SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1993
For fiscal year ended
December 31, 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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock*
Title of class
*Report being filed pursuant to Section 13 of the act.
Indicate by check mark whether the registrant (2) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to the Form 10-K.
The aggregate market value (based upon the last sale price as quoted by
the New York Stock Exchange on March 17, 1995) of the shares held by
non-affiliates was approximately $100,780,000.
As of March 17, 1995, there were 10,035,609 shares of the
registrant's common stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Proxy Statement - Annual Meeting of Part III, Items 10, 12 and 13
Stockholders to be held May 18, 1995
PART 1
Item 1. Description of Business
____________________________________
Item 1. (a) General Development of Business
__________________________________________________
AmVestors Financial Corporation (AmVestors or the company) is an
insurance holding company whose subsidiaries are 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). AmVestors was incorporated in 1986 to serve as a
holding company for all of the common stock of American.
American specializes in the sale of annuity products throughout the
United States. Single premium deferred annuities ("SPDA") accounted for
approximately 78% of all premiums received by the company in 1994. Other
products offered include single premium immediate annuities ("SPIA") and
flexible premium deferred annuities ("FPDA"). As of December 31, 1994, the
company had total annuity contracts in force of $2.0 billion.
The company designs its products and directs its marketing efforts
towards the savings and retirement market. U.S. Census Bureau statistics
indicate that the pre-retirement segment of this market, ages 45 to 64,
("preretirement market") is the fastest growing age group in the country and
also project a 30% increase in the number of individuals in this age group
during the 1990s. Historically, the 50 and older age group has accounted for
over 80% of all annuity premiums received by the company and, to date, the
average premium received by it per annuity contract has been approximately
$22,000. The company continues to target this age group because management
believes that as this group ages, it will have an increasing interest in
saving for retirement, nursing home care and unanticipated medical costs.
The company seeks to make sales in the market for retirement savings
products by offering annuity products that meet the demands of agents and the
pre-retirement population. The company markets its annuity products through
independent agents licensed in 47 states and the District of Columbia. Agents
are recruited through the company's wholly-owned subsidiary, American Sales,
as well as through various other marketing organizations. As of December 31,
1994, the company had approximately 6,700 independent agents licensed to sell
the company's products. The company does not market its annuity products
through stockbrokers. The company endeavors to attract agents to sell its
products by offering a broad selection of fixed annuity products, by
providing timely, comprehensive services to agents and customers and by
continuing to specialize in annuity products. Since 1990, over 34% of annuity
premiums received by American have been produced by agents recruited by
American Sales, resulting in commission savings for the company as compared
with business produced by agents recruited through other marketing
organizations.
Beginning in 1988, management restructured the company's investment
portfolio, reducing the holdings of non-investment grade securities from
approximately 59% of its total bond portfolio as of the end of 1987 to
approximately 7% as of December 31, 1994. During the same period, the company
has expanded internal investment management capabilities through the addition
of new personnel, and has augmented its capabilities for agent recruitment
through American Sales and the establishment of relationships with additional
marketing organizations. The company repaid its outstanding indebtedness in
1993, with proceeds from the sale to the public of 3,451,668 shares of its
common stock. As a result of these actions, management believes that the
company is now better positioned to take advantage of the opportunities for
the sale of its products in the savings and retirement market. The company's
strategy is to expand sales in a growing market, attract quality agents, sell
products with profit potential and maintain a high quality investment
portfolio.
The company incorporates certain features in its annuity contracts
that are designed to reduce the occurrence and effect of premature contract
terminations and significant withdrawals. Such features include surrender
charges which decline over time and which apply, subject to certain
exceptions, to premature terminations during the first five to fourteen years
of an annuity contract. In addition, annual withdrawals free of surrender
charges are generally limited to 10% of an annuity's cash value. Certain of
American's annuities also provide for deferred payments of the surrender
value of the annuity over a five year period or market value adjustments of
surrender value which reflect changes in interest rates.
Certain annuity policies incorporate a "bailout" feature which
generally allows policyowners to withdraw their account balances for a
limited period of time, free of surrender charges, if credited rates fall
below a specified level. The company experienced significant surrenders
following the reduction of credited rates below specified "bailout" levels
during 1992 and 1993.
Founded in 1965, American has focused on the sale of single premium
annuity products since 1984. On May 9, 1994, A.M. Best which rates insurance
companies based on factors of concern to policyowners, reaffirmed American's
"A-" (Excellent) rating. On October 24, 1994, Duff & Phelps reaffirmed
American's claims paying ability rating of "A+" (Single-A-Plus).
There were no material proceedings involving the company or any of
its subsidiaries, or mergers or acquisitions.
Item 1. (b) Financial Information About Industry Segments
______________________________________________________________
The company does not have any material reportable segments.
Item 1. (c) Narrative Description of Business
_________________________________________________
See Item 1. (c) (l) (i)
Item 1. (c) (1) Business Done and Intended to be Done
__________________________________________________________
See Item 1. (c) (l) (i)
Item 1. (c) (1) (i) Principal Products
__________________________________________
INDUSTRY OVERVIEW
Annuities have traditionally been used by individuals as a
tax-deferred savings vehicle for retirement planning. U.S. Census Bureau
statistics indicate that the 45 to 64 age group is the fastest growing age
group in the country and project a 30% increase in the number of individuals
in this age group during the 1990s. The company believes that this
demographic trend, longer life expectancy, and rising per capita income, as
well as the tax deferred savings advantage of annuity products relative to
other savings products, will increase demand for single premium annuities for
retirement planning.
COMPANY OVERVIEW
Founded in 1965, American has focused on the sale of single premium
annuities since 1984. During various periods prior to 1984, American offered
participating and nonparticipating ordinary life insurance, flexible premium
annuities and certain disability income and cancer expense policies. However,
in the middle 1980s, American perceived greater opportunities in the savings
and retirement market and began to concentrate its marketing efforts on the
sale of single premium annuities.
In 1988, management reviewed the company's investment strategy and
determined to reverse the non-investment grade strategy which the company had
employed since entering the single premium annuity market in 1984. Management
reduced the percentage of the company's bond portfolio rated below investment
grade from approximately 59% at the end of 1987 to approximately 41% by the
end of 1988. In 1989 and 1990 the company suffered substantial losses related
to its investments in non-investment grade bonds as the credit quality of
issuers of, and the market for, non-investment grade bonds deteriorated.
Through the restructuring of its investment portfolio in 1991 and 1992, the
company ultimately was able to increase, consistent with the company's
investment policy, the portion of its bond portfolio rated investment grade
to approximately 93%.
The level of sales and surrenders of SPDAs was adversely affected in
1991 and 1992 by the company's substantial investment losses, the highly
publicized financial difficulties of other life insurance companies, and A.M.
Best's lowering in July 1991, of American's rating from "A" (Excellent) to
"A-" (Excellent). In response, management took additional steps to improve
the company's financial condition and competitive position in the annuity
business. The company expanded internal investment management capabilities
and augmented its agent recruitment capabilities through its internal
marketing organization, American Sales, and the establishment of
relationships with additional marketing organizations. During 1993, the
company repaid its bank debt and contributed $14.6 million to the statutory
capital of American with proceeds from the sale of 3,451,668 shares of common
stock. Management believes the actions taken resulted in the increased sales
experienced in 1994 and 1993.
STRATEGY
The company has developed its business strategy to better enable it
to capitalize on what it perceives as significant opportunities in the
growing annuity market. The elements of this strategy are to (i) expand sales
in a growing market while maintaining its focus on single premium annuities,
(ii) attract quality agents, (iii) design and sell products with profit
potential, and (iv) maintain a high quality investment portfolio.
EXPAND SALES IN A GROWING MARKET. The company believes that its focus
on deferred annuity products in the expanding savings and retirement market
provides opportunity for growth. The company seeks to meet the needs of the
savings and retirement market by offering a portfolio of annuity products
nationwide. Over 80% of American's premiums received have been from
individuals ages 50 and over.
ATTRACT QUALITY AGENTS. The company intends to pursue the growth of
its business through increased production from existing agents and through
the creation of new agent relationships. American believes that it is able to
attract agents to sell its products by providing a broad selection of fixed
annuity products and timely, comprehensive services to agents and customers.
The company recruits agents through its wholly-owned subsidiary, American
Sales, and through other marketing organizations, and regularly evaluates its
distribution system for growth opportunities. American has approximately
6,700 independent insurance agents licensed to sell its products in 47 states
and the District of Columbia.
DESIGN AND SELL PRODUCTS WITH PROFIT POTENTIAL. The company seeks to
design its products to enhance the potential for profit and reduce the risk
of loss. Management's philosophy is to limit sales of annuities when it
believes that market conditions would prevent the company from achieving
targeted spreads. The company adjusts credited rates based on prevailing
market conditions and available investment yields, subject to certain
interest rate guarantees. Annuities currently issued by the company include
features such as surrender charges, limited free withdrawal privileges,
market value adjustments and deferred payout provisions. These features are
designed to encourage persistency and provide protection from losses due to
premature termination. Management continuously monitors and adjusts its produc
t features and terms in response to market conditions.
MAINTAIN A HIGH QUALITY INVESTMENT PORTFOLIO. The company seeks to
maintain a high quality investment portfolio and to purchase investments
taking into account the anticipated cash flows of its assets and liabilities.
The weighted average duration of the company's investments was 4.7 years as
of December 31, 1994. As of that date, approximately 97% of the company's
investment portfolio consisted of bonds approximately 93% of which were
investment grade.
MARKETING AND DISTRIBUTION
To access the market of potential annuity buyers, the company
maintains a network of independent agents licensed in 47 states and the
District of Columbia. As of December 31, 1994, American had approximately
6,700 agents contracted to sell its annuity products.
The company also maintains contact with approximately 26,000 agents
that are not currently licensed, but have either sold American's annuities in
the past or have expressed an interest in doing so. These agents continue to
receive periodic mailings related to interest rate and commission changes,
and new product introductions, and are reappointed as required in order to
represent the company in selling its products. However, in order to save
costs associated with reappointing agents, the company does not automatically
relicense an agent that has not written business for twelve months. Such
costs include the annual licensing fee of $20 to $40 per agent.
The company recruits new agents through American Sales and through
other marketing organizations. Because both American Sales and other
marketing organizations rely on independent agents, the company does not
maintain an exclusive or captive sales force thereby avoiding the related
costs. Since 1990, over 34% of annuity premiums received by American have
been produced by agents recruited through American Sales. Marketing
organizations are responsible for, and bear the cost of, recruiting agents.
In accordance with industry custom, American Sales and the marketing
organizations receive a gross commission from American for originating an
annuity contract, a portion of which is paid to the originating agent (the
"street commission"). The marketing organization or American Sales retains
the difference between the gross commission and the street commission (the
"override commission"). The availability of override commissions provides an
economic incentive to the marketing organizations to recruit agents who
produce business.
The company, through American Sales, recruits new agents principally
through direct mail solicitations. The company analyzes the market for its
products and reviews the number and geographical distribution of licensed
agents regularly. Data reviewed include premiums received and agents licensed
per capita by state. This allows the company to identify specific regions of
the country where it believes it can most effectively recruit agents for the
sales of its annuity products. The company develops a targeted list of
potential agents from sources such as databases of licensed agents maintained
by state insurance commissioners as well as industry associations such as the
Million Dollar Round Table and the American Society of Chartered Life
Underwriters. The company also regularly advertises its products, rates and
commission levels in various industry trade publications. To be contracted by
the company, agents must be licensed by state insurance regulatory
authorities and have their applications approved by the company.
Crediting rates, commissions, the perceived quality of the issuer,
product features and services are generally the principal factors influencing
an agent's willingness and ability to sell particular annuity products. The
company believes that both agents and policyowners value the service provided
by the company. For example, American generally issues an SPDA policy,
together with the agent's commission check, within 72 hours of receiving the
application and premium. The company also seeks to provide ongoing service to
the agent. Towards that end, the company provides agents with access to the
company's senior executives. The company has developed an interactive system
accessible by all agents to obtain policy information. In addition, agents
and annuitants can access information about their policies via a toll-free
telephone number.
The company collects premiums from policyowners throughout the United
States. During 1994, 57.4% of its SPDA sales were in the following states:
Florida (7.8%), Illinois (7.5%), California (6.5%), Michigan (6.5%), Texas
(5.7%), Ohio (5.2%), Kansas (4.9%), Colorado (4.6%), Wisconsin (4.6%), and
New Jersey (4.1%).
The company is not dependent on any one agent or agency for any
substantial amount of its business. No single agent accounted for more than
1.0% of American's annual sales in 1994, and the top twenty individual agents
accounted for approximately 13.8% of American's volume in 1994. The company
does not have exclusive agency agreements with its agents and management
believes most of these agents sell products, similar to those sold by
American, for other insurance companies. This can result in sales declines if
for any reason American is relatively less competitive or there are concerns
such as existed in 1991, about asset quality, the downgrade in American's
A.M.Best rating, and the insolvencies of other insurance companies.
The four major independent marketing organizations through which the
company recruits agents to sell its annuity products were responsible for the
recruitment of agents that accounted for 46.1% of premiums received during
1994. While the termination of the company's relationships with any of its
marketing organizations could result in the loss of agents and could
adversely affect the level of sales and surrenders, the company does not
believe that the loss of any one marketing organization would have a material
adverse effect on the financial condition of the company.
In 1991, the company became aware of five instances of agent fraud
involving two agents in Ohio, one agent in Tennessee, one agent in Texas and
one agent in Kansas. While there was no connection between any of the five
agents, all cases of agent fraud involved either (i) the wrongful taking of
funds from certain individuals who thought they were submitting funds to the
company, or (ii) forged endorsements of surrender checks payable to
policyholders of the company. The agents were prosecuted and settlements were
reached with the victims. Certain amounts paid by the company were recovered
from two banks that cashed checks with forged endorsements. The company (i)
engaged a firm to review and recommend procedures, (ii) adopted changes in
certain procedures relating to agent licensing, policy issuance and delivery,
and processing of withdrawals and surrenders, to help reduce future
occurrences of fraud, and (iii) purchased insurance coverage for up to $10
million of future losses from fraud. By implementing these changes the
company believes that it has substantially reduced the likelihood of future
material loss resulting from agent fraud.
PRODUCTS
The company specializes in the sale of SPDA products to individuals.
During each of the past three years, sales of SPDAs have accounted for
approximately 86% of the company's premiums received, while sales of SPIAs
and FPDAs have accounted for virtually all remaining premiums received.
