SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended March 31, 1995
Commission File Number 0-15330
AMVESTORS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1021516
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 Southwest 8th Avenue, Topeka, Kansas 66603
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (913) 232-6945
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this
report.
Class Outstanding March 31, 1995
Common Stock, no par value 10,071,472 shares
AMVESTORS FINANCIAL CORPORATION
INDEX
PARTI. Financial Information: Page Number
Consolidated Balance Sheets-
March 31, 1995 and December 31, 1994 2-3
Consolidated Statements of Earnings-
Three months ended March 31, 1995 and 1994 4
Consolidated Statements of Stockholders' Equity-
Twelve months ended December 31, 1994 and
Three months ended March 31, 1995 5
Consolidated Statements of Cash Flow-
Three months ended March 31, 1995 and 1994 6-7
Notes to Consolidated Financial Statements 8-21
Management's Discussion and Analysis of Financial
Condition and Results of Operations 22-27
PART II. Other Information 28-29
1
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(000's Omitted)
(Unaudited)
ASSETS 1995 1994
Investments:
Debt securities:
Bonds:
Held-to-maturity (market $1,191,172
and $1,145,692). $ 1,232,990 1,237,185
Available-for-sale (cost $634,636
and $621,138) 640,220 607,046
1,873,210 1,844,231
Equity securities, available-for-sale:
Common stock (cost $2,101 and $2,124) 2,411 2,325
Preferred stock (cost $45 and $45) 38 31
2,449 2,356
Other long-term investments 54,028 58,773
Short-term investments 453 520
1,930,140 1,905,880
Less allowance for credit losses (2,231) (2,231)
Total investments 1,927,909 1,903,649
Cash and cash equivalents 20,467 10,621
Accounts receivable (net of allowance
for uncollectible accounts of $246 and $227) 731 2,310
Amounts receivable under reinsurance agreements 148,744 149,656
Amounts receivable on securities settlements
in process 566 905
Accrued investment income 29,163 29,296
Deferred policy acquisition costs 148,371 148,871
Deferred income taxes 4,563 11,136
Other assets 3,845 3,577
Total assets $ 2,284,359 2,260,021
See notes to consolidated financial statements.
2
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(000's Omitted, except per share data)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
Liabilities:
Policy liabilities:
Future policy benefits $ 2,155,925 2,148,763
Other policy liabilities 6,112 2,983
2,162,037 2,151,746
Amounts due on securities settlements
in process - 274
Accrued expenses and other liabilities 4,428 3,805
Total liabilities 2,166,465 2,155,825
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 - 10,071,472
shares in 1995 and 10,034,742
shares in 1994 12,816 12,769
Paid in capital 63,712 63,499
Unrealized investment gains (losses)
(net of deferred policy acquisition cost
amortization expense (benefit) of $1,472
and $(3,476) and deferred income tax
expense (benefit) of $1,545 and $(2,616)) 2,870 (7,813)
Retained earnings 41,631 38,876
121,029 107,331
Less leveraged employee stock ownership trust
(LESOP) (3,135) (3,135)
Total stockholders' equity 117,894 104,196
Total liabilities and stockholders'
equity $ 2,284,359 2,260,021
See notes to consolidated financial statements.
3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended March 31, 1995 and 1994
(000's Omitted, except per share data)
(Unaudited)
1995 1994
Revenue:
Insurance premiums and policy charges........... $ 1,904 1,292
Net investment income........................ 38,220 34,889
Net investment gains (losses)................... (10) 1,178
Other revenue.................................... 98 132
Total revenue................................ 40,212 37,491
Benefits and expenses:
Benefits, claims and interest credited
to policyholders............................. 29,000 27,003
Amortization of deferred policy acquisition
costs .......................................... 2,988 2,424
General insurance expenses.................... 2,215 2,207
Premium and other taxes, licenses and fees...... 525 335
Other expenses................................... 75 70
Total benefits and expenses................ 34,803 32,039
Operating earnings................................ 5,409 5,452
Income tax expense................................ 1,893 1,880
Net earnings..................... $ 3,516 3,572
Earnings per share of common stock:
Primary:
Net earnings........................... $ .34 .34
Fully diluted:
Net earnings.......................... $ .34 .34
Average share outstanding:
Primary 10,251 10,401
Fully diluted...................... 10,292 10,401
See notes to consolidated financial statements.
4
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
(Unaudited)
Unrealized
Investment
Common Paid-in Gains Retained Treasury
Stock Capital (Losses) Earnings Stock LESOP Total
Balance as of January 1, 1994..... $ 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) - -
Remaining offering costs............... - (135) - - - - (135)
Redemption of stockholders
rights plan.......................... - (101) - - - - (101)
Issuance of common stock:
upon exercise of options........... 28 133 - - - - 161
Tax effect of options exercises......... - 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 - (3,135) 104,196
Net earnings.......................... - - - 3,516 - - 3,516
Decrease in unrealized invest-
ment losses............... - - 10,683 - - - 10,683
Cash dividends to stockholders
($.075 cents per share on
common stock)................ - - - (761) - - (761)
Issuance of common stock:
upon exercise of options............. 47 146 - - - - 193
Tax effect of options exercises...... - 67 - - - - 67
Balance March 31, 1995........... $ 12,816 63,712 2,870 41,631 - (3,135) 117,894
See notes to consolidated financial statements.
