SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Six Months Ended June 30, 1994
Commission File Number 0-15330
AMVESTORS FINANCIAL CORPORATION
____________________________________________________
(Exact name of registrant as specified in its charter)
Kansas 48-1021516
______________________________ ____________________________
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization)
415 Southwest 8th Avenue, Topeka, Kansas 66603
________________________________________ __________
(Address of principal executive offices) (Zip code)
Registrant s telephone number, including area code:(913) 232-6945
______________
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 shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Class Outstanding June 30, 1994
______________ _________________________
Common Stock, no par value 10,142,842 shares
AMVESTORS FINANCIAL CORPORATION
INDEX
PARTI. Financial Information:
Page Number
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993 2-3
Consolidated Statements of Earnings
Six months ended June 30, 1994 and 1993 4
Consolidated Statements of Earnings
Three months ended June 30, 1994 and 1993 5
Consolidated Statements of Stockholders Equity
Twelve months ended December 31, 1993 and
Six months ended June 30, 1994 6
Consolidated Statements of Cash Flows
Six months ended June 30, 1994 and 1993 7
Notes to Consolidated Financial Statements 8-22
Management s Discussion and Analysis of Financial
Condition and Results of Operations 23-30
PART II. Other Information 31-34
1
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1994 and December 31, 1993
(000's Omitted)
(Unaudited)
ASSETS 1994 1993
Investments:
Debt securities:
Bonds:
Held-to-maturity (market $1,176,334 and $1,104,914) $1,232,525 1,066,583
Available-for-sale (cost $580,512 and market $705,738) 586,330 662,696
Preferred stock with mandatory redemption requirements,
available-for-sale (cost $184 and market $177) 177 184
1,819,032 1,729,463
Equity securities, available-for-sale:
Common stock (cost $2,400 and $2,968) 2,153 3,036
Preferred stock (cost $45 and $662) 22 876
2,175 3,912
Other long-term investments 49,298 39,880
Short-term investments 1,904 1,911
1,872,409 1,775,166
Less allowance for credit losses (2,500) (2,500)
Total investments 1,869,909 1,772,666
Cash and cash equivalents 3,080 21,782
Accounts receivable (net of allowance for uncollectible
accounts of $343 and $348) 56 819
Amounts receivable under reinsurance agreements 50,606 151,392
Amounts receivable on securities settlements in process 1,226 1,203
Accrued investment income 28,964 26,544
Deferred policy acquisition costs 134,629 128,671
Deferred income taxes 8,737 8,622
Other assets 3,350 2,997
Total assets $ 2,200,557 2,114,696
See notes to consolidated financial statements.
2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1994 and December 31, 1993
(000's Omitted, except per share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY 1994 1993
Liabilities:
Policy liabilities:
Future policy benefits $2,083,111 2,005,339
Other policy liabilities 4,662 4,948
2,087,773 2,010,287
Amounts due on securities settlements in process 950 -
Accrued expenses and other liabilities 4,431 4,064
Total liabilities 2,093,154 2,014,351
Commitments and contingencies
Stockholders equity:
Common stock, no par value, authorized
25,000,000 shares; issued 10,142,842 shares
in 1994 and 1993 12,907 12,907
Paid in capital 64,478 64,612
Unrealized investment gains (net of deferred policy
acquisition cost effects of $2,164 and $-0- and
deferred income tax expense of $1,182 and $548) 2,195 1,064
Retained earnings 31,244 25,183
110,824 103,766
Less leveraged employee stock ownership trust (LESOP) (3,421) (3,421)
Total stockholders equity 107,403 100,345
Total liabilities and stockholders equity 2,200,557 2,114,696
See notes to consolidated financial statements.
3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Six months ended June 30, 1994 and 1993
(000's Omitted, except per share data)
(Unaudited)
1994 1993
Revenue:
Insurance premiums and policy charges $ 2,946 3,525
Net investment income 69,163 68,825
Net investment gains 1,055 12,746
Other revenue 281 190
Total revenue 73,445 85,286
Benefits and expenses:
Benefits, claims and interest credited to
policyholders 54,679 57,236
Amortization of deferred policy acquisition costs 4,995 9,554
General insurance expenses 3,940 4,434
Premium and other taxes, licenses and fees 532 376
Other expenses 116 138
Total benefits and expenses 64,262 71,738
Operating earnings 9,183 13,548
Interest expense - 542
Earnings before income tax expense 9,183 13,006
Income tax expense 3,122 3,902
Net earnings $ 6,061 9,104
Earnings per share of common stock:
Primary:
Net earnings $ .58 1.39
Fully diluted:
Net earnings $ .58 1.31
Average shares outstanding:
Primary 10,363 6,438
Fully diluted 10,363 6,937
See notes to consolidated financial statements.
4
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
(Unaudited)
Unrealized
investment
Preferred Common Paid-in gains Retained Treasury
stock stock capital (losses) earnings stock LESOP Total
Balance as of January 1, 1993 $ 172 8,186 45,016 (809) 7,441 (6,855)(3,688) 49,463
Net earnings - - - - 17,978 - - 17,978
Decrease in unrealized
investment losses - - - 1,873 - - - 1,873
Cash dividends to stock-
holders ($1.50 per share
on preferred stock) - - - - (236) - - (236)
Cash paid on reverse stock
split - - (25) - - - - (25)
Issuance of common stock:
upon completion of
stock offering - 4,392 25,014 - - - - 29,406
upon exercise of options - 290 1,704<F2> - - - - 1,994
upon conversion of
preferred stock (172) 729 (557) - - - - -
Cancellation of treasury stock - (690) (6,165) - - 6,855 - -
Repurchase of warrants
upon payment of debt - - (375) - - - - (375)
Allocation of LESOP shares - - - - - - 267 267
Balance as of December 31, 1993 - 12,907 64,612 1,064<F1>25,183 - (3,421) 100,345
Net earnings - - - - 6,061 - - 6,061
Expenses related to 1993 stock
offering - - (134) - - - - (134)
Cumulative effect of
adoption of SFAS 115 on
January 1, 1994 - - - 19,431 - - - 19,431
Decrease in unrealized
investment gains - - - (18,300) - - - (18,300)
Balance as of June 30, 1994 $ - 12,907 64,478 2,195 31,244 - (3,421) 107,403
<F3><F4>
<FN>
<F1> Net of deferred income taxes of $548.
<F2> Net of income tax benefit of $441.
<F3> Net of deferred income taxes of $1,182.
<F4> Net of amortization of deferred policy acquisition cost of $2,164.
See notes to consolidated financial statements.
6
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash and Cash Equivalents
Six months ended June 30, 1994 and 1993 (000's Omitted)
(Unaudited)
1994 1993
Operating Activities:
Net earnings $ 6,061 9,104
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Interest credited to policyholders 55,937 58,656
Depreciation 229 249
Amortization of (discounts) premiums on debt
securities, net (1,877) (878)
Amortization of deferred policy acquisition costs 4,995 9,554
Net investment (gains) losses (1,055) (12,746)
Accrued investment income (2,420) 493
Deferred income taxes (1,297) 977
Amortization of discount on notes payable - 3
Accrued expenses and other liabilities 368 (341)
Other, net 393 2,352
Net cash provided by operating activities 61,334 67,423
Investing Activities:
Purchases of debt securities (323,485) (260,218)
Proceeds from sale of debt securities 166,763 238,428
Proceeds from maturation of debt securities 77,538 56,900
Purchases of long-term investments (11,898) (6,252)
Principal collected on mortgage loans 293 2,178
Policy loans originated (769) (754)
Principal collected on policy loans 603 763
Short-term investments, net 7 465
Capitalization of deferred policy acquisition costs (13,116) (7,231)
Other, net 690 151
Net cash provided by (used in) investing activities (103,374) 24,430
Financing Activities:
Premiums received 145,447 89,932
Surrender and death benefits paid (126,930) (230,854)
Surrender and risk charges collected 2,787 2,643
Amount due on securities settlements in process 927 (28,856)
Payments on notes payable - (4,502)
Cash dividends to stockholders - (159)
Issuance of common stock (134) 1,805
Other, net 1,241 (3,162)
Net cash provided by (used in) financing activities 23,338 (173,153)
Increase (Decrease) in Cash and Cash Equivalents (18,702) (81,300)
Cash and Cash Equivalents:
Beginning of year 21,782 93,050
End of period $ 3,080 11,750
Supplemental schedule of cash flow information:
Income tax payments $ 2,690 204
Interest payments $ - 540
Unrealized investment gains available for sale $ 5,541 -
Less: Associated amortization of deferred policy
acquisition costs 2,164 -
Deferred income tax expense 1,182 -
Net unrealized investment gains available for sale $ 2,195 -
See notes to consolidated financial statements.
