SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1998 333-42425
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PROTECTIVE LIFE AND ANNUITY
INSURANCE COMPANY
(formerly American Foundation Life Insurance Company)
(Exact name of registrant as specified in its charter)
Alabama 63-0761690
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2801 Highway 280 South
Birmingham, Alabama 35223
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (205) 879-9230
--------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
--------------------------------------------
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Aggregate market value of voting stock held by nonaffiliates of the
registrant: None
Number of shares of Common Stock, $10.00 Par Value, outstanding as of
March 5, 1999: 250,000
The registrant meets the conditions set forth in General Instruction I(1)
(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format pursuant to General Instruction I(2).
DOCUMENTS INCORPORATED BY REFERENCE
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None, except Exhibits
<PAGE>
PART I
Item 1. Business
Protective Life and Annuity Insurance Company ("the Company'), a stock
life insurance company, was founded in 1978 as American Foundation Life
Insurance Company. Effective March 1, 1999, the Company was renamed Protective
Life and Annuity Insurance Company. Since 1983, all outstanding shares of the
Company's common stock have been owned by Protective Life Insurance Company
("Protective"), which is a wholly-owned 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, as an insurance company or a reinsurance company,
in 48 states, including New York.
PLC through its subsidiaries provides financial services through the
production, distribution, and administration of insurance and investment
products. PLC through its subsidiaries operates 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 December 31, 1998, the Company was involved in the
businesses of four of PLC's seven divisions: the Acquisitions 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 intercompany 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.
Item 2. Properties
The Company has no properties. The Company has contracts with PLC and
Protective under which it receives investment, legal, and data processing on a
fee basis and other managerial and administrative services on a shared cost
basis.
Protective's administrative office building is located at 2801 Highway 280
South, Birmingham, Alabama 35223.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the
Company or any of its affiliates is a party or of which any of its affiliates'
properties is subject. For additional information regarding legal proceedings
see Note F to the financial statements included herein.
Item 4. Submission of Matters to a Vote of Security Holders Not required in
accordance with General Instruction I(2)(c).
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Share-Owner Matters
The Company is a wholly-owned subsidiary of Protective. All of the
preferred stock issued by the Company is owned by PLC. Therefore, neither the
Company's common stock nor its preferred stock is publicly traded.
At December 31, 1998, $101.3 million of share-owners' equity excluding net
unrealized gains and losses represented net assets of the Company that cannot be
transferred to Protective in the form of dividends, loans, or advances.
Insurers are subject to various state statutory and regulatory
restrictions on the insurers' ability to pay dividends. In general, dividends up
to specific levels are considered ordinary and may be paid thirty days after
written notice to the insurance commissioner of the state of domicile unless
such commissioner objects to the dividend prior to the expiration of such
period. Dividends in larger amounts are considered extraordinary and are subject
to affirmative prior approval by such commissioner. The maximum amount that
would qualify as ordinary dividends to Protective by the Company in 1999 is
estimated to be $5.1 million.
The Company paid preferred dividends of $0.1 million to PLC in each of
1998 and 1997. Also in 1998 the Company declared and paid a common stock
dividend of 50,000 shares to Protective. The Company expects to continue to be
able to pay cash dividends, subject to its earnings and financial condition and
other relevant factors.
Item 6. Selected Financial Data
Not required in accordance with General Instruction I(2)(a).
Item 7. Management's Narrative Analysis of the Results of Operations
In accordance with General Instruction I(2)(a), the Company includes the
following analysis with the reduced disclosure format.
Revenues
The following table sets forth revenues by source for the periods shown:
<TABLE>
<CAPTION>
Year Ended
December 31 Percentage
Increase
1998 1997 (Decrease)
----------------------------------------------
<S> <C> <C> <C>
Premiums and policy fees..........................$ 9,767,144 $ 8,415,833 16.1%
Net investment income............................. 10,678,166 6,233,845 71.3%
Realized investment gains (losses)................ 127,769 (59,889) -
Other income...................................... (598) 8,718 (106.9)%
-----------------------------
$20,572,481 $14,598,507
=============================
</TABLE>
Premiums and policy fees, net of reinsurance ("premiums and policy fees")
increased $1.4 million or 16.1% in 1998 over 1997. The coinsurance by the
Acquisitions Division of a block of policies from Lincoln National Corporation
in October 1998 resulted in a $3.6 million increase in premiums and policy fees
in 1998 as compared to 1997. The Dental Division's loss of a large customer at
December 31, 1997 resulted in a $2.8 million decrease in premiums and policy
fees in 1998 as compared to 1997. The Financial Institution Division began
operating through the Company in late 1997. Premiums and policy fees from the
Financial Institutions Division were $0.8 million higher in 1998 as compared to
1997 reflecting a full year of operations in 1998 as compared to a partial year
in 1997.
<PAGE>
Net investment income for 1998 was $10.7 million or 71.3% higher than for
the preceding year primarily due to increases in the average amount of invested
assets associated with the coinsurance transaction described above. The
percentage earned on average cash and investments was 6.4% in 1998 and 7.6% in
1997.
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 proper 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 generally result from portfolio management
decisions to maintain proper matching of assets and liabilities.
In 1998, the Company established an allowance for uncollectible amounts on
investments totaling $0.5 million at December 31, 1998. Realized investment
gains in 1998 of $0.6 million were largely offset by the realized investment
loss of $0.5 million to set up the above-mentioned investment allowance.
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 Year Ended December 31
1998 1997
------------ ------------
<S> <C> <C>
Operating Income (Loss)(1)
Life Insurance
Acquisitions $3,408,955 $1,621,102
Specialty Insurance Products
Dental 736,761 609,843
Financial Institutions 387,194 7,946
Retirement Savings and
Investment Products
Investment Products (58,991)
Corporate and Other (1,248,164) 617,141
--------------------------------------------------------------------------------------
Total operating income 3,225,755 2,856,032
--------------------------------------------------------------------------------------
Realized Investment Gains (Losses)
Corporate and Other 127,769 (59,889)
--------------------------------------------------------------------------------------
Total net 127,769 (59,889)
--------------------------------------------------------------------------------------
Income (Loss) Before Income Tax
Life Insurance
Acquisitions 3,408,955 1,621,102
Specialty Insurance Products
Dental 736,761 609,843
Financial Institutions 387,194 7,946
Retirement Savings and
Investment Products
Investment Products (58,991)
Corporate and Other (1,120,395) 557,252
--------------------------------------------------------------------------------------
Total income before
income tax $3,353,524 $2,796,143
--------------------------------------------------------------------------------------
(1) Income before income tax excluding realized investment gains and losses.
</TABLE>
Pretax earnings from the Acquisitions Division increased $1.8 million in
1998 as compared to 1997. Earnings from the Acquisitions Division are normally
expected to decline over time (due to the lapsing of policies resulting from
deaths of insureds or terminations of coverage) unless new acquisitions are
made. In October 1998, the Division acquired approximately 260,000 policies from
Lincoln National Corporation. The policies represent the payroll deduction
business originally marketed and underwritten by Aetna. This acquisition
resulted in a $1.6
<PAGE>
million increase in pretax earnings in 1998. The Division's mortality experience
was approximately $0.3 million less favorable in 1998 than in 1997.
The Dental Division's 1998 pretax earnings increased $0.1 million as
compared to 1997. A decrease in earnings related to the loss of a large customer
at December 31, 1997 was more than offset by increases in other areas.
The Financial Institutions Division began operating through the Company in
late 1997. The Division's 1998 pretax earnings were $0.4 million as compared to
the Division's earnings from the latter part of 1997 which were insignificant.
The Investment Products Division began marketing certain annuity products
in the state of New York in the latter part of 1998, resulting in a pretax
operating loss of approximately $0.1 million primarily related to start-up
expenses.
The Corporate and Other segment consists of net investment income and
realized investment gains not identified with the preceding business segments.
Pretax losses for this segment were $1.1 million in 1998 as compared to pretax
gains of $0.6 million in 1997 primarily due to decreased net investment income
on capital.
Income Tax Expense
The following table sets forth the effective income tax rates for the
periods shown:
Year Ended Effective Income
December 31 Tax Rates
----------- ---------------
1998........................................... 28%
1997........................................... 34%
Management's current estimate of the effective income tax rate for 1999 is
28%.
Net Income
The following table sets forth net income for the periods shown:
Net Income
-----------------------
Percentage
Year Ended Increase
December 31 Amount (Decrease)
---------- ----------
1998.................................. $2,414,538 30.8%
1997.................................. $1,845,454 (23.6)%
Compared to 1997, net income in 1998 increased 30.8%, reflecting improved
operating earnings in the Acquisitions, Dental and Financial Institutions
Divisions, and higher realized investment gains offset by lower operating
earnings in the Investment Products Division and the Corporate and Other
segment.
Recently Issued Accounting Standards
For additional information regarding recently issued accounting standards
see Note A to the financial statements included herein.
<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. PLC began work
on the Year 2000 problem in 1995. At that time, PLC identified and assessed
PLC's critical mainframe systems, and prioritized the remediation efforts that
were to follow. During 1998 all other hardware and software, including
non-information technology (non-IT) related hardware and software, were included
in the process. PLC's Year 2000 plan includes all subsidiaries.
PLC estimates that Year 2000 remediation is complete for most of its
insurance administration and general administration systems. Of the general
administration systems that are not yet remediated, the majority are new systems
that were implemented during 1998 and are scheduled to be upgraded to the
current release of the system during the second quarter of 1999. All remediated
systems are currently in production. Personal computer network hardware and
software have been reviewed, with upgrades implemented where necessary. A review
of personal computer desktop software is in progress, but not complete. All Year
2000 personal computer preparations are expected to be completed by June 30,
1999. With respect to non-IT equipment and processes, the assessment and
remediation is progressing on schedule and all known issues are expected to be
remediated before December 31, 1999.
Two insurance administration systems identified as mission critical are
not yet fully remediated. A personal computer database system that processes
member information for one subsidiary is currently being remediated. This effort
is on schedule and targeted to be complete by June 30, 1999. Also, another
personal computer application, which processes policy information for one line
of business, is being re-written and is currently in test.
This system is targeted to be in production by April 30, 1999.
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of PLC's mission-critical systems. A
large portion of the testing is conducted by a contract programming staff
dedicated full time to Year 2000 preparations.
These resources have been part of PLC's Year 2000 project since 1995.
Integrated tests involve multiple system testing and are used to verify
the Year 2000 readiness of interfaces and connectivity across multiple systems.
PLC is using its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing. Integrated testing will
continue throughout 1999.
