UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 0-22404
ALLIED Life Financial Corporation
(Exact name of registrant as specified in its charter)
Iowa
(State or other jurisdiction of incorporation or organization)
42-1406716
(I.R.S. Employer Identification No.)
701 Fifth Avenue, Des Moines, Iowa
(Address of principal executive offices)
50391-2003
(Zip Code)
515-280-4211
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate the number of outstanding shares of each of the issuer's classes of
common stock, as of August 1, 1998:
4,450,269 shares of Common Stock.
This document contains 18 pages.
<PAGE>
PART I
Item 1. Financial Statements
ALLIED Life Financial Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In thousands)
Assets
Investments
<S> <C> <C>
Fixed maturities available for sale, at fair value $ 814,004 $ 766,028
Equity securities at fair value 4,667 3,201
Mortgage loans on real estate 825 984
Policy loans 11,407 11,164
Other invested assets 2,649 3,014
Short-term investments, at cost 1,968 3,594
Total investments 835,520 787,985
Accrued investment income 11,266 10,988
Accounts receivable 799 912
Reinsurance ceded receivables 6,805 7,168
Deferred policy acquisition costs 85,404 84,188
Other assets 16,476 13,216
Total assets $ 956,270 $ 904,457
See accompanying Notes to Interim Consolidated Financial Statements.
</TABLE>
1
<PAGE>
ALLIED Life Financial Corporation Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In thousands)
Liabilities
Policy liabilities
Policyholder account balances
<S> <C> <C>
Annuity contracts $ 537,960 $ 514,908
Universal life contracts 202,690 196,709
Other 8,853 7,732
Future policy benefits 41,561 38,124
Policy and contract claims 5,461 4,102
Other policyholder funds 2,162 1,778
798,687 763,353
Checks drawn in excess of bank balances 1,490 2,066
Current income taxes payable ------ 23
Deferred income taxes 12,524 10,552
Indebtedness to affiliates (note 2) 2,170 3,638
Note payable (note 3) 17,570 6,360
Other liabilities (note 6) 5,845 4,308
Total liabilities 838,286 790,300
Stockholders' equity
Preferred stock, no par value, issuable in series,
authorized 7,500 shares
6.75% Series, authorized 2,440 shares, issued and
outstanding of 2,370 in 1998 and 2,292 in 1997 25,716 24,869
ESOP Series, authorized 300 shares, issued
and outstanding of 99 in 1998 and 101 in 1997 1,522 1,467
Common stock, no par value, $1 stated value,
authorized 25,000 shares, issued and outstanding of
4,438 in 1998 and 4,398 in 1997 4,438 4,398
Additional paid-in capital 45,573 44,964
Retained earnings 30,353 29,404
Accumulated other comprehensive income 10,382 9,055
Total stockholders' equity 117,984 114,157
Total liabilities and stockholders' equity $ 956,270 $ 904,457
See accompanying Notes to Interim Consolidated Financial Statements.
</TABLE>
2
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(In thousands, except per share data)
Revenues
Insurance revenues
<S> <C> <C> <C> <C>
Policyholder assessments on
universal life contracts $ 5,633 $ 5,430 $ 11,354 $ 10,813
Surrender charges 1,217 605 2,154 1,225
Life insurance premiums 3,869 3,652 8,191 6,898
Other insurance income 2,521 1,353 4,606 2,577
Reinsurance premiums ceded (3,538) (2,453) (6,770) (4,751)
Total insurance revenues 9,702 8,587 19,535 16,762
Investment income 13,887 12,852 27,630 25,535
Realized investment gains (losses) 349 140 514 (253)
Other income 380 339 797 662
24,318 21,918 48,476 42,706
Benefits and Expenses
Policyholder benefits
Interest credited to policyholder
account balances
Annuity contracts 7,342 6,437 14,624 12,621
Universal life contracts 2,662 2,488 5,281 5,181
Other 108 89 181 215
Death benefits 3,584 2,078 6,783 4,884
Other policyholder benefits 1,638 1,339 4,114 2,544
Reinsurance recoveries (494) (95) (2,043) (383)
Total policyholder benefits 14,840 12,336 28,940 25,062
Amortization of deferred policy
acquisition costs 2,881 2,557 5,353 4,713
Commissions 1,403 1,012 2,712 1,884
Affiliated operating expenses 148 158 315 301
Other operating expenses (notes 4 and 6) 2,897 1,838 6,973 3,538
22,169 17,901 44,293 35,498
Income before income taxes 2,149 4,017 4,183 7,208
Income Taxes
Current (362) 1,918 459 2,242
Deferred 1,385 (580) 1,256 160
1,023 1,338 1,715 2,402
Net Income 1,126 2,679 2,468 4,806
Unrealized holding gain arising
during the period, net of income tax 1,751 11,223 1,326 6,382
Comprehensive Income $ 2,877 $ 13,902 $ 3,794 $ 11,188
Net income applicable to
common stock (diluted basis) $ 700 $ 2,280 $ 1,621 $ 4,014
Earnings Per Share
Basic earnings per share $ 0.15 $ 0.51 $ 0.36 $ 0.89
Diluted earnings per share $ 0.15 $ 0.50 $ 0.36 $ 0.87
See accompanying Notes to Interim Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
ALLIED Life Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Six Months Ended
June 30,
1998 1997
(Dollars in thousands)