SPDAs involve a one-time premium deposit by the policyowner at the
time of issuance. Following an accumulation period, the policyowner is
entitled to receive the principal value plus accumulated interest credited to
such annuity, payable either in a lump-sum or through annuity payments over a
certain period or for life. Interest credited during the accumulation period
generally is not subject to federal or state income tax. Payments are
typically made to the annuitant after age 65 and are taxable at the tax rate
then applicable to the annuitant.
American currently sells annuity products with different benefits,
interest rates and commission structures. These products offer tax-deferred
accumulation of interest, various interest guarantees, guaranteed cash
values, and a choice of guaranteed income options on the selected maturity
date. The portfolio of products is continuously reviewed with new plans added
and others discontinued in an effort to remain competitive.
The company's operating earnings are derived primarily from its
investment results, including realized gains (losses), less interest credited
to annuity contracts and expenses. In determining credited rates, American
takes into account the profitability of its annuity business and the relative
competitive positions of its products. Credited rates during the initial and
any renewal period are based on assumptions and estimates relating
principally to persistency, investment yield and expenses as well as managemen
t's judgment as to certain market and competitive conditions.
American's SPDAs have an initial credited interest rate (currently
5.75% to 8.75%, depending on the features of the contract) guaranteed for a
period of one to five years. Following the initial guarantee period, American
may adjust the credited interest rate annually, subject to the guaranteed
minimum interest rates specified in the contracts. Such minimum guaranteed
rates range from 4% to 6%. The credited rates on SPDAs with accumulated
values of approximately $537.5 million are currently set at the minimum
guaranteed rate. The accumulated values of SPDAs by credited interest rates
are as follows as of December 31, 1994: $834.7 million-less than or equal to
5.5%; $619.4 million-greater than 5.5% but less than or equal to 6.5%; $215.4
million-greater than 6.5% but less than or equal to 7.5%; and $150.5
million-greater than 7.5%. The credited rates on SPDAs representing a
majority of total accumulated value may be reset by the company within a
period of one year subject to the guaranteed minimum rate.
The company incorporates a number of features in its annuity products
designed to reduce the occurrence and adverse effect of premature termination
of the policy. Premature termination of an annuity contract results in the
loss of future investment earnings related to the annuity deposit and in the
accelerated recognition of deferred expenses related to policy acquisition,
principally commissions, which are otherwise recoverable over the life of the
policy.
The primary feature incorporated by the company to minimize premature
terminations is a surrender charge. While the policyowner is permitted at any
time to withdraw all or part of the accumulated value of his policy, such
withdrawals are generally subject to a surrender charge for the period of
years specified in the contract. The surrender charge, which is a percentage
of the total accumulated value including accrued interest, is designed to
discourage premature termination. Surrender charges, subject to certain
exceptions, apply for the number of years specified in the contract and
decline to zero over a period of five to fourteen years. All annuities
currently issued by the company include surrender charges and approximately
90% of the company's contracts in force currently have surrender charges. The
company generally limits free annual withdrawal to 10% of accumulated value.
When the company receives a request for surrender of an annuity
policy, a conservation letter is mailed to the policyowner. This letter is
designed to inform the policyowner of the possible tax implications and the
surrender charge payable under the annuity policy. No surrender benefits are
paid until the company receives a written response to the conservation
letter. Typically policyowners who have requested a surrender of $10,000 or
more are personally contacted by telephone. The company's conservation
procedures are designed to (i) attempt to conserve the business, (ii)
ascertain the causes of the surrenders, and (iii) identify and terminate
agents who write low persistency business. In certain contracts, the
surrender charge is waived for a period of 45 to 60 days following the
crediting of a renewal interest rate below a specified rate ( the "bailout"
rate). Of the company's $2.0 billion annuity contracts in force as of
December 31, 1994, $180.9 million have a "bailout" feature remaining. The "bai
lout" rate on $180.5 million of this amount is 6% or less. Surrender charges
also generally do not apply to one-time annual withdrawals by policyowners of
up to 10% of the accumulated value of the annuity.
Approximately 39% of the SPDA business in force as of December 31,
1994, provides that the company may pay any surrender value in level
installments over 60 months in lieu of a lump sum payment. Additionally, at
that date approximately 14% of the SPDA business in
force had a market value
adjustment provision that will provide American with additional protection
during a period of rising interest rates through a reduction in the surrender
value payable upon surrender of the policy.
INVESTMENTS
The company's earnings are largely determined by its ability to
maintain a spread between its investment results and the interest credited on
its annuity products. The average duration of the company's investments was
4.7 years as of December 31, 1994. As of that date, the company had $1,914.3
million of cash and invested assets of which $1,844.2 million or
approximately 96% represented investments in bonds. At that date,
approximately 93% of the company's bond portfolio was rated investment grade.
As of December 31, 1994, the carrying value of the company's bond portfolio
exceeded its market value by $91.5 million.
The following table summarizes the company's investment results for
the period indicated:
INVESTMENT RESULTS
For the Year Ended December 31,
1994 1993 1992
(dollars in millions)
Average invested assets <F1>................... $ 1,862.3 1,770.9 1,689.6
Net investment income <F2>..................... 142.0 138.5 141.2
Yield <F3>..................................... 7.6% 7.8% 8.4%
Net investment gains (losses) <F4>............. $ .8 17.0 20.5
________________
<FN><F1> Average of cash, invested assets (before SFAS 115 adjustment) and net
amounts due to or from brokers on unsettled security trades at the beginning
and end of period.
<F2> Net of investment expenses.
<F3> Net investment income divided by average invested assets.
<F4> Net invested gains (losses) include provisions for impairments in value
that were considered other than temporary.
The following table sets forth the company's investment portfolio as
of December 31, 1994:
INVESTMENT PORTFOLIO
As of December 31, 1994
Carrying
Value % of Total
(dollars in millions)
Debt Securities <F1>:
U.S. Government...................................... $ 3.6 .1%
Investment grade corporate........................... 1,041.2 54.4
Non-investment grade corporate....................... 136.9 7.2
Mortgage-backed <F2>.................................. 662.5 34.6
Total debt securities 1,844.2 96.3
Equity Securities <F3>:
Common stock......................................... 2.4 .1
Total equity securities 2.4 .1
Mortgage loans on real estate................................ 5.5 .3
Real estate <F4>.............................................. .4 -
Policy loans................................................. 5.1 .3
Other long-term investments <F5>.............................. 47.8 2.5
Short-term investments <F6>................................... .5 -
Less allowance for credit losses............................. (2.2) (.1)
Total investments 1,903.7 99.4
Cash......................................................... 10.6 .6
Total cash and investments $ 1,914.3 100.0%
<FN><F1> Debt securities "held-to-maturity" are generally stated at amortized
cost adjusted for impairments in value, while those "available-for-sale" are
carried at estimated market value. Total market value of debt securities
as of December 31, 1994, was approximately $1,752.7 million, representing
net unrealized investment losses of approximately $105.6 million.
<F2> Consist primarily of collateralized mortgage obligations ("CMOs").
<F3> Equity securities are stated at current market values. Original cost of
equity securities as of December 31, 1994, was approximately $2.2 million.
<F4> Real estate owned is carried at cost less depreciation.
<F5> Consist principally of investments in limited partnerships 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.
<F6> Short-term investments are carried at amortized cost which approximates
market value.
Included in other Long Term Investments on December 31, 1994, were
$23.1 million, at market, of limited partnership investments. These funds are
managed by outside investment advisors. The investment guidelines of these
partnerships allow for a very broad range of investment alternatives to
include, but not limited to, derivatives, currencies, foreign and U.S.
stocks, foreign and U.S. bonds, futures, options and commodities. Such
partnerships are generically referred to as hedge funds. These investments
were made with a goal of obtaining yield over time which exceeds the yield of
the S&P 500 Index and are carried at market value with any unrealized gains
and losses recorded in Net Investment Income in the company's statement of
earnings. Net Investment Income (Loss) on these partnerships were $1.2
million and ($1.9) million for 1993 and 1994, respectively. The company first
invested in such partnerships in July 1993; therefore, 1993 income represents
partial year results. Subsequent to December 31, 1994, the company withdrew
$5.5 million from certain of these partnerships. Management believes that the
earnings on this class of investments could experience greater volatility
than that which might be achieved by the S&P 500 Index and could, therefore, m
aterially affect the company's earnings for any given period.
Bonds and mortgage-backed securities often contain options which
permit an issuer to call, prepay or repurchase a security at a specified
price in the future. When a security is called, it is probable that American
will have to reinvest the proceeds at a lower interest rate. Mortgage-backed
securities are accounted for using expected prepayment assumptions.
Accordingly, as prepayment rates on mortgage-backed securities change, the
company adjusts its income realization on mortgage-backed securities to reflec
t its best estimate of future cash flows and the corresponding income
resulting from the accretion of discounts and the amortization of premiums.
Mortgage-backed securities are subject to prepayment risk. This is
due to the fact that in periods of declining interest rates, the mortgages
which collateralize the security may be repaid more rapidly than scheduled,
as individuals refinance higher rate mortgages to take advantage of lower
prevailing rates. As a result, holders of mortgage-backed securities could
receive prepayments on their investments which the holder may not be able to
reinvest at interest rates comparable to the rate on the prepaying security.
The company has reduced this risk of prepayment by investing a
majority (approximately 76%) of its mortgage-backed investment portfolio
in planned amortization class ("PAC"), targeted amortization class ("TAC")
and accretion directed class ("AD") instruments. These investments are
designed to amortize in a more predictable manner by shifting the primary
risk of prepayment of the underlying collateral to investors in other
tranches ("support classes") of the CMO. Sequential and pass-through classes r
epresent approximately 22% of the book value of the company's mortgage-backed
securities as of December 31, 1994.
In some instances, American invests in non-agency, non-government
sponsored enterprise mortgage-backed securities. Such investments comprised
24% of the book value of American's mortgage-backed securities at December
31, 1994. The credit risk associated with non-agency, non-government
sponsored enterprise mortgage-backed securities generally is greater than
that of an agency or government sponsored enterprise mortgage-backed
securities which benefit from either explicit or implicit guarantees of the
U.S. government or an agency or instrumentality thereof; however, all of
American's non-agency, non-government sponsored enterprise mortgage-backed
securities are rated either Aaa or Aa by Moody's. As of December 31, 1994,
the company did not own any "interest only," "principal only," or "residual"
classes of CMOs.
For additional information on the company's investment in
mortgage-backed securities see Note 2 of Notes to Consolidated Financial
Statements.
The company carries all investments which it believes have
experienced other than temporary declines in value at estimated net
realizable value. In addition, as of December 31, 1994, the company
maintained a GAAP credit loss reserve of $2.2 million. The following table
indicates by quality rating the composition of the company's debt securities
portfolio (at book and market value) excluding short-term investments as of
December 31, 1994:
COMPOSITION OF DEBT SECURITIES BY QUALITY RATING (1)
As of December 31, 1994
% of % of Market or
Book Debt Invested Estimated
Value Securities Assets Fair Value
(dollars in millions)
Investment grade:
U.S. Government, its agencies and
government sponsored enterprises......... $ 517.3 27.8% 27.0% $ 494.2
Aaa.......................................... 121.2 6.5 6.3 116.8
Aa........................................... 144.3 7.8 7.6 134.0
A............................................ 522.7 28.1 27.3 488.0
Baa.......................................... 415.9 22.4 21.7 392.0
Total investment grade 1,721.4 92.6 89.9 1,625.0
Non-investment grade:
Ba........................................... 126.4 6.8 6.6 119.4
B............................................ 10.5 .6 .6 8.3
Total non-investment grade 136.9 7.4 7.2 127.7
Total debt securities $ 1,858.3 100.0% 97.1% $ 1,752.7
As used in the above table and elsewhere in this report, book value
is defined as amortized cost, including adjustments for any other than
temporary dimunitions in value, prior to any market value adjustments.
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.
Rising interest rates could encourage increased policy surrenders.
This could create the need to sell bonds at a time when their market values
are below their book values.
The weighted average life and duration of the company's bond
portfolio as of December 31, 1994, and for the past three years were as
follows:
WEIGHTED AVERAGE LIFE AND DURATION
As of December 31,
1994 1993 1992
Weighted average life............. 6.7 5.5 6.8
Weighted average duration<F1>...... 4.7 4.2 4.8
<FN><F1> Reflects average duration weighted by market value. Duration is a
measure of the price sensitivity of a bond to changes in interest rates.
See Note 2 of Notes to Consolidated Financial Statements for
information regarding the maturity of the company's bond portfolio as of
December 31, 1994.
The company attempts to manage its assets and liabilities so that
income and principal payments received from investments are adequate to meet
the cash flow requirements of its policyholder liabilities. The relatively
short-term nature of the investment portfolio reflects the characteristics of
the company's liabilities. Approximately 93% of the policy and deposit
liabilities of the company represents reserves for SPDAs that may be
partially or totally surrendered at the policyholders' option, subject to
surrender charges, market value adjustments or other limitations, when
applicable. The cash flows of the company's liabilities are affected by
actual maturities, surrender experience and credited interest rates. The
company periodically performs cash flow studies under various interest rate
scenarios to evaluate the adequacy of expected cash flows from its assets to
meet the expected cash requirements of its liabilities. The company utilizes
these studies to determine if it is necessary to lengthen or shorten the
average life and duration of its investment portfolio. Because of the
significant uncertainties involved in the estimation of asset and liability
cash flows, there can be no assurance that the company will be able to
effectively manage the relationship between its asset and liability cash
flows.
The components of net investment gains (losses) for the past three
years were as follows:
COMPONENTS OF NET INVESTMENT GAINS (LOSSES)
For the Year Ended December 31,
1994 1993 1992
Investment gains on investments
disposed of................................. $ 4.3 18.6 26.9
Investment losses on investments
disposed of.................................. (3.5) (.1) (7.2)
Writedowns on investments held at
year end..................................... (.3) (.2) (3.6)
Allowance for credit losses-
beginning of year............................ 2.5 2.5 7.0
Allowance for credit losses-end
of year..................................... (2.2) (2.5) (2.5)
Other ................................... - (1.3) (.1)
Net investment gains (losses)................. $ .8 17.0 20.5
See "Management Discussion and Analysis of Financial Condition and
Results of Operations" with respect to amounts of securities sold. See Notes
1 and 2 of Notes to Consolidated Financial Statements for additional
information with respect to investments.
OTHER INSURANCE PRODUCTS
Prior to 1987, American sold, among other products, cancer expense
plans and nonparticipating and participating life insurance. In 1982,
American reinsured all of its cancer expense plans and in 1986, American
reinsured approximately 65% of its nonparticipating life insurance in force
through assumption reinsurance treaties. The total reserves on reinsurance
ceded under assumption reinsurance treaties were approximately $11 million at
the time of transfer. A recent federal district court decision held that in
certain circumstances an insurer may remain contingently or primarily liable
for policy liabilities transferred in assumption reinsurance transactions.