5
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash and Cash Equivalents
Three months ended March 31, 1995 and 1994
(Unaudited)
(000's Omitted)
1995 1994
Operating Activities:
Net earnings............................................ $ 3,516 3,572
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Interest credited to policyholders.................... 29,242 27,683
Amortization of (discounts) premiums on debt
securities, net....................................... (266) (1,290)
Amortization of deferred policy acquisition costs..... 2,988 2,424
Net investment (gains) losses........................... 10 (1,178)
Accrued investment income.............................. 133 218
Deferred income taxes.................................. 2,411 (221)
Other, net............................................. 2,093 2,270
Net cash provided by operating activities................ 40,127 33,478
Investing Activities:
Purchases of securities:
Held-to-maturity........................................ (612) (56,602)
Available-for-sale....................................... (40,042) (19,767)
Proceeds from sale of securities:
Held-to-maturity...................................... - 108
Available-for-sale....................................... 1,721 16,527
Proceeds from maturity or redemption of securities:
Held-to-maturity......................................... 4,793 17,961
Available-for-sale...................................... 25,131 19,894
Other long-term investment, net........................... 4,728 (12,723)
Short-term investments, net............................... 67 (203)
Capitalization of deferred policy acquisition
costs .................................................. (7,436) (6,425)
Other, net............................................... (156) 965
Net cash used in investing activities...................... (11,806) (40,265)
Financing Activities:
Premiums received.......................................... 75,768 69,849
Surrender and death benefits paid.......................... (96,499) (65,083)
Surrender and risk charges collected....................... 1,507 1,334
Securities settlements in process......................... 65 (4,666)
Issuance of common stock................................... 193
Other, net................................................ 491 (154)
Net cash provided by (used in) financing activities....... (18,475) 1,280
Increase (Decrease) in Cash and Cash Equivalents........... 9,846 (5,507)
Cash and Cash Equivalents:
Beginning of year.................................... 10,621 21,782
End of year....................................... $ 20,467 16,275
See notes to consolidated financial statements.
6
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
Increase (Decrease) in Cash and Cash Equivalents
Three months ended March 31, 1995 and 1994
(Unaudited)
(000's Omitted)
1995 1994
Supplemental schedule of cash flow information:
Income tax payments........................................................ $ (1,272) -
Interest payments.......................................................... $ - -
Change in net unrealized investment gains (losses)
on available-for-sale securities.......................................... $ 19,792 (22,275)
Less: Associated (increase) reduction in amortization
of deferred policy acquisition costs.............................. (4,948) 6,615
Deferred income tax (expense) benefit................................. (4,161) 5,481
Net change in net unrealized gains (losses) on
available-for-sale securities............................................. $ 10,683 (10,179)
See notes to consolidated financial statements.
7
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
_______________________________________________
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
AmVestors and its wholly-owned subsidiaries, American Investors Life
Insurance Company, Inc. (American), American Investors Sales Group, Inc.
(American Sales), AmVestors Investment Group, Inc. (AIG) and Omni-Tech
Medical, Inc. (Omni-Tech), (collectively the company). All significant
intercompany accounts and transactions have been eliminated.
B. ACCOUNTING PRINCIPLES AND PRACTICES:
The accompanying unaudited consolidated financial statements have
been prepared on the basis of generally accepted accounting principles as
promulgated by the American Institute of Certified Public Accountants. In the
opinion of the company, the consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of March 31, 1995 and the results of
earnings and the statements of cash flow for the three month periods ended
March 31, 1995 and 1994.
C. INVESTMENTS:
Debt securities held-to-maturity are carried at amortized cost,
except that those securities with an other than temporary impairment in value
are carried at estimated net realizable value. Debt securities
available-for-sale are carried at the estimated market value, with any
unrealized gains or losses recorded in 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 company's invested assets,
which may occur in the future due to conditions unknown to management at this
time. Management periodically reviews the adequacy of the allowance for
credit losses. As credit losses are realized, they are charged against the
allowance.
Investments in common stock and non-redeemable preferred stock are
carried at market.
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.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
D. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Estimated fair value amounts have been determined by the company
using available market information and appropriate valuation methodologies.
Due to the fact that considerable judgment is required to interpret market
data to develop the estimates of fair value, the estimates presented are not
necessarily indicative of the amounts that could be realized in a current
market exchange.
