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 1934
For fiscal year ended
December 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
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 February 21, 1996) of the shares held by
non-affiliates was approximately $108,416,000.
As of February 21, 1996, there were 10,154,995 shares of the
registrant's common stock, no par value, outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
__________ ________________________
Proxy Statement - Annual Meeting of Part III, Items 10,
Stockholders to be held May 16, 1996 12 and 13
2
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 principal subsidiaries are American Investors
Life Insurance Company, Inc. (American), American Investors Sales Group, Inc.
(American Sales) and AmVestors Investment Group, Inc. (AIG). 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 deferred annuity products
throughout the United States. Deferred annuities accounted for approximately
96% of all premiums received by the company in 1995. Other products offered
include single premium immediate annuities (SPIAs) and flexible premium
universal life policies (FPULs). As of December 31, 1995, the company had
total annuity contracts in force of $2.1 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,("pre-retirement 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,
1995, the company had approximately 7,500 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 NMOs.
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
3
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 June 8, 1995, A.M. Best which rates insurance
companies based on factors of concern to policyowners, reaffirmed American's
"A-" (Excellent) rating. On February 15, 1995, 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.
On September 8, 1995, the company signed a merger agreement pursuant
to which it will acquire all of the outstanding capital stock of Financial
Benefit Group (FBG), a Delaware corporation, for $5.31 per share, payable in
the company's common stock, warrants and cash.
FBG is an insurance holding company which owns all of the shares of
Financial Benefit Life Insurance Company, a Florida domiciled insurer which
specializes in the sale and underwriting of annuity products and is admitted
in 41 jurisdictions, which includes 39 states, the District of Columbia and
the U.S. Virgin Islands. FBG also owns all of the shares of Annuity
International Marketing Corporation and The Insurancemart, Inc. both of which
specialize in the distribution and marketing of annuities.
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.
4
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.
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 single premium
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
7,500 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.
As of December 31, 1995, approximately 98% of the company's investment
portfolio consisted of bonds approximately 92% of which were investment
grade. The weighted average duration of the company's bond portfolio was 4.4
years as of that date.
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
5
December 31, 1995, American had approximately
7,500 agents contracted to sell its annuity products.
The company also maintains contact with approximately 29,000 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 31% 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 organizations 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 a deferred annuity
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 had 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 1995, 62.0% of its deferred annuity sales were in the
following states:
6
California (10.6%), Florida (8.7%), Ohio (6.5%), Texas
(6.1%),Illinois (6.0%), New Jersey (5.5%), Pennsylvania (5.1%), Wisconsin
(4.8%), Kansas (4.6%) and Michigan (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 1995, and the top twenty individual agents
accounted for approximately 10.6% of American's volume in 1995. 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 62.0% of premiums received during
1995. 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.
Products
The company specializes in the sale of deferred annuity products to
individuals. During each of the past three years, sales of deferred annuities
have accounted for approximately 96% of the company's premiums received,
while sales of SPIAs and FPULs have accounted for virtually all remaining
premiums received.
Single premium deferred annuities 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 deferred annuities have an initial credited interest rate
(currently 5.25% to 9.75%, depending on the features of the contract)
guaranteed for a period
7
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 typically range from 3% to 6%. The credited rates on
deferred annuities with accumulated values of approximately $470.2 million
are currently set at the minimum guaranteed rate. The accumulated values of
deferred annuities by credited interest rates are as follows as of December
31, 1995: $896.1 million-less than or equal to 5.5%; $611.6 million-greater
than 5.5% but less than or equal to 6.5%; $332.3 million-greater than 6.5%
but less than or equal to 7.5%; and $189.2 million-greater than 7.5%. The
credited rates on deferred annuities 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 rate below a specified rate (the "bailout" rate). Of
the company's $2.1 billion annuity contracts in force as of December 31,
1995, $213.1 million have a "bailout" feature remaining. The "bailout" rate
on $211.0 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 deferred annuity business in force as of
December 31, 1995, 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 11% of the deferred annuity 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.
8
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. As of December 31, 1995, the company had $2,143.8
million of cash and invested assets of which $2,046.1 million or
approximately 95% represented investments in bonds, which had a duration of
4.4 years. At that date, approximately 92% of the company's bond portfolio
was rated investment grade. As of December 31, 1995, the market value of the
company's bond portfolio exceeded its book value by $96.8 million.
The following table summarizes the company's investment results for
the period indicated:
Investment Results
For the Year Ended December 31,
1995 1994 1993
(dollars in millions)
Average invested assets <F1>.. $1,992.7 $ 1,862.3 $ 1,770.9
Net investment income <F2>.... 156.5 142.0 138.5
Yield <F3>.................... 7.9% 7.6% 7.8%
Net investment gains <F4>..... 1.0 .8 17.0
Trading losses................. (.9) - -
________________
<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 in 1994 and 1993 provisions for
impairments in value that were considered other than temporary.
9
The following table sets forth the company's investment portfolio as
of December 31, 1995:
Investment Portfolio
As of December 31, 1995
Carrying
Value % of Total
(dollars in millions)
Debt Securities <F1>:
Available-for-sale:
U.S. Government..................... $ 52.7 2.5%
Investment grade corporate.......... 1,139.5 53.1
Non-investment grade corporate...... 151.5 7.0
Mortgage-backed <F2>................. 700.9 32.7
____________ ____________
Total debt securities
available-for-sale............. 2,044.6 95.3
____________ ____________
Trading:
Investment grade corporate.......... .5 -
Non-investment grade corporate...... 1.0 .1
____________ ____________
Total debt securities trading.... 1.5 .1
____________ ____________
Total debt securities............ 2,046.1 95.4
____________ ____________
Equity Securities<F3>:
Available-for-sale
Common stock........................ 1.2 .1
Preferred stock..................... 7.7 .3
Total equity securities
available-for-sale............. 8.9 .4
Trading:
Preferred stock..................... .6 -
Total equity securities trading.. .6 -
Total equity securities.......... 9.5 .4
Mortgage loans on real estate..... 5.4 .3
Real estate <F4>................... .3 -
Policy loans...................... 5.3 .3
Other long-term investments <F5>... 28.5 1.3
Short-term investments <F6>........ .4 -
Total investments............. 2,095.5 97.7
Cash.............................. 48.3 2.3
Total cash and investments.... $ 2,143.8 100.0%
10
<FN><F1> Debt securities classified as "available-for-sale" or "trading" are
carried
at estimated market value. Total market value of debt securities as of
December 31, 1995, was approximately $2,046.1 million, representing net
unre-
alized investment gains of approximately $96.8 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, 1995, was approximately $9.2
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.
<FN><F6> Short-term investments are carried at amortized cost which
approximates
market value.
Included in other Long Term Investments on December 31, 1995, 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 $3.6
million, ($1.9) million, and $1.2 million for 1995, 1994 and 1993,
respectively. The company first invested in such partnerships in July 1993.;
therefore, 1993 income represents partial year results. 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, materially 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.
11
The company has reduced this risk of prepayment by investing a
majority (approximately 75%) 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 represent
approximately 23% of the book value of the company's mortgage-backed
securities as of December 31, 1995.
In some instances, American invests in non-agency, non-government
sponsored enterprise mortgage-backed securities. Such investments comprised
25% of the book value of American's mortgage-backed securities at December
31, 1995. 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, with the
exception of six issues, with a carrying value of $19.3 million as of
December 31, 1995, all of the company's investments in other mortgage-backed
securities are rated A or better by Standard & Poor's or Moody's. As of
December 31, 1995, the company did not own any "interest only," "principal
only," or "residual" classes of CMOs.
For additional information on the company's investment in
mortgage-backed securities see Note 2 of Notes to Consolidated Financial
Statements.
The company carries all investments which it believes have
experienced other than temporary declines in value at estimated net
realizable value. The following table indicates by quality rating the
composition of the company's debt securities portfolio (at amortized cost and
market value) excluding short-term investments as of December 31, 1995:
Composition of Debt Securities by Quality Rating
As of December 31, 1995
___________________________________
% of Market or % of
Amortized Debt Estimated Invested
Cost Securities Fair Value Assets
(dollars in millions)
Investment Grade:
U.S. Government, its agencies and
government sponsored
enterprises..................$ 556.9 28.6% $ 585.2 27.9%
Aaa............................. 135.9 7.0 140.7 6.7
Aa.............................. 121.6 6.2 127.8 6.1
A............................... 565.1 29.0 594.1 28.4
Baa............................. 411.2 21.1 438.5 20.9
Total investment grade........ 1,790.7 91.9 1,886.3 90.0
Non-investment grade:
U.S. Government, its agencies and
government sponsored
enterprises 9.6 .5 7.2 .4
Ba.............................. 134.9 6.9 139.2 6.6
B............................... 14.1 .7 13.4 .6
Total non-investment grade.... 158.6 8.1 159.8 7.6
Total debt securities.........$1,949.3 100.0% $2,046.1 97.6%
12
As used in the above table and elsewhere in this report, book value
is defined as amortized cost, including adjustments for any other then
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, 1995, and for the past three years were as
follows:
Weighted Average Life and Duration (expressed in years)
As of December 31,
1995 1994 1993
Weighted average life........ 5.9 6.7 5.5
Weighted average duration<F1> 4.4 4.7 4.2
<FN><F1> Reflects average duration weighted by market value. Duration is a
measure
of 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, 1995.