Based on management's belief that the reinsurers are solvent and capable of
meeting all obligations on the policies reinsured, management considers the
likelihood that any liability would inure to the company remote. However, in
the event of the insolvency of the reinsurers, it is possible that the
company would be liable for the reinsured policies.
American has $17.3 million face amount of participating life
insurance policies in force, net of reinsurance, and $53.6 million of
nonparticipating life insurance, net of reinsurance, in force. American has
followed a plan of paying dividends on its outstanding participating life
insurance policies in amounts determined annually by its Board of Directors
and expects to continue doing so in the future. For the year ended December
31, 1994, dividends paid under these policies totalled $.2 million. Actual mor
tality experience in a particular period may be different than actuarially
expected mortality experience and, consequently, may adversely affect the
company's operating results for such period.
REINSURANCE
American reinsures portions of life insurance risks with unaffiliated
insurance companies under traditional indemnity reinsurance agreements.
Generally, American enters into traditional reinsurance arrangements to
assist in diversifying its risk and to limit its maximum loss exposure on
risks that exceed American's policy retention limits, currently $150,000 per
life. Reinsurance does not fully discharge American's obligation to pay
policy claims on the reinsured business. American remains responsible for
policy claims to the extent the reinsurer fails to pay claims. No reinsurer
of business ceded by American has failed to pay any policy claims (either
individually or in the aggregate) with respect to such ceded business. As of
December 31, 1994, American had ceded to reinsurers $259.2 million of its
$330.1 million of life insurance in force and had taken $148.6 million of
related reserve credits against future policy benefits. Of the insurance
ceded and reserve credits taken, $228.9 million and $146.9 million,
respectively, relate to one reinsurance contract with Employers Reassurance
Corporation (ERC). This reinsurance agreement pertains to the coinsurance of
90% of all risks associated with all of the SPWL policies written by the
company prior to 1989. Based on a review of the 1993 statutory Annual
Statements filed by ERC with the Kansas Insurance Department and ERC's A.M.
Best rating of "A+" (Superior), the company believes that ERCis solvent and
capable of meeting its obligations on the policies reinsured.
RATINGS
American has been rated "A-" (Excellent) by A.M. Best since 1991.
A.M. Best's ratings for insurance companies currently range from "A++" to
"F," and some companies are not rated. Publications of A.M. Best indicate
that "A" (Excellent) and "A-" (Excellent) ratings are assigned to those
companies which, in A.M. Best's opinion, have achieved excellent overall
performance when compared to the norms of the life insurance industry, and
generally, have demonstrated a strong ability to meet their policyholder and
other contractual obligations. In evaluating a company's financial and
operating performance, A.M. Best reviews the company's profitability,
leverage and liquidity as well as the company's book of business, the
adequacy of its policy reserves and the experience and competency of its
management. American has a claims paying ability rating from Duff & Phelps of
"A+" (High). Duff & Phelps' claims paying ability ratings represent its
opinion as to the financial ability of an operating insurance company to meet
obligations under its insurance policies and are based on current information
provided by the insurance company and other sources. Higher ratings generally
indicate financial stability and a strong ability to pay claims. A.M. Best's
and Duff & Phelps' ratings are based upon factors of concern to policyowners,
agents and intermediaries and are not directed toward the protection of
investors.
REGULATION
The company and American are subject to the insurance laws and
regulations of Kansas, the domiciliary state of American, and the laws and
regulations of the other states in which American is licensed to do business.
At present, American is licensed to conduct business in 47 states and the
District of Columbia. The insurance laws and regulations, as well as the
level of supervisory authority that may be exercised by the various state
insurance departments, vary by jurisdiction, but generally grant broad powers
to supervisory agencies or state regulators to examine and supervise
insurance companies and insurance holding companies with respect to every
significant aspect of the insurance business. These laws and regulations
generally require insurance companies to meet certain solvency standards and
asset tests, to maintain minimum standards of business conduct and to file
certain reports with regulatory authorities, including information concerning
their capital structure, ownership and financial condition.
American is required to file annual statutory financial statements in
each jurisdiction in which it is licensed. Additionally, American is subject
to periodic examination by the insurance departments of the jurisdictions in
which it is licensed, authorized and accredited. The Kansas Insurance
Department completed its most recent examination of American for the years
ended December 31, 1990 through December 31, 1993. The results of this
examination contained no material adverse findings.
The NAIC adopted an accreditation program in 1992 which requires
Insurance Departments of the various states to become accredited by the end
of 1994 or cede certain control over their domestic companies. The program
requires certain model laws, model regulations and practices to be in effect.
The Kansas Insurance Department has been accredited under the NAIC program.
INSURANCE HOLDING COMPANY REGULATIONS; RESTRICTIONS ON DIVIDENDS AND
DISTRIBUTIONS. The company and American are subject to regulation under the
insurance and insurance holding company statutes of Kansas. The insurance
holding company laws and regulations vary from jurisdiction to jurisdiction,
but generally require insurance and reinsurance subsidiaries of insurance
holding companies to register with the applicable state regulatory
authorities and to file with those authorities certain reports describing,
among other information, their capital structure, ownership, financial
condition, certain
intercompany transactions and general business operations. The insurance
holding company statutes also require prior regulatory agency approval or, in
certain circumstances, prior notice of certain material intercompany
transfers of assets, as well as certain transactions between insurance
companies, their parent companies and affiliates.
The company is an insurance holding company and substantially all
income reflected in its Consolidated Statements of Earnings is derived from
the operations of American. The company's assets consist primarily of the
stock of American and its other subsidiaries. Dividends, fees, rents and
commissions received from American have been, and together with the company's
retained funds and earnings thereon will be, the source of funds for the
payment of operating and other expenses incurred by the company. Insurance
laws and regulations of Kansas, the state of incorporation of American,
restrict the flow of funds, including dividends, from American to the
company. In addition, the payment of dividends, fees, rents and commissions
by American reduces its capital and surplus, and therefore, can affect the
amount of annuities it can write.
Pursuant to the Kansas Insurance Holding Company Act, American may
not, without prior approval of the Kansas Insurance Department, pay dividends
if the amount of such dividends added to all other dividends or other
distributions made by American within the preceding twelve months exceeds the
greater of (i) its statutory net gain from operations for the prior calendar
year or (ii) 10% of statutory surplus at the end of the preceding calendar
year. During the year ended December 31, 1994, American had a statutory net
gain from operations of $4.2 million. As of December 31, 1994, 10% of
American's statutory
surplus was $8.8 million. In addition, another provision
of Kansas insurance law limits dividends that American may pay to the company
to earned surplus calculated on a statutory basis, which totalled $13.0
million as of December 31, 1994. Subject to the provisions of the Kansas
insurance law, American also may advance funds to the company in the form of
loans.
Under the Kansas Insurance Statute, unless (i) certain filings are
made with the Kansas Insurance Department, (ii) certain requirements are met,
including a public hearing and (iii) approval or exemption is granted by the
insurance commissioner, no person may acquire any voting security or security
convertible into a voting security of an insurance holding company, such as
the company, which controls a Kansas insurance company or merge with such a
holding company, if as a result of such transaction such person would
"control" the insurance holding company. "Control" is presumed to exist if a
person directly or indirectly owns or controls 10% or more of the voting
securities of another person.
NAIC REGULATORY CHANGES. The NAIC and insurance regulators also have
become involved in a process of re-examining existing laws and regulations
and their application to insurance companies. In particular, this
re-examination has focused on insurance company investment and solvency
issues and, in some instances, has resulted in new interpretations of
existing law, the development of new laws and the implementation of
non-statutory guidelines.
Regulations prescribed by the NAIC require the establishment of an
Asset Valuation Reserve ("AVR") account designed to stabilize a company's
statutory capital and surplus against fluctuations in the market value of
stocks and bonds. The AVR consists of two main components: a "default
component," which provides for potential credit related losses on
debt-securities and an "equity component," which provides for potential
losses on all types of equity investments, including real estate. The
regulations also require the establishment of an Interest Maintenance Reserve
("IMR"), which is credited with the portion of realized investment gains and
losses net of tax from the sale of fixed maturities attributable to changes
in interest rates. The IMR is required to be amortized into earnings over the
remaining period to maturity of the fixed maturities sold.
RISK-BASED CAPITAL REQUIREMENTS. The NAIC has adopted risk-based
capital ("RBC") requirements that require insurance companies to calculate
and report information under a risk-based formula that attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
product and investment portfolio. Under the formula, a company first
determines its Authorized Control Level risk-based capital ("ACL") by taking
into account (i) the risk with respect to the insurer's assets; (ii) the risk
of adverse insurance experience with respect to the insurer's liabilities and
obligations; (iii) the interest rate risk with respect to the insurer's
business; and (iv) all other business risks and such other relevant risks as
are set forth in the RBC instructions. A company's "Total Adjusted Capital"
is the sum of statutory capital and surplus and such other items as the RBC
instructions may provide.
The requirements provide for four different levels of regulatory
attention. The "Company Action Level" is triggered if a company's Total
Adjusted Capital is less than 2.0 times its ACL but greater than or equal to
1.5 times its ACL. At the Company Action Level, the company must submit a
comprehensive plan to the regulatory authority which discusses proposed
corrective actions to improve its capital position. The "Regulatory Action
Level"is triggered if a company's Total Adjusted Capital is less than 1.5
times but greater than or equal to 1.0 times its ACL. At the Regulatory
Action Level, the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. The "Authorized Control Level" is triggered if a company's Total
Adjusted Capital is less than 1.0 times but greater than or equal to 0.7
times its ACL,
and the regulatory authority may take action it deems
necessary, including placing the company under regulatory control. The
"Mandatory Control Level" is triggered if a company's Total Adjusted Capital
is less than 0.7 times its ACL, and the regulatory authority is mandated to
place the company under its control. As of December 31, 1994, American's
Total Adjusted Capital was $111.3 million and its Authorized Control Level
risk-based capital was $25.1 million.
Should a future deficiency occur, American would be subject to an
increased level of regulatory attention and, depending on the capital
deficiency, possibly to actual control by the appropriate regulatory
authorities.
ASSESSMENTS AGAINST INSURERS. Under the guaranty fund laws of all
states in which the company operates, insurers can be assessed for losses
incurred by policyholders of insolvent insurance companies. At present, most
guaranty fund laws provide for assessments based upon the amount of primary
insurance underwritten in a given jurisdiction. See Note 13 of Notes to
Consolidated Financial Statements. The company has set up a reserve for its
current estimate of future non-recoverable guaranty fund assessments.
FEDERAL REGULATION. Although the federal government generally does
not directly regulate the insurance industry, federal initiatives often have
an impact on the business. Congress and certain federal agencies are
investigating the current condition of the insurance industry in the United
States in order to decide whether some form of federal role in the regulation
of insurance companies would be appropriate. It is not possible to predict
the outcome of any such congressional activity or the potential effects
thereof on the company.
Item 1. (c) (1) (ii) New Products
________________________________________
The company introduced various versions of SPDA and FPDA during 1994.
In addition, a flexible premium universal life policy was introduced,
providing the company with a source of revenue diversification. The company
has not marketed a life insurance policy since the first quarter of 1993.
Item 1. (c) (1) (iii) Sources of Raw Materials
_____________________________________________________
The company does not require any raw materials.
Item 1. (c) (iv) Patents, Trademarks, Franchises, Etc.
____________________________________________________________
The company does not hold any patents, trademarks, licenses,
franchises, or concessions which are materially important.
Item 1. (c) (1) (v) Seasonal Nature of Business
____________________________________________________
The company is not engaged in a seasonal business.
Item 1. (c) (1) (vi) Working Capital Items
_____________________________________________
Not applicable.
Item 1. (c) (1) (vii) Dependence on Customers
_______________________________________________
The company is not dependent on a single customer or a few customers
where the loss of any one or more of whom would have an adverse effect on the
company.
Item 1. (c) (1) (viii) Backlog of Orders
_________________________________________
There is no backlog of orders with respect to the company.
Item 1. (c) (1) (ix) Portion(s) of Business Subject to Governmental
Negotiations
______________________________________________________________________________
There are no portions of the company's business which are subject to
renegotiation or termination of governmental contracts.
Item 1. (c) (1) (x) Competition in Registrant's Business
____________________________________________________________
The insurance industry is highly competitive and the company competes
with individual companies and with groups of
affiliated companies with substantially greater financial resources, larger
sales forces and more widespread agency and brokerage relationships. In
addition, in marketing annuity products, the company competes with other life
insurance companies as well as financial institutions which market
functionally competitive products.
The company's marketing strategy is to provide products for the
individual and business market through experienced, independent insurance
agents and brokers licensed to sell life insurance. The company utilizes
marketing agencies to recruit its agency force and also recruits agents
directly, utilizing industry trade publications and direct mail. The agents
and representatives contracted to sell for the company currently number
approximately 6,700.
The company's agents and brokers also represent other insurance
companies and sell policies which may compete with those of the company. The
company believes it has been successful in attracting and retaining brokers
and agents because it has been able to offer a competitive package of
innovative products, competitive commission structures, prompt policy
issuance and responsive policyholder service.
On January 18, 1995, the U.S. Supreme Court issued its decision in
the case of NATIONSBANK OF NORTH CAROLINA, N.A., V. VARIABLE ANNUITY LIFE
INSURANCE CO. In NATIONSBANK the Supreme Court upheld a decision by the
Office of the Comptroller of the Currency that a national bank may broker
annuities. However, the decision did not grant national banks the authority
to issue or underwrite annuities. The decision may increase interest on the
part of banks to begin selling annuities or to expand their existing efforts
to sell annuities.
The decision may result in a partial shift in the distribution of
annuities from insurance agents to national banks, which could result in a
decrease in sales for the company, or it may result in an increase in the
number of annuities sold because of distribution through national banks,
which could result in new distribution opportunities for the company.
Item 1. (c) (1) (xi) Research and Development
________________________________________________
The company made no material expenditures with respect to research
and development.
Item 1. (c) (1) (xii) Environmental Issues
____________________________________________
Subsurface assessments and research conducted beneath the parking lot
of the company's home office complex have indicated the possible existence of
underground storage tanks and levels of contamination which may require
remedial action. The company does not believe that any required remedial
action will result in any material capital expenditures.
Item 1. (c) (1) (xiii) Numbers of Persons Employed
___________________________________________________
On December 31, 1994, the company employed 100 persons in its Home
Office and had approximately 6,700 full and part-time agents who are paid on
a commission basis.
Item 1. (d) Foreign Operations
______________________________
The company does not have any material operations in foreign
countries nor does it derive any material portion of its revenue from
customers in foreign countries.