Cash Flow From Operating Activities
<S> <C> <C>
Net income $ 2,468 $ 4,806
Adjustments to reconcile net income to net cash provided by
operating activities
Policyholder assessments on universal life contracts (11,354) (10,813)
Surrender charges (2,154) (1,225)
Interest credited to policyholder account balances 21,513 18,017
Realized investment (gains) losses (514) 252
Change in
Accrued investment income (278) (314)
Reinsurance ceded receivables 363 177
Deferred policy acquisition costs (3,183) (3,541)
Liabilities for future policy benefits 3,437 1,967
Policy and contract claims and other policyholder funds 1,744 284
Current income taxes (1,182) (1,836)
Deferred income taxes 1,256 159
Other, net (288) (1,335)
Net cash provided by operating activities 11,828 6,598
Cash Flows from Investing Activities
Purchase of fixed maturities held to maturity ------ (7,594)
Maturities, calls, and principal reductions of fixed maturities
held to maturity ------ 8,022
Purchase of fixed maturities available for sale (174,287) (99,272)
Proceeds from sale of fixed maturities available for sale 93,282 71,304
Maturities, calls, and principal reductions of fixed maturities
available for sale 37,776 11,035
Purchase of equity securities (1,840) (3,046)
Proceeds from sale of equity securities 373 1,146
Proceeds from repayment of mortgage loans 159 335
Change in policy loans, net (243) (462)
Purchase of property, plant, and equipment (1,152) (1,713)
Net cash used in investing activities (45,932) (20,245)
Cash Flows from Financing Activities
Change in checks drawn in excess of bank balances (576) (682)
Deposits to policyholder account balances 55,980 55,296
Withdrawals from policyholder account balances (32,914) (38,099)
Change in note payable, net 11,210 (1,590)
Change in note payable to affiliate (1,254) 2,228
Proceeds from issuance of stock, net 704 555
Repurchase of stock ---- (2,478)
Dividends paid to stockholders (672) (587)
Net cash provided by financing activities 32,478 14,643
Net (Decrease) Increase in Cash and Short-term Investments (1,626) 996
Cash and short-term investments at beginning of year 3,594 920
Cash and short-term investments at end of quarter $ 1,968 $ 1,916
See accompanying Notes to Interim Consolidated Financial Statements
</TABLE>
4
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
ALLIED Life Financial Corporation (ALFC) and its subsidiaries on a consolidated
basis (the Company).
At June 30, 1998, ALLIED Mutual Insurance Company (ALLIED Mutual), an affiliated
property-casualty insurance company, controlled 56% of the voting stock of
ALLIED Life Financial Corporation and the ALLIED Life Financial Corporation
Employee Stock Ownership Trust owned 1%. The remainder was owned by public
stockholders.
The accompanying interim consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the ALLIED Life Financial Corporation's Annual
Report on 10K for the year ended December 31, 1997. The interim consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles (GAAP) and include all adjustments which are in the
opinion of management necessary for a fair presentation of the results for the
interim periods. In the opinion of management, all such adjustments are of a
normal and recurring nature. All significant intercompany balances and
transactions have been eliminated.
(2) Transactions with Affiliates
The Company and its affiliates pool their excess cash pursuant to the
Intercompany Cash Concentration Fund Agreement. The fund, administered by AID
Finance Services, Inc. (an affiliate of the Company), also issues short-term
loans (30 days or less) to affiliated companies in accordance with the current
intercompany borrowing policy. At June 30, 1998, the Company had a net
investment balance in the intercompany fund of $1.8 million. Pursuant to the
Agreement, AID Finance Services, Inc. receives a management fee of 5 basis
points which the fund participants pay in the form of an additional 0.05% in the
interest rate for borrowings and a 0.05% reduction in the interest rate on
invested funds.
ALLIED Life Financial Corporation has a note payable with ALLIED Mutual. At June
30, 1998 the outstanding balance of the note payable was $2.1 million.
(3) Note Payable to Nonaffiliates
ALLIED Life Insurance Company, a wholly owned subsidiary, has a line of credit
agreement with the Federal Home Loan Bank (FHLB) to make available borrowings of
$25 million. Interest is payable at either an adjustable interest rate with the
interest rate set and charged daily on the outstanding advance amount or at a
fixed rate with the interest rate set at issuance. As of June 30, 1998,
borrowings on this line of credit agreement were $17.6 million at an interest
rate of 6.37% per annum. All borrowings with the FHLB are secured by securities
with a carrying value of $31.2 million.