The carrying values and estimated fair values of the company's
financial instruments as of March 31, 1995, and December 31, 1994, were as
follows:
(000's Omitted)
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
Assets
Debt securities............ $1,873,210 1,831,392 1,844,231 1,752,738
Equity securities...... 2,449 2,449 2,356 2,356
Other long-term investments... 54,028 54,069 58,773 58,536
Short-term investments........ 453 453 520 520
Cash and cash equivalents...... 20,467 20,467 10,621 10,621
Accounts receivable on
securities settlements in
process..................... 566 566 905 905
Accounts receivable and
accrued investment income.... 29,894 29,894 31,606 31,606
Liabilities:
Future policy benefits -
investment contracts...... 1,923,955 1,809,307 1,917,066 1,799,090
Other policy liabilities..... 6,112 6,112 2,983 2,983
Amounts due on securities
settlements in process..... - - 274 274
Accrued expenses and other
liabilities................ 4,428 4,428 3,805 3,805
DEBT SECURITIES - Fair values are based on quoted market prices or
dealer quotes, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
EQUITY SECURITIES - Fair value equals the carrying value as these
securities are carried at quoted market value.
OTHER LONG-TERM INVESTMENTS - For certain homogeneous categories of
mortgage loans, fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. Fair value of policy loans and other long-term investments
is estimated to approximate the assets' carrying value.
SHORT-TERM INVESTMENTS and cash and cash equivalents - The carrying
amounts reported in the balance sheet approximate the assets' fair value.
AMOUNTS RECEIVABLE ON SECURITIES SETTLEMENTS IN PROCESS - The
carrying amount reported in the balance sheet approximates the fair value of
this asset.
ACCOUNTS RECEIVABLE AND ACCRUED INVESTMENT INCOME - The carrying
amounts reported in the balance sheet for these assets approximates fair
value.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________
FUTURE POLICY BENEFITS FOR INVESTMENT CONTRACTS - The fair values for
deferred annuities were estimated to be the amount payable on demand at the
reporting date as those investment contracts have no defined maturity and are
similar to a deposit liability. The amount payable at the reporting date was
calculated as the account balance less any applicable surrender charges.
OTHER POLICY LIABILITIES - The carrying amount reported in the
balance sheet approximates the fair value of these liabilities.
AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying
amount reported in the balance sheet approximates the fair value of this
liability.
ACCRUED EXPENSES AND OTHER LIABILITIES - The carrying amount reported
in the balance sheet approximates the fair value of these liabilities.
The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value
amounts.
E. DEFERRED POLICY ACQUISITION COSTS:
The costs of acquiring new business (primarily commissions and policy
expenses), which vary with and are directly related to the production of new
business, have been deferred. The deferred costs related to investment-type
deferred annuity contracts are amortized in relation to the incidence of
expected gross profits over the expected life of the policies. For single
premium life insurance, deferred policy acquisition costs are amortized over
the life of the policies, but not more than 20 years for policies issued
before January l, 1987, and not more than 30 years for policies issued after
December 31, 1986, based on the expected gross profits for the amortization
periods. The deferred costs related to traditional life contracts are
amortized over the premium paying period for the related policies using the
same actuarial assumptions as to interest, mortality and withdrawals as are
used to calculate the reserves for future benefits.
Determination of expected gross profits includes management's 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 (losses) realized in the first three months of
1995 and 1994 resulted in the company experiencing investment margins greater
than those estimated. As a result, $3,731 and $264,156 of the unamortized
balance of deferred policy acquisition costs were expensed in the three
months ended March 31, 1995 and 1994, 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.
f. Future policy benefits:
Liabilities for future policy benefits under life insurance policies,
other than single premium life insurance, have been computed by the net level
premium method based upon estimated future policy benefits (excluding
participating dividends), investment yield, mortality and withdrawals giving
recognition to risk of adverse deviation. Interest rates range from 41\2% to
101\2% depending on the year of issue, with mortality and withdrawal
assumptions based on company and industry experience prevailing at the time
of issue.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
For single premium life insurance and single premium annuities, the
future policy benefits are equal to the accumulation of the single premiums
at the credited rate of interest and for single premium whole life, less any
mortality charges.
G. PARTICIPATING POLICIES:
The company issued participating policies in past years on which
dividends are paid to policyholders as determined annually by the Board of
Directors. The amount of dividends declared but undistributed is included in
other liabilities. Policy benefit reserves do not include a provision for
estimated future participating dividends.
H. DEPRECIATION:
The home office buildings are depreciated on the straight-line basis
over estimated lives of 40 years. Other depreciation is provided on the
straight-line basis over useful lives ranging from 5 to 8 years.
I. INCOME TAXES:
The company and its subsidiaries prepare and file their income tax
returns on a consolidated basis.
The company provides for the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
reported in the financial statements on the liability method.
J. EARNINGS PER SHARE:
Primary earnings per share of common stock are computed by dividing
net earnings 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.
K. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money market accounts.