Item 2. Properties
__________________
The company owns its home office complex consisting of four buildings
and the adjacent property in Topeka, Kansas. Total
floor space in the four buildings is approximately 31,000 square feet. Recent
and projected growth along with the efficiencies to be gained from having its
operations under one roof have led the company to investigate the acquisition
of different facilities.
Item 3. Legal Proceedings
_________________________
The company does not have any material legal proceedings pending
against it.
Item 4. Submission of Matters to a Vote of Security Holders
__________________________________________________________
No matters were submitted to security holders during the fourth
quarter of the fiscal year covered by this report.
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related
______________________________________________________________________________
Stockholder Matters
_____________________
The common stock of the company began trading on the New York Stock
Exchange under the symbol AMV on November 30, 1994. Prior to that date the
company's common stock traded in the over-the-counter market under the NASDAQ
symbol AVFC. The following table shows the quarterly high and low sales price
per share of common stock of the company as reported by the New York Stock
Exchange and NASDAQ:
COMMON
High Low
1994
Fourth Quarter.................... 10 81\4
Third Quarter..................... 10 8
Second Quarter.................... 101\2 83\4
First Quarter..................... 12 95\8
1993
Fourth Quarter.................... 11 93\8
Third Quarter..................... 11 3\4 93\4
Second Quarter.................... 13 3\4 93\8
First Quarter..................... 16 7\8 10
There were no dividends paid during 1993 or 1994.
On February 23, 1995, the board of directors declared an annual cash
dividend of 71\2 cents per common share, payable April 13, 1995, to
stockholders of record on March 18, 1995.
As of March 17, 1995, there were approximately 3,723 holders of record of
the company's common stock.
See Management's Discussion and Analysis of Liquidity and Capital
Resources and Note 8 of the Notes to Consolidated Financial Statements for
the statutory limitation on dividends payable from American under Kansas law.
Item 6. Selected Financial Data
_______________________________________
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
Following is a summary of selected financial data for the five years ended
December 31, 1994:
(000's Omitted, except per share data)
1994 1993 1992 1991 1990
Total Revenue <F1>................... $ 149,700 162,523 175,708 173,372 116,235
Earnings (loss) before
income taxes and
extraordinary item................ $ 19,286 26,755 17,318 6,675 (13,965)
Income tax expense (benefit)........ 5,593 8,564 118 (3,444) 3,754
Earnings (loss) before
extraordinary item.............. 13,693) 18,191 17,200 10,119 (17,719)
Extraordinary item: Loss on
early extinguishment of
debt............................ - (213) (382) - -
Net earnings (loss)................. $ 13,693 17,978 16,818 10,119 (17,719)
Earnings (loss) per share of
common stock:*
Primary:
Earnings (loss) before
extraordinary item.............. $ 1.32 2.62 2.94 1.84 (3.22)
Extraordinary item.............. - (.03) (.07) - -
Net earnings (loss)............. $ 1.32 2.59 2.87 1.84 (3.22)
Fully diluted:
Earnings (loss) before
extraordinary item.............. $ 1.32 2.49 2.62 1.84 (3.22)
Extraordinary item.............. - (.03) (.06) - -
Net earnings (loss)............. $ 1.32 2.46 2.56 1.84 (3.22)
Cash dividends per share
of common stock................ $ - - - - .50
Total Assets........................ $ 2,260,021 2,114,696 2,090,136 1,959,071 1,773,042
Capitalization:
Bank debt .......................... $ - - 19,859 28,437 33,562
Stockholders' equity................ 104,196 100,345 49,463 30,936 17,264
Total Capitalization................ $ 104,196 100,345 69,322 59,373 50,826
<FN><F1> Total revenue for the years 1994, 1993, 1992 and 1991 includes net
investment gains of
$.8, $17.0, $20.5 and $16.5 million, respectively while the year 1990
includes net investment losses of $24.3 million.
*Per share data for 1990, 1991 and 1992 has been restated to give effect to a
one-for-two and one-half reverse stock split effective June 11, 1993.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
___________
GENERAL
The company specializes in the sale of deferred annuity products as a
retirement savings vehicle for individuals. During each of the past three
years, sales of SPDAs have accounted for at least 86% 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 defer
ral 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 and policy charges are realized as revenue, and DAC is
amortized as an expense. The timing of DACamortization 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 1994, 1993 and 1992, the company's weighted average expected surrender
levels were 9.0%, 13.0% and 9.9%, compared to the weighted average actual
surrenders of 9.8%, 14.7% and 9.6%. Historically, 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 9% for 1994, 7% for 1993 and 7% for
1992. Although, as of December 31, 1994, approximately $180.9 million, or 14%
of annuity account values contained a "bailout" provision, the current
credited rates on these policies are above the "bailout" rate. The "bailout"
rate on $180.5 million of this amount is 6% or less. If the company reduces
credited rates below the "bailout" rates on policies containing "bailout"
provisions in the future, it intends to pay any resulting surrenders from
cash provided by operations and premiums received. In the event such sources
are not sufficient to pay surrenders, the company would have to sell
securities at the then current market prices. American expects that
withdrawals on its annuity contracts will increase as such contracts approach
maturity. The company may not be able to realize investment gains in the
future to offset the adverse impact on earnings, should future "bailout"
surrenders occur.
MARGIN ANALYSIS
The company's earnings are impacted by realized investment gains and
losses and by the associated amortization of DAC. The actual timing and
pattern of such amortization is determined by the actual profitability to
date (which includes realized investment gains and losses) and the expected
future profitability on a particular annuity contract. To the extent
investment income is accelerated through realization of investment gains, the
corresponding amortization of DAC is also accelerated as the stream of
profitability on the underlying annuities is effectively accelerated. When
investment losses are realized, the reverse is true. The following margin
analysis depicts the effects of realized gains (losses) on the company's
operating earnings (loss):
For the Year Ended December 31,
1994 1993 1992
(dollars in millions)
(percent of average invested assets)
Average invested assets <F1>.........$ 1,862.3 100.00% $ 1,770.9 100.00% $1,689.6 100.00%
Insurance premiums and
policy charges.................... $ 6.3 .34% $6.6 .37% $ 7.5 .44%
Net investment income <F2>........... 142.0 7.62 138.5 7.82 141.2 8.36
Income from disposal of
private placement
securities...................... - - - - 5.8 .34
Policyholder benefits............... (112.3) (6.03) (113.8) (6.43) (128.0) (7.57)
Gross interest margin............... 36.0 1.93 31.3 1.76 26.5 1.57
Associated amortization of
deferred acquisition
costs........................... (8.8) (.47) (4.7) (.26) (7.7) (.46)
Net interest margin................. 27.2 1.46 26.6 1.50 18.8 1.11
Net investment gains................ .8 .04 17.0 .96 20.5 1.21
Associated amortization of
deferred acquisition
costs........................... (.2) (.01) (4.8) (.27) (8.7) (.51)
Net margin from investment
gains........................... .6 .03 12.2 .69 11.8 .70
Total net margin.................... 27.8 1.49 38.8 2.19 30.6 1.81
Expenses, net....................... (8.5) (.46) (11.1) (.62) (10.9) (.65)
Operating earnings.................. 19.3 1.03 27.7 1.57 19.7 1.16
Interest expense.................... - - (1.0) (.06) (2.4) (.14)
Earnings before income
taxes........................... 19.3 1.03 26.7 1.51 17.3 1.02
Income tax (expense)
benefit......................... (5.6) (.30) (8.5) (.48) (.1) (.01)
Earnings before extra-
ordinary loss................... 13.7 .73 18.2 1.03 17.2 1.01
Extraordinary loss on early
extinguishment of debt.......... - - (.2) (.01) (.4) (.02)
Net earnings........................$ 13.7 .73% $18.0 1.02% $ 16.8 .99%
Operating earnings..................$ 19.3 1.03% $27.7 1.57% $ 19.7 1.16%
Less: Net margin from
investment gains................ .6 .03 12.2 .69 11.8 .70
Operating earnings
excluding net investment
gains and associated
amortization of deferred
policy acquisition
costs...........................$ 18.7 1.00% $15.5 .88% $ 7.9 .46%
<FN><F1> Average of cash, invested assets (before SFAS 115 adjustment) 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.
RESULTS OF OPERATIONS
Years Ended December 31, 1994, 1993 and 1992
NET INVESTMENT INCOME increased $3.5 million, or 3%, to $142.0
million from $138.5 million in 1993. This increase resulted from an increase
in average invested assets from $1,770.9 million in 1993 to $1,862.3 million
in 1994, offset in part by a reduction in the average yield on invested
assets from 7.8% for the year ended December 31, 1993, to 7.6% for the year
ended December 31, 1994. Net investment income decreased $2.7 million, or 2%,
to $138.5 million in 1993 from $141.2 million in 1992. This decrease resulted
from the reduction in the average yield on invested assets from 8.4% for the
year ended December 31, 1992, to 7.8% for the year ended December 31, 1993,
offset in part by an increase in average invested assets from $1,689.6
million in 1992 to $1,770.9 million for 1993. Average yields have been
impacted by declining interest rates throughout 1992 and 1993 and the
reinvestment at lower yields of proceeds from securities disposed of to
realize investment gains. The 1994 yields were down as a result of an
investment in investment partnerships. These partnerships form a fund of
funds totalling $23.1 million on December 31, 1994 which is structured in an
attempt to consistently provide returns in excess of the Standard & Poor's
(S&P) 500 over time without regard to the general direction of financial
markets. This fund generated a loss of $1.9 million in 1994 compared with
income of $1.2 million in 1993. Since the date of original investment this
investment has experienced a loss of 2.2%, compared to a cash flow equivalent
loss of 9.4% had the same amounts been invested at the same time in 10 year
treasury bonds, or a .6% gain had the funds been invested in the Standard &
Poor's 500.
NET INVESTMENT GAINS decreased $16.2 million, or 95%, to $.8 million
for the year ended December 31, 1994, from $17.0 million for the year ended
December 31, 1993. This follows a $3.5 million decrease in 1993 from $20.5
million for the year ended December 31, 1992. Gains and losses may be
realized upon securities which are disposed of for various reasons. The gains
realized in 1994 are the result of general portfolio management while those
taken in 1993 were to reduce the effects of the statutory losses resulting
from surrenders following the reduction of interest crediting rates on
certain annuity policies below the "bailout" rate. The gains realized during
1992 were primarily to utilize the tax benefit of capital loss carryforwards.
The decision to realize gains or losses lies to a great degree in managements
discretion. Unrealized gains (losses) in the company's bond portfolio were
($105.6) million, $81.4 million and $41.5 million as of December 31, 1994,
1993 and 1992, respectively.
INCOME FROM DISPOSAL OF PRIVATE PLACEMENT SECURITIES was $5.8 million
in 1992. During 1988, 1989, and 1990, American purchased private placement
securities believed to have a quality rating equivalent to "BBB" by Standard
& Poor's. In 1992 the company engaged an independent firm to review the
private placement securities portfolio. That review determined those
securities would have been rated "BB" - "B" if they had been rated by S&P
when issued and that the total market value of the securities at the time of
the report was approximately $5.8 million less than the par value of these
securities. On September 21, 1992, an affiliate of the placement agent agreed
to purchase the bonds at their par value, which approximated the company's
cost. Several of these bonds had been written down in an amount totalling
$2.1 million during 1990, 1991 and 1992 when declines in value were
considered to be other than temporary. The effect on 1992 operations of this
transaction was a net investment loss of $4.3 million representing the
difference between the market value at the time of sale and the GAAP book
carrying value of the securities, and $5.8 million of income from disposal of
private placement securities representing the amount received in excess of
market value. There were no similar transactions in 1994 or 1993.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS decreased
$1.5 million, to $112.3 million in 1994 from $113.8 million in 1993. This
decrease results primarily from a reduction in the average interest rate
credited on the company's annuity liabilities, from 6.2% as of December 31,
1993 to 5.8% as of December 31, 1994. This decrease was partially offset by
an increase in annuity liabilities to $1,971.6 million on December 31, 1994.
In 1993, this amount decreased $14.2 million, or 11%, to $113.8 million from
$128.0 million in 1992. This decrease resulted primarily from a reduction in
the average interest rate credited on annuity liabilities, from 7.1% as of
December 31, 1992 to 6.2% as of December 31, 1993. This decrease was
partially offset by an increase in annuity liabilities to $1,826.9 million on
December 31, 1993, from $1,806.2 million on December 31, 1992.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS decreased $.4
million, to $9.0 million in 1994, from $9.4 million in 1993. Amortization of
deferred policy acquisition costs (DAC) associated with gross interest
margins increased $4.1 million, to $8.8 million in 1994, from $4.7 million in
1993. Amortization associated with investment gains decreased $4.6 million,
to $.2 million in 1994, from $4.8 million in 1993. The 1993 amortization
amounts reflect the lowering of interest crediting rates and the resulting
increase in the estimates of future expected gross profits and the
realization of $17.0 million of investments gains. This follows a decrease of
$7.0 million, or 43%, in 1993 from $16.4 million in 1992, primarily due to
decreased investment gains, the inclusion of income from disposal of private p
lacement securities in the 1992 period and the increase in the estimates of
future expected gross profits previously discussed. Acquisition costs
incurred in 1994 and deferred into future policy periods were $25.8 million,
compared with $18.2 million in 1993 and $14.1 million in 1992.
GENERAL INSURANCE EXPENSES decreased $1.2 million, or 14%, to $7.6
million in 1994 from $8.8 million in 1993. This decrease is primarily
attributable to the deferral of additional expenses related to the
acquisition of annuity contracts in 1994. This follows an increase in general
insurance expenses of $.1 million in 1993 from $8.7 million in 1992.
PREMIUM AND OTHER TAXES, LICENSES AND FEES decreased $1.1 million, or
46%, to $1.3 million in 1994 from $2.4 million in 1993 following a decrease
of $.1 million, or 4%, in 1993 from $2.5 million in 1992. The above amounts
include charges (credits) of approximately ($.4) million, $1.6 million and $1.
8 million for the years 1994, 1993 and 1992, respectively, for nonrecoverable
guaranty fund assessments resulting from a significant number of insolvencies
that occurred in recent years.
INTEREST EXPENSE decreased $1.0 million in 1994 following the
repayment of all debt in November, 1993, with proceeds from the company's
common stock offering. This follows a decrease of $1.4 million to $1.0
million in 1993 from $2.4 million in 1992. This decrease reflects the
repayment of debt in 1993.
INCOME TAX EXPENSE decreased $2.9 million to $5.6 million in 1994
from $8.5 million in 1993. During 1993, income tax expense increased $8.4
million to $8.5 million from $.1 million in 1992. A large portion of the tax
on net investment gains realized in 1992 was offset by tax benefits from
capital loss carryforwards from 1989 and 1990. These capital loss
carryforwards were fully utilized during 1992 resulting in the taxation of
the net investment gains realized in 1993 and 1994.