(4) Merger with Nationwide
On June 3, 1998, ALFC announced that it had entered into an Agreement and Plan
of Merger to be acquired by Nationwide Mutual Insurance Company (Nationwide) at
a price of $30 per share cash for its common stock. The transaction is subject
to regulatory approvals and, if required, approval by the ALFC shareholders. The
transaction is structured as a tender offer for all of the outstanding shares of
common stock of ALFC, to be followed by a second-stage merger of a subsidiary of
Nationwide with and into ALFC. During the quarter, the Company incurred, net of
tax, $921,000 ($0.20 per share) in merger related expenses ($955,000 pretax -
included in Other operating expenses).
5
<PAGE>
ALLIED Life Financial Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (continued)
(5) New Accounting Standards
In June of 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive
Income." This statement establishes new rules for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The new rules require that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The Company adopted SFAS 130 on January 1, 1998. This
statement requires revised and additional disclosures but will have no effect on
the results of operations or the financial position of the Company.
In June of 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." Under this statement, public companies will
report financial and descriptive information about their operating segments.
SFAS 131 is effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS 131 on January 1, 1998. This statement requires revised and
additional disclosures but has no effect on the results of operations or the
financial position of the Company. The Company considers its combined life
insurance and annuity operations to be its only material operating segment.
In June of 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal quarters beginning
after June 30, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure the instruments at fair value. Early application
is encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this statement. SFAS 133 shall not be applied
retroactively. Management has not determined the impact of SFAS 133 on the
financial position, results of operations, or liquidity of the Company at this
time.
(6) Litigation Reserve
The Company announced in January, 1998 that a complaint had been filed by a
policyholder of ALLIED Life Financial Corporation's principal subsidiary, ALLIED
Life Insurance Company ("ALLIED Life"), in Superior Court in the State of
California for the County of Los Angeles. The Complaint was cast as a class
action and alleged that ALLIED Life fraudulently increased the cost of insurance
rates charged to policyholders in breach of the terms of its universal life
policies, its fiduciary obligation, and its obligations of good faith and fair
dealing toward its policyholders and without adequate notice. The plaintiff, an
insured under a universal life policy issued by ALLIED Life, seeks actual,
consequential, and punitive damages in unspecified amounts as well as interest,
attorney's fees, an accounting for moneys allegedly improperly charged to
policyholders, and injunctive relief, on behalf of herself and all policyholders
of ALLIED Life with similar universal life policies.
While the outcome of the litigation remains uncertain, the Company has estimated
that a reasonable range of costs with respect to this litigation, including
attorney fees, would be, on an after tax basis, $700,000 to $1.5 million.
Accordingly, in the first quarter of 1998, the Company recorded an after tax
reserve in the amount of $1.3 million ($2.0 million pretax - included in Other
operating expenses) in connection with the lawsuit.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking Information
Management's estimates, beliefs and anticipations in the following discussion
and in Note 6 of the Notes to Interim Financial Statements are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (Reform Act). Investors are cautioned that there are important factors that
could cause actual results to differ materially from those in these
forward-looking statements. These factors include, but are not limited to (1)
risks and uncertainties relating to the pending tender offer by Nationwide
Mutual
6
<PAGE>
Insurance Company for shares of the Company's common stock and the pending
merger of a subsidiary of Nationwide Mutual Insurance Company into and with the
Company, including the risks that the tender offer and merger are not
consummated; (2) heightened competition, particularly intensified price
competition, the entry of new competitors from the financial services sector,
and the creation of new products by competitors; (3) adverse state and federal
legislation and regulations, including federal tax laws affecting individuals,
changes in the taxation of insurance companies, federal legislation allowing the
entry of new competitors from the financial services sector, and the regulation
of product design and the marketing of those products; (4) changes in interest
rates causing a reduction of investment income; (5) general economic and
business conditions that are less favorable than expected; (6) unanticipated
changes in industry trends; and (7) inaccuracies in assumptions regarding future
morbidity, persistency, morality, and interest rates, and other risks detailed
herein and from time to time in the Company's other reports.
Overview
The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the interim
consolidated financial statements and related footnotes included elsewhere
herein, and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
ALLIED Life Financial Corporation (ALFC) is an insurance holding company. The
financial statements include the accounts of ALLIED Life Insurance Company
(ALLIED Life), ALLIED Life Brokerage Agency, Inc. (ALBA), and ALLIED Group
Merchant Banking Corporation (AGMB). ALLIED Life accounts for substantially all
of the Company's operations and sells primarily universal life insurance, term
life insurance, and annuity products.
The following table reflects ALLIED Life's production information and pretax
operating results excluding realized investment gains (losses) and related
amortization of deferred policy acquisition costs for the periods indicated.
