income for the three-month and nine-month periods ended September
30, 1998 and 1997 and condensed statements of cash flows for the nine-months
ended September 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
October 27, 1998
2
<PAGE>
<TABLE>
<CAPTION>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-----------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
three months: 1998 - $423,045; 1997 - $881,068
nine months: 1998 - $1,208,624; 1997 - $2,187,739) $1,826,997 $2,147,726 $4,929,264 $ 6,823,120
Net investment income 2,047,860 1,628,030 4,893,543 4,800,502
Realized investment gains (losses) (500,000)
Other income 8,718
---------- ---------- --------- ----------
3,874,857 3,775,756 9,322,807 11,632,340
---------- ---------- --------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
three months: 1998 - $1,206,396; 1997 - $563,730
nine months: 1998 - $2,817,986; 1997 - $2,381,786 2,686,038 2,117,545 5,967,483 6,832,283
Amortization of deferred policy acquisition costs 106,783 85,703 311,379 261,108
Other operating expenses (net of reinsurance ceded:
three months: 1998 - $213,656; 1997 - $1,619
nine months: 1998 - $205,582; 1997 - $42,013) 222,514 595,451 1,137,529 1,827,291
---------- --------- --------- ---------
3,015,335 2,798,699 7,416,391 8,920,682
---------- --------- --------- ---------
INCOME BEFORE INCOME TAX 859,522 977,057 1,906,416 2,711,658
Income tax expense 240,666 332,200 533,796 921,964
---------- --------- --------- ---------
NET INCOME $ 618,856 $ 644,857 $1,372,620 $ 1,789,694
========== ========== ========== =========
</TABLE>
See notes to condensed financial statements
3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities $ 74,743,852 $ 68,201,559
Mortgage loans on real estate 8,400,177 10,902,986
Investment in real estate, net 398,087 407,624
Policy loans 9,797,777 11,635,376
Short-term investments 2,000,000 873,844
------------ ------------
Total investments 95,339,893 92,021,389
Cash 945,224 2,218,201
Accrued investment income 1,260,811 1,230,529
Accounts and premiums receivable, net 977,516 1,233,659
Reinsurance receivables 7,436,070 7,680,586
Deferred policy acquisition costs 1,973,956 1,692,285
Other assets 52,401 70,809
Assets held in separate accounts 21,717
------------- ------------
$108,007,588 $106,147,458
============= ============
LIABILITIES
Policy liabilities and accruals $ 55,757,160 $ 56,717,914
Annuity deposits 1,009,679 929,124
Other policyholders' funds 11,883,412 12,080,458
Other liabilities 6,486,298 8,964,653
Accrued income taxes 11,978
Deferred income taxes 2,281,655 2,005,168
Liabilities held in separate accounts 21,717
------------ -----------
77,451,899 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:
1998 - 250,000: 1997 - 200,000 2,500,000 2,000,000
Additional paid-in capital 8,200,000 6,200,000
Retained earnings 17,361,575 16,538,954
Accumulated other comprehensive income
Net unrealized gains on investments (net of income
tax: 1998 -$969,156; 1997 - $381,870) 2,492,114 709,187
------------ ------------
30,555,689 25,450,141
------------ ------------
$108,007,588 $106,147,458
============ ============
</TABLE>
See notes to condensed financial statements
4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,372,620 $ 1,789,694
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deferred policy acquisition costs 311,379 261,108
Capitalization of deferred policy acquisition costs (593,050)
Deferred income tax (566,340) 375,228
Accrued income tax 11,978
Interest credited to universal life and investment products 811,436 839,159
Policy fees assessed on universal life and investment products (751,805) (791,050)
Change in accrued investment income and other receivables 470,377 1,447,487
Change in policy liabilities and other policyholders'
funds of traditional life and health products (194,536) (3,245,213)
Change in other liabilities (2,478,355) 276,712
Other (net) 18,408 19,820
----------- ----------
Net cash used in operating (provided by) activities (1,587,888) 972,945
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale 12,857,145 82,591,759
Other 2,515,965 246,103
Sale of investments
Investments available for sale 275,980
Cost of investments acquired
Investments available for sale (16,546,471) (85,103,098)
------------ ------------
Net cash used in investing activities (1,173,361) (1,989,256)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to stockholders (50,000) (50,000)
Change in universal life deposits (461,728) (25,982)
Capital contributions 2,000,000 0
------------ -----------
Net cash provided by (used in) financing activities 1,488,272 (75,982)
----------- -----------
INCREASE (DECREASE) IN CASH (1,272,977) (1,092,293)
CASH AT BEGINNING OF PERIOD 2,218,201 1,574,181
----------- -----------
CASH AT END OF PERIOD $ 945,224 $ 481,888
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Income taxes $ 350,000 $ 675,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock dividend $ 500,000
</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 nine month period ended September 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
NINE MONTHS ENDED SEPTEMBER 30, 1998
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ -------- ------------
<S> <C> <C> <C>
Premiums and policy fees $2,880,352 $1,520,945 $527,947
Net investment income 3,565,457 518,138
Realized investment gains (losses)
Other income --------- --------- -------
Total revenues 6,445,809 2,039,083 527,947