7
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
_______________________________________________
a. Principles of consolidation:
The consolidated financial statements include the accounts of
AmVestors and its wholly-
owned subsidiaries American Investors Life Insurance Company,
Inc. (American), American
Investors Sales Group, Inc. (American Sales), AmVestors
Investment Group, Inc. (AIG) and
Omni-Tech Medical, Inc. (Omni-Tech), (collectively the
company). All significant intercompany
accounts and transactions have been eliminated.
b. Accounting Principles and Practices:
The accompanying unaudited consolidated financial statements
have been prepared on the
basis of generally accepted accounting principles as promulgated
by the American Institute of
Certified Public Accountants. In the opinion of the company, the
consolidated financial
statements contain all adjustments (consisting of only normal
recurring accruals) necessary
to present fairly the financial position as of June 30, 1994 and
December 31, 1993 and the
statements of earnings and the statements of cash flows for the
six month periods ended June
30, 1994 and 1993.
c. Investments:
Debt securities held-to-maturity are carried at amortized cost,
except that those securi-
ties with an other than temporary impairment in value are carried
at estimated net reali-
zable value. Debt securities available-for-sale are carried at
the estimated market value,
with any unrealized gains or losses recorded in stockholder's
equity.
Investments are reviewed on each balance sheet date to
determine if they are impaired. In
determining whether an investment is impaired, the company
considers whether the decline in
market value at the balance sheet date is an other than temporary
decline; if so, then the
investment's carrying value is reduced to a new cost basis which
represents estimated net
realizable value. The decline in value is reported as a realized
loss, and a recovery from
the new cost basis is recognized as a realized gain only at sale.
The estimates of net realizable value are based on information
obtained from published
financial information provided by issuers, independent sources
such as broker dealers or the
company's independent investment advisor. Such amounts represent
an estimate of the consider-
ation to be received in the future when the defaulted company's
debt is settled through the
sale of their assets or the restructuring of their debt. These
estimates do not represent
the discounted present value of these future considerations.
An allowance for credit losses has been recorded to reduce
total investments by charging
investment losses. The recorded allowance reflects management's
estimate of losses existing
in the company's invested assets, which may occur in the future
due to conditions unknown to
management at this time. Management periodically reviews the
adequacy of the allowance for
credit losses. As credit losses are realized, they are charged
against the allowance.
Investments in common stock and non-redeemable preferred stock
are carried at market,
with any unrealized gains or losses recorded in stockholders'
equity.
The cost of securities sold is determined on the identified
certificate basis.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
Other long-term investments include policy loans and mortgage
loans on real estate which
are carried at cost less principal payments since date of
acquisition, and certain partner-
ship investments which are carried at an amount equal to the
company's share of the partner-
ships' estimated market value.
d. Fair value of financial instruments:
Estimated fair value amounts have been determined by the
company using available market
information and appropriate valuation methodologies. Due to the
fact that considerable judg-
ment is required to interpret market data to develop the
estimates of fair value, the esti-
mates presented are not necessarily indicative of the amounts
that could be realized in a
current market exchange.
The carrying values and estimated fair values of the company's
financial instru-
ments as of June 30, 1994 were as follows:
(000's Omitted)
Carrying Fair
Value Value
Assets
Debt securities $ 1,819,032 1,762,841
Equity securities 2,175 2,175
Other long-term investments 49,298 49,437
Short-term investments 1,904 1,904
Cash and cash equivalents 3,080 3,080
Accounts receivable and accrued investment
income 29,020 29,020
Liabilities:
Future policy benefits - investment contracts 1,852,415 1,741,700
Other policy liabilities 4,662 4,662
Amounts due on securities settlement in
process 950 950
Accrued expenses and other liabilities 4,431 4,431
Debt securities - Fair values are based on quoted market prices
or dealer quotes, if
available. If a quoted market price is not available, fair value
is estimated using quoted
market prices for similar securities.
Equity securities - Fair value equals the carrying value as
these securities are carried
at quoted market value.
Other long-term investments - For certain homogeneous
categories of mortgage loans, fair
value is estimated using quoted market prices for securities
backed by similar loans, adjust-
ed for differences in loan characteristics. Fair value of policy
loans and other long-term
investments is estimated to approximate the assets carrying
value.
Short-term investments and cash and cash equivalents - The
carrying amounts reported in the
balance sheet approximate the assets fair value.
Accounts receivable and accrued investment income - The
carrying amounts reported in the
balance sheet for these assets approximates fair value.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
Future policy benefits for investment contracts - The fair
values for deferred annuities
were estimated to be the amount payable on demand at the
reporting date as those investment
contracts have no defined maturity and are similar to a deposit
liability. The amount payable
at the reporting date was calculated as the account balance less
any applicable surrender
charges.
Other policy liabilities - The carrying amount reported in the
balance sheet approximates
the fair value of these liabilities.
Amounts due on securities settlements in process - The carrying
amount reported in the balance sheet approximates
the fair value of this liability.
Accrued expenses and other liabilities - The carrying amount
reported in the balance sheet
approximates the fair value of these liabilities.
The use of different market assumptions and/or estimation
methodologies could have a mater-
ial effect on the estimated fair value amounts.
e. Deferred policy acquisition costs:
The costs of acquiring new business (primarily commissions and
policy expenses), which vary
with and are directly related to the production of new business,
have been deferred. The
deferred costs related to investment-type deferred annuity
contracts are amortized in rela-
tion to the incidence of expected gross profits over the expected
life of the policies, but
not more than 15 years. For single premium life insurance,
deferred policy acquisition costs
are amortized over the life of the policies, but not more than 20
years for policies issued
before January l, 1987, and not more than 30 years for policies
issued after December 31,
1986, based on the expected gross profits for the amortization
periods. The deferred costs
related to traditional life contracts are amortized over the
premium paying period for the
related policies using the same actuarial assumptions as to
interest, mortality and with-
drawals as are used to calculate the reserves for future
benefits.
Determination of expected gross profits includes managements'
best estimate of certain ele-
ments over the life of the contracts, including anticipated
excess investment income, surrend-
er charge revenues and mortality charge revenues (single premium
life insurance). Estimates
of expected gross profits used as a basis for amortization are
evaluated regularly by manage-
ment, and the total amortization recorded to date is adjusted by
a charge or credit to the
statement of operations if actual experience indicates that the
estimates should be revised.
Net investment gains realized in the first six months of 1994 and
1993 resulted in the
company experiencing investment margins greater than those
estimated. As a result, $247,783
and $3,413,095 of the unamortized balance of deferred policy
acquisition costs were expensed
in the six months ended June 30, 1994 and 1993, respectively.
The amount charged off is
based on actual gross profits earned to date in relation to total
gross profits expected to
be earned over the life of the related contracts.
Estimates of the expected gross profits to be realized in future
years include the antici-
pated yield on investments. Deferred policy acquisition costs
will be adjusted in the future
based on actual investment income earned.
f. Future policy benefits:
Liabilities for future policy benefits under life insurance
policies, other than single
premium life insurance, have been computed by the net level
premium method based upon esti-
mated future policy benefits (excluding participating dividends),
investment yield, mortality
and withdrawals giving recognition to risk of adverse deviation.
Interest rates range from 4%
to 9% depending on the year of issue, with mortality and
withdrawal assumptions based on
company and industry experience prevailing at the time of issue.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
For single premium life insurance and single premium annuities,
the future policy benefits
are equal to the accumulation of the single premiums at the
credited rate of interest and
for single premium whole life, less any mortality charges.
g. Participating policies:
The company issued participating policies in past years on
which dividends are paid to
policyholders as determined annually by the Board of Directors.
The amount of dividends
declared but undistributed is included in other liabilities.
Policy benefit reserves do not
include a provision for estimated future participating dividends.
h. Depreciation:
The home office buildings are depreciated on the straight-line
basis over estimated lives
of 40 years. Other depreciation is provided on the straight-line
basis over useful lives
ranging from 5 to 8 years.
i. Income taxes:
The company and its subsidiaries prepare and file their income
tax returns on a consoli-
dated basis.