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 90% of the policy and deposit
liabilities of the company represents reserves for deferred annuities 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.
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.
13
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 $16.6 million face amount of participating life
insurance policies in force, net of reinsurance, and $55.2 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, 1995, 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, 1995, American had ceded to reinsurers $240.2 million of its
$312.0 million of life insurance in force and had taken $145.2 million of
related reserve credits against future policy benefits. Of the insurance
ceded and reserve credits taken, $212.3 million and $143.6 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 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 ERC is 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
14
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.
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
15
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 debt service, 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, 1995, American had a statutory net
gain from operations of $6.0 million. As of December 31, 1995, 10% of
American's statutory surplus was $9.8 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 $16.8
million as of December 31, 1995. Subject to the provisions of 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")
16
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, 1995, American's
Total Adjusted Capital was $124.8 million and its Authorized Control Level
risk-based capital was $26.3 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 direct
insurance underwritten in a given jurisdiction. See Note 12 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 deferred annuities during
1995. In addition, a flexible premium universal life policy was introduced,
providing the company with a source of revenue diversification. The company
had not marketed a
17
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 7,500.
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.
In addition to competing with other life insurance companies, the
company also competes with financial institutions, including banks and mutual
funds, which market annuities and other retirement savings products and have
substantially grater resources than the company. Competition from financial
institutions may be increased as a result of a ruling by the United States
Supreme Court on January 18, 1995 in the case of NationsBank v. VALIC in
which the Court concluded that for purposes of Section 92 of the National
Bank Act, annuities are investment products
18
rather than insurance products
and that federal banks can therefore serve as agents for their customers in
the purchase and sale of both fixed and variable annuities.
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 indicted the possible existence of
underground storage tanks and level of contamination which may require
remedial action. The company does not believe that any required remedial
action will result in an material capital expenditures.
Item 1. (c) (1) (xiii) Numbers of Persons Employed
___________________________________________________
On December 31, 1995, the company employed 100 persons in its home
office and had approximately 7,500 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. During 1995, the company began
construction of a six-story Home Office building in Topeka, Kansas to house
all operations and plans to move into the new facility by early 1997.
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.
19
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
________ ________
1995
Fourth Quarter........ 117\8 107\8
Third Quarter......... 127\8 107\8
Second Quarter........ 115\8 10
First Quarter......... 103\4 91\4
1994
Fourth Quarter........ 10 81\4
Third Quarter......... 10 8
Second Quarter........ 101\2 83\4
First Quarter......... 12 95\8
A dividend of 7.5 cents was paid on April 13, 1995 and no dividends paid
during 1994.
On February 23, 1996, the board of directors declared a divided of 7.5
cents per common share, payable March 27, 1996, to stockholders of record on
March 13, 1996.
As of February 21, 1996, there were approximately 3,558 holders of record
of the company's common stock.
See Management's Discussion and Analysis of Liquidity and Capital
Resources and Note 7 of the Notes to Consolidated Financial Statements for
the statutory limitation on dividends payable from American under Kansas law.
20
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, 1995:
(000's Omitted, except per share data)
1995 1994 1993 1992 1991
Total Revenue <F1>........ $166,651 149,700 162,523 175,708 173,372
Earnings before income
taxes and extraordinary
item................... $ 25,129 19,286 26,755 17,318 6,675
Income tax expense
(benefit)................ 8,530 5,593 8,564 118 (3,444)
Earnings before
extraordinary item...... 16,599 13,693 18,191 17,200 10,119
Extraordinary item: Loss
on early extinguishment
of debt................. - - (213) (382) -
Net earnings............ $ 16,599 13,693 17,978 16,818 10,119
Earnings per share of
common stock:*
Primary:
Earnings before
extraordinary item. $ 1.60 1.32 2.62 2.94 1.84
Extraordinary item.... - - (.03) (.07) -
Net earnings......... $ 1.60 1.32 2.59 2.87 1.84
Fully diluted:
Earnings before
extraordinary item.... $ 1.60 1.32 2.49 2.62 1.84
Extraordinary item.... - - (.03) (.06) -
Net earnings.......... $ 1.60 1.32 2.46 2.56 1.84
Cash dividends per
share of common
stock............... $ .075 - - - -
Total Assets........... $2,476,204 2,260,021 2,114,696 2,090,136 1,959,071
Capitalization:
Bank debt........... $ 7,000 - - 19,859 28,437
Stockholders' equity. 174,445 104,196 100,345 49,463 30,936
Total Capitalization..... $181,445 104,196 100,345 69,322 59,373
<FN><F1> Total revenue for the years 1995, 1994, 1993, 1992 and 1991 includes
net
investment gains of $1.0, $.8, $17.0, $20.5 and $16.5 million, respectively.
*Per share data for 1991 and 1992 has been restated to give effect to a
one-for-two and one half reverse stock split effective June 11, 1993.
21
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 deferred annuities have accounted for at least 96% of the
company's premiums received, while sales of SPIAs and FPULs 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 deferred
annuities, SPIAs without life contingencies and FPULs are not recognized as
revenue at the time of sale. Similarly, policy acquisition costs (principally
commissions) related to such sales are not recognized as expenses but are
capitalized as deferred acquisition costs, or "DAC". As a result of this
deferral of costs and the lack of revenue recognition for premiums received,
no profit or loss is realized on these contracts at the time of sale.
Premiums received on deferred annuities, SPIAs without life contingencies and
FPULs 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 1995, 1994 and 1993, the company's weighted average expected surrender
levels were 8.9%, 9.0% and 13.0%, compared to the weighted average actual
surrenders of 14.2%, 9.8% and 14.7%. 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 and 1993, the company deemed it advisable, due to the
22
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 and $326.2 million during 1994 and 1993, respectively. As a result,
$18.3 million, or 17%, and $139.6 million, or 43%, of such policies were
surrendered during 1994 and 1993, 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, and 7% for 1993. Although, as of December 31, 1995, approximately
$213.1 million, or 12% of annuity account values contained a "bailout"
provision, the current credited rates on these policies are above the
"bailout" rate. The "bailout" rate on $211.0 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. The company may not be able to realize
investment gains in the future to offset the adverse impact on earnings,
should future "bailout" surrenders were to 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 corresponding amortization of DAC is
reduced as stream of profitability on the underlying annuities is effectively
reduced. The following margin analysis depicts the effects of realized gains
(losses) on the company's operating earnings (loss):
23
For the Year Ended December 31,
1995 1994 1993
(dollars in millions)
(percent of average invested assets)
Average invested assets<F1> $1,992.7 100.0% $1,862.3 100.0% $1,770.9 100.0%
Insurance premiums and
policy charges.......... $ 8.5 .43% $6.3 .34% $ 6.6 .37%
Net investment income <F2>.. 156.5 7.85 142.0 7.62 138.5 7.82
Net trading losses......... (.9) (.04) - - - -
Policyholder benefits..... (118.9) (5.97) (112.3)(6.03) (113.8) (6.43)
Gross interest margin.... 45.2 2.27 36.0 1.93 31.3 1.76
Associated amortization
of deferred
acquisition costs....... (12.1) (.61) (8.8) (.47) (4.7) (.26)
Net interest margin......... 33.1 1.66 27.2 1.46 26.6 1.50
Net investment gains....... 1.0 .05 .8 .04 17.0 .96
Associated amortization
of deferred
acquisition costs.... (.2) (.01) (.2) (.01) (4.8) (.27)
Net margin from investment
gains............ .8 .04 .6 .03 12.2 .69
Total net margin....... 33.9 1.70 27.8 1.49 38.8 2.19
Expenses, net.......... (8.7) (.44) (8.5) (.46) (11.1) (.62)
Operating earnings.... 25.2 1.26 19.3 1.03 27.7 1.57
Interest expense......... (.1) - - - (1.0) (.06)
Earnings before income
taxes................. 25.1 1.26 19.3 1.03 26.7 1.51
Income tax (expense)
benefit............... (8.5) (.43) (5.6) (.30) (8.5) (.48)
Earnings before
extraordinary loss..... 16.6 .83 13.7 .73 18.2 1.03
Extraordinary loss on early
extinguishment of debt.. - - - - (.2) (.01)
Net earnings................ $16.6 .83 $13.7 .73% $18.0 1.02%
Operating earnings......... $25.2 1.26% $19.3 1.03% $27.7 1.57%
Less: Net margin from
investment gains...... .8 .04 .6 .03 12.2 .69
Operating earnings
excluding net investment
gains and associated
amortization of deferred
policy acquisition
costs.................. $24.4 1.22% $18.7 1.00% $15.5 .88%
24
<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, 1995, 1994 and 1993
INSURANCE PREMIUMS AND POLICY CHARGES increased $2.2 million or 35%,
to $8.5 million from $6.3 million in 1994, due to an increase in surrender
charges assessed on the surrender of annuity policies. This follows a
decrease of $.3 million or 5%, to $6.3 million in 1994 from $6.6 million in
1993. This decrease reflects a $.5 million decrease in SPIA sales which was
partially offset by a $.3 million increase in surrender charges assessed on
the surrender of annuity policies. Surrender benefits increased $113.4
million to $307.4 million in 1995 from $194.0 million in 1994. The 1994
amount of $194.0 million represents a decrease of $76.8 million from $270.8
million in 1993. The increase in surrenders realized in 1995 reflects both
the increased number of policies no longer covered by a surrender charge and
the returns available on alternative investments as annuity rates decline.
