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 Nine Months Ended September 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 September 30, 1994
_______ ______________________________
Common Stock, no par value 10,132,842 shares
AMVESTORS FINANCIAL CORPORATION
INDEX
PART I. Financial Information: Page Number
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993 2-3
Consolidated Statements of Earnings
Nine months ended September 30, 1994 and 1993 4
Consolidated Statements of Earnings
Three months ended September 30, 1994 and 1993 5
Consolidated Statements of Stockholders' Equity
Twelve months ended December 31, 1993 and
Nine months ended September 30, 1994 6
Consolidated Statements of Cash Flows -
Nine months ended September 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 31-32
1
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1994 and December 31, 1993
(000's Omitted)
(Unaudited)
ASSETS 1994 1993
Investments:
Debt securities:
Bonds:
Held-to-maturity (market $1,185,620 and
$1,104,914) $ 1,253,538 1,066,583
Available-for-sale (cost $601,040 and market
$705,738) 600,221 662,696
Preferred stock with mandatory redemption
requirements, available-for-sale
(cost $151 and market $177) 143 184
1,853,902 1,729,463
Equity securities, available-for-sale:
Common stock (cost $2,259 and $2,968) 2,552 3,036
Preferred stock (cost $45 and $662) 25 876
2,577 3,912
Other long-term investments 42,677 39,880
Short-term investments 624 1,911
1,899,780 1,775,166
Less allowance for credit losses (2,500) (2,500)
Total investments 1,897,280 1,772,666
Cash and cash equivalents 9,135 21,782
Accounts receivable (net of allowance
for uncollectible accounts of $403 and $348) 893 819
Amounts receivable under reinsurance agreements 150,042 151,392
Amounts receivable on securities settlements
in process 600 1,203
Accrued investment income 27,077 26,544
Deferred policy acquisition costs 140,277 128,671
Deferred income taxes 9,438 8,622
Other assets 3,733 2,997
Total assets $ 2,238,475 2,114,696
See notes to consolidated financial statements.
2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 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 $ 2,121,645 2,005,339
Other policy liabilities 3,798 4,948
2,125,443 2,010,287
Amounts due on securities settlements in process - 2,208
Accrued expenses and other liabilities 3,232 4,064
Total liabilities 2,130,883 2,014,351
Commitments and contingencies - -
Stockholders' equity:
Common stock, no par value, authorized -
25,000,000 shares; issued - 10,152,842 shares
in 1994 and 10,142,842 shares in 1993 12,919 12,907
Paid in capital 64,434 64,612
Unrealized investment gains (losses) (net of
deferred policy acquisition cost amortization
expense (benefit) of $387 and $-0- and deferred
income tax expense (benefit) of $(329) and $548) (612) 1,064
Retained earnings 34,449 25,183
111,190 103,766
Less treasury stock, at cost, 20,000 shares (177) -
Less leveraged employee stock ownership trust
(LESOP) (3,421) (3,421)
Total stockholders' equity 107,592 100,345
Total liabilities and stockholders' equity $ 2,238,475 2,114,696
See notes to consolidated financial statements.
3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Nine months ended September 30, 1994 and 1993
(000's Omitted, except per share data)
(Unaudited)
1994 1993
Revenue:
Insurance premiums and policy charges $ 4,831 5,082
Net investment income 105,361 103,018
Net investment gains 328 15,263
Other revenue 443 259
Total revenue 110,963 123,622
Benefits and expenses:
Benefits, claims and interest credited
to policyholders 83,198 85,428
Amortization of deferred policy acquisition
costs 7,524 10,162
General insurance expenses 5,301 6,538
Premium and other taxes, licenses and fees 748 457
Other expenses 176 198
Total benefits and expenses 96,947 102,783
Operating earnings 14,016 20,839
Interest expense - 843
Earnings before income tax expense 14,016 19,996
Income tax expense 4,750 6,399
Net earnings $ 9,266 13,597
Earnings per share of common stock:
Primary:
Net earnings $ .90 2.08
Fully diluted:
Net earnings $ .89 1.96
Average shares outstanding:
Primary 10,352 6,424
Fully diluted 10,358 6,938
See notes to consolidated financial statements.