The company provides for the recognition of deferred tax assets
and liabilities for the
expected future tax consequences of events that have been
reported in the financial state-
ments on the liability method.
j. Earnings per share:
Primary earnings per share of common stock are computed by
dividing net earnings reduced
by preferred dividend requirements by the sum of the weighted
average number of shares out-
standing during the period plus dilutive common stock equivalents
applicable to stock options
and warrants, calculated using the treasury stock method. Fully
diluted earnings per share
assumes the conversion of the convertible preferred stock
outstanding during 1993.
k. Consolidated statements of cash flows:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money
market accounts.
l. New accounting standards:
Effective January 1, 1994, the company adopted the provisions
of SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This
Statement addresses the account-
ing and reporting for certain investments in debt and equity
securities by requiring such
investments to be classified in held-to-maturity,
available-for-sale, or trading categories.
The cumulative effect of the adoption of this Statement was an
increase in stockholder's
equity of $19,430,903, representing the aggregate excess fair
value over cost for those
securities included in the available-for-sale category, net of
associated amortization of
deferred policy acquisition costs and deferred income tax
expense. Net earnings for the
period ended June 30, 1994 were not affected by the adoption
of this Statement.
m. Reclassifications:
Certain reclassifications have been made to conform the June
30, 1993 and December 31,
1993 financial statements to the June 30, 1994 presentation.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments:
__________________
A summary of investment income is as follows:
(000's Omitted)
For the Period
Ended June 30,
1994 1993
Debt securities $ 70,441 68,267
Equity securities 46 43
Other long-term investments (979) 683
Short-term investments 431 748
Other 158 110
70,097 69,851
Less investment expenses 934 1,026
Net investment income $ 69,163 68,825
Net investment gains (losses):
Debt securities $ 472 12,950
Equity securities 583 (204)
Net investment gains (losses) $ 1,055 12,746
The maturity of the company's debt and equity securities
portfolio as of June 30, 1994 was as follows:
(000's Omitted)
As of June 30, 1994
Held-to-maturity Available-for-sale
Estimated Estimated
Book Market Book Market
Value Value Value Value
Debt securities:
Bonds:
One year or less $ 2,499 2,528 26,142 26,208
Two years through five years 111,482 110,673 280,935 283,555
Six years through ten years 932,808 890,338 240,478 242,675
Eleven years and after 185,736 172,795 32,957 33,892
1,232,525 1,176,334 580,512 586,330
Preferred stock with mandatory
redemption requirements - - 184 177
Equity securities - - 2,445 2,175
$ 1,232,525 1,176,334 583,141 588,682
These tables include mortgage-backed securities based on the
estimated cash flows of the
underlying mortgages.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
_____________________________
The book value, estimated market value and unrealized market
gains and losses of debt and
equity securities as of June 30, 1994, and December 31, 1993 were
as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
Value Gains Losses Value
June 30, 1994
_____________
Bonds held-to-maturity:
Corporate debt obligations
Investment grade $ 821,198 5,528 46,478 780,248
High-yield 99,708 210 5,676 94,242
920,906 5,738 52,154 874,490
U.S. Treasury obligations 3,628 4 236 3,396
Mortgage-backed securities 307,991 243 9,786 298,448
Bonds held-to-maturity 1,232,525 5,985 62,176 1,176,334
Bonds available-for-sale:
Corporate debt obligation
Investment grade 194,150 5,121 72 199,199
High-yield 3,212 - 282 2,930
197,362 5,121 354 202,129
U.S. Treasury obligations 77,518 - 2,212 75,306
Mortgage-backed securities 305,632 4,829 1,566 308,895
Bonds available-for-sale 580,512 9,950 4,132 586,330
Total bonds 1,813,037 15,935 66,308 1,762,664
Preferred stock with mandatory redemption
requirements available-for-sale 184 - 7 177
Equity securities available-for-sale 2,445 226 496 2,175
$ 1,815,666 16,161 66,811 1,765,016
December 31, 1993
__________________
Bonds held-to-maturity:
Corporate debt obligations
Investment grade $ 776,905 32,703 3,480 806,128
High-yield 84,063 2,799 559 86,303
860,968 35,50 4,039 892,431
U.S. Treasury obligations 3,631 14 5 3,640
Mortgage-backed securities 201,984 6,905 46 208,843
Bonds held-to-maturit 1,066,583 42,421 4,090 1,104,914
Bonds available-for-sale:
Corporate debt obligations
Investment grade 198,636 19,943 - 218,579
High-yield
198,636 19,943 - 218,579
U.S. Treasury obligations 9,954 12 - 9,966
Mortgage-backed securities 454,106 23,087 - 477,193
Bonds available-for-sale 662,696 43,042 - 705,738
Total bonds 1,729,279 85,463 4,090 1,810,652
Preferred stock with mandatory
redemption requirements 184 - 7 177
Equity securities 3,630 795 513 3,912
$1,733,093 86,258 4,610 1,814,741
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
____________________________
The preceding table includes the book value and estimated
market value of debt securities
which the company has determined to be impaired (other than
temporary decline in value) as follows:
Accumulated Estimated
Original Write Book Market
Cost downs Value Value
June 30, 1994 $ 7,545 7,545 _ _
December 31, 1993 $ 7,611 7,582 29 76
The company defines high-yield securities as those corporate
debt obligations rated below
investment grade by Standard & Poor's and Moody's or, if unrated,
those that meet the objective
criteria developed by the company's independent investment
advisory firm. Management believes
that the return on high-yield securities adequately compensates
the company for additional
credit and liquidity risks that characterize such investments. In
some cases, the ultimate col-
lection of principal and timely receipt of interest is dependent
upon the issuer attaining
improved operating results, selling assets or obtaining
financing.
The book value, estimated market value and unrealized market
gains and losses by type of
mortgage-backed security as of June 30, 1994, and December 31,
1993 were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
June 30, 1994 Value Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes $ 75,516 292 3,591 72,217
Targeted amortization classes and
accretion directed classes 7,687 - 59 7,628
Sequential classes 18,695 6 85 18,616
Pass-throughs 49 4 - 53
Total government agency
mortgage-backed securities 101,947 302 3,735 98,514
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 348,831 2,836 4,516 347,151
Sequential classes 783 11 - 794
Pass-throughs 324 8 - 332
Total government sponsored enterprise
mortgage-backed securities 349,938 2,855 4,516 348,277
Other mortgage-backed securities:
Planned amortization classes 27,160 153 167 27,146
Sequential classes 123,981 1,761 2,588 123,154
Pass-throughs 14 1 - 15
Subordinated classes 10,583 - 346 10,237
Total other mortgage-backed securities 161,738 1,915 3,101 160,552
Total mortgage-backed securities $ 613,623 5,072 11,352 607,343
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
___________________________
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
December 31, 1993 Value Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes $ 104,528 5,064 - 109,592
Targeted amortization classes and
accretion directed classes 7,646 436 - 8,082
Sequential classes 37,220 1,171 - 38,391
Pass-throughs 60 6 - 66
Total government agency
mortgage-backed securities 149,454 6,677 - 156,131
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 340,328 17,588 - 357,916
Sequential classes 5,612 58 - 5,670
Pass-throughs 428 30 - 458
Total government sponsored enterprise
mortgage-backed securities 346,368 17,676 - 364,044
Other mortgage-backed securities:
Planned amortization classes 47,887 983 31 48,839
Sequential classes 101,852 4,306 15 106,143
Pass-throughs 19 1 - 20
Subordinated classes 10,510 349 - 10,859
Total other mortgage-backed securities 160,268 5,639 46 165,861
Total mortgage-backed securities $ 656,090 29,992 46 686,036
Certain mortgage-backed securities are subject to significant
prepayment risk. This is due
to the fact that in periods of declining interest rates,
mortgages may be repaid more rapidly
than scheduled, as individuals refinance higher rate mortgages to
take advantage of the lower
current rates. As a result, holders of mortgage-backed securities
may receive large prepay-
ments on their investments which they are unable to reinvest at
an interest rate comparable to
the rate on the prepaying mortgages. Mortgage-backed pass-through
securities and sequential
classes, which comprised 23.4% and 22.1% of the book value of the
company's mortgage-backed
securities as of June 30, 1994 and December 31, 1993,
respectively, are sensitive to this pre-
payment risk.
A portion of the company's mortgage-backed securities portfolio
consists of planned amorti-
zation class ("PAC"), targeted amortization class ("TAC") and
accretion directed class ("AD")
instruments. These securities are designed to amortize in a more
predictable manner by shift-
ing the primary risk of prepayment to investors in other tranches
(support classes) of the
mortgage-backed security. PAC, TAC and ADsecurities comprised
74.8% and 76.3% of the book
value of the company's mortgage-backed securities as of June 30,
1994 and December 31, 1993.