Business partners and suppliers that provide products or services critical
to PLC's operations are being reviewed and in some cases their Year 2000
preparations are being monitored by the Company. To date, no partners or
suppliers have reported that they expect to be unable to continue supplying
products and services after January 1, 2000. Initial reviews are targeted to be
completed in the first quarter of 1999. Monitoring and testing of critical
partners and suppliers will continue throughout 1999. Formal contingency
planning will begin in March 1999 and continue throughout the year. These plans
will augment PLC's existing disaster recovery plans.
PLC cannot specifically identify all of the costs to develop and implement
its Year 2000 plan. The cost of new systems to replace non-compliant systems
have been capitalized in the ordinary course of business. Other costs have been
expensed as incurred. Through December 31, 1998, costs that have been
specifically identified as relating
<PAGE>
to the Year 2000 problem total $3.9 million, with an additional $1.3 million
estimated to be required to support continued testing activity. PLC's Year 2000
efforts have not adversely affected its normal procurement and development of
information technology.
Although PLC believes that a process is in place to successfully address
Year 2000 issues, 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 the Company's operations, or that the Year 2000 issue will not
otherwise adversely affect the Company.
Should some of the Company's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, the Company may experience
significant delays in its ability to perform certain functions, but does not
expect to be unable to perform critical functions or to otherwise conduct
business.
Item 8. Financial Statements and Supplementary Data
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants...........................................
Statements of Income for the years ended December 31, 1998, 1997, and 1996..
Balance Sheets as of December 31, 1998 and 1997.............................
Statements of Share-Owners' Equity for the years ended
December 31, 1998, 1997, and 1996........................................
Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996
Notes to Financial Statements...............................................
Financial Statement Schedules:
Schedule III-- Supplementary Insurance Information.........................
Schedule IV-- Reinsurance..................................................
All other schedules to the financial statements required by Article 7 of
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Share Owners
Protective Life and Annuity Insurance Company
(formerly American Foundation Life Insurance Company)
Birmingham, Alabama
In our opinion, the financial statements and financial statement
schedules listed in the index on page 8 of this Form 10-K present fairly, in all
material respects, the financial position of Protective Life and Annuity
Insurance Company (formerly American Foundation Life Insurance Company) at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements and
financial statement schedules are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 11, 1999
Birmingham, Alabama
<PAGE>
<TABLE>
<CAPTION>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF INCOME
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ---------- ----------
REVENUES
<S> <C> <C> <C>
Premiums and policy fees............................................... $23,242,432 $11,420,914 $12,226,202
Reinsurance ceded...................................................... (13,475,288) (3,005,081) (2,768,199)
----------------------------------------
Net of reinsurance ceded............................................. 9,767,144 8,415,833 9,458,003
Net investment income.................................................. 10,678,166 6,233,845 6,611,489
Realized investment gains.............................................. 127,769 (59,889) (28,070)
Other income........................................................... (598) 8,718 2,406
----------------------------------------
20,572,481 14,598,507 16,043,828
----------------------------------------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded: 1998-$18,523,397;
1997-$4,430,527; 1996-$4,031,931)................................... 9,261,000 9,075,762 9,675,240
Amortization of deferred policy acquisition costs...................... 1,711,138 320,288 346,710
Other operating expenses (net of reinsurance ceded: 1998-$247,095;
1997-$60,900; 1996-$75,843)......................................... 6,246,819 2,406,314 2,361,076
----------------------------------------
17,218,957 11,802,364 12,383,026
----------------------------------------
INCOME BEFORE INCOME TAX.................................................. 3,353,524 2,796,143 3,660,802
----------------------------------------
INCOME TAX EXPENSE (BENEFIT)
Current.............................................................. 548,581 1,743,864
Deferred............................................................. 938,986 402,108 (499,191)
----------------------------------------
938,986 950,689 1,244,673
----------------------------------------
NET INCOME................................................................ 2,414,538 1,845,454 2,416,129
PREFERRED STOCK DIVIDENDS................................................. 100,000 100,000 100,000
----------------------------------------
INCOME AVAILABLE TO COMMON SHARE OWNER.................................... $2,314,538 $1,745,454 $2,316,129
========================================
See notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
BALANCE SHEETS
December 31
-------------------------------------
1998 1997
----------------- -----------
ASSETS
Investments:
<S> <C> <C>
Fixed maturities, at market (amortized cost: 1998-$346,561,571;
1997-$67,110,502) $360,113,277 $68,201,559
Mortgage loans on real estate 7,900,221 10,902,986
Investment real estate, net of accumulated depreciation (1997-$93,376) 407,624
Policy loans 54,103,044 11,635,376
Short-term investments 18,267,431 873,844
- ---------------------------------------------------------------------------------------------------------------------
Total investments 440,383,973 92,021,389
Cash 2,218,201
Accrued investment income 7,597,305 1,230,529
Accounts and premiums receivable, net of allowance for uncollectible
amounts (1998-$7,000; 1997-$7,000) 673,967 1,233,659
Reinsurance receivables 22,405,337 7,680,586
Deferred policy acquisition costs 133,275,451 1,692,285
Other assets 55,968 70,809
Assets related to separate accounts
Variable annuity. 237,565
--------------------------------------------------------------------------------------------------------------------
$604,629,566 $106,147,458
====================================================================================================================
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims $439,842,102 $ 56,254,682
Unearned premiums 2,487,277 463,232
- ---------------------------------------------------------------------------------------------------------------------
442,329,379 56,717,914
Annuity deposits 3,434,342 929,124
Other policyholders' funds 12,143,006 12,080,458
Other liabilities 7,941,276 8,964,653
Deferred income taxes 7,305,381 2,005,168
Liabilities related to separate accounts
Variable annuity 237,565
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 473,390,949 80,697,317
=====================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE F
SHARE-OWNERS' EQUITY
Preferred Stock, $1.00 par value, shares
authorized, issued and outstanding: 2,000 2,000 2,000
Common Stock, $10.00 par value
Shares authorized: 1998-500,000; 1997-200,000
Shares issued and outstanding: 1998-250,000; 1997-200,000 2,500,000 2,000,000
Additional paid-in capital 101,574,516 6,200,000
Retained earnings 18,353,492 16,538,954
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 1998-$4,743,097;
1997-$381,870) 8,808,609 709,187
- ---------------------------------------------------------------------------------------------------------------------
Total share-owners' equity 131,238,617 25,450,141
- ---------------------------------------------------------------------------------------------------------------------
$604,629,566 $106,147,458
=====================================================================================================================
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF SHARE-OWNERS' EQUITY
Net
Additional Unrealized Total
Preferred Common Paid-In Gains (Losses Retained Share-Owners'
Stock Stock Capital On Investments Earnings Equity
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $2,000,000 $ 4,202,000 $ 923,193 $15,477,371 $22,602,564
-----------
Net income for 1996 2,416,129 2,416,129
Decrease in net unrealized gains on investments
(net of income tax: ($748,368)) (1,389,826) (1,389,826)
Reclassification adjustment for amounts included in
net income (net of income tax: $9,824) 18,246 18,246
-----------
Comprehensive income for 1996 1,044,549
-----------
Redemption feature of preferred stock removed -
Note H $2,000 1,998,000 2,000,000
Common dividends ($15 per share) (3,000,000 (3,000,000)
Preferred dividends ($50 per share) (100,000) (100,000)
----------------------------------------------------------------------------
Balance, December 31, 1996 2,000 2,000,000 6,200,000 (448,387) 14,793,500 22,547,113
-----------
Net income for 1997 1,845,454 1,845,454
Increase in net unrealized gains on investments
(net of income tax: $602,348) 1,118,646 1,118,646
Reclassification adjustment for amounts included in
net income (net of income tax: $20,961) 38,928 38,928
-----------
Comprehensive income for 1997 3,003,028
-----------
Preferred dividends ($50 per share) (100,000) (100,000)
----------------------------------------------------------------------------
Balance, December 31, 1997 2,000 2,000,000 6,200,000 709,187 16,538,954 25,450,141
-----------
Net income for 1998 2,414,538 2,414,538
Increase in net unrealized
gains on investments (net of income tax-$4,405,946) 8,182,472 8,182,472
Reclassification adjustment for amounts included
in net income (net of income tax: ($44,719)) (83,050) (83,050)
-----------
Comprehensive income for 1998 10,513,960
-----------
Common stock dividend (50,000 shares) 500,000 (500,000)
Preferred dividends ($50 per share) (100,000) (100,000)
Capital contribution from Protective 95,374,516 95,374,516
----------------------------------------------------------------------------
Balance, December 31, 1998 $2,000 $2,500,000 $101,574,516 $8,808,609 $18,353,492 $131,238,617
============================================================================
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
December 31
---------------------------------------
1998 1997 1996
---------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 2,414,538 $ 1,845,454 $ 2,416,129
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred policy acquisition costs 1,711,138 320,288 346,710
Capitalization of deferred policy acquisition costs (783,304)
Deferred income taxes 938,986 1,025,417 (499,191)
Interest credited to universal life and investment products 2,422,680 1,059,710 1,111,034
Policy fees assessed on universal life and investment products (1,004,958) (1,048,883) (1,179,765)
Change in accrued investment income and other receivables (19,671,587) 2,020,726 (6,955)
Change in policy liabilities and other policyholder funds of traditional life and
health products 84,738,359 (8,576,735) (1,612,231)
Change in receivable from Protective Life Insurance Company 24,817,851
Change in other liabilities (1,023,377) 200,205 (2,294,791)
Other (net) 14,841 (79,787) (326,038)
----------------------------------------
Net cash provided by (used in) operating activities 69,757,316 (3,233,605) 22,772,753
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale 1,164,896,631 135,907,273 98,454,653
Other 3,018,788 3,661,121 1,545,594
Sale of investments:
Investment available for sale 210,129,485 4,386,839 46,567,425
Other 435,000 400,000
Cost of investments acquired:
Investments available for sale (1,371,973,391) (139,609,229) (165,042,338)
Other (310,000)
----------------------------------------
Net cash provided by (used in) investing activities 6,506,513 4,346,004 (18,384,666)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to share owners (100,000) (100,000) (3,100,000)
Investment product deposits and change in universal life deposits (78,382,030) (368,379) (723,167)
----------------------------------------
Net cash used in financing activities (78,482,030) (468,379) (3,823,167)
----------------------------------------
INCREASE (DECREASE) IN CASH (2,218,201) 644,020 564,920
CASH AT BEGINNING OF YEAR 2,218,201 1,574,181 1,009,261
----------------------------------------
CASH AT END OF YEAR $ 0 $ 2,218,201 $ 1,574,181
========================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year:
Income taxes $ 350,000 $ 548,581 $ 1,830,301
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisitions and bulk reinsurance assumptions
Assets acquired $ 247,894,180
Liabilities assumed (380,405,180)
------------
Net $ (132,511,000)
============
</TABLE>
See notes to financial statements.