4
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended September 30, 1994 and 1993
(000's Omitted, except per share data)
(Unaudited)
[CAPTION]
1994 1993
Revenue:
Insurance premiums and policy charges $ 1,886 1,557
Net investment income 36,198 34,193
Net investment gains (losses) (727) 2,517
Other revenue 162 69
Total revenue 37,519 38,336
Benefits and expenses:
Benefits, claims and interest credited
to policyholders 28,519 28,192
Amortization of deferred policy acquisition
costs 2,530 608
General insurance expenses 1,361 2,104
Premium and other taxes, licenses and fees 216 81
Other expenses 60 60
Total benefits and expenses 32,686 31,045
Operating earnings 4,833 7,291
Interest expense - 301
Earnings before income tax expense 4,833 6,990
Income tax expense 1,628 2,497
Net earnings $ 3,205 4,493
Earnings per share of common stock:
Primary:
Net earnings $ .31 .69
Fully diluted:
Net earnings $ .31 .65
Average shares outstanding:
Primary 10,347 6,390
Fully diluted 10,354 6,913
See notes to consolidated financial statements.
5
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-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 upon - 4,392 25,014 - - - - 29,406
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-December 31, 1993 - 12,907 64,612 1,064<F1> 25,183 - (3,421) 100,345
Net earnings - - - - 9,266 - - 9,266
Expenses related to 1993
stock offering - - (134) - - - - (134)
Cumulative effect of
adoption of SFAS 115 on
January 1, 1994 - - - 19,613 - - - 19,613
Decrease in unrealized
investment gains - - - (21,289) - - - (21,289)
Issuance of common stock upon
exercise of options - 12 58 - - - - 70
Purchase of treasury stock - - - - - (177) - (177)
Redemption of stockholders
rights plan - - (102) - - - - (102)
Balance-September 30,
1994 $ - 12,919 64,434 (612) 34,449 (177) (3,421) 107,592
<F3> <F4>
<FN>
<F1> Net of deferred income taxes of $548.
<F2> Net of income tax benefit of $441.
<F3> Net of deferred income tax expense (benefit) of $(329).
<F4> Net of amortization of deferred policy acquisition cost of $387.
See notes to consolidated financial statements.
6
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash and Cash Equivalents
Nine months ended September 30, 1994 and 1993 (000's Omitted) (Unaudited)
[CAPTION]
1994 1993
Operating Activities:
Net earnings $ 9,266 13,597
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Interest credited to policyholders 84,935 87,503
Depreciation 337 402
Amortization of (discounts) premiums on debt
securities, net (2,062) (1,514)
Amortization of deferred policy acquisition costs 7,524 10,162
Net investment (gains) losses (328) (15,263)
Accrued investment income (533) (1,186)
Deferred income taxes (486) 1,452
Accrued expenses and other liabilities (832) 945
Other, net (654) 2,161
Net cash provided by operating activities 97,167 98,259
Investing Activities:
Purchases of debt securities (511,406) (455,408)
Proceeds from sale of debt securities 284,710 319,367
Proceeds from maturation of debt securities 105,579 105,164
Purchases of long-term investments (12,275) (16,266)
Principal collected on long-term investments 8,255 2,768
Policy loans originated (1,031) (1,167)
Principal collected on policy loans 852 1,096
Short-term investments, net 1,287 1,026
Capitalization of deferred policy acquisition costs (19,517) (12,618)
Other, net (306) (650)
Net cash provided by (used in) investing
activities (143,852) (56,688)
Financing Activities:
Premiums received 206,889 157,329
Surrender and death benefits paid (181,223) (272,708)
Surrender and risk charges collected 4,199 3,816
Amount due on securities settlements in process 2,811 (6,951)
Payments on notes payable - (6,002)
Cash dividends to stockholders - (236)
Purchase of treasury stock (177) -
Redemption of stockholders rights plan (102) -
Issuance of common stock (64) 1,807
Other, net 1,705 (2,216)
Net cash provided by (used in) financing
activities 34,038 (125,161)
Increase (Decrease) in Cash and Cash Equivalents (12,647) (83,590)
Cash and Cash Equivalents:
Beginning of year 21,782 93,050
End of period $ 9,135 9,460
Supplemental schedule of cash flow information:
Income tax payments $ 5,305 204
Interest payments $ - 772
Net unrealized investment gains (losses) on
available-for-sale securities $ (554) -
Less: Associated amortization of deferred policy
acquisition costs 387 -
Deferred income tax expense (benefit) (329) -
Net unrealized investment gains available for sale $ (612) -
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 September 30, 1994 and December 31, 1993 and the
statements of earnings and the statements of cash flows for the nine month
periods ended September 30, 1994 and 1993.
c. Investments:
Debt securities held-to-maturity are carried at amortized cost, except that
those securities with an other than temporary impairment in value are carried
at estimated net realizable 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 source such as broker dealers or the company's independent
investment advisor. Such amounts represent an estimate of the consideration
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 partnership investments which are carried at an
amount equal to the company's share of the partnerships' estimated market
value with any unrealized gains or losses recorded in net investment income.