The company does not invest in support class securities or
principal-only ("PO") and interest-
only ("IO") strips.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
___________________________
As of June 30, 1994, 73.6% of the company's mortgage-backed
securities were issued by either
government agencies or government sponsored enterprises, compared
to 75.6% as of December 31,
1993. The credit risk associated with these securities is
generally less than other mortgage-
backed securities. With the exception of one issue, with a book
value of $14,243 as of June 30,
1994, all of the company's investments in other mortgage-backed
securities are rated A or
better by Standard & Poor's or Moody's.
The amounts shown as "market" are primarily based on quotations
obtained from independent
sources such as broker dealers who make markets in similar
securities. Unless representative
trades of securities actually occur at the balance sheet date,
these quotes are generally esti-
mates of market value based on an evaluation of appropriate
factors such as institution-size
trading in similar securities, yield, credit quality, coupon
rate, maturity, type of issue and
other market data. The estimated market value of high-yield
securities and the secondary market
for high-yield securities have been and are likely to continue to
be volatile because these
securities are affected by various economic factors in addition
to interest rate levels. Losses
are recognized in the period they occur based upon specific
review of the securities portfolio
and other factors.
The consideration received on sales of debt and equity
securities, book value and realized
gains and losses on those sales were as follows:
(000's Omitted)
For the Period Ended June 30,
1994 1993
Consideration received $ 249,735 340,392
Book value 248,680 327,646
Net investment gains (losses) $ 1,055 12,746
Investment gains $ 2,167 13,219
Investment losses (1,112) (473)
Net investment gains (losses) $ 1,055 12,746
The above table includes bonds of one issuer which the company
had classified as held-to-
maturity. These bonds had a book value of $8,507,732 and the sale
resulted in a realized loss
of $205,526. The decision to sell these bonds was based upon a
significant deterioration in the
issuer's credit worthiness.
Net unrealized gains (losses) on debt securities
held-to-maturity, debt securities available-
for-sale, equity securities available-for-sale and other
long-term investments changed
as follows:
(000's) Omitted
Net Unrealized Gains (Losses)
Debt Debt Equity
Securities Securities Securities Other
Held-to- Available- Available- Long Term
Maturity for-Sale for-Sale Investments
Balance as of January 1, 1992 37,420 4,115 (809) -
1993 Net Change 911 38,920 1,091 1,330
Balance as of December 31, 1993 38,331 43,035 282 1,330
1994 Net Change (94,522) (37,224) (552) (1,330)
Balance as of June 30, 1994 $ (56,191) 5,811 (270) -
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Investments (continued):
___________________________
At June 30, 1994 and December 31, 1993, investments with statutory carrying
values of $1,789,640,651 and $1,736,404,701, respectively, were on deposit
with insurance departments to meet regulatory requirements.
3. Related Party Transactions:
______________________________
On January 22, 1991, the company made a $504,000, 30 year, first mortgage
loan on the personal residence of a Director. At the time the loan was made,
it represented a loan to value of
80%. This loan originally provided for interest at the rate equal
to the cost of funds of the
Eleventh District of the Federal Reserve, plus two percent and
had a final payment due February
1, 2021. On December 10, 1992 the terms of the loan were renegoti
ated to provide for interest
to be fixed at a rate of 7.5% and a final payment due January 10,
2008. The outstanding prin-
cipal balance on this loan was $22,977 and $205,059 as of June
30, 1994 and December 31, 1993,
respectively.
4. Other Assets:
________________
Other assets consist of the following:
(000's Omitted)
June 30, December 31,
1994 1993
Property and equipment at cost:
Home office building (including land of $352) $2,113 2,113
Furniture and equipment 3,418 3,328
Automobiles 114 100
5,645 5,541
Less accumulated depreciation 3,180 3,174
2,465 2,367
Other 885 630
$ 3,350 2,997
5. Reinsurance
_______________
The company reinsures portions of insurance it writes. The maximum amount of
risk retained by the company on any one life is $150,000.
A summary of reinsurance data follows (000's Omitted):
For the Ceded to Assumed
Period Gross other from other Net
Ended Descriptions amount companies companies amount
June 30, Life insurance in force $ 341,339 269,877 - 71,462
1994 Insurance premiums and
policy charges $ 3,431 485 - 2,946
June 30, Life insurance in force $ 367,529 292,745 - 74,784
1993 Insurance premiums and
policy charges $ 4,095 570 - 3,525
June 30, Future policy benefits $2,083,111 149,502 - 1,933,609
1994
December Future policy benefits $2,005,339 150,500 - 1,854,839
31, 1993
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Reinsurance (continued):
___________________________
The company had amounts receivable under reinsurance agreements
of $150,606,141 and
$151,392,088 as of June 30, 1994, and December 31, 1993,
respectively. Of the amounts,
$148,737,173 and $149,468,739 were associated with a single
reinsurer. In 1989, the company
entered into a coinsurance agreement which ceded 90% of the risk
on the company's block of
single premium whole life policies written prior to 1989 to
Employers Reassurance Corporation
(ERC). The agreement provides that ERC assumes 90% of all risks
associated with each policy
in the block. The following table identifies the components of
the amounts receivable from ERC:
(000's Omitted)
June 30, December 31,
1994 1993
Reserve for future policy benefits $ 147,810 148,712
Reimbursement for benefit payments and
administrative allowance 927 757
$ 148,737 149,469
6. Retirement Plans:
____________________
The company sponsors an Employee Stock Ownership Plan (ESOP)
for all full-time employees
with one year of service. Qualifying participants may contribute
an amount not to exceed ten
percent of covered compensation. The company made no
contributions to this plan during either
the six months ended June 30, 1994 or 1993.
The company sponsors a Leveraged Employee Stock Ownership Plan
(LESOP) for all full-time
employees with one year of service.
The LESOP has acquired shares of the company aggregating 370,244
through the proceeds of a
note payable to American. The note bears interest at 7.0% and is
payable in annual install-
ments through December 30, 2002. The note had unpaid principal
balance of $3,639,922 as of
June 30, 1994.
Each year, the company will make contributions to the LESOP
which are to be used to make
loan interest and principal payments. On December 31 of each
year, a portion of the common
stock will be allocated to participating employees. Of the
368,178 shares of the company's
common stock now owned by the LESOP, 75,357 shares have
been allocated to the participating
employees with the remaining 292,821 shares being held by
American as collateral for the
loan.
The unallocated portion of the company's common stock owned by
the LESOP has been recorded
as a separate reduction of stockholders equity. Accrued
contributions to the LESOP were
$279,339, and $319,157, for the six months ended June 30, 1994,
and 1993, respectively.
During 1992, the company's Board of Directors approved retirement
plans for its members and
members of the Board of Directors of certain of its subsidiaries.
The plans provide that
retired Directors shall serve as Advisory Members to the Board at
a fee of $750 per meeting
attended and a monthly lifetime benefit in the amount of $750 be
paid to each qualified
Director upon retirement. In addition, the company has agreed to
continue any life insurance
policies being provided as of the date of retirement.
To qualify for this benefit, a Director must have reached the age
of 60 and meet years of
service requirements thereafter. The plan also calls for a
mandatory retirement on the date
the Director's term expires following age 70.
As of June 30, 1994, five of the company's directors qualified
for benefits under the plan.
A liability in the amount of $562,492, representing the present
value of future benefits, has
been established. Charges to earnings relating to the plans were
$1,068, and $7,919, for the
six months ended June 30, 1994 and 1993, respectively.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Retirement Plans (continued):
________________________________
Effective January 1, 1993, the company adopted an Age-Weighted
Money Purchase Plan for all
full-time employees with one year of service. The full cost of
this plan will be paid by the
company with qualifying participants receiving contributions
based upon their age at plan
implementation and current salary. Contributions to the
Age-Weighted Money Purchase Plan for
the six months ended June 30, 1994 and 1993 were $93,259 and -0-
respectively.
7. Stockholders Equity:
________________________
Dividends by American to AmVestors are limited by laws
applicable to insurance companies.
Under Kansas law, American may pay a dividend, without prior
consent of the Kansas Commissioner
of Insurance, in an amount equal to the greater of 10% of
statutory capital and surplus at the
end of the preceding year or all of the statutory net gain from
operations of the preceding
year, provided that such dividend does not exceed its unassigned
surplus (surplus profits) at
the end of the preceding year. As of December 31, 1993, surplus
profits of American were
$12,621,521 and 10% of statutory capital and surplus was
$8,714,605. Statutory net income
(loss) for the year 1993 was ($1,469,786). American is also
required to maintain, on a statuto-
ry basis, paid-in capital stock and surplus (capital in excess of
par value and unassigned sur-
plus) of $100,000 each. As of June 30, 1994 and December 31,
1993 American's statutory capital
and surplus was $91,654,324 and $87,146,052 respectively.