The decrease realized in 1994 reflects the reduction in surrenders from
"bailout" products to $18.3 million in 1994 from $139.6 million in 1993.
NET INVESTMENT INCOME increased $14.5 million, or 10%, to $156.5
million from $142.0 million in 1994. This increase resulted from both an
increase in average invested assets from $1,862.3 million in 1994 to $1,992.7
million in 1995 and an increase in the average yield on invested assets from
7.6% in 1994 to 7.9% in 1995. Net investment income increased $3.5 million,
or 3%, to $142.0 million in 1994 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% in 1993 to 7.6% in 1994. The 1994
yield was impacted by losses generated by an investment in investment
partnerships. These partnerships form a fund of funds totalling $23.1 million
on December 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 genera
ted income of $3.6 million in 1995 compared with a loss of $1.9 million in
1994 and income of $1.2 million in 1993.
NET TRADING LOSSES of $.9 million in 1995 primarily result from a
program designed to create capital losses for tax purposes which can be
carried back against capital gains realized in 1992. To accomplish this, the
company utilized a preferred stock dividend roll program, buying the stock at
prices which included the dividend, collecting the dividend and then selling
the stock at prices excluding the dividend. The net effect of this program
was to generate dividend income of $1.0 million, included in net investment
income, and capital losses of $1.0 million. The company had no trading
activity in either 1994 or 1993.
NET INVESTMENT GAINS increased $.2 million, or 25%, to $1.0 million
in 1995 from $.8 million in 1994. This follows a decrease of $16.2 million,
or 95%, to $.8 million in 1994 from $17.0 million in 1993. The 1995 gain
reflects the release of the allowance for credit losses that was first
established in 1989. The release of this reserve increased 1995 investment
gains by $2.2 million. 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
25
surrenders
following the reduction of interest crediting rates on certain annuity
policies below the "bailout" rate. The decision to realize gains or losses
lies to a great degree in management's discretion. Unrealized gains (losses)
in the company's bond portfolio were $96.8 million, ($105.6) million and
$81.4 million as of December 31, 1995, 1994 and 1993 respectively.
OTHER REVENUE increased $.9 million, or 150%, to $1.5 million in 1995
from $.6 million in 1994. This increase resulted from a gain of $.7 million
recognized on the sale of Omni-Tech Medical Inc., and a $.3 million increase
in Omni-Tech sales. Other revenue increased $.3 million to $.6 million in
1994 from $.3 million in 1993. This increase is due to an increase in
Omni-Tech sales.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased
$6.6 million, or 6%, to $118.9 million in 1995 from $112.3 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 December 31,
1994 to 6.0% as of December 31, 1995, along with an increase in annuity
liabilities to $2,082.0 million on December 31, 1995 from $1,971.6 million on
December 31, 1994. In 1994, this expense decreased $1.5 million, to $112.3
million from $113.8 million in 1993. This decrease resulted primarily from a
reduction in the average interest rate credited on 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 from $1,826.9 million on December 31, 1993.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS increased $3.4
million, or 38%, to $12.4 million in 1995 from $9.0 million in 1994.
Amortization of deferred policy acquisition costs (DAC) associated with gross
interest margin increased $3.3 million to $12.1 million in 1995 from $8.8
million in 1994. Amortization of DACassociated with investment gains was
unchanged at an expense of $.2 million on gains of $1.0 million in 1995 and
an expense of $.2 million on gains of $.8 million in 1994. The increase in
1995 amortization associated with gross interest margin reflects the
increased surrenders realized during 1995. Amortization of DACdecreased $.4
million, to $9.0 million in 1994 from $9.4 million in 1993. Amortization of
DAC associated with gross interest margins increased $4.1 million, to $8.8
million in 1994, from $4.7 million in 1993. Amortization of DACassociated
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
investment gains. Acquisition costs incurred in 1995 and deferred into future
policy periods were $34.8 million, compared with $25.8 million in 1994 and
$18.2 million in 1993.
GENERAL INSURANCE EXPENSES increased $.8 million, or 11%, to $8.4
million in 1995 from $7.6 million in 1994. Management believes this increase
can be attributed to increases in business activity and assets under
management. This follows a decrease of $1.2 million 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.
PREMIUM AND OTHER TAXES, LICENSES AND FEES INCREASED $.3 million, or
23%, to $1.6 million in 1995 from $1.3 million in 1994 following a decrease
of $1.1 million in 1994 from $2.4 million in 1993. The above amounts include
charges of approximately $1.0 million, $.5 million and $1.6 million for
the years 1995, 1994 and 1993, respectively, for nonrecoverable guaranty fund
assessments resulting from the significant number of insolvencies that have
occurred in recent years.
26
INTEREST EXPENSE increased $.1 million in 1995 as a result of $7.0
million of borrowing under the company's credit agreement. The proceeds of
this borrowing were contributed to the surplus of American. Interest expense
decreased $1.0 million in 1994 following the repayment of all debt in
November, 1993, with proceeds from the company's 1993 common stock offering.
INCOME TAX EXPENSE increased $2.9 million to $8.5 million in 1995
from $5.6 million in 1994. This follows a $3.0 million decrease in 1994 from
$8.6 million in 1993. Taxes were provided at an effective rate of 34%, 29%
and 32% in 1995, 1994 and 1993, respectively.
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 approved by the Kansas Insurance Commissioner.
The liquidity requirements of American are met by premiums received
from annuity sales, net investment income received, and proceeds from
investments upon maturity, sale or redemption. The primary uses of funds by
American are the payment of surrenders, policy benefits, operating expenses
and commissions, as well as the purchase of assets for investment.
For purposes of the company's consolidated statements of cash flows,
financing activities include premiums received from sales of deferred
annuities, 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, 1995,
1994 and 1993, was ($7.6) million, $26.6 million and ($91.5) million,
respectively.
The decrease in net cash provided by annuity contracts without life
contingencies in 1995 resulted primarily from a $125.6 million increase in
surrender and death benefits paid from $246.6 million (approximately 11.5% of
beginning reserves for future policy benefits) to $372.2 million
(approximately 17.3% of beginning reserves for future policy benefits) along
with a $89.9 million increase in premiums received from $267.8 million to
$357.7 million. 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.
Net cash provided by the company's operating activities was $157.9
million, $130.5 million and $129.7 million in 1995, 1994 and 1993,
respectively.
Cash provided by financing and operating activities and by the sale
and maturity of portfolio investments is used primarily to purchase portfolio
investments and
27
for the payment of acquisition costs (commissions and
expenses associated with the sale and issuance 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 (4%, 2% and 3% as
of December 31, 1995, 1994 and 1993, respectively). The weighted average
duration of the company's bond portfolio was 4.4 years as of December 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. 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, 1994, the company entered into a credit agreement with
The First National Bank of Chicago and Boatmen's First National Bank of
Kansas City, as Lenders. Under the terms of this agreement, the Lenders have
committed to lend up to $15,000,000 in the form of a 5-year reducing credit
facility, of which $7,000,000 had been borrowed at December 31, 1995. For
additional information regarding this credit agreement, see Note 5 of Notes
to Consolidated Financial Statements.
As of December 31, 1995, the company owned bonds of 3 issuers in
amounts exceeding 10% of stockholders' equity. The carrying value of such
bonds was $58.0 million which represented 3% 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.
Recent regulatory actions against certain large life insurers
encountering financial difficulty have prompted the various state guaranty
associations to begin assessing life insurance companies for the resulting
losses. For further information regarding the effects of guaranty fund
assessments, see Note 12 of Notes to Consolidated Financial Statements.