--------- --------- -------
Benefits and settlement expenses 4,368,904 1,329,099 268,035
Amortization of deferred policy
acquisition costs 197,597 113,782
Other operating expenses 581,969 540,851 36,821
--------- --------- -------
Total benefits and expenses 5,148,470 1,869,950 418,638
--------- --------- -------
Income before income tax 1,297,339 169,133 109,309
CORPORATE
INVESTMENT AND
PRODUCTS OTHER ADJUSTMENTS TOTAL
-------- ----- ----------- -----
Premiums and policy fees $ 20 $4,929,264
Net investment income $809,948 4,893,543
Realized investment gains (losses) $(500,000) (500,000)
Other income ------ -------- --------- ----------
Total revenues 20 809,948 (500,000) 9,322,807
------ -------- --------- ----------
Benefits and settlement expenses 1,445 5,967,483
Amortization of deferred policy
acquisition costs 311,379
Other operating expenses (22,112) 1,137,529
------ ---------
Total benefits and expenses (20,667) 7,416,391
------ -------- -------- ---------
Income before income tax 20,687 809,948 (500,000) 1,906,416
Income tax expense 533,796 533,796
---------
Net income $1,372,620
=========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT INCOME FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ -------- ------------
<S> <C> <C> <C>
Premiums and policy fees $3,085,680 $3,737,440
Net investment income 3,533,140 786,297
Realized investment gains (losses)
Other income 8,718
--------- ----------
Total revenues 6,627,538 4,523,737
--------- ----------
Benefits and settlement expenses 4,029,853 2,802,430
Amortization of deferred policy
acquisition costs 261,108
Other operating expenses 454,467 1,188,860
--------- ---------
Total benefits and expenses 4,745,428 3,991,290
--------- ---------
Income before income tax 1,882,110 532,447
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
INVESTMENT AND
PRODUCTS OTHER ADJUSTMENTS TOTAL
-------- ----- ----------- -----
<S> <C> <C> <C> <C>
Premiums and policy fees $ 6,823,120
Net investment income $481,065 4,800,502
Realized investment gains (losses)
Other income 8,718
-------- ----------
Total revenues 481,065 11,632,340
-------- ----------
Benefits and settlement expenses 6,832,283
Amortization of deferred policy
acquisition costs 261,108
Other operating expenses 183,964 1,827,291
------- ---------
Total benefits and expenses 183,964 8,920,682
------- ---------
Income before income tax 297,101 2,711,658
Income tax expense $921,964 921,964
---------
Net income $ 1,789,694
=========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
OPERATING SEGMENT ASSETS
SEPTEMBER 30, 1998
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ -------- ------------
<S> <C> <C> <C>
Investments and other assets $72,437,428 $6,944,487 $2,274,484
Deferred policy acquisition costs 1,408,999 564,957
----------- --------- ---------
Total assets $73,846,427 $6,944,487 $2,839,441
=========== ========= =========
CORPORATE
INVESTMENT AND
PRODUCTS OTHER TOTAL
Investments and other assets $287,139 $24,090,094 $106,033,632
Deferred policy acquisition costs 1,973,956
-------- ---------- -----------
Total assets $287,139 $24,090,094 $108,007,588
======= ========== ===========
OPERATING SEGMENT ASSETS
DECEMBER 31, 1997
DENTAL AND
CONSUMER FINANCIAL
ACQUISITIONS BENEFITS INSTITUTIONS
------------ -------- ------------
Investments and other assets $76,644,539 $7,111,880
Deferred policy acquisition costs 1,692,285
---------- ---------
Total assets $78,336,824 $7,111,880
========== =========
CORPORATE
INVESTMENT AND
PRODUCTS OTHER TOTAL
Investments and other assets $20,698,754 $104,455,173
Deferred policy acquisition costs 1,692,285
---------- -----------
Total assets $20,698,754 $106,147,458
========== ===========
9
</TABLE>
<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 September 30, 1998, and for the nine months then ended, the
Company had stockholders' equity and net income prepared in conformity with
statutory reporting practices of $23.3 million and $1.0 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 September 30, 1998 and December 31,
1997, prepared on the basis of reporting investments at amortized cost rather
than at market values, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
<S> <C> <C>
Total investments $ 71,282,582 $ 90,930,332
All other assets 33,263,736 14,126,069
------------ ------------
$104,546,318 $105,056,401
=========== ===========
Deferred income taxes $ 1,312,499 $ 1,623,298
All other liabilities 75,170,244 78,692,149
------------ ------------
76,482,743 80,315,447
Stockholders' equity 28,063,575 24,740,954
------------ ------------
$104,546,318 $105,056,401
=========== ===========
</TABLE>
10
<PAGE>
NOTE F - COMPREHENSIVE INCOME
The following table sets forth the Company's comprehensive income for
the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
1998 1997
---- ----
<S> <C> <C>
Net income $1,372,620 $1,789,694
Increase in net unrealized gains
on investments (net of income tax:
1998 - $553,361; 1997 - $427,835) 1,422,927 794,550
Reclassification adjustment for amounts
included in net income (net of income
tax: 1998 - $140,000) 360,000
---------- ----------
Comprehensive income $3,155,547 $2,584,244
========== ==========
</TABLE>
NOTE G - ACQUISITION
On October 14, 1998, the Company completed its acquisition of
approximately 260,000 policies from Lincoln National Corporation. The policies
represent the payroll deduction business originally marketed and underwritten by
Aetna.