On March 17, 1989, the Board of Directors of the company adopted
the 1989 Nonqualified Stock
Option Plan (the "1989 Nonqualified Plan") and simultaneously
approved the termination of the
1986 Incentive Stock Option Plan and the 1986 Nonqualified Stock
Option Plan. All of the
options outstanding under those Plans were cancelled and replaced
with options under the 1989
Nonqualified Plan. The options granted under the 1989
Nonqualified Plan will cover the same
number of shares and have the same exercise price as the
cancelled options, and none of such
options may be exercised beyond ten years from the original date
of grant of the cancelled
option. A total of 768,737 options to acquire common stock are
outstanding under the 1989
Nonqualified Plan.
The 1989 Nonqualified Plan is administered by the Board of
Directors and officers of the
company and its subsidiaries. The terms of the options, including
the number of shares, and the
exercise price are subject to the sole discretion of the Board of
Directors.
Changes during the periods were as follows:
For the Period Ended
June 30, December 31,
1994 1993
Options outstanding, beginning of period 816,107 757,340
Options granted - 413,000
Options exercised - (227,561)
Options expired (18,870) (126,659)
Options cancelled (28,500) (13)
Options outstanding, end of period 768,737 816,107
Outstanding options exercisable at end of period 470,237 403,107
Shares reserved for future grants at end of period 245,547 145,677
Option prices per share:
Exercised, during the period - $4.84-$9.60
Outstanding, end of period $4.84-$12.66 $4.84-$13.75
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Stockholders' Equity (continued):
_____________________________________
On March 17, 1989, the Board of Directors also adopted the 1989
Stock Appreciation Rights
Plan (the SAR Plan) and the 1989 Restricted Stock Plan (the
Restricted Stock Plan). The SAR
Plan authorized the Board of Directors to grant stock
appreciation rights to employees,
officers and directors in such amounts and with such exercise
prices as it shall determine. No
stock appreciation rights granted under the SAR Plan may be
exercised more than five years
from its date of grant. The SAR Plan authorized a maximum of
125,000 shares to be issued
pursuant to stock appreciation rights granted thereunder. During
1991, stock appreciation
rights under the SAR Plan were granted as follows: 30,000 rights
with a base price of
$6.875, the closing stock price on December 31, 1991, exercisable
on December 31, 1992;
30,000 rights with a base of $10.9375, the closing stock price on
December 31, 1992, exer-
cisable on December 31, 1993; and 30,000 rights with a base price
of $11.00, the closing
stock price on December 31, 1993, exercisable on December 31,
1994.
For the Period Ended
June 30, December 31,
1994 1993
Rights outstanding, beginning of period 30,000 60,000
Rights granted - -
Rights exercised - (30,000)
Rights expired - -
Rights cancelled - -
Rights outstanding, end of period 30,000 30,000
Reserved for future grants 5,000 5,000
The company recorded no compensation expense relating to stock
appreciation rights for the
six months ended June 30, 1994 and 1993.
The Restricted Stock Plan authorizes the Board of Directors to
make restricted stock awards
to employees, officers and directors in such amounts as it shall
determine. The stock issued
pursuant to such awards is subject to restrictions on
transferability for a period of five
years. Such stock is subject to a five-year vesting schedule, and
the company is required to
repurchase all vested stock from a grantee if such grantee's
employment with the company is
terminated prior to the lapse of the transfer restrictions. The
Restricted Stock Plan autho-
rizes a maximum of 125,000 shares to be issued thereunder. No
restricted stock awards have
been granted pursuant to the Restricted Stock Plan.
In conjunction with its bank borrowing, the company issued
ten-year warrants to purchase a
total of 170,002 shares of its common stock as summarized in the
following table:
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98
4/30/92 95,002 6.3855 5/1/02
170,002
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Rights Plan:
______________________________
At a meeting of the company's Board of Directors held August 4,
1988, a resolution was
passed adopting a Stockholders' Rights Plan. The Rights Plan
provides that one junior pre-
ferred stock purchase right will be distributed as a dividend on
each outstanding share of
common stock of the company held on and after August 5, 1988.
Each right entitles holders of the company's common stock to
purchase one one-hundredth
share of a new series of junior participating preferred stock of
the company at an exercise
price of $9.216. Each such fractional share of preferred stock is
equivalent in voting power
to one share of the company's common stock and would be paid
dividends equal to the dividend
paid on each share of common stock. The rights will be
exercisable only if a person or group
acquires beneficial ownership of 20% or more of the company's
common shares, or announces a
tender or exchange offer upon consummation of which, such person
or group would beneficially
own 20% or more of the common shares, or if a person or group
acquired beneficial ownership
of 10% or more of the common shares and such person or group is
judged to be an "Adverse
Person" by the company.
If any person or group becomes the beneficial owner of 20% or
more of the company's common
shares, effects certain business combinations, or engages in
certain "self-dealing" transac-
tions, each right, not owned by the person or group, entitles its
holder to purchase the
previously described fractional shares of the company s junior
participating preferred stock,
at the right s then-current exercise price (or in certain
circumstances as determined by the
company, a combination of cash, property, common shares or other
securities), having a value
of twice the right's exercise price of $9.216. For purposes of
determining the value of the
junior preferred stock, each one one-hundredth of a share shall
be considered to be equiva-
lent in value to one share of the company s common stock.
In addition, if the company is
involved in a merger or business combination transaction with
another person in which the
company is not the surviving company, each right that has not
previously been exercised will
entitle its holder to purchase, at the right's then-current
exercise price, common shares of
such other person having a value of twice the right's exercise
price.
The company generally will be entitled to redeem the rights at 1
cent per right at any
time until the 20th business day following the announcement that
a 20% ownership position
has been acquired.
10. Other Revenue:
__________________
Effective December 1, 1989, the company entered into a
coinsurance agreement with
Employers Reassurance Corporation (ERC) which reinsured 90% of
the risk on the company's
block of SPWL policies written prior to 1989. The agreement
provides that ERC assumes 90% of
all risks associated with each policy in the block. These
policies continue to be admini-
stered by American. In return, American receives an
administrative allowance of $31.50 per
policy per year. The total allowance received during the six
months ended June 30, 1994 and
1993 was $65,873 and $69,320, respectively.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Income Taxes:
_________________
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the Period
Ended June 30,
1994 1993
Current income tax expense $ 4,419 2,995
Deferred income tax expense (benefit) (1,297) 907
Total income tax expense $ 3,122 3,902
12. Contingencies:
_____________________
The company's insurance subsidiary is subject to state guaranty
association
assessments in all states in which it is admitted. Generally
these associations
guarantee specified amounts payable to residents of the state
under policies issued
by insolvent insurers. Most state laws permit assessments or some
portion thereof
to be credited against future premium taxes. Guaranty fund
assessments reduced 1993
and 1992 income before taxes by approximately $1,594,000, and
$1,834,000, respec-
tively. The company expects that further charges to income may
be required in the
future and will record such amounts when they become known.
13. Subsequent Event:
__________________________
On June 30, 1994, the company's Board of Directors voted to
repeal the Stockholders'
Rights Plan and set the close of business on July 22, 1994 as the
record date for the pay-
ment of the one cent per share redemption price. Stockholders of
record were paid on August
8, 1994, in full redemption of the rights under the plan. The
total amount to redeem the
Rights was $101,432.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
________________________________________________________________________________
General
The company specializes in the sale of SPDA products as a
retirement savings vehicle for
individuals. During each of the past three years, sales of SPDAs
have accounted for at least
92% of the company s premiums received, while sales of SPIAs and
FPDAs have accounted for
virtually all remaining premiums received.
The company's operating earnings are derived primarily from its
investment results, including
realized gains (losses), less interest credited to annuity
contracts and expenses. Under GAAP,
premiums received on SPDAs, SPIAs without life contingencies and
FPDAs are not recognized as
revenue at the time of sale. Similarly, policy acquisition costs
(principally commissions)
related to such sales are not recognized as expenses but are
capitalized as deferred acquisi-
tion costs, or "DAC". As a result of this deferral of costs and
the lack of revenue recogni-
tion for premiums received, no profit or loss is realized on
these contracts at the time of
sale. Premiums received on SPDAs, SPIAs without life
contingencies and FPDAs are reflected on
the company's balance sheet by an increase in assets equal to the
premiums received and by a
corresponding increase in future policy liabilities.