L. NEW ACCOUNTING STANDARDS:
Effective January 1, 1995, the company adopted the provisions of SFAS
No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments." This Statement requires disclosure about the amount,
nature, and terms of derivative financial instruments. Since the company has
no derivative financial instruments as defined in the Statement, the adoption
of this accounting standard did not result in any additional financial
statement disclosure.
M. RECLASSIFICATIONS:
Certain reclassifications have been made to conform the March 31,
1994 and December 31, 1994 financial statements to the March 31, 1995
presentation.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments:
_________________
A summary of investment income is as follows:
(000's Omitted)
For the Period
Ended March 31,
1995 1994
Debt securities............ $ 36,199 35,659
Equity securities......... 6 5
Other long-term investments.... 2,113 (412)
Short-term investments.......... 435 134
38,753 35,386
Less investment expenses......... 533 497
Net investment income.......... $ 38,220 34,889
Net investment gains (losses):
Debt securities............ $ 13 595
Equity securities........ 2 583
Other................... (25) -
Net investment gains (losses).. $ (10) 1,178
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 yields 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 March 31, 1995 was as follows:
(000's Omitted)
As of March 31, 1995
Held-to-Maturity Available-for-Sale
Estimated Estimated
Book Market Book Market
Value Value Value Value
Debt securities:
One year or less $ 3,000 3,041 12,242 10,684
Two years through five years 220,959 218,083 159,487 161,244
Six years through ten years 877,179 844,963 341,464 346,078
Eleven years and after 131,852 125,085 121,443 122,214
1,232,990 1,191,172 634,636 640,220
Equity securities - - 2,146 2,449
$ 1,232,990 1,191,172 636,782 642,669
These tables include mortgage-backed securities based on the
estimated cash flows of the underlying mortgages.
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.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
_____________________________
The book value, estimated market value and unrealized market gains
and losses of debt and equity securities as of March 31, 1995, and December
31, 1994, were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
Value Gains Losses Value
March 31, 1995
_______________
Bonds held-to-maturity:
Corporate debt obligations
Investment grade.................................... $ 796,340 6,072 36,692 765,720
High-yield.......................................... 128,187 1,078 5,142 124,123
924,527 7,150 41,834 889,843
U.S. Treasury obligations........................... 4,230 7 269 3,968
Mortgage-backed securities.......................... 304,233 154 7,026 297,361
Bonds held-to-maturity.............................. 1,232,990 7,311 49,129 1,191,172
Bonds available-for-sale:
Corporate debt obligations
Investment grade.................................... 267,576 6,550 1,726 272,400
High-yield.......................................... 3,217 40 7 3,250
270,793 6,590 1,733 275,650
U.S. Treasury obligations........................... 5,055 - 13 5,042
Mortgage-backed securities.......................... 358,788 3,566 2,826 359,528
Bonds available-for-sale............................ 634,636 10,156 4,572 640,220
Total bonds......................................... 1,867,626 17,467 53,701 1,831,392
Equity securities available-for-sale.................. 2,146 532 229 2,449
$ 1,869,772 17,999 53,930 1,833,841
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
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
____________________________
The preceding table includes the carrying value and estimated market
value of debt securities which the company has determined to be impaired (othe
r than temporary decline in value) as follows:
(000's Omitted)
Accumulated Estimated
Original Write Carrying Market
Cost Downs Value Value
March 31, 1995 $ 7,545 7,545 - -
December 31, 1994 $ 9,535 7,814 1,721 1,721
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 March 31, 1995, and
December 31, 1994 were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
March 31, 1995 Value Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes.................. $ 75,582 208 2,099 73,691
Targeted amortization classes and
accretion directed classes................... 7,751 12 - 7,763
Pass-throughs................................. 38 3 - 41
Total government agency
mortgage-backed securities............... 83,371 223 2,099 81,495
Government-sponsored enterprise
mortgage-backed securities:
Planned amortization classes.................. 404,154 2,434 3,549 403,039
Sequential classes............................ 19,655 5 83 19,577
Pass-throughs................................. 287 7 - 294
Total government-sponsored enterprise
mortgage-backed securities.......... 424,096 2,446 3,632 422,910
Other mortgage-backed securities:
Planned amortization classes................ 22,174 23 131 22,066
Sequential classes........................... 122,821 1,028 2,426 121,423
Pass-throughs................................. 12 - - 12
Subordinated classes......................... 10,547 - 1,564 8,983
Total other mortgage-backed securities. 155,554 1,051 4,121 152,484
Total mortgage-backed securities................... $ 663,021 3,720 9,852 656,889
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
___________________________
(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
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 21.5%
and 21.6% of the carrying value of the company's mortgage-backed securities
as of March 31, 1995 and December 31, 1994, respectively, are sensitive to
this prepayment risk.