<TABLE>
<CAPTION>
Life Insurance Operations
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(Dollars in thousands)
Production information
Life insurance
Face amount in force
Directly produced by agents
<S> <C> <C> <C> <C>
Universal Life $ 4,459,617 $ 4,485,388
Term life 4,789,323 4,468,907
Whole life 50,935 50,630
9,299,875 9,004,925
Other 411,605 378,839
$ 9,711,480 $ 9,383,764
Face amount of new life insurance sold
Directly produced by agents
Universal Life $ 80,981 $ 141,707 $ 170,516 $ 299,346
Term life 267,916 358,491 566,670 630,678
Whole life 1,282 2,723 3,582 4,479
350,179 502,921 740,768 934,503
Other 2,241 1,475 4,048 3,249
$ 352,420 $ 504,396 $ 744,816 $ 937,752
Termination rate
Universal Life 13.6% 6.4% 12.4% 6.6%
Term life 17.2% 16.5% 16.9% 16.9%
Annuities
Account balance $ 537,960 $ 484,569
First-year annuity premiums $ 12,945 $ 18,933 $ 32,638 $ 32,957
</TABLE>
7
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
<TABLE>
Life Insurance Operations (Continued)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(Dollars in thousands)
Profitability
<S> <C> <C> <C> <C>
Investment income $ 13,876 $ 12,840 $ 27,600 $ 25,512
Interest credited on
Annuities 7,342 6,437 14,624 12,858
Universal life 2,662 2,488 5,281 4,944
Other 108 89 181 215
Total interest expense 10,112 9,014 20,086 18,017
Investment spread 3,764 3,826 7,514 7,495
Fee income
Universal life charges 6,613 5,831 13,111 11,669
Annuity surrender charges 237 204 396 369
Total fee income 6,850 6,035 13,507 12,038
Other insurance income 2,852 2,552 6,028 4,724
Adjusted insurance revenues 13,466 12,413 27,049 24,257
Other expenses
Amortization of deferred policy
acquisition costs (1) 2,689 2,486 5,075 4,922
Commissions 1,173 805 2,207 1,493
Other operating expenses 1,846 1,730 3,749 3,322
Administrative fees 196 127 379 247
Litigation reserve ---- ---- 2,000 ----
Total acquisition and operating
expenses 5,904 5,148 13,410 9,984
Death benefits, net 3,342 1,968 5,324 4,294
Other policyholder benefits, net 1,386 1,353 3,530 2,751
Total other expenses 10,632 8,469 22,264 17,029
Income before income taxes and realized
investment gains (losses) from
insurance operations $ 2,834 $ 3,944 $ 4,785 $ 7,228
<FN>
(1)Excludes amortization of deferred policy acquisition costs resulting
from net realized investment gains(losses).
</FN>
</TABLE>
PROPOSED MERGER WITH NATIONWIDE MUTUAL INSURANCE COMPANY
On June 3, 1998, the Company announced it had entered into a Merger Agreement
with Nationwide that provides for the acquisition of all of the outstanding
common stock of the Company by Nationwide pursuant to a tender offer at a price
of $30.00 per share cash for its common stock (the "Offer") to be followed by
the merger of an acquisition subsidiary of Nationwide with and into the Company,
in which the shareholder (other than Nationwide, its acquisition subsidiary and
shareholders validly exercising dissenters' rights of appraisal)
8
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
would receive $30.00 in cash per share (the "Merger"). The Board of Directors
("Board") had unanimously approved the Offer and had determined that the terms
of the Offer and the Merger are fair to and in the best interest of the
Company's stockholders. The Board unanimously recommended that the Company's
stockholders accept the Offer and tender their shares. Nationwide's obligations
to consummate the Offer and the Merger and to purchase and pay for the shares
are subject to a number of conditions, including, without limitation, the
condition that all insurance regulatory approvals necessary for Nationwide's
acquisition of control of the Company and its insurance subsidiaries are
obtained on terms and conditions reasonably satisfactory to Nationwide.
On June 10, 1998, Nationwide filed a Schedule 14D-1, a tender offer statement
pursuant to Section 14 (D) (1) of the Securities Exchange Act of 1934, with the
Securities and Exchange Commission ("SEC"). On June 10, 1998, the Company filed
a Schedule 14D-9, Solicitation/Recommendation Statement, with the SEC.
In conjunction with the tender offer by Nationwide, the Board of Directors of
the Company, acting upon the recommendation of the Compensation Committee
(Compensation Committee) of the Board, amended or approved of the adoption of
several officer or employee related benefits.
Upon a change in control, both the Company's Executive Stock Option Plan and
Long-Term Management Incentive Plan will automatically vest all participants who
hold unexercised stock options. The options will be settled in cash computing
the amount to pay using the tender offer price of $30 less the strike price on
each option. The Company will not incur the expense for the cash settlement of
the options until the change in control occurs and estimates the amount to be
approximately $2.4 million.
The Compensation Committee approved of severance pay plans applicable to the
Company's salaried and hourly employees as well as approved of the Company
entering into separate severance agreements with executive officers and certain
other employees of the Company. The severance pay plans will pay lump sum
amounts and provide certain health benefits to employees and executive officers
who are terminated, whose employment has been adversely affected, or who resign
with the Company's approval following a change in control. The Company at this
time can not estimate the amount of expense, if any, that will be incurred in
relation to these severance plans.