The company's earnings depend, in significant part, upon the
persistency of its annuities.
Over the life of the annuity, net investment income, net
investment gains and policy charges
are realized as revenue, and DAC is amortized as an expense. The
timing of DAC amortization is
based on the projected realization of profits including realized
gains (losses) for each type
of annuity contract and is periodically adjusted for actual
experience. If a policy is termi-
nated prior to its expected maturity, any remaining related DAC
is expensed in the current
period. Most of American's annuity policies in force have
surrender charges which are designed
to discourage and mitigate the effect of premature withdrawals.
As a result, the impact on
earnings from surrenders will depend upon the extent to which
available surrender charges off-
set the associated amortization of DAC. For the years
ended 1993, 1992 and 1991, the company's
weighted average expected surrender levels were 13.0%, 9.9% and
5.7%, compared to the weighted
average actual surrenders of 14.7%, 9.6% and 10.2%. The negative
impact on earnings of any
difference between the actual surrender levels and expected
surrender levels has been more than
offset by the realization of gains on the sale of securities and
the change in future expected
gross profits as the result of the company's reduction in
credited rates.
Recent periods of low interest rates have reduced the company s
investment yields. As a
result of the lower investment yields, the company elected to
reduce credited interest rates on
certain of its annuity products. Certain annuities issued by the
company include a "bailout"
feature. This feature generally allows policyowners to withdraw
their entire account balance
without surrender charge for a period of 45 to 60 days following
the initial determination of
a renewal crediting rate below a predetermined level. If a
policyowner elects not to withdraw
funds during this period, surrender charges are reinstated. On
policies including a "bailout"
feature, the company announces its renewal crediting rates on
January 14 of each year. In
January 1994, 1993 and 1992, the company deemed it advisable, due
to the general decline in
interest rates and the yield on its investment portfolio, to
reduce credited interest rates on
certain annuity contracts below the "bailout" level. The
aggregate account values of annuity
contracts on which the crediting rate was reduced below the
"bailout" level totalled $109.8
million, $326.2 million, and $160.4 million during 1994, 1993 and
1992, respectively. As a
result, $18.1 million, or 17%, $139.6 million, or 43%, and $34.6
million, or 22%, of such
policies were surrendered during 1994, 1993, and 1992,
respectively. The company was able to
offset the negative impact of "bailout" surrenders on its
earnings through the realization of
gains on the sale of its securities. Excluding surrenders from
"bailout" products,
American's annuity withdrawal rates were 7% in both 1993 and
1992. Although, as of
June 30, 1994, approximately $169.6 million, or 10% of annuity
account values contained a "bailout" provision, the current
credited rates on these policies are above
the "bailout" rate. The "bailout" rate on $90.0 million of this
amount is 5% or less.
If the company reduces credited rate below the "bailout" rates on
policies containing
23
"bailout" provisions in the future, it intends to pay any
resulting surrenders from cash
provided by operations and premiums received. In the event such
sources are not sufficient
to pay surrenders, the company would have to sell securities at
the then current market
prices. American expects that withdrawals on its annuity
contracts will increase as such
contracts approach maturity. There is no certainty as to the
company's ability to realize
investment gains in the future to offset the adverse impact on
earnings, should future
"bailout" surrenders were to occur.
Premiums received by the company on the sale of its annuity
products have declined and
surrenders have increased in recent years. In the years ended
December 31, 1993, 1992 and
1991, premiums received amounted to $222.2 million, $168.7
million and $219.2 million,
respectively. Management believes the decline in premiums
received during 1992 was due
primarily to the rating downgrade of American by A.M. Best in
July 1991, from "A"
(Excellent) to "A-" (Excellent) and, to a lesser extent, to
reductions in credited rates, agent and
policyholder concerns about the company's non-investment grade
bond holdings and the highly
publicized insolvencies of other life insurance companies.
Management also believes that a
general decline in interest rates and a corresponding reduction
in credited rates offered on
annuity products may have reduced the relative attractiveness of
annuities as compared with
alternative investment vehicles. Management believes that A.M.
Best ratings may have affected
the credited rates and commissions the company has had to credit
or pay to retain or attract
business relative to the credited rates and commissions credited
or paid by carriers
enjoying A+ (Superior) and A++(Superior) ratings. The company has
not materially altered the
levels of commissions paid or interest rates credited in
response to its A.M. Best ratings
downgrade from A (Excellent) to A- (Excellent). In response to
these events, the company
continued to reduce its holdings of non-investment grade
securities to less than 6% as of
June 30, 1994. In addition, the company has expanded its internal
investment management
capabilities through the addition of new personnel. The company
reduced its outstanding
indebtedness from $31.2 million at the end of 1988 to $0 million
as of December 31, 1993.
Recently, the company has augmented its capabilities for agent
recruitment through American
Sales and the establishment of relationships with additional
National Marketing
Organizations. As a result of these actions, management believes
that the company is now
better positioned to take advantage of any opportunities for the
sale of its products in the
savings and retirement market.
24
Margin Analysis
The company's earnings are impacted by realized investment
gains and losses and by the
associated amortization of DAC. The actual timing and pattern of
such amortization is determined by
the actual profitability to date (which includes realized
investment gains and losses) and the
expected future profitability on a particular annuity contract.
To the extent investment income
is accelerated through realization of investment gains, the
corresponding amortization of DAC
is also accelerated as the stream of profitability on the
underlying annuities is effectively
accelerated. When investment losses are realized, the reverse is
true. The following margin
analysis depicts the effects of realized gains (losses) on the
company's operating earnings (loss):
For the Six Months Ended June 30,
1994 1993
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1> $ 1,831.6 100.0% $ 1,710.9 100.0%
Insurance premiums and policy charges $ 2.9 .3% $ 3.5 .4%
Net investment income <F2> 69.2 7.6 68.8 8.0
Policyholder benefits (54.7) (6.0) (57.2) (6.7)
Gross interest margin 17.4 1.9 15.1 1.7
Associated amortization of deferred
acquisition costs (4.7) (.5) (6.1) (.7)
Net interest margin 12.7 1.4 9.0 1.0
Net investment gains 1.1 .1 12.7 1.5
Associated amortization of deferred
acquisition costs (.2) - (3.4) (.4)
Net margin from investment gains .8 .1 9.3 1.1
Total net margin 13.5 1.5 18.3 2.1
Expenses, net (4.3) (.5) (4.8) (.6)
Operating earnings 9.2 1.0 13.5 1.5
Interest expense - - .5 -
Earnings before income taxes 9.2 1.0 13.0 1.5
Income tax expense (benefit 3.1 .3 3.9 .5
Net earnings $ 6.1 .7% $ 9.1 1.0%
Operating earnings $ 9.2 1.0% $ 13.5 1.5%
Less: Net margin from investment gains .8 .1 9.3 1.1
Operating earnings excluding net investment
gains and associated amortization of
deferred policy acquisition costs $ 8.4 .9% $ 4.2 .4%
<FN>
<F1>Average of cash, invested assets (excluding unrealized gains (losses) on debt
securities
available-for-sale) and net amounts due to or from brokers on unsettled security
trades at
the beginning and end of period.
<F2>Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding.
25
For the Quarter Ended June 30,
1994 1993
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1> $ 1,859.0 100.0% $ 1,679.1 100.0%
Insurance premiums and policy charges $ 1.7 .4% $ 1.9 .5%
Net investment income <F2> 34.3 7.4 33.7 8.0
Policyholder benefits (27.7) (6.0) (27.6) (6.6)
Gross interest margin 8.3 1.8 8.0 1.9
Associated amortization of deferred
acquisition costs (2.6) (.6) (3.1) (.7)
Net interest margin 5.7 1.2 4.9 1.2
Net investment gains (losses) (.1) - 3.6 .9
Associated amortization of deferred
acquisition costs - - (.8) (.2)
Net margin from investment gains (losses) (.1) - 2.8 .7
Total net margin 5.6 1.2 7.7 1.9
Expenses, net (1.8) (.4) (2.2) (.5)
Operating earnings 3.8 .8 5.5 1.4
Interest expense - - .3 1
Earnings before income taxes 3.8 .8 5.2 1.3
Income tax expense (benefit) 1.3 .3 1.6 .4
Net earnings $ 2.5 .5% $ 3.6 9%
Operating earnings $ 3.8 .8% $ 5.5 1.4%
Less: Net margin from investment
gains (losses) (.1) - 2.8 .7
Operating earnings excluding net investment
gains (losses)and associated amortization
of deferred policy acquisition costs $.3.9 .8% $ 2.7 .7%
<FN>
<F1>Average of cash, invested assets (excluding unrealized gains
(losses) on debt securities
available-for-sale) and net amounts due to or from brokers on
unsettled security trades at
the beginning and end of period.