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, 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 filed with 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 years ended December 31, 1994, 1993
and 1992, was $26.6 million, ($91.5) million and ($27.7) million,
respectively.
The increase in net cash provided by annuity contracts without life
contingencies in 1994 resulted primarily from a $72.3 million decrease in
surrender and death benefits paid from $318.9 million (approximately 16.1% of
beginning reserves for future policy benefits) to $246.6 million
(approximately 12.3% of beginning reserves for future policy benefits) along
with a $45.6 million increase in premiums received from $222.2 million to
$267.8 million. The decline in net cash provided by annuity contracts without
life contingencies in 1993 resulted primarily from a $115.8 million increase
in surrender and death benefits paid from $203.1 million (approximately 11.1%
of beginning reserves for future policy benefits) to $318.9 million
(approximately 16.1% of beginning reserves for future policy benefits) offset
by a $53.5 million increase in premiums received from $168.7 million to
$222.2 million. The decline in net cash provided by annuity contracts without
life contingencies in 1992 resulted primarily from a $50.5 million decline in
premiums received from $219.2 million to $168.7 million, and a $5.8 million
increase in surrender and death benefits paid from $197.3 million
(approximately 12.6% of beginning reserves for future policy benefits) to
$203.1 million (approximately 11.1% of beginning reserves for future policy
benefits).
Net cash provided by the company's operating activities was $130.5
million, $129.7 million and $142.9 million in 1994, 1993 and 1992,
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%, 3% and 7% as
of December 31, 1994, 1993 and 1992, respectively). The weighted average
duration of the company's investment portfolio was 4.7 years as of December
31, 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 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 7 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. In December, 1994, the company
entered into a credit agreement with The First National Bank of Chicago and
Boatman's First National Bank of Kansas City, as Lenders. Under the terms of
this agreement, the Lenders have committed to lend up to $25,000,000 in the
form of a 5-year reducing credit facility. For
additional information
regarding this credit agreement, see Note 6 of Notes to Consolidated
Financial Statements.
As of December 31, 1994, the company owned bonds of 39 issuers in
amounts exceeding 10% of stockholders' equity. The book value of such bonds
was $546.4 million which represented 29% of the company's invested assets.
See Note 2 of Notes to Consolidated Financial Statements. A default by any
one of these issuers could materially adversely affect the results of
operations and financial condition of the company. Twenty-six bonds with an
aggregate book value of $364.7 million were REMIC Trusts established by
government-sponsored enterprises. The remaining $181.7 million of such bonds
represent 13 issuers, of which all but one in the amount of $10.1 million are
rated investment grade.
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 13 of Notes to Consolidated Financial Statements.
REINSURANCE. The company had amounts receivable under reinsurance
agreements of $149.7 million and $151.4 million as of December 31, 1994 and
1993, respectively. Of the amounts, $147.9 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 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. See Item 1.(c)(l) Business Done and
Intended to be Done-Other Insurance Products.
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. Conversely, if interest rates rise
(as was the case in 1994), fixed income investments generally will decrease
in market value, while net investment income will increase.
In a rising interest rate environment (such as that experienced in
1994), 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.
In addition to the increase in the company's average cost of funds
caused by a rising interest rate environment, surrenders of annuities that
are no longer protected by surrender charges increase. While the company
experienced a decrease in total surrenders during 1994, the decrease was
primarily due to the large number of bailout surrenders in 1993. Throughout
1994, the company saw an increase in surrenders of policies which no longer
were covered by surrender charges. Management believes the increased
surrenders experienced in 1994 were due to the increasing interest rates
throughout 1994. This trend
has continued into 1995. Management believes that
surrenders are lower during periods of declining interest rates.
BOND PORTFOLIO RESTRUCTURING. During 1990, the quoted market values
of many non-investment grade bonds substantially decreased. In response to
this decrease, the company substantially increased the allowance for credit
losses during the third quarter of that year, and completed a significant
restructuring of its bond portfolio during 1991.
During 1994, 1993 and 1992, the company disposed of bonds with book
values of $337.7, $374.6 and $673.8 million for net gains (losses) of $(.8)
$18.6 and $19.7 million, respectively. In 1993, the company reduced credited
interest rates below the "bailout" rates on certain annuity policies and the
related surrenders experienced during the "bailout" period resulted in losses
on a statutory basis. The company sold securities at gains to restore the
statutory surplus lost. The following chart sets forth the reasons that bonds
were disposed of, the book value of bonds disposed of and the gains (losses)
on dispositions for the years ended December 31, 1994, 1993, and 1992:
ANALYSIS OF BOND DISPOSITIONS
Years Ended December 31,
1994 1993 1992
Book Gains Book Gains Book Gains
Value (Losses) Value (Losses) Value (Losses)
(dollars in millions)
Bonds redeemed by issuer:
Investment grade............. $ 9.3 $.1 $ 41.2 $ .7 $ 73.7 $ -
Non-investment grade......... 2.3 (.1) 10.1 1.3 16.7 .5
Bonds sold to avoid further
losses as a result of
deteriorated credit
worthiness:
Investment grade............. 8.5 (.2) 12.4 (.1) 36.4 (.3)
Non-investment grade......... 2.0 (.2) 1.8 (.1) 55.1 (5.9)
Bonds sold as part of
normal portfolio management
Investment grade............. 315.6 (.4) - - - -
Non-investment grade......... - - - - - -
Bonds sold to utilize tax
benefit of capital
losses:
Investment grade............. - - - - 461.4 23.7
Non-investment grade......... - - - - 30.5 1.7
Bonds sold to provide
statutory capital:
Investment grade............. - - 301.9 16.5 - -
Non-investment grade......... - - 7.2 .3 - -
Subtotals:
Investment grade............. 333.4 (.5) 355.5 17.1 571.5 23.4
Non-investment grade......... 4.3 (.3) 19.1 1.5 102.3 (3.7)
Total........................ $ 337.7 $(.8) $ 374.6 $ 18.6 $673.8 $ 19.7
In managing the relationship between its assets and liabilities, the
company utilizes models which determine the cash flows necessary to meet the
expected cash needs on the underlying liabilities under various interest rate
scenarios. The company also utilizes these models to determine the dollar
value of securities that would need to be sold under each interest rate
scenario so as to determine what portion of its investment portfolio needs to
be carried on its balance sheet as "available-for-sale." In addition, certain
conditions specific to an individual security (such as deterioration in
credit quality) may result in a security being carried as
"available-for-sale." For a discussion of the impact of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" see Note 1
of Notes to Consolidated Financial Statements.
The carrying value, estimated market value, unrealized gains, and
unrealized losses in non-investment grade bonds owned as of December 31,
1993, and December 31, 1992, were $84.1 million and $78.4 million,
respectively, $86.3 million and $74.5 million, respectively, $2.8 million and
$.6 million, respectively, and $.6 million and $4.5 million, respectively.
The carrying value and estimated market value of securities which are not
actively traded in a liquid market as of December 31, 1993 and December 31,
1992, were $.1 million and $.1 million, respectively. The market values of
corporate debt securities rated below investment grade and comparable unrated
securities tend to be more sensitive to issuer-specific developments and
changes in economic conditions than higher rated securities. Issuers of these
securities are often highly leveraged, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. In addition, such issuers may not have
other methods of financing available to them, and may be unable to repay debt
at maturity by refinancing. The risk of loss due to default in payment of
interest or principal by such issuers is significantly greater than with inves
tment grade issuers for the previously mentioned reasons and because such
securities frequently are subordinated to the prior payment of senior
indebtedness. As of December 31, 1993, the carrying value of the company's
five largest investment in securities rated non-investment grade by both
Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's") aggregated $24.3 million, with an approximate market value of
$25.2 million, none of which individually exceed $6.0 million. For a list of
all investments exceeding 10% of stockholders' equity including those
classified as non-investment grade by the company, seeNote 2 of Notes to
Consolidated Financial Statements.
The company's allowance for credit losses was $2.2 million, $2.5
million and $2.5 million on December 31, 1994, 1993 and 1992, respectively.
As of December 31, 1994, December 31, 1993 and December 31, 1992, the book
value of non-investment grade bonds were $136.9 million, $84.1 million and
$78.4 million, respectively. The amount of non-investment grade bonds held
affects the amount of credit risk in the company's portfolio more
significantly than do the amounts of investment grade bonds.
Item 8. Financial Statements and Supplemental Data
____________________________________________________________
Page Number
Independent Auditors' Report 31
Consolidated Balance Sheets - as of December 31,
1994 and 1993 32-33
Consolidated Statements of Earnings - for the years
ended December 31, 1994, 1993 and 1992 34
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1994, 1993 and
1992 35
Consolidated Statements of Cash Flows - for the
years ended December 31, 1994, 1993 and 1992 36-37
Notes to Consolidated Financial Statements - for the
years ended December 31, 1994, 1993 and 1992 38-56
INDEPENDENT AUDITORS' REPORT
__________________________________
To the Board of Directors and Shareholders of
AmVestors Financial Corporation
Topeka, Kansas
We have audited the accompanying consolidated balance sheets of
AmVestors Financial Corporation and subsidiaries (the company) as of December
31, 1994 and 1993, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of AmVestors
Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
company adopted the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities in
1994 and Statement of Financial Accounting Standards No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts in
1993.
/s/Deloitte & Touche LLP
____________________________
Kansas City, Missouri
March 29, 1995
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
As of December 31,
ASSETS 1994 1993
Investments:
Debt securities:
Bonds:
Held-to-maturity (market $1,145,692 and
$1,104,914)........................................................ $ 1,237,185 1,066,583
Available-for-sale (cost $621,138 and market
$705,738).......................................................... 607,046 662,696
Preferred stock with mandatory redemption
requirements, available-for-sale
(market $177)...................................................... - 184
1,844,231 1,729,463
Equity securities, available-for-sale:
Common stock (cost $2,124 and $2,968)................................. 2,325 3,036
Preferred stock (cost $45 and $662)................................... 31 876
2,356 3,912
Other long-term investments............................................. 58,773 39,880
Short-term investments.................................................. 520 1,911
1,905,880 1,775,166
Less allowance for credit losses........................................ (2,231) (2,500)
Total investments....................................... 1,903,649 1,772,666
Cash and cash equivalents................................................... 10,621 21,782
Accounts receivable (net of allowance for
uncollectible accounts of $227 and $348)................................ 2,310 819
Amounts receivable under reinsurance agreements............................. 149,656 151,392
Amounts receivable on securities settlements
in process .......................................................... 905 1,203
Accrued investment income................................................... 29,296 26,544
Deferred policy acquisition costs........................................... 148,871 128,671
Deferred income taxes....................................................... 11,136 8,622
Other assets................................................................ 3,577 2,997
Total assets............................................ $ 2,260,021 2,114,696
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted, except per share data)
As of December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
Liabilities:
Policy liabilities:
Future policy benefits................................................ $ 2,148,763 2,005,339
Other policy liabilities.............................................. 2,983 4,948
2,151,746 2,010,287
Amounts due on securities settlements in process........................ 274 -
Accrued expenses and other liabilities.................................. 3,805 4,064
Total liabilities...................................... 2,155,825 2,014,351
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, authorized-
2,000,000 shares...................................................... - -
Common stock, no par value, authorized -
25,000,000 shares; issued - 10,034,742 shares
in 1994 and 10,142,842 shares in 1993................................. 12,769 12,907
Paid in capital......................................................... 63,499 64,612
Unrealized investment gains (losses)(net of
deferred policy acquisition cost amortization
expense (benefit) of $(3,476) and $-0- and deferred
income tax expense (benefit) of $(2,616) and $548).................. (7,813) 1,064
Retained earnings....................................................... 38,876 25,183
107,331 103,766
Less leveraged employee stock ownership trust
(LESOP) ....................................................... (3,135) (3,421)
Total stockholders' equity............................. 104,196 100,345
Total liabilities and stockholders'
equity................................................ $2,260,021 2,114,696
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's Omitted, except per share data)
For the Year Ended December 31,
1994 1993 1992
Revenue:
Insurance premiums and policy charges.......................... $ 6,331 6,594 7,545
Net investment income.......................................... 142,009 138,539 141,155
Net investment gains........................................... 803 17,049 20,521
Income from disposal of private placement
securities................................................... - - 5,821
Other revenue.................................................. 557 341 666
Total revenue.......................................... 149,700 162,523 175,708
Benefits and expenses:
Benefits, claims and interest credited to
policyholders................................................ 112,310 113,848 128,049
Amortization of deferred policy acquisition
costs........................................................ 9,026 9,436 16,409
General insurance expenses..................................... 7,587 8,830 8,694
Premium and other taxes, licenses and fees..................... 1,252 2,395 2,519
Other expenses................................................. 239 265 276
Total benefits and expenses............................ 130,414 134,774 155,947
Operating earnings............................................. 19,286 27,749 19,761
Interest expense............................................... - 994 2,443
Earnings before income tax expense and
extraordinary item........................................... 19,286 26,755 17,318
Income tax expense............................................. 5,593 8,564 118
Earnings before extraordinary item............................. 13,693 18,191 17,200
Extraordinary item: Loss on early
extinguishment of debt (net of income tax
benefit of $100 and $196).................................... - (213) (382)
Net earnings................................................... $13,693 17,978 16,818
Earnings per share of common stock:
Primary:
Earnings before extraordinary item........................... $ 1.32 2.62 2.94
Extraordinary item........................................... - (.03) (.07)
Net earnings................................................. $ 1.32 2.59 2.87)
Fully diluted:
Earnings before extraordinary item........................... $ 1.32 2.49 2.62
Extraordinary item........................................... - (.03) (.06)
Net earnings................................................. $ 1.32 2.46 2.56)
Average share outstanding:
Primary........................................................ 10,341 6,860 5,770
Fully diluted.................................................. 10,341 7,315 6,567
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
Unrealized Retained
investment earnings
Common Paid-in gains (accum. Treasury
stock capital (losses) deficit) stock LESOP Total
Balance as of January 1, 1992........ $7,812 41,152 (858) (9,099) (6,855) (1,388) 30,936
Net earnings......................... - - - 16,818 - - 16,818
Decrease in unrealized
investment losses................... - - 49 - - - 49
Cash dividends to stockholders
($2.00 per share on preferred