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 judgment is required to interpret market data to develop
the estimates of fair value, the estimates 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
instruments as of September 30, 1994 were as follows:
(000's Omitted)
Carrying Fair
Value Value
Assets
Debt securities $ 1,853,902 1,785,984
Equity securities 2,577 2,577
Other long-term investments 42,677 42,746
Short-term investments 624 624
Cash and cash equivalents 9,135 9,135
Amounts receivable on securities
settlements in process 600 600
Accounts receivable and accrued
investment income 27,970 27,970
Liabilities:
Future policy benefits - investment
contracts 1,891,256 1,774,110
Other policy liabilities 3,798 3,798
Amounts due on securities
settlement in process 2,208 2,208
Accrued expenses and other
liabilities 3,232 3,232
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, adjusted 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.
Amounts receivable on securities settlements in process - The carrying amount
reported in the balance sheet approximates the fair value of this asset.
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 material 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 relation 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 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 withdrawals as are used to calculate the reserves for future
benefits.
Determination of expected gross profits includes managements' best estimate of
certain elements over the life of the contracts, including anticipated excess
investment income, surrender 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 management, 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 nine months of 1994 and 1993 resulted
in the company experiencing investment margins greater than those estimated.
As a result, $78,480 and $4,192,438 of the unamortized balance of deferred
policy acquisition costs were expensed in the nine months ended September 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 related contracts.
Estimates of the expected gross profits to be realized in future years include
the anticipated 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 estimated 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
consolidated 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 statements 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 outstanding 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 accounting 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 $19,612,653, 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 September 30,
1994 were not affected by the adoption of this Statement.
m. Reclassifications:
Certain reclassifications have been made to conform the September 30, 1993 and
December 31, 1993 consolidated financial statements to the September 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 September 30,
1994 1993
Debt securities $ 105,999 102,232
Equity securities 38 65
Other long-term investments (261) 1,232
Short-term investments 642 826
Other 330 171
106,748 104,526
Less investment expenses 1,387 1,508
Net investment income $ 105,361 103,018
Net investment gains (losses):
Debt securities $ (252) 15,467
Equity securities 580 (204)
Net investment gains (losses) $ 328 15,263
The maturity of the company's debt and equity securities portfolio as of
September 30, 1994 was as follows:
(000's Omitted)
As of September 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............. $ 1,324 1,336 25,118 23,031
Two years through five years. 159,732 157,383 211,485 213,838
Six years through ten years.. 921,016 870,299 230,085 230,548
Eleven years and after....... 171,466 156,602 134,352 132,804
1,253,538 1,185,620 601,040 600,221
Preferred stock with mandatory
redemption requirements..... - - 151 143
Equity securities............. - - 2,304 2,577
$ 1,253,538 1,185,620 603,495 602,941
These tables include mortgage-backed securities based on the estimated future
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 September 30, 1994, and December 31, 1993
were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
Value Gains Losses Value
September 30, 1994
__________________
Bonds held-to-maturity:
Corporate debt obligations
Investment grade $ 808,044 3,776 52,478 759,342
High-yield 136,052 416 6,644 129,824
944,096 4,192 59,122 889,166
U.S. Treasury obligations 3,627 1 268 3,360
Mortgage-backed securities 305,815 114 12,835 293,094
Bonds held-to-maturity 1,253,538 4,307 72,225 1,185,620
Bonds available-for-sale:
Corporate debt obligation
Investment grade 219,673 3,236 1,170 221,739
High-yield 3,212 - 162 3,050
222,885 3,236 1,332 224,789
U.S. Treasury obligations - - - -
Mortgage-backed securities 378,155 3,019 5,742 375,432
Bonds available-for-sale 601,040 6,255 7,074 600,221
Total bonds 1,854,578 10,562 79,29 1,785,841
Preferred stock with mandatory
redemption requirements
available-for-sale 151 - 8 143
Equity securities
available-for-sale 2,304 502 229 2,577
$ 1,857,033 11,064 79,536 1,788,561
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 35,502 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-maturity 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