<F2>Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding.
26
Results of Operations
Six Months Ended June 30, 1994 and 1993
Insurance premiums and policy charges decreased $.6 million, or
17%, to $2.9 million in
1994 from $3.5 million in 1993, due primarily to a $.5 million
decrease in premiums received
on SPIA contracts.
Net investment income increased $.4 million, or 1% to $69.2
million from $68.8 million in
1993. This increase resulted from an increase in average invested
assets from $1,710.9
million in 1993 to $1,831.6 million in 1994, offset in part by a
reduction in the yield on
average invested assets from 8.0% for the six months ended
June 30, 1993, to 7.6% for the
six months ended June 30, 1994. The decline in yield experienced
during the first six months
of 1994 resulted in part from a $14.2 million investment in four
investment partnerships.
These partnerships lost a total of $2.3 million during the first
six months of 1994. These
partnerships along with three other partnerships form a fund of
funds totalling $26.9 million
which is structured in an attempt to consistently provide returns
in excess of the Standard
and Poors 500 over time without regard to the general direction
of financial markets. The
funds' annualized loss since inception in July 1993 was 2.7%,
compared with a cash flow
equivalent loss of 2.0% had the same amounts been invested at the
same time in the Standard
and Poors 500.
In addition to the losses experienced in the company's
partnership investments, average
yields have been impacted by declining interest rates throughout
1993 and the reinvestment at
lower yields of proceeds from securities disposed of to realize
investment gains.
Net investment gains decreased $11.6 million, to $1.1 million
in 1994, from $12.7 million
in 1993. Gains and losses may be realized upon securities which
are disposed of for various
reasons. The gains realized during 1993 were primarily taken to
reduce the effects of the
statutory losses resulting from surrenders in the first
quarter of 1993 following the
reduction of crediting rates on certain annuity policies below
the "bailout" rate. Unrealized
gains (losses) in the company's bond portfolio were ($50.4)
million, $81.4 million and $96.9
million as of June 30, 1994, December 31, 1993 and June 30, 1993,
respectively.
Benefits, claims and interest credited to policyholders
decreased $2.5 million, or 4%, to
$54.7 million in 1994 from $57.2 million in 1993. This decrease
results primarily from a
reduction in the average interest rate credited on the
company's annuity liabilities, from
6.4% as of June 30, 1993 to 5.8% as of June 30, 1994. This
decrease was partially offset by
an increase in annuity liabilities to $1,905.7 million on June
30, 1994 from $1,723.3 million
on June 30, 1993.
Amortization of deferred policy acquisition costs decreased $4.6
million, or 48%, to $5.0
million in 1994 from $9.6 million in 1993, primarily due to
decreased net investment gains
and an increase in the estimates of future expected gross profits
resulting from the lowering
of interest crediting rates. Amortization of deferred policy
acquisition costs (DAC)
associated with investment gains decreased $3.2 million to $.2
million in 1994, from $3.4 million
in 1993. Amortization of DAC associated with gross interest
margins decreased $1.4 million to
$4.7 million in 1994, from $6.1 million in 1993. Acquisition
costs incurred during 1994 and
deferred into future policy periods were $13.1 million, compared
with $7.2 million in 1993.
Interest expense decreased $.5 million, to $-0- million in 1994
from $.5 million in 1993.
The company's bank debt was paid on November 19, 1993, with
proceeds from a common stock
offering.
Income tax expense decreased $.8 million to $3.1 million in
1994 from $3.9 million in
1993. Taxes were provided at an effective rate of 34.0% on 1994
income and 30.0% on 1993
income.
27
Results of Operations
Three Months Ended June 30, 1994 and 1993
Insurance premiums and policy charges decreased $.2 million, or
11%, to $1.7 million in
1994 from $1.9 million in 1993, due primarily to a $.2 million
decrease in premiums received
on SPIA contracts.
Net investment income increased $.6 million, or 2% to $34.3
million from $33.7 million in
1993. This increase resulted from an increase in average invested
assets from $1,679.1
million in 1993 to $1,859.0 million in 1994, offset in part by a
reduction in the yield on
average invested assets from 8.0% for the quarter ended June 30,
1993, to 7.4% for the
quarter ended June 30, 1994. The decline in yield experienced
during the second quarter of 1994
resulted in part from a $19.7 million investment in four
investment partnerships. These
partnerships lost a total of $.9 million during the second
quarter of 1994. These partner-
ships along with three other partnerships form a fund of funds
totalling $26.9 million which
is structured in an attempt to consistently provide returns in
excess of the Standard and
Poors 500 over time without regard to the general direction of
financial markets. The funds'
annualized loss since inception in July 1993 was 2.7%, compared
with a cash flow equivalent
loss of 2.0% had the same amounts been invested at the same time
in the Standard and Poors
500.
In addition to the losses experienced in the company's
partnership investments, average
yields have been impacted by declining interest rates throughout
1993 and the reinvestment
at lower yields of proceeds from securities disposed of to
realize investment gains.
Net investment gains (losses) decreased $3.7 million, to a loss
of $.1 million in 1994,
from gains of $3.6 million in 1993. Gains and losses may be
realized upon securities which
are disposed of for various reasons. The gains realized during
1993 were to reduce the effects of the
statutory losses resulting from surrenders following the
reduction of
crediting rates on certain annuity policies below the bailout
rate in the first quarter of 1993.
Unrealized gains (losses) in the company's bond portfolio were
($50.4) million, $81.4
million and $96.9 million as of June 30, 1994, December 31, 1993
and June 30, 1993,
respectively.
Benefits, claims and interest credited to policyholders
increased $.1 million to $27.7
million in 1994 from $27.6 million in 1993. This increase results
primarily from an increase
in annuity liabilities to $1,905.7 million on June
30, 1994 from $1,723.3 million on June
30, 1993. This increase was partially offset by a reduction in
the average interest rate
credited on the company's annuity liabilities, from 6.4% as of
June 30, 1993 to 5.8% as of
June 30, 1994.
Amortization of deferred policy acquisition costs decreased $1.3
million, or 33%, to $2.6
million in 1994 from $3.9 million in 1993, primarily due to
decreased net investment gains
and an increase in the estimates of future expected gross profits
resulting from the lower-
ing of interest crediting rates. Amortization of deferred policy
acquisition costs (DAC)
associated with investment gains decreased $.8 million to $-0-
million in 1994, from $.8
million in 1993. Amortization of DAC associated with gross
interest margins decreased $.5
million to $2.6 million in 1994, from $3.1 million in 1993.
Acquisition costs incurred
during 1994 and deferred into future policy periods
were $6.7 million, compared with $3.5
million in 1993.
Interest expense decreased $.3 million, to $-0- million in 1994
from $.3 million in 1993.
The company's bank debt was paid on November 19, 1993, with
proceeds from a common stock
offering.
Income tax expense decreased $.3 million to $1.3 million in
1994 from $1.6 million in
1993. Taxes were provided at an effective rate of 34.0% on 1994
income and 30.0% on 1993
income.
28
Liquidity and Capital Resources
The company is an insurance holding company whose principal
asset is the common stock of
American. The company's primary cash requirements are to pay
operating expenses.
As a holding company, the company relies on funds received from
American to meet its cash
requirements at the holding company level. The company receives
funds from American in the
form of commissions paid to American Sales, investment fees paid
to AIG, rent, administra-
tive, printing and data processing charges and dividends. The
insurance laws of Kansas
generally limit the ability of American to pay cash dividends in
excess of certain amounts
without prior regulatory approval and also require that certain
agreements relating to the
payment of fees and charges to the company by American be
approved by the Kansas Insurance
Commissioner.
The liquidity and requirements of American are met by premiums
received from annuity
sales, net investment income received, and proceeds from
investments upon maturity, sale or
redemption. The primary uses of funds by American are the payment
of surrenders, policy
benefits, operating expenses and commissions, as well as the
purchase of assets for investment.
For purposes of the company's consolidated statements of cash
flows, financing activities
include premiums received from sales of SPDAs, surrenders and
death benefits paid, and
surrender and policy charges collected on these contracts. The
net cash provided by (used in)
these particular financing activities for the six months ended
June 30, 1994 and 1993, was
$21.3 million and ($138.3) million, respectively.