In the transaction, the Company will assume the $330 million of life
insurance reserves, and receive approximately $30 million of policy loans and
$200 million of cash. In connection with the transaction, Protective contributed
approximately $96.9 million of capital in the form of corporate bonds.
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.
11
<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
the Company's preferred stock are owned by PLC. The Company is authorized to
transact insurance business in 31 states, including New York and is an
authorized reinsurer in an additional 13 states.
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. 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 September 30, 1998, the Company was involved
in the operations of four of PLC's Divisions: the Acquisition Division, the
Dental Division, the Financial Institutions Division and the Investment Products
Division. 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 the
Company's current expectations of future events and/or results. The word
"believe", "expect", "anticipate" and similar expressions identify
forward-looking statements which are based on future expectations rather than
on historical facts and are therefore subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
expressed. 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.
12
<PAGE>
Revenues
The following table sets forth revenues by source for the period shown,
and the percentage change from the prior period:
<TABLE>
<CAPTION>
NINE MONTHS PERCENTAGE
ENDED INCREASE/
SEPTEMBER 30 (DECREASE)
1998 1997
---- ----
<S> <C> <C> <C>
Premiums and policy fees $4,929,264 $ 6,823,120 (27.8)%
Net investment income 4,893,543 4,800,502 1.9
Realized investment losses (500,000)
Other income 8,718
---------- -----------
$9,322,807 $11,632,340
========== ===========
</TABLE>
Premiums and policy fees decreased $1.9 million or 27.8% in the first
nine months of 1998 over the first nine months of 1997. Premiums and policy fees
from the Acquisitions Division decreased $0.2 million. Premiums and policy fees
related to the Dental Division decreased $2.2 million in the first nine 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 $0.5 million of new premiums
and policy fees in the first nine months of 1998. The Investment Products
Division began marketing products through the Company during the third quarter
of 1998 which produced a small amount (less than $0.1 million) of premiums and
policy fees.
Net investment income in the first nine months of 1998 increased
slightly as compared to the corresponding period of the preceding year.
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
nine months of 1998 due to the establishment of an allowance for investment
defaults.
13
<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:
OPERATING INCOME AND INCOME BEFORE INCOME TAX
NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Operating Income1
Acquisitions $1,297,339 $1,882,110
Dental and Consumer Benefits 169,133 532,447
Financial Institutions 109,309
Investment Products 20,687
Corporate and Other 809,948 297,101
--------- ---------
Total operating income 2,406,416 2,711,658
Realized Investment Gains (Losses)
Unallocated realized investment gains (losses) (500,000)
---------
Total net (500,000)
---------
Income Before Income Tax
Acquisitions 1,297,339 1,882,110
Dental and Consumer Benefits 169,133 532,447
Financial Institutions 109,309
Investment Products 20,687
Corporate and Other 809,948 297,101
Unallocated realized investment gains (losses) (500,000)
---------- ----------
Total income before tax $1,906,416 $2,711,658
========= ==========
</TABLE>
1 Income before tax excluding realized investment gains and losses.
Pretax earnings from the Acquisitions Division decreased $0.6 million
in the first nine 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 $0.4 million lower in the first
nine months of 1998 as compared to the first nine 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 nine months
of 1998.
The Investment Products Division began marketing in the third quarter
of 1998. The Division had pretax earnings of less than $0.1 million in the first
nine months of 1998.