September 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
collection 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 September 30, 1994, and December 31,
1993 were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
September 30, 1994 Value Gains Losses Value
__________________
Government agency mortgage-backed securities:
Planned amortization classes $ 75,540 314 3,739 72,115
Targeted amortization classes and
accretion directed classes 7,708 - 139 7,569
Sequential classes 10 - - 10
Pass-throughs 45 3 - 48
Total government agency
mortgage-backed securities 83,303 317 3,878 79,742
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes 418,372 1,506 8,538 411,340
Sequential classes 19,783 9 408 19,384
Pass-throughs 308 2 - 310
Total government sponsored enterprise
mortgage-backed securities 438,463 1,517 8,946 431,034
Other mortgage-backed securities:
Planned amortization classes 23,467 50 210 23,307
Sequential classes 128,162 1,248 3,436 125,974
Pass-throughs 13 1 - 14
Subordinated classes 10,562 - 2,107 8,455
Total other mortgage-backed securities 162,204 1,299 5,753 157,750
Total mortgage-backed securities $ 683,970 3,133 18,577 668,526
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 prepayments
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 21.7% and
22.1% of the book value of the company's mortgage-backed securities as of
September 30, 1994 and December 31, 1993, respectively, are sensitive to this
prepayment risk.
A portion of the company's mortgage-backed securities portfolio consists of
planned amortization class ("PAC"), targeted amortization class ("TAC") and
accretion directed class ("AD") instruments. These securities are designed to
amortize in a more predictable manner by shifting the primary risk
of prepayment to investors in other tranches (support classes) of the
mortgage-backed security. PAC, TAC and AD securities comprised 76.8% and
76.3% of the book value of the company's mortgage-backed securities as of
September 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 September 30, 1994, 76.3% 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 $13,114 as
of September 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
estimates 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
September 30,
1994 1993
Consideration received $ 400,561 344,543
Book value 400,233 329,045
Net investment gains (losses) $ 328 15,498
Investment gains $ 3,388 15,751
Investment losses (3,060) (253)
Net investment gains (losses) $ 328 15,498
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 (106,249) (43,862) (9) (1,330)
Balance as of September 30, 1994 $(67,918) (827) 273 -
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
___________________________
At September 30, 1994 and December 31, 1993, investments with statutory carrying
values of $1,866,857,134 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 renegotiated to provide
for interest to be at a rate of 7.5% and a final payment due January 10,
2008. The outstanding principal balance on this loan was
$17,448 and $205,059 as of September 30, 1994 and December 31, 1993,
respectively.
4. Other Assets:
________________
Other assets consist of the following:
(000's Omitted)
September 30, December 31,
1994 1993
Property and equipment at cost:
Home office building (including land of $352) $ 2,121 2,113
Furniture and equipment 3,424 3,328
Automobiles 114 100
5,659 5,541
Less accumulated depreciation 3,217 3,174
2,442 2,367
Other 1,291 630
$ 3,733 2,997
5. Reinsurance:
_______________
The company reinsures portions of the insurance risk it writes. The maximum
amount of risk retained by the company on any one life is $150,000.
A summary of reinsurance data follows (000's Omitted):
For the Ceded to Assumed
Period Gross other from other Net Descriptions
Ended Descriptions amount companies companies amount
___________ _________________________ __________ _____________ ______________ ____________
September Life insurance in force..$ 336,808 264,858 - 71,950
30, 1994 Insurance premiums and
policy charges ... $ 5,558 727 - 4,831
September Life insurance in force. $ 360,429 285,601 - 74,828
30, 1993 Insurance premiums and
policy charges ... $ 5,941 859 - 5,082
September Future policy benefits.. $2,121,645 149,293 - 1,972,352
30, 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 $150,042,191
and $151,392,088 as of September 30, 1994, and December 31, 1993,
respectively. Of the amounts, $148,286,573 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)
September 30, December 31,
1994 1993
Reserve for future policy benefits $ 147,625 148,712
Reimbursement for benefit payments and
administrative allowance 662 757
$ 148,287 149,469
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 nine months ended September 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 installments through December 30, 2002. The note had
unpaid principal balance of $3,639,922 as of September 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 $419,010, and $454,424, for the nine months
ended September 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 plans also call for a
mandatory retirement on the date the Director's term expires following age 70.