The increase in net cash provided by annuity contracts without
life contingencies in the
first six months of 1993 resulted primarily from a $104.0 million
decrease in surrender and
death benefits paid from $230.9 million to $126.9 million and by
a $55.5 million increase in
premiums received from $89.9 million to $145.4 million.
Net cash provided by the company's operating activities was
$61.3 million and $67.4
million in 1994 and 1993, respectively.
Cash provided by financing and operating activities and by the
sale and maturity of port-
folio investments is used primarily to purchase portfolio
investments and for the payment of
acquisition costs (commissions and expenses associated with the
sale and issue of policies).
To meet its anticipated liquidity requirements, the company
purchases investments taking into
account the anticipated future cash flow requirements of its
underlying liabilities. In
addition, the company invests a portion of its assets in
short-term investments and maturities
of less than one year (2% and 3% as of June 30, 1994 and December
31, 1993, respectively).
The weighted average duration of the company's investment
portfolio was 4.6 years as of June
30, 1994.
The company continually assesses its capital requirements in
light of business developments
and various capital and surplus adequacy ratios which affect
insurance companies. During the
past five years, the company has met its capital needs and those
of American through several
different sources including bank borrowing and the sale of
both preferred and common stock.
On December 31, 1991, the company issued 172,000 shares of its
$2.00 Series B Convertible
Preferred Stock with a total stated value of $4.3 million. The
Preferred Stock was convert-
ible at $7.50 per share into 573,332 shares of the company s
Common Stock. On December 30,
1992, the company issued and sold 235,294 shares of Common Stock
at $10.625 per share to the
company's Leveraged Employee Stock Ownership Plan ("LESOP"). This
purchase was financed with
the proceeds of a $2.5 million loan from American. For additional
information regarding the
LESOP, see Note 6 of Notes to Consolidated Financial Statements.
In 1993, the company raised
$29.4 million through the sale of 3,451,668 shares of Common
Stock.
29
Recent regulatory actions against certain large life insurers
encountering financial diffi-
culty have prompted the various state guaranty associations to
begin assessing life insurance
companies for the resulting losses. For further information
regarding the effects of guaranty
fund assessments, see Note 12 of Notes to Consolidated Financial
Statements.
Reinsurance. The company had amounts receivable under
reinsurance agreements of $150.6
million and $151.4 million as of June 30, 1994 and December 31,
1993, respectively. Of the
amounts, $148.7 million and $149.5 million, respectively, were
associated with a single
insurer, ERC. In 198 9, the company entered into a coinsurance
agreement which ceded 90% of
the risk on the company's block of SPWL written prior to 1989 to
ERC. The agreement provides
that ERC assumes 90% of all risks associated with each policy in
the block. Under the terms
of the contract the company continues to administer the policies
and is reimbursed for all
payments made under the terms of those policies. Additionally,
the company receives a fee
from the reinsurer for administering such policies. Cash
settlements under the contract are
made with ERC on a monthly basis. If ERC were to become
insolvent, American would remain
responsible for the payment of all policy liabilities.
In addition, the company is a party to two assumption reinsurance
agreements with other
reinsurers.
Effect of Inflation and Changes in Interest Rates. The company
does not believe that
inflation has had a material effect on its consolidated results
of operations during the
past three years. The company seeks to manage its investment
portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the market
value of the company's fixed
income securities increases or decreases directly with interest
rate changes. For example, if
interest rates decline (as was the case in 1992 and 1993), the
company's fixed income
investments generally will increase in market value, while net
investment income
will decrease.
In a rising interest rate environment, the company's average cost
of funds would increase
over time as it prices its new and renewing annuities to maintain
a generally competitive
market rate. During such a rise in interest rates, new funds
would be invested in bonds with
higher yields than the liabilities assumed. In a declining
interest rate environment, the
company's cost of funds would decrease over time, reflecting
lower interest crediting rates
on its fixed annuities.
30
PART II. OTHER INFORMATION
AMVESTORS FINANCIAL CORPORATION
Item 1. Legal Proceedings
________________________________
The company has no material legal proceedings pending against
it.
Item 2. Changes in Securities
_____________________________________
For a description of the Stockholders Rights Plan, see Note 8 of
Notes to consolidated
Financial Statements which is incorporated herein by reference.
Item 3. Defaults upon Senior Securities
_________________________________________________
None
Item 4. Submission of Matters to a Vote of Security Holders
________________________________________________________________
The annual meeting of the stockholders of the company was held
May 19, 1994. The following
Directors were elected at the annual meeting:
Janis L. Andersen
Mark V. Heitz
Robert T. McElroy, M.D.
The names of the other Directors whose terms of office as
Directors continued after the meet-
ing were as follows:
Robert G. Billings
Jack H. Brier
Ralph W. Laster, Jr.
R. Rex Lee, M.D.
Robert R. Lee, II
James V. O'Donnell
At the annual meeting, a proposal to approve the 1994 Stock
Purchase Plan for Non-Employee
Directors passed with 8,391,732 shares voting in favor, 297,585
shares voting against and
56,906 shares abstaining.
Item 5. Other Information
________________________________
None
Item 6. Exhibits and Reports on Form 8-K
___________________________________________________
(a)Exhibits (numbered in accordance with Item 601 of
Regulations S-K).
Exhibit Page Number or Incorporation
Number Description by Reference
(2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration
July 10, 1986, between AmVestors FormS-2, File #2-82811
Financial Corporation and American dated November 26, 1986.
Investors Life Insurance Company,
Inc.
(2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q
Directors dated January 7, 1988, dated May 11, 1988.
providing for succession to the
position of Chairman of the Board
of Directors
31
Exhibit Page Number or Incorporation
Number Description by Reference
(4)(a) Rights Agreement dated as of Exhibit (1) to Form 8-K
August 4, 1988, between AmVestors dated August 10, 1988.
Financial Corporation and The
Merchants Bank, which includes the
form of Certificate of Designation
setting forth the terms of the
series A Junior Participating
Preferred Stock, $1.00 par value per
share, as Exhibit A, the form of
Right Certificate as Exhibit B and
the Summary of Rights to Purchase
Preferred Stock as Exhibit C
(4)(b) Specimen Common Stock Certificate Exhibit (4)(d) to Form 10-Q
dated August 13, 1993.
(11) Calculation of Earnings (Loss) per Share P 34
(20)(a) Reports on Form 8-K
There were no reports on Form 8-K for
the three months ended June 30, 1994
(22) Wholly-owned subsidiaries of the registrant:
American Investors Life Insurance
Company, Inc.
415 Southwest Eighth Avenue
Topeka, Kansas 66603
American Investors Sales Group, Inc.
(formerly Gateway Corporation)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
AmVestors Investment Group, Inc.
(formerly American Investors Sales
Group, Inc.)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
Omni-Tech Medical, Inc.
6206 Southwest Ninth Terrace
Topeka, Kansas 66615
32
Signatures
_____________________________
Pursuant to the requirements of Section 13 or 15 (d) 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.
AMVESTORS FINANCIAL CORPORATION
By: /c/Ralph W. Laster, Jr.
____________________________
Ralph W. Laster, Jr.
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer
and Chief Financial Officer)
(Principal Accounting Officer)
Date: August 15, 1994
________________
33
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
CALCULATION OF EARNINGS (LOSS) PER SHARE
(000's Omitted, except per share data)
For the Six Months Ended For the Quarter Ended
June 30, June 30, 1994
CALCULATION OF PRIMARY EARNINGS
PER SHARE
Net earnings $ 6,025 9,104 2,453 3,614
Less dividends on preferred
stock - (159) - (75)
Earnings for primary earnings
per share $ 6,025 8,945 2,453 3,539
Average number of common shares
outstanding 10,143 6,087 10,143 6,094
Dilutive effect of stock options
and warrants after application
of treasury stock method 220 351 199 324
Average number of common shares
and common equivalents
outstanding 10,363 6,438 10,342 6,418
Primary earnings per share $ .58 1.39 .24 .55
CALCULATION OF FULLY DILUTED
EARNINGS PER SHARE
Earnings for fully diluted
earnings per share $ 6,025 9,104 2,453 3,614
Shares used in calculating
primary earnings per share 10,363 6,438 10,339 6,418
Shares resulting from assumed
conversion of preferred stock - 499 - 499
Additional dilutive effect of
stock options and warrants after
application of treasury stock
method - - 11 -
Average number of common shares
outstanding on a fully diluted
basis 10,363 6,937 10,350 6,917
Fully diluted earnings per share $ .58 1.31 .24 .52
34