14
<PAGE>
The Corporate and Other segment consists of net investment income not
identified with the preceding operating divisions. Pretax income from this
segment was $0.8 million in the first nine months of 1998 and $0.3 million in
the first nine months of 1997.
Income Taxes
The following table sets forth the effective tax rates for the periods
shown:
NINE MONTHS
ENDED ESTIMATED EFFECTIVE
SEPTEMBER 30 INCOME TAX RATES
------------ -------------------
1997 34 %
1998 28
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:
NET INCOME
-------------------------------------
NINE MONTHS
ENDED PERCENTAGE
SEPTEMBER 30 TOTAL DECREASE
------------ ----- ----------
1997 $1,789,694 (23.5)%
1998 1,372,620 (23.3)
Compared to the same period in 1997, net income in the first nine
months of 1998 decreased $0.4 million, reflecting decreases related to the
Acquisitions, and Dental Divisions and realized investment losses which were
partially offset by increases related to the Financial Institutions and
Investment Products Divisions 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" and SFAS No. 134, "Accounting for MortgageBacked Securities Retained
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." The adoption of these accounting standards is not expected to have
a material effect on the Company's financial condition.
15
<PAGE>
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 than 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 is also confirming that its service providers are implementing
plans to identify and modify or replace their systems that have a Year 2000
issue. Substantial resources are being devoted to this effort; however, PLC
cannot specifically identify all of the costs to develop and implement these
plans. Since 1995, the costs that have been identified as relating to
addressing the Year 2000 problem total less than $5 million.
The majority of the modifications necessary for PLC's mainframe systems
to be able to process transactions dated beyond 1999 have been completed
and the remainder are targeted for completion by December 31, 1998. PLC's
other systems are currently being addressed with most targeted completion dates
being prior to June 30, 1999. 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 attempt to determine the Year 2000
readiness of critical vendors and business partners. During 1999, PLC will
future date test its systems in a production environment, and finalize its
contingency plans. PLC currrently 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 it 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.
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.
16
<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: November 13, 1998 /s/ Jerry W. DeFoor
Jerry W. DeFoor
Vice President and Controller,
and Chief Accounting Officer
(Duly authorized officer)
17
Exhibit 99
to
Form 10-Q
of
American Foundation Life Insurance Company
for the nine months
ended September 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 many aspects of the insurance business, which
may include 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. 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.
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
<PAGE>
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 is also confirming that its service providers are implementing
plans to identify and modify or replace their systems that have a Year 2000
issue.
PLC currently anticipates that its systems with Year 2000 issues will
have been 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 tht 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 adversely affect PLC.
Should some of PLC's systems not be available due to Year 2000
problems, in a resonably 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 attempt to otherwise
conduct business.
<PAGE>
However, other worst case scenarios, depending upon their duration, could have
a material adverse effect on the operations of PLC, Protective Life and the
Company.
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. The cost of
reinsurance is, in some cases, reflected in the premium rates charged by the
Company. Under certain reinsurance agreements, the reinsurer may increase the
rate it charges the Company for the reinsurance, though the Company does not
anticipate increases to occur. Therefore, if the cost of reinsurance were to
increase with respect to policies where the rates have been guaranteed by the
Company, the Company could be adversely affected.
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.
<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> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<DEBT-HELD-FOR-SALE> 74,743,852 70,731,637
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 0 0
<MORTGAGE> 8,400,177 12,973,129
<REAL-ESTATE> 398,087 410,803
<TOTAL-INVEST> 95,339,893 97,946,517
<CASH> 945,224 481,888
<RECOVER-REINSURE> 7,436,070 8,349,788
<DEFERRED-ACQUISITION> 1,973,956 1,658,363
<TOTAL-ASSETS> 108,007,588 110,869,085
<POLICY-LOSSES> 55,757,160 56,900,641
<UNEARNED-PREMIUMS> 0 0
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 11,883,412 17,599,169
<NOTES-PAYABLE> 0 0
2,000 2,000
0 0
<COMMON> 2,000,000 2,000,000
<OTHER-SE> 28,053,689 28,053,689
<TOTAL-LIABILITY-AND-EQUITY> 108,007,588 110,869,085
4,929,264 6,823,120
<INVESTMENT-INCOME> 4,893,543 4,800,503
<INVESTMENT-GAINS> (500,000) 0
<OTHER-INCOME> 0 8,718
<BENEFITS> 5,967,483 6,832,283
<UNDERWRITING-AMORTIZATION> 311,379 261,108
<UNDERWRITING-OTHER> 1,137,529 1,827,291
<INCOME-PRETAX> 1,906,416 2,711,658
<INCOME-TAX> 533,796 921,964
<INCOME-CONTINUING> 1,372,620 1,789,694
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,372,620 1,789,694
<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>