The Compensation Committee amended the Company's Employee Stock Ownership Plan
(ESOP) to provide that employees in the ESOP will be fully vested in their
accounts upon the occurrence of a change in control. Also, in the event of a
change in control, the amendment provides that the Company will make an employer
contribution to the ESOP in the form of cash equal to the value of certain
minimum allocation requirements as defined by the plan for the plan year. The
Company has determined that the additional expense to be incurred due to these
amendments will be immaterial.
In the second quarter, the Company incurred merger related expenses, pre-tax, of
$955,000. Included in these expenses are two items that were the result of Board
of Director action. They include the amending of the Short Term Management
Incentive Plan to provide that in the event of a change in control that certain
bonus amounts will be paid to participants regardless of actual level of growth
or earnings per share. This was done to account for the fact that the Company
has incurred large expenses in regards to the proposed merger and there would be
a remote possibility of earnings per share goals being reached. Also, the Board
of Directors approved of a retention bonus plan to which each employee of the
Company (excluding any officer of the Company or ALLIED Life) who remains in the
Company's employ through November 30, 1998, will receive a bonus in the amount
equal to such employee's bi-weekly base salary to be paid as soon as practicable
after November 30, 1998 but not later than December 15, 1998.
Effective August 1, 1998, due to the pending merger, the Company suspended
further purchases under its Employee Stock Purchase Plan, Outside Director Stock
Purchase Plan and Dividend Reinvestment, and Stock Purchase Plan.
9
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
RESULTS OF OPERATIONS
Consolidated revenues for the six months ended June 30, 1998 were $48.5 million,
a 13.5% increase over the $42.7 million reported for the first six months of
1997. Investment income rose 8.2% to $27.6 million from $25.5 million.
For the second quarter only, consolidated revenues grew 11% to $24.3 million in
1998 from $21.9 million in 1997. Investment income rose 8.1% to $13.9 million
from $12.9 million.
Operating income decreased 45.6% to $3.9 million from $7.3 million for the six
months ended 1998 and 1997, respectively. Net income decreased 48.6% to $2.5
million ($0.36 per common share) from $4.8 million ($0.87 per common share) for
the same time periods. These decreases were due to three factors. The Company
incurred $955,000 in the second quarter for merger related expenses due to the
Agreement and Plan of Merger with Nationwide Mutual Insurance Company. For
further information on the merger see note 4 to Notes to Interim Consolidated
Financial Statements. The Company also incurred higher than expected death
benefits for the second quarter (see Life Insurance Operations below). Finally,
during the first quarter of 1998, the Company established a $2.0 million reserve
for potential litigation expenses (see note 6 to Notes to Interim Consolidated
Financial Statements). Operating earnings per common share for the first six
months of 1998 were $0.33 compared to $0.88 for the first six months of 1997.
For the second quarter only, operating income decreased 49.5% to $2.0 million
from $3.9 million. Net income decreased to $1.1 million ($0.15 per common share)
from $2.7 million ($0.50 per common share) for the same time periods. Operating
earnings per common share for the second quarter of 1998 were $0.13 compared to
$0.50 for the second quarter of 1997.
Life Insurance Operations
The following analysis of life insurance operations should be read with
reference to the preceding tables.
Total life insurance in force grew 3.5% to $9.7 billion at June 30, 1998 from
$9.4 billion at June 30, 1997. Growth was slowed by lower sales and a greater
termination rate in relation to universal life insurance.
The face amount of new life insurance sold directly by agents through June 30,
1998 decreased 20.7% to $740.8 million from $934.5 million through June 30,
1997. The primary factor was a 43% decrease in the face amount of new universal
life insurance sold to $170.5 million from $299.3 million. For the second
quarter only, the face amount of new universal life insurance sold decreased
42.9% to $81 million from $141.7 million. Universal life policyholder account
balances were up 6.8% to $202.7 million from $189.8 million.
The universal life termination rate will continue to run higher than historic
levels for 1998 and 1999 as a result of higher expected lapses on the Champion
Universal Life product which was sold in 1993 and 1994. About 50% of the
Champion business was sold at a low term-like premium level, which increases to
a more normal permanent life insurance premium level beginning after the fifth
policy anniversary date. This block of business is expected to lapse at a higher
rate as the customer is required to pay the higher premium levels. The minimum
premium level Champion product was originally priced with a higher expected 6th
year lapse ratio. The Company has an active conservation program to retain the
minimum premium Champion business, which includes offering term life insurance
products or a low minimum premium universal life policy.
The face amount of new term life insurance sold directly by agents decreased
10.2% to $566.7 million through June 30, 1998 from $630.7 million through June
30, 1997. For the second quarter only, the face amount of new term life
insurance sold decreased 25.3% to $267.9 million from $358.5 million.