A portion of the company's mortgage-backed securities portfolio
consists of planned amortization class ("PAC"), targeted amortization class
("TAC") and accretion directed class ("AD") instruments. These securities are
designed to amortize in a more predictable manner by shifting the primary
risk of prepayment to investors in other tranches (support classes) of the
mortgage-backed security. PAC, TAC and ADsecurities comprised 76.9% and 76.8%
of the carrying value of the company's mortgage-backed securities as of March
31, 1995 and December 31, 1994.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
___________________________
As of March 31, 1995, 76.5% of the company's mortgage-backed
securities were issued by either government agencies or government-sponsored
enterprises, compared to 76.4% as of December 31, 1994. 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
$16,729,203 as of March 31, 1995, all of the company's investments in other
mortgage-backed securities are rated A or better by Standard& Poor's or
Moody's.
The amounts shown as "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 recogni
zed 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 Period Ended March 31,
1995 1994
Consideration received.............................. $ 33,873 56,850
Carrying value...................................... 33,858 55,672
Net investment gains (losses)..................... $ 15 1,178
Investment gains.................................... $ 15 1,191
Investment losses................................... - (13)
Net investment gains (losses)..................... $ 15 1,178
The above table contains no sales of securities which the company had
classified as held-to-maturity.
Net unrealized gains (losses) on debt securities held-to-maturity,
debt securities available-for-sale, equity securities available-for-sale and
other long-term investments changed as follows:
(000's) Omitted
Net Unrealized Gains (Losses)
Debt Debt Equity
Securities Securities Securities Other
Held-to- Available- Available- Long Term
Maturity for-Sale for-Sale Investments
Balance as of January 1, 1994........... $ 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 -
1995 Net Change......................... 49,675 19,676 116 -
Balance as of March 31, 1995............ $(41,818) 5,584 303 -
At March 31, 1995, and December 31, 1994, investments with statutory
carrying values of
$1,851,735,229 and $1,866,074,033, respectively, were on deposit with
various insurance departments. These amounts exceeded the minimum required
deposits by $40,602,677 and $66,325,834 as of March 31, 1995, and December
31, 1994, respectively.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. Other Assets:
________________
Other assets consist of the following:
(000's Omitted)
March 31, December 31,
1995 1994
Property and equipment at cost:
Home office building
(including land of $352)........................ $ 2,196 2,152
Furniture and equipment........................ 3,561 3,464
Automobiles............................ 115 115
5,872 5,731
Less accumulated depreciation.......... 3,414 3,336
2,458 2,395
Other................................... 1,387 1,182
$ 3,845 3,577
4. 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
Period Gross Other Net
Ended Descriptions Amount Companies Amount
March 31, Life insurance in force $324,030 252,801 71,229
1995 Insurance premiums and
policy charges 2,188 284 1,904
March 31, Life insurance in force 347,597 274,915 72,682
1994 Insurance premiums and
policy charges 1,546 254 1,292
March 31, Future policy benefits 2,155,925 146,620 2,009,305
1995
December 31, Future policy benefits 2,148,763 148,575 2,000,188
1994
The company had amounts receivable under reinsurance agreements of
$148,744,400 and $149,656,094 as of March 31, 1995, and December 31, 1994,
respectively. Of the amounts,
$147,034,466 and $147,949,099 were associated with a single
reinsurer. In 1989, the company entered into a coinsurance agreement which
ceded 90% of the risk on the company's block of single premium whole life
policies written prior to 1989 to Employers Reassurance Corporation (ERC).
The agreement provides that ERC assumes 90% of all risks associated with each
policy in the block.
The following table identifies the components of the amounts
receivable from ERC:
(000's Omitted)
March 31, December 31,
1995 1994
Reserve for future policy benefits.. $ 144,941 146,919
Reimbursement for benefit payments and
administrative allowance........... 2,093 1,030
$ 147,034 147,949
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. 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 March 31, 1995, there had been no borrowings under this agreement.
6. Retirement Plans:
____________________
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time employees with one year of service. Qualifying participants may
contribute an amount not to exceed 10% of covered compensation. The company
made no contributions to this plan during either the three months ended March
31, 1995 or 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 shares of the company aggregating 370,244
through the proceeds of a note payable to American. The note bears interest
at 7.0% and is payable in annual installments through December 30, 2002. The
note had an unpaid principal balance of $3,336,038 as of March 31, 1995, and
December 31, 1994, respectively.
Each year the company will make contributions to the LESOP which are
to be used to make loan interest and principal payments. On December 31 of
each year, a portion of the common stock will be allocated to participating
employees. Of the 367,429 shares of the company's common stock now owned by
the LESOP, 99,054 shares have been allocated to the participating employees
with the remaining 268,375 shares being held by American as collateral for
the loan.
The unallocated portion of the company's common stock owned by the
LESOP has been recorded as a separate reduction of stockholders' equity.