REINSURANCE. The company had amounts receivable under reinsurance
agreements of $146.6 million and $149.7 million as of December 31, 1995 and
1994, respectively. Of the amounts, $145.0 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 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
28
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 1995 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 1995, 1994 and 1993, the company disposed of bonds with book
values of $144.7, $337.7 and $374.6 million for net gains (losses) of ($.1),
($.8) and $18.6 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 table 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, 1995, 1994 and 1993:
29
Analysis of Bond Dispositions
Years Ended December 31,
1995 1994 1993
Book Gains Book Gains Book Gains
Value (Losses) Value (Losses) Value (Losses)
(dollars in millions)
Bonds redeemed by issuer:
Investment grade.......... $18.9 $.5 $9.3 $.1 $ 41.2 $ .7
Non-investment grade...... 4.2 (.1) 2.3 (.1) 10.1 1.3
Bonds sold to avoid
further losses
as a result of
deteriorated credit
worthiness:
Investment grade.......... 11.8 (1.2) 8.5 (.2) 12.4 (.1)
Non-investment grade...... 3.4 - 2.0 (.2) 1.8 (.1)
Bonds sold as part of
normal portfolio
management:
Investment grade.......... 91.3 .5 315.6 (.4) - -
Non-investment grade..... 15.1 .2 - - - -
Bonds sold to provide
statutory capital:
Investment grade.......... - - - - 301.9 16.5
Non-Investment grade...... - - - - 7.2 .3
Subtotals:
Investment grade.. 122.0 (.2) 333.4 (.5) 355.5 17.1
Non-investment grade.... 22.7 .1 4.3 (.3) 19.1 1.5
Total................... $144.7 $(.1) $337.7 $(.8) $374.6 $18.6
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 book value, estimated market value, unrealized gains, and
unrealized losses in non-investment grade bonds owned as of December 31,
1995, and December 31, 1994, were $158.5 million and $136.9 million,
respectively, $159.8 million and $126.5 million, respectively, $4.2 million
and $.1 million, respectively, and $1.8 million and $9.3 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
30
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 investment 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, 1995, the carrying value of the company's five largest
investments in securities rated non-investment grade by both Standard &
Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's")
aggregated $39.6 million, with an approximate market value of $38.0 million,
none of which individually exceed $11.0 million. For a list of all
investments exceeding 10% of stockholders' equity see Note 2 of Notes to
Consolidated Financial Statements.
31
Item 8. Financial Statements and Supplemental Data
_______________________________________________________
Page Number
Independent Auditors' Report 33
Consolidated Balance Sheets - as of December 31,
1995 and 1994 34-35
Consolidated Statements of Earnings - for the years
ended December 31, 1995, 1994 and 1993 36
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 37
Consolidated Statements of Cash Flows - for the
years ended December 31, 1995, 1994 and 1993 38-39
Notes to Consolidated Financial Statements - for the
years ended December 31, 1995, 1994 and 1993 40-60
32
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, 1995 and 1994, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. 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, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
The company adopted the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities in 1994.
/s/ Deloitte & Touche LLP
_____________________________
Kansas City, Missouri
February 29, 1996
33
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
As of December 31,
ASSETS 1995 1994
Investments:
Debt securities:
Bonds:
Held-to-maturity (market: $-0- and $1,145,692)... $ - 1,237,185
Available-for-sale (cost: $1,947,777 and
$621,138) ............................. 2,044,606 607,046
Trading (cost: $1,489 and $-0-)............ 1,485 -
2,046,091 1,844,231
Equity securities:
Common stock, available-for-sale
(cost: $1,047 and $2,124).................. 1,181 2,325
Preferred stock, available-for-sale (cost: $7,566
and $45) ........................ 7,733 31
Preferred stock, trading (cost: $619 and $-0-)... 629 -
9,543 2,356
Other long-term investments....................... 39,491 58,773
Short-term investments............................ 436 520
2,095,561 1,905,880
Less allowance for credit losses................. - (2,231)
Total investments......................... 2,095,561 1,903,649
Cash and cash equivalents.................... 48,281 10,621
Accounts receivable (net of allowance for
uncollectable accounts of $739 and $227)...... 454 2,310
Amounts receivable under reinsurance agreements.. 146,618 149,656
Amounts receivable on securities settlements
in process ......................... 10,873 905
Accrued investment income....................... 29,357 29,296
Deferred policy acquisition costs............... 140,476 148,871
Deferred income taxes........................... - 11,136
Other assets.................................... 4,584 3,577
Total assets.................................... $2,476,204 2,260,021
See notes to consolidated financial statements.
34
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted, except share and per share data)
As of December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
Liabilities:
Policy liabilities:
Future policy benefits.................. $ 2,259,028 2,148,763
Other policy liabilities............. 7,312 2,983
2,266,340 2,151,746
Notes payable....................... 7,000 -
Deferred income taxes............... 22,901 -
Amounts due on securities settlements in
process 1,438 274
Accrued expenses and other liabilities.... 4,080 3,805
Total liabilities..................... 2,301,759 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 and outstanding
- 10,140,738 shares in 1995 and 10,034,742
shares in 1994............................ 12,904 12,769
Paid in capital 64,284 63,499
Unrealized investment gains (losses)(net of
deferred policy acquisition cost amortization
expense (benefit) of $27,327 and ($3,476) and
deferred income tax expense (benefit) of
$24,431 and ($2,616))................... 45,372 (7,813)
Retained earnings.......................... 54,714 38,876
177,274 107,331
Less leveraged employee stock ownership
trust (LESOP) (2,829) (3,135)
Total stockholders' equity......... 174,445 104,196
Total liabilities and stockholders' equity.. $2,476,204 2,260,021
See note to consolidated financial statements.
35
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's Omitted, except per share data)
For the Year Ended December 31,
1995 1994 1993
Revenue:
Insurance premiums and policy charges....... $ 8,500 6,331 6,594
Net investment income........................ 156,510 142,009 138,539
Net trading losses........................... (882) - -
Net investment gains........................ 1,038 803 17,049
Other revenue................................ 1,485 557 341
Total revenue............................ 166,651 149,700 162,523
Benefits and expenses:
Benefits, claims and interest credited
to policyholders............................ 118,886 112,310 113,848
Amortization of deferred policy acquisition
costs....................................... 12,365 9,026 9,436
General insurance expenses................... 8,370 7,587 8,830
Premium and other taxes, licenses and fees... 1,603 1,252 2,395
Other expenses............................... 221 239 265
Total benefits and expenses.............. 141,445 130,414 134,774
Operating earnings............................. 25,206 19,286 27,749
Interest expense............................... 77 - 994
Earnings before income tax expense and
extraordinary item............................ 25,129 19,286 26,755
Income tax expense............................. 8,530 5,593 8,564
Earnings before extraordinary item............. 16,599 13,693 18,191
Extraordinary item: Loss on early
extinguishment of debt (net of income tax
benefit of $100)............................. - - (213)
Net earnings................................... $16,599 13,693 17,978
Earnings per share of common stock:
Primary:
Earnings before extraordinary item........... $ 1.60 1.32 2.62
Extraordinary item............................ - - (.03)
Net earnings................................. $ 1.60 1.32 2.59
Fully diluted:
Earnings before extraordinary item........... $ 1.60 1.32 2.49
Extraordinary item........................... - - (.03)
Net earnings................................. $ 1.60 1.32 2.46
Average shares outstanding:
Primary........................................ 10,354 10,341 6,860
Fully diluted.................................. 10,404 10,341 7,315
See notes to consolidated financial statements.
36
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
Unrealized
Investment
Common Paid-in Gains Retained Treasury
Stock Capital (Losses) Earnings Stock LESOP Total
Balance as of January
1, 1993 $8,186 45,016 (809) 7,441 (6,855) (3,688) 49,463
Net earnings...... - - - 17,978 - - 17,978
Change in unrealized
investment
gains (losses)......... - - 1,873 - - - 1,873
Cash dividends to stockholders
($1.50 per share on preferred
stock)................ - - - (236) - - (236)
Cash paid on reverse stock
split..... - (25) - - - - (25)
Issuance of common stock:
upon completion of stock
offering............ 4,392 25,014 - - - - 29,406
upon exercise of options 290 1,704<F1> - - - - 1,994
upon conversion of preferred
stock............ 729 (557) - - - - -
Retirement of treasury
stock.. (690) (6,165) - - 6,855 - -
Repurchase of warrants on debt
payment.............. - (375) - - - - (375)
Allocation of LESOPshares. - - - - - 267 267
Balance as of December 31,
1993.................. 12,907 64,612 1,064 25,183 - (3,421) 100,345
Net earnings...... - - - 13,693 - - 13,693
Cumulative effect of adoption
of SFAS 115..... - - 19,613 - - - 19,613
Change in unrealized investment
gains (losses)........... - - (28,490) - - - (28,490)
Remaining offering costs... - (135) - - - - (135)
Redemption stockholders rights
plan..................... - (101) - - - - (101)
Issuance of common stock:
upon exercise of options 28 143<F1> - - - - 171
Purchase of treasury shares - - - - (1,186) - (1,186)
Retirement of treasury
stock.. (166) (1,020) - - 1,186 - 0
Allocation of LESOP
shares - - - - - 286 286
Balance as of December
31, 1994............... 12,769 63,499 (7,813) 38,876 - (3,135) 104,196
Net earnings........ - - - 16,599 - - 16,599
Change in unrealized investment
gains (losses)......... - - 53,185 - - - 53,185
Cash dividends to stockholders
($.075 per share on common
stock)............... - - - (761) - - (761)
Issuance of common stock:
upon exercise of options. 135 785<F1> - - - - 920
Allocation of LESOPshares - - - - - 306 306
Balance December 31,
1995. $12,904 64,284 45,372 54,714 - (2,829) 174,445
<FN><F1> Net
1. of income tax benefit of $440, $10 and $129 for the years ended
December 31, 1995, 1994 and 1993, respectively.