stock).............................. - - - (278) - - (278)
Issuance of common stock:
upon exercise of options............ 75 235 - - - - 310
upon sale to LESOP.................. 299 2,201 - - - (2,500) -
Issuance of preferred stock.......... - 988 - - - - 988
Issuance of warrants................. - 440 - - - - 440
Allocation of LESOP shares........... - - - - - 200 200
Balance as of December 31, 1992 . 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 stockholders
($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 - - - - 1,994
upon conversion of preferred
stock.............................. 729 (557) - - - - -
Retirement of treasury stock......... (690) (6,165) - - 6,855 - -
Repurchase of warrants on debt
payment............................. - (375) - - - - (375)
Allocation of LESOP shares........... - - - - - 267 267
Balance as of December 31, 1993...... 12,907 64,612 1,064 25,183 - (3,421) 100,345
Net earnings......................... - - - 13,693 - - 13,693
Cumulative effect of adoption
of SFAS 115......................... - - 19,613 - - - 19,613
Increase in unrealized invest-
ment losses......................... - - (28,490) - - - (28,490)
Remaining offering costs............. - (135) - - - - (135)
Redemption stockholders rights
plan................................ - (101) - - - - (101)
Issuance of common stock:
upon exercise of options............ 28 133 - - - - 161
Tax effect exercise of options....... - 10 - - - - 10
Purchase of treasury shares.......... - - - - (1,186) - (1,186)
Retirement of treasury stock......... (166) (1,020) - - 1,186 - 0
Allocation of LESOP shares........... - - - - - 286 286
Balance as of December 31, 1994. $12,769 63,499 (7,813) 38,876 0 (3,135) 104,196
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Operating Activities:
Net earnings................................................... $ 13,693 17,978 16,818
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Interest credited to policyholders......................... 114,871 116,942 132,160
Amortization of (discounts) premiums on debt
securities, net........................................ (2,347) (1,905) (937)
Amortization of deferred policy acquisition
costs.................................................... 9,026 9,436 16,409
Net investment (gains) losses.............................. (803) (17,049) (20,521)
Accrued investment income.................................. (2,752) (2,366) (872)
Deferred income taxes...................................... 651 4,635 (2,405)
Other, net................................................. (1,830) 1,982 2,235
Net cash provided by operating activities.............. 130,509 129,653 142,887
Investing Activities:
Purchases of securities:
Held-to-maturity............................................. (242,464) (578,918) (845,211)
Available-for-sale........................................... (332,647) - -
Proceeds from sale of securities:
Held-to-maturity............................................. 8,302 341,498 581,342
Available-for-sale........................................... 319,846 - -
Proceeds from maturity or redemption
of securities:
Held-to-maturity............................................. 35,375 184,280 231,060
Available-for-sale........................................... 86,973 - -
Other long-term investment, net................................ (20,215) (20,326) (1,709)
Short-term investments, net.................................... 1,392 (487) (677)
Capitalization of deferred policy
acquisition costs............................................ (25,750) (18,212) (14,076)
Other, net..................................................... (413) (497) 163
Net cash used in investing activities.................. (169,601) (92,662) (49,108)
Financing Activities:
Premiums received.............................................. 267,802 222,177 168,657
Surrender and death benefits paid.............................. (246,632) (318,880) (203,134)
Surrender and risk charges collected........................... 5,409 5,161 6,768
Securities settlements in process.............................. 573 (25,609) 14,070
Payments on notes payable...................................... - (19,918) (9,000)
Issuance of common stock....................................... 27 31,400 2,810
Purchase of LESOP stock........................................ - - (2,500)
Other, net..................................................... 752 (2,590) (492)
Net cash provided by (used in)
financing activities.................................. 27,931 (108,259) (22,821)
Increase (Decrease) in Cash and Cash Equivalents................... (11,161) (71,268) 70,958
Cash and Cash Equivalents:
Beginning of year.............................................. 21,782 93,050 22,092
End of year.................................................... $ 10,621 21,782 93,050
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Supplemental schedule of cash flow information:
Income tax payments............................................ $ 6,150 3,204 2,242
Interest payments.............................................. $ - 1,071 1,671
Change in net unrealized investment gains
(losses) on available-for-sale securities.................... $ (56,823) - -
Less: Associated reduction in amortization
of deferred policy acquisition costs.................. 16,221 - -
Deferred income tax benefit........................... 13,177 - -
Net change in net unrealized gains (losses)
on available-for-sale securities............................. $ (27,425) - -
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1993 and 1992
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. 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. Beginning in 1994, debt
securities available-for-sale are carried at estimated market value, with any
unrealized gains or losses recorded in stockholders' equity. In 1993, debt
securities classified as available-for-sale were carried at the lower of
aggregate cost or estimated market value, with any unrealized loss recorded
in stockholders' 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 advisors. 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 investment 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.
The cost of securities sold is determined on the identified
certificate basis.
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.
C. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
______________________________________________________________
The carrying values and estimated fair values of the company's financial
instruments as of December 31, 1994 and 1993 were as follows:
(000's Omitted)
As of December 31,
1994 1993
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Debt securities. . . . . . . . . 1,844,231 1,752,738 1,729,463 1,810,829
Equity securities. . . . . . . . 2,356 2,356 3,912 3,912
Other long-term investments. . . 58,773 58,536 39,880 40,215
Short-term investments. . . . . 520 520 1,911 1,911
Cash and cash equivalents. . . . 10,621 10,621 21,782 21,782
Amounts receivable on securities
settlement in process. . . . . . . 905 905 1,203 1,203
Accounts receivable and accrued
investment income. . . . . . . . . 31,606 31,606 27,363 27,363
Liabilities:
Future policy benefits - investment
contracts. . . . . . . . . . . . . 1,917,066 1,799,090 1,789,109 1,672,754
Other policy liabilities. . . . . . 2,983 2,983 4,948 4,948
Amounts due on securities
settlements in process. . . . . . 274 274 - -
Accrued expenses and other
liabilities. . . . . . . . . . . . 3,805 3,805 4,064 4,064
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 approximate fair value.
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 c
alculated 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
______________________________________________________________
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.
D. 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. 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 1, 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 the 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 earnings if actual experience indicates that the estimates
should be revised.
Net investment gains realized in 1994, 1993 and 1992 resulted in the
company experiencing investment margins greater than those estimated. As a
result, $203,940, $4,790,523 and $8,691,521 of the unamortized balance of
deferred policy acquisition costs were expensed in 1994, 1993 and 1992,
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 anticipated yield on investments. Deferred policy
acquisition costs will be adjusted in the future based on actual investment
income earned.
E. 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.
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.
F. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
______________________________________________________________
G. 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.
H. 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.
I. EARNINGS PER SHARE:
Primary earnings per share of common stock are computed by dividing
net earnings (reduced by preferred dividend requirements in 1993 and 1992) 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 1992. During 1993, 573,332 common shares were issued upon
conversion of $4,300,000 of Series B Convertible Preferred Stock. Had this
conversion occurred on January 1, 1993, primary earnings per share would have
been $2.46 for 1993. During 1993, 1,646,883 shares of common stock were sold
to retire debt in the amount of $14,030,289. Had this sale and the
corresponding retirement of debt occurred on January 1, 1993, primary
earnings per share would have been $2.25 for 1993.
J. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money market accounts.
K. NEW ACCOUNTING STANDARDS:
Effective January 1, 1994, the company adopted to 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 (net of related amortization of deferred
policy acquisition costs of $12,745,031 and deferred income tax expense of
$10,560,659), 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 December 31, 1994 were
not affected by the adoption of this Statement.
Effective May 1993, the company adopted the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" and restated the financial statements of prior years
to report amounts ceded to reinsurers separately as assets in the respective
consolidated balance sheets. Adoption of this standard increased total assets
and liabilities by $148,626,459 and $150,635,000 as of December 31, 1994 and
1993, respectively.
L. RECLASSIFICATIONS:
Certain reclassifications have been made to conform prior years' financial
statements to the December 31, 1994, presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments:
A summary of investment income is as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Debt securities.................................................... $ 142,469 136,533 139,089
Equity securities.................................................. 50 76 89
Other long-term investments........................................ 486 3,096 1,972
Short-term investments............................................. 830 931 2,083
143,835 140,636 143,233
Less investment expenses........................................... 1,826 2,097 2,078
Net investment income.............................................. $ 142,009 138,539 141,155
Net investment gains (losses)
Debt securities................................................ $ (533) 18,486 23,560
Equity securities.............................................. 1,335 (274) 11
Other ........................................................ 1 (1,163) (3,050)
Net investment gains (losses)...................................... $ 803 17,049 20,521
Certain limited partnership investments are included in income from
other long-term investments. These funds (commonly referred to as hedge
funds) are managed by outside investment advisors. The investment guidelines
of these partnerships provide for a broad range of investment alternatives,
including stocks, bonds, futures, options, commodities, and various other
financial instruments. These investments were purchased with the
strategy that yield in excess of the S&P 500 Index may be obtained. The
partnerships are carried at an amount equal to the company's share of the
partnerships' estimated market value with related unrealized gains and losses
recorded in net investment income. In accordance with the permitted
guidelines, the investments purchased by these partnerships may experience
greater than normal volatility which could materially effect the company's
earnings for any given period.
The maturity of the company's debt and equity securities portfolio as
of December 31, 1994 was as follows:
(000's Omitted)
As of December 31, 1994
Held-to-maturity Available-for-sale
Estimated Estimated
Book Market Book Market
Value Value Value Value
Debt Securities:
Bonds:
One year or less $ 999 1,003 23,580 22,232
Two years through five years 195,835 187,900 159,075 158,308
Six years through ten years 892,544 823,583 319,157 311,431
Eleven years and after 147,807 133,206 119,326 115,075
1,237,185 1,145,692 621,138 607,046
Equity securities - - 2,169 2,356
$ 1,237,185 1,145,692 623,307 609,402
These tables include mortgage-backed securities based on the
estimated future cash
flows of the underlying mortgages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_________________________
The book value, estimated market value and unrealized market gains
and losses of debt and equity securities as of December 31, 1994, and 1993
were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
Value Gains Losses Value
December 31, 1994
__________________
Bonds held-to-maturity:
Corporate debt obligations
Investment grade.................................... $ 792,746 1,160 62,907 730,999
High-yield.......................................... 135,698 108 9,267 126,539
928,444 1,268 72,174 857,538
U.S. Treasury obligations........................... 3,618 - 319 3,299
Mortgage-backed securities.......................... 305,123 1 20,269 284,855
Bonds held-to-maturity.............................. 1,237,185 1,269 92,762 1,145,692
Bonds available-for-sale:
Corporate debt obligations
Investment grade.................................... 253,055 1,005 5,633 248,427
High-yield.......................................... 1,218 - 8 1,210
254,273 1,005 5,641 249,637
Mortgage-backed securities.......................... 366,865 590 10,046 357,409
Bonds available-for-sale............................ 621,138 1,595 15,687 607,046
Total bonds......................................... 1,858,323 2,864 108,449 1,752,738
Equity securities available-for-sale.................. 2,169 417 230 2,356
$1,860,492 3,281 108,679 1,755,094
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
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_________________________
The preceding table includes the carrying value and estimated market
value of debt securities which the company has determined to be impaired
(other than temporary decline in value) as follows:
(000's Omitted)
Accumulated Estimated
Original Write- Carrying Market
Cost downs Value Value
December 31, 1994 $9,535 7,814 1,721 1,721
December 31, 1993 $7,611 7,582 29 76
The company defines high-yield securities as those corporate debt
obligations rated below investment grade by Standard & Poor's and Moody's or,
if unrated, those that meet the objective criteria developed by the company's
independent investment advisory firm. Management believes that the return on
high-yield securities adequately compensates the company for additional
credit and liquidity risks that characterize such investments. In some cases,
the ultimate collection of principal and timely receipt of interest is
dependent upon the issuer attaining improved operating results, selling
assets or obtaining financing.
The book value, estimated market value and unrealized market gains
and losses by type of mortgage-backed security as of December 31, 1994, and
December 31, 1993 were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
December 31, 1994 Value Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes................................$ 75,557 12 5,614 69,955
Targeted amortization classes and accretion
directed classes........................................... 7,729 - 319 7,410
Pass-throughs............................................... 40 2 - 42
Total government agency mortgage-backed
securities........................................... 83,326 14 5,933 77,407
Government sponsored enterprise mortgage-backed
securities:
Planned amortization classes................................ 410,313 104 15,852 394,565
Sequential classes.......................................... 19,705 - 1,087 18,618
Pass-throughs............................................... 299 - 2 297
Total government sponsored enterprise
mortgage-backed securities........................... 430,317 104 16,941 413,480
Other mortgage-backed securities:
Planned amortization classes................................ 22,686 22 745 21,963
Sequential classes.......................................... 125,100 451 5,345 120,206
Pass-throughs............................................... 13 - - 13
Subordinated classes........................................ 10,546 - 1,351 9,195
Total other mortgage-backed securities. . . . . . . . . 158,345 473 7,441 151,377
Total mortgage-backed securities............................... $ 671,988 591 30,315 642,264
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
______________________
(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-b
acked pass-through securities and sequential classes, which comprised 21.6%
and 22.1% of the carrying value of the company's mortgage-backed securities
as of December 31, 1994 and December 31, 1993, respectively, are sensitive to
this prepayment risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_______________________
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 ADsecurities comprised 76.8% and 76.3%
of the carrying value of the company's mortgage-backed securities as of
December 31, 1994 and December 31, 1993, respectively. The company does not
invest in support class securities or principal-only ("PO") and interest-only
("IO") strips.