Accrued contributions to the LESOP were $76,391, and $71,391, for the three
months ended March 31, 1995, and 1994, 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.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Retirement Plans (continued):
________________________________
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 March 31, 1995, five of the company's directors qualified for
benefits under the plan. A liability in the amount of $519,785, representing
the present value of future benefits, has been established. Charges (credits)
to earnings related to the plans were ($1,395) and $1,068 for the three
months ended March 31, 1995 and 1994, 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
three months ended March 31, 1995, and 1994 were $65,276 and $44,400
respectively.
7. Stockholders' Equity:
________________________
Dividends by American to AmVestors are limited by laws applicable to
insurance companies. Under Kansas law, American may pay a dividend, without
prior consent of the Kansas Commissioner of Insurance, in an amount equal to
the greater of 10% of statutory capital and surplus at the end of the
preceding year or all of the statutory net gain from operations of the
preceding year, provided that such dividend does not exceed its unassigned
surplus (surplus profits) at the end of the preceding year. As of December
31, 1994, surplus profits of American were $12,996,673 and 10% of statutory
capital and surplus was $8,752,120. Statutory net gain (loss) from operations
for the year 1994 was $5,645,097. 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 March 31, 1995, and
December 31, 1994, American's statutory capital and surplus was $85,844,947
and $87,521,204, 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.
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 909,107 options to acquire common stock are outstanding
under the 1989 Nonqualified Plan.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Stockholders' Equity (continued):
____________________________________
The 1989 Nonqualified Plan is administered by the Board of Directors
and officers of the company and its subsidiaries. The terms of the options,
including the number of shares, and the exercise price are subject to the
sole discretion of the Board of Directors.
Changes during the periods were as follows:
For the Period Ended
March 31, December 31,
1995 1994
Options outstanding, beginning of period....... 859,837 816,107
Options granted............................... 86,000 95,000
Options exercised............................. (36,730) (22,200)
Options expired............................... - (29,070)
Options outstanding, end of period............ 909,107 859,837
Outstanding options exercisable at end of period 728,107 764,837
Options reserved for future grants at end of period 132,247 132,247
Option prices per share:
Exercised, during the period................. $4.84-$5.31 $5.31-$7.50
Outstanding, end of period................... $4.84-$12.66 $4.84-$12.66
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 Period Ended
March 31, December 31,
1995 1994
Rights outstanding, beginning of period................... - 30,000
Rights granted............................................ - -
Rights exercised.......................................... - (30,000)
Rights expired............................................ - -
Rights cancelled.......................................... - -
Rights outstanding, end of period......................... -0- -0-
Rights reserved for future grants
at end of period......................................... 5,000 5,000
The company recorded no compensation expense relating to stock
appreciation rights for the three months ended March 31, 1995, and 1994,
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.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Stockholders' Equity (continued):
_____________________________________
In conjunction with a previous 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
On February 23, 1995, the board of directors declared an annual
dividend of $.075 per common share, payable April 13, 1995, to stockholders
of record on March 18, 1995. A liability in the amount of $760,875 has been
established as of March 31, 1995, with an offsetting charge to retained
earnings.
8. 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.
9. Other Revenue:
__________________
Effective December 1, 1989, the company entered into a coinsurance
agreement with Employers Reassurance Corporation (ERC) which reinsured 90% of
the risk on the company's block of SPWL policies written prior to 1989. The
agreement provides that ERC assumes 90% of all risks associated with each
policy in the block. These policies continue to be administered by American.
In return, American receives an administrative allowance of $31.50 per policy
per year. The total allowance received during the three months ended March
31, 1995 and 1994 was $31,301 and $33,170, respectively.
10. Income Taxes:
_________________
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the Period
Ended March 31,
1995 1994
Current income tax expense (benefit).......... $ (518) 2,101
Deferred income tax expense (benefit)......... 2,411 (221)
Total income tax expense.................. $1,893 1,880
11. 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 the guaranty fund assessments impacted
1994 and 1993 income before taxes by approximately $(368,000) and $1,594,000,
respectively. The company expects that further charges to income may be
required in the future and will record such amounts when they become known.
21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The company specializes in the sale of Single Premium Deferred
Annuity (SPDA) 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 Single Premium
Immediate Annuities (SPIAs) and Flexible Premium Deferred Annuities (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 Generally Accepted Accounting
Principals (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 acquisiti
on costs, or "DAC". As a result of this deferral of costs and the lack of
revenue recognition for premiums received, no profit or loss is realized on
these contracts at the time of sale. Premiums received on SPDAs, SPIAs
without life contingencies and FPDAs are reflected on the company's balance
sheet by an increase in assets equal to the premiums received and by a
corresponding increase in future policy liabilities.