10
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
First-year annuity premiums decreased to $32.6 million through June 30, 1998
from $33 million through June 30, 1997. For the second quarter only, first year
annuity premiums decreased 31.6% to $12.9 million from $18.9 million. The total
annuity account balance increased 11% to $538 million at June 30, 1998 from
$484.6 million at June 30, 1997.
The decrease in sales of life insurance and annuity premiums are due to the fact
that merger related events leading up to the proposed Plan of Merger caused
uncertainties in the minds of the field producers which resulted in new
production for the quarter at less than expected levels. A series of meetings
with agents are being held to address their questions, and management currently
expects, after the close of the contemplated transaction, future new business to
return to more historic levels.
Adjusted insurance revenues increased 11.5% to $27 million for the first six
months of 1998 from $24.3 million for the first six months of 1997. The growth
in annuity account balances permitted invested assets, on a cost basis, to
increase by 9.0%. ALLIED Life's return on invested assets through June 30, 1998
decreased to 7.19% from 7.26% through June 30, 1997.
Investment spread for the first six months of 1998 and 1997 remained at $7.5
million. For second quarter 1998 and 1997 only, the investment spread remained
at $3.8 million. Annual average interest-credited rates on universal life
contracts decreased to 5.28% from 5.30% and on annuities increased to 5.54% from
5.41%.
Amortization of deferred policy acquisition costs for the first six months of
1998 and 1997 increased 3.1% to $5.2 million from $4.9 million. For the second
quarter only, amortization of deferred policy acquisition costs increased 8.2%
to $2.7 million from $2.5 million. Through the first six months other operating
expenses increased 12.8% to $3.7 million from $3.3 million. For the second
quarter only, operating expenses grew 6.7% to $1.8 million from $1.7 million.
Death benefits net of reinsurance for the first six months of 1998 and 1997
increased 24% to $5.3 million ($0.57 per common share) from $4.3 million ($0.46
per common share). For the second quarter only, death benefits net of
reinsurance increased 69.8% to $3.3 million ($0.36 per common share) from $2
million ($0.21 per common share). Other policyholder benefits net of reinsurance
increased 28.3% to $3.5 million from $2.8 million. For the second quarter only,
they remained at $1.4 million.
In January, 1998 a lawsuit was filed by a policyholder of ALLIED Life related to
a universal life insurance policy DAC tax (see note 5 to Notes to Interim
Consolidated Financial Statements). The outcome of the litigation remains
uncertain but the Company established a reserve in the first quarter of 1998 of
$2.0 million ($1.3 million after tax) to cover potential expenses related to the
lawsuit.
ALLIED Life's operating income through June 30, 1998 and 1997 decreased 33.8% to
$4.8 million from $7.2 million. For the second quarter only, operating income
decreased 28.1% to $2.8 million from $3.9 million. For the year to date the
Company has experienced higher death benefits which combined with the litigation
reserve has caused operating income to be substantially lower. Higher death
benefits and a lower investment spread are the main reasons operating income for
the quarter is lower.
YEAR 2000 ISSUE
The Company is aware of the problems associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two-digit year value to 00.
Computer systems must properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
11
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The Company has assessed its computer systems as they relate to the year 2000
issue. The Company has formulated a plan which management believes will resolve
the issue. This plan is being updated and revised as additional information
becomes available. The Company currently has both internal personnel and
external consultants implementing the plan and believes resources dedicated to
the problem are sufficient. The Company believes that testing of the systems
will be finalized before the year 2000 and should not have a significant effect
on the Company's ability to conduct business in a reasonable fashion. The
Company estimates that total external related costs still to be incurred related
to the year 2000 issue will range between $400,000 and $900,000.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated
Life insurance companies generally produce a positive cash flow from operations.
Its adequacy is measured by the companies' liquidity. There should be sufficient
cash to meet benefit obligations to policyholders and normal operating expenses
as they are incurred and sufficient excess to help meet future policy benefit
payments and to write new business. ALLIED Life's liquidity position continued
to be favorable for the second quarter 1998 and cash inflows were at levels
sufficient to meet its obligations.
The Company's cash inflows consist primarily of deposits to policyholder account
balances, income from sales, maturities and calls of investments, and repayments
of investment principal. The Company's cash outflows primarily are related to
policyholder account withdrawals, investment purchases, policy acquisition
costs, policyholder benefits, and current operating expenses. These outflows
typically are met from normal annual premium and net investment cash inflows.
For the first six months of 1998 the Company operations provided cash inflows of
$11.8 million and financing activities provided cash inflows of $32.5 million.
For the first six months of 1997 it was $6.6 million and $14.6 million,
respectively. These inflows were used primarily to increase the Company's fixed
maturity investment portfolio.
Matching the investment portfolio maturities to the cash flow demands of the
insurance coverages being provided is an important consideration. The Company
performs cash-flow testing of its assets and liabilities under various scenarios
to evaluate the adequacy of reserves. In developing its investment strategy, the
Company establishes a level of cash and securities that when combined with
expected net cash inflows from operations, maturities of fixed-maturity
investments, principal payments on mortgage-backed securities, and its insurance
products is believed by management to be adequate to meet anticipated short-term
and long-term benefit and expense payment obligations.