As of December 31, 1994, 76.4% 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 four issues, with a carrying value of
$15,186,000 as of December 31, 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 following investments held as of December 31, 1994, exceeded ten
percent of stockholders' equity:
(000's Omitted)
As of December 31,
1994 1993
Book Estimated Book Estimated
Value Market Value Market
10% of Stockholders' Equity..................................... $ 10,420 10,035
Bonds:
Ashland Oil, Inc., various interest rates
and due dates through 2004.............................. $ 13,731 13,383
CBC Holdings, Inc., 10.33%, due 08-1997......................... 16,395 16,110 16,598 17,057
Countrywide Funding Corp, various interest
rates and due dates through 2023........................ 16,733 14,811 12,127 12,145
D&P CBO Partners & Corporation, 9.93%,
due 01-1995............................................. 13,033 13,038 14,999 15,095
FHLMC 1142 G, 7.95%, due 06-2000................................ 12,725 12,582 14,935 15,403
FHLMC 1295,J 7.5%, due 11-2005.................................. 14,678 13,938 14,676 15,586
FHLMC1435 G, 7%, due 10-2000.................................... 13,784 13,233
FHLMC 1496 G, 4%, due 05-2003................................... 11,780 11,555
FHLMC 1497 D, 6.4%, due 01-2003................................. 12,738 12,441
FHLMC 1538 H, 6.5%, due 04-2007................................. 13,726 13,055
FHLMC 1564 G, 6.25%, due 02-2003................................ 12,996 12,447
FHLMC 1698 G, 6%, due 06-2003................................... 13,725 13,050
FHLMC 1701 PG, 6.25%, due 10-2002............................... 13,704 12,903
FHLMC 1693 G, 6%, due 04-2003................................... 13,649 13,008
FNMAREMIC 90 138 G P11, 8.5%, due 01-1999...................... 13,961 13,860 14,039 14,630
FNMAG30 PG, 8.2%, due 03-1997................................... 14,843 14,855 14,816 15,492
FNMA92 24 G P11, 7.5%, due 03-2000.............................. 15,251 14,391 15,293 15,492
FNMA92 15H, 6.75%, due 12-2006.................................. 15,105 13,111 15,106 15,272
FNMAG 93 G01, 7%, due 02-2003................................... 14,822 13,402 14,815 15,342
FNMA 92 210 H, 6.5%, due 02-2006................................ 12,153 11,604
FNMA 92 192 H P11, 6.5%, due 12-2001............................ 14,541 13,570 14,489 15,070
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_______________________
(000's Omitted)
As of December 31,
1994 1993
Book Estimated Book Estimated
Value Market Value Market
FNMAG 92 G64 G, 7%, due 11-2002................................. 16,236 14,783 16,221 16,887
FNMAG 92 66 G, 7%, due 01-2003.................................. 14,853 13,477 14,849 15,314
FNMAG 93 G02, 7%, due 12-2002................................... 14,803 13,439 14,795 15,319
FNMA 93 85 PH, 6.5%, due 11-2007............................... 11,449 11,088
FNMA 94 34 PG, 6%, due 09-2003.................................. 13,697 13,013
FNMA 94 86 PH, 6%, due 07-2005.................................. 13,291 12,558
FNMA 94 83 B, 7.5%, due 12-2007............................... 19,177 18,031
FNMA89 65 G, 8.65%, due 01-1998....................... 12,069 11,955 12,112 12,514
Greentree 94-1, 6.9%, due 05-2002..................... 14,814 13,758
Hydro Quebec Ser IF, 7.375%, due 02-2003.............. 11,997 11,177
Liberty Mutual Capital Corp, 8.10%, due 01-2005....... 12,208 10,647 12,292 12,062
Ontario Province, various interest rates
and due dates through 2004.............................. 19,418 18,464
Paramount Communications Inc., 7.5%,
due 01-2002................................... 10,665 9,831 10,630 11,110
Prudential Home Mtg 92-A B 31 Sub, 7.85%
due 09-1995................................... 10,546 9,195 10,510 10,859
RFC 1992, various interest rates and due
dates through 1997............................ 19,517 18,772
RTC 1991 6 CL B5, 8.839%, due 02-1997................. 14,989 14,972 14,985 15,375
Texas Utilities Electric, various interest
rates and due dates through 2005.............. 10,905 10,309
Three Rivers CBO LP, 9.62% due 10-1998................ 11,710 11,385 11,782 12,072
The amounts shown as "estimated 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. 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,
carrying value and realized gains and losses on those sales were as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Consideration received..................... $ 462,138 393,142 693,532
Carrying value............................. 461,335 374,584 673,870
Net investment gains (losses)............ $ 803 18,558 19,662
Investment gains........................... $ 4,268 18,677 26,851
Investment losses.......................... (3,465) (119) (7,189)
Net investment gains (losses)............ $ 803 18,558 19,662
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_______________________
The above table includes bonds of one issuer which the company had
classified as held-to-maturity. These bonds have 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
creditworthiness.
In addition to the above sales, the company transferred bonds of two
issuers from held-to-maturity to available-for-sale as a result of an
increase in the risk weights used for regulatory risk-based capital purposes.
The book value of these bonds was $16,960,874. Bonds of another issuer with a
book value of $1,721,460 were also transferred from held-to-maturity to
available-for-sale based upon a significant deterioration in the issuer's
creditworthiness.
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 Long-
Held-to- Available- Available- term
Maturity for-Sale for-Sale Investments
Balance as of January 1, 1992........... $ 45,063 - (858) -
1992 Net change....................... (7,643) 4,115 49 -
Balance as of December 31, 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.................... (129,824) (57,127) (95) (1,330)
Balance as of December 31, 1994...... $ (91,493) (14,092) 187 -
At December 31, 1994 and 1993, investments with statutory carrying
values of $1,866,074,033 and $1,736,404,701 respectively, were on deposit
with various insurance departments. These amounts exceeded the minimum
required deposits by $66,325,834 and $57,640,783 as of December 31, 1994 and
1993, respectively.
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 fixed at a rate of 7.5% and a final
payment due January 10, 2008. The outstanding principal balances on this
loan were $11,815 and $205,059 as of December 31, 1994 and 1993,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Other Assets:
________________
Other assets consist of the following: (000's Omitted)
As of December 31,
Property and equipment at cost:
Home office building
(including land of $352) $ 2,152 2,113
Furniture and equipment 3,464 3,328
Automobiles 115 100
5,731 5,541
Less accumulated depreciation 3,336 3,174
2,395 2,367
Other........................................................ 1,182 630
$ 3,577 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
Year Ended Gross other Net
December 31, Descriptions amount companies amount
1994 Life insurance
in force.................... $ 330,108 259,200 70,908
Insurance premiums
and policy charges......... $ 7,308 977 6,331
Future policy
benefits................... $ 2,148,763 148,575 2,000,188
1993 Life insurance
in force.................... $ 354,703 280,819 73,884
Insurance premiums
and policy charges......... $ 7,936 1,342 6,594
Future policy
benefits................... $ 2,005,339 150,500 1,854,839
1992 Life insurance
in force.................... $ 384,179 306,506 77,673
Insurance premiums
and policy charges......... $ 9,312 1,767 7,545
Future policy
benefits................... $ 1,984,013 150,194 1,833,819
The company had amounts receivable under reinsurance agreements of
$149,656,094 and $151,392,088 as of December 31, 1994, and December 31, 1993,
respectively. Of the amounts, $147,949,099 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Reinsurance (cont.):
_______________________
The following table identifies the components of the amounts
receivable from ERC:
(000's Omitted)
As of December 31,
1994 1993
Reserve for future policy benefits $ 146,919 148,712
Reimbursement for benefit payments....................... 1,030 757
$ 147,949 149,469
6. Credit Agreement:
____________________
On December 29, 1994, the company entered into a credit agreement
with The First National Bank of Chicago (First Chicago) and Boatmen's First
National Bank of Kansas City (Boatmen's), as Lenders. Under the terms of this
agreement, the Lenders have committed to lend up to $25,000,000 in the form
of a 5-year reducing revolving credit facility. The company has agreed to pay
a commitment fee of .25% per annum on the unused portion of the commitment.
Borrowings under this agreement may be used for general corporate purposes.
Interest on the borrowings under this agreement is determined at the
option of the company to be: (i) a fluctuating rate of interest equal to the
higher of the corporate base rate announced by First Chicago from time to
time, and a fluctuating rate equal to the weighted average of rates on
overnight Federal Funds transactions with members of the Federal Reserve
System as published by the Federal Reserve Bank of New York plus .50% per
annum, or (ii) a Eurodollar rate plus a margin ranging from 1.00% to 1.25%.
In addition to general covenants which are customary for facilities
such as this, the company has agreed to maintain minimum consolidated net
worth, a minimum cash flow coverage ratio, minimum risk based capital for
American, minimum capital, surplus and asset valuation reserve of American
and to maintain a maximum debt to equity(including indebtedness) ratio.
Additional covenants include: (i) limitations on acquisitions; (ii)
maintenance of current lines of business; (iii) limitations on additional
indebtedness; (iv) limitations on investments; (v) limitations on dividends
and stock repurchases, and (vi) limitations on mergers, consolidations and
sales of assets, typical of such facilities.
At December 31, 1994, there had been no borrowings under this
agreement.
7. 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 the plan during the three years ended
December 31, 1994.
The company sponsors a Leveraged Employee Stock Ownership Plan
(LESOP) for all full-time employees with one year of service.
The LESOP has acquired 370,244 shares of the company's stock 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 balances of $3,336,038 and $3,639,922 as of December 31,
1994 and 1993, respectively.
Each year, the company makes 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 is allocated to participating employees.
Of the 368,079 shares of the company's common stock now owned by the LESOP,
99,704 shares have been allocated to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Retirement Plans (continued):
________________________________
participating employees with the remaining 268,375 shares 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.
Contributions to the LESOP during December 31, 1994, 1993 and 1992 were
$285,565, $266,886 and $200,226, 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 December 31, 1994, five of the company's directors qualified
for benefits under the plan. A liability in the amount of $521,180,
representing the present value of future benefits, has been established.
Charges (credits) to earnings relating to the plans were
($40,244), $(3,282) and $564,706, for the years ended December 31,
1994, 1993 and 1992, respectively.
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
year ended December 31, 1994 and 1993, were $215,664 and $213,059,
respectively.
8. Stockholders' Equity:
________________________
Dividends by American to AmVestors are limited by laws applicable to
insurance companies. Under Kansas law, American may pay a dividend from its
surplus profits, without prior consent of the Kansas Commissioner of
Insurance, if the dividend does not exceed 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. As of December 31, 1994,
surplus profits of American were $12,996,673 and 10% of statutory capital and
surplus was $8,752,120. 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 December 31, 1994 and 1993
American's statutory capital and surplus was $87,521,204 and $87,146,052,
respectively. Statutory net income (loss) for the years 1994, 1993 and 1992
was $4,167,120, ($1,469,786) and $1,853,297, respectively.
In connection with the original establishment of the Interest
Maintenance Reserve (IMR), the Commissioner of Insurance of Kansas, the
company's domiciliary state, ordered that American prepare its December 31,
1992, NAIC Annual Statement Form to equitably allocate 1992 capital gains and
losses, not included in the calculation of the Asset Valuation Reserve (AVR),
on other than government securities, fifty (50%) percent to surplus and fifty
(50%) percent to IMR, after calculation of the AVR pursuant to the
instructions provided by the NAIC. This differs from prescribed statutory
accounting practices.
This permitted accounting practice increased statutory surplus as of
December 31, 1992, by $8,167,587. Gains and losses for years subsequent to
1992 are recorded in accordance with prescribed statutory accounting
practices.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (cont.):
_________________________________
On March 17, 1989, the Board of Directors of the company adopted the
1989 Nonqualified Stock Option 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 859,837 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 years were as follows:
For the Year Ended December 31,
1994 1993 1992
Options outstanding, beginning
of year...................................... 816,107 757,340 797,632
Options granted............................... 95,000 413,000 81,574
Options exercised............................. (22,200) (227,561) (58,264)
Options expired........................... (29,070) (126,659) (63,602)
Options cancelled........................ - (13) -
Options outstanding, end of year......... 859,837 816,107 757,340
Outstanding options exercisable
at end of year.......................... 764,837 403,107 675,766
Options reserved for future grants
at end of year.......................... 132,247 145,677 3,802
Option prices per share:
Exercised, during the year............ $5.31-$7.50 $4.84-$9.60 $5.31
Outstanding, end of year.............. $4.84-$12.66 $4.84-$13.75 $4.84-$13.75
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.
For the Year Ended December 31,
1994 1993
Rights outstanding, beginning of year..................... 30,000 60,000
Rights granted............................................ - -
Rights exercised.......................................... - (30,000)
Rights expired............................................ (30,000) -
Rights cancelled.......................................... - -
Rights outstanding, end of year........................... -0- 30,000
Rights reserved for future grants ....................... 5,000 5,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (cont.):
_________________________________
The company recorded compensation expense relating to stock
appreciation rights of
$-0-, $1,875 and $121,875, for the years ended December 31, 1994, 1993, and
1992, respectively.
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 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
__________
9. Stockholders' Rights Plan:
______________________________
On June 30, 1994, the company's Board of Directors voted to repeal
the 1988 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. Income From Disposal of Private Placement Securities
_____________________________________________________
Income from disposal of private placement securities was $5.8 million
in 1992. During 1988, 1989, and 1990, American purchase private placement
securities believed to have a quality rating equivalent to "BBB" by S&P. In
1992, the company engaged an independent firm to review the private placement
portfolio. That review determined those securities would have been rated
"BB"-"B" if they had been rated by S&P when issued and that the total market
value of the securities at the time of the report was approximately $5.8
million less than the par value of these securities. On September 21, 1992,
an affiliate of the placement agent agreed to purchase the bonds at their par
value, which approximated the company's cost. Several of these bonds had been
written down in an amount totalling $2.1 million during 1990, 1991 and 1992
when declines in value were considered to be other than temporary. The effect
on 1992 operations of this transaction was a net investment loss of $4.3
million representing the difference between the market value at the time of
the sale and the GAAP book carrying value of the securities, and $5.8 million
of income from the disposal of private placement securities, representing the
amount received in excess of market value. There were no similar transactions
in 1994 or 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. 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 in 1994, 1993 and 1992 was $129,972,
$136,912 and $143,370, respectively.
During 1993 and 1992, the company received amounts of $51,000 and
$472,000, respectively representing recoveries of amounts paid during 1991 as
a result of the settlement of legal claims which resulted from agent fraud.