The company's earnings depend, in significant part, upon the
persistency of its annuities. Over the life of the annuity, net investment
income, net investment gains (losses) and policy charges are realized as
revenue, and DAC is amortized as an expense. The timing of DAC amortization
is based on the projected realization of profits including realized gains
(losses) for each type of annuity contract and is periodically adjusted for
actual experience. If a policy is terminated prior to its expected maturity,
any remaining related DAC is expensed in the current period. Most of
American's annuity policies in force have surrender charges which are
designed to discourage and mitigate the effect of premature withdrawals. As a
result, the impact on earnings from surrenders will depend upon the extent to
which available surrender charges offset the associated amortization of DAC.
For the years ended 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%. 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
22
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 rate 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. There is no certainty as to the company's ability to realize
investment gains in the future to offset the adverse impact on earnings,
should future "bailout" surrenders occur.
23
MARGIN ANALYSIS
The company's earnings are impacted by realized investment gains and
losses and by the associated amortization of DAC. The actual timing and
pattern of such amortization is determined by the actual profitability to
date (which includes realized investment gains and losses) and the expected
future profitability on a particular annuity contract. To the extent
investment income is accelerated through realization of investment gains, the
corresponding amortization of DAC is also accelerated as the stream of
profitability on the underlying annuities is effectively accelerated. When
investment losses are realized, the reverse is true. The following margin
analysis depicts the effects of realized gains (losses) on the company's
operating earnings:
For the Three Months Ended March 31,
1995 1994
(dollars in millions)
(percent of average
invested assets annualized)
Average invested assets <F1>............................... $ 1,936.2 100.00% $ 1,823.1 100.00%
Insurance premiums and policy charges..................... $ 1.9 .39% 1.3 .28%
Net investment income <F2>................................. 38.2 7.90 34.9 7.65
Policyholder benefits..................................... (29.0) (5.99) (27.0) (5.92)
Gross interest margin..................................... 11.1 2.30 9.2 2.01
Associated amortization of deferred
acquisition costs........................................ (3.0) (.62) (2.2) (.47)
Net interest margin....................................... 8.1 1.68 7.0 1.54
Net investment gains...................................... - - 1.2 .26
Associated amortization of deferred
acquisition costs........................................ - - (.3) (.06)
Net margin from investment gains.......................... - - .9 .20
Total net margin.......................................... 8.1 1.68 7.9 1.74
Expenses, net............................................. (2.7) (.56) (2.5) (.54)
Operating earnings........................................ 5.4 1.12 5.4 1.20
Interest expense.......................................... - - - -
Earnings before income taxes.............................. 5.4 1.12 5.4 1.20
Income tax expense (benefit).............................. 1.9 .39 1.8 .39
Net earnings.............................................. $ 3.5 .73% 3.6 .81%
Operating earnings........................................ $ 5.4 1.12 5.4 1.20%
Less: Net margin from investment gains.................... - - .9 .20
Operating earnings excluding net investment
gains and associated amortization of
deferred policy acquisition costs....................... $ 5.4 1.12% 4.5 1.00%
<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 beginningand end of
period.
<F2>Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding.
24
Results of Operations
Three Months Ended March 31, 1995, and 1994
INSURANCE PREMIUMS AND POLICY CHARGES increased $.6 million or 46%,
to $1.9 million in 1995 from $1.3 million in 1994, due primarily to a $.5
million increase in surrender charges received on SPDA's.
NET INVESTMENT INCOME increased $3.3 million, or 9%, to $38.2 million
from $34.9 million in 1994. This increase reflects both an increase in
average invested assets from $1,823.1 million in 1994 to $1,936.2 million in
1995 and an increase in the average yield on invested assets from 7.7% for
the quarter ended March 31, 1994, to 7.9% for the same
period in 1995. The 1994 yield was impacted by losses generated by an
investment in investment partnerships. These partnerships form a fund of
funds totalling $18.4 million on March 31, 1995, 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 income of $1.0 million in 1995 compared with a
loss of $.9 million in 1994.
In addition to the losses experienced in the company's partnership
investments, average yields have been impacted by declining interest rates
throughout 1993 and the reinvestment at lower yields of proceeds from
securities disposed of to realize investment gains.
NET INVESTMENT GAINS (LOSSES) decreased $1.2 million, to a $10.0
thousand loss in 1995, from a $1.2 million gain in 1994. Gains and losses may
be realized upon securities which are disposed of for various reasons. The
gains realized during 1994 are the result of general portfolio management.
Unrealized gains (losses) in the company's bond portfolio were $(36.2)
million, $(105.6) million and $.1 million as of March 31, 1995, December 31,
1994 and March 31, 1994, respectively.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased
$2.0 million, or 7%, to $29.0 million in 1995 from $27.0 million in 1994.
This increase results primarily from an increase in the average interest rate
credited on the company's annuity liabilities, from 5.8% as of March 31,
1994, to 5.9% as of March 31, 1995, along with an increase in annuity
liabilities to $1,979.8 million on March 31, 1995, from $1,861.6 million on
March 31, 1994.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased $.6
million, or 25%, to $3.0 million in 1995 from $2.4 million in 1994.