A source of cash flows for the holding company is dividend payments from ALLIED
Life. Through the second quarter of 1998, the Company paid cash dividends on
common stock of $619,000. ALLIED Life paid to the Company dividends of $1.1
million to fund the Company's dividend requirements and its note payment on the
indebtedness to affiliates.
The Company has a line of credit agreement that provides additional liquidity.
The agreement makes $25 million available through March 13, 1999. Interest is
payable at a current rate upon issuance. From time to time, the Company has also
borrowed funds from its affiliates on an arms-length basis. At June 30, 1998,
the Company had outstanding borrowings of $17.6 million under the line of credit
agreements and $2.1 million from affiliates.
Management anticipates that funds to meet the Company's short-term and long-term
capital expenditures, cash dividends, and operating cash needs will come from
existing capital and internally generated funds and believes the total is
adequate to meet expected cash obligations. As of June 30, 1998, the Company had
no material commitments for capital expenditures. As additional capital needs
arise, the Company will consider taking on additional debt or issuing equity.
Specific methods for meeting such needs will depend upon financial market
conditions at the time.
12
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on May 5, 1998.
(b) James W. Callison and Dennis H. Kelly, Jr., were elected
to serve as directors of the Company for a term of three
years which expires in 2001. A current director whose term
expires in 1999 is John E. Evans. Current directors whose
terms expire in 2000 are Harold S. Evans and George D.
Milligan.
(c) With respect to the voting on the election of directors:
For Withheld Broker Non Votes
James W. Callison 6,459,943 710 0
Dennis H. Kelly Jr. 6,459,943 710 0
(d) None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 2.1 - Agreement and Plan of Merger, dated June 3,
1998, among Nationwide Mutual Insurance Company, Nationwide
Life Acquisition Corporation, and the Company, incorporated
by reference to Exhibit 2 to the Schedule 14D-9 of the
Company, dated June 10, 1998.
Exhibit 11 - Statement re Computation of Per Share
Earnings.
Exhibit 27 - Financial Data Schedule
(b) The Company filed two reports on Form 8-K during the second
quarter ended June 30, 1998.
Items Financial Date
Reported Statements Filed
Item 5 -- Other None June 3, 1998
Item 5 -- Other None June 4, 1998
SIGNATURES
Pursuant to the requirements 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.
ALLIED Life Financial Corporation
(Registrant)
Date: August 13, 1998 By: /s/ Wendell P. Crosser
----------------------------------------------
Wendell P. Crosser, Vice President and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
13
<TABLE>
Exhibit 11
ALLIED Life Financial Corporation and Subsidiaries
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(In thousands, except per share data)
Numerator
<S> <C> <C> <C> <C>
Net income $ 1,126 $ 2,679 $ 2,468 $ 4,806
Preferred stock dividends (453) (426) (900) (792)
Numerator for basic earnings
per share - income available to
common stockholders 673 2,253 1,568 4,014
Effect of diluted securities
Convertible preferred stock
dividends 27 27 53 54
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversion $ 700 $ 2,280 $ 1,621 $ 4,068
Denominator
Denominator for basic earnings
per share - weighted average
shares 4,422 4,446 4,413 4,474
Effect of dilutive securities
Stock options 46 28 38 30
Convertible preferred stock 103 108 107 108
Dilutive potential common shares 149 136 145 138
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 4,571 4,582 4,558 4,612
Basic earnings per share $ 0.15 $ 0.51 $ 0.36 $ 0.89
Diluted earnings per share $ 0.15 $ 0.50 $ 0.36 $ 0.87
14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> Jun-30-1998
<DEBT-HELD-FOR-SALE> 814,004