As of September 30, 1994, five of the company's directors qualified for
benefits under the plan. A liability in the amount of $550,762, representing
the present value of future benefits, has been established. Earnings for the
nine months ended September 30, 1994 reflect a benefit of $10,662
relating to the plans, while 1993 nine months reflect an expense of $15,313.
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 nine months
ended September 30, 1994 and 1993 were $146,277 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
statutory basis, paid-in capital stock and surplus (capital in
excess of par value and unassigned surplus) of $100,000 each. As
of September 30, 1994 and December 31, 1993 American's statutory capital and
surplus was $90,999,944 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 827,037 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
September 30, December 31,
1994 1993
Options outstanding, beginning of period 816,107 757,340
Options granted 50,000 413,000
Options exercised (10,000) (227,561)
Options expired (19,070) (126,659)
Options cancelled (10,000) (13)
Options outstanding, end of period 827,037 816,107
Outstanding options exercisable at
end of period 460,037 403,107
Shares reserved for future grants
at end of period 177,247 145,677
Option prices per share:
Exercised, during the period $ 7.03 $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, exercisable 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
September December
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 nine months ended September 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 authorizes a maximum 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 Trust 12/8/88 75,000 $ 3.9688 12/9/98
Company of New York
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 preferred 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" transactions, 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
equivalent 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.
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 payment 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.
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 administered by
American. In return, American receives an administrative allowance of
$31.50 per policy per year. The total allowance received during the nine months
ended September 30, 1994 and 1993 was $98,148 and $103,317, 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 September 30,
1994 1993
Current income tax expense $ 5,236 5,168
Deferred income tax expense (benefit) (486) 1,231
Total income tax expense $ 4,750 6,399
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, respectively. The
company expects that further charges to income may be required in the future
and will record such amounts when they become known.
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 acquisition costs, or "DAC". As a result of this deferral
of costs and the lack of revenue recognition 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 (losses) 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 terminated 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 offset 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,
$18.3 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
September 30, 1994, approximately $176.5 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
$92.1 million of this amount is 5% or less. If the company reduces credited
rate below the "bailout" rates on policies
23
containing "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 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 8% as of September 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:
For the Nine Months Ended September 30,
1994 1993
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1> $ 1,850.6 100.0% $ 1,738.5 100.0%
Insurance premiums and policy charges $ 4.8 .3% $ 5.1 .4%
Net investment income <F2> 105.4 7.6 103.0 7.9
Policyholder benefits (83.2) (6.0) (85.4) (6.5)
Gross interest margin 27.0 1.9 22.7 1.8
Associated amortization of deferred
acquisition costs (7.4) (.5) (6.0) (.5)
Net interest margin 19.6 1.4 16.7 1.3
Net investment gains .3 - 15.3 1.2
Associated amortization of deferred
acquisition costs (.1) - (4.2) (.3)
Net margin from investment gains .2 - 11.1 .9
Total net margin 19.8 1.4 27.8 2.2
Expenses, net (5.8) (.4) (6.9) (.5)
Operating earnings 14.0 1.0 20.9 1.7
Interest expense - - .8 .1
Earnings before income taxes 14.0 1.0 20.0 1.6
Income tax expense 4.7 .3 6.4 .5
Net earnings $ 9.3 .7% $ 13.6 1.1%
Operating earnings $ 14.0 1.0% $ 20.9 1.7%
Less: Net margin from investment gains .2 - 11.1 .9
Operating earnings excluding net
investment gains and associated
amortization of deferred policy
acquisition costs $ 13.8 1.0% $ 9.8 .8%
<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 September 30,
1994 1993
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1> $ 1,886.5 100.0% $ 1,703.3 100.0%
Insurance premiums and policy charges $ 1.9 .4% $ 1.6 .4%
Net investment income <F2> 36.2 7.7 34.2 8.0
Policyholder benefits (28.5) (6.0) (28.2) (6.6)
Gross interest margin 9.6 2.1 7.6 1.8
Associated amortization of deferred