See notes to consolidated financial statements.
37
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
1995 1994 1993
Operating Activities:
Net earnings................ $16,599 13,693 17,978
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Interest credited to policyholders....... 121,182 114,871 116,942
Amortization of (discounts) premiums on
debt securities, net............... (1,561) (2,347) (1,905)
Amortization of deferred policy acquisition
costs......................... 12,365 9,026 9,436
Net trading losses............ 882 - -
Net investment (gains).......... (1,038) (803) (17,049)
Accrued investment income................ (61) (2,752) (2,366)
Deferred income taxes................... 6,990 651 4,635
Other, net.............................. 2,538 (1,830) 1,982
Net cash provided by operating activities....... 157,896 130,509 129,653
Investing Activities:
Purchases of securities:
Held-to-maturity............................ (5,052) (242,464) (578,918)
Available-for-sale.......................... (343,322) (332,647) -
Trading.................................... (72,018) - -
Proceeds from sale of securities:
Held-to-maturity......................... - 8,302 341,498
Available-for-sale....................... 140,742 319,846 -
Trading............................. 69,017 - -
Proceeds from maturity or redemption:
Held-to-maturity....................... 26,303 35,375 184,280
Available-for-sale................. 85,767 86,973 -
Other long-term investments, net........... 19,271 (20,215) (20,326)
Short-term investments, net.................. 83 1,392 (487)
Capitalization of deferred policy acquisition
costs.................................. (34,775) (25,750) (18,212)
Other, net.................................. (1,741) (413) (497)
Net cash used in investing activities. (115,725) (169,601) (92,662)
Financing Activities:
Premiums received........................... 357,705 267,802 222,177
Surrender and death benefits paid......... (372,234) (246,632) (318,880)
Surrender and risk charges collected........ 6,971 5,409 5,161
Securities settlements in process........... (8,804) 573 (25,609)
Proceeds from notes payable................. 7,000 - -
Payments on notes payable................... - - (19,918)
Cash dividends to stockholders............. (761) - -
Issuance of common stock................... 920 171 31,400
Other, net................................. 4,692 608 (2,590)
Net cash provided by (used in) financing
activities........................... (4,511) 27,931 (108,259)
Increase (Decrease) in Cash and Cash Equivalents 37,660 (11,161) (71,268)
Cash and Cash Equivalents:
Beginning of year..................... 10,621 21,782 93,050
End of year........................ $48,281 10,621 21,782
See notes to consolidated financial statements.
38
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
1995 1994 1993
Supplemental schedule of cash flow
information:
Income tax payments (refunds)............. $ (1,507) 6,150 3,204
Interest payments......................... $ 43 - 1,071
Change in net unrealized investment gains
(losses)................................... $ 111,035 (56,823) -
Less: Associated reduction in amortization
of deferred policy acquisition costs... (30,803) 16,221 -
Deferred income tax (expense) benefit. (27,047) 13,177 -
Net change in net unrealized investment
gains (losses).............................. $ 53,185 (27,425) -
See notes to consolidated financial statements.
39
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 1994 and 1993
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), (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. Debt securities
available-for-sale are carried at 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 advisor. Such amounts represent an estimate of the consideration
to be received in the future when the defaulted company's debt is settled
through the sale of their assets or the restructuring of their debt. These
estimates do not represent the discounted present value of these future
considerations.
Investments in common stock and preferred stock are carried at
market, with unrealized gains (losses) recorded in stockholders' equity for
securities available-for-sale.
Investments in debt and equity securities which were purchased
principally for the purpose of selling such securities in the near term are
classified as trading securities and are carried at market. Unrealized gains
(losses) are included currently in the results of earnings.
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 partner's estimated market value with any unrealized
gains or losses recorded in net investment income.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________________
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.
The carrying values and estimated fair values of the company's
financial instruments as of December 31, 1995 and 1994 were as follows:
(000's Omitted)
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Debt securities............... $2,046,091 2,046,091 1,844,231 1,752,738
Equity securities............ 9,543 9,543 2,356 2,356
Other long-term investments.. 39,491 39,546 58,773 58,536
Short-term investments....... 436 436 520 520
Cash and cash equivalents..... 48,281 48,281 10,621 10,621
Amounts receivable on securi-
ties settlement in process.. 10,873 10,873 905 905
Accounts receivable and accrued
investment income............ 29,811 29,811 31,606 31,606
Liabilities:
Future policy benefits -
investment contracts....... 2,022,653 1,900,895 1,917,066 1,799,090
Other policy liabilities..... 7,312 7,312 2,983 2,983
Notes payable............... 7,000 7,000 - -
Amounts due on securities
settlements in process..... 1,438 1,438 274 274
Accrued expenses and other
liabilities................ 4,080 4,080 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.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________________
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 approximate 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.
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.
Notes payable - The fair value of the company's note payable
has been estimated to be an amount equal to the balance reported in the
balance sheet.
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 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. SIGNIFICANT RISKS AND UNCERTAINTIES
NATURE OF OPERATIONS - The company specializes in the sale of
deferred annuity products, the earnings on which are not currently taxable to
the annuity owner. Any changes in tax regulation which eliminate or
significantly reduce this advantage of tax deferred income would adversely
impact the operations of the company. The company's products are marketed
through a network of independent agents licensed in 47 states and the
District of Columbia. The company is not dependent on any one agent or agency
for a substantial amount of its business. No single agent accounted for more
than 1% of annuity sales in 1995, and the top twenty individual agents
accounted for approximately 11% of 1995 annuity sales.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
CERTAIN SIGNIFICANT ESTIMATES - Certain costs incurred to
acquire new business are deferred and amortized in relation to the incidence
of expected gross profits over the expected life of the policies.
Determination of expected gross profits includes management's estimate of
certain elements over the life of the policies, including investment income,
interest to be credited to the contract, surrenders and resultant surrender
charges, deaths and in the case of life insurance, mortality charges to be
collected. These estimates of expected gross profits are
42
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________________
used as a basis for amortizing deferred costs. These estimates are
periodically reviewed by management and if actual experience indicates that
the estimates should be revised the total amortization recorded to date is
adjusted by a charge or credit to earnings.
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 polici
es 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.
Net investment gains realized in 1995, 1994 and 1993 resulted
in the company experiencing investment margins greater than those estimated.
As a result, $3,902, $203,940 and $4,790,523 of the unamortized balance of
deferred policy acquisition costs were expensed in 1995, 1994 and 1993,
respectively. The amount charged off is based on actual gross profits earned
to date in relation to total gross profits expected to be earned over the
life of the related contracts.
Estimates of the expected gross profits to be realized in
future years include the 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.
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 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.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________________
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 is computed by
dividing net earnings (reduced by preferred dividend requirements in 1993) 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. 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.
K. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money market accounts and other securities with original
maturities within three months.
L. NEW ACCOUNTING STANDARDS:
Effective January 1, 1994, the company adopted the provisions
of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This Statement addresses the accounting and reporting for
certain investments in debt and equity securities by requiring such
investments to be classified in held-to-maturity, available-for-sale, or
trading categories. The cumulative effect of the adoption of this Statement
was an increase in stockholder's equity of $19,612,653 (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.
Effective November 30, 1995, the company adopted the provisions
of "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" and transferred all bonds with an
amortized cost of $1,159,390,768 classified as held-to-maturity to
available-for-sale. The effect of the adoption was an increase in
stockholders' equity of $21,218,205(net of related amortization of deferred
policy acquisition costs of $12,792,403 and deferred income taxes of
$11,425,188). Net earnings for the year ended December 31, 1995 were not
affected by the adoption of this implementation guide.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
___________________________________________________________________
Effective for fiscal years beginning after December 15, 1995,
SFAS No. 121, "Accounting for the Impairment Of Long Lived Assets"
establishes accounting standards for the impairment of long-lived assets,
certain intangibles, and goodwill related to those assets. The company does
not expect this Statement to have a material effect on its consolidated
financial statements.
Effective January 1, 1996, SFAS No. 123, "Accounting for
Stock-Based Compensation," will require increased disclosure of compensation
expense arising from stock compensation plans. The Statement encourages
rather than requires companies to adopt a new method that accounts for stock
compensation awards based on their estimated fair value at the date they are
granted. Companies will be permitted, however, to continue accounting under
APB Opinion No. 25 which requires compensation cost be recognized based on
the difference, if any, between the quoted market price of the stock on the
date of grant and the amount an employee must pay to acquire the stock. The
company will continue to apply APB Opinion No. 25 in its consolidated
financial statements and will disclose pro forma net income and earnings per
share in a footnote to its consolidated financial statements, determined as
if the new method were applied.