<PAGE>
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
Note A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements of Protective Life and Annuity
Insurance Company ("the Company") are prepared on the basis of generally
accepted accounting principles. Such accounting principles differ from statutory
reporting practices used by insurance companies in reporting to state regulatory
authorities. (See also Note B.)
The Company was founded in 1978 as American Foundation Life Insurance
Company. Effective March 1, 1999, the Company's name was changed to Protective
Life and Annuity Insurance Company. Since 1983, all outstanding shares of the
Company's common stock have been owned by Protective Life Insurance Company
("Protective"), which is a wholly-owned 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make various estimates
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities, as well as the reported amounts of revenues
and expenses.
NATURE OF OPERATIONS
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. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities;" SFAS No. 130, "Reporting Comprehensive
Income;" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
The adoption of these accounting standards did not have a material effect
on the Company's financial statements.
INVESTMENTS
The Company has classified all of its investments in fixed maturities and
short-term investments as "available for sale."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
o Fixed maturities (bonds and redeemable preferred stocks) -- at current
market value.
o Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
<PAGE>
Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
o Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate
acquired through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.
o Policy loans -- at unpaid balances.
o Short-term investments -- at cost, which approximates current market
value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses, net of income tax, reported as a
component of share-owners' 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
share-owners' equity will fluctuate significantly as interest rates change.
The Company's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
1998 1997
Total investments............................... $426,832,267 $ 90,930,332
Deferred policy acquisition costs............... 133,275,451 1,692,285
All other assets................................ 30,970,142 12,433,784
----------------------------
$591,077,860 $105,056,401
============================
Deferred income taxes........................... $ 2,562,284 $ 1,623,298
All other liabilities........................... 466,085,568 78,692,149
----------------------------
468,647,852 80,315,447
Share-owners' equity............................ 122,430,008 24,740,954
----------------------------
$591,077,860 $105,056,401
============================
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
SEPARATE ACCOUNTS
The assets and liabilities related to separate accounts in which the Company
does not bear the investment risk are valued at market and reported separately
in the accompanying financial statements.
REVENUES AND BENEFITS EXPENSE
o Traditional Life and Health Insurance Products-- Traditional life
insurance products consist principally of those products with fixed
and guaranteed premiums and benefits and include whole life insurance
policies, term and term-like life insurance policies, limited-payment
life insurance policies, and certain annuities with life
contingencies. Life insurance and immediate annuity premiums are
recognized as revenue when due. Health insurance premiums are
recognized as revenue over the terms of the policies. Benefits and
expenses are associated with earned premiums so that profits are
recognized over the life of the contracts. This is accomplished by
means of the provision for liabilities for future policy benefits
and the amortization of deferred policy acquisition costs.
<PAGE>
Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including
assumptions as to investment yields, mortality, persistency, and
other assumptions based on the Company's experience modified as
necessary to reflect anticipated trends and to include provisions for
possible adverse deviation. Reserve investment yield assumptions are
graded and range from 2.5% to 7.0%. The liability for future policy
benefits and claims on traditional life and health insurance products
includes estimated unpaid claims that have been reported to the
Company and claims incurred but not yet reported. Policy claims are
charged to expense in the period that the claims are incurred.
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Balance beginning of year................................ $3,724,904 $5,008,998 $3,862,708
Less reinsurance..................................... 203,199 801,709 370,612
-----------------------------------------
Net balance beginning of year............................ 3,521,705 4,207,289 3,492,096
=========================================
Incurred related to:
Current year............................................. 7,178,869 5,947,439 6,293,400
Prior year............................................... (173,472) (331,984) (153,466)
-----------------------------------------
Total incurred....................................... 7,005,397 5,615,455 6,139,934
=========================================
Paid related to:
Current year............................................. 5,904,526 4,913,958 4,883,873
Prior year............................................... 1,026,981 1,387,081 540,868
-----------------------------------------
Total paid........................................... 6,931,507 6,301,039 5,424,741
=========================================
Net balance end of year.................................. 3,595,595 3,521,705 4,207,289
Plus reinsurance..................................... 494,064 203,199 801,709
-----------------------------------------
Balance end of year...................................... $4,089,659 $3,724,904 $5,008,998
=========================================
</TABLE>
o Universal Life and Investment Products-- Universal life and
investment products include universal life insurance, deferred
annuities, and annuities without life contingencies. Revenues for
universal life and investment products consist of policy fees that
have been assessed against policy account balances for the costs of
insurance, policy administration, and surrenders. That is, universal
life and investment product deposits are not considered revenues in
accordance with generally accepted accounting principles. Benefit
reserves for universal life and investment products represent policy
account balances before applicable surrender charges plus certain
deferred policy initiation fees that are recognized in income over
the term of the policies. Policy benefits and claims that are charged
to expense include benefit claims incurred in the period in excess of
related policy account balances and interest credited to policy
account balances. Interest credit rates for universal life and
investment products ranged from 3.4% to 9.4% in 1998.
The Company's accounting policies with respect to variable annuities
are identical except that policy account balances (excluding account
balances that earn a fixed rate) are valued at market and reported as
components of assets and liabilities related to separate accounts.
<PAGE>
Note A -- SIGNIFICANT ACCOUNTING POLICIES (Continued)
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life and health
insurance, universal life insurance, and investment products that vary with and
are primarily related to the production of new business have been deferred.
Traditional life and health insurance acquisition costs are being amortized over
the premium-payment period of the related policies in proportion to the ratio of
annual premium income to total anticipated premium income. Acquisition costs for
universal life and investment products are amortized over the lives of the
policies in relation to the present value of estimated gross profits before
amortization. Under SFAS No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," the Company makes certain assumptions
regarding the mortality, persistency, expenses, and interest rates it expects to
experience in future periods. These assumptions are to be best estimates and are
to be periodically updated whenever actual experience and/or expectations for
the future change from that assumed.
The cost to acquire blocks of insurance representing the present value of
future profits from such blocks of insurance is also included in deferred policy
acquisition costs. The Company amortizes the present value of future profits
over the premium payment period, including accrued interest of approximately
5.75%. The unamortized present value of future profits was approximately $131.2
million at December 31, 1998. During 1998, $132.5 million of present value of
future profits on acquisitions made during the year was capitalized and $1.3
million was amortized.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. Deferred federal income taxes arise from the
recognition of temporary differences between the bases of assets and liabilities
determined for financial reporting purposes and the bases determined for income
tax purposes. Such temporary differences are principally related to the deferral
of policy acquisition costs and the provision for future policy benefits and
expenses.
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
net income, total assets, or share-owners' equity.
<PAGE>
Note B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method and are based on realistic
estimates of expected mortality, interest, and withdrawals as adjusted to
provide for possible unfavorable deviation from such assumptions, (c) deferred
income taxes are provided for temporary differences between financial and
taxable earnings, (d) the Asset Valuation Reserve and Interest Maintenance
Reserve are restored to share-owners' equity, (e) agents' debit balances and
prepaid expenses are reported as assets rather than being charged directly to
surplus (referred to as nonadmitted items), (f) certain items of interest
income, principally accrual of mortgage and bond discounts are amortized
differently, and (g) bonds are stated at market instead of amortized cost.
The reconciliations of net income and share-owners' equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
<TABLE>
<CAPTION>
Net Income Share-Owners' Equity
------------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996
------------ -------- ----------- --------- ------------ -----------
In conformity with statutory reporting
<S> <C> <C> <C> <C> <C> <C>
practices:....................................$5,365,091 $2,794,015 $2,558,227 $26,256,416 $20,467,722 $18,031,163
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization........................... (1,711,138) (320,288) (346,710) 133,275,451 1,692,285 1,919,471
Deferred income tax...................... (938,986) 402,108 499,191 (7,305,381) (2,005,168) (979,751)
Asset Valuation Reserve.................. 1,334,584 730,240 560,732
Interest Maintenance Reserve............. (82,982) (85,826) (89,611) 460,059 161,051 285,805
Nonadmitted items........................ 15,671 10,431 7,090
Other timing and valuation adjustments... (217,447) (944,555) (204,968) (22,798,183) 4,393,580 2,722,603
----------------------------------------------------------------------------
In conformity with generally accepted
accounting principles......................... $2,414,538 $1,845,454 $2,416,129 $131,238,617 $25,450,141 $22,547,113
============================================================================
</TABLE>
Note C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 7,525,336 $4,701,611 $4,708,490
Mortgage loans on real estate 952,437 1,146,325 1,431,687
Investment real estate 72,318 65,584 73,756
Policy loans 656,623 643,653 752,828
Other, principally short-term investments 2,083,693 112,127 160,644
------------------------------------------
11,290,407 6,669,300 7,127,405
Investment expenses (612,241) (435,455) (515,916)
------------------------------------------
$10,678,166 $6,233,845 $6,611,489
==========================================
Realized investment gains (losses) for the years ended December 31 are summarized as follows:
Fixed maturities.................................... $ 87,677 $(59,889) $ 22,247
Mortgage loans and other investments................ 40,092 0 (50,317)
------------------------------------------
$127,769 $(59,889) $(28,070)
==========================================
</TABLE>
In 1998, the Company established an allowance for uncollectible amounts on
investments totaling $500,000 at December 31, 1998. Additions and reductions to
the allowance are included in realized investment gains (losses). Without such
additions/reductions, the Company had net realized investment gains of $627,769
in 1998.
<PAGE>
Note C -- INVESTMENT OPERATIONS ( Continued)
In 1998, gross gains on the sale of investments available for sale (fixed
maturities and short-term investments) were approximately $600,000 and gross
losses were approximately $500,000. In 1997, gross gains were approximately
$10,000 and gross losses were approximately $70,000. In 1996, gross gains were
approximately $20,000.