<DEBT-CARRYING-VALUE> 814,004
<DEBT-MARKET-VALUE> 814,004
<EQUITIES> 4,667
<MORTGAGE> 825
<REAL-ESTATE> 0
<TOTAL-INVEST> 835,520
<CASH> 0
<RECOVER-REINSURE> 6,805
<DEFERRED-ACQUISITION> 85,404
<TOTAL-ASSETS> 956,270
<POLICY-LOSSES> 47,022
<UNEARNED-PREMIUMS> 122
<POLICY-OTHER> 2,040
<POLICY-HOLDER-FUNDS> 749,503
<NOTES-PAYABLE> 19,740
0
27,238
<COMMON> 4,438
<OTHER-SE> 86,309
<TOTAL-LIABILITY-AND-EQUITY> 956,270
4,148
<INVESTMENT-INCOME> 27,630
<INVESTMENT-GAINS> 514
<OTHER-INCOME> 16,184
<BENEFITS> 28,941
<UNDERWRITING-AMORTIZATION> 5,353
<UNDERWRITING-OTHER> 7,045
<INCOME-PRETAX> 4,183
<INCOME-TAX> 1,715
<INCOME-CONTINUING> 2,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,468
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<DEBT-HELD-FOR-SALE> 500,289 498,675 720,281 746,302
<DEBT-CARRYING-VALUE> 699,498 697,297 720,281 746,302
<DEBT-MARKET-VALUE> 705,637 699,601 720,281 746,302
<EQUITIES> 6,407 7,875 9,142 10,284
<MORTGAGE> 1,457 1,325 1,122 1,010
<REAL-ESTATE> 0 0 0 0
<TOTAL-INVEST> 722,339 722,176 746,616 776,884
<CASH> 0 0 0 0
<RECOVER-REINSURE> 5,786 5,671 5,609 6,347
<DEFERRED-ACQUISITION> 92,418 99,994 93,418 88,822
<TOTAL-ASSETS> 835,600 845,829 865,253 894,012
<POLICY-LOSSES> 37,209 38,780 38,831 40,347
<UNEARNED-PREMIUMS> 54 83 107 84
<POLICY-OTHER> 1,522 1,990 2,099 2,048
<POLICY-HOLDER-FUNDS> 659,078 669,367 682,316 703,968
<NOTES-PAYABLE> 20,470 25,000 22,782 19,125
0 0 0 0
24,586 25,234 25,620 26,012
<COMMON> 4,497 4,514 4,369 4,390
<OTHER-SE> 70,858 67,675 78,631 80,583
<TOTAL-LIABILITY-AND-EQUITY> 835,600 845,829 865,253 894,012
6,728 1,678 3,665 5,359
<INVESTMENT-INCOME> 48,182 12,683 25,535 38,758
<INVESTMENT-GAINS> 122 (393) (252) 605
<OTHER-INCOME> 25,678 6,820 13,759 21,070
<BENEFITS> 47,988 12,726 25,062 37,842
<UNDERWRITING-AMORTIZATION> 10,595 2,156 4,712 7,859
<UNDERWRITING-OTHER> 10,117 2,715 5,724 8,647
<INCOME-PRETAX> 12,010 3,191 7,204 11,444
<INCOME-TAX> 3,937 1,064 2,402 3,813
<INCOME-CONTINUING> 8,073 2,127 4,806 7,632
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 8,073 2,127 4,806 7,632
<EPS-PRIMARY> 1.39 0.37 0.87 1.40
<EPS-DILUTED> 1.39 0.37 0.87 1.40
<RESERVE-OPEN> 0 0 0 0
<PROVISION-CURRENT> 0 0 0 0
<PROVISION-PRIOR> 0 0 0 0
<PAYMENTS-CURRENT> 0 0 0 0
<PAYMENTS-PRIOR> 0 0 0 0
<RESERVE-CLOSE> 0 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0 0
<FN>
This Financial Data Statement has been filed with earnings per share restated for the applicable years
in accordance with SFAS 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<DEBT-HELD-FOR-SALE> 432,845 442,105 465,468
<DEBT-CARRYING-VALUE> 643,139 646,168 663,862
<DEBT-MARKET-VALUE> 650,197 649,879 667,750
<EQUITIES> 4,954 5,509 6,145
<MORTGAGE> 1,750 1,736 1,577
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 660,853 669,216 686,663
<CASH> 0 0 0
<RECOVER-REINSURE> 5,662 5,374 6,284
<DEFERRED-ACQUISITION> 88,356 93,704 96,285
<TOTAL-ASSETS> 767,143 780,632 804,453
<POLICY-LOSSES> 33,228 33,932 36,670
<UNEARNED-PREMIUMS> 71 77 82
<POLICY-OTHER> 1,363 1,167 1,718
<POLICY-HOLDER-FUNDS> 599,635 615,859 637,954
<NOTES-PAYABLE> 13,325 16,930 13,480
0 0 0
23,496 23,830 24,209
<COMMON> 4,635 4,640 4,491
<OTHER-SE> 69,761 69,264 68,762
<TOTAL-LIABILITY-AND-EQUITY> 767,143 780,632 804,453
1,215 2,733 5,210
<INVESTMENT-INCOME> 11,750 23,687 35,513
<INVESTMENT-GAINS> (84) (144) (193)
<OTHER-INCOME> 6,444 12,746 19,135
<BENEFITS> 11,121 22,566 35,526
<UNDERWRITING-AMORTIZATION> 1,733 3,842 5,764
<UNDERWRITING-OTHER> 2,427 4,928 7,581
<INCOME-PRETAX> 4,044 7,685 10,794
<INCOME-TAX> 1,347 2,524 3,527
<INCOME-CONTINUING> 2,697 5,161 7,267
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,697 5,161 7,267
<EPS-PRIMARY> 0.49 0.94 1.30
<EPS-DILUTED> 0.49 0.94 1.30
<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>
This Financial Data Statement has been filed with earnings per share restated for the applicable years
in accordance with SFAS 128.
</FN>
</TABLE>