M. RECLASSIFICATIONS:
Certain reclassifications have been made to conform prior
years' financial statements to the December 31, 1995, presentation.
2. INVESTMENTS:
A summary of investment income is as follows:
(000's Omitted)
For the Year Ended December 31,
1995 1994 1993
Net investment income:
Debt securities....... $ 148,040 142,469 136,533
Equity securities... 1,158 50 76
Other long-term investments. 8,032 486 3,096
Short-term investments...... 1,612 830 931
158,842 143,835 140,636
Less investment expenses. 2,332 1,826 2,097
Net investment income....... $ 156,510 142,009 138,539
Net investment gains (losses):
Debt securities.............. $ 417 (533) 18,486
Equity securities........ 646 1,335 (274)
Other...................... (25) 1 (1,163)
Net investment gains (losses)... $ 1,038 803 17,049
Net trading gains (losses):
Debt securities............ $ 68 - -
Equity securities......... (950) - -
Net trading gains (losses)..... $ (882) - -
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investment (continued):
_______________________________
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 to
achieve a yield in excess of the S&P 500 Index. 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 affect the company's earnings for
any given period.
The maturity of the company's debt and equity securities portfolio as
of December 31, 1995 was as follows:
(000's Omitted)
As of December 31, 1995
Available-for-sale Trading
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
Debt Securities:
Bonds:
One year or less................. $ 25,660 23,361 - -
Two years through five years.... 461,364 478,490 - -
Six years through ten years.... 1,228,934 1,302,318 462 467
Eleven years and after........... 231,819 240,437 1,027 1,018
1,947,777 2,044,606 1,489 1,485
Equity securities............... 8,613 8,914 619 629
$1,956,390 2,053,520 2,108 2,114
These tables include mortgage-backed securities based on the
estimated future cash flows of the underlying mortgages.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
The amortized cost, estimated market value and unrealized market
gains and losses of debt and equity securities as of December 31, 1995, and
1994 were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1995
___________________
Bonds available-for-sale:
Corporate debt obligations
Investment grade.............. $1,076,873 63,321 724 1,139,470
High-yield............... 147,878 5,468 1,810 151,536
1,224,751 68,789 2,534 1,291,006
U.S. Treasury obligations... 51,743 942 215 2,664
Mortgage-backed securities
Investment grade.............. 661,652 32,062 1 693,713
High-Yield.................... 9,631 - 2,408 7,223
Bonds available-for-sale....... 1,947,777 101,793 4,964 2,044,606
Bonds trading:
Corporate debt obligations
Investment grade............... 458 - 7 451
High-Yield..................... 1,031 5 2 1,034
Bonds trading................... 1,489 5 9 1,485
Total bonds.................... 1,949,266 101,798 4,973 2,046,091
Equity securities.............. 9,232 614 303 9,543
$1,958,498 102,412 5,276 2,055,634
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................. 2,169 417 230 2,356
$1,860,492 3,281 108,679 1,755,094
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:
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
______________________________
Accumulated Estimated
Original Write- Carrying Market
Cost downs Value Value
December 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 amortized cost, estimated market value and unrealized market
gains and losses by type of mortgage-backed security as of December 31, 1995,
and December 31, 1994 were as follows:
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1995
Government agency mortgage-backed
securities:
Planned amortization classes and
accretion directed classes......... $ 71,164 1,823 - 72,987
Targeted amortization classes
and accretion directed classes.... 7,833 360 - 8,193
Pass-throughs..................... 32 3 - 35
Total government agency
mortgage-backed securities....... 79,029 2,186 - 81,215
Government sponsored enterprise
mortgage-backed securities:
Planned amortization classes...... 403,359 23,750 - 427,109
Sequential classes............... 19,546 1,405 - 20,951
Pass-throughs................... 3,258 21 - 3,279
Total government sponsored
enterprise mortgage-backed
securities................... 426,163 25,176 - 451,339
Other mortgage-backed securities:
Planned amortization classes..... 18,574 172 - 18,746
Sequential classes............ 134,245 4,484 1 138,728
Pass-throughs................... 11 - - 11
Subordinated classes............ 13,261 44 2,408 10,897
Total other mortgage-backed
securities.................... 166,091 4,700 2,409 168,382
Total mortgage-backed securities.. $671,283 32,062 2,409 700,936
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
______________________________
(000's Omitted)
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1994
___________________
Government agency mortgage-backed
securities:
Planned amortization classes and
accretion directed 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 23.4%
and 21.6% of the carrying value of the company's mortgage-backed securities
as of December 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 74.6% and 76.8%
of the carrying value of the company's mortgage-backed securities as of
December 31, 1995 and December 31, 1994, respectively.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
________________________________
As of December 31, 1995, 75.3% 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 six issues, with a carrying value of $19.3
million as of December 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 following investments held as of December 31, 1995, exceeded ten
percent of stockholders' equity:
(000's Omitted)
As of December 31,
1995 1994
Amortized Estimated Amortized Estimated
Cost Market Cost Market
10% of Stockholders' Equity...... $ 17,444 10,420
Bonds:
FNMA 94 83 B, 7.5%, 7-2003...... $19,197 20,598 19,177 18,031
LA County Pension Oblig, various
interest
rates and due dates through 2005.. 18,633 20,675
Quebec Province CDA, 8.625%,
due 01-2005.. 20,199 21,923
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 Year Ended December 31,
1995 1994 1993
Consideration received.......... $275,012 462,138 393,142
Carrying value................. 275,204 461,335 374,584
Net investment gains (losses). $ (192) 803 18,558
Investment gains............... $ 2,773 4,268 18,677
Investment losses.............. (2,965) (3,465) (119)
Net investment gains (losses). $ (192) 803 18,558
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (continued):
______________________________
During 1995, the company transferred bonds of four issuers from
held-to-maturity to available-for-sale based upon a significant deterioration
in the issuers' creditworthiness. The book value of these bonds at the time
of transfer was $16,128,888. Included in the above table are 1995 losses of
$2,151,154 on the sale of bonds of four issuers which the company had
transferred from held-to-maturity to available-for-sale.
The 1994 amounts include bonds of one issuer which the company had
classified as held-to-maturity, the sale of which resulted in a loss of
$205,526. The decision to sell these bonds was based upon a significant
deterioration in the issuers' creditworthiness. The book value of these bonds
at the time of sale was $8,507,732.
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 Debt Securities Equity Other Long-
Held-to- Available Securities Available Securities term
Maturity for-Sale Trading for-Sale Trading Investments
Balance as of
January 1, 1993 $ 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 - -
1995 Net change... 91,493 110,921 (4) 114 10 -
Balance as of
December 31, 1995 $ - 96,829 (4) 301 10 -
At December 31, 1995 and 1994, investments with statutory carrying
values of $1,956,343,973 and $1,866,074,033, respectively, were on deposit
with various insurance departments. These amounts exceeded the minimum
required deposits by $53,856,902 and $66,325,834 as of December 31, 1995 and
1994 respectively.
3. OTHER ASSETS:
Other assets consist of the following:
(000's Omitted)
As of December 31,
1995 1994
Property and equipment at cost:
Home office building (including
land of $352)...................... $3,643 2,152
Furniture and equipment............ 3,711 3,464
Automobiles........................ 99 115
7,453 5,731
Less accumulated depreciation........ 3,650 3,336
3,803 2,395
Other ................................ 781 1,182
$4,584 3,577
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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
Year Ended Gross other Net
December 31, Descriptions amount companies amount
1995 Life insurance
in force $ 311,991 240,206 71,785
Insurance premiums
and policy charges $ 9,409 909 8,500
Future policy
benefits $ 2,259,028 145,183 2,113,845
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
The company is contingently liable for the portion of the policies
reinsured under each of its existing reinsurance agreements in the event the
reinsurance companies are unable to pay their portion of any reinsured claim.
Management believes that any liability from this contingency is unlikely.
The company had amounts receivable under reinsurance agreements of
$146,617,611 and $149,656,094 as of December 31, 1995, and December 31, 1994,
respectively. Of the amounts, $144,965,371 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. Reimbursements received from ERC
for amounts paid by the company on the reinsured risks totalled $12,044,418,
$9,740,717 and $7,991,680 for the years ended December 31, 1995, 1994 and
1993, respectively.
The following table identifies the components of the amounts
receivable from ERC:
(000's Omitted)
As of December 31,
1995 1994
Reserve for future policy benefits............. $ 143,558 146,919
Reimbursement for benefit payments............. 1,407 1,030
$ 144,965 147,949
52
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. On July 28, 1995, this
agreement was amended to reduce the commitment from $25,000,000 to
$15,000,000. 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. During December, 1995, the company
borrowed $7,000,000 (effective annual interest at December 31, 1995 of 6.91%)
under the credit agreement and contributed the proceeds to the capital and
surplus of American. Principal repayments for this borrowing are as follows:
1996 - $-0- 1997 - $1,820,000 1998 - $2,240,000 1999 - $2,940,000.