Amortization of deferred policy acquisition costs (DAC) associated with
investment gains decreased $.2 million to $.4 thousand in 1995 on $.1
thousand of loss, from $.3 million in 1994 on $1.2 million of gains.
Amortization of DAC associated with gross interest margin increased $.8
million to $3.0 million in 1995 from $2.2 million in 1994. Acquisition costs
incurred during 1995 and deferred into future policy periods were $7.4
million, compared with $6.4 million in 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, investment fees paid to AIG, rent, administrative, printing
and data processing charges and dividends. The insurance laws of Kansas
generally limit the ability of American to pay cash dividends in excess of
certain amounts without prior regulatory approval and also require that certai
n agreements relating to the payment of fees and charges to the company by
American be approved by the Kansas Insurance Commissioner.
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The liquidity requirements of American are met by premiums received
from annuity sales, net investment income received, and proceeds from
investments upon maturity, sale or redemption. The primary uses of funds by
American are the payment of surrenders, policy benefits, operating expenses
and commissions, as well as the purchase of assets for investment.
For purposes of the company's consolidated statements of cash flows,
financing activities include premiums received from sales of SPDAs,
surrenders and death benefits paid, and surrender and policy charges
collected on these contracts. The net cash provided by (used in) these
particular financing activities for the three months ended March 31, 1995,
and 1994, was ($19.2) million and $6.1 million, respectively.
The decrease in net cash provided by annuity contracts without life
contingencies in the first three months of 1995 resulted primarily from a
$31.4 million increase in surrender and death benefits paid, from $65.1
million to $96.5 million offset by a $6.0 million increase in premiums
received from $69.8 million to $75.8 million.
Net cash provided by the company's operating activities was $40.1
million and $33.5 million in 1995 and 1994, 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 (3% and 2% as of
March 31, 1995, and December 31, 1994, respectively). The weighted average
duration of the company's investment portfolio was 4.7 years as of March 31,
1995.
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 6 of Notes to Consolidated
Financial Statements. In 1993, the company raised $29.4 million through the
sale of 3,451,668 shares of Common Stock. In December 31, 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 5 of Notes to Consolidated
Financial Statements.
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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 11 of Notes to Consolidated Financial Statements.
REINSURANCE. The company had amounts receivable under reinsurance
agreements of $148.7 million and $149.7 million as of March 31, 1995, and
December 31, 1994, respectively. Of the amounts, $147.0 million and $147.9
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 Single Premium Whole Life (SPWL) policies 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. The company also receives a
fee from the reinsurer for administering such policies. Cash settlements
under the contract are made with ERC on a monthly basis. If ERC were to
become insolvent, American would remain responsible for the payment of all
policy liabilities.
In addition, the company is a party to two assumption reinsurance
agreements with other reinsurers.
EFFECT OF INFLATION AND CHANGES IN INTEREST RATES. The company does
not believe that inflation has had a material effect on its consolidated
results of operations during the past three years. The company seeks to
manage its investment portfolio, in part, to reduce its exposure to interest
rate fluctuations. In general, the market value of the company's fixed income
securities increases or decreases directly with interest rate changes. For
example, if interest rates decline (as was the case in 1992 and 1993), the
company's fixed income investments generally will increase in market value,
while net investment income will decrease. 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.
27
PART II. OTHER INFORMATION
AMVESTORS FINANCIAL CORPORATION
Item 1. Legal Proceedings
The company has no material legal proceedings pending against it.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits (numbered in accordance with Item 601 of Regulations S-K).
Exhibit Page Number or
Number Description Number
(2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration
July 10, 1986, between AmVestors Form S-2, File #2-82811
Financial Corporation and American dated November 26 1986.
Investors Life Insurance Company,
Inc.
(2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q
Directors dated January 7, 1988, dated May 11, 1988.
providing for succession to the
position of Chairman of the Board
of Directors
(4)(a) Specimen Common Stock Certificate Exhibit (4)(a) to Form 10-K
dated March 30, 1995.
(11) Calculation of Earnings (Loss) per Share
(20)(a) Reports on Form 8-K P 31
There were no reports on Form 8-K for
the three months ended March 31, 1995
28
Exhibit Page Number or Incorporation
Number Description by Reference
(22) Wholly-owned subsidiaries of the registrant:
American Investors Life Insurance
Company, Inc.
415 Southwest Eighth Avenue
Topeka, Kansas 66603
American Investors Sales Group, Inc.
(formerly Gateway Corporation)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
AmVestors Investment Group, Inc.
(formerly American Investors Sales
Group, Inc.)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
Omni-Tech Medical, Inc.
6206 Southwest Ninth Terrace
Topeka, Kansas 66615
(27) Financial Data Schedule
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
AMVESTORS FINANCIAL CORPORATION
By: /c/Ralph W. Laster, Jr.
Ralph W. Laster, Jr.
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Accounting Officer)
Date: May 11, 1995
30