The amortized cost and estimated market values of the Company's
investments classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1998 Cost Gains Losses Values
----------- ----------------------------------------------------------
Fixed maturities:
Bonds:
<S> <C> <C> <C> <C>
Mortgage-backed............................. $ 6,488,768 $ 204,235 $ 6,693,003
United States Government and
authorities............................... 8,731,486 474,109 9,205,595
States, municipalities, and
political subdivisions.................... 3,075,631 105,159 3,180,790
Public utilities............................ 54,040,814 1,380,112 $ 12,869 55,408,057
Convertibles and bonds with
warrants.................................. 694,723 179,348 515,375
All other corporate bonds................... 273,530,149 12,673,749 1,093,441 285,110,457
----------------------------------------------------------
346,561,571 14,837,364 1,285,658 360,113,277
Short-term investments.............................. 18,267,431 18,267,431
----------------------------------------------------------
$364,829,002 $14,837,364 $1,285,658 $378,380,708
==========================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Values
----------- ----------------------------------------------------------
Fixed maturities:
Bonds:
Mortgage-backed............................. $ 11,348,224 $ 348,395 $ 11,696,619
United States Government and
authorities............................... 8,746,050 242,265 $ 4,982 8,983,333
Public utilities............................ 9,228,405 198,255 5,441 9,421,219
Convertibles and bonds with
warrants.................................. 694,485 0 168,610 525,875
All other corporate bonds................... 37,093,338 572,155 90,980 37,574,513
67,110,502 1,361,070 270,013 68,201,559
----------------------------------------------------------
Short-term investments.............................. 873,844 873,844
----------------------------------------------------------
$ 67,984,346 $1,361,070 $ 270,013 $ 69,075,403
==========================================================
</TABLE>
<PAGE>
Note C -- INVESTMENT OPERATIONS (Continued)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown below. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Values
1998
<S> <C> <C>
Due in one year or less......................... $ 28,436,528 $ 28,618,945
Due after one year through five years............ 178,463,434 185,885,380
Due after five years through ten years........... 78,858,516 83,976,562
Due after ten years.............................. 60,803,093 61,632,390
---------------- ---------------
$346,561,571 $360,113,277
================ ===============
Estimated
Amortized Market
Cost Values
1997
Due in one year or less.......................... $ 2,171,455 $ 2,177,160
Due after one year through five years............ 27,762,163 28,202,077
Due after five years through ten years........... 34,516,587 35,136,758
Due after ten years.............................. 2,660,297 2,685,564
---------------- ---------------
$ 67,110,502 $ 68,201,559
================ ===============
</TABLE>
The approximate percentage distribution of the Company's fixed maturity
investments by quality rating at December 31 is as follows:
Rating 1998 1997
-------- -------
AAA 4.4% 26.8%
AA 6.7 1.7
A 43.7 24.3
BBB 43.1 37.4
BB or Less 2.1 9.8
-------- -------
100.0% 100.0%
======== =======
At December 31, 1998 and 1997, the Company had bonds which were rated less
than investment grade of $7.7 million and $6.7 million, respectively, having an
amortized cost of $7.8 million and $6.8 million, respectively.
The change in unrealized gains (losses), net of income tax on fixed
maturities for the years ended December 31 is summarized as follows:
1998 1997 1996
----------- ---------- -----------
Fixed maturities..................... $8,099,422 $1,157,574 $(1,371,579)
At December 31, 1998, approximately 99% of the Company's mortgage loans
were commercial loans of which 51% were retail, and 48% were office buildings.
The Company specializes in making mortgage loans on either credit-oriented or
credit-anchored commercial properties, most of which are strip shopping centers
in smaller towns and cities. No single tenant's leased space represents more
than 10% of mortgage loans. All of the mortgage loans are on properties located
in the following states listed in decreasing order of significance: Alabama,
Tennessee, Florida, Colorado, Georgia, Texas and Arkansas.
<PAGE>
Note C -- INVESTMENT OPERATIONS (Continued)
Many of the mortgage loans have call provisions after three to ten years.
Assuming the loans are called at their next call dates, approximately $0.5
million would become due in 2000 to 2003.
At December 31, 1998, the average mortgage loan was $0.5 million, and the
weighted average interest rate was 9.2%. The largest single mortgage loan was
$1.9 million.
At December 31, 1998, the Company had no problem mortgage loans or
foreclosed properties. At December 31, 1997, the Company's problem mortgage
loans and foreclosed properties totaled $0.4 million. Since the Company's
mortgage loans are collateralized by real estate, any assessment of impairment
is based upon the estimated fair value of the real estate. Based on the
Company's evaluation of its mortgage loan portfolio, the Company does not expect
any material losses on its mortgage loans.
Policy loan interest rates generally range from 4.5% to 8.0%.
Note D -- FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------ --------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income............... 35.00% 35.00% 35.00%
Tax-exempt interest...................................................... (3.98) (7.20) (7.33)
Other adjustments........................................................ (3.02) 6.20 6.33
--------- ------ --------
Effective income tax rate................................................ 28.00% 34.00% 34.00%
========= ====== ========
</TABLE>
The provision for federal income tax differs from amounts currently
payable due to certain items reported for financial statement purposes in
periods which differ from those in which they are reported for income tax
purposes.
Details of the deferred income tax provision for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- --------
<S> <C> <C> <C>
Deferred policy acquisition costs.....................................$14,616,912 $(100,971) $ (530,008)
Benefit and other policy liability changes............................(11,991,104) (72,878) 1,698,144
Temporary differences of investment income............................ 398,620 (199,660) (208,432)
Other items........................................................... (2,085,442) 775,617 (1,458,895)
----------- ---------- ---------
$ 938,986 $ 402,108 $ (499,191)
=========== ========== =========
</TABLE>
<PAGE>
Note D -- FEDERAL INCOME TAXES (Continued)
The components of the Company's net deferred income tax liability as of
December 31 were as follows:
1998 1997
------------------------
Deferred income tax assets:
Policy and policyholder liability reserves..........$ 12,392,740 $ 401,636
Deferred policy acquisition costs................... 195,580
------------------------
12,392,740 597,216
------------------------
Deferred income tax liabilities:
Unrealized gain on investments...................... 5,276,789 516,942
Other............................................... 2,085,442
Deferred policy acquisition costs................... 14,421,332
------------------------
19,698,121 2,602,384
------------------------
Net deferred income tax liability $ 7,305,381 $2,005,168
========================
The Company's income tax returns are included in the consolidated income
tax returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations. At December 31, 1998 and
1997 no amounts were payable to PLC for income tax liabilities.
Note E -- RECENT ACQUISITIONS
In October 1998, the Company coinsured a block of life insurance policies
from Lincoln National Corporation. The policies represent the payroll deduction
business originally marketed and underwritten by Aetna.
This transaction has been accounted for as a purchase, and the result of
this transaction has been included in the accompanying financial statements
since the effective date of the agreement.
Note F -- 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 insurer 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 damage suit. The Company, like other insurers, in the ordinary course
of business, are involved in such litigation or alternatively in arbitration.
Although the outcome of any litigation or arbitration cannot be predicted with
certainty, the Company believes that at the present time 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 G -- SHARE-OWNERS' EQUITY AND RESTRICTIONS
Dividends on common stock are noncumulative and are paid as determined by
the Board of Directors. At December 31, 1998, approximately $101.3 million of
share-owners' equity excluding net unrealized gains and losses represented net
assets of the Company that cannot be transferred in the form of dividends,
loans, or advances to Protective. In general, dividends up to specified levels
are considered ordinary and may be paid thirty days after written notice to the
insurance commissioner of the state of domicile unless such commissioner objects
to the dividend prior to the expiration of such period. Dividends in larger
amounts are considered extraordinary and are subject to affirmative prior
approval by such commissioner. The maximum amount that would qualify as ordinary
dividends to Protective by the Company in 1999 is estimated to be $5.1 million.
During 1998 Protective made a capital contribution of $95,374,516
consisting of corporate bonds.
<PAGE>
Note H -- PREFERRED STOCK
Prior to November 1998, the Company's preferred stock had a provision for
an annual minimum cumulative dividend, when and if declared, of $50.00 per
share, and additional dividends to the extent the Company's statutory earnings
for the immediately preceding year exceeded $1.0 million. The minimum dividend
and any accumulation was to be paid before any dividend on any other class of
capital stock was paid. The additional dividends were noncumulative and were in
preference to any other dividend on any other class of capital stock. Dividends
of $100,000 were declared and paid in each of 1998, 1997 and 1996 on the
preferred stock. As of December 31, 1998, all cumulative preferred dividends
have been paid. Effective November 3, 1998, the Company's articles of
incorporation were amended such that the provision for an annual minimum
cumulative dividend was removed.
During 1996, the Company's articles of incorporation were amended such
that the preferred stock is redeemable at $1,000 per share solely at the
Company's discretion. At December 31, 1995, the preferred stock was reported as
"Redeemable Preferred Stock", whereas at December 31, 1996, it is reported as a
component of share-owners' equity.
Note I -- RELATED PARTY MATTERS
The Company has no employees; therefore, the Company purchases data
processing, legal, investment, and other management services from PLC and other
affiliates. The cost of such services was $1.2 million in 1998, $1.2 million in
1997, and $1.4 million in 1996.
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amount of $287,629 at December 31, 1998 and $183,009
at December 31, 1997. The Company routinely receives from or pays to affiliates
under the control of PLC reimbursements for expenses incurred on one another's
behalf.
Receivables and payables among affiliates are generally settled monthly.
Note J -- OPERATING SEGMENTS
PLC, through its subsidiaries, operates seven divisions whose principal
strategic focuses can be grouped into three general categories: Life Insurance,
Specialty Insurance Products, and Retirement Savings and Investment Products.
Each division has a senior officer of Protective responsible for its operations,
which include the related operations of the Company. A division is generally
distinguished by products and/or channels of distribution. A brief description
of each division the Company operates in follows.
Life Insurance
Acquisitions Division. The Acquisitions Division focuses solely on
acquiring, converting, and servicing policies acquired from other companies.
These acquisitions may be accomplished through acquisitions of companies or
through the assumption or reinsurance of life insurance and related policies.
Specialty Insurance Products
Dental and Consumer Benefits Division. The Division's primary focus is on
indemnity and prepaid dental products. In 1997, the Division exited from the
traditional group major medical business, fulfilling the Division's strategy to
focus primarily on dental and related products.
Financial Institutions Division. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, consumer finance companies and automobile dealers. The Division also
includes a small property casualty insurer that sells automobile service
contracts.
<PAGE>
Note K -- OPERATING SEGMENTS (continued)
Retirement Savings and Investment Products
Investment Products Division. The Investment Products Division
manufactures, sells, and supports fixed and variable annuity products. These
products are primarily sold through stockbrokers, but are also sold through
financial institutions and the Individual Life Division's agency sales force.
Corporate and Other
The Company has an additional business segment herein referred to as
Corporate and Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the Divisions above
(including net investment income on capital).