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 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.
6. Retirement Plans:
______________________
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time employees with one year of service. Qualifying participants may
contribute an amount not to exceed ten percent of covered compensation. The
company made no contributions to the plan during the three years ended
December 31, 1995.
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 $3,010,882 and $3,336,038 as of December 31,
1995 and 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 is allocated to participating
employees. Of the 361,735 shares of the company's common stock now owned by
the LESOP, 119,518 shares have been allocated to the participating employees
with the remaining 242,217 shares being held by American as collateral for
the loan.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Retirement Plans (continued):
____________________________________
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, 1995, 1994 and 1993 were
$305,564, $285,565 and $266,886, 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.
A liability in the amount of $435,637, representing the present value
of future benefits, has been established. Charges (credits) to earnings
relating to the plans were ($85,543), ($40,244) and ($3,282), for the years
ended December 31, 1995, 1994 and 1993, 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, 1995, 1994 and 1993, were $210,907, $215,664 and
$213,059, 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 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, 1995,
surplus profits of American were $16,764,059 and 10% of statutory capital and
surplus was $9,828,859. 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 $400,000 each. As of December 31, 1995 and 1994
American's statutory capital and surplus was $98,288,590 and $87,521,204
respectively. Statutory net income (loss) for the years 1995, 1994 and 1993
was $5,984,601, $4,167,120 and ($1,469,786), 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.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. STOCKHOLDERS' EQUITY (CONTINUED):
This represented a permitted accounting practice for regulatory
purposes, the effect of which was to increase statutory surplus by $8,168,000
as of December 31, 1992 ($6,371,000 as of December 31, 1995).
In addition, American received permission from the Commissioner of
Insurance of Kansas to amortize the effects of changing to Actuarial
Guideline No. 32 concerning the Commissioners Annuity Reserve Valuation
Method for individual annuity contracts over a three-year period beginning in
1995 rather than to record the full amount of the change of $2,176,000. The
effect of this permitted accounting practice was to increase statutory
surplus by $943,150 as of December 31, 1995.
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 839,841 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,
1995 1994 1993
Options outstanding, beginning of year 859,837 816,107 757,340
Options granted..................... 86,000 95,000 413,000
Options exercised................... (105,996) (22,200) (227,561)
Options expired................... - (29,070) (126,659)
Options cancelled................. - - (13)
Options outstanding, end of year..... 839,841 859,837 816,107
Outstanding options exercisable
at end of year...................... 779,841 764,837 403,107
Options reserved for future grants
at end of year...................... 46,247 132,247 145,677
Option prices per share:
Exercised, during the year....... $4.84-$10.63 5.31-$7.50 $4.84-$9.60
Outstanding, end of year....... $4.84-$12.66 4.84-$12.66 $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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. STOCKHOLDERS' EQUITY (CONTINUED):
For the Year
Ended December 31,
1995 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...... - - 30,000
Reserved for future grants............ 5,000 5,000 5,000
The company recorded compensation expense relating to stock
appreciation rights of $-0-, $-0- and $1,875, for the years ended December
31, 1995, 1994, and 1993, 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 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
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 in 1995, 1994 and 1993 was $121,780,
$129,972 and $136,912, respectively.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. Income Taxes:
___________________
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the Year Ended December 31,
1995 1994 1993
Current income tax expense.............. $ 1,540 4,942 4,477
Deferred income tax expense (benefit).. 6,990 651 4,087
Total income tax expense (benefit)....... $ 8,530 5,593 8,564
The net deferred tax asset was comprised of the following:
(000's Omitted)
For the Year Ended
December 31,
1995 1994
Gross deferred tax assets:
Investments.......................... $ 679 7,178
Deferred policy acquisition costs........ 9,565 _
Property and equipment.................. 314 341
Other assets........................... 143 11
Reserves for future policy benefits.... 109,273 107,448
Accrued expenses and other liabilities. 1,708 1,828
121,682 116,806
Gross deferred tax liabilities:
Investments.......................... 36,442 1,011
Accounts receivable.................. 50,708 51,940
Accrued investment income............ - 193
Deferred policy acquisition costs.. 55,530 49,653
Policy and contract claims......... 335 279
143,015 103,076
(21,333) 13,730
Less valuation allowance. (1,568) (2,594)
Net deferred tax asset (liability).$(22,901) 11,136
The company's net deferred tax asset (liability) consists of amounts
that represent both ordinary tax deductions and capital losses in future tax
returns and includes a valuation allowance as it is more likely than not that
a portion of the deferred tax asset will not be realized. The inability to
offset ordinary income with capital losses and uncertainty as to the timing
of future losses and the ability to carry those losses back against prior
income has resulted in the company establishing a valuation allowance.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. Income taxes (continued):
_________________________________
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,
1995 1994 1993
Expected tax expense................. $ 8,795 6,750 9,091
State Income tax..................... 71 254 201
Change in valuation allowance on future
deductions.......................... 188 (153) (470)
Change in valuation allowance on capital
loss temporary differences............. (179) (597) (555)
Change in expected tax rate on future
deductions......................... - (321) -
Change in other net temporary differences,
not previously tax effected.............. (345) (340) 297
Actual income tax expense (benefit)...... $ 8,530 5,593 8,564
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 component of the deferred income tax
provision are as follows:
(000's Omitted)
For the Year Ended December 31,
1995 1994 1993
Investments.................... $ 3,067 (692) 938
Accounts receivable............ (1,232) 843 4,447
Accrued investment income..... (193) 204 (10)
Deferred policy acquisition costs.. 7,094 6,629 2,488
Property and equipment............ 27 (234) (107)
Other assets....................... (133) (9) (1)
Future policy benefits............. (1,825) (5,632) (2,485)
Policy and contract claims......... 56 178 -
Accrued expenses and other liabilities 120 114 (440)
Operating loss carryfoward........... - - 282
Valuation allowance on future deductions
and capital loss differences......... 9 (750) (1,025)
Deferred income tax expense (benefit) $6,990 651 4,087
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. ACQUISITION
On September 8, 1995, the company signed a merger agreement pursuant
to which it will acquire all of the outstanding capital stock of Financial
Benefit Group (FBG), a Delaware corporation, for $5.31 per share, payable in
the company's common stock, warrants and cash.
FBG is an insurance holding company which owns all of the shares of
Financial Benefit Life Insurance Company, a Florida domiciled insurer which
specializes in the sale and underwriting of annuity products and is admitted
in 41 jurisdictions, which includes 39 states, the District of Columbia and
the U.S. Virgin Islands. FBG also owns all of the shares of Annuity
International Marketing Corporation and The Insurancemart, Inc. both of which
specialize in the distribution and marketing of annuities.
The merger is subject to the approval of the stockholders of FBG and
the company and the fulfillment of certain other conditions set forth in the
merger agreement. Special Meetings of Stockholders for both FBG and the
company will be held on April 8, 1996 to approve the acquisition, with the
closing expected to occur as soon thereafter as practicable.
In connection with the acquisition, the company received a bank
commitment from First Chicago for borrowing of up to $35 million, the
proceeds of which will be used to fund the cash portion of the purchase price
and refinance existing indebtedness of the company and FBG.
The transaction will be accounted for using the purchase method with
any resulting goodwill being amortized over a period not to exceed 40 years.
12. 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 1995,
1994 and 1993 income before taxes by approximately $1,001,000, $504,000 and
$1,594,000, respectively. The company expects that further changes to income
may be required in the future and will record such amounts when they become
known.
13. Quarterly results (Unaudited):
______________________________________
The company's quarterly results are set forth in the following table:
(000's Omitted, except per share data)
1995 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
Total revenue............. $40,212 40,378 40,378 45,683
Earnings before income taxes.. $ 5,409 5,494 5,607 8,619
Income tax expense............ 1,893 1,923 1,801 2,913
Net earnings................ $ 3,516 3,571 3,806 5,706
Per share of common stock:
Primary:
Net earnings............. $ .34 .35 .37 .55
Fully diluted:
Net earnings............. $ .34 .34 .37 .55
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
13. QUARTERLY RESULTS (UNAUDITED) (CONTINUED):
1994 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
Total revenue.... $ 37,491 35,594 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
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 16, 1996, 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 16, 1996, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
______________________________________________________________________________
__
The information set forth under the caption "Principal Holder of
Voting Securities" in the company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 16, 1996, 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 16, 1996, is
incorporated herein by reference.
60
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 65
I Summary of Investments 66
II Condensed Financial Information of Registrant 67-68
III Supplementary Insurance information 69
V Valuation and Qualifying Account and Reserves 70
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 July 10, Exhibit (2) Registration
1986, between AmVestors Financial Form S-2, File #2-82811
Corporation and American Investors Life Dated November 26, 1986
Insurance Company, Inc.