12. Income Taxes:
________________
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Current income tax expense......................................... $ 4,943 4,477 2,523
Deferred income tax expense (benefit).............................. 650 4,087 (2,405)
Total income tax expense (benefit)............................. $ 5,593 8,564 118
The net deferred tax asset was comprised of the following:
(000's Omitted)
For the Year Ended
December 31,
1994 1993
Gross deferred tax assets:
Investments $ 7,178 2,359
Accrued investment income - 10
Property and equipment 341 107
Other assets 11 2
Reserves for future policy benefits 107,448 101,816
Accrued expenses and other liabilities 1,828 1,943
116,806 106,237
Gross deferred tax liabilities:
Investments $ 1,011 2,299
Accounts receivable 51,940 51,098
Accrued investment income 193 -
Deferred policy acquisition costs 49,653 41,807
Policy and contract claims 279 101
103,076 95,305
13,730 10,932
Less valuation allowance (2,594) (2,310)
Net deferred tax asset $ 11,136 8,622
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
12. Income Taxes (cont.):
________________________
The actual tax expense (benefit) for each year differs from the
"expected" tax expense (computed by applying the Federal tax rate of 35% to
earnings before income taxes) as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Expected tax expense............................................... $ 6,750 9,091 5,873
State income tax................................................... 254 201 45
Tax exempt municipal bond interest and dividends
received deductions................................................ - - (2)
Capital loss carryforward.......................................... - - (6,130)
Book/tax capital difference on bond dispositions................... - - (225)
Operating loss carryforward not tax effected....................... - - -
Stock options exercised............................................ - - (92)
Change in valuation allowance on future
deductions..................................................... (153) (470) 1,238
Change in valuation allowance on capital loss
temporary differences.......................................... (597) (555) (638)
Change in expected tax rate on future
deductions..................................................... (321) - -
Change in other net temporary differences, not
previously tax effected........................................ (340) 297 49
Actual income tax expense (benefit)................................ $ 5,593 8,564 118
Deferred income taxes are provided for the tax effects of transactions
that are reported in different periods for financial reporting and tax return
purposes. The primary components of the deferred income tax provision are as
follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Investments........................................................ $ (692) 938 (2,545)
Accounts receivable................................................ 842 4,447 1,531
Accrued investment income.......................................... 204 (10) -
Deferred policy acquisition costs.................................. 6,629 2,488 (1,776)
Property and equipment............................................. (234) (107) -
Other assets....................................................... (9) (1) -
Future policy benefits............................................. (5,632) (2,485) (1,893)
Policy and contract claims......................................... 178 - 32
Accrued expenses and other liabilities............................. 114 (440) (807)
Operating loss carryforward........................................ - 282 (282)
Valuation allowance on future deductions and
capital loss differences....................................... (750) (1,025) 3,335
Deferred income tax expense (benefit).......................... $ 650 4,087 (2,405)
As of December 31, 1994, the company had no capital loss
carryforwards available to offset future realized investment gains.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
13. Commitments and 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. Charges (credits) relating to guaranty fund assessments impacted 1994,
1993 and 1992 income before taxes by approximately $(368,000), $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.
14. Quarterly results (Unaudited):
________________________________
The company's quarterly results are set forth in the following table:
(000's Omitted, except per share data)
1994 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
Total revenue........................................... $ 37,491 35,954 37,519 38,188
Earnings before income taxes............................ $ 5,412 3,771 4,833 5,270
Income tax expense...................................... 1,840 1,282 1,628 843
Net earnings............................................ $ 3,572 2,489 3,205 4,427
Per share of common stock:
Primary:
Net earnings.................................. $ .34 .24 .31 .43
Fully diluted:
Net earnings.................................. $ .34 .24 .31 .43
1993 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
Total revenue........................................... $ 45,927 39,359 38,336 38,901
Earnings before income taxes and extra-
ordinary item....................................... $ 7,843 5,163 6,990 6,743
Income tax expense...................................... 2,353 1,549 2,497 2,149
Net earnings before extraordinary item.................. 5,490 3,614 4,493 4,594
Extraordinary item...................................... - - - (213)
Net earnings............................................ $ 5,490 3,614 4,493 4,381
Per share of common stock:
Primary:
Net earnings before extraordinary item.......... $ .84 .55 .69 .57
Extraordinary item............................ - - - (.03)
Net earnings.................................. $ .84 .55 .69 .54
Fully diluted:
Net earnings before extraordinary item........ $ .78 .52 .65 .54
Extraordinary item............................ - - - (.02)
Net earnings.................................. $ .78 .52 .65 .52
Item 9. Changes in and Disagreements with Accountants and
Accounting and Financial Disclosure
There have been no disagreements on accounting and financial
disclosure within the twenty-four months prior to the date of the most recent
financial statements.
PART III
Item 10. Directors and Executive Officers of the Registrant
______________________________________________________________
The information set forth under the caption "Proposal A. Election of
Directors" in the company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held May 18, 1995, is incorporated herein by reference.
Item 11. Executive Compensation
_________________________________
The information set forth under the caption "Executive Compensation"
in the company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held May 18, 1995, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
__________________________________________________________________________
The information set forth under the caption "Principal Holders of Voting
Securities" in the company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 18, 1995, is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
_________________________________________________________
The information set forth under the caption "Compensation Committee
Interlocks and Insider Participation" in the company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 18, 1995, is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
____________________________________________________________________________
(a) 1. Financial Statements
See index to Financial Statements at Item 8.
(b) 2. Financial Statement Schedules
Schedule Page
Number Description Number
________ ____________________________________________________ _________________
Independent Auditors' Report 61
I Summary of investments 62
II Condensed Financial information of registrant 63-64
III Supplementary insurance information 65
V Valuation and qualifying accounts and reserves 66
All other schedules are omitted because they are not required or
because the required information is included in the consolidated financial
statements and the notes thereto.
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 Financial From S-2, File #2-82811
Corporation and American Investors Life dated November 26, 1986.
Insurance Company, Inc.
(2)(b) Resolutions of the Board of Directors Exhibit (2)(a) to Form 10-Q
dated January 7, 1988, providing for dated May 11, 1988.
succession to the position of Chairman
of the Board of Directors
(3)(a) Articles of Incorporation as Amended and Exhibit (3)(a) to Form 10-Q
Restated dated October 26, 1993
(4)(a) Specimen Common Stock Certificate P 67
(4)(b) Common Stock Purchase Warrant Exhibit (10)(o) to Form 10-K
expiring December 9, 1998 dated April 12, 1989
(4)(c) Common Stock Purchase Warrant Exhibit (10)(v) to Form 10-Q
expiring May 1, 2002 dated May 13, 1992
(10)(a) Form of Indemnification Agreement between Exhibit (10)(o) to Form 10-K
company and its officers and directors dated March 29, 1988
(10)(b) Employment Agreement dated May 18, 1989, Exhibit (10)(a) to Form 10-Q
between the company and Ralph W. Laster, dated August 8, 1989
Jr.
(10)(c) 1989 Non-Qualified Stock Option Plan Exhibit (10)(q) to Form 10-K
adopted March 17, 1989 dated April 12, 1989
(10)(d) Stock Appreciation Rights Plan adopted Exhibit (10)(r) to Form 10-K
March 17, 1989 dated April 12, 1989
(10)(e) Restricted Stock Plan adopted Exhibit 4.4 to Registration
March 17, 1989 statement on Form S-8 dated
September 19, 1989
Registration No. 33-31155
(10)(f) Employment Agreement dated October 3, 1994 Exhibit (10)(a) to Form 10-Q
1992, between the company and Ralph W. dated November 10, 1994
Laster, Jr.
(10)(g) Bonus Compensation Agreement dated Exhibit (10)(b) to Form 10-Q
September 30, 1994, between to company dated November 10, 1994
and Ralph W. Laster,Jr.
(10)(h) Bonus Compensation Agreement dated Exhibit (10)(c) to Form 10-Q
September 30, 1994, between the Company dated November 10, 1994
and Mark V. Heitz
(10)(i) Credit Agreement dated December 29, 1994, P 68-144
between the company, First National Bank
of Chicago and Boatman's First National
Bank of Kansas City
Exhibit Page Number or Incorporation
Number Description by Reference
(10)(j) 1994 Stock Purchase Plan for Non-Employee PP 145-149
Directors effective February 24, 1994
(10)(k) Incentive Compensation Plan between the PP 150-156
company and certain designated employees
effective for the calendar year 1994
(11) Calculation of Earnings (Loss) per Share P 157
(20) Reports on Form 8-K
There were no reports on Form 8-K for
the twelve months ended December 31, 1994
(21) 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
(23) Independent Auditors' Consent P 158
(27) Financial Data Sheet
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: /s/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: March 30, 1995
________________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/Ralph W. Laster, Jr. March 30, 1995
Ralph W. Laster, Jr Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Accounting Officer)
/s/Mark V. Heitz President, General Counsel March 30, 1995
Mark V. Heitz and Director
/s/Janis L. Andersen Director March 30, 1995
Janis L. Andersen
/s/Robert G. Billings Director March 30, 1995
Robert G. Billings
/s/Jack H. Brier Director March 30, 1995
Jack H. Brier
/s/Robert T. McElroy Director March 30, 1995
Robert T. McElroy, M.D.
/s/R. Rex Lee Director March 30, 1995
R. Rex Lee, M.D.
/s/Robert R. Lee Director March 30, 1995
Robert R. Lee
/s/James V. O'Donnell Director March 30, 1995
James V. O'Donnell
INDEPENDENT AUDITORS' REPORT
_____________________________
We have audited the consolidated financial statements of AmVestors
Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and
for each of the three years in the period ended December 31, 1994, and have
issued our report thereon dated March 29, 1995; such report is included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedules of AmVestors Financial Corporation and subsidiaries, listed in Item
14. These financial statement schedules are the responsibility of the
company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/Deloitte & Touche LLP
____________________________
Kansas City, Missouri
March 29, 1995
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
SCHEDULE I
As of December 31, 1994
(000's Omitted)
Amount at
which shown
in the
Market balance
Type of Investment Cost Value sheet
Debt securities:
Bonds:
Held-to-maturity:
U.S. treasury obligations $ 3,618 3,299 3,618
Mortgage-backed securities 305,123 284,855 305,123
Public utilities 124,818 114,073 124,818
All other corporate bonds 803,626 743,465 803,626
Available-for-sale:
U.S. treasury obligations - - -
Mortgage-backed securities 366,865 357,409 357,409
Public utilities 22,276 21,699 21,699
All other corporate bonds 231,997 227,938 227,938
Total Bonds 1,858,323 1,752,738 1,844,231
Preferred stock-redeemable - - -
Total debt securities 1,858,323 1,752,738 1,844,231
Equity securities:
Common stocks:
Banks, trust and insurance
companies 1,825 2,037 2,037
Public utilities 237 89 89
All other common stock 62 199 199
Preferred stock - non-redeemable 45 31 31
Total equity securities 2,169 2,356 2,356
Mortgage loans on real estate 5,465 5,475 5,465
Other long-term investments 53,308 53,061 53,308
Short-term investments 520 520 520
1,919,785 1,814,150 1,905,880
Allowance for credit losses (2,231) - (2,231)
Total investments $ 1,917,554 1,814,150 1,903,649
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II
BALANCE SHEETS
(000's Omitted)
As of December 31,
1994 1993
ASSETS
Investment in subsidiaries 107,744 104,773
Long-term investments 536 494
Cash and cash equivalents $ (33) (48)
Other assets 2,782 2,941
Total Assets $ 111,029 108,160
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes Payable $ 5,434 5,761
Other liabilities 1,399 2,054
Total liabilities 6,833 7,815
Stockholders' Equity:
Preferred stock - -
Common stock 12,769 12,907
Paid-in capital 63,499 64,612
Unrealized investment gains (losses) (7,813) 1,064
Retained earnings 38,876 25,183
107,331 103,766
Less leveraged employee stock ownership trust (3,135) (3,421)
Total stockholders' equity 104,196 100,345
Total liabilities and stockholders' equity $ 111,029 108,160
STATEMENTS OF OPERATIONS
For the year ended December 31,
1994 1993 1992
Equity in earnings of subsidiaries $ 13,748 17,732 18,562
Investment income 67 23 58
Other revenues 4,149 4,103 3,713
Operating expense (3,867) (2,921) (3,399)
Interest expense (466) (1,533) (2,766)
Net earnings before income taxes
and extraordinary item 13,631 17,404 16,168
Income tax benefit (62) (787) (1,032)
Net earnings before extraordinary
item 13,693 18,191 17,200
Extraordinary loss - (213) (382)
Net earnings $ 13,693 17,978 16,818
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II (cont.)
STATEMENTS OF CASH FLOWS (000's Omitted)
Increase (Decrease) in Cash and Cash Equivalents
For the Year Ended December 31,
1994 1993 1992
Operating Activities:
Net earnings $ 13,693 17,978 16,818
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Equity in earnings of subsidiaries (13,748) (17,732) (18,562)
Amortization of discount on notes
payable - 59 862
Other liabilities (656) 1,368 215
Other assets 160 877 (4)
Other, net 134 (372) (647)
Net cash provided by (used in)
operating activities (417) 2,178 (1,318)
Investing Activities:
Investment in subsidiaries (135) (14,600) -
Dividends from subsidiaries 1,900 2,680 7,495
Purchases of debt securities - - (75)
Proceeds from sale of debt securities - 75 -
Purchases of long-term investments (233) (494) -
Principal payments on long-term
investments 190 - -
Net cash provided by (used in)
investing activities 1,722 (12,339) 7,420
Financing Activities:
Additions to notes payable - - 3,159
Payments on notes payable (326) (20,855) (9,521)
Cash dividends to stockholders - (236) (278)
Redemption of stockholder plan (101) - -
Fractional cash on reverse stock
split - (25) -
Issuance of common stock 27 31,400 2,810
Purchase of treasury stock (1,186) - -
Repurchase of warrants - (375) -
Purchase of LESOP stock - - (2,500)
Allocation of LESOP shares 286 267 200
Other, net 10 - -
Net cash provided by (used in)
financing activities (1,290) 10,176 (6,130)
Increase (Decrease) in Cash and
Cash Equivalents 15 15 (28)
Cash and Cash Equivalents:
Beginning of year (48) (63) (35)
End of year $ (33) (48) (63)
Supplemental schedule of cash flow
information:
Income tax payments $ 6,150 3,204 2,000
Interest payments $ - 1,614 1,516
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE III
(000's Omitted)
Future
Policy Amortization
Year Deferred Benefits Other Premium Benefits of Deferred
Ended Policy Losses, Claims & Policy Net Claims & Policy Other
December Acquisition Claims & & Charges Investment Settlement Acquisition Operating
31, Costs Loss Expense Benefits Revenue Income Expenses Costs Expenses
1992 $119,895 1,984,013 148 7,545 141,155 4,458 16,409 11,280
1993 $128,671 2,005,339 157 6,594 138,539 4,257 9,436 11,285
1994 $148,871 2,148,763 134 6,331 142,009 3,570 9,026 8,883
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE V
(000's Omitted)
Additions
Balance Charged to Charged to Balance at
Beginning Costs and Other and End of
of Period Expenses Accounts Deductions Period
Year Ended December 31, 1992:
Allowance for Credit Losses $ 7,000 - 658 5,158 2,500
Allowance for Deferred Tax
Asset - 3,335 - - 3,335
Allowance for Uncollectible
Agent Balances 23 254 - - 277
$ 7,023 3,589 658 5,158 6,112
Year Ended December 31, 1993:
Allowance for Credit Losses $ 2,500 - 1,442 1,442 2,500
Allowance for Deferred Tax
Asset 3,335 - - 1,025 2,310
Allowance for Uncollectible
Agent Balances 277 141 - 70 348
$ 6,112 141 1,442 2,537 5,158
Year Ended December 31, 1994:
Allowance for Credit Losses $ 2,500 - 360 629 2,231
Allowance for Deferred Tax
Asset 2,310 284 - - 2,594
Allowance for Uncollectible
Agent Balances 348 88 - 209 227
$ 5,158 372 360 838 5,052