acquisition costs (2.7) (.6) .2 -
Net interest margin 6.9 1.5 7.8 1.8
Net investment gains (losses) (.7) (.1) 2.5 .6
Associated amortization of deferred
acquisition costs (.2) - (.8) (.2)
Net margin from investment gains (losses) (.5) (.1) 1.7 .4
Total net margin 6.4 1.4 9.5 2.2
Expenses, net (1.5) (.3) (2.2) (.5)
Operating earnings 4.8 1.0 7.3 1.7
Interest expense - - .3 .1
Earnings before income taxes 4.8 1.0 7.0 1.6
Income tax expense 1.6 .3 2.5 .5
Net earnings $ 3.2 .7% $ 4.5 1.1%
Operating earnings $ 4.8 1.0% $ 7.3 1.7%
Less: Net margin from investment
gains (losses) (.5) (.1) 1.7 .4
Operating earnings excluding net investment
gains (losses) and associated amortization
of deferred policy acquisition costs $ 5.3 1.1% $ 5.6 1.3%
<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
Nine Months Ended September 30, 1994 and 1993
Net investment income increased $2.4 million, or 2%, to $105.4 million from
$103.0 million in 1993. This increase resulted from an increase in average
invested assets from $1,738.5 million in 1993 to $1,850.6 million in 1994,
offset in part by a reduction in the yield on average invested
assets from 7.9% for the nine months ended September 30, 1993, to 7.6% for
the nine months ended September 30, 1994. The decline in yield experienced
during the first nine months of 1994 resulted in part from an investment in
investment partnerships. These partnerships form a fund of funds
totalling $23.5 million on September 30, 1994 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. This fund lost a total of $1.5 million during the first nine months
of 1994. The fund's annualized loss since inception in July 1993 was .9%,
compared to a cash flow equivalent loss of 11.8% had the same amounts
been invested at the same time in 10 year treasury bonds, or a 1.2%
gain had the funds been invested 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 $15.0 million, to $.3 million in 1994, from $15.3
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 ($68.7) million, $81.4
million and $113.6 million as of September 30, 1994, December 31, 1993 and
September 30, 1993, respectively.
Benefits, claims and interest credited to policyholders decreased $2.2
million, or 3%, to $83.2 million in 1994 from $85.4 million in 1993. This
decrease results primarily from a reduction in the average interest rate
credited on the company's annuity liabilities, from 6.3% as of September
30, 1993 to 5.8% as of September 30, 1994. This decrease was
partially offset by an increase in annuity liabilities to $1,944.1 million on
September 30, 1994 from $1,777.3 million on September 30, 1993.
Amortization of deferred policy acquisition costs decreased $2.7 million, or
26%, to $7.5 million in 1994 from $10.2 million in 1993. Amortization of
deferred policy acquisition costs (DAC) associated with investment gains
decreased $4.1 million to $.1 million in 1994 on $.3 million of gains, from
$4.2 million in 1993 on $15.3 million of gains. Amortization of DAC
associated with gross interest margins increased $1.4 million to
$7.4 million in 1994 on $.3 million of gains, from $6.0 million in 1993.
Acquisition costs incurred during 1994 and deferred into future policy
periods were $19.5 million, compared with $12.6 million in 1993.
General insurance expenses decreased $1.2 million, or 18%, to $5.3 million in
1994 from $6.5 million in 1993. This decrease is attributable to an increase
of $1.4 million increase in the amount of policy acquisition related expenses
deferred, from $1.3 million in 1993 to $2.7 million in 1994, related to the
company's increased recruiting and marketing efforts during 1994. Management
believes these efforts are responsible for the more than 35% increase in
premiums written during the first nine months of 1994 when
compared with the same period of 1993.
Interest expense decreased $.8 million, to $-0- million in 1994 from $.8
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 $1.6 million to $4.8 million in 1994 from $6.4
million in 1993. Taxes were provided at an effective rate of 34% on 1994
income and 32% on 1993 income.
27
Results of Operations
Three Months Ended September 30, 1994 and 1993
Insurance premiums and policy charges increased $.3 million, or 19%, to $1.9
million in 1994 from $1.6 million in 1993, due primarily to a $.4 million
increase in surrender charges received on SPDA's.
Net investment income increased $2.0 million, or 6%, to $36.2 million from
$34.2 million in 1993. This increase resulted from an increase in average
invested assets from $1,703.3 million in 1993 to $1,886.5 million in 1994,
offset in part by a reduction in the yield on average invested
assets from 8.0% for the quarter ended September 30, 1993, to 7.7% for the
quarter ended September 30, 1994. Average yields have been impacted by
declining interest rates throughout 1993 and the reinvestment at lower yields
of proceeds from securities disposed of to realized investment gains. In
addition, third quarter yields were down as a result of an investment in
investment partnerships. These partnerships form a fund of funds totalling $23.5
million on September 30, 1994 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.