(2)(b) Agreement and Plan of Merger Exhibit (2.1) to
Registration
statement on Form S-4,
File No. 333-01309 dated
March 1, 1996
(2)(c) Resolutions of the Board of Directors Exhibit (2)(a) to Form
dated January 7, 1988, providing for 10-Q dated May 11, 1988.
succession to the position of Chairman
of the Board of Directors
(3)(a) Articles of Incorporation as Amended Exhibit (3)(a) to Form 10-Q
and Restated dated October 26, 1993
(3)(b) Bylaws of the company Exhibit (4.2) to
Registration
statement on Form S-8, File
No. 33-31155 dated September
19, 1989
(4)(a) Specimen Common Stock Certificate Exhibit (4)(a) to Form 10-K
expiring December 9, 1998 dated March 30, 1995
(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
61
Exhibit Page Number or Incorporation
Number Description by Reference
(10)(a) Form of Indemnification Agreement Exhibit (10)(a) to Form 10-K
between company and its officers and dated March 29, 1988
directors
(10)(b) 1989 Non-Qualified Stock Option Plan Exhibit (10)(q)to Form 10-K
adopted March 17, 1989 dated April 12, 1989
(10)(c) Stock Appreciation Rights Plan adopted Exhibit (10)(r) to Form 10-K
March 17, 1989 dated April 12, 1989
(10)(d) 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)(e) Employment Agreement dated December 17, Exhibit (10)(l) to Form 10-K
1992, among the company, it's dated March 30, 1993
subsidiaries and Mark V. Heitz
(10)(f) Employment Agreement dated October 3, Exhibit (10)(a) to Form 10-Q
1994, among the company, its subsidiaries dated November 10, 1994
and Ralph W. Laster, Jr
(10)(g) Bonus Compensation Agreement dated Exhibit (10)(b) to Form 10-Q
September 30, 1994, between the 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 Exhibit (10)(i) to Form 10-K
between the company, First National Bank dated March 30, 1995
of Chicago and Boatmen's First National
Bank of Kansas City
(10)(j) Amendment No. 1 to Credit Agreement dated Exhibit (10)(a)to Form 10-Q
December 29, 1994, between the company, dated August 11, 1995
First National Bank of Chicago and
Boatmen's First National Bank of Kansas
City
(10)(k) 1994 Stock Purchase Plan for Non- Exhibit (10)(j) to Form 10-K
Employee Directors effective dated March 30, 1995
February 24, 1994
(10)(l) Incentive Compensation Plan between the Exhibit (10)(k) to Form 10-K
company and certain designated employees dated March 30, 1995
effective for the calendar year 1994
(10)(m) 1995 Special Incentive Bonus Agreement PP 71-72
between the company and Ralph W. Laster,
Jr. dated April 27, 1995
62
Exhibit Page Number or Incorporation
Number Description by Reference
(10)(n) 1995 Special Incentive Bonus Agreement PP 73-74
between the company and Mark V. Heitz
dated April 27, 1995
(11) Calculation of Earnings per Share P 75
(20) Reports on Form 8-K
The company filed a report on
Form 8-K on September 22, 1995
(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
(23) Independent Auditors' Consent P 76
(27) Financial Data Sheet
63
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 14, 1996
________________
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 14, 1996
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 14, 1996
Mark V. Heitz and Director
/s/Janis L. Andersen Director March 14, 1996
Janis L. Andersen
Director
Robert G. Billings
/s/Jack H. Brier Director March 14, 1996
Jack H. Brier
Director
Robert T. McElroy, M.D.
/s/R. Rex Lee Director March 14, 1996
R. Rex Lee, M.D.
/s/Robert R. Lee Director March 14, 1996
Robert R. Lee
/s/James V. O'Donnell Director March 14, 1996
James V. O'Donnell
64
INDEPENDENT AUDITORS' REPORT
_______________________________
We have audited the consolidated financial statements of AmVestors
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and
for each of the three years in the period ended December 31, 1995, and have
issued our report thereon dated February 29, 1996; 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
February 29, 1996
65
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
SCHEDULE I
As of December 31, 1995
(000's Omitted)
Amount at
which
shown
in the
Market balance
Type of Investment Cost Value sheet
Debt securities:
Bonds:
Available-for-sale:
U.S. treasury obligations $ 51,743 52,664 52,664
Mortgage-backed securities 671,283 700,936 700,936
Public utilities 150,536 158,695 158,695
All other corporate bonds 1,074,215 1,132,311 1,132,311
Trading:
All other corporate bonds 1,489 1,485 1,485
Total debt securities 1,949,266 2,046,091 2,046,091
Equity securities:
Available-for-sale:
Banks, trust and insurance
companies 198 465 465
Public utilities 237 67 67
All other common stock 612 649 649
Preferred stock 7,566 7,733 7,733
Trading:
Preferred stock 619 629 629
Total equity securities 9,232 9,543 9,543
Mortgage loans on real estate 5,391 5,445 5,391
Other long-term investments 34,100 34,100 34,100
Short-term investments 436 436 436
Total investments $1,998,425 2,095,615 2,095,561
66
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II
BALANCE SHEETS
(000's Omitted)
As of December 31,
1995 1994
___________ ___________
ASSETS
_______
Investments in subsidiaries $ 182,723 107,744
Long-term investments
- 635
Cash and cash equivalents 756 (33)
Other assets 3,424 2,683
Total Assets $ 186,903 111,029
LIABILITIES AND STOCKHOLDERS' EQUITY
_________________________________________
Liabilities:
Notes payable $ 12,084 5,434
Other liabilities 374 1,399
Total liabilities 12,458 6,833
Stockholders' Equity:
Preferred stock - -
Common stock 12,904 12,769
Paid-in capital 64,284 63,499
Unrealized investment gains (losses) 45,372 (7,813)
Retained earnings 54,714 38,876
177,274 107,331
Less leveraged employee stock ownership
trust (2,829) (3,135)
Total stockholders' equity 174,445 104,196
Total liabilities and stockholders' equity $186,903 111,029
STATEMENTS OF EARNINGS
For the year ended December 31,
1995 1994 1993
Equity in earnings of subsidiaries $15,799 13,748 17,732
Net investment income 93 67 23
Other revenues 3,676 4,149 4,103
Operating expense (2,624) (3,867) (2,921)
Interest expense (518) (466) (1,533)
Net investment gains 177 - -
Net earnings before income taxes and
extraordinary item 16,603 13,631 17,404
Income tax expense (benefit) 4 (62) (787)
Net earnings before extraordinary item 16,599 13,693 18,191
Extraordinary loss - - (213)
Net earnings $16,599 13,693 17,978
67
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,
1995 1994 1993
Operating Activities:
Net earnings $ 16,599 13,693 17,978
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Equity in earnings of subsidiaries (15,799) (13,748) (17,732)
Amortization of discount on notes
payable - - 59
Net investment gains (177) - -
Accrued investment income 4 - -
Other liabilities (1,075) (656) 1,368
Other assets (847) 160 877
Other, net 338 134 (372)
Net cash provided by (used in)
operating activities (957) (417) 2,178
Investing Activities:
Investment in subsidiaries (6,457) (135) (14,600)
Dividends from subsidiaries 690 1,900 2,680
Sale of equity securities 223 - -
Purchase of equity securities (300) - -
Proceeds from sale of debt securities - - 75
Purchases of long-term investments (601) (233) (494)
Short-term investments, net 266 - -
Principal payments on long-term
investments 809 190 -
Net cash provided by (used in)
investing activities (5,370) 1,722 (12,339)
Financing Activities:
Proceeds from notes payable 7,000 - -
Payments on notes payable (350) (326) (20,855)
Cash dividends to stockholders (761) - (236)
Redemption of stockholder plan - (101) -
Fractional cash on reverse stock split - - (25)
Issuance of common stock 791 27 31,400
Purchase of treasury stock - (1,186) -
Repurchase of warrants - - (375)
Allocation of LESOPshares 306 286 267
Other, net 130 10 -
Net cash provided by (used in)
financing activities 7,116 (1,290) 10,176
Increase (Decrease) in Cash and Cash
Equivalents 789 15 15
Cash and Cash Equivalents:
Beginning of year (33) (48) (63)
End of year $ 756 (33) (48)
Supplemental schedule of cash flow
information:
Income tax payments $(1,507) 6,150 3,204
Interest payments $ 485 - 1,614
68
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
DecemberAcquisition Claims & & Charges Investment Settlement Acquisition
Operating
31, Costs Loss ExpenseBenefits Revenue Income Expenses Costs Expenses
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
1995 $140,476 2,259,028 76 8,500 156,510 3,067 12,365 10,006
69
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 End of
of Period Expenses Accounts Deductions Period
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 Uncollectable
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 Uncollectable
Agent Balances 348 88 - 209 227
$ 5,158 372 360 838 5,052
Year Ended December 31, 1995:
Allowance for Credit Losses $ 2,231 - - 2,231 -
Allowance for Deferred
Tax Asset 2,594 - - 1,026 1,568
Allowance for Uncollectable
Agent Balances 227 512 - - 739
$ 5,052 512 - 3,257 2,307
70