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax. Premiums and policy fees, other income, benefits and settlement expenses,
and amortization of deferred policy acquisition costs are attributed directly to
each operating segment. Net investment income is allocated based on directly
related assets required for transacting the business of that segment. Realized
investment gains (losses) and other operating expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
Operating segment income and assets for the years ended December 31 are as
follows:
<PAGE>
<TABLE>
<CAPTION>
Dental and Total
Consumer Financial Investment Corporate Net
Operating Segment Income Acquisitions Benefits Institutions Products & Other Adjustments(1) Income
- --------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums and policy fees $ 7,414,597 $1,503,364 $848,682 $501 $ 9,767,144
Net investment income 11,071,366 718,492 136,472 $(1,248,164) 10,678,166
Realized investment gains (losses) 127,769 127,769
Other income (598) (598)
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 18,485,963 2,221,856 985,154 (97) (1,120,395) 20,572,481
- --------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 7,594,508 1,340,838 316,900 8,754 9,261,000
Amortization of deferred policy
acquisition costs 1,535,385 175,753 1,711,138
Other operating expenses 5,947,115 144,257 105,307 50,140 6,246,819
- --------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 15,077,008 1,485,095 597,960 58,894 17,218,957
- -------------------------------------------------------------------------------------------------------------------------------
Income before income tax 3,408,955 736,761 387,194 (58,991) (1,120,395) 3,353,524
Income tax expense $938,986 938,986
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,414,538
- -------------------------------------------------------------------------------------------------------------------------------
1997
Premiums and policy fees $ 4,231,380 $4,158,505 $ 25,948 $ 8,415,833
Net investment income 4,590,650 1,026,054 $ 617,141 6,233,845
Realized investment gains (losses) (59,889) (59,889)
Other income 8,718 8,718
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 8,830,748 5,184,559 25,948 557,252 14,598,507
- -------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 5,984,374 3,080,800 10,588 9,075,762
Amortization of deferred policy
acquisition costs 312,874 7,414 320,288
Other operating expenses 912,398 1,493,916 2,406,314
- -------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 7,209,646 4,574,716 18,002 11,802,364
- -------------------------------------------------------------------------------------------------------------------------------
Income before income tax 1,621,102 609,843 7,946 557,252 2,796,143
Income tax expense $950,689 950,689
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,845,454
- -------------------------------------------------------------------------------------------------------------------------------
1996
Premiums and policy fees $ 4,540,107 $4,917,896 $ 9,458,003
Net investment income 5,569,799 1,049,427 $ (7,737) 6,611,489
Realized investment gains (losses) (28,070) (28,070)
Other income 2,406 2,406
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 10,112,312 5,967,323 (35,807) 16,043,828
- -------------------------------------------------------------------------------------------------------------------------------
Benefits and settlement expenses 5,813,515 3,861,725 9,675,240
Amortization of deferred policy
acquisition costs 346,710 346,710
Other operating expenses 855,442 1,505,634 2,361,076
- -------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 7,015,667 5,367,359 12,383,026
- -------------------------------------------------------------------------------------------------------------------------------
Income before income tax 3,096,645 599,964 (35,807) 3,660,802
Income tax expense $ 1,244,673 1,244,673
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,416,129
- -------------------------------------------------------------------------------------------------------------------------------
(1) Adjustments represents the recognition of income tax expense. There are no
asset adjustments.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Dental and
Consumer Financial Investment Corporate Total
Acquisitions Benefits Institutions Products & Other Assets
- --------------------------------------------------------------------------------------------------------------------------------
Operating Segment Assets
1998
<S> <C> <C> <C> <C> <C> <C>
Investments and other assets $434,928,613 $ 6,642,241 $2,658,668 $774,504 $26,350,089 $471,354,115
Deferred policy acquisition costs 132,582,526 692,925 133,275,451
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $567,511,139 $ 6,642,241 $3,351,593 $774,504 $26,350,089 $604,629,566
- --------------------------------------------------------------------------------------------------------------------------------
1997
Investments and other assets $ 76,644,539 $ 7,111,880 $20,698,754 $104,455,173
Deferred policy acquisition costs 1,606,596 $ 85,689 1,692,285
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 78,251,135 $ 7,111,880 $ 85,689 $20,698,754 $106,147,458
- --------------------------------------------------------------------------------------------------------------------------------
1996
Investments and other assets $ 78,189,386 $12,870,675 $17,974,564 $109,034,625
Deferred policy acquisition costs 1,919,471 1,919,471
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 80,108,857 $12,870,675 $17,974,564 $110,954,096
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note K -- REINSURANCE
The Company assumes risks from and reinsures certain parts of its risks
with other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies.
The Company has reinsured approximately $7.6 billion, $133 million, and
$163 million in face amount of life insurance risks with other insurers
representing $12.6 million, $0.7 million, and $0.9 million of premium income for
1998, 1997, and 1996, respectively. The Company has also reinsured accident and
health risks representing $0.9 million, $2.3 million, and $1.9 million of
premium income for 1998, 1997, and 1996, respectively. In 1998 and 1997, policy
and claim reserves relating to insurance ceded of $21.9 million and $7.5 million
respectively are included in reinsurance receivables. Should any of the
reinsurers be unable to meet its obligation at the time of the claim, obligation
to pay such claim would remain with the Company. At December 31, 1998 and 1997,
the Company had paid $0.5 million and $0.2 million, respectively, of ceded
benefits which are recoverable from reinsurers.
Note L -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- -----------------------------
Estimated Estimated
Carrying Market Carrying Market
Amount Values Amount Values
------------------------------ ----------------------------
Assets (see Notes A and C):
Investments:
<S> <C> <C> <C> <C>
Fixed maturities..................... $360,113,277 $360,113,277 $67,110,502 $68,201,559
Mortgage loans on real estate........ 7,900,221 8,511,779 10,902,986 11,649,144
Short-term investments............... 18,267,431 18,267,431 873,844 873,844
Cash...................................... 0 0 2,218,201 2,218,201
Liabilities (see Notes A):
Annuity deposits..................... 3,434,342 3,406,010 929,124 929,124
</TABLE>
Except as noted below, fair values were estimated using quoted market
prices.
The Company estimates the fair value of its mortgage loans using discounted
cash flows from the next call date. The Company believes the fair value of its
short-term investments approximates book value due to being short-term. The
Company estimates the fair value of its annuities using surrender values. The
Company believes it is not practicable to determine the fair value of its policy
loans since there is no stated maturity, and policy loans are often repaid by
reductions to policy benefits.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
- -------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H
- -------------------------------------------------------------------------------------------------------------------
Future Annuity
Deferred Policy Deposits Premiums Benefits
Policy Benefits and Other and Net and
Acquisition and Unearned Policyholders' Policy Investment Settlement
Segment Costs Claims Premiums Funds Fees Income (1) Expenses
Year Ended
December 31,1998:
Life Insurance
<S> <C> <C> <C> <C> <C> <C> <C>
Acquisitions...... $132,582,526 $439,215,364 $ 54,170 $ 8,600,060 $7,414,597 $11,071,366 $7,594,508
Specialty Insurance Products
Dental and Consumer
Benefits....... 172,903 189 6,445,537 1,503,364 718,492 1,340,838
Financial Institutions 692,925 213,835 2,432,918 848,682 136,472 316,900
Retirement Savings and
Investment Products
Investment Products 240,000 531,751 501 8,754
Corporate and Other.. (1,248,164)
- -------------------------------------------------------------------------------------------------------------------
TOTAL........ $133,275,451 $439,842,102 $2,487,277 $15,577,348 $9,767,144 $10,678,166 $9,261,000
===================================================================================================================
Year Ended
December 31,1997:
Life Insurance
Acquisitions......$ 1,606,596 $56,177,703 $ 463,232 $ 6,048,563 $4,231,380 $ 4,590,650 $5,984,374
Specialty Insurance Products
Dental and Consumer
Benefits....... 0 76,979 0 6,961,019 4,158,505 1,026,054 3,080,800
Financial Institutions 85,689 25,948 10,588
Corporate and Other.. 0 0 0 0 617,141 0
- -------------------------------------------------------------------------------------------------------------------
TOTAL........$ 1,692,285 $56,254,682 $ 463,232 $13,009,582 $8,415,833 $ 6,233,845 $9,075,762
===================================================================================================================
Year Ended
December 31,1996:
Life Insurance
Acquisitions......$ 1,919,471 $59,483,455 $ 182,499 $ 6,028,180 $4,540,107 $ 5,569,799 $5,813,515
Specialty Insurance Products
Dental and Consumer
Benefits........ 0 76,979 0 12,891,670 4,917,896 1,049,427 3,861,725
Corporate and Other.. 0 0 0 (7,737) 0
- --------------------------------------------------------------------------------------------------------------------
TOTAL........$ 1,919,471 $59,560,434 $ 182,499 $18,919,850 $9,458,003 $ 6,611,489 $9,675,240
====================================================================================================================
- ------------------------------------------------
COL. I COL. J
- ------------------------------------------------
Amortization
of Deferred
Policy Other
Acquisitions Operating
Segment Costs Expenses
Year Ended
December 31,1998:
Life Insurance
Acquisitions......$ 1,535,385 $ 5,947,115
Specialty Insurance Products
Dental and Consumer
Benefits....... 144,257
Financial Institutions 175,753 105,307
Retirement Savings and
Investment Products 50,140
Investment Products
Corporate and Other..
- ---------------------------------------------------
TOTAL........ $ 1,711,138 $ 6,246,819
===================================================
Year Ended
December 31,1997:
Life Insurance
Acquisitions......$ 312,874 $ 912,398
Specialty Insurance Products
Dental and Consumer
Benefits....... 0 1,493,916
Financial Institutions 7,414 0
Corporate and Other.. 0 0
- ------------------------------------------------
TOTAL........$ 320,288 $ 2,406,314
=================================================
Year Ended
December 31,1996:
Life Insurance
Acquisitions......$ 346,710 $ 855,442
Specialty Insurance Products
Dental and Consumer
Benefits........ 0 1,505,634
Corporate and Other.. 0 0
- ---------------------------------------------------
TOTAL........$ 346,710 $ 2,361,076
===================================================
(1) Allocations of Net Investment Income and Other Operating Expenses are
based on a number of assumptions and estimates and results would change if
different methods were applied.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
Year Ended December 31,1998:
<S> <C> <C> <C> <C> <C>
Life insurance in force(1)........................ $ 282,231 $ 7,575,418 $ 7,914,524 $ 621,337 1273.8%
===================================================================================================================================
Premiums and policy fees:
Life insurance.................................... $4,195,074 $12,616,610 $17,462,742 $9,041,206 193.1%
Accident and health insurance...................... 1,542,679 858,678 41,937 725,938 5.8%
- ----------------------------------------------------------------------------------------------------------------------
TOTAL......................................... $5,737,753 $13,475,288 $17,504,679 $9,767,144
======================================================================================================================
Year Ended December 31,1997:
Life insurance in force(1)........................ $ 229,717 $ 133,080 $ 367,176 $ 463,813 79.2%
===================================================================================================================================
Premiums and policy fees:
Life insurance.................................... $2,926,434 $ 752,253 $ 2,124,374 $4,298,555 49.4%
Accident and health insurance..................... 6,325,182 2,252,828 44,924 4,117,278 1.2%
- ----------------------------------------------------------------------------------------------------------------------
TOTAL......................................... $9,251,616 $ 3,005,081 $ 2,169,298 $8,415,833
======================================================================================================================
Year Ended December 31,1996:
Life insurance in force(1)........................ $ 247,048 $ 169,330 $ 549,583 $ 627,301 87.6%
===================================================================================================================================
Premiums and policy fees:
Life insurance.................................... $3,222,836 $ 910,593 $ 2,698,743 $5,010,986 53.9%
Accident and health insurance..................... 6,245,784 1,857,606 58,839 4,447,017 1.3%
- ----------------------------------------------------------------------------------------------------------------------
TOTAL......................................... $9,468,620 $ 2,768,199 $ 2,757,582 $9,458,003
======================================================================================================================
(1) Dollars in thousands
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
Item 10. Directors and Executive Officers of the Registrant Not required in
accordance with General Instruction I(2)(c).
Item 11. Executive Compensation
Not required in accordance with General Instruction I(2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management
Not required in accordance with General Instruction I(2)(c).
Item 13. Certain Relationships and Related Transactions
Not required in accordance with General Instruction I(2)(c).
PART IV
Item14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)
The following documents are filed as part of this report:
1. Financial Statements (Item 8)
2. Financial Statement Schedules (see index annexed)
3. Exhibits:
The exhibits listed in the Exhibit Index on page 31 of this Form
10-K are filed herewith or are incorporated herein by reference.
No management contract or compensatory plan or arrangement is
required to be filed as an exhibit to this form. The Registrant
will furnish a copy of any of the exhibits listed upon the
payment of $5.00 per exhibit to cover the cost of the Registrant
in furnishing the exhibit.
(b) Reports on Form 8-K:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama on March 25, 1999.
PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
(Formerly American Foundation Life Insurance Company)
March 25, 1999 By: /s/ WAYNE E. STUENKEL
President
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
------------------------ --------------------------------- -------------------------
(i) Principal Executive Officer
/s/WAYNE E. STUENKEL President March 25, 1999
Wayne E. Stuenkel
(ii) Principal Accounting Officer
/s/JERRY W. DEFOOR Vice President and Controller, March 25, 1999
Jerry W. DeFoor and Chief Accounting Officer
(iii) Board of Directors:
/s/WAYNE E. STUENKEL President March 25, 1999
Wayne E. Stuenkel
* Director March 25, 1999
Danny L. Bentley
* Director March 25, 1999
Richard J. Bielen
* Director March 25, 1999
R. Stephen Briggs
* Director March 25, 1999
Carolyn King
* Director March 25, 1999
Deborah J. Long
* Director March 25, 1999
Jim E. Massengale
* Director March 25, 1999
Steven A. Schultz
* Director March 25, 1999
A. S. Williams III
*By: /s/JERRY W. DEFOOR
Jerry W. DeFoor
Attorney-in-fact
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Item
Number Document
<S> <C> <C>
3(a)(1) -- 1998 Amended and Restated Articles of Incorporation
3(a)(2) -- Articles of Amendment to 1998 Amended and Restated Articles of Incorporation
* 3(b) -- By-laws
* 4(a) -- Tax-Sheltered Annuity Endorsement
* 4(b) -- Qualified Retirement Plan Endorsement
* 4(c) -- Individual Retirement Annuity Endorsement
** 4(d) -- Group Modified Guaranteed Annuity Contract
** 4(e) -- Application for Group Modified Guaranteed Annuity Contract
** 4(f) -- Individual Modified Guaranteed Annuity Certificate
24 -- Power of Attorney
27 -- Financial Data Schedule
99 -- Safe Harbor for Forward-Looking Statements
* Incorporated herein by reference to the Registrant's Form N-4 Registration Statement,
Registration No. 333-41577, filed on December 5, 1997.
** Incorporated herein by reference to the Registrant's Pre-Effective Amendment No. 1 to Form S-1 Registration
Statement, Registration No. 333-42425, filed on April 16, 1998.
</TABLE>
<PAGE>
Exhibit 3(a)(1)
1998
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
Pursuant to a resolution duly adopted by its Board of Directors, American
Foundation Life Insurance Company hereby adopts, in accordance with Sections
10-2B-10.03 and 10-2B-10.07, Code of Alabama 1975, the following Amended and
Restated Articles of Incorporation:
ARTICLE I
NAME
1.1 The name of the corporation shall be American Foundation Life
Insurance Company (hereinafter referred to as "the Corporation").
ARTICLE II
PERIOD OF DURATION
2.1 The duration of the Corporation shall be perpetual.
ARTICLE III
PURPOSES, OBJECTS AND POWERS
3.1 The purposes and objects and powers of the Corporation are:
(a) To engage in any lawful business, act or activity for which a
corporation may be organized under the Alabama Business Corporation Act, it
being the purpose and intent of this Article III to invest the Corporation with
the broadest purposes, objects and powers lawfully permitted a corporation
formed under the said Act.
(b) To carry on any and all aspects, ordinary or extraordinary, of any
lawful business and to enter into and carry out any transaction, ordinary or
extraordinary, permitted by law, having and exercising in connection therewith
all powers given to corporations by the laws of the State of Alabama.
(c) Without limiting the scope and generality of the foregoing, the
Corporation shall have the following specific purposes, objects and powers:
(1) To transact the business of life, disability, health and accident
insurance and to issue annuities and endowments and every other kind of
insurance in such places as may be approved by the Board of Directors subject to
applicable regulatory approvals, including without limitation, to transact the
business of insuring the lives of individuals and the writing of every kind of
insurance pertaining to life, including the granting, selling, purchasing and
disposing of annuities and endowments; to accept risks and insure against
accidents to sickness of persons; to effect re-insurance, and generally to make
all contracts and to do and perform all things whatsoever pertaining to the
business of insuring lives and of taking risks against accidents to or sickness
of persons, or the granting, selling, purchasing and disposing of annuities and
endowments, and in and about the conduct of life insurance business to do and
perform every act and thing
<PAGE>
not inconsistent with the laws of the State of Alabama or the provisions thereof
(2) To have and to exercise any and all of the powers specifically granted
in the insurance laws of the State of Alabama, none of which shall be deemed to
be inconsistent with the nature, character or object of the Corporation and none
of which are denied to it by these Articles of Incorporation.
(3) To build, manufacture or otherwise process or produce; to acquire,
own, manage, operate, improve or deal with; to sell, lease, mortgage, pledge,
distribute or otherwise deal in and dispose of property of every kind and
wheresoever situated.
(4) To purchase, lease or otherwise acquire any interest in the properties
and rights of any person, firm, corporation or governmental unit; to pay for the
same in cash, in share of stock, bonds, or other securities, evidences of
indebtedness or property of this Corporation or of any other person, firm,
corporation or governmental unit.
(5) To be a promoter or incorporator, to subscribe for, purchase, deal in
dispose of, an stock, bond obligation or other security, of any person, firm,
corporation, or governmental unit, and while owner and holder thereof to
exercise all rights of possession and ownership.
(6) To purchase or otherwise acquire (including, without limitation, to
purchase its own shares to the extent of unreserved and unrestricted capital
surplus available therefor) to the fullest extent permitted by the Alabama
business corporation Act, and to sell, pledge or otherwise deal in or dispose of
shares of its own stock, bond, obligations or other securities.
(7) To borrow money from any person, firm, corporation or governmental
unit and to secure any debt by mortgage or pledge of any property of the
Corporation; to make contracts, guarantees, and indemnity agreements and incur
liabilities and issue its notes if not inconsistent with the provisions of the
Constitution of Alabama as the same may be amended from time to time.
(8) To lend money, or aid or extend credit, to, or use its credit to
assist, any person, firm corporation, or governmental unit, including without
limitation, its employees and directors and those of any subsidiary, in
accordance with and subject to the provisions of the Alabama Business
Corporation Act and the Alabama Insurance Code.
(9) To guarantee any indebtedness and other obligations of, and to lend
its aid and credit to, any person, firm, corporation, or governmental unit, and
to secure the same by mortgage or pledge of, or security interest in, any
property of the Corporation.
(10) To consolidate, merge or otherwise reorganize in any manner permitted
by law; to engage in one or more partnerships and join ventures as a general or
limited partner.
(11) To carry on its business anywhere in the United States and in foreign
countries.
(12) to elect or appoint officers and agents and define their duties and
fix their compensation; to pay pensions and establish pension plans, pension
trusts, profit sharing plans, stock bonus plans, stock option plans, and other
incentive or deferred compensation plans for any or all of its directors,
officers and employees.
(13) To make donations for the public welfare or for charitable,
scientific, or educational purposes; to transact any lawful business which the
Board of Directors shall find to be in aid of governmental policy.
<PAGE>
ARTICLE IV
CAPITAL STOCK
4.1 The aggregate number of shares of capital stock which the Corporation
shall have authority to issue shall be 500,000 shares of common stock of the par
value of $10.00 a share and 2,000 shares of participating preferred stock of the
par value of $1.00 per share, with both classes having the rights, powers,
preferences, privileges and limitations set forth in Sections 4.2 and 4.3 below.
4.2 The common stock of the Corporation shall have the rights,
preferences, and voting powers, with the restrictions and limitations thereof,
as set forth in the subsections below. The shares of common stock may be issued
by the Board of Directors, without any action by the shareholders, for such
consideration as they shall deem advisable or by means of dividend upon the
reclassification, reduction or restriction of surplus of the Corporation as the
Board of Directors shall deem necessary or desirable, in which case shares so
issued as a dividend shall be deemed fully-paid and non-assessable:
(a) The holders of said shares shall be entitled to one vote per share at
all meetings of the shareholders of the Corporation.
(b) After the payment of the holders of all preferred stock of the
preferential amounts to which they shall be entitled in the event of the
dissolutions, or liquidation, of the company, the holders of the shares of
common stock shall be entitled to all of the residue of the assets and shall
receive payment thereof in proportion to the shares held by them respectively.
(c) Subject to the express terms and provisions of the shares as
designated as preferred stock of all classes, the holders of the shares of
common stock shall have all other rights interests, powers and privileges of
shareholders of corporations for profit as provided by Alabama law, without any
restrictions, qualifications or limitations thereof.
4.3 The participating preferred stock of the Corporation shall have the
rights, preferences, and voting powers, with the restrictions and limitations
thereof, as set forth in the subsection below. The shares of participating
preferred stock may be issued by the Board of Directors, without any action by
the shareholders, for such consideration as they shall deem advisable or by
means of dividend upon the reclassification, reduction or restriction of surplus
of the Corporation as the Board of Directors shall deem necessary or desirable,
in which case shares so issued as a dividend shall be deemed fully-paid and
non-assessable:
(a) On and after April 1, 1985 the holders of the participating preferred
stock shall be entitled, in preference to any cash dividends paid upon any stock
of the Corporation, to receive minimum dividends, payable at the rate of Fifty
Dollars ($50.00) per share per annum if, as and when declared by the Board of
Directors of the Corporation. The minimum dividends shall be cumulative (whether
or not there shall be net profits or net assets of the Corporation legally
available for the payment of the minimum dividends) but accumulations of the
minimum dividends shall not bear interest. The minimum dividends and
accumulations thereof shall be payable before any dividend on any other class of
capital stock of the Corporation shall be paid or set apart.
(b) On and after April 1, 1985 the holders of the participating preferred
stock shall be entitled in preference to any cash dividends paid upon any stock
of the Corporation, to receive additional dividends, payable semi-annually if,
as and when declared by Board of Directors of the Corporation from the statutory
operating earnings of the Corporation for the immediately preceding fiscal year
of the Corporation in excess of One Million Dollars ($1,000,000), such statutory
operating earnings to be determined on the basis of insurance accounting without
regard to capital gains or losses. The additional cumulative and shall be
payable before any dividend on any other class of capital stock shall be paid or
set apart. Such additional dividends shall be declared out of any account from
which dividends are lawfully declarable, subject to the foregoing limitations.
<PAGE>
(c) Except as provided in (a) or (b) or both, the holders of the
participating preferred stock shall not, as such, be entitled to participate in
the other earnings of the Corporation or receive any other or further dividends
of any whatsoever or other share or interest in the profits of the Corporation
for or on account of the participating preferred stock.
(d) (1) Upon any dissolution, liquidation, or other winding up of the
Corporation, whether voluntary or involuntary and whether or not the Corporation
shall have a surplus or earnings available for minimum or additional dividends
or both, or upon any distribution of capital (other than in redemption of the
participating preferred stock) or in the event of insolvency, rehabilitation or
reorganization of the Corporation, there shall be paid to the holders of
participating preferred stock the sum of One Thousand Dollars ($1,000) per
share, together with the amount of all unpaid, accrued dividends thereon,
whether or not earned or declared, before any sum shall be paid to any assets
distributed among the holders of the common stock of the Corporation, and after
such payment to the holders of the participating preferred stock, all remaining
assets and funds of the Corporation shall be paid to the holders of the common
stock according to their respective shares, except as otherwise provided by law.
If the assets remaining after payment or provision for the liabilities of the
Corporation are insufficient to pay the full amount as hereinabove provided,
such assets as remain shall be divided among the holders of the participating
preferred stock in proportion to the number of shares of participating preferred
stock in proportion to the number of shares of participating preferred stock
held. The Corporation may, nevertheless, declare and pay dividends upon any
class or classes of stock without being required to accumulate any reserve or
otherwise provide in advance for any payment to holders of participating
preferred stock pursuant to this subsection (d).
(2) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation, nor the sale, transfer or lease of all
or substantially all the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation.
(e) To the maximum extent otherwise permitted by law, the Corporation
shall have the right to purchase any outstanding participating preferred stock
provided, however, that no sum may be set aside for or applied to the purchase
by the Corporation of any stock, common or preferred, unless and until all
cumulative minimum dividends have been paid. Shares of participating preferred
stock which have been purchased or redeemed by the Corporation shall be retired
and canceled and shall under no circumstances be reissued.
(f) (1) The participating preferred stock shall have no voting rights with
respect to the election of directors or any other matters submitted to vote of
the stockholders of the Corporation, except as may be otherwise provided by the
Constitution and laws of the State of Alabama or except as hereinafter provided
in subsection (h) below or as follows: in the event of the failure of the
Corporation to pay six (6) semi-annual minimum dividends, whether or not
successive, to the holders of the participating preferred stock, then and
thereafter until all past minimum dividends are paid the holders of the
participating preferred stock, voting separately as a class, shall have the
right to elect at any annual meeting of the shareholders of the Corporation then
and thereafter held until such time as the past dividends are fully paid, such
number of directors as shall constitute (to the next lowest whole number)
one-fourth (1/4) of the Board of Directors from time to time. Unless and until
such event of deficiency in the payment of the minimum dividends occurs the
holders of the participating preferred stock shall not be deemed to be voting
shareholders of the Corporation and, thus, shall not be entitled to notice of
any meetings of the shareholders, annual or special, or to be entitled to
participate, as such, in the management of the Corporation.
(2) In no event shall the holders of participating preferred stock,
as such holders, be entitled to preemptive rights with respect to, or other
right to subscribe for or purchase, any stock or other securities of the
Corporation.
(g) If at any time the Corporation elects to redeem shares of the
participating preferred stock as provided in subsection 4.2(e), the Corporation
shall pay to the holders of the shares so redeemed an amount in cash equal to
One Thousand Dollars ($1,000) per share.
(h) The provisions of the this Article IV shall not be amended, modified
or repealed, nor shall
<PAGE>
any amendment or restatement of these Articles of Incorporation become effective
if inconsistent with the provisions of Article IV, without the affirmative vote
or written consent of the holders of at least two-thirds (2/3) of the
outstanding shares of the participating preferred stock, unless such amendment
be solely to increase the number of shares of common stock authorized.
ARTICLE V
REGISTERED OFFICE AND REGISTERED AGENT
5.1 The location and mailing address of the registered office of the
Corporation shall be 2801 Highway 280 South, Birmingham, Alabama 35223, which
shall be its principal place of business and home office in the State of
Alabama.
5.2 The registered agent at such address shall be whosoever is elected,
appointed or otherwise designated as the Secretary of the Corporation.
ARTICLE VI
BOARD OF DIRECTORS
6.1 The business and affairs of the Corporation shall be managed and
conducted by a board of directors not less than five (5) natural persons and not
more than fifteen (15). The number of directors and the membership of board
shall be determined by the shareholders in the manner setforth in the bylaws.
No decrease in the number of directors shall have the effect of shortening the
term of any incumbent director. Any director may be removed in accordance with
the Bylaws and laws of the State of Alabama.
6.2 To the fullest extent permitted by the Alabama Business Corporation
Act as in effect on the date hereof and as hereafter amended from time to time,
a director the Corporation shall not be liable to the Corporation or its
shareholders for monetary damages for any action taken, or any failure to take
any action, as a director, except for liability for (A) the amount of financial
benefit received by a director to which he or she is not entitled; (B) an
intentional infliction of harm on the corporation or shareholders; (C) a
violation of Section 10-2B-8.33; (D) an intentional violation of criminal law;
or (E) a breach of the director's duty of loyalty to the corporation or its
shareholders. If the Alabama Business Corporation Act or any successor statute
is amended after adoption of this provision to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the Alabama Business Corporation Act, as so amended
from time to time, provided, in no event shall a director be exempt from any
obligation imposed by Alabama law. Any repeal or modification of this Section
6.2 by the shareholders of the Corporation shall not adversely affect any right
or protection of a director of the Corporation existing at the time of such
repeal or modification or with respect to events occurring prior to such time.
6.3 In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation; subject, nevertheless to the provisions of the Code of Alabama,
this 1998 Amended and Restated Charter and to any bylaws from time to time
adopted; provided, however, that no bylaws so adopted shall invalidate any prior
act of the directors which would have been valid if such bylaw had not been
adopted.
<PAGE>
ARTICLE VII
INTERNAL AFFAIRS
The following provisions for the regulation of the business and for the
conduct of the affairs of the Corporation, the directors and the shareholders
are hereby adopted:
7.1 The power to alter, amend, or repeal the Bylaws or adopt new bylaws
shall be vested in the Board of Directors and the shareholders, or either of
them, which power may be exercised in the manner and to the extent provided in
the Bylaws, provided, however, that the Board of Directors may not alter, amend
or repeal any bylaw establishing what constitutes a quorum at such shareholders'
meetings, or which was adopted by the shareholders and specifically provides
that it cannot be altered, amended or repealed by the Board of Directors. The
Bylaws may contain any provisions for the regulation of the business and for the
conduct of the affairs of the Corporation, the directors and shareholders not
inconsistent with this 1998 Restated and Amended Articles of Incorporation.
7.2 The Corporation reserves the right from time to time to amend, alter
or repeal each and every provision contained in this 1998 Restated and Amended
Articles of Incorporation, or to add one or more additional provisions, in the
manner now or hereafter prescribed or permitted by the Alabama Insurance Code or
the Alabama Business Corporation Act, and all rights conferred upon shareholders
at any time are granted subject to this reservation.
The foregoing 1998 Amended and Restated Articles of Incorporation
supersedes the original Certificate of Incorporation, the 1982 Restated Articles
of Incorporation, and any amendments previously adopted with respect thereto.
IN WITNESS WHEREOF, American Foundation Life Insurance Company has caused
this 1998 Amended and Restated Articles of Incorporation to be executed by its
President and attested by its Secretary this day 20th day of July, 1998.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
By:/S/WAYNE E. STUENKEL
Wayne E. Stuenkel
Its President
ATTEST:
/S/DEBORAH J. LONG
Deborah J. Long
Its Secretary
Exhibit 3(a)(2)
ARTICLES OF AMENDMENT TO
1998 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
American Foundation Life Insurance Company, a corporation organized and
existing under the Code of Alabama, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of American Foundation Life Insurance
Company, via Unanimous Written Consent dated as of October 20, 1998, duly
adopted a resolution setting forth proposed amendments to the 1998 Amended and
Restated Articles of Incorporation of said Corporation, in the form set forth
below, declaring said amendments to be advisable and directing the same to be
submitted to a vote of the Sole Common Shareholder of said Corporation via
Unanimous Written Consent in Lieu of a Special Meeting of the Sole Shareholder
dated as of October 20, 1998.
SECOND: That thereafter, the said Sole Common Shareholder, via Unanimous
Written Consent in Lieu of a Special Meeting, dated as of October 20, 1998, and
in accordance with Title 10 of the Alabama Business Corporation Act, voted in
favor of the following amendments to the 1998 Amended and Restated Articles of
Incorporation:
By deleting Section 1.1 of Article I in its entirety and
inserting in lieu thereof the following:
1.1 Effective March 1, 1999, the name of the corporation shall be
Protective Life and Annuity Insurance Company (hereinafter
referred to as (the "Corporation").
THIRD: That thereafter, in accordance with Section 4.3(h) of the Articles,
Protective Life Corporation, as the Sole Preferred Shareholder of the
Corporation, via a Unanimous Written Consent in lieu of a Special Meeting of the
Sole Preferred Shareholder dated as of October 20, 1998, and in accordance with
Title 10 of the Alabama Business Corporation Act, voted in favor of the
following amendment to the 1998 Amended and Restated Articles of Incorporation:
By deleting Article IV, Capital Stock, in its entirety and
inserting in lieu thereof the provisions as set forth in Exhibit
A, attached hereto and incorporated herein as set forth in full
at this point.
FOURTH: That the said Amendment was duly adopted in accordance
with the provisions of Title 10 of the Alabama Business Corporation Act.
IN WITNESS WHEREOF, said American Foundation Life Insurance Company, has
caused its corporate seal to be hereunto affixed and these Articles of Amendment
to be signed by Wayne Stuenkel, its President, and Deborah J. Long, its
Secretary, hereby declaring and certifying that this is its act and deed and the
facts herein stated are true, this 2nd day of November, 1998.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
By: /S/WAYNE E. STUENKEL
Wayne Stuenkel
President
ATTEST:
/S/DEBORAH J. LONG
Deborah J. Long
Secretary
(CORPORATE SEAL)
<PAGE>
EXHIBIT A TO ARTICLES OF AMENDMENT TO
1998 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
ARTICLE IV
CAPITAL STOCK
4.1 The aggregate number of shares of capital stock which the Corporation
shall have authority to issue shall be 500,000 shares of common stock of the par
value of $10.00 a share and 2,000 shares of preferred stock of the par value of
$1.00 per share, with both classes having the rights, powers, preferences,
privileges and limitations set forth in Sections 4.2 and 4.3 below.
4.2 The common stock of the Corporation shall have the rights, interests,
preferences, voting powers, and privileges of shareholders of corporations for
profit as provided by Alabama law, without any restrictions, qualifications or
limitations thereof, except as set forth in the subsections below:
(a) The holders of the shares of common stock shall be entitled to one
vote per share at all meetings of the shareholders of the Corporation.
(b) The holders of the shares of common stock shall not have preemptive
rights with respect to, or other right to subscribe for or purchase, any stock
or other securities of the Corporation.
(c) The Board of Directors, when and as they shall deem advisable, without
any action by the shareholders, may declare a cash dividend on the common stock
of the Corporation at any time, to be payable at any time. There is no
requirement that dividends, either cash or stock, be declared and/or paid out at
any specific time, other that those as declared by the Board of Directors.
(d) The shares of common stock may be issued by the Board of Directors,
without any action by the shareholders, for such consideration as they shall
deem advisable or by means of stock dividend, including but not limited to, upon
the reclassification, reduction or restriction of surplus of the Corporation as
the Board of Directors shall deem necessary or desirable, in which case, shares
so issued as a stock dividend shall be deemed fully-paid and non-assessable.
4.3 The preferred stock of the Corporation shall have the rights,
interests, preferences, voting powers, and privileges of shareholders of
corporations for profit as provided by Alabama law, without any restrictions,
qualifications or limitations thereof, except as set forth in the subsections
below:
(a) The preferred stock shall have no voting rights with respect to the
election of directors or any other matters submitted to vote of the shareholders
of the Corporation, except as may be otherwise provided by the Constitution and
laws of the State of Alabama or except as hereinafter provided in subsection (f)
below. Unless the event occurs as described in (f) below, the holders of the
preferred stock shall not be deemed to be voting shareholders of the Corporation
and, thus, shall not be entitled to notice of any meetings of the shareholders,
annual or special, or to be entitled to participate, as such, in the management
of the Corporation.
(b) In no event shall the holders of preferred stock, as such holders, be
entitled to preemptive rights with respect to, or other right to subscribe for
or purchase, any stock or other securities of the Corporation.
(c) The Board of Directors, when and as they shall deem advisable, without
any action by the shareholders, may declare a cash dividend on the preferred
stock of the Corporation at any time, to be payable at any time. There is no
requirement that dividends, either cash or stock, be declared and/or paid out at
any specific time, other that those as declared by the Board of Directors.
(d) The shares of preferred stock may be issued by the Board of
Directors, without any action by the shareholders, for such consideration as
they shall deem advisable or by means of stock dividend, including but not
limited to, upon the reclassification, reduction or restriction of surplus of
the Corporation
<PAGE>
as the Board of Directors shall deem necessary or desirable. Shares so issued as
a stock dividend shall be deemed fully-paid and non-assessable.
(e) To the maximum extent permitted by law, the Corporation shall have the
right to purchase any outstanding preferred stock. Shares of preferred stock
which have been purchased or redeemed by the Corporation shall be retired and
canceled and shall under no circumstances be reissued. If, at any time, the
Corporation elects to redeem any or all of the currently issued and outstanding
shares of preferred stock, the Corporation shall pay to the holders of shares so
redeemed an amount in cash equal to One Thousand Dollars ($1,000) per share. If
at a date in the future, additional shares of preferred stock are authorized and
subsequently issued, the redemption price per share will be in an amount
determined by the Board of Directors.
(f) The provisions of the this Article IV shall not be amended, modified
or repealed, nor shall any amendment or restatement of these Articles of
Incorporation become effective if inconsistent with the provisions of Article
IV, without the affirmative vote or written consent of the holders of at least
two-thirds (2/3) of the outstanding shares of the preferred stock, unless such
amendment be solely to increase the number of shares of common stock authorized.
EXHIBIT 24
DIRECTORS' POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That each of the undersigned Directors
of Protective Life and Annuity Insurance Company (formerly American Foundation
Life Insurance Company), an Alabama corporation, ("Company") by his execution
hereof or upon an identical counterpart hereof , does hereby constitute and
appoint John D. Johns, Deborah J. Long, Nancy Kane, or Jerry W. DeFoor, and each
or any of them, his true and lawful attorneys-in-fact and agents, for him and in
his name, place and stead, to execute and sign the 1998 Annual Report on Form
10-K to be filed by the Company with the Securities and Exchange Commission,
pursuant to the provisions of the Securities Exchange Act of 1934 and, further,
to execute and sign any and all amendments to such Annual Report, and to file
same, with all exhibits and schedules thereto and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all the
acts of said attorneys-in-fact and agents or any of them which they may lawfully
do in the premises or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand
and seal this 1st day of March, 1999.
WITNESS TO ALL SIGNATURES:
/S/ JERRY W. DEFOOR /S/ DRAYTON NABERS, JR.
Jerry W. DeFoor Drayton Nabers, Jr.
/S/ JOHN D. JOHNS
John D. Johns
/S/ R. STEPHEN BRIGGS
R. Stephen Briggs
/S/ JIM E. MASSENGALE
Jim E. Massengale
/S/ A. S. WILLIAMS III
A. S. Williams III
/S/ CAROLYN KING
Carolyn King
/S/ DEBORAH J. LONG
Deborah J. Long
/S/ STEVEN A. SCHULTZ
Steven A. Schultz
/S/ WAYNE E. STUENKEL
Wayne E. Stuenkel
/S/ DANNY L. BENTLEY
Danny L. Bentley
/S/ RICHARD J. BIELEN
Richard J. Bielen
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Protective Life and Annuity Insurance
Company (formerly known as American Foundation Life Insurance Company) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 360,113,277 68,201,559 61,224,888
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 0 0 0
<MORTGAGE> 7,900,221 10,902,986 14,757,881
<REAL-ESTATE> 0 407,624 420,341
<TOTAL-INVEST> 440,383,973 92,021,389 95,210,820
<CASH> 0 2,218,201 1,574,181
<RECOVER-REINSURE> 673,967 1,233,659 1,042,547
<DEFERRED-ACQUISITION> 133,275,451 1,692,285 1,919,471
<TOTAL-ASSETS> 604,629,566 106,147,458 110,954,096
<POLICY-LOSSES> 439,842,102 56,254,682 59,560,434
<UNEARNED-PREMIUMS> 2,487,277 463,232 182,499
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 12,143,006 12,080,458 17,946,695
<NOTES-PAYABLE> 0 0 0
2,000 2,000 2,000
0 0 0
<COMMON> 2,500,000 2,000,000 2,000,000
<OTHER-SE> 128,736,617 23,448,141 20,545,113
<TOTAL-LIABILITY-AND-EQUITY> 604,629,566 106,147,458 110,954,096
9,767,144 8,415,833 9,458,003
<INVESTMENT-INCOME> 10,678,166 6,233,845 6,611,489
<INVESTMENT-GAINS> 127,769 (59,889) (28,070)
<OTHER-INCOME> (598) 8,718 2,406
<BENEFITS> 9,261,000 9,075,762 9,675,240
<UNDERWRITING-AMORTIZATION> 1,711,138 320,288 346,710
<UNDERWRITING-OTHER> 6,246,819 2,406,314 2,361,076
<INCOME-PRETAX> 3,353,524 2,796,143 3,660,802
<INCOME-TAX> 938,986 950,689 1,244,673
<INCOME-CONTINUING> 2,414,538 1,845,454 2,416,129
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,314,538<F2> 1,745,454<F2> 2,316,129<F2>
<EPS-PRIMARY> 0<F1> 0<F1> 0<F1>
<EPS-DILUTED> 0<F1> 0<F1> 0<F1>
<RESERVE-OPEN> 0 0 0
<PROVISION-CURRENT> 0 0 0
<PROVISION-PRIOR> 0 0 0
<PAYMENTS-CURRENT> 0 0 0
<PAYMENTS-PRIOR> 0 0 0
<RESERVE-CLOSE> 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0
<FN>
<F1> Protective Life and Annuity Insurance Company 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.
<F2> After dividends on preferred stock of $50 per share.
</FN>
</TABLE>
<PAGE>
Exhibit 99
to
Form 10-K
of
Protective Life and Annuity Insurance Company
(formerly American Foundation Life Insurance Company)
for
Fiscal Year
ended December 31, 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. Protective Life and Annuity
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, as an insurance company or
reinsurance company in 48 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. 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 December 31, 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.
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
<PAGE>
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 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 affiliates to dispose of
illiquid assets on unfavorable terms, which could have a material adverse effect
on the Company.
INTEREST RATE FLUCTUATIONS. Sudden 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
<PAGE>
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 share owners. 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 be proposed 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 or alternatively in arbitration. The outcome of any
such litigation or arbitration 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 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's results may be
affected by the performance of others because 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,
<PAGE>
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. 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.
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 attempt to otherwise
conduct business. However, other worst case scenarios, depending on their
duration, could have a material adverse effect on PLC and the Company and their
operations.
REINSURANCE. The Company and its insurance affiliates cede insurance to
other insurance companies. However, the 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.