This fund had income of $.3 million for the quarter ended September 30,
1994. On an annualized basis this represents a return of 5.3%, compared to a
cash flow equivalent loss of 4.5% had the same amounts been invested at the
same time in 10 year treasury bonds, or a 15.5% gain had the funds been
invested in the Standard and Poors 500.
Net investment gains (losses) decreased $3.2 million, to a loss of $.7
million in 1994, from gains of $2.5 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 ($68.7) million, $81.4 million and $113.6 million as of
September 30, 1994, December 31, 1993 and September 30, 1993, respectively.
Benefits, claims and interest credited to policyholders increased $.3 million
to $28.5 million in 1994 from $28.2 million in 1993. This increase results
primarily from an increase in annuity liabilities to $1,944.1 million on
September 30, 1994 from $1,777.3 million on September 30, 1993. This increase
was partially offset by a reduction in the average interest rate
credited on the company's annuity liabilities, from 6.3% as of
September 30, 1993 to 5.8% as of September 30, 1994.
Amortization of deferred policy acquisition costs increased $1.9 million, to
$2.5 million in 1994 from $.6 million in 1993. Amortization of deferred
policy acquisition costs (DAC) associated with investment gains (losses)
decreased $1.0 million to a benefit of $.2 million in 1994 on losses
of $.7 million, from $.8 million in 1993 on $2.5 million of gains.
Amortization of DAC associated with gross interest margins increased $2.9
million to $2.7 million in 1994, from a benefit of $.2 million in 1993. The
period to period increase was primarily due to an increase during the quarter
ended September 30, 1993, in the estimates of future expected gross
profits resulting from the lowering of interest crediting rates
during that quarter. Acquisition costs incurred during 1994 and deferred into
future policy periods were $6.4 million, compared with $5.4 million in 1993.
General insurance expenses decreased $.7 million, or 33%, to $1.4 million in
1994 from $2.1 million in 1993. This decrease is attributable to an $.7
million increase in the amount of policy acquisition related expenses
deferred, from $.5 million in 1993 to $1.2 million in 1994, related
to the company's increased recruiting and marketing efforts during
1994. Management believes these efforts are responsible for the more than 35%
increase in premiums written during the first nine months of 1994 when
compared with the same period of 1993.
28
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 $.9 million to $1.6 million in 1994 from $2.5
million in 1993. Taxes were provided at an effective rate of 34% on 1994
income and 36% on 1993 income.
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, administrative, 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 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 nine months ended September 30, 1994 and 1993, was $29.9
million and ($111.6) million, respectively.
The increase in net cash provided by annuity contracts without life
contingencies in the first nine months of 1993 resulted primarily from a
$91.5 million decrease in surrender and death benefits paid from $272.7
million to $181.2 million and by a $49.6 million increase in
premiums received from $157.3 million to $206.9 million.
Net cash provided by the company's operating activities was $97.2 million and
$98.3 million in 1994 and 1993, respectively.
Cash provided by financing and operating activities and by the sale and
maturity of portfolio 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 September 30, 1994 and December 31, 1993, respectively). The
weighted average duration of the company's investment portfolio was 4.8 years
as of September 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
29
preferred Stock with a total stated value of $4.3 million. The Preferred Stock
was convertible 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.
Recent regulatory actions against certain large life insurers
encountering financial difficulty 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 $150.0 million and $151.4 million as of September 30, 1994 and December
31, 1993, respectively.
Of the amounts, $148.3 million and $149.5 million, respectively, were associated
with a single insurer, ERC. In 1989, 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 ERC's share of 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
_______________________________________________________________
None
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 Form S-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
(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
31
Exhibit Page Number or Incorporation
Number Description by Reference
(4)(b) Specimen Common Stock Certificate Exhibit (4)(d) to Form 10-Q
dated August 13, 1993.
(10)(a) Employment Agreement dated PP 34-46
October 3,1994, between the company
and Ralph W. Laster, Jr.
(10)(b) Bonus Compensation Agreement dated PP 47-56
September 30, 1994, between the
company and Ralph W. Laster, Jr.
(10)(c) Bonus Compensation Agreement dated PP 57-66
September 30, 1994, between the
company and Mark V. Heitz
(11) Calculation of Earnings (Loss) per Share P 67
(20)(a) Reports on Form 8-K
There were no reports on Form 8-K for
the three months ended September 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
(27) Financial Data Schedule
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: November 10, 1994
___